<PAGE>
As filed with the Securities and Exchange Commission on July 2, 1999
Registration No. 333-77017
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Westinghouse Air Brake Company
(Exact Name of Registrant as Specified in Its Charter)
Delaware 3743 25-1615902
(Primary Standard (I.R.S. Employer
(State or other Industrial Identification Number)
jurisdiction of Classification Code
incorporation or Number)
organization)
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1001 Air Brake Avenue
Wilmerding, Pennsylvania 15148
Telephone: (412) 825-1000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Robert J. Brooks
Chief Financial Officer and Chief Accounting Officer
1001 Air Brake Avenue
Wilmerding, Pennsylvania 15148
Telephone: (412) 825-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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with a copy to:
David L. DeNinno, Esquire
Reed Smith Shaw & McClay LLP
435 Sixth Avenue
Pittsburgh, Pennsylvania 15219
Telephone: (412) 288-3214
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act Registration number of the earlier effective
Registration Statement for the same offering: [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities
Registration Statement number of the earlier effective Registration Statement
for the same offering: [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in the prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is prohibited. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated July 2, 1999
OFFER TO EXCHANGE
9 3/8% Series B2 Senior Notes due 2005
for Any and All Outstanding 9 3/8% Series B Senior Notes due 2005
of
Westinghouse Air Brake Company
The exchange offer will expire at 5:00 p.m.,
New York City time, on , 1999, unless extended
LOGO
MATERIAL TERMS OF THE EXCHANGE OFFER
. Expires at 5:00 p.m., New York City time, on , 1999, unless
extended.
. The only conditions to completing the exchange offer are that:
. the exchange offer not violate applicable law or any applicable
interpretation of the staff of the Securities and Exchange Commission;
. no injunction, order or decree has been issued which would prohibit,
prevent or materially impair our ability to proceed with the exchange
offer; and
. any necessary governmental approvals have been obtained.
. All unregistered notes that are validly tendered and not validly
withdrawn will be exchanged.
. Tenders of unregistered notes may be withdrawn at any time prior to the
expiration of the exchange offer.
. The terms of the registered notes to be issued in the exchange offer are
substantially identical to the unregistered notes that we issued on
January 12, 1999, except for transfer restrictions and registration
rights.
. We will not receive any proceeds from the exchange offer.
. If you fail to tender your unregistered notes while the exchange offer is
open, you will continue to hold unregistered securities and your ability
to transfer them could be adversely affected.
You should carefully consider the risk factors relating to the exchange offer
that we describe starting on page 14 of this prospectus.
Neither the Securities and Exchange Commission
nor any state securities commission has approved
or disapproved of these securities or passed upon
the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal
offense.
The date of this prospectus is , 1999
<PAGE>
TABLE OF CONTENTS
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Summary................................................................... 1
Summary Selected Historical and Pro Forma Financial Data.................. 9
Risk Factors.............................................................. 14
Special Note Regarding Forward-Looking Statements......................... 19
Use of Proceeds........................................................... 20
Capitalization............................................................ 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 34
Unaudited Pro Forma Condensed Combined Financial Statements............... 44
Management................................................................ 53
Security Ownership of Certain Beneficial Owners and Management............ 55
Description of Indebtedness............................................... 57
Terms of the Exchange Offer............................................... 61
Description of the New Notes.............................................. 69
Book-Entry; Delivery and Form............................................. 92
Exchange and Registration Rights.......................................... 96
Federal Income Tax Consequences........................................... 98
Plan of Distribution...................................................... 102
Where You Can Find More Information....................................... 103
Legal Matters............................................................. 104
Experts................................................................... 104
Index to Financial Statements............................................. F-1
</TABLE>
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We are a Delaware corporation. Our principal executive offices are located
at 1001 Air Brake Avenue, Wilmerding, Pennsylvania 15148, and our telephone
number is (412) 825-1000. Our web site is located at http://www.wabco-rail.com.
Information contained on our web site does not constitute part of this
prospectus.
The prospectus incorporates important business and financial information
about WABCO that is not included in or delivered with the prospectus. The
information is available without charge to Note holders upon written or oral
request to Alvaro Garcia-Tunon, Vice President and Treasurer, at WABCO at the
address and phone number listed above. To obtain timely delivery, you must
request the information no later than , 1999, which is five business
days prior to the expiration date of the exchange offer. See also "Where You
Can Find More Information."
You should rely only on the information incorporated by reference or
provided in this prospectus. We have authorized no one to provide you with
different information. We are not making an offer of these securities in any
state where the offer is not permitted. You should not assume that the
information in this prospectus or the prospectus supplement is accurate as of
any date other than the date on the front of the document.
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<PAGE>
SUMMARY
In this prospectus, "WABCO," "we," "us," and "our" refer to Westinghouse Air
Brake Company and its consolidated subsidiaries, unless the context otherwise
requires.
This summary highlights information contained elsewhere in this prospectus.
You should carefully read the entire prospectus, including "Risk Factors"
beginning on page 14.
Westinghouse Air Brake Company
We are one of North America's largest manufacturers of value-added equipment
for locomotives, railway freight cars and passenger transit vehicles. We
believe that we maintain more than half of the market share in North America
for our primary braking-related equipment, as well as a significant market
share in North America for our other principal products. We also sell products
in Europe, Australia, South America and Asia. Our products are intended to
enhance safety, improve productivity and reduce maintenance costs for our
customers. Our major product offerings include electronic controls and
monitors, air brakes, couplers, door controls, draft gears and brake shoes. We
aggressively pursue technological advances with respect to both new product
development and product enhancements and we believe that our new and enhanced
products developed since 1992 accounted for approximately 25% of our net sales
in 1998. Recent acquisitions have also added significantly to growth in our net
sales and growth of operating earnings plus depreciation, amortization and
unusual items, which we refer to as EBITDA. EBITDA is used because we believe
it is an indicator of our ability to service existing and future indebtedness.
EBITDA should not be considered as an alternative to net income as a measure of
operating results or to cash flows as a measure of liquidity in accordance with
generally accepted accounting principles. Our computation of EBITDA may not be
comparable to similarly titled measures of other companies. We had net sales of
$670.9 million, net income of $41.7 and EBITDA of $129.9 million for the twelve
months ended December 31, 1998.
We also provide value-added service centers to railroads and operators of
passenger transit systems, operating 15 repair and upgrade sites in North
America, Australia and the United Kingdom. Through our service centers, we
capitalize on the increased outsourcing of repair and upgrade business by
railroads and transit authorities.
We are located at 1001 Air Brake Avenue, Wilmerding, Pennsylvania 15148, and
our telephone number is (412) 825-1000.
Our Products
We have significant product and service lines within each of our three
product groups. Our new product development programs also strengthen our sales
both to original equipment manufacturers of railroad vehicles and equipment and
to end-users, including operators of rail vehicles such as railroads, transit
authorities, utilities and leasing companies. We believe that we have a
competitive advantage in our markets based upon the range of our products, as
well as the quality and competitive pricing associated with our products and
our ability to offer support to purchasers through our service and upgrade
centers. Our products and services, listed by our three product groups,
include:
.Our railroad group, which accounted for 58% of our revenues for the year ended
December 31, 1998, and which sells freight cars, locomotives and electronics
for the railroads.
.Our transit group, which accounted for 32% of our revenues for the year ended
December 31, 1998, and which sells passenger transit equipment.
.Our molded products group, which accounted for 10% of our revenues for the
year ended December 31, 1998, and which sells brake shoes, disc brake pads and
other rubber products.
<PAGE>
Approximately half of our net sales have historically been derived from
products sold directly to original equipment manufacturers of locomotives,
railway freight cars and passenger transit vehicles. The balance of our net
sales are after-market sales that are generated from the sale of replacement
parts, repair services and upgrade work purchased by end-users. We believe that
our substantial installed base of products designed for the original equipment
manufacturer is a significant competitive advantage in providing products and
services to the end-user as well. We also believe that end-users tend to
purchase our replacement parts due to the high quality of our products and
services.
Pending Merger with MotivePower
On June 2, 1999 we agreed to merge with MotivePower Industries, Inc.
MotivePower will be the surviving corporation. Each share of our common stock
will be converted into 1.3 shares of MotivePower's common stock. Immediately
upon completion of the merger, our stockholders will own approximately 55% of
MotivePower's common stock. The merger is intended to be a tax-free
reorganization for federal income tax purposes. For accounting purposes, it
will be accounted for as a pooling of interests. Completion of the merger is
subject to various conditions, including approval by both of our companies'
stockholders. The completion of the merger will affect, among other things, our
management structure and our indebtedness. MotivePower has filed a registration
statement with the SEC with respect to the shares of MotivePower common stock
to be issued in the merger. That registration statement contains a joint proxy
statement/prospectus further describing the merger. See "Where You Can Find
More Information."
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<PAGE>
The Exchange Offer
On January 12, 1999, we issued $75 million in aggregate principal amount of
our 9 3/8% Senior Notes due 2005 in a private placement. We entered into an
exchange and registration rights agreement with Chase Securities, Inc., the
initial purchaser of the old notes, in which we agreed to deliver to you this
prospectus and to complete an offer to exchange the old notes for registered
notes with substantially identical terms except that the new notes will have
been registered under the Securities Act of 1933 and will not bear legends
restricting their transfer. Completing this exchange offer will satisfy our
obligations under the exchange and registration rights agreement.
We believe that you may resell the new notes without compliance with the
registration and prospectus delivery requirements of the Securities Act,
subject to limited conditions. We issued the old notes under an indenture that
grants you rights. The new notes also will be issued under that indenture and
you will have the same rights under the indenture as the holders of the old
notes. You should read the discussion under the headings "Terms of the Exchange
Offer" and "Description of the New Notes" for further information. References
to the "notes" apply to both the old notes and the new notes.
Summary of the Terms of the Exchange Offer
<TABLE>
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The Exchange Offer.......... We are offering to exchange $1,000 principal
amount of new notes registered under the
Securities Act for each $1,000 principal amount
of old notes. In order to be exchanged, an Old
Note must be properly tendered and accepted. All
old notes that are validly tendered and not
validly withdrawn will be exchanged for new
notes.
As of this date, there is $75 million aggregate
principal amount of old notes outstanding.
We will issue the new notes promptly after the
expiration of the exchange offer.
Exchange and Registration
Rights Agreement...........
We are offering to exchange your unregistered old
notes for registered new notes with substantially
the same terms. The exchange offer is intended to
satisfy our obligations under the exchange and
registration rights agreement. After the exchange
offer is completed, you will no longer be
entitled to any exchange or registration rights
with respect to your old notes.
The exchange and registration rights agreement
requires us to file a registration statement for
a continuous offering in accordance with Rule 415
under the Securities Act for your benefit if you
would not receive freely tradable registered
notes in the exchange offer or you are ineligible
to participate in the exchange offer and indicate
that you wish to have your old notes registered
under the Securities Act. See "Terms of the
Exchange Offer--Procedures For Tendering Old
Notes."
Resales of the Registered Based on an interpretation by the staff of the
Notes...................... SEC set forth in no-action letters issued to
third parties, we believe that new
</TABLE>
3
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<TABLE>
<S> <C>
notes issued pursuant to the exchange offer in
exchange for old notes may be offered for resale,
resold and otherwise transferred if you are not a
broker-dealer and if you meet the following
conditions:
. The new notes to be acquired by you in the
exchange offer are acquired by you in the
ordinary course of your business;
. you are not engaging in and do not intend to
engage in a distribution of the new notes;
. you do not have an arrangement or
understanding with any person to participate
in the distribution of the registered notes;
and
. you are not an "affiliate" of ours, as that
term is defined in Rule 405 under the
Securities Act.
If you do not meet the above conditions, you may
incur liability under the Securities Act if you
transfer any new note without delivering a
prospectus meeting the requirements of the
Securities Act. We do not assume or indemnify you
against that liability.
A broker-dealer who acquired old notes directly
from us cannot exchange those old notes in the
exchange offer. Otherwise, each broker-dealer
that receives new notes in the exchange offer for
its own account in exchange for old notes which
were acquired by that broker-dealer as a result
of market-making activities or other trading
activities must acknowledge that it will deliver
a prospectus meeting the requirements of the
Securities Act in connection with any resales of
the registered notes. For a period of 90 days
after the date of this prospectus, we will make
this prospectus available to a broker-dealer to
use for an offer to resell or to otherwise
transfer these registered notes.
Expiration Date............. The exchange offer will expire at 5:00 p.m., New
York City time, on , 1999, unless we decide
to extend the exchange offer. We do not intend to
extend the exchange offer, although we reserve
the right to do so.
Accrued Interest on the New
Notes and the Old Notes....
Each new note will bear interest from its
issuance date. Holders of old notes that are
accepted for exchange will receive, in cash,
accrued interest on the old notes to, but not
including, the issuance date of the new notes.
The interest will be paid with the first interest
payment on the new notes. Interest on the old
notes accepted for exchange will cease to accrue
upon issuance of the new notes.
Conditions to the Exchange The only conditions to completing the exchange
Offer...................... offer are that the exchange offer not violate
applicable law or any applicable interpretation
of the SEC's staff, that no injunction, order or
decree has been issued which would prohibit,
prevent or materially impair our ability to
proceed with the exchange offer and that any
necessary governmental approvals have been
obtained. See "Terms of the Exchange Offer--
Conditions."
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4
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Procedures for Tendering Each holder of old notes wishing to accept the
Old Notes.................. exchange offer must complete, sign and date the
accompanying letter of transmittal, or a
facsimile thereof, in accordance with the
instructions contained in this prospectus and in
the letter of transmittal, and mail or otherwise
deliver the letter of transmittal, together with
the old notes and any other required
documentation, to the exchange agent at the
address set forth in this prospectus. By
executing the letter of transmittal, each holder
will represent to us that, among other things,
the new notes acquired pursuant to the exchange
offer are being obtained in the ordinary course
of business of the person receiving such new
notes, whether or not such person is the holder,
that neither the holder nor any such other person
has any arrangement or understanding with any
person to participate in the distribution of such
new notes and that neither the holder nor any
such other person is our "affiliate," as defined
under Rule 405 of the Securities Act. See "Terms
of the Exchange Offer--Procedures for Tendering
Old Notes." Following the consummation of the
exchange offer, holders of old notes eligible to
participate but who do not tender their old notes
will not have any further exchange rights and
such old notes will continue to be subject to
restrictions on transfer. Accordingly, the
liquidity of the market for such old notes could
be adversely affected.
Special Procedures for
Beneficial Owner...........
If you are the beneficial owner of old notes and
they are registered in the name of a broker,
dealer, commercial bank, trust company or other
nominee, and you wish to tender your old notes,
you should promptly contact the person in whose
name your old notes are registered and instruct
that person to tender on your behalf. If you wish
to tender on your own behalf, you must, prior to
completing and executing the letter of
transmittal and delivering your old notes, either
make appropriate arrangements to register
ownership of the old notes in your name or obtain
a properly completed bond power from the person
in whose name your old notes are registered. The
transfer of registered ownership may take
considerable time. See "Terms of the Exchange
Offer--Procedures for Tendering Old Notes."
Guaranteed Delivery If you wish to tender your old notes and:
Procedures.................
. they are not immediately available;
. time will not permit your old notes or other
required documents to reach the exchange agent
before the expiration of the exchange offer;
or
. you cannot complete the procedure for book-
entry transfer on a timely basis;
you may tender your old notes in accordance with
the guaranteed delivery procedures set forth in
"Terms of the Exchange Offer--Procedures for
Tendering Old Notes."
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5
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<TABLE>
<S> <C>
Acceptance of Old Notes and
Delivery of Registered
Notes......................
Except under the circumstances described above
under "Conditions to the Exchange Offer," we will
accept for exchange any and all old notes that are
properly tendered in the exchange offer prior to
5:00 p.m., New York City time, on the expiration
date. The new notes to be issued to you in the
exchange offer will be delivered promptly
following the expiration date. See "Terms of the
Exchange Offer."
