<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1998
REGISTRATION NO. 333-53005
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
AMENDMENT NO. 3
TO
Form S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------------
3590
(Primary Standard Industrial Classification Code Number)
<TABLE>
<CAPTION>
(Exact name of registrant as (State or other jurisdiction of (I.R.S. Employer
specified in its charter) incorporation or organization) Identification No.)
<S> <C> <C>
Coltec Industries Inc Pennsylvania 13-1846375
AMI Industries, Inc. Colorado 84-1045236
CII Holdings Inc Delaware 13-3314412
Coltec Canada Inc Delaware 13-3887111
Coltec Holdings Inc Delaware 52-1571894
Coltec Industrial Products Inc Delaware 23-2825769
Coltec International Services Co Delaware 13-3895074
Coltec North Carolina Inc North Carolina 58-2043890
Coltec Technical Services Inc Delaware 13-3314406
</TABLE>
<TABLE>
<CAPTION>
(Exact name of registrant as (State or other jurisdiction of (I.R.S. Employer
specified in its charter) incorporation or organization) Identification No.)
<S> <C> <C>
Delavan Inc Delaware 42-1467902
Garlock Inc Ohio 13-2838953
Garlock International Inc Delaware 13-3035538
Garlock Overseas Corporation Delaware 16-1010822
Haber Tool Inc Michigan 38-3147840
Jamco Products LLC Texas 76-0559044
Menasco Aerosystems Inc Delaware 13-3799120
Stemco Inc Texas 06-0943080
Walbar Inc Delaware 04-2895576
</TABLE>
ROBERT J. TUBBS, ESQ.
3 COLISEUM CENTRE
2550 WEST TYVOLA ROAD
CHARLOTTE, N.C. 28217
(704) 423-7000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
GEORGE W. BILICIC, JR., ESQ.
CRAVATH, SWAINE & MOORE
WORLDWIDE PLAZA
825 EIGHTH AVENUE
NEW YORK, NY 10019
(212) 474-1000
------------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]..........................
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]..........................
------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
PROSPECTUS
SUBJECT TO COMPLETION, DATED AUGUST 12, 1998
$300,000,000
Offer for all Outstanding 7 1/2% Senior Notes Due 2008
of
COLTEC INDUSTRIES INC
THE EXCHANGE OFFER WILL EXPIRE AT MIDNIGHT, NEW YORK
CITY TIME ON , 1998, UNLESS EXTENDED.
------------------
Coltec Industries Inc ("Coltec" or the "Company") hereby offers (the
"Exchange Offer"), upon the terms and subject to the conditions set forth in
this Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange up to $300.0 million aggregate principal amount of
its 7 1/2% Series B Senior Notes Due 2008 (the "Exchange Notes") that have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a Registration Statement (as defined herein) of which this
Prospectus, constitutes a part, for a like principal amount of its 7 1/2% Senior
Notes Due 2008 (the "Outstanding Notes" and, together with the Exchange Notes,
the "Senior Notes") with the holders thereof. The terms of the Exchange Notes
are identical in all material respects to the Outstanding Notes except for
certain transfer restrictions and registration rights relating to the
Outstanding Notes and except that, if the Exchange Offer is not consummated by
October 13, 1998, the interest rate borne by the Outstanding Notes will increase
by amounts specified herein until the Exchange Offer is consummated. The
Exchange Notes will evidence the same indebtedness as the Outstanding Notes and
will be issued under and entitled to the same benefits under the Indenture (as
defined herein) as the Outstanding Notes. In addition, the Exchange Notes and
the Outstanding Notes will be treated as one series of securities under the
Indenture. The Outstanding Notes were issued on April 16, 1998 (the "Issue
Date"), pursuant to an offering (the "Original Senior Notes Offering") exempt
from registration under the Securities Act.
Interest on the Exchange Notes will be payable on April 15 and October 15 of
each year, commencing October 15, 1998. The Exchange Notes will be redeemable at
any time, in whole or in part, at the option of the Company at the redemption
price set forth herein and will not be entitled to the benefit of any sinking
fund. The Exchange Notes will be senior obligations of the Company and will rank
pari passu in right of payment with all existing and future senior obligations
of the Company (including indebtedness under the Amended Credit Agreement (as
defined herein)) and will rank senior in right of payment to all subordinated
obligations of the Company. As of March 29, 1998 and December 31, 1997, on a pro
forma basis after giving effect to the Original Senior Notes Offering and the
concurrent TIDES Offering (as defined herein) (collectively the "Offerings") and
the application of the estimated net proceeds therefrom to reduce indebtedness
under the Amended Credit Agreement, the Company would have had approximately
$424.5 million and $323.9 million of other senior indebtedness, respectively
($372.5 million and $262.0 million, respectively, of which would have been
indebtedness outstanding under the Amended Credit Agreement). The Exchange Notes
will be unconditionally guaranteed, jointly and severally, on a senior basis, by
the Subsidiary Guarantors (as defined herein). The Subsidiary Guarantees (as
defined herein) will be senior obligations of the Subsidiary Guarantors and will
rank pari passu in right of payment with all existing and future senior
obligations of the Subsidiary Guarantors (including guarantees of indebtedness
under the Amended Credit Agreement) and will rank senior to all subordinated
obligations of such Subsidiary Guarantors. The Subsidiary Guarantees may be
released without action on the part of the holders of Senior Notes in certain
circumstances. See "Description of the Senior Notes -- Guarantees". As of March
29, 1998 and December 31, 1997, after giving effect to the Offerings and the
application of the estimated net proceeds therefrom to reduce indebtedness under
the Amended Credit Agreement, the Subsidiary Guarantors would have had
approximately $372.5 and $262.0 million of other senior indebtedness,
respectively (all of which would have been guarantees of indebtedness under the
Amended Credit Agreement). The Indenture does not contain any limitation on the
incurrence of additional indebtedness by the Company or its subsidiaries.
The Exchange Notes and the Subsidiary Guarantees will be secured, subject to
the provisions of the Amended Collateral Documents (as defined herein), equally
and ratably with the indebtedness of the Company and the Subsidiary Guarantors
under the Amended Credit Agreement and related documents and liability in
connection with interest rate protection and other hedging agreements
contemplated by the Amended Credit Agreement, by a security interest in the
Collateral (as defined herein). The Collateral may be released without action on
the part of the holders of Senior Notes in certain circumstances. See
"Description of the Senior Notes -- Collateral". As of March 29, 1998 and
December 31, 1997, on a pro forma basis after giving effect to the Offerings and
the application of the estimated net proceeds therefrom to reduce indebtedness
under the Amended Credit Agreement, the Company and its subsidiaries would have
had approximately $372.5 million and $262.0 million of other secured
indebtedness outstanding, respectively (all of which would have been
indebtedness outstanding under the Amended Credit Agreement). See "Description
of the Senior Notes".
The Company will accept for exchange any and all Outstanding Notes that are
validly tendered and not withdrawn on or prior to midnight, New York City time,
on the date the Exchange Offer expires (the "Expiration Date"), which will be
, 1998 (20 business days following the commencement of the Exchange
Offer), unless the Exchange Offer is extended. Tenders of Outstanding Notes may
be withdrawn at any time prior to midnight, New York City time, on the
Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Outstanding Notes being tendered for exchange. Outstanding
Notes may be tendered only in integral multiples of $1,000. See "The Exchange
Offer".
For each Outstanding Note accepted for exchange, the holder of such
Outstanding Notes will receive an Exchange Note having a principal amount equal
to that of the surrendered Outstanding Note. Interest on the Exchange Notes will
accrue from the last interest payment date on which interest was paid on the
Outstanding Notes surrendered in exchange therefor, or if no interest has been
paid on the Outstanding Notes surrendered in exchange therefor, or if no
interest has been paid on the Outstanding Notes, from the Issue Date. Holders of
Outstanding Notes whose Outstanding Notes are accepted for exchange will not
receive any interest payment in respect of interest on such Outstanding Notes
otherwise payable on any interest payment date the record date for which occurs
on or after the consummation of the Exchange Offer. Consequently, holders who
exchange their Outstanding Notes for Exchange Notes will receive the same
interest payment on October 15, 1998 (the first interest payment date with
respect to the Outstanding Notes and the Exchange Notes) that they would have
received had they not accepted the Exchange Offer. See "the Exchange Offer --
Interest on the Exchange Notes".
(Cover continued on next page)
------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS WHO
TENDER THEIR OUTSTANDING NOTES FOR EXCHANGE NOTES IN THE EXCHANGE OFFER, SEE
"RISK FACTORS" BEGINNING ON PAGE 11.
------------------
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.
The date of this Prospectus is , 1998
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE> 3
(Cover continued from previous page)
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement (as
defined herein). See "The Exchange Offer -- Consequences of Exchanging
Outstanding Senior Notes" for a discussion of the Company's belief, based on
interpretations by the staff of the Securities and Exchange Commission (the
"SEC" or the "Commission") as set forth in no-action letters issued to third
parties, as to the transferability of the Exchange Notes upon satisfaction of
certain conditions. Each broker-dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Outstanding Notes where
such Outstanding Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any resale
of Exchange Notes. See "Plan of Distribution".
There is no established trading market for the Exchange Notes, and there can
be no assurance regarding the future development of a market for the Exchange
Notes, or the ability of the holders of the Exchange Notes to sell their
Exchange Notes or the price at which such holders may be able to sell their
Exchange Notes. The Company does not currently intend to list the Exchange Notes
on any securities exchange or to seek approval for quotation of the Exchange
Notes on any securities exchange or to seek approval for quotation of the
Exchange Notes through any automated quotation system. Accordingly, there can be
no assurance as to the development or liquidity of any market for the Exchange
Notes.
The Company will not receive any proceeds for the Exchange Offer. The
Company will pay all of the expenses incident to the Exchange Offer. In the
event the Company terminates the Exchange Offer and does not accept for exchange
any Outstanding Notes, the Company will promptly return the Outstanding Notes to
the holders thereof. See "The Exchange Offer".
<PAGE> 4
AVAILABLE INFORMATION
Coltec is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "SEC" or the "Commission"). 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 at Room 1024,
Judiciary Plaza, 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. Such material may also be accessed electronically
by means of the Commission's home page on the Internet at http://www.sec.gov.
Such reports and other information may also be inspected at the offices of the
New York Stock Exchange, Inc. (the "NYSE"), 20 Broad Street, New York, New York
10005 and the Pacific Exchange Incorporated (the "PSE"), 301 Pine Street, Suite
1104, San Francisco, California 94104.
This Prospectus constitutes a part of a registration statement on form S-4
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act. As permitted by the rules and regulations of the Commission,
this Prospectus does not contain all of the information contained in the
Registration Statement and the exhibits and schedules thereto and reference is
hereby made to the Registration Statement and exhibits and schedules thereto for
further information with respect to the Company and the securities offered
hereby. Statements contained herein concerning the provisions of any documents
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission are not necessarily complete, and in each instance reference is made
to the copy of such document so filed. Each such statement is qualified in its
entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Coltec pursuant to the Exchange Act are
incorporated in this Prospectus by reference:
(i) Annual Report on Form 10-K for the year ended December 31, 1997;
(ii) Quarterly Report on Form 10-Q for the period ended March 29,
1998;
(iii) Quarterly Report on Form 10-Q for the period ended June 28,
1998;
(iv) Current Report on Form 8-K, dated March 30, 1998;
(v) Current Report on Form 8-K, dated April 8, 1998;
(vi) Current Report on Form 8-K, dated April 14, 1998; and
(vii) Current Report on Form 8-K, dated May 15, 1998.
All documents filed by the Company with the SEC pursuant to Sections 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 Exchange Offer shall be deemed to be
incorporated by reference in this Prospectus and to be a part of this Prospectus
from the date of filing of such documents.
Any statement contained in a document, all or a portion of which is
incorporated or deemed to be incorporated by reference herein, or contained in
this Prospectus, shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
subsequently filed document which also is or is deemed to be 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.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any or all of the above documents incorporated or deemed to be
incorporated herein by reference (other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference into the documents that
this Prospectus incorporates) and any other information requested thereby as
described above under "Available Information". Written or oral requests should
be directed to the Company's principal executive office at: Coltec Industries
Inc, 3 Coliseum Centre, 2550 West Tyvola Road, Charlotte, North Carolina 28217,
Attention: Corporate Secretary (telephone (704) 423-7000).
i
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Certain
capitalized terms used but not defined are used as defined elsewhere in this
Prospectus.
THE COMPANY
Coltec and its consolidated subsidiaries manufacture and sell a diversified
range of highly engineered aerospace and industrial products primarily in the
United States, Canada and Europe. Coltec's operations are conducted through its
two principal segments -- Aerospace and Industrial. Through its Aerospace
segment, which in 1997 accounted for approximately 42% of total Company sales
and approximately 37% of total Company operating profit, Coltec is a leading
manufacturer of landing gear systems, engine fuel controls, flight attendant and
cockpit seats, turbine blades, fuel injectors, nozzles and related components
for commercial and military aircraft. Through its Industrial segment, which in
1997 accounted for approximately 58% of total Company sales and approximately
63% of total Company operating profit, Coltec is a leading manufacturer of
industrial seals, gaskets, packing products, self-lubricating bearings and oil
seals and hubodometers for trucks and trailers and is a producer of
technologically advanced spray nozzles for agricultural, home heating and
industrial applications. Coltec also produces high-horsepower diesel engines for
naval ships and diesel, gas and dual-fuel engines for electric power plants and
produces air compressors and tooling for industrial applications.
The Company derived approximately 50% of sales in 1997 from its
aftermarket, or parts and services, business. Aftermarket sales tend to generate
significantly higher margins and tend to be less affected by general economic
cycles than the Company's sales of products to original equipment manufacturers
("OEMs"). In addition, management believes the Company is benefiting from
several other industry trends which will help the Company achieve its growth and
operating goals. These trends include strong growth in world airline fleets,
preference by OEMs to source complex integrated systems rather than component
parts, an increased preference to consolidate purchasing of consumable products
from a single full line supplier and customer demand for integrated sales and
service providers.
In 1997, Coltec had sales and EBITDA (as defined herein) of $1,314.9
million and $236.2 million, an increase of 13.4% and 22.0%, respectively, from
1996. Year end 1997 backlog increased 29.1% to $875.6 million from $678.3
million at year end 1996. For the quarter ended March 29, 1998, Coltec had sales
and EBITDA of $374.4 million and $65.7 million, respectively, an increase of
21.1% and 23.0%, respectively, from the first quarter of 1997. Backlog at the
end of the first quarter of 1998 increased 10.6% to $968.2 million from $875.6
million at year end 1997. Coltec's common stock is listed on the NYSE, and based
on the closing price of $20 1/4 per share on July 14, 1998, the Company had a
total equity market capitalization of approximately $1,338.5 million.
BUSINESS STRATEGY
The Company's strategy is to develop and maintain market leading positions
and attractive margins for its products through technological innovation, cost
efficiencies, product differentiation and superior quality and service. The
Company emphasizes targeted development of highly engineered, value-added
products designed to meet specific customer requirements. This emphasis enables
the Company to maintain close, interactive relationships with major aircraft
manufacturers as well as the Company's principal industrial customers and to
develop new products in response to customer needs. Coltec views its superior
customer responsiveness as one of its key competitive strengths. Successful
introduction of new products, cost reductions, productivity improvements and
selected divestitures have helped the Company maintain operating margins
averaging more than 12.5% over the last five years.
Through "Coltec 2000", the Company's three-year growth and operating plan,
the Company has set specific growth and operating targets focused on achieving
annual revenues of $2 billion by the year 2000 while maintaining the quality of
earnings. The plan calls for substantial growth internally, complemented by
strategic
1
<PAGE> 6
acquisitions which extend product offerings of the Company's existing businesses
and leverage the Company's existing distribution network. The key elements of
the plan are as follows:
- Focus on Aftermarket -- For the year ended December 31, 1997,
approximately 50% of the Company's sales were derived from the
aftermarket. The Company's products sold in the aftermarket include
industrial seals, hub systems and a variety of aftermarket parts used in
the maintenance of engines, compressors, pumps and gas turbines. A broad
and fragmented buyer base coupled with the critical nature of replacement
parts generates sales with generally higher margins than sales to
original equipment manufacturers. In addition, because the products are
consumable in nature and are replaced over time, the aftermarket provides
a stable source of income.
- Develop New Products -- The Company believes that responsiveness to
customer demands is a critical success factor in both its Aerospace and
Industrial markets. As a result, the Company has undertaken a number of
initiatives to reduce the time and cost of bringing new products to
market and has established a long term objective of generating 50% of
sales from products introduced within the prior five years. Recent new
product and application introductions have included (i) landing gear
systems for the Boeing 777, (ii) Power$ync II computerized controls for
compressors, (iii) QuickSet(TM) 9001 packing systems and Tandem Seal(TM)
industrial sealing products, (iv) the Raindrop Ultra agricultural spray
nozzle, (v) new versions of FADEC electronic fuel controls for aircraft,
(vi) fuel injectors for the Rolls-Royce RB211 which allowed the Company
to enter the large jet engine market and (vii) the Company's Chandler
Evans Control Systems Division's agreement to develop and utilize its
advanced Variable Displacement Vane Pump technology in aircraft engine
applications.
- Focus on Globalization -- For the year ended December 31, 1997,
approximately 10% of the Company's revenues were generated from outside
of the United States and Canada. As part of its Coltec 2000 strategy, the
Company seeks to grow its international operations, through a mix of
internal growth and acquisitions. Given the global nature of many of the
markets in which the Company competes, management believes that an
increased global presence will lead to substantial operating
efficiencies, as fixed development and operating costs can be amortized
over a greater sales base. In terms of internal growth, the Company will
emphasize the development and expansion of its international customer
base, through the sale of products such as the fuel injectors to
Rolls-Royce for the RB211 and the BMW aircraft engines. The Company has
established sales and distribution capabilities in Asian and South
American countries and will pursue international growth through
complementary acquisitions such as its recent acquisition of Groupe
Carbone Lorraine's sealing products business.
- Total Systems Sourcing -- Management believes that many of the Company's
largest customers, including The Boeing Company ("Boeing"), are placing
increased emphasis on suppliers which are capable of providing integrated
systems rather than component parts. The Company believes that its design
and engineering competencies and cellular manufacturing processes provide
a competitive advantage in the design and manufacture of integrated
systems and are areas in which the Company will continue to invest. For
example, in 1995 the Company supplied Boeing with non-integrated landing
gear systems. However, in 1996 with the Boeing 737 and 757, Coltec began
providing fully integrated landing gear which includes the installation
of wheels, tires, brakes, hydraulics, electrical harnesses, lights and
sensing systems on the base landing gear. In 1997, the Company began
providing fully integrated landing gear for the Boeing 777 aircraft
thereby increasing revenue by more than 20% per unit. The Company will
begin providing fully integrated landing gear for the Boeing 767 in 1998.
- Productivity Initiatives -- A number of productivity initiatives have
been implemented which have been designed to reduce lead times, curtail
scrap and enhance throughput, which are expected among other things, to
improve inventory turns. Such initiatives have included the consolidation
of multiple product lines into common production facilities and the
relocation of the Company's Delavan Spray Technologies Division to new
state-of-the-art facilities near major transportation hubs. Cycle time
reductions have reduced required inventory levels while improving
customer responsiveness. For example, during 1997, Walbar Arizona reduced
cycle times on damper seal production by approximately 70%, while the
Company's Menasco Division reduced production time for Boeing 737 landing
gear main cylinders from
2
<PAGE> 7
20 weeks to 12. The Company intends to continue to enhance its production
processes through optimization of workflow, investment in upgraded
manufacturing technologies and robotics, and related initiatives. In
addition, all of the Company's major divisions are in the late stages of
implementing new enterprise reporting systems. The new systems are
enhancing shop floor reporting, materials management, order entry and
cost evaluation and control. Management believes that these programs are
leading to productivity and efficiency improvements and are having a
positive impact on operating performance. The new enterprise systems have
the added benefit of addressing year 2000 systems issues. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations".
Coltec is a Pennsylvania corporation with its principal executive offices
located at 3 Coliseum Centre, 2550 West Tyvola Road, Charlotte, North Carolina
28217. The telephone number of Coltec is (704) 423-7000.
TIDES OFFERING
Concurrently with the Original Senior Notes Offering, Coltec Capital Trust
(the "Trust") offered and sold, by means of a separate offering circular (the
"TIDES Offering"), 3,000,000 5 1/4% Convertible Preferred Securities (the
"Convertible Preferred Securities"), liquidation preference $50 per Convertible
Preferred Security, which are guaranteed to the extent set forth therein by, and
convertible into common stock of, the Company. The Company issued to the Trust
5 1/4% Convertible Subordinated Deferrable Interest Debentures Due 2028 (the
"TIDES Debentures"), which have an aggregate principal amount, interest,
conversion and other terms substantially similar or analogous to those of the
Convertible Preferred Securities. Indebtedness under the TIDES Debentures is
unsecured and subordinated to the Senior Notes and all other Senior Debt (as
defined in the Indenture relating to the TIDES Debentures) of the Company.
RECENT DEVELOPMENT
On May 15, 1998, the Company completed the previously-announced sale of the
capital stock of its Holley Performance Products subsidiary ("Holley") to
Kohlberg & Co., L.L.C., a private merchant banking firm located in Mount Kisco,
New York, for $100 million in cash. The proceeds from this acquisition were
applied toward reducing debt. For 1997, Holley had gross revenues and operating
income of approximately $99.0 million and $8.0 million, respectively.
3
<PAGE> 8
THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $300.0 million
aggregate principal amount of Outstanding Notes for an equal aggregate principal
amount of Exchange Notes. The Exchange Notes will evidence the same indebtedness
as the Outstanding Notes and will be issued under and entitled to the same
benefits as the Outstanding Notes under the Indenture (the "Indenture"), dated
as of April 16, 1998 among the Company, the Subsidiary Guarantors and Bankers
Trust Company, as Trustee (the "Trustee"). In addition, the Exchange Notes and
the Outstanding Notes will be treated as one series of securities under the
Indenture.
Securities Offered......... Up to $300.0 million aggregate principal amount of
7 1/2% Senior Exchange Notes Due 2008, which have
been registered under the Securities Act. The terms
of the Exchange Notes are identical in all material
respects to the Outstanding Notes except for
certain transfer restrictions and registration
rights relating to the Outstanding Notes and except
that, if the Exchange Offer is not consummated on
or prior to October 13, 1998, the interest rate
borne by the Outstanding Notes will increase by
amounts specified herein until the Exchange Offer
is consummated. See "Description of the Senior
Notes -- Registered Exchange Offer; Registration
Rights".
The Exchange Offer......... The Exchange Notes are being offered in exchange
for a like principal amount of Outstanding Notes
validly tendered pursuant to the Exchange Offer. As
of the date hereof, $300.0 million in aggregate
principal amount of Outstanding Notes are
outstanding. The Company will issue the Exchange
Notes to tendering holders of Outstanding Notes on
or promptly after the Expiration Date. The issuance
of the Exchange Notes is intended to satisfy the
obligations of the Company contained in the
Registration Rights Agreement. For procedures on
tendering, see "The Exchange Offer" and
"Description of the Senior Notes -- Registered
Exchange Offer; Registration Rights".
Expiration of the
Exchange Offer........... Midnight, New York City time, on ,
1998, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is
extended. See "The Exchange Offer -- Terms of the
Exchange Offer; Period of Tendering Outstanding
Notes".
Tenders; Withdrawal........ The tender of Outstanding Notes pursuant to the
Exchange Offer may be withdrawn at any time prior
to the Expiration Date. Any Outstanding Notes not
accepted for exchange for any reason will be
returned without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
Conditions to the
Exchange Offer........... The Exchange Offer shall not be subject to any
conditions, other than that the Exchange Offer does
not violate applicable law or any applicable
interpretation of the staff of the Commission.
There can be no assurance that any such condition
will not occur. Holders of Outstanding Notes will
have certain rights under the Registration Rights
Agreement should the Company fail to consummate the
Exchange Offer. See "The Exchange Offer -- Certain
Conditions to the Exchange Offer".
United States Taxation
Considerations........... The exchange pursuant to the Exchange Offer should
not be a taxable event for Federal income tax
purposes. See "United States Taxation".
4
<PAGE> 9
Exchange Agent............. Bankers Trust Company, the Trustee under the
Indenture, is serving as the exchange agent (the
"Exchange Agent") in connection with the Exchange
Offer.
Use of Proceeds............ There will be no cash proceeds payable to the
Company from the issuance of the Exchange Notes
pursuant to the Exchange Offer. See "Use of
Proceeds" for a description of the use of proceeds
from the issuance of the Outstanding Notes.
CONSEQUENCES OF EXCHANGING OUTSTANDING NOTES
Holders of Outstanding Notes who do not exchange their Outstanding Notes
for Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the provisions of the Indenture regarding transfer and exchange of the
Outstanding Notes and the restrictions on transfer of such Outstanding Notes as
set forth in the legend thereon as a consequence of the issuance of the
Outstanding Notes pursuant to exemptions from, or in transactions not subject
to, the registration requirements of the Securities Act and applicable state
securities laws. In general, the Outstanding Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register Outstanding Notes under the Securities Act. Based on interpretations by
the staff of the Commission, as set forth in no-action letters issued to third
parties, the Company believes that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Outstanding Notes may be offered for resale,
resold or otherwise transferred by holders thereof (other than any such holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such Exchange
Notes. However, the Company does not intend to request the Commission to
consider, and the Commission has not considered, the Exchange Offer in the
context of a no-action letter and there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer as in such other circumstances. Each holder, other than a broker-dealer,
must acknowledge that (i) the Exchange Notes received by such holder will be
acquired in the ordinary course of its business, (ii) at the time of the
consummation of the Exchange Offer such holder will have not engaged in, and
does not intend to engage in, a distribution of Exchange Notes and has no
arrangement or understanding to participate in a distribution of Exchange Notes
and (iii) such holder is not an affiliate of the Company within the meaning of
Rule 405 of the Securities Act or if it is such an affiliate, that it will
comply with the registration and prospectus delivery requirements of the
Securities Act, to the extent applicable. If any holder is an affiliate of the
Company, is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the Exchange Notes to be
acquired pursuant to the Exchange Offer, such holder (i) could not rely on the
applicable interpretations of the staff of the Commission and (ii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Outstanding Notes, where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution". However, to
comply with state securities laws, the Exchange Notes may not be offered or sold
in any state unless they have been registered or qualified for sale in such
state or an exemption from registration or qualification is available and is
complied with. The offer and sale of the Exchange Notes to "qualified
institutional buyers" (as such term is defined under Rule 144A of the Securities
Act) is generally exempt from registration or qualification under state
securities laws. The Company currently does not intend to register or qualify
the sale of the Exchange Notes in any state where an exemption from registration
or qualification is required and not available. See "The Exchange
Offer -- Consequences of Failure to Exchange and Requirements for Transfer of
Exchange Notes".
5
<PAGE> 10
SUMMARY DESCRIPTION OF EXCHANGE NOTES
Securities Offered......... $300.0 million aggregate principal amount of 7 1/2%
Series B Senior Notes Due April 15, 2008 of Coltec
Industries Inc.
Maturity Date.............. April 15, 2008.
Interest Payment Dates..... April 15 and October 15 of each year, commencing
October 15, 1998. Interest on the Exchange Notes
will accrue from the last interest payment date on
which interest was paid on the Outstanding Notes
surrendered in exchange therefor, or if no interest
has been paid on the Outstanding Notes, from the
Issue Date. Holders of Outstanding Notes whose
Outstanding Notes are accepted for exchange will
not receive any payment in respect of interest on
such Outstanding Notes otherwise payable on any
interest payment date the record date for which
occurs on or after consummation of the Exchange
Offer. Consequently, holders who exchange their
Outstanding Notes for Exchange Notes will receive
the same interest payment on October 15, 1998 (the
first interest payment date with respect to the
Senior Notes) that they would have received had
they not accepted the Exchange Offer. See "The
Exchange Offer -- Interest on the Exchange Notes".
Optional Redemption........ The Senior Notes are redeemable, in whole or in
part, at any time, at the option of the Company, at
a redemption price equal to the greater of (i) 100%
of the principal amount of such Senior Notes and
(ii) the sum of the present value of the remaining
scheduled payments of principal and interest
thereon from the redemption date to the maturity
date, discounted to the redemption date on a
semiannual basis (assuming a 360-day year
consisting of twelve 30-day months) at the Treasury
Rate plus 37.5 basis points, plus accrued interest
thereon to the date of redemption. The Senior Notes
are not entitled to the benefit of any sinking
fund.
Ranking.................... The Senior Notes are senior obligations of the
Company and will rank pari passu in right of
payment with all existing and future senior
obligations of the Company (including indebtedness
under the Amended Credit Agreement) and will rank
senior in right of payment to all subordinated
obligations of the Company. As of December 31,
1997, on a pro forma basis after giving effect to
the Offerings and the application of the estimated
net proceeds therefrom to reduce indebtedness under
the Amended Credit Agreement, the Company would
have had approximately $323.9 million of other
senior indebtedness ($262.0 million of which would
have been indebtedness outstanding under the
Amended Credit Agreement). The Indenture does not
contain any limitation on the incurrence of
additional indebtedness by the Company.
Guarantees................. The Senior Notes are unconditionally guaranteed,
jointly and severally, on a senior basis, by the
Subsidiary Guarantors. The Subsidiary Guarantees
will be senior obligations of the Subsidiary
Guarantors and will rank pari passu in right of
payment with all existing and future senior
obligations of the Subsidiary Guarantors (including
guarantees of indebtedness under the Amended Credit
Agreement) and will rank senior to all subordinated
obligations of such Subsidiary Guarantors. The
Subsidiary Guarantees may be released without
action on the part of the holders of Senior Notes
in certain circumstances. As of December 31, 1997,
on a pro forma basis after giving effect to the
Offerings and the application of the estimated net
proceeds therefrom to reduce indebtedness under the
Amended Credit Agreement, the Subsidiary Guarantors
would have had approximately
6
<PAGE> 11
$262.0 million of other senior indebtedness (all of
which would have been guarantees of indebtedness
under the Amended Credit Agreement). The Indenture
relating to the Senior Notes does not contain any
limitation on the incurrence of additional
indebtedness by the Company's subsidiaries.
Security................... The Senior Notes and the Subsidiary Guarantees are
secured, subject to the provisions of the Amended
Collateral Documents, equally and ratably with the
indebtedness of the Company and the Subsidiary
Guarantors under the Amended Credit Agreement and
related documents and liabilities in connection
with interest rate protection and other hedging
agreements contemplated by the Amended Credit
Agreement, by a security interest in the
Collateral. The Collateral may be released without
action on the part of the holders of Senior Notes
in certain circumstances. As of December 31, 1997,
after giving effect to the Offerings and the
application of the estimated net proceeds therefrom
to reduce indebtedness under the Amended Credit
Agreement, the Company and its subsidiaries would
have had approximately $262.0 million of other
secured indebtedness outstanding (all of which
would have been indebtedness outstanding under the
Amended Credit Agreement). For a description of the
Collateral and the Amended Collateral Documents,
see "Description of Other Indebtedness" and
"Description of the Senior Notes".
Restrictive Covenants...... The Indenture contains certain covenants that limit
(i) the granting of certain additional liens
without securing the Senior Notes equally and
ratably, (ii) the entering into of certain sale and
leaseback transactions and (iii) certain
consolidations, mergers and transfers of assets.
However, these limitations are subject to a number
of important qualifications. See "Description of
the Senior Notes -- Certain Covenants" and
"-- Merger, Consolidation or Sale of Assets".
Use of Proceeds............ There will be no cash proceeds to the Company from
the Exchange Offer.
7
<PAGE> 12
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth summary consolidated financial and other data
of Coltec for the five years ended December 31, 1997 and for three months ended
March 30, 1998 and March 29, 1998. The information should be read in conjunction
with Coltec's consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus and incorporated by reference
herein. The statement of earnings data and other financial data for 1993, 1994
and 1995 have been restated to reflect the sale of the Company's automotive
original equipment components business in 1996, which was accounted for as a
discontinued operation. The summary consolidated financial and other data, with
the exception of order backlog, at and for the years ended December 31, 1993
through 1997, were derived from the consolidated financial statements of Coltec
which have been audited by Arthur Andersen LLP, independent public accountants.
The selected consolidated financial and other data, with the exception of order
backlog, at and for the three months ended March 30, 1997 and March 29, 1998
were derived from the unaudited consolidated financial statements of Coltec
which are incorporated by reference herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, ---------------------
---------------------------------------------------- MARCH 30, MARCH 29,
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net sales....................................... $1,061.4 $1,000.2 $1,099.6 $1,159.7 $1,314.9 $ 309.2 $ 374.4
Cost of goods sold.............................. 703.9 648.3 744.2 811.1 898.3 211.7 260.1
-------- -------- -------- -------- -------- -------- --------
Gross profit.................................... 357.5 351.9 355.4 348.6 416.6 97.5 114.3
Selling and administrative...................... 183.8 186.7 186.4 191.0 218.8 52.6 61.0
Special charge(a)............................... 25.2 -- 27.0 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating income(b)............................. 148.5 165.2 142.0 157.6 197.8 44.9 53.3
Interest expense and other, net................. 110.2 89.5 89.9 74.9 54.0 12.4 15.1
Income taxes.................................... 13.7 27.2 17.6 28.1 48.9 11.0 13.0
-------- -------- -------- -------- -------- -------- --------
Earnings from continuing operations before
extraordinary item(b)......................... 24.6 48.5 34.5 54.6 94.9 21.5 25.2
Discontinued operations(c)...................... 40.6 45.5 36.7 57.1 -- -- --
Extraordinary item(d)........................... (17.8) (1.5) (.3) (30.6) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net earnings.................................... $ 47.4 $ 92.5 $ 70.9 $ 81.1 $ 94.9 $ 21.5 $ 25.2
======== ======== ======== ======== ======== ======== ========
Earnings (loss) per common share:(e)
Before extraordinary item..................... $ .35 $ .70 $ .49 $ .79 $ 1.42 $ .32 $ .38
Discontinued operations....................... .59 .65 .53 .82 -- -- --
Extraordinary item............................ (.26) (.02) -- (.44) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net earnings per share.......................... $ .68 $ 1.33 $ 1.02 $ 1.17 $ 1.42 $ .32 $ .38
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital................................. $ 163.1 $ 189.6 $ 208.9 $ 215.6 $ 187.9 $ 217.2 $ 228.4
Total assets.................................... 796.5 847.5 894.5 849.5 933.0 851.9 1,076.1
Total debt...................................... 1,033.6 970.1 945.8 720.3 759.4 731.3 860.0
Shareholders' equity............................ (625.5) (525.6) (453.8) (417.0) (359.2) (413.7) (335.2)
OTHER FINANCIAL DATA:
EBITDA(f)....................................... $ 197.5 $ 207.3 $ 184.1 $ 193.6 $ 236.2 $ 53.4 $ 65.7
Cash flows from operating activities............ 105.2 98.2 91.0 49.5 61.4 12.7 10.1
Cash flows from investing activities............ (9.9) (41.4) (66.8) 284.6 (141.9) (13.6) (96.3)
Cash flows from financing activities............ (96.7) (58.4) (24.5) (323.0) 80.2 (6.4) 92.6
Capital expenditures............................ 38.6 38.2 42.5 44.6 81.2 13.6 15.0
Order backlog (at end of period)(g)............. 598.6 594.2 657.1 678.3 875.6 805.9 968.2
Ratio of earnings to fixed charges(h)........... 1.3x 1.8x 1.6x 2.1x 3.5x 3.5x 3.4x
Ratio of EBITDA to interest expense(i).......... 1.8x 2.3x 2.0x 2.6x 4.4x 4.3x 4.4x
Ratio of total debt to EBITDA(j)................ 5.2x 4.7x 5.1x 3.7x 3.2x 13.7x 13.1x
</TABLE>
- ---------------
(a) In 1997, Coltec incurred a special charge of $10.0 million for the
restructuring of its Industrial segment. In 1997, the remaining $10.0 million
accrual for the 1995 special charge was reversed. In 1995, Coltec incurred a
special charge of $27.0 million primarily in the Aerospace Segment to cover
the costs of closing the Walbar compressor blade facility in Canada. The
charge also covered selected workforce reductions throughout the Company. In
1993, Coltec incurred a special charge of $25.2 million to cover the cost of
consolidation and rearrangement of certain manufacturing facilities and
related workforce reductions primarily in the Aerospace segment.
(b) Operating income for 1996 included a charge of $14.2 million related to the
bankruptcy of Fokker Aircraft B.V. ("Fokker"), a major aerospace customer of
Coltec.
8
<PAGE> 13
(c) See note 2 to the audited consolidated financial statements of Coltec
included elsewhere in this Prospectus.
(d) See note 3 to the audited consolidated financial statements of Coltec
included elsewhere in this Prospectus. Extraordinary charges relate to either
early retirement of debt or debt refinancings.
(e) Represents diluted earnings per common share. See note 5 to the audited
consolidated financial statements and note 3 to the unaudited interim
consolidated financial statements of Coltec included elsewhere in this
Prospectus. The Company's reported earnings per common share for 1996, 1995,
1994 and 1993 equaled diluted earnings per share as set forth in Statement of
Financial Accounting Standards No. 128.
(f) "EBITDA" as used herein means earnings from continuing operations before
extraordinary item plus interest expense, taxes, depreciation and
amortization. EBITDA is presented because the Company believes that it is a
widely accepted indicator of cash flow and a company's ability to incur and
service indebtedness. However, EBITDA should not be considered as a measure
of operating performance or as an alternative to, or more meaningful than,
operating income, net income or cash flows from operations (as measured by
U.S. generally accepted accounting principles). EBITDA as presented herein
may not be comparable to similarly titled measures presented by other
companies. EBITDA for 1993 would have been $222.7 million excluding the
special charge of $25.2 million described in note (a) above. EBITDA for 1995
would have been $211.1 million excluding the $27.0 million special charge
described in note (a) above.
(g) Of the $875.6 million backlog at December 31, 1997, $267.2 million was
scheduled to be shipped after 1998.
(h) 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 before extraordinary
item. Fixed charges consist of interest expense, capitalized interest and
that portion of rental expense deemed to be representative of the interest
factor.
(i) The ratio of EBITDA to interest expense for 1993 and 1995, based upon EBITDA
of $222.7 million and $211.1 million, respectively, as described in note (f)
above, would have been 2.0x and 2.3x, respectively.
(j) The ratio of total debt to EBITDA for 1993 and 1995, based upon EBITDA of
$222.7 million and $211.1 million, respectively, as described in note (f)
above, would have been 4.6x and 4.5x, respectively.
9
<PAGE> 14
RISK FACTORS
Prospective holders of the Exchange Notes should carefully review the
information contained elsewhere in this Prospectus and should particularly
consider the following factors.
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this Prospectus,
including, without limitation, the statements under "Prospectus Summary",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and located elsewhere herein regarding industry
prospects, the Company's prospects and the Company's financial position are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations (the "Cautionary Statements") are disclosed in this Prospectus,
including, without limitation, those factors described below. All subsequent
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements.
SUBSTANTIAL LEVERAGE; SHAREHOLDERS' DEFICIT
As of March 29, 1998 and December 31, 1997, Coltec's total indebtedness was
$860.0 million and $759.4 million, respectively. At such dates, Coltec had total
assets of $1,076.1 million and $933.0 million, respectively, and a shareholders'
deficit of $335.2 million and $359.2 million, respectively. As of March 29, 1998
and December 31, 1997, after giving effect to the Offerings and the use of the
estimated net proceeds therefrom to reduce indebtedness under the Amended Credit
Agreement, Coltec's indebtedness would have been $724.5 million and $623.9
million, respectively, and Coltec also would have had outstanding $150 million
of company-obligated mandatorily redeemable Convertible Preferred Securities.
The degree to which Coltec is leveraged could have important consequences
to the holders of Senior Notes. Coltec's substantial indebtedness could
materially adversely 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 the securities offered hereby.
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.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Amended 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. These
restrictions, in combination with the highly leveraged nature of Coltec, could
limit the ability of Coltec to effect future financings and otherwise limit
future business activities, which, in each case, could have a material adverse
effect on Coltec. See "Description of Other Indebtedness".
CYCLICAL BUSINESS; GOVERNMENT CONTRACTS
The Aerospace, Industrial and other business sectors to which Coltec sells
its products are, to varying degrees, cyclical and have historically experienced
periodic downturns, which often have had a negative effect on demand for
Coltec's products. Prior downturns have resulted in negative effects on Coltec's
net sales, gross margin and net income. Although Coltec believes that, by
concentrating on products with strong aftermarket demand, it has reduced its
exposure to such business downturns, any future material weakness in demand in
any of these industries could have a material adverse effect on the business,
financial condition and results of operations of Coltec. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Additionally, many of Coltec's competitors have substantially greater financial
resources than Coltec and may be better able to withstand the effects of such
periodic downturns.
10
<PAGE> 15
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. In addition, substantially all
of Coltec's government contracts are fixed-price contracts under which Coltec
agrees to perform the work for a fixed price and, accordingly, realizes all the
benefit or detriment occasioned by decreased or increased costs of performing
the contracts. From time to time, Coltec accepts fixed-price contracts for
products that have not been previously developed. In such cases, Coltec is
subject to the risk of delays and cost overruns. See "Business -- Contract
Risks".
ASBESTOS LITIGATION
The historical business operations of Coltec have resulted in a substantial
volume of asbestos litigation, in which plaintiffs have alleged personal injury
or death as a result of exposure to asbestos fibers in a number of products
which were manufactured or distributed by two of the Company's subsidiaries.
While the Company believes that several factors, including agreed upon funding
agreements with its insurance carriers, will provide resources sufficient to
meet the vast majority of the currently anticipated costs and expenses
associated with this litigation, the large volume of current and potential
future asbestos claims, the depletion of insurance coverage of a small
non-operating subsidiary, the payment of some non-insured litigation costs and
the unavailability of insurance for claims alleging first exposure to asbestos
after July 1, 1984 may result in liabilities to the Company in the future that
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "-- Potential Exposure to Environmental
Liabilities" below and "Business -- Legal Proceedings -- Asbestos Litigation".
POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES
Coltec is subject to various federal, state and local environmental laws,
ordinances and regulations, including those governing discharges of pollutants
into the air and water, the storage, handling and disposal of solid wastes,
hazardous wastes and hazardous substances and the health and safety of employees
("Environmental Laws"). Violations of Environmental Laws could result in
liability for government penalties, claims by third parties for personal injury
and property damage, costs of investigation and remediation of contamination and
the cost of natural resource damage. Agencies responsible for enforcing
Environmental Laws have authority to impose significant civil or criminal
penalties for non-compliance. Coltec believes it is currently in material
compliance with all applicable requirements of Environmental Laws, but there can
be no assurance that some future non-compliance will not result in the
imposition of significant liabilities.
Future events, such as new information concerning past releases of
hazardous substances, changes in existing Environmental Laws or their
interpretation, and more rigorous enforcement by regulatory authorities, may
give rise to additional expenditures, compliance requirements or liabilities
that could have a material adverse effect on the business, financial condition
and results of the operations of Coltec. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations -- Environmental
Matters" and "Business -- Environmental Matters".
COLLATERAL
The Senior Notes are secured, equally and ratably, with indebtedness under
the Amended Credit Agreement and related documents and liabilities in connection
with interest rate protection and other hedging agreements contemplated by the
Amended Credit Agreement, by a security interest in the Collateral pursuant to
the Amended Collateral Documents. The Amended Collateral Documents may be
amended to, among other things, secure additional extensions of credit or add
additional secured creditors without the consent of the Senior Noteholders or
the Trustee under the Indenture. See "Description of Other Indebtedness -- The
Amended Credit Agreement -- Collateral" for a description of the Collateral and
the Amended Collateral Documents.
