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UNITED STATES
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 fiscal year ended December 31, 1997
COMMISSION FILE NUMBER 1-13782
WESTINGHOUSE AIR BRAKE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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 executive (Registrant's telephone
offices) number)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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(NAME OF EXCHANGE
(TITLE OF CLASS) ON WHICH REGISTERED)
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Common Stock, par value $.01 per share New York Stock Exchange
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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 February 27, 1998, 33,704,200 shares of Common Stock of the
registrant were issued and outstanding, of which 8,751,531 shares were
unallocated ESOP shares. The registrant estimates that as of February 27, 1998,
the aggregate market value of the voting shares held by non-affiliates of the
registrant was approximately $329.1 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 May 26, 1998 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.................................................. 11
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
Executive Officers of the Company........................... 12
PART II
Item 5. Market for Registrant's Shares of Common Stock and Related
Stockholder Matters....................................... 13
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Item 8. Financial Statements and Supplementary Data................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 19
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 19
Item 11. Executive Compensation...................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 19
Item 13. Certain Relationships and Related Transactions.............. 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 20
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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. WABCO is headquartered in Wilmerding,
Pennsylvania and operates subsidiaries primarily in the United States, Canada,
United Kingdom, France, Australia and Italy. The Company's products are sold to
the original equipment manufacturer (OEM) market and the aftermarket. Products
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% in North America and a
significant market share for its other principal products. Because of its large
market share, breadth of product lines and 130-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 service and upgrade sites in the
United States and Canada.
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.
STRATEGY
WABCO's strategy for growth is focused on using technological advancements to
develop new products, expanding the range of after-market products and services,
and penetrating international markets. In addition, management continually
evaluates acquisition opportunities that meet the Company's criteria and
complement WABCO's operating strategies and product offerings.
INDUSTRY OVERVIEW
Rail traffic is a key factor underlying the demand for the Company's products.
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, 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 trends, 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 aggressive 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 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 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 play 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, 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
1.4 trillion in 1997. During recent years, railroad traffic in the United States
has increased significantly, particularly intermodal freight traffic, which grew
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the rate of 8% to 14% per year through 1994. Intermodal traffic declined
slightly in 1995 but has increased modestly since that time.
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 such as the combination of Union Pacific and
Southern Pacific as well as Burlington Northern and Santa Fe. The five major
Class I Railroads in the United States 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 with an affiliated company. The Company is now placing an increased
emphasis on the international opportunities. Sales outside North America
represented approximately 12% of revenue in 1997 compared with 3% in 1994.
WABCO's products are sold internationally directly or through licensees or
agents in Japan, South America, Europe, South Africa, Korea, Taiwan, Thailand,
Malaysia, India, Pakistan, Australia and 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's products and services are delivered through the following five
broad divisions with sales as indicated:
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YEAR ENDED
DECEMBER 31
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DOLLARS IN THOUSANDS 1997 1996
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Electronics..................... $ 73,615 $ 66,883
Freight Car..................... 195,200 192,106
Transit......................... 174,280 96,195
Locomotive...................... 50,137 36,915
Friction & Other................ 71,209 61,413
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Net sales..................... $564,441 $453,512
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Note: Prior year amounts have been reclassified, where necessary, to conform to
the current year presentation.
The Company's operating units consist of small strategic business units 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 segments of the railway market serviced by the
Company.
ELECTRONICS
Pulse Electronics is the headquarters for the Company's electronics product
line. In anticipation of the trend towards merging pneumatic and electronically
controlled products, the Company created the Integrated Railway Products Group
in 1996. Through this group, WABCO delivers high-quality, hardened electronics
to the railroad industry in the form of on-board systems and braking for
locomotives and freight cars. The technologies have worldwide applications and
provide the flexibility to adapt to the specifications of a particular country.
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
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 new product development effort has focused on electronic
technology for brakes and controls, and over the past several years, WABCO has
introduced a number of significant new products including the EPIC(R)
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Electronic Brake, PowerLink(TM), Compressor Aftercoolers, Train Trax(TM),
Trainlink(TM), Train Sentry III(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 (while
this implies a declining order rate for replacements, it is uncertain whether
this will take place); 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.
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 1997 were $195.2 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,
PA and Laurinburg, NC, respectively.
The Company's traditional freight products include the ABDX Freight Brake Valve,
the Mark Series draft gears and hand brakes and slack adjusters. The Company
actively pursues the development of new freight products exemplified by the
Automated Single Car Tester, the first computerized freight air brake tester
designed to reduce time and cost. In addition, during the past several years the
Company has introduced ELX(TM) Empty Load Equipment, TMX(R) Truck Mounted Brake
Assembly, SAC-1(TM) Articulated Coupler, slackless drawbar and AP Cobra(R) Brake
Shoe.
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 Remanufactured
Control Valves and stabilization and vibration protection upgrades.
New car deliveries in 1997 were 50,396 compared with 57,877 in 1996; 1997 new
car orders totaled over 88,000, their highest level since 1978. The average age
of the existing fleet, at approximately 18 years, is at an all time high.
The Company operates five freight service centers located near major railroad
customers: Chicago, IL; Columbia, SC; Kansas City, KS; Vacaville, CA; and Stoney
Creek, Ontario. The railroads began significantly outsourcing repairs in 1985,
and the Company has been successfully aggressively pursuing repair business from
railroad customers. 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 service 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 compounds providing superior durability and performance.
Historically, replacement parts and upgrades have accounted for approximately
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
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in-house maintenance programs. These customers include all major railroads in
North American 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.
PASSENGER TRANSIT
The Company's passenger transit operations produce various products for
passenger transit applications at its dedicated facilities in Spartanburg, SC,
Niles, IL, Montreal, Canada, the United Kingdom and Italy. Total passenger
transit product line sales in 1997 were $174.3 million. As part of the Company's
strategy to expand its passenger transit product offerings and international
sales, WABCO completed in 1997 the acquisitions of Stone Safety Service
Corporation and Stone U.K. Limited (collectively "Stone"), the heavy rail air
conditioning business of Thermo King Corporation ("Thermo King"), and H.P.
s.r.1. ("HP") of Italy. Stone and Thermo King provide significant presence in
the rail industry air conditioning business and HP is a leading supplier of door
controls for transit rail cars and buses in Italy.
Net sales in the passenger transit business increased primarily as a result of
the 1996 acquisition of Vapor Corporation, Vapor U.K. and Vapor Canada, Inc.
("Vapor") which significantly enhanced the Company's position in the passenger
transit market. 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 that approximate 20% of sales. 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 that will
provide a solid foundation for future replacement parts and upgrades.
In December 1997, WABCO secured contracts valued at approximately $150 million
for a 1,080 combined car order for the Metropolitan Transportation Authority/New
York City Transit Authority. WABCO will supply all braking, door activation,
coupling and certain other equipment for rapid transit cars. Product shipments
will commence with prototypes beginning in 1998 with scheduled contract
deliveries over the three-year period 1999 through 2001.
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 40% of the Company's traditional transit sales
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 brakes, 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, SC; Niles, IL; Hackensack, NJ; Stoney Creek, Ontario,
Montreal, Quebec and Dartford, England. 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 passenger transit and service centers are located near major
transportation centers, including Chicago, IL; Atlanta, GA; Sun Valley, CA;
Yonkers, NY; 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. The Company believes it has substantial opportunities to
increase sales to the passenger transit repair market 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, and the transit systems
serving the greater New York City area, Atlanta, Boston, Chicago, Dallas, Los
Angeles, Philadelphia, San Francisco, Toronto 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,
GEC Alsthom and Adtranz.
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LOCOMOTIVE
WABCO's locomotive operations, based in Wilmerding, Pennsylvania, had sales of
$50.1 million in 1997. 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 air-cooled compressors. These
braking components and related air-cooled compressors are used in virtually the
entire installed base of North American locomotives, and the Company currently
is the primary supplier of these components.
According to industry estimates, the outlook for the number of locomotive builds
over the next few years is expected to be relatively consistent. 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 expanded its locomotive repair services in response to railroad
restructuring and gradual elimination of in-house repair services. Locomotive
service centers are operated in Wilmerding, PA; Kansas City, KS; Vacaville, CA;
and Columbia, SC. 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 I 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.
FRICTION AND OTHER
The Company's friction products operations are in Laurinburg, NC, Australia and
France in addition to joint ventures in India. Friction products are sold as
original equipment and as aftermarket brake shoe replacements primarily to the
Company's freight, transit and locomotive markets. The 1996 acquisition of
Futuris Industrial Products Pty of Australia ("Futuris") enabled the Company to
add a complementary product line of low- and medium-friction products.
WABCO'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, GA to supply the
increasing demand and expanded the plant's capacity in 1995. WABCO's iron
foundry located in Ontario, Canada manufactures complex ductile and grey iron
castings requiring numerous cores and precise alloy composition requirements.
The foundry 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
WABCO'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 12% of net sales compared to 9% a year ago and
4% in 1995. 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
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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.
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 and has opened a sales office in
Beijing. This market is attractive, in part, because it utilizes North
American/AAR-type railroad technology. The Company's products are installed on
over 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 Empty Load Equipment, DECELOSTAT(R) microprocessor based slip-slide
equipment and Mark Series draft gears.
Management 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 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. In addition, in October 1996 WABCO, through Futuris, established
a manufacturing and distribution joint venture, Pioneer Friction Products, to
provide brake shoes for the Indian market. In the fourth quarter of 1997, WABCO
entered into a second joint venture located in India to produce low friction
brake shoes for the Indian Railways.
MANUFACTURING
Management 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 regular
periodic formal Kaizens and over 400 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. WABCO productivity measures
have benefited, in part, from Kaizen as evidenced in a more than 33% increase in
inventory turnover and an almost doubling of revenue per employee since 1990.
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 high level of competency.
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 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
6
<PAGE> 9
required for its products. The Company produces substantially all of its
requirements for rubber products and complex iron foundry products and also
utilizes Thermo Sealed for certain metal finishing work. This vertical
integration contributes to overall cost 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. For the fiscal years ended December 31, 1997, 1996 and 1995, the
Company incurred costs of approximately $24.4 million, $18.2 million and $14.6
million on product development and improvement activities (exclusive of
manufacturing support). Such expenditures represented 4.3%, 4.0% and 3.4% of net
sales for the same periods, respectively. From time to time, WABCO 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 the industry in establishing
electronics in freight 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 and Canada. 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 1997, approximately 50% 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 sales are 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 a small number of customers often represent a significant portion of
the Company's net sales, no one customer represented more than 10% of the
Company's sales in 1997. 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 that 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 has numerous U.S. patents, patent
applications pending and trademarks as well as foreign patents and trademarks
throughout the world. WABCO attempts to protect its intellectual property by
legal action in situations where it feels such action is warranted. The Company
also
7
<PAGE> 10
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 the trademark WABCO
for use other than in railway related applications 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 74 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 sales. 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 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.
8
<PAGE> 11
SUPPLIERS
The Company actively purchases from over 400 suppliers. The Company has
maintained an excellent relationship with its suppliers. In 1997, 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 wholly
owned foundry in Canada, 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, 1998, the Company had a total backlog of firm orders with an
aggregate sales price of approximately $400.1 million, compared to $376.3
million as of December 31, 1997. Of the year-end 1997 amount, $295.1 million was
attributable to passenger transit products and the balance 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 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.
EMPLOYEES
As of December 31, 1997, the Company had approximately 3,400 employees,
approximately 1,000 of whom were unionized. Approximately 310 employees at the
Freight Car facility in Ontario, Canada are represented by the National
Automotive, Aerospace, Transportation, and General Workers Union (CAW-Canada).
In March 1998, WABCO and CAW-Canada agreed to a three-year extension, through
April 2001, of their labor contract. Approximately 235 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 325 employees at the Company's foundry in Ontario, Canada are
represented by the International Union, United Automobile, Aerospace and
Agricultural Implement Workers of America (U.A.W.). A five-year union contract
for this facility expiring in September 2002 was recently negotiated.
Approximately 38 employees at the Futuris Industrial Products facilities in
Australia are represented by Metal Trades Industry Association of Australia.
Approximately 90 employees at the Vapor facility in Montreal, Quebec, Canada are
represented by a local association. A five-year contract for this facility
expires in March 2002. 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 1,400 employees) participate in the Company's Employee
Stock Ownership Plan ("ESOP").
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.
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
9
<PAGE> 12
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 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
friction product 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 with respect to third party
claims survive until 2000, except that claims which are timely asserted continue
until resolved. 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, NC. The Company believes that
any 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 the former Manville site used by RFPC 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. Active claims for conditions existing prior to July
1992 will continue to be covered beyond July 2002. The aggregate limit of
coverage under the insurance policy provided by Manville Corporation is $12.5
million. The Company has submitted a claim under the policy for any costs of
clean up imposed on or incurred by the Company in connection with the "Old James
Landfill" and Rocky Mountain has acknowledged coverage under the policy, subject
to the stated policy exclusions. 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 has received a demand from
Johns Manville in the amount of $161,000 which is alleged to represent the
Company's share for closure of certain wastewater ponds at the Laurinburg, NC
leased facility. The Company believes that this claim is also covered by the
insurance policy and has submitted a notice of claim to Rocky Mountain. In
January 1998, the Company discovered petroleum contaminated soils in the
vicinity of the oil-water separator at the Laurinburg leased facility. The
Company has filed a notice of claim requesting coverage under the insurance
policy for clean up costs associated with removal of the contaminated soils,
which the Company estimates will be less than $30,000.
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.
10
<PAGE> 13
ITEM 2. PROPERTIES
The following table provides certain summary information with respect to the
principal facilities owned or leased by WABCO. 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. The Greensburg, PA, Germantown, MD, Niles, IL and Chicago, IL
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, PA site.
<TABLE>
<CAPTION>
OWN/ APPROX. SQ.
LOCATION PRIMARY USE DIVISION LEASE FOOTAGE
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
Wilmerding, PA Manufacturing/Service Locomotive Own 850,000(1)
Niles, IL Manufacturing Passenger transit Own 355,300
Stoney Creek, Ontario Manufacturing/Service Freight Own 189,170
Spartanburg, SC Manufacturing/Service Passenger transit Lease 183,600
Wallaceburg, Ontario Foundry Freight Own 127,555
Chicago, IL Manufacturing Freight Own 111,500
St-Laurent, Quebec Manufacturing Passenger transit Own 106,000
Laurinburg, NC Manufacturing Friction Lease 105,000
Greensburg, PA Manufacturing Rubber Own 97,830
Germantown, MD Manufacturing/Service Electronics Own 80,000
Wetherill Park, NSW Manufacturing Friction Lease 73,141
Burlington, Ontario Manufacturing Thermo Sealed Own 46,209
Hackensack, NJ Manufacturing Passenger transit Lease 36,400
Ball Ground, GA Manufacturing Rubber Lease 30,000
Sassuolo, Italy Manufacturing Passenger transit Lease 30,000
Burlington, Ontario Manufacturing Thermo Sealed Own 28,165
Tottenham, VIC Manufacturing Friction Lease 26,910
Kansas City, KS Service Center Freight/Locomotive Lease 21,627
Vacaville, CA Service Center Freight/Locomotive Lease 21,600
Winnipeg, Manitoba Service Center Freight/Locomotive Lease 20,000
Dartford, UK Manufacturing Passenger transit Lease 14,860
Columbia, SC Service Center Freight/Locomotive Lease 12,250
Yonkers, NY Service Center Passenger transit Lease 12,000
Chicago, IL Service Center Freight/Locomotive Own 11,400
Sun Valley, CA Service Center Passenger transit Lease 4,000
Atlanta, GA Service Center Passenger transit Lease 1,200
- ------------------------------------------------------------------------------------------
</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 and generally
include options to renew. The leases on the service centers are for three-year
terms with renewal options.
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<PAGE> 14
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 in Item 1,
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 with
respect to third party claims survive until 2000. An insurance policy provided
by Manville Corporation, the former 50% owner of RFPC, covers the other 50% of
RFPC related claims up to a maximum of $12.5 million.
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, 1997.
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 2, 1998.
<TABLE>
<CAPTION>
NAME AGE OFFICE WITH THE COMPANY
<S> <C> <C>
- ---------------------------------------------------------
William E. Kassling 54 Director, Chairman and
Chief Executive Officer
Gregory T. H. Davies 51 President and Chief
Operating Officer
Robert J. Brooks 53 Director and Chief
Financial Officer
Emilio A. Fernandez 53 Director and Vice
Chairman
Howard J. Bromberg 55 Vice President and
General Manager,
Locomotive and Molded
Products
John M. Meister 50 Executive Vice President
and General Manager,
Transit Product Group
Mark C. Van Cleave 39 Vice President and
General Manager,
Cardwell Westinghouse
Timothy J. Logan 45 Vice President,
International
George A. Socher 49 Vice President and
Corporate Controller
Alvaro Garcia-Tunon 45 Vice President, Corporate
Planning and Investor
Relations
- ---------------------------------------------------------
</TABLE>
WILLIAM E. KASSLING has been a director, President, Chairman and Chief Executive
Officer of the Company since the 1990 Acquisition. Mr. Kassling was also
President of WABCO from 1990 through February 1998. 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.
GREGORY T. H. DAVIES joined WABCO in March 1998 as President and Chief Operating
Officer. Mr. Davies was formerly with Danaher Corporation since 1988, where he
was Vice President and Group Executive responsible for its Jacobs Vehicle
Systems, Delta Consolidated Industries and A.L. Hyde Corporation operating
units. Prior to that, he held executive positions at Cummins Engine Company and
Ford Motor Company.
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.
12
<PAGE> 15
EMILIO A. FERNANDEZ was named Vice Chairman in March 1998. He has been a
Director and was Executive Vice President of the Company since the Company's
January 1995 acquisition of Pulse Electronics, Inc. which he co-founded in 1975.
From 1996 to February 1998 he was Executive Vice President--Integrated Railway
Systems. Mr. Fernandez is a director of PMI, Inc., a private corporation.
HOWARD J. BROMBERG has been Vice President and General Manager, Locomotive and
Molded 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 M. MEISTER has been Vice President and General Manager of the Company's
Passenger Transit Unit since the 1990 Acquisition. In 1997, he was appointed to
the newly created position of Executive Vice President--Transit Products Group.
From 1985 until 1990 he was General Manager of the passenger transit 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. In March 1998, he was
named to the additional position of Senior Vice President--Freight Sales and
Marketing. 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.
TIMOTHY J. LOGAN has been Vice President, International since August 1996.
Previously, from 1987 until August 1996, Mr. Logan was Vice President,
International Operations for Ajax Magnethermic Corporation and from 1983 until
1987 he was President of Ajax Magnethermic Canada, Ltd.
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 1988 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
February 27, 1998, there were 33,704,200 shares of Common Stock outstanding held
by 269 holders of record. The high and low sales price of the shares and
dividends paid per share were as follows:
<TABLE>
<CAPTION>
QUARTER HIGH LOW DIVIDEND
<S> <C> <C> <C>
- -----------------------------------------------------
1997
Fourth............... $27.875 $21.875 $.01
Third................ 23.125 17.875 .01
Second............... 20.000 12.750 .01
First................ 14.250 12.250 .01
- -----------------------------------------------------
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
- -----------------------------------------------------
</TABLE>
13
<PAGE> 16
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,
--------------------------------------------------------
IN THOUSANDS EXCEPT PER SHARE AMOUNTS 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Net sales.......................................... $564,441 $453,512 $424,959 $347,469 $285,274
Cost of sales...................................... 378,323 300,163 278,901 229,544 195,872
-------- -------- -------- -------- --------
Gross profit..................................... 186,118 153,349 146,058 117,925 89,402
Operating expenses................................. 96,143 73,631 56,756 44,287 39,871
-------- -------- -------- -------- --------
Income from operations............................. 89,975 79,718 89,302 73,638 49,531
Interest expense and other, net.................... 29,385 26,070 30,793 11,184 10,052
-------- -------- -------- -------- --------
Income before taxes, extraordinary item and change
in accounting principle.......................... 60,590 53,648 58,509 62,454 39,479
Income taxes....................................... 23,327 20,923 23,402 25,613 13,378
-------- -------- -------- -------- --------
Income before extraordinary item and change in
accounting principle............................. 37,263 32,725 35,107 36,841 26,101
Loss on early extinguishment of debt............... (1,382)
Cumulative effect of change in accounting
principle........................................ 2,000
-------- -------- -------- -------- --------
Net income......................................... $ 37,263 $ 32,725 $ 33,725 $ 36,841 $ 28,101
======== ======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary item and change in
accounting principle............................. $1.42 $1.15 $1.32 $.92 $.65
Loss on early extinguishment of debt............... (.05)
Cumulative effect of change in accounting
principle........................................ .05
-------- -------- -------- -------- --------
Net income......................................... $1.42 $1.15 $1.27 $.92 $.70
======== ======== ======== ======== ========
Cash dividends per share........................... $.04 $.04 $.01 -- --
Weighted average diluted shares outstanding........ 26,173 28,473 26,639 40,000 40,000
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital.................................... $ 48,719 $ 48,176 $ 36,674 $ 46,640 $ 28,703
Property, plant and equipment, net................. 108,367 95,844 72,758 67,346 66,378
Total assets....................................... 410,879 363,236 263,407 187,728 175,625
Total debt......................................... 364,934 341,690 305,935 78,060 107,870
Shareholders' equity (deficit)..................... (79,263) (76,195) (108,698) 46,797 11,008
- --------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Westinghouse Air Brake Company is North America's largest manufacturer of
value-added equipment for locomotives, railway freight cars and passenger
transit vehicles. The Company's primary manufacturing operations are in the
United States and Canada and revenues have historically been predominantly from
North America. In recent years, the proportion of international sales has
increased.
The Company's customer base consists of freight transportation companies,
locomotive and freight car original equipment manufacturers, railroads and
transit car builders and public transit systems.
1997 VERSUS 1996
SUMMARY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------
Dollars in millions, Percent
except per share 1997 1996 Change
<S> <C> <C> <C>
- --------------------------------------------------
Net income........... $ 37.3 $ 32.7 14.1
Diluted earnings per
share.............. 1.42 1.15 23.5
Net sales............ 564.4 453.5 24.5
Income from
operations......... 90.0 79.7 12.9
Earnings before
interest, taxes,
depreciation and
amortization....... 114.9 102.0 12.6
Gross profit
margin............. 33.0% 33.8% --
- --------------------------------------------------
</TABLE>
Net income for 1997 increased $4.6 million, or 14.1%, compared with 1996.