Withdrawal.................. You may withdraw the tender of your old notes at
any time prior to 5:00 p.m., New York City time,
on the expiration date. We will return to you any
old notes not accepted for exchange for any reason
without expense to you as promptly as we can after
the expiration or termination of the exchange
offer.
Exchange Agent.............. The Bank of New York is serving as the exchange
agent in connection with the exchange offer.
Consequences of Failure to If you do not participate in the exchange offer,
Exchange................... upon completion of the exchange offer, the
liquidity of the market for your old notes could
be adversely affected. You may be unable to sell
or transfer your old notes and the value of your
old notes may decline. See "Terms of the Exchange
Offer--Consequences of Failure to Exchange."
Shelf Registration If any holder of the old notes, other than any
Statement.................. such holder that is our "affiliate" within the
meaning of Rule 405 under the Securities Act, is
not eligible under applicable securities laws to
participate in the exchange offer, and such holder
has satisfied conditions relating to the provision
of information to us for use therein, we have
agreed to register the old notes on a shelf
registration statement and to use our reasonable
best efforts to cause it to be declared effective
by the SEC as promptly as practical on or after
the consummation of the exchange offer. We have
agreed to maintain the effectiveness of such shelf
registration statement for, under certain
circumstances, a maximum of two years, to cover
resales of the old notes held by any such holders.
Federal Income Tax The exchange of the old notes will not be a
Consequences............... taxable event for federal income tax purposes. See
"Federal Income Tax Consequences."
SUMMARY OF THE TERMS OF THE NEW NOTES
The New Notes............... $75 million principal amount of 9 3/8% Senior
Notes due 2005, Series B2.
Maturity.................... June 15, 2005.
Interest.................... The new notes will pay interest in cash at the
rate of 9 3/8% per annum, payable on June 15 and
December 15 of each year, commencing December 15,
1999.
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6
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<S> <C>
Sinking Fund................ None.
Optional Redemption......... At our option, we may redeem any or all of new
notes, at any time on or after June 15, 2000, for
a redemption price initially equal to 104.688% of
their principal amount, plus any accrued and
unpaid interest. The redemption price will
decrease by equal amounts each year to 100% of
the principal amount of the notes, plus any
accrued and unpaid interest on and after June 15,
2002. See "Description of the New Notes--Optional
Redemption."
Change of Control........... Upon a change of control of WABCO, as described
in the indenture, you will have the right to
require us to make an offer to repurchase the new
notes at a purchase price equal to 101% of their
principal amount, plus any accrued and unpaid
interest. We can not assure that we will have
sufficient funds available at the time of any
change of control to repurchase the notes. We
cannot otherwise redeem the notes. See
"Description of the New Notes--Covenants--Change
of Control."
Ranking..................... The notes will be:
. equal in right of payment with all of our
existing and future unsubordinated debt; and
. senior in right of payment to any of our
future subordinated debt.
The notes are not:
. guaranteed by our subsidiaries; however, our
senior secured credit agreement is
unconditionally guaranteed by all of our
subsidiaries, which guarantee is limited to
$250 million in the aggregate so long as the
old notes remain outstanding; and
. secured by any collateral; however, our senior
secured credit agreement is secured by
substantially all of our assets, including all
of the stock of our domestic subsidiaries and
65% of the stock of most of our foreign
subsidiaries, and substantially all of the
assets of all of our subsidiaries.
The effect of the subsidiaries' guarantee of the
senior secured credit agreement is to cause the
notes to effectively be subordinate to and rank
below all liabilities of our subsidiaries. Our
March 31, 1999 balance sheet had liabilities of
our subsidiaries, excluding guarantees and
intercompany obligations, of $66.0 million.
Further, the effect of the security interests
granted under the senior secured credit agreement
is to cause the notes to effectively be
subordinate to and rank below the debt of that
facility. As of March 31, 1999, our total
indebtedness was $470.5 million, all of which was
unsubordinated indebtedness. Approximately $276.1
million of such indebtedness was secured
indebtedness under the senior secured credit
agreement. See "Description of the New Notes--
Ranking," "Description of Indebtedness" and
"Capitalization."
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<TABLE>
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Covenants................... The indenture contains covenants for your benefit
as holders of the notes that will, among other
things, restrict our ability to:
. incur indebtedness;
. pay dividends and redeem stock;
. undertake certain transactions with our
affiliates;
. grant liens;
. sell assets;
. invest in and distribute from subsidiaries;
. use proceeds from sales of assets and
subsidiary stock;
. undertake sale/leaseback transactions; and
. consolidate, merge and sell assets.
These covenants are subject to a number of
important exceptions. See "Description of the New
Notes--Covenants."
Form of New Notes........... The new notes will be available initially only in
book-entry form. Except as described under "Book-
Entry; Delivery and Form," we expect that the new
notes will be represented by a global note which
will be deposited with, or on behalf of,
Depository Trust Company, with links to the
Euroclear System and Cedel Bank, Societe Anonyme,
and registered in its name or in the name of its
nominee. Beneficial interests in the global note
representing the new notes will be shown on, and
transfers thereof will be effected through,
records maintained by DTC and its participants.
After the initial issuance of the global note,
notes in certificated form will be issued in
exchange for the global note only under limited
circumstances as set forth in the indenture. See
"Book-Entry; Delivery and Form."
Use of Proceeds............. We used proceeds from issuance of the old notes
to repay certain indebtedness. We will not,
however, receive any proceeds from the exchange
offer. See "Use of Proceeds."
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8
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SUMMARY SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
How We Prepared the Financial Statements
We are providing the following information to aid you in your analysis of
the financial aspects of the exchange offer. We derived this information from
the MotivePower and WABCO audited financial statements for the years ended
December 31, 1994 through 1998 and the unaudited financial statements for the
three months ended March 31, 1999 and 1998. The information is only a summary
and you should read it together with the historical financial statements and
related notes included in this prospectus or contained in the annual reports
and other information that have been filed with the SEC. See "Where You Can
Find More Information."
Pooling of Interests Accounting Treatment
We expect that the merger of MotivePower and WABCO, as described at the end
of the section entitled "Business," will be accounted for as a "pooling of
interests." This means that, for accounting and financial reporting purposes,
we will treat the companies as if they had always been combined.
We have presented unaudited pro forma condensed combined financial
information that reflects the pooling of interests method of accounting to give
you a better picture of what the businesses of MotivePower and WABCO might have
looked like had they been combined since the beginning of the periods
presented. We prepared the pro forma condensed combined statements of income
and pro forma condensed combined balance sheet by adding or combining the
historical amounts of each company. The accounting policies of MotivePower and
WABCO are substantially comparable. However, adjustments were made to conform
the classification of amortization expense and income taxes receivable in the
unaudited pro forma condensed combined financial statements. The WABCO and
MotivePower combined company may have performed differently had they always
been combined. The unaudited pro forma condensed combined financial information
may not be indicative of the historical results that would have been achieved
had the companies always been combined or the future results that the combined
company will experience after the merger.
Merger-Related Expenses
We estimate that merger-related fees and expenses, consisting primarily of
SEC filing fees, fees and expenses of investment bankers, attorneys and
accountants, and financial printing and other related charges, will be
approximately $20-25 million.
Integration-Related Expenses
We estimate that costs of approximately $35-$40 million will be incurred for
severance and other integration-related expenses, including the elimination of
duplicate facilities and excess capacity, operational realignment and related
workforce reductions. These expenditures are necessary to reduce costs and
operate efficiently.
Periods Covered
The summary unaudited pro forma condensed combined financial data combines
MotivePower's and our results for the years ended December 31, 1994 through
1998 and the three months ended March 31, 1999 and 1998, and give effect to the
merger as if it had occurred at the beginning of the periods presented. The
combined balance sheet data in the table below combines the balance sheets of
MotivePower and WABCO as of December 31, 1994 through 1998 and as of March 31,
1999 and 1998.
9
<PAGE>
Summary Historical Financial Data of WABCO
The following summary historical financial data for each of the years ended
December 31, 1994 through 1998 has been derived from our audited consolidated
financial statements. The following summary historical financial data for the
three months ended March 31, 1999 and 1998 has been derived from our unaudited
consolidated financial statements. This information is only a summary and you
should read it together with our historical financial statements and related
notes contained in this prospectus and in the annual and quarterly reports and
other information that we have filed with the SEC. See "Where You Can Find More
Information."
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
------------------ -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- --------- --------- --------- --------- ---------
(unaudited) (thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Data:
Net sales............... $191,204 $158,136 $670,909 $564,441 $453,512 $424,959 $347,469
Gross profit............ 61,545 51,796 219,179 186,118 153,349 146,058 117,925
Operating income........ 28,897 24,755 104,666 89,975 79,718 89,302 73,368
Net income.............. 11,920 10,858 41,654 37,263 32,725 33,725 36,841
Diluted earnings per
share ................. $ 0.46 $ 0.42 $ 1.62 $ 1.42 $ 1.15 $ 1.27 $ 0.92
Cash flow from (used in)
operating activities... 5,915 12,467 42,067 66,974 58,911 45,881 43,711
Cash flow from (used in)
investing activities... (7,493) (9,229) (141,471) (42,688) (91,745) (71,105) (12,853)
Cash flow from (used in)
financing activities... 2,953 285 102,198 (22,439) 32,507 24,261 (29,810)
Cash dividends per
share.................. 0.01 0.01 0.04 0.04 0.04 0.01 0.00
Ratio of Earnings to
Fixed Charges(1)....... 4.0 4.0 3.1 2.8 2.9 2.7 6.4
Other Data:
EBITDA(2)............... 35,682 31,139 129,874 114,599 101,967 107,936 89,695
<CAPTION>
March 31, December 31,
------------------ -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets............ $609,460 $434,339 $596,184 $410,879 $363,236 $263,407 $187,728
Total debt.............. 470,490 364,946 467,817 364,934 341,690 305,935 78,060
Shareholders' equity
(deficit).............. (19,362) (66,731) (33,853) (79,263) (76,195) (108,698) 46,797
</TABLE>
- --------
(1) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes plus fixed charges by fixed charges. Fixed
charges consist of interest expense on indebtedness, amortization of debt
expense and 33% of rental payments under operating leases (an amount
estimated by management of the interest components of such rentals). The
ratio of earnings to fixed charges as of March 31, 1999 and December 31,
1998 is not materially affected by this offering.
(2) EBITDA is defined as operating income plus depreciation, amortization and
unusual items. There were no such unusual items in any of the periods
presented above. EBITDA should not be construed as a substitute for income
from operations, net income or cash flow from operating activities, for
the purpose of analyzing operating performance, financial position and
cash flows. EBITDA measures are calculated differently by other companies.
As such, the EBITDA measures presented may not be comparable to other
similarly titled measures of other companies. EBITDA has been presented
because it is commonly used by investors to analyze and compare companies
on the basis of operating performance and to determine a company's ability
to service debt.
10
<PAGE>
Summary Historical Financial Data of MotivePower
The following summary historical financial data for each of the years ended
December 31, 1994 through 1998 has been derived from MotivePower's audited
consolidated financial statements. The following summary historical financial
data for the three months ended March 31, 1999 and 1998 has been derived from
MotivePower's unaudited consolidated financial statements. This information is
only a summary and you should read it together with MotivePower's historical
financial statements and related notes contained in this prospectus and in the
Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other
information that they have filed with the SEC. See "Where You Can Find
More Information."
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
------------------ -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- --------- --------- --------- --------- ---------
(unaudited) (thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Data:
Net sales............... $107,274 $ 82,853 $365,218 $305,930 $291,407 $263,718 $368,537
Gross profit (loss)..... 27,523 21,356 81,322 72,342 56,847 (5,167) (5,478)
Operating income
(loss)................. 14,805 11,003 40,363 34,618 24,232 (51,113) (49,977)
Net income (loss)....... 7,878 6,648 32,197 20,276 11,509 (40,414) (42,793)
Diluted earnings (loss)
per share(1)(2)........ $ 0.28 $ 0.24 $ 1.15 $ 0.74 $ 0.44 $ (1.56) $ (1.65)
Cash flow from (used in)
operating activities... 13,169 (5,265) 31,344 35,452 43,368 (21,743) (85,141)
Cash flow from (used in)
investing activities... (36,150) (6,139) (102,324) (22,472) 12,407 (15,408) (36,941)
Cash flow from (used in)
financing activities... 28,491 490 59,743 (1,319) (56,235) 30,388 120,463
Cash dividends
per share(1)(3)........ 0.00 0.00 0.00 0.00 0.00 0.03 2.21
Other Data:
EBITDA(4)............... 18,619 13,482 51,770 44,585 34,589 1,057 871
<CAPTION>
March 31, December 31,
------------------ -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets............ $407,812 $285,607 $371,198 $283,102 $234,044 $280,948 $311,297
Total debt.............. 134,164 50,833 105,798 50,507 49,592 120,118 108,176
Shareholders' equity.... 186,637 151,441 177,929 144,548 120,980 94,527 114,124
</TABLE>
- --------
(1) Reflects a three-for-two common stock split in the form of a 50 percent
stock dividend effective April 2, 1999.
(2) The diluted loss per share for 1994 is a supplemental pro forma amount.
(3) Includes a special dividend to Morrison Knudsen Corporation of $2.13 per
share on 16,724,000 shares paid in 1994.
(4) EBITDA is defined as operating income plus depreciation, amortization and
unusual items. The 1995 EBITDA includes $40,838 of expenses for inventory
writedowns related to a specific product line ($20,273), facility writedown
($9,570), locomotive lease fleet impairment ($7,064), loss on disposition
of an operation ($2,849), costs associated with a class action and
derivative suit ($582), and a provision for a contract loss ($500) which
were separately disclosed and reported as unusual items in MotivePower's
1995 income statement and were added to the 1995 EBITDA amount. The 1994
EBITDA includes $39,216 of expenses for provisions for contract losses
($12,418), loss on disposition of an operation ($11,060), inventory
writedowns related to a specific product line ($8,398), and costs
associated with a class action and derivative suit ($7,340) which were
separately disclosed and reported as unusual items in MotivePowers' 1994
income statement and were added to the 1994 EBITDA amount. EBITDA should
not be construed as a substitute for income from operations, net income or
cash flow from operating activities, for the purpose of analyzing operating
performance, financial position and cash flows. EBITDA measures are
calculated differently by other companies. As such, the EBITDA measures
presented may not be comparable to other similarly titled measures of other
companies. EBITDA has been presented because it is commonly used by
investors to analyze and compare companies on the basis of operating
performance and to determine a company's ability to service debt.
11
<PAGE>
Summary Unaudited Pro Forma Condensed Combined Financial Data
The following summary unaudited pro forma condensed combined financial data
has been derived from and should be read with the "Unaudited Pro Forma
Condensed Combined Financial Statements and Related Notes." This information is
based on the historical consolidated balance sheets and related historical
consolidated statements of income of MotivePower and WABCO giving effect to the
merger using the pooling of interests method of accounting for business
combinations. This information is for illustrative purposes only. The companies
may have performed differently had they always been combined. The summary
unaudited pro forma condensed combined financial data may not be indicative of
the historical results that would have been achieved had the companies always
been combined or the future results that the combined company will experience
after the merger.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
-------------------- -------------------------------------------
1999 1998 1998 1997 1996
---------- -------- -------------- ------------- -------------
(unaudited) (in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Financial Data:
Net sales............... $298,478 $240,989 $1,036,127 $870,371 $744,919
Gross profit............ 89,068 73,152 300,501 258,460 210,196
Operating income........ 43,702 35,758 145,029 124,593 103,950
Income before
extraordinary item..... 20,267 17,978 79,196 57,539 45,298
Diluted earnings per
common share
before extraordinary
item(1)(2)............. $ 0.33 $ 0.29 $ 1.29 $ 0.94 $ 0.72
Cash flow from (used in)
operating activities... 19,084 7,202 73,411 102,426 102,279
Cash flow from (used in)
investing activities... (43,643) (15,368) (243,795) (65,160) (79,338)
Cash flow from (used in)
financing activities... 31,444 775 161,941 (23,758) (23,728)
Cash dividends per
share(1)(2)(3)......... $ 0.00 $ 0.00 $ 0.02 $ 0.02 $ 0.02
Ratio of Earnings to
Fixed Charges(4)....... 4.4 3.9
Other Data:
EBITDA(5)............... 54,301 44,621 181,644 159,184 136,556
<CAPTION>
March 31, December 31,
-------------------- -------------------------------------------
1999 1998 1998 1997 1996
---------- -------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets............ 1,015,052 719,946 967,382 693,981 597,280
Total debt.............. 604,654 415,779 573,615 415,441 391,282
Shareholders' equity.... 126,275 84,710 144,076 65,285 44,785
</TABLE>
- --------
(1) Reflects the effects of a three-for-two split of MotivePower common stock
in the form of a 50 percent stock dividend effective April 2, 1999.
