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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended December 31, 1996
COMMISSION FILE NUMBER 1-13782
WESTINGHOUSE AIR BRAKE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 25-1615902
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1001 AIR BRAKE AVENUE
WILMERDING, PENNSYLVANIA 15148 (412) 825-1000
(Address of principal (Registrant's telephone
executive offices) number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(NAME OF EXCHANGE
(TITLE OF CLASS) ON WHICH REGISTERED)
- --------------------------------------- ---------------------------
Common Stock, par value $.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
As of March 14, 1997, 37,488,733 shares of Common Stock of the registrant
were issued and outstanding, of which 8,927,565 shares were unallocated ESOP
shares. The registrant estimates that as of March 14, 1997, the aggregate market
value of the voting shares held by non-affiliates of the registrant was
approximately $180.5 million based on the closing price on the New York Stock
Exchange for such stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the registrant's Annual Meeting of
Shareholders to be held on April 22, 1997 are incorporated by reference into
Part III of this Form 10-K.
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TABLE OF CONTENTS
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PART I
Item 1. Business...................................................................... 1
Item 2. Properties.................................................................... 12
Item 3. Legal Proceedings............................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders........................... 14
Executive Officers of the Company............................................. 14
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters.......... 15
Item 6. Selected Financial Data....................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 17
Item 8. Financial Statements and Supplementary Data................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................ 24
PART III
Item 10. Directors and Executive Officers of the Registrant............................ 24
Item 11. Executive Compensation........................................................ 24
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 24
Item 13. Certain Relationships and Related Transactions................................ 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 25
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PART I
ITEM 1. BUSINESS
GENERAL
Westinghouse Air Brake Company ("WABCO" or the "Company") is North
America's largest manufacturer of value-added equipment for locomotives, railway
freight cars and passenger transit vehicles. The Company's products, which are
sold to both the original equipment market and the aftermarket, are intended to
enhance safety, improve productivity and reduce maintenance costs for its
customers. The Company believes it maintains a market share for its primary
braking related equipment in excess of 50% for North America and a significant
market share for its other principal products. Because of its large market
share, breadth of product lines and 129-year history in the industry, the
Company believes its products are widely installed in locomotives, freight cars
and passenger transit vehicles throughout North America. In addition to its
product offerings, the Company believes it has a significant presence in
providing outsourced value-added services to the railroad and passenger transit
aftermarkets, operating ten repair and upgrade sites in the United States and
Canada. WABCO aggressively pursues technological advances in product
development. Demand for the Company's products and services is largely driven by
use of railroads as a mode of shipment as well as government spending and
investment in infrastructure for the passenger transit market.
Certain statements in this annual report on Form 10-K are forward-looking
statements concerning the future operations of the Company. Such statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, and there are many important factors that could cause actual
results to differ materially from those in the forward-looking statements.
INDUSTRY OVERVIEW
A key factor underlying the demand for the Company's products is rail
traffic. Overall, rail traffic is affected by growth in total intercity freight
and passenger traffic and by rail's share of that traffic. Intercity freight
traffic is a function of gross national product. Following World War II, rail's
share of intercity freight traffic began to fall. This decline accelerated with
the completion of the Interstate Highway System in the 1960s which (together
with increases in permitted truck weights and sizes which followed) allowed
interstate truckers to compete much more effectively for manufactured goods and
merchandise traffic. As a result, railroads experienced major diversion losses
to trucks in most of their non-bulk segments. Increased demand for coal and
export grain, two areas with limited truck competition, partially offset these
losses in the 1970s. Reflecting the industry's efforts to stem these losses,
merger activity in the 1980s generally involved railroads with parallel systems,
with the intent of achieving immediate cost reductions for the merged railroads
by eliminating overlapping capacity through the closing of branch lines and the
reduction of rolling stock.
The Staggers Rail Act and the National Transportation Act of 1987
deregulated freight rates and services in the United States and Canada in 1980
and 1987, respectively, resulting in steadily decreasing rail rates. This
decrease in rates caused rail traffic to grow significantly and spurred
railroads to pursue more aggressively programs to improve operating efficiency.
Both of these trends positively affected demand for the Company's products.
Throughout the 1980s and into the 1990s, many railroads pursued multi-year
programs to consolidate, streamline and strengthen their operations by improving
operating efficiencies through equipment modernization, higher asset
utilization, reducing surplus employees, implementing state-of-the-art
technologies and systems and other improvements. The drive for efficiency has
prompted railroads to make substantial capital outlays for new and upgraded
equipment that can improve train performance and reduce labor costs. Automation
has become an integral part of railroads' cost reduction programs, as evidenced
by the use of end-of-train monitors, such as those produced by the Company's
electronic group, which have permitted railroads to run trains without manned
cabooses. Railroads, through the use of newer products and technology, have the
flexibility to run more or longer trains, thereby achieving lower labor costs
and higher worker productivity. Railroads' desire to achieve efficiency has thus
created a demand for more efficient and faster braking equipment as well as for
other products that can improve the reliability and performance of locomotives
and freight cars. Management believes the Company is well positioned to provide
a significant role in this trend.
More recently, rail traffic has increased due to the growth in intermodal
traffic and strong demand for low sulfur coal from the western United States
prompted by the Clean Air Act Amendments of 1990. In addition,
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labor agreements and increased efficiencies have created a more competitive cost
structure, enabling the railroad industry to increase utilization of freight
cars and locomotives and to achieve market share gains in intercity freight
shipments. Revenue Ton-miles have increased from approximately 919 billion in
1980 to over 1.3 trillion in 1996. Revenue Ton-miles have risen at an average
annual compound growth rate of 3.7% since 1986, outpacing the 2.7% growth rate
for industrial production for the same period. During recent years, railroad
traffic in the United States has increased significantly, particularly
intermodal freight traffic, which has been growing at the rate of 8% to 14% per
year through 1994. Intermodal traffic declined 1.4% in 1995 from 1994 levels,
but increased by 2.3% in 1996.
Management believes that the railroads' share of intercity freight traffic
will continue to grow due to the factors discussed above as well as lower
freight rates following the industry deregulation, streamlined services, and a
shift in railroads' focus to capitalize on their economies of scale in the
handling of bulk commodities such as coal, grain, ores, lumber and chemicals. In
addition, in recent years, a nationwide shortage of truck drivers has caused
trucking companies to increase their use of railway intermodal services in order
to meet their shipping commitments. In contrast to the railroads' 1980s merger
activity, the goal of which was to effect cost reductions, railroad merger
activity in the 1990s has been characterized by a focus on geographic expansion
and growth. To build and improve traffic, the industry has recently experienced
a series of mergers, restructurings and divestitures whereby the major Class I
Railroads (the 12 United States railroads with 1993 annual revenues exceeding
$253.7 million) have concentrated on their core long-haul routes while divesting
their low-density branch lines to smaller and more cost-efficient regional
freight operators. The resulting effect for both the long-haul carriers and the
regional operators has been higher traffic density, permitting greater asset
utilization, efficiency improvements through investment in new and upgraded
equipment, and more extensive use of intermodal shipping to provide customers
with a "seamless delivery" system combining both rail and truck transport--all
of which have a secondary effect of ultimately reducing operating costs for the
railroads.
The Company believes that increased demand for its products will also
result from expanding international sales. Prior to January 1995, the Company's
sales were largely restricted to the North America market under a pre-existing
agreement. The Company is now placing an increased emphasis on the international
opportunities and is selling its products directly or through licensees or
agents outside North America, including in Japan, South America, Europe, South
Africa, Korea, Taiwan, Thailand, Malaysia, India, Pakistan, Australia and The
People's Republic of China. China in particular is viewed by management as a
potential growth market for the Company because of its rapidly expanding
economy, the attractiveness of railway as a primary transportation mode for
China's goods and people and the compatibility of China's railroads with North
American-type technology.
PRODUCTS AND MARKETS
The Company operates principally in three segments of the railway
industry--locomotive, freight car and passenger transit. Within each segment,
the Company's operating units consist of small strategic business units which
are designed to achieve maximum operating efficiency, flexibility and customer
responsiveness. These units generally have fewer than 400 employees and are
responsible for their own engineering, manufacturing and customer relationships.
Marketing, sales and certain administrative responsibilities are based at the
Company's headquarters in Wilmerding, Pennsylvania. The Company believes that
this decentralized operating structure enables it to provide timely,
individualized service to the three distinct segments of the railway market
serviced by the Company.
LOCOMOTIVE
The Company's locomotive operations are based in Wilmerding, Pennsylvania
and Rockville, Maryland. Total locomotive product line sales in 1996 were
approximately $118 million or 21% higher than 1995 sales of approximately $98
million. The net sales in the locomotive product line increased as a result of
the recently introduced electro-pneumatic braking equipment and safety related
sales of end of train monitoring equipment as well as the Company's overall
expansion of its electronic based locomotive product line through the 1995
acquisition of Pulse.
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Through acquisitions (most notably Pulse Electronics) and internal product
development, the Company has endeavored to reduce the adverse effect of a
possible downturn in new locomotive build orders and has taken advantage of the
trend of increasing the electronic content in each locomotive. The Company's
dollar content per locomotive has nearly doubled since 1990, and management
believes that the Company has taken the lead in the introduction of high
performance electronic products. The Company's position as a market leader for
traditional pneumatic braking equipment for new locomotives over the past 5 to
10 years has also provided it with a large installed base for spare parts,
retrofit and upgrade sales.
The Company's locomotive operations manufacture air brake equipment,
compressors (which are located on the locomotive and supply the air needed to
run the braking system throughout an entire train), air dryers, slack adjusters,
brake cylinders, and monitoring and control equipment used to control the brakes
and related equipment on each of the freight cars being pulled. Historically,
the Company's most significant locomotive products have been the 26-C and 30-A
pneumatic control equipment and compressors. These braking components are used
in virtually the entire installed base of North American locomotives, and the
Company currently is the primary supplier of these components.
The Company's new product development effort has focused on electronic
technology for brakes and controls, and it has recently introduced a number of
significant new products including the EPIC(R) Electronic Brake, PowerLink,
Compressor Aftercoolers, Train Trax(TM), Trainlink(TM), Train Sentry(R),
Fuellink(TM) and Armadillo(TM).
As railroads replace older locomotives and continue to look for ways to be
more competitive with trucking in the freight hauling market, through new or
upgraded technologically advanced equipment, they have placed an increased
emphasis on productivity and efficiency. This emphasis has manifested itself in
two significant trends: (1) alternating current ("AC") locomotives, which are
more powerful than their direct current ("DC") predecessors, are rapidly gaining
industry acceptance, and (2) the electronic content per locomotive, including
electronic brakes, monitoring devices and diagnostics, is increasing. Two AC
locomotives are powerful enough to do the work of three DC locomotives, thus
implying a declining order rate for replacements; electronic devices improve
reliability, safety and productivity by performing work that would have
otherwise been done more slowly and at a greater cost by manual labor. The
Company believes that with its combined pneumatic and expanding electronic
technology capabilities, it is uniquely positioned for leadership in the next
generation of electronic-pneumatic technology in the locomotive market.
According to industry estimates, the outlook for the number of locomotive
builds over the next few years is expected to decline from cyclical peaks of
1,200 in 1995 and 925 in 1996 to approximately 750 per year. The average age of
the locomotive fleet has increased dramatically since 1980, and approximately
36% of the 19,000 locomotives in service are at least 20 years old. Industry
analysts estimate that an average locomotive has a life span of 20 to 30 years.
The Company has recently expanded its locomotive repair services in
response to railroad restructuring and gradual elimination of in-house repair
services. The Company operates locomotive repair centers in Wilmerding,
Pennsylvania; Rockville, Maryland; Kansas City, Kansas;, Vacaville, California;
and Columbia, South Carolina. Although demand for outsourced locomotive repair
services is not as large as for freight car repair services, the Company
believes demand for locomotive repair services will continue to grow as more
railroads choose to eliminate their own shops in favor of services and
proprietary product upgrades offered by the Company. In addition, as new
diagnostics, future enhancements and technological upgrades become available for
the control computers of the EPIC(R) 3102 Electronic Brakes or the Pulse
Armadillo(TM), the Company believes many of its customers will opt to upgrade or
add to their existing system.
The customers for the Company's locomotive OEM products are large North
American locomotive manufacturers, including General Electric Company ("GE") and
General Motors Corporation ("GM"), as well as all major class 1 railroads. The
Company's brake systems are currently installed on new locomotives manufactured
by both GE and GM. The Company's compressors are currently installed on
virtually all new GE locomotives. The Company's aftermarket replacement parts
are sold primarily to the railroads.
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FREIGHT CAR
The Company's freight car related production operations are located in
Stoney Creek, Ontario, and Chicago, Illinois. Net sales for typical freight cars
can vary considerably based upon the type and purpose of the freight platform
with articulated or intermodal cars generally having the highest WABCO content.
Total freight car product line sales in 1996 were approximately $211 million.
The Company's freight car operations manufacture the following freight car
products: brake control valves and related components, truck mounted brakes,
empty load sensing equipment, draft gears, hand brakes, slack adjusters and
articulated car connectors. Approximately 60% of the OEM sales of freight car
products are air brake equipment, with draft gears accounting for 17%, and hand
brakes and slack adjusters accounting for 10%. Production of approximately 60%
of the Company's freight products takes place at the Stoney Creek facilities,
with the remainder produced primarily in Chicago. Rubber products and brake
shoes used in North American freight operations are manufactured in Greensburg,
Pennsylvania and Laurinburg, North Carolina, respectively.
The Company's traditional freight products include the ABDX(TM) Freight
Brake Valve, the Mark Series draft gears and hand brakes and slack adjusters.
The Company actively pursues the development of new freight products and during
the past several years has introduced ELX(TM) Empty Load Equipment, TMX(TM)
Truck Mounted Brake Assembly, SAC-1(TM) Articulated Coupler, slackless drawbar,
AP Cobra(R) Brake Shoe and the new automated brake tester plates.
The Company's new products development program provides it with a platform
of product upgrades which allows it to further increase its aftermarket
presence. Major upgrade product offerings for freight cars include ABDX(TM)
Remanufactured Control Valves and stabilization and vibration protection
upgrades.
Based upon industry estimates, the outlook for new freight car deliveries
is expected to decline from an average of 56,000 platforms in the peak demand
experienced in 1994-1996 to an average level of about 45,000 in 1997. Industry
experts believe that car builds should remain at this level for at least three
to four years and will then continue to grow due to replacement of cars
delivered during the high build years of 1979-1981. The average age of the
existing fleet, at approximately 18 years, is at an all time high.
The Company operates five freight repair centers located near major
railroad customers: Chicago, Illinois; Columbia, South Carolina; Kansas City,
Kansas; Vacaville, California; and Stoney Creek, Ontario. The railroads first
began significantly outsourcing repairs in 1985, and the Company has begun
aggressively pursuing repair business from railroad customers. This effort has
been particularly successful in the Company's freight car related business. The
Company expects that the potential for growth of this business is substantial as
railroads seek to outsource increasing amounts of their repair work. Outsourcing
provides a less expensive, more responsive alternative to railroads' traditional
in-house repair work. The Company's repair facilities have been established with
a minimum of fixed overhead costs in order that they can be easily moved and/or
expanded as necessary to match the new demands from the railroads. Management
believes that the current repair center network has substantial room for
additional growth without significant capital costs.
The Company provides replacement parts for all of its products and
equipment and believes end-users should replace broken or worn parts with parts
from the original equipment manufacturer due to the high potential liability
risks related to the critical nature of these products. The Company's rubber
components are widely used as replacement parts for brake valve repair in the
railroad industry. The Company's rubber diaphragms and gaskets are made from
unique rubber components providing superior durability and performance.
Replacement parts and upgrades typically account for more than 40% of the
Company's freight sales.
In the OEM market, the Company's freight products are sold to all major
North American freight car builders. Principal customers include Trinity
Industries, Inc., Union Tank Company, Johnstown America Corp., The Greenbrier
Companies, ACF Industries, Inc., Thrall Car Manufacturing Co. and National Steel
Car, Ltd. Replacement parts are sold primarily to railroads and other car owners
for their in-house maintenance programs. These customers include all major
railroads in North America and a number of private fleet owners including TTX
Company and GE. Virtually all fleet owners and OEM customers rely on the Company
for supply of products.
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PASSENGER TRANSIT
The Company's passenger transit operations produce various products for
passenger transit applications at its dedicated facilities in Spartanburg, South
Carolina, Niles, Illinois and Montreal, Quebec, Canada. Total passenger transit
product line sales in 1996 were approximately $107 million compared to $72
million in 1995.
The net sales in the passenger transit business increased primarily as a
result of the acquisition of Vapor Corporation (f/k/a Mark IV Transportation
Products Corp.) ("Vapor"), Vapor U.K., Vapor Canada, Inc. and Vapor Netherlands,
B.V. in September 1996 (the "Vapor Acquisition"). The Company significantly
enhanced its position in the passenger transit market with the Vapor
Acquisition. Vapor is the leading North American supplier of passenger transit
door components for both rail and rubber tire transit vehicles and has
significantly increased the Company's dollar content per car. Additionally, the
Company believes that it will be able to increase significantly Vapor's
aftermarket sales, currently 20%, to a level more like its own of 50%. Also, as
the Company participates in the cyclical upswing in the passenger transit market
over the next 5 to 10 years, it will continue to benefit from its increasing
installed base which will provide a solid foundation for future replacement
parts and upgrades.
Substantially all of the Company's principal passenger transit products are
engineered to customer specifications. Consequently, there is less
standardization among the Company's transit products than there is with its
freight and locomotive products. The Company views its transit business as being
comprised of three distinct segments: aftermarket sales of replacement parts,
new products (upgrades) for existing vehicles and OEM sales. The first two
segments constituted more than 50% of the Company's traditional transit sales in
1996, with the remainder consisting of OEM sales. Because the market for OEM
sales has been at a cyclical low during the past several years, the Company
expects that the OEM sales market presents an opportunity for improved growth
during the next several years. The overall market for replacement parts and
upgrades is relatively stable because the installed passenger transit vehicle
base in the United States and Canada has remained constant at approximately
20,000 vehicles (based on the Company's estimates). Currently, nearly 80% of the
Company's passenger transit division's total sales are in the brake controls,
couplers and door product lines.
The Company's principal transit products include electronic brake
equipment, pneumatic control equipment, air compressors, tread brakes and disc
brakes, couplers, collection equipment, overhead electrification, monitoring
systems, wheels, climate control and door equipment and components.
Replacement parts constitute the largest requirement to maintain a transit
fleet. The Company administers its replacement parts business from its
facilities in Spartanburg, South Carolina, Stoney Creek, Ontario, Niles,
Illinois and Montreal, Quebec. The replacement parts organization offers
advanced concepts in services, including the packaging of all parts needed to
perform an overhaul or "kitting". The Company's replacement parts are sold
primarily to in-house repair shops and transit authorities.
The Company's repair and service centers are located near major
transportation centers, including Chicago, Illinois, Atlanta, Georgia, Sun
Valley, California, Yonkers, New York, Stoney Creek, Ontario and Montreal,
Quebec. Repair cycles for passenger transit vehicles vary by transit authority.