In the event of foreclosure on the Collateral, the proceeds from the sale
of the Collateral may not be sufficient to satisfy the Company's obligations
under the Senior Notes and the Amended Credit Agreement in full. The amount to
be received upon such a sale would be dependent upon numerous factors including
the timing and the manner of the sale. In addition, the book value of the
Collateral should not be relied upon as a measure of
11
<PAGE> 16
realizable value. By its nature, the Collateral will be illiquid and may have no
readily ascertainable market value. Accordingly, there can be no assurance that
the Collateral can be sold in a short period of time. A significant portion of
the Collateral includes assets which may only be usable as part of the existing
operating businesses of the Company. Accordingly, any such sale of the
Collateral, including the real property portion thereof, separate from the sale
of certain of the Company's operating businesses, may not be feasible or of
significant value. To the extent that third parties enjoy Permitted Liens (as
defined herein) or liens otherwise permitted under the Indenture, such third
parties may have rights and remedies with respect to the property subject to
such permitted Liens that, if exercised, could adversely affect the value or
availability of the Collateral. In addition, the ability of the holders of
Senior Notes to realize upon any of the Collateral may be subject to certain
bankruptcy law limitations in the event of a bankruptcy.
Under the Amended Collateral Documents, the control of foreclosure
proceedings, the enforcement and amendment of the Amended Collateral Documents
and the right to take other actions with respect to the Collateral belong solely
to the Collateral Agent and the lenders under the Amended Credit Agreement. The
lenders under the Amended Credit Agreement may release Collateral, in whole or
in part, from time to time, and in such event, the Collateral so released will
be automatically released as security for the Senior Notes without any action on
the part of the Trustee or the Senior Noteholders. In addition, all Collateral
under the Amended Credit Agreement and the Amended Collateral Documents will be
automatically released upon the Company's long-term indebtedness being rated
BBB- by Standard & Poor's Ratings Group and Baa3 by Moody's Investors Service,
Inc., and in such event, all Collateral securing the Senior Notes will also be
automatically released without any action on the part of the Trustee or the
Senior Noteholders. See "Description of Other Indebtedness -- The Amended Credit
Agreement -- Collateral".
CERTAIN SUBSIDIARIES NOT INCLUDED AS SUBSIDIARY GUARANTORS
The Subsidiary Guarantors include only the domestic subsidiaries of the
Company that have guaranteed the Company's obligations under the Amended Credit
Agreement. However, the consolidated financial information included in this
Offering Circular is presented on a consolidated basis, including both domestic
and foreign subsidiaries of the Company. See note 20 to the Company's audited
consolidated financial statements and note 6 to the Company's unaudited interim
financial statements included elsewhere in this Prospectus for Subsidiary
Guarantor financial information.
LACK OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Outstanding Notes are currently owned by a small number of beneficial
owners. The Outstanding Notes have not been registered under the Securities Act
and are subject to significant restrictions on resale. The Exchange Notes will
be a new issue of securities for which there is currently no trading market.
There can be no assurance regarding the future development of a market for the
Exchange Notes, or the ability of holders of the Exchange Notes to sell their
Exchange Notes or the price at which holders may be able to sell their Exchange
Notes. If the Exchange Notes are traded after their initial issuance, they may
trade at a discount from their initial offering price, depending upon prevailing
interest rates, the market for similar securities and other factors, including
general economic conditions and the financial condition and performance of, and
prospects for, the Company. To the extent that Outstanding Notes are tendered
and accepted in the Exchange Offer, the trading market for untendered and
tendered but unaccepted Outstanding Notes could be adversely affected. The
Company does not intend to apply for listing of the Exchange Notes on any
securities exchange, or for quotation of the Exchange Notes on any automated
quotation system.
Historically, the market for non-investment grade debt securities has from
time to time been subject to disruptions that have caused substantial volatility
in the prices of such securities. There can be no assurance that the market for
the Senior Notes will not be subject to similar disruptions. Any such
disruptions may have an adverse effect on the holders of the Senior Notes and
the Exchange Notes.
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Outstanding Notes pursuant
to the Exchange Offer will be made only after a timely receipt by the Company of
Outstanding Notes, a properly completed and duly executed Letter of Transmittal
or an Agent's Message (as defined herein) in lieu thereof and all other required
documents.
12
<PAGE> 17
Therefore, holders of the Outstanding Notes desiring to tender their Outstanding
Notes in exchange for Exchange Notes should allow sufficient time to ensure
timely delivery. The Company is under no duty to give notification of defects or
irregularities with respect to the tenders of Outstanding Notes for exchange.
Outstanding Notes that are not tendered or are tendered but not accepted will,
following the consummation of the Exchange Offer, continue to be subject to the
existing restrictions on transfer thereof. See "The Exchange Offer".
CONSEQUENCES OF FAILURE TO EXCHANGE AND REQUIREMENTS FOR TRANSFER OF EXCHANGE
NOTES
Holders of Outstanding Notes who do not exchange their Outstanding Notes
for Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the provisions in the Indenture regarding transfer and exchange of the
Outstanding Notes and the restrictions on transfer of such Outstanding Notes as
set forth in the legend thereon as a consequence of the issuance of the
Outstanding Notes pursuant to exemptions from or in transactions not subject to,
the registration requirements of the Securities Act and applicable state
securities laws. In general, the Outstanding Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register Outstanding Notes under the Securities Act. Based on interpretations by
the staff of the Commission, as set forth in no-action letters issued to third
parties, the Company believes that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Outstanding Notes may be offered for resale,
resold or otherwise transferred by holders thereof (other than any such holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such Exchange
Notes. However, the Company does not intend to request the Commission to
consider, and the Commission has not considered, the Exchange Offer in the
context of a no-action letter and there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer as in such other circumstances. Each holder, other than a broker-dealer,
must acknowledge that (i) the Exchange Notes received by such holder will be
acquired in the ordinary course of its business, (ii) at the time of the
consummation of the Exchange Offer such holder will have not engaged in, and
does not intend to engage in, a distribution of Exchange Notes and has no
arrangement or understanding to participate in a distribution of Exchange Notes
and (iii) such holder is not an affiliate of the Company within the meaning of
Rule 405 of the Securities Act or if it is such an affiliate, that it will
comply with the registration and prospectus delivery requirements of the
Securities Act, to the extent applicable. If any holder is an affiliate of the
Company, is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the Exchange Notes to be
acquired pursuant to the Exchange Offer, such holder (i) could not rely on the
applicable interpretations of the staff of the Commission and (ii) must comply
with the registration and prospectus delivery requirement of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Outstanding Notes, where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution". However, to
comply with state securities laws, the Exchange Notes may not be offered or sold
in any state unless they have been registered or qualified for sale in such
state or an exemption from registration or qualification is available and is
complied with. The offer and sale of the Exchange Notes to "qualified
institutional buyers" (as such term is defined under Rule 144A of the Securities
Act) is generally exempt from registration or qualification under state
securities laws. The Company currently does not intend to register or qualify
the sale of the Exchange Notes in any state where an exemption from registration
or qualification is required and not available. See "The Exchange
Offer -- Consequences of Failure to Exchange and Requirements for Transfer for
Exchange Notes".
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<PAGE> 18
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OUTSTANDING NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept for
exchange Outstanding Notes which are properly tendered on or prior to the
Expiration Date and not withdrawn as permitted below. As used herein, the term
"Expiration Date" means midnight, New York City time, on , 1998;
provided, however, that if the Company, in its sole discretion, has extended the
period of time for which the Exchange Offer is open, the term "Expiration Date"
means the latest time and date to which the Exchange Offer is extended.
As of the date of this Prospectus, $300.0 million aggregate principal
amount of the Outstanding Notes is outstanding. This Prospectus, together with
the Letter of Transmittal, is first being sent on or about , 1998, to
all holders of Outstanding Notes known to the Company. The Company's obligation
to accept Outstanding Notes for exchange pursuant to the Exchange Offer is
subject to certain conditions as set forth below under "-- Certain Conditions to
the Exchange Offer".
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer remains open, and
thereby delay acceptance for exchange of any Outstanding Notes, by giving oral
or written notice of such extension in the manner described below. During any
such extension, all Outstanding Notes previously tendered will remain subject to
the Exchange Offer and may be accepted for exchange by the Company. Any
Outstanding Notes not accepted for exchange for any reason will be returned
without expense to the tendering holder thereof as promptly as practicable after
the expiration or termination of the Exchange Offer.
Outstanding Notes tendered in the Exchange Offer must be in denominations
of principal amounts of $1,000 and any integral multiples thereof.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Outstanding Notes not theretofore
accepted for exchange, upon the occurrence of any of the events specified below
under "-- Certain Conditions to the Exchange Offer". The Company will give oral
or written notice of any extension, amendment, non-acceptance or termination to
the holders of the Outstanding Notes as promptly as practicable, such notice in
the case of any extension to be issued by means of press release or other public
announcement no later than 9:00 a.m., New York City time, on the next business
day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OUTSTANDING NOTES
The tender to the Company of Outstanding Notes by a holder thereof as set
forth below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to tender
Outstanding Notes for exchange pursuant to the Exchange Offer must transmit a
properly completed and duly executed Letter of Transmittal, including all other
documents required by such Letter of Transmittal or (in the case of a book-entry
transfer) an Agent's Message in lieu of such Letter of Transmittal, to the
Exchange Agent at the address set forth below under "-- Exchange Agent" on or
prior to the Expiration Date. In addition, either (i) certificates for such
Outstanding Notes must be received by the Exchange Agent along with the Letter
of Transmittal, or (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Outstanding Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
("DTC" or the "Book-Entry Transfer Facility") pursuant to the procedure for
book-entry transfer described below, must be received by the Exchange Agent
prior to the Expiration Date with the Letter of Transmittal or Agent's Message
in lieu of such Letter of Transmittal, or (iii) the holder must comply with the
guaranteed delivery procedures described below. The term "Agent's Message" means
a message, transmitted by the Book-Entry Transfer Facility to and received by
the Exchange Agent and forming a part of a Book-Entry Confirmation, which states
that the Book-Entry Transfer Facility has received an express acknowledgment
from the tendering participant, which acknowledgment states that such
participant has received and agrees to be bound by, and makes the
representations and warranties contained in,
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<PAGE> 19
the Letter of Transmittal and that the Company may enforce such Letter of
Transmittal against such participant. THE METHOD OF DELIVERY OF THE OUTSTANDING
NOTES, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED
THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. NO LETTER OF TRANSMITTAL OR
OUTSTANDING NOTES SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or a firm which is otherwise an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (collectively,
"Eligible Institutions"), unless the Outstanding Notes tendered pursuant thereto
are tendered (i) by a registered holder of the Outstanding Notes who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution. If Outstanding Notes are registered in the name of a
person other than a signer of the Letter of Transmittal, the Outstanding Notes
surrendered for exchange must be endorsed by, or be accompanied by a written
instrument or instruments of transfer or exchange, in satisfactory form as
determined by the Company in its sole discretion, duly executed by, the
registered holder with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder or holders of any Outstanding Notes listed therein, such
Outstanding Notes must be endorsed or accompanied by appropriate powers of
attorney, in either case signed exactly as the name of the registered holder or
holders appears on the Outstanding Notes.
If the Letter of Transmittal or any Outstanding Notes or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Outstanding Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
tenders of any particular Outstanding Notes not properly tendered or to not
accept any particular Outstanding Notes the Company's acceptance of which would,
in the opinion of the Company or its counsel, be unlawful. The Company also
reserves the absolute right to waive any defects or irregularities or conditions
of the Exchange Offer as to any particular Outstanding Notes either before or
after the Expiration Date (including the right to waive the ineligibility of any
holder who seeks to tender Outstanding Notes in the Exchange Offer). The
Company's interpretation of the terms and conditions of the Exchange Offer as to
any particular Outstanding Notes either before or after the Expiration Date
(including the Letter of Transmittal and the instructions therein) will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Outstanding Notes must be cured within such time as
the Company shall determine. Neither the Company, the Exchange Agent nor any
other person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Outstanding Notes nor shall any of
them incur any liability for failure to give such notification. Tenders of
Outstanding Notes will not be deemed to have been made until such irregularities
have been cured or waived. Any Outstanding Notes received by the Exchange Agent
that are not properly tendered and as to which the defects or irregularities
have not been cured or waived will be returned without cost by the Exchange
Agent to the tendering holder of such Outstanding Notes unless otherwise
provided in the Letter of Transmittal as soon as practicable following the
Expiration Date.
In addition, the Company reserves the right in its sole discretion to (a)
purchase or make offers for any Outstanding Notes that remain outstanding
subsequent to the Expiration Date, or, as set forth under "-- Certain
15
<PAGE> 20
Conditions to the Exchange Offer", to terminate the Exchange Offer and (b) to
the extent permitted by applicable law, purchase Outstanding Notes in the open
market, in privately negotiated transactions or otherwise. The terms of any such
purchases or offers may differ from the terms of the Exchange Offer.
By tendering, each holder of Outstanding Notes will represent to the
Company that, among other things, the Exchange Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is the holder,
and that neither the holder nor any other person has any arrangement or
understanding with any person to participate in the distribution of the Exchange
Notes. In the case of a holder that is not a broker-dealer, each such holder, by
tendering, will also represent to the Company that such holder is not engaged
in, or intends to engage in, a distribution of the Exchange Notes. If any holder
or any such other person is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company, or is engaged in or intends to engage in or has
an arrangement or understanding with any person to participate in a distribution
of such Exchange Notes to be acquired pursuant to the Exchange Offer, such
holder or any such other person (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Outstanding Notes, where such
Outstanding Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
See "Plan of Distribution". The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Outstanding
Notes properly tendered and will issue the Exchange Notes promptly after
acceptance of the Outstanding Notes. See "--Certain Conditions to the Exchange
Offer".
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted properly tendered Outstanding Notes for exchange when, as and if the
Company has given oral or written notice thereof to the Exchange Agent, with
written confirmation of any oral notice to be given promptly thereafter.
For each Outstanding Note accepted for exchange, the holder of such
Outstanding Note will receive an Exchange Note having a principal amount equal
to that of the surrendered Outstanding Note. Interest on the Exchange Notes will
accrue from the last interest payment date on which interest was paid on the
Outstanding Notes surrendered in exchange therefor, or if no interest has been
paid on the Outstanding Notes, from the Issue Date. Holders of Outstanding Notes
whose Outstanding Notes are accepted for exchange will be deemed to have waived
the right to receive any payment in respect of interest on such Outstanding
Notes otherwise payable on any interest payment date the record date for which
occurs on or after consummation of the Exchange Offer. Consequently, holders who
exchange their Outstanding Notes for Exchange Notes will receive the same
interest payment on October 15, 1998 (the first interest payment date with
respect to the Outstanding Notes and the Exchange Notes) that they would have
received had they not accepted the Exchange Offer.
In all cases, issuance of Exchange Notes for Outstanding Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of (i) certificates for such Outstanding
Notes or a timely Book-Entry Confirmation of such Outstanding Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility, (ii) a properly
completed and duly executed Letter of Transmittal or an Agent's Message in lieu
thereof and (iii) all other required documents. If any tendered Outstanding
Notes are not accepted for any reason set forth in the terms and conditions of
the Exchange Offer or if Outstanding Notes are submitted for a greater principal
amount that the holder desired to exchange, such unaccepted or non-exchanged
Outstanding Notes will be returned without expense to the tendering holder
thereof (or, in the case of Outstanding Notes tendered by book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant
to the book-entry procedures described below, such non-exchanged Outstanding
Notes will be credited to an account maintained with such Book-Entry Transfer
Facility) as promptly as practicable after the expiration or termination of the
Exchange Offer.
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<PAGE> 21
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Outstanding Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Outstanding Notes by causing
the Book-Entry Transfer Facility to transfer such Outstanding Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Outstanding Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal (or a facsimile thereof
or an Agent's Message in lieu thereof), with any required signature guarantees
and any other required documents, must, in any case, be transmitted to and
received by the Exchange Agent at one of the addresses set forth below, under
"-- Exchange Agent" on or prior to the Expiration Date or the guaranteed
delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
Any registered holder who desires to tender its Outstanding Notes (i) whose
Outstanding Notes are not immediately available, (ii) who cannot deliver their
Outstanding Notes, the Letter of Transmittal, or any other required documents to
the Exchange Agent prior to the Expiration Date, or (iii) who cannot complete
the procedure for book-entry transfer on a timely basis, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Outstanding Notes,
the certificate number or numbers of such Outstanding Notes and the
principal amount of Outstanding Notes tendered, stating that the tender is
being made thereby, and guaranteeing that, within three business days after
the Expiration Date, the certificates for all physically tendered
Outstanding Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, together with a properly completed and
duly executed Letter of Transmittal (or a facsimile thereof or an Agent's
Message in lieu thereof), with any required signature guarantees and any
other documents required by the Letter of Transmittal, will be deposited by
the Eligible Institution with the Exchange Agent; and
(c) The certificates for all physically tendered outstanding Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the case may be,
together with a properly completed and duly executed Letter of Transmittal
(or a facsimile thereof or an Agent's Message in lieu thereof) with any
required signature guarantees, and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within three
business days after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to midnight, New York City time, on the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at its address set forth herein prior to
midnight, New York City time, on the Expiration Date. Any such notice of
withdrawal must (i) specify the name of the person having tendered the
Outstanding Notes to be withdrawn (the "Depositor"), (ii) include a statement
that the Depositor is withdrawing its election to have Outstanding Notes
exchanged, and identify the Outstanding Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Outstanding Notes),
and (iii) where certificates for Outstanding Notes have been transmitted,
specify the name in which such Outstanding Notes are registered, if different
from that of the Depositor. If certificates for Outstanding Notes have been
delivered or otherwise identified to the Exchange Agent, then, prior to the
release of such certificates the withdrawing holder must also submit the serial
numbers of the particular certificates to be withdrawn and signed notice of
withdrawal with signatures guaranteed by an Eligible Institution unless such
holder is an Eligible Institution. If Outstanding Notes have been tendered
pursuant
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<PAGE> 22
to the procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Outstanding Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) for such withdrawal
notices will be determined by the Company, whose determination shall be final
and binding on all parties. Any Outstanding Notes so withdrawn will be deemed
not to have been validly tendered for purposes of the Exchange Offer and no
Exchange Notes will be issued with respect thereto unless the Outstanding Notes
so withdrawn are validly retendered. Any Outstanding Notes which have been
tendered but which are not accepted for exchange for any reason will be returned
to the holder thereof without cost to such holder (or, in the case of
Outstanding Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Outstanding Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Outstanding
Notes) as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Outstanding Notes may be
retendered by following one of the procedures described above under
"-- Procedures for Tendering Outstanding Notes" at any time prior to midnight,
New York City time, on the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
The Exchange Offer is not subject to any conditions, other than that the
Exchange Offer does not violate applicable law or any applicable interpretation
of the staff of the Commission. There can be no assurance that any such
condition will not occur. Holders of Outstanding Notes will have certain rights
under the Registration Rights Agreement should the Company fail to consummate
the Exchange Offer.
If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any Outstanding Notes and
return any Outstanding Notes that have been tendered to the holders thereof,
(ii) extend the Exchange Offer and retain all Outstanding Notes tendered prior
to the Expiration Date, subject to the rights of such holders of tendered
Outstanding Notes to withdraw their tendered Outstanding Notes, or (iii) waive
such termination event with respect to the Exchange Offer and accept all
properly tendered Outstanding Notes that have not been withdrawn. If such waiver
constitutes a material change in the Exchange Offer, the Company will disclose
such change by means of a supplement to this Prospectus that will be distributed
to each registered holder of Outstanding Notes, and the Company will extend the
Exchange Offer for a period of five to ten business days, depending upon the
significance of the waiver and the manner of disclosure to the registered
holders of the Outstanding Notes, if the Exchange Offer would otherwise expire
during such period.
EXCHANGE AGENT
The Trustee under the Indenture, has been appointed as Exchange Agent for
the Exchange Offer. All executed Letters of Transmittal should be directed to
the Exchange Agent at one of the addresses set forth below. Questions and
requests for assistance and requests for additional copies of this Prospectus or
of the Letter of Transmittal should be directed to the Exchange Agent addressed
as follows:
<TABLE>
<S> <C> <C>
By Mail or Overnight Courier By Hand
Bankers Trust Company Bankers Trust Company
4 Albany Street, 4th Floor 4 Albany Street, 4th Floor
New York, NY 10006 New York, NY 10006
Attention: Corporate Trust Services Attention: Corporate Trust Services
Confirm by Telephone
(212) 250-2500
</TABLE>
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
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<PAGE> 23
FEES AND EXPENSES
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated to be $100,000.
TRANSFER TAXES
Holders who tender their Outstanding Notes for exchange will not be
obligated to pay any transfer taxes in connection therewith, except that holders
who instruct the Company to register Exchange Notes in the name of, or request
that Outstanding Notes not tendered or not accepted in the Exchange Offer be
returned to, a person other than the registered tendering holder will be
responsible for the payment of any applicable transfer tax thereon.
CONSEQUENCES OF EXCHANGING OUTSTANDING NOTES
Holders of Outstanding Notes who do not exchange their Outstanding Notes
for Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the provisions in the Indenture regarding transfer and exchange of the
Outstanding Notes and the restrictions on transfer of such Outstanding Notes as
set forth in the legend thereon as a consequence of the issuance of the
Outstanding Notes pursuant to exemptions from, or in transactions not subject
to, the registration requirements of the Securities Act and applicable state
securities laws. In general, the Outstanding Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register Outstanding Notes under the Securities Act. See "Description of the
Senior Notes -- Registered Exchange Offer; Registration Rights". Based on
interpretations by the staff of the Commission, as set forth in no-action
letters issued to third parties, the Company believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange for Outstanding Notes may be offered
for resale, resold or otherwise transferred by holders thereof (other than any
such holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holders' business and
such holders have no arrangement with any person to participate in the
distribution of such Exchange Notes. However, the Company does not intend to
request the Commission to consider, and the Commission has not considered, the
Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances. Each holder,
other than a broker-dealer, must acknowledge that (i) the Exchange Notes
received by such holder will be acquired in the ordinary course of its business,
(ii) at the time of the consummation of the Exchange Offer such holder will have
not engaged in, and does not intend to engage in, a distribution of Exchange
Notes and has no arrangement or understanding to participate in a distribution
of Exchange Notes and (iii) such holder is not an affiliate of the Company
within the meaning of Rule 405 of the Securities Act or if it is such an
affiliate, that it will comply with the registration and prospectus delivery
requirements of the Securities Act, to the extent applicable. If any holder is
an affiliate of the Company, is engaged in or intends to engage in or has any
arrangement or understanding with respect to the distribution of the Exchange
Notes to be acquired pursuant to the Exchange Offer, such holder (i) could not
rely on the applicable interpretations of the staff of the Commission and (ii)
must comply with the registration and prospectus delivery requirement of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives Exchange Notes for its own account in exchange for Outstanding
Notes must acknowledge that such Outstanding Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities and that it will deliver a prospectus in connection with any resale
of such Exchange Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of
19
<PAGE> 24
Exchange Notes received in exchange for Outstanding Notes, where such
Outstanding Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution." In addition, to comply with state securities
laws, the Exchange Notes may not be offered or sold in any state unless they
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with. The offer and
sale of the Exchange Notes to "qualified institutional buyers" (as such term is
defined under Rule 144A of the Securities Act) is generally exempt from
registration or qualification under state securities laws. The Company currently
does not intend to register or qualify the sale of the Exchange Notes in any
state where an exemption from registration or qualification is required and not
available.
20
<PAGE> 25
USE OF PROCEEDS
There will be no cash proceeds payable to the Company from the Exchange
Offer.
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes contemplated in this Prospectus,
the Company will receive Outstanding Notes in like principal amount, the form
and terms of which are the same as the form and terms of the Exchange Notes
(which they replace), except as otherwise described herein. The Outstanding
Notes surrendered in exchange for Exchange Notes will be retired and canceled
and cannot be reissued. Accordingly, the issuance of the Exchange Notes will not
result in any increase or decrease in the indebtedness of the Company.
The aggregate net proceeds to the Company from the Original Offering were
approximately $435.5 million. The net proceeds from the Original Offering were
used by the Company to reduce indebtedness under the Amended Credit Agreement.
CAPITALIZATION
The following table sets forth the consolidated capitalization of Coltec as
of December 31, 1997 and as of March 29, 1998 on a historical basis, and as
adjusted to give effect to the Offerings and the use of the estimated net
proceeds therefrom to reduce indebtedness under the Amended Credit Agreement, as
if such transactions had occurred on December 31, 1997 and on March 29, 1998,
respectively. The table should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Prospectus and
incorporated by reference. See "Selected Consolidated Financial and Other Data".
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 29, 1998
----------------------- -----------------------
ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents......................... $ 14,693 $ 14,693 $ 21,075 $ 21,075
========= ========= ========= =========
Current maturities of long-term debt.............. $ 1,811 $ 1,811 $ 4,184 $ 4,184
Long-term debt (excluding current maturities):
Amended Credit Agreement........................ 697,500 262,000 808,000 372,500
Senior Notes due 2008........................... -- 300,000 -- 300,000
Other debt due 1999-2010........................ 60,078 60,078 47,854 47,854
--------- --------- --------- ---------
Total long-term debt.................... 759,389 623,889 860,038 724,538
--------- --------- --------- ---------
Company-obligated mandatorily redeemable
convertible preferred securities of Coltec
Capital Trust................................... -- 150,000 -- 150,000
--------- --------- --------- ---------
Shareholders' equity:
Preferred Stock, $.01 par value, 2,500,000
shares authorized; no shares outstanding..... -- -- -- --
Common Stock, $.01 par value, 100,000,000 shares
authorized, 70,517,363 shares issued at March
29, 1998 and 70,501,948 shares issued at
December 31, 1997 (excluding 25,000,000
shares held by a wholly owned subsidiary).... 705 705 705 705
Capital surplus................................... 642,828 642,828 641,815 641,815
Retained deficit.................................. (912,029) (912,029) (886,808) (886,808)
Other equity...................................... (11,112) (11,112) (13,495) (13,495)
Less cost of 4,542,000 shares at March 31, 1998
and 4,666,406 shares at December 31, 1997 of
Common Stock in treasury........................ (79,553) (79,553) (77,445) (77,445)
--------- --------- --------- ---------
Total shareholders' equity.............. (359,161) (359,161) (335,228) (335,228)
--------- --------- --------- ---------
Total capitalization.................... $ 400,228 $ 414,728 $ 524,810 $ 539,310
========= ========= ========= =========
</TABLE>
21
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected consolidated financial and other
data of Coltec for the five years ended December 31, 1997 and for the three
months ended March 30, 1997 and March 29, 1998. The information should be read
in conjunction with Coltec's consolidated financial statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus and incorporated by reference
herein. The statement of earnings data and other financial data for 1993, 1994
and 1995 have been restated to reflect the sale of the Company's automotive
original equipment components business in 1996, which was accounted for as a
discontinued operation. The selected consolidated financial and other data, with
the exception of order backlog, at and for the years ended December 31, 1993
through 1997, were derived from the consolidated financial statements of Coltec
which have been audited by Arthur Andersen LLP, independent public accountants.
The selected consolidated financial and other data, with the exception of order
backlog, at and for the three months ended March 30, 1997 and March 29, 1998
were derived from the unaudited consolidated financial statements of Coltec
which are incorporated by reference herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, ---------------------
---------------------------------------------------- MARCH 30, MARCH 29,
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net sales....................................... $1,061.4 $1,000.2 $1,099.6 $1,159.7 $1,314.9 $ 309.2 $ 374.4
Cost of goods sold.............................. 703.9 648.3 744.2 811.1 898.3 211.7 260.1
-------- -------- -------- -------- -------- -------- --------
Gross profit.................................... 357.5 351.9 355.4 348.6 416.6 97.5 114.3
Selling and administrative...................... 183.8 186.7 186.4 191.0 218.8 52.6 61.0
Special charge(a)............................... 25.2 -- 27.0 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating income(b)............................. 148.5 165.2 142.0 157.6 197.8 44.9 53.3
Interest expense and other, net................. 110.2 89.5 89.9 74.9 54.0 12.4 15.1
Income taxes.................................... 13.7 27.2 17.6 28.1 48.9 11.0 13.0
-------- -------- -------- -------- -------- -------- --------
Earnings from continuing operations before
extraordinary item(b)......................... 24.6 48.5 34.5 54.6 94.9 21.5 25.2
Discontinued operations(c)...................... 40.6 45.5 36.7 57.1 -- -- --
Extraordinary item(d)........................... (17.8) (1.5) (.3) (30.6) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net earnings.................................... $ 47.4 $ 92.5 $ 70.9 $ 81.1 $ 94.9 $ 21.5 $ 25.2
======== ======== ======== ======== ======== ======== ========
Earnings (loss) per common share:(e)
Before extraordinary item..................... $ .35 $ .70 $ .49 $ .79 $ 1.42 $ .32 $ .38
Discontinued operations....................... .59 .65 .53 .82 -- -- --
Extraordinary item............................ (.26) (.02) -- (.44) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net earnings per share.......................... $ .68 $ 1.33 $ 1.02 $ 1.17 $ 1.42 $ .32 $ .38
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital................................. $ 163.1 $ 189.6 $ 208.9 $ 215.6 $ 187.9 $ 217.2 $ 228.4
Total assets.................................... 796.5 847.5 894.5 849.5 933.0 851.9 1,076.1
Total debt...................................... 1,033.6 970.1 945.8 720.3 759.4 731.3 860.0
Shareholders' equity............................ (625.5) (525.6) (453.8) (417.0) (359.2) (413.7) (335.2)
OTHER FINANCIAL DATA:
EBITDA(f)....................................... $ 197.5 $ 207.3 $ 184.1 $ 193.6 $ 236.2 $ 53.4 $ 65.7
Cash flows from operating activities............ 105.2 98.2 91.0 49.5 61.4 18.7 10.1
Cash flows from investing activities............ 9.9 (41.4) (66.8) 284.6 (141.9) (13.6) (96.3)
Cash flows from financing activities............ 96.7 (58.4) (24.5) (323.0) 80.2 (6.4) 92.6
Capital expenditures............................ 38.6 38.2 42.5 44.6 81.2 13.6 15.0
Order backlog (at end of period)(g)............. 598.6 594.2 657.1 678.3 875.6 805.9 968.2
Ratio of earnings to fixed charges(h)........... 1.3x 1.8x 1.6x 2.1x 3.5x 3.5x 3.4x
Ratio of EBITDA to interest expense(i).......... 1.8x 2.3x 2.0x 2.6x 4.4x 4.3x 4.4x
Ratio of total debt to EBITDA(j)................ 5.2x 4.7x 5.1x 3.7x 3.2x 13.7x 13.1x
</TABLE>
- ---------------
(a) In 1997, Coltec incurred a special charge of $10.0 million for the
restructuring of its Industrial segment. In 1997, the remaining $10.0 million
accrual for the 1995 special charge was reversed. In 1995, Coltec incurred a
special charge of $27.0 million primarily in the Aerospace Segment to cover
the costs of closing the Walbar compressor blade facility in Canada. The
charge also covered selected workforce reductions throughout the Company. In
1993, Coltec incurred a special charge of $25.2 million to cover the cost of
consolidation and rearrangement of certain manufacturing facilities and
related workforce reductions primarily in the Aerospace segment.
(b) Operating income for 1996 included a charge of $14.2 million related to the
bankruptcy of Fokker, a major aerospace customer of Coltec.
22
<PAGE> 27
(c) See note 2 to the audited consolidated financial statements of Coltec
included elsewhere in this Prospectus.
(d) See note 3 to the audited consolidated financial statements of Coltec
included elsewhere in this Prospectus. Extraordinary charges relate to either
early retirement of debt or debt refinancings.
(e) Represents diluted earnings per common share. See note 5 to the audited
consolidated financial statements and note 3 to the unaudited interim
consolidated financial statements of Coltec included elsewhere in this
Prospectus. The Company's reported earnings per common share for 1996, 1995,
1994 and 1993 equaled diluted earnings per share as set forth in Statement of
Financial Accounting Standards No. 128.
(f) "EBITDA" as used herein means earnings from continuing operations before
extraordinary item plus interest expense, taxes, depreciation and
amortization. EBITDA is presented because the Company believes that it is a
widely accepted indicator of cash flow and a company's ability to incur and
service indebtedness. However, EBITDA should not be considered as a measure
of operating performance or as an alternative to, or more meaningful than,
operating income, net income or cash flows from operations (as measured by
U.S. generally accepted accounting principles). EBITDA as presented herein
may not be comparable to similarly titled measures presented by other
companies. EBITDA for 1993 would have been $222.7 million excluding the
special charge of $25.2 million described in note (a) above. EBITDA for 1995
would have been $211.1 million excluding the $27.0 million special charge
described in note (a) above.
(g) Of the $875.6 million backlog at December 31, 1997, $267.2 million was
scheduled to be shipped after 1998.
(h) 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 before extraordinary
item. Fixed charges consist of interest expense, capitalized interest and
that portion of rental expense deemed to be representative of the interest
factor.
(i) The ratio of EBITDA to interest expense for 1993 and 1995, based upon EBITDA
of $222.7 million and $211.1 million, respectively, as described in note (f)
above, would have been 2.0x and 2.3x, respectively.
(j) The ratio of total debt to EBITDA for 1993 and 1995, based upon EBITDA of
$222.7 million and $211.1 million, respectively, as described in note (f)
above, would have been 4.6x and 4.5x, respectively.
23
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
In conjunction with the divestitures of the Company's automotive OEM
components operations during 1996 (see note 2 to the Company's audited
consolidated financial statements included elsewhere in this Prospectus), the
Company was realigned into two operating segments. The following are the major
products in each industry segment:
Aerospace: Menasco landing gear and flight control actuation systems;
Walbar blades, vanes and discs for jet and other gas turbine engines;
Chandler Evans fuel pumps and control systems; Delavan gas turbine
products; Lewis Engineering cockpit instrumentation and sensors; AMI flight
attendant seats.
Industrial: Garlock seals, gaskets, packings, bearings, valves and
tape; Quincy air compressors; Delavan spray nozzles; France compressor
products; FM Engine large diesel and dual-fuel engines; Haber and Sterling
dies; Ortman Fluid Power cylinders.
In January 1998, Coltec acquired Marine & Petroleum Mfg., Inc.,'s ("M&P")
manufacturing facilities based in Texas for approximately $17.0 million and
Tex-o-Lon and Repro-Lon for approximately $25.0 million. The M&P facilities
produce flexible graphite and PTFE fluid sealing products used in the
petrochemical business. Tex-o-Lon manufactures, machines and distributes PTFE
products, primarily for the semiconductor industry. Repro-Lon reprocesses PTFE
compounds for the chemical and semiconductor industries. These acquisitions were
combined into one division, Coltec Specialty Products. See note 19 to the
Company's audited consolidated financial statements included elsewhere in this
Prospectus.
In February 1998, Coltec purchased the Sealing Division of Groupe Carbone
Lorraine which will be segregated into two divisions. Cefilac, based in Saint
Etienne and Montbrison, France, produces seals, gaskets and packings, metal
o-rings and spiral-wound gaskets used in the chemical, power and refining
industries. Helicoflex, based in Columbia, South Carolina, produces metal
o-rings and spring-loaded seals and metal c-rings. Helicoflex sealing products
are specifically designed for equipment and processes exposed to high
temperatures, cryogenic temperatures, high pressures, vacuum conditions,
radioactive environments or corrosive applications. See note 19 to the Company's
audited consolidated financial statements included elsewhere in this Prospectus.
On May 15, 1998, the Company completed the previously-announced sale of the
capital stock of its Holley Performance Products subsidiary to Kohlberg & Co.,
L.L.C., a private merchant banking firm located in Mount Kisco, New York, for
$100 million in cash. The proceeds from this acquisition were applied toward
reducing debt. For 1997, Holley had gross revenues and operating income of
approximately $99.0 million and $8.0 million, respectively.
The financial review that follows is based on continuing operations,
excluding the impact of the 1996 discontinued operations discussed in note 2 to
the audited consolidated financial statements of Coltec included elsewhere in
this Prospectus, and Coltec's two operating segments, Aerospace and Industrial.
The 1995 information has been restated to reflect the discontinued operations
and Coltec's two realigned operating segments. Earnings per share information
represents diluted earnings per common share (see note 5 to the audited
consolidated financial statements and note 3 to the unaudited interim financial
statements of Coltec included elsewhere in this Prospectus). The following
discussion of operating results has been structured to provide an analysis from
the perspective of Coltec as a whole, followed by a more detailed analysis for
each operating segment.
24
<PAGE> 29
INDUSTRY SEGMENT INFORMATION
The following table shows financial information by industry segment for the
five years ended December 31, 1997 and the three months ended March 30, 1997 and
March 29, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, ----------------------
--------------------------------------------------------- MARCH 30, MARCH 29,
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Aerospace............. $ 356.9 $ 339.2 $ 378.3 $ 433.5 $ 558.3 $ 119.1 $ 166.2
Industrial............ 705.4 662.7 722.6 726.9 757.6 190.1 209.2
Intersegment
elimination(a)...... (.9) (1.7) (1.3) (.7) (1.0) -- (1.0)
-------- -------- -------- -------- --------- --------- --------
Total............... $1,061.4 $1,000.2 $1,099.6 $1,159.7 $ 1,314.9 $ 309.2 $ 374.4
======== ======== ======== ======== ========= ========= ========
Operating income:
Aerospace............. $ 44.5(c) $ 51.0 $ 32.4(d) $ 51.6(e) $ 97.7(f) $ 18.3 $ 26.1
Industrial............ 135.6(c) 145.4 146.6 147.1 139.8(f) 36.3 37.3
-------- -------- -------- -------- --------- --------- --------
Total segments........ 180.1 196.4 179.0 198.7 237.5 54.6 63.4
Corporate
unallocated(b)...... (31.6) (31.2) (37.0)(d) (41.1) (39.7) (9.7) (10.1)
-------- -------- -------- -------- --------- --------- --------
Total............... $ 148.5(c) $ 165.2 $ 142.0(d) $ 157.6(e) $ 197.8(f) $ 44.9 $ 53.3
======== ======== ======== ======== ========= ========= ========
Operating margin:
Aerospace............. 12.5% 15.0% 8.6% 11.9% 17.5% 15.4% 15.7%
Industrial............ 19.2 21.9 20.3 20.2 18.5 19.1 17.9
Total............... 14.0% 16.5% 12.9% 13.6% 15.0% 14.5% 14.2%
Return on total
assets:(g)
Aerospace............. 12.7% 14.3% 8.3% 12.4% 22.3% 17.2% 19.0%
Industrial............ 49.8 53.3 49.1 51.2 45.0 46.7 32.6
Total............... 18.6% 19.5% 15.9% 18.5% 21.2% 21.1% 19.8%
Backlog:(h)
Aerospace............. $ 475.1 $ 445.7 $ 538.0 $ 560.7 $ 734.3 $ 674.2 $ 804.9
Industrial............ 124.0 148.5 119.5 117.8 142.0 132.6 163.3
Intersegment
elimination......... (.5) -- (.4) (.2) (.7) (.9) --
-------- -------- -------- -------- --------- --------- --------
Total............... $ 598.6 $ 594.2 $ 657.1 $ 678.3 $ 875.6 $ 805.9 $ 968.2
======== ======== ======== ======== ========= ========= ========
</TABLE>
- ---------------
(a) Reflects elimination of intercompany sales between divisions in different
segments.
(b) Represents corporate selling and administrative expense, including other
income and expense, that is not allocable to individual industry segments.
(c) Operating income for 1993 included a special charge of $25.2 million as
follows: $17.2 million in the Aerospace Segment and $8.0 million in the
Industrial Segment. Excluding the special charge, operating income,
operating margin and return on total assets for 1993 would have been $61.7
million, 17.3% and 17.6%, respectively, for Aerospace, and $143.6 million,
20.4% and 52.7%, respectively, for Industrial.
(d) Operating income for 1995 included a special charge of $27.0 million as
follows: $23.4 million in the Aerospace Segment and $3.6 million in
Corporate Unallocated. Excluding the special charge, operating income,
operating margin and return on total assets for 1995 would have been $55.8
million, 14.7% and 13.4%, respectively, for Aerospace.
(e) Operating income for 1996 included a charge of $14.2 million related to the
bankruptcy of a major aerospace customer (Fokker). Excluding this charge,
operating income, operating margin and return on total assets for 1996 would
have been $65.8 million, 15.2% and 18.1%, respectively, for Aerospace and
$171.8 million, 15.9% and 22.0%, respectively, for the Company.
(f) Operating income for 1997 included a special charge of $10.0 million for
the restructuring of its Industrial Segment. In 1997 the remaining $10.0
million accrual for the 1995 special charge related to the Aerospace Segment
was reversed.
(g) Return on total assets is calculated for each segment by dividing annualized
segment operating income by segment total assets at end of applicable
period, and for total Company by dividing total Company annualized operating
income by total assets at end of applicable period.
(h) Of the $875.6 million backlog at December 31, 1997, $267.2 million was
scheduled to be shipped after 1998.
25
<PAGE> 30
RESULTS OF OPERATIONS -- FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
COMPANY REVIEW
Net sales for first quarter 1998 increased 21.1% to $374.4 million from
$309.2 million for first quarter 1997 primarily driven by increases in the
Aerospace Segment. Gross profit increased to $114.3 million for first quarter
1998 from $97.5 million in first quarter 1997. The gross profit margin decreased
slightly to 30.5% in first quarter 1998 from 31.5% in first quarter 1997 as a
result of slightly lower gross profit margins in the Industrial Segment. Selling
and administrative expenses totaled $61.0 million, or 16.3% of sales, in first
quarter 1998 compared to $52.6 million, or 17.0% of sales in first quarter 1997.
Operating income increased to $53.3 million in first quarter 1998 from
$44.9 million in first quarter 1997. Operating margin for first quarter 1998 was
14.2% compared to 14.5% for first quarter 1997. The margin decrease related to a
slight decrease in operating margin in the Industrial Segment.
Interest expense increased to $15.1 million in first quarter 1998 (interest
expense in the first quarter of 1998 would have been $15.8 million after giving
pro forma effect to the Offerings and use of the estimated net proceeds
therefrom) from $12.4 million for first quarter 1997. This increase was a result
of increased outstanding amounts under the credit facility due to acquisitions
discussed below under "-- Liquidity and Capital Resources."
The effective tax rate was 34% in the first quarter of 1998 and 1997.
As a result of the foregoing, net earnings were $25.2 million in first
quarter 1998, or $0.38 per share, compared to net earnings of $21.5 million, or
$0.32 per share, in first quarter 1997.
SEGMENT REVIEW -- AEROSPACE
Sales in first quarter 1998 for the Aerospace Segment totaled $166.2
million increasing 39.5% from $119.1 million in first quarter 1997. At Menasco,
which represented approximately 50% of this increase, sales increased
significantly due to rising commercial aircraft production as well as improved
military sales. Menasco deliveries of main landing gear systems for the Boeing
737 increased from 33 shipsets in first quarter 1997 to 69 shipsets in first
quarter 1998, while military sales benefited primarily from higher shipset
deliveries for the F-15 and F-16 programs. At Walbar, a sales increase of
approximately $10.0 million was primarily due to increased customer demand and
expanding product lines. Aerospace Segment sales were also favorably impacted by
the acquisition of AMI Industries, Inc. ("AMI") in July 1997.
Operating income for the Aerospace Segment increased to $26.1 million in
first quarter 1998 from $18.3 million in first quarter 1997. Operating margin
for first quarter 1998 was 15.7% compared to 15.4% for first quarter 1997. At
Menasco's Aerospace Division, operating margin was impacted by a favorable mix
of landing gear systems for certain commercial airline programs as well as
improved manufacturing efficiencies due to higher production. Walbar also
yielded improved manufacturing efficiencies as a result of its higher production
levels. The increased margin was also driven by higher sales volumes and
improved margins for the Segment's other businesses.
SEGMENT REVIEW -- INDUSTRIAL
Industrial sales increased to $209.1 million in first quarter 1998 from
$190.1 million in first quarter 1997. The Stemco and Quincy Compressor Divisions
experienced solid sales volume increases totaling approximately $4.0 million.
Sales for Garlock Sealing Technologies increased by approximately $8.0 million
primarily due to the acquisition of the sheet rubber and conveyor belt business
of Dana Corporation's Boston Weatherhead division. Holley sales decreased by
approximately $4.0 million due to curtailed orders by two major customers.