Earnings per share increased 23.5% to $1.42 per diluted share. Net sales for
1997 were $564.4 million, reflecting a 24.5% increase compared to the prior
year. The higher revenue base reflects the benefits associated with acquisitions
and new products. Operating income and earnings before interest, taxes,
depreciation and amortization increased in the comparison primarily due to
revenue growth and related gross margins.
A number of significant events occurred in 1997 and 1996 that impacted the
Company's results of operations and financial condition:
- -- The Company completed several strategic acquisitions that complement and
enhance the mix of existing products and markets. Revenues from operations
acquired in 1997 and 1996 totaled $128.2 million in 1997 and accounted for
$85.5 million of the overall 1997 sales increase. Following is a summary of
acquisitions completed in the past two years:
- In May 1997, the Company purchased Stone. Stone is located in New Jersey and
England, and is one of the world's leading suppliers of air conditioning
equipment for the transit industry with an established product base in North
America, Europe and the Far East.
- On June 27, 1997 the Company acquired the heavy rail air conditioning
business of Thermo King.
The aggregate purchase price for the Stone and Thermo King acquisitions was
approximately $7.7 million and was financed by utilizing the Company's
revolving line of credit.
- During July 1997, the Company acquired 100% of the stock of HP for a total
purchase price of $5.8 million, which included the assumption of $2.3
million in debt. HP is a leading supplier of door controls for transit rail
cars and buses in the Italian market.
- In October 1997, WABCO purchased the rail products business and related
assets of Sloan Valve Company for $2.5 million. The acquired products
included slack adjusters, angle cocks and retainer valves.
- In September 1996, the Company acquired Vapor, a passenger transit door
manufacturer, for $63.9 million.
- In January 1996, the Company acquired Futuris, an Australian friction
products manufacturer, for a cash purchase price of $15 million.
- -- In March 1997, an agreement was reached with one of the Company's major
shareholders, Scandinavian Incentive Holding B.V. ("SIH"), whereby the
Company repurchased 4 million shares of its common stock held by SIH for $44
million, or $11 per share, plus $2 million in fees. The Company and its bank
group agreed to amend the Company's credit facility to increase the revolving
credit availability from $125 million to $140 million and to waive the 1996
mandatory term-loan principal payment from excess cash flow.
In conjunction with this transaction, SIH also sold 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.
15
<PAGE> 18
The following table sets forth, for the period indicated, the Company's net
sales by market:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
--------------------
DOLLARS IN THOUSANDS 1997 1996
<S> <C> <C>
- ------------------------------------------------------
Electronics..................... $ 73,615 $ 66,883
Freight Car..................... 195,200 192,106
Transit......................... 174,280 96,195
Locomotive...................... 50,137 36,915
Friction & Other................ 71,209 61,413
-------- --------
Net sales..................... $564,441 $453,512
- ------------------------------------------------------
</TABLE>
NET SALES
Net sales for the year ended December 31, 1997 increased $110.9 million, or
24.5%, to $564.4 million. The acquisitions of Vapor, Stone, Thermo King and HP
contributed $85.5 million of the increase. In addition, increased volume in the
Electronics, Transit and Friction businesses favorably affected the comparison.
GROSS PROFIT
Gross profit increased 21.4% to $186.1 million in 1997 compared to $153.3
million in 1996. Gross margin, as a percentage of sales, was 33.0% in 1997 and
33.8% in 1996. The effect of initially lower margins at the recently acquired
businesses was the primary factor for the change.
OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
------------------ PERCENT
DOLLARS IN THOUSANDS 1997 1996 CHANGE
<S> <C> <C> <C>
- -------------------------------------------------------
Selling and marketing... $25,364 $18,643 36.1
General and
administrative........ 38,033 29,437 29.2
Engineering............. 24,386 18,244 33.7
Amortization............ 8,240 7,854 4.9
Other expense
(income).............. 120 (547) NM
------- -------
Total operating
expenses............ $96,143 $73,631 30.6
- -------------------------------------------------------
NM--not meaningful
</TABLE>
Total operating expenses increased $22.5 million in the year-to-year comparison
primarily reflecting the effect of acquisitions completed in 1997 and 1996.
Incremental expenses from acquired businesses totaled $15.3 million. In
addition, higher operating expenses reflect costs associated with certain
strategic initiatives including expanded international marketing activities and
additional engineering efforts associated with new product development.
INCOME FROM OPERATIONS
Operating income totaled $90.0 million in 1997 compared with $79.7 million a
year ago. Higher operating income reflects higher sales volume and related gross
profit.
INTEREST EXPENSE
Interest expense increased $3.6 million to $29.7 million during 1997, primarily
due to funding costs associated with repurchases of common stock and
acquisitions, partially offset by debt repayments.
INCOME TAXES
The provision for income taxes increased $2.4 million to $23.3 million in 1997
compared with $20.9 million in 1996. The effective tax rate declined to 38.5% in
1997 from 39.0% in 1996, due to the establishment of a Foreign Sales Corporation
in the latter part of 1996.
1996 VERSUS 1995
SUMMARY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
DOLLARS IN MILLIONS, ---------------- PERCENT
EXCEPT PER SHARE 1996 1995 CHANGE
<S> <C> <C> <C>
- -------------------------------------------------------
Net income................ $ 32.7 $ 33.7 (3.0)
Diluted earnings per
share................... 1.15 1.27 (9.4)
Net sales................. 453.5 425.0 6.7
Income from operations.... 79.7 89.3 (10.8)
Earnings before interest,
taxes, depreciation and
amortization............ 102.0 108.1 (5.6)
Gross profit margin....... 33.8% 34.4% --
- -------------------------------------------------------
</TABLE>
NET INCOME
Net income for 1996 declined $1.0 million to $32.7 million compared with 1995.
The lower income was due to a change in product sales mix, including lower sales
in the freight market due to reduced OEM production and from increased spending
to support additional engineering and international sales staffing. The higher
operating costs more than offset revenue growth.
NET SALES
Net sales increased $28.5 million to $453.5 million in 1996 from $425.0 million
in 1995. The increase was primarily due to the 1996 acquisitions of Vapor and
Futuris. Sales also benefited from a full year of the Pulse acquisition that was
completed in the first quarter of 1995. Partially offsetting these positive
factors were lower sales in the Company's freight car division due in part to a
5% decline in OEM production.
GROSS PROFIT
Gross profit increased $7.3 million or 5%, to $153.3 million in 1996 primarily
due to higher sales volume. Gross margin, as a percentage of sales, declined
slightly in 1996 to
16
<PAGE> 19
33.8% versus 34.4% in 1995 primarily as a result of changes in product mix.
OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
------------------ PERCENT
DOLLARS IN THOUSANDS 1996 1995 CHANGE
<S> <C> <C> <C>
- -------------------------------------------------------
Selling and marketing... $18,643 $13,047 42.9
General and
administrative........ 29,437 22,791 29.2
Engineering............. 18,244 14,577 25.2
Amortization............ 7,854 6,160 27.5
Other expense
(income).............. (547) 181 NM
------- -------
Total operating
expenses............ $73,631 $56,756 29.7
- -------------------------------------------------------
</TABLE>
NM--not meaningful
OPERATING EXPENSES
Total operating expenses increased $16.9 million in the comparison and totaled
$73.6 million in 1996. The higher expense level was primarily due to the Futuris
and Vapor acquisitions. In addition, expenses increased, in part, due to WABCO's
expanded new product development initiatives and international marketing
activities as well as increased corporate expenses for shareholder
communication, legal and insurance costs.
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 39.0% in 1996
compared to 40.0% in 1995 due to lower effective state tax rates and the benefit
of a Foreign Sales Corporation (FSC) established in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is provided primarily by operating cash flow and long-term borrowings.
WABCO's operations generated cash flow totaling $67.0 million, $58.9 million and
$45.8 million in 1997, 1996 and 1995, respectively. Operating cash flow has been
increasing primarily due to a combination of earnings growth and improved asset
management. Gross capital expenditures were $29.6 million, $13.2 million, and
$16.2 million in 1997, 1996 and 1995, respectively. The majority of capital
expenditures reflect spending for replacement equipment and as well as increased
capacity and efficiency. In addition, in 1997 WABCO made significant investments
in a new electronics technology development center. The Company expects capital
expenditures in 1998 to approximate $28 million.
The following table sets forth outstanding indebtedness of WABCO:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
DOLLARS IN THOUSANDS 1997 1996
<S> <C> <C>
- ------------------------------------------------------
Revolving credit notes.......... $100,880 $ 61,000
Term loan....................... 145,500 163,700
Senior notes.................... 100,000 100,000
Note payable--Pulse
acquisition................... 16,990 16,990
Other........................... 1,564
-------- --------
364,934 341,690
Less--current portion......... 32,600 29,700
-------- --------
$332,334 $311,990
- ------------------------------------------------------
</TABLE>
The Company's revolving credit and term loan borrowings have been made pursuant
to a credit agreement, as amended (the Credit Agreement), with a consortium of
commercial banks. The Credit Agreement provides for up to $140 million of
revolving credit loans, including letters of credit, and provided $170.6 million
of term loans, of which $145.5 million was outstanding at December 31, 1997.
Credit Agreement borrowings bear variable interest rates indexed to common
indexes LIBOR. The weighted-average contractual interest rate on Credit
Agreement borrowings was 7.36% at year-end 1997. In order to reduce the impact
of interest rate changes on this variable rate debt, the Company entered into
interest rate swaps which effectively convert a portion of the debt from
variable to fixed-rate borrowings over the term of the swap contracts. The
interest rate swaps have an aggregate notional value of $100 million and mature
in 1998 through 2000. The interest rate swaps altered the weighted-average
interest rate paid on borrowings under the Credit Agreement from 7.36% to 7.67%
at year-end 1997.
Principal repayments of term loan borrowings are due in semi-annual installments
until maturity in January 2002.
The 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 per share quarterly dividends on the Common Stock, subject to certain
conditions. The Credit Agreement contains various
17
<PAGE> 20
other covenants and restrictions including: a limitation on the incurrence of
additional indebtedness; a limitation on mergers, consolidations and sales of
assets and acquisitions; other than sales of assets in the ordinary course of
business; a limitation on liens; a limitation on certain 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 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.
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%; and 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%.
In 1997, WABCO completed the Stone, Thermo King and HP acquisitions for an
aggregate purchase price of $13.5 million in cash including $2.3 million of
assumed debt. In 1996, the Company acquired Vapor and Futuris for $63.9 million
and $15 million, respectively. These transactions utilized borrowings for the
purchase price. Also, in 1995 the Company acquired Pulse Electronics for $54.9
million, consisting of $20 million in bank borrowings, a $17.0 million note
payable and WABCO Common Stock valued at $17.9 million at the time of the
acquisition.
In March 1997, SIH sold its 10 million shares of WABCO Common Stock. The Company
purchased 4 million shares at $11 per share, and investors consisting of Vestar
Equity Partners, L.P., Harvard Private Capital Group, American Industrial
Partners Capital Fund II, L.P. and certain members of WABCO's management
acquired the remaining 6 million shares at the same price. The Company financed
the 4 million share repurchase through borrowings under its credit facility.
In connection with the establishment of the ESOP in January 1995, 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 had an original
term of 50 years, with annual payments of principal and interest of
approximately $12 million. 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 annual cash outlays by an estimated $3 to $4
million.
Management believes, based upon current levels of operations and forecasted
earnings, that cash flow from operations, together with borrowings under the
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.
18
<PAGE> 21
EFFECT OF YEAR 2000
The Company has information system improvement initiatives under way which
include both new computer hardware and software applications. The new system is
expected to be operational by late 1998 and will be year 2000 compliant. The
majority of the expenditures incurred for hardware and purchased software
related to this project are capitalized and amortized over their estimated
useful lives. Other costs are expensed as incurred. These expenditures are not
expected to have a significant impact on the Company's future results of
operations or financial position.
FORWARD-LOOKING STATEMENTS
From time to time, in this report and in other written reports and oral
statements, references are made to expectations regarding future performance of
the Company. Examples include, but are not limited to, statements as to
expectations, beliefs and strategies, future earnings, revenue growth, and sales
expansion opportunities. These "forward-looking statements," are based on
currently available competitive, financial and economic data and the Company's
operating plans, but they are inherently uncertain. Investors must recognize
that events could turn out to be significantly different from what is expected.
Differences from expectations in the factors listed below, among others, could
affect the Company's financial performance in the future and could cause actual
results to differ materially from those expressed or implied in such
forward-looking statements. These factors, which include changes in both
domestic and global assumptions and expectations are, among others: overall
economic conditions; interest rates; demand for services in the freight and
passenger rail industry; consolidations in the rail industry; demand for the
Company's products and services; product mix; gains and losses in market share;
demand for freight cars, locomotives, passenger transit cars and buses; industry
demand for faster and more efficient braking equipment; continued outsourcing by
the Company's customers; governmental funding for some of the Company's
customers; future regulation/deregulation of the Company's customers and/or the
rail industry; successful research and development; success in developing,
marketing and delivering new products; the Company's ability to complete
expected sales; cancellation of orders; labor stability; integration of recent
acquisitions; completion of additional acquisitions; changes in expected level
of capital expenditures; continued bank financing; warranty claims;
environmental laws; lawsuits; and other factors identified within this Form 10-K
and other filings with the Securities and Exchange Commission. Such statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
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 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 May 26,
1998, 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.
19
<PAGE> 22
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 22
Consolidated Balance Sheet as of
December 31, 1997 and 1996 23
Consolidated Statement of
Operations for the three years
ended December 31, 1997, 1996
and 1995 24
Consolidated Statement of Cash
Flows for the three years ended
December 31, 1997, 1996 and 1995 25
Consolidated Statement of
Shareholders' Equity for the
three years ended December 31,
1997, 1996 and 1995 26
Notes to Consolidated Financial
Statements 27
(2) FINANCIAL STATEMENT SCHEDULES
Report of Independent Public
Accountants 40
Schedule II--Valuation and
Qualifying Accounts 41
(B) REPORTS ON FORM 8-K
None
(C) EXHIBITS
3.1 Restated Certificate of Incorporation
of the Company dated January 30,
1995, as amended March 30, 1995**
3.2 Amended and Restated By-Laws of the
Company, effective March 31,
1997*****
4.1 Form of Indenture between the Company
and The Bank of New York**
4.2 Form of Note (included in Exhibit
4.1)
4.3 First Supplemental Indenture dated as
of March 21, 1997 between the Company
and The Bank of New York*
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 Amended and Restated Stockholders
Agreement dated as of March 5, 1997
among the Voting Trust, Vestar Equity
Partners, L.P., Harvard Private
Capital Holdings, Inc. ("Harvard"),
American Industrial Partners Capital
Fund II, L.P. ("AIP") and the
Company*
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)**
</TABLE>
20
<PAGE> 23
<TABLE>
<S> <C> <C>
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 Plan**
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)****
10.23 Amendment No. 1 to Amended and
Restated Stockholders Agreement dated
as of March 5, 1997 among the Voting
Trust, Vestar Equity Partners, L.P.,
Harvard, AIP and the Company*
10.24 Common Stock Registration Rights
Agreement dated as of March 5, 1997
among the Company, Harvard, AIP and
the Voting Trust*
21 List of subsidiaries of the Company*
23 Consent of Arthur Andersen LLP*
27 Financial Data Schedule*
99 Annual Report on Form 11-K for the
year ended December 31, 1997 of the
Westinghouse Air Brake Company
Employee Stock Ownership Plan and
Trust*
</TABLE>
- ---------
* Filed herewith
** Filed as an exhibit to the Company's Registration Statement on Form S-1
(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, dated
October 3, 1996
***** Filed as an exhibit to the Company's Registration Statement on Form S-8
(No. 333-39159)
21
<PAGE> 24
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,
1997 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
February 16, 1998
22
<PAGE> 25
WESTINGHOUSE AIR BRAKE COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1997 1996
Dollars in thousands, except share data ---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................ $ 836 $ 618
Accounts receivable......................................... 91,438 73,507
Inventories................................................. 69,297 62,355
Deferred taxes.............................................. 11,169 9,517
Other....................................................... 7,759 4,172
--------- ---------
Total current assets.................................... 180,499 150,169
Property, plant and equipment............................... 186,534 162,324
Accumulated depreciation.................................... (78,167) (66,480)
--------- ---------
Property, plant and equipment, net...................... 108,367 95,844
OTHER ASSETS:
Prepaid pension costs....................................... 5,061 4,608
Goodwill.................................................... 66,599 60,490
Other intangibles........................................... 42,466 44,241
Other noncurrent assets..................................... 7,887 7,884
--------- ---------
Total other assets...................................... 122,013 117,223
--------- ---------
Total Assets............................................ $ 410,879 $ 363,236
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt........................... $ 32,600 $ 29,700
Accounts payable............................................ 37,582 23,789
Accrued income taxes........................................ 488 2,634
Advance deposits............................................ 21,210 13,330
Accrued compensation........................................ 13,080 10,947
Accrued warranty............................................ 12,851 8,172
Accrued interest............................................ 3,038 3,532
Accrued restructuring costs................................. -- 3,158
Other accrued liabilities................................... 10,931 6,731
--------- ---------
Total current liabilities............................... 131,780 101,993
Long-term debt.............................................. 332,334 311,990
Reserve for postretirement benefits......................... 14,860 13,309
Accrued pension costs....................................... 4,700 4,724
Deferred income taxes....................................... 5,561 7,415
Other long-term liabilities................................. 907 --
--------- ---------
Total liabilities....................................... 490,142 439,431
--------- ---------
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.................................. 105,522 104,321
Less-Treasury stock, at cost, 13,743,924 and 9,937,867
shares.................................................... (190,657) (149,331)
Less-Unearned ESOP shares, at cost, 8,751,531 and 8,927,565
shares.................................................... (131,273) (133,914)
Retained earnings........................................... 141,617 105,363
Cumulative translation adjustment........................... (4,946) (3,108)
--------- ---------
Total shareholders' equity.............................. (79,263) (76,195)
--------- ---------
Liabilities and Shareholders' Equity.................... $ 410,879 $ 363,236
========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
23
<PAGE> 26
WESTINGHOUSE AIR BRAKE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
Dollars in thousands, except share data ---- ---- ----
<S> <C> <C> <C>
Net sales................................................... $564,441 $453,512 $424,959
Cost of sales............................................... 378,323 300,163 278,901
-------- -------- --------
Gross profit........................................... 186,118 153,349 146,058
Selling and marketing expenses.............................. 25,364 18,643 13,047
General and administrative expenses......................... 38,033 29,437 22,791
Engineering expenses........................................ 24,386 18,244 14,577
Amortization expense........................................ 8,240 7,854 6,160
Other operating expense (income)............................ 120 (547) 181
-------- -------- --------
Income from operations................................. 89,975 79,718 89,302
Other income and expenses Interest expense.................. 28,115 24,533 24,857
Interest expense to affiliates............................ 1,614 1,619 6,141
Other (income) expense, net............................... (344) (82) (205)
-------- -------- --------
Income before income taxes.................................. 60,590 53,648 58,509
Income taxes................................................ 23,327 20,923 23,402
-------- -------- --------
Income before extraordinary item............................ 37,263 32,725 35,107
Loss on extinguishment of debt, net of tax benefits......... -- -- (1,382)
-------- -------- --------
Net income.................................................. $ 37,263 $ 32,725 $ 33,725
======== ======== ========
Earnings Per Common Share
Basic earnings
Income before extraordinary item....................... $1.45 $1.15 $1.32
Loss on extinguishment of debt, net of tax benefits.... (.05)
-------- -------- --------
Basic earnings per share............................... $1.45 $1.15 $1.27
======== ======== ========
Diluted earnings
Income before extraordinary item....................... $1.42 $1.15 $1.32
Loss on extinguishment of debt, net of tax benefits.... (.05)
-------- -------- --------
Diluted earnings per share............................. $1.42 $1.15 $1.27
======== ======== ========
Weighted Average Shares Outstanding (in thousands) Basic..... 25,693 28,473 26,639
Diluted... 26,173 28,473 26,639
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
24
<PAGE> 27
WESTINGHOUSE AIR BRAKE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1997 1996 1995
Dollars in thousands ---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 37,263 $ 32,725 $ 33,725
Adjustments to reconcile net income to cash provided by
operations
Depreciation and amortization............................. 24,624 22,249 18,634
Provision for ESOP contribution........................... 3,229 2,870 2,597
Deferred income taxes..................................... (3,506) 2,456 (1,137)
Extraordinary item........................................ 1,382
Changes in operating assets and liabilities, net of
acquisitions
Accounts receivable.................................... (6,623) (9,868) 5,841
Inventories............................................ 1,817 8,100 (7,932)
Accounts payable....................................... 5,900 (6,574) 3,786
Accrued income taxes................................... (1,349) (411) (5,879)
Accrued liabilities and advance deposits............... 5,522 9,740 (1,825)
Other assets and liabilities........................... 97 (2,376) (3,311)
-------- -------- --------
Net cash provided by operating activities......... 66,974 58,911 45,881
-------- -------- --------
INVESTING ACTIVITIES
Purchase of property, plant and equipment, net............ (29,196) (12,855) (16,205)
Acquisitions of businesses................................ (13,492) (78,890) (54,900)
-------- -------- --------
Net cash used for investing activities................. (42,688) (91,745) (71,105)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from issuance of debt obligations................ 65,000 417,000
Repayments of term debt................................... (18,200) (26,300) (175,000)
Net proceeds from (repayments of) revolving credit
arrangements........................................... 39,880 (2,935) 59,785
Net repayments of other borrowings........................ (555)
Payment of debt to affiliate.............................. (10) (73,910)
Debt issuance fees........................................ (2,068) (492) (11,041)
Purchase of treasury stock................................ (44,000) (1,629) (165,602)
Purchase of ESOP shares................................... (140,040)
Cash dividends............................................ (1,009) (1,127) (285)
Proceeds from exercise of stock options................... 3,513
Net proceeds from stock offering.......................... 95,454
Issuance of shares to acquire Pulse Electronics........... 17,900
-------- -------- --------
Net cash (used for) provided by financing activities... (22,439) 32,507 24,261
-------- -------- --------
Effect of changes in currency exchange rate................. (1,629) 735 (131)
-------- -------- --------
Increase (decrease) in cash................................. 218 408 (832)
Cash, beginning of year..................................... 618 210 1,042
-------- -------- --------
Cash, end of year........................................... $ 836 $ 618 $ 210
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid during the year............................. $ 30,223 $ 25,624 $ 28,290
Income taxes paid during the year......................... 28,182 20,452 30,269
</TABLE>
The accompanying notes are an integral part of this statement.