(2) Reflects the exchange of 1.3 shares of MotivePower common stock for each
share of our common stock outstanding.
(3) Includes a special dividend to Morrison Knudson Corporation of $2.13 on
16,724,000 shares which was paid in 1994.
(4) The ratio of earnings to fixed charges, adjusted to reflect the merger, has
been calculated by dividing income before income taxes plus fixed charges
by fixed charges. Fixed charges consist of interest expense on
indebtedness, amortization of debt expense and 33% of rental payments under
operating leases (an amount estimated by management of the interest
components of such rentals).
(5) EBITDA is defined as operating income plus depreciation, amortization and
unusual items. There were no such unusual items in any of the periods
presented above. EBITDA should not be construed as a substitute for income
from operations, net income or cash flow from operating activities, for the
purpose of analyzing operating performance, financial position and cash
flows. EBITDA measures are calculated differently by other companies. As
such, the EBITDA measures presented may not be comparable to other
similarly titled measures of other companies. EBITDA has been presented
because it is commonly used by investors to analyze and compare companies
on the basis of operating performance and to determine a company's ability
to service debt.
12
<PAGE>
Selected Historical Financial Data For WABCO
(Dollars in Thousands)
The following selected historical financial data for each of the years ended
December 31, 1994 through 1998 has been derived from our audited consolidated
financial statements and for the three months ended March 31, 1999 and 1998 the
data has been derived from our unaudited consolidated financial statements.
This information is only a summary and you should read it together with our
historical audited financial statements and related notes contained in this
prospectus and in the annual and quarterly reports and other information that
we have filed with the SEC. See "Where You Can Find More Information."
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
-------------------- -------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- -------- -------- -------- --------- --------
(unaudited) (thousands of except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Net sales............... $ 191,204 $ 158,136 $670,909 $564,441 $453,512 $ 424,959 $347,469
Cost of sales........... 129,659 106,340 451,730 378,323 300,163 278,901 229,544
--------- --------- -------- -------- -------- --------- --------
Gross profit.......... 61,545 51,796 219,179 186,118 153,349 146,058 117,925
Operating expenses...... 32,648 27,041 114,513 96,143 73,631 56,756 44,287
--------- --------- -------- -------- -------- --------- --------
Income from
operations........... 28,897 24,755 104,666 89,975 79,718 89,302 73,638
Interest expense and
other, net............. 9,162 7,242 32,136 29,385 26,070 30,793 11,184
--------- --------- -------- -------- -------- --------- --------
Income before taxes
and extraordinary
item................. 19,735 17,513 72,530 60,590 53,648 58,509 62,454
Income taxes............ 7,346 6,655 27,561 23,327 20,923 23,402 25,613
--------- --------- -------- -------- -------- --------- --------
Income before
extraordinary item... 12,389 10,858 44,969 37,263 32,725 35,107 36,841
(Loss) on early
extinguishment of
debt................... (469) -- (3,315) -- -- (1,382) --
--------- --------- -------- -------- -------- --------- --------
Net income............ $ 11,920 $ 10,858 $ 41,654 $ 37,263 $ 32,725 $ 33,725 $ 36,841
========= ========= ======== ======== ======== ========= ========
Diluted Earnings per
Common Share
Income before
extraordinary item..... $ .48 $ .42 $ 1.75 $ 1.42 $ 1.15 $ 1.32 $ .92
Loss on early
extinguishment of
debt................... (.02) -- (.13) -- -- (.05) --
--------- --------- -------- -------- -------- --------- --------
Net income............ $ .46 $ .42 $ 1.62 $ 1.42 $ 1.15 $ 1.27 $ .92
========= ========= ======== ======== ======== ========= ========
Cash dividends per
share.................. $ .01 $ .01 $ .04 $ .04 $ .04 $ .01 $ .00
Weighted average diluted
shares outstanding..... 25,776 25,669 25,708 26,173 28,473 26,639 40,000
--------- --------- -------- -------- -------- --------- --------
Other Financial Data
Cash flow from (used in)
operating activities... 5,915 12,467 42,067 66,974 58,911 45,881 43,711
Cash flow from (used in)
investing activities... (7,493) (9,229) (141,471) (42,688) (91,745) (71,105) (12,853)
Cash flow from (used in)
financing activities... 2,953 285 102,198 (22,439) 32,507 24,261 (29,810)
Depreciation and
Amortization........... 6,785 6,384 25,208 24,624 22,249 18,634 16,057
Capital Expenditures.... 6,533 5,329 28,957 29,196 12,855 16,205 12,853
Interest Expense(1)..... 9,096 7,373 31,217 29,729 26,152 30,998 10,898
Ratio of Earnings to
Fixed Charges(2)....... 4.0 4.0 3.1 2.8 2.9 2.7 6.4
Other Data
EBITDA(3)............... 35,682 31,139 129,874 114,599 101,967 107,936 89,695
<CAPTION>
As of March 31, As of December 31,
-------------------- -------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Working capital......... $121,062 $ 58,741 $ 95,411 $ 48,719 $ 48,176 $ 36,674 $ 46,640
Property, plant and
equipment, net......... 128,066 109,990 124,981 108,367 95,844 72,758 67,346
Total assets............ 609,460 434,339 596,184 410,879 363,236 263,407 187,728
Total debt.............. 470,490 364,946 467,817 364,934 341,690 305,935 78,060
Shareholders' equity
(deficit).............. (19,362) (66,731) (33,853) (79,263) (76,195) (108,698) 46,797
</TABLE>
- --------
(1) Pro forma after giving effect to the offering, the interest expense for
the three months ended March 31, 1999 and the year ended December 31, 1998
would have been $9.1 million and $32.7 million.
(2) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes plus fixed charges by fixed charges. Fixed
charges consist of interest expense on indebtedness, amortization of debt
expense and 33% of rental payments under operating leases (an amount
estimated by management of the interest components of such rentals). The
ratio of earnings to fixed charges as of March 31, 1999 and December 31,
1998 is not materially affected by this offering.
(3) EBITDA is defined as operating income plus depreciation, amortization and
unusual items. There were no such unusual items in any of the periods
presented above. EBITDA should not be construed as a substitute for income
from operations, net income or cash flow from operating activities, for
the purpose of analyzing operating performance, financial position and
cash flows. EBITDA measures are calculated differently by other companies.
As such, the EBITDA measures presented may not be comparable to other
similarly titled measures of other companies. EBITDA has been presented
because it is commonly used by investors to analyze and compare companies
on the basis of operating performance and to determine a company's ability
to service debt.
13
<PAGE>
RISK FACTORS
In addition to the other information contained in this prospectus, the
following factors should be considered carefully before tendering old notes in
exchange for new notes. The risk factors set forth below are generally
applicable to the old notes as well as the new notes.
We are highly leveraged and have a deficit in stockholders' equity, which could
impact our ability to timely repay the notes.
Our company has substantial debt. As of March 31, 1999, our total
indebtedness was approximately $470.5 million. Further, as of March 31, 1999,
we had a $19.4 million deficit in stockholders' equity. See "Capitalization."
As of March 31, 1999, our total indebtedness was $470.5 million, of which
approximately $276.1 million was outstanding under our credit agreement with a
consortium of commercial banks, $75.0 million was outstanding under the notes
and $100.0 million was outstanding under our previously existing 9 3/8% Senior
Notes due 2005 and issued in 1995. As of March 31, 1999, we had the ability to
incur up to approximately $44.3 million of additional indebtedness under the
credit agreement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Description of Indebtedness."
Our debt requires the dedication of a substantial portion of our future cash
flow to the payment of principal and interest on indebtedness. It may,
therefore, limit our ability to fund future working capital, capital
expenditures, research and development costs and other general corporate
requirements. It may also increase our vulnerability to adverse economic and
industry conditions, limit our flexibility in planning for, or reacting to,
changes in our business and industry, place us at a competitive disadvantage
compared to our competitors that have less debt, and limit our ability to
borrow additional funds. The result of the foregoing could impact our ability
to timely repay the notes.
Our credit facilities limit our ability to take certain actions. These
limitations could trigger defaults under our credit facilities which could lead
to bankruptcy, and could impact our ability to timely repay the notes.
Our credit agreement contains covenants that, among other things, limit the
payment of dividends and the incurrence of additional debt and restrict
mergers, acquisitions and sales of assets or sales of the stock of our
subsidiaries. In addition, a "change in control" constitutes an event of
default. Change in control is defined to include:
. ownership of more than 35% of the common stock by any person other than
certain designated persons or entities; or
. a combination of certain designated persons or entities ceasing to own
35% of the common stock.
We are also required to maintain specified financial ratios and meet certain
other financial tests.
The indenture under which our $100 million in existing notes were issued in
1995 and the indenture pertaining to the notes covered by this exchange offer
also contain covenants that, among other things, limit our ability, as well as
the ability of certain of our 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;
14
<PAGE>
. enter into transactions with affiliates;
. create liens; and
. enter into sale/leaseback transactions.
Our requirement to meet the foregoing covenants impacts the manner in which
we operate our business. It could limit our ability to spend money on capital
projects, research and development costs, or similar items. It could also make
us unable to complete acquisitions or to take advantage of favorable business
opportunities. Further, our failure to meet any of the foregoing covenants
could trigger defaults under our credit facilities. The documents for our
credit facilities are cross-defaulted, so that defaults in one document would
default others. A series of defaults could trigger our bankruptcy and the
potential that we would be unable to timely repay the notes.
The 1995 existing notes indenture and the indenture to the notes covered by
this exchange offer also restrict, subject to certain exceptions, our ability
to consolidate and merge with, or to transfer all or substantially all our
assets to, another person. In addition, upon the occurrence of a change of
control under the existing notes indenture and the indenture to the notes
covered by this exchange offer, each holder of the existing notes and the notes
covered by this exchange offer will have the right to require us to repurchase
all or a portion of the existing notes or the notes covered by this exchange
offer held by such holder, at a purchase price equal to 101% of the principal
amount thereof, plus accrued interest, if any, to the date of repurchase. We
can not assure that we will have the financial ability to repurchase all these
notes upon a change of control. In addition, the exercise of such rights could
trigger cross-default provisions in the credit agreement with bank lenders and
lead to our bankruptcy.
We believe that the proposed merger with Motive Power will constitute an
event of default under our credit agreement but not directly under either
indenture. We anticipate receiving a waiver under or renegotiating our credit
agreement prior to the merger. Although we believe that we will be able to
maintain compliance with our current financial tests, we can not assure that we
will be able to do so. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Description of the New Notes" and "Description of Indebtedness."
The notes are effectively subordinated. Upon our liquidation the notes would
only be paid after our bank lenders under our credit agreement are first paid.
We may not have sufficient funds to fully pay the notes after repaying amounts
that are effectively senior to the notes.
Although the notes rank side by side in right of payment with indebtedness
outstanding under the credit agreement, the debt under the credit agreement is
secured by substantially all of our assets and those of our domestic
subsidiaries. The notes are unsecured and therefore do not have the benefit of
such collateral. If an event of default occurs under the credit agreement, the
lenders under the credit agreement will have preferential claims to those
assets and may foreclose upon those assets to the exclusion of the holders of
the notes, notwithstanding the existence of an event of default with respect to
the notes. Accordingly, in such an event, our assets which secure obligations
under the credit agreement would first be used to repay in full amounts
outstanding under the credit agreement before being available to pay the notes.
The notes are not guaranteed by our subsidiaries. The credit agreement is
unconditionally guaranteed by all of our domestic subsidiaries. The notes will
be effectively subordinated to all of the liabilities of our subsidiaries,
including trade payables. This is because your only access to the assets of the
subsidiaries is through the stock of the subsidiaries. WABCO owns the stock of
our subsidiaries, while direct creditors of the subsidiaries, including the
lenders under the credit agreement, who have guarantees from the subsidiaries,
and trade creditors of the subsidiaries, have direct access to the
subsidiaries' assets. At March 31, 1999, the total liabilities of our
subsidiaries, including trade payables, were approximately $66.0 million,
exclusive of guarantees by such subsidiaries under the credit agreement and
intercompany obligations.
After paying in full the bank lenders under the credit agreement prior to
repaying the notes, and while paying the remainder of our obligations at the
same time as we pay the notes, we could be in the position to be unable to
fully repay the notes.
15
<PAGE>
Termination fees with MotivePower could require us to make material payments to
MotivePower if we terminate the pending merger transaction. This cash
expenditure would have a negative impact on our financial condition.
We must pay to MotivePower a termination fee of $15 million plus $2 million
in expenses if the merger agreement terminates under specified circumstances.
Any amounts that we are required to pay MotivePower could affect our cash flow
and potentially reduce our ability to repay the notes.
The pending merger with MotivePower will create expenses and require
substantial management attention which could negatively impact our ability to
repay the notes.
Although the pending merger is expected to create a more competitive
enterprise, there are a number of risks to WABCO in connection with the merger.
The combined company (MotivePower merged with WABCO) may not be able to realize
the cost savings and other synergies from the merger or successfully integrate
the operations of MotivePower and WABCO. MotivePower and WABCO will need to
integrate numerous systems, including management information, purchasing,
accounting and finance, sales, billing and payroll, which will require
substantial attention from management. Diversion of management attention to and
difficulties associated with integrating MotivePower and WABCO could harm the
combined company. Further, the direct costs of the merger, which are estimated
to be approximately $20-25 million, and the integration related expenses in
connection with the merger, which are estimated to be approximately $35-40
million, will impact the combined company going forward. These risks are
described in detail in the joint proxy statement/prospectus for the merger
transaction. See "Where You Can Find More Information."
Our ability to expand our international operations may be limited by the need
to obtain additional regulatory approvals in foreign jurisdictions and the need
to meet local equipment requirements.
Approximately 17% of our revenues are derived from the international
operations which we conduct in North America, the United Kingdom, Canada,
France, Australia, India and Italy. We are also exploring the possibility of
expansion into other international markets.
Our ability to expand sales of our products internationally, in particular
our locomotive and freight braking products, is limited by the necessity of
obtaining regulatory approval in new jurisdictions. For example, local
regulatory approval is required in order to market our brake shoes in India.
Our international growth strategy can also be hampered by the additional
expense of modifying products to comply with local railroad equipment
requirements.
Our financial performance on a U.S. dollar denominated basis can be
significantly affected by fluctuations in currency exchange rates.
Our international operations also pose risks due to currency exchange rates.
Our financial performance is reported on a U.S. dollar denominated basis.
However, our international operations are generally conducted in the currencies
of the countries in which such operations are located. Fluctuations in currency
exchange rates can negatively impact our financial results. These financial
results are important to avoiding defaults under our credit facilities.
Fluctuations in customer orders in the railway industry due to economic
conditions and alternate forms of transportation can reduce our revenues and
harm our financial results.
The railway industry has historically been subject to significant
fluctuations due to overall economic conditions and the level of use of
alternate methods of transportation. In economic downturns, railroads may defer
certain expenditures in order to conserve cash in the short term, and
reductions in freight traffic may reduce demand for our products. This could
reduce our revenues without a corresponding decrease in our fixed
16
<PAGE>
costs. This can negatively impact our financial results. We can not assure that
economic conditions will remain favorable or that there will not be significant
fluctuations adversely affecting the industry as a whole and, as a result, our
company.
Cyclicality in the passenger transit industry can reduce our revenues and harm
our financial results.