Industrial sales increased by more than $10.0 million as a result of first
quarter 1998 Industrial Segment acquisitions, Tex-o-Lon, and Repro-Lon and the
Sealing Division of Group Carbone Lorraine.
Operating income for the Industrial Segment increased slightly at $37.3
million in first quarter 1998 compared to $36.3 million in first quarter 1997.
Operating income increased for Garlock Sealing Technologies and Quincy
Compressor Divisions due to higher sales volumes. Operating results at Holley
were approximately
26
<PAGE> 31
$1.0 million lower due to decreased sales volumes and an unfavorable mix of
products sold. Excluding Holley, operating income in the Industrial Segment
increased 6% on a 14% sales increase. On May 15, 1998 the Company completed its
previously-announced sale of Holley for $100 million. See "-- Overview".
Operating margins were also negatively impacted by the Industrial Segment
acquisitions although the acquisitions were immediately accretive.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $10.1 million of operating cash flows in first
quarter 1998 compared with $12.7 million for first quarter 1997. The lower
operating cash flows in 1998 were primarily due to negative cash flow generated
by working capital requirements primarily from the increase in accounts
receivable. The change in assets and liabilities generated negative cash flow of
$28.8 million in first quarter 1998 compared to negative cash flow of $1.7
million in first quarter 1997. This negative cash flow impact was offset by
increased net earnings and decreased payments related to liabilities of
discontinued operations and asbestos claims.
The current ratio of current assets to current liabilities at March 29,
1998 was 1.91, increasing from 1.78 at December 31, 1997. Cash and cash
equivalents increased to $21.1 million at March 29, 1998 from $14.7 million at
December 31, 1997.
In the first quarter of 1998 the Company invested $15.0 million in capital
expenditures compared to $13.6 million during the same prior year period. Debt
increased by $100.6 million at March 29, 1998 compared to December 31, 1997
through additional borrowings under the Company's revolving credit facility
primarily for first quarter 1998 acquisitions.
In January 1998, the Company acquired certain M&P manufacturing facilities
based in Texas for approximately $17.0 million. Combined annual sales for these
facilities are expected to approximate $18.0 million. The Company also acquired
Tex-o-Lon and Repro-Lon for approximately $25.0 million. These two Texas
businesses have combined annual sales of $15.0 million. The acquisitions were
accounted for as purchases; accordingly, the purchase prices, which were
financed through available cash resources, were allocated to the acquired assets
based upon their fair market values. See "-- Overview".
In February 1998, the Company purchased the Sealing Division of Groupe
Carbone Lorraine for $45.6 million. Sales for this division in 1998 are expected
to approximate $38.0 million. This acquisition was accounted for as a purchase
and the purchase price, also financed through available cash resources, was
allocated to the acquired assets based upon their fair market values. See
"-- Overview".
RESULTS OF OPERATIONS -- 1997 COMPARED TO 1996
COMPANY REVIEW
Net sales for 1997 increased 12.9% to $1.31 billion from $1.16 billion in
1996 primarily driven by increases in the Aerospace Segment. Gross profit
increased to $416.6 million in 1997 from $348.6 million in 1996. The gross
profit margin increase in 1997 to 31.7% from 30.1% in 1996 primarily resulted
from the 1996 bankruptcy of a major aerospace customer (Fokker). Selling and
administrative expenses totaled $218.8 million, or 16.6%, of sales in 1997
compared to $191.0 million, or 16.5%, of sales (15.9% excluding the Fokker
impact) in 1996. The increase resulted from costs associated with expanding
Coltec's businesses, both domestically and internationally.
Operating income amounted to $197.8 million in 1997 compared to $157.6
million for 1996. The 1996 amount includes the effect of the $14.2 million
charge related to the bankruptcy of Fokker. Operating margin for 1997 was 15.0%
and was 13.6% (14.8% excluding the effect of the charge related to Fokker) for
1996.
Interest expense decreased 27.8% from $74.9 million in 1996 to $54.0
million in 1997 (interest expense in 1997 would have been $54.7 million after
giving pro forma effect to the Offerings and the use of the estimated net
proceeds therefrom), a result of lower interest rates primarily from refinancing
high-cost, fixed-rate debt with lower-cost, variable-rate bank debt, and a full
year impact of applying a substantial portion of the proceeds from the 1996
second quarter sale of Coltec's automotive original equipment ("OE") components
operations to debt reduction.
27
<PAGE> 32
The effective tax rate was 34.0% in 1997 and 1996.
The 1996 results of discontinued operations reflect the aforementioned 1996
second quarter sale of the automotive OE components operations as well as the
1996 fourth quarter sale of Farnam Sealing Systems. Note 2 to the Company's
audited consolidated financial statements describes these transactions.
The 1996 extraordinary charge of $30.6 million relates to the refinancing
of high-cost, fixed-rate debt with lower-cost, variable-rate bank debt. In
January and December 1996, Coltec redeemed $605.8 million of such high-cost
debt.
Net earnings and earnings from continuing operations were $94.9 million, or
$1.42 per share, in 1997 while 1996 net earnings amounted to $81.1 million, or
$1.17 per share, with earnings from continuing operations for 1996 of $54.6
million, or $0.79 per share. The 1996 charge related to Fokker impacted earnings
by $0.13 per share. The reduction in interest expense increased earnings by
$0.20 per share in 1997.
SEGMENT REVIEW -- AEROSPACE
Sales in 1997 for the Aerospace Segment aggregated $558.3 million, a 28.8%
increase over 1996 sales of $433.5 million. At Menasco, which represented
approximately 50% of this increase, sales increased due to rising commercial
aircraft production as well as improved military sales. Menasco deliveries of
main landing gear systems for the Boeing 737 increased to 196 shipsets in 1997
from 72 shipsets in 1996, while military sales benefited primarily from higher
shipset deliveries for the F-15 and F-16 programs (151 shipsets in 1997 versus
83 shipsets in 1996). At Chandler Evans, higher sales were primarily due to
increased sales of spare parts while original equipment sales also improved.
Aerospace Segment sales were favorably impacted by the acquisition of AMI in
July 1997 (see note 2 to the Company's audited consolidated financial statements
included elsewhere in this Prospectus). Sales in 1997 for the other aerospace
businesses increased due to increased sales volumes resulting from the continued
strengthening of the commercial aircraft market and regional airlines.
Operating income for the Aerospace Segment increased 48.5% to $97.7 million
in 1997, before the reversal of $10.0 million of the 1995 special charge which
primarily related to the closing of the Walbar compressor blade facility in
Canada. In 1995, the special charge included amounts for contractual obligation
with customers which the Company could not fulfill upon the closing of the
facility, and related legal fees. These amounts were reversed during 1997
because the customers did not enforce the contracts. Operating income was $65.8
million in 1996, excluding the 1996 charge for the Fokker bankruptcy. The
Segment's operating margin for 1997 was 17.3% (15.7% excluding the special
charge reversal) versus 15.2% in 1996 excluding the Fokker bankruptcy charge. At
the Menasco Aerospace division, operating margin was impacted by improved
manufacturing efficiencies due to higher production. Chandler Evans realized
higher margins due to higher after-market sales and selling price increases for
certain products. The increase was also driven by higher sales volumes and
improved margins for the other engine components businesses.
SEGMENT REVIEW -- INDUSTRIAL
Industrial Segment sales increased to $757.6 million in 1997 from $726.9
million in 1996. During 1997, Quincy Compressor and Fairbanks Morse Engine ("FM
Engine") divisions had significant sales volume increases. The FM Engine
increase was due to increased orders and the recovery from a ten-week strike in
1996. Garlock Sealing Technologies ("Garlock") also experienced sales increases
in part as a result of Coltec's acquisition of the sheet rubber and conveyor
belt business from Dana Corporation's Boston Weatherhead division (see note 2 to
the Company's audited consolidated financial statements included elsewhere in
this Prospectus). The above increases, totaling approximately $35.0 million,
were partially offset by lower sales volumes of $8.6 million at Holley.
Operating income for the Industrial Segment was $139.8 million in 1997
($149.8 million excluding the special charge of $10.0 million for restructuring
costs in the Industrial Segment; see Note 4 to the consolidated financial
statements) compared to $147.1 million in 1996. The Segment's operating margin
for 1997 was 18.5% (19.8% before the $10.0 million special charge) compared to
20.2% in 1996. Operating income increased for Quincy Compressor and FM Engine by
approximately $10.0 million due to the higher sales volumes as
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<PAGE> 33
mentioned above while Garlock's income was impacted by approximately $2.0
million of increased costs related to international initiatives. Holley's
operating income was $4.7 million lower primarily as a result of decreased sales
volumes.
RESULTS OF OPERATIONS -- 1996 COMPARED TO 1995
COMPANY REVIEW
Net sales for 1996 increased 5.5% to $1.16 billion from $1.10 billion in
1995 primarily due to increases in the Aerospace Segment. Gross profit decreased
to $348.6 million in 1996 from $355.4 million in 1995. The gross profit decline
in 1996 to 30.1% from 32.3% in 1995 stemmed from the impact of the bankruptcy of
a major aerospace customer (Fokker), increased spending related to asbestos (see
note 16 to the Company's consolidated financial statements included elsewhere in
this Prospectus) and higher other manufacturing costs. Selling and
administrative expenses totaled $191.0 million, or 16.5% of sales (15.9%
excluding the Fokker impact), in 1996 compared to $186.4 million, or 17.0% of
sales, in 1995.
Operating income amounted to $157.6 million in 1996 compared to $142.0
million for 1995. These amounts include the effect of the $14.2 million charge
in 1996 related to the bankruptcy of Fokker and the 1995 special charge of $27.0
million. Operating margin for 1996 was 13.6% (14.8% excluding the effect of the
charge related to Fokker) and 1995 was 12.9% (15.4% excluding the special
charge). The operating margin decrease to 14.8% from 15.4% related to the same
reasons as those explaining the decrease in overall gross profit margin
(excluding Fokker).
Interest expense decreased 16.7% from $89.9 million in 1995 to $74.9
million in 1996, a direct result of applying a substantial portion of the
proceeds from the second quarter sale of the Company's automotive OE components
operations to debt reduction. The Company also benefited from the January 1996
redemption of $46.4 million of 11 1/4% debentures which was funded with
lower-cost, variable-rate bank debt.
The effective tax rate was 34.0% in 1996 and 33.8% in 1995.
The results of discontinued operations reflect the aforementioned second
quarter sale of the automotive OE components operations as well as the fourth
quarter sale of Farnam Sealing Systems. Note 2 to the Company's audited
consolidated financial statements included elsewhere in this Prospectus
describes these transactions.
The 1996 extraordinary charge of $30.6 million relates to the refinancing
of high-cost, fixed-rate debt with lower-cost, variable-rate bank debt. In
January and December 1996, the Company redeemed $605.8 million of such high-cost
debt.
As a result of the foregoing, net earnings were $81.1 million, or $1.17 per
share, in 1996 while 1995 net earnings amounted to $70.9 million, or $1.02 per
share. Earnings from continuing operations in 1996 were $54.6 million, or $0.79
per share, compared to 1995 earnings from continuing operations of $34.5
million, or $0.49 per share. The 1996 charge related to Fokker impacted earnings
by $0.13 per share while the 1995 special charge affected earnings by $0.25 per
share. The aforementioned reduction in interest expense increased earnings by
$0.14 per share in 1996.
SEGMENT REVIEW -- AEROSPACE
Sales in 1996 for the Aerospace Segment aggregated $433.5 million, a 14.6%
increase over 1995 sales of $378.3 million. At Menasco, deliveries doubled in
1996 (41 versus 20) for shipsets of landing gear systems for the Boeing 777
while shipset deliveries for the McDonnell Douglas MD-80 increased more than
50%. These increases more than offset the lost business for the F-70 and F-100
programs due to the bankruptcy of Fokker, resulting in a net increase in Menasco
sales of approximately $12.0 million. Sales for Walbar increased by greater than
$30.0 million due to a change in the billing practices for consigned inventory
at its Arizona facility although profitability levels were not affected. Sales
in 1996 for the other aerospace businesses increased due to higher sales volumes
resulting from the continued strength of the commercial and regional airline
markets, as well as higher selling prices for certain products and new product
sales.
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<PAGE> 34
Operating income for the Aerospace Segment increased 18.0% to $65.8 million
in 1996 from $55.8 million in 1995, excluding the 1996 charge for the Fokker
bankruptcy and the 1995 special charge. Excluding such charges, the Segment's
operating margin for 1996 was 15.2% versus 14.7% in 1995. Contributing to this
increase were the significant improvement in 1996 operating results of Walbar's
Canadian operations due to the closing of the compressor blade facility, as well
as higher margins which were achieved at its turbine blade business, yielding an
increase in operating income at Walbar of $7.7 million. The increase was also
driven by higher sales volumes and improved margins for the other engine
components businesses. At Menasco, operating results were flat compared to 1995
with the improvement from the Boeing 777 and MD-80 programs offsetting the loss
of the Fokker business. Menasco was also impacted by a less favorable mix of
landing gear systems for certain commercial airline programs.
SEGMENT REVIEW -- INDUSTRIAL
Industrial Segment sales increased slightly to $726.9 million in 1996 from
$722.6 million in 1995. During 1996, Garlock realized the full year benefit of
its December 1995 acquisition of certain assets of Furon Company's metallic
gasket business. Garlock's sales were also favorably impacted by continued
volume increases for KLOZURE oil seals, cut gaskets and GYLON gasketing products
for a total increase of $18.0 million. Moderate sales increases were registered
by the Holley and France Compressor Products ("France Compressor") divisions. FM
Engine sales were unfavorably affected by approximately $12.0 million from lower
shipments of commercial, government and Alco engines due to the effects of a ten
week strike. The Stemco division also experienced a downturn in sales due to
lower trailer production levels.
Operating income for the Industrial Segment was essentially unchanged at
$147.1 million in 1996 compared to $146.6 million in 1995. The Segment's
operating margin for 1996 was 20.2% compared to 20.3% in 1995. Operating income
increased by a total of $6.3 million for Garlock, Holley and France Compressor
primarily due to higher sales volumes. The negative impact of the strike at FM
Engine of approximately $6.0 million was offset by the gain on the sale of
Stemco's truck exhaust business (see note 2 to the Company's audited
consolidated financial statements included elsewhere in this Prospectus).
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The Company generated cash from operations of $61.4 million in 1997
compared to $49.5 million in 1996. The increase in operating cash flows stemmed
from the increase in net earnings. The increase in inventory in response to the
ramp-up for certain aircraft was offset by the increase in accounts payable.
Working capital at December 31, 1997 of $187.9 million was $27.7 million lower
than year-end 1996 as a result of the sale of $82.5 million of trade accounts
receivable (see note 6 to the Company's consolidated financial statements
included elsewhere in this Prospectus) partially offset by a $12.5 million
increase of accounts receivable prior to sale and a $52.5 million increase of
inventories. The 1997 ratio of current assets to current liabilities was 1.78
compared to 1.95 in 1996. Cash and cash equivalents decreased to $14.7 million
in 1997 from $15.0 million in 1996.
Net cash used in investing activities in 1997 included $81.2 million of
capital expenditures and $60.7 million for business acquisitions (see note 2 to
the Company's audited consolidated financial statements included elsewhere in
this Prospectus). Net cash provided by investing activities of $284.6 million in
1996 consisted of proceeds from divestitures amounting to $329.1 million (see
note 2 to the Company's audited consolidated financial statements included
elsewhere in this Prospectus) with capital expenditures totaling $44.6 million
in 1996.
Financing activities in 1997 generated $80.2 million primarily from the
$82.5 million proceeds from sale of accounts receivable (see note 6 to the
Company's audited consolidated financial statements included elsewhere in this
Prospectus). The purchase of $42.7 million of treasury stock was offset by a
$39.5 million net increase in the Company's revolving facility. Financing
activities in 1996 used cash of $323.0 million. A substantial portion of the
proceeds from the 1996 second quarter sale of the Company's automotive OE
components operations was applied to debt reduction. During 1996, Coltec
refinanced $617.0 million of high-cost, fixed-rate debt with lower-cost,
variable-rate bank debt. Coltec also purchased treasury stock with a cost of
$46.4 million in 1996.
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<PAGE> 35
CAPITAL EXPENDITURES
Capital expenditures increased to $81.2 million in 1997 from $44.6 million
in 1996 and $42.5 million in 1995, as Coltec continued to invest in capital
improvements to increase efficiency, reduce costs, pursue new opportunities,
expand production capacity and improve facilities. The level of capital
expenditures has and will vary from year to year, affected by the timing of
capital spending for production equipment for new products, periodic plant and
facility expansion, and cost reduction and labor efficiency programs. Capital
expenditures during 1997 included amounts for the construction of and equipment
purchases for significant production expansions at Menasco's original equipment
facilities. Coltec estimates capital expenditures for 1998 to approximate $60.0
million, including amounts for equipment purchases related to capacity
expansions and upgrades.
ENVIRONMENTAL MATTERS
Coltec's policy is to accrue environmental remediation costs when it is
both probable that a liability was incurred and the amount can be reasonably
estimated. Coltec currently estimates its future non-capital expenditures
related to environmental matters to range between $27.0 million and $50.0
million. Investigations have been completed for approximately 17 sites and
continuing investigations are being done at approximately 11 sites. Accruals are
provided for all sites based on the factors discussed above. As remediation
plans are written and implemented, estimated costs become more fact-based and
less judgment-based. In connection with these environmental expenditures, Coltec
had accrued $31.7 million at December 31, 1997 representing management's best
estimate of probable non-capital expenditures. These non-capital expenditures
are estimated to be incurred over the next 10 to 20 years. In addition, capital
expenditures aggregating $5.0 million may be required during the next two years
related to environmental matters. Although Coltec is pursuing insurance recovery
in connection with certain of these matters, no receivable has been recorded
with respect to any potential recovery of costs in connection with any
environmental matter. During 1997, costs associated with environmental
remediation and ongoing assessment were not significant. See "Risk
Factors -- Potential Exposure to Environmental Liabilities" and
"Business -- Environmental Matters".
ASBESTOS LITIGATION
The Company and certain of its subsidiaries are defendants in various
lawsuits involving asbestos-containing products. See "Risk Factors -- Potential
Exposure to Environmental Liabilities", "Business -- Legal
Proceedings -- Asbestos Litigation" and note 16 to the Company's audited
consolidated financial statements and note 4 to the unaudited interim
consolidated financial statements of the Company included elsewhere in this
Prospectus. Based on the factors discussed in such sections and notes as well as
the experience of the Company's subsidiaries and other defendants in asbestos
litigation, the likely sharing of judgments among multiple responsible
defendants, and the substantial amount of insurance coverage that the Company
expects to be available from its solvent carriers, the Company believes that
pending and reasonably anticipated future actions are not likely to have a
material effect on the Company's results of operations and financial condition.
OTHER COMMITMENTS
Liabilities of discontinued operations at December 31, 1997 of $159.9
million relate to contingent contractual obligations, reserves for
postretirement benefits and other future estimated costs for various
discontinued operations. The Company expects future cash payments will extend at
least over the next five to ten years.
Consistent with industry practice, the Company uses the program method of
accounting for long-term commercial jet aircraft programs. The program method of
accounting involves the use of various estimates related to total program
revenues and costs. These estimates involve various assumptions and projections
relative to the outcome of future events, including the quantity and timing of
shipset deliveries. Also included are assumptions relative to future labor
performances and rates, and projections relative to material and overhead costs.
These assumptions involve various levels of expected performance improvements.
The Company reevaluates its estimates periodically and reflects changes in
estimates in current operations.
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<PAGE> 36
As is the case with most other companies, the Company recognizes the need
to ensure its operations will not be adversely impacted by the Year 2000 date
transition and is faced with the task of addressing related issues. The Company
is evaluating whether the effect of the Year 2000 transition issues resulting
from relationships with customers, suppliers and other constituents will have an
impact on the Company's results of operations or financial condition. At
December 31, 1997, the Company estimates that expenditures over the next two
years for the cost of modifying its existing software for the Year 2000 date
transition will have an immaterial impact on consolidated operating results.
FINANCIAL RESOURCES
At December 31, 1997, total debt was $759.4 million compared with $720.3
million at year-end 1996. In December 1996, the Company amended the Amended
Credit Agreement increasing the total commitment to $850.0 million from $465.0
million and extending the maturity date to December 15, 2001. The additional
commitment was used to redeem substantially all of the Company's outstanding
high-cost, fixed-rate debt. The Amended Credit Agreement also provides for a
maximum issuance of $125.0 million for letters of credit and reductions in the
total commitment of $75.0 million and $100 million at December 15, 1999 and
2000, respectively. In December 1997, the Company amended the Amended Credit
Agreement to establish an $80.0 million sublimit for Canadian borrowings under
the existing facility. At December 31, 1997, $697.5 million of borrowings and
$40.1 million of letters of credit were outstanding under the credit facility,
leaving availability of $112.4 million. In February 1998, the Company amended
the Amended Credit Agreement to increase the commitment thereunder from $850
million to $900 million. In connection with the Offerings, the Amended Credit
Agreement was further amended, among other things, to permit the TIDES Offering
and the Original Offering, to provide that the Senior Notes would be secured
equally and ratably with the lenders under the Amended Credit Agreement and to
provide that the total commitment thereunder would be reduced by two-thirds of
the gross proceeds to the Company from the Offerings in lieu of the $75.0
million and $100.0 million reductions described above. On a pro forma basis
after giving effect to such amendment and the completion of the Offerings
(assuming gross proceeds therefrom of $450 million), as of March 29, 1998 and
December 31, 1997, the Company would have had $372.5 million and $262.0 million,
respectively, of borrowings and $30.9 million and $40.1 million, respectively,
of letters of credit outstanding and $196.6 million and $297.9 million,
respectively, available for borrowing under the Amended Credit Agreement. The
Company believes that internally generated funds and borrowings available under
the Amended Credit Agreement will be sufficient to meet its foreseeable working
capital, capital expenditure and debt service requirements.
During 1997, Coltec entered into interest rate swaps to reduce (hedge) the
impact of interest rate changes for variable rate borrowings under its credit
facility. The agreements include an aggregate notional amount of $405.0 million,
fixed interest rates ranging from 5.78% to 6.40% and maturity dates ranging from
April 1998 to October 2002. The Company's hedging activities had an immaterial
impact on consolidated operating results for the year ended December 31, 1997.
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<PAGE> 37
BUSINESS
Coltec and its consolidated subsidiaries manufacture and sell a diversified
range of highly engineered aerospace and industrial products primarily in the
United States, Canada and Europe. Coltec's operations are conducted through its
two principal segments -- Aerospace and Industrial. Through its Aerospace
segment, which in 1997 accounted for approximately 42% of total Company sales
and approximately 37% of total Company operating profit, Coltec is a leading
manufacturer of landing gear systems, engine fuel controls, flight attendant and
cockpit seats, turbine blades, fuel injectors, nozzles and related components
for commercial and military aircraft. Through its Industrial segment, which in
1997 accounted for approximately 58% of total Company sales and approximately
63% of total Company operating profit, Coltec is a leading manufacturer of
industrial seals, gaskets, packing products, self-lubricating bearings and oil
seals and hubodometers for trucks and trailers and is a producer of
technologically advanced spray nozzles for agricultural, home heating and
industrial applications. Coltec also produces high-horsepower diesel engines for
naval ships and diesel, gas and dual-fuel engines for electric power plants and
produces air compressors and tooling for industrial applications.
The Company derived approximately 50% of sales in 1997 from its
aftermarket, or parts and services, business. Aftermarket sales tend to generate
significantly higher margins and tend to be less affected by general economic
cycles than the Company's sales of products to OEMs. In addition, management
believes the Company is benefiting from several other industry trends which will
help the Company achieve its growth and operating goals. These trends include
strong growth in world airline fleets, preference by OEMs to source complex
integrated systems rather than component parts, an increased preference to
consolidate purchasing of consumable products from a single full line supplier
and customer demand for integrated sales and service providers.
In 1997, Coltec had sales and EBITDA (as defined herein) of $1,314.9
million and $236.2 million, an increase of 13.4% and 22.0%, respectively, from
1996. Year end 1997 backlog increased 29.1% to $875.6 million from $678.3
million at year end 1996. For the quarter ended March 29, 1998, Coltec had sales
and EBITDA of $374.4 million and $65.7 million, respectively, an increase of
21.1% and 23.0%, respectively, from the first quarter of 1997. Backlog at the
end of the first quarter of 1998 increased 10.6% to $968.2 million from $875.6
million at year end 1997. Coltec's common stock is listed on the NYSE, and based
on the closing price of $20 1/4 per share on July 14, 1998, the Company had a
total equity market capitalization of approximately $1,338.5 million.
BUSINESS STRATEGY
The Company's strategy is to develop and maintain market leading positions
and attractive margins for its products through technological innovation, cost
efficiencies, product differentiation and superior quality and service. The
Company emphasizes targeted development of highly engineered, value-added
products designed to meet specific customer requirements. This emphasis enables
the Company to maintain close, interactive relationships with major aircraft
manufacturers as well as the Company's principal industrial customers and to
develop new products in response to customer needs. Coltec views its superior
customer responsiveness as one of its key competitive strengths. Successful
introduction of new products, cost reductions, productivity improvements and
selected divestitures have helped the Company maintain operating margins
averaging more than 12.5% over the last five years.
Through "Coltec 2000", the Company's three-year growth and operating plan,
the Company has set specific growth and operating targets focused on achieving
annual revenues of $2 billion by the year 2000 while maintaining the quality of
earnings. The plan calls for substantial growth internally, complemented by
strategic acquisitions which extend product offerings of the Company's existing
businesses and leverage the Company's existing distribution network. The key
elements of the plan are as follows:
- Focus on Aftermarket -- For the year ended December 31, 1997,
approximately 50% of the Company's sales were derived from the
aftermarket. The Company's products sold in the aftermarket include
industrial seals, hub systems and a variety of aftermarket parts used in
the maintenance of engines, compressors, pumps and gas turbines. A broad
and fragmented buyer base coupled with the critical nature of replacement
parts generates sales with generally higher margins than sales to
original equipment manufacturers. In addition, because the products are
consumable in nature and are replaced over time, the aftermarket provides
a stable source of income.
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- Develop New Products -- The Company believes that responsiveness to
customer demands is a critical success factor in both its Aerospace and
Industrial markets. As a result, the Company has undertaken a number of
initiatives to reduce the time and cost of bringing new products to
market and has established a long term objective of generating 50% of
sales from products introduced within the prior five years. Recent new
product and application introductions have included (i) landing gear
systems for the Boeing 777, (ii) Power$ync II computerized controls for
compressors, (iii) QuickSet(TM) 9001 packing systems and Tandem Seal(TM)
industrial sealing products, (iv) the Raindrop Ultra agricultural spray
nozzle, (v) new versions of FADEC electronic fuel controls for aircraft,
(vi) fuel injectors for the Rolls-Royce RB211 which allowed the Company
to enter the large jet engine market and (vii) the Company's Chandler
Evans Control Systems Division's agreement to develop and utilize its
advanced Variable Displacement Vane Pump technology in aircraft engine
applications.
- Focus on Globalization -- For the year ended December 31, 1997,
approximately 10% of the Company's revenues were generated from outside
of the United States and Canada. As part of its Coltec 2000 strategy, the
Company seeks to grow its international operations, through a mix of
internal growth and acquisitions. Given the global nature of many of the
markets in which the Company competes, management believes that an
increased global presence will lead to substantial operating
efficiencies, as fixed development and operating costs can be amortized
over a greater sales base. In terms of internal growth, the Company will
emphasize the development and expansion of its international customer
base, through the sale of products such as the fuel injectors to
Rolls-Royce for the RB211 and the BMW aircraft engines. The Company has
established sales and distribution capabilities in Asian and South
American countries and will pursue international growth through
complementary acquisitions such as its recent acquisition of Groupe
Carbone Lorraine's sealing products business.
- Total Systems Sourcing -- Management believes that many of the Company's
largest customers, including Boeing, are placing increased emphasis on
suppliers which are capable of providing integrated systems rather than
component parts. The Company believes that its design and engineering
competencies and cellular manufacturing processes provide a competitive
advantage in the design and manufacture of integrated systems and are
areas in which the Company will continue to invest. For example, in 1995
the Company supplied Boeing with non-integrated landing gear systems.
However, in 1996 with the Boeing 737 and 757, Coltec began providing
fully integrated landing gear which includes the installation of wheels,
tires, brakes, hydraulics, electrical harnesses, lights and sensing
systems on the base landing gear. In 1997, the Company began providing
fully integrated landing gear for the Boeing 777 aircraft thereby
increasing revenue by more than 20% per unit. The Company will begin
providing fully integrated landing gear for the Boeing 767 in 1998.
- Productivity Initiatives -- A number of productivity initiatives have
been implemented which have been designed to reduce lead times, curtail
scrap and enhance throughput, which are expected among other things, to
improve inventory turns. Such initiatives have included the consolidation
of multiple product lines into common production facilities and the
relocation of the Company's Delavan Spray Technologies Division to new
state-of-the-art facilities near major transportation hubs. Cycle time
reductions have reduced required inventory levels while improving
customer responsiveness. For example, during 1997, Walbar Arizona reduced
cycle times on damper seal production by approximately 70%, while the
Company's Menasco Division reduced production time for Boeing 737 landing
gear main cylinders from 20 weeks to 12. The Company intends to continue
to enhance its production processes through optimization of workflow,
investment in upgraded manufacturing technologies and robotics, and
related initiatives. In addition, all of the Company's major divisions
are in the late stages of implementing new enterprise reporting systems.
The new systems are enhancing shop floor reporting, materials management,
order entry and cost evaluation and control. Management believes that
these programs are leading to productivity and efficiency improvements
and are having a positive impact on operating performance. The new
enterprise systems have the added benefit of addressing year 2000 systems
issues. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
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AEROSPACE
Through its Aerospace segment, Coltec is a leading manufacturer of landing
gear systems, engine fuel controls, flight attendant and cockpit seats, turbine
blades, fuel injectors, nozzles and related components for commercial and
military aircraft. The operating units and principal products, markets and
competitors of the Aerospace segment are as follows:
<TABLE>
<CAPTION>
OPERATING UNITS PRINCIPAL PRODUCTS PRINCIPAL MARKETS PRINCIPAL COMPETITORS
--------------- ------------------ ----------------- ---------------------
<S> <C> <C> <C>
Menasco............... Aircraft landing gear Commercial and B.F. Goodrich,
and flight control military aircraft Messier- Dowty
actuators, landing manufacturers,
gear parts, repairs airlines, U.S. Gov-
and overhaul ernment
Walbar................ Aircraft and Aircraft and Chromalloy, Howmet
industrial gas turbine stationary gas turbine
engine and services, engine manufacturers,
turbocharger rotating diesel engine
assemblies manufacturers
Chandler Evans Aircraft fuel pump and Aircraft engine Argotech, Hamilton
Control............. control systems manufacturers, U.S. Standard, Sundstrand,
Government and AlliedSignal Controls
aftermarket and Accessories
Delavan Gas Turbine
Products............ Aircraft engine fuel Aircraft engine Parker-Hannifin,
nozzles, valves and manufacturers, U.S. Textron
afterburner spray bars Government and
aftermarket
Lewis Engineering..... Aircraft Commercial and Ametek, Rogerson,
instrumentation, military aircraft, Rosemont, Norwich
temperature sensors, engine manufacturers Aerospace
and level control and process industries
products and
electrical harnesses
AMI Industries, Aircraft flight Commercial aircraft IPECO, Sicma
Inc................. attendant and cockpit manufacturers, and
seats airlines
</TABLE>
Menasco. Menasco is one of the leading suppliers of landing gear systems
for medium-to-heavy commercial and military aircraft. The design, manufacture
and test of aircraft landing gear and components, and related overhaul and
repair, comprise 90% of Menasco's sales volume. Landing gear and precision
components are highly engineered and manufactured to customer specifications and
sold to aircraft manufacturers, aircraft operators and to the United States
Government ("U.S. Government"), both as original equipment and as spare parts
for existing aircraft. Menasco's historical concentration of landing gear sales
among a limited number of companies reflects the relatively small number of
medium and heavy aircraft manufacturers. Landing gear systems generally account
for up to 2% of the total cost of an aircraft. Menasco also provides spare parts
for landing gear and landing gear overhaul services. Aftermarket business
represented 22% of Menasco's total sales in 1997. The remaining 10% of Menasco's
sales are primarily flight control actuators. Menasco produces large hydraulic
and mechanical actuators and has the capability to produce shock mitigation
equipment for both military and commercial applications.
Walbar. Walbar is an original equipment manufacturer and coating and
repair service center for aircraft and industrial gas turbine engine components.
Its product base ranges from complex precision machined turbine parts to
high-technology protective coatings. Its primary machined products are turbine
blades, vanes and other related turbine airfoil components. Walbar also
manufactures disks, integrally bladed rotors and complex impellers, as well as
complete rotating assemblies for flight and auxiliary power engines and
locomotive turbochargers. Following the reduction in U.S. Government
appropriation for military aircraft engines, Walbar
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<PAGE> 40
has successfully increased its focus on non-aerospace applications, and now
enjoys significant market share in the locomotive turbocharger market and the
gas turbine power generation market.
Chandler Evans. Chandler Evans Control Systems Division ("CECO") produces
gas turbine engine fuel controls and pumps, and pneumatic and hydraulic
components for use in aircraft and helicopter engines and aircraft systems. CECO
has carved a niche market in the area of small engine fuel pumps and controls
for both commercial and military applications. CECO also supplies small turbine
engines with Full Authority Digital Electronic Control ("FADEC") systems.
Computerized electronics in a FADEC system make aircraft safer and less
expensive to operate. In 1997, a CECO FADEC was successfully operated in the
first flight test of the U.S. Army's Boeing/Sikorsky Rah-66 Comanche helicopter.
CECO continues to supply the military market with fuel pump technology. Its
combination main and afterburner centrifugal fuel pump for the Boeing F/A-18 E/F
fighter was successfully flight tested in 1997. Additionally in 1997, CECO's
latest metering fuel pump, the Variable Displacement Vane Pump, was selected as
a fueldraulic pump to be used for multinational advanced vectoring exhaust
nozzle applications.
During 1997, CECO's aftermarket sector contributed 49% of its revenues
compared to 42% during 1996. This was due, in part, to increased Company focus
on this market coupled with the recovery in the worldwide airline and general
aviation market, and also an increase in U.S. Government contracts.
Delavan Gas Turbine Products. Delavan Gas Turbine Products Division
("Delavan") is a custom designer and manufacturer of fuel injectors, flow
control valves, fuel manifolds, afterburner spray bars and other accessories for
commercial and military gas turbine engines. Product applications in the
aerospace industry include products for engines powering large commercial and
regional airliners, business aircraft, military and commercial helicopters,
military fighters and transports and auxiliary power units. In the industrial
sector, Delavan fuel injectors and valves are utilized in large land-based gas
turbines found in electrical power generation plants and natural gas pipeline
installations.
Lewis Engineering. Lewis Engineering designs, develops and produces
electromechanical and electronic instrumentation for aircraft cockpits, landing
gear electrical harnesses and temperature sensors for aircraft and engine
systems. These products are used in commercial transport, general aviation and
military markets.
AMI Industries, Inc. AMI, a Colorado-based company, was acquired in the
third quarter of 1997. AMI is a leading designer and manufacturer of flight
attendant and cockpit seats and is recognized for supplying high comfort cabin
attendant seats.
One customer (Boeing) in the Aerospace segment represented approximately
14% of Coltec's 1997 total sales.
INDUSTRIAL
Through its Industrial segment, Coltec is a leading manufacturer of
industrial seals, gaskets, packing products, self-lubricating bearings and oil
seals and hubodometers for trucks and trailers. The Industrial segment also
produces spray nozzles for agricultural, home heating and industrial
applications, as well as high-horsepower diesel engines for naval ships and
diesel, gas and dual-fuel engines for electric power plants. Coltec also
produces air compressors and automotive products. The operating units and
principal products, markets and competitors of the Industrial segment are as
follows:
<TABLE>
<CAPTION>
OPERATING UNITS PRINCIPAL PRODUCTS PRINCIPAL MARKETS PRINCIPAL COMPETITORS
--------------- ------------------ ----------------- ---------------------
<S> <C> <C> <C>
Garlock Sealing Seals, gaskets, Chemical, pulp and Applied Industrial
Technologies........ packings and expansion paper, refining, Technologies, CR
joints, butterfly utilities, industrial Industries, A.W.
valves, PTFE sheet and and electronics Chesterton, Richard
film, OEM parts and Klinger, AMRI, Durco,
gaskets Neotecha, Dewal, W.
Gore, Durametallic,
John Crane
</TABLE>
36
<PAGE> 41
<TABLE>
<CAPTION>
OPERATING UNITS PRINCIPAL PRODUCTS PRINCIPAL MARKETS PRINCIPAL COMPETITORS
--------------- ------------------ ----------------- ---------------------
<S> <C> <C> <C>
Fairbanks Morse Diesel, gas and U.S. Navy, marine, Caterpiller, Cooper
Engine.............. dual-fuel engines locomotive and Industries, General
stationary power Motors
markets
Quincy Compressor..... Air compressors and Manufacturing, climate Gardner-Denver,
vacuum pumps control, oil and gas Sullair,
industries Ingersoll-Rand,
Champion
Garlock Bearings...... Self-lubricated Automotive and Kolbenschmidt, Rexnord
bearings equipment
manufacturers
Stemco................ Heavy duty wheel-end Fleet truck operators, CR Industries, Federal
systems, oil seals, truck parts Mogul, Nelson,
hubcaps and distributors and Donaldson
hubodometers, hubnuts vehicle assemblers
Delavan Spray Spray nozzles, Home heating, Spraying Systems,
Technologies........ accessories, pumps and industrial and Danfoss
systems agriculture
France Compressor Compressor valves and Compressor Hoerbiger, C. Lee Cook
Products............ seals manufacturers and end
users
Haber Tool............ Cold-forming dies Fastener and Form Flow
automotive
manufacturers
Plastomer Products.... PTFE tape Industrial Fluoroglas, W. Gore
manufacturers
Sterling Die.......... Thread-rolling dies Fastener manufacturers Reed Rico
Ortman Fluid Power.... Hydraulic and Fluid power market Parker-Hannifin,
pneumatic cylinders Miller Fluid Power
Garlock Rubber Sheet rubber products Steel mills, chemical B.F. Goodrich
Technologies........ processors, refineries
and paper mills
Danti Tool............ Details, jigs, Machinery builders, Uclid, Burdette
fixtures, precision automotive parts
machining manufacturers, other
production facilities
Coltec Specialty Engineered polytetra- Semiconductor, Furon, EGC
Products(1)......... fluoroethylene (PTFE) petrochemical refining
products plants
Cefilac(1)............ Seals, gaskets and Chemical, power, John Crane, Laddy
packing, metal o-rings petrochemical refining
and spiral wound plants
gaskets
Helicoflex(1)......... Metal o-rings; spring Power generation, Advanced Products
loaded seals petrochemical refining
plants
</TABLE>
- ---------------
(1) Purchased in early 1998.
The more significant operating units in the Industrial segment are
discussed below.
Garlock Sealing Technologies. Garlock Sealing Technologies ("Garlock")
produces and markets fluid sealing devices that prevent leakage and exclude
contaminants from rotating and reciprocating machinery. Garlock also produces
seal joints for high temperature and corrosive environment applications.
The newest Garlock products are positioned to meet current emission
standards for valves, pumps and flanges. To assist customers in complying with
more stringent global regulations for fugitive volatile organic compound
emissions, Garlock has developed a variety of products using traditional and
newly developed
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<PAGE> 42
materials. Garlock products include compression packings, gaskets and gasketing
materials, hydraulic, oil and mechanical seals, elastomeric expansion joints,
industrial textiles, metallic gaskets and other specialized industrial products.
Sophisticated Garlock products protect equipment in industry applications
where performance is vital to safety and environmental concerns. These
applications include natural resource recovery, petroleum refining, chemicals,
primary metals, food and pharmaceuticals, power generation, mining, pulp and
paper, water and waste treatment, construction and transportation.
In October 1997, Coltec acquired the assets of the sheet rubber and
conveyor belt business of Dana Corporation's Boston Weatherhead Division. This
division, now known as Garlock Rubber Technologies manufactures high-quality
rubber sheet products used for gasketing and other applications in steel mills,
chemical processing, refineries and paper production including conveyor belts.
All of Garlock Rubber Technologies' products are consumable. Although the
products are also purchased for use in original equipment, in 1997 the
maintenance and replacement aftermarket accounted for approximately 80% of
Garlock's total sales.
Quincy Compressor. The Quincy Compressor Division ("Quincy") is a
manufacturer of a wide range of helical screw and reciprocating air compressors
and vacuum pumps. Quincy products vary in size from one-third to 350 horsepower
and are used in a variety of industrial applications, including industrial base
load, pneumatic temperature and instrument control, diesel and gas engine
starting, paint spraying and emergency standby service. Much of Quincy's
business is in the highly competitive industrial and climate control compressor
markets.
Garlock Bearings. Garlock Bearings is a leading producer of specialized
self-lubricating bearings, which consist of either steel or reinforced epoxy
composite backings with non-metallic bearing surfaces of polytetrafluoroethylene
("PTFE") fibers or a mixture that includes PTFE. PTFE provides maintenance-free
performance and reduced friction. Garlock Bearings' products typically perform
as sleeve bearings or thrust washers under conditions of no lubrication, minimal
lubrication or pre-lubrication. Garlock Bearings has a major share of the
self-lubricating bearing market in North America. In 1997, approximately 80% of
sales were to original equipment manufacturers, with major competition coming
from companies in Japan and Germany.
Fairbanks Morse. The Fairbanks Morse Engine Division ("Fairbanks Morse")
offers a broad range of heavy-duty diesel engines. Fairbanks Morse has the
capacity to provide diesel engines from 640 to 29,320 horsepower. In addition,
Fairbanks Morse manufactures dual-fuel, gas and diesel engines ranging in size
from four to 18 cylinders. Engines are offered in both conventional "V" and
in-line, four-cycle versions as well as in-line, two-cycle opposed-piston
configurations. They are used for marine propulsion and marine power generation
and in pump, compressor and electrical power generation applications. In
September 1997, Fairbanks Morse acquired the assets related to the Alco
locomotive business of General Electric Company ("GE"). The assets pertain to
the manufacture and sale of Alco locomotive engines and turbochargers and Alco
locomotive chassis components. Fairbanks Morse can now sell FM/ALCO locomotive
products throughout the world except India, where GE has retained rights to
manufacture and sell such products.
Stemco. The Stemco Division is a developer and producer of unitized hub
systems, hub oil seals, hubcaps, axle nuts and distance-measuring devices for
medium and heavy-duty trucks.
Delavan Spray Technologies. The Delavan Spray Technologies Division
(formerly Delavan Commercial Products Division) is a designer and producer of
atomizers for combustion and industrial applications and atomizers, pumps and
accessories for agricultural, industrial and oil burner metering applications.
Danti Tool. In September 1997, Coltec acquired DM&T, Inc., doing business
as Danti Tool, which makes many of the tooling products utilized by Haber Tool's
existing customer base.
SUBSEQUENT ACQUISITIONS
In January 1998, Coltec purchased Tex-o-Lon and Repro-Lon and certain
assets of Marine & Petroleum Mfg., Inc., Texas-based businesses. The
acquisitions were combined into one division, Coltec Specialty Products. Coltec
Specialty Products manufactures PTFE fluid sealing products for the
semiconductor industry and reprocesses PTFE compounds for the chemical and
semiconductor industry.
38
<PAGE> 43
In February 1998, Coltec purchased the Sealing Division of Groupe Carbone
Lorraine which will be segregated into two divisions. Cefilac, based in Saint
Etienne and Montbrison, France, produces seals, gaskets and packings,
metal-o-rings and spiral-wound gaskets used in the chemical, power and refining
industries. Helicoflex, based in Columbia, South Carolina, produces
metal-o-rings and spring-loaded seals and metal c-rings. Helicoflex sealing
products are specifically designed for equipment and processes exposed to high
temperatures, cryogenic temperatures, high pressures, vacuum conditions,
radioactive environments or corrosive applications. See note 19 to the Company's
audited consolidated financial statements included elsewhere in this Prospectus.