25
<PAGE> 28
WESTINGHOUSE AIR BRAKE COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL UNALLOCATED CUMULATIVE
COMMON PAID-IN TREASURY ESOP RETAINED TRANSLATION
STOCK CAPITAL STOCK SHARES EARNINGS ADJUSTMENT
Dollars in thousands, except per share data ----- ------- ----- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994....... $400 $ 9,600 $ 40,325 $(3,528)
Net income....................... 33,725
Cash dividends ($.01 per share)... (285)
Purchase of treasury stock....... $(165,602)
Loan to ESOP to purchase shares... $(140,040)
Allocation of ESOP shares........ (204) 2,801
Acquisition of Pulse Electronics... 17,900
Initial public stock offering.... 74 95,380
Translation adjustment........... 756
---- -------- --------- --------- --------- -------
BALANCE, DECEMBER 31, 1995....... 474 104,776 (147,702) (137,239) 73,765 (2,772)
Net income....................... 32,725
Cash dividends ($.04 per share)... (1,127)
Purchase of treasury stock....... (1,629)
Allocation of ESOP shares........ (455) 3,325
Translation adjustment........... (336)
---- -------- --------- --------- --------- -------
BALANCE, DECEMBER 31, 1996....... 474 104,321 (149,331) (133,914) 105,363 (3,108)
Net income....................... 37,263
Cash dividends ($.04 per share)... (1,009)
Purchase of treasury stock....... (44,000)
Exercise of stock options, net of tax
benefits....................... 839 2,674
Allocation of ESOP shares........ 362 2,641
Translation adjustment........... (1,838)
---- -------- --------- --------- --------- -------
BALANCE, DECEMBER 31, 1997....... $474 $105,522 $(190,657) $(131,273) $ 141,617 $(4,946)
==== ======== ========= ========= ========= =======
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
Dollars in thousands, except per share data ------
<S> <C>
BALANCE, DECEMBER 31, 1994....... $ 46,797
Net income....................... 33,725
Cash dividends ($.01 per share)... (285)
Purchase of treasury stock....... (165,602)
Loan to ESOP to purchase shares... (140,040)
Allocation of ESOP shares........ 2,597
Acquisition of Pulse Electronics... 17,900
Initial public stock offering.... 95,454
Translation adjustment........... 756
---------
BALANCE, DECEMBER 31, 1995....... (108,698)
Net income....................... 32,725
Cash dividends ($.04 per share)... (1,127)
Purchase of treasury stock....... (1,629)
Allocation of ESOP shares........ 2,870
Translation adjustment........... (336)
---------
BALANCE, DECEMBER 31, 1996....... (76,195)
Net income....................... 37,263
Cash dividends ($.04 per share)... (1,009)
Purchase of treasury stock....... (44,000)
Exercise of stock options, net of tax
benefits....................... 3,513
Allocation of ESOP shares........ 3,003
Translation adjustment........... (1,838)
---------
BALANCE, DECEMBER 31, 1997....... $ (79,263)
=========
</TABLE>
The accompanying notes are an integral part of this statement.
26
<PAGE> 29
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Westinghouse Air Brake Company (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 manufacturer market and the aftermarket, are intended to
enhance safety, improve productivity and reduce maintenance costs for its
customers. The Company's products include electronic controls and monitors, air
brakes, couplers, door controls, draft gears and brake shoes. The Company's
primary manufacturing operations are in the United States and Canada, and the
Company's revenues have been primarily from North America. 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
American-based railroad companies. The Company's passenger transit operations
are dependent on the budgeting and expenditure appropriation process of federal,
state and local governmental units for mass transit needs established by public
policy.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its majority owned subsidiaries. Such statements have been prepared in
accordance with generally accepted accounting principles. All intercompany
accounts and transactions have been eliminated in consolidation. Certain prior
year amounts have been reclassified, where necessary, to conform to 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.
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, net of reserves, were:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
Dollars in thousands 1997 1996
<S> <C> <C>
- ------------------------------------------------------
Raw materials..................... $27,395 $20,140
Work-in-process................... 26,640 31,294
Finished goods.................... 15,262 10,921
------------------
Total inventory............... $69,297 $62,355
- ------------------------------------------------------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment additions are stated at cost. Expenditures for
renewals and betterments are capitalized. Expenditures for ordinary maintenance
and repairs are expensed as incurred. The Company provides for book depreciation
principally on the straight-line method over the following estimated useful
lives of plant and equipment.
<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Land improvements........................... 10 to 20
Buildings................................... 20 to 40
Machinery and equipment..................... 4 to 15
</TABLE>
Accelerated depreciation methods are utilized for income tax purposes.
INTANGIBLE ASSETS
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.
Goodwill and other intangible assets, including patents and tradenames, are
periodically reviewed for impairment based on an assessment of future operations
(see Note 4).
REVENUE RECOGNITION
Revenue is recognized when 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.
STOCK-BASED COMPENSATION
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
27
<PAGE> 30
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
required disclosure in the footnotes (see Note 11).
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred. Such costs
totaled $24.4 million, $18.2 million and $14.6 million in 1997, 1996 and 1995,
respectively.
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 $9.9 million, $5.5 million and
$8.1 million for 1997, 1996 and 1995, respectively. Warranty reserves were $12.9
million and $8.2 million at December 31, 1997 and 1996, respectively.
FINANCIAL DERIVATIVES
The Company periodically enters into interest rate swap agreements to reduce the
impact of interest rate changes on its variable rate borrowings. Interest rate
swaps are agreements with a counterparty to exchange periodic interest payments
(such as pay fixed, receive variable) calculated on a notional principal amount.
The interest rate differential to be paid or received is accrued to interest
expense (see Note 5).
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred tax assets
and liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. The provision for income taxes includes Federal, state and foreign
income taxes (see Note 9).
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are translated
into U.S. currency under the guidelines set forth in SFAS No. 52, "Foreign
Currency Translation." The effects of currency exchange rate changes on
intercompany transactions of a long-term investment nature are accumulated and
carried as a component of shareholders' equity.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share". As required, the Company adopted this Standard in its 1997
financial statements for all periods presented.
SFAS No. 128 sets forth requirements for computing basic and diluted earnings
per share. Basic earnings per common share are computed by dividing net income
applicable to common shareholders by the weighted-average number of shares of
common stock outstanding during the year. Diluted earnings per common share are
computed by dividing net income applicable to common shareholders by the
weighted average number of shares of common stock outstanding adjusted for the
assumed conversion of all dilutive securities (employee stock options) (see Note
10).
The adoption of SFAS No. 128 did not have a material impact on reported earnings
per share.
SIGNIFICANT CUSTOMERS AND 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 and chemical
companies. No one customer accounted for more than 10% of the Company's sales in
1997 or 1996, and, in 1995, one customer accounted for more than 10%. The
allowance for doubtful accounts was $2.0 million and $1.3 million as of December
31, 1997 and 1996, respectively.
EMPLOYEES
As of December 31, 1997, approximately 29% of the Company's workforce is covered
by collective bargaining agreements. These agreements expire at various times
between 1998 and 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued several Statements
of Financial Accounting Standards including the following:
28
<PAGE> 31
SFAS No. 130, "Reporting Comprehensive Income," is effective for fiscal years
beginning after December 15, 1997. This Statement establishes standards for
reporting and display of comprehensive income and its components. Comprehensive
income includes net income and all other changes in shareholders' equity except
those resulting from investments and distributions to owners.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements issued for periods beginning
after December 15, 1997. This Statement requires financial and descriptive
information about an entity's operating segments to be included in the annual
financial statements.
Neither of these standards, when implemented, is expected to impact the reported
financial position or results of operations of the Company.
3. ACQUISITIONS
Effective July 31, 1997 the Company acquired 100% of the stock of H.P. s.r.1.
("HP"), an Italian company, for a total purchase price of $5.8 million, which
included the assumption of $2.3 million in debt. HP is located in Sassuolo,
Italy and is a leading supplier of door controls for transit rail cars and buses
in the Italian market. Revenues approximated $9 million for its most recent
fiscal year. The acquisition was accounted for under the purchase method. The
excess of the purchase price over the fair value of the net assets acquired of
approximately $3.5 million was allocated to goodwill.
Effective May 1, 1997 the Company purchased Stone Safety Service Corporation and
Stone U.K. Limited ("Stone"), a supplier of transit air conditioning equipment,
from Enprotech Corporation, a subsidiary of Itochu International. Stone is
located in New Jersey and England. On June 27, 1997, the Company acquired the
heavy rail air conditioning business of Thermo King Corporation ("Thermo King")
from Westinghouse Electric. The Thermo King purchase included certain inventory,
equipment and drawings. The aggregate purchase price for the Stone and Thermo
King acquisitions was approximately $7.7 million. Annual revenues of the Stone
and Thermo King acquisitions aggregate approximately $30 million. The
acquisitions were accounted for under the purchase method. The excess of the
purchase price over the fair value of net assets acquired of approximately $2
million was allocated to goodwill.
The results of operations for HP, Stone and Thermo King are included in the
Company's financial statements since the date of the applicable acquisition. The
effect of the acquisitions is not considered material to the consolidated
results of the Company.
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. Annual revenues for its
most recent fiscal year prior to the acquisition of totaled $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 $28.5 million and has been allocated as follows:
<TABLE>
<CAPTION>
Dollars in thousands
<S> <C>
- ------------------------------------------------------
Tradename.................................... $11,121
Patents...................................... 6,479
Non-compete agreements....................... 1,261
Goodwill..................................... 9,191
Technology................................... 425
-------
$28,477
- ------------------------------------------------------
</TABLE>
The tradename and goodwill are being amortized over 40 years; the patents over
their remaining lives; and the non-compete agreements over 5 years. Annual
amortization expense of the intangible assets is $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, are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED DECEMBER 31
-----------------------
Dollars in thousands,
except per share 1996 1995
<S> <C> <C>
- --------------------------------------------------------
Net sales...................... $508,107 $489,936
Net income..................... 33,497 35,177
Diluted earnings 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
29
<PAGE> 32
actually occurred on January 1, 1995, or to project the Company's results of
operations for any future period.
Effective January 31, 1996, the Company acquired Futuris Industrial Products
Pty. Ltd. ("Futuris"), an Australian company, for a cash purchase price of $15
million. Futuris is a leading manufacturer of brake shoes and disc brake pads
for railroads in Australia and the Pacific Rim. The acquisition was accounted
for under the purchase method and the excess of the purchase price over the fair
value of the net assets acquired, or $10 million, was allocated primarily to
goodwill. The effect of the acquisition is not considered material to the
consolidated results of the Company.
4. INTANGIBLES
Intangible assets of the Company, other than goodwill, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
Dollars in thousands 1997 1996
<S> <C> <C>
- --------------------------------------------------------
Patents, tradenames and
trademarks, net of accumulated
amortization of $19,768 and
$15,407 (4-40 years)........... $35,942 $36,920
Covenants not to compete, net of
accumulated amortization of
$9,333 and $8,963 (5 years).... 1,133 1,839
Other intangibles, net of
accumulated amortization of
$7,052 and $7,090 (3-7
years)......................... 5,391 5,482
--------------------
$42,466 $44,241
- --------------------------------------------------------
</TABLE>
At December 31, 1997 and 1996, goodwill, net of accumulated amortization of $5.4
million and $4.2 million, respectively, totaled $66.6 million and $60.5 million,
respectively. The Company evaluates the recoverability of intangible assets,
including goodwill, at each balance sheet date based on forecasted future
operations, 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.
5. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
Dollars in thousands 1997 1996
<S> <C> <C>
- --------------------------------------------------------
Revolving credit notes......... $100,880 $ 61,000
Term loan...................... 145,500 163,700
Senior notes................... 100,000 100,000
Note payable--Pulse
acquisition.................. 16,990 16,990
Other.......................... 1,564 --
----------------------
364,934 341,690
Less--current portion........ 32,600 29,700
----------------------
$332,334 $311,990
- --------------------------------------------------------
</TABLE>
The Company's revolving credit and term loan borrowings have been made pursuant
to a credit agreement (the "Credit Agreement"), with a consortium of commercial
banks. The Credit Agreement provides for up to $140.0 million of revolving
credit loans and provided $170.6 million of term loans, of which $145.5 million
was outstanding at December 31, 1997. The Credit Agreement also provides for up
to $5 million of swingline loans and for the issuance of up to $50 million of
letters of credit. The incurrence of swingline loans and the issuance of letters
of credit will reduce the $140 million borrowing availability under the
revolving credit portion of the Credit Agreement.
Borrowings under the Credit Agreement bear variable rates of interest indexed to
several options including LIBOR and prime. At December 31, 1997, the contractual
interest rate on borrowings outstanding under the Credit Agreement was 7.36%.
The Company entered into interest rate swap agreements to alter the impact of
changes in interest rates on its variable rate borrowings. At year-end 1997, the
notional value of interest rate swaps outstanding totaled $100 million. The swap
agreements effectively change the Company's interest rate exposure on $100
million of loans from variable to fixed rates. As a result, the effective
interest rate was 7.67% on borrowings under the Credit Agreement at year-end
1997. The interest rate swap agreements mature in 1998 through 2000.
The Company is exposed to credit risk in the event of nonperformance by the
counterparties. However, since only the cash interest payments are exchanged,
exposure is significantly less than the notional amount. The counterparties are
large financial institutions and the Company does not anticipate nonperformance.
The maximum balances outstanding under the revolving credit loans were $105.4
million and $85.9 million during 1997 and 1996, respectively. Average balances
outstanding were $87.7 million and $72.0 million, respectively. Borrowings
outstanding under the revolving credit commitment are due January 31, 2001.
30
<PAGE> 33
Scheduled term loan principal repayments are as follows:
<TABLE>
<CAPTION>
Dollars in millions
<S> <C>
- ------------------------------------------------------
1998.......................................... $ 32.6
1999.......................................... 36.9
2000.......................................... 18.5
2001.......................................... 38.0
2002.......................................... 19.5
------
$145.5
- ------------------------------------------------------
</TABLE>
At December 31, 1997, the Company had outstanding letters of credit in the
aggregate amount of $17.1 million, primarily as collateral for contract
performance guarantees.
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 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 (limited to $1.9
million annually) 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.
The Company's senior notes, issued in June 1995, bear interest at the rate of
9.375% and mature June 2005. The net proceeds 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), it is provided that such
obligations are subordinate in right of payment to the Notes.
In conjunction with the Credit Agreement and Senior Note Offering and other
borrowings, debt issuance costs of $14.0 million were incurred and are being
amortized over the terms of the borrowings. The accumulated amortization of debt
issuance costs were $4.7 million and $2.8 million at December 31, 1997 and 1996,
respectively.
The $17 million note payable incurred in conjunction with the acquisition of
Pulse Electronics matures January 2004 and bears interest at 9.5% per annum,
subject to adjustment, based on prime plus 1%, in February 1998 and 2001 with a
maximum rate of 13%.
6. 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 service center
employees. In connection with the establishment of the ESOP (see Note 8) 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. 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.
Net periodic pension expense for the U.S. pension plans was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
Dollars in thousands 1997 1996 1995
<S> <C> <C> <C>
- -----------------------------------------------------------
Current service cost... $ 621 $ 564 $ 807
Interest on projected
benefit obligation
(PBO)................ 1,297 1,186 1,128
Return on plan
assets............... (2,905) (1,178) (883)
Net
amortization/deferrals.. 1,611 50 (64)
Recognition of special
events............... -- 696 70
--------------------------------
Net periodic pension
expense............ $ 624 $ 1,318 $1,058
- -----------------------------------------------------------
</TABLE>
Weighted average discount rates of 7.25%, 7.5% and 7.5% were used in determining
the actuarial present value of the projected benefit obligation at December 31,
1997, 1996 and 1995, respectively. The expected long-term rates of return on
assets were 10% in 1997, 1996 and 1995. 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.
31
<PAGE> 34
The following table sets forth the U.S. pension plans' funded status and amounts
recognized:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
Dollars in thousands 1997 1996
<S> <C> <C>
- ---------------------------------------------------------
Actuarial present value of
accumulated benefit
obligations (ABO)
Vested benefits............... $(14,333) $(12,417)
Nonvested benefits............ (2,317) (253)
----------------------
Total ABO................... (16,650) (12,670)
Additional benefits based on
estimated future salary
levels........................ (2,839) (3,897)
----------------------
PBO for service rendered to
date.......................... (19,489) (16,567)
Plan assets at fair value....... 16,118 13,303
----------------------
PBO in excess of plan assets.... (3,371) (3,264)
Unrecognized prior service
cost.......................... 248 231
Unrecognized net gain from past
experience different from that
assumed and changes in
assumptions................... (1,551) (1,572)
Adjustment for minimum
liability..................... (26) (119)
----------------------
Accrued pension cost.......... $ (4,700) $ (4,724)
- ---------------------------------------------------------
</TABLE>
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>
YEAR ENDED DECEMBER 31
-----------------------------------
Dollars in thousands 1997 1996 1995
<S> <C> <C> <C>
- -----------------------------------------------------------
Current service
cost................ $ 684 $ 490 $ 437
Interest on PBO....... 1,378 1,208 1,131
Return on plan
assets.............. (1,558) (1,304) (1,306)
Net amortization/
deferrals........... 254 252 132
-----------------------------------
Total pension
expense........... $ 758 $ 646 $ 394
- -----------------------------------------------------------
</TABLE>
Weighted average discount rates of 7.25%, 8.5% and 8.5% were used in determining
the actuarial present value of the projected benefit obligation at December 31,
1997, 1996 and 1995. The expected long-term rates of return on assets at the
measurement dates were 9.25%, 9.25% and 10% in 1997, 1996 and 1995,
respectively.
The following table sets forth the Canadian plans' funded status and amounts
recognized:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
Dollars in thousands 1997 1996
<S> <C> <C>
- ---------------------------------------------------------
Actuarial present value of ABO
Vested benefits............... $(18,438) $(14,258)
Nonvested benefits............ (114) (59)
----------------------
Total ABO................... (18,552) (14,317)
Additional benefits based on
estimated future salary
levels........................ (1,384) (900)
----------------------
PBO for service rendered to
date.......................... (19,936) (15,217)
Plan assets at fair value....... 19,693 17,637
----------------------
Over (under) funded PBO......... (243) 2,420
Unrecognized prior service
cost.......................... 1,940 1,135
Unrecognized net gain from past
experience different from that
assumed and changes in
assumptions................... 3,364 1,053
----------------------
Prepaid pension cost............ $ 5,061 $ 4,608
- ---------------------------------------------------------
</TABLE>
7. POSTRETIREMENT BENEFITS
In addition to providing pension benefits, the Company had provided certain
unfunded postretirement health care and life insurance benefits for
substantially all U.S. employees. In conjunction with the establishment of the
ESOP in January 1995 (see Note 8), 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. The Company
is not obligated to pay health care and life insurance benefits to individuals
who had retired prior to 1990.
Postretirement benefit expenses were comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
Dollars in thousands 1997 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------
Service cost.............. $ 289 $ 267 $202
Interest cost............. 1,226 935 757
Net amortization.......... 155 13 (93)
----------------------------
Total postretirement
benefit expense....... $1,670 $1,215 $866
- ----------------------------------------------------------
</TABLE>
32
<PAGE> 35
The accumulated postretirement benefit obligation was comprised of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
Dollars in thousands 1997 1996
<S> <C> <C>
- --------------------------------------------------------
Fully eligible plan
participants................... $ 7,942 $ 7,514
Other active plan participants... 9,808 7,466
--------------------
Total postretirement ABO....... 17,750 14,980
Unrecognized transition
obligation..................... (324) (550)
Unrecognized prior service
cost........................... 290 359
Unrecognized net loss............ (2,856) (1,480)
--------------------
Accrued postretirement
benefit...................... $14,860 $13,309
- --------------------------------------------------------
</TABLE>
The accumulated postretirement benefit 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 7.25%, 7.5% and 7.5% at December 31,
1997, 1996 and 1995. The assumed medical cost trend rate at December 31, 1997
was 5.75%. A one percentage point increase in the assumed health care cost trend
rates for each future year increases annual postretirement benefit expense by
$256,000 and the accumulated postretirement benefit obligation by $2.7 million.
8. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (ESOP)
Effective January 31, 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 6 and 7, the ESOP contributions are
intended to supplement or replace other salaried employee benefit plans.
In connection with the establishment of the ESOP, 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% and was collateralized by the shares purchased by
the ESOP. Company contributions to the ESOP will be used to repay the ESOP
loan's annual debt service requirements of $12 million. The Company is obligated
to contribute amounts sufficient to repay the ESOP loan. The ESOP uses such
Company contributions to repay the ESOP loan. Approximately 187,000 shares were
to be allocated annually to participants over a 50-year period. These
transactions occur simultaneously and, for accounting purposes, offset each
other. Unearned ESOP shares of $131.3 million at December 31, 1997, is reflected
as a reduction in shareholders' equity in the accompanying financial statements
and 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
recognized for allocated ESOP shares was $3.2 million, $2.6 million and $2.6
million in 1997, 1996 and 1995, respectively. In addition, the Company incurred
expenses of approximately $1 million in 1995 to establish the ESOP and related
trust.
9. INCOME TAXES
A reconciliation of the United States federal statutory income tax rate to the
effective income tax rate is provided below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1997 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------
U. S. federal statutory
rate........................ 35.0% 35.0% 35.0%
State taxes................... 2.7 3.5 4.3
Foreign....................... .8 .5 .7
------------------------
Effective rate.............. 38.5% 39.0% 40.0%
- ----------------------------------------------------------
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
Dollars in thousands 1997 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------
Current taxes
Federal............ $18,490 $17,498 $16,032
State.............. 1,849 2,138 3,817
Foreign............ 6,494 2,372 6,413
---------------------------------
26,833 22,008 26,262
Deferred taxes
Federal............ (1,375) (2,432) (597)
State.............. (137) (278) (142)
Foreign............ (1,994) 1,625 (3,081)
---------------------------------
(3,506) (1,085) (3,820)
---------------------------------
Total
provision...... $23,327 $20,923 $22,442
- ----------------------------------------------------------
</TABLE>
The 1995 provision includes a $960,000 income tax effect on the extraordinary
loss (see Note 13) related to the early extinguishment of certain debt
obligations.