Although many industries tend to be cyclical, the passenger transit railway
industry is particularly so. New passenger transit car orders vary from year to
year and are influenced greatly by major replacement programs and by the
construction or expansion of transit systems by transit authorities. Although
our revenues may be reduced at any time due to lack of orders from the
passenger transit industry, our fixed costs which are necessary to be prepared
for busy periods may stay the same. This can negatively impact our financial
results.
Because a material portion of our future net sales will be derived from
governmental or other public entities, and not private companies, we can be
negatively affected by changes in political, economic or similar conditions.
A substantial portion of our net sales has been, and we expect that a
material portion of our future net sales may be, derived from contracts with
metropolitan transit and commuter rail authorities and Amtrak. To the extent
that future funding for proposed public projects is curtailed or withdrawn
altogether as a result of changes in political, economic, fiscal or other
conditions beyond our control, such projects may be delayed or cancelled,
resulting in a potential loss of new business.
We are currently involved in asbestos litigation which could, under certain
circumstances, require us to use substantial amounts of cash for legal fees and
settlements or judgments.
We acquired the North American operations of the railway products group of
American Standard, Inc. in 1990. There are various pending claims by employees
of third parties who allege they were exposed to asbestos while handling
American Standard products manufactured prior to the acquisition (American
Standard discontinued the use of asbestos in its products in 1980). We believe
that pursuant to the asset purchase agreement by which we acquired the railway
products group, American Standard remains liable for all asbestos claims filed
against our company. Although we believe that American Standard is willing and
able to fulfill its indemnity obligation, there can be no assurance that
American Standard will not dispute or become unable to perform its obligations.
If this occurs, we would be required to use our cash to pay for legal fees and
settlements or judgments related to the asbestos claims.
With respect to asbestos claims against our friction products subsidiary,
RFPC, we believe that the American Standard asset purchase agreement requires
American Standard to indemnify our company and RFPC for 50% of any liability
and defense costs that RFPC may incur with respect to asbestos claims. The
remaining costs should be covered by insurance. American Standard's indemnity
obligation with respect to RFPC claims expires in March 2000 in connection with
claims that are initiated after that date. Again, although we believe that
American Standard is willing and able to fulfill its indemnity obligation with
respect to RFPC asbestos claims, there can be no assurance that American
Standard will not dispute or become unable to perform its obligations. If this
occurs, we would be required to use our cash to pay for legal fees and
settlements or judgments related to the asbestos claims.
Finally, we believe that Mark IV Industries, Inc., the former owner of
another of our subsidiaries, Vapor Corporation, is obligated to indemnify our
company and Vapor for asbestos claims against Vapor. Although we believe that
Mark IV is willing and able to fulfill its indemnity obligation with respect to
Vapor asbestos claims, there can be no assurance that Mark IV will not dispute
or become unable to perform its obligations. If this occurs, we would be
required to use our cash to pay for legal fees and settlements or judgments
related to the asbestos claims.
17
<PAGE>
Year 2000 issues may negatively affect our operations. Year 2000 issues may
also negatively affect our suppliers or customers in a manner which could
impact our business.
We have developed remediation and replacement programs to address the Year
2000 issues with respect to our internal systems. However, with respect to our
internal systems, we can not assure that the remediation and replacement
programs that are currently operating will not experience minor disruptions. In
addition, we can not assure that our vendors, suppliers and other service
providers will successfully resolve their own Year 2000 issues in a manner that
avoids significant impact to us. We have received written assurances from some
of our suppliers and customers and other providers acknowledging the Year 2000
issues and stating their present intention to be compliant. We have not
received assurances from all of our suppliers and other providers and there is
no guarantee that one or more key suppliers and other providers will not fail
to become compliant in time to avoid a disruption to our business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Effects of Year 2000." A Year 2000 failure of our systems, or those
of key customers or suppliers, could cause disruptions of our business. These
disruptions could include a slowdown or shutdown of production, an inability to
invoice or collect from customers, an inability to receive critical supplies or
a reduction in customer orders. Any one or more of these could harm our
financial results.
Our products are generally sold with a limited warranty for defects. We have
reviewed our products currently in use by our customers or being sold and do
not believe that there will be material increases in warranty or liability
claims arising out of Year 2000 non-compliance. However, a material increase in
such claims could require us to apply substantial amounts of money or time to
correct any defects.
There is no established market for the resale of the notes. Noteholders may not
be able to resell their notes or may have to resell them at a discount.
Prior to this exchange offer, there was no existing trading market for the
old notes and there were no registered notes. Although Chase Securities, the
initial purchaser of the Notes, informed us that it intended to make a market
in the notes, it was not obligated to do so and any such market making may be
discontinued at any time without notice, at the sole discretion of Chase
Securities. In addition, such market making activity may be limited during the
pendency of the exchange offer or the effectiveness of a shelf registration
statement in lieu thereof. Accordingly, we can not offer any assurance as to
the development or liquidity of any market for the new notes, although we
expect that the new notes will be eligible for trading through The Private
Offerings, Resales and Trading through Automated Linkages Market, also known as
the "PORTAL market." The PORTAL market acts as a facilitator of SEC Rule 144A
and provides regulatory oversight for the clearance and settlement of domestic
and foreign debt and equity securities through designated clearing and
depository organizations. It includes equity, fixed income and derivative
securities. Settlement in the PORTAL market and via DTC occurs much faster than
does delivery or traditional European clearance and settlement, which may take
weeks.
The exchange offer is not conditioned upon any minimum or maximum aggregate
principal amount of notes being tendered for exchange. We cannot assure the
liquidity of the trading market for the new notes, or, in the case of non-
exchanging holders of notes, the trading market for the old notes following the
exchange offer. Noteholders may not be able to resell their notes or may have
to resell them at a discount.
18
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business," and elsewhere in this prospectus that constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties,
and other factors that may cause our or our industry's results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. For those statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels
of activity, performance, or achievements. We do not assume responsibility for
the accuracy and completeness of the forward-looking statements.
The factors that could affect our forward-looking statements include those
listed under "Risk Factors" and the following:
Economic and Industry Conditions
. fluctuations in interest rates
. materially adverse changes in economic or industry conditions generally
or in the markets served by our companies, including North America,
South America, Europe and Australia
. demand for services in the freight and passenger rail industry
. consolidations in the rail industry
. demand for our products and services
. continued outsourcing by our customers
. demand for freight cars, locomotives, passenger transit cars and buses
. industry demand for faster and more efficient braking equipment
Operating Factors
. supply disruptions
. technical difficulties
. changes in operating conditions and costs
. successful introduction of new products
. labor relations
. completion and integration of additional acquisitions
. the development and use of new technology
. Year 2000 disruptions
Competitive Factors
. the actions of competitors
Political Governmental Factors
. political stability in relevant areas of the world
. future regulation/deregulation of our customers and/or the rail industry
19
<PAGE>
. governmental funding for some of our customers
. political developments and laws and regulations, such as forced
divestiture of assets, restrictions on production, imports or exports,
price controls, tax increases and retroactive tax claims, expropriation
of property, cancellation of contract rights, and environmental
regulations
Transaction or Commercial Factors
. the outcome of negotiations with partners, governments, suppliers,
customers or others.
USE OF PROCEEDS
A portion of the net proceeds from the old notes were used to repay
$30 million outstanding under an unsecured credit facility, the proceeds of
which were used to fund our acquisition of Rockwell Railroad Electronics. Such
unsecured credit facility was terminated. The balance of the proceeds was used
to reduce revolving credit borrowings under the credit agreement as required
under its terms. The Chase Manhattan Bank, an affiliate of the initial
purchaser, Chase Securities, is an agent and lender under both the unsecured
credit facility and the credit agreement. As of December 31, 1998, the
unsecured credit facility bore interest at a rate of 9.75% per annum. As of the
same date, interest on the revolving credit borrowings under the credit
agreement bore interest at an average variable rate of 7.23% per annum.
This exchange offer, relating to the new notes, is intended to satisfy our
obligations under the purchase agreement and the exchange and registration
rights agreement with respect to the old notes. We will not receive any cash
proceeds from the issuance of the new notes offered hereby. In consideration
for issuing the new notes contemplated in this prospectus, we will receive old
notes in like principal amount. The form and terms of the old notes are the
same in all material respects as the forms and terms of the new notes, which
replace the old notes, except as otherwise described herein. The old notes
surrendered in exchange for new notes will be retired and canceled and cannot
be reissued. Accordingly, issuance of the new notes will not result in any
increase or decrease in WABCO's indebtedness. As such, no effect has been given
to the exchange offer in the pro forma statements or capitalization tables.
20
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999 on a
historical basis and as adjusted for our merger with MotivePower. This table
should be read in conjunction with "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and the notes thereto set forth in or
incorporated by reference in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
--------------------------
As Adjusted
Historical for the Merger
---------- --------------
<S> <C> <C>
Debt (including current portion):
Revolving credit notes............................... $ 73,600 $ 200,600
Term loan............................................ 202,500 202,500
9 3/8% Senior notes, due June 2005................... 100,000 100,000
9 3/8% Series B Senior notes, due June 2005.......... 75,000 75,000
Pulse acquisition note............................... 16,990 16,990
Industrial Revenue Bonds............................. -- 7,164
Other................................................ 2,400 2,400
--------- ---------
Total Debt......................................... $ 470,490 $ 604,654
========= =========
Shareholders' Equity (Deficit):
Common stock......................................... $ 474 $ 882
Additional paid-in capital........................... 108,066 128,322
Less-Treasury Stock, at cost......................... (187,014) (5,986)
Less-Unearned ESOP Shares, at cost................... (127,397) (127,397)
Retained Earnings.................................... 193,965 137,597
Deferred Compensation................................ (103) 5,531
Accumulated other comprehensive loss................. (7,353) (12,674)
--------- ---------
Total Shareholders' Equity (Deficit)............... (19,362) 126,275
========= =========
Total Capitalization............................... $ 451,128 $ 730,929
========= =========
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Our business is comprised of three principal business segments: railroad,
transit and molded products. Our 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
each of these three segments. In addition, management continually evaluates
acquisition opportunities that meet our criteria and complement our operating
strategies and product offerings.
Results of Operations
First Quarter 1999 Compared To
First Quarter 1998
Summary Results of Operations
<TABLE>
<CAPTION>
Three Months
Ended March 31
-------------------- Percent
1999 1998 Change
--------- --------- -------
Dollars in millions
except per share
<S> <C> <C> <C>
Net sales....................................... $ 191.2 $ 158.1 20.9%
Gross profit margin............................. 32.2% 32.8% nm
Income from operations.......................... $ 28.9 $ 24.8 16.5
Income before extraordinary item................ 12.4 13.8
Extraordinary item, net of tax.................. (.5) -- nm
Net income...................................... 11.9 10.9 9.2
Diluted earnings per share, before extraordinary
items.......................................... .48 .42 14.3
Diluted earnings per share...................... .46 .42 9.5
</TABLE>
- --------
nm-not meaningful
Income before extraordinary items for the first three months of 1999
increased $1.5 million, or 13.8%, compared with the same period a year ago.
Because of the $469 thousand, net of tax, extraordinary charge to write-off
certain previously capitalized debt issuance costs, net income increased only
$1.0 million, compared to the first quarter of 1998. Diluted earnings per share
before extraordinary item increased 14.3% to $.48. Income from operations
increased in the comparison primarily due to revenue growth and related gross
profit.
A number of events have occurred over the comparative period that impacted
our results of operations and financial condition including:
. In 1998, we completed several acquisitions that complement and enhance
the mix of existing products and markets. The results of these
acquisitions are included in the first quarter of 1999, but not in the
first quarter of 1998. Acquisitions completed during this timeframe were
Rockwell Railroad Electronics, Comet Industries, Inc, Lokring
Corporation, Hadady Corporation, and RFS(E) Limited. See "Business."
Aggregate incremental revenues from all of the above acquisitions were
$20.9 million in the first quarter of 1999.
. In January 1999, we issued the old notes at a premium resulting in an
effective interest rate of 8.5%. As a result of the issuance and payoff
of the unsecured credit facility, we wrote off previously capitalized
debt issuance costs of approximately $469 thousand, net of tax ($.02 per
diluted share) in the first quarter of 1999, which was reported as an
extraordinary item.
22
<PAGE>
Net Sales
The following table sets forth our net sales by business segment:
<TABLE>
<CAPTION>
Three Months
Ended
March 31
-----------------
1999 1998
-------- --------
Dollars in
thousands
<S> <C> <C>
Railroad group................................................ $118,316 $ 87,686
Transit group................................................. 54,862 51,531
Molded products group......................................... 18,026 18,919
-------- --------
Net sales................................................... $191,204 $158,136
======== ========
</TABLE>
Net sales for the first quarter of 1999 increased $33.1 million, or 20.9%,
to $191.2 million. This increase was primarily attributable to incremental
revenue from the acquisitions referred to above within the railroad group.
Increased sales volumes in the railroad group also refect a strong original
equipment manufacturer market for freight cars, with approximately 21,600
freight cars delivered in the first quarter of 1999 compared to 17,800 in the
same period of 1998. In spite of this increase, we anticipate new freight car
deliveries in 1999 to be lower than that of 1998; however, railroad original
equipment manufacturer and aftermarket sales are expected to be reasonably
strong for the foreseeable future.
Gross Profit
Gross profit increased 18.8% to $61.5 million in the first quarter of 1999
compared to $51.8 million in the same period of 1998. Gross margin, as a
percentage of sales, was 32.2% compared to 32.8%. Gross margin is dependent on
a number of factors including sales volume and product mix. Incremental revenue
from recent acquisitions at lower margins as compared to our historical results
was the primary reason for the lower margins in the period-to-period
comparison. These lower margins were partially offset by favorable margins on
increased sales in the core railroad group operations.
Operating Expenses
<TABLE>
<CAPTION>
Three Months
Ended March 31
--------------------- Percent
1999 1998 Change
---------- ---------- -------
Dollars in thousands
<S> <C> <C> <C>
Selling and marketing............................. $ 8,503 $ 6,914 23.0%
General and administrative........................ 12,828 11,584 10.7
Engineering....................................... 8,907 6,438 38.4
Amortization...................................... 2,410 2,105 14.5
---------- ----------
Total........................................... $32,648 $27,041 20.7%
========== ==========
</TABLE>
Total operating expenses as a percentage of net sales were 17.1% in the
first quarter of 1999 and 1998. Total operating expenses increased $5.6 million
in the quarter-to-quarter comparison of which $5.2 million, or 93% of the
increase, related to operating expenses of the acquired businesses. Excluding
incremental revenues and operating expenses from businesses acquired in the
comparative period, operating expenses as a percentage of sales would have
decreased to approximately 16.1% due to costs incurred in 1998 to install
computer system upgrades that included Year 2000 compliant software. In
addition, during the fourth quarter 1998 and first quarter of 1999, we
completed the consolidation of several facilities as we integrated recently
acquired businesses into our core operations.
Income from Operations
Operating income totaled $28.9 million in the first quarter of 1999 compared
with $24.8 million in the first quarter of 1998. Higher operating income
resulted from higher sales volume and related higher gross profit. As
23
<PAGE>
a percentage of revenue, operating income was 15.1% and is substantially
consistent with that of the prior year. Favorable volume changes at relatively
stable operating margins in the railroad group was the primary reason for the
increase in operating income.
Interest and Other Expense
Interest expense totaled $9.1 million, an increase of $1.7 million in the
quarter-to-quarter comparison. The increase was primarily due to financing
costs of recent acquisitions, partially offset by debt repayments.
Income Taxes
The provision for income taxes on income before extraordinary items
increased to $7.3 million for the first quarter of 1999. The effective tax rate
declined to 37.25% in the current quarter from 38.0% a year ago, resulting from
additional benefits through our Foreign Sales Corporation and lower overall
effective state tax rates.