INTERNATIONAL OPERATIONS
Coltec's international operations, mainly in Canada and France, are
conducted through foreign-based manufacturing or sales subsidiaries, or both,
and include export sales of domestic divisions to unrelated foreign customers.
Export sales of diesel engines are made either directly or through foreign
representatives. Compressors are sold through foreign distributors. Certain
products of Coltec's Industrial segment are sold in foreign countries through
salesmen and sales representatives or sales agents.
Coltec's Canadian operations include the manufacture of landing gear
systems and aircraft flight controls, the provision of overhaul services for
these systems and controls for Canadian and other customers and the manufacture
of turbine components and turbine and compressor rotating parts primarily for
aircraft gas turbine engines. The Canadian operations also manufacture and
market seals, gasketing material, packings and truck products, and market parts
for Fairbanks Morse diesel engines and accessories and other products for use in
Canada and other countries.
Coltec operates 18 plants in Canada, Mexico, France, the United Kingdom,
Australia, Germany and Poland. In addition, Coltec occupies leased office and
warehouse space in various foreign countries.
Devaluations or fluctuations relative to the United States dollar in the
exchange rates of the currency of any country where Coltec has foreign
operations could adversely affect the profitability of such operations in the
future.
For financial information on operations by geographic segments, see note 17
to the Company's audited consolidated financial statements included elsewhere in
this Prospectus.
Coltec's contracts with foreign nations for delivery of military equipment,
including components, are subject to deferral or cancelation by U.S. Government
regulation or orders regulating sales of military equipment abroad. Any such
action on the part of the U.S. Government could have an adverse effect on
Coltec.
SALES BY CLASS OF PRODUCTS
During the last three fiscal years, landing gear systems was the only class
of similar products that accounted for at least 10% of total Coltec sales. In
1997, 1996 and 1995, sales of landing gear systems constituted 18%, 15% and 14%,
respectively, of Coltec's total sales.
BACKLOG
At December 31, 1997, Coltec's backlog of firm unfilled orders was $875.6
million compared with $678.3 million at December 31, 1996. Approximately $267.2
million of the 1997 year-end backlog is scheduled to be shipped after 1998.
CONTRACT RISKS
Coltec, through its various operating units, primarily Menasco, Chandler
Evans, Walbar and Delavan Gas Turbine Products, produces products for
manufacturers of commercial aircraft pursuant to contracts that generally call
for deliveries at predetermined prices over varying periods of time and that
provide for termination payments intended to compensate for certain costs
incurred in the event of cancelation. In addition, certain commercial aviation
contracts contain provisions for termination for convenience similar to those
contained in
39
<PAGE> 44
U.S. Government contracts described below. Longer-term agreements normally
provide for price adjustments intended to compensate for deferral of delivery
depending upon market conditions.
A portion of the business of Coltec's Menasco, Chandler Evans, Walbar and
Delavan Gas Turbine Products divisions has been as a subcontractor and as a
prime contractor in supplying products in connection with military programs.
Substantially all of Coltec's U.S. Government contracts are firm fixed-price
contracts. Under firm fixed-price contracts, Coltec agrees to perform certain
work for a fixed price and, accordingly, realizes all the benefit or detriment
occasioned by decreased or increased costs of performing the contracts. From
time to time, Coltec accepts fixed-price contracts for products that have not
been previously developed. In such cases, Coltec is subject to the risk of
delays and cost overruns. Under U.S. Government regulations, certain costs,
including certain financing costs, portions of research and development costs,
and certain marketing expenses related to the preparation of competitive bids
and proposals, are not allowable. The U.S. Government also regulates the methods
under which costs are allocated to U.S. Government contracts. With respect to
U.S. Government contracts that are obtained pursuant to an open bid process and
therefore result in a firm fixed price, the U.S. Government has no right to
renegotiate any profits earned thereunder. In U.S. Government contracts where
the price is negotiated at a fixed price rather than on a cost-plus basis, as
long as the financial and pricing information supplied to the U.S. Government is
current, accurate and complete, the U.S. Government similarly has no right to
renegotiate any profits earned thereunder. If the U.S. Government later conducts
an audit of the contractor and determines that such data was inaccurate or
incomplete and that the contractor thereby made an excessive profit, the U.S.
Government may take action to recoup the amount of such excessive profit, plus
treble damages, and take other enforcement actions.
U.S. Government contracts are, by their terms, subject to termination by
the U.S. Government either for its convenience or for default of the contractor.
Fixed-price type contracts provide for payment upon termination for items
delivered to and accepted by the U.S. Government, and, if the termination is for
convenience, for payment of the contractor's costs incurred plus the costs of
settling and paying claims by terminated subcontractors, other settlement
expenses, and a reasonable profit on its costs incurred. However, if a contract
termination is for default by the contractor (a) the contractor is paid such
amount as may be agreed upon for completed and partially-completed products and
services accepted by the U.S. Government, (b) the U.S. Government is not liable
for the contractor's costs with respect to unaccepted items, and is entitled to
repayment of advance payments and progress payments, if any, related to the
terminated portions of the contracts, and (c) the contractor may be liable for
excess costs incurred by the U.S. Government in procuring undelivered items from
another source.
In addition to the right of the U.S. Government to terminate, U.S.
Government contracts are conditioned upon the continuing availability of
Congressional appropriations. Congress usually appropriates funds on a fiscal-
year basis even though contract performance may take many years. Consequently,
at the outset of a major program, the contract is usually partially funded, and
additional monies are normally committed to the contract by the procuring agency
only as appropriations are made by Congress for future fiscal years.
See "Risk Factors -- Cyclical Business; Government Contracts".
RESEARCH AND PATENTS
Most divisions of Coltec maintain staffs of manufacturing and product
engineers whose activities are directed at improving the products and processes
of Coltec's operations. Manufactured and development products are subject to
extensive tests at various divisional plants. Total research and development
cost, including product development, was $46.5 million for 1997, $44.1 million
for 1996 and $45.1 million for 1995.
Coltec owns a number of United States and other patents and trademarks and
has granted licenses under some of such trademarks. Management does not consider
the business of Coltec as a whole to be materially dependent upon any patent,
patent right or trademark.
EMPLOYEE RELATIONS
As of December 31, 1997, Coltec had approximately 9,100 employees, of whom
approximately 3,700 were salaried. Approximately 41% of the hourly employees are
represented by unions for collective bargaining
40
<PAGE> 45
purposes. Union agreements relate, among other things, to wages, hours and
conditions of employment, and the wages and benefits finished are generally
comparable to industry and area practices.
In 1997, three collective bargaining agreements covering approximately 350
hourly employees were renegotiated. Coltec considers the labor relations of
Coltec to be satisfactory, although it has experienced work stoppages from time
to time in the past. One collective bargaining agreement covering approximately
200 employees was due to expire in 1998 and has been renegotiated for a
five-year term.
Coltec is subject to extensive U.S. Government regulations with respect to
many aspects of its employee relations, including increasingly important
occupational health and safety and equal employment opportunity matters. Failure
to comply with certain of these requirements could result in ineligibility to
receive U.S. Government contracts. These conditions are common to the various
industries in which Coltec participates and entail risks of financial and other
exposure.
PROPERTIES
Coltec operates 62 manufacturing plants in 22 states in the U.S. and in
Canada, Mexico, France, the United Kingdom, Australia, Germany and Poland. In
addition, Coltec has other facilities throughout the United States and in
various foreign countries, which include sales offices, repair and service
shops, light manufacturing and assembly facilities, administrative offices and
warehouses.
Certain information with respect to Coltec's significant manufacturing
plants that are owned in fee, all of which (other than the Palmyra, New York and
Ontario Facilities) are encumbered pursuant to a certain credit agreement
between Coltec and certain banks and related security documents, is set forth
below:
<TABLE>
<CAPTION>
APPROXIMATE NUMBER APPROXIMATE
SEGMENT LOCATION OF SQUARE FEET ACREAGE
- ------- ------------------------------ ------------------ -----------
<S> <C> <C> <C>
Aerospace................ West Hartford, Connecticut(a) 538,000 71
Euless, Texas 442,000 42
Oakville, Ontario 280,000 14
Mississauga, Ontario 141,000 7
Industrial............... Palmyra, New York 677,000 137
Beloit, Wisconsin 856,000 73
Longview, Texas 265,000 52
</TABLE>
- ---------------
(a) Approximately 239,000 square feet are utilized by the Aerospace Segment with
the balance leased to third parties.
In addition to the owned facilities, certain manufacturing activities of
some industry segments are conducted within leased premises, the largest of
which is in the Industrial segment, located in Quincy, Illinois, and covers
approximately 173,000 square feet. Some of these leases provide for options to
purchase or to renew the lease with respect to the leased premises.
Coltec's total manufacturing facilities presently being utilized aggregate
approximately 4,902,000 square feet of floor area of which approximately
4,230,000 square feet of area are owned in fee and the balance is leased from
third parties.
Coltec leases approximately 35,000 square feet at 3 Coliseum Centre, 2550
West Tyvola Road, Charlotte, North Carolina, for its executive offices, and has
renewal options under such lease through 2011.
In the opinion of management, Coltec's principal properties, whether owned
or leased, are suitable and adequate for the purposes for which they are used
and are suitably maintained for such purposes.
ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive Environmental Laws. The
Company takes a proactive approach in addressing the applicability of all
Environmental Laws as they relate to its manufacturing operations and in
proposing and implementing any remedial plans that may be necessary. The Company
believes it is either
41
<PAGE> 46
in material compliance with all currently applicable regulations or is operating
in accordance with the appropriate variances and compliance schedules or similar
arrangements. The Company has identified certain situations that will require
future capital and non-capital expenditures to maintain or improve compliance
with current Environmental Laws. The majority of the identified situations
relate to remediation projects at former operating sites which have been sold or
closed and primarily deal with soil and groundwater remediation.
The Company has been notified that it is among the potentially responsible
parties under Environmental Laws, for the costs of investigating and, in some
cases, remediating contamination by hazardous materials at approximately 28
sites. Such laws can impose joint and several liability for the costs of
investigating and remediating properties contaminated by 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 Company's policy is to accrue
environmental remediation costs when both it is probable that a liability has
been incurred and the amount can be reasonably estimated. The measurement of
liability is based on an evaluation of currently available facts with respect to
each individual situation and takes into consideration factors such as existing
technology, presently enacted laws and regulations and prior experience in
remediation of contaminated sites. Investigations have been completed for
approximately 17 sites and continuing investigations are being done at
approximately 11 sites. Accruals are provided for all sites based on the factors
discussed above. As remediation plans are written and implemented, estimated
costs become more fact-based and less judgment-based. As assessments and
remediation progress at individual sites, these liabilities are reviewed
periodically and adjusted to reflect additional technical and legal information.
The Company currently estimates that its future non-capital expenditures
related to environmental matters will range between $27.0 million and $50.0
million, representing management's best estimate of probable non-capital
expenditures. At December 31, 1997, Coltec had accrued $31.7 million for
expenditures which will be incurred over the next 10 to 20 years. In addition,
capital expenditures aggregating $5.0 million related to environmental matters,
may be required during the next two years. Although the Company is pursuing
insurance recovery in connection with certain of the underlying matters, no
receivable has been recorded with respect to any potential recovery of costs in
connection with any environmental matter. During 1997, costs associated with
environmental remediation and ongoing assessment were not significant.
Actual costs to be incurred for identified situations in future periods may
vary from estimates, given inherent uncertainties in evaluating environmental
exposures due to unknown conditions, changing government regulations and legal
standards regarding liability and evolving related technologies. Subject to the
imprecision in estimating future environmental costs, the Company believes that
compliance with current Environmental Laws will not require significant capital
expenditures or have a material adverse effect on its consolidated results of
operations or financial position.
See "Risk Factors -- Potential Exposure to Environmental Liabilities".
LEGAL PROCEEDINGS
ASBESTOS LITIGATION
As of December 31, 1997 and 1996, two subsidiaries of Coltec were among a
number of defendants (typically 15 to 40) in approximately 110,000 and 94,700
actions, respectively (including approximately 2,400 and 5,100 actions,
respectively, in advanced stages of processing), filed in various states by
plaintiffs alleging injury or death as a result of exposure to asbestos fibers.
During 1997, 1996 and 1995, these two subsidiaries of Coltec were named
defendants in approximately 38,200, 39,900 and 44,000 new actions, respectively.
Through December 31, 1997, approximately 199,000 of the approximately 309,000
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 from an extensive list of defendants.
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.
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<PAGE> 47
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 Pennsylvania Supreme
Court's ruling. Coltec has negotiated a final agreement with most of its excess
carriers that are in the layers of coverage immediately above its first layer.
Coltec is currently receiving payments pursuant to this agreement. Coltec
believes that, with respect to the remaining carriers, a final agreement can be
achieved without litigation and on substantially the same basis that it has
resolved the issues with its other carriers.
Payments were made by the Company with respect to asbestos liability and
related costs aggregating $59.2 million in 1997, $71.3 million in 1996 and $56.7
million in 1995, substantially all of which were covered by insurance.
Settlements are generally made on a group basis with payments made to individual
claimants over periods of one to four years. Related to payments not covered by
insurance, Coltec recorded charges to operations amounting to $8.0 million in
1997, $8.0 million in 1996 and $5.0 million in 1995. The average cost to the
Company for unreimbursed expenses and liability per case disposed was
approximately $253 in 1997, $404 in 1996 and $318 in 1995.
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 December 31,
1997, 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 $47.3
million and Coltec expects that this cost will be substantially covered by
insurance.
With respect to the 107,600 outstanding actions as of December 31, 1997
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 potential liability or costs to Coltec. The lawsuits are disposed of over a
period of time ranging from one year to more than five years, with the majority
being disposed of by the third year after filing. 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.
The Company believes that it will continue to receive some number of
asbestos lawsuits into the foreseeable future. It is difficult, however, to
predict the number of asbestos lawsuits that Coltec's subsidiaries will receive
or the time frame in which they will be received. 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, the jurisdiction in
which a lawsuit is filed, the pendency of tort reform 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. Subsidiaries of Coltec continue
to distribute encapsulated asbestos-bearing product in the United States with
annual sales of less than $1.5 million. All sales are accompanied by appropriate
warnings. The
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<PAGE> 48
end users of such product are sophisticated users, who utilize the product for
critical applications where no known substitutes exist or have been approved.
Insurance coverage of a small nonoperating subsidiary formerly distributing
asbestos-bearing products is nearly depleted. Considering the foregoing, as well
as the experience of Coltec's subsidiaries and other defendants, and given the
substantial amount of other insurance coverage that Coltec expects to be
available from its solvent carriers to cover the majority of its exposure,
Coltec believes that pending and reasonably anticipated future actions are not
likely to have a materially adverse 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, some of
which allege initial exposure after July 1, 1984.
In addition to claims for personal injury, Coltec's subsidiaries have been
involved in an insignificant number of property damage claims based upon
asbestos-containing materials found in schools, public facilities and private
commercial buildings. Based upon the proceedings to date, the overwhelming
majority of these claims have been resolved without a material adverse impact on
Coltec. Likewise, the insignificant number of claims to be resolved are not
expected to have a materially adverse effect on Coltec's results of operations
and financial condition.
Coltec has recorded an accrual for its liabilities for asbestos-related
matters that are deemed probable and can be reasonably estimated (settled
actions and actions in advanced states of processing), and has separately
recorded an asset equal to the amount of such liabilities that is 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 sheets of Coltec were as follows
at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accounts and notes receivable............................... $56,039 $67,012
Other assets................................................ 16,249 18,728
Accrued expenses............................................ 50,688 60,659
Other liabilities........................................... 2,682 10,879
</TABLE>
See "Risk Factors -- Asbestos Litigation".
OTHER LITIGATION
In September 1983, the local employees' union at Menasco Canada Ltee. (now
Coltec Aerospace Canada Ltd.) ("Menasco Canada"), a federation of trade unions
and several member-employees filed a complaint in the Province of Quebec
Superior Court against Menasco Canada, alleging, among other things, an illegal
lock-out, failure to negotiate in good faith, interference with the affairs of
the union and various violations of local law. The plaintiffs are collectively
seeking approximately Cdn. $14.0 million in damages, and Menasco Canada has
filed a cross-claim for Cdn. $21.0 million and has closed its operations in
Quebec Province. Coltec does not believe that this action will have a material
effect on Coltec's consolidated results of operations and financial condition.
On September 24, 1986, approximately 150 former salaried employees of
Crucible Inc (a former subsidiary of Coltec) commenced an action claiming
benefits under a corporate employment policy that had been established in 1962
and was terminated in 1972 by the corporation's Board of Directors. (George W.
Henglein, et al. v. Colt Industries Operating Corporation Informal Plan for
Plant Shutdown Benefits for Salaried Employees, et al., U.S. District Court for
the Western District of Pennsylvania, 86-cv-2021). Plaintiffs alleged that the
policy continued after the Board of Directors' action by reason of the Company's
failure to notify them of elimination of the employment policy. As a result of
that failure to notify, the policy was converted into a welfare or pension
benefit plan upon the passage of the Employee Retirement Income Security Act in
1974. Based upon the occurrence of this conversion, the plaintiffs were entitled
to benefits in 1982 when Crucible Inc's Midland operations closed. Following a
non-jury trial in the U.S. District Court for the Western District of
Pennsylvania,
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<PAGE> 49
defendant's motion to dismiss was granted and the plaintiffs appealed. The Court
of Appeals for the Third Circuit remanded the case to the District Court
directing it to make specific findings of fact and conclusions of law and also
found for the defendant on the jurisdiction of the District Court. The defendant
again moved for dismissal and again defendant's motion to dismiss was granted by
the District Court. This second decision of the District Court was appealed to
the Court of Appeals for the Third Circuit and the case was again remanded to
the District Court for additional findings as to the application of the law. On
February 10, 1994, the District Court for the third time dismissed the
plaintiffs' complaint and the plaintiffs appealed to the Third Circuit Court of
Appeals. On September 26, 1994, the Third Circuit Court of Appeals for the third
time remanded the case to the District Court. The Circuit Court held the record
established by plaintiffs in the District Court was insufficient to allow the
Court the ability to apply the appropriate legal standard. On November 4, 1994
the Court of Appeals for the Third Circuit denied the defendant's request for a
rehearing. The defendant petitioned the U.S. Supreme Court for a writ of
Certiorari; its petition was denied in 1995. The defendant again moved for
dismissal before the District Court based upon the holding of the Circuit Court
that plaintiffs had failed to establish their case at trial. The District Court
denied the motion and sua sponte ordered a new trial de novo. A trial was held
during July 1996 with both parties introducing evidence. A decision was rendered
in 1997 finding the existence of an informal plan. The District Court remanded
to the administrator of Coltec's employee benefit plans the duties of
calculating the benefits due to those plaintiffs entitled.
The District Court held that all but six of the named plaintiffs' claims
were time barred. Both the defendants and plaintiffs filed timely notices of
appeal. Notwithstanding its filing of a notice of appeal, defendant has claimed
and so notified the Circuit Court that it was of the opinion that the District
Court's order was not final and thus not now appealable. As of December 1997,
plaintiffs have concurred in defendant's position. Coltec does not believe that
this action will have a material effect on Coltec's consolidated results of
operations and financial condition.
In addition to the litigation described above, there are various pending
legal proceedings involving Coltec which are routine in nature and incidental to
the business of Coltec. Coltec does not believe that these proceedings will have
a material effect on Coltec's consolidated results of operations and financial
condition.
The U.S. Government conducts investigations into procurement of defense
contracts as a part of a continuing process. Under current federal law, if such
investigations establish the existence of improper activities, among other
matters, debarment or suspension of a company from participating in the
procurement of defense contracts could result. These conditions are common to
the aerospace and government industries in which Coltec participates and entail
the risk of financial and other exposure. See "-- Contract Risks" above. Coltec
is not aware of any such investigation, nor is Coltec aware of any facts which,
if known to investigators, might prompt any investigation.
PRODUCT LIABILITY INSURANCE
Coltec has product liability insurance coverage for liabilities arising
from aircraft products which management believes to be adequate. In addition,
with respect to other products (exclusive of liability for exposure to asbestos
products), Coltec has product liability insurance in amounts exceeding $2.5
million per occurrence, which management believes to be adequate.
Coltec is self-insured (for claims arising after July 1984) with respect to
liability for exposure to asbestos products since third party insurance became
unavailable in July 1984.
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 and France, do not
operate in hyper-inflationary economies, except for Mexico, which Coltec does
not believe will have a material effect on Coltec's consolidated results of
operations and financial condition.
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<PAGE> 50
MANAGEMENT
The directors and executive officers of Coltec are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John W. Guffey, Jr................................. 60 Chairman, Chief Executive Officer and
Director.
Nishan Teshoian.................................... 56 President, Chief Operating Officer and
Director.
David D. Harrison.................................. 51 Executive Vice President, Chief Financial
Officer and Director.
Laurence H. Polsky................................. 54 Executive Vice President, Administration.
Robert J. Tubbs.................................... 51 Executive Vice President, General Counsel
and Secretary.
Michael J. Burdulis................................ 52 Senior Vice President, Group Operations.
Richard L. Dashnaw................................. 61 Senior Vice President, Group Operations and
President of the Fairbanks Morse Engine
Division.
Paul R. Kuhn....................................... 56 Senior Vice President, Group Operations.
Joseph F. Andolino................................. 45 Group President and Vice President, Taxes.
John N. Maier...................................... 46 Vice President and Controller.
Joseph R. Coppola.................................. 67 Director.
William H. Grigg................................... 65 Director.
David I. Margolis.................................. 68 Director.
Joel Moses......................................... 56 Director.
Richard A. Stuckey................................. 66 Director.
</TABLE>
Mr. Guffey has been Chairman of the Board and Chief Executive Officer of
Coltec since January 1998. Chairman of the Board, Chief Executive Officer and
President of Coltec from February 1995 to December 1997. Member of the Executive
Committee and member of the Nominating Committee of Coltec. President and Chief
Operating Officer of Coltec from prior to 1993 to January 1995. Director of
Gleason Corp., a manufacturer of machine tools.
Mr. Teshoian, President and Chief Operating Officer since January 1998.
Chairman of the Board and Chief Executive Officer of Keystone from August 1995
to December 1997. Executive Vice President of Operations of the Tools and
Hardware Division of Cooper Industries from June 1993 to July 1995. President of
the Belden Division of Cooper Industries from prior to 1993 to August 1993.
Mr. Harrison, Executive Vice President and Chief Financial Officer of
Coltec since January 1997. Executive Vice President, Chief Financial Officer and
Treasurer of Coltec from October 1996 to January 1997. Executive Vice President
and Chief Financial Officer of Pentair Inc., a diversified manufacturing
company, from February 1994 to August 1996. From prior to 1993 to February 1994
Vice President, Finance of General Electric Appliances Canada, a manufacturing
company from February 1994 to August 1996. From prior to 1992 to February 1994
Vice President, Finance of General Electric Appliances Canada (CAMCO).
Mr. Polsky, Executive Vice President, Administration since January 1994.
Senior Vice President, Administration from April 1992 to December 1993.
Mr. Tubbs, Executive Vice President, General Counsel and Secretary since
January 1997. Senior Vice President, General Counsel and Secretary from November
1995 to January 1997. Senior Vice President and General Counsel from March 1995
to November 1995. General Counsel-Operations of Olin Corporation ("Olin"), a
chemical and metals manufacturing company, from May 1993 to February 1995.
Deputy General Counsel of Olin from prior to 1993 to May 1993.
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<PAGE> 51
Mr. Burdulis, Senior Vice President, Group Operations since June 1996.
Group President from January 1995 to May 1996. President of the Garlock Sealing
Technologies Division from February 1994 to December 1994. President of the
Central Moloney Transformer Division from prior to 1993 to January 1994.
Mr. Dashnaw, Senior Vice President, Group Operations and President of the
Fairbanks Morse Engine Division since January 1994. Group President and
President of the Fairbanks Morse Engine Division from prior to 1993 to December
1993.
Mr. Kuhn, Senior Vice President, Group Operations since January 1998, Group
President and President of Chandler Evans Control Systems Division from January
1993 to December 1997.
Mr. Andolino, Group President and Vice President, Taxes since July 1997.
Vice President, Taxes from March 1997 to June 1997. Staff Vice President, Taxes
from June 1995 to March 1997. Senior Tax Counsel of AlliedSignal Inc., a
diversified manufacturing company, from prior to 1993 to May 1995.
Mr. Maier, Vice President and Controller since March 1997. Staff Vice
President and Controller from March 1995 to March 1997. Vice President and
Controller of Lukens, Inc., a speciality steel and industrial products company,
from prior to 1993 to February 1995.
Mr. Coppola, Member of the Audit Committee, member of the Stock Option and
Compensation Committee (the "Compensation Committee") and Chairman of the
Nominating and Corporate Governance Committee (the "Nominating Committee") of
Coltec. Chairman, Chief Executive Officer and President of Giddings & Lewis,
Inc. ("Giddings & Lewis"), a machine tool manufacturing company from July 1993
to retirement from Giddings & Lewis in July 1997. From prior to 1993 to July
1993 he was Senior Vice President, Manufacturing Services of Cooper Industries,
Inc. ("Cooper Industries"), a diversified manufacturing company. Director of
Belden Inc., a manufacturer of electrical wire and cable.
Mr. Grigg, Chairman of the Audit Committee and member of the Nominating
Committee of Coltec. Chairman and Chief Executive Officer of Duke Power Company,
now Duke Energy Corporation, ("Duke"), a public utility company, from April 1994
to June 1997. Mr. Grigg retired from Duke in December 1997. Vice Chairman of
Duke from prior to 1993 to April 1994. Director of Duke and the following mutual
funds: Hatteras Income Securities Inc., Nations Fund Inc., Nations Fund Trust,
Nations Fund Portfolios Inc., Nations LifeGoal Portfolios Inc., Nations
Institutional Reserves Inc., Nations Government Income Term Trust 2003, Inc.,
Nations Government Income Term Trust 2004, Inc. and Nations Balanced Target
Maturity Inc. Director of Shaw Group, Inc. a designer, manufacturer and service
provider of complex piping systems.
Mr. Margolis, Chairman of the Executive Committee of Coltec since October
1994. Chairman of the Board and Chief Executive Officer of Coltec from prior to
1993 to retirement from Coltec in January 1995. Director of Burlington
Industries, Inc., a manufacturer of textiles.
Mr. Moses, Chairman of the Compensation Committee and member of the
Executive Committee of Coltec. Provost, Massachusetts Institute of Technology
("MIT"), since June 1995. D.C. Jackson Professor of Computer Science and
Engineering, MIT since June 1995. Dean, School of Engineering, MIT, from prior
to 1993 to June 1995. Director of Analog Devices, Inc., a manufacturer of
integrated circuits.
Mr. Stuckey, member of the Audit Committee and member of the Compensation
Committee of Coltec. Chief Economist, E.I. du Pont de Nemours and Company, Inc.,
a diversified chemical manufacturing company, from prior to 1993 to retirement
from du Pont in December 1994. Economic consultant since January 1995.
Certain of the Company's officers are participants in or parties to certain
employee benefit and compensation plans and agreements which provide for
accelerated or increased benefits upon a change of control of the Company. Such
plans and agreements are described in more detail in the Company's Proxy
Statement for its 1998 Annual Meeting of Shareholders, the relevant part of
which is incorporated by reference into the Company's Annual Report on Form 10-K
for the year ended December 31, 1997. See "Available Information".
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<PAGE> 52
DESCRIPTION OF THE SENIOR NOTES
GENERAL
The Senior Notes were, and the Exchange Notes will be, issued under the
Indenture among the Company, the Subsidiary Guarantors and Bankers Trust
Company, as Trustee.
The following is a summary of certain provisions of the Indenture, the
Amended Collateral Documents, and the Senior Notes, a copy of each of which,
together with the form of Senior Notes, is available upon request to the Company
at the address set forth under "Available Information". The following summary of
certain provisions of the Indenture and such documents and instruments does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Indenture and such documents and
instruments, including the definitions of certain terms therein and those terms
made a part thereof by the TIA. Capitalized terms used herein and not otherwise
defined have the meanings set forth under "-- Certain Definitions". For purposes
of this summary, the term "Company" refers only to Coltec Industries Inc and not
to any Subsidiary of the Company.
Principal of, premium, if any, and interest on the Senior Notes will be
payable, and the Senior Notes may be exchanged or transferred, at the office or
agency of the Company in the Borough of Manhattan, The City of New York (which
initially shall be the corporate trust office of the Trustee, in New York, New
York), except that, at the option of the Company, payment of interest may be
made by check mailed to the registered holders of the Senior Notes at their
registered addresses.
The Senior Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000. No
service charge will be made for any registration of transfer or exchange of
Senior Notes, but the Company may require payment of a sum sufficient to cover
any transfer tax or other similar governmental charge payable in connection
therewith.
For each Outstanding Note accepted for exchange, the Holder thereof will
receive an Exchange Note having a principal amount equal to that of the
surrendered Outstanding Note.
The terms of the Exchange Notes are identical in all material respects to
the terms of the Outstanding Notes, except for certain transfer restrictions and
registration rights relating to the Outstanding Notes and except that, if the
Exchange Offer is not consummated on or prior by October 13, 1998, the rate per
annum at with the Outstanding Notes bear interest will be increased by amounts
specified herein. See "-- Registered Exchange Offer; Registration Rights."
The Exchange Notes will evidence the same indebtedness as the Outstanding
Notes and will be issued under and entitled to the same benefits under the
Indenture as the Outstanding Notes. In addition, the Exchange Notes and the
Outstanding Notes will be treated as one series of securities under the
Indenture.
TERMS OF THE SENIOR NOTES
The Senior Notes are senior obligations of the Company, limited to $300
million aggregate principal amount, and will mature on April 15, 2008. The
Senior Notes are secured to the extent set forth below under "-- Collateral" and
are guaranteed by the Subsidiary Guarantors to the extent set forth below under
"-- Guarantees".
Each Senior Note will bear interest at a rate per annum shown on the front
cover of this Prospectus from April 16, 1998 or from the most recent date to
which interest has been paid or provided for, payable semiannually to Senior
Noteholders of record at the close of business on the April 1 or October 1
immediately preceding the interest payment date on April 15 and October 15 of
each year, commencing October 15, 1998. Interest on the Senior Notes will be
computed on the basis of a 360-day year of twelve 30-day months.
OPTIONAL REDEMPTION
The Senior Notes are redeemable, in whole or in part, at any time, at the
option of the Company, at a redemption price equal to the greater of (i) 100% of
the principal amount of such Senior Notes and (ii) the sum of the present value
of the remaining scheduled payments of principal and interest thereon from the
redemption date to the maturity date, discounted to the redemption date on a
semiannual basis (assuming a 360-day year
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<PAGE> 53
consisting of twelve 30-day months) at the Treasury Rate plus 37.5 basis points,
plus accrued interest thereon to the date of redemption.
"Treasury Rate" means, with respect to any redemption date for the Senior
Notes, (i) the yield, under the heading which represents the average for the
immediately preceding week, appearing in the most recently published statistical
release designated "H.15(519)" or any successor publication which is published
weekly by the Board of Governors of the Federal Reserve System and which
establishes yields on actively traded United States Treasury securities adjusted
to constant maturity under the caption "Treasury Constant Maturities," for the
maturity corresponding to the Comparable Treasury Issue (if no maturity is
within three months before or after the Maturity Date, yields for the two
published maturities most closely corresponding to the Comparable Treasury Issue
shall be determined and the Treasury Rate shall be interpolated or extrapolated
from such yields on a straight line basis, rounding to the nearest month) or
(ii) if such release (or any successor release) is not published during the week
preceding the calculation date or does not contain such yields, the rate per
annum equal to the semi-annual equivalent yield to maturity of the Comparable
Treasury Issue, calculated using a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such redemption date. The Treasury Rate shall be calculated
on the third Business Day preceding the redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the Senior Notes to be redeemed that would be utilized, at
the time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of comparable maturity to the
remaining term of such Senior Notes. "Independent Investment Banker" means one
of the Reference Treasury Dealers appointed by the Trustee after consultation
with the Company.
"Comparable Treasury Price" means with respect to any redemption date for
the Senior Notes (i) the average of four Reference Treasury Dealer Quotations
for such redemption date, after excluding the highest and lowest such Reference
Treasury Dealer Quotations, or (ii) if the Trustee obtains fewer than four such
Reference Treasury Dealer Quotations, the average of all such quotations.
"Reference Treasury Dealer" means each of Credit Suisse First Boston
Corporation, BT Alex. Brown Incorporated and two other primary U.S. Government
securities dealers in New York City (each, a "Primary Treasury Dealer")
appointed by the Trustee in consultation with the Company; provided, however,
that if any of the foregoing shall cease to be a Primary Treasury Dealer, the
Company shall substitute therefor another Primary Treasury Dealer.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the
third Business Day preceding such redemption date.
Notice of any redemption will be mailed at least 30 days but no more than
60 days before the redemption date to each holder of Senior Notes to be
redeemed. Unless the Company defaults in payment of the redemption price, on and
after the redemption date interest will cease to accrue on the Senior Notes or
portions thereof called for redemption.
Except as set forth above, the Senior Notes are not redeemable by the
Company prior to maturity and are not entitled to the benefit of any sinking
fund.
RANKING
The Senior Notes are senior obligations of the Company and will rank pari
passu in right of payment with all existing and future senior obligations of the
Company (including indebtedness under the Amended Credit Agreement) and will
rank senior in right of payment to all subordinated obligations of the Company,
including the TIDES Debentures issued by the Company. The Senior Notes are
secured to the extent set forth below under "-- Collateral" and guaranteed by
the Subsidiary Guarantors to the extent set forth below under "-- Guarantees".
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<PAGE> 54
As of March 29, 1998 and December 31, 1997, on a pro forma basis after
giving effect to the Offerings and the application of the estimated net proceeds
therefrom to reduce indebtedness under the Amended Credit Agreement, the Company
would have had approximately $724.5 million and $623.9 million of total
consolidated long-term indebtedness, respectively. As of March 29, 1998 and
December 31, 1997, approximately $424.5 million and $323.9 million,
respectively, of such indebtedness ($372.5 million and $262.0 million,
respectively, of which would have been indebtedness outstanding under the
Amended Credit Agreement) would have been senior indebtedness. As of March 29,
1998 and December 31, 1997, $372.5 million and $262.0 million, respectively, of
such indebtedness (all of which would have been indebtedness outstanding under
the Amended Credit Agreement) would have been secured indebtedness. The
Indenture does not contain limitations on the amount of additional indebtedness
which the Company may incur.
GUARANTEES
Each Subsidiary Guarantor will fully and unconditionally guarantee, jointly
and severally, to each Holder and the Trustee, on a senior basis, the full and
prompt payment of principal of and interest on the Senior Notes, and of all
other obligations of the Company under the Indenture. The Subsidiary Guarantees
(including the payment of principal of, premium, if any, and interest on the
Senior Notes) are senior obligations of such Subsidiary Guarantors and will rank
pari passu in right of payment with all existing and future senior obligations
of the Subsidiary Guarantors and will rank senior to all subordinated
obligations of such Subsidiary Guarantors. The Subsidiary Guarantees are secured
to the extent set forth below under "-- Collateral".
As of March 29, 1998 and December 31, 1997 on a pro forma basis after
giving effect to the Offerings and the application of the estimated net proceeds
therefrom to reduce indebtedness under the Amended Credit Agreement, $372.5
million and $262.0 million, respectively, of the indebtedness of the Subsidiary
Guarantors would have been senior indebtedness (all of which would have been
guarantees of indebtedness under the Amended Credit Agreement). As of March 29,
1998 and December 31, 1997, $372.5 million and $262.0 million, respectively, of
the indebtedness of the Subsidiary Guarantors would have been secured
indebtedness (all of which would have been guarantees of indebtedness
outstanding under the Amended Credit Agreement). The Indenture does not contain
any limitation on the amount of additional indebtedness that the Company's
Subsidiaries, including the Subsidiary Guarantors, may incur. See note 20 to the
Company's audited consolidated financial statements and note 6 to the unaudited
interim consolidated financial statements of the Company included elsewhere in
this Prospectus.
The obligations of each Subsidiary Guarantor are limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor (including any guarantees of
indebtedness under the Amended Credit Agreement) and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Subsidiary Guarantee or pursuant to its contribution obligations under the
Indenture, result in the obligations of such Subsidiary Guarantor under the
Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law.
The Indenture provides that any Subsidiary Guarantor may, without the
consent of the holders of any outstanding Senior Notes, consolidate with or sell
or lease as, or substantially as, an entirety its assets to, or merge with or
into, any other Person; provided that (i) immediately after giving effect to
such transaction, no Event of Default under the Indenture, and no event which,
after notice or the lapse of time, or both, would become such an Event of
Default shall have occurred and be continuing and (ii) an officers' certificate
and legal opinion covering such condition shall be delivered to the Trustee.
Notwithstanding the foregoing, each Subsidiary Guarantor may consolidate with or
merge into or sell its assets to the Company or another Subsidiary Guarantor.
Upon the sale or other disposition of all of the assets of any Subsidiary
Guarantor, by way of merger, consolidation or otherwise, or a sale or other
disposition of all of the Capital Stock of such Subsidiary Guarantor, then, in
each case in accordance with the preceding paragraph, such Subsidiary Guarantor
(in the event of a sale or other disposition, by way of such a merger,
consolidation or otherwise, of all the Capital Stock of such Subsidiary
Guarantor) shall be automatically released from all its obligations under the
Indenture and the Subsidiary Guarantee without any action on the part of the
Trustee or the Holders.
Until such time as all Guarantees by the Subsidiary Guarantors under the
Indenture shall have been released in accordance with the next succeeding
sentence, the Company shall cause each Subsidiary that Guarantees the
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<PAGE> 55
Company's obligations under the Credit Agreement (other than Foreign
Subsidiaries) to become a Subsidiary Guarantor under the Indenture and thereby
Guarantee the Senior Notes on the terms and conditions set forth in the
Indenture. Upon the release of a Guarantee by a Subsidiary of the Company's
obligations under the Credit Agreement, the Subsidiary Guarantee of such
Subsidiary under the Indenture will be released and discharged at such time and
will not be reinstated or renewed in the event any such Subsidiary thereafter
Guarantees obligations of the Company under the Credit Agreement, so long as the
Guarantee by such Subsidiary under the Credit Agreement remains released (i)
until the next succeeding refinancing, restatement, renewal, extension or
replacement of the Credit Agreement or amendment to increase the available
principal amount thereunder, or (ii) for a period of 90 consecutive days,
whichever is later.
COLLATERAL
The Senior Notes and the Subsidiary Guarantees are secured, subject to the
terms of the Collateral Documents, equally and ratably with the indebtedness of
the Company under the Amended Credit Agreement and related documents and
liabilities in connection with interest rate protection and other hedging
agreements contemplated by the Amended Credit Agreement, by a security interest
in the collateral (the "Collateral") under the Amended Collateral Documents
described under "Description of Other Indebtedness -- The Amended Credit
Agreement -- Collateral".
In the event of foreclosure on the Collateral, the proceeds from the sale
of the Collateral may not be sufficient to satisfy the Company's obligations
under the Senior Notes and the Amended Credit Agreement in full. The amount to
be received upon such a sale would be dependent upon numerous factors including
the timing and the manner of the sale. In addition, the book value of the
Collateral should not be relied upon as a measure of realizable value. By its
nature, the Collateral will be illiquid and may have no readily ascertainable
market value. Accordingly, there can be no assurance that the Collateral can be
sold in a short period of time. A significant portion of the Collateral,
including the real property portion thereof, includes tangible and intangible
assets which may only be usable as part of the existing operating businesses of
the Company. Accordingly, any such sale of the Collateral, including the real
property portion thereof, separate from the sale of certain of the Company's
operating businesses, may not be feasible or of significant value. To the extent
that third parties enjoy Permitted Liens or Liens otherwise permitted by the
covenant described under "-- Certain Covenants -- Limitations on Liens", such
third parties may have rights and remedies with respect to the property subject
to such Liens that, if exercised, could adversely affect the value of the
Collateral. In addition, the ability of the Senior Noteholders to realize upon
any of the Collateral may be subject to certain bankruptcy law limitations in
the event of a bankruptcy. See "Risk Factors -- Collateral".
Upon the termination of all obligations under the Amended Credit Agreement
or the release by the lenders under the Amended Credit Agreement of all
Collateral, the Amended Collateral Documents will terminate and the Collateral
will be released. Under the Amended Collateral Documents, the control of
foreclosure proceedings, the enforcement and amendment of the Amended Collateral
Documents and the right to take other actions with respect to the Collateral
belong solely to the Collateral Agent and the lenders under the Amended Credit
Agreement. The lenders under the Amended Credit Agreement may release
Collateral, in whole or in part, from time to time, and in such event, the
Collateral so released will be automatically released as security for the Senior
Notes without any action on the part of the Trustee or the Senior Noteholders.
In addition, all Collateral under the Amended Credit Agreement and the Amended
Collateral Documents will be automatically released upon the Company's long-term
indebtedness being rated BBB- by Standard & Poor's and Baa3 by Moody's, and in
such event, all Collateral securing the Senior Notes will also be automatically
released without any action on the part of the Trustee or the Senior
Noteholders. For a further description of the Amended Collateral Documents, see
"Description of Other Indebtedness -- The Amended Credit
Agreement -- Collateral".
CERTAIN COVENANTS
The Indenture contains covenants, including, among others, the following:
LIMITATION ON LIENS. The Indenture provides that, with respect to the
Senior Notes, neither the Company nor any Subsidiary Guarantor will, nor
will they permit any of their Subsidiaries (excluding Foreign Subsidiaries)
to, create, incur, or permit to exist, any Lien on any of their respective
assets, whether now owned or hereafter acquired, in order to secure any
Indebtedness of either of the Company or any
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<PAGE> 56
Subsidiary Guarantor, without effectively providing that the Senior Notes
shall be equally and ratably secured until such time as such Indebtedness
is no longer secured by such Lien, except: (i) Liens securing Indebtedness
arising under the Credit Agreement, so long as such Liens also secure the
Senior Notes, equally and ratably; (ii) Liens on cash and cash equivalents
securing obligations in respect of letters of credit in accordance with the
terms of the Credit Agreement, (iii) Liens existing as of the closing date
of the Senior Notes Offering (the "Closing Date"); (iv) Liens existing as
of the Closing Date or granted after the Closing Date on any assets of the
Company or any Subsidiary Guarantor or any of their Subsidiaries securing
Indebtedness of the Company or any Subsidiary Guarantor created in favor of
the Holders of the Senior Notes; (v) Liens securing Indebtedness of the
Company or any Subsidiary which is incurred to extend, renew or refinance
Indebtedness which is secured by Liens permitted to be incurred under the
Indenture; provided that such Liens do not extend to or cover any assets of
the Company or any Subsidiary other than the assets securing the
Indebtedness being extended, renewed or refinanced and that the principal
amount of such Indebtedness does not exceed the principal amount of the
Indebtedness being extended, renewed or refinanced at the time of such
extension, renewal or replacement, or at the time the Lien was issued,
created or assumed or otherwise permitted; (vi) Permitted Liens; and (vii)
Liens created in substitution of or as replacements for any Liens permitted
by the preceding clauses (i) through (vi) or this clause (vii), provided
that, based on a good faith determination of an officer of the Company, the
asset encumbered under any such substitute or replacement Lien is
substantially similar in nature to the asset encumbered by the otherwise
permitted Lien which is being replaced.
Notwithstanding the foregoing and the covenant described under
"-- Limitation on Sale and Lease-Back Transactions" below, the Company and
any Subsidiary may, without securing any of the Senior Notes, create, incur
or permit to exist Liens which would otherwise be subject to the
restrictions set forth in the preceding paragraph, if after giving effect
thereto and at the time of determination, the aggregate amount of Exempted
Debt does not exceed the greater of (x) $100 million and (y) 15% of
Consolidated Net Assets.