The components of income before taxes on income for U.S. and foreign operations,
primarily Canada, were $47.9 million and $12.7 million, respectively, for 1997,
$42.4 million and $11.3 million, respectively, for 1996 and $46.6 million and
$9.2 million, respectively, for 1995.
33
<PAGE> 36
The sources of deferred income taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
Dollars in thousands 1997 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------
Depreciation............... $ 176 $ 782 $ (619)
Postretirement benefits.... (851) (171) (427)
Pension.................... 958 (319) 560
ESOP....................... (1,150) (919) (957)
Accrued warranty........... (1,697) (497) 8
Inventory.................. 451 (1,450) (77)
Other liabilities and
reserves................. (1,393) 1,489 (2,308)
--------------------------
Deferred tax benefits.... $(3,506) $(1,085) $(3,820)
- ----------------------------------------------------------
</TABLE>
Components deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
Dollars in thousands 1997 1996
<S> <C> <C>
- --------------------------------------------------------
Depreciation........................ $(8,422) $(8,246)
Postretirement benefits............. 2,915 2,064
Pension............................. 780 (178)
ESOP................................ 3,026 1,876
Accrued warranty.................... 4,178 2,481
Inventory........................... 3,111 3,562
Other............................... 20 543
----------------
Net deferred tax asset............ $ 5,608 $ 2,102
- --------------------------------------------------------
</TABLE>
10. EARNINGS PER SHARE
The computation of earnings per share is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
Dollars in thousands, -----------------------------
except per share 1997 1996 1995
<S> <C> <C> <C>
- ---------------------------------------------------------
BASIC EARNINGS PER SHARE
Net income applicable to
common shareholders..... $37,263 $32,725 $33,725
Divided by
Weighted average shares
outstanding........... 25,693 28,473 26,639
Basic earnings per
share................... $1.45 $1.15 $1.27
- ---------------------------------------------------------
DILUTED EARNINGS PER SHARE
Net income applicable to
common shareholders..... $37,263 $32,725 $33,725
Divided by sum of
Weighted average shares
outstanding........... 25,693 28,473 26,639
Conversion of dilutive
stock options......... 480 -- --
---------------------------
Diluted shares
outstanding........... 26,173 28,473 26,639
Diluted earnings per
share................... $1.42 $1.15 $1.27
- ---------------------------------------------------------
</TABLE>
Options to purchase .5 million, 2.2 million and 1.3 million shares of common
stock were outstanding in 1997, 1996 and 1995, respectively, but were not
included in the computation of diluted earnings per share because the options'
exercise price exceeded the average market price of the common shares.
11. 1995 STOCK INCENTIVE PLAN
The Company adopted the 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 3.1 million shares of Westinghouse Air Brake Company
common stock. Options to purchase approximately 2.9 million shares of
Westinghouse Air Brake Company common stock under the plan have been granted,
net of forfeitures, to employees of Westinghouse Air Brake Company at, or in
excess of, fair market value at the date of grant. Generally, the options become
exercisable over three and five-year vesting periods and expire ten years from
the date of grant.
In 1996, as 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
years, are subject to accelerated vesting after three years if the Company
achieves certain earnings targets 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. Through year-end 1997, the Company granted
nonstatutory stock options to nonemployee directors to purchase a total of
25,000 shares.
The Company applies APB 25 and related interpretations in accounting for its
stock option plans. Accordingly, no compensation expense has been recognized
under these plans. Had compensation expense 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 SFAS No. 123, the Company's net
income and earnings per share would be as set forth in the following table. For
purposes of pro forma disclosures, the estimated fair value is amortized to
expense over the options' vesting period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
Dollars in thousands, -----------------------------------
except per share 1997 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------
Net income
As reported........ $37,263 $32,725 $33,725
Pro forma.......... 34,007 31,117 32,482
Diluted earnings per
share
As reported........ $ 1.42 $ 1.15 $ 1.27
Pro forma.......... 1.30 1.09 1.22
- ----------------------------------------------------------
</TABLE>
Since compensation expense associated with option grants is recognized over the
vesting period, the initial impact of applying SFAS No. 123 on pro forma net
income is not
34
<PAGE> 37
representative of the potential impact on pro forma net income in future years.
In each subsequent year, pro forma compensation expense would include the effect
of recognizing a portion of compensation expense from multiple awards.
For purposes of presenting pro forma results, 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1997 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------
Dividend yield............. .23% .32% 0.00%
Risk-free interest rate.... 5.80 6.25 6.58
Stock price volatility..... 29.22 30.43 30.43
Expected life (years)...... 5.3 7.3 7.5
- ----------------------------------------------------------
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
fair value of traded options, which are significantly different than employee
stock options. Although this valuation model is an acceptable method for use in
presenting pro forma information, because of the differences in traded options
and employee stock options, the Black-Scholes model does not necessarily provide
a single measure of the fair value of employee stock options.
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Beginning of year............ 2,222,456 $13.63 1,279,500 $14.00 -- --
Granted...................... 748,126 17.84 958,956 13.14 1,316,500 $14.00
Exercised.................... (135,139) 13.75
Canceled..................... (57,000) 14.00 (16,000) 14.00 (37,000) 14.00
--------- --------- ---------
End of year.................. 2,778,443 $14.64 2,222,456 $13.63 1,279,500 $14.00
========= ========= =========
Exercisable at end of year... 671,971 332,992 252,300
Available for future grant... 186,418 877,544 1,820,500
Weighted average fair value
of options granted during
the year................... $8.07 $4.05 $5.56
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$11.00 to $21.38. The weighted-average remaining contractual life of those
options is 8 years.
12. OPERATING LEASES
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>
- ------------------------------------------------------
1998......................................... $ 2,783
1999......................................... 2,418
2000......................................... 2,188
2001......................................... 1,569
2002......................................... 855
Thereafter................................... 2,573
-------
$12,386
- ------------------------------------------------------
</TABLE>
Rental expense under all leases was approximately $3.3 million, $2.8 million and
$2.8 million for the years ended December 31, 1997, 1996 and 1995. Operating
leases relate principally to several manufacturing locations, warehouse and
office space, transportation equipment and communication systems.
13. EXTRAORDINARY ITEM
In connection with an amendment to the Credit Agreement (see Note 5), the
Company wrote off approximately $2.3 million of previously capitalized cost
relating to the previous credit agreement. In 1995, this resulted in an after
tax charge of $1.4 million or $.05 per share, which has been reflected as an
extraordinary item.
14. STOCK REPURCHASE
In March 1997, the Company repurchased from Scandinavian Incentive Holdings,
B.V., ("SIH"), 4,000,000 shares of the Company's Common Stock for an aggregate
purchase price of $44 million plus fees and expenses of approximately $2 million
(the "Redemption"). The Redemption was effected pursuant to a Redemption Agree-
35
<PAGE> 38
ment (the "Redemption Agreement") dated as of March 5, 1997 among the Company,
SIH and Incentive AB, the sole shareholder of SIH. Concurrently therewith, SIH
sold its remaining 6,000,000 shares of WABCO Common Stock to investors
consisting of Vestar Equity Partners, L.P. ("Vestar"), Harvard Private Capital
Holdings, Inc. ("Harvard"), American Industrial Partners Capital Fund II, L.P.
("AIP") and certain members of management of the Company (the "Management
Purchasers") for a purchase price of $11 per share in cash, pursuant to a Stock
Purchase Agreement dated as of March 5, 1997, which sale was effective as of
March 31, 1997 (the "SIH Purchase").
To finance the Redemption, the Company amended its Credit Agreement to increase
the revolving credit availability by $15 million (from $125 million to $140
million) and to obtain a waiver of the requirement to make a prepayment in an
aggregate principal amount equal to 50% of excess cash flow for 1996, or
approximately $11.5 million. The Company obtained consents from record owners as
of March 3, 1997 of its Senior Notes (the "Notes") to certain amendments to a
covenant contained in the Indenture dated as of June 20, 1995 among the Company,
as issuer, and The Bank of New York, as trustee, pursuant to which the Notes
were issued (the "Indenture"). The Company borrowed $46 million to fund the
Redemption and related expenses.
Upon the Company's receipt of the requisite consents, the Indenture was amended
(i) to permit additional Restricted Payments in an amount of approximately $22
million in order to complete the Redemption, and (ii) to permit up to $2 million
of additional Restricted Payments to be made in advance of when they would
otherwise have been permitted.
The following presents the Company's results for the year ended December 31,
1997 on a pro forma basis as if the stock repurchase had occurred on January 1,
1997:
<TABLE>
<CAPTION>
In thousands,
except per share REPORTED PRO FORMA
<S> <C> <C>
- --------------------------------------------------------
Net income.................... $37,263 $36,774
Basic earnings per share...... 1.45 1.49
Diluted earnings per share.... 1.42 1.46
Average shares used for
basic....................... 25,693 24,718
Average shares used for
diluted..................... 26,173 25,198
- --------------------------------------------------------
</TABLE>
15. STOCKHOLDERS' AND VOTING TRUST AGREEMENTS
As of December 31, 1997, the approximate ownership interests in the Company's
common stock are held by management and the ESOP (45%), the investors referred
to in Note 14 (16%), and all others including public shareholders (39%). The
investors referred to in Note 14 and certain members of senior management
purchased 6 million shares of WABCO common stock from SIH. The seller is a
successor in interest to Incentive AB (a Swedish corporation) which acquired
Investment AB Cardo, an original equity owner at the time of the 1990
acquisition of the Railway Products Group of American Standard, Inc. ("1990
Acquisition"). A Stockholders Agreement exists between management and the
investors referred to in Note 14 that provides for, among other things, the
composition of the Board of Directors as long as certain minimum stock ownership
percentages are maintained, restrictions on the disposition of shares and rights
to request the registration of the shares.
The active original management owners have entered into an Amended Voting
Trust/Disposition Agreement effective December 13, 1995, as amended. 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 8.
16. PREFERRED STOCK
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 Company's shareholders. The rights and preferences of the
preferred stock would be superior to those of the common stock. At December 31,
1997 and 1996 there was no preferred stock issued or outstanding.
17. COMMITMENTS AND CONTINGENCIES
Under the terms of the purchase agreement and related documents for the 1990
Acquisition, 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
36
<PAGE> 39
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. The Company believes that any 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. The Company has submitted a claim under the
policy for any costs of clean up imposed on or incurred by the Company in
connection with the "Old James Landfill" and International Insurance, Ltd. has
acknowledged coverage under the policy, subject to the stated policy exclusions.
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.
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 indemnification agreement 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.
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. INTERNATIONAL SALES
The following table sets forth geographic sales distribution:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1997 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------
United States................. 75% 75% 83%
Canada........................ 13 16 13
Other international........... 12 9 4
- ----------------------------------------------------------
</TABLE>
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments approximate
their related carrying values, except for the following:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
CARRY FAIR CARRY FAIR
DOLLARS IN MILLIONS VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
- ---------------------------------------------------------
Senior Notes 9 3/8%...... $(100) $(106) $(100) $(102)
Note Payable--Pulse
9 1/2%................. (17) (18) (17) (18)
Interest rate swaps...... -- (1) -- (1)
- ---------------------------------------------------------
</TABLE>
Fair values of the fixed rate obligations were estimated using discounted cash
flow analyses. The fair value of the Company's interest rate swaps (see Note 5)
were based on dealer quotes and represent the estimated amount the Company would
pay to the counterparty to terminate the swap agreements.
37
<PAGE> 40
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
1997
Net sales............................................. $136,508 $138,066 $142,761 $147,106
Operating income...................................... 22,542 22,784 22,036 22,613
Income before taxes................................... 15,719 15,279 14,486 15,106
Net income............................................ 9,589 9,320 8,836 9,518
Diluted earnings per common share..................... 0.34 0.37 0.35 0.37
1996
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
Diluted earnings per common share..................... 0.27 0.29 0.28 0.31
- -------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 41
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: February 26, 1998
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 February 26, 1998
----------------------------------------------
William E. Kassling, Chairman of the Board,
President and Chief Executive Officer
By /s/ ROBERT J. BROOKS February 26, 1998
----------------------------------------------
Robert J. Brooks, Chief Financial Officer,
Chief Accounting Officer and Director
By /s/ JAMES C. HUNTINGTON JR. February 26, 1998
----------------------------------------------
James C. Huntington Jr., Director
By /s/ KIM DAVIS February 26, 1998
----------------------------------------------
Kim Davis, Director
By /s/ EMILIO A. FERNANDEZ February 26, 1998
----------------------------------------------
Emilio A. Fernandez, Director
By /s/ JAMES V. NAPIER February 26, 1998
----------------------------------------------
James V. Napier, Director
By /s/ JAMES P. KELLEY February 26, 1998
----------------------------------------------
James P. Kelley, Director
</TABLE>
39
<PAGE> 42
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 February 16, 1998.
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
February 16, 1998
40
<PAGE> 43
SCHEDULE II
WESTINGHOUSE AIR BRAKE COMPANY
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
BALANCE CHARGED/ CHARGED DEDUCTIONS BALANCE
AT BEGINNING (CREDITED) TO OTHER FROM AT END
DOLLARS IN THOUSANDS OF PERIOD TO EXPENSE ACCOUNTS(1) RESERVES OF PERIOD
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
1997
Accrued warranty.......................... $8,172 $9,893 $2,281 $7,495 $12,851
Allowance for doubtful accounts........... 1,347 812 36 150 2,045
1996
Accrued warranty.......................... $3,655 $5,459 $3,802 $4,744 $ 8,172
Allowance for doubtful accounts........... 831 406 210 100 1,347
1995
Accrued warranty.......................... $3,685 $8,123 -- $8,153 $ 3,655
Allowance for doubtful accounts........... 1,242 (361) -- 50 831
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reserves of acquired companies.
41
<PAGE> 44
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<C> <S> <C>
3.1 Restated Certificate of Incorporation of the Company dated
January 30, 1995, as amended March 30, 1995**
3.2 Amended and Restated By-Laws of the Company, effective March
31, 1997*****
4.1 Form of Indenture between the Company and The Bank of New
York**
4.2 Form of Note (included in Exhibit 4.1)
4.3 First Supplemental Indenture dated as of March 21, 1997
between the Company and The Bank of New York*
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 Amended and Restated Stockholders Agreement dated as of
March 5, 1997 among the Voting Trust, Vestar Equity
Partners, L.P., Harvard Private Capital Holdings, Inc.
("Harvard"), American Industrial Partners Capital Fund II,
L.P. ("AIP") and the Company*
10.7 Common Stock Registration Rights Agreement dated as of
January 31, 1995 among the Company, SIH, the 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 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>
42
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<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 Plan**
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)****
10.23 Amendment No. 1 to Amended and Restated Stockholders
Agreement dated as of March 5, 1997 among the Voting Trust,
Vestar Equity Partners, L.P., Harvard, AIP and the Company*
10.24 Common Stock Registration Rights Agreement dated as of March
5, 1997 among the Company, Harvard, AIP and the Voting
Trust*
21 List of subsidiaries of the Company*
23 Consent of Arthur Andersen LLP*
27 Financial Data Schedule*
99 Annual Report on Form 11-K for the year ended December 31,
1997 of the Westinghouse Air Brake Company Employee Stock
Ownership Plan and Trust*
</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
September 19, 1996
***** Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-39159)
43
<PAGE> 1
Exhibit 4.3
=============================================================
WESTINGHOUSE AIR BRAKE COMPANY
Issuer
AND
THE BANK OF NEW YORK
Trustee
----------------------
FIRST SUPPLEMENTAL INDENTURE
----------------------
Dated as of March 21, 1997
$100,000,000
9-3/8% Senior Notes Due 2005
=============================================================
<PAGE> 2
FIRST SUPPLEMENTAL INDENTURE (hereinafter, the "First
Supplemental Indenture"), dated as of March 21, 1997, between Westinghouse Air
Brake Company, a Delaware corporation, as Issuer (the "Company") and The Bank of
New York, a New York banking corporation, as Trustee (the "Trustee").
A. The Company has executed and delivered to the Trustee an
Indenture dated as of June 20, 1995 (the "Indenture"), providing for the
issuance of $100,000,000 principal amount of the Company's 9-3/8% Senior Notes
due 2005 (the "Senior Notes").
B. The Company desires to amend the Indenture in accordance
with Article 9 thereof as follows, which amendments have been authorized by a
majority of the holders of the outstanding Senior Notes in accordance with
Section 9.2 of the Indenture.
C. The Company has executed and delivered to the Trustee (i)
resolutions by the board of directors of the Company authorizing the execution
of the First Supplemental Indenture and (ii) evidence of receipt by the Company
of the requisite consents of the Senior Note holders pursuant to Section 9.2 of
the Indenture.
D. The Company has executed and delivered to the Trustee (i)
an officers' certificate and (ii) an opinion from the Company's counsel as
conclusive evidence that the First Supplemental Indenture is permitted by the
Indenture, not inconsistent with the Indenture and valid and binding upon the
Company in accordance with its terms pursuant to Section 9.6 if the Indenture.
----------------------
In consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the Company
and the Trustee hereby amend the Indenture as follows:
1. Section 4.11(b) is hereby amended by deleting the word
"and" at the end of clause (vi) thereto, deleting "." at the end of clause (vii)
thereto, inserting ";" at the end of clause (vii) thereto, and adding the
following new clauses (viii) and (ix):
(viii) the redemption of up to 4,000,000 shares of Common
Stock from Scandinavian Incentive Holdings, B.V. on or prior
to April 30, 1997 at an aggregate price that, together with
Restricted Payments otherwise permitted under Section 4.11(a),
would not exceed $44,000,000; provided, however, that
Restricted Payments made pursuant to this clause (viii) shall
be included in the calculation of Restricted Payments for all
purposes under Section 4.11(a)(3); and
(ix) up to an aggregate amount of $2,000,000 of additional
Restricted Payments from and after the effective date of the
First Supplemental Indenture to this Indenture until such time
as the Company has the authority under Section 4.11(a) to make
such Restricted Payments; provided, however, that Restricted
Payments made pursuant to this clause (viii) shall be included
1
<PAGE> 3
in the calculation of Restricted Payments for all purposes
under Section 4.11(a)(3).
2. For all purposes of this First Supplemental Indenture,
except as otherwise herein expressly provided or unless the context otherwise
requires, the terms and expressions used herein shall have the same meanings as
corresponding terms and expressions used in the Indenture.
3. Except as hereby expressly amended, the Indenture and the
Senior Notes issued thereunder are in all respects ratified and confirmed and
all terms, conditions and provisions thereof shall remain in full force and
effect.
4. This First Supplemental Indenture shall form a part of the
Indenture for all purposes, and every Holder of Senior Notes theretofore or
hereafter authenticated and delivered shall be bound hereby.
5. This First Supplemental Indenture may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original, and all of which when taken together shall constitute one and the same
instrument.
6. This First Supplemental Indenture shall be governed by the
laws of the State of New York, without regard to conflicts of law principles
thereof.
7. This First Supplemental Indenture shall become effective
upon execution by the Company and the Trustee in accordance with the terms of
the Indenture; however, the amendments to the Indenture set forth in this First
Supplemental Indenture shall not become operative until the Company has
deposited with the Trustee sufficient immediately available funds to make
payments equal to $15.00 for each $1,000 principal amount of Senior Notes held
by Holders who have delivered to the Trustee prior to 12:00 p.m., New York City
time, on March 19, 1997 valid and unrevoked consents in form and substance
satisfactory to the Company and the Trustee.
-2-
<PAGE> 4
IN WITNESS WHEREOF, the parties have caused this First
Supplemental Indenture to be duly executed as of the date and year first written
above.
ISSUER
WESTINGHOUSE AIR BRAKE COMPANY
By: /s/ ROBERT J. BROOKS
-------------------------------
Title: Vice President and Secretary
----------------------------
TRUSTEE
THE BANK OF NEW YORK
By: /s/ LUCILLE P. FIRRINCIELI
------------------------------
Title: Assistant Vice President
---------------------------
-3-
<PAGE> 1
Exhibit 10.6
AMENDED AND RESTATED
STOCKHOLDERS AGREEMENT
THIS AMENDED AND RESTATED STOCKHOLDERS AGREEMENT (this
"AGREEMENT") dated as of March 5, 1997, by and among the VOTING TRUST (the
"VOTING TRUST) created under the Second Amended WABCO Voting Trust/Disposition
Agreement, dated as of December 13, 1995 (the "VOTING TRUST AGREEMENT"), VESTAR
EQUITY PARTNERS, L.P., a Delaware limited partnership ("VESTAR"), HARVARD
PRIVATE CAPITAL HOLDINGS, INC., a Massachusetts corporation ("HARVARD"),
AMERICAN INDUSTRIAL PARTNERS CAPITAL FUND II, L.P., a Delaware limited
partnership ("AIP"), and WESTINGHOUSE AIR BRAKE COMPANY, a Delaware corporation
("WABCO"). The Voting Trust, Vestar, Harvard, AIP and WABCO are sometimes
individually referred to as a "PARTY" and collectively the "PARTIES".
WHEREAS, this Agreement amends and restates the Stockholders
Agreement dated as of January 31, 1995 (the "Existing Stockholder Agreement") by
and among the Voting Trust, Scandinavian Incentive Holdings B.V. ("SIH") and
WABCO, and to which Vestar/WABCO Investors, L.P., Vestar Capital Partners, Inc.,
William E. Kassling, Emilio A. Fernandez, and Incentive AB executed limited
joinders;
WHEREAS, concurrently with this Agreement becoming effective
Vestar, Harvard, AIP and members of WABCO's management are purchasing 6 million
of the shares of Common Stock owned by SIH and WABCO is repurchasing 4 million
of the shares of Common Stock owned by SIH (the purchase of such 10 million SIH
Shares, the "SIH Repurchase"); and
WHEREAS, the Parties desire to set forth certain agreements
with respect to the ownership of Common Stock by the Parties other than WABCO
and certain other matters relating to WABCO.
NOW, THEREFORE, in consideration of the promises and mutual
covenants hereinafter set forth, the Parties hereby agree as follows:
1. DEFINITIONS
1.1 In addition to the terms defined elsewhere herein, the following
terms shall have the following meanings:
1.1.1 "ACT" shall mean the Securities Act of 1933, as amended.
1.1.2 "AFFILIATE" shall mean any entity which is now, or
hereinafter becomes controlled by, or in control of, or in
common control with, another entity. "CONTROL" shall mean more
than fifty percent (50%) of the ownership interest or voting
rights of any entity, directly or indirectly.
<PAGE> 2
1.1.3 "AIP Shares" shall mean the shares of Common Stock owned
by AIP.