Fiscal Year 1998 Compared To
Fiscal Year 1997
Summary Results of Operations
<TABLE>
<CAPTION>
Year Ended
December 31
------------- Percent
1998 1997 Change
------ ----- -------
Dollars in
millions,
except per
share
<S> <C> <C> <C>
Gross profit margin..................................... 32.7% 33.0% nm
Income from operations.................................. $104.7 $90.0 16.3%
Income before extraordinary item........................ 45.0 37.3 20.6
Extraordinary item, net of tax.......................... 3.3 -- nm
Net income.............................................. 41.7 37.3 11.8
Diluted earnings per share, before extraordinary item... 1.75 1.42 20.7
Diluted earnings per share.............................. 1.62 1.42 14.1
</TABLE>
- --------
nm-not meaningful
Income before extraordinary item for 1998 increased $7.7 million, or 20.6%,
compared with the same period for 1997. Because of the $3.3 million
extraordinary charge to write-off certain previously capitalized debt issuance
costs, net income increased only $4.4 million, compared to 1997. Diluted
earnings per share before extraordinary item increased 20.7% to $1.75 and
diluted earnings per share increased 14.1% to $1.62. Income from operations
increased in the comparison primarily due to revenue growth and related gross
profit.
A number of events have occurred over the comparative period that impacted
the company's results of operations and financial condition including:
. In 1997 and 1998, we completed several acquisitions that complement and
enhance the mix of existing products and markets. Acquisitions completed
during this timeframe were Rockwell Railroad Electronics, Comet,
Lokring, Hadady, RFS (E), Sloan Valve Company, HP s.r.l, Stone Safety
Services Corporation and Stone U.K. Limited, and Thermo King
Corporation. See "Business." Aggregate incremental revenues from all of
the above acquisitions were $63.7 million in 1998.
. In June 1998, we refinanced our credit agreement and subsequently
amended the agreement in October 1998. This resulted in a write off of
previously deferred financing costs of approximately $3.3 million, net
of tax ($.13 per share), which has been reported as an extraordinary
item.
. In March 1997, we repurchased 4 million shares of our common stock held
by a major shareholder for $44 million plus $2 million in related fees.
24
<PAGE>
Net Sales
The following table sets forth, for the period indicated, our net sales by
business segment:
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------
1998 1997
---------- ----------
Dollars in thousands
<S> <C> <C>
Railroad group............................................ $ 388,797 $ 310,295
Transit group............................................. 211,801 189,541
Molded products group..................................... 70,311 64,605
---------- ----------
Net sales............................................... $ 670,909 $ 564,441
========== ==========
</TABLE>
Net sales for 1998 increased $106.5 million, or 18.9%, to $670.9 million.
This increase was primarily attributable to incremental revenue in 1998 of
approximately $43.2 million from the acquisitions referred to above within the
railroad group. Increased sales volumes in the railroad group also reflect a
strong market for freight cars sold to original equipment manufacturers, with
approximately 76,000 freight cars delivered in 1998 compared to 50,000 in 1997.
These increases were partially offset by lower sales in the electronics portion
of the railroad group, where in 1997 product sales benefited from a federal
mandate that certain monitoring equipment be installed in trains by July 1997.
Incremental revenue in 1998 for the acquisitions referred to above, of
approximately $20.5 million, was the primary reason for the increase in
revenues in the transit group. We anticipate new freight car deliveries in 1999
to be slightly lower than that of 1998, however, railroad original equipment
manufacturers and after-market sales are expected to be reasonably strong for
the foreseeable future.
Gross Profit
Gross profit increased 17.8% to $219.2 million in 1998 compared to $186.1
million in 1997. Gross margin, as a percentage of sales, was 32.7% as compared
to 33.0%. Gross margin is dependent on a number of factors including sales
volume and product mix. Incremental revenue from recent acquisitions at lower
margins as compared to our historical results, was the primary reason for the
lower margins in the period-to-period comparison. These lower margins were
partially offset by favorable margins on increased sales in the railroad and
molded product groups.
Operating Expenses
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------Percent
1998 1997 Change
---------- -----------------
Dollars in thousands
<S> <C> <C> <C>
Selling and marketing.............................. $ 30,711 $ 25,364 21.1%
General and administrative......................... 45,337 38,153 18.8
Engineering........................................ 30,436 24,386 24.8
Amortization....................................... 8,029 8,240 (2.6)
---------- --------- ----
Total............................................ $ 114,513 $ 96,143 19.1%
========== ========= ====
</TABLE>
Total operating expenses as a percentage of net sales were 17.1% in 1998
compared with 17.0% in 1997. Total operating expenses increased in 1998 by
$18.4 million in the period-to-period comparison. Incremental expenses from
acquired businesses totaled $10.2 million or 55% of the increase. In addition,
higher operating expenses reflect costs associated with computer system
upgrades which includes Year 2000 compliant computer software of approximately
$3.5 million and additional engineering efforts associated with new product
development. We anticipate cost savings in 1999 from the consolidation of
several facilities and a related net reduction of employees as recently
acquired businesses are integrated into our core operations.
25
<PAGE>
Income from Operations
Operating income totaled $104.7 million in 1998 compared with $90.0 million
in 1997. Higher operating income results from higher sales volume and related
higher gross profit. As a percentage of revenue, operating income was 15.6% and
is substantially consistent with that of the prior year. Favorable volume
changes in the railroad and the molded products groups were partially offset by
lower profits, as a percentage of sales, in the transit group.
Interest and Other Expense
Interest expense increased $1.5 million to $31.2 million during 1998,
primarily due to financing costs of recent acquisitions, partially offset by
debt repayments.
Other expense for 1998 totaled $0.9 million primarily reflecting the effects
of changes in foreign currency exchange rates associated with a loan to a
wholly-owned subsidiary. The effect of subsequent changes in exchange rates
will be reflected in future periods.
Income Taxes
The provision for income taxes increased $4.2 million to $27.6 million in
1998 compared with 1997. The effective tax rate declined to 38% in 1998 from
38.5% a year ago, resulting from additional benefits through our foreign sales
corporation and lower overall effective state tax rates.
Fiscal Year 1997 Compared To
Fiscal Year 1996
Summary Results of Operations
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------- Percent
1997 1996 Change
---------- ---------- -------
Dollars in millions,
except per share
<S> <C> <C> <C>
Net sales....................................... $ 564.4 $ 453.5 24.5%
Gross profit margin............................. 33.0% 33.8% nm
Income from operations.......................... $ 90.0 $ 79.7 12.9
Net income...................................... 37.3 32.7 14.1
Diluted earnings per share...................... 1.42 1.15 23.5
</TABLE>
- --------
nm-not meaningful
Net income for 1997 increased $4.6 million, or 14.1% compared with 1996.
Diluted earnings per share increased 23.5% to $1.42 per diluted share. The
higher earnings per share reflects the benefits associated with acquisitions
and new products and the 4 million share repurchase. Income from operations
increased in the comparison primarily due to revenue growth and related gross
profit.
Net Sales
The following table sets forth, for the period indicated, our net sales by
business segment:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------
1997 1996
----------- -----------
Dollars in thousands
<S> <C> <C>
Railway group........................................... $ 310,295 $ 294,021
Transit group........................................... 189,541 100,902
Molded products group................................... 64,605 58,589
----------- -----------
Net sales............................................. $ 564,441 $ 453,512
=========== ===========
</TABLE>
26
<PAGE>
Net sales for the year ended December 31, 1997 increased $110.9 million, or
24.5%, to $564.4 million. The transit group acquisitions of Vapor, Stone,
Thermo King and HP contributed $85.5 million of the increase. In addition,
increased volumes in all groups 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 lower margins of the recently acquired businesses
was the primary factor for the change.
Operating Expenses
<TABLE>
<CAPTION>
Year Ended
December 31
--------------------- Percent
1997 1996 Change
---------- ---------- -------
Dollars in thousands
<S> <C> <C> <C>
Selling and marketing............................. $ 25,364 $ 18,643 36.1%
General and administrative........................ 38,153 28,890 32.1
Engineering....................................... 24,386 18,244 33.7
Amortization...................................... 8,240 7,854 4.9
---------- ----------
Total........................................... $ 96,143 $ 73,631 30.6%
========== ==========
</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 in 1997 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 earlier. 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.
Liquidity and Capital Resources
Liquidity is provided primarily by operating cash flow and borrowings under
our credit facilities.
Operating cash flow decreased $6.6 million in the first quarter of 1999 as
compared to the first quarter of 1998 as a result of a 27% increase in working
capital since December 31, 1998. These changes are primarily due to higher
accounts receivable and inventory levels related to sales growth and reductions
to balances on open accounts with vendors. In addition, inventory levels have
increased within the transit group as production continues for future product
deliveries related to the Metropolitan Transit Authority/New York City Transit
project. Deliveries are expected to commence in the second half of 1999.
27
<PAGE>
Gross capital expenditures were $6.5 million, $5.3 million, $29.0 million,
$29.6 million and $13.2 million in the first quarters of 1999 and 1998, and in
the years 1998, 1997 and 1996, respectively. The majority of capital
expenditures for these periods relates to incurring costs for upgrades to
existing equipment, replacement of antiquated equipment and purchases of new
equipment due to expansion of WABCO's operations, where we believe overall cost
savings can be achieved through increased efficiencies. We expect 1999 capital
expenditures for equipment purchased for similar purposes to approximate $25 to
$30 million.
In 1998, 1997 and 1996, our cash flow from operating activities was
approximately $42 million, $67 million and $59 million, respectively. The
decrease in operating cash flow from 1997 to 1998 was primarily related to an
increase in working capital due to higher accounts receivables and increased
inventory levels associated with increased sales growth and acquired businesses
with large working capital requirements. These additional working capital
requirements resulted in less operating cash flow for debt repayments in 1998
as compared to 1997. Our acquisitions of businesses also resulted in increased
borrowings.
In 1998, we completed the Rockwell, Comet, Lokring, RFS(E) and Hadady
acquisitions for an aggregate purchase price of $112.9 million consisting of
debt and cash. In 1997, we completed the Stone, Thermo King, Sloan and HP
acquisitions for an aggregate purchase price of $16.0 million. In 1996, we
acquired Vapor Group and Futuris Industrial Products Pty. Ltd for an aggregate
purchase price of $78.9 million. See "Business." These transactions utilized
borrowings for the purchase price. Also, in 1995, we acquired Pulse for $54.9
million, consisting of $20 million in bank borrowings, a $17.0 million note
payable and the company's common stock valued at $17.9 million at the time of
the acquisition.
In the quarter ending March 31, 1999, we issued $75 million of additional
Senior Notes and used the proceeds to repay amounts outstanding on certain term
debt and the balance to repay a portion of our revolving credit facility,
thereby increasing amounts available under the credit agreement. See below for
additional information.
In March 1997, the repurchase of our stock held by Scandanavian Incentive
Holding B.V. occurred. See "Business." We financed the 4 million share
repurchase that was part of the SIH sale through borrowings under our credit
facility.
The following table sets forth our outstanding indebtedness and average
interest rates at March 31, 1999. The revolving credit note and term loan
interest rates are variable and dependent on market conditions. Interest on the
Pulse note can vary with changes to prime.
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
-------- -----------
Dollars in thousands
<S> <C> <C>
Credit Agreement, matures 12/2003
Revolving credit, 6.3%................................... $ 73,600 $105,555
Term loan, 6.3%.......................................... 202,500 202,500
9 3/8% Senior notes due 6/2005............................. 175,000 100,000
Unsecured credit facility.................................. -- 30,000
Pulse note, 9.5%, due 1/2004............................... 16,990 16,990
Comet notes................................................ -- 10,200
Other...................................................... 2,400 2,572
-------- --------
Total.................................................... $470,490 $467,817
======== ========
</TABLE>
As of March 31, 1999 and December 31, 1998, we had $20,264 and $30,579,
respectively, of debt that is due to be repaid within one year.
28
<PAGE>
Credit Agreement
The credit agreement provides for an aggregate credit facility of $350
million, consisting of up to $170 million of June 1998 term loans, up to $40
million of September 1998 term loans, and up to $140 million of revolving
loans. At March 31, 1999, amounts available under the revolving credit facility
increased to $44.3 million.
In January 1999, we completed the private placement of $75 million of old
notes with an effective rate of 8.5% which mature in June 2005. The January
issuance improved our financial liquidity by:
. using a portion of the proceeds to repay $30 million of debt associated
with the Rockwell Railroad Electronics acquisition that bore interest at
9.56%, and;
. using a portion of the proceeds to repay variable-rate revolving credit
borrowings thereby increasing amounts available under the revolving
credit facility.
Credit agreement borrowings bear variable interest rates indexed to common
indexes such as LIBOR. The weighted-average contractual interest rate on credit
agreement borrowings was approximately 6.7% on March 31, 1999. To reduce the
impact of interest rate changes on a portion of this variable-rate debt, we
entered into interest rate swaps which effectively convert a portion of the
debt from variable to fixed-rate borrowings during the term of the swap
contracts. On March 31, 1999, the notional value of interest rate swaps
outstanding totaled $50 million and effectively changed our interest rate from
a variable rate to a fixed rate of approximately 7.1%. The interest rate swap
agreements mature in 2000 and 2001.
Principal repayments of term loan borrowings are due in semi-annual
installments until maturity in December 2003. See Note 5 to "Notes to
Consolidated Financial Statements".
The credit agreement limits us with respect to declaring or making cash
dividend payments and prohibits us from declaring or making other distributions
whether in cash, property, securities or a combination thereof, with respect to
any shares of our capital stock subject to exceptions, including an exception
pursuant to which we will be permitted to pay cash dividends on our common
stock in any fiscal year in an aggregate amount up to $15 million minus the
aggregate amount of prepayments of the Pulse note during such fiscal year so
long as no default in the payment of interest or fees has occurred thereunder.
The credit agreement contains various other covenants and restrictions
including, without limitation, the following:
. a limitation on the incurrence of additional indebtedness;
. a limitation on mergers, consolidations and sales of assets and
acquisitions, other than mergers and consolidations with certain
subsidiaries, sales of assets in the ordinary course of business, and
acquisitions for which the consideration paid by WABCO does not exceed
$50 million individually or $150 million in the aggregate;
. a limitation on liens;
. a limitation on sale and leasebacks;
. a limitation on investments, loans and advances;
. a limitation on debt payments;
. a limitation on capital expenditures;
. a minimum interest expense coverage ratio; and
. a maximum leverage ratio.
All debt incurred under the credit agreement is secured by substantially all
of our and our domestic subsidiaries' assets and is guaranteed by our domestic
subsidiaries.
The credit agreement contains customary events of default, including payment
defaults, failure of representations to be true in any material respect,
covenant defaults, defaults with respect to other indebtedness of the company,
bankruptcy, judgments against us, ERISA defaults and "change of control" of
WABCO.
29
<PAGE>
9 3/8% Senior Notes Due June 2005
In June 1995 we issued $100 million of 9 3/8% Senior Notes due June 2005. In
January 1999, we issued the old notes at a premium resulting in an effective
rate of 8.5%. As a result of the issuance and payoff of the unsecured credit
facility, we wrote off previously capitalized debt issuance costs of
approximately $.02 per diluted share in the first quarter of 1999.
The terms of the existing $100 million notes, the old notes and the new
notes are substantially the same, and they were issued pursuant to indentures
that are substantially the same. The old notes and new notes bear interest at
the rate of 9 3/8% and mature in June 2005. The net proceeds of the existing
notes were used to prepay term loans outstanding under the then existing credit
agreement. The net proceeds of the old notes were used to repay the unsecured
credit facility and to reduce revolving credit borrowings.
The notes are our senior unsecured obligations and rank pari passu in right
of payment with all existing and future indebtedness under:
. capitalized lease obligations;
. the credit agreement;
. our indebtedness for money borrowed; and
. indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which we are responsible or liable
unless, in the case of this clause and the immediately preceding clause,
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 indentures pursuant to which the existing notes, the old notes and the
new notes were issued contain restrictive covenants which, among other things,
limit our and certain of our subsidiaries' ability 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
indenture also restricts, subject to exceptions, our ability to consolidate and
merge with, or to transfer all or substantially all of its assets to, another
person.