Most authorities, however, have instituted preventative maintenance programs so
that at fixed periods within the life cycle of the equipment they perform major
overhauls and renewal of the equipment. As in the locomotive and freight
markets, the Company is endeavoring to increase its business in the passenger
transit repair market. The Company believes that it has substantial
opportunities to increase this business as a result of increased maintenance
programs and more extensive outsourcing of repair work.
The Company's products are installed in virtually every major transit
system in North America (including AMTRAK, Canada's Via Rail, the New York
Metropolitan Transit Authority and the transit systems serving Chicago,
Philadelphia, Atlanta, Toronto, Boston, Los Angeles, San Francisco and
Washington, D.C.). The Company's OEM products are sold to the major worldwide
passenger transit manufacturers, including Bombardier, Inc., Kawasaki Rail Car
Inc., Hitachi Limited, Siemens AG and GEC Alsthom.
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FRICTION AND OTHER
The Company's friction products operations are in Laurinburg, North
Carolina, Southeastern Australia and Eastern France. Friction products are sold
as original equipment and as aftermarket brake shoe replacements primarily to
the Company's freight, transit and locomotive markets. Total sales of friction
products increased 35% over 1995 sales primarily as a result of the 1996
acquisition of Futuris Industrial Products Pty of Australia ("Futuris"). The
Company's other operations consist primarily of the manufacture and sale of
industrial rubber products and iron foundry products and metal finishing. The
Company's rubber products are particularly well suited to industrial
applications requiring unique compounds which perform well under harsh
conditions. The rubber products industry is fragmented, with numerous small to
medium-sized participants. Demand for industrial rubber products by third
parties amounted to one-third of output and has been increasing. In response,
the division opened a new plant in 1994 in Ball Ground, Georgia to supply the
increasing demand and expanded the plant's capacity in 1995. The Company's Benn
Iron foundry manufactures complex ductile and grey iron castings requiring
numerous cores and precise alloy composition requirements. Benn Iron also
produces complex castings for non-railway applications, including components for
manufacturers such as Caterpillar, Inc. and Detroit Diesel Corporation. The
Company's Thermo Sealed division provides metal finishing and processing
services, principally to the automotive industry. Thermo Sealed has perfected a
thermal deburring technique for cleaning metal parts.
INTERNATIONAL
The Company's products are sold through licensees and agents in Japan,
South America, Europe, South Africa, Korea, Taiwan, Thailand, Malaysia, India,
Pakistan and The Peoples' Republic of China. Other than Canada, the Company's
international sales currently comprise approximately 9% of its total net sales.
In Japan, the Company has long-standing license relationships with NABCO
(formerly Nippon Air Brake Company) and Mitsubishi Electric Company and in
Australia with Westinghouse Brake Australia Limited. In Europe, the Company's
products are sold to a limited extent through SAB WABCO Holdings B.V. ("SAB
WABCO"), while friction products are sold directly through a subsidiary of the
Company. The Company believes that international sales represent a significant
opportunity for further growth.
The Company is seeking to expand its international sales in each of its
principal product lines through joint ventures with railway suppliers having a
strong presence in local markets and through selected acquisitions. Due to
differences in rail equipment requirements and other factors, the Company
believes that its best opportunities for increased international sales currently
are in areas of the world outside Europe and Japan. For passenger transit
products the Company has been working with SAB WABCO for the establishment of a
joint venture to market products outside of North America and Europe. The
Company believes that such a joint venture would have a competitive advantage in
terms of the products it can offer and the number of components it can provide
for a given project.
SAB WABCO has granted the Company a license to manufacture and sell certain
brake products in the United States, Canada and Mexico. The term of the license
extends to 2003. A component of the Company's long-term international strategy
is its right of first refusal, subject to certain exceptions, to purchase SAB
WABCO if prior to December 31, 1999 the current owner of SAB WABCO decides to
sell more than 50% of its interest in SAB WABCO to a third party. There can be
no assurance, however, that the Company will be able to acquire SAB WABCO.
Management believes that The People's Republic of China represents an
especially attractive market opportunity for the Company, in part because it
utilizes North American/AAR-type railroad technology. The Company's products are
installed on approximately 425 locomotives currently in use in China, giving it
a base from which to expand future sales. The Company believes that it will be
able to sell specific high technology braking products not available from
Chinese manufacturers, such as ELX(TM) Empty Load Equipment and DECELOSTAT(R)
microprocessor based slip-slide equipment. The Company also has sold
approximately 3,000 Mark Series draft gears into the Chinese market.
The Company believes that friction products represent an immediate
opportunity for substantial increased international sales. WABCO has developed
composition materials suitable for use on most rail systems worldwide. WABCO
believes that its technological advantage and overall cost competitiveness in
this
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product line should enable it to penetrate international markets. The Company
intends to expand its direct European sales of friction products through its
subsidiary, Cobra Europe, S.A., and to seek other outlets and distributors.
Through the acquisition of Futuris, the Company significantly expanded its sales
to Pacific rim countries. The Company, through Futuris, established a
manufacturing and distribution joint venture, Pioneer Friction Products, for
brake shoes for the Indian market in October 1996.
MANUFACTURING
The Company believes strongly in its proven Kaizen (continuous improvement)
technique which has been a major force in improving manufacturing processes
throughout the Company. Kaizens involve large-scale collaborative sessions of
shop floor employees, management, and, frequently, customers. Kaizens provide a
means for the Company, despite its decentralization and lean management
structure, to identify and implement the best manufacturing practices utilizing
demand-flow cell methodology and to promote a common corporate culture. Since
initiating the Kaizen approach in 1991, the Company has conducted over 50 formal
Kaizens and over 375 projects resulting in manufacturing and other functional
improvements. The Company is continuing the Kaizen process on a monthly basis,
rotating through each of its plants. From 1990 to 1996, inventory turnover
improved from 3.0x to 4.3x and sales per employee increased from $94,000 to
$170,000.
On a more regular basis than the Kaizens, the Company's Total Quality
Improvement Program ("TQIP") involves employees at all levels of the Company to
address quality problems as they arise and resolve them quickly. Management
believes that both the Kaizens and TQIP have and will continue to have a
significant positive impact on the quality of the Company's products, as well as
productivity and responsiveness to customer needs.
Most of the Company's manufacturing facilities are ISO 9001 certified
facilities. The ISO rating is an international standard developed to ensure that
engineering and manufacturing processes are at a very high level of competency.
ISO 9001 is a very stringent standard.
The Company has received numerous quality awards and certifications from
its customers, including the Union Pacific Total Supplier Quality Award, General
Motors Mark of Excellence, CSX Quality Management System Award, Conrail
Certified Quality Supplier Award, National Association of Purchasing Managers
Quality Assurance Program Award and annual TTX excellent supplier awards.
The Company will continue its efforts to maintain its position as a low
cost producer through the increased utilization of demand-flow cells and
continued focus on increased productivity. Demand-flow cells, consisting of one
or more employees, operate in conjunction with other cells to manufacture
products as and when required by the customer. The production process is
streamlined, inventory on hand is minimized, work force availability is
maximized, and quality control is integrated into each major manufacturing step
instead of limited to one final inspection of the finished product. The
Company's use of demand-flow cells has led to improved customer service,
increased inventory turnover rates, quickened response to changing market needs,
improved quality control, higher productivity and reduced requirements for
working capital and manufacturing and warehouse space.
The Company's manufacturing processes also benefit from the internal
production of some of the key components required for its products. The Company
produces substantially all of its requirements for rubber products and iron
foundry products and also utilizes Thermo Sealed for certain metal finishing
work. This vertical integration contributes to overall costs control, quality
maintenance and improvement and customer responsiveness. The Company believes
that this vertical integration also enables the Company to adjust capacity to
correspond to product development cycles more quickly and shortens new product
cycle time.
ENGINEERING AND DEVELOPMENT
In furtherance of its strategy of using technology to develop new products,
the Company is actively engaged in a variety of engineering and development
activities. The Company employs 342 engineering and development personnel
(including product enhancement and support), 208 of whom have engineering
degrees. These persons have generated an average of 45 new patents per year over
the past three years. For the
7
<PAGE> 10
fiscal years ended December 31, 1994, 1995 and 1996, the Company incurred costs
of approximately $10.8 million, $14.6 million and $18.2 million on product
development and improvement activities (exclusive of manufacturing support),
which expenditures represented 3.1%, 3.4% and 4.0% of net sales for the same
periods, respectively. From time to time, the Company conducts specific research
projects in conjunction with universities, customers and other railroad product
suppliers.
The Company's engineering and development program is largely focused upon
new braking technologies, with an emphasis on the application of electronics to
traditional pneumatic systems. Electronic actuation of braking has long been a
part of the Company's transit product line but interchangeability, connectivity
and durability have presented problems to establishing electronics in railway
applications. Efforts are under way to develop both hard-wired and
radio-activated braking systems. The Company is currently developing electro-
pneumatic braking equipment for freight cars that include on-board electronics
to monitor braking performance and communicate data to the locomotive.
SALES AND MARKETING
In North America, the Company uses its sales force to market its products
and services directly to end-users (railroads, transit authorities, utilities
and leasing companies) and OEM locomotive and freight car builders. Although the
Company's marketing personnel are based primarily in Wilmerding, the Company
maintains regional sales offices throughout the United States. The use of
regional sales offices permits the Company's field sales force to maintain close
and frequent contact with customers. The Company supplements its sales efforts
with the technical support of its engineering staff with respect to specific
products, which advises on product design, cost estimation and bid preparation.
The sales force can also request the assistance and involvement of the product
managers for each major product line who can work directly with a customer to
address specific customers' needs. Certain members of senior management also
actively participate in marketing efforts which the Company believes has
resulted in the development of close relationships with the purchasing managers,
end-users of the products and senior management of many of the Company's
principal customers. Marketing efforts consist of ongoing personal visits to
customers' facilities, participation in industry and customer-sponsored seminars
and trade conventions, and traditional advertising and public relations
activities.
CUSTOMERS
In 1996, approximately 53% of the Company's net sales were generated from
the "aftermarket" sale of replacement parts, repair services and upgrade work
purchased by end-users of rail vehicles such as railroads, transit authorities,
utilities and leasing companies. The remaining 47% of the Company's net sales
are derived from sales made directly to OEM manufacturers of locomotives,
freight cars and passenger transit vehicles.
The Company has developed and fostered long-term relationships with major
purchasers of air brakes and related products, particularly manufacturers of
locomotives, freight cars and passenger transit vehicles. The Company has also
fostered relationships with the end-users of its products, principally owners
and operators of locomotives, freight cars and passenger transit vehicles.
Long-term customers are particularly important, given the limited number of
buyers and purveyors of air brakes. Freight car end-users include railroads,
utilities, leasing companies and major industrial companies. Although the
Company services directly nearly 800 active customers, a small number of
customers often represents a significant portion of the Company's net sales.
In 1996, no one customer represented more than 10% of the Company's sales.
A significant portion of the Company's OEM locomotive and freight car sales is
the result of specifications by end-users. In the passenger transit market,
almost all OEM sales are the result of specifications established by individual
transit authorities and passenger railroads. In all product lines, the Company
vigorously endeavors to have end-users adopt specifications which are compatible
with the Company's products.
INTELLECTUAL PROPERTY
The Company applies for patent and trademark protection where it believes
the expense of doing so is justified. The Company currently has 474 United
States patents (with 194 issued since 1990), with 58 applications pending, 42
United States trademarks and numerous foreign patents and trademarks throughout
8
<PAGE> 11
the world. The Company attempts to protect its intellectual property by legal
action in situations where it feels such action is warranted. The Company also
relies on a combination of trade secrets and other intellectual property laws,
nondisclosure agreements and other protective measures to establish and protect
its proprietary rights in its intellectual property.
Certain trademarks, among them the name WABCO(R), were acquired or licensed
by the Company from American Standard Inc. in 1990 pursuant to its acquisition
of the North American operations of the Railway Products Group of American
Standard (the "1990 Acquisition"). The Company owns or has the right to use all
intellectual property rights in these trademarks to the extent such trademarks
are used in connection with products and fields of use (businesses) acquired in
the 1990 Acquisition. The intellectual property rights in such trademarks for
use not in connection with the railway fields of use for WABCO were retained by
American Standard.
The Company is a party, as licensor and licensee, to a variety of license
agreements. Although these license agreements collectively are valuable, and the
Company is very proud of having had licensing arrangements with Japanese
companies for 73 years, the Company does not believe that any single agreement,
other than the SAB WABCO agreement discussed in the following paragraph, is of
material importance to its business as a whole.
The Company and SAB WABCO entered into a license agreement (the "SAB
License") in December 1993, pursuant to which SAB WABCO granted the Company a
license to the intellectual property and know-how related to the manufacturing
and marketing of certain disc brakes, tread brakes and low noise and resilient
wheel products. The Company is authorized to manufacture and sell the licensed
products in North America (including to OEM manufacturers located outside North
America if such licensed products are incorporated into a final product to be
sold in North America). SAB WABCO has a right of first refusal to supply the
Company with bought-in components of the licensed products on commercially
competitive terms. To the extent SAB WABCO files additional patent or trademark
applications, or develops additional know-how in connection with the licensed
products, such additional intellectual property and know-how are also subject to
the SAB License. The Company may, at its expense, request the service of SAB
WABCO in manufacturing, installing, testing and maintaining the licensed
products and providing customer support. SAB WABCO is entitled to a free,
nonexclusive license of the use of any improvements to the licensed products
developed by the Company. If any such improvements are patented by the Company,
SAB WABCO has the right to request the transfer of such patents upon payment of
reasonable compensation therefor; in such cases, the Company is entitled to a
free, nonexclusive license to use the patented product. The Company is required
to pay a lump sum fee for certain licensed products as well as royalties based
on specified percentages of sale. The license expires December 31, 2003, but may
be renewed for additional one-year terms.
In connection with the Company's recapitalization in January, 1995, the
Company and SAB WABCO agreed (i) to use their best efforts to negotiate an
agreement to distribute each other's products, (ii) to explore the feasibility
of a joint venture to expand into regions where neither is currently
represented, (iii) that the SAB License will be amended to include additional
disc brake and tread brake technology, (iv) that SAB WABCO will in the future
grant to the Company a license for the manufacture and sale of electronic brake
equipment that it designs, (v) that SAB WABCO will grant to the Company the
right to purchase SAB WABCO's option on 40% of the shares in SAB WABCO de
Brasil, and (vi) that the Company will have a right of first refusal to purchase
SAB WABCO if prior to December 31, 1999 the current owner decides to sell more
than 50% of its interest in SAB WABCO to a third party, subject to certain
exceptions. There is no assurance that the Company and SAB WABCO will reach
agreement on issues relating to future cooperation or that the Company will be
able to acquire SAB WABCO. Accordingly, the Company and SAB WABCO could be
competitors in international markets.
COMPETITION
The Company operates in a competitive marketplace. Price competition is
strong and the existence of cost conscious purchasers of a limited number has
historically limited WABCO's ability to increase prices. In addition to price,
competition is based on product performance and technological leadership,
quality, reliability of delivery and customer service and support. The Company
believes that it is well positioned to succeed in its
9
<PAGE> 12
markets. The Company also believes that many of its products provide customers
with opportunities to reduce existing maintenance costs and improve efficiency.
The Company's principal competitors vary to some extent across its principal
product lines. However, New York Air Brake Company, a subsidiary of the German
air brake producer Knorr-Bremse AG (collectively, "NYAB/Knorr"), is the
Company's principal overall OEM competitor. The Company's competition for
locomotive, freight and passenger transit repair business is primarily from the
railroads' and passenger transit authorities' in-house operations, as well as
from Comet Industries and NYAB/Knorr.
LOCOMOTIVE
The Company's principal competitor in OEM locomotive braking equipment is
NYAB/Knorr. In OEM compressor sales, the Company's principal competitor is
Gardner-Denver. Traditionally, the Company has been the primary supplier of air
cooled compressors to GE and Gardner-Denver has been the primary supplier of
water cooled compressors to GM. Pulse's primary competitors are Q-Tron,
GE-Harris, Quantum Engineering, Rockwell International (through its recent
acquisition of TSM) and Union Switch & Signal Inc.
In sales of rubber replacement parts, the Company's competition includes
Longwood Elastomers Inc. and other smaller firms. In compressor replacement
parts, Gardner-Denver and Triangle Engineering Corp. are the major competitors.
Management believes that the Company has established itself over the years as
one of the most important North American locomotive parts suppliers.
FREIGHT CAR
The Company's principal competitor in freight car braking equipment is
NYAB/Knorr. In the draft gear product line, the Company's principal competitor
is Miner Enterprises Inc. In the hand brake and slack adjuster product line, the
Company's principal competitor is Ellcon National.
PASSENGER TRANSIT
The Passenger Transit division's major competitor in the brake and
compressor business is NYAB/ Knorr. In the bus door equipment business the major
competitor is Gebr. Bode & Company of Germany, and in the rail door equipment
business competitors include SMC Pneumatics (UK) Ltd. and IFE AG of Austria.
Other competitors are Stone-Safety Corp. and Thermo King Corp. (a subsidiary of
Westinghouse Electric Corp.) in the climate control market, Westcode (a former
50% owned subsidiary of the Company) in the door control market and both Dellner
and Scharfenburg in the coupler business. In the replacement parts business
segment, the Company competes with a number of independent machine shops which
reproduce the Company's product designs and sell directly to various transit
systems.
SUPPLIERS
The Company actively purchases from over 400 suppliers. The Company has
maintained an excellent relationship with its suppliers. In 1996, no single
supplier accounted for more than 10% of total purchases made by the Company.
Approximately 90% of the Company's iron casting needs are provided by its
subsidiary, Benn Iron, with the remainder provided by two other suppliers. Most
of the rubber products and all of the friction products required by the Company
are provided in-house by subsidiaries. The Company believes that its integrated
manufacturing facilities provide it with strategic and competitive advantages.
BACKLOG
As of February 28, 1997, the Company had a total backlog of firm orders
with an aggregate sales price of approximately $214 million, as compared to a
total backlog of firm orders with an aggregate sales price of approximately $214
million as of December 31, 1996. Of the year-end 1996 amount, $152 million was
attributable to passenger transit products and $62 million was attributable to
railway and other products. Other than the transit market, backlog is not a
significant component of the Company's business, and management believes it is
not an important indicator of future business performance. Because of the
Company's quick
10
<PAGE> 13
turnaround time, the Company's locomotive and freight customers tend to order
products from the Company on an as-needed basis. Based upon industry data
concerning freight and locomotive OEM backlog, the Company believes that demand
for its products will remain reasonably strong. With respect to OEM passenger
transit products, there is a longer lead time for car deliveries and,
accordingly, the Company carries a larger backlog of orders.