LIMITATION ON SALE AND LEASE-BACK TRANSACTIONS. The Indenture
provides that neither the Company nor any Subsidiary Guarantor will, nor
will they permit any of their Subsidiaries (excluding Foreign Subsidiaries)
to, enter into any sale and lease-back transaction for the sale and leasing
back of any property or asset, whether now owned or hereafter acquired, of
the Company or any Subsidiary (except such transactions (i) entered into
prior to the Closing Date, (ii) for the sale and leasing back of any
property or asset by a Subsidiary to the Company or to another Subsidiary
Guarantor (or, if there are no Subsidiary Guarantors, another Subsidiary),
(iii) involving leases for less than three years or (iv) in which the lease
for the property or asset is entered into within 180 days after the later
of the date of acquisition, completion of construction or commencement or
full operations of such property or asset) unless (a) the Company or any
such Subsidiary would be entitled under the first paragraph of the
"Limitation on Liens" covenant described above to create, incur or permit
to exist a Lien on the assets to be leased securing Indebtedness in an
amount at least equal to the Attributable Debt in respect of such
transaction without equally and ratably securing the Senior Notes, (b) the
Company or any Subsidiary would be entitled under the second paragraph of
the "Limitations on Liens" covenant described above to create, incur or
permit to exist a Lien on the assets to be leased securing Indebtedness in
an amount at least equal to the Attributable Debt in respect of such
transaction without equally and ratably securing the Senior Notes or (c)
the proceeds of the sale of the assets to be leased are at least equal to
their fair market value and the proceeds are applied to the purchase or
acquisition (or in the case of real property, the construction) of assets
or to the repayment of Indebtedness of the Company or any Subsidiary
Guarantor (or, if there are no Subsidiary Guarantors, another Subsidiary).
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture provides that the Company may, without the consent of the
holders of any outstanding Senior Notes, consolidate with or sell or lease its
assets as, or substantially as, an entirety, to, or merge with or into, any
other entity, provided that (i) the Company shall be the continuing entity, or
the successor entity formed by or resulting from any such consolidation or
merger or which shall have received the transfer of such assets is organized
under the laws of any domestic jurisdiction and expressly assumes the Company's
obligations to pay principal of (and premium, if any) and interest on all the
Senior Notes and the due and punctual performance and observance of all the
covenants and conditions contained in the Indenture; (ii) immediately after
giving effect to
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such transaction, no Event of Default under the Indenture, and no event which,
after notice or the lapse of time, or both, would become such an Event of
Default shall have occurred and be continuing; and (iii) an officers'
certificate and legal opinion covering certain of such conditions shall be
delivered to the Trustee.
Upon any consolidation or merger, or any sale or lease of the assets of the
Company as, or substantially as, an entirety in accordance with the provisions
of the Indenture, the entity formed by such consolidation or into which the
Company shall have been merged or to which such sale or lease shall have been
made shall succeed to and be substituted for the Company with the same effect as
if it had been named in the Indenture as a party thereto and thereafter from
time to time such successor entity may exercise each and every right and power
of the Company under the Indenture in the name of the Company or in its own
name; and any act or proceeding by any provision of the Indenture required or
permitted to be done by the Board of Directors or any officer of the Company may
be done with like force and effect by the like board or officer of any entity
that shall at the time be the successor of the Company hereunder. In the event
of the sale by the Company of its assets as, or substantially as, an entirety
upon the terms and conditions of the Indenture, the Company shall be released
from all its liabilities and obligations under the Indenture and the Senior
Notes.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Senior Note when due, that continues for 30 days,
(ii) a default in the payment of principal of any Senior Note when due at its
Stated Maturity, upon declaration or otherwise, (iii) the failure by the Company
to comply with its obligations under the covenant described under "-- Merger,
Consolidation or Sale of Assets", (iv) the failure by the Company or a
Subsidiary Guarantor to comply for 60 days after notice with any of its
obligations under the covenants described under "-- Certain Covenants", (v) the
failure by the Company or any Subsidiary Guarantor to comply for 60 days after
notice with its other agreements contained in the Indenture (other than those
referred to in (i), (ii), (iii) or (iv) above), (vi) the failure by the Company,
any Subsidiary Guarantor or any Subsidiary of the Company to pay any
Indebtedness within any applicable grace period after final maturity or the
acceleration of any such Indebtedness by the holders thereof because of a
default if the total amount of such Indebtedness unpaid or accelerated exceeds
$30 million or its foreign currency equivalent (the "cross acceleration
provision"), (vii) certain events of bankruptcy, insolvency or reorganization of
the Company or any Significant Subsidiary (the "bankruptcy provisions"), (viii)
any judgment or decree for the payment of money in excess of $30 million is
rendered against the Company or any Significant Subsidiary remains outstanding
for a period of 60 days following such judgment and is not discharged, waived or
stayed within 30 days after notice (the "judgment default provision"), (ix)
except as permitted by the Indenture, a Subsidiary Guarantee ceases to be in
full force and effect for 30 days after notice or a Subsidiary Guarantor denies
or disaffirms its obligations under its Subsidiary Guarantee (the "subsidiary
guarantee provision") or (x) except as permitted by the Amended Collateral
Documents, the Credit Agreement and the Indenture or any amendments thereto, any
of the Collateral Documents ceases to be in full force and effect or ceases to
be effective, in all material respects, to create a Lien on the Collateral in
favor of the Senior Noteholders for 30 days after notice (the "collateral
provision").
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
However, a default under clauses (iv), (v), (viii), (ix) and (x) will not
constitute an Event of Default until the Trustee or the Holders of 25% in
aggregate principal amount of the outstanding Senior Notes notify the Company as
provided in the Indenture of the default and the Company does not cure such
default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the Senior
Noteholders of at least 25% in aggregate principal amount of the outstanding
Senior Notes by notice to the Company may declare the principal of and accrued
but unpaid interest on all the Senior Notes to be due and payable. Upon such a
declaration, such principal and interest will be due and payable immediately. If
an Event of Default relating to certain events of bankruptcy, insolvency or
reorganization of the Company occurs and is continuing, the principal of and
accrued interest on all the Senior Notes will ipso facto become immediately due
and payable without any declaration or other act on the part of the Trustee or
any Senior Noteholders. Under certain circumstances, the Senior
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Noteholders of a majority in aggregate principal amount of the outstanding
Senior Notes may rescind any such acceleration with respect to the Senior Notes
and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
shall have offered to the Trustee reasonable indemnity or security against any
loss, liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Senior Notes unless (i) such Holder
shall have previously given the Trustee notice that an Event of Default is
continuing, (ii) Holders of at least 25% in aggregate principal amount of the
outstanding Senior Notes shall have requested the Trustee to pursue the remedy,
(iii) such Holders shall have offered the Trustee security or indemnity
satisfactory to the Trustee against any loss, liability or expense, (iv) the
Trustee shall not have complied with such request within 60 days after the
receipt of the request and the offer of such reasonable security or indemnity
and (v) the Holders of a majority in principal amount of the outstanding Senior
Notes shall not have given the Trustee a direction inconsistent with such
request within such 60-day period. Subject to certain restrictions, the Holders
of a majority in principal amount of the outstanding Senior Notes are given the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or of exercising any trust or power conferred on
the Trustee. The Trustee, however, may refuse to follow any direction that
conflicts with law or the Indenture or that the Trustee determines is unduly
prejudicial to the rights of any other Holder or that would involve the Trustee
in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within 30 days after it is known to a Trust officer or written notice of it is
received by the Trustee. Except in the case of a Default in the payment of
principal of, premium (if any) or interest on any Senior Note, the Trustee may
withhold notice if and so long as a committee of its Trust officers in good
faith determines that withholding notice is not opposed to the interests of the
Senior Noteholders. In addition, the Company is required to deliver to the
Trustee, within 120 days after the end of each fiscal year, (i) a certificate
indicating whether the signers thereof know of any Default that occurred during
the previous year and (ii) an opinion of counsel either stating that action has
been taken with respect to any filing, refiling, recording or re-recording with
respect to the Collateral as is necessary to maintain the Lien on the Collateral
in favor of the Senior Noteholders or that no such action is necessary to
maintain such Lien. The Company also is required to deliver to the Trustee,
within 30 days after the occurrence thereof, written notice of any event which
would constitute certain Defaults, their status and what action the Company is
taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Senior Notes
then outstanding and any past default or compliance with any provisions may be
waived with the consent of the Holders of a majority in principal amount of the
Senior Notes then outstanding. However, without the consent of each Holder of an
outstanding Senior Note affected, no amendment may, among other things, (i)
reduce the amount of Senior Notes whose Holders must consent to an amendment,
(ii) reduce the rate of or extend the time for payment of interest on any Senior
Note, (iii) reduce the principal of or extend the Stated Maturity of any Senior
Note, (iv) reduce the premium payable upon any redemption of any Senior Note or
change the time at which any Senior Note may be redeemed, (v) make any Senior
Note payable in money other than that stated in the Senior Note, (vi) impair the
right of any Holder to receive payment of principal of and interest on such
Holder's Senior Notes on or after the due dates therefor or to institute suit
for the enforcement of any payment on or with respect to such Holder's Senior
Notes, (vii) make any changes that would affect the ranking of the Senior Notes
or, except (a) in accordance with the terms of the Collateral Documents or the
Indenture, (b) as permitted by the following paragraph or (c) in order to give
effect to amendments to any of the Amended Collateral Documents, the security
for the Senior Notes in a manner material and adverse to the Senior Noteholders
or (viii) make any change in the amendment provisions which require each
Holder's consent or in the waiver provisions.
Without the consent of any Holder, the Company, the Subsidiary Guarantors
and the Trustee may amend the Indenture to cure any ambiguity, omission, defect
or inconsistency whether wholly within the Indenture or as
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compared to any of the Amended Collateral Documents, or to make such other
provisions in regard to matters or questions arising under the Indenture as the
Board of Directors of the Company may deem necessary or desirable and which
shall not materially and adversely affect the rights of the Holders, to provide
for the assumption by a successor corporation of the obligations the Company
under the Indenture, to provide for uncertificated Senior Notes in addition to
or in place of certificated Senior Notes (provided that the uncertificated
Senior Notes are issued in registered form for purposes of Section 163(f) of the
Code, or in a manner such that the uncertificated Senior Notes are as described
in Section 163(f)(2)(B) of the Code), to add additional Guarantees with respect
to the Senior Notes, to add additional security for the Senior Notes, to add to
the covenants of the Company for the benefit of the Senior Noteholders or to
surrender any right or power conferred upon the Company, to make any change that
does not adversely affect the rights of any Holder in any material respect, to
comply with, or allow for compliance with, any requirement of the SEC in
connection with qualifying the Indenture under the TIA or giving effect to the
security arrangements contemplated by the Indenture, to give effect to the
provisions of the Amended Collateral Documents and the Indenture, including with
regard to the release of all or a portion of the Collateral in accordance with
such provisions and to give effect to the release of any Subsidiary Guarantee in
accordance with the terms of the Indenture.
The consent of the Senior Noteholders is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is sufficient if
such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Senior Noteholders a notice briefly describing such
amendment. However, the failure to give such notice to all Senior Noteholders,
or any defect therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Senior Noteholder may transfer or exchange Senior Notes in accordance
with the Indenture. Upon any transfer or exchange, the registrar and the Trustee
may require a Senior Noteholder, among other things, to furnish appropriate
endorsements and transfer documents and the Company may require a Senior
Noteholder to pay any taxes required by law or permitted by the Indenture,
including any transfer tax or other similar governmental charge payable in
connection therewith. The Company is not required to transfer or exchange any
Senior Note selected for redemption or to transfer or exchange any Senior Note
for a period of 15 days prior to a selection of Senior Notes to be redeemed. The
Senior Notes will be issued in registered form and the registered holder of a
Senior Note will be treated as the owner of such Senior Note for all purposes.
DEFEASANCE
GENERAL
The Company at any time may terminate all its obligations under the Senior
Notes and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Senior Notes, to replace mutilated, destroyed, lost
or stolen Senior Notes and to maintain a registrar and paying agent in respect
of the Senior Notes. The Company at any time may terminate its obligations under
the covenants described under "Certain Covenants", (other than the covenant
described under "-- Merger, Consolidation or Sale of Assets") and the operation
of the cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries, the judgment default provision, the subsidiary
guarantee provision or the collateral provision described under "-- Defaults"
("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Senior Notes may not be accelerated
because of an Event of Default with respect thereto. If the Company exercises
its covenant defeasance option, payment of the Senior Notes may not be
accelerated because of an Event of Default specified in clause (iv), (v), (vi),
(vii) (with respect only to Significant Subsidiaries), (viii), (ix) or (x) under
"-- Defaults" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit or cause to be deposited in trust (the "defeasance trust") with the
Trustee money or U.S. Government Obligations which through the scheduled payment
of principal and interest in respect thereof in accordance with their terms will
provide cash at
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such times and in such amounts as will be sufficient to pay principal and
interest when due on all the Senior Notes (except lost, stolen or destroyed
Senior Notes which have been replaced or repaid) to maturity or redemption, as
the case may be, and must comply with certain other conditions.
TAX CONSEQUENCES
Under current law such deposit and discharge would, in the case of legal
defeasance, and could, in the case of covenant defeasance, constitute a taxable
exchange of the related Senior Notes. If the defeasance of such Senior Notes is
considered to be a taxable exchange, each Holder of such Senior Notes would be
required to recognize gain or loss equal to the difference between the Holder's
tax basis in such Senior Notes and the value of the Holder's interest in the
defeasance trust. In addition, such Holders thereafter might be required to
include in income a different amount than would be includable in the absence of
the discharge. Prospective investors are urged to consult their own tax advisers
as to the specific consequences of such a deposit and discharge, including the
applicability and effect of tax laws other than the federal income tax law.
CONCERNING THE TRUSTEE
Bankers Trust Company is the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the Senior
Notes.
The Indenture contains certain limitations on the rights of the Trustee, if
it is a creditor of the Company, to obtain payment of claims in certain cases,
or to realize on certain property received in respect of any such claim as
security or otherwise. The Trustee will be permitted to engage in other
transactions; provided, however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the SEC for permission to
continue or resign. Bankers Trust Company is also the Administrative Agent under
the Amended Credit Agreement and will act as Collateral Agent on behalf of all
the secured creditors under the Amended Collateral Documents (including, without
limitations, the Holders of the Senior Notes and the lenders under the Amended
Credit Agreement).
The Holders of a majority in principal amount of the outstanding Senior
Notes have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that if an Event of Default occurs
(and is not cured) the Trustee will be required, in the exercise of its power,
to use the degree of care of a prudent man in the conduct of his own affairs.
Subject to such provisions, the Trustee will be under no obligation to exercise
any of its rights or powers under the Indenture at the request of any Holder of
Senior Notes, unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense and then
only to the extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Senior Notes will be governed by,
and construed in accordance with, the laws of the State of New York without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Attributable Debt" means in connection with a sale and lease-back
transaction, the lesser of (i) the fair market value of the assets subject to
such transaction and (ii) the present value (discounted at a rate per annum
equal to the average interest borne by all outstanding securities issued under
the Indenture (which may include securities in addition to the Senior Notes)
determined on a weighted average basis and compounded semiannually) of the
obligations of the lessee for rental payments during the term of the related
lease.
"Capital Lease" means any Indebtedness represented by a lease obligation of
a person incurred with respect to real property or equipment acquired or leased
by such person and used in its business that is required to be recorded as a
capital lease in accordance with GAAP.
"Capital Stock" of any Person means any and all shares, interests,
participations, rights to purchase, warrants, options or other equivalents
(however designated) of corporate stock or other equity of such Person.
"Code" means the Internal Revenue Code of 1986, as amended.
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"Consolidated Net Assets" means as of any particular time the aggregate
amount of assets after deducting therefrom all current liabilities except for
(i) notes and loans payable, (ii) current maturities of long-term debt and (iii)
current maturities of obligations under capital leases, all as set forth on the
most recent consolidated balance sheet of the Company and its consolidated
Subsidiaries and computed in accordance with GAAP.
"Credit Agreement" means the Amended and Restated Credit Agreement as
amended and restated as of December 18, 1996, as amended by the Fifth Amendment
thereto, dated March 16, 1998, among the Company, Coltec Aerospace Canada
Limited, a Subsidiary of the Company, Bankers Trust Company, as Administrative
Agent, Bank of America National Trust and Savings Association, as Documentation
Agent, The Chase Manhattan Bank, as Syndication Agent, Bank of Montreal, as
Canadian Paying Agent, and the various lenders party thereto, as such agreement
may be amended (including any amendment, restatement and successors thereof),
supplemented, refinanced, renewed, extended, replaced, in whole or in part, or
otherwise modified from time to time, including any increase in the principal
amount of the obligations thereunder.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Exempted Debt" means the sum of the following as of the date of
determination: (i) Indebtedness of the Company and its Subsidiaries (other than
Foreign Subsidiaries) incurred after the Closing Date and secured by Liens not
otherwise permitted by the covenant described under "-- Limitation on Liens"
above and (ii) Attributable Debt of the Company and its Subsidiaries in respect
of sale and lease-back transactions entered into after the Closing Date, other
than sale and lease-back transactions permitted by clauses (a) and (c) of the
covenant described under the "-- Limitation on Sale and Lease-Back Transactions"
above.
"Foreign Subsidiary" means any Subsidiary which is incorporated or
otherwise organized under the laws of any jurisdiction other than the United
States of America, any state thereof or the District of Columbia and any
Subsidiary thereof.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"Guarantee" means a guarantee, direct or indirect, in any manner
(including, without limitation, letters of credit and reimbursement agreements
in respect thereof), of all or any part of any Indebtedness; provided, however,
that the term "Guarantee" shall not include endorsements for collection or
deposit in the ordinary course of business. The term "Guarantee" used as a verb
has a corresponding meaning.
"Holder" or "Senior Noteholder" means the Person in whose name a Senior
Note is registered on the Registrar's books.
"Indebtedness" means, with respect to any Person, without duplication, (i)
principal of, and premium, if any, and interest (including interest accruing on
or after the filing of any petition in bankruptcy or for reorganization relating
to such Person whether or not such claim for post-petition interest is allowed
in such proceeding) on any indebtedness of such Person (a) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets, of
such person or only to a portion thereof), (b) evidenced by notes, debentures or
similar instruments (including purchase money obligations) given in connection
with the acquisition of any property or assets (other than trade accounts
payable for inventory or similar property acquired in the ordinary course of
business), including securities, for the payment of which such Person is liable,
directly or indirectly, or the payment of which is secured by a lien, charge or
encumbrance on property or assets of such Person, (c) for goods, materials or
services purchased in the ordinary course of business (other than trade accounts
payable arising in the ordinary course of business which are due less than three
months after the acceptance of such goods, materials or services), (d) with
respect to letters of credit or bankers acceptances issued for the account of
such Person or performance, surety or similar bonds, (e) for the payment of
money relating to a
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Capital Lease obligation or (f) under interest rate swaps, caps or similar
agreements and foreign exchange contracts, currency swaps or similar agreements;
(ii) any liability of any other Person of the kind described in the preceding
clause (i), which such Person has Guaranteed or which is otherwise its legal
liability; and (iii) any and all deferrals, renewals, extensions and refunding
of, or amendments, modifications or supplements to, any indebtedness of the kind
described in any of the preceding clauses (i) or (ii).
"Lien" means any lien, security interest, charge or encumbrance of any kind
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, and any agreement to give any security interest).
"Permitted Liens" means (i) Liens on any asset of the Company or any
Subsidiary created solely to secure obligations incurred to finance the
refurbishment, improvement or construction of such asset, which obligations are
incurred no later than 180 days after completion of such refurbishment,
improvement or construction, and all renewals, extensions, refinancings,
replacements or refundings of such obligations, or to secure all or part of the
cost of such refurbishment, improvement or construction; (ii) (a) Liens to
secure the payment of the purchase price incurred in connection with the
acquisition (including acquisition through merger or consolidation) of any asset
(including shares of stock), including Capital Lease transactions in connection
with any such acquisition and (b) Liens existing on any asset at the time of
acquisition thereof or at the time of acquisition by the Company or any
Subsidiary of any Person then owning such asset, directly or indirectly, whether
or not such existing Liens were given to secure the payment of the purchase
price of the property to which they attach; provided that, with respect to
clause (a), such Liens shall be given within one year after such acquisition and
shall attach solely to the assets acquired or purchased and any improvements
then or thereafter placed thereon; (iii) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (iv) Liens upon specific items of
inventory or other goods and proceeds of any Person securing such Person's
obligations in respect of bankers' acceptances issued or created for the account
of such Person to facilitate the purchase, shipment or storage of such inventory
or other goods; (v) Liens securing reimbursement obligations with respect to
letters of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof; (vi) Liens encumbering
customary initial deposits and margin deposits and other Liens, in each case
securing Indebtedness of the Company or any Subsidiary under interest rate and
currency hedging instruments and forward contract, option, futures contracts,
futures options or similar agreements or arrangements designed to protect the
Company or any Subsidiary from fluctuations in interest rates, currencies or the
price of commodities or any combination of the foregoing; (vii) Liens arising
out of conditional sale, title retention, consignment or similar arrangements
for the sale of goods entered into by the Company or any Subsidiary in the
ordinary course of business; (viii) Liens in favor of the Company or any
Subsidiary; (ix) Liens for taxes, assessments or governmental charges or levies
on the assets of the Company or any Subsidiary if the same shall not at the time
be delinquent or thereafter can be paid without penalty, or are being contested
in good faith and by appropriate proceedings or Liens for the excess of the
amount of any past due taxes for which a final assessment has not been received
over the amount of such taxes as estimated and paid; (x) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens and other similar Liens
on the assets of the Company or any Subsidiary arising in the ordinary course of
business which secure payment of obligations not more than 60 days past due or
are being contested in good faith and by appropriate proceedings; (xi) Liens on
the assets of the Company or any Subsidiary incurred in the ordinary course of
business to secure performance of obligations with respect to statutory or
regulatory requirements, performance or return-of-money bonds, surety bonds or
other obligations of a like nature and incurred in a manner consistent with
industry practice; (xii) Liens on the assets of a Receivables Subsidiary in a
Qualified Receivables Transaction; (xiii) Liens in respect of any judgment
rendered which is being contested diligently and in good faith by appropriate
proceedings by the Company or any of its Subsidiaries and which does not have a
material adverse effect on the ability of the Company and its Subsidiaries to
operate the business or operations of the Company or its Subsidiaries taken as a
whole; and (xiv) Liens in favor of the United States or any state or territory
or possession thereof, or any foreign country, or any department, agency,
instrumentality or political subdivision of any of such domestic or foreign
governmental entity, to secure partial, progress, advance or other payments
pursuant to any contract or statute or to secure any liability incurred for the
purpose of financing all or part of the purchase price or the cost of
constructing the asset subject to such Liens.
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"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by the Company or any of its Subsidiaries
pursuant to which the Company or any of its Subsidiaries may sell, convey or
otherwise transfer to (i) a Receivables Subsidiary (in the case of a transfer by
the Company or a Subsidiary) and (ii) any other Person (in the case of a
transfer by a Receivables Subsidiary), or may grant a security interest in, any
accounts receivable (whether now existing or arising in the future) of the
Company or any of its Subsidiaries, and any assets related thereto including all
collateral securing such accounts receivable, all contracts and all guarantees
or other obligations in respect of such accounts receivable, proceeds of such
accounts receivable and other assets which, in each case, are customarily and
regularly transferred, or in respect of which security interests are customarily
granted, in connection with asset securitization transactions involving accounts
receivable.
"Receivables Subsidiary" means a Subsidiary of the Company which engages in
no activities other than in connection with the financing of accounts receivable
and which is designated by or pursuant to the authority of the Board of
Directors as a Receivables Subsidiary (a) no portion of the Indebtedness of
which (i) is guaranteed by the Company or any Subsidiary, (ii) is recourse to or
obligates the Company or any Subsidiary in any manner other than pursuant to
customary representations, warranties, covenants and indemnities entered into in
connection with a Qualified Receivables Transactions or (iii) subjects any
assets of the Company or any Subsidiary, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to the
representations, warranties, covenants and indemnities entered into in the
ordinary course of business in connection with a Qualified Receivables
Transaction and other than in respect of the related pledge of the financed
accounts receivable and (b) with which neither the Company nor any Subsidiary
has any obligation to maintain or preserve such Subsidiary's financial condition
or cause such Subsidiary to achieve certain levels of operating results.
"Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X
promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subsidiary" means a Person (other than an individual), a majority of the
outstanding voting stock, partnership interests, membership interests or other
equity interest, as the case may be, of which is owned or controlled, directly
or indirectly, by the Company or by one or more other Subsidiaries of the
Company. For the purposes of this definition, "voting stock" means stock having
voting power for the election of directors, trustees or managers, as the case
may be, whether at all times or only so long as no senior class of stock has
such voting power by reason of any contingency.
"Subsidiary Guarantee" means the Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Senior Notes.
"Subsidiary Guarantor" means each Subsidiary of the Company existing on the
Closing Date and each new Subsidiary created after the Closing Date (in each
case other than Foreign Subsidiaries), in each case, that Guarantees the
Company's obligations under the Credit Agreement; provided that, if such
Subsidiary's Guarantee of the Company's obligations under the Credit Agreement
is released or ceases to be in effect, such Subsidiary shall no longer be a
Subsidiary Guarantor.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. sec.sec.
77aaa-77bbbb) as in effect on the Closing Date.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the
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payment of which the full faith and credit of the United States of America is
pledged and which are not callable or redeemable at the issuer's option.
BOOK-ENTRY; DELIVERY AND FORM
The Exchange Notes will be issued in the form of a Global Exchange Note.
The Global Exchange Note will be deposited with, or on behalf of, the Depository
and registered in the name of the Depository or its nominee. Except as set forth
below, the Global Exchange Note may be transferred, in whole and not in part,
only to the Depository or another nominee of the Depository. Investors may hold
their beneficial interests in the Global Exchange Note directly through the
Depository if they have an account with the Depository or indirectly through
organizations which have accounts with the Depository.
Exchange Notes that are issued as described below under "-- Certificated
Exchange Notes" will be issued in definitive form. Upon the transfer of an
Exchange Note in definitive form, such Exchange Note will, unless the Global
Exchange Note has previously been exchanged for Exchange Notes in definitive
form, be exchanged for an interest in the Global Exchange Note representing the
principal amount of Exchange Notes being transferred.
The Depository has advised the Company as follows: The Depository is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depository was created to hold securities of institutions that have accounts
with the Depository ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers (which may
include the Initial Purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depository's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
whether directly or indirectly.
Upon the issuance of the Global Exchange Note, the Depository will credit,
on its book-entry registration and transfer system, the principal amount of the
Exchange Notes represented by such Global Exchange Note to the accounts of
participants. Ownership of beneficial interests in the Global Exchange Note will
be limited to participants or persons that may hold interests through
participants. Ownership of beneficial interests in the Global Exchange Note will
be shown on, and the transfer of those ownership interests will be effected only
through, records maintained by the Depository (with respect to participants'
interest) and such participants (with respect to the owners of beneficial
interests in the Global Exchange Note other than participants). The laws of some
jurisdictions may require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and laws may impair
the ability to transfer or pledge beneficial interests in the Global Exchange
Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Exchange Note, the Depository or such nominee, as the case
may be, will be considered the sole legal owner and holder of the related
Exchange Notes for all purposes of such Exchange Notes and the Indenture. Except
as set forth below, owners of beneficial interests in the Global Exchange Note
will not be entitled to have the Exchange Notes represented by the Global
Exchange Note registered in their names, will not receive or be entitled to
receive physical delivery of certificated Exchange Notes in definitive form and
will not be considered to be the owners or holders of any Exchange Notes under
the Global Exchange Note. The Company understands that under existing industry
practice, in the event an owner of a beneficial interest in the Global Exchange
Note desires to take any action that the Depository, as the holder of the Global
Exchange Note, is entitled to take, the Depository would authorize the
participants to take such action, and that the participants would authorize
beneficial owners owning through such participants to take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
Payment of principal of and interest on Exchange Notes represented by the
Global Exchange Note registered in the name of and held by the Depository or its
nominee will be made to the Depository or its nominee, as the case may be, as
the registered owner and holder of the Global Exchange Note.
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The Company expects that the Depository or its nominee, upon receipt of any
payment of principal of or interest on the Global Exchange Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Exchange
Note as shown on the records of the Depository or its nominee. The Company also
expects that payments by participants to owners of beneficial interests in the
Global Exchange Note held through such participants will be governed by standing
instructions and customary practices and will be the responsibility of such
participants. The Company will not have any responsibility or liability for any
aspect of the records relating to, or payments made on account of, beneficial
ownership interests in the Global Exchange Note for any Exchange Note or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests or for any other aspect of the relationship between the
Depository and its participants or the relationship between such participants
and the owners of beneficial interests in the Global Exchange Note owning
through such participants.
Unless and until it is exchanged in whole or in part for certificated
Exchange Notes in definitive form, the Global Exchange Note may not be
transferred except as a whole by the Depository to a nominee of such Depository
or by a nominee of such Depository to such Depository or another nominee of such
Depository.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Exchange Note among participants
of the Depository, it is under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. Neither
the Trustee nor the Company will have any responsibility for the performance by
the Depository or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED EXCHANGE NOTES
The Exchange Notes represented by the Global Exchange Note are exchangeable
for certificated Exchange Notes in definitive form of like tenor as such
Exchange Notes in denominations of U.S. $1,000 and integral multiples thereof if
(i) the Depository notifies the Company that it is unwilling or unable to
continue as Depository of the Global Exchange Note or if at any time the
Depository ceases to be a clearing agency registered under the Exchange Act and
a successor Depository is not appointed by the Company within 90 days, (ii) the
Company in its discretion at any time determines not to have all of the Exchange
Notes represented by the Global Exchange Note or (iii) an Event of Default has
occurred and is continuing. Any Exchange Note that is exchangeable pursuant to
the preceding sentence is exchangeable for certificated Exchange Notes issuable
in authorized denominations and registered in such names as the Depository shall
direct. Subject to the foregoing, the Global Exchange Note is not exchangeable,
except for a Global Exchange Note of the same aggregate denomination to be
registered in the name of the Depository or its nominee.
REGISTERED EXCHANGE OFFER; REGISTRATION RIGHTS
Holders of Exchange Notes are not entitled to any registration rights with
respect to the Exchange Notes. The Company and the Subsidiary Guarantors have
agreed pursuant to a registration rights agreement (the "Registration Rights
Agreement") with the Initial Purchasers, for the benefit of the holders of the
Senior Notes, that the Company will, at its cost, (i) within 90 days after the
Issue Date, file a Registration Statement with the SEC with respect to the
Exchange Offer to exchange the Outstanding Notes for Exchange Notes having terms
substantially identical in all material respects to the Outstanding Notes except
that such notes will not contain terms with respect to transfer restrictions and
(ii) use its reasonable best efforts to cause the Registration Statement to be
declared effective under the Securities Act within 150 days after the Issue
Date. Upon the effectiveness of the Registration Statement, the Company will
offer the Exchange Notes in exchange for surrender of the Outstanding Notes. The
Company will keep the Exchange Offer open for not less than 20 days (or longer
if required by applicable law) after the date notice of the Registered Exchange
Offer is mailed to the holders of the Senior Notes. For each Outstanding Note
surrendered to the Company pursuant to the Exchange Offer, the holder of such
Outstanding Note will receive an Exchange Note having a principal amount at
maturity equal to that of the surrendered Outstanding Note at maturity. Interest
on each Exchange Note will accrue from the last interest payment date on which
interest was paid on the Outstanding Note surrendered in exchange thereof or, if
no interest has been paid on such Outstanding Note, from the date interest
begins to accrue on such Outstanding Note.
In the event that applicable interpretations of the staff of the SEC do not
permit the Company to effect the Exchange Offer, or if for any other reason the
Exchange Offer is not consummated within 180 days of the
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Closing Date, or if the Initial Purchasers so request with respect to
Outstanding Notes not eligible to be exchanged for Exchange Notes in the
Exchange Offer, or if any holder of Outstanding Notes is not eligible to
participate in the Exchange Offer or does not receive freely tradeable Exchange
Notes in the Exchange Offer, the Company, will, at its cost, (a) as promptly as
practicable, file a shelf registration statement (the "Shelf Registration
Statement") with the SEC covering resales of the Outstanding Notes or the
Exchange Notes, as the case may be, (b) use its reasonable best efforts to cause
the Shelf Registration Statement to be declared effective under the Securities
Act and (c) keep the Shelf Registration Statement effective until the earlier of
(i) the time when the Senior Notes covered by the Shelf Registration Statement
can be sold pursuant to Rule 144 without any limitations under clauses (c), (e),
(f) and (h) of Rule 144 and (ii) two years from the Issue Date; provided that
the Company will be permitted to suspend the use of the prospectus which forms a
part of the Shelf Registration Statement for a period not to exceed 45 days in
any three-month period or three periods not to exceed an aggregate of 90 days in
any 12-month period under certain circumstances relating to pending corporate
developments, public filings with the Commission and similar events. The Company
will, in the event a Shelf Registration Statement is filed, among other things,
provide to each holder for whom such Shelf Registration Statement was filed
copies of the prospectus which is a part of the Shelf Registration Statement,
notify each such holder when the Shelf Registration Statement has become
effective and take certain other actions as are required to permit unrestricted
resales of the Senior Notes. A holder selling such Senior Notes pursuant to the
Shelf Registration Statement generally would be required to be named as a
selling security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such
holder (including certain indemnification obligations).
If (i) within 90 days after the Issue Date, neither the Registration
Statement nor the Shelf Registration Statement has been filed with the SEC; (ii)
within 180 days after the Issue Date, neither the Exchange Offer is consummated
nor the Shelf Registration Statement is declared effective; or (iii) after
either the Registration Statement or the Shelf Registration Statement is
declared effective, such registration statement thereafter ceases to be
effective or usable (subject to certain exceptions, including the blackout
provisions described above) in connection with resales of Outstanding Notes or
Exchange Notes in accordance with and during the periods specified in the
Registration Rights Agreement (each such event referred to in clause (i) through
(iii) being herein called a "Registration Default"), additional cash interest
will accrue on the Outstanding Notes and the Exchange Notes at the rate of 0.50%
per annum from and including the date on which any such Registration Default
shall occur to but excluding the date on which all Registration Defaults have
been cured, calculated on the principal amount of the Senior Notes as of the
date on which such interest is payable. Such interest is payable in addition to
any other interest payable from time to time with respect to the Senior Notes.
If the Company effects the Exchange Offer, it will be entitled to close the
Registered Exchange Offer 20 business days after the commencement thereof
provided that it has accepted all Senior Notes theretofore validly tendered in
accordance with the terms of the Exchange Offer.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available upon request to the Company.
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DESCRIPTION OF OTHER INDEBTEDNESS
The following summaries of certain indebtedness of the Company do not
purport to be complete and are subject to, and qualified in their entirety by
reference to, the definitive agreements governing such indebtedness, copies of
which are available upon request to the Company.
THE AMENDED CREDIT AGREEMENT
GENERAL
The Company and Coltec Aerospace Canada Limited, a Canadian subsidiary of
the Company (the "Canadian Borrower"), are parties to the Amended Credit
Agreement with various lenders (collectively, the "Lenders"), Bankers Trust
Company, as Administrative Agent, Bank of America National Trust and Savings
Association, as Documentation Agent, The Chase Manhattan Bank, as Syndication
Agent, and Bank of Montreal, as Canadian Paying Agent. Capitalized terms used
but not defined in this summary have the meanings assigned thereto in the
Amended Credit Agreement.
The Amended Credit Agreement provides for revolving borrowings by the
Company and the Canadian Borrower of up to $900 million, which will be reduced
by 66 2/3% of the gross proceeds to the Company from the TIDES Offering and the
Senior Notes Offering (the "Total Commitment") and which expires on December 15,
2001. The Canadian Borrower may borrow up to $80 million under the Amended
Credit Agreement with the remainder of the Total Commitment available only to
the Company.
The Amended Credit Agreement also provides for the issuance of certain
standby letters of credit and trade letters of credit (collectively, the
"Letters of Credit") for the account of the Company; provided that the
outstanding amount of all Letters of Credit does not exceed, (x) when added to
the outstanding amount of letters of credit not issued under the Amended Credit
Agreement, $125 million or (y) when added to all loans outstanding under the
Amended Credit Agreement, the Total Commitment.
GUARANTEES
The obligations of the Company under the Amended Credit Agreement are
guaranteed by each existing domestic subsidiary of the Company and will be
guaranteed by each subsequently acquired domestic subsidiary (excluding the
trust that will issue the Convertible Preferred Securities in the TIDES Offering
and certain other subsidiaries) of the Company (the "Credit Agreement Subsidiary
Guarantees"). The obligations of the Canadian Borrower under the Amended Credit
Agreement are guaranteed by the Company and by each existing Canadian subsidiary
of the Canadian Borrower and will be guaranteed by each subsequently acquired
subsidiary of the Canadian Borrower.
COLLATERAL
Pledged Securities. Pursuant to a pledge agreement, dated as of March 24,
1992 and as amended and restated as of December 18, 1996 and as further amended
as of April 16, 1998, made by the Company to Bankers Trust Company, as
Collateral Agent (the "Company Pledge Agreement"), the obligations of the
Company under the Amended Credit Agreement and the Senior Notes are secured by
pledges of all the capital stock of the Company's direct domestic subsidiaries
and 66% of the capital stock of the Company's direct foreign subsidiaries and
any promissory notes held by the Company.
Pursuant to a pledge agreement, dated as of March 24, 1992 and as amended
and restated as of December 18, 1996 and as further amended as of April 16,
1998, made by the Company's subsidiaries to Bankers Trust Company, as Collateral
Agent (the "Subsidiaries Pledge Agreement"), the obligations of each domestic
subsidiary of the Company under the Subsidiaries Guarantee and the Subsidiary
Guarantees of the Senior Notes are secured by pledges of all the capital stock
of such subsidiary's direct domestic subsidiaries and 66% of all the capital
stock of such subsidiary's direct foreign subsidiaries and any promissory notes
held by such subsidiary. The securities pledged pursuant to the Company Pledge
Agreement and the Subsidiaries Pledge Agreement are referred to herein as the
"Pledged Securities".
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Other Security. Pursuant to a security agreement, dated as of March 24,
1992 and as amended and restated as of December 18, 1996 and as further amended
as of April 16, 1998, made by the Company to Bankers Trust Company, as
Collateral Agent (the "Company Security Agreement"), the obligations of the
Company and loans to the Canadian Borrower under the Amended Credit Agreement
and the Senior Notes are secured by a security interest in substantially all
inventory, accounts receivable, a cash collateral account, intellectual property
rights, computer programs, contracts, goods, general intangibles, chattel paper,
documents and instruments of the Company and all proceeds of the foregoing.
Pursuant to a security agreement, dated as of March 24, 1992 and as amended
and restated as of December 18, 1996 and as further amended as of April 16,
1998, made by the Company's subsidiaries to Bankers Trust Company, as Collateral
Agent (the "Subsidiaries Security Agreement"), the obligations of each domestic
subsidiary of the Company under the Subsidiaries Guarantee and the Subsidiary
Guarantees of the Senior Notes are secured by a security interest in
substantially all inventory, accounts receivable, a cash collateral account,
intellectual property rights, computer programs, contracts, goods, general
intangibles, chattel paper, documents and instruments of such subsidiary and all
proceeds of the foregoing.
Real Property. The obligations of the Company under the Amended Credit
Agreement and the Senior Notes are secured by first mortgages or deeds of trust
on certain of the manufacturing plants owned by the Company and its
subsidiaries, including the plants in West Hartford, Connecticut, Euless, Texas,
Beloit, Wisconsin, and Longview, Texas (collectively, the "Mortgages"). See
"Business -- Properties".
The Company Pledge Agreement, the Subsidiaries Pledge Agreement, the
Company Security Agreement, the Subsidiaries Security Agreement and the
Mortgages are hereinafter referred to as the "Amended Collateral Documents".
The following is a summary of the material provisions of the Amended
Collateral Documents pertaining to the Collateral.
Collateral Agent. Bankers Trust Company will be the Collateral Agent under
each of the Amended Collateral Documents. Bankers Trust Company is also the
Administrative Agent under the Amended Credit Agreement. The Collateral Agent is
not a fiduciary to any of the secured creditors, including, without limitation,
the holders of the Senior Notes. However, any enforcement of the provisions of
the Amended Collateral Documents by the Collateral Agent will be made for the
benefit of all the secured creditors under the Amended Collateral Documents,
including for the benefit of the holders of the Senior Notes.
Obligations Secured by the Collateral. The obligations which are secured by
the Collateral include (i) payments of principal of and interest on the loans
under the Amended Credit Agreement, all reimbursement obligations and unpaid
drawings with respect to letters of credit under the Amended Credit Agreement
and all other obligations owing to the lenders in connection with the Amended
Credit Agreement and related documents, (ii) all liabilities in connection with
interest rate protection and other hedging agreements contemplated by the
Amended Credit Agreement and (iii) payments of principal of and interest on the
Senior Notes and the Exchange Notes and all other obligations of the Company
under the Indenture and the Senior Notes and the Exchange Notes (items (i), (ii)
and (iii) above, together with certain expenses of, and amounts paid by, the
Collateral Agent or any secured creditor, are hereinafter referred to as the
"Obligations").
Enforcement of Collateral Provisions. The Amended Collateral Documents may
be enforced only by the Collateral Agent, in each case acting upon instructions
from the "Required Secured Creditors", which is defined to mean the "Required
Banks", which, in turn, is defined to mean the lenders holding a majority of the
obligations (or of all the obligations in certain cases) under the Amended
Credit Agreement. Because the holders of the Senior Notes are not included in
the definition of "Required Secured Creditors", neither the holders of the
Senior Notes nor the Trustee under the Indenture relating to the Senior Notes
will have the ability to enforce the provisions of any of the Amended Collateral
Documents.
Generally, upon an acceleration of the obligations under the Amended Credit
Agreement, an acceleration of indebtedness under third-party debt agreements in
excess of $10 million, a voluntary, involuntary or court-declared bankruptcy or
certain other events, in each case as set forth in the Amended Credit Agreement,
or upon an Event of Default under the Indenture, the Required Secured Creditors
may direct the Collateral Agent to
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enforce the provisions of the Amended Collateral Documents. In such an event,
the Collateral Agent may exercise any of its rights as a secured creditor under
the Uniform Commercial Code and the Amended Collateral Documents (such as
foreclosing upon and selling portions of the Collateral and voting the Pledged
Securities).
The occurrence of an Event of Default under the Indenture will not give the
holders of the Senior Notes or the Trustee under the Indenture relating to the
Senior Notes the right at any time to direct the Collateral Agent to exercise
any of its rights or to enforce any provisions under the Amended Collateral
Documents.
Notwithstanding the foregoing, in the event that (i) the principal of any
secured Obligations has been accelerated or the final maturity thereof has
occurred and there exists a payment Event of Default where the aggregate
principal amount of such Obligations is at least $100 million and where such
payment Event of Default has continued for 90 days and (ii) the Required Secured
Creditors have not directed the Collateral Agent to enforce the provisions of
any of the Amended Collateral Documents, then a majority of the "Secured
Creditors" (defined to mean a majority of all the secured Obligations, including
the Senior Notes) may cause the Collateral Agent to enforce such provisions. The
Required Secured Creditors, however, would continue to have the right to direct
the manner and method of such enforcement.
Upon the occurrence of an event of default under the Amended Credit
Agreement, the Administrative Agent may notify the Company and the Canadian
Borrower of its election to terminate the Amended Credit Agreement and, upon
such notice, the obligations of the Company and the Canadian Borrower will be
accelerated and be immediately due and payable except that, upon the occurrence
of certain bankruptcy-related events of default, such termination and
acceleration will be deemed to occur immediately without notice. Upon such
acceleration, in addition to such other rights as are permitted by the Amended
Credit Agreement or by law, the Collateral Agent has the right to enforce all of
the liens and security interests created pursuant to the Amended Credit
Agreement and the Amended Collateral Documents.