1.1.4 "ASSOCIATE" shall mean any natural person who is a
partner, officer, director or employee of (i) another person,
(ii) a corporate general partner of a limited partnership or
(iii) a company or partnership that controls, is controlled
by, or is under common control with, such person. "PERSON"
shall mean an individual, corporation, partnership,
association, joint-stock company, trust and unincorporated
association.
1.1.5 "COMMON STOCK" shall mean shares of common stock, par
value $.01 per share, of WABCO.
1.1.6 "ESOP" shall mean, collectively, the WABCO Employee
Stock Ownership Plan effective January 1, 1995 and the WABCO
Employee Stock Ownership Trust established effective January
1, 1995 pursuant to the WABCO Employee Stock Ownership Trust
Agreement between WABCO and the U.S. Trust Company of
California, N.A., as such plan and trust may be amended,
modified or supplemented from time to time.
1.1.7 "HARVARD SHARES" shall mean the shares of Common Stock
owned by Harvard.
1.1.8 "PULSE SHARES" shall mean the shares of Common Stock
delivered by WABCO pursuant to that certain Asset Purchase
Agreement dated as of January 23, 1995, by and among WABCO,
Pulse Acquisition Corporation, Pulse Electronics, Incorporated
and Pulse Embedded Computer Systems, Inc.
1.1.9 "QUALIFYING PUBLIC OFFERING" shall mean a sale of shares
of Common Stock in a bona fide underwritten public offering
that is registered under the Act and conducted in the United
States in a manner reasonably designed to effect a broad
distribution of such shares.
1.1.10 "SEC" shall mean the United States Securities and
Exchange Commission.
1.1.11 "SIH SHARES" shall mean the 10,000,000 shares of Common
Stock owned by SIH.
1.1.12 "TRUSTHOLDERS" shall mean the holders of Trust
Certificates issued by the Voting Trust in exchange for shares
of Common Stock.
1.1.13 "VESTAR SHARES" shall mean the shares of Common Stock
owned by Vestar or Vestar Capital Partners, Inc.
1.1.14 "VOTING TRUST SHARES" shall mean the shares of Common
Stock owned by the Voting Trust.
2
<PAGE> 3
2. NOTICE OF CERTAIN ACTIVITIES
2.1 Harvard hereby agrees that, so long as a Harvard representative is
on the Board of Directors of the Company, Harvard shall provide prompt
written notice to the Company if at any time Harvard competes with
WABCO in the railway products or rail passenger transit business,
PROVIDED, HOWEVER, that this covenant shall only apply with respect to
investments by Harvard in excess of $10,000,000.
2.2 Vestar hereby agrees that, so long as a Vestar representative is on
the Board of Directors of the Company, Vestar shall provide prompt
written notice to the Company if at any time Vestar or a wholly-owned
subsidiary of Vestar competes with WABCO in the railway products or
rail passenger transit business; PROVIDED, HOWEVER, that this covenant
shall only apply with respect to investments by Vestar or any of its
wholly-owned subsidiaries in excess of $10,000,000.
3. CERTAIN PURCHASES AND CORPORATE MATTERS
3.1 REPURCHASES. On or about the date hereof, (i) WABCO is acquiring
from SIH 4,000,000 of the SIH Shares (the "SIH REPURCHASE"), and (ii)
Vestar, Harvard, AIP and certain members of WABCO's management are
collectively purchasing 6,000,000 of the SIH Shares.
3.2 BY-LAWS. On or before the effective date hereof, the By-Laws of
WABCO (the "BY-LAWS") shall be amended to read as set forth in EXHIBIT
3.2 to this Agreement.
4. MANAGEMENT OF WABCO
4.1 BOARD OF DIRECTORS.
4.1.1 COMPOSITION.
(a) Subject to paragraphs (b) through (h) hereof, the Board of
Directors of WABCO (the "BOARD") shall consist of such number
of persons as is determined from time to time by the
affirmative vote of a majority of the Directors then in
office.
(b) The Board shall maintain a Nominating Committee, which
Nominating Committee shall nominate persons to be elected to
the Board as set forth in this Agreement. The Chairman of the
Board shall have exclusive authority to select the members of
the Board who will serve on the Nominating Committee, subject
in any event to the provision in Section 4.1.1(h). At any time
that a new Director is elected pursuant to the terms of this
Agreement, the remaining Directors then in office shall have
an obligation to ratify and approve such elections.
(c) The Nominating Committee shall nominate persons for
election to the Board so that the Board shall be comprised of
the following: (i) the Chief Executive of WABCO; (ii) another
executive officer of WABCO; (iii) at least three individuals
who are not employees of WABCO or any of its subsidiaries;
(iv) one individual designated by Vestar (the "Vestar
Director") (so long as Vestar and its partners, and Vestar
Capital and its stockholders and officers, and their
respective Affiliates collectively and beneficially own at
least 50% of the shares of Common Stock beneficially owned by
Vestar and Vestar Capital immediately after the closing of the
SIH Repurchase); (v) one individual designated by William E.
Kassling (so long as Mr. Kassling
3
<PAGE> 4
and members of his immediate family and their Affiliates
collectively and beneficially own at least 50% of the shares
of Common Stock beneficially owned by Mr. Kassling immediately
after the closing of the SIH Repurchase); (vi) one individual
designated by Harvard (the "Harvard Director") (so long as
Harvard and its stockholders and officers and their respective
Affiliates collectively and beneficially own at least 50% of
the shares of Common Stock beneficially owned by Harvard
immediately after the closing of the SIH Repurchase); and
(vii) Emilio A. Fernandez (so long as (x) Mr. Fernandez is
able and willing to serve and (y) Mr. Fernandez and his
immediate family and their Affiliates (the "FERNANDEZ GROUP")
collectively and beneficially own at least 50% of the Pulse
Shares. So long as Mr. Fernandez meets the qualifications set
forth in the foregoing clause (vii), the Chairman of the Board
shall direct the Nominating Committee to nominate Mr.
Fernandez as a member of the Board of Directors.
(d) If requested by WABCO in order to comply with paragraph
(c) above, Vestar, Mr. Kassling and/or Harvard shall cause its
designee for Director to resign effective at such time as
Vestar, Mr. Kassling or Harvard, as the case may be, no longer
has the ability to designate a Director pursuant to paragraph
(c) above, and Mr. Fernandez shall resign effective at such
time as the Fernandez Group no longer beneficially owns at
least 50% of the Pulse Shares.
(e) Vestar, Harvard and Mr. Kassling may, at any time during
which their respective right to designate Directors is
applicable, cause the removal of any Director designated by it
or him and designate a new individual or individuals to serve
as Director or Directors by prior written notice to the
Nominating Committee, which shall promptly nominate such
individual(s) for election to the Board. Except with respect
to Mr. Fernandez, in the event of a vacancy on the Board of
Directors caused by the death, resignation or removal of a
Director prior to the fulfillment of his term, the Party or
other person or entity originally designating such Director
shall, so long as its right to designate such Director is
applicable, designate an individual to serve as a successor
Director and shall promptly notify the Nominating Committee of
such action in writing, and the Nominating Committee shall
promptly nominate such individual for election to the Board.
The death, resignation or removal of Mr. Fernandez as a
director shall terminate his right to serve on the Board of
Directors, and the Fernandez Group shall have no right to
designate a successor to fill any vacancy caused by such
death, resignation or removal.
(f) Any person designated by Vestar, Harvard, Mr. Kassling or,
in the case of Mr. Fernandez, the Chairman of the Board, as
provided for herein shall be nominated by the Nominating
Committee to be elected to the Board at the stockholders'
meeting, or by the Directors already elected to the Board, as
the case may be, voting in conformity with such nomination. In
furtherance thereof, each of the Voting Trust, Vestar,
Harvard, Vestar Capital, AIP, Mr. Kassling, Mr. Fernandez,
Robert J. Brooks, Howard J. Bromberg and John M. Meister
agrees to vote all of the shares of Common Stock and any other
voting securities of WABCO from time to time held by it or him
in favor of, and each of the Voting Trust, Harvard, Vestar
Capital, AIP, Mr. Kassling, Mr. Fernandez, Mr. Brooks, Mr.
Bromberg and Mr. Meister agrees to cause any shares of Common
Stock or other WABCO voting securities as to which it or he
from time to time has the right to direct the vote to be voted
in favor of, and to take any other appropriate steps to cause,
the election to the Board of individuals designated by Vestar,
Harvard and/or Mr. Kassling and, in the case of Mr. Fernandez,
the Chairman of the Board, and nominated by the Nominating
Committee in accordance with this Section 4.1.1; PROVIDED,
that Mr. Kassling shall not be deemed to control any shares of
Common Stock held by the ESOP for purposes of this Section 4.1
(g) Each director elected in accordance with the foregoing
paragraphs (b) through (f) shall be elected to one of three
classes, as allocated by the Chairman of the Board in his sole
discretion.
4
<PAGE> 5
Each director will be elected to hold office for a term
expiring at the third succeeding annual meeting. In all such
cases, a Director's term of office shall continue until his
successor is duly elected and qualified or until his earlier
resignation or removal. Until such time as Vestar designates a
new individual in accordance with this Section 4.1.1, James P.
Kelley shall be the Vestar Director and shall continue in his
current term as a Director. The Harvard Director shall fill
the vacancy to be created by Mikael Lilius' resignation from
the Board and shall be nominated for a full term expiring in
2000. Each other Director currently serving as such (with the
exception of Mr. Lilius) will continue his present term.
(h) Each committee of the Board shall include either the
Vestar Director or the Harvard Director (as determined by
Harvard and Vestar) as one of its members.
4.1.2 POWERS AND MANAGEMENT.
(a) The Board of Directors shall have full power to control,
manage and direct the business of WABCO and to take such
actions as may be necessary to further the purposes of WABCO.
(b) The management of the business of WABCO shall be the
responsibility of a Chief Executive Officer, to be appointed
by the Board of Directors. William E. Kassling shall continue
to be the Chief Executive Officer of WABCO and he shall
continue to serve as Chief Executive Officer until replaced by
the Board of Directors in accordance with the provisions of
any employment agreement then in force between WABCO and Mr.
Kassling. The Chief Executive Officer of WABCO shall, subject
to subsection(a) above, be entitled to make all decisions
regarding the ordinary course of business operations of WABCO
according to good business practice.
(c) All of the Directors shall have one vote each. A quorum
shall be constituted by a majority of the Directors then in
office.
5. TRANSFER OF SECURITIES
5.1 NO TRANSFER.
5.1.1 Except as permitted by Section 5.2 hereof, until March
31, 2001, neither Vestar, Harvard, AIP nor the Voting Trust
shall sell, transfer, assign, mortgage, change, hypothecate,
give away or otherwise dispose of (collectively, "TRANSFER")
any Common Stock owned or held by it. Any transfer contrary to
the provisions of this Agreement shall be null and void. The
foregoing shall not restrict (i) the transferability of
interests in the Voting Trust so long as any such transfer
does not affect the underlying Common Stock and (ii) the
ability of Vestar Capital Partners, Inc. to pledge the 40,000
Vestar Shares currently held by Vestar Capital Partners, Inc.
5.1.2 No transfer of shares of Common Stock by Vestar,
Harvard, AIP or the Voting Trust shall be permitted pursuant
to Section 5.2 hereof except (i) pursuant to an effective
registration statement covering such shares under the Act and
any applicable state securities laws, (ii) in a transaction
permitted by Rule 144 promulgated under the Act and as to
which WABCO has received reasonably satisfactory evidence of
compliance with the provisions of Rule 144, (iii) to a person
whom the seller reasonably believes is a Qualified
Institutional Buyer within the meaning of Rule 144A
promulgated under the Act purchasing for its own account or
for the account of a Qualified Institutional Buyer that is
aware that the transfer is being made in reliance upon Rule
144A promulgated under the Act, or (iv) upon receipt of a
legal opinion in form and
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<PAGE> 6
substance reasonably acceptable to WABCO rendered by counsel
(who may be an employee of the party for whom or on whose
behalf the opinion is being rendered) reasonably satisfactory
to WABCO to the effect that the transaction does not require
registration under the Act and any applicable state securities
laws. This Section shall not apply to transfers by Vestar,
Harvard or AIP to their respective Affiliates as permitted by
Section 5.2.1.
5.1.3 At the request of WABCO, each share certificate for the
Common Stock held by Vestar, Harvard, AIP or the Voting Trust
shall be provided with the following legend:
"The shares of stock represented by this certificate
are subject to, and may be sold, transferred,
assigned, mortgaged, changed, hypothecated, given
away or otherwise disposed of (collectively,
"transferred") only in accordance with, the
provisions of the Amended and Restated Stockholders
Agreement dated as of March 5, 1997. The shares of
stock represented by this certificate have not been
registered under the Securities Act of 1933, as
amended (the "Act"), or any applicable state
securities laws, and may not be transferred , and
Westinghouse Air Brake Company (the "Company") is not
required to give effect to any attempted transfer,
except in accordance with the terms of said
Stockholders Agreement and (i) pursuant to an
effective registration statement covering such
security under the Act and any applicable state
securities laws, (ii) in a transaction permitted by
Rule 144 promulgated under the Act and as to which
the Company has received reasonably satisfactory
evidence of compliance with the provisions of Rule
144, (iii) to a person whom the seller reasonably
believes is a Qualified Institutional Buyer within
the meaning of Rule 144A promulgated under the Act
purchasing for its own account or for the account of
a Qualified Institutional Buyer that is aware that
the transfer is being made in reliance upon Rule 144A
promulgated under the Act, or (iv) upon receipt of a
legal opinion in form and substance reasonably
acceptable to the Company rendered by counsel (who
may be an employee of the party for whom or on whose
behalf the opinion is being rendered) reasonably
satisfactory to the Company to the effect that the
transaction does not require registration under the
Act and any applicable state securities laws."
5.2 TRANSFERS ALLOWED.
5.2.1 On or prior to March 31, 1998 the Harvard Shares, the
Vestar Shares and the AIP Shares may only be transferred (i)
to Affiliates or partners of such transferor who agree in a
writing, in form and substance reasonably satisfactory to
WABCO, to be bound by and subject to the provisions of this
Agreement , (ii) in connection with the exercise of
"piggyback" registration rights granted to such transferor by
WABCO, or (iii) in connection with any merger, consolidation,
reorganization, recapitalization or similar transaction or any
tender or exchange offer approved or recommended by WABCO's
Board of Directors. After March 31, 1998 the Harvard Shares,
the Vestar Shares and the AIP Shares may be transferred as
permitted under the foregoing clauses (i), (ii) and (iii) and
(w) in a Qualifying Public Offering, (x) in any disposition to
a person which, to the best knowledge of Harvard, Vestar or
AIP, as the case may be, after due inquiry (it being
understood that Harvard, Vestar and AIP may rely on
representations and warranties made by such person and such
person's Schedule 13D or Schedule 13G filings with the SEC
unless Harvard, Vestar or AIP has actual knowledge that such
Schedules are not accurate), will not beneficially own,
together with such person's Affiliates, a number of shares of
Common Stock then outstanding on a fully diluted basis which,
when combined with the number of Harvard Shares, Vestar Shares
or AIP Shares, as the case may be, being disposed of in such
disposition would constitute more than 6% of the shares of
Common Stock then outstanding on a
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<PAGE> 7
fully diluted basis, (y) to or through any broker,
underwriter, placement agent or other financial intermediary,
acting in such capacity, which undertakes in a writing
reasonably satisfactory to WABCO to effect any subsequent
transfer by it of such Harvard Shares, AIP Shares or Vestar
Shares, as the case may be, in a Qualifying Public Offering or
(z) to any person (other than any person which, to the best
knowledge of Harvard, Vestar or AIP, as the case may be, after
due inquiry, is a competitor or customer of WABCO or has,
prior to such sale, initiated or been an active participant
in, an unsolicited change of control transaction by tender
offer, proxy contest, consent solicitation or otherwise with
respect to WABCO), provided that WABCO shall have a right of
first offer with respect to any Harvard Shares, Vestar Shares
or AIP Shares, as the case may be, proposed to be sold in
accordance with this clause (z) pursuant to Section 5.2.2
hereof unless WABCO shall have approved of such transfer in
writing.
5.2.2 If either Harvard, Vestar or AIP (the "SELLING PARTY")
proposes to sell any Harvard Shares, Vestar Shares or AIP
Shares, as the case may be pursuant to clause (z) of Section
5.2.1 hereof (a "THIRD PARTY SALE"), the Selling Party shall
not transfer such Shares (the "OFFERED SHARES") without first
offering the Offered Shares to WABCO in accordance with the
following procedures. The Selling Party shall provide to WABCO
written notice of its intention to sell (the "SALE NOTICE"),
which Sale Notice shall include a request for WABCO to make a
written offer (the "WABCO OFFER") to purchase for cash all of
the Offered Shares. WABCO shall have the right to make a WABCO
Offer for the Offered Shares by notifying the Selling Party
(such notice being referred to as an "ELECTION NOTICE") at any
time within 35 days of WABCO's receipt of the Sale Notice of
WABCO's intent to make such WABCO Offer; PROVIDED, that any
such Election Notice from WABCO shall be irrevocable, contain
all of the material terms and conditions of the sale and be
accompanied by a commitment letter from a bank or other
responsible source of financing for such purchase or a
certificate signed by the Chief Financial Officer of WABCO
certifying that WABCO has sufficient funds to purchase the
Offered Shares. If WABCO exercises its right to purchase the
Offered Shares pursuant to the foregoing sentence, the closing
of the purchase of the Offered Shares by WABCO shall take
place at the principal offices of WABCO on a date specified by
WABCO in the Election Notice, but in any event not later than
100 days after receipt by WABCO of the Sale Notice. On the
closing date for such purchase, the Selling Party shall
deliver the Offered Shares to WABCO free and clear of all
liens, encumbrances and security interests and, in connection
therewith, the Selling Party shall execute and deliver such
agreements, documents and instruments, including stock powers,
as WABCO shall reasonably require. If WABCO fails to deliver
an Election Notice within 35 days of receipt by WABCO of the
Selling Party Sale Notice or if WABCO otherwise advises the
Selling Party in writing that WABCO does not intend to
exercise its right to acquire the Offered Shares, the Selling
Party shall be entitled to sell the Offered Shares to any
other person without any requirements as to the terms and
conditions of such sale; PROVIDED, that if the Selling Party
does not sell the Offered Shares by the earlier to occur of
180 days from the expiration of WABCO's right to deliver an
Election Notice or 180 days from written notice from WABCO
that it does not intend to exercise its right to acquire the
Offered Shares, the provisions of this Section 5.2.2 shall
again apply to the Offered Shares.
If WABCO delivers its Election Notice for the Offered Shares
within 35 days of receipt by WABCO of the Selling Party Sale
Notice, the Selling Party shall be entitled to offer the
Offered Shares to any person pursuant to a Third Party Sale at
a price that is more favorable to the Selling Party than those
set forth in the Election Notice, provided that any such sale
must occur within 180 days of the date of delivery of the
Election Notice.
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<PAGE> 8
Notwithstanding the foregoing, if the Selling Party's Sale
Notice is in connection with any tender offer or exchange
offer for outstanding Common Stock, WABCO shall be required to
the extent WABCO desires to purchase the Offered Shares to
exercise its right to so purchase, and to close such purchase
of, the Offered Shares by the date which is the earlier of (i)
10 days following receipt of such Sale Notice and (ii) the
business day prior to the expiration of such tender or
exchange offer.
5.2.3 After March 31, 1998 Harvard, Vestar and AIP shall be
permitted to sell Shares pursuant to and subject to the
limitations set forth in Rule 144 of the SEC under the Act.
5.2.4 Notwithstanding any provision herein to the contrary,
Trustholders (other than William E. Kassling, Robert J.
Brooks, Howard J. Bromberg and John M. Meister, who shall be
subject to Section 5.2.5 below) shall, to the extent permitted
by the Voting Trust Agreement, be permitted to transfer Voting
Trust Shares, withdraw Voting Trust Shares from the Voting
Trust, and/or sell or otherwise dispose of Shares at any time.
Upon expiration of the Voting Trust, Voting Trust Shares may
be distributed in accordance with the terms thereof and such
Voting Trust Shares will no longer be subject to Section 5.1.
5.2.5 (a) Except as permitted by Section 5.2.5(b), 5.2.5(c)
and 5.2.5(d), until March 31, 2001, none of Messrs. Kassling,
Fernandez, Brooks, Bromberg and Meister (collectively, the
"Management Group") shall sell, transfer, assign, mortgage,
change, hypothecate, give away or otherwise dispose of
(collectively "transfer") any shares of Common Stock
beneficially owned by him or any of his interest in the Voting
Trust (treating any Common Stock held by the Voting Trust for
the account of any member of the Management Group as Common
Stock owned by such member).
(b) Subject to Section 5.2.5(f) below, each member of the
Management Group shall be permitted to transfer shares of
Common Stock beneficially owned by him at any time in
accordance with the terms of Section 8 of the Voting Trust
Agreement, as in effect on the date hereof, regardless of
whether such person is a participant in the Voting Trust. Each
member of the Management Group who is also a participant in
the Voting Trust shall be permitted to withdraw shares of
Common Stock from the Voting Trust at any time in accordance
with the terms of the Voting Trust Agreement, as in effect on
the date hereof.
(c) So long as any member of the Management Group continues to
be an employee of WABCO or any of its subsidiaries, such
member, together with his transferees permitted under this
Section 5.2.5, may transfer during each 12-month period
following the effective date of this Agreement, in the
aggregate, 5% of the shares of Common Stock beneficially owned
by such member on the date of this Agreement.
(d) In the event that a member of the Management Group's
employment with WABCO and its subsidiaries is terminated for
any reason, such member, together with his transferees
permitted under this Section 5.2.5, may transfer during each
12-month period following the effective date of such
termination, in the aggregate, 20% of the shares of Common
Stock beneficially owned by such member on the effective date
of such termination. The restriction in this Section 5.2.5(d)
may be waived by the Chairman of the Board of WABCO as to any
member of the Management Group if such member delivers to the
Chairman a request for waiver indicating that such waiver is
required in order to alleviate personal hardship. The decision
as to whether and to what extent to grant a waiver shall be in
the sole discretion of the Chairman.