REGULATION
The Federal Railroad Administration ("FRA") administers and enforces
federal laws and regulations relating to railroad safety. These regulations
govern equipment and safety appliance standards for freight cars and other rail
equipment used in interstate commerce. The Association of American Railroads
("AAR") also promulgates a wide variety of rules and regulations governing
safety and design of equipment, relationships among railroads with respect to
railcars in interchange and other matters. The AAR also certifies railcar
builders and component manufacturers that provide equipment for use on railroads
in the United States. New products generally must undergo AAR testing and
approval processes. As a result of these regulations, the Company must maintain
certain certifications with the AAR as a component manufacturer, and products
sold by the Company must meet AAR and FRA standards.
EMPLOYEES
As of December 31, 1996, the Company had 3,181 employees, approximately
1,020 of whom were unionized. Approximately 315 employees at the Freight Car
facility in Ontario, Canada are represented by the National Automotive,
Aerospace, Transportation, and General Workers Union. The current three-year
union contract covering this facility expires in April 1998. Approximately 283
employees at the Locomotive and Rubber Products division facilities in
Wilmerding and Greensburg, Pennsylvania are represented by the United
Electrical, Radio and Machine Workers of America. The union contract for these
facilities extends through May, 2001. Approximately 320 employees at the Benn
Iron foundry in Ontario, Canada are represented by the International Union,
United Automobile, Aerospace and Agricultural Implement Workers of America
(U.A.W.). The three-year union contract for this facility expires in September
1997. Approximately 30 employees at the Futuris Industrial Products facilities
in Australia are represented by Metal Trades Industry Association of Australia.
One of the contracts is currently being negotiated, and the other contract
expires in November 1997. Approximately 72 employees at the Vapor facility in
Montreal, Quebec, Canada are represented by a local association. A five year
contract for this facility has recently been reached. No significant work
stoppages or significant labor problems have occurred since 1982. The Company
considers its relationship with its employees to be good. The majority of
non-union employees in the United States (approximately 1,200 employees)
participate in the Company's Employee Stock Ownership Plan ("ESOP").
ENVIRONMENTAL MATTERS
The Company is subject to a variety of environmental laws and regulations
governing discharges to air and water, the handling, storage and disposal of
hazardous or solid waste materials and the remediation of contamination
associated with releases of hazardous substances. The Company believes that its
operations currently comply in all material respects with all of the various
environmental laws and regulations applicable to its business; however, there
can be no assurance that environmental requirements will not change in the
future or that the Company will not incur significant costs to comply with such
requirements.
Under the terms of the purchase agreement and related documents for the
1990 Acquisition, American Standard indemnified the Company for certain items
including environmental claims. American Standard has indemnified the Company
for any claims, losses, costs and expenses arising from (i) claims made in
connection with any of the environmental matters disclosed by American Standard
to the Company at the time of the 1990 Acquisition, (ii) any pollution or threat
to human health or the environment related to American Standard's (or any
previous owner's or operator's) ownership or operation of the properties
acquired by the Company in the 1990 Acquisition, which pollution or threat was
caused or arises out of conditions existing prior to the 1990 Acquisition
(limited to environmental laws in effect as of December 31, 1991), and (iii) any
material claim ("Environmental Claim") alleging potential liability for the
release of pollutants or the violation of any federal, state or local laws or
regulations relating to pollution or protection of human
11
<PAGE> 14
health or the environment, for which American Standard has retained liability.
Such indemnity covers investigatory costs only if the investigation is
undertaken pursuant to a larger Environmental Claim and to the extent of
American Standard's pro-rata liability for such larger Environmental Claim.
American Standard has no obligation to indemnify for investigatory costs
incurred by the Company independently or otherwise unrelated to an indemnifiable
event. American Standard's indemnification obligations are limited to aggregate
amounts in excess of $500,000. The Company has exceeded this deductible. In
addition, American Standard's indemnification obligation with respect to
RFPC-related claims only extends to 50% of the amount claimed, up to a maximum
of $14 million (provided liability is asserted directly and solely against
RFPC). The indemnification obligations survive until 1997 with respect to
non-third party claims and until 2000 with respect to third party claims. If
American Standard should be unable to meet its obligations under this indemnity,
the Company will be responsible for such items. In the opinion of management,
American Standard has the present ability to meet its indemnification
obligations.
The Company, through RFPC, has been named, along with other parties, as a
potentially responsible party under the North Carolina Inactive Sites Response
Act because of an alleged release or threat of release of hazardous substances
at the "Old James" landfill site in Laurinburg, North Carolina. Based upon
discussions with a representative of the North Carolina Department of
Environment, Health and Natural Resources, the Company believes that the total
costs for all parties associated with the cleanup activities at this site should
not exceed $1 million. The Company believes that any such cleanup costs for
which it may be held responsible are covered by (i) the American Standard
indemnity discussed above and (ii) an insurance policy for environmental claims
provided by Manville Corporation, the former 50% owner of RFPC, in connection
with WABCO's 1992 acquisition of Manville Corporation's interest in RFPC.
Pursuant to the terms of the purchase agreement for the acquisition of Manville
Corporation's interest in RFPC, Rocky Mountain International Insurance, Ltd., an
affiliate of Manville Corporation, provided an insurance policy to cover any
claims, losses, costs and expenses relating to, among other things,
environmental liabilities arising from conditions existing at RFPC sites prior
to the acquisition (limited to environmental laws in effect as of July 1992).
This insurance policy is the sole remedy for the Company with respect to covered
claims. The insurance policy survives until July 2002. The aggregate limit of
coverage under the insurance policy provided by Manville Corporation is $12.5
million. In addition to the insurance policy provided by Manville Corporation,
American Standard's indemnification obligations described above cover 50% of
RFPC-related claims.
The Company believes that the indemnification agreements and insurance
policy referred to above are adequate to cover any potential liabilities during
their respective terms arising in connection with the above-described
environmental conditions. None of the insurance or indemnification agreements is
currently the subject of any dispute.
In March 1994, WABCO retained an environmental consultant to study the
environmental conditions at the Wilmerding, Pennsylvania property. The purpose
of the investigation was to evaluate whether contaminants were present at the
property. This study was undertaken at the Company's sole initiative. The
consultant identified four primary areas that may require remediation because of
elevated levels of certain volatile organic compounds believed to have
originated before the 1990 Acquisition. The consultant also recommended several
options to address the contamination. Remediation of several areas is currently
being conducted and the Company is evaluating which option will be selected for
the remaining areas. The Company is not required to conduct any remediation at
the property because of a consent decree or government order. The consultant
anticipates that the cost of remediation at the property will range between
$100,000 and $1,000,000, depending upon the final option selected. Costs of
remediating the property are covered by the American Standard indemnity
described above.
ITEM 2. PROPERTIES
The following table provides certain summary information with respect to
the principal facilities owned or leased by Company. The Company believes that
its facilities and equipment are in good condition and that, together with
scheduled capital improvements, they are adequate for its present and
immediately projected needs. However, the Rockville, Maryland facility is
operating at capacity, and a replacement facility is planned for 1998 to allow
for expected growth. The Greensburg, Pennsylvania, Niles, Illinois and Chicago,
Illinois
12
<PAGE> 15
properties are subject to mortgages to secure the Company's indebtedness under
the Credit Agreement. The Company's corporate headquarters are located in the
Wilmerding, Pennsylvania site.
<TABLE>
<CAPTION>
OWN/ APPROX. SQ.
LOCATION PRIMARY USE DIVISION LEASE FOOTAGE
- ------------------------ ---------------------- ------------------- ------- ------------
<S> <C> <C> <C> <C>
Greensburg, PA Manufacturing Rubber own 97,830
Ball Ground, GA Manufacturing Rubber lease 30,000
Chicago, IL Manufacturing Freight own 111,500
Burlington, Ontario Manufacturing Thermo Sealed own 46,209
Burlington, Ontario Manufacturing Thermo Sealed own 28,165
Laurinburg, NC Manufacturing Friction lease 105,000
Wetherill Park, NSW Manufacturing Friction lease 73,141
Tottenham, VIC Manufacturing Friction lease 26,910
St-Laurent, Quebec Manufacturing Passenger transit own 106,000
Niles, IL Manufacturing Passenger transit own 355,300
Wilmerding, PA Manufacturing/Repair Locomotive own 850,000(1)
Stoney Creek, Ontario Manufacturing/Repair Freight own 189,170
Spartanburg, SC Manufacturing/Repair Passenger transit lease 183,600
Rockville, MD Manufacturing/Repair Locomotive lease 44,000
Chicago, IL Repair Center Freight/Locomotive own 11,400
Columbia, SC Repair Center Freight/Locomotive lease 12,250
Kansas City, KS Repair Center Freight/Locomotive lease 21,627
Winnipeg, Manitoba Repair Center Freight/Locomotive lease 20,000
Vacaville, CA Repair Center Freight/Locomotive lease 21,600
Sun Valley, CA Repair Center Passenger transit lease 4,000
Yonkers, NY Repair Center Passenger transit lease 12,000
Wallaceburg, Ontario Foundry Benn Iron own 127,555
</TABLE>
- ---------
(1) Approximately 250,000 square feet currently are used in connection with
WABCO'S operations.
The leases on the manufacturing facilities are long-term; the earliest to
expire expires June 30, 1997, but the lease includes options to renew. The
leases on the repair centers are for three-year terms, with renewal options; the
earliest to expire expires March 31, 1997. The Company also leases several sales
offices throughout the United States.
ITEM 3. LEGAL PROCEEDINGS
There are various pending lawsuits and claims arising out of the conduct of
the Company's business. These include claims by employees of third parties who
allege they were exposed to asbestos while handling American Standard products
manufactured prior to the 1990 Acquisition. American Standard discontinued the
use of asbestos in its products in 1980. American Standard has indemnified the
Company against these claims and is defending them. Under the terms of the
purchase agreement and related documents for the 1990 Acquisition, American
Standard has indemnified the Company for any claims, losses, costs and expenses
arising from, among other things, product liability claims by third parties,
intellectual property infringement actions and any other claims or proceedings,
in each case to the extent they related to events occurring, products sold or
services rendered prior to the 1990 Acquisition and affect the properties
acquired by the Company. American Standard's indemnification obligations are
limited to aggregate amounts in excess of $500,000 and, as described above, this
deductible has already been exceeded. In addition, American Standard's
indemnification obligation with respect to RFPC-related claims only extends to
50% of the amount claimed, up to a maximum of $14 million (provided liability is
asserted directly and solely against RFPC). The indemnification obligations
survive until 1997 with respect to non-third party claims, and until 2000 with
respect to third party claims.
13
<PAGE> 16
From time to time the Company is involved in litigation relating to claims
arising out of its operations in the ordinary course of business. As of the date
hereof, the Company is involved in no litigation which the Company believes will
have a material adverse effect on its financial condition or results of
operations. The Company historically has not been required to pay any material
liability claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fiscal quarter ended December 31, 1996.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the nine
executive officers of the Company as of March 1, 1997.
<TABLE>
<CAPTION>
NAME AGE OFFICE WITH THE COMPANY
- ------------------------- --- -----------------------------------------------------------
<S> <C> <C>
William E. Kassling 52 Director, President, Chairman and Chief Executive Officer
Robert J. Brooks 52 Director and Chief Financial Officer
Emilio A. Fernandez 52 Director, Executive Vice President of the Company and
President of Pulse
Howard J. Bromberg 54 Vice President and General Manager, Locomotive and Moulded
Products
John M. Meister 49 Vice President and General Manager, Passenger Transit
Mark C. Van Cleave 38 Vice President and General Manager, Cardwell Westinghouse
George A. Socher 48 Vice President and Corporate Controller
Kevin P. Conner 39 Vice President, Human Resources
Alvaro Garcia-Tunon 44 Vice President, Corporate Planning and Investor Relations
</TABLE>
William E. Kassling has been a director, President, Chairman and Chief
Executive Officer and General Manager of Freight Products Operations of the
Company since the 1990 Acquisition. From 1984 until 1990 he headed the Railway
Products Group of American Standard Inc. Between 1980 and 1984 he headed
American Standard's Building Specialties Group and between 1978 and 1980 he
headed Business Planning for American Standard. Mr. Kassling is a director of
Dravo Corp., Scientific Atlanta, Inc. and Commercial Intertech, Inc.
Robert J. Brooks has been a director and Chief Financial Officer of the
Company since the 1990 Acquisition. From 1986 until 1990 he served as worldwide
Vice President, Finance for the Railway Products Group of American Standard. Mr.
Brooks is a director of Crucible Materials Corp.
Emilio A. Fernandez has been director and Executive Vice President of the
Company since the Company's January 1995 acquisition of Pulse Electronics, Inc.
and is also President of Pulse, which he co-founded in 1975. Mr. Fernandez is a
director of PMI, Inc.
Howard J. Bromberg has been Vice President and General Manager, Locomotive
and Moulded Products since September 1995. From 1990 until September 1995, Mr.
Bromberg served as Vice President and General Manager of the Company's
Locomotive and Rubber Products Unit. From 1987 until 1990 he served as General
Manager of the Locomotive/Rubber Products group of the Railway Products Group of
American Standard.
John Meister has been Vice President and General Manager of the Company's
Passenger Transit Unit since the 1990 Acquisition. From 1985 until 1990 he was
General Manager of that business unit for the Railway Products Group of American
Standard.
Mark C. Van Cleave has been Vice President and General Manager of the
Company's subsidiary, Cardwell Westinghouse, since September 1995. From 1993
until September 1995 Mr. Van Cleave was Vice President, Commuter and Coal
Operations of Chicago & North Western Transportation Company. From 1992 until
1993 he was Assistant Vice President of Commuter Operations thereof and from
1989 until 1992 he was General Superintendent of Maintenance Operations thereof.
14
<PAGE> 17
George A. Socher has been Vice President and Corporate Controller of the
Company since July 1995. From 1994 until June 1995 Mr. Socher was Corporate
Controller and Chief Accounting Officer of Sulcus Computer Corp. From 1990 until
1994 he was Corporate Controller of Stuart Medical Inc.
Kevin P. Conner has been Vice President of Human Resources of the Company
since the 1990 Acquisition. From 1986 until 1990, Mr. Conner was Vice President
of Human Resources of the Railway Products Group of American Standard.
Alvaro Garcia-Tunon has been Vice President of Corporate Planning and
Investor Relations of the Company since August 1995. From 1990 until August 1995
Mr. Garcia-Tunon was Vice President of Business Development of Pulse
Electronics, Inc.
The executive officers are elected annually by the Board of Directors of
the Company at an organizational meeting which is held immediately after each
Annual Meeting of Stockholders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S SHARES OF COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Company is listed on the New York Stock Exchange.
As of March 14, 1997, there were 37,488,733 shares of Common Stock held by 244
holders of record. The high and low sales price of the shares and dividends paid
per share were as follows:
<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
------- ------- --------
<S> <C> <C> <C>
1996:
Fourth......................................... $13.000 $10.625 $.01
Third.......................................... $13.125 $10.250 $.01
Second......................................... $14.125 $10.750 $.01
First.......................................... $11.875 $ 9.125 $.01
1995:
Fourth......................................... $15.125 $ 8.625 $.01
Third.......................................... $18.875 $14.125 $.01
June 16-June 30................................ $15.000 $14.000 --
</TABLE>
15
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
information of the Company and has been derived from financial statements
audited by Arthur Andersen LLP, independent public accountants.
This operating data should be read in conjunction with, and is qualified by
reference to, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements of the Company
and the Notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total sales, net........................ $ 453,512 $424,959 $347,469 $285,274 $229,552
Cost of sales........................... 300,163 278,901 229,544 195,872 167,593
--------- -------- -------- -------- --------
Gross profit.......................... 153,349 146,058 117,925 89,402 61,959
OPERATING EXPENSES:
Selling and marketing................... 18,643 13,047 10,738 10,190 8,779
General and administrative.............. 29,437 22,791 18,025 16,921 15,592
Engineering............................. 18,244 14,577 10,819 8,015 7,626
Amortization............................ 7,854 6,160 4,842 4,846 4,995
Other operating (income) expense........ (547) 181 (137) (101) (1,617)
--------- -------- -------- -------- --------
Income from operations.................. 79,718 89,302 73,638 49,531 26,584
OTHER (INCOME) EXPENSES:
Interest................................ 24,533 24,857 1,156 3,688 5,980
Interest to affiliates.................. 1,619 6,141 9,742 9,742 9,608
Other expense (income), net............. (82) (205) 286 (3,378) (92)
--------- -------- -------- -------- --------
Income before taxes, extraordinary item
and change in accounting principle.... 53,648 58,509 62,454 39,479 11,088
Income taxes............................ 20,923 23,402 25,613 13,378 3,216
--------- -------- -------- -------- --------
Income before extraordinary item and
change in accounting principle........ 32,725 35,107 36,841 26,101 7,872
Loss on early extinguishment of debt.... -- (1,382) -- -- --
Cumulative effect of change in
accounting principle.................. -- -- -- 2,000 --
--------- -------- -------- -------- --------
Net income.............................. $ 32,725 $ 33,725 $ 36,841 $ 28,101 $ 7,872
========= ======== ======== ======== ========
PER COMMON SHARE:
Income before extraordinary item and
change in accounting principle........ $ 1.15 $ 1.32 $ .92 $ .65 $ .20
Loss on early extinguishment of debt.... -- (.05) -- -- --
Cumulative effect of change in
accounting principle.................. -- -- -- .05 --
--------- -------- -------- -------- --------
Net income.............................. $ 1.15 $ 1.27 $ .92 $ .70 $ .20
========= ======== ======== ======== ========
Weighted average shares outstanding..... 28,473 26,639 40,000 40,000 40,000
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................... $ 48,176 $ 36,674 $ 46,640 $ 28,703 $ 25,101
Property, plant and equipment, net...... 95,844 72,758 67,346 66,378 68,267
Total assets............................ 363,236 263,407 187,728 175,625 180,532
Total debt.............................. 341,690 305,935 78,060 107,870 137,210
Stockholders' equity (deficit).......... (76,195) (108,698) 46,797 11,008 (15,965)
</TABLE>
16
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
A number of significant events occurred in 1996 and 1995 which impacted the
Company's results of operations and financial condition:
- In September 1996, the Company acquired the Vapor Group (a passenger
transit door manufacturer) for a cash purchase price of $63.9 million,
which was funded by additional term borrowings under the Company's credit
facility. This acquisition contributed $30 million to 1996 revenues.
- In January 1996, the Company acquired Futuris Industrial Products Pty (an
Australian friction products manufacturer) for a cash purchase price of
$15 million, which was funded by borrowing under the Company's revolving
credit facility. This acquisition contributed revenue of $11 million in
1996.
- In January 1995, the Company acquired Pulse Electronics for $54.9
million, consisting of $20 million cash, $17 million debt and common
stock valued at $17.9 million. This acquisition contributed revenue of
$49 million and $31 million in 1996 and 1995, respectively.
- In January 1995 the Company completed a recapitalization transaction
whereby it repurchased 20 million shares or 50% of its outstanding Common
Stock for $300 million. This transaction was financed by both term and
revolving debt and significantly increased the Company's debt and
interest expense over the prior year. In conjunction with the
recapitalization the Company established an ESOP which in turn purchased
9.3 million of the 20 million shares described above in exchange for a
$140 million loan from the Company.