Application of Proceeds. All moneys collected by the Collateral Agent upon
any sale or other disposition of the Collateral shall be applied as follows:
(i) first, to the payment of all amounts owing to the Collateral Agent;
(ii) second, to the payment of the "Primary Obligations," which is defined
to include all of (i) the obligations under the Amended Credit Agreement,
(ii) the Senior Notes and (iii) the obligations in connection with interest
rate protection and other hedging agreements contemplated by the Amended
Credit Agreement;
(iii) third, to the payment of the "Secondary Obligations," which is
defined to mean all Obligations other than the Primary Obligations; and
(iv) fourth, to the Company or its subsidiaries, as the case may be.
All actions required or permitted to be taken by the Senior Noteholders
will be taken only by the Trustee as directed by the Senior Noteholders and all
payments required to be made with respect to the Senior Notes will be paid to
the Trustee on behalf of the Senior Noteholders.
Amendments and Waivers. The Amended Collateral Documents may be amended or
waived by the Required Banks; provided that any change, waiver or modification
materially adversely affecting the rights and benefits of a single "Class" of
secured creditors (and not all secured creditors in a like or similar manner)
will require the written consent of the "Requisite Class Creditors" of such
Class, which is defined to mean a majority of such affected Class; provided
further that any Class will not be considered to be affected differently from
any other Class due to the Obligations of any such other Class being paid,
repaid, refinanced, renewed or extended and the Collateral being released, in
whole or in part (whether by action of such other Class or otherwise), as
security for such Class and such other Class. Each of the lenders under the
Amended Credit Agreement, the interest rate protection creditors and the holders
of the Senior Notes will constitute a separate Class.
Notwithstanding the foregoing, the Required Banks may at any time agree to
amendments to the Amended Collateral Documents in order to, among other things,
(i) secure additional extensions of credit or (ii) add
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additional Secured Creditors to a specified Class, in each case, without the
consent of the other Secured Creditors.
Release of Collateral. Pursuant to the terms of the Amended Collateral
Documents, any Collateral representing less than all or substantially all of the
Collateral may be released upon the direction of the Required Banks, which in
this context means Lenders representing holders of a majority of the Obligations
under the Amended Credit Agreement. The approval of all the Lenders under the
Amended Credit Agreement is required for releases of all or substantially all of
the Collateral, except as set forth in the following paragraph. Upon such
direction by the applicable Required Banks, the applicable Collateral will be
released whether or not the Senior Notes remain outstanding and without regard
to the ratings of the Company's Rated Indebtedness. Notwithstanding the
foregoing, in the event the Trustee notifies the Collateral Agent in writing
that the Senior Notes have been accelerated, the Collateral Agent will not
release any Collateral or terminate any Amended Collateral Documents, except
with the prior written consent of the holders of the Senior Notes holding a
majority of the then-outstanding Senior Notes.
In addition, all Collateral under the Amended Collateral Documents shall be
automatically released and all such Amended Collateral Documents shall be
terminated and of no further force or effect at such time as (x) no default or
event of default under the Amended Credit Agreement is in existence and (y) the
Company has then outstanding Rated Indebtedness which is at such time rated at
least BBB- by Standard & Poor's and Baa3 by Moody's; provided that the Rated
Indebtedness described above shall be required to be unsecured or, if secured,
both Standard & Poor's and Moody's shall have stated to the Company and the
Administrative Agent in writing that, assuming that neither the Amended Credit
Agreement nor the Senior Notes were secured, the long-term unsecured Debt
pursuant to the Amended Credit Agreement and the Senior Notes would be rated at
least BBB-by Standard & Poor's and Baa3 by Moody's at such time; provided
further that such release shall not be effected until the tenth Business Day
after the Company delivers to the Administrative Agent written notice of the
attainment of such rating and, if required, a copy of the written statements
specified above. Notwithstanding anything to the contrary contained in the
immediately preceding sentence or the proviso thereto, if the Company at any
time requests in writing that the Administrative Agent cause the release of all
Collateral under all the Amended Collateral Documents and establishes to the
satisfaction of the Administrative Agent that (x) no default or event of default
under the Amended Credit Agreement is in existence (and no default or event of
default shall be in existence after the release described below) and (y) at the
time of the release of all Collateral under all the Amended Collateral Documents
(and after giving effect thereto), the Company's Rated Indebtedness (which shall
be unsecured Debt after the release of Collateral contemplated by this
paragraph, and shall include the Debt under the Amended Credit Agreement and the
Senior Notes, to the extent then outstanding) shall be rated at least BBB-by
Standard & Poor's and Baa3 by Moody's (and the Company shall have furnished to
the Administrative Agent a written statement from each of Standard & Poor's and
Moody's to the effect that, if neither the Amended Credit Agreement nor the
Senior Notes were secured, the long term unsecured Debt pursuant to the Amended
Credit Agreement and the Senior Notes would be rated at least BBB- by Standard &
Poor's and Baa3 by Moody's at such time), then all Collateral under all the
Amended Collateral Documents shall be released and all such Amended Collateral
Documents shall be terminated and of no further force or effect.
Upon the disposition of Holley, Holley was released under the Amended
Credit Agreement and the Indenture as a Subsidiary Guarantor and its assets and
its capital stock was released under the Amended Collateral Documents as
security for borrowings under the Amended Credit Agreement and the Senior Notes.
See "Prospectus Summary -- Recent Development".
Termination. Each of the Amended Collateral Documents will terminate on
the date on which all Obligations under the Amended Credit Agreement have been
paid. In addition, the Amended Collateral Documents may be terminated upon the
direction of the Required Banks, which in this context means Lenders
representing all the Obligations under the Amended Credit Agreement. Upon such
termination of the Amended Collateral Documents, the Collateral will be released
whether or not the Senior Notes remain outstanding.
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COVENANTS
The Amended Credit Agreement includes certain financial covenants that
require the Company to maintain (i) a ratio of Consolidated Current Assets to
Consolidated Current Liabilities at all times of greater than 1.25 to 1.0, (ii)
an Interest Coverage Ratio for any period of four consecutive fiscal quarters of
greater than 3.0 to 1.0, (iii) a Leverage Ratio at all times prior to and
including June 30, 1998 of less than 4.25 to 1.0, from July 1, 1998 to and
including December 31, 1999 of less than 3.75 to 1.0, and thereafter of less
than 3.25 to 1.0. The Company has also agreed that the Company and its
subsidiaries will not make capital expenditures which in the aggregate exceed
$90 million for the fiscal year ending December 31, 1997, $75 million for the
fiscal year ending December 31, 1998, $65 million for each of the fiscal years
ending December 31, 1999 and December 31, 2000, and $70 million for the fiscal
year ending December 31, 2001.
The Amended Credit Agreement also includes covenants that prohibit the
Company and its subsidiaries from, among other things and subject to certain
exceptions, (i) incurring certain liens on the property and assets of the
Company and its subsidiaries, (ii) winding up, liquidating or dissolving its
affairs or entering into any transaction of merger or consolidation, or
conveying, selling, leasing or otherwise disposing of property or assets, (iii)
authorizing, declaring or paying any dividends (other than, among other things,
distributions on the Common Stock or Convertible Preferred Securities) or
repurchasing Common Stock or Convertible Preferred Securities, except, in any
fiscal year, subject to certain limitations, the Company may pay dividends or
repurchase Common Stock or Convertible Preferred Securities in an amount equal
to the greater of $7.5 million or 30% of Consolidated Net Income for the
preceding fiscal year, (iv) incurring Debt, other than Debt outstanding under
the Amended Credit Agreement and certain other existing Debt, accrued expenses,
the Senior Notes, the TIDES Debentures, Debt incurred to pay all or a portion of
the purchase price of equipment or machinery secured by liens placed upon
equipment or machinery used in the ordinary course of the business of the
Company, Debt incurred with respect to certain lease obligations, Debt under
interest rate protection agreements, certain permitted acquired Debt, Debt of
foreign subsidiaries of the Company not to exceed $100 million, and other Debt
not otherwise permitted under the Amended Credit Agreement up to the aggregate
amount of $100 million, (v) lending money or extending credit or making advances
to any person or purchasing or acquiring any stock, obligations or securities of
any person, (vi) entering into transactions with affiliates, except in the
ordinary course of business and on terms and conditions substantially as
favorable to the Company or such subsidiary as would be obtainable in a
comparable arm's-length transaction with an unaffiliated entity, (vii) prepaying
or redeeming the Senior Notes in an amount greater than $100 million, (viii)
restricting the ability of its subsidiaries to pay dividends or other
distributions on its capital stock, make loans or advances to the Company or
other subsidiaries or transfer assets to the Company, (ix) making certain
issuances of capital stock or securities convertible into or exercisable for
capital stock and (x) certain other restrictions.
CERTAIN DEFINITIONS
"Backstopped Letters of Credit" means certain existing Letters of Credit
described in the Amended Credit Agreement with respect to which standby Letters
of Credit serve as support for the reimbursement obligations of the Company and
its subsidiaries to the issuers of such Backstopped Letters of Credit.
"Capitalized Lease Obligations" of any person means all rental obligations
which, under generally accepted accounting principles, are or will be required
to be capitalized on the books of such person, in each case taken at the amount
thereof accounted for as indebtedness in accordance with such principles.
"Consolidated Current Assets" means the consolidated current assets of the
Company and its subsidiaries plus the Total Unutilized Commitment less the
aggregate amount of Non-Facility Letter of Credit Outstandings at such time.
"Consolidated Current Liabilities" means the consolidated current
liabilities of the Company and its subsidiaries, but excluding the current
portion of any long-term Debt which would otherwise be included therein.
"Consolidated EBITDA" means for any period Consolidated EBIT, adjusted by
adding thereto the amount of all amortization of intangibles and depreciation
that were deducted in arriving at Consolidated EBIT for such period.
67
<PAGE> 72
"Consolidated EBIT" means for any period the consolidated net income of the
Company and its subsidiaries before interest income, consolidated interest
expense and provision for taxes and without giving effect to any extraordinary
gains or gains from sales of assets other than inventory sold in the ordinary
course of business (determined after taking into account losses from sales of
such assets).
"Credit Documents" means the Amended Credit Agreement, and all documents
executed in connection therewith, including each of the promissory notes
required to be executed by the Company, any subsidiary of the Company or the
Canadian Borrower under the Amended Credit Agreement, the Credit Guarantees and
each Security Document.
"Debt" means, as to any person, without duplication, (i) all indebtedness
(including principal, interest, fees and charges) of such person for borrowed
money or for the deferred purchase price of property or services (other than
trade payables incurred in the ordinary course of business), (ii) the maximum
amount available to be drawn under all letters of credit (excluding Backstopped
Letters of Credit so long as (x) fully supported by one or more Letters of
Credit issued under the Amended Credit Agreement and (y) no unreimbursed drawing
has been made under the respective Backstopped Letter of Credit) issued for the
account of such person and with respect to which such person has a reimbursement
obligation and all unpaid drawings in respect of such letters of credit, (iii)
all Debt of the types described in clause (i) (other than certain trade
payables), (ii), (iv), (v), (vi) or (vii) secured by liens on property of such
person, (iv) all Capitalized Lease Obligations of such person, (v) all
obligations of such person to pay a specified purchase price for goods or
services, whether or not delivered or accepted, i.e., take-or-pay and similar
obligations, (vi) all contingent obligations of such persons and (vii) all
obligations under any interest rate protection or other hedging agreement or
under any similar type of agreement entered into with a person not a Lender;
provided that the aggregate outstanding amount of any Debt described in clause
(iii) above shall equal the lesser of (x) the aggregate outstanding amount of
all Debt secured by such lien and (y) the fair market value of all property
subject to such lien; provided further that on and after the date on which any
other Debt for borrowed money (the "Defeased Debt") shall have been permanently
defeased or otherwise satisfied and discharged in the manner provided in the
documentation governing such Defeased Debt, and so long as the Company and its
subsidiaries are permanently relieved as a result thereof of all monetary
obligations, and obligations to comply with covenants, with respect thereto
(which defeasances, satisfactions and discharges are subject to the limitations
set forth in the Amended Credit Agreement), such Defeased Debt shall not be
considered outstanding Debt for purposes of the Amended Credit Agreement.
"Interest Coverage Ratio" means for any period the ratio of Consolidated
EBITDA for such period to consolidated interest expense for such period.
"Letter of Credit Outstandings" means, at any time, the sum of (i) the
aggregated stated amount of all then outstanding Letters of Credit and (ii) the
aggregate amount of all unpaid drawings at such time.
"Leverage Ratio" means, at any date of determination, the ratio of (i)
consolidated indebtedness on such date to (ii) Consolidated EBITDA for the
period of four consecutive quarters most recently ended on or prior to such
date, in each case taken as one accounting period.
"Moody's" means Moody's Investors Service, Inc.
"Non-Facility Letters of Credit" means each letter of credit (other than
any Letter of Credit issued pursuant to the Amended Credit Agreement) issued for
the account of the Company and its subsidiaries.
"Rated Indebtedness" means long-term unsecured Debt of the Company which is
rated by both Standard & Poor's and Moody's, or if no such Debt of the Company
shall be rated, Debt under the Amended Credit Agreement or Debt of the Company
which is equally and ratably secured with Debt under the Amended Credit
Agreement, to the extent such Debt shall be rated by either Standard & Poor's or
Moody's.
"Security Documents" means each pledge agreement, each security agreement,
each mortgage and each additional security document.
"Standard & Poor's" means Standard & Poor's Ratings Group, a division of
The McGraw-Hill Companies, Inc.
68
<PAGE> 73
"Total Unutilized Commitment" means, at any time, an amount equal to the
remainder of (x) the then Total Commitment, less (y) the sum of (I) the
aggregate principal amount of revolving borrowings then outstanding plus (II)
the then aggregate amount of Letter of Credit Outstandings.
OTHER INDEBTEDNESS
As of December 31, 1997, the Company had outstanding $7.5 million of 9 3/4%
senior notes due 1999, $7.4 million of 9 3/4% senior notes due 2000 and $48.8
million of other indebtedness due between 1998 and 2010. In 1996, the Company
conducted a tender offer and consent solicitation for the 9 3/4% senior notes
due 1999 and 9 3/4% senior notes due 2000, pursuant to which all restrictive
covenants were removed and all notes other than the amounts set forth in the
preceding sentence were repurchased.
UNITED STATES TAXATION
GENERAL
The following is a general discussion of the material U.S. Federal income
tax consequences of a holder's rights under the Registration Rights Agreement.
This discussion assumes that a holder of Senior Notes will hold such Senior
Notes as capital assets within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended (the "Code"). This discussion does not deal
with all U.S. Federal income tax consequences that may be relevant to particular
investors in light of their personal investment circumstances, including persons
holding Senior Notes as part of a conversion or constructive sale transaction or
as part of a hedge or hedging transaction, or as a position in a straddle for
tax purposes, nor does it discuss U.S. Federal income tax consequences
applicable to certain types of investors subject to special treatment under U.S.
Federal income tax laws, including insurance companies, tax-exempt
organizations, financial institutions or broker-dealers, persons that have a
functional currency other than the U.S. dollar, investors in pass-through
entities and foreign persons, including foreign corporations, partnerships and
individuals. In addition, this discussion does not consider the effect of any
foreign, state, local, gift, estate or other tax laws that may be applicable to
a particular investor.
This discussion is based upon current provisions of the Code, Treasury
regulations promulgated thereunder, administrative rulings and pronouncements of
the Internal Revenue Service ("IRS") and judicial decisions currently in effect,
all of which are subject to change, possibly with retroactive effect. The
Company has not and will not seek any rulings or opinions from the IRS with
respect to the matters discussed herein, and as a result, there can be no
assurance that the IRS will not disagree with or challenge any of the
conclusions set forth in this discussion.
EXCHANGE OFFER
The Company will be required to pay additional cash interest on the Senior
Notes if it fails to comply with certain of its obligations under the
Registration Rights Agreement. Such additional interest should be taxable to a
holder as ordinary interest income at the time it accrues or is received in
accordance with each such holder's usual method of tax accounting. It is
possible, however, that the IRS may take a different position, in which case
holders might be required to include such additional interest in income as it
accrues or becomes fixed (regardless of their usual method of tax accounting).
The exchange of Outstanding Notes for Exchange Notes pursuant to the
Exchange Offer will not constitute a taxable event for U.S. Federal income tax
purposes. As a result, (i) a holder of Outstanding Notes will not recognize
taxable gain or loss as a result of the exchange of Outstanding Notes for
Exchange Notes pursuant to the Exchange Offer, (ii) the holding period of the
Exchange Notes will include the holding period of the Outstanding Notes
surrendered in exchange therefor and (iii) a holder's adjusted tax basis in the
Exchange Notes will be the same as such holder's adjusted tax basis in the
Outstanding Notes immediately prior to the surrender of such Outstanding Notes
pursuant to the Exchange Offer.
UNITED STATES ALIEN HOLDERS OF NOTES
For purposes of this discussion, a "United States Alien Holder" is any
beneficial owner of a Senior Note that is a corporation, individual,
partnership, estate or trust that is, as to the United States, a foreign
corporation, a non-resident alien individual, a foreign partnership or a
nonresident fiduciary of a foreign estate or trust.
69
<PAGE> 74
Under present United States Federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) payment of principal and interest on the Senior Notes by the Company or
any paying agent to any United States Alien Holder will not be subject to United
States Federal withholding tax, provided that, in the case of interest, (i) such
Holder does not own, actually or constructively, ten percent or more of the
total combined voting power of all classes of stock of the Company entitled to
vote, is not a controlled foreign corporation related, directly or indirectly,
to the Company through stock ownership, and is not a bank receiving interest
described in Section 881(c)(3)(A) of the Code and (ii) either (A) the beneficial
owner of the Senior Note certifies to the Company or its agent, under penalties
of perjury, that it is not a United States holder and provides its name and
address or (B) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business (a "Financial Institution"), and holds the Senior Notes in such
capacity, certifies to the Company or its agent, under penalties of perjury,
that such statement has been received from the beneficial owner by it or by a
Financial Institution between it and the beneficial owner and furnishes the
Company or its agent with a copy thereof.
(b) a United States Alien Holder of a Senior Note will not be subject to
United States Federal income tax on gain realized on the sale, exchange or other
disposition of such Senior Note unless (i) subject to certain exceptions, such
Holder is an individual who is present in the United States for 183 days or more
during the taxable year of disposition and certain other requirements are met;
(ii) such gain is effectively connected with the conduct by such Holder of a
trade or business in the United States; or (iii) the United States Alien Holder
is subject to tax pursuant to the provisions of the Code applicable to certain
former citizens and residents of the United States; and
(c) a Senior Note or coupon held by an individual who is not a citizen or
resident of the United States at the time of his death will not be subject to
United States Federal estate tax as a result of such individual's death,
provided that the individual does not own, actually or constructively, ten
percent or more of the total combined voting power of all classes of stock of
the Company entitled to vote and, at the time of the individual's death,
payments with respect to such Senior Note would not have been effectively
connected to the conduct by such individual of a trade or business in the United
States.
If a United States Alien Holder is engaged in a trade or business in the
United States and interest paid with respect to the Notes is effectively
connected with the conduct of such trade or business, the United States Alien
Holder, although exempt from the withholding tax discussed in clause (a) above,
will be subject to United States federal income tax on such interest on a net
income basis in the same manner as if it were a United States person. In
addition, if such United States Alien Holder is a foreign corporation, it may be
subject to a branch profits tax equal to 30% of its effectively connected
earnings and profits for the taxable year, subject to adjustments.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Annual information reporting will apply to interest income on the Senior
Notes and payments made on, and proceeds from the sale of, the Senior Notes may
be subject to a backup withholding tax of 31% unless the holder complies with
certain identification requirements. Any amounts withheld from payment to a
United States Alien Holder under the backup withholding rules will be allowed as
a credit against such Holder's United States Federal income tax liability and
may entitle such Holder to a refund, provided that the required information is
furnished to the United States Internal Revenue Service.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THE PARTICULAR TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND DISPOSING OF
THE SENIOR NOTES, INCLUDING THE APPLICATION OF FEDERAL, STATE, LOCAL AND FOREIGN
TAX LAWS AND POSSIBLE FUTURE CHANGES IN SUCH TAX LAWS.
70
<PAGE> 75
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Outstanding Notes where such Outstanding Notes were acquired as a
result of market-making activities or other trading activities. The Company has
agreed that, for a period of 180 days after the Expiration Date, it will make
this prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such Exchange Notes. Any broker-dealer
that resells Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of Exchange
Notes and any commission or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that, by acknowledging that it will deliver and delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer other than commissions or concessions of any
brokers or dealers and will indemnify the Holders of the Senior Notes (including
any broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the issuance and sale of the Exchange
Notes offered hereby will be passed upon for the Company by Robert J. Tubbs,
Executive Vice President, General Counsel and Secretary of the Company.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements included in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as stated in
their report with respect thereto, and is included herein.
71
<PAGE> 76
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Earnings for the Three Months
Ended March 29, 1998 and March 30, 1997 (unaudited)....... F-2
Consolidated Balance Sheets at March 29, 1998 and December
31, 1997 (unaudited)...................................... F-3
Consolidated Statements of Cash Flows for the Three Months
Ended March 29, 1998 and March 30, 1997 (unaudited)....... F-4
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 29, 1998 and March 30, 1997
(unaudited)............................................... F-5
Notes to Consolidated Financial Statements (unaudited)...... F-6
Report of Independent Public Accountants.................... F-14
Consolidated Statements of Earnings for Years Ended December
31, 1997, 1996 and 1995................................... F-15
Consolidated Balance Sheets at December 31, 1997 and 1996... F-16
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-17
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995.............. F-18
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1997, 1996 and 1995.............. F-19
Notes to Consolidated Financial Statements.................. F-20
</TABLE>
F-1
<PAGE> 77
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
MARCH 29, MARCH 30,
1998 1997
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net sales................................................... $374,441 $309,172
Cost of sales............................................... 260,148 211,675
-------- --------
Gross profit................................................ 114,293 97,497
Selling and administrative.................................. 60,999 52,569
-------- --------
Operating income............................................ 53,294 44,928
Interest expense and other, net............................. 15,080 12,364
-------- --------
Earnings before income taxes................................ 38,214 32,564
Income taxes................................................ 12,993 11,072
-------- --------
Net earnings................................................ $ 25,221 $ 21,492
======== ========
Basic earnings per common share............................. $ .38 $ .32
======== ========
Basic weighted-average common shares........................ 65,881 66,786
======== ========
Diluted earnings per common share........................... $ .38 $ .32
======== ========
Diluted weighted-average common and common equivalent
shares.................................................... 67,137 67,731
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-2
<PAGE> 78
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 29, DEC. 31,
1998 1997
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 21,075 $ 14,693
Accounts and notes receivable, net of allowance of $4,319 in
1998 and $2,894 in 1997................................... 151,935 120,311
Inventories
Finished goods.............................................. 49,506 53,748
Work in process and finished parts.......................... 179,678 158,937
Raw materials and supplies.................................. 43,978 44,051
---------- ---------
273,162 256,736
Deferred income taxes....................................... 17,171 15,195
Other current assets........................................ 17,412 20,508
---------- ---------
Total current assets................................... 480,755 427,443
Property, plant and equipment, net.......................... 304,271 287,619
Costs in excess of net assets acquired, net................. 210,528 157,751
Other assets................................................ 80,527 60,221
---------- ---------
$1,076,081 $ 933,034
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt........................... $ 4,184 $ 1,811
Accounts payable............................................ 99,124 93,799
Accrued expenses............................................ 144,012 138,969
Current portion of liabilities of discontinued operations... 4,999 4,999
---------- ---------
Total current liabilities.............................. 252,317 239,578
Long-term debt.............................................. 855,854 757,578
Deferred income taxes....................................... 87,221 79,229
Other liabilities........................................... 64,260 60,892
Liabilities of discontinued operations...................... 151,657 154,918
Commitments and contingencies............................... -- --
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,
70,517,363 and 70,501,948 shares issued at March 29, 1998
and December 31, 1997, respectively (excluding 25,000,000
shares held by a wholly owned subsidiary)................. 705 705
Capital surplus............................................. 641,815 642,828
Retained deficit............................................ (886,808) (912,029)
Unearned compensation....................................... (2,699) (2,721)
Minimum pension liability................................... (1,646) (1,646)
Foreign currency translation adjustments.................... (9,150) (6,745)
---------- ---------
(257,783) (279,608)
Less cost of 4,542,709 and 4,666,406 shares of common stock
in treasury at March 29, 1998 and December 31, 1997,
respectively.............................................. (77,445) (79,553)
---------- ---------
(335,228) (359,161)
---------- ---------
$1,076,081 $ 933,034
========== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE> 79
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 29, MARCH 30,
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................ $ 25,221 $ 21,492
Adjustments to reconcile net earnings to cash provided by
operating activities:
Depreciation and amortization............................. 12,416 8,511
Deferred income taxes..................................... 6,016 5,536
Payments of liabilities of discontinued operations........ (3,261) (10,750)
Other operating items..................................... (1,525) (10,321)
Changes in assets and liabilities:
Accounts and notes receivable.......................... (18,969) (5,040)
Inventories............................................ (9,184) (6,339)
Other current assets................................... 3,748 (3,700)
Accounts payable....................................... 178 12,995
Accrued expenses....................................... (176) 56
Accrued pension liability.............................. (4,359) 288
-------- --------
Cash provided by operating activities..................... 10,105 12,728
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (15,005) (13,554)
Acquisition of businesses................................... (81,312) --
-------- --------
Cash used in investing activities......................... (96,317) (13,554)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in revolving facility, net......................... 110,500 14,000
Purchase of treasury stock.................................. -- (17,419)
Repayment of long-term debt................................. (14,035) (2,971)
Payments for unclaimed stock................................ (3,871) --
-------- --------
Cash provided by (used in) financing activities........... 92,594 (6,390)
-------- --------
Increase (decrease) in cash and cash equivalents............ 6,382 (7,216)
Cash and cash equivalents -- beginning of period............ 14,693 15,029
-------- --------
Cash and cash equivalents -- end of period.................. $ 21,075 $ 7,813
======== ========
Supplemental cash flow data:
Cash paid for interest.................................... $ 12,409 $ 11,024
Cash paid (refunded) for income taxes..................... 4,990 (11,140)
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE> 80
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 29, MARCH 30,
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net earnings................................................ $25,221 $21,492
------- -------
Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustments.................. (2,405) (1,100)
Unearned compensation..................................... 22 (692)
------- -------
Other comprehensive income/(loss), net of tax.......... (2,383) (1,792)
------- -------
Comprehensive income........................................ $22,838 $19,700
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE> 81
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. SUMMARY OF ACCOUNTING POLICIES
Financial Information:
The unaudited consolidated financial statements included herein reflect in
the opinion of management of Coltec Industries Inc (the Company) all normal
recurring adjustments necessary to present fairly the consolidated financial
position and results of operations for the periods indicated. The unaudited
consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The Consolidated Balance Sheet as of December 31, 1997 has
been extracted from the audited consolidated financial statements as of that
date. For further information, refer to the audited consolidated financial
statements and footnotes of the Company included elsewhere herein.
2. ACQUISITIONS
On January 30, 1998, the Company acquired certain Marine and Petroleum Mfg.
Inc.'s manufacturing facilities based in Texas for approximately $17,000. The
plants acquired produce flexible graphite and polytetrafluoroethylene (PTFE)
fluid sealing products used in the petrochemical industry. Combined annual sales
for these facilities are expected to approximate $18,000. The Company also
acquired Tex-o-Lon and Repro-Lon for approximately $25,000. These two Texas
businesses have combined annual sales of $15,000. Tex-o-Lon manufactures,
machines and distributes PTFE products, primarily for the semiconductor
industry. Repro-Lon reprocesses PTFE compounds for the chemical and
semiconductor industries. The acquisitions were accounted for as purchases;
accordingly, the purchase price, which was financed through available cash
resources, was allocated to the acquired assets based upon their fair market
values.
On February 2, 1998, the Company purchased the Sealing Division of Groupe
Carbone Lorraine for $45,600. This division, with facilities in France and South
Carolina, produces high-technology metallic gaskets used in the nuclear,
petroleum and chemical industries. Sales are expected to approximate $38,000.
This acquisition was accounted for as a purchase and the purchase price, also
financed through available cash resources, was allocated to the acquired assets
based upon their fair market values.
3. EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings per Share, effective December 15, 1997. The Company's
reported earnings per common share for the three months ended March 30, 1997
equaled diluted earnings per share as set forth in SFAS No. 128. As a result,
the Company's reported earnings per share for three months ended March 30, 1997
were not restated.
Basic earnings per common share is computed by dividing net income by the
weighted-average number of shares of common stock outstanding during the year.
Diluted earnings per common share is computed by using the treasury stock
method to determine shares related to stock options and restricted stock.
F-6
<PAGE> 82
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 29, MARCH 30,
1998 1997
--------- ---------
(IN THOUSANDS)
----------------------
<S> <C> <C>
Weighted-average common shares......................... 65,881 66,786
Stock options and restricted stock issued.............. 1,256 945
------ ------
Diluted weighted-average common and common equivalent
shares............................................... 67,137 67,731
====== ======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company 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 March 29, 1998 two subsidiaries of the Company were among a number of
defendants (typically 15 to 40) in approximately 106,000 actions (including
approximately 2,400 actions in advanced stages of processing) filed in various
states by plaintiffs alleging injury or death as a result of exposure to
asbestos fibers. During the first three months of 1998, two subsidiaries of the
Company received approximately 11,000 new actions compared to approximately
7,300 new actions received during the first three months of 1997. Through March
29, 1998, approximately 214,000 of the approximately 320,000 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 $1,000 or more in compensatory damages and
$2,000 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 the Company or any or 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"),
the Company settled litigation with its primary and most of its first-level
excess insurance carriers, substantially on the basis of the Court's ruling. The
Company has negotiated a final agreement with most of its excess carriers that
are in the layers of coverage immediately above its first layer. The Company is
currently receiving payments pursuant to this agreement. The Company believes
that, with respect to the remaining carriers, a final agreement can be achieved
without litigation and on substantially the same basis that it has resolved the
issues with its other carriers. Settlements are generally made on a group basis
with payments made to individual claimants over periods of one to four years.
Payments were made with respect to asbestos liability and related costs
aggregating $14,901 and $20,191 for the first three months of 1998 and 1997,
respectively, substantially all of which were covered by insurance. Related to
payments not covered by insurance, the Company recorded charges to operations
amounting to $2,000 for the first three months of 1998 and 1997.
In accordance with the Company'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 the
Company can reasonably estimate the cost to dispose of these actions. As of
March 29, 1998, the Company 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 $70,636 and the Company expects that this cost will be
substantially covered by insurance.
F-7
<PAGE> 83
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
With respect to the 103,600 outstanding actions as of March 29, 1998, which
are in preliminary procedural stages, the Company 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 potential liability or costs to the Company. 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 or 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, the Company generally does not have the information
necessary to analyze the actions in sufficient detail to estimate the ultimate
liability or costs to the Company, if any, until the actions appear on a trial
calendar. A determination to seek dismissal, to attempt to settle or 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 the
Company's subsidiaries will receive in the future. The Company has noted that,
with respect to recently settled 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 the Company's
asbestos-related actions. The Company 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, the
Company 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.
Insurance coverage of a small non-operating subsidiary formerly
distributing asbestos-bearing products is nearly depleted. Considering the
foregoing, as well as the experience of the Company's subsidiaries and other
defendants in asbestos litigation, the likely sharing of judgments among
multiple responsible defendants, and the substantial amount of insurance
coverage that the Company expects to be available from its solvent carriers, the
Company believes that pending and reasonably anticipated future actions are not
likely to have a material effect on the Company's consolidated results of
operations and financial condition. Although the insurance coverage which the
Company 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. The Company's subsidiaries continue to be named as
defendants in new cases, some of which allege initial exposure after July 1,
1984.
In addition to claims for personal injury, the Company's subsidiaries have
been involved in an insignificant number of property damage claims based upon
asbestos-containing materials found in schools, public facilities and private
commercial buildings. Based upon proceedings to date, the overwhelming majority
of these claims have been resolved without a material adverse impact on the
Company. Likewise, the insignificant number of claims remaining to be resolved
are not expected to have a material effect on the Company's consolidated results
of operations and financial condition.
The Company has recorded an accrual for 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
has separately recorded an asset equal to the amount of such liabilities that is
expected to be recovered by insurance. In addition, the Company 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-
F-8
<PAGE> 84
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
related matters and the receivable from insurance carriers included in the
Consolidated Balance Sheets are as follows:
<TABLE>
<CAPTION>
MARCH 29, DEC. 31,
1998 1997
--------- --------
<S> <C> <C>
Accounts and notes receivable........................... $62,403 $56,039
Other assets............................................ 25,812 16,249
Accrued expenses........................................ 59,173 50,688
Other liabilities....................................... 11,463 2,682
</TABLE>
With respect to environmental proceedings, the Company has been notified
that it is among the Potentially Responsible Parties under federal environmental
laws, or similar state laws, relative to the costs of investigating and in some
cases remediating contamination by hazardous materials at several sites. Such
laws impose joint and several liability for the costs of investigating and
remediating properties contaminated by 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 Company's policy is to accrue environmental remediation costs when it is
both probable that a liability has been incurred and the amount can be
reasonably estimated. The measurement of liability is based on an evaluation of
currently available facts with respect to each individual situation and takes
into consideration factors such as existing technology, presently enacted laws
and regulations and prior experience in remediation of contaminated sites.
Investigations have been completed for approximately 17 sites and continuing
investigations are being done at approximately 11 sites. Accruals are provided
for all sites based on the factors discussed above. As remediation plans are
written and implemented, estimated costs become more fact-based and less
judgment-based. As assessments and remediation progress at individual sites,
these liabilities are reviewed periodically and adjusted to reflect additional
technical and legal information. While it is often difficult to reasonably
quantify future environmental-related expenditures, the Company currently
estimates its future non-capital expenditures related to environmental matters
to range between $26,000 and $48,000. In connection with these expenditures, the
Company has accrued $31,400 at March 29, 1998, representing management's best
estimate of probable non-capital environmental expenditures. These non-capital
expenditures are estimated to be incurred over the next 10 to 20 years. In
addition, capital expenditures aggregating $5,000 may be required during the
next two years related to environmental matters. Although the Company is
pursuing insurance recovery in connection with certain of these matters, no
receivable has been recorded with respect to any potential recovery of costs in
connection with any environmental matters.
As in the case with most other companies, the Company recognizes the need
to ensure its operations will not be adversely impacted by the Year 2000 date
transition and is faced with the task of addressing related issues. The Company
is evaluating whether the effect of the Year 2000 transition issues resulting
from relationships with customers, suppliers and other constituents will have an
impact on the Company's results of operations or financial condition. At March
29, 1998, the Company estimates that expenditures over the next two years for
the cost of modifying its existing software for the Year 2000 date transition
will have an immaterial impact on consolidated operating results.
5. SUBSEQUENT EVENTS
In April 1998, the Company privately placed $300,000 principal amount
7 1/2% Senior Notes due 2008 (Senior Notes) and $150,000 liquidation value of
5 1/4% Trust Convertible Preferred Securities. Net proceeds of approximately
$436,000 from both offerings were used to reduce indebtedness under Coltec's
credit agreement.
On May 15, 1998, Coltec completed the previously-announced sale of the
capital stock of its Holley Performance Products subsidiary to Kohlberg & Co.,
L.L.C., a private merchant banking firm located in Mount
F-9
<PAGE> 85
COLTEC INDUSTRIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Kisco, New York, for $100 million in cash. The proceeds of the transaction were
applied toward reducing debt. In 1997, Holley Performance's revenues were
approximately $99,000.
6. SUPPLEMENTAL GUARANTOR INFORMATION
Substantially all the Company's subsidiaries incorporated in the United
States (the "Subsidiary Guarantors") have fully and unconditionally guaranteed,
on a joint and several basis, the Company's obligations to pay principal and
interest with respect to the Senior Notes. Each Subsidiary Guarantor is wholly
owned and management has determined that separate financial statements for the
Subsidiary Guarantors are not material to investors. The subsidiaries of the
Company that are not Subsidiary Guarantors are referred to in this note as the
"Non-Guarantor Subsidiaries".
The following supplemental consolidating condensed financial statements
present balance sheets as of March 29, 1998 and December 31, 1997 and statements
of earnings and of cash flows for the three months ended March 29, 1998 and
March 30, 1997. In the consolidating financial statements, Coltec Industries Inc
("Parent") accounts for its investments in wholly-owned subsidiaries using the
equity method and the Subsidiary Guarantors account for their investments in
Non-Subsidiary Guarantors using the equity method. Interest expense related to
the indebtedness under the Company's credit agreement and its three series of
senior notes is allocated to United States subsidiaries based on net sales.