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<PAGE> 9
(e) Each member of the Management Group agrees not to effect
any public sale or distribution of shares of Common Stock
owned by him or any similar security of the Company, or any
securities convertible into or exchangeable or exercisable for
such securities, or any securities into which such securities
are convertible or for which such securities are exchangeable
or exercisable, during the 10 days prior to, and during the 90
day period beginning on, the effective date of any
registration statement in which "Holders" (as defined in that
certain Common Stock Registration Rights Agreement of even
date herewith among the Company, Vestar, Harvard, AIP, the
Voting Trust and certain other holders of shares of Common
Stock) are participating in connection with an underwritten
public offering of shares of Common Stock (except as part of
such registration), if and to the extent reasonably requested
in writing (with reasonable prior notice) by the lead managing
underwriter of the underwritten public offering.
(f) Each member of the Management Group agrees that no shares
of Common Stock (or any interests in the Voting Trust)
beneficially owned by him, his spouse or his minor children
will be transferred in a transfer permitted by this Section
5.2.5 (other than subsections (c) and (d) above) unless the
transferee agrees in a writing, in form and substance
reasonably satisfactory to WABCO, to be bound by and subject
to the provisions of this Section 5.2.5.
(g) Shares of Common Stock beneficially owned by the
Management Group are as follows:
William E. Kassling 1,548,336 shares
Emilio A. Fernandez 643,444 shares
Robert J. Brooks 437,300 shares
Howard J. Bromberg 640,200 shares
John M. Meister 251,000 shares
It is agreed that the foregoing shares include all shares of
Common Stock controlled by the Management Group and their
respective spouses and minor children and that all of the
foregoing shares shall be subject to this Agreement.
(h) Shares of Common Stock held by the ESOP shall not be
deemed to be beneficially owned by any member of the
Management Group for purposes of this Agreement. Shares of
Common Stock held in the Voting Trust (other than shares
deposited by members of the Management Group in the Voting
Trust) also shall not be deemed to be beneficially owned by
any member of the Management Group for purposes of this
Agreement.
6. ASSIGNMENT
6.1 This Agreement and all of the provisions hereof shall be binding
upon and inure to the benefit of the Parties to this Agreement and
their respective successors and assigns.
6.2 Neither this Agreement nor any of the rights, interests and
obligations hereunder shall be assignable by any Party without the
prior written consent of the other Parties; provided, however, Vestar,
Harvard and AIP shall have the right to assign their rights, interests
and obligations hereunder to their respective Affiliates from time to
time so long as such Affiliates agree in a writing, in form and
substance reasonably satisfactory to WABCO, to be bound by and subject
to the provisions of this Agreement.
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7. TERM
7.1 This Agreement shall continue in effect (unless terminated by a
mutual agreement of the Parties) until March 31, 2007.
8. CONCILIATION AND ARBITRATION
8.1 CONCILIATION. If any dispute, claim or difference arises out of or
relating to this Agreement, or as to the rights and liabilities of the
Parties hereunder or as to the breach or invalidity hereof, or in
connection with the construction of this Agreement (each such event
being hereinafter called a "DISPUTE"), the Parties shall use their best
efforts to resolve the Dispute and, if they so desire, consult outside
experts for assistance in arriving at such a resolution.
8.2 ARBITRATION. (a) Any Dispute shall be finally settled by
arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association ("AAA") effective as of the
commencement of the arbitration(the "RULES"), except as such Rules may
be modified as provided in this Agreement. The arbitration shall be
held in New York, New York, unless the parties mutually agree to have
the arbitration held elsewhere, and judgment upon the award made
therein may be entered by any court having jurisdiction thereof;
PROVIDED, HOWEVER, that nothing contained in this paragraph shall be
construed to limit or preclude a party from bringing any action in any
court of competent jurisdiction for injunctive or other provisional
relief to compel another party to comply with its obligations under
this Agreement during the pendency of the arbitration proceedings. The
arbitral tribunal shall be composed of three(3) arbitrators, who shall
be experienced commercial litigators admitted to practice law in the
State of New York. If the Dispute is between two of the Parties, each
Party shall appoint one arbitrator. If the Dispute is among more than
two Parties hereto, the Parties shall mutually agree upon and appoint
two arbitrators. If such Parties fail to nominate an arbitrator (in the
case of a two-party Dispute) or if the Parties fail to agree upon two
arbitrators (in the case of a more than two Party Dispute) in
accordance with the two preceding sentences within thirty(30) days from
the date when the notice of intention to arbitrate referred to in Rule
6 of the Rules (the "COMMENCEMENT NOTICE") has been received by the
Respondent (as defined in the Rules) such appointment shall, upon
written request by either or any Party (as the case may be) to the AAA,
be made in accordance with Rule 14 of the Rules. The two arbitrators
thus appointed shall attempt to agree upon the third arbitrator to act
as chairperson of the arbitration tribunal. If said two (2) arbitrators
fail to appoint the chairperson within thirty (30) days from the date
of appointment of the second arbitrator, upon written request of either
party to the AAA, such appointment shall be made in accordance with
Rule 15 of the Rules. The arbitrators shall have no power to waive,
alter, amend, revoke, or suspend any of the provisions of this
Agreement, provided, however, that the arbitrators shall have the power
to decide all questions with respect to the interpretation and validity
of this Subsection 8.2. An arbitrator may not act as an advocate for
the party nominating him, and all three arbitrators shall be impartial
and unbiased. A majority vote by the three arbitrators shall be
required on any decision made by them; PROVIDED, HOWEVER, that lacking
such a majority in the case of questions of amounts of dollar or other
quantities, the vote for the greatest amount or quantity shall be
deemed to be a vote for the amount or quantity next in magnitude in
order to form a majority for such vote. The arbitrators shall permit
such discovery as they shall determine is appropriate in the
circumstances, taking into account the needs of the Parties and the
desirability of making discovery expeditious and cost-effective. Any
such discovery shall be limited to information directly relevant to the
controversy or claim in arbitration and shall be concluded within
thirty (30) days after the appointment of the arbitration panel. This
agreement to arbitrate shall be binding upon the heirs or successors
and the assigns and any
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<PAGE> 11
trustee, receiver or executor of each party hereto. Except to the
extent required by law or court or administrative order, no party,
arbitrator, representative, counsel or witness shall disclose or
confirm to any person not present at the arbitration hearings, any
information about the arbitration proceeding or hearings, including the
names of the parties and arbitrators, the nature and amount of the
claims, the financial condition of any party, the expected date of
hearing or the award made.
(b) Subject to and not in any way limiting subsection (a) hereof, each
of the parties hereto irrevocably consents to personal jurisdiction in
any action brought in connection with this Agreement in the United
Stated District Court for the Southern District of New York or any New
York court of competent jurisdiction, including, but not limited to,
any action to enforce an award rendered pursuant to subsection (a)
hereof, and the Voting Trust and WABCO each hereby appoints Reed Smith
Shaw & McClay, Attention: Ruth S. Perfido, Esq. as its agent for
service of process, Vestar hereby appoints Vestar Capital Partners,
Inc., Attention: Robert L. Rosner as its agent for service of process,
Harvard hereby appoints Ropes & Gray, Attention: Larry J. Rowe as its
agent for service of process and AIP hereby appoints American
Industrial Partners Corporation, Attention: Ken Pereira as its agent
for service of process. The submission of the Parties to jurisdiction
as set forth in this subsection (b) does not constitute and shall not
be deemed a consent to jurisdiction for any purpose other than those
expressly set forth in this Agreement.
9. GENERAL PROVISIONS
9.1 NOTICES. Any notice, request, demand, waiver or other communication
required or permitted to be given hereunder shall be in writing and
shall be deemed to have been duly given (i) when delivered by hand,
(ii) five business days after it is mailed certified or registered
mail, return receipt requested with postage prepaid, (iii) when
answered back if sent by telecopy (with receipt confirmed) or (iv)
three business days after it is sent by express delivery service, as
follows:
IF TO VESTAR:
c/o Vestar Capital Partners, Inc.
Seventeenth Street Plaza
1225 17th Street
Suite 1600
Denver, CO 80202
Attention: James P. Kelley
Fax: 303-292-6639
With a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Attention: Peter J. Gordon, Esq.
Fax: 212-455-2502
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IF TO THE VOTING TRUST:
c/o Westinghouse Air Brake Company
1001 Air Brake Avenue
Wilmerding, PA 15148
Attention: William E. Kassling
Fax: 412-825-1156
With a copy to:
Reed Smith Shaw & McClay
435 Sixth Avenue
Pittsburgh, PA 15219
Attention: David L. DeNinno, Esq.
Fax: 412-288-3063
IF TO HARVARD:
c/o Harvard Private Capital Group, Inc.
600 Atlantic Avenue, 26th Floor
Boston, Massachusetts 02100
Attention: John Sallay
Fax: 617-523-1063
With a copy to:
Ropes & Gray
One International Place
Boston, Massachusetts 02110-26242
Attention: Larry J. Rowe, Esq.
Fax: 617-951-7050
IF TO AIP:
American Industrial Partners
551 Fifth Avenue
Suite 3800
New York, NY 10176
Attention: Robert J. Klein
Fax: 212-986-5099
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With a copy to:
American Industrial Partners
One Maritime Plaza
Suite 2525
San Francisco, CA 94111
Attention: Ken Pereira
Fax: 415-788-5302
IF TO WABCO:
Westinghouse Air Brake Company
1001 Air Brake Avenue
Wilmerding, Pennsylvania 15148
Attention: William E. Kassling
Fax: (412) 825-1156
With a copy to:
Reed Smith Shaw & McClay
435 Sixth Avenue
Pittsburgh, PA 15219
Attention: David L. DeNinno, Esq.
Fax: 412-288-3063
Any Party may change its address specified for notices here in by
designating a new address by notice in accordance with this Section.
9.2 WAIVER. Any failure on the part of either Party hereto to comply
with any of its obligations, agreement or conditions hereunder may be
waived by the other Party. No waiver of any provision of this Agreement
shall be deemed, or shall constitute, a waiver of any other provision,
whether or not similar, nor shall any waiver constitute a continuing
wavier.
9.3 BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the Parties and their respective heirs, legal
representatives, executors, administrators, successors and assigns as
permitted by the terms of this Agreement.
9.4 SEVERABILITY. If any provision of this Agreement should be or
become fully or partly invalid or unenforceable for any reason
whatsoever or violate any applicable law, this Agreement is to be
considered divisible as to such provision and such provision is to be
deleted from this Agreement, and the remainder of this Agreement shall
be deemed valid and binding as if such provision were not included
herein. There shall be substituted for any such provision deemed to be
deleted a suitable provision which, as far as it is legally possible,
comes nearest to what the Parties desired or would have
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<PAGE> 14
desired according to the sense and purpose of this Agreement had this
been considered when concluding this Agreement.
9.5 HEADINGS. The section and other headings in this Agreement are
inserted solely as a matter of convenience and for reference only, and
do not constitute a part of this Agreement.
9.6 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
among the Parties as to the subject matter hereof and supersedes any
other agreements, representations, warranties, or communications,
whether oral or written, among the Parties (or their Affiliates)
relating to the subject matter hereof. Each of WABCO, the other parties
hereto and, by its execution and delivery of its termination letter,
SIH hereby acknowledges and agrees that the Existing Stockholders
Agreement is amended and restated in full by this Agreement and that
all obligations owed by SIH and its Affiliates to WABCO under the
Existing Stockholders Agreement (other than under Section 10 thereof)
are terminated effective upon the effectiveness of this Agreement.
9.7 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware and such laws shall
also govern in the settlement by arbitration or otherwise of any and
all disputes arising between the Parties as well as the validity of the
arbitration clause in Section 11 above.
9.8 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
9.9 EXHIBITS INCORPORATED. All Exhibits attached hereto are
incorporated herein by reference, and all blanks in such Exhibits, if
any, will be filled in as required in order to consummate the
transactions contemplated herein and in accordance with this Agreement.
9.10 MODIFICATIONS. No modification, alteration, addition, change or
amendment of the terms of this Agreement shall be binding on the
Parties unless reduced to writing and duly executed by each of the
Parties hereto in the same manner as the execution of this Agreement.
9.11 EFFECT OF STOCK SPLITS, STOCK DIVIDENDS, ETC. If the outstanding
shares of Common Stock shall be changed into or exchangeable for a
different number or kind of shares of stock or other securities of
WABCO or another corporation, or if the outstanding number of shares of
Common Stock is increased or decreased, in each case as a result of a
stock dividend, stock split-up, reverse stock split-up, reorganization,
reclassification, combination of shares, merger, consolidation or like
event (collectively, a "STOCK EVENT"), the provisions of this Agreement
shall apply to the shares or other securities acquired pursuant to such
Stock Event (the "ADDITIONAL SHARES") to the extent (but only to the
extent) that such provisions apply to the shares of Common Stock on
which or as a result of which the Additional Shares are issued or paid
to the holders thereof.
9.12. EFFECTIVENESS. This Agreement shall become effective upon the
consummation of the SIH Repurchase.
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IN WITNESS WHEREOF, each party hereto has executed or caused
this Agreement to be executed on its behalf, all on the day and year first above
written.
VESTAR EQUITY PARTNERS, L.P.
By: VESTAR ASSOCIATES, L.P., its General Partner
By: VESTAR ASSOCIATES CORPORATION, its
General Partner
/s/ JAMES P. KELLEY
------------------------------
By: James P. Kelley
Title: Managing Director
HARVARD PRIVATE CAPITAL HOLDINGS, INC.
By: /s/ MARK A. ROSEN
---------------------------
Its: AUTHORIZED SIGNATORY
By: /s/ MICHAEL B. EISENSON
---------------------------
Its: AUTHORIZED SIGNATORY
VOTING TRUST
By: /s/ ROBERT J. BROOKS
---------------------------
Its: TRUSTEE
WESTINGHOUSE AIR BRAKE COMPANY
By: /s/ ROBERT J. BROOKS
---------------------------
Its: VICE PRESIDENT AND SECRETARY
15
<PAGE> 16
AMERICAN INDUSTRIAL PARTNERS
CAPITAL FUND II, L.P.
By: American Industrial Partners II, L.P., its
General Partner
By: American Industrial Partners
Corporation, its General Partner
/s/ THEODORE C. ROGERS
----------------------------
By: Theodore C. Rogers
Title: Chairman
16
<PAGE> 17
JOINDER
Vestar Capital Partners, Inc. joins in this Amended and Restated
Stockholders Agreement for the limited purpose of agreeing to be bound by and to
be entitled to the benefits of Sections 2, 4 and 5 hereof.
VESTAR CAPITAL PARTNERS, INC.
By: /s/ JAMES P. KELLEY
--------------------------
Name: James P. Kelley
Title: Managing Director
17
<PAGE> 18
JOINDER
The undersigned join in this Amended and Restated Stockholders
Agreement for the limited purpose of agreeing to be bound by and to be entitled
to the benefits of Sections 4 through 9 hereof.
/s/ WILLIAM E. KASSLING
-----------------------------
William E. Kassling
DAVIDECO, INC.
By: /s/ WILLIAM E. KASSLING
------------------------
Its: DIRECTOR
/s/ EMILIO A. FERNANDEZ
-----------------------------
Emilio A. Fernandez
/s/ OFELIA FERNANDEZ
-----------------------------
Ofelia Fernandez
/s/ ROBERT J. BROOKS
-----------------------------
Robert J. Brooks
SUEBRO, INC.
By: /s/ ROBERT J. BROOKS
------------------------
Its: PRESIDENT
/s/ JOHN M. MEISTER
-----------------------------
John M. Meister
18
<PAGE> 1
Exhibit 10.23
AMENDMENT NO. 1 TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
THIS AMENDMENT NO. 1, dated as of March 28, 1997 TO THE
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT (this "Amendment"), dated as of
March 5, 1997, by and among the VOTING TRUST (the "Voting Trust") created under
the Second Amended WABCO Voting Trust/Disposition Agreement, dated as of
December 13, 1995 (the "Voting Trust Agreement"), VESTAR EQUITY PARTNERS, L.P.,
a Delaware limited partnership ("Vestar"), HARVARD PRIVATE CAPITAL HOLDINGS,
INC., a Massachusetts corporation ("Harvard"), AMERICAN INDUSTRIAL PARTNERS
CAPITAL FUND II, L.P., a Delaware limited partnership ("AIP"), and WESTINGHOUSE
AIR BRAKE COMPANY, a Delaware corporation ("WABCO").
W I T N E S S E T H T H A T:
WHEREAS, the parties hereto have previously entered into that
certain Amended and Restated Stockholders Agreement (the "Stockholders
Agreement"), dated as of March 5, 1997; and
WHEREAS, the parties hereto executed the Stockholders
Agreement based upon the understanding that Howard J. Bromberg ("Mr. Bromberg")
would execute a joinder to such Stockholders Agreement; and
WHEREAS, it is now the understanding of the parties hereto
that Mr. Bromberg will not be asked to execute such a joinder; and
WHEREAS, the parties hereto wish to amend the Stockholders
Agreement to delete references to Mr. Bromberg from such Stockholders Agreement.
NOW, THEREFORE, the parties hereto, in consideration of their
mutual covenants hereinafter set forth and intending to be legally bound hereby,
agree as follows:
Section 1. AMENDMENTS.
Section 4.1.1(f) of the Stockholders Agreement is hereby
amended in its entirety to read as follows:
Any person designated by Vestar, Harvard, Mr. Kassling or, in
the case of Mr. Fernandez, the Chairman of the Board, as
provided for herein shall be nominated by the Nominating
Committee to be elected to the Board at the stockholders'
meeting, or by the Directors already elected to the Board, as
the case may be, voting in conformity with such nomination. In
furtherance thereof, each of the Voting Trust, Vestar,
Harvard, Vestar Capital, AIP, Mr. Kassling, Mr. Fernandez,
Robert J. Brooks and John M. Meister agrees to vote all of the
shares of Common Stock and any other voting securities of
WABCO from time to time held by it or him in favor of, and
each of the Voting Trust, Harvard, Vestar Capital, AIP, Mr.
Kassling, Mr. Fernandez, Mr. Brooks and Mr. Meister agrees to
cause any shares of Common Stock or other WABCO voting
securities as to which it or he from time to time has the
right to direct the vote to be voted in favor of, and to take
any other appropriate steps to cause, the election to the
Board of individuals
<PAGE> 2
designated by Vestar, Harvard and/or Mr. Kassling and, in the
case of Mr. Fernandez, the Chairman of the Board, and
nominated by the Nominating Committee in accordance with this
Section 4.1.1; provided, that Mr. Kassling shall not be deemed
to control any shares of Common Stock held by the ESOP for
purposes of this Section 4.1
Section 5.2.4 of the Stockholders Agreement is hereby amended
in its entirety to read as follows:
Notwithstanding any provision herein to the contrary,
Trustholders (other than William E. Kassling, Robert J. Brooks
and John M. Meister, who shall be subject to Section 5.2.5
below) shall, to the extent permitted by the Voting Trust
Agreement, be permitted to transfer Voting Trust Shares,
withdraw Voting Trust Shares from the Voting Trust, and/or
sell or otherwise dispose of Shares at any time. Upon
expiration of the Voting Trust, Voting Trust Shares may be
distributed in accordance with the terms thereof and such
Voting Trust Shares will no longer be subject to Section 5.1.
Section 5.2.5(a) of the Stockholders Agreement is hereby
amended in its entirety to read as follows:
Except as permitted by Section 5.2.5(b), 5.2.5(c) and
5.2.5(d), until March 31, 2001, none of Messrs. Kassling,
Fernandez, Brooks and Meister (collectively, the "Management
Group") shall sell, transfer, assign, mortgage, change,
hypothecate, give away or otherwise dispose of (collectively
"transfer") any shares of Common Stock beneficially owned by
him or any of his interest in the Voting Trust (treating any
Common Stock held by the Voting Trust for the account of any
member of the Management Group as Common Stock owned by such
member); provided, however, that members of the Management
Group also shall be permitted to transfer at any time shares
of Common Stock in the circumstances described in clauses (i),
(ii) and (iii) of the first sentence of Section 5.2.1 hereof.
Section 5.2.5(g) of the Stockholders Agreement is hereby
amended in its entirety to read as follows:
Shares of Common Stock beneficially owned by the Management
Group are as follows:
William E. Kassling 1,548,336 shares
Emilio A. Fernandez 643,444 shares
Robert J. Brooks 437,300 shares
John M. Meister 251,000 shares
It is agreed that the foregoing shares include all shares of
Common Stock controlled by the Management Group and their
respective spouses and minor children and that all of the
foregoing shares shall be subject to this Agreement.
Section 2. MISCELLANEOUS. Except as expressly set forth
herein, the terms and provisions of the Stockholders Agreement are and shall
remain in full force and effect.
Section 3. GOVERNING LAW. This Amendment shall be governed by
and construed in accordance with the laws of the State of Delaware.
2
<PAGE> 3
IN WITNESS WHEREOF, the Parties hereto, by their officers
thereunto duly authorized, have executed and delivered this Amendment as of the
day and year first above written.
VESTAR EQUITY PARTNERS, L.P.
By: VESTAR ASSOCIATES, L.P., its General
Partner
By: VESTAR ASSOCIATES CORPORATION,
its General Partner
/s/ JAMES P. KELLEY
---------------------------
By: James P. Kelley
Title: Managing Director
HARVARD PRIVATE CAPITAL HOLDINGS, INC.
By: /s/ MARK A. ROSEN
---------------------------
Its: Authorized Signatory
By: /s/ MICHAEL R. EISENSON
---------------------------
Its: Authorized Signatory
VOTING TRUST
By: /s/ ROBERT J. BROOKS
---------------------------
Its: Trustee
WESTINGHOUSE AIR BRAKE COMPANY
By: /s/ ROBERT J. BROOKS
---------------------------
Its: Vice President And Secretary
3
<PAGE> 4
AMERICAN INDUSTRIAL PARTNERS
CAPITAL FUND II, L.P.
By: American Industrial Partners II, L.P.,
its General Partner
By: American Industrial Partners
Corporation, its General Partner
/s/ THEODORE C. ROGERS
-------------------------
By: Theodore C. Rogers
Title: Chairman
4
<PAGE> 1
Exhibit 10.24
COMMON STOCK
REGISTRATION RIGHTS AGREEMENT
This COMMON STOCK REGISTRATION RIGHTS AGREEMENT (this
"Agreement"), dated as of March 5, 1997, is made and entered into by
Westinghouse Air Brake Company, a Delaware corporation (the "Company"), Harvard
Private Capital Holdings, Inc., a Massachusetts corporation ("Harvard"),
American Industrial Partners Capital Fund II, L.P., a Delaware limited
partnership ("AIP"), the Voting Trust (the "Voting Trust") created under the
Second Amended WABCO Voting Trust/Disposition Agreement, dated as of December
13, 1995, Vestar Equity Partners, L.P., a Delaware limited partnership
("Vestar"), Vestar Capital Partners, Inc. ("Vestar Capital"), Emilio A.