- In June 1995, the Company completed an Initial Public Stock Offering
whereby it received net proceeds of approximately $95 million that were
used to reduce outstanding debt; also, a public debt offering of $100
million was completed and the proceeds were used to reduce outstanding
bank debt; and in June 1995 the Company entered into an Amended Bank
Credit Agreement which provided for an aggregate credit facility of $250
million.
- Primarily as a result of these events, total debt outstanding at December
31, 1996 was $342 million compared to $306 million at December 31, 1995;
shareholders equity at December 31, 1996 was a negative $76 million
compared to negative $109 million at December 31, 1995. Total interest
expense for 1996 was $26.2 million versus 31.0 million for 1995.
Net Sales for 1996 were $453.5 million, an increase of $28.5 million
compared to $425.0 million in 1995. The Vapor and Futuris acquisitions, which
contributed $40.7 million, were the main reasons for the increased revenue.
Operating income for 1996 was $79.7 million compared to $89.3 million in
1995. Lower margins in the Company's locomotive pneumatics and freight car
divisions and increased operating expenses accounted for the lower income.
Net income for 1996 was $32.7 million or $1.15 per share compared to $33.7
million or $1.27 per share in 1995 (after an extraordinary charge of $2.3
million or $.05 per share). Reduced interest expense and lower overall effective
tax rates in 1996 partially offset lower operating income.
RESULTS OF OPERATIONS
The following tables set forth, for the period indicated, the Company's net
sales by market:
17
<PAGE> 20
NET SALES BY MARKET
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994 1996 1995 1994
-------- -------- -------- ----- ----- -----
(IN THOUSANDS) (% OF NET SALES)
<S> <C> <C> <C> <C> <C> <C>
Locomotives.......................... $118,454 $ 98,248 $ 55,980 26.1% 23.1% 16.1%
Freight cars......................... 211,082 240,405 211,123 46.6 56.5 60.8
Passenger transit.................... 107,091.. 72,242 68,482 23.6 17.0 19.7
Other................................ 16,885 14,064 11,884 3.7 3.4 3.4
-------- -------- -------- ----- ----- -----
Net sales.......................... $453,512 $424,959 $347,469 100.0% 100.0% 100.0%
======== ======== ======== ===== ===== =====
</TABLE>
The following table sets forth certain data from the Company's Consolidated
Statements of Operations for the fiscal years ended December 31, 1996, 1995 and
1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994 1996 1995 1994
------ ------ ------ ----- ----- -----
(IN MILLIONS) (% OF NET SALES)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................. $453.5 $425.0 $347.5 100.0% 100.0% 100.0%
Cost of sales.............................. 300.2 278.9 229.5 66.2 65.6 66.0
------ ------ ------ ----- ----- -----
Gross profit............................... 153.3 146.1 118.0 33.8 34.4 34.0
Selling and marketing expenses............. 18.6 13.0 10.7 4.1 3.1 3.1
General and administrative expenses........ 29.4 22.8 18.1 6.5 5.4 5.2
Engineering expenses....................... 18.2 14.6 10.8 4.0 3.4 3.1
Amortization expenses...................... 7.9 6.2 4.9 1.7 1.5 1.4
Other operating income, net................ (.5) .2 (.1) .1 -- --
------ ------ ------ ----- ----- -----
Income from operations................. 79.7 89.3 73.6 17.6 21.0 21.2
Interest expense........................... 24.5 24.9 1.2 5.4 5.9 0.3
Interest expense to affiliates............. 1.6 6.1 9.7 .4 1.4 2.8
Other expense (income), net................ -- (.2) .3 -- -- .1
------ ------ ------ ----- ----- -----
Income before income taxes............. 53.6 58.5 62.4 11.8 13.7 18.0
Income taxes............................... 20.9 23.4 25.6 4.6 5.5 7.4
------ ------ ------ ----- ----- -----
Income before extra-ordinary item...... 32.7 35.1 36.8 7.2 8.2 10.6
Cumulative effect of extra-ordinary item... -- (1.4) -- -- (.3) --
------ ------ ------ ----- ----- -----
Net income................................. $ 32.7 $ 33.7 $ 36.8 7.2% 7.9% 10.6%
====== ====== ====== ===== ===== =====
</TABLE>
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Net Sales
Net sales increased 7% to $453.5 million in 1996 from $425.0 million in
1995. The 1996 acquisitions of Vapor and Futuris accounted for $40.7 million of
the increase; 1996 revenue also benefited from a full year of the Pulse
acquisition versus eleven months in 1995. Partially offsetting these positive
factors were lower sales in the Company's freight car division. Freight division
sales decreased $29.3 million or 12% to $211.1 million in 1996 compared to
$240.5 million in 1995 due, in part, to a 5% decline in the OEM market, as North
American freight car deliveries fell from 60,853 units in 1995 to 57,877 units
in 1996. A significant slowdown in both intermodal freight car and coal car
production also adversely affected the mix of sales of the freight car
division's products. Sales of locomotive related products increased by $20.3
million or 21% to $118.5 million in 1996 compared to $98.2 million in 1995. This
increase, which was achieved in spite of a reduction in North American
locomotive deliveries, was due to a significant increase in electronic related
safety and braking equipment supplied by the Company's Railway Electronics
Group. Sales of electronic related products, including the recently mandated
end-of-train monitoring device, increased by over $13 million or 24% in 1996
compared to 1995 levels. Sales of the Company's historical locomotive products,
including pneumatic brakes, compressors and air dryers increased by $5 million
or 14%. Passenger transit sales increased by $34.9 million to $107.1 million in
1996 compared to $72.2 million in 1995. The acquisition of Vapor accounted for
$30.1 million of the increase. Capital spending by most transit authorities
remained stable. Sales of friction
18
<PAGE> 21
products, which are included within the freight, locomotive and transit markets,
increased by $15.7 million in 1996 with the acquisition of Futuris accounting
for $10.6 million of the increase. The effect of price increases on 1996
revenues was less than 2%.
Gross Profit
Gross Profit increased $7.3 million or 5%, to $153.3 million in 1996
compared to $146.1 million in 1995. The gross profit increase was due to the
overall 7% increase in net sales. Gross margin, as a percentage of sales,
declined slightly in 1996 to 33.8% versus 34.4% in 1995 primarily as a result of
changes in product mix.
Selling and Marketing Expenses
Selling expenses increased $5.6 million in 1996 of which Vapor and Futuris
and the effect of a full year of Pulse accounted for $4.4 million; increased
expenses for the Company's international marketing activities accounted for the
remainder of the increase.
General and Administrative Expenses
General and administrative expenses increased by $6.6 million of which
Vapor and Futuris and a full year of Pulse accounted for $3.0 million; the
remainder was due to increased corporate expenses including shareholder
communications, legal expenses, insurance expenses and costs for expanded
international activities.
Engineering Expenses
Engineering expenses, excluding manufacturing support engineering which is
included in cost of sales, increased by $3.7 million; Vapor and Futuris
accounted for $2.3 million and the balance of the increase was due to expanded
staffing related to new product development, primarily within the electronics
group.
Amortization Expense
Amortization expense increased by $1.7 million primarily as the result of
the amortization of intangibles, including goodwill and technology, associated
with the acquisitions of Vapor, Futuris and Pulse.
Income from Operations
Operating income in 1996 was $79.7 million versus $89.3 million in 1995.
The decrease was primarily due to higher operating expenses and amortization
which more than offset the increased gross profit.
Interest Expense
Total interest expense for 1996 was $26.2 million, a decrease of $4.8
million from 1995, primarily as a result of lower overall weighted average
interest rates in 1996 and the reduced debt levels from the proceeds of the
Company's IPO in June 1995.
Income Taxes
The Company's overall effective income tax rate declined to 39% in 1996
compared to 40% in 1995 due to lower effective state tax rates and the benefit
of a Foreign Sales Corporation (FSC) established in 1996.
Net Income
Net Income for 1996 was $32.7 million compared to $35.1 million in 1995
(before an extraordinary charge of $2.3 million). The lower income resulted from
higher operating costs providing for the future with additional engineering and
international sales staffing, which more than offset the positive income
changes.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
Net Sales
Net sales increased 22% to $425.0 million in 1995 from $347.5 in 1994. The
acquisition of Pulse Electronics in January, 1995 accounted for $30.9 million or
40% of the increase. The remainder of the increase was due to increased demand
for the Company's products in the Locomotive and Freight Car divisions. Net
sales in the Freight Car division increased by $29.3 million or 13.9% to $240.4
million in 1995 compared to
19
<PAGE> 22
$211.1 million in 1994 due to strong demand from new car deliveries and
continued acceptance of recently introduced products including the ELX Empty
Load Equipment and the truck mounted brake assembly; repair and service revenues
in the Freight Car division increased nearly $8 million or 14% from continued
retrofitting of older rolling stock with new valve stabilization and leakage
protection features. The strong OEM revenues reflect the fact that North
American freight car deliveries increased by 14.2% from 53,281 units in 1994 to
60,853 units in 1995. 1995 sales in the Locomotive division increased $42.2
million or 75% over 1994 levels; $30.9 million of the increase was due to the
acquisition of Pulse Electronics. Excluding Pulse, locomotive revenue increased
$11.3 million or 20% due primarily to North American locomotive deliveries
increasing by over 18% from 1,034 units in 1994 to 1,217 units in 1995. Net
revenues in the Passenger Transit division increased in 1995 by $3.8 million or
6% as spending for new vehicles by most transit authorities remained fairly
stable. Other product sales consisting primarily of industrial rubber increased
by $2.2 million or 18% as the Company expanded its outside rubber sales. Of the
total 22% increase in net sales, price increases accounted for 2% or
approximately $7 million, volume accounted for $39 million or 11% and the Pulse
Acquisition comprised $30.9 million or 9%.
Gross Profit
Gross profit increased $28 million or 23.8% in 1995 and gross margin
increased from 34.0% in 1994 to 34.4% in 1995. The improvement in gross profit
was due to the 22% increase in sales volume and higher overall margins resulting
from changes in product mix. Partially offsetting these factors was an increase
in warranty expense of $3.4 million, from $4.7 million in 1994 to $8.1 million
in 1995, primarily due to upgrade costs of $4.4 million for the Company's EPIC
brake product line.
Selling and Marketing Expenses
Selling expenses increased $2.3 million, of which Pulse accounted for $1.2
million; other selling expenses for new product support increased $1.1 million
or 10%, and as a percent of sales, the total remained constant at 3.1% in both
1994 and 1995.
General and Administrative Expenses
General and administrative expenses increased by $4.8 million of which
increase Pulse accounted for $4.3 million. Excluding Pulse, general expenses
increased by less than 3% or $.5 million.
Engineering Expenses
Engineering expenses, excluding manufacturing support engineering which is
included in cost of sales, increased by $3.8 million; approximately $2.6 million
of this was due to the Pulse Acquisition. The balance of $1.2 million represents
increased engineering to support new product development.
Amortization Expenses
Amortization expenses increased by $1.3 million primarily due to
amortization of intangibles, including goodwill, associated with the Pulse
Acquisition.
Income from Operations
Operating income in 1995 increased by $15.7 million or 21.3% over the prior
year due primarily to the higher sales volume while the Company was able to
maintain profit margins at 21%.
Interest Expense
Total interest expense for 1995 was $31 million, an increase of $20.1
million over 1994 due primarily to the increased debt resulting from the
Company's recapitalization transaction and establishment of an ESOP in January,
1995 partially offset by the proceeds of the IPO in June 1995.
Income Taxes
The Company's overall effective income tax rate for 1995 was 40% compared
to 41% in 1994, due to lower effective state tax rates.
20
<PAGE> 23
Extraordinary Item
The extraordinary item in 1995 of $1.4 million represents a net of tax
charge resulting from the Company's June 1995 Amended Credit Facility which
required the write-off of previously deferred debt financing cost.
Net Income
Net income for 1995 was $33.7 million compared to $36.8 million in 1994 as
the increased 1995 operating income was offset by increased interest expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated cash from operating activities of $58.9 million,
$45.8 million and $43.7 million in the years 1996, 1995 and 1994, respectively.
Cash generated from operating activities has been increasing primarily due to
stable net income and improved asset management. Capital expenditures were $12.9
million, $16.2 million, and $12.9 million in 1996, 1995 and 1994, respectively.
The majority of capital expenditures reflect spending for replacement equipment
and molds as well as increased capacity and efficiency. The Company expects
capital expenditures in 1997 to approximate $25 million with about $8 million of
such capital expenditures to be used to invest in a new manufacturing facility
and technology center for the electronics group, and the remainder for machinery
and equipment to improve efficiency and quality in the freight and transit
divisions as well as replacements.
In 1996, the Company acquired both Vapor and Futuris for $64 million and
$15 million, respectively. Both of these transactions had utilized borrowings
for the entire purchase price. Also, in 1995 the Company acquired Pulse
Electronics for $54.9 million, consisting of $20 million in bank borrowings, $17
million in a related party note and $17.9 million of WABCO Common Stock.
As a result of the recapitalization transaction on January 31, 1995 and
subsequent IPO and Senior Note offering and related Amended Bank Credit Facility
transaction in June, 1995, the Company's debt structure and debt service
requirements changed significantly.
The Company debt structure at December 31, 1996 was $341,690, as is shown
below in the "Actual" column.
On March 4, 1997, one of the Company's major shareholders, Scandinavian
Incentive Holding B.V. ("SIH"), agreed to sell the 10 million shares of WABCO
Common Stock that it holds. Under the terms of the agreement, the Company will
purchase 4 million shares at $11 per share, and an investment group consisting
of Vestar Equity Partners, L.P., Harvard Private Capital Group, American
Industrial Partners Capital Fund II, L.P. and certain members of Company
management will acquire the remaining 6 million shares at the same price. The
transaction is conditioned upon, among other things, obtaining approval of the
Company's senior note holders. The Company intends to finance the purchase
through borrowings under its credit facility.
The pro forma disclosures reflect this subsequent event also described in
Note 19 to the financial statements whereby the Company agreed to repurchase 4
million shares of its common stock at an estimated cost of $11 per share and
fund the transaction, including fees, with additional borrowings of $46 million.
The
21
<PAGE> 24
transaction was approved by the Company's Board of Directors on March 4, 1997
and is expected to be completed by March 31, 1997.
<TABLE>
<CAPTION>
PRO FORMA
FOR STOCK
ACTUAL RE-PURCHASE
-------- -----------
(IN THOUSANDS)
------------------------
<S> <C> <C>
Borrowings under the Amended Bank Credit Agreement:
Term loans......................................... $163,700 $ 163,700
Revolving credit notes............................. 61,000 107,000
Senior notes, 9 3/8% due 2005...................... 100,000 100,000
Note payable--Pulse acquisition................. 16,990 16,990
-------- -----------
Total........................................... $341,690 $ 387,690
======== =========
Required 1997 principal payments..................... $ 29,700 $ 18,200
======== =========
Total estimated 1997 debt service including
interest........................................... $ 57,000 $ 48,000
======== =========
</TABLE>
The Company's primary source of liquidity, other than operations, is the
$125 million revolving credit facility under the Company's Credit Agreement, as
amended ($140 million on a pro forma basis). As of December 31, 1996, the
Company had utilized approximately $61.0 million for borrowings and $10.5
million for letters of credit and therefore had remaining borrowing capacity of
$53.5 million. (The Company's remaining borrowing capacity, after giving the pro
forma effect to the stock repurchase described above, is approximately $23
million). Revolving credit borrowings are due January, 2001.
Term borrowings under the Amended Credit Agreement are due in semi-annual
installments which commenced June 30, 1996 with the final payment due January,
2002. Remaining scheduled annual payments are $18.2 million, $22.6 million,
$40.2 million, $20.1 million and $41.4 million for the years ending 1997, 1998,
1999, 2000 and 2001, respectively, and $21.2 million due January 31, 2002. In
addition, certain accelerated payments are required.
For either Term Loans or Revolving Loans, the Company may choose from the
following interest rate options: (a) the Alternate Base Rate, which is the
greater of (i) Chase Manhattan Bank's prime rate, (ii) the weighted average of
the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers plus one half of one percent
and (iii) a rate based on the secondary market rate for three-month certificates
of deposit plus 1%, in each case plus an applicable margin ranging from 0% to
.375% based on WABCO's interest expense coverage ratio and leverage ratio, or
(b) the Adjusted LIBO Rate, which is the London interbank overseas rate for
dollar deposits, as adjusted for statutory reserve requirements, plus an
applicable margin ranging from .75% to 1.5%, based on WABCO's interest expense
coverage ratio and leverage ratio. Interest is payable periodically. In
addition, the Company must pay certain fees to the administrative agents and
participating lending institutions, including a commitment fee of .375% on the
unborrowed amount of the Term Loans and Revolving Loans. In order to reduce the
impact of interest rate changes on this variable rate debt the Company has
entered into interest rate swaps with three different lenders in the aggregate
amount of $75 million. These agreements effectively change the Company's
interest rate exposure from variable to fixed rates ranging from 7.22% to 8.37%.
These agreements expire in 1998 and 1999.
The Amended Credit Agreement limits the Company with respect to declaring
or making cash dividend payments and prohibits the declaration or making of
other distributions whether in cash, property, securities or a combination
thereof, with respect to any shares of the Company's capital stock. However, the
Company is permitted to pay $.01 quarterly dividends on the Common Stock,
subject to certain conditions. The Amended Credit Agreement contains various
other covenants and restrictions including, without limitation, the following: a
limitation on the incurrence of additional indebtedness, a limitation on
mergers, consolidations and sales of assets and acquisitions (other than mergers
and consolidations with certain subsidiaries, sales of assets in the ordinary
course of business, and acquisitions requiring WABCO to pay $5 million or less
in any fiscal year and $20 million or less in the aggregate, respectively), a
limitation on liens, a limitation on certain
22
<PAGE> 25
debt payments, a limitation on capital expenditures, a minimum fixed charge
coverage ratio, a minimum interest expense coverage ratio and a maximum leverage
ratio.
The Company's senior notes issued in June 1995, bear interest at the rate
of 9.375% and mature in June 2005. The net proceeds of the Note Offering were
used to prepay an additional portion of the term loans outstanding under the
existing credit agreement. The Notes are senior unsecured obligations of the
Company and rank pari passu in right of payment with all existing and future
indebtedness under (i) capitalized lease obligations, (ii) the Amended Credit
Agreement, (iii) indebtedness of the Company for money borrowed and (iv)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which the Company is responsible or liable unless, in the
case of clause (iii) or (iv), in the instrument creating or evidencing the same
or pursuant to which the same is outstanding, it is provided that such
obligations are subordinate in right of payment to the Notes (collectively,
Senior Indebtedness).
The Company's indenture, pursuant to which the notes were issued, contains
certain restrictive covenants which, among other things, limit the ability of
the Company and certain of its subsidiaries to incur indebtedness, pay dividends
on and redeem capital stock, create restrictions on investments in unrestricted
subsidiaries, make distributions from certain subsidiaries, use proceeds from
the sale of assets and subsidiary stock, enter into transactions with
affiliates, create liens and enter into sale/leaseback transactions. The
Company's indenture also restricts, subject to certain exceptions, the Company's
ability to consolidate and merge with, or to transfer all or substantially all
of its assets to, another person.