Unsecured Credit Facility
In October 1998, we obtained a $30 million unsecured credit facility from a
group of commercial banks for the purpose of financing the acquisition of
Rockwell Railroad Electronics. At December 31, 1998, the interest rate on the
note was 9.75% per annum. In January 1999, this facility was repaid with
proceeds of the offering of the notes.
Pulse Note
As partial payment for the Pulse acquisition, we issued a $17 million note
due January 31, 2004. Interest is payable semiannually and accrues at 9.5%
until February 1, 2001; 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%, with a maximum adjustment of 2%.
Comet Notes
In connection with the Comet acquisition, we issued notes totaling $12.2
million, of which unsecured notes totaling $6.2 million were delivered by us
and a note in the amount of $6 million was delivered by a subsidiary and
secured by the acquired assets. The notes bore interest at the rate of 10% per
annum and were scheduled to mature on October 8, 1999. These notes were repaid
in January 1999.
30
<PAGE>
ESOP
In connection with the establishment of the ESOP, we made a $140 million
loan to the ESOP, which was used to purchase 9,336,000 shares of our
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.
Our contributions to the ESOP will be used to repay the ESOP loan's annual debt
service requirements of approximately $12 million. We are obligated to
contribute amounts sufficient to repay the ESOP loan. The ESOP uses such
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. The net
effect of the ESOP is that our common stock is allocated to employees in lieu
of 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 available 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 for the foreseeable future, including 1999.
Nevertheless, we will remain leveraged to a significant extent and our debt
service obligations will continue to be substantial. Our debt requires the
dedication of a substantial portion of future cash flows to the payment of
principal and interest on indebtedness, thereby reducing funds available for
capital expenditures and future business opportunities that we believe are
available. We believe that cash flow and liquidity will be sufficient to meet
our debt service requirements. If our sources of funds were to fail to satisfy
our cash requirements, we may need to refinance our existing debt or obtain
additional financing. We cannot assure that such new financing alternatives
would be available. Even if available, such new financing would likely be more
costly and burdensome than the debt agreements currently in place. We intend to
reduce our indebtedness in 1999 through generating operating income and by
reducing working capital requirements and other measures.
Effects of Year 2000
We have information system improvement initiatives in process that include
both new computer hardware and software applications. The new system is
substantially operational and is Year 2000 compliant. The estimated cost of the
project is expected to be in the $8 to $10 million range with the majority of
costs, approximately $8 million, previously incurred. The majority of the
expenditures incurred for hardware and purchased software related to this
project has been capitalized and is amortized over their estimated useful
lives. Other costs, such as training and advisory consulting, are expensed as
incurred. These expenditures are not expected to have a significant impact on
our future results of operations or financial condition.
We have identified other equipment that we use in our operations that have
non-information system characteristics and have embedded technology components,
such as those items with internal clocks. We will need to replace this type of
equipment but do not believe a possible Year 2000 failure will have a
significant impact on our operations. The estimated cost of replacement
equipment is not considered significant.
We have received written assurances from some of our suppliers and customers
and other providers acknowledging Year 2000 issues and stating their present
intention to be compliant; however, not all customers, vendors and providers
have provided such assurances.
We will continue to evaluate our information technology applications, as
well as those of our suppliers, regularly, and based on such evaluation, will
revise our Year 2000 readiness planning accordingly. We have been evaluating
our Year 2000 preparedness in a number of areas, including our information
technology infrastructure, external resources, physical plant and production
facilities, equipment and machinery, products and inventory.
31
<PAGE>
In the evaluation and prioritization of Year 2000 concerns, we seek to
develop potential solutions to the Year 2000 issues identified in our planning,
consider these solutions in light of our other information technology and
business priorities, prioritize the various remediation tasks, and develop an
implementation schedule. Identified problems are corrected as soon as
practicable after identification.
We are in the process of developing contingency plans and actions for Year
2000 issues related to both internal and external systems. As part of this
planning, we are evaluating the incremental cost of the contingency
alternatives as compared to the perceived level of risk for Year 2000 problems.
In some cases we have determined that the perceived level of risk does not
justify the cost of the contingency alternative. Contingency plans involve
consideration of a number of possible actions, including, to the extent
necessary or justified, the selection of alternative service providers and
adjustments to staffing strategies, as ordering and billing procedures could be
done manually. We plan to continue developing and modifying our contingency
plans throughout 1999 as we monitor and evaluate the progress of our internal
and external Year 2000 compliance program.
With regard to contingency planning, as noted, we are assessing the Year
2000 readiness of our key suppliers, distributors, customers and service
providers. Toward that objective, since we have not received assurances from
all of our suppliers and other service providers that they will be compliant,
we are evaluating the risks to us that the failure of others to be Year 2000
ready would cause a material disruption to, or have a material effect on, our
financial condition, business or operations. Although we have not determined
our costs to handle Year 2000 failures by our third party suppliers or
customers, we presently believe such costs will not be material. Due to the
nature of our business, we do not anticipate that Year 2000 problems at our
suppliers or customers will generate many problems with the process such
suppliers or customers must undertake in order to provide products to us or
purchase products from us, as the case may be. For example, our critical
supplies include bar stock and scrap metal, which are commodity materials which
can be obtained from different sources. Further, these types of industries are
not expected to be severely hampered by Year 2000 issues. Rather, if anything,
we expect that Year 2000 problems will affect the ability of our suppliers or
customers to communicate with us in a manner in which we can efficiently obtain
the necessary supplies or take customer orders. We have attempted to address
these Year 2000 concerns by preparing to accept paper copy orders from
customers and enter those orders into our own computer system, if our
customers' computers are unable to communicate with our computers. Our ordering
on the supply end is typically done by paper copy rather than computer, so it
should not be negatively impacted by Year 2000 issues. We are also considering
the advisability of augmenting our inventories of certain raw materials and
finished products, securing additional sources for certain supplies and
services, arranging for back-up utilities, and exploring the use of manual
paper flow to handle both the distribution and sales channels, among other
things.
Our products are generally sold with a limited warranty for defects. We have
reviewed our products currently in use by our customers or being sold and do
not believe that there will be material increases in warranty or liability
claims arising out of year 2000 non-compliance. However, a material increase in
such claims could have a material adverse effect on our financial condition,
future results of operations and liquidity. If large scale systems failures
occur, it could have a significant adverse effect on our financial condition,
future results of operations and liquidity.
Effects of Inflation; Seasonality
General price inflation has not had a material impact on our results of
operations. Some of our labor contracts contain negotiated salary and benefit
increases and others contain cost of living adjustment clauses that would cause
our cost automatically to increase if inflation were to become significant. Our
business is not seasonal, although the third quarter results generally tend to
be slightly lower than other quarters, reflecting vacation and down time at our
major customers during this period.
32
<PAGE>
Conversion to the Euro Currency
On January 1, 1999, certain members of the European Union established fixed
conversion rates between their existing currencies and the European Union's
common currency, known as the "Euro". We conduct business in member countries.
The transition period for the introduction of the Euro is from January 1, 1999
through June 30, 2002. We are assessing the issues involved with the
introduction of the Euro; however, it does not expect conversion to the Euro to
have a material impact on its operations or financial results. In all
probability, the effect will be positive as pricing between countries and
foreign divisions will be more predictable.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This Statement establishes accounting and reporting
standards requiring that every derivative instrument be measured at its fair
value and the changes in fair value be recorded currently in earnings unless
specific hedge accounting criteria are met. Statement No. 133 is effective for
fiscal years beginning after June 15, 1999 and, accordingly, we anticipate
adopting this standard January 1, 2000. Management continues to evaluate the
impact this standard will have on results of operations and financial
condition.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
In the ordinary course of business, we are exposed to risks that increases
in interest rates may adversely affect funding costs associated with $246
million of variable-rate debt, (considering the effects of interest rate swaps,
which represents 52% of total long-term debt at March 31, 1999. Management has
entered into pay-fixed, receive-variable interest rate swap contracts that
partially mitigate the impact on variable-rate debt of interest rate increases.
See Note 5 to the "Notes to Consolidated Financial Statements". At March 31,
1999, an instantaneous 100 basis point increase in interest rates would reduce
our earnings by $1.6 million, net of tax, assuming no additional intervention
strategies by management.
Foreign Currency Exchange Risk
We routinely enter into several types of financial instruments for the
purpose of managing our exposure to foreign currency exchange rate fluctuations
in countries in which we have significant operations. As of March 31, 1999, we
had no significant instruments outstanding.
We are also subject to risks associated with changes in foreign currency
exchange rates to the extent its operations are conducted in currencies other
than the U.S. dollar. At March 31, 1999, approximately 74% of our net sales are
in the United States, 12% in Canada and 14% in other international locations,
primarily Europe.
33
<PAGE>
BUSINESS
Westinghouse Air Brake Company was formed in 1990 through the acquisition of
the railway products group of American Standard Inc. We believe that we are
North America's largest manufacturer of value-added equipment for locomotives,
railway freight cars and passenger transit vehicles. Our 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 significantly, in line with our strategy to
expand our business outside North America.
Our customer base consists of freight transportation companies, locomotive
and freight car original equipment manufacturers, transit car builders and
public transit systems.
We believe that we maintain a market share in North America in excess of 50%
for our primary braking related equipment and a significant market share in
North America for our other principal products. We also sell our products in
Europe, Africa, Australia, South America and Asia.
Export sales from our United States operations were $60.7 million, $57.3
million and $61.5 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The following data reflects income from operations by major
geographic area attributed to our operations within each of the following
regions.
<TABLE>
<CAPTION>
Income from Operations
------------------------
Year ended December 31,
------------------------
1998 1997 1996
-------- ------- -------
In thousands
<S> <C> <C> <C>
United States.......................................... $ 76,873 $76,208 $67,881
Canada................................................. 20,364 9,918 8,827
Other international.................................... 7,429 3,849 3,010
-------- ------- -------
Total................................................ $104,666 $89,975 $79,718
======== ======= =======
</TABLE>
Our major products are intended to enhance safety, improve productivity and
reduce maintenance costs for our customers. Our major product offerings include
electronic controls and monitors, air brakes, couplers, door controls, draft
gears and brake shoes. We aggressively pursue technological advances with
respect to both new product development and product enhancements.
We have completed a number of strategic acquisitions since 1995. The
following is a summary of these acquisitions:
. In October 1998, we purchased Rockwell Railroad Electronics, the
railroad electronics business, from Rockwell Collins, Inc. for a total
purchase price of approximately $80.0 million.
. In October 1998, we purchased the air brake repair business of Comet
Industries, Inc. for a total purchase price of approximately $13.2
million.
. In July 1998, we acquired the assets of Lokring Corporation for a total
purchase price of $5.1 million. The acquired products include a fitting
that connects non-welded joints.
. In April 1998, we completed the acquisition of the transit coupler
product line of Hadady Corporation for a total purchase price of $4.6
million, which included amounts for designs and drawings.
. In April 1998, we acquired the railway repair business in the United
Kingdom of RFS (E) Limited for a total purchase price of approximately
$10.0 million.
. In October 1997, we 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.
34
<PAGE>
. In July 1997, we acquired 100% of the stock of HP s.r.l. 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 May 1997, we purchased Stone Safety Services Corporation and Stone
U.K. Limited, thus acquiring 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. In connection
with this acquisition, in June 1997, we acquired the heavy rail air
conditioning business of Thermo King Corporation. The aggregate purchase
price for these acquisitions was approximately $7.7 million.
. In September 1996, we acquired the Vapor Group, a passenger transit door
manufacturer in the United States and Europe, for $63.9 million.
. In January 1996, we acquired Futuris Industrial Products Pty. Ltd., an
Australian friction products manufacturer, for approximately $15.0
million.
. In January 1995, we acquired Pulse Electronics, a privately held
manufacturer of end-of-train monitors and other electronic products for
the railway industry for $54.9 million.
Also, in March 1997, an agreement was reached with one of our major
shareholders, Scandinavian Incentive Holding B.V., whereby we repurchased 4
million shares of our common stock held by SIH for $46 million, including fees.
In conjunction with this transaction, SIH also sold its remaining 6 million
shares of our common stock to Vestar Equity, Harvard Private Capital Holdings,
American Industrial Partners and certain members of senior management.
Our Products
We have significant product and service lines within each of our three
product groups. Our new product development programs also strengthen our sales
both to the original equipment manufacturer and to end-users, including
operators of rail vehicles such as railroads, transit authorities, utilities
and leasing companies. We believe that we have a competitive advantage in our
markets based on the range of our products, as well as the quality and
competitive pricing associated with our products and our ability to offer
support to purchasers through our service and upgrade centers. Our products and
services, listed by our three product groups, include:
. Our railroad group, which accounted for 58% of our revenues for the year
ended December 31, 1998
. Freight Car--We manufacture, sell and service air brake equipment,
brake valves, draft gears, hand brakes and slack adjusters for
freight cars.
. Locomotive--We manufacture, sell and service air brake equipment,
compressors, air dryers, slack adjusters and brake cylinders for
locomotives.
. Electronics--We manufacture, sell and service high-quality
electronics for the railroads. These include monitoring products,
control equipment and braking product for locomotives and freight
cars. We believe that we are an industry leader in insulating
electronic components to protect them from severe conditions. Such
conditions include extreme temperatures and high shock/vibration
environments. Our acquisition of Rockwell Railroad Electronics on
October 5, 1998 significantly strengthened our capabilities in this
area by expanding our freight electronic air brake capability and by
increasing our electronics product line, which now include display
and positioning systems, data communications and monitoring products
for locomotives.
. Our transit group, which accounted for 32% of our revenues for the year
ended December 31, 1998
. Passenger Transit--We manufacture, sell and service electronic brake
equipment, pneumatic control equipment, air compressors, tread
brakes and disc brakes, couples, collection equipment, overhead
electrification, monitoring systems, wheels, climate control and
door equipment and other components for passenger transit vehicles.
We believe that our ability to manufacture a wide range of these
integrated products provides us with a competitive advantage in the
35
<PAGE>
passenger transit market. For example, in 1997, we received contracts
valued at $150 million to provide equipment for 1,080 new passenger
transit cars for the Metropolitan Transportation Authority/New York
City Transit. We expect deliveries to commence in the second half of
1999.
. Our molded products group, which accounted for 10% of our revenues for
the year ended December 31, 1998
. Friction and Other Products and Services--We manufacture and sell
brake shoes, disc brake pads and other rubber products.
Approximately half of our net sales have historically been derived from
products sold directly to original equipment manufacturers of locomotives,
railway freight cars and passenger transit vehicles. The balance of our net
sales is generated from the sale of replacement parts, repair services and
upgrade work purchased by end-users. We believe that our substantial installed
base of products designed for the original equipment manufacturer is a
significant competitive advantage in providing products and services to the
end-user as well. We also believe that end-users tend to purchase our
replacement parts due to the high quality of our products and services. We
expect our replacement, repair and upgrade sales for end-users to increase as
a result of increased utilization and aging of rail transport equipment, as
well as technological improvements of our products. As a result of our
substantial sales to end-users, we believe that we are less adversely affected
by fluctuations in domestic demand for new railroad vehicles than our
competitors because of our substantial sales to end-users.
Industry Overview
Rail traffic, in terms of both freight and passengers, is a key factor
underlying the demand for our products. Government investment in public rail
transportation also plays a significant role. Additionally, railroads
continuously seek to increase the efficiency and productivity of their rail
operations in order to improve profitability. We design an array of products
to meet this goal and believe that through our products and service offerings,
we are well positioned to contribute to and benefit from the railroad
industry's drive to improve efficiency and productivity. For example, our end
of train device, automated single car tester and electro-pneumatic brake all
provide significant cost saving opportunities for our customers.
In connection with the growth of rail traffic, we note that demand for
North American locomotive and freight car products remain strong due to:
. continued growth in revenue ton-miles in the United States, defined as
weight times distance traveled by Class 1 railroads, of 1,376 billion in
1998 as compared to 1,067 billion in 1992;
. continued strong delivery of new freight cars:
. aging freight car fleet, with an average age of 17.8 years in 1998 with
approximately 50% over 17 years old;
. the desire of railroads to gain efficiency improvements from larger,
more efficient aluminum cars;
. aging locomotive fleet, with more than 52% of the fleet over 17 years
old; and
. newer locomotive designs, which provide for more powerful and efficient
locomotives which, in turn, provide these locomotives with greater
pulling power and the ability to haul more tonnage per locomotive.