Fernandez, Jr., Emilio A. Fernandez, Jr., as custodian for Eric A. Fernandez,
and Ofelia B. Fernandez (collectively, the "Pulse Shareholders").
WHEREAS, the parties hereto other than Harvard, Vestar and AIP
are parties to that certain Common Stock Registration Rights Agreement dated as
of January 31, 1995 (the "Existing Registration Rights Agreement");
WHEREAS, concurrently with this Agreement becoming effective
Vestar, Harvard, AIP and certain members of the Company's management are
purchasing 6 million of the shares of Company common stock, par value $.01 per
share (the "Common Stock") owned by Scandinavian Incentive Holding B.V. ("SIH")
and the Company is redeeming 4 million of the shares of Common Stock owned by
SIH (such purchase and redemption being referred to herein collectively as the
"SIH Repurchase");
WHEREAS, the Company believes that the SIH Repurchase is in
the best interest of the Company; and
WHEREAS, the parties hereto have requested, and the Company
has agreed to provide, the registration rights set forth herein;
NOW, THEREFORE, in consideration of the premises, the
covenants and agreements contained herein and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Company, Harvard, Vestar, Vestar Capital, AIP, the Pulse Shareholders and the
Voting Trust hereby agree as follows:
1. DEFINITIONS. As used in this agreement, the following
capitalized terms shall have the following respective meanings:
(a) "AFFILIATE" shall mean, when used with respect to a
specified Person, another Person that directly, or indirectly through one or
more intermediaries, Controls or is Controlled by or is under common Control
with the Person specified.
(b) "CONTROL" shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of a Person, whether through the ownership of voting securities, by
contract or otherwise, and the terms "Controlling" and "Controlled" shall have
meanings correlative thereto.
(c) "EXCHANGE ACT" shall mean the Securities Exchange Act of
1934, as amended.
(d) "HOLDER" shall mean (i) each of Harvard, Vestar, Vestar
Capital, AIP, the Voting Trust, the Pulse Shareholders (so long as any such
Person is a holder of Registrable Securities) and (ii) any transferee (or
subsequent transferee) of Registrable Securities from persons identified in
clause (i), who agrees in a writing reasonably satisfactory in form and
substance to the Company to be bound by the provisions of this Agreement.
<PAGE> 2
(e) "PERSON" shall mean an individual, corporation,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
(g) "PULSE SHARES" shall mean the shares of Common Stock
delivered by the Company to Pulse Electronics and Pulse Computer pursuant to
that certain Asset Purchase Agreement, dated as of January 23, 1995, by and
among the Company, Pulse Acquisition Corporation, Pulse Electronics and Pulse
Computer.
(h) "REGISTRABLE SECURITIES" shall mean the Securities. As to
any particular Registrable Securities, such Securities shall cease to be
Registrable Securities when (i) a registration statement with respect to the
sale of such Securities shall have become effective under the Securities Act and
such Securities shall have been disposed of in accordance with such registration
statement, (ii) they shall have been otherwise transferred or sold to the
public, new certificates for them not bearing a legend restricting further
transfer shall have been delivered by the Company and subsequent disposition of
them shall not require registration of them under the Securities Act or (iii)
they shall have ceased to be outstanding.
(i) "REGISTRATION EXPENSES" shall mean all expenses incident
to performance of or compliance with this Agreement, including, without
limitation, (i) all SEC and stock exchange or National Association of Securities
Dealers, Inc. registration, listing and filing fees, (ii) all fees for and
expenses of complying with securities or blue sky laws (including fees and
disbursements of counsel for the underwriters in connection with blue sky
qualifications of the Registrable Securities), (iii) all word processing,
duplicating, printing, messenger and delivery expenses, (iv) all fees and
expenses incurred in connection with the listing of the Registrable Securities
on any securities exchange pursuant to clause (vii) of Section 3, (v) the fees
and disbursements of counsel for the Company and of its independent public
accountants, including the expenses of any special audits and/or "cold comfort"
letters required by or incidental to such performance and compliance, (vi) the
fees and disbursements of one counsel selected by Holders of a majority of the
Registrable Securities sought to be registered, such counsel to be reasonably
satisfactory to the Company, and (vii) any fees and disbursements of
underwriters customarily paid by the issuers or sellers of securities, but
excluding underwriting discounts and commissions payable with respect to the
Registrable Securities and any applicable transfer taxes.
(j) "SECURITIES" shall mean, collectively, the shares of
Common Stock being acquired in the SIH Purchase (other than the four million
shares being redeemed by the Company), the Pulse Shares beneficially owned by
the Pulse Shareholders and the shares of Common Stock held from time to time in
the Voting Trust and any other shares of Common Stock which may be owned by
Holders from time to time.
(k) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
(l) "SEC" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act or the
Exchange Act.
(m) "SUPPLEMENTAL DEMAND" shall mean a request by Harvard, the
Voting Trust or Vestar pursuant to Section 2(a), 2(b) or 2(c) hereof, as the
case may be (other than a first or second demand thereunder), for registration
of Registrable Securities pursuant to a Form S-3 Registration Statement at a
time when the Company is eligible to use Form S-3 for registration of such
Registrable Securities.
2
<PAGE> 3
2. DEMAND REGISTRATION.
(a) HARVARD DEMAND. Harvard shall have the right to make two
requests to the Company for the registration of Registrable Securities owned by
Harvard, upon the terms and conditions set forth herein. Harvard's first request
(the "First Harvard Demand") may be made at any time commencing after June 30,
1998. Harvard's second request (the "Second Harvard Demand") may be made at any
time commencing one year after the consummation of any public offering of the
Registrable Securities made in connection with the exercise of the First Harvard
Demand. One or both of the Harvard demands may be made by an Affiliate of
Harvard to which Registrable Securities owned by Harvard have been transferred,
but in no event shall Harvard and such Affiliate be permitted to make more than
two demands in the aggregate pursuant to this Section 2(a). Harvard also shall
be permitted to make an unlimited number of Supplemental Demands.
(b) VOTING TRUST DEMANDS. The Voting Trust shall have the
right to make two requests to the Company for the registration of Registrable
Securities held by the Voting Trust, upon the terms and conditions set forth
herein. The Voting Trust's first and second (the "First Voting Trust Demand" and
"Second Voting Trust Demand") requests maybe made at any time that the First
Harvard Demand and the Second Harvard Demand, respectively, may be made. The
Voting Trust also shall be permitted to make an unlimited number of Supplemental
Demands.
(c) VESTAR DEMANDS. Vestar shall have the right to make two
requests to the Company for the registration of Registrable Securities owned by
Vestar or Vestar Capital, upon the terms and conditions set forth herein.
Vestar's first and second (the "First Vestar Demand" and "Second Vestar Demand")
requests may be made at any time that the First Harvard Demand and the Second
Harvard Demand, respectively, may be made. One or both of the Vestar demands may
be made by an Affiliate of Vestar to which Registrable Securities owned by
Vestar have been transferred, but in no event shall Vestar and such Affiliate be
permitted to make more than two demands in the aggregate pursuant to this
Section 2(c). Vestar also shall be permitted to make an unlimited number of
Supplemental Demands.
(d) ACTIONS UPON DEMAND. Upon the written request of Harvard,
the Voting Trust or Vestar, at any time at which a demand may be made in
accordance with paragraph (a), (b), or (c) above, requesting that the Company
register under the Securities Act all or part of the Registrable Securities held
by such Holder and specifying the intended method of disposition thereof, the
Company will promptly give written notice (the "Notice") of such requested
registration to the other Holders of Registrable Securities. The Company will
include in such registration all Registrable Securities of any Holder with
respect to which the Company has received written requests for inclusion therein
within 15 business days after the receipt by such Holder of the Notice (which
request shall specify the Registrable Securities intended to be disposed of by
such Holder). The Company thereupon will, as expeditiously as possible, use its
reasonable best efforts to effect the registration under the Securities Act of
the Registrable Securities so as to permit the disposition (in accordance with
the intended method thereof as aforesaid) of the Registrable Securities so to be
registered.
(e) INCIDENTAL REGISTRATION. (i) If the Company at any time
proposes to register any of its securities under the Securities Act (other than
pursuant to subsection (a), (b) or (c) of this Section 2) on any form other than
Form S-4 or S-8 (or any similar form then in effect) for sale for its own
account or otherwise, and if the registration form proposed to be used may be
used for the registration of Registrable Securities, the Company will each such
time give prompt written notice to all Holders of Registrable Securities of its
intention to do so. Upon the written request of any such Holder made within 30
days after the receipt of any such notice (which request shall specify the
Registrable Securities intended to be disposed of by such Holder), the Company
will use its reasonable best efforts to cause all such Registrable Securities,
the Holders of which shall have so requested the registration thereof, to be
registered under the Securities Act (with the securities at the time proposed to
be registered for sale for the Company's own account or otherwise), to the
extent requisite to permit
3
<PAGE> 4
the sale or other disposition (in accordance with the intended methods thereof
as aforesaid) by the Holders of the Registrable Securities to be so registered).
No registration effected pursuant to a request or requests
referred to in this subsection (e) shall be deemed to have been effected
pursuant to subsection (a), (b) or (c) of this Section 2.
Notwithstanding anything to the contrary in this subsection
(e), the Company shall have the right to discontinue any registration under this
subsection (e) at any time prior to the effective date of such registration if
the registration of the other securities giving rise to such registration under
this subsection (e) is discontinued (and notice of such discontinuance will be
promptly given to each participating Holder); but no such discontinuation shall
preclude an immediate or subsequent request for registration pursuant to
subsections (a), (b) or (c) of this Section 2.
(f) LIMITATIONS ON DEMAND. The Company shall not be obligated
to file a registration statement, or file any amendment or supplement thereto,
and may suspend the sellers' rights to make sales pursuant to an effective
registration statement, at any time when the Company, in the good faith judgment
of its Board of Directors, reasonably believes that the filing thereof at the
time requested, or the offering of securities pursuant thereto, would adversely
affect a pending or proposed public offering of the Company's securities, a
financing, or an acquisition, merger, recapitalization, consolidation,
reorganization or similar transaction, or negotiations, discussions or pending
proposals with respect thereto, or would otherwise be seriously detrimental to
the Company and its stockholders. The filing of a registration, or any amendment
or supplement thereto, by the Company cannot be deferred, and the sellers'
rights to make sales pursuant to an effective registration statement cannot be
suspended pursuant to the provisions of the preceding sentence for more than
fifteen days after the abandonment or consummation of any of the foregoing
proposals for transactions or, in any event, for more than 90 days after the
date of the Board's determination referenced in the preceding sentence (and the
Company shall not be entitled to request more than one such suspension in any
nine month period). If the Company pursuant to this Section 2(f) suspends the
sellers' right to make sales pursuant to an effective registration statement,
the applicable registration period shall be extended by the number of days of
such suspension. If the Company pursuant to this Section 2(f) delays the filing
with the SEC of a registration statement or any amendment or supplement thereto
or the effectiveness of such registration statement, Harvard, the Voting Trust,
or Vestar, as the case may be, may, by written notice to the Company withdraw
its request made pursuant to Section 2(a), 2(b), or 2(c), respectively, and
thereafter shall be entitled to make one additional request pursuant to Section
2(a), 2(b), or 2(c), as the case may be, in lieu of the withdrawn request.
(g) EXPENSES. Subject to the last sentence of Section 3(e),
the Company will pay all Registration Expenses in connection with the
registration of Registrable Securities pursuant to this Section 2, whether or
not such registration shall become effective, except that all Registration
Expenses in connection with the registration of Registrable Securities pursuant
to a Supplemental Demand by Harvard, Vestar and/or the Voting Trust, as the case
may be, shall be paid by the Holders participating in such Supplemental
Registration whether or not such registration shall become effective.
(h) EFFECTIVE REGISTRATION STATEMENT. A registration requested
pursuant to this Section 2 will not be deemed to have been effected unless a
registration statement with respect thereto has become effective; PROVIDED, that
if, within 90 days after it has become effective, the offering of Registrable
Securities pursuant to such registration is interfered with by any stop order,
injunction or other order or requirement of the SEC or other governmental agency
or court for any reason other than a violation of applicable law solely by the
Holders and the registration has not within three business days thereafter
become effective, such registration will be deemed not to have been effected,
and a Holder may, by written notice to the Company, withdraw its request made
pursuant to Section 2(a), 2(b), or 2(c), as the case may be, and thereafter
shall be entitled to make one additional request pursuant to Section 2(a), 2(b),
or 2(c), as the case may be, in lieu of the withdrawn request.
4
<PAGE> 5
(i) SELECTION OF UNDERWRITERS. If a requested registration
pursuant to this Section 2 involves an underwritten offering in which the
Company is participating by including therein at least $3 million of Common
Stock for its own account, the Company shall have the right to select the lead
managing underwriter of the offering, which shall be an investment banking firm
of nationally recognized standing reasonably satisfactory to the Holder
demanding registration pursuant to Section 2(a), 2(b), or 2(c), as the case may
be, and the Holder demanding registration pursuant to Section 2(a), 2(b), or
2(c), as the case may be, shall have the right to select a co-manager, which
shall be an investment banking firm of nationally recognized standing reasonably
satisfactory to the Company. If a requested registration pursuant to this
Section 2 involves an underwritten offering in which the Company is not
participating by including therein at least $3 million of Common Stock for its
own account, the Holder demanding registration pursuant to 2(a), 2(b) or 2(c),
as the case may be, shall have the right to select the lead managing underwriter
of the offering, which shall be an investment banking firm of nationally
recognized standing reasonably satisfactory to the Company, and the Company
shall have the right to select a co-manager, which shall be an investment
banking firm of nationally recognized standing reasonably satisfactory to the
Holder demanding registration.
(j) PRIORITY IN REGISTRATIONS. If a registration pursuant to
this Section 2 involves an underwritten offering and the lead managing
underwriter advises the Company in writing that, in its opinion, the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering within a price range stated by the Holder
requesting registration as being acceptable, the Company will include in such
registration the securities the Company proposes to sell for its own account, if
any, and the number of such Registrable Securities requested to be included in
such registration that, in the opinion of the lead managing underwriter, can be
sold, allocated pro rata among the Company and all requesting Holders on the
basis of the total number of shares proposed to be registered by the Company in
good faith and the number of shares of Registrable Securities then held by each
such Holder (provided that any Registrable Securities thereby allocated to any
such Holder that exceed such Holder's request will be reallocated among the
remaining requesting Holders based on the number of shares of Registrable
Securities held by each such Holder).
(k) ADDITIONAL DEMAND REGISTRATION. Notwithstanding any other
provisions of this Section 2, at any time or from time to time, if, solely as a
result of the operation of Section 2(j), the Company effects the registration of
less than 80% of (x) the Registrable Securities requested to be registered
pursuant to Section 2(a), (y) the Registrable Securities requested to be
registered pursuant to Section 2(b), or (z) the Registrable Securities requested
to be registered pursuant to Section 2(c) and the amount which is less than such
80% threshold has not been registered pursuant to a subsequent incidental
registration pursuant to Section 2(e), the holders of not less than 50% of the
remaining Registrable Securities owned or held by Harvard, the Voting Trust or
Vestar and/or Vestar Capital, as the case may be, shall be entitled to request
an additional registration pursuant to Section 2(a), Section 2(b), or Section
2(c), as the case may be. Any such registration shall be requested and effected
in accordance with the terms of this Section 2, and the Company will pay all
Registration Expenses in connection with any such registration but only to the
same extent as the Company was required to pay such Registration Expenses
pursuant to Section 2(g) in connection with the registration pursuant to which
such Holders initially requested registration.
(l) REGISTRATION OF OTHER SECURITIES. Whenever the Company
shall effect a registration pursuant to Section 2 hereof, no securities other
than Registrable Securities and Common Stock being sold by the Company for its
own account shall be included among the securities covered by such registration
unless all requesting Holders and the Company shall have consented thereto in
writing.
(m) REGISTRATION STATEMENT FORM. Registration under Section 2
hereof shall be on such appropriate registration form prescribed by the SEC
under the Securities Act (i) as shall be selected by the Company and as shall be
reasonably acceptable to the Holder of a majority of the Registrable Securities
covered by such registration statement and (ii) as shall permit the disposition
of the Registrable Securities pursuant to the intended method of disposition
thereof specified in accordance with Section 2(d). The Company agrees to
5
<PAGE> 6
include in such registration statement filed pursuant to Section 2 hereof all
information which any Holder, upon advice of counsel or upon the advice of the
lead managing underwriter (or upon the advice of any demanding Holder if the
Company shall have selected the lead managing underwriter or if the registration
statement is not being filed in connection with an underwritten offering), to
facilitate the marketing of such shares, shall reasonably request. Without
limiting the Company's obligations under the preceding sentence, the Company
may, if permitted by law, effect any registration requested under Section 2
hereof by the filing of a registration statement on Form S-3 (or any successor
or similar short form registration statement).
(n) "OTHER REGISTRATION RIGHTS". The Company shall not grant
to any person registration rights which (i) are exercisable prior to the time
when registration rights hereunder are first exercisable, (ii) would result in
the deferral of a demand registration which could otherwise be affected
hereunder, (iii) would operate to reduce the number of Registrable Securities
which could be registered pursuant to a demand registration hereunder by
Harvard, Vestar or the Voting Trust, (iv) except with respect to Common Stock
issued by the Company in the future, would operate to reduce the number of
Registrable Securities which could be registered in any other registration
hereunder or (v) would have priority for inclusion in any registration hereunder
over any Registrable Securities of any Holder.
3. REGISTRATION PROCEDURES. (a) If and whenever the Company is
required to use its reasonable best efforts to effect the registration under the
Securities Act of Registrable Securities as provided in this Agreement, the
Company will, as expeditiously as possible:
(i) prepare and file with the SEC as soon as practicable a
registration statement with respect to such Registrable Securities,
and, subject to Section 2(f), use its reasonable best efforts to cause
such registration statement to become effective;
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective until the earlier of (x) the date on which all of
the Registrable Securities have been disposed of in accordance with the
method of disposition set forth in such registration statement and (y)
90 days after the effective date of such registration statement and to
comply with the provisions of the Securities Act applicable to the
Company with respect to the disposition of all securities covered by
such registration statement during such period; PROVIDED, that before
filing a registration statement or prospectus, or any amendments or
supplements thereto, the Company will furnish to one counsel, selected
by the Holders of a majority of the Registrable Securities covered by
such registration statement to represent all Holders of Registrable
Securities covered by such registration statement, at least five
business days prior to the filing of such registration statement and
the prospectus contained therein and at least one business day prior to
the filing of any amendment or supplements thereto, copies of all
documents proposed to be filed, which documents will be subject to the
review of such counsel and no such registration statement or
prospectus, or any amendment or supplement thereto, shall be filed to
which such counsel shall have reasonably objected on the grounds that
such registration statement or prospectus, or amendment or supplement
(with respect to disclosures or omissions in the case of a registration
under Section 2 relating to the Holders of Registrable Securities),
does not comply in all material respects with the requirements of the
Securities Act or the rules or regulations thereunder and shall have
specified the basis for such objection in reasonable detail;
(iii) furnish to each seller of Registrable Securities covered
by such registration statement such number of copies of such final
conformed versions of such registration statement and of each such
amendment and supplement thereto (in each case including all exhibits
and any documents incorporated by reference), such number of copies of
such registration statement (including each preliminary prospectus and
any summary prospectus) and any other prospectus filed under Rule 424
under the Securities Act, in conformity with the requirements of the
Securities Act, and such other final
6
<PAGE> 7
documents, as such seller may reasonably request in writing in order to
facilitate the disposition of the Registrable Securities;
(iv) use its reasonable best efforts to register or qualify
the Registrable Securities covered by such registration statement under
such other securities or blue sky laws of such jurisdictions as each
seller shall reasonably request, and do any and all other acts and
things which may be reasonably necessary or advisable to enable such
seller to consummate the disposition in such jurisdictions of the
Registrable Securities owned by such seller, except that the Company
shall not for any such purpose be required to qualify generally to do
business as a foreign corporation in any jurisdiction, subject itself
to taxation in any jurisdiction (other than taxes related to the
issuance of the Registrable Securities) or consent to general service
of process in any jurisdiction where, but for the requirements of this
clause (iv), it would not be obligated to be so qualified, subject to
taxation or subject to general service of process;
(v) use its reasonable best efforts to cause such Registrable
Securities covered by such registration statement to be registered with
or approved by such other governmental agencies or authorities as may
be necessary to enable the seller or sellers thereof to consummate the
disposition of such Registrable Securities.
(vi) promptly notify each seller of any such Registrable
Securities covered by such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act within the appropriate period mentioned in clause (ii)
of this Section 3, of the Company's becoming aware that the prospectus
included in such registration statement, as then in effect, includes an
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing,
and at the request of any such seller, prepare and furnish to such
seller a reasonable number of copies of an amended or supplemental
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances
then existing;
(vii) otherwise use its reasonable best efforts to comply with
all applicable rules and regulations of the SEC, and make available to
its security holders, as soon as reasonably practicable (but not more
than eighteen months) after the effective date of the registration
statement, an earnings statement which shall satisfy the provisions of
Section 11(a) of the Securities Act and the rules and regulations
promulgated thereunder;
(viii) use its best efforts to list, subject to official
notice of issuance, such Registrable Securities on any securities
exchange on which the Common Stock is then listed, if such Registrable
Securities are not already so listed and if such listing is then
permitted under the rules of such exchange;
(ix) enter into such customary agreements (including an
underwriting agreement in customary form) and take such other actions
as sellers of a majority of such Registrable Securities covered by such
registration statement or the underwriters, if any, reasonably request
in order to expedite or facilitate the disposition of such Registrable
Securities;
(x) obtain a "cold comfort" letter or letters from the
Company's independent public accountants, addressed to such seller (and
the underwriters, if any), in customary form and covering matters of
the type customarily covered by "cold comfort" letters dated the
effective date of such registration statement (and, if such
registration includes an underwritten offering, dated the date of the
closing under the underwriting agreement), reasonably satisfactory in
form and substance to such seller; and
7
<PAGE> 8
(xi) use its reasonable best efforts to furnish to each seller
of Registrable Securities a signed counterpart, addressed to such
seller (and the underwriters, if any), of a customary opinion of
counsel for the Company dated the effective date of such registration
statement (and, if such registration includes an underwritten offering,
dated the date of the closing under the underwriting agreement),
reasonably satisfactory in form and substance to such seller;
(xii) subject to Section 7, make available for reasonable
inspection by, or give reasonable access to, any seller of such
Registrable Securities covered by such registration statement, by any
underwriter participating in any disposition to be effected pursuant to
such registration statement and by any attorney, accountant or other
agent retained by any such seller or any such underwriter, all
pertinent financial and other records, pertinent corporate documents
and properties of the Company, and cause all of the Company's officers,
directors and employees to supply all information reasonably requested
by any such seller, underwriter, attorney, accountant or agent in
connection with such registration statement.