As partial payment for the Pulse Acquisition, the Company issued the $17.0
million Long-Term Pulse Seller Note, due January 31, 2004. Interest is payable
semiannually, and accrues until February 1, 1998 at the per annum rate of 9.5%;
from February 1, 1998 until January 31, 2001, interest will accrue at the prime
rate charged by Chase Manhattan Bank on December 31, 1997 plus 1%; from February
1, 2001 until January 31, 2004, interest will accrue at the prime rate charged
by Chase Manhattan Bank on December 31, 2000 plus 1%.
The ESOP Loan had an original term of 50 years, with annual payments of
principal and interest of approximately $12 million. As a result of the
inclusion of the U.S. Vapor salaried employees, the term of the ESOP loan will
be reduced. The ESOP Loan bears interest at 8.5% per annum. The ESOP will repay
the ESOP Loan using contributions from the Company. The Company is obligated to
contribute amounts sufficient to repay the ESOP Loan. The net effect of the ESOP
is that the Company's stock is allocated to employees in lieu a retirement plan
that was previously a cash based defined benefit plan, and accordingly results
in reduced cash outlays by an estimated $3 to $4 million annually.
In conjunction with a plan approved on November 1, 1995 to repurchase up to
one million shares of Common Stock, the Company had purchased 405,000 shares at
an aggregate cost of approximately $3.8 million through December 31, 1996.
Management believes, based upon current levels of operations and forecasted
earnings, that cash flow from operations, together with borrowings under the
Amended Credit Agreement, will be adequate to make payments of principal and
interest on debt, including the Notes, to make required contributions to the
ESOP, to permit anticipated capital expenditures, and to fund working capital
requirements and other cash needs. Nevertheless, the Company will remain
leveraged to a significant extent and its debt service obligations will continue
to be substantial. If the Company's sources of funds were to fail to satisfy the
Company's cash requirements, the Company may need to refinance its existing debt
or obtain additional financing. There is no assurance that such new financing
alternatives would be available, and, in any case, such new financing (if
available) would be expected to be more costly and burdensome than the debt
agreements currently in place.
ENVIRONMENTAL MATTERS AND PRODUCT LIABILITY
Based on available information, environmental matters and product liability
claims do not presently represent material contingencies to the Company. See
Note 17 to the Company's December 31, 1996 Consolidated Financial Statements.
23
<PAGE> 26
EFFECTS OF INFLATION; SEASONALITY
General price inflation has not had a material impact on the Company's
results of operations. Some of the Company's labor contracts contain negotiated
salary and benefit increases and others contain cost of living adjustment
clauses which would cause the Company's cost automatically to increase if
inflation were to become significant. The Company's business is not seasonal,
although the third quarter results generally tend to be slightly lower than
other quarters, reflecting vacation and down time at its major customers during
this period.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are set forth in Item 14 of
Part IV hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10 THROUGH 13.
In accordance with the provisions of General Instruction G to Form 10-K,
the information required by Item 10 (Directors and Executive Officers of the
Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of
Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and
Related Transactions) is not set forth herein because the Company's definitive
Proxy Statement for its Annual Meeting of Shareholders to be held on April 22,
1997, which includes such information, will be filed with the Commission not
later than 120 days after the end of the fiscal year covered by this annual
report. Such information is incorporated in this annual report by reference,
except for the information required to be included in the Proxy Statements by
paragraphs (i), (k) and (l) of Item 402 of Regulations S-K.
24
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The financial statements, financial statement schedules and exhibits listed
below are filed as part of this annual report:
<TABLE>
<S> <C> <C> <C>
(A) (1) FINANCIAL STATEMENTS PAGE NO.
--------
Report of Independent Public Accountants 27
Westinghouse Air Brake Company Consolidated Balance Sheet as of December
31, 1996 and 1995 28
Westinghouse Air Brake Company Consolidated Statement of Operations for
the three years ended December 31, 1996, 1995 and 1994 29
Westinghouse Air Brake Company Consolidated Statement of Cash Flows for
the three years ended December 31, 1996, 1995 and 1994 30
Westinghouse Air Brake Company Consolidated Statement of Shareholders
Equity for the three years ended December 31, 1996, 1995 and 1994 31
Notes to Consolidated Financial Statements 32
(2) FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants 51
Schedule II--Valuation and Qualifying Accounts 52
(B) REPORTS ON FORM 8-K
On October 3, 1996, the Company filed a Form 8-K related to the
acquisition of the Vapor Group.
(C) EXHIBITS:
3.1 Restated Certificate of Incorporation of the Company dated January 30, 1995,
as amended March 30, 1995**
3.2 By-Laws of the Company as adopted, effective January 31, 1995**
4.1 Form of Indenture between the Company and The Bank of New York**
4.2 Form of Note (included in Exhibit 4.1)
9 Second Amended WABCO Voting Trust/Disposition Agreement dated as of December
13, 1995 among the Management Investors (Schedules and Exhibits omitted)***
10.1 Westinghouse Air Brake Company Employee Stock Ownership Plan and Trust,
effective January 31, 1995**
10.2 ESOP Loan Agreement dated January 31, 1995 between Westinghouse Air Brake
Company Employee Stock Ownership Trust ("ESOT") and the Company (Exhibits
omitted)**
10.3 Employee Stock Ownership Trust Agreement dated January 31, 1995 between the
Company and U.S. Trust Company of California, N.A.**
10.4 Pledge Agreement dated January 31, 1995 between ESOT and the Company**
10.5 Credit Agreement dated as of January 31, 1995 and Amended and Restated as of
February 15, 1995 and June 9, 1995 among the Company, various financial
institutions, Chemical Bank Delaware, The Bank of New York and Credit Bank
Suisse (Schedules and Exhibits omitted)***
10.6 Stockholders Agreement dated as of January 31, 1995 among the Company, SIH
and RAC Voting Trust**
</TABLE>
25
<PAGE> 28
<TABLE>
<S> <C> <C>
10.7 Common Stock Registration Rights Agreement dated as of January 31, 1995 among
the Company, SIH, RAC Voting Trust, Vestar Capital, Pulse Electronics, Inc.,
Pulse Embedded Computer Systems, Inc., the Pulse Shareholders and ESOT
(Schedules and Exhibits omitted)**
10.8 Indemnification Agreement dated January 31, 1995 between the Company and the
RAC Voting Trust trustees**
10.9 Agreement of Sale and Purchase of the North American Operations of the
Railway Products Group, an operating division of American Standard Inc.,
dated as of 1990 between Rail Acquisition Corp. and American Standard Inc.
(only provisions on indemnification are reproduced)**
10.10 Letter Agreement (undated) between the Company and American Standard Inc. on
environmental costs and sharing**
10.11 Purchase Agreement dated as of June 17, 1992 among the Company, Schuller
International, Inc., Manville Corporation and European Overseas Corporation
(only provisions on indemnification are reproduced)**
10.12 Asset Purchase Agreement dated as of January 23, 1995 among the Company,
Pulse Acquisition Corporation, Pulse Electronics, Inc., Pulse Embedded
Computer Systems, Inc. and the Pulse Shareholders (Schedules and Exhibits
omitted)**
10.13 License Agreement dated as of December 31, 1993 between SAB WABCO Holdings
B.V. and the Company**
10.14 Letter Agreement dated as of January 19, 1995 between the Company and Vestar
Capital Partners, Inc.**
10.15 Westinghouse Air Brake Company 1995 Stock Incentive**
10.16 Westinghouse Air Brake Company 1995 Non-Employee Directors' Fee and Stock
Option Plan**
10.17 Form of Employment Agreement between William E. Kassling and the Company**
10.18 Letter Agreement dated as of January 1, 1995 between the Company and Vestar
Capital Partners, Inc.**
10.19 Form of Indemnification Agreement between the Company and Authorized
Representatives**
10.20 Share Purchase Agreement between Futuris Corporation Limited and the Company
(Exhibits omitted)**
10.21 Purchase Agreement dated as of September 19, 1996 by and among Mark IV
Industries, Inc., Mark IV PLC, and W & P Holding Corp. (Exhibits and
Schedules omitted)****
10.22 Purchase Agreement dated as of September 19,1996 by and among Mark IV
Industries Limited and Westinghouse Railway Holdings (Canada) Inc. (Exhibits
and Schedules omitted)****
21 List of subsidiaries of the Company*
23 Consent of Arthur Andersen LLP*
28 Form 11-K for the Westinghouse Air Brake Company Employee Stock Ownership
Plan and Trust for the fiscal year ended December 31, 1996*
</TABLE>
- ---------
* Filed herewith
** Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-90866)
*** Filed as an exhibit to the Company's Annual Report on Form 10-K for the
period ended December 31, 1995
**** Filed as an exhibit to the Company's Current Report on Form 8-K, filed
October 3, 1996
26
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Westinghouse Air Brake Company:
We have audited the accompanying consolidated balance sheet of Westinghouse
Air Brake Company (a Delaware corporation) and Subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Westinghouse Air Brake
Company and Subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
March 4, 1997
27
<PAGE> 30
WESTINGHOUSE AIR BRAKE COMPANY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................................ $ 618 $ 210
Accounts receivable............................................................. 73,507 45,644
Inventories..................................................................... 62,355 52,922
Deferred tax assets............................................................. 9,517 3,483
Other current assets............................................................ 4,172 4,459
--------- --------
Total current assets........................................................ 150,169 106,718
Property, Plant and Equipment................................................... 162,324 125,036
Less--Accumulated depreciation.................................................. (66,480) (52,278)
--------- --------
Property, plant and equipment, net.......................................... 95,844 72,758
OTHER ASSETS:
Prepaid pension costs........................................................... 4,608 4,441
Goodwill........................................................................ 60,490 42,286
Intangibles..................................................................... 44,241 26,812
Debt issuance costs............................................................. 7,383 9,014
Other noncurrent assets......................................................... 501 1,378
--------- --------
Total other assets.......................................................... 117,223 83,931
--------- --------
Total Assets................................................................ $ 363,236 $263,407
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt............................................... $ 29,700 $ 22,448
Accounts payable................................................................ 23,789 20,698
Accrued income taxes............................................................ 2,634 2,829
Advance deposits................................................................ 13,330 7,257
Accrued compensation............................................................ 10,947 6,766
Accrued warranty................................................................ 8,172 3,655
Accrued interest................................................................ 3,532 2,786
Accrued restructuring costs..................................................... 3,158 --
Other accrued liabilities....................................................... 6,731 3,605
--------- --------
Total current liabilities................................................... 101,993 70,044
Long-Term Debt.................................................................. 311,990 283,487
Reserve for Postretirement Benefits............................................. 13,309 10,415
Accrued Pension Costs........................................................... 4,724 5,061
Deferred Income Taxes........................................................... 7,415 3,098
--------- --------
Total liabilities........................................................... 439,431 372,105
--------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, 1,000,000 shares authorized, no shares issued
Common stock, $.01 par value; 100,000,000 shares authorized and 47,426,600
shares issued................................................................. 474 474
Additional paid-in capital...................................................... 104,321 104,776
Less--Treasury stock, at cost, 9,937,867 and 9,783,567 shares................... (149,331) (147,702)
Less--Unearned ESOP shares, 8,927,565 and 9,149,280 shares...................... (133,914) (137,239)
Retained earnings............................................................... 105,363 73,765
Cumulative translation adjustment............................................... (3,108) (2,772)
--------- --------
Total shareholders' equity.................................................. (76,195) (108,698)
--------- --------
Total Liabilities and Shareholders' Equity.................................. $ 363,236 $263,407
========= ========
</TABLE>
The accompanying notes are an integral part of this statement.
28
<PAGE> 31
WESTINGHOUSE AIR BRAKE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net Sales.................................................. $453,512 $424,959 $347,469
Cost of Sales.............................................. 300,163 278,901 229,544
-------- -------- --------
Gross profit.......................................... 153,349 146,058 117,925
Selling and Marketing Expenses............................. 18,643 13,047 10,738
General and Administrative Expenses........................ 29,437 22,791 18,025
Engineering Expenses....................................... 18,244 14,577 10,819
Amortization Expense....................................... 7,854 6,160 4,842
Other Operating Expense (Income), net...................... (547) 181 (137)
-------- -------- --------
Income from operations................................ 79,718 89,302 73,638
Other Income and Expenses:
Interest expense......................................... 24,533 24,857 1,156
Interest expense to affiliates........................... 1,619 6,141 9,742
Other (income) expense, net.............................. (82) (205) 286
-------- -------- --------
Income before income taxes................................. 53,648 58,509 62,454
Income taxes............................................... 20,923 23,402 25,613
-------- -------- --------
Income before extraordinary item........................... 32,725 35,107 36,841
Loss on Extinguishment of Debt, Net........................ -- (1,382) --
-------- -------- --------
Net Income................................................. $ 32,725 $ 33,725 $ 36,841
======== ======== ========
Income Per Common Share:
Income before extraordinary item......................... $ 1.15 $ 1.32 $ .92
Loss on extinguishment of debt, net...................... -- (.05)
-------- -------- --------
Net income................................................. $ 1.15 $ 1.27 $ .92
======== ======== ========
Weighted average shares, in thousands...................... 28,473 26,639 40,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
29
<PAGE> 32
WESTINGHOUSE AIR BRAKE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................ $ 32,725 $ 33,725 $ 36,841
Adjustments to reconcile net income to cash provided by
operations--
Depreciation and amortization........................... 22,249 18,634 16,057
Provision for contribution to ESOP...................... 2,870 2,597 --
Extraordinary item...................................... -- 1,382 --
Deferred income taxes................................... 2,456 (1,137) (1,024)
Changes in certain assets and liabilities--
Accounts receivable.................................. (9,868) 5,841 (7,657)
Inventories.......................................... 8,100 (7,932) (7,698)
Other assets and liabilities......................... (2,376) (3,311) 571
Accounts payable..................................... (6,574) 3,786 626
Accrued income taxes................................. (411) (5,879) 3,230
Accrued liabilities and advance deposits............. 9,740 (1,825) 2,765
--------- -------- --------
Net cash provided by operating activities....... 58,911 45,881 43,711
--------- -------- --------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net.......... (12,855) (16,205) (12,853)
Purchase of Pulse Electronics, Inc...................... -- (54,900) --
Purchase of Futuris Industrial Products, Ltd............ (15,040) -- --
Purchase of Vapor Corporation........................... (63,850) -- --
--------- -------- --------
Net cash used for investing activities............... (91,745) (71,105) (12,853)
--------- -------- --------
FINANCING ACTIVITIES:
Payments of term debt................................... (26,300) (175,000) (25,660)
Proceeds from issuance of debt obligations.............. 65,000 417,000 --
Debt issuance fees...................................... (492) (11,041) --
Purchase of treasury stock.............................. (1,629) (165,602) --
Issuance of shares to acquire Pulse Electronics, Inc.... -- 17,900 --
Purchase of ESOP shares................................. -- (140,040) --
Net borrowings (payments) on revolving credit
arrangements......................................... (2,935) 59,785 (4,150)
Net proceeds from stock offering........................ -- 95,454 --
Payment of debt to affiliate............................ (10) (73,910) --
Cash dividends.......................................... (1,127) (285) --
--------- -------- --------
Net cash provided by (used for) financing activities 32,507 24,261 (29,810)
--------- -------- --------
Foreign currency translation adjustment................... 735 (131) (37)
--------- -------- --------
Increase (decrease) in cash............................... 408 (832) 1,011
Cash, beginning of year................................... 210 1,042 31
--------- -------- --------
Cash, end of year......................................... $ 618 $ 210 $ 1,042
========= ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
30
<PAGE> 33
WESTINGHOUSE AIR BRAKE COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL UNALLOCATED CUMULATIVE TOTAL
COMMON PAID-IN TREASURY ESOP RETAINED TRANSLATION SHAREHOLDERS'
STOCK CAPITAL STOCK SHARES EARNINGS ADJUSTMENT EQUITY
------ ---------- --------- ----------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993.... $400 $ 9,600 $ -- $ -- $ 3,484 $ (2,476) $ 11,008
Net income.................... -- -- -- -- 36,841 -- 36,841
Translation Adjustment........ -- -- -- -- -- (1,052) (1,052)
---- -------- --------- --------- --------- --------- ----------
Balance, December 31, 1994.... 400 9,600 -- -- 40,325 (3,528) 46,797
Net income.................... -- -- -- -- 33,725 -- 33,725
Cash Dividends ($.01 per
share)...................... -- -- -- -- (285) -- (285)
Purchase of treasury stock.... -- -- (165,602) -- -- -- (165,602)
Loan to ESOP to purchase
shares...................... -- -- -- (140,040) -- -- (140,040)
Allocation of ESOP shares..... -- (204) -- 2,801 -- -- 2,597
Acquisition of Pulse
Electronics................. -- -- 17,900 -- -- -- 17,900
Initial public stock
offering.................... 74 95,380 -- -- -- -- 95,454
Translation Adjustment........ -- -- -- -- -- 756 756
---- -------- --------- --------- --------- -------- ---------
Balance, December 31, 1995.... 474 104,776 (147,702) (137,239) 73,765 (2,772) (108,698)
Net income.................... -- -- -- -- 32,725 -- 32,725
Cash dividends ($.01 per
share)...................... -- -- -- -- (1,127) -- (1,127)
Purchase of treasury stock.... -- -- (1,629) -- -- -- (1,629)
Allocation of ESOP shares..... -- (455) -- 3,325 -- -- 2,870
Translation Adjustment........ -- -- -- -- -- (336) (336)
---- -------- --------- --------- --------- -------- ---------
Balance, December 31, 1996.... $474 $104,321 $(149,331) $(133,914) $ 105,363 $ (3,108) $ (76,195)
==== ======== ========= ========= ========= ======== =========
</TABLE>
The accompanying notes are an integral part of this statement.
31
<PAGE> 34
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
Organization
Westinghouse Air Brake Company (the Company) was incorporated in 1989 and
in 1990 acquired the North American operations of the Railway Products Group of
American Standard, Inc. (the "1990 Acquisition"). Until January 31, 1995, the
Company was 50% owned by a group comprised of management and a private
investment company, and 50% owned by Scandinavian Incentive Holding B.V. (SIH),
a Netherlands corporation. The 50% interest owned by SIH was previously owned by
Investment AB Cardo, which was acquired during 1994 by Incentive AB, a Swedish
corporation and affiliate of SIH.
The Company's equity and debt structure was significantly changed as a
result of the recapitalization transaction on January 31, 1995 (see Note 2) and
the initial public offering and note offering completed in June 1995 (see Note
3).
Operations
The Company is a manufacturer of railroad value added equipment and related
safety and efficiency products for locomotives, freight cars and passenger
transit vehicles. The Company's primary manufacturing operations are in the
United States and Canada, and the Company's revenues have been primarily from
North America. Because of the nature and similarity of customers in the United
States and Canada, the Company considers this to represent one homogeneous
market. International revenues, other than Canada, were 9%, 4% and 3% in 1996,
1995 and 1994, respectively. The Company's customer base consists of freight
transportation (railroad) companies, locomotive and freight car original
equipment manufacturers, railroads and transit car builders and public transit
systems.