The following drive the demand for products related to passenger transit
products:
. replacement building and/or expansion programs by transit authorities;
these programs are funded in part by federal and state governments,
including the recently authorized Intermodal Surface Transportation and
Efficiency Act, providing up to $42 billion to be made available,
subject to appropriations, for transit-related infrastructure between
1998 and 2003; and
. aging United States passenger transit car fleet, which had an average
age of 21.6 years in 1997 and an average age of 19.3 years in 1995.
36
<PAGE>
Strategy
We are committed to enhancing our position as a producer of value-added
equipment for the rail industry and we will continue to seek ways to increase
our content per rail vehicle. Building on our leading market share, our strong
presence in the end-user market and our technological leadership, we are
pursuing a strategy involving five key elements.
We will continue to expand technology-driven new product development and
product lines.
. We plan to continue to emphasize research and development to create new
and improved products to increase our market share and profitability.
. We are focusing on technological advances, especially in the areas of
electronics, braking products and other on-board systems as a means of
new product growth.
We will continue to increase our repair and upgrade services.
. By continuing to leverage our broad product offering and our large
installed product base, we intend to expand our presence in the repair
and upgrade services market.
. We believe that our services are more cost effective than, and that we
offer product upgrades not available in, most independent repair shops.
. To capitalize on the growing aftermarket, we are developing and
marketing retrofit and upgrade products, which serve as a platform for
offering additional installation, replacement parts and repair services
to our customers.
We intend to grow our international presence.
. We believe that international sales represent a significant opportunity
for further growth.
. Our net sales outside of the United States and Canada comprised
approximately 17% of our net sales for the year ended December 31, 1998,
compared to 4% in 1994. We intend to increase our existing international
sales by:
.acquisitions;
.direct sales of products through or subsidiaries and licensees; and
.forming joint ventures with railway suppliers having a strong presence
in their local markets.
We will pursue strategic acquisitions.
. We intend to pursue strategic acquisitions that expand our product
lines, increase our aftermarket business, increase our international
sales and increase our technical capabilities.
. An integral component of our acquisition strategy is to realize revenue
growth and cost savings through the integration of the acquired
business.
We will continue to improve our manufacturing efficiency and quality.
We intend to retain what we consider to be a leading position as a low cost
producer in the industry while maintaining world-class product quality,
technology and customer responsiveness. We are dedicated to utilizing our
Performance System, which includes continuous improvement across all phases of
our business through:
. our total Quality Improvement Program, which is an ongoing program to
continuously improve our manufacturing processes by encouraging feedback
from work "teams," continuing worker training, statistical engineering,
monitoring systems and evaluation of the processes; and
. a continuing emphasis on customer satisfaction and enterprise value.
37
<PAGE>
Each of these efforts enables us to streamline processes, improve product
quality and customer satisfaction, reduce product cycle times and respond more
rapidly to market developments. We believe that our management and employees
are offered appropriate incentives to carry out our strategy. For example,
management currently owns approximately 31% of our common stock and our
employees own common stock through the ESOP.
Backlog
As of April 30, 1999, we had a total backlog of firm orders with an
aggregate sales price of approximately $440.2 million, compared to $460.9
million as of December 31, 1998, $424.0 million as of April 30, 1998, and
$376.3 million as of December 31, 1997. Of the April 30, 1999 amount, we expect
to fill $138 million after fiscal year 1999. Also of that amount, $309.6
million was attributable to passenger transit products, including products for
cars deliverable to the MTA, and the balance was attributable to railway and
other products. Other than the transit market, backlog is not a significant
component of our business, and management believes it is not an important
indicator of future business performance. Because of our quick turnaround time,
our locomotive and freight customers tend to order our products on an as-needed
basis. With respect to manufacturer passenger transit products, there is a
longer lead time for car deliveries and, accordingly, we carry a larger backlog
of orders. Our contracts are subject to standard industry cancellation
provisions, including cancellations on short notice or upon completion of
designated stages, including, without limitation, contracts relating to the
MTA. Substantial scope-of-work adjustments are common. For these and other
reasons, work in our backlog may be delayed or cancelled and backlog should not
be relied upon as an indicator of our future performance.
Engineering and Development
In furtherance of our strategy of using technology to develop new products,
we are actively engaged in a variety of engineering and development activities.
For the fiscal years ended December 31, 1998, 1997 and 1996, we incurred costs
of approximately $30.4 million, $24.4 million, and $18.2 million, respectively,
on product development and improvement activities, exclusive of manufacturing
support. Such expenditures represented 4.5%, 4.3%, and 4.0% of net sales for
the same periods, respectively. From time to time, we conduct specific research
projects in conjunction with universities, customers and other railroad product
suppliers.
Our engineering and development program is largely focused upon new braking
technologies, with an emphasis on the application of electronics to traditional
pneumatic equipment. Electronic actuation of braking has long been a part of
our 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 the major components of
both hard-wired and radio-activated braking equipment.
Intellectual Property
We have numerous U.S. patents, patent applications pending and trademarks as
well as foreign patents and trademarks throughout the world. We also rely on a
combination of trade secrets and other intellectual property laws,
nondisclosure agreements and other protective measures to establish and protect
our proprietary rights in our intellectual property.
Trademarks, among them the name WABCO, were acquired or licensed by us from
American Standard Inc. in 1990 pursuant to our acquisition of the North
American operations of the railway products group of American Standard.
We are a party, as licensor and licensee, to a variety of license
agreements. We do not believe that any single agreement, other than the SAB
license discussed in the following paragraph, is of material importance to our
business as a whole.
WABCO and SAB WABCO Holdings B.V. entered into a license agreement on
December 31, 1993, pursuant to which SAB WABCO granted us a license to the
intellectual property and know-how related to the
38
<PAGE>
manufacturing and marketing of certain disc brakes, tread brakes and low noise
and resilient wheel products. SAB WABCO is a Swedish corporation that was our
former affiliate, both companies having portions that were owned by the same
parent prior to 1990. Our company is authorized to manufacture and sell the
licensed products in North America, including to original equipment
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 us 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. We may, at our 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 that we develop. If we patent any such improvements, SAB
WABCO has the right to request the transfer of such patents upon payment of
reasonable compensation therefor; in such cases, we are entitled to a free,
nonexclusive license to use the patented product. We are 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 our recapitalization in January 1995, we agreed with SAB
WABCO:
. to use our respective best efforts to negotiate an agreement to
distribute each other's products,
. to explore the feasibility of a joint venture to expand into regions
where neither company is currently represented,
. that the SAB license will be amended to include additional disc brake
and tread brake technology,
. that SAB WABCO will in the future grant us a license for the manufacture
and sale of electronic brake equipment that it designs,
. that SAB WABCO will grant to us the right to purchase SAB WABCO's option
on 40% of the shares in SAB WABCO de Brasil, and
. that we 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
exceptions.
There is no assurance that we will reach agreement on issues relating to
future cooperation or that we will be able to acquire SAB WABCO. Accordingly,
WABCO and SAB WABCO could be competitors in international markets.
Customers
A few customers within each business segment represent a significant portion
of our net sales; however, no one customer represented more than 10% of our
consolidated revenues in 1998. The loss of a few key customers within our
railroad and transit group could have an adverse effect on our financial
condition, results of operations and liquidity.
Competition
We operate in a competitive marketplace. Price competition is strong and the
existence of cost conscious purchasers of a limited number has historically
limited our 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. Our principal competitors vary to
some extent across our principal product lines. However, within North America,
New York Air Brake Company, a subsidiary of the German air brake producer
Knorr-Bremse AG, is our principal overall original equipment manufacturers
competitor. Our competition for locomotive, freight and passenger transit
service and repair business is primarily from the railroads' and passenger
transit authorities' in-house operations, as well as New York Air Brake Company
and Knorr-Bremse.
39
<PAGE>
Employees
As of December 31, 1998, we employed approximately 4,300 employees,
approximately 1,200 of whom were unionized. The majority of employees subject
to collective bargaining agreements is within North America, and these
agreements are generally effective through 2001 and 2002.
The majority of non-union employees in the United States, approximately
2,000 employees, participate in the ESOP.
Regulation
In the course of our operations, we are subject to various regulations,
agencies and entities. In the United States, these include principally the
Federal Railroad Administration and the Association of American Railroads.
The Federal Railroad Association administers and enforces federal laws and
regulations relating to railroad safety. These regulations govern equipment and
safety standards for freight cars and other rail equipment used in interstate
commerce.
The Association of American Railroads 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
Association of American Railroads also certifies railcar builders and component
manufacturers that provide equipment for use on railroads in the United States.
New products generally must undergo Association of American Railroads testing
and approval processes.
As a result of these regulations and regulations in other countries in which
we derive our revenues, we must maintain certifications as a component
manufacturer and for products we sell.
Properties
The following table provides summary information with respect to the
principal facilities that we own or lease. We believe that our facilities and
equipment are in good condition and that, together with scheduled capital
improvements, are adequate for our present and immediately projected needs. The
Greensburg, PA, Germantown, MD, Niles, IL and Chicago, IL properties are
subject to mortgages to secure our indebtedness under the credit agreement. Our
corporate headquarters are located in the Wilmerding, PA site.
<TABLE>
<CAPTION>
Own/ Approximate
Location Primary Use Primary Segment Lease Square Feet
-------- ----------- --------------- ----- -----------
<S> <C> <C> <C> <C>
Domestic
- --------
Wilmerding, PA.......... Manufacturing/Service railroad group Own 850,000(1)
Chicago, IL............. Manufacturing railroad group Own 111,500
Germantown, MD.......... Manufacturing/Service railroad group Own 80,000
Kansas City, MO......... Service Center railroad group Lease 55,891
Bossier City, LA........ Service Center railroad group Lease 40,000
Carson City, NV......... Service Center railroad group Lease 22,000
Columbia, SC............ Service Center railroad group Lease 12,250
Chicago, IL............. Service Center railroad group Lease 19,200
Niles, IL............... Manufacturing transit group Own 355,300
Spartanburg, SC......... Manufacturing/Service transit group Lease 183,600
Plattsburgh, NY......... Manufacturing transit group Lease 64,000
Elmsford , NY........... Service Center transit group Lease 28,000
Sun Valley , CA......... Service Center transit group Lease 4,000
Atlanta, GA............. Service Center transit group Lease 1,200
Laurinburg, NC.......... Manufacturing molded products group Own 105,000
Greensburg, PA.......... Manufacturing molded products group Own 97,830
Ball Ground, GA......... Manufacturing molded products group Lease 30,000
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Own/ Approximate
Location Primary Use Primary Segment Lease Square Feet
-------- ----------- --------------- ----- -----------
<S> <C> <C> <C> <C>
International
Doncaster, UK........... Manufacturing/Service railroad group Own 330,000
Stoney Creek, Ontario... Manufacturing/Service railroad group Own 189,170
Wallaceburg, Ontario.... Foundry railroad group Own 127,555
Burlington, Ontario..... Manufacturing railroad group Own 46,209
Burlington, Ontario..... Manufacturing railroad group Own 28,165
Winnipeg, Manitoba...... Service Center railroad group Lease 20,000
Montreal, Quebec........ Manufacturing transit group Own 106,000
Sassuolo, Italy......... Manufacturing transit group Lease 30,000
Burton on Trent, UK..... Manufacturing transit group Lease 18,000
Etobicoke, Ontario...... Service Center transit group Lease 3,800
Wetherill Park, NSW..... Manufacturing molded products group Lease 73,141
Schweighouse, France.... Manufacturing molded products group Lease 30,000
Tottenham, VIC.......... Manufacturing molded products group Lease 26,910
</TABLE>
- --------
(1) Approximately 250,000 square feet are currently used in connection with our
operations. The balance of the space is leased to other companies.
The above information does not include facilities scheduled to be closed
during 1999. Leases on the above facilities are long-term and generally include
options to renew.
Environmental Matters
We are 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. We believe our operations currently comply in
all material respects with each of the various environmental laws and
regulations applicable to our business. We can not, however, be assured that
environmental requirements will not change in the future or that we will not
incur significant costs to comply with such requirements.
Under the terms of the purchase agreement and related documents for our 1990
acquisition of American Standard's railway products group, American Standard
indemnified WABCO for certain items including environmental claims. See "--
Legal Matters."
WABCO, 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. We believe that any cleanup
costs for which we may be held responsible are covered by the American Standard
indemnity discussed above, as well as an insurance policy for environmental
claims provided by Manville Corporation. Manville is the former 50% owner of
RFPC. Pursuant to the terms of the purchase agreement for the acquisition of
Manville's interest in RFPC, Rocky Mountain International Insurance, Ltd., an
affiliate of Manville, 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. Such policy is limited to environmental laws
in effect as of July 1992.
This insurance policy is our sole remedy 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. We have submitted claims and have received
recoveries under the policy for costs of cleanup imposed on or incurred by us
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
41
<PAGE>
policy provided by Manville Corporation, American Standard's indemnification
obligations described above cover 50% of RFPC-related claims.
We believe 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.
Legal Matters
We acquired the North American operations of the railway products group of
American Standard, Inc. in 1990. There are various pending claims by employees
of third parties who allege they were exposed to asbestos while handling
American Standard products manufactured prior to the acquisition, American
Standard discontinued the use of asbestos in its products in 1980. We believe
that pursuant to the asset purchase agreement by which we acquired the railway
products group, American Standard remains liable for all asbestos claims filed
against us. Although we believe that American Standard is willing and able to
fulfill its indemnity obligation, there can be no assurance that American
Standard will not dispute or become unable to perform its obligations. If this
occurs, we may be materially adversely affected.
With respect to asbestos claims against our friction products subsidiary,
RFPC, we believe that the American Standard asset purchase agreement requires
American Standard to indemnify WABCO and RFPC for 50% of any liability and
defense costs that RFPC may incur with respect to asbestos claims. The
remaining costs should be covered by insurance. American Standard's indemnity
obligation with respect to RFPC claims expires in March 2000 in connection with
claims that are initiated after that date. Again, although we believe that
American Standard is willing and able to fulfill its indemnity obligation with
respect to RFPC asbestos claims, there can be no assurance that American
Standard will not dispute or become unable to perform its obligations. If this
occurs, we may be materially adversely affected.
Finally, we believe that Mark IV Industries, Inc., the former owner of
another of our subsidiaries, Vapor Corporation, is obligated to indemnify WABCO
and Vapor for asbestos claims against Vapor. Although we believe that Mark IV
is willing and able to fulfill its indemnity obligation with respect to Vapor
asbestos claims, there can be no assurance that Mark IV will not dispute or
become unable to perform its obligations. If this occurs, we may be materially
adversely affected.
On February 12, 1999, GE Harris Railway Electronics, LLC and GE Harris
Railway Electronic Services, LLC brought suit against us in the U.S. federal
court, in the District of Delaware, for alleged patent infringement and unfair
competition related to a communications system used in some of our products. GE
Harris is seeking to prohibit WABCO from future infringement and is seeking an
unspecified amount of money damages to recover, in part, royalties. While this
lawsuit is in the early stages, we believe the technology developed and used by
us does not infringe on the GE Harris patents. We plan to contest the
infringement claims vigorously, in order to present alternative product lines
to customers in the rail industry.
From time to time we are involved in litigation relating to claims arising
out of our operations in the ordinary course of business. As of the date
hereof, we are involved in no litigation that we believe will have a material
adverse effect on our financial condition, results of operations, or liquidity.
We historically have not been required to pay any material liability claims.
Pending Merger with MotivePower
On June 2, 1999, we agreed to merge with and into MotivePower Industries,
Inc., a Pennsylvania corporation. The terms of the merger are set forth in an
Agreement and Plan of Merger dated as of June 2, 1999, between WABCO and
MotivePower. In the merger, each share of our common stock will be converted
into 1.3 shares of MotivePower's common stock, par value $0.01 per share. We
issued a joint press release with MotivePower announcing the execution of the
Merger Agreement on June 3, 1999.