F-10
<PAGE> 86
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 29, 1998
-------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.................... $115,099 $168,430 $102,468 $(11,556) $374,441
Cost of sales................ 80,531 115,127 76,046 (11,556) 260,148
-------- -------- -------- -------- --------
Gross profit................. 34,568 53,303 26,422 -- 114,293
Selling and administrative... 18,502 24,472 18,025 -- 60,999
-------- -------- -------- -------- --------
Operating Income............. 16,066 28,831 8,397 -- 53,294
Equity earnings of
affiliates................. 20,681 7,014 -- (27,695) --
Interest expense and other,
net........................ (8,339) (17,530) 11,310 (521) (15,080)
-------- -------- -------- -------- --------
Earnings before income
taxes...................... 28,408 18,315 19,707 (28,216) 38,214
Income taxes................. 3,187 2,422 7,384 -- 12,993
-------- -------- -------- -------- --------
Net earnings................. $ 25,221 $ 15,893 $ 12,323 $(28,216) $ 25,221
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 30, 1997
--------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales................... $104,543 $134,791 $78,624 $ (8,786) $309,172
Cost of sales............... 73,195 89,602 57,664 (8,786) 211,675
-------- -------- ------- -------- --------
Gross profit................ 31,348 45,189 20,960 -- 97,497
Selling and
administrative............ 15,111 29,924 7,534 -- 52,569
-------- -------- ------- -------- --------
Operating Income............ 16,237 15,265 13,426 -- 44,928
Equity earnings of
affiliates................ 18,414 3,019 -- (21,433) --
Interest expense and other,
net....................... (12,212) (51) (101) -- (12,364)
-------- -------- ------- -------- --------
Earnings before income
taxes..................... 22,439 18,233 13,325 (21,433) 32,564
Income taxes................ 947 5,735 4,390 -- 11,072
-------- -------- ------- -------- --------
Net earnings................ $ 21,492 $ 12,498 $ 8,935 $(21,433) $ 21,492
======== ======== ======= ======== ========
</TABLE>
F-11
<PAGE> 87
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 29, 1998
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents........... $ 7,187 $ 2,555 $ 11,333 $ 21,075
Accounts and notes receivable,
net............................... -- 77,502 74,433 151,935
Inventory, net...................... 102,426 71,724 99,012 273,162
Deferred income taxes............... 9,023 8,065 83 17,171
Other current assets................ 4,113 8,539 4,760 17,412
--------- --------- ---------- ----------- ----------
Total current assets........... 122,749 168,385 189,621 -- 480,755
Intercompany, net................... (611,880) (312,134) 924,014 --
Investments in affiliates........... 996,828 595,095 867 $(1,592,790) --
Property, plant and equipment....... 94,948 120,312 89,011 304,271
Cost in excess of net assets
acquired, net..................... 25,782 137,856 46,890 210,528
Other assets........................ 42,234 3,574 34,719 80,527
--------- --------- ---------- ----------- ----------
Total assets................... $ 670,661 $ 713,088 $1,285,122 $(1,592,790) $1,076,081
========= ========= ========== =========== ==========
Total current liabilities........... $ 90,380 $ 42,586 $ 119,351 $ 252,317
Long term debt...................... 760,417 3,139 92,298 855,854
Deferred income taxes............... (30,499) 103,690 14,030 87,221
Other liabilities................... 33,934 12,909 17,480 $ (63) 64,260
Liabilities of discontinued
operations........................ 151,657 -- -- 151,657
Shareholders' equity................ (335,228) 550,764 1,041,963 (1,592,727) (335,228)
--------- --------- ---------- ----------- ----------
Total liabilities and
shareholders' equity......... $ 670,661 $ 713,088 $1,285,122 $(1,592,790) $1,076,081
========= ========= ========== =========== ==========
DECEMBER 31, 1997
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
Cash and cash equivalents........... $ 9,912 $ 722 $ 4,059 $ 14,693
Accounts and notes receivable,
net............................... -- 60,881 59,430 120,311
Inventory, net...................... 99,100 71,958 85,678 256,736
Deferred income taxes............... 4,535 10,689 (29) 15,195
Other current assets................ 4,540 10,406 5,562 20,508
--------- --------- ---------- ----------- ----------
Total current assets........... 118,087 154,656 154,700 -- 427,443
Intercompany, net................... (741,897) 10,933 730,964 --
Investments in affiliates........... 1,057,890 355,399 2,688 $(1,415,977) --
Property, plant and equipment....... 89,488 118,405 79,726 287,619
Cost in excess of net assets
acquired, net..................... 21,820 133,441 2,490 157,751
Other assets........................ 40,266 3,490 16,465 60,221
--------- --------- ---------- ----------- ----------
Total assets................... $ 585,654 $ 776,324 $ 987,033 $(1,415,977) $ 933,034
========= ========= ========== =========== ==========
Total current liabilities........... $ 93,669 $ 49,494 $ 96,415 $ 239,578
Long term debt...................... 689,302 1,611 66,665 757,578
Deferred income taxes............... (32,780) 101,871 10,138 79,229
Other liabilities................... 39,706 12,844 10,544 $ ( 2,202) 60,892
Liabilities of discontinued
operations........................ 154,918 -- -- 154,918
Shareholders' equity................ (359,161) 610,504 803,271 (1,413,775) (359,161)
--------- --------- ---------- ----------- ----------
Total liabilities and
shareholders' equity......... $ 585,654 $ 776,324 $ 987,033 $(1,415,977) $ 933,034
========= ========= ========== =========== ==========
</TABLE>
F-12
<PAGE> 88
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 29, 1998
------------------------------------------------------------------
NON-GUARANTOR
PARENT GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash provided by operating
activities $ 998 $ 1,833 $ 7,274 -- $ 10,105
-------- -------- -------- -------- --------
Cash flows from investing
activities:
Capital expenditures............. (7,699) (5,120) (2,186) (15,005)
Acquisition of business.......... (25,000) (17,000) (39,312) (81,312)
Cash from (to) Parent............ (63,618) 22,120 41,498 --
-------- -------- -------- -------- --------
Cash used in investing
activities.................. (96,317) -- -- -- (96,317)
-------- -------- -------- -------- --------
Cash flows from financing
activities:
Repayment of long-term debt...... (85) (83) (13,867) (14,035)
Increase (decrease) in revolving
facility, net................. 70,500 40,000 110,500
Purchase of treasury stock....... (3,871) (3,871)
Cash from (to) Parent............ 26,050 83 (26,133) --
-------- -------- -------- -------- --------
Cash provided by financing
activities.................. 92,594 -- -- -- 92,594
-------- -------- -------- -------- --------
Cash and cash equivalents:
Increase in cash and cash
equivalents................... (2,725) 1,833 7,274 6,382
Cash and cash equivalents --
beginning of period........... 9,912 722 4,059 14,693
-------- -------- -------- -------- --------
Cash and cash equivalents -- end
of period..................... $ 7,187 $ 2,555 $ 11,333 -- $ 21,075
======== ======== ======== ======== ========
THREE MONTHS ENDED MARCH 30, 1997
------------------------------------------------------------------
NON-GUARANTOR
PARENT GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------- ------------- ------------ ------------
Cash provided by operating
activities....................... $ 17,982 $ 116 $ (5,370) -- $ 12,728
-------- -------- -------- -------- --------
Cash flows from investing
activities:
Capital expenditures............. (5,853) (2,234) (5,467) (13,554)
Cash from (to) Parent............ (7,701) 2,234 5,467 --
-------- -------- -------- -------- --------
Cash used in investing
activities.................. (13,554) -- -- -- (13,554)
-------- -------- -------- -------- --------
Cash flows from financing
activities:
Repayment of long-term debt...... (1,733) (1,238) (2,971)
Increase (decrease) in revolving
facility, net................. 14,000 14,000
Purchase of treasury stock....... (17,419) (17,419)
Cash from (to) Parent............ (1,238) 1,238
-------- -------- -------- -------- --------
Cash provided by financing
activities.................. (6,390) -- -- -- (6,390)
-------- -------- -------- -------- --------
Cash and cash equivalents:
Increase in cash and cash
equivalents................... (1,962) 116 (5,370) (7,216)
Cash and cash equivalents --
beginning of period........... 5,475 570 8,984 15,029
-------- -------- -------- -------- --------
Cash and cash equivalents -- end
of period..................... $ 3,513 $ 686 $ 3,614 -- $ 7,813
======== ======== ======== ======== ========
</TABLE>
F-13
<PAGE> 89
COLTEC INDUSTRIES INC
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Coltec Industries Inc:
We have audited the accompanying consolidated balance sheets of Coltec
Industries Inc and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, shareholders' equity, cash flows
and comprehensive income for each of the three years in the period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Coltec Industries Inc and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Charlotte, North Carolina
February 2, 1998 (except with respect to information discussed in Note 20, as to
which the
date is April 16, 1998)
F-14
<PAGE> 90
COLTEC INDUSTRIES INC
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net sales............................................... $1,314,869 $1,159,691 $1,099,624
Cost of sales........................................... 898,269 811,123 744,201
---------- ---------- ----------
Gross profit............................................ 416,600 348,568 355,423
Selling and administrative.............................. 218,808 190,993 186,401
Special charges......................................... -- -- 27,000
---------- ---------- ----------
Operating income........................................ 197,792 157,575 142,022
Interest expense and other, net......................... 54,043 74,894 89,886
---------- ---------- ----------
Earnings from continuing operations before income taxes
and extraordinary item................................ 143,749 82,681 52,136
Income taxes............................................ 48,875 28,111 17,615
---------- ---------- ----------
Earnings from continuing operations before extraordinary
item.................................................. 94,874 54,570 34,521
---------- ---------- ----------
Discontinued operations (net of tax)
Income from operations................................ -- 19,252 36,639
Gain on sale.......................................... -- 37,931 --
---------- ---------- ----------
Total discontinued operations.................... -- 57,183 36,639
---------- ---------- ----------
Extraordinary item (net of tax)......................... -- (30,614) (254)
---------- ---------- ----------
Net earnings............................................ $ 94,874 $ 81,139 $ 70,906
========== ========== ==========
Basic earnings per common share
Before extraordinary item............................. $ 1.44 $ .79 $ .49
---------- ---------- ----------
Discontinued operations
Income from operations............................. -- .28 .53
Gain on sale....................................... -- .55 --
---------- ---------- ----------
Total discontinued operations.................... -- .83 .53
---------- ---------- ----------
Extraordinary item.................................... -- (.44) --
---------- ---------- ----------
Net earnings.......................................... $ 1.44 $ 1.18 $ 1.02
========== ========== ==========
Weighted-average common shares.......................... 65,896 69,091 69,839
========== ========== ==========
Diluted earnings per common share
Before extraordinary item............................. $ 1.42 $ .79 $ .49
---------- ---------- ----------
Discontinued operations
Income from operations............................. -- .28 .53
Gain on sale....................................... -- .54 --
---------- ---------- ----------
Total discontinued operations.................... -- .82 .53
---------- ---------- ----------
Extraordinary item.................................... -- (.44) --
---------- ---------- ----------
Net earnings.......................................... $ 1.42 $ 1.17 $ 1.02
========== ========== ==========
Diluted weighted-average common shares.................. 66,911 69,376 69,839
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-15
<PAGE> 91
COLTEC INDUSTRIES INC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 14,693 $ 15,029
Accounts and notes receivable, net of allowance of $2,894 in
1997 and $2,007 in 1996................................... 120,311 190,325
Inventory, net.............................................. 256,736 204,198
Deferred income taxes....................................... 15,195 10,524
Other current assets........................................ 20,508 22,895
---------- ----------
Total current assets................................... 427,443 442,971
Property, plant and equipment, net.......................... 287,619 214,790
Costs in excess of net assets acquired, net................. 157,751 132,872
Other assets................................................ 60,221 58,869
---------- ----------
$ 933,034 $ 849,502
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt........................... $ 1,811 $ 2,528
Accounts payable............................................ 93,799 55,410
Accrued expenses............................................ 138,969 155,229
Current portion of liabilities of discontinued operations... 4,999 14,229
---------- ----------
Total current liabilities.............................. 239,578 227,396
Long-term debt.............................................. 757,578 717,722
Deferred income taxes....................................... 79,229 50,646
Other liabilities........................................... 60,892 100,005
Liabilities of discontinued operations...................... 154,918 170,740
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock -- $.01 par value, 2,500,000 shares
authorized, issued and outstanding -- none
Common stock -- $.01 par value, 100,000,000 shares
authorized, 70,501,948 and 70,398,661 shares issued at
December 31, 1997 and 1996, respectively (excluding
25,000,000 shares held by a wholly owned subsidiary)...... 705 704
Capital surplus............................................. 642,828 643,221
Retained deficit............................................ (912,029) (1,006,903)
Unearned compensation....................................... (2,721) (2,136)
Minimum pension liability................................... (1,646) (3,200)
Foreign currency translation adjustments.................... (6,745) (1,151)
---------- ----------
(279,608) (369,465)
Less cost of 4,666,406 and 3,182,822 shares of common stock
in treasury at December 31, 1997 and 1996, respectively... (79,553) (47,542)
---------- ----------
(359,161) (417,007)
---------- ----------
$ 933,034 $ 849,502
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-16
<PAGE> 92
COLTEC INDUSTRIES INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings........................................... $ 94,874 $ 81,139 $ 70,906
Adjustments to reconcile net earnings to cash provided
by operating activities
Gain on divestitures................................. -- (66,791) --
Extraordinary item................................... -- 51,001 390
Special charge provision............................. -- -- 27,000
Depreciation and amortization........................ 38,415 36,014 42,086
Deferred income taxes................................ 24,791 39,146 5,665
Payments of liabilities of discontinued operations... (25,052) (19,563) (2,504)
Special charge payments.............................. (11,746) (6,309) (8,945)
Foreign currency translation adjustment.............. (5,594) 665 (1,135)
Other operating items................................ (6,951) (4,370) 19,791
Changes in assets and liabilities, net of effects
from acquisitions and divestitures:
Accounts and notes receivable..................... (4,263) (42,602) (6,632)
Inventories....................................... (42,508) 2,704 (32,373)
Other current assets.............................. 3,455 (617) 3,762
Accounts payable.................................. 35,963 (55) (4,283)
Accrued expenses.................................. (18,972) (21,302) (21,071)
Accrued pension liability......................... (20,993) 443 (1,649)
--------- --------- ---------
Cash provided by operating activities................ 61,419 49,503 91,008
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from divestitures............................. -- 329,113 --
Capital expenditures................................... (81,218) (44,550) (42,496)
Acquisition of businesses.............................. (60,711) -- (21,750)
Other.................................................. -- -- (2,512)
--------- --------- ---------
Cash provided by (used in) investing activities...... (141,929) 284,563 (66,758)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt refinancing......................... -- 542,000 --
Issuance of long-term debt............................. 813 -- 19,070
Repayment of long-term debt............................ (8,113) (622,582) (13,537)
Increase (decrease) in revolving facility, net......... 39,500 (196,000) (30,000)
Purchase of treasury stock............................. (42,695) (46,426) --
Proceeds from sale of accounts receivable.............. 82,500 -- --
Proceeds from exercise of stock options................ 8,169 -- --
--------- --------- ---------
Cash provided by (used in) financing activities...... 80,174 (323,008) (24,467)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents....... (336) 11,058 (217)
Cash and cash equivalents -- beginning of year......... 15,029 3,971 4,188
--------- --------- ---------
Cash and cash equivalents -- end of year............... $ 14,693 $ 15,029 $ 3,971
========= ========= =========
Supplemental cash flow data:
Cash paid for:
Interest.......................................... $ 50,207 $ 74,870 $ 92,292
Income taxes...................................... 19,327 27,667 41,685
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-17
<PAGE> 93
COLTEC INDUSTRIES INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK MINIMUM CURRENCY
--------------- CAPITAL RETAINED UNEARNED PENSION TRANSLATION
SHARES AMOUNT SURPLUS DEFICIT COMPENSATION LIABILITY ADJUSTMENTS
------ ------ -------- ----------- ------------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994... 70,016 $700 $638,407 $(1,158,948) $(3,480) $ -- $ (681)
Net earnings................. 70,906
Issuance of restricted stock,
net........................ 61 1 1,006 1,072
Exercise of stock options.... (30)
Tax benefit from stock option
and incentive plan......... 36
Foreign currency translation
adjustments................ (1,135)
------ ---- -------- ----------- ------- ------- -------
Balance, December 31, 1995... 70,077 701 639,419 (1,088,042) (2,408) -- (1,816)
Net earnings................. 81,139
Repurchase of common stock...
Issuance of restricted stock,
net........................ 322 3 3,941 272
Exercise of stock options....
Tax benefit from stock option
and incentive plan......... (139)
Minimum pension liability.... (3,200)
Foreign currency translation
adjustments................ 665
------ ---- -------- ----------- ------- ------- -------
Balance, December 31, 1996... 70,399 704 643,221 (1,006,903) (2,136) (3,200) (1,151)
Net earnings................. 94,874
Repurchase of common stock...
Issuance of restricted stock,
net........................ 103 1 2,173 (585)
Exercise of stock options.... (2,566)
Minimum pension liability.... 1,554
Foreign currency translation
adjustments................ (5,594)
------ ---- -------- ----------- ------- ------- -------
Balance, December 31, 1997... 70,502 $705 $642,828 $(912,029) $(2,721) $(1,646) $(6,745)
====== ==== ======== =========== ======= ======= =======
<CAPTION>
TREASURY STOCK
-----------------
SHARES AMOUNT TOTAL
------ -------- ---------
<S> <C> <C> <C>
Balance, December 31, 1994... (99) $ (1,599) $(525,601)
Net earnings................. 70,906
Issuance of restricted stock,
net........................ (26) (422) 1,657
Exercise of stock options.... 25 405 375
Tax benefit from stock option
and incentive plan......... 36
Foreign currency translation
adjustments................ (1,135)
------ -------- ---------
Balance, December 31, 1995... (100) (1,616) (453,762)
Net earnings................. 81,139
Repurchase of common stock... (3,129) (46,426) (46,426)
Issuance of restricted stock,
net........................ (10) (142) 4,074
Exercise of stock options.... 56 642 642
Tax benefit from stock option
and incentive plan......... (139)
Minimum pension liability.... (3,200)
Foreign currency translation
adjustments................ 665
------ -------- ---------
Balance, December 31, 1996... (3,183) (47,542) (417,007)
Net earnings................. 94,874
Repurchase of common stock... (2,160) (42,695) (42,695)
Issuance of restricted stock,
net........................ (4) (51) 1,538
Exercise of stock options.... 681 10,735 8,169
Minimum pension liability.... 1,554
Foreign currency translation
adjustments................ (5,594)
------ -------- ---------
Balance, December 31, 1997... (4,666) $(79,553) $(359,161)
====== ======== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-18
<PAGE> 94
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net earnings................................................ $94,874 $81,139 $70,906
Other comprehensive income/loss, net of tax:
Foreign currency translation adjustments.................. (5,594) 665 (1,135)
Unearned compensation..................................... (585) 272 1,072
Minimum pension liability................................. 1,554 (3,200) --
------- ------- -------
Other comprehensive income/(loss), net of tax.......... (4,625) (2,263) (63)
------- ------- -------
Comprehensive income........................................ $90,249 $78,876 $70,843
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-19
<PAGE> 95
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF ACCOUNTING POLICIES
Organization:
Coltec Industries Inc (the Company) is a diversified manufacturing company
serving the aerospace and general industrial markets primarily in the United
States, Canada and Europe.
Basis of Presentation:
Investments in which the Company has ownership of 50% or more of the voting
common stock are consolidated in the financial statements. Intercompany accounts
and transactions are eliminated.
Certain 1996 and 1995 amounts have been reclassified to conform to the 1997
presentation.
Accounting Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
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 the Company has the contractual right to bill. The
Company is involved in long-term government contracts which are accounted for on
a percentage completed basis. However, the Company's long-term contracts
primarily relate to commercial jet aircraft programs, which are planned,
committed and facilitized based on long-term delivery forecasts. Cost of sales
for jet aircraft programs is determined based on estimated average total cost
and revenue for the respective programs based on shipset quantities representing
what is believed to be conservative customer-produced market projections.
Estimated program average costs and revenues are reviewed and assessed
periodically, with changes in estimates recognized as adjustments to current
operations.
Program commitment quantities generally represent deliveries for the next
three to five years, although initial program quantities for new programs can
include orders and deliveries up to ten years. As of December 31, 1997 and 1996,
the Company had delivered approximately 34% and 26%, respectively, of the total
commitment quantities under these programs. The program method of accounting, an
aerospace industry-developed and accepted practice, was adopted by the Company
in the 1970's.
Inventories:
Inventories, including inventories under long-term commercial and
government contracts and programs, are valued at the lower of cost or market.
Cost elements included in inventory are material, labor and factory overhead,
primarily using standard cost, which approximates actual cost. Cost on
approximately 50% of the domestic inventory at December 31, 1997 and 1996 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.
F-20
<PAGE> 96
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Property, Plant and Equipment:
Property, plant and equipment is carried at cost. Depreciation of plant and
equipment is provided generally by using the straight-line method, based on
estimated useful lives of the assets. The ranges of estimated useful lives used
in computing depreciation for financial reporting are 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 is the lesser of the
asset life or the lease term.
Renewals and betterments are capitalized by additions to the related asset
accounts, while repair and maintenance costs are charged against earnings.
Costs in Excess of Net Assets Acquired:
It is the Company's policy to amortize the excess costs arising from
acquisitions on a straight-line basis over periods not to exceed 40 years. As of
December 31, 1997 the remaining weighted average life of the Company's goodwill
was 26 years. 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. At December
31, 1997 and 1996, accumulated amortization related to all completed
acquisitions was $74,013 and $68,045, respectively.
Income Taxes:
Income taxes are provided using 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.
Environmental Expenditures:
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.
Start-up Costs:
Start-up costs related to new operations and new product lines are expensed
as incurred.
Cash and Cash Equivalents:
The Company considers all short-term investments purchased with a maturity
of three months or less to be cash equivalents.
Foreign Currency Translation:
The financial statements of foreign subsidiaries were prepared in their
respective local currencies and were 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 in the Consolidated Balance Sheets. Foreign currency transaction gains
and losses are included in net earnings. For 1997, 1996 and 1995, such gains and
losses were not significant.
F-21
<PAGE> 97
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
2. ACQUISITIONS AND DIVESTITURES
On June 30, 1997, the Company acquired the assets of AMI Industries Inc.
(AMI), a Colarado-based manufacturer of flight attendant and cockpit seats for
commercial aircraft, for approximately $25,000. The purchase agreement also
includes contingent payments based on earning levels for the years ended
December 31, 1997-2000. These contingent payments will be recorded as additional
purchase price and amortized over the remaining life of goodwill. For financial
statement purposes, the acquisition was accounted for as a purchase and,
accordingly, AMI's results are included in the Company's consolidated financial
statements since the date of acquisition. The purchase price, which was financed
through available cash resources, has been allocated to the acquired assets
based upon their fair market values. The $12,200 excess of the purchase price
over net assets is being amortized over 25 years. AMI expects annual sales to
approximate $40,000.
On October 7, 1997, the Company acquired the assets of the sheet rubber and
conveyor belt business of Dana Corporation's Boston Weatherhead division for
$28,000. Annualized sales are expected to approximate $35,000. The acquisition
was accounted for as a purchase and its results are included in the Company's
consolidated financial statements since the date of acquisition. The purchase
price, which was also financed through available cash resources, has been
allocated to the acquired assets based upon their fair market values. The $6,900
excess of the purchase price over net assets is being amortized over 25 years.
The impact of these acquisitions was not material in relation to the
Company's results of operations. Consequently, pro forma information is not
presented. The Company also had several small acquisitions during 1997, which
were not material to the Company's financial position or results of operations.
In June 1996, the Company sold Holley Automotive, Coltec Automotive and
Performance Friction Products to Borg-Warner Automotive, Inc. for $296,522 in
cash. In December 1996, Coltec sold Farnam Sealing Systems division to Meillor
SA for $20,728 in cash and a note receivable for $3,000. The sale of these
automotive original equipment (OE) components businesses resulted in an
after-tax gain of $37,931 (net of income taxes of $25,332), net of liabilities
retained, transaction costs and obligations relating to the sales. The sale of
the automotive OE components businesses represented a disposal of the Company's
Automotive Segment. Accordingly, the 1996 and 1995 Consolidated Statements of
Earnings were restated to reflect the operations of the automotive OE components
businesses as a discontinued operation. Net sales of the discontinued automotive
OE components businesses were $182,599 and $302,260 in 1996 and 1995,
respectively.
In December 1996, the Company also sold the exhaust systems and components
business of its Stemco division for $11,863 resulting in a pre-tax gain of
$3,528. Such gain is reflected in the 1996 Consolidated Statement of Earnings in
continuing operations. Net sales of the exhaust systems and components business
were $18,085 and $20,503 in 1996 and 1995, respectively.
3. EXTRAORDINARY ITEM
In 1996, the Company redeemed all of its outstanding 11 1/4% debentures and
substantially all of its outstanding 9 3/4% and 10 1/4% senior notes at
redemption prices ranging from 105.125% to 106.987% of par. The redemption of
these notes including consent payments resulted in an extraordinary charge of
$30,614, net of income taxes of $20,387.
The Company incurred extraordinary charges of $254, net of income taxes of
$136, in 1995 in connection with early retirement of debt.
4. SPECIAL CHARGES
In the third quarter of 1995, the Company recorded a special charge of
$27,000, primarily in the Aerospace Segment to cover the costs of closing the
Walbar compressor blade facility in Canada. The facility was closed during 1996.
The charge also covered selected workforce reductions throughout the Company.
The special charge included costs to cover the cancellation of contractual
obligations resulting from the decision to close the Walbar
F-22
<PAGE> 98
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
facility, asset write-downs, severance and employee-related costs and other
costs necessary to implement the shutdown of the Walbar facility and selected
workforce reductions throughout the Company.
At December 31, 1997 all related costs had been charged and the remaining
accrual was reversed. The activity in the related reserve through December 31,
1997 was as follows:
<TABLE>
<CAPTION>
CONTRACTUAL ASSET
OBLIGATIONS WRITEDOWNS SEVERANCE OTHER TOTAL
----------- ---------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
1995 charge........................ $ 9,065 $ 7,845 $ 5,084 $ 5,006 $ 27,000
1995 activity...................... (65) (4,549) (1,778) (2,553) (8,945)
------- ------- ------- ------- --------
December 31, 1995.................. 9,000 3,296 3,306 2,453 18,055
1996 activity...................... (961) (1,875) (1,876) (1,597) (6,309)
------- ------- ------- ------- --------
December 31, 1996.................. 8,039 1,421 1,430 856 11,746
1997 activity...................... (1,200) -- (517) (29) (1,746)
Reversal........................... (6,839) (1,421) (913) (827) (10,000)
------- ------- ------- ------- --------
December 31, 1997.................. $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= ========
</TABLE>
In the third quarter of 1997, the Company recorded a special charge of
$10,000, to cover the restructuring of its Industrial Segment. This special
charge included the costs of closing its FMD Electronics operations in Roscoe,
Illinois and its Ortman Fluid Power operations in Hammond, Indiana. The special
charge also included the costs to restructure the Company's Industrial Segment
businesses in Canada and Germany and certain termination costs related to the
relocation of the Delavan Commercial divisional headquarters to North Carolina.
The third quarter 1997 charge included costs resulting from cancellation of
contractual obligations, asset writedowns, severance and employee-related costs
and other costs to shut down these facilities that will not benefit future
operations. The related reserve activity for the year ended December 31, 1997
was as follows:
<TABLE>
<CAPTION>
CONTRACTUAL ASSET
OBLIGATIONS WRITEDOWNS SEVERANCE OTHER TOTAL
----------- ---------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
1997 charge........................ $ 641 $ 1,049 $ 5,425 $ 2,885 $ 10,000
1997 activity...................... 641 1,049 5,425 2,885 10,000
------- ------- ------- ------- --------
December 31, 1997.................. $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= ========
</TABLE>
5. EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings per Share, effective December 15, 1997. The Company's
reported earnings per common share for 1996 and 1995 equaled diluted earnings
per share as set forth in SFAS No. 128. As a result, the Company's reported
earnings per share for 1996 and 1995 were not restated.
Basic earnings per common share is computed by dividing net income by the
weighted-average number of shares of common stock outstanding during the year.
Diluted earnings per common share is computed by using the treasury stock method
to determine shares related to stock options and restricted stock.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Weighted-average common shares.............................. 65,896 69,091 69,839
Stock options and restricted stock issued................... 1,015 285 --
------ ------ ------
Diluted weighted-average common shares...................... 66,911 69,376 69,839
====== ====== ======
</TABLE>
F-23
<PAGE> 99
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
6. SALE OF ACCOUNTS RECEIVABLE
In September 1997, the Company and certain of its subsidiaries sold their
U.S. and Canadian customer trade receivables to CNC Finance LLC (CNC Finance), a
wholly owned bankruptcy remote subsidiary of the Company. CNC Finance entered
into a three-year agreement to sell without recourse, on a revolving basis, an
undivided fractional ownership interest in the receivables, based on the level
of eligible receivables, up to a maximum of $85,000 to a special purpose entity
of a financial institution. At December 31, 1997, $82,500 of the Company's
receivables were sold under this agreement and the sale was reflected as a
reduction of accounts receivable in the 1997 Consolidated Balance Sheet. The
undivided interests were sold at a discount which was included in Interest
expense and other, net in the 1997 Consolidated Statement of Earnings.
7. INVENTORY
Inventories consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Finished goods.............................................. $ 53,748 $ 48,813
Work in process and finished parts.......................... 158,937 122,817
Raw materials and supplies.................................. 44,051 32,568
-------- --------
Total.................................................. $256,736 $204,198
======== ========
</TABLE>
At December 31, 1997 and 1996, $54,441 and $45,371, respectively, of
contract advances were offset against inventories under long-term commercial and
government contracts and programs in the Consolidated Balance Sheets. Losses on
commercial and government contracts and programs are recognized in full when
identified.
Included in inventories are deferred production, engineering and tooling
costs related to the Company's various long-term jet aircraft programs, which
represent total costs incurred since the inception of the programs less the
costs of units delivered based on the anticipated average costs of producing the
total units provided for under these programs. At December 31, 1997 and 1996,
inventories included $30,909 and $25,872, respectively, of deferred engineering
costs; $26,457 and $966, respectively, of deferred production costs; and $15,850
and $14,104, respectively, of deferred tooling costs. Total costs incurred to
date on long-term jet aircraft programs exceed the total cost of units delivered
and in-process, based on the estimated average cost of all units to be
delivered, by $73,216 and $40,942 at December 31, 1997 and 1996, respectively,
and are being amortized over current and future deliveries for the respective
program quantities. Certain engineering costs included in inventory are directly
reimbursable from customers. At December 31, 1997 and 1996, $10,700 and $6,400,
respectively, were reimbursable from customers.
The excess of current cost over last-in, first-out cost at December 31,
1997 and 1996 was $22,022 and $20,152, respectively.
F-24
<PAGE> 100
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and improvements....................................... $ 14,517 $ 16,182
Buildings and equipment..................................... 135,173 121,515
Machinery and equipment..................................... 486,335 415,749
Leasehold improvements...................................... 12,209 11,239
Construction in progress.................................... 30,535 23,010
-------- --------
Total.................................................. 678,769 587,695
Less accumulated depreciation............................... 391,150 372,905
-------- --------
Total.................................................. $287,619 $214,790
======== ========
</TABLE>
9. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Salaries, wages and employee benefits....................... $ 34,603 $ 37,979
Taxes....................................................... 13,728 18,995
Interest.................................................... 7,115 3,032
Asbestos.................................................... 50,688 60,659
Other....................................................... 32,835 34,564
-------- --------
Total.................................................. $138,969 $155,229
======== ========
</TABLE>
10. INCOME TAXES
Domestic and foreign components of earnings from operations before income
taxes and extraordinary item were as follows for the years ended December 31,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Domestic................................................. $114,517 $ 68,199 $ 25,426
Foreign.................................................. 29,232 14,482 26,710
-------- -------- --------
Total............................................... $143,749 $ 82,681 $ 52,136
======== ======== ========
</TABLE>
Income taxes on earnings from continuing operations were as follows for the
years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current
Domestic............................................... $ 18,094 $ (2,912) $ 4,717
Foreign................................................ 6,872 13,634 7,638
-------- -------- --------
24,966 10,722 12,355
-------- -------- --------
</TABLE>
F-25
<PAGE> 101
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Deferred
Domestic............................................... 17,706 24,126 3,836
Foreign................................................ 6,203 (6,737) 1,424
-------- -------- --------
23,909 17,389 5,260
-------- -------- --------
Total............................................... $ 48,875 $ 28,111 $ 17,615
======== ======== ========
</TABLE>
As discussed in note 2 to consolidated financial statements, the Company
sold its original equipment components businesses in 1996 resulting in income
tax on the gain of the sale of $25,332. As discussed in note 3 to consolidated
financial statements, the Company incurred extraordinary charges related to
early retirement of debt resulting in income taxes of $20,387 in 1996 and $136
in 1995.
Reconciliation of tax at the U.S. statutory income tax rate of 35% for the
years ended December 31, 1997, 1996 and 1995 to income taxes on earnings from
continuing operations was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Tax at U.S. statutory rate.................................. $50,312 $28,938 $18,248
Repatriation of non-U.S. earnings......................... (1,195) 1,900 2,692
Non-U.S. rate differential................................ 2,844 1,828 (287)
Utilization of tax credits................................ (997) (1,104) (960)
Adjustment of reserves.................................... (2,736) (6,979) (6,172)
Other..................................................... 647 3,528 4,094
------- ------- -------
Income taxes.............................................. $48,875 $28,111 $17,615
------- ------- -------
Effective tax rate.......................................... 34.0% 34.0% 33.8%
======= ======= =======
</TABLE>
The significant components of deferred tax assets and liabilities at
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Excess tax over book depreciation............... $ -- $(21,828) $ -- $(26,754)
Book/tax differences on contract income......... -- (24,230) -- (27,154)
Employee benefit plans.......................... 7,747 -- 19,749 --
Accrued expenses and liabilities................ 5,375 -- 10,625 --
Foreign tax credit carryforwards................ 3,700 -- 6,600 --
Capital transactions, net....................... -- (27,901) -- (28,127)
Other........................................... -- (3,194) 11,538 --
------- -------- ------- --------
16,822 (77,153) 48,512 (82,035)
Less valuation allowance........................ (3,700) -- (6,600) --
------- -------- ------- --------
Total........................................... $13,122 $(77,153) $41,912 $(82,035)
======= ======== ======= ========
</TABLE>
The valuation allowance is attributable to foreign tax credit
carryforwards, which expire in 1998 through 2002.
F-26
<PAGE> 102
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
11. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Credit Agreement 6.7%*(a)................................... $697,500 $658,000
9 3/4% senior notes due 1999(b)............................. 7,507 7,507
9 3/4% senior notes due 2000(c)............................. 7,405 7,405
10 1/4% senior subordinated notes due 2002(d)............... -- 3,909
Other due 1998-2010......................................... 46,977 43,429
-------- --------
759,389 720,250
Less current portion........................................ 1,811 2,528
-------- --------
$757,578 $717,722
======== ========
</TABLE>
- ---------------
* Indicates average interest rate for 1997 and 1996.
(a) In 1996, the reducing revolving credit facility (the Credit Agreement),
entered into with a syndicate of banks, was amended to expire December 15,
2001 with the total commitment increased to $850,000 from $465,000 (see note
3 to consolidated financial statements). The facility will be reduced by
$75,000 on December 15, 1999 and an additional $100,000 on December 15,
2000. The Credit Agreement provides up to $125,000 for the issuance of
letters of credit. At December 31, 1997, $40,089 of letters of credit had
been issued under the Credit Agreement. Obligations under the facility are
secured by substantially all of the Company's assets. Borrowings under the
facility bear interest, at the Company's option, at an annual rate equal to
the base rate or the Eurodollar rate plus 0.875%. The base rate is the
higher of 0.50% in excess of the Federal Reserve reported certificate of
deposit rate and the prime lending rate. Letter of credit fees of 0.875% are
payable on outstanding letters of credit and a commitment fee of 0.375% is
payable on the unutilized facility.
During 1997, the Company entered into interest rate swaps to reduce (hedge)
the impact of interest rate changes for variable rate borrowings under its
credit facility. The agreements include an aggregate notional amount of
$405,000, fixed interest rates ranging from 5.78% to 6.40% and maturity
dates ranging from April 1998 to October 2002.
(b) The 9 3/4% senior notes due 1999 are not redeemable prior to maturity on
November 1, 1999.
(c) The 9 3/4% senior notes due 2000 are not redeemable prior to maturity on
April 1, 2000.
(d) The 10 1/4% senior subordinated notes were redeemed on April 1, 1997 at
105.125% of par.
Minimum payments on long-term debt due within five years from December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 1,811
1999........................................................ 23,797
2000........................................................ 9,180
2001........................................................ 699,831
2002........................................................ 1,361
Thereafter.................................................. 23,409
--------
Total....................................................... $759,389
========
</TABLE>
12. PENSION PLANS
The Company 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 primarily on years of
service and either final average salary or fixed amounts for each year of
service. The Company's policy is to fund amounts which are actuarially
determined to provide the plans with sufficient assets to meet future benefit
payment requirements. Plan assets consist principally of publicly traded equity
and fixed-income securities. Pension coverage for employees of non-U.S.
subsidiaries is provided in accordance with local requirements and customary
practices.
F-27
<PAGE> 103
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
For certain 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).
During 1997, the Company merged several of its underfunded plans with its
overfunded plans.
As of December 31, 1997 and 1996, the funded status of the Company's
pension plans was as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
OVER-FUNDED UNDER-FUNDED OVER-FUNDED UNDER-FUNDED
PLANS PLANS PLANS PLANS
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligations............... $396,189 $ 30,604 $259,200 $119,158
-------- -------- -------- --------
Accumulated benefit obligations.......... $406,385 $ 30,878 $265,396 $124,022
-------- -------- -------- --------
Projected benefit obligations............ $427,737 $ 34,039 $289,973 $127,234
Plan assets at fair value.................. 568,094 1,551 408,979 79,735
-------- -------- -------- --------
Funded status.............................. 140,357 (32,488) 119,006 (47,499)
Unrecognized net (gain) loss............... (120,839) 6,889 (89,702) (205)
Unrecognized transition (asset)
obligations.............................. (2,192) 1,525 (1,389) 628
Unrecognized prior service cost............ 15,255 2,571 2,837 15,033
Minimum liability adjustment............... -- (7,824) -- (12,200)
-------- -------- -------- --------
(Accrued) prepaid pension cost............. $ 32,581 $(29,327) $ 30,752 $(44,243)
======== ======== ======== ========
</TABLE>
Included in the underfunded plans are amounts for unfunded, non-qualified
defined benefit plans.
At December 31, 1997 and 1996, the Company recorded a minimum liability of
$7,824 and $12,200, respectively, for underfunded plans with a partial offset to
other assets of $5,292 and $7,300, respectively, and an after-tax charge to
shareholders' equity of $1,646 and $3,200, respectively.
Assumptions as of December 31 used to develop the net periodic pension cost
for U.S. plans were:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Discount rate for benefit obligations....................... 7.25% 7.75% 7.50%
Expected long-term rate of return on assets................. 9.00% 9.00% 9.00%
Rate of increase in compensation levels..................... 4.75% 5.00% 5.00%
</TABLE>
For non-U.S. plans, which were not material, similar economic assumptions
were used.
The components of net periodic pension cost for the years ended December
31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost............................................. $ 8,404 $ 9,377 $ 7,618
Interest cost on projected benefit obligations........... 31,996 31,142 30,317
Actual return on assets.................................. (95,430) (52,049) (91,611)
Amortization and deferral, net........................... 47,782 11,443 52,953
-------- -------- --------
Net periodic pension cost................................ $ (7,248) $ (87) $ (723)
======== ======== ========
</TABLE>
For discontinued operations, the total projected benefit obligations at
December 31, 1997 and 1996 were $203,737 and $214,822, respectively, and are
fully funded. Interest cost on the projected benefit obligations for
F-28
<PAGE> 104
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
1997, 1996 and 1995 was $16,097, $16,502 and $19,609, respectively, and was
fully offset by return on assets resulting in no net periodic pension cost.
13. POSTRETIREMENT BENEFITS
The Company provides certain health care and life insurance benefits to its
eligible retired employees, principally in the United States, with some of these
retirees paying a portion of the related costs. The Company's accumulated
postretirement benefit obligations, none of which are funded, and the accrued
postretirement benefit cost at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Actuarial present value of accumulated postretirement
benefit obligations:
Retirees.................................................. $ 16,980 $ 13,493
Fully eligible plan participants.......................... 1,925 2,416
Other plan participants................................... 3,113 3,053
-------- --------
Total..................................................... 22,018 18,962
Unrecognized transition obligations......................... (15,330) (16,614)
Unrecognized net loss....................................... (4,611) (561)
Unrecognized prior service cost............................. 1,964 2,495
-------- --------
Accrued postretirement benefit cost......................... $ 4,041 $ 4,282
======== ========
</TABLE>
The components of postretirement benefit cost for the years ended December
31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost............................................. $ 187 $ 395 $ 198
Interest cost on accumulated postretirement benefit
obligations............................................ 1,433 1,951 1,927
Amortization of transition obligations................... 1,022 1,107 1,373
Amortization and deferral, net........................... (756) (124) (63)
-------- -------- --------
Postretirement benefit cost.............................. $ 1,886 $ 3,329 $ 3,435
======== ======== ========
</TABLE>
Discount rates of 7.25% and 7.75% were used in determining the accumulated
postretirement benefit obligations at December 31, 1997 and 1996, respectively.
The health care cost trend rates used in determining the accumulated
postretirement benefit obligations at December 31, 1997 were 8.7% in 1998
gradually declining to 5.0% by 2005. The effect of a 1% increase in the health
care cost trend rates in each year would increase the total service and interest
cost components of the postretirement benefit cost for 1997 by approximately
$142 and increase the accumulated postretirement benefit obligations at December
31, 1997 by approximately $1,400.
14. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of the Company's financial instruments.
Cash and cash equivalents, accounts and notes receivable and accounts payable:
The carrying amount approximates fair value due to the short-term nature of
these items.
F-29
<PAGE> 105
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Long-term receivables and investments:
The fair value 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 variable-rate long-term debt approximates carrying value.
Forward exchange contracts and interest rate hedges:
The fair value is based on quoted market prices of similar contracts.
The estimated fair value of the Company's financial instruments at December
31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Long-term receivables and investments......... $ 35,017 $ 42,737 $ 32,427 $ 39,817
Long-term debt................................ 759,389 760,609 720,250 720,824
Forward exchange contracts.................... -- (8,384) -- 87
Interest rate hedges.......................... -- (3,555) -- --
</TABLE>
The Company utilizes forward exchange contracts to hedge U.S.
dollar-denominated sales, under long-term contracts, of certain foreign
subsidiaries. The Company does not engage in speculation. The Company's forward
exchange contracts do not subject the Company to risk due to exchange rate
movements because gains and losses on these contracts offset gains and losses on
the sales and related receivables being hedged. At December 31, 1997 and 1996,
the Company had $162,000 and $216,000, respectively, of forward exchange
contracts, denominated in Canadian dollars, which had a fair value of $153,616
and $216,087, respectively. The contracts have varying maturities with none
exceeding five years. Gains and losses on forward exchange contracts are
deferred and recognized over the life of the underlying long-term contract being
hedged.
The Company has an outstanding contingent liability for guaranteed debt and
lease payments of $30,772, and for letters of credit $55,969. 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, non-performance
by the other parties to the contingent liabilities will not have a material
effect on the Company's results of operations and financial condition.
15. STOCK OPTION AND INCENTIVE PLANS
Pursuant to the Company's stock option plans, stock options and shares of
restricted stock have been granted to officers and key employees and stock
options to directors. Under the stock option plans, 7,468,000 shares of common
stock may be issued. Stock options outstanding under the stock option plans 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% or 33%, commencing one year from
date of grant and expiring ten years from date of grant.
The Company applies Accounting Principles Board Opinion #25, Accounting for
Stock Issued to Employees, in accounting for its stock option plans.
Accordingly, no compensation expense has been recognized for these plans. Had
compensation expense for the Company's stock option plans been determined based
on the fair value at the grant dates for awards under these plans consistent
with SFAS No. 123, Accounting for Stock-Based Compensation, the Company's pro
forma net earnings would have been $92,137 for 1997, $79,425 for 1996 and
$69,487 for 1995 and earnings per share would have been $1.38 in 1997, $1.15 in
1996 and $1.00 in 1995.
F-30
<PAGE> 106
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The fair value of each option was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: risk-free interest rate of 6.75% for 1997 and 7.0% for 1996 and
1995, no dividends paid, expected life of 3.7 years for 1997 and five years for
1996 and 1995, and volatility of 21% for 1997 and 23% for 1996 and 1995. The
weighted-average fair value of options granted was $5.75 for 1997, $4.76 for
1996 and $4.00 for 1995.
A summary of the status of the Company's fixed stock option plans as of
December 31, 1997, 1996 and 1995 was follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OPTION AVERAGE
OF SHARES PRICE RANGE EXERCISE
(000S) PER SHARE PRICE
--------- ------------ ---------
<S> <C> <C> <C>
December 31, 1994....................................... 2,317 $15.00-21.25 N/A
Granted................................................. 2,960 10.75-18.08
Exercised............................................... (25) 15.00
Canceled................................................ (64) 15.00-18.25
------ ------------ ------
December 31, 1995....................................... 5,188 10.75-21.25 $13.16
Granted................................................. 516 11.00-15.75 13.43
Exercised............................................... (56) 10.75-11.63 11.37
Canceled................................................ (236) 10.75-21.25 12.82
------ ------------ ------
December 31, 1996....................................... 5,412 10.75-21.25 13.22
Granted................................................. 1,069 18.88-22.88 21.09
Exercised............................................... (1,004) 10.75-18.75 14.64
Canceled................................................ (217) 10.75-18.75 12.08
------ ------------ ------
December 31, 1997....................................... 5,260 $10.75-22.88 $14.59
------ ------------ ------
</TABLE>
Stock options exercisable were 2,156,000, 2,103,000 and 1,188,000 at
December 31, 1997, 1996 and 1995, respectively.
The following summarizes information about the Company's stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------
WEIGHTED- WEIGHTED-
NUMBER AVERAGE AVERAGE
OUTSTANDING REMAINING EXERCISE
(000S) LIFE PRICE
RANGE OF EXERCISE PRICES ----------- --------- ---------
<S> <C> <C> <C>
$10.75 to $15.75......................................... 3,559 7.1 years $12.05
$16.25 to $20.13......................................... 744 6.9 years 18.02
$21.19 to $22.88......................................... 957 9.6 years 21.35
----- --------- ------
$10.75 to $22.88......................................... 5,260 7.6 years $14.59
----- --------- ------
</TABLE>
F-31
<PAGE> 107
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
------------------------
WEIGHTED-
NUMBER AVERAGE
OUTSTANDING EXERCISE
(000S) PRICE
RANGE OF EXERCISE PRICES ----------- ---------
<S> <C> <C>
$10.75 to $15.75............................................ 1,755 $12.79
$16.25 to $20.13............................................ 383 17.91
$21.19 to $22.88............................................ 18 21.25
----- ------
$10.75 to $22.88............................................ 2,156 $13.77
----- ------
</TABLE>
In addition to the granting of stock options, the Company has granted
shares of restricted stock. Restrictions on certain shares lapse 100% three
years from the date of grant. Restrictions on the remaining shares lapse in
annual installments of 33% commencing one year from 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 Sheets and is
being charged to earnings over the period the restricted shares vest.
Shares available for grant at December 31, 1997 under the stock option
plans were 138,569.
16. COMMITMENTS AND CONTINGENCIES
The Company and certain of its subsidiaries are liable for lease payments
and 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 December 31, 1997 and 1996, two subsidiaries of the Company were among a
number of defendants (typically 15 to 40) in approximately 110,000 and 94,700
actions, respectively (including approximately 2,400 and 5,100 actions,
respectively, in advanced stages of processing), filed in various states by
plaintiffs alleging injury or death as a result of exposure to asbestos fibers.
During 1997, 1996 and 1995, two subsidiaries of the Company received
approximately 38,200, 39,900 and 44,000 new actions, respectively. Through
December 31, 1997, approximately 199,000 of the approximately 309,000 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 $1,000 or more in compensatory damages and $2,000
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 the Company 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"), the Company settled litigation with its primary and most of its
first-level excess insurance carriers, substantially on the basis of the Court's
ruling. The Company has negotiated a final agreement with most of its excess
carriers that are in the layers of coverage immediately above its first layer.
The Company is currently receiving payments pursuant to this agreement. The
Company believes that, with respect to the remaining carriers, a final agreement
can be achieved without litigation and on substantially the same basis that it
has resolved the issues with its other carriers. Settlements are generally made
on a group basis with payments made to individual claimants over periods of one
to four years. Payments were made with respect to asbestos liability and related
costs aggregating $59,247 in 1997, $71,354 in 1996 and $56,739 in 1995,
substantially all of which were covered by insurance. Related to payments not
covered by insurance, the Company recorded charges to operations amounting to
$8,000 in 1997, $8,000 in 1996 and $5,000 in 1995.
F-32
<PAGE> 108
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
In accordance with the Company'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 the
Company can reasonably estimate the cost to dispose of these actions. As of
December 31, 1997, the Company 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 $47,350, and the Company expects that this cost will be
substantially covered by insurance.
With respect to the 107,600 outstanding actions as of December 31, 1997,
which are in preliminary procedural stages, the Company 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 potential liability or costs to the Company. 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, the Company generally does
not have the information necessary to analyze the actions in sufficient detail
to estimate the ultimate liability or costs to the Company, 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 the
Company's subsidiaries will receive in the future. The Company 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 the
Company's asbestos-related actions. The Company 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, the Company 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 the Company's subsidiaries and other
defendants in asbestos litigation, the likely sharing of judgments among
multiple responsible defendants, and the substantial amount of insurance
coverage that the Company expects to be available from its solvent carriers, the
Company believes that pending and reasonably anticipated future actions are not
likely to have a material effect on the Company's results of operations and
financial condition.
Although the insurance coverage which the Company 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. The Company's
subsidiaries continue to be named as defendants in new cases, some of which
allege initial exposure after July 1, 1984.
In addition to claims for personal injury, the Company's subsidiaries have
been involved in an insignificant number of property damage claims based upon
asbestos-containing materials found in schools, public facilities and private
commercial buildings. Based upon proceedings to date, the overwhelming majority
of these claims have been resolved without a material adverse impact on the
Company. Likewise, the insignificant number of claims remaining to be resolved
are not expected to have a material effect on the Company's results of
operations and financial condition.
F-33
<PAGE> 109
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The Company has recorded an accrual for 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
has separately recorded an asset equal to the amount of such liabilities that is
expected to be recovered by insurance. In addition, the Company 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 Sheets were as
follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accounts and notes receivable............................... $56,039 $67,012
Other assets................................................ 16,249 18,728
Accrued expenses............................................ 50,688 60,659
Other liabilities........................................... 2,682 10,879
</TABLE>
With respect to environmental proceedings, the Company has been notified
that it is among the Potentially Responsible Parties under federal environmental
laws, or similar state laws, relative to the costs of investigating and in some
cases remediating contamination by hazardous materials at several sites. Such
laws impose joint and several liability for the costs of investigating and
remediating properties contaminated by 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 Company's policy is to accrue environmental remediation costs when it is
both probable that a liability has been incurred and the amount can be
reasonably estimated. The measurement of liability is based on an evaluation of
currently available facts with respect to each individual situation and takes
into consideration factors such as existing technology, presently enacted laws
and regulations and prior experience in remediation of contaminated sites.