The Company's operations and revenue base are generally dependent on the
capital replacement cycles, for locomotives and freight cars, of the large North
America based railroad companies. The passenger transit operations of the
Company are dependent on the budgeting and expenditure appropriation process of
federal, state and local governmental units for mass transit needs established
by public policy.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation. Certain prior year amounts have been
reclassified, where necessary, to conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual amounts could differ from the estimates.
Revenue Recognition Policy and International Sales
The Company recognizes revenue once products have been shipped to the
respective customers and the price for the product has been determined. Sales
returns are infrequent and not material in relation to the Company's net sales.
32
<PAGE> 35
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
under the first-in, first-out (FIFO) method. Inventory costs include material,
labor and overhead. The components of inventory at December 31 are:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
--------------------
1996 1995
------- -------
<S> <C> <C>
Raw materials.................................... $20,140 $17,118
Work-in-process.................................. 31,294 20,262
Finished goods................................... 10,921 15,542
------- -------
$62,355 $52,922
======= =======
</TABLE>
Property, Plant and Equipment
Property, plant and equipment additions are stated at cost. Expenditures
for ordinary maintenance and repairs are expensed. Expenditures for renewals and
betterments are capitalized. The Company provides for book depreciation over the
following estimated useful lives of plant and equipment principally on the
straight-line method. Accelerated depreciation methods are utilized for income
tax purposes.
<TABLE>
<S> <C>
Land improvements................................ 10-20 years
Buildings........................................ 20-40 years
Machinery and equipment.......................... 4-15 years
</TABLE>
Goodwill and Other Intangible Assets
Goodwill and other intangible assets, including patents and tradenames, are
periodically reviewed for impairment based on an assessment of future operations
to ensure that they are appropriately valued. Goodwill is amortized on a
straight line basis over 40 years. Other intangibles are amortized on a straight
line basis over their estimated economic lives.
Statement of Financial Accounting Standards No. 123
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), in October 1995. This statement established a "fair value based
method" of financial accounting and related reporting standards for stock-based
employee compensation plans, such as the Company's 1995 Stock Incentive Plan
(see Note 11). SFAS No. 123 became effective for calendar year 1996 and provides
for adoption in the income statement or through footnote disclosure only. The
Company has continued to account for its 1995 Stock Incentive Plan under APB
Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS
123, and has provided the new disclosure in the footnotes (see Note 11).
Warranty Costs
Warranty costs are accrued based on management's estimates of repair or
upgrade costs per unit and historical experience. In recent years, the Company
has introduced several new products. The Company does not have the same level of
historical warranty experience for these new products as it does for its
continuing products. Therefore, warranty reserves have been established for
these new products based upon management's estimates. Actual future results may
vary from such estimates. Warranty expense was $5,459,000, $8,123,000 and
$4,723,000 for 1996, 1995 and 1994, respectively (which ranges from 1.9% to 1.1%
of net sales), and the warranty reserve was $8,172,000 and $3,655,000 at
December 31, 1996 and 1995, respectively. The increase in the warranty reserves
is primarily due to the Vapor acquisition.
Foreign Currency Translation
The financial statements of the Company's Canadian subsidiaries are
translated into U.S. currency under the guidelines set forth in SFAS No. 52
"Foreign Currency Translation".
33
<PAGE> 36
Interest Rate Swap Agreements
The Company periodically enters into interest rate swap agreements to
reduce the impact of interest rate changes on its variable rate bank credit
borrowings. The interest rate differential to be paid or received is accrued as
interest rates change and is recognized as interest expense in the period of
change (see Note 4).
Significant Customers and Group Concentrations of Credit Risk
The Company's trade receivables are primarily from rail and transit
industry original equipment manufacturers, railroad carriers and commercial
companies that utilize rail cars in their operations, such as utility companies
and chemical companies. The allowance for doubtful accounts was $1,347,000 and
$831,000 as of December 31, 1996 and 1995. No one customer accounted for more
than 10% of the Company's sales in 1996 or 1994, although one customer did
account for more than 10% in 1995.
Research and Development
Research and development costs are charged to expense as incurred.
Income Taxes
The provision for income taxes includes Federal, state and foreign income
taxes currently payable and those deferred or prepaid because of temporary
differences between financial statement and tax bases of assets and liabilities.
Employee Benefits
The Company provides certain benefits to substantially all of its active
employees, such as medical insurance and retirement benefits, including pension
and postretirement medical benefits. In connection with the recapitalization
transaction described in Note 2, the Company formed an Employee Stock Ownership
Plan (ESOP). In connection with the recapitalization and establishment of the
ESOP in January 1995, the pension plan and postretirement health care plan for
salaried employees were modified effective March 31, 1995 (see Notes 7 and 8).
In 1994 the Company adopted Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits," which prescribes how
employers should recognize liabilities for postemployment benefits provided to
former and inactive employees and their dependents, other than retirees.
Employees
As of December 31, 1996, the Company employed 1,020 persons, or 32% of its
workforce, who are covered by collective bargaining agreements. These agreements
expire at various times between 1997 and 2001.
Disclosures Regarding Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments
approximate their related carrying values, except for: the Company's 9 3/8%
senior notes term debt which have a fair value of approximately $102 million and
a carrying value of $100 million and the $17 million 9.5% note payable, issued
in connection with the Pulse acquisition, which has a fair value of $18 million
and a carrying value of $17 million. The fair value of the Company's interest
rate swaps (see Note 4) is approximately $1.2 million. This represents the
estimated amount that the banks would receive to terminate the swap agreements
at December 31, 1996 and the current creditworthiness of the swap
counterparties.
34
<PAGE> 37
Supplemental Cash Flow Disclosure
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash paid during the year for:
Interest.............................. $25,624 $28,290 $10,897
Income taxes.......................... $20,452 $30,269 $23,184
</TABLE>
Earnings Per Share
Earnings per common and common equivalent share is based upon the weighted
average common and common equivalent shares outstanding during the year. Common
Stock equivalents are attributable to outstanding common stock options. Primary
and fully diluted earnings per share are the same.
2. RECAPITALIZATION:
The Company's debt and capital structure was substantially changed during
1995 by (a) the recapitalization transaction on January 31, 1995, as described
below, (b) an initial public offering (IPO) and a related note offering in June
1995 as more fully described in Note 3 and (c) a June 1995 amendment to the
existing bank credit agreement as more fully described in Note 4.
On January 31, 1995, an equity recapitalization transaction (the
Transaction) was consummated. The Transaction, which resulted in the repurchase
of 20,000,000 shares (or 50%) of the 40,000,000 previously outstanding shares of
the Company's common stock, was made by the Company (10,664,000 shares) and a
newly formed Employee Stock Ownership Plan and Trust (the ESOP) (9,336,000
shares). The stock repurchase was funded by new bank borrowings which were then
subsequently refinanced as part of the IPO and related note offering (see Note
3) and the amended credit agreement (see Note 4).
3. INITIAL PUBLIC STOCK OFFERING AND NOTE OFFERING:
In June 1995, the Company completed an IPO whereby it sold a total of
7,426,600 shares (including 426,600 shares pursuant to the underwriters
over-allotment provision) of common stock resulting in aggregate net proceeds of
$95.4 million. The proceeds from the IPO were used to fully repay $73.9 million
of the 13% senior subordinated notes (see Note 4) and to repay a portion of the
outstanding term loans.
In connection with the IPO, the Company completed a public offering (the
Note Offering) of $100 million principal amount of senior notes (the Notes) due
2005 (with an interest rate of 9.375%). The net proceeds of the Note Offering
were used to prepay an additional portion of the term loans outstanding under
the existing credit agreement (see Note 4).
4. LONG-TERM DEBT:
At December 31, long-term debt consisted of the following:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
---------------------
1996 1995
-------- --------
<S> <C> <C>
Revolving credit notes........................... $ 61,000 $ 63,935
Term loan........................................ 163,700 125,000
Senior notes, 9 3/8% due 2005.................... 100,000 100,000
Note payable--Pulse acquisition.................. 16,990 17,000
-------- --------
341,690 305,935
Less--Current portion............................ 29,700 22,448
-------- --------
$311,990 $283,487
======== ========
</TABLE>
The Company's revolving credit and term loan borrowings have been made
pursuant to a credit agreement (the Credit Agreement), as amended and restated
February 15, 1995, June 9, 1995 and September 19, 1996, with a consortium of
commercial banks. The Credit Agreement provides for up to
35
<PAGE> 38
$125 million of revolving credit loans and $170.6 million of term loans,
consisting of the remaining 1995 term loan commitment ($105.6 million) and the
1996 term loan commitment ($65 million). The proceeds from the 1996 term loan
were used to fund the acquisition of the Vapor Group (see Note 10). The Credit
Agreement bears interest at rates based on several options including LIBOR and
prime, and the effective interest rate on borrowings outstanding at December 31,
1996 approximated 7.46%. The Credit Agreement also provides for swingline loans
up to an aggregate of $5 million and for the issuance of letters of credit in an
aggregate face amount of up to $15 million. The incurrence of swingline loans
and the issuance of letters of credit will reduce the $125 million borrowing
availability under the revolving credit portion of the Amended Credit Agreement.
At December 31, 1996, the Company had outstanding letters of credit in the
aggregate amount of $10.5 million, primarily as collateral for contract
performance guarantees.
The Credit Agreement provides for the following scheduled term loan
principal repayments:
<TABLE>
<CAPTION>
(DOLLAR IN MILLIONS)
---------------------
<S> <C>
1997.................................... $ 18.2
1998.................................... 22.6
1999.................................... 40.2
2000.................................... 20.1
2001.................................... 41.4
2002.................................... 21.2
-------
$ 163.7
=======
</TABLE>
In addition, accelerated principal repayments are required if the Company
achieves certain excess annual cash flow, as defined. As a result of 1996 excess
cash flow, an incremental accelerated principal repayment of approximately $11.5
million will be required in 1997 and this accelerated payment has been included
in the current portion of term debt.
The maximum balances outstanding in 1996 and 1995 under the revolving
credit loans were $85.9 million and $87.4 million, and the average balances
outstanding were $72.0 million and $54.0 million, respectively, and the weighted
average interest rates on such loans were 6.9% and 8.2%. Borrowings outstanding
under the revolving credit commitment are due January 31, 2001.
Substantially all of the Company's U.S. assets, 100% of the capital stock
of its U.S. subsidiaries and 65% of the capital stock of its non-U.S.
subsidiaries are pledged as collateral pursuant to the credit agreement. The
Credit Agreement contains covenants specifying customary events of default and
includes restrictions, including the maintenance of financial ratios and
limitations on mergers, dividend payments and certain other matters. Annual cash
dividends are limited to $1.9 million as the result of these restrictions. At
December 31, 1996, the Company believes it was in compliance with all applicable
covenants of the Amended Credit Agreement.
The Company's senior notes, issued in June 1995, bear interest at the rate
of 9.375% and mature June 2005. The net proceeds of the Note Offering were used
to prepay an additional portion of the term loans outstanding under the existing
credit agreement. The Notes are senior unsecured obligations of the Company and
rank pari passu in right of payment with all existing and future indebtedness
under (i) capitalized lease obligations, (ii) the Credit Agreement, (iii)
indebtedness of the Company for money borrowed and (iv) indebtedness evidenced
by notes, debentures, bonds or other similar instruments for the payment of
which the Company is responsible or liable unless, in the case of clause (iii)
or (iv), in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that such obligations are subordinate in
right of payment to the Notes (collectively, Senior Indebtedness).
The Company's indenture, pursuant to which the Notes were issued, contains
certain restrictive covenants which, among other things, limit the ability of
the Company and certain of its Canadian subsidiaries to incur indebtedness, pay
dividends on and redeem capital stock, create restrictions on investments in
unrestricted subsidiaries, make distributions from certain subsidiaries, use
proceeds from the sale of assets and subsidiary stock, enter into transactions
with affiliates, create liens and enter into sale/leaseback transactions.
36
<PAGE> 39
The Company's indenture also restricts, subject to certain exceptions, the
Company's ability to consolidate and merge with, or to transfer all or
substantially all of its assets to, another person.
In conjunction with the Amended Credit Agreement and Senior Note Offering,
debt financing fees of $12.0 million were incurred and are being amortized over
the terms of the borrowings. The accumulated amortization of debt issuance costs
were $2,752,000 and $908,000 at December 31, 1996 and December 31, 1995,
respectively.
The $17 million note payable incurred in conjunction with the acquisition
of Pulse Electronics (see Note 10) matures January 2004 and bears interest at
the rate of 9.5%, subject to adjustment, based on prime plus l% in February 1998
and 2001 with a maximum rate of 13%.
The Company has entered into interest rate swap agreements to eliminate the
impact of changes in interest rates on its borrowings. At December 31, 1996, the
Company has outstanding interest rate swap agreements with commercial banks
having a total notional principal amount of $75 million. Those agreements
effectively change the Company's interest rate exposure on $75 million of loans
from variable to fixed rates (resulting in effective interest rates ranging from
7.22% to 8.37%). The interest rate swap agreements mature in 1998 and 1999. The
Company is exposed to credit loss in the event of nonperformance by the other
parties to the interest rate swap agreements. However, the Company does not
anticipate nonperformance by the counterparties.
See Note 19 regarding a subsequent amendment to the Company's debt
agreements in conjunction with a stock repurchase.
5. INTANGIBLES:
Intangible assets are being amortized using the straight-line method over
their respective estimated useful lives. Goodwill is amortized over 40 years and
the accumulated amortization was $4,195,000 and $2,389,000 at December 31, 1996
and 1995, respectively. Intangible assets of the Company, other than goodwill,
consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
ASSETS (AMORTIZATION PERIOD) 1996 1995
------------------------------------------------------------- ------- -------
<S> <C> <C>
Patents and trademarks, net of accumulated amortization of
$15,407 and $11,347 (4-10 years)........................... $36,920 $19,886
Covenants not to compete, net of accumulated amortization of
$8,963 and $8,323 (5 years)................................ 1,839 1,218
Other intangibles, net of accumulated amortization of $7,090
and $6,319 (3-7 years)..................................... 5,482 5,708
------- -------
$44,241 $26,812
======= =======
</TABLE>
The Company evaluates the recoverability of intangible assets, including
goodwill, at each balance sheet date based on forecasted future operations and
undiscounted cash flows and other subjective criteria. Based upon historical
information, management believes that the carrying amount of these intangible
assets will be realizable over the respective amortization periods.
6. INCOME TAXES:
A reconciliation of the United States federal statutory income tax rate to
the effective income tax rate is provided below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
United States federal statutory rate....................... 35.0% 35.0% 35.0%
Non-U.S. (Canadian) taxes.................................. .5 .7 1.0
State taxes, net of federal tax benefit.................... 3.5 4.3 5.0
---- ---- ----
39.0% 40.0% 41.0%
==== ==== ====
</TABLE>
37
<PAGE> 40
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current taxes:
Federal........................................ $17,498 $16,032 $16,563
State.......................................... 2,138 3,817 5,251
Foreign........................................ 2,372 6,413 4,783
------- ------- -------
22,008 26,262 26,597
------- ------- -------
Deferred taxes:
Federal........................................ (2,432) (597) (633)
State.......................................... (278) (142) (126)
Foreign........................................ 1,625 (3,081) (225)
------- ------- -------
(1,085) (3,820) (984)
------- ------- -------
Total provision.................................. $20,923 $22,442 $25,613
======= ======= =======
</TABLE>
The 1995 total provision includes a $960,000 income tax effect on the
extraordinary loss (see Note 14) related to the early extinguishment of certain
debt obligations.
The components of income before taxes on income for U.S. and non-U.S.
(primarily Canada) operations are $42,397,000 and $11,251,000 for 1996,
$46,594,000 and $9,213,000 for 1995 and $50,309,000 and $12,145,000 for 1994.
The sources of deferred income taxes were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Depreciation.......................................... $ 782 $ (619) $ (145)
Postretirement benefits............................... (171) (427) (411)
Pension............................................... (1,238) (397) 647
Accrued warranty...................................... (497) 8 134
Inventory............................................. (1,450) (77) (52)
Other liabilities and reserves........................ 1,489 (2,308) (1,157)
------- ------- -------
$(1,085) $(3,820) $ (984)
======= ======= =======
</TABLE>
The following table highlights the major components comprising the deferred
tax assets and liabilities:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
---------------------
1996 1995
------- -------
<S> <C> <C>
Deferred income taxes:
Depreciation.................................................. $(8,246) $(6,210)
Postretirement benefits....................................... 2,064 1,893
Pension....................................................... 1,698 460
Accrued warranty.............................................. 2,481 1,378
Inventory..................................................... 3,562 1,513
Other deferred income taxes................................... 543 1,351
------- -------
Net deferred asset............................................ $ 2,102 $ 385
======= =======
</TABLE>
7. RETIREMENT AND EMPLOYEE SAVINGS PLANS:
The Company has a defined benefit pension plan which covers substantially
all union employees and provides pension benefits of stated amounts for each
year of service of the employee. The Company also has a defined contribution
plan which prior to March 31, 1995, covered certain nonunion employees and a
noncontributory defined benefit plan for certain domestic repair center
employees. In connection with the
38
<PAGE> 41
establishment of the ESOP (see Note 9) in January 1995, the pension plan for
U.S. salaried employees was modified to eliminate any credit (or accrual) for
current service costs for any future periods, effective March 31, 1995. The
Company's 401(k) savings plan was also amended to provide for the Company's
future matching contributions to be made to the ESOP in the form of the
Company's common stock. Separate plans are maintained for U.S. and Canadian
employees. The Company's funding methods, which are primarily based on the ERISA
requirements, differ from those used to recognize pension expense, which is
primarily based on the projected unit credit method, in the accompanying
financial statements.
As a result of the formation of the Company described in Note 1, the
Company recorded a pension liability of $4,308,000 in connection with the U.S.
Pension Plan for Collectively Bargained Employees and a pension asset of
$5,378,000 in connection with the Canadian pension plans in the opening balance
sheet.
Net periodic pension expense for the U.S. pension plans was as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current service cost.................................. $ 564 $ 807 $ 1,663
Interest cost on projected benefit obligation......... 1,186 1,128 891
Expected return on assets............................. (1,178) (883) 146
Net amortization and deferrals........................ 50 (64) (854)
Recognition of special events......................... 696 70 --
Additional liability to reach minimum................. -- -- 189
------- ------- -------
Net periodic pension expense.......................... $ 1,318 $ 1,058 $ 2,035
======= ======= =======
</TABLE>
Weighted average discount rates of 7.5%, 7.5% and 9.0% were used in
determining the actuarial present value of the projected benefit obligation at
December 31, 1996, 1995 and 1994. The expected long-term rates of return on
assets at the measurement dates were 10% in 1996, 1995 and 1994. Plan assets
consist primarily of common stocks, corporate bonds, U.S. government obligations
and temporary investments.