(b) In connection with any registration requested pursuant to
this Agreement, management of the Company shall participate in customary road
show meetings reasonably requested upon reasonable prior notice by the lead
managing underwriter of such offering.
(c) The Company may require each seller of Registrable
Securities as to which any registration is being effected to furnish the Company
with such information regarding such seller and the distribution of such
securities as required to be included in the related registration statement as
the Company may from time to time reasonably request in writing.
(d) Each Holder of Registrable Securities being sold pursuant
to a registration effected pursuant hereto agrees that as of the date that a
final prospectus is made available to it for distribution to prospective
purchasers of such Registrable Securities it shall cease to distribute copies of
any preliminary prospectus prepared in connection with the offer and sale of
such Registrable Securities.
(e) Each Holder of Registrable Securities further agrees that,
upon receipt of any notice from the Company of the happening of any event of the
kind described in clause (vi) of Section 3(a), such Holder will forthwith
discontinue disposition of Registrable Securities pursuant to the registration
statement covering such Registrable Securities until such Holder's receipt of
the copies of the supplemented or amended prospectus contemplated by clause (vi)
of Section 3(a), and, if so directed by the Company, such Holder will deliver to
the Company (at the Company's expense) all copies, other than permanent file
copies then in such Holder's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
Notwithstanding the foregoing, the Holder shall not be responsible for any
continued disposition of Registrable Securities by any underwriter. In the event
the Company shall give any such notice, the period mentioned in clause (ii) of
Section 3(a) shall be extended by the number of days during the period from, and
including the date of the giving of, such notice pursuant to clause (vi) of
Section 3(a) and including the date when each seller of Registrable Securities
covered by such registration statement shall have received the copies of the
supplemented or amended prospectus contemplated by clause (vi) of Section 3(a).
If any event of the kind described in clause (vi) of Section 3(a) occurs and
such event is the fault solely of one or more Holders, such Holder or Holders
shall pay all Registration Expenses attributable to the preparation, filing and
delivery of any supplemented or amended prospectus contemplated by clause (vi)
of Section 3(a).
(f) Each Holder of Registrable Securities agrees that it will
pay all underwriting discounts and commissions applicable to its sale of
Registrable Securities in any underwritten public offering effected pursuant to
this Agreement, all transfer taxes applicable to its sale of Registrable
Securities and, subject to the provisions set forth in clause (vi) of the
definition of Registration Expenses, the fees and disbursements of its counsel.
Except as otherwise provided in clause (vi) of the definition of Registration
Expenses, if two or more
8
<PAGE> 9
Holders jointly retain counsel, the fees and expenses of such counsel shall be
borne by such Holders on such basis as such Holders shall mutually agree in
writing.
4. INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. In connection with any
registration statement filed by the Company under the Securities Act pursuant to
Section 2, the Company will, and it hereby agrees to, indemnify and hold
harmless, to the extent permitted by law, the seller of any Registrable
Securities covered by such registration statement, each other Person, if any,
who participates as an underwriter in the offering or sale of such securities
and each other Person, if any, who controls such Holder or seller or any such
underwriter, and their respective directors, officers, employees, stockholders,
partners, agents and representatives, and their respective Affiliates, against
any and all losses, claims, damages, expenses or liabilities, joint or several,
to which such indemnified party may become subject under the Securities Act,
common law or otherwise, insofar as such losses, claims, damages, expenses or
liabilities (or actions or proceedings in respect thereof, whether or not such
indemnified party is a party thereto) arise out of or are based upon (i) any
untrue statement or alleged untrue statement of any material fact contained in
any registration statement under which such securities were registered under the
Securities Act, any preliminary, final or summary prospectus contained therein,
or any amendment or supplement thereto, or (ii) any omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing, and the Company will reimburse such indemnified party for any
legal or any other expenses reasonably incurred by it in connection with
investigating or defending any such loss, claim, liability, action or
proceeding; PROVIDED, that as to any preliminary prospectus, the Company shall
not be liable to any indemnified party if such party failed to send or give a
copy of the final prospectus to any person within the time required by the
Securities Act and such untrue statement or alleged untrue statement of material
fact or omission or alleged omission to state a material fact in such
preliminary prospectus was corrected in such final prospectus; and PROVIDED,
FURTHER, that the Company shall not be liable to any indemnified party in any
such case to the extent that any such loss, claim, damage, expense, liability
(or action or proceeding in respect thereof), arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement or amendment or supplement thereto or in any
such preliminary, final or summary prospectus in reliance upon and in conformity
with written information with respect to such seller furnished to the Company by
or on behalf of such seller for use in the preparation thereof; and PROVIDED,
FURTHER, that the Company shall not be liable for any amounts paid in connection
with any settlement if such settlement is effected without the written consent
of the Company (which shall not be unreasonably withheld); and PROVIDED,
FURTHER, that the Company will not be liable to any Person who participates as
an underwriter in the offering or sale of Registrable Securities or any other
Person, if any, who controls such underwriter within the meaning of the
Securities Act, under the indemnity agreement in this Section 4(a) with respect
to any preliminary prospectus or the final prospectus or the final prospectus as
amended or supplemented, as the case may be, to the extent that any such loss,
claim, damage or liability of such underwriter or controlling Person results
from the fact that such underwriter sold Registrable Securities to a person to
whom there was not sent or given, at or prior to the written confirmation of
such sale, a copy of the final prospectus (including any documents incorporated
by reference therein) or of the final prospectus as then amended or supplemented
(including any documents incorporated by reference therein), whichever is most
recent, if the Company has previously furnished copies thereof to such
underwriter. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such seller or any indemnified party
and shall survive the transfer of such securities by such seller.
(b) INDEMNIFICATION BY THE SELLER. In connection with any
registration statement filed by the Company under the Securities Act pursuant to
Section 2, each Holder of Registrable Securities covered by such registration
statement shall, and hereby agrees to, indemnify and hold harmless (in the same
manner and to the same extent and subject to the same provision as set forth in
Section 4(a)) the Company, each other Holder of Registrable Securities, any
underwriter and each other Person, if any, who controls the Company or such
Holder
9
<PAGE> 10
or any such underwriter, and their respective directors, officers, employees,
partners, stockholders, agents and representatives, and their respective
Affiliates, with respect to any statement or alleged statement in or omission or
alleged omission from such registration statement, any preliminary, final or
summary prospectus contained therein, or any amendment or supplement, if such
statement or alleged statement or omission or alleged omission was made in
reliance upon and in conformity with written information with respect to such
Holder furnished to the Company by such Holder for use in preparation of such
registration statement, preliminary, final or summary prospectus or amendment or
supplement, or a document incorporated by reference into any of the foregoing.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Company or any of the Holders, or any
of their respective controlling Persons, directors, officers, employees,
stockholders, partners, agents and representatives, or any of their respective
Affiliates, and shall survive the transfer of such securities by such Holder.
Notwithstanding the foregoing, the liability of any Holder under this Section
4(b) shall be limited to an amount equal to the amount by which the total price
at which the Registrable Securities were sold by such Holder and distributed to
the public in the offering which gave rise to the liability exceeds the amount
of any damages that such Holder has otherwise been required to pay be reason of
such offering. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include any legal or other fees and expenses reasonably incurred by such party
in connection with any investigation or proceeding.
(c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an
indemnified party hereunder of written notice of the commencement of any action
or proceeding with respect to which a claim for indemnification or contribution
may be made pursuant to this Section 4, such indemnified party will, if a claim
in respect thereof is to be made against an indemnifying party, give written
notice to the latter of the commencement of such action or proceeding; provided,
that the failure of the indemnified party to give notice as provided herein
shall not relieve the indemnifying party of its obligations under the preceding
subdivisions of this Section 4, except to the extent that the indemnifying party
is actually prejudiced by such failure to give notice. In case any such action
or proceeding is brought against an indemnified party, the indemnifying party
shall assume the defense thereof with counsel reasonably satisfactory to the
indemnified party. The indemnified party shall have the right to employ separate
counsel in any such action or proceeding and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party has agreed to pay such
fees and expenses or (ii) the indemnifying party shall have failed to assume the
defense of such action or proceeding or to employ counsel reasonably
satisfactory to the indemnified party therein or (iii) the named parties to any
such action or proceeding (including any impleaded party) include both the
indemnifying party and the indemnified party and (x) there are one or more legal
defenses available to the indemnified party which are different from or
additional to those available to the indemnifying party and which result in a
conflict between the indemnifying party and such indemnified party or (y) the
representation of both parties by the same counsel would be inappropriate due to
differing interests between them, in either which case under the preceding
clause (iii), if the indemnified party notifies the indemnifying party in
writing that the indemnified party elects to employ separate counsel at the
expense of the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such action or proceeding on behalf of the
indemnified party. No indemnifying party will consent to entry of any judgment
or enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such indemnified party of a
release from all liability in respect to such claim or litigation. The
indemnifying party shall not, in connection with any one such action or
proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys at any time for all indemnified parties, which firm shall be
designated in writing by the indemnified parties.
(d) CONTRIBUTION. If the indemnification provided for in this
Section 4 from the indemnifying party is unavailable to an indemnified party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then the indemnifying party in lieu of indemnifying such
indemnified party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages,
10
<PAGE> 11
liabilities or expenses in such proportion as is appropriate to reflect the
relative fault of the indemnifying party and indemnified party in connection
with the actions that results in such losses, claims, damages, liabilities and
expenses, as well as any other relevant equitable considerations. The relative
fault of such indemnifying party and the indemnified parties shall be determined
by reference to, among other things, whether any action in question, including
any untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact, has been made by, or relates to information
supplied by, such indemnifying party or indemnified parties, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such action. Notwithstanding the foregoing, no Holder shall be required
to contribute any amount in excess of the amount by which the total price at
which the Registrable Securities were sold by such Holder and distributed to the
public in the offering that resulted in such losses, claims, damages,
liabilities and expenses exceed the amount of any damages that such Holder has
otherwise been required to pay by reason of any such actions. The amount paid or
payable by a party as a result of the losses, claims, damages, liabilities and
expenses referred to above shall be deemed to include any legal or other fees
and expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 4(d) were determined by pro
rata allocation or by any other method of allocation which does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. The obligation of each Holder to contribute in respect of any
offering of Registrable Securities is several in the same proportion that the
proceeds of such offering received by such Holder bears to the total proceeds of
such offering and not joint. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
If indemnification is available under this Section 4, the
indemnifying parties shall indemnify each indemnified party to the full extent
provided in Section 4(a) or (b), as the case may be, without regard to the
relative fault of said indemnifying parties or indemnified party or any other
equitable consideration provided for in this Section 4(d).
(e) NON-EXCLUSIVITY. The obligations of the parties under this
Section 4 shall be in addition to any liability which any party may otherwise
have to any other party.
5. HOLDBACK AGREEMENT.
(a) RESTRICTIONS ON PUBLIC SALE BY HOLDERS. Each Holder agrees
not to effect any public sale or distribution of Registrable Securities or any
similar security of the Company, or any securities convertible into or
exchangeable or exercisable for such securities, or any securities into which
such securities are convertible or for which such securities are exchangeable or
exercisable, during the 10 days prior to, and during the 90 day period beginning
on, the effective date of any registration statement in which Holders are
participating in connection with an underwritten public offering of the
Registrable Securities (except as part of such registration), if and to the
extent reasonably requested in writing (with reasonable prior notice) by the
lead managing underwriter of the underwritten public offering.
(b) RESTRICTIONS ON PUBLIC SALE BY THE COMPANY. The Company
agrees not to effect any primary public sale or distribution of any securities
similar to those being registered, or any securities convertible into or
exchangeable or exercisable for such securities, or any securities into which
such securities are convertible or for which such securities are exchangeable or
exercisable, during the 10 days prior to, and the 90 day period beginning on,
the effective date of any registration statement in which Holders are
participating in connection with an underwritten public offering if an to the
extent reasonably requested in writing (with reasonable prior notice) by the
lead managing underwriter of the underwritten public offering.
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<PAGE> 12
6. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Holder of
Registrable securities may participate in any underwritten registration
hereunder unless such Holder (a) agrees to sell such Holder's securities on the
basis provided in and in compliance with any underwriting arrangements and (b)
complete and executes all questionnaires, appropriate and limited powers of
attorney, escrow agreements, indemnities, underwriting agreements and other
documents reasonably required under the terms of such underwriting arrangements.
7. MISCELLANEOUS.
(a) AMENDMENTS AND WAIVERS. This Agreement may be amended and
the Company may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if the Company shall have obtained
the written consent to such amendment, action or omission to act, of the Holders
of a majority of the Registrable Securities then outstanding; provided, however,
that no such amendment which would have an adverse effect on any Holder shall be
effective as to such Holder without the written consent of such Holder (or if
such Holder is not an original Holder hereunder, without the written consent of
at least a majority of the Registrable Securities held by the original Holder
who directly or indirectly transferred shares to such Holder, together with all
other direct or indirect transferees of such original Holder). Each Holder of
Registrable Securities at the time or thereafter outstanding shall be bound by
any consent authorized by this Section 7(a), whether or not such Registrable
Securities shall have been marked to indicate such consent.
(b) SUCCESSORS, ASSIGNS AND TRANSFEREES. This Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors, assigns and transferees.
(c) NOTICES. Any notice, request, demand, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be deemed to have been duly given (i) when delivered by hand, (ii)
five business days after it is mailed certified or registered mail, return
receipt requested with postage prepaid, (iii) when answered back if sent by
telecopy (with respect confirmed) or (iv) three business days after it is sent
by express delivery service, as follows:
(i) if to the Company, to:
Westinghouse Air Brake Company
1001 Air Brake Avenue
Wilmerding, Pennsylvania 15148
With a copy to:
Reed Smith Shaw & McClay
435 Sixth Avenue
Pittsburgh, Pennsylvania 15219
Attention: David L. DeNinno
Telecopier: 412-288-3063
(ii) if to Harvard, to:
c/o Harvard Private Capital Group, Inc.
600 Atlantic Avenue, 26th Floor
Boston, Massachusetts 02100
Attention: John Sallay
Telecopier: 617-523-1063
12
<PAGE> 13
With a copy to:
Ropes & Gray
One International Place
Boston, Massachusetts 02110-26242
Attention: Larry J. Rowe
Telecopier: 617-951-7050
(iii) if to AIP:
American Industrial Partners
551 Fifth Avenue, Suite 3800
New York, New York 10176
Attention: Robert J. Klein
Telecopier: 212-986-5099
With a copy to:
American Industrial Partners
One Maritime Plaza, Suite 2525
San Francisco, California 94111
Attention: Ken Pereira
Telecopier: 415-788-5302
and
Latham & Watkins
5800 Sears Tower
Chicago, IL 60606
Attention: Mark Stegemoeller, Esq.
Telecopier: 312-993-9767
(iv) if to the Voting Trust, to:
c/o Westinghouse Air Brake Company
1001 Air Brake Avenue
Wilmerding, Pennsylvania 15148
Attention: Robert J. Brooks
Telecopier: (412) 825-1156
With a copy to:
Reed Smith Shaw & McClay
435 Sixth Avenue
Pittsburgh, Pennsylvania 15219
Attention: David L. DeNinno
Telecopier: (412) 288-3063
(v) if to Vestar or Vestar Capital, to:
13
<PAGE> 14
Vestar Capital Partners, Inc.
Seventeenth Street Plaza
1225 17th Street, Suite 1600
Denver, Colorado 80202
Attention: James P. Kelley
Telecopier: (303) 292-6639
With a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Peter J. Gordon, Esq.
Telephone No.: (212) 455-2605
Telecopier No.: (212) 455-2502
(vi) if to any Pulse Shareholder, to such Holder at
such Holder's address, telephone number of
telecopier number set forth in the Company's records.
All such notices and communications shall be deemed to have been given or made
(1) when delivered by hand, (2) five business days after it is mailed, certified
or registered mail, return receipt requested with postage prepaid, (3) when
answered by if sent by telex, telegram or telecopy (with receipt confirmed) or
(4) three business days after it is sent by express delivery service.
(d) DESCRIPTIVE HEADINGS. The headings in this Agreement are
for convenience of reference only and shall not limit or otherwise affect the
meaning of terms contained herein.
(e) SEVERABILITY. In the event that any one or more of the
provisions, paragraphs, words, clauses, phrases or sentences contained herein,
or the application thereof in any circumstances, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision, paragraph, word, clause, phrase or
sentence in every other respect and of the remaining provisions, paragraphs,
words, clauses, phrases or sentences hereof shall not be in any way impaired, it
being intended that all rights, powers and privileges of the parties hereto
shall be enforceable to the fullest extent permitted by law.
(f) COUNTERPARTS. This Agreement may be executed in two or
more counterparts, and by different parties on separate counterparts, each of
which shall be deemed an original, but all such counterparts shall together
constitute one and the same instrument.
(g) GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York
applicable to contracts made and to be performed therein. The parties to this
Agreement hereby agree to submit to the jurisdiction of the courts of the State
of New York in any action or proceeding arising out of or relating to this
Agreement.
(h) SPECIFIC PERFORMANCE. The parties hereto acknowledge and
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. Accordingly, it is agreed that they
shall be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Agreement and to enforce specifically the terms and
provisions hereof in any court of competent jurisdiction in the United States or
any state thereof, in addition to any other remedy to which they may be entitled
at law or equity.
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<PAGE> 15
(i) ENTIRE AGREEMENT. This Agreement is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to such subject matter. Vestar and the Voting
Trust hereby agree that all rights of either of them under the Existing
Registration Rights Agreement are hereby terminated.
(j) EFFECTIVENESS. This Agreement shall become effective upon
the consummation of the SIH Repurchase.
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<PAGE> 16
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first written above.
WESTINGHOUSE AIR BRAKE COMPANY
By: /s/ ROBERT J. BROOKS
---------------------------------
Name: Robert J. Brooks
Title: Vice President and Secretary
HARVARD PRIVATE CAPITAL HOLDINGS, INC.
By: /s/ MARK A. ROSEN
---------------------------------
Name: Mark A. Rosen
Title: Authorized Signatory
By: /s/ MICHAEL B. EISENSON
---------------------------------
Name: Michael B. Eisenson
Title: Authorized Signatory
VOTING TRUST
By: /s/ ROBERT J. BROOKS
---------------------------------
Name: Robert J. Brooks
Title: Trustee
VESTAR EQUITY PARTNERS, L.P.
By: VESTAR ASSOCIATES, L.P., its General
Partner
By: VESTAR ASSOCIATES CORPORATION,
its General Partner
By: /s/ JAMES P. KELLEY
--------------------------
Name: James P. Kelley
Title: Managing Director
VESTAR CAPITAL PARTNERS, INC.
By: /s/ JAMES P. KELLEY
---------------------------------
Name: James P. Kelley
Title: Managing Director
16
<PAGE> 17
AMERICAN INDUSTRIAL PARTNERS
FUND II, L.P.
By: AMERICAN INDUSTRIAL PARTNERS, II, L.P.,
its General Partner
By: AMERICAN INDUSTRIAL PARTNERS
CORPORATION, its General Partner
By: /s/ THEODORE C. ROGERS
---------------------------
Name: Theodore C. Rogers
Title: Chairman
/s/ EMILIO A. FERNANDEZ, JR.
------------------------------------
Emilio A. Fernandez, Jr.
/s/ EMILIO A. FERNANDEZ, JR.
------------------------------------
Emilio A. Fernandez, Jr.,
as custodian for Eric A. Fernandez
/s/ OFELIA B. FERNANDEZ
------------------------------------
Ofelia B. Fernandez
17
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF
WESTINGHOUSE AIR BRAKE COMPANY
WABCO'S
JURISDICTION OF OWNERSHIP
COMPANY INCORPORATION INTEREST
- -------------------------------------------------------------------------------
Allied Friction Products Australia Pty Ltd. Australia 100%
Benn Iron Foundry Ltd. Canada 100%
Cobra Europe S.A. France 100%
Evand Pty Ltd. Australia 100%
F.I.P. Pty Ltd. Australia 100%
Greysham Railway Friction Products India 65%
H.P. s.r.l. Italy 100%
Pioneer Friction India 51%
Railroad Friction Products Corporation Delaware 100%
RFPC Holding Corporation Delaware 100%
Stone Safety Service Corp New Jersey 100%
Stone U.K. United Kingdom 100%
TFL, Inc. Delaware 100%
ThermoSealed Castings Ltd. Canada 100%
Vapor Canada Inc. Canada 100%
Vapor Corporation Delaware 100%
Vapor UK Limited United Kingdom 100%
Westinghouse Railway (Canada), Ltd. Canada 100%
Westinghouse Railway Holdings (Canada) Inc. Canada 100%
<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 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
WESTINGHOUSE AIR BRAKE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 836
<SECURITIES> 0
<RECEIVABLES> 93,483
<ALLOWANCES> 2,045
<INVENTORY> 69,297
<CURRENT-ASSETS> 180,499
<PP&E> 186,534
<DEPRECIATION> 78,167
<TOTAL-ASSETS> 410,879
<CURRENT-LIABILITIES> 131,780
<BONDS> 332,334
0
0
<COMMON> 474
<OTHER-SE> (79,263)
<TOTAL-LIABILITY-AND-EQUITY> 410,879
<SALES> 564,441
<TOTAL-REVENUES> 564,441
<CGS> 378,323
<TOTAL-COSTS> 378,323
<OTHER-EXPENSES> 96,143
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,729
<INCOME-PRETAX> 60,590
<INCOME-TAX> 23,327
<INCOME-CONTINUING> 37,263
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,263
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.42
</TABLE>
<PAGE> 1
EXHIBIT 99
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):
[ X ] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended December 31, 1997
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
Employees 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
February 26, 1998
2