Investigations have been completed for approximately 17 sites and continuing
investigations are being done at approximately 11 sites. Accruals are provided
for all sites based on the factors discussed above. As remediation plans are
written and implemented, estimated costs become more fact-based and less
judgment-based. As assessments and remediation progress at individual sites,
these liabilities are reviewed periodically and adjusted to reflect additional
technical and legal information. While it is often difficult to reasonably
quantify future environmental-related expenditures, the Company currently
estimates its future non-capital expenditures related to environmental matters
to range between $27,000 and $50,000. In connection with these expenditures, the
Company has accrued $31,716 at December 31, 1997 representing management's best
estimate of probable non-capital environmental expenditures. These non-capital
expenditures are estimated to be incurred over the next 10 to 20 years. In
addition, capital expenditures aggregating $5,000 may be required during the
next two years related to environmental matters. Although the Company is
pursuing insurance recovery in connection with certain of these matters, no
receivable has been recorded with respect to any potential recovery of costs in
connection with any environmental matters.
Under operating lease commitments, expiring on various dates after December
31, 1997, the Company and certain of its subsidiaries are obligated as of
December 31, 1997, to pay rentals totaling $30,658 as follows: $5,482 in 1998,
$4,970 in 1999, $3,573 in 2000, $2,673 in 2001, $1,973 in 2002 and $11,987 in
later years.
At December 31, 1997, the Company had committed to a minimum employer
contribution of $15,806 to the Company's 401K plans.
17. SEGMENT INFORMATION
As discussed in note 2 to consolidated financial statements, the Company
divested all of its automotive OE components businesses in 1996. As a result of
the divestitures, the Company is now reporting the results of its
F-34
<PAGE> 110
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
business units in two operating segments, Aerospace and Industrial. The
presentation of sales and operating income under "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Segment
Review -- Aerospace" and "-- Segment Review -- Industrial" are an integral part
of the financial statements. One customer (Boeing) in the Aerospace Segment
represented approximately 14% and 12% of the Company's 1997 and 1996 total
sales, respectively.
Information on total assets, depreciation of property, plant and equipment
and capital expenditures by industry segment was as follows for the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Total assets:
Aerospace................................................. $437.3 $415.5 $391.3
Industrial................................................ 310.6 287.2 298.3
Corporate unallocated..................................... 185.1 146.8 134.3
------ ------ ------
Subtotal............................................... 933.0 849.5 823.9
Discontinued operations................................... -- -- 70.6
------ ------ ------
Total.................................................. $933.0 $849.5 $894.5
====== ====== ======
Depreciation of property, plant and equipment:
Aerospace................................................. $ 13.4 $ 12.2 $ 12.3
Industrial................................................ 14.0 12.9 12.9
Corporate unallocated..................................... 2.3 1.9 1.6
------ ------ ------
Subtotal............................................... 29.7 27.0 26.8
Discontinued operations................................... -- 3.5 5.7
------ ------ ------
Total.................................................. $ 29.7 $ 30.5 $ 32.5
====== ====== ======
Capital expenditures:
Aerospace................................................. $ 46.9 $ 26.9 $ 17.6
Industrial................................................ 31.4 13.7 13.7
Corporate unallocated..................................... 2.9 4.0 2.6
------ ------ ------
Subtotal............................................... 81.2 44.6 33.9
Discontinued operations................................... -- 5.4 8.6
------ ------ ------
Total.................................................. $ 81.2 $ 50.0 $ 42.5
====== ====== ======
</TABLE>
F-35
<PAGE> 111
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Information by geographic segment was as follows for the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
OPERATING TOTAL
SALES INCOME ASSETS
-------- --------- ------
(IN MILLIONS)
<S> <C> <C> <C>
1997
Domestic operations......................................... $1,027.2 $198.4 $590.1
Foreign operations.......................................... 287.7 39.1 157.8
-------- ------ ------
Total segments.............................................. 1,314.9 237.5 747.9
Corporate unallocated....................................... -- (39.7) 185.1
-------- ------ ------
Total.................................................. $1,314.9 $197.8 $933.0
======== ====== ======
1996
Domestic operations......................................... $ 888.6 $182.5 $554.2
Foreign operations.......................................... 271.1 16.2 148.5
-------- ------ ------
Total segments.............................................. 1,159.7 198.7 702.7
Corporate unallocated....................................... -- (41.1) 146.8
-------- ------ ------
Total.................................................. $1,159.7 $157.6 $849.5
======== ====== ======
1995
Domestic operations*........................................ $ 854.0 $168.7 $554.8
Foreign operations.......................................... 245.6 10.3 205.4
-------- ------ ------
Total segments.............................................. 1,099.6 179.0 760.2
Corporate unallocated....................................... -- (37.0) 134.3
-------- ------ ------
Total.................................................. $1,099.6 $142.0 $894.5
======== ====== ======
</TABLE>
- ---------------
* Includes total assets from discontinued operations.
18. SUPPLEMENTARY EARNINGS INFORMATION
The following expenses were included in the Consolidated Statements of
Earnings for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Maintenance................................................. $24,000 $22,816 $22,633
Taxes, other than federal income taxes
Payroll................................................... 30,025 24,633 24,379
Property.................................................. 4,928 4,626 4,226
State and local........................................... 6,241 5,121 2,601
Rent........................................................ 8,950 9,965 8,604
Research and developments costs............................. 46,548 44,125 45,730
</TABLE>
19. SUBSEQUENT EVENTS
On January 30, 1998, the Company acquired Marine and Petroleum Mfg. Inc.'s
manufacturing facilities based in Texas for approximately $17,000. The plants
acquired produce flexible graphite and Teflon sealing products used in the
petrochemical industry. Combined annual sales for these facilities are expected
to approximate $18,000. The Company also acquired Tex-o-Lon and Repro-Lon for
approximately $25,000. These
F-36
<PAGE> 112
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
two Texas businesses have combined annual sales of $15,000. Tex-o-Lon
manufactures, machines and distributes Teflon products, primarily for the
semiconductor industry. Repro-Lon reprocesses Teflon compounds for the chemical
and semiconductor industries. The acquisitions were accounted for as purchases;
accordingly, the purchase price, which was financed through available cash
resources, was allocated to the acquired assets based upon their fair market
values.
On February 2, 1998, the Company purchased the Sealing Division of Groupe
Carbone Lorraine for $45,600. This division, with facilities in France and South
Carolina, produces high-technology metallic gaskets used in the nuclear,
petroleum and chemical industries. Sales for 1998 are expected to approximate
$38,000. This acquisition will be accounted for as a purchase and the purchase
price, also financed through available cash resources, will be allocated to the
acquired assets based upon their fair market values.
In February 1998, the Company amended its existing credit facility
increasing the total commitment to $900,000 from $850,000.
20. OTHER SUBSEQUENT EVENTS AND SUPPLEMENTAL GUARANTOR INFORMATION
In April 1998, the Company privately placed $300,000 principal amount of
7 1/2% Senior Notes due 2008 (Senior Notes) and $150,000 liquidation value of
5 1/4% Trust Convertible Preferred Securities. Net proceeds of approximately
$436,000 from both offerings were used to reduce indebtedness under Coltec's
credit agreement.
Substantially all the Company's subsidiaries incorporated in the United
States (the "Subsidiary Guarantors") have fully and unconditionally guaranteed,
on a joint and several basis, the Company's obligations to pay principal and
interest with respect to the Senior Notes. Each Subsidiary Guarantor is wholly
owned and management has determined that separate financial statements for the
Subsidiary Guarantors are not material to investors. The subsidiaries of the
Company that are not Subsidiary Guarantors are referred to in this note as the
"Non-Guarantor Subsidiaries".
The following supplemental consolidating condensed financial statements
present balance sheets as of December 31, 1997 and 1996 and statements of
earnings and of cash flows for the years ended December 31, 1997, 1996 and 1995.
In the consolidating financial statements, Coltec Industries Inc ("Parent")
accounts for its investments in wholly-owned subsidiaries using the equity
method and the Subsidiary Guarantors account for their investments in
Non-Subsidiary Guarantors using the equity method. Interest expense related to
the indebtedness under the Company's credit agreement and its three series of
senior notes is allocated to United States subsidiaries based on net sales.
F-37
<PAGE> 113
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales....................... $430,206 $586,901 $340,833 $(43,071) $1,314,869
Cost of sales................... 295,466 394,948 250,926 (43,071) 898,269
-------- -------- -------- -------- ----------
Gross profit.................... 134,740 191,953 89,907 -- 416,600
Selling and administrative...... 49,854 122,251 46,703 -- 218,808
-------- -------- -------- -------- ----------
Operating income................ 84,886 69,702 43,204 -- 197,792
Equity earnings of
subsidiaries.................. 55,570 22,156 -- (77,726) --
Interest expense and other,
net........................... (30,505) (54,975) 31,437 -- (54,043)
-------- -------- -------- -------- ----------
Earnings before income taxes.... 109,951 36,883 74,641 (77,726) 143,749
Income taxes.................... 15,077 8,630 25,168 -- 48,875
-------- -------- -------- -------- ----------
Net earnings.................... $ 94,874 $ 28,253 $ 49,473 $(77,726) $ 94,874
======== ======== ======== ======== ==========
</TABLE>
F-38
<PAGE> 114
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales....................... $363,743 $530,876 $285,875 $(20,803) $1,159,691
Cost of sales................... 253,345 360,074 218,507 (20,803) 811,123
-------- -------- -------- -------- ----------
Gross profit.................... 110,398 170,802 67,368 -- 348,568
Selling and administrative...... 32,749 82,812 75,432 190,993
-------- -------- -------- -------- ----------
Operating income................ 77,649 87,990 (8,064) -- 157,575
Equity earnings of
subsidiaries.................. 43,755 12,820 -- (56,575) --
Interest expense and other,
net........................... (66,891) (16,676) 8,673 (74,894)
-------- -------- -------- -------- ----------
Earnings from continuing
operations before income taxes
and extraordinary item........ 54,513 84,134 609 (56,575) 82,681
Income taxes.................... (19,309) 24,672 22,748 28,111
-------- -------- -------- -------- ----------
Earnings from continuing
operations before
extraordinary item............ 73,822 59,462 (22,139) (56,575) 54,570
Discontinued operations (net of
tax).......................... 37,931 -- 19,252 57,183
Extraordinary item (net of
tax).......................... (30,614) -- -- (30,614)
-------- -------- -------- -------- ----------
Net earnings.................... $ 81,139 $ 59,462 $ (2,887) $(56,575) $ 81,139
======== ======== ======== ======== ==========
</TABLE>
F-39
<PAGE> 115
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales........................ $472,806 $379,419 $253,071 $ (5,672) $1,099,624
Cost of sales.................... 317,612 242,777 189,484 (5,672) 744,201
-------- -------- -------- -------- ----------
Gross profit..................... 155,194 136,642 63,587 -- 355,423
Selling and administrative....... 89,562 77,614 19,225 186,401
Special charges.................. 27,000 -- -- 27,000
-------- -------- -------- -------- ----------
Operating income................. 38,632 59,028 44,362 -- 142,022
Equity earnings in
subsidiaries................... 58,100 12,820 -- (70,920) --
Interest expense and other,
net............................ (79,910) (9,264) (712) (89,886)
-------- -------- -------- -------- ----------
Earnings from continuing
operations before income taxes
and extraordinary item......... 16,822 62,584 43,650 (70,920) 52,136
Income taxes..................... (18,850) 21,827 14,638 17,615
-------- -------- -------- -------- ----------
Earnings from continuing
operations before extraordinary
item........................... 35,672 40,757 29,012 (70,920) 34,521
Discontinued operations (net of
tax)........................... 35,488 1,151 -- 36,639
Extraordinary item (net of
tax)........................... (254) -- (254)
-------- -------- -------- -------- ----------
Net earnings..................... $ 70,906 $ 41,908 $ 29,012 $(70,920) $ 70,906
======== ======== ======== ======== ==========
</TABLE>
F-40
<PAGE> 116
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents..... $ 9,912 $ 722 $ 4,059 $ 14,693
Accounts and notes receivable,
net......................... -- 60,881 59,430 120,311
Inventory, net................ 99,100 71,958 85,678 256,736
Deferred income taxes......... 4,535 10,689 (29) 15,195
Other current assets.......... 4,540 10,406 5,562 20,508
---------- -------- -------- ----------- --------
Total current assets........ 118,087 154,656 154,700 -- 427,443
Intercompany, net............. (741,897) 10,933 730,964 --
Investments in affiliates..... 1,057,890 355,399 2,688 $(1,415,977) --
Property, plant and
equipment................... 89,488 118,405 79,726 287,619
Cost in excess of net assets
acquired, net............... 21,820 133,441 2,490 157,751
Other assets.................. 40,266 3,490 16,465 60,221
---------- -------- -------- ----------- --------
Total assets................ $ 585,654 $776,324 $987,033 $(1,415,977) $933,034
========== ======== ======== =========== ========
Total current liabilities..... $ 93,669 $ 49,494 $ 96,415 $239,578
Long term debt................ 689,302 1,611 66,665 757,578
Deferred income taxes......... (32,780) 101,871 10,138 79,229
Other liabilities............. 39,706 12,844 10,544 $ (2,202) 60,892
Liabilities of discontinued
operations.................. 154,918 -- -- 154,918
Shareholders' equity.......... (359,161) 610,504 803,271 (1,413,775) (359,161)
---------- -------- -------- ----------- --------
Total liabilities and
shareholders' equity..... $ 585,654 $776,324 $987,033 $(1,415,977) $933,034
========== ======== ======== =========== ========
</TABLE>
F-41
<PAGE> 117
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents....... $ 5,475 $ 570 $ 8,984 $ 15,029
Accounts and notes receivable,
net........................... 38,773 49,556 101,996 190,325
Inventory, net.................. 77,816 54,269 72,113 204,198
Deferred income taxes........... 5,566 8,830 (3,872) 10,524
Other current assets............ 14,417 5,583 2,895 22,895
---------- -------- -------- ----------- ---------
Total current assets.......... 142,047 118,808 182,116 -- 442,971
Intercompany, net............... (955,038) 274,177 680,861 --
Investments in affiliates....... 1,159,429 97,481 -- $(1,256,910) --
Property, plant and equipment... 72,933 75,166 66,691 214,790
Cost in excess of net assets
acquired, net................. 14,728 115,525 2,619 132,872
Other assets.................... 39,025 954 18,890 58,869
---------- -------- -------- ----------- ---------
Total assets.................. $ 473,124 $682,111 $951,177 $(1,256,910) $ 849,502
========== ======== ======== =========== =========
Total current liabilities....... $ 11,341 $ 7,541 $208,514 $ 227,396
Long term debt.................. 689,116 -- 28,606 717,722
Deferred income taxes........... (49,402) 92,120 7,928 50,646
Other liabilities............... 68,337 6,989 24,679 100,005
Liabilities of discontinued
operations.................... 170,740 -- -- 170,740
Shareholders' equity............ (417,008) 575,461 681,450 $(1,256,910) (417,007)
---------- -------- -------- ----------- ---------
Total liabilities and
shareholders' equity....... $ 473,124 $682,111 $951,177 $(1,256,910) $ 849,502
========== ======== ======== =========== =========
</TABLE>
F-42
<PAGE> 118
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------
NON-GUARANTOR
PARENT GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash from operating activities... $ 66,192 $ 152 $ (4,925) -- $ 61,419
--------- -------- --------- -------- ---------
Cash flows from investing
activities:
Capital expenditures........... (28,720) (29,542) (22,956) (81,218)
Acquisition of businesses...... (32,716) (27,995) -- (60,711)
Cash from (to) Parent.......... (80,493) 57,537 22,956 --
--------- -------- --------- -------- ---------
Cash used in investing
activities................ (141,929) -- -- -- (141,929)
--------- -------- --------- -------- ---------
Cash flows from financing
activities:
Issuance of long-term debt..... 813 -- -- 813
Repayment of long-term debt.... (4,929) (133) (3,051) (8,113)
Increase (decrease) in
revolving facility, net..... (500) -- 40,000 39,500
Purchase of treasury stock..... (42,695) -- -- (42,695)
Proceeds from sale of accounts
receivable.................. -- -- 82,500 82,500
Proceeds from exercise of
stock options............... 8,169 -- -- 8,169
Cash from (to) Parent.......... 119,316 133 (119,449) --
--------- -------- --------- -------- ---------
Cash provided by financing
activities................ 80,174 -- -- -- 80,174
--------- -------- --------- -------- ---------
Increase (decrease) in cash and
cash equivalents............... 4,437 152 (4,925) (336)
Cash and cash equivalents --
beginning of period............ 5,475 570 8,984 15,029
--------- -------- --------- -------- ---------
Cash and cash equivalents --
end of period.................. $ 9,912 $ 722 $ 4,059 -- $ 14,693
========= ======== ========= ======== =========
</TABLE>
F-43
<PAGE> 119
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash from operating
activities.................... $ 43,920 $ (179) $ 5,762 -- $ 49,503
--------- ------- -------- -------- ---------
Cash flows from investing
activities:
Capital expenditures.......... (20,799) (8,376) (15,375) (44,550)
Proceeds from divestitures.... 329,113 -- -- 329,113
Cash from (to) Parent......... (23,751) 8,376 15,375 --
--------- ------- -------- -------- ---------
Cash provided by investing
activities............... 284,563 -- -- -- 284,563
--------- ------- -------- -------- ---------
Cash flows from financing
activities:
Proceeds from debt
refinancing................ 542,000 -- -- 542,000
Repayment of long-term debt... (622,582) -- -- (622,582)
Decrease in revolving
facility, net.............. (196,000) -- -- (196,000)
Purchase of treasury stock.... (46,426) -- -- (46,426)
--------- ------- -------- -------- ---------
Cash used in financing
activities............... (323,008) -- -- -- (323,008)
--------- ------- -------- -------- ---------
Increase (decrease) in cash and
cash equivalents.............. 5,475 (179) 5,762 11,058
Cash and cash equivalents --
beginning of period........... -- 749 3,222 3,971
--------- ------- -------- -------- ---------
Cash and cash equivalents -- end
of period..................... $ 5,475 $ 570 $ 8,984 -- $ 15,029
========= ======= ======== ======== =========
</TABLE>
F-44
<PAGE> 120
COLTEC INDUSTRIES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash from operating
activities.................... $ 89,825 $ (485) $ 1,668 -- $ 91,008
-------- ------- -------- -------- --------
Cash flows from investing
activities:
Capital expenditures.......... (25,559) (8,900) (8,037) (42,496)
Acquisition of business....... (21,750) -- -- (21,750)
Other......................... (2,512) -- -- (2,512)
Cash from (to) Parent......... (16,937) 8,900 8,037 --
-------- ------- -------- -------- --------
Cash used in investing
activities............... (66,758) -- -- -- (66,758)
-------- ------- -------- -------- --------
Cash flows from financing
activities:
Issuance of long-term debt.... -- -- 19,070 19,070
Repayment of long-term debt... (11,084) -- (2,453) (13,537)
Decrease in revolving
facility, net.............. (30,000) -- -- (30,000)
Cash from (to) Parent......... 16,617 -- (16,617) --
-------- ------- -------- -------- --------
Cash used in financing
activities............... (24,467) -- -- -- (24,467)
-------- ------- -------- -------- --------
Increase (decrease) in cash
and cash equivalents....... (1,400) (485) 1,668 (217)
Cash and cash equivalents --
beginning of period........ 1,400 1,234 1,554 4,188
-------- ------- -------- -------- --------
Cash and cash equivalents --
end of period.............. -- $ 749 $ 3,222 -- $ 3,971
======== ======= ======== ======== ========
</TABLE>
F-45
<PAGE> 121
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS CONFIDENTIAL
OFFERING CIRCULAR AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY INITIAL
PURCHASER. THIS CONFIDENTIAL OFFERING CIRCULAR DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS CONFIDENTIAL OFFERING CIRCULAR
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 OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. i
Incorporation of Certain Documents by
Reference........................... i
Prospectus Summary.................... 1
Risk Factors.......................... 10
The Exchange Offer.................... 14
Use of Proceeds....................... 21
Capitalization........................ 21
Selected Consolidated Financial and
Other Data.......................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 33
Management............................ 46
Description of the Senior Notes....... 48
Description of Other Indebtedness..... 63
United States Taxation................ 69
Plan of Distribution.................. 71
Legal Matters......................... 71
Independent Public Accountants........ 71
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
COLTEC INDUSTRIES INC
$300,000,000
7 1/2% Series B Senior Notes
Due 2008
PROSPECTUS
- ------------------------------------------------------
<PAGE> 122
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Sections 1741 and 1742 of the 1988 Business
Corporation Law of the Commonwealth of Pennsylvania, which provide for
indemnification of directors and officers in certain circumstances. In addition,
Article VIII of the By-laws of Coltec provides that, except as prohibited by
law, any director, officer or employee of Coltec is entitled to be indemnified
in any action or proceeding in which he or she may be involved by virtue of
holding such position.
In addition, Coltec maintains a directors' and officers' liability
insurance policy and has entered into indemnification agreements with each of
its executive officers and directors.
The indemnification referred to above will not limit the liability of any
director or officer of Coltec for violation of any of the federal securities
laws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
+4.1 Indenture dated April 16, 1998, between Coltec and Bankers
Trust Company as trustee, relating to the 7 1/2% Senior
Secured Notes.
+4.2 Form of 7 1/2% Series B Senior Secured Notes (included in
Exhibit 4.1 above).
+4.3 Registration Rights Agreement, dated as of April 16, 1998,
between Coltec and the Initial Purchasers named therein.
+4.4 Fifth Amendment to the Credit Agreement, dated as of March
16, 1998 among Coltec, Coltec Aerospace Canada Ltd., the
Subsidiary Guarantors named therein, the financial
institutions party thereto from time to time, Bank of
America National Trust and Savings Association, as
Documentation Agent, The Chase Manhattan Bank, as
Syndication Agent, Bankers Trust Company, as Administrative
Agent, and Bank of Montreal, as Canadian Paying Agent.
+4.5 Consent and Agreement, dated as of March 31, 1998, with
respect to the Credit Agreement among Coltec, Coltec
Aerospace Canada Ltd., the Subsidiary Guarantors named
therein, the financial institutions party thereto from time
to time, Bank of America National Trust and Savings
Association, as Documentation Agent, The Chase Manhattan
Bank, as Syndication Agent, Bankers Trust Company, as
Administrative Agent, and Bank of Montreal, as Canadian
Paying Agent.
+4.6 Modification to Fifth Amendment to Credit Agreement, dated
as of April 20, 1998, among Coltec, Coltec Aerospace Canada
Ltd., the Subsidiary Guarantors named therein, the financial
institutions party thereto from time to time, Bank of
America National Trust and Savings Association, as
Documentation Agent, The Chase Manhattan Bank, as
Syndication Agent, Bankers Trust Company, as Administrative
Agent, and Bank of Montreal, as Canadian Paying Agent.
+4.7 Amended and Restated Company Pledge Agreement, dated as of
March 24, 1998, made by Coltec in favor of Bankers Trust
Company as collateral agent.
+4.8 Amended and Restated Company Security Agreement, dated as of
March 24, 1998, made by Coltec in favor of Bankers Trust
Company as collateral agent.
+4.9 Amended and Restated Subsidiary Pledge Agreement, dated
March 24, 1998, made by the Subsidiary named therein in
favor of Bankers Trust Company as collateral agent.
+4.10 Amended and Restated Subsidiary Security Agreement, dated
March 24, 1998, made by the Subsidiary named therein in
favor of Bankers Trust Company as collateral agent.
</TABLE>
II-1
<PAGE> 123
<TABLE>
<C> <S>
+4.11 Second Amendment to Receivables Transfer and Administration Agreement, dated January 26, 1998,
between Coltec and Coltec North Carolina Inc.
*5.1 Opinion of Robert J. Tubbs, Executive Vice President, General Counsel and Secretary of Coltec.
+12.1 Computation of Ratio of Earnings to Fixed Charges and other Ratios.
*23.1 Consent of Robert J. Tubbs (included in Item 5.1).
*23.2 Consent of Arthur Andersen LLP.
+24.1 Power of Attorney (contained on the signature page)
+25.1 Statement of Eligibility under the Trust Indenture Act of 1939 of Bankers Trust Company on Form
T-1.
+99.1 Form of Letter of Transmittal.
+99.2 Form of Notice of Guaranteed Delivery.
+99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees.
+99.4 Form of Letter to Clients.
</TABLE>
- ---------------
* Filed herewith.
+ Previously filed.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(a) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement.
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(b) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(c) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(d) that, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered
II-2
<PAGE> 124
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(e) to deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule
14c-3 under the Securities and Exchange Act of 1934; and, where interim
financial information required to be presented by Article 3 of Regulation
S-X are not set forth in the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
(f) insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue;
(g) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request; and
(h) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
II-3
<PAGE> 125
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Charlotte, State of North Carolina on the 11th day of August, 1998.
COLTEC INDUSTRIES INC
by *
------------------------------------
Name: John W. Guffey, Jr.
Title:Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
* Chairman, Chief Executive Officer August 11, 1998
- --------------------------------------------- and Director
John W. Guffey, Jr.
* President, Chief Operating Officer August 11, 1998
- --------------------------------------------- and Director
Nishan Teshoian
* Executive Vice President, August 11, 1998
- --------------------------------------------- Chief Financial Officer and Director
David D. Harrison
* Vice President and Controller August 11, 1998
- ---------------------------------------------
John N. Maier
* Director August 11, 1998
- ---------------------------------------------
William H. Grigg
* Director August 11, 1998
- ---------------------------------------------
Joel Moses
* Director August 11, 1998
- ---------------------------------------------
Richard A. Stuckey
* Director August 11, 1998
- ---------------------------------------------
David I. Margolis
* Director August 11, 1998
- ---------------------------------------------
Joseph R. Coppola
*By: /s/ ROBERT J. TUBBS August 11, 1998
- ---------------------------------------------
Robert J. Tubbs
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 126
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of August, 1998.
AMI INDUSTRIES, INC.
by *
------------------------------------
Name: John M. Cybulski
Title: Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
* Chairman and Director August 11, 1998
- -----------------------------------------------------
John M. Cybulski
* Vice President and Treasurer August 11, 1998
- -----------------------------------------------------
Thomas C. Ekle
/s/ ROBERT J. TUBBS Vice President, Secretary August 11, 1998
- ----------------------------------------------------- and Director
Robert J. Tubbs
* Director August 11, 1998
- -----------------------------------------------------
David D. Harrison
*By /s/ ROBERT J. TUBBS
-------------------------------------------------
Robert J. Tubbs
Attorney-in-Fact
August 11, 1998
</TABLE>
II-5
<PAGE> 127
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of August, 1998.
CII HOLDINGS INC.
by /s/ ROBERT J. TUBBS
------------------------------------
Name: Robert J. Tubbs
Title: President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
/s/ ROBERT J. TUBBS President and Director August 11, 1998
- -----------------------------------------------------
Robert J. Tubbs
* Vice President and Treasurer August 11, 1998
- -----------------------------------------------------
David D. Harrison
*By /s/ ROBERT J. TUBBS August 11, 1998
-------------------------------------------------
Robert J. Tubbs
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 128
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of August, 1998.
COLTEC CANADA INC
by *
------------------------------------
Name: John M. Cybulski
Title: Chairman and President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
* Chairman, President and August 11, 1998
- ----------------------------------------------------- Director
John M Cybulski
* Vice President, Treasurer and August 11, 1998
- ----------------------------------------------------- Director
David D. Harrison
/s/ ROBERT J. TUBBS Vice President, Secretary and August 11, 1998
- ----------------------------------------------------- Director
Robert J. Tubbs
*By /s/ ROBERT J. TUBBS August 11, 1998
-------------------------------------------------
Robert J. Tubbs
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 129
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of August, 1998.
COLTEC INDUSTRIAL PRODUCTS INC
by *
------------------------------------
Name: Klemens B. Schoenfelder
Title: President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
* President and Director August 11, 1998
- ---------------------------------------------------
Klemens B. Schoenfelder
/s/ ROBERT J. TUBBS Vice President, Secretary and August 11, 1998
- --------------------------------------------------- Director
Robert J. Tubbs
*By: /s/ ROBERT J. TUBBS August 11, 1998
---------------------------------------------
Robert J. Tubbs
Attorney-in-Fact
</TABLE>
II-8
<PAGE> 130
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of August, 1998.
COLTEC INTERNATIONAL SERVICES CO
by *
------------------------------------
Name: Michael J. Burdulis
Title: President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
* President August 11, 1998
- -----------------------------------------------------
Michael J. Burdulis
* Vice President and Treasurer August 11, 1998
- -----------------------------------------------------
David D. Harrison
/s/ ROBERT J. TUBBS Vice President, Secretary and August 11, 1998
- ----------------------------------------------------- Director
Robert J. Tubbs
* Director August 11, 1998
- -----------------------------------------------------
Lawrence H. Polsky
*By: /s/ ROBERT J. TUBBS
------------------------------------------------
Robert J. Tubbs
Attorney-in-Fact
</TABLE>
II-9
<PAGE> 131
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of August, 1998.
COLTEC NORTH CAROLINA INC
by *
------------------------------------
Name: David D. Harrison
Title: President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
* President and Director August 11, 1998
- ---------------------------------------------
David D. Harrison
* Vice President and Treasurer August 11, 1998
- ---------------------------------------------
Thomas B. Jones, Jr.
/s/ ROBERT J. TUBBS Vice President, Secretary and Director August 11, 1998
- ---------------------------------------------
Robert J. Tubbs
*By /s/ ROBERT J. TUBBS
-----------------------------------------
Robert J. Tubbs
Attorney-in-Fact
</TABLE>
II-10
<PAGE> 132
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of August, 1998.
COLTEC TECHNICAL SERVICES INC
by /s/ ROBERT J. TUBBS
------------------------------------
Name: Robert J. Tubbs
Title: President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
/s/ ROBERT J. TUBBS President and Director August 11, 1998
- -----------------------------------------------------
Robert J. Tubbs
* Vice President and Treasurer August 11, 1998
- -----------------------------------------------------
David D. Harrison
</TABLE>
*By /s/ ROBERT J. TUBBS
--------------------------------
Robert J. Tubbs
Attorney-in-Fact
II-11
<PAGE> 133
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of August, 1998.
DELAVAN INC
by /s/ ROBERT J. TUBBS
------------------------------------
Name: Robert J. Tubbs
Title: President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
/s/ ROBERT J. TUBBS President, Secretary and August 11, 1998
- ----------------------------------------------------- Director
Robert J. Tubbs
* Vice President, Treasurer and August 11, 1998
- ----------------------------------------------------- Director
David D. Harrison
*By /s/ ROBERT J. TUBBS
-------------------------------------------------
Robert J. Tubbs
Attorney-in-Fact
</TABLE>
II-12
<PAGE> 134
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of August, 1998.
GARLOCK INC
by *
------------------------------------
Name: Michael J. Burdulis
Title: President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
* President August 11, 1998
- -----------------------------------------------------
Michael J. Burdulis
* Vice President, Treasurer and August 11, 1998
- ----------------------------------------------------- Director
David D. Harrison
/s/ ROBERT J. TUBBS Vice President, Secretary and August 11, 1998
- ----------------------------------------------------- Director
Robert J. Tubbs
*By /s/ ROBERT J. TUBBS
-------------------------------------------------
Robert J. Tubbs
Attorney-in-Fact
</TABLE>
II-13
<PAGE> 135
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of August, 1998.
GARLOCK INTERNATIONAL INC
by *
------------------------------------
Name: Michael J. Burdulis
Title:President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
* President August 11, 1998
- -----------------------------------------------------
Michael J. Burdulis
* Vice President, Treasurer and August 11, 1998
- ----------------------------------------------------- Director
David D. Harrison
/s/ ROBERT J. TUBBS Vice President, Secretary and August 11, 1998
- ----------------------------------------------------- Director
Robert J. Tubbs
*By /s/ ROBERT J. TUBBS
-------------------------------------------------
Robert J. Tubbs
Attorney-in-Fact
</TABLE>
II-14
<PAGE> 136
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of August, 1998.
GARLOCK OVERSEAS CORPORATION
by *
------------------------------------
Name: Michael J. Burdulis
Title:Chairman and President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
* President August 11, 1998
- -----------------------------------------------------
Michael J. Burdulis
* Vice President, Treasurer and August 11, 1998
- ----------------------------------------------------- Director
David D. Harrison
/s/ ROBERT J. TUBBS Vice President, Secretary and August 11, 1998
- ----------------------------------------------------- Director
Robert J. Tubbs
*By /s/ ROBERT J. TUBBS
-------------------------------------------------
Robert J. Tubbs
Attorney-in-Fact
</TABLE>
II-15
<PAGE> 137
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of July, 1998.
HABER TOOL COMPANY INC
by *
------------------------------------
Name: Richard L. Dashnaw
Title:President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
* President August 11, 1998
- -----------------------------------------------------
Richard L. Dashnaw
* Vice President, Treasurer and August 11, 1998
- ----------------------------------------------------- Director
David D. Harrison
/s/ ROBERT J. TUBBS Vice President, Secretary and August 11, 1998
- ----------------------------------------------------- Director
Robert J. Tubbs
*By /s/ ROBERT J. TUBBS
-------------------------------------------------
Robert J. Tubbs
Attorney-in-Fact
</TABLE>
II-16
<PAGE> 138
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of August, 1998.
JAMCO PRODUCTS LLC
by *
------------------------------------
Name: Thomas C. Johns
Title:President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
* President and Manager August 11, 1998
- -----------------------------------------------------
Thomas C. Johns
* Manager August 11, 1998
- -----------------------------------------------------
David D. Harrison
/s/ ROBERT J. TUBBS Manager August 11, 1998
- -----------------------------------------------------
Robert J. Tubbs
</TABLE>
*By /s/ ROBERT J. TUBBS
--------------------------------
Robert J. Tubbs
Attorney-in-Fact
II-17
<PAGE> 139
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of August, 1998.
MENASCO AEROSYSTEMS INC
by *
------------------------------------
Name: John M. Cybulski
Title: Chairman
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
* Chairman
- ---------------------------------------------
John M. Cybulski August 11, 1998
* Vice President, Finance and Director
- ---------------------------------------------
John J. Orct August 11, 1998
* Vice President and Treasurer
- ---------------------------------------------
David D. Harrison August 11, 1998
By /s/ ROBERT J. TUBBS
-----------------------------------------
Robert J. Tubbs
Attorney-in-Fact
</TABLE>
II-18
<PAGE> 140
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of August, 1998.
STEMCO INC
by *
------------------------------------
Name: Michael J. Leslie
Title: President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
* President August 11, 1998
- -----------------------------------------------------
Michael J. Leslie
* Vice President, Treasurer and August 11, 1998
- ----------------------------------------------------- Director
David D. Harrison
/s/ ROBERT J. TUBBS Vice President, Secretary and August 11, 1998
- ----------------------------------------------------- Director
Robert J. Tubbs
*By: /s/ ROBERT J. TUBBS
------------------------------------------------
Robert J. Tubbs
Attorney-in-Fact
</TABLE>
II-19
<PAGE> 141
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of August, 1998.
WALBAR INC
by *
------------------------------------
Name: Peter Challinor
Title: President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
* President August 11, 1998
- -----------------------------------------------------
Peter Challinor
* Vice President and Treasurer August 11, 1998
- -----------------------------------------------------
David D. Harrison
/s/ ROBERT J. TUBBS Vice President, Secretary and August 11, 1998
- ----------------------------------------------------- Director
Robert J. Tubbs
*By /s/ ROBERT J. TUBBS
-------------------------------------------------
Robert J. Tubbs
Attorney-in-Fact
</TABLE>
II-20
<PAGE> 142
EXHIBIT INDEX
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBITS PAGE
- -------- ----
<C> <S> <C>
+4.1 Indenture dated April 16, 1998, between Coltec and Bankers
Trust Company as trustee, relating to the 7 1/2% Senior
Secured Notes.
+4.2 Form of 7 1/2% Series B Senior Secured Notes (included in
Exhibit 4.1 above).
+4.3 Registration Rights Agreement, dated as of April 16, 1998,
between Coltec and the Initial Purchasers named therein.
+4.4 Fifth Amendment to the Credit Agreement, dated as of March
16, 1998 among Coltec, Coltec Aerospace Canada Ltd., the
Subsidiary Guarantors named therein, the financial
institutions party thereto from time to time, Bank of
America National Trust and Savings Association, as
Documentation Agent, the Chase Manhattan Bank, as
Syndication Agent, Bankers Trust Company, as Administrative
Agent, and Bank of Montreal, as Canadian Paying Agent.
+4.5 Consent and Agreement, dated as of March 31, 1998, with
respect to the Credit Agreement among Coltec, Coltec
Aerospace Canada Ltd., the Subsidiary Guarantors named
therein, the financial institutions party thereto from time
to time, Bank of America National Trust and Savings
Association, as Documentation Agent, the Chase Manhattan
Bank, as Syndication Agent, Bankers Trust Company, as
Administrative Agent, and Bank of Montreal, as Canadian
Paying Agent.
+4.6 Modification to Fifth Amendment to Credit Agreement, dated
as of April 20, 1998, among Coltec, Coltec Aerospace Canada
Ltd., the Subsidiary Guarantors named therein, the financial
institutions party thereto from time to time, Bank of
America National Trust and Savings Association, as
Documentation Agent, The Chase Manhattan Bank, as
Syndication Agent, Bankers Trust Company, as Administrative
Agent, and Bank of Montreal, as Canadian Paying Agent.
+4.7 Amended and Restated Company Pledge Agreement, dated as of
March 24, 1998, made by Coltec in favor of Bankers Trust
Company as collateral agent.
+4.8 Amended and Restated Company Security Agreement, dated as of
March 24, 1998, made by Coltec in favor of Bankers Trust
Company as collateral agent.
+4.9 Amended and Restated Subsidiary Pledge Agreement, dated
March 24, 1998, made by the Subsidiary named therein in
favor of Bankers Trust Company as collateral agent.
+4.10 Amended and Restated Subsidiary Security Agreement, dated
March 24, 1998, made by the Subsidiary named therein in
favor of Bankers Trust Company as collateral agent.
+4.11 Second Amendment to Receivables Transfer and Administration
Agreement, dated January 26, 1998, between Coltec and Coltec
North Carolina Inc.
*5.1 Opinion of Robert J. Tubbs, Executive Vice President,
General Counsel and Secretary of Coltec.
+12.1 Computation of Ratio of Earnings to Fixed Charges and other
Ratios.
*23.1 Consent of Robert J. Tubbs (included in Item 5.1).
*23.2 Consent of Arthur Andersen LLP.
+24.1 Power of Attorney
+25.1 Statement of Eligibility under the Trust Indenture Act of
1939 of Bankers Trust Company on Form T-1.
+99.1 Form of Letter of Transmittal.
</TABLE>
II-21
<PAGE> 143
<TABLE>
<CAPTION>
EXHIBITS PAGE
- -------- ----
<C> <S> <C>
+99.2 Form of Notice of Guaranteed Delivery.
+99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
+99.4 Form of Letter to Clients.
</TABLE>
- ---------------
* Filed herewith.
+ Previously filed.
II-22
<PAGE> 1
Exhibit 5.1
[Letterhead of Robert J. Tubbs]
July 15, 1998
Board of Directors
Coltec Industries Inc
3 Coliseum Centre
2550 West Tyvola Road
Charlotte, North Carolina 28217
Ladies and Gentlemen:
I have acted as counsel for Coltec Industries Inc, a Pennsylvania
corporation (the "Company"), in connection with the filing by the Company with
the Securities and Exchange Commission (the "Commission") of a registration
statement on Form S-4 (the "Registration Statement") under the Securities Act of
1933 (the "Act"), relating to the proposed issuance, in exchange (the "Exchange
Offer") for up to $300,000,000 aggregate principal amount of the Company's
7 1/2% Senior Notes due 2008 (the "Outstanding Notes"), of a like principal
amount of the Company's 7 1/2% Series B Senior Notes due 2008 (the "Exchange
Notes"). The Exchange Notes are to be issued pursuant to the indenture dated as
of April 16, 1998 (the "Indenture") by and among the Company, as issuer, certain
subsidiaries of the Company (the "Subsidiary Guarantors") as guarantors, and
Bankers Trust Company, as trustee (the "Trustee"). The Exchange Notes are to be
guaranteed on a senior basis (the "Guarantee") by the Subsidiary Guarantors.
<PAGE> 2
2
In that connection, I have examined originals, or copies certified or
otherwise identified to my satisfaction, of such documents, corporate records
and other instruments as I have deemed necessary for purposes of this opinion,
including the Indenture.
Based on the foregoing, I am of opinion as follows:
1. The Indenture has been duly authorized, executed and delivered by
the Company and the Subsidiary Guarantors and, assuming the due authorization,
execution and delivery thereof by the Trustee, the Indenture constitutes a
legal, valid and binding obligation of the Company and the Subsidiary
Guarantors, enforceable against the Company and each of the Subsidiary
Guarantors in accordance with its terms (subject to applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or other similar
laws affecting creditors' rights generally from time to time in effect and to
general principles of equity, including concepts of materiality, reasonableness,
good faith and fair dealing, regardless of whether such enforceability is
considered in a proceeding in equity or at law).
2. The Exchange Notes have been duly authorized by the Company, and
when executed and authenticated in accordance with the provisions of the
Indenture and delivered in exchange for the Outstanding Notes pursuant to the
Exchange Offer, will constitute valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms and entitled to
the benefits of the Indenture (subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or other similar laws affecting
creditors' rights generally from time to time in effect and to general
principles of equity, including concepts of materiality, reasonableness, good
faith and fair dealing, regardless of whether such enforceability is considered
in a proceeding in equity or at law); in expressing the opinion set forth in
this paragraph 2, I have assumed that the form of the Exchange Notes will
conform to that included in the Indenture.
3. The Guarantee has been duly authorized, and when the Exchange Notes
have been executed and authenticated in accordance with the provisions of the
Indenture and delivered in exchange for the Outstanding Notes pursuant to the
Exchange Offer, the Guarantee of the Exchange Notes will constitute a valid and
binding obligation of the Subsidiary Guarantors (subject to applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or
other
<PAGE> 3
3
similar laws affecting creditors' rights generally from time to time in effect
and to general principles of equity, including concepts of materiality,
reasonableness, good faith and fair dealing, regardless of whether such
enforceability is considered in a proceeding in equity or at law).
The opinions expressed herein are limited to the Federal laws of the
United States of America, the laws of the State of New York and the corporate
law of the Commonwealth of Pennsylvania, and I express no opinion with respect
to the laws of any other country, state or jurisdiction.
I hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement. I also consent to the reference to me
under the heading "Legal Matters" in the Registration Statement and in the
related Prospectus. In giving this consent, I do not thereby admit that I am
included in the category of persons whose consent is required under Section 7 of
the Act or the rules and regulations of the Commission.
This opinion is being delivered to you in my capacity as the Executive
Vice President, General Counsel and Secretary of the Company and solely for the
purpose of being included as an exhibit to the Registration Statement. This
opinion addresses matters only as of the date hereof and may not be relied upon
in any manner for any other purpose without my prior written consent.
Sincerely,
/s/ ROBERT J. TUBBS
---------------------------------------
Robert J. Tubbs
Executive Vice President,
General Counsel and Secretary
<PAGE> 1
Exhibit 23.2
As independent public accountants, we hereby consent to the use of our report
included in this Registration Statement and to the incorporation by reference in
this Registration Statement of our report dated February 2, 1998 (except with
respect to information discussed in Note 20 as to which the date is April 16,
1998) included in Coltec Industries Inc's Form 10-K for the year ended December
31, 1997 and to all references to our Firm included in this Registration
Statement.
Arthur Andersen LLP
Charlotte, North Carolina
August 11, 1998
S-4