In 1996, as the result of an early retirement package offered to certain
union employees, the Company incurred a charge of $696,000 reflected above as a
special event.
The following table sets forth the U.S. pension plans' funded status and
amounts recognized as of December 31:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested benefits........................................... $(12,417) $(12,155)
Nonvested benefits........................................ (253) (416)
-------- --------
Total accumulated benefit obligation........................ (12,670) (12,571)
Additional benefits based on estimated future salary
levels.................................................... (3,897) (3,233)
-------- --------
Projected benefit obligation for service rendered to date... (16,567) (15,804)
Plan assets at fair value................................... 13,303 11,398
-------- --------
Projected benefit obligation in excess of plan assets....... (3,264) (4,406)
Unrecognized prior service costs............................ 231 256
Unrecognized net gain from past experience different from
that assumed and the effect of changes in assumptions..... (1,572) (894)
Adjustment to reflect minimum liability..................... (119) (17)
-------- --------
(Accrued) pension cost recognized in the accompanying
balance sheet............................................. $ (4,724) $ (5,061)
======== ========
</TABLE>
39
<PAGE> 42
The Company's Canadian subsidiaries have defined benefit retirement plans
covering substantially all employees. Net periodic pension expense for the
Canadian plans was as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current service cost.................................. $ 490 $ 437 $ 391
Interest cost on projected benefit obligation......... 1,208 1,131 984
Return on plan assets................................. (1,304) (1,306) (1,291)
Net amortization and deferrals........................ 252 132 33
------- ------- -------
Net periodic pension expense.......................... $ 646 $ 394 $ 117
======= ======= =======
</TABLE>
Weighted average discount rates of 8.5%, 8.5% and 10% were used in
determining the actuarial present value of the projected benefit obligation at
December 31, 1996, 1995 and 1994. The expected long-term rates of return on
assets at the measurement dates were 9.25%, 10% and 10% in 1996, 1995 and 1994,
respectively.
The following table sets forth the Canadian plans' funded status and
amounts recognized as of December 31:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
1996 1995
-------- --------
<S> <C> <C>
Actuarial present value of benefit accumulated obligations:
Vested benefits............................................ $(14,258) $(13,290)
Nonvested benefits......................................... (59) (85)
-------- --------
Total accumulated benefit obligation......................... (14,317) (13,375)
Additional benefits based on estimated future salary
levels..................................................... (900) (991)
-------- --------
Projected benefit obligation for service rendered to date.... (15,217) (14,366)
Plan assets at fair value.................................... 17,637 14,311
-------- --------
Projected benefit obligation less plan assets................ 2,420 (55)
Balance of unrecognized prior service cost................... 1,135 1,254
Unrecognized net gain from past experience different from
that assumed and the effect of changes in assumptions...... 1,053 3,242
-------- --------
Prepaid pension cost recognized in the accompanying balance
sheet...................................................... $ 4,608 $ 4,441
======== ========
</TABLE>
As a result of the 1996 acquisitions of Futuris and Vapor (see Note 10) the
Company sponsors other defined benefit plans in Australia and Canada. The total
1996 pension expense for these plans was approximately $175,000.
8. POSTRETIREMENT BENEFITS:
In addition to providing pension benefits, the Company had provided certain
unfunded postretirement health care and life insurance benefits for
substantially all employees. In conjunction with the establishment of the ESOP
in January 1995 (see Note 9), the postretirement health care and life insurance
benefits for salaried employees were modified to discontinue benefits for
employees who had not attained the age of 50 by March 31, 1995. As a result of
the formation of the Company discussed in Note 1, the Company is not obligated
to pay health care and life insurance benefits to individuals who had retired as
of the acquisition date. As part of the accounting for the 1990 Acquisition, a
liability for active employees of $5,798,000 was established for the estimated
unfunded postretirement health benefit obligation as of the acquisition date. As
part of the purchase accounting for the 1996 acquisition of Vapor (See Note 10),
a liability of $1.7 million was established for postretirement medical benefits.
40
<PAGE> 43
The postretirement benefit expenses were comprised of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Service cost............................................. $ 267 $ 202 $ 300
Interest cost............................................ 935 757 731
Net Amortization......................................... 13 (93) 51
------ ------ ------
$1,215 $ 866 $1,082
====== ====== ======
</TABLE>
Actual postretirement benefit payments were $68,000, $67,000 and $188,000
in 1996, 1995 and 1994.
The accumulated postretirement benefit obligation was comprised of the
following:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
---------------------
1996 1995
------- -------
<S> <C> <C>
Fully eligible plan participants.............................. $ 7,514 $ 4,816
Other active plan participants................................ 7,466 7,007
------- -------
Total accumulated postretirement benefit obligation........... 14,980 11,823
Unrecognized transition obligation............................ (550) (623)
Unrecognized prior service cost............................... 359 428
Unrecognized net (loss)....................................... (1,480) (1,213)
------- -------
Accrued postretirement benefit cost........................... $13,309 $10,415
======= =======
</TABLE>
The accumulated postretirement benefit transition obligation was
actuarially determined using a method that applied specific interest rates to
future cash flows when discounting the obligation to its present value. The
interest rate associated with future cash flows and used to discount the
accumulated postretirement benefit obligation to present value was 7.5%, 7.5%
and 9% at December 31, 1996, 1995 and 1994. The assumed medical cost trend rate
at December 31, 1996 was 10%, grading down to an ultimate rate of 6% in 1998. A
one percentage point increase in the assumed health care cost trend rates for
each future year increases annual postretirement benefit expense by $221,000 and
the accumulated postretirement benefit obligation by $2,552,000.
9. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (ESOP):
Effective January 1, 1995, the Company established the ESOP to enable
participating employees to obtain ownership interests in the Company. Employees
eligible to participate in the ESOP primarily include the salaried U.S.
employees and, as described in Notes 7 and 8, the ESOP contributions are
intended to supplement or replace other salaried employee benefit plans.
In connection with the transaction described in Note 2, the Company made a
$140 million loan to the ESOP which was used to purchase 9,336,000 shares of the
Company's outstanding common stock. The ESOP loan initially had a term of 50
years with interest at 8.5%. The loan is collateralized by the shares purchased
by the ESOP. Company contributions to the ESOP will be used to repay the ESOP
loan, which requires annual payments of $12 million (includes principal and
interest) beginning December 31, 1995. The Company is obligated to contribute
amounts sufficient to repay the ESOP loan. The ESOP uses such Company
contributions to repay the loan made to the ESOP by the Company. These
transactions occur simultaneously and, for accounting purposes, offset each
other. The effect of the ESOP on the Company's financial statements is that the
unearned ESOP shares of $133.9 million at December 31, 1996, as reflected in the
shareholders' equity section of the accompanying financial statements, will be
amortized to compensation expense coterminous with the ESOP loan. In addition,
any difference between the market price of the Company's common stock and $15
per share (the purchase price paid by the ESOP) will also be charged or credited
to compensation expense (with the offset to additional paid-in capital) based on
the annual allocation to ESOP participants. Total compensation expense incurred
in 1996 and 1995 for allocated ESOP shares was $2,578,000 and $2,597,000. In
addition, the Company incurred expenses of approximately $1 million in 1995 to
establish the ESOP and related trust.
41
<PAGE> 44
Initially approximately 187,000 shares were to be allocated annually to
participants over a 50-year period. As a result of the acquisition and inclusion
of certain United States employees of Vapor, the annual ESOP allocation will
increase to approximately 284,000, with a corresponding reduction in the
repayment term of the ESOP loan.
10. ACQUISITIONS:
Vapor Group
On September 19, 1996, the Company acquired from Mark IV Industries Inc.
the Vapor Group (Vapor) for a cash purchase price of approximately $63.9
million. The transaction, which has been accounted for as a purchase, was
effective September 1, 1996 and accordingly the results of Vapor have been
included in the accompanying financial statements since September 1, 1996.
Pursuant to an earn out provision, the purchase price may be increased by up to
$2 million based on a sales formula. Vapor is the leading manufacturer of door
controls for transit rail cars and metropolitan buses in the United States, with
annual revenues for its most recent fiscal year (prior to the acquisition) of
approximately $65 million. The net tangible assets of Vapor were approximately
$36 million at the date of purchase. The fair market valuations and allocation
of the purchase price to the acquired tangible and intangible assets have been
based upon an independent appraisal. The purchase price paid in excess of the
fair value of the acquired net tangible assets was approximately $28.2 million
and has been allocated as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
Trade Name................................................... $ 11,121
Patents...................................................... 6,479
Non-compete Agreements....................................... 1,261
Goodwill..................................................... 8,924
Technology................................................... 425
--------
$ 28,210
========
</TABLE>
The tradename and goodwill will be amortized over 40 years. The patents
over the remaining lives and the non-compete agreements over 5 years for a total
annual expense of $1.2 million.
In conjunction with integrating the Vapor operations into the Company,
early retirement incentives and other severance programs have been offered to
the Vapor employees. The estimated cost of this restructuring ($3.2 million) was
accrued in the allocation of the Vapor purchase price.
Pro forma results of operations, including the effect of the pro forma
adjustments related to the acquisition of Vapor, assuming the transaction had
occurred on January 1, 1995, would be as follows:
<TABLE>
<CAPTION>
UNAUDITED
(DOLLARS IN THOUSANDS)
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Net Sales................................................... $508,107 $489,936
Net Income.................................................. $ 33,497 $ 35,177
Net Income per Common Share................................. $ 1.18 $ 1.32
</TABLE>
The pro forma financial information presented above does not purport to
present what the Company's results of operations would have been if the
acquisition of Vapor had actually occurred on January 1, 1995, or to project the
Company's results of operations for any future period.
Futuris Industrial Products Pty. Ltd.
Effective January 31, 1996, the Company acquired Futuris Industrial
Products Pty. Ltd. (Futuris), an Australian company, for a cash purchase price
of approximately $15 million. Futuris is a leading manufacturer of brake shoes
and disc brake pads for railroads in Australia and the Pacific Rim, with annual
revenues of approximately $10.5 million. The acquisition has been accounted for
under the purchase method and the excess of the purchase price over the fair
value of the net assets acquired was approximately $10 million and
42
<PAGE> 45
has been allocated primarily to goodwill. The effect of the acquisition is not
considered material to the consolidated results of the Company.
Pulse Electronics
Effective January 31, 1995, the Company purchased substantially all of the
assets and related liabilities of Pulse Electronics, Inc. (Pulse) for
$54,900,000. Pulse manufactures a variety of electronic products for the rail
industry, including event recorders, end-of-train devices, engineman alertness
monitors and fuel measuring devices. The purchase price consisted of: (a) a $20
million cash payment, (b) a $17 million note payable which matures January 2004
and bears interest at 9.5%, which will be adjusted to a new rate based on the
prime interest rate plus 1% as of February l, 1998 and 2001 (with a maximum
adjustment on each date of 2% and an absolute maximum interest rate of 13%) and
(c) 1,193,333 shares of the Company's common stock. In addition, noncompete
agreements were entered into with two of the former owners of Pulse for a
two-year period after their employment with the Company is terminated. The net
tangible assets of Pulse were approximately $9 million at the date of purchase.
The fair market valuations and allocation of the purchase price to the acquired
tangible and intangible assets have been based upon an independent appraisal.
The purchase price paid in excess of the fair values of the acquired net
tangible assets approximates $46 million and has been allocated as follows:
<TABLE>
<CAPTION>
FAIR ANNUAL
VALUE AMORTIZATION AMORTIZATION
($000) PERIOD EXPENSE ($000)
------- ------------ ---------------
<S> <C> <C> <C>
Technology...................................... $ 3,500 20 $ 175
Skilled work force.............................. 1,400 5 280
Noncompete agreements........................... 500 5 100
Trade name...................................... 12,000 40 300
Goodwill........................................ 28,600 40 715
-------
$ 1,570
=======
</TABLE>
The Company has selected a 40-year amortization period for goodwill and
trade name because the Company and its acquired businesses operate in a stable
and mature, basic manufacturing environment. Further, the Company's products and
technology are not prone to obsolescence, and can be and have been adapted to
meet the changing needs of its customer base. The Company and its predecessors
have been in existence for over 125 years and the basic operating principles of
their core products have remained relatively unchanged. See Note 20 for pro
forma disclosure as if the Pulse acquisition occurred January l, 1995.
Other
During 1995 the Company acquired a 50% ownership interest in Westcode
Incorporated, a manufacturer of transit door equipment. During 1996 the Company
disposed of its 50% interest in Westcode as a part of obtaining Federal
Department of Justice approval for the acquisition of Vapor. These transactions
are not material to the Company's operations.
11. 1995 STOCK INCENTIVE PLAN:
The Company adopted a 1995 Stock Incentive Plan on May 26, 1995, under
which the Company may grant options to employees of Westinghouse Air Brake
Company and Subsidiaries for up to 3,100,000 shares of Westinghouse Air Brake
Company common stock. Options to purchase approximately 1,518,000 shares of
Westinghouse Air Brake Company common stock under the plan have been granted to
employees of Westinghouse Air Brake Company at, or in excess of, fair market
value at the date of grant (which currently range from $11 to $14 per share).
Generally, the options become exercisable over three and five-year vesting
periods and expire ten years from the date of grant.
In 1996, as a part of a long-term incentive program, the Company granted
options to purchase up to 684,206 shares to certain executives under the 1995
stock incentive plan. The option price per share is the greater of the market
value of the stock on the date of grant or $14. The options, which vest 100%
after eight
43
<PAGE> 46
years, are subject to accelerated vesting after three years if the Company
achieves certain earnings targets, during its fiscal years 1997, 1998 and 1999,
as established by the compensation committee of the board of directors.
Effective November 1, 1995, the Company adopted a nonemployee directors
stock option plan under which 100,000 shares of common stock are reserved for
issuance at a price not less than $14. In November 1995, the Company granted
nonstatutory stock options to members of the board of directors to purchase a
total of 20,000 shares at a price of $14.
The Company applies APB 25 and related interpretations in accounting for
its stock option plans. Accordingly, no compensation cost has been recognized
under these plans. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant dates for awards under the
plan consistent with the method set forth under FAS 123, the Company's net
income and net income per share would have been decreased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net income:
As reported................................................. $32,725 $33,725
Pro forma................................................... $31,117 $32,482
Net income per common share:
As reported................................................. $ 1.15 $ 1.27
Pro forma................................................... $ 1.09 $ 1.22
</TABLE>
Since compensation expense associated with option grants is recognized over
the vesting period, the initial impact of applying FAS 123 on pro forma net
income is not representative of the potential impact on pro forma net income in
future years, when the effect of the recognition of a portion of compensation
expense from multiple awards would be reflected.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yields of
.32% and 0%; risk-free interest rates of 6.25% and 6.58%; and expected lives of
7.3 years and 7.5 years. Since the Company is a recent public registrant, it has
utilized its recent trading activity during 1996 in determining its expected
stock price volatility of 30.43%. The weighted average fair value of options
granted during the year was $4.05 ($2.47, net of taxes) and $5.56 ($3.34, net of
taxes) for the years ended December 31, 1996 and 1995, respectively.
44
<PAGE> 47
The following is a summary of stock option activity under the 1995 stock
incentive plan:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- ---------
<S> <C> <C>
Balance at January 1, 1995................................. -- $ --
Granted.................................................... 1,316,500 14.00
Exercised.................................................. -- --
Canceled................................................... (37,000) 14.00
---------- ---------
Balance at December 31, 1995............................... 1,279,500 $ 14.00
Granted.................................................... 958,956 $ 13.14
Exercised.................................................. -- --
Canceled................................................... (16,000) 14.00
---------- -------
Balance at December 31, 1996............................... 2,222,456 $ 13.63
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
--------- ---------
<S> <C> <C>
Exercisable................................................. 332,992 252,300
Available for future grants................................. 877,544 1,820,500
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED- WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- -------- ----------- ------------ --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$11.00 274,750 9.83 years $ 11.00 68,692 $11.00
$14.00 1,947,706 8.22 years $ 14.00 264,300 $14.00
</TABLE>
12. OPERATING LEASES:
Rental expense under all leases was approximately $2,786,000, $2,773,000
and $1,941,000 for the years ended December 31, 1996, 1995 and 1994. Operating
leases relate principally to warehouse and office space, transportation,
equipment and communication systems. Minimum annual rentals payable under
noncancelable leases in each of the next five years and beyond are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
1997......................................................... $2,390
1998......................................................... 2,021
1999......................................................... 1,825
2000......................................................... 1,648
2001 and thereafter.......................................... 1,723
------
$9,607
======
</TABLE>
14. EXTRAORDINARY ITEM:
In connection with the June 9, 1995 Amended Credit Agreement (see Note 4),
the Company wrote off approximately $2,342,000 of previously capitalized cost
relating to the previous credit agreement. This resulted in net of tax charge of
$1,382,000 or $.05 per share, which has been reflected as an extraordinary item.
15. STOCKHOLDERS' AND VOTING TRUST AGREEMENTS:
As of December 31, 1996, the approximate ownership interests in the
Company's common stock are held by: management and the ESOP (43%), Scandinavian
Incentive Holding B.V. (SIH) (27%), and all others
45
<PAGE> 48
including public shareholders (30%). SIH is a successor in interest to Incentive
AB (a Swedish corporation) which acquired Investment AB Cardo. Investment AB
Cardo was one of the original equity owners at the time of the Company's 1990
acquisition of the Railway Products Group of American Standard Inc.
A Stockholders Agreement exists between management, SIH and a private
investment group that provides for, among other things, the composition of the
Board of Directors as long as certain minimum stock ownership percentages are
maintained.
A Registration Rights Agreement has also been entered into with SIH which
provides that SIH may make two requests to the Company for the additional
registration of the shares owned by SIH. This would enable SIH to sell its
common stock in the public market. The former Pulse shareholders and the ESOP
have the right to request that their shares be included in the registration
requested by SIH. The Company also has a right of first refusal in the event
that SIH decides to sell its shares to a private investor.
See Note 19 regarding a subsequent event which, when completed, will change
the ownership percentages and also amend and restate the stockholders agreements
and related registration rights agreement.
Those shareholders comprised of the active original management owners have
entered into an Amended Voting Trust/Disposition Agreement effective December
13, 1995. The agreement provides for, among other matters, the stock to be voted
as one block and restrictions on the sale or transfer of such stock. The
agreement expires on January 1, 2000 and can be terminated by an affirmative
vote of two-thirds of the stock shares held by the trust. In connection with
this Voting Trust, the Company has entered into an Indemnification Agreement
with the trustees, which is covered by the Company's directors and officers
liability insurance.
The shares held by the ESOP (established January 31, 1995) are subject to
the terms of the related ESOP Loan Agreement, Employee Stock Ownership Trust
Agreement, Employee Stock Ownership Plan and the Pledge Agreement. The ESOP is
further described in Note 9.
16. PREFERRED STOCK:
Effective January 1995, the Company's authorized capital stock includes
1,000,000 shares of preferred stock. The Board of Directors has the authority to
issue the preferred stock and to fix the designations, powers, preferences and
rights of the shares of each such class or series, including dividend rates,
conversion rights, voting rights, terms of redemption and liquidation
preferences, without any further vote or action by the shareholders of the
Company. The rights and preferences of the preferred stock would be superior to
those of the common stock. At December 31, 1996 and 1995 there is no preferred
stock issued or outstanding.
17. COMMITMENTS AND CONTINGENCIES:
Under the terms of the purchase agreement and related documents for the
1990 Acquisition described in Note 1, the seller, American Standard, Inc. (ASI),
has indemnified the Company for certain items including, among others,
environmental claims. The indemnification provisions of the agreement expire at
various dates through 2000 (which is when the environmental indemnification
expires). If ASI was unable to honor or meet these indemnifications, the Company
would be responsible for such items. In the opinion of management, ASI currently
has the ability to meet its indemnification obligations. ASI has not disputed
any coverage or reimbursement under these provisions.
The Company, through one of its operating subsidiaries, has been named,
along with other parties, as a Potentially Responsible Party (PRP) under the
North Carolina Inactive Sites Response Act because of an alleged release or
threat of release of hazardous substances at the "Old James" landfill site in
North Carolina. Based upon discussions with a representative of the North
Carolina Department of Environment, Health and Natural Resources, the Company
believes that the total cleanup costs for all parties should not exceed $1
million. The Company believes that the costs associated with the cleanup
activities at this site which it may be held responsible for, if any, are
covered by (a) the ASI indemnification referred to above, as ASI previously
owned 50% of the subsidiary and (b) a related insurance policy which expires
January 2002 for environmental claims provided by the other former 50% owner of
the involved operating subsidiary. In addition, management believes that such
costs, if any, attributable to the Company will not be material and, therefore,
has not established a reserve for such costs.
46
<PAGE> 49
In March 1994, the Company retained an environmental consultant to study
the environmental conditions at the Wilmerding, Pennsylvania property. The
purpose of the study was to evaluate whether contaminants were present at the
property. This study was undertaken at the Company's sole initiative. The
consultant identified four primary areas that may require remediation because of
elevated levels of certain volatile organic compounds believed to have
originated before the 1990 Acquisition. The consultant also recommended several
options to address the contamination. Remediation of several areas is currently
being conducted and the Company is evaluating which option will be selected for
the remaining areas. The Company is not required to conduct any remediation at
the property because of a consent decree or government order. The consultant
anticipates that the cost of remediation will range between $100,000 and
$1,000,000, depending upon the final option selected. The Company believes the
costs for which it may be responsible, if any, are covered by the ASI
indemnification agreement referred to above and that such costs, if any, will
not be material and therefore has not established a reserve for such costs.
The Company's operations do not use and its products do not contain any
asbestos. The operations acquired by the Company from ASI discontinued the use
of asbestos in 1980. The Company is named as a codefendant in asbestos claims
filed by third parties against ASI relating to events occurring prior to 1981
(which is significantly prior to the 1990 Acquisition). These claims are covered
by the two indemnification agreements and the insurance policy referred to
above. ASI has taken complete responsibility in administering, defending and
settling the claims. The Company is not involved with, nor has it incurred any
costs related to, these claims. ASI has not claimed that the Company has any
responsibility for these cases. Management believes that these claims are not
related to the Company and that such costs, if any, attributable to the Company
and will not be material; therefore, the financial statements accordingly do not
reflect any costs or reserves for such claims.
In the opinion of management, based on available information, environmental
matters and asbestos claims do not presently represent any material
contingencies to the Company.
As of December 31, 1996, the Company is contingently liable in the amount
of $10.5 million under standby letters of credit and guarantees.
From time to time the Company is involved in litigation relating to claims
arising out of its operations in the ordinary course of business. As of the date
hereof, the Company is involved in no litigation which the Company believes will
have a material adverse effect on its financial condition or results of
operations. The Company historically has not been required to pay any material
liability claims.
18. RELATED PARTY TRANSACTIONS:
In connection with the Pulse acquisition, the Company assumed a lease
agreement (which expires December 31, 2002) between Pulse and a limited
partnership in which the principal partners are former shareholders of Pulse.
Rent is payable monthly and is the greater of either (a) $27,603 per month
through January 1998, then readjusted every five years to reflect the fair
market value of the lease or (b) the debt service, including the related taxes,
under the bank financing agreement ($1.44 million original loan) used for the
acquisition of the premises.
In conjunction with the recapitalization transaction, the IPO, the
formation of the ESOP and the acquisition of Pulse, the Company paid $4.1
million of investment advisory fees to the private investment company which has
been a shareholder of the Company.
See also Notes 4, 9, 10, 15 and 19 for certain other related party
transactions.
19. SUBSEQUENT EVENT--STOCK REPURCHASE
On March 4, 1997, an agreement was reached with SIH, a major shareholder,
whereby the Company agreed to repurchase 4 million shares of its common stock
held by SIH for a purchase price of $11 per share for a total purchase price of
$44 million. The Company and its bank group agreed to amend the Company's credit
facility to increase the revolving credit availability by $15 million (from $125
million to $140 million) and to waive the 1996 term excess cash flow payment of
approximately $11.5 million. Approval of the senior noteholders must still be
obtained to complete this transaction. The total fees involved in this
transaction are
47
<PAGE> 50
estimated to be $2 million, which will be capitalized and amortized over the
lives of the loan agreements. The Company anticipates it will borrow up to $46
million to fund this transaction which is expected to be completed by March 31,
1997.
In conjunction with this transaction, SIH also agreed to sell its remaining
6 million shares of the Company's common stock to a group of investors
consisting of Vestar Equity Partners, L.P., Harvard Private Capital Group,
American Industrial Partners Capital Fund II, L.P. and certain members of senior
management.
The stockholders' and voting trust agreements described in Note 15 will
also be amended and restated as a result of these transactions.
The following presents the Company's debt structure, net income and
earnings per share on a pro forma basis as if the stock repurchase occurred at
January 1, 1996:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
AND THE YEAR THEN ENDED
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
--------------------------
UNAUDITED
PRO FORMA
FOR STOCK
ACTUAL RE-PURCHASE
-------- -----------
<S> <C> <C>
Term loans................................................. $163,700 $ 163,700
Revolving credit notes..................................... 61,000 107,000
Senior notes, 9 3/8% due 2005.............................. 100,000 100,000
Note payable--Pulse acquisition............................ 16,990 16,990
-------- -----------
Total.................................................... $341,690 $ 387,690
======== =========
Net income................................................. $ 32,725 $ 30,600
======== =========
Earnings per share......................................... $ 1.15 $ 1.25
======== =========
Weighted average shares.................................... 28,473 24,473
======== =========
</TABLE>
20. UNAUDITED PRO FORMA INFORMATION:
The unaudited pro forma condensed income statement below gives effect to
the occurrence of the Company's recapitalization transaction, public stock
offering and refinancing (Notes 2, 3, 4 and 9) and the acquisition of Pulse
Electronics (Note 10) as if these events had occurred on January 1, 1995. The
unaudited pro forma income statement does not purport to represent what the
Company's results of operations actually would have been if the foregoing had in
fact occurred on such date.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
--------------------------------------
HISTORICAL COMPANY
1995 ADJUSTMENTS PRO FORMA
-------- ----------- ---------
<S> <C> <C> <C>
Sales............................................. $424,959 $ 2,649 $ 427,608
Gross profit...................................... 146,058 1,633 147,691
Income from operations............................ 89,302 763 90,065
Interest expense and other, net................... 30,793 (3,616) 27,177
Income before taxes and extraordinary item........ 58,509 4,379 62,888
Income taxes...................................... 23,402 1,798 25,200
Income before extraordinary item.................. 35,107 2,581 37,688
Earnings per share before extraordinary item...... 1.32 1.33
Weighted average shares outstanding............... 26,639 28,423
</TABLE>
48
<PAGE> 51
21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-----------------------------------------------
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales...................................... $105,731 $109,135 $109,801 $128,845
Operating income............................... 19,221 19,987 19,682 20,828
Income before taxes............................ 12,826 13,761 13,348 13,713
Net income..................................... 7,696 8,256 8,009 8,764
Net income per common share.................... .27 .29 .28 .31
Weighted average common shares outstanding..... 28,482 28,410 28,456 28,518
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales...................................... $109,742 $115,134 $104,566 $ 95,517
Operating income............................... 26,145 26,768 17,497 18,892
Income before taxes............................ 18,375 16,631 10,965 12,538
Income before extraordinary item............... 10,841 9,812 6,469 7,985
Net income..................................... 10,841 8,430 6,469 7,985
Income per common share before
extraordinary item........................... .40 .44 .23 .28
Net income per common share.................... .40 .38 .23 .28
Weighted average common shares outstanding..... 26,902 22,376 28,639 28,640
</TABLE>
During the fourth quarter of 1996, the estimated annual income tax rate was
revised to 39%. The decrease resulted primarily from reductions in tax rates for
several states and the establishment of a Foreign Sales Corporation. The
adjustment resulted in a $.02 increase in fourth quarter earnings per share.
49
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTINGHOUSE AIR BRAKE COMPANY
By /s/ WILLIAM E. KASSLING
---------------------------
William E. Kassling
Chief Executive Officer
Date: March 18, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE
- ----------------------------------------------- ------------------
<S> <C>
By /s/ WILLIAM E. KASSLING March 18, 1997
-----------------------------
William E. Kassling, Chairman of the Board,
President and Chief Executive Officer
By /s/ ROBERT J. BROOKS March 18, 1997
-----------------------------
Robert J. Brooks, Chief Financial Officer,
Chief Accounting Officer and Director
By /s/ JAMES C. HUNTINGTON JR. March 18, 1997
-----------------------------
James C. Huntington Jr., Director
By /s/ MIKAEL LILIUS March 18, 1997
-----------------------------
Mikael Lilius, Director
By /s/ EMILIO A. FERNANDEZ March 18, 1997
-----------------------------
Emilio A. Fernandez, Director
By /s/ JAMES V. NAPIER March 18, 1997
-----------------------------
James V. Napier, Director
By /s/ JAMES P. KELLEY March 18, 1997
-----------------------------
James P. Kelley, Director
</TABLE>
50
<PAGE> 53
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Westinghouse Air Brake Company:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Westinghouse Air Brake Company included in
this Form 10-K, and have issued our report thereon dated March 4, 1997. Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. The schedule listed in the index in Item 14(a)2 of this Form 10-K is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial date required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
March 4, 1997
51
<PAGE> 54
SCHEDULE II
WESTINGHOUSE AIR BRAKE COMPANY
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
BALANCE CHARGED DEDUCTIONS BALANCE
AT BEGINNING CHARGED TO OTHER FROM AT END
DESCRIPTION OF PERIOD TO EXPENSE ACCOUNTS(1) RESERVES OF PERIOD
------------ ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1994
Accrued Warranty............... $3,645 $4,723 -- $4,683 $ 3,685
Allowance for doubtful
accounts.................... 1,329 238 -- 325 1,242
1995
Accrued Warranty............... $3,685 $8,123 -- $8,153 $ 3,655
Allowance for doubtful
accounts.................... 1,242 (361) -- 50 831
1996
Accrued Warranty............... $3,655 $5,459 $ 3,802 $4,744 $ 8,172
Allowance for doubtful
accounts.................... 831 406 210 100 1,347
</TABLE>
- ---------
(1) Reserves of acquired company.
52
<PAGE> 55
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION NUMBER
- ------- ------------------------------------------------------------------- ---------------
<C> <S> <C>
3.1 Restated Certificate of Incorporation of the Company dated January
30, 1995, as amended March 30, 1995**
3.2 By-Laws of the Company as adopted, effective January 31, 1995**
4.1 Form of Indenture between the Company and The Bank of New York**
4.2 Form of Note (included in Exhibit 4.1)
9 Second Amended WABCO Voting Trust/Disposition Agreement dated as of
December 13, 1995 among the Management Investors (Schedules and
Exhibits omitted)***
10.1 Westinghouse Air Brake Company Employee Stock Ownership Plan and
Trust, effective January 31, 1995**
10.2 ESOP Loan Agreement dated January 31, 1995 between Westinghouse Air
Brake Company Employee Stock Ownership Trust ("ESOT") and the
Company (Exhibits omitted)**
10.3 Employee Stock Ownership Trust Agreement dated January 31, 1995
between the Company and U.S. Trust Company of California, N.A.**
10.4 Pledge Agreement dated January 31, 1995 between ESOT and the
Company**
10.5 Credit Agreement dated as of January 31, 1995 and Amended and
Restated as of February 15, 1995 and June 9, 1995 among the
Company, various financial institutions, Chemical Bank Delaware,
The Bank of New York and Credit Bank Suisse (Schedules and Exhibits
omitted)***
10.6 Stockholders Agreement dated as of January 31, 1995 among the
Company, SIH and RAC Voting Trust**
10.7 Common Stock Registration Rights Agreement dated as of January 31,
1995 among the Company, SIH, RAC Voting Trust, Vestar Capital,
Pulse Electronics, Inc., Pulse Embedded Computer Systems, Inc., the
Pulse Shareholders and ESOT (Schedules and Exhibits omitted)**
10.8 Indemnification Agreement dated January 31, 1995 between the
Company and the RAC Voting Trust trustees**
10.9 Agreement of Sale and Purchase of the North American Operations of
the Railway Products Group, an operating division of American
Standard Inc., dated as of 1990 between Rail Acquisition Corp. and
American Standard Inc. (only provisions on indemnification are
reproduced)**
10.10 Letter Agreement (undated) between the Company and American
Standard Inc. on environmental costs and sharing**
10.11 Purchase Agreement dated as of June 17, 1992 among the Company,
Schuller International, Inc., Manville Corporation and European
Overseas Corporation (only provisions on indemnification are
reproduced) **
10.12 Asset Purchase Agreement dated as of January 23, 1995 among the
Company, Pulse Acquisition Corporation, Pulse Electronics, Inc.,
Pulse Embedded Computer Systems, Inc. and the Pulse Shareholders
(Schedules and Exhibits omitted)**
10.13 License Agreement dated as of December 31, 1993 between SAB WABCO
Holdings B.V. and the Company**
</TABLE>
53
<PAGE> 56
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION NUMBER
- ------- ------------------------------------------------------------------- ---------------
<C> <S> <C>
10.14 Letter Agreement dated as of January 19, 1995 between the Company
and Vestar Capital Partners, Inc.**
10.15 Westinghouse Air Brake Company 1995 Stock Incentive **
10.16 Westinghouse Air Brake Company 1995 Non-Employee Directors' Fee and
Stock Option Plan**
10.17 Form of Employment Agreement between William E. Kassling and the
Company**
10.18 Letter Agreement dated as of January 1, 1995 between the Company
and Vestar Capital Partners, Inc.**
10.19 Form of Indemnification Agreement between the Company and
Authorized Representatives**
10.20 Share Purchase Agreement between Futuris Corporation Limited and
the Company (Exhibits omitted)**
10.21 Purchase Agreement dated as of September 19, 1996 by and among Mark
IV Industries, Inc., Mark IV PLC, and W & P Holding Corp. (Exhibits
and Schedules omitted)****
10.22 Purchase Agreement dated as of September 19,1996 by and among Mark
IV Industries Limited and Westinghouse Railway Holdings (Canada)
Inc. (Exhibits and Schedules omitted)****
21 List of subsidiaries of the Company
23 Consent of Arthur Andersen LLP
28 Form 11-K for the Westinghouse Air Brake Company Employee Stock
Ownership Plan and Trust for the fiscal year ended December 31,
1996
</TABLE>
- ---------
** Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-90866)
*** Filed as an exhibit to the Company's Annual Report on Form 10-K for the
period ended December 31, 1995
**** Filed as an exhibit to the Company's Current Report on Form 8-K, filed
September 19, 1996
54
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF
WESTINGHOUSE AIR BRAKE COMPANY
<TABLE>
<CAPTION>
WABCO'S
JURISDICTION OF OWNERSHIP
COMPANY INCORPORATION INTEREST
- ---------------------------------------------------------- ----------------- ---------
<S> <C> <C>
Allied Friction Products Australia Pty Ltd. Australia 100%
Benn Iron Foundry Ltd. Ontario 100%
Cobra Canada Inc. Canada 100%
Cobra Europe S.A. France 100%
Evand Pty Ltd. Australia 100%
Futuris Industrial Products Pty Ltd. Australia 100%
Mark IV Netherlands B.V. Netherlands 100%
Pulse Electronics, Inc. Delaware 100%
Railroad Friction Products Corporation Delaware 100%
RFPC Holding Corporation Delaware 100%
TFL, Inc. Delaware 100%
ThermoSealed Castings Ltd. Ontario 100%
Vapor Canada Inc. Canada 100%
Vapor Corporation Delaware 100%
Vapor UK Limited United Kingdom 100%
W & P Holding Corporation Delaware 100%
Westinghouse Railway (Canada), Ltd. Ontario 100%
Westinghouse Railway Holdings (Canada) Inc. Ontario 100%
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports,
included in this Form 10-K, into the Company's previously filed Registration
Statement File No. 33-80417.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
March 21, 1997
<PAGE> 1
EXHIBIT 28
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 11-K
ANNUAL REPORT
PURSUANT TO SECTION 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One):
[ ] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED].
For the transition period from to
------------- ------------
COMMISSION FILE NUMBER 1-13782
A. Full title of the plan and the address of the plan, if different from
that of the issuer named below:
Westinghouse Air Brake Company Employee Stock Ownership Plan and Trust
B. Name of issuer of the securities held pursuant to the plan and the
address of its principal executive office:
Westinghouse Air Brake Company, 1001 Air Brake Avenue, Wilmerding,
Pennsylvania 15148
1
<PAGE> 2
The Westinghouse Air Brake Company Employee Stock Ownership Plan and Trust
is subject to the Employee Retirement Income Security Act of 1974. The required
financial statements will be filed by amendment within the time prescribed by
the rules of Form 11-K.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the ESOP Committee of Westinghouse Air Brake Company has duly caused this annual
report to be signed on its behalf by the undersigned hereunto duly authorized.
Westinghouse Air Brake Company
Employee Stock Ownership Plan and
Trust
By /s/ KEVIN P. CONNER
-----------------------------
Kevin P. Conner
Member of the ESOP Committee
March 24, 1997
2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 618
<SECURITIES> 0
<RECEIVABLES> 73,507
<ALLOWANCES> 0
<INVENTORY> 62,355
<CURRENT-ASSETS> 150,169
<PP&E> 162,324
<DEPRECIATION> 66,480
<TOTAL-ASSETS> 363,236
<CURRENT-LIABILITIES> 101,993
<BONDS> 311,990
0
0
<COMMON> 474
<OTHER-SE> (76,669)
<TOTAL-LIABILITY-AND-EQUITY> 363,236
<SALES> 453,512
<TOTAL-REVENUES> 453,512
<CGS> 300,163
<TOTAL-COSTS> 300,163
<OTHER-EXPENSES> (629)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,152
<INCOME-PRETAX> 53,648
<INCOME-TAX> 20,923
<INCOME-CONTINUING> 32,725
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,725
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.15
</TABLE>