42
<PAGE>
The merger is intended to constitute a tax-free reorganization under the
Internal Revenue Code of 1986, as amended, and will be accounted for as a
pooling of interests.
Consummation of the merger is subject to various conditions, including:
. approval and adoption of the merger agreement and the merger by the
shareholders of each of WABCO and MotivePower;
. the expiration or termination of applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the receipt of other approvals required under foreign laws;
. registration of the shares of MotivePower common stock to be issued in
the merger under the Securities Act of 1933, as amended;
. receipt of opinions of counsel as to the federal tax treatment of
aspects of the merger; and
. satisfaction of other conditions.
The merger agreement and the transactions contemplated thereby will be
submitted for adoption and approval at the meetings of the shareholders of each
company. Prior to such meetings, MotivePower will file a registration statement
with the SEC registering under the Securities Act the MotivePower common stock
to be issued in the merger. Such shares of MotivePower common stock will be
offered to our shareholders pursuant to a prospectus that will also serve as a
joint proxy statement for the shareholders' meetings.
We refer all note holders to the text of the merger agreement, a copy of
which was filed with our Form 8-K dated June 2, 1999 and which is incorporated
herein by reference, and to the registration statement which contains the joint
proxy statement/prospectus further describing the merger. See "Where You Can
Find More Information." The completion of the merger will affect, among other
things, our management structure and our indebtedness.
In connection with the execution of the merger agreement, both of companies
entered into a stock option agreement pursuant to which WABCO granted
MotivePower an option to purchase up to approximately 19% of the outstanding
shares of our common stock, before giving effect to the WABCO option,
exercisable in the circumstances specified in the WABCO option agreement.
MotivePower and WABCO also entered into another stock option agreement pursuant
to which MotivePower granted us an option to purchase up to approximately 19%
of the outstanding shares of MotivePower common stock, before giving effect to
the MotivePower option, exercisable in the circumstances specified in the
MotivePower option agreement.
We encourage noteholders to review the text of such agreements, copies of
which were filed as exhibits to WABCO's Form 8-K dated June 2, 1999 and which
are incorporated herein by reference. See "Where You Can Find More
Information."
43
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
combine the historical consolidated balance sheets and statements of income of
MotivePower and WABCO giving effect to the merger using the pooling of
interests method of accounting for a business combination.
We are providing the following information to aid you in your analysis of
the financial aspects of the merger. We derived this information from the
audited consolidated financial statements of MotivePower for the years ended
December 31, 1998, 1997 and 1996 and the unaudited consolidated financial
statements for the three months ended March 31, 1999 and 1998 and from the
audited consolidated financial statements of WABCO for the years ended December
31, 1998, 1997 and 1996 and the unaudited consolidated financial statements for
the three months ended March 31, 1999 and 1998. The information is only a
summary and you should read it in conjunction with our historical financial
statements and related notes contained in this prospectus and annual reports
and other information that have been filed with the SEC. See "Where You Can
Find More Information."
The unaudited pro forma condensed combined statements of income for the
years ended December 31, 1998, 1997 and 1996 and for the three months ended
March 31, 1999 and 1998 assume the merger was effected at the beginning of the
periods presented. The unaudited pro forma condensed combined balance sheet
gives effect to the merger as if it had occurred on March 31, 1999. The
accounting policies of MotivePower and WABCO are substantially comparable.
However, adjustments were made to conform the classification of amortization
expense and income taxes receivable in the unaudited pro forma condensed
combined financial statements.
The unaudited pro forma combined financial information is for illustrative
purposes only. The WABCO and MotivePower combined company may have performed
differently had they always been combined. The unaudited pro forma condensed
combined financial information may not be indicative of the historical results
that would have been achieved had the companies always been combined or the
future results that the combined company will experience after the merger.
44
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
MotivePower WABCO Reporting Proforma
(as Reported) (as Reported) Adjustments Combined
------------- ------------- ----------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Assets
Cash...................... $ 11,170 $ 4,627 $ $ 15,797
Accounts receivable....... 56,615 137,921 194,536
Inventories............... 99,539 107,703 207,242
Deferred taxes............ 7,639 12,842 20,481
Other..................... 7,661 8,731 (2,220) 14,172
-------- --------- --------- ----------
Total current assets.. 182,624 271,824 (2,220) 452,228
Property, plant and
equipment................ 154,726 223,849 378,575
Accumulated depreciation.. (58,249) (95,783) (154,032)
-------- --------- --------- ----------
Property, plant and
equipment, net....... 96,477 128,066 224,543
Other assets:
Goodwill and other
intangibles.............. 87,571 196,535 284,106
Underbillings............. 26,868 -- 26,868
Other noncurrent assets... 14,272 13,035 27,307
-------- --------- --------- ----------
Total other assets.... 128,711 209,570 338,281
-------- --------- --------- ----------
Total assets.......... $407,812 $ 609,460 $ (2,220) $1,015,052
======== ========= ========= ==========
Liabilities
Current portion of long-
term debt................ 557 20,264 20,821
Accounts payable.......... 32,780 51,347 84,127
Accrued income taxes...... -- 10,039 (2,220) 7,819
Customer deposits......... 282 17,310 17,592
Other accrued
liabilities.............. 33,453 51,802 41,000 126,255
-------- --------- --------- ----------
Total current
liabilities.......... 67,072 150,762 38,780 256,614
Long-term debt............ 133,607 450,226 583,833
Accrued pension and
postretirement costs..... -- 20,454 20,454
Commitments and
contingencies............ 17,692 -- 17,692
Deferred income taxes..... 1,419 3,533 4,952
Other long-term
liabilities.............. 1,385 3,847 5,232
-------- --------- --------- ----------
Total liabilities..... 221,175 628,822 38,780 888,777
Shareholders' Equity
Preferred stock........... -- -- --
Common stock.............. 260 474 148 882
Additional paid-in
capital.................. 207,418 108,066 (187,162) 128,322
Treasury stock, at cost... (5,986) (187,014) 187,014 (5,986)
Unearned ESOP shares, at
cost..................... -- (127,397) (127,397)
Retained earnings......... (15,368) 193,965 (41,000) 137,597
Deferred compensation..... 5,634 (103) 5,531
Accumulated other
comprehensive income
(loss)................... (5,321) (7,353) (12,674)
-------- --------- --------- ----------
Total shareholders'
equity............... 186,637 (19,362) (41,000) 126,275
-------- --------- --------- ----------
Liabilities and
shareholders' equity..... $407,812 $ 609,460 $ (2,220) $1,015,052
======== ========= ========= ==========
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
45
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MotivePower WABCO Proforma Proforma
(as Reported) (as Reported) Adjustments Combined
------------- ------------- ----------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales.................. $ 365,218 $ 670,909 $ $1,036,127
Cost of sales.............. (283,896) (451,730) (735,626)
--------- --------- ------ ----------
Gross profit............. 81,322 219,179 300,501
--------- --------- ------ ----------
Selling, general and
administrative expenses... (40,959) (76,048) 3,426 (113,581)
Engineering expenses....... -- (30,436) (30,436)
Amortization expense....... -- (8,029) (3,426) (11,455)
--------- --------- ------ ----------
Total operating
expenses................ (40,959) (114,513) (155,472)
--------- --------- ------ ----------
Operating income......... 40,363 104,666 145,029
Other income (expense):
Interest expense......... (5,894) (31,217) (37,111)
Other income--Argentina.. 10,362 -- 10,362
Other income (expense),
net..................... 3,950 (919) 3,031
--------- --------- ------ ----------
Income before income
taxes and extraordinary
item.................... 48,781 72,530 121,311
Income taxes............... (14,554) (27,561) (42,115)
--------- --------- ------ ----------
Income before extraordinary
item....................... $ 34,227 $ 44,969 $ $ 79,196
========= ========= ====== ==========
Earnings per common share--
basic:
Income before
extraordinary item...... $ 1.28 $ 1.79 $ $ 1.33
========= ========= ====== ==========
Earnings per common share--
diluted:
Income before
extraordinary item...... $ 1.23 $ 1.75 $ $ 1.29
========= ========= ====== ==========
Weighted average shares
outstanding:
Basic.................... 26,771 25,081 7,524 59,376
Diluted.................. 27,929 25,708 7,712 61,349
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
46
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MotivePower WABCO Proforma Proforma
(as Reported) (as Reported) Adjustments Combined
------------- ------------- ----------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales................... $ 305,930 $ 564,441 $ $ 870,371
Cost of sales............... (233,588) (378,323) (611,911)
--------- --------- ------ ---------
Gross profit.............. 72,342 186,118 258,460
--------- --------- ------ ---------
Selling, general and
administrative expenses.... (37,724) (63,517) 3,333 (97,908)
Engineering expenses........ -- (24,386) (24,386)
Amortization expense........ -- (8,240) (3,333) (11,573)
--------- --------- ------ ---------
Total operating expenses.. (37,724) (96,143) (133,867)
--------- --------- ------ ---------
Operating income.......... 34,618 89,975 124,593
Other income (expense):
Interest expense.......... (5,163) (29,729) (34,892)
Other income--Argentina... 2,003 -- 2,003
Other income (expense),
net...................... 531 344 875
--------- --------- ------ ---------
Income before income taxes
and extraordinary item... 31,989 60,590 92,579
Income taxes................ (11,713) (23,327) (35,040)
--------- --------- ------ ---------
Income before extraordinary
item....................... $ 20,276 $ 37,263 $ $ 57,539
========= ========= ====== =========
Earnings per common share--
basic:
Income before
extraordinary item....... $ 0.76 $ 1.45 $ $ 0.96
========= ========= ====== =========
Earnings per common share--
diluted:
Income before
extraordinary item....... $ 0.74 $ 1.42 $ $ 0.94
========= ========= ====== =========
Weighted average shares
outstanding:
Basic..................... 26,541 25,693 7,708 59,942
Diluted................... 27,314 26,173 7,851 61,338
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
47
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MotivePower WABCO Proforma Proforma
(as Reported) (as Reported) Adjustments Combined
------------- ------------- ----------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales................... $ 291,407 $ 453,512 $ $ 744,919
Cost of sales............... (234,560) (300,163) (534,723)
--------- --------- ------ ---------
Gross profit.............. 56,847 153,349 210,196
--------- --------- ------ ---------
Selling, general and
administrative expenses.... (32,615) (47,533) 3,407 (76,741)
Engineering expenses........ -- (18,244) (18,244)
Amortization expense........ -- (7,854) (3,407) (11,261)
--------- --------- ------ ---------
Total operating expenses.. (32,615) (73,631) (106,246)
--------- --------- ------ ---------
Operating income.......... 24,232 79,718 103,950
Other income (expense):
Interest expense.......... (9,143) (26,152) (35,295)
Other income--Argentina... 1,565 -- 1,565
Other income (expense),
net...................... 3,633 82 3,715
--------- --------- ------ ---------
Income before income taxes
and extraordinary item... 20,287 53,648 73,935
Income taxes................ (7,714) (20,923) (28,637)
--------- --------- ------ ---------
Income before extraordinary
item........................ $ 12,573 $ 32,725 $ $ 45,298
========= ========= ====== =========
Earnings per common share--
basic:
Income before
extraordinary item........ $ 0.48 $ 1.15 $ $ 0.72
========= ========= ====== =========
Earnings per common share--
diluted:
Income before
extraordinary item........ $ 0.48 $ 1.15 $ $ 0.72
========= ========= ====== =========
Weighted average shares
outstanding:
Basic..................... 26,345 28,473 8,542 63,360
Diluted................... 26,349 28,473 8,542 63,364
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
48
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
MotivePower WABCO Proforma Proforma
(as Reported) (as Reported) Adjustments Combined
------------- ------------- ----------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales................... $107,274 $ 191,204 $ $ 298,478
Cost of sales............... (79,751) (129,659) (209,410)
-------- --------- ----- ---------
Gross profit.............. 27,523 61,545 89,068
-------- --------- ----- ---------
Selling, general and
administrative expenses.... (12,718) (21,331) 971 (33,078)
Engineering expenses........ -- (8,907) (8,907)
Amortization expense........ -- (2,410) (971) (3,381)
-------- --------- ----- ---------
Total operating expenses.. (12,718) (32,648) (45,366)
-------- --------- ----- ---------
Operating income.......... 14,805 28,897 43,702
Other income (expense):
Interest expense.......... (2,194) (9,096) (11,290)
Other income (expense),
net...................... (201) (66) (267)
-------- --------- ----- ---------
Income before income taxes
and extraordinary item... 12,410 19,735 32,145
Income taxes................ (4,532) (7,346) (11,878)
-------- --------- ----- ---------
Income before extraordinary
item....................... $ 7,878 $ 12,389 $ $ 20,267
======== ========= ===== =========
Earnings per common share--
basic:
Income before
extraordinary item....... $ 0.29 $ 0.49 $ $ 0.34
======== ========= ===== =========
Earnings per common share--
diluted:
Income before
extraordinary item....... $ 0.28 $ 0.48 $ $ 0.33
======== ========= ===== =========
Weighted average shares
outstanding:
Basic..................... 26,986 25,371 7,611 59,968
Diluted................... 28,146 25,776 7,733 61,655
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
49
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
MotivePower WABCO Proforma Proforma
(as Reported) (as Reported) Adjustments Combined
------------- ------------- ----------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales................... $ 82,853 $ 158,136 $ $ 240,989
Cost of sales............... (61,497) (106,340) (167,837)
-------- --------- ----- ---------
Gross profit.............. 21,356 51,796 73,152
-------- --------- ----- ---------
Selling, general and
administrative expenses.... (10,353) (18,498) 826 (28,025)
Engineering expenses........ -- (6,438) (6,438)
Amortization expense........ -- (2,105) (826) (2,931)
-------- --------- ----- ---------
Total operating expenses.. (10,353) (27,041) (37,394)
-------- --------- ----- ---------
Operating income.......... 11,003 24,755 35,758
Other income (expense):
Interest expense.......... (1,213) (7,373) (8,586)
Other income (expense),
net...................... 957 131 1,088
-------- --------- ----- ---------
Income before income taxes
and extraordinary item... 10,747 17,513 28,260
Income taxes................ (3,627) (6,655) (10,282)
-------- --------- ----- ---------
Income before extraordinary
item....................... $ 7,120 $ 10,858 $ $ 17,978
======== ========= ===== =========
Earnings per common share--
basic:
Income before
extraordinary item....... $ 0.27 $ 0.43 $ $ 0.30
======== ========= ===== =========
Earnings per common share--
diluted:
Income before
extraordinary item....... $ 0.26 $ 0.42 $ $ 0.29
======== ========= ===== =========
Weighted average shares
outstanding:
Basic..................... 26,709 24,962 7,489 59,160
Diluted................... 27,824 25,669 7,701 61,194
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
50
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The unaudited pro forma condensed combined statements of income are based on
the consolidated financial statements of MotivePower and WABCO for the years
ended December 31, 1998, 1997 and 1996 and for the three months ended March 31,
1999 and 1998. The unaudited pro forma condensed combined balance sheet is
based on the consolidated financial statements of MotivePower and WABCO at
March 31, 1999.
MotivePower and WABCO consolidated financial statements are prepared in
conformity with generally accepted accounting principles and require
MotivePower and WABCO management to make estimates that affect the reported
amounts of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities. In the opinion of MotivePower and WABCO, the
unaudited pro forma condensed combined financial statements include all
adjustments necessary to present fairly the results of the periods presented.
Actual results are not expected to differ materially from these estimates.
Note 2. Accounting Policies and Financial Statement Classifications
The accounting policies of MotivePower and WABCO are substantially
comparable. The unaudited pro forma combined condensed statements of income
reflect reclassification adjustments to conform to the presentation of
amortization expense. The unaudited pro forma combined condensed balance sheet
reflects a reclassification adjustment to conform the presentation of income
taxes receivable and payable.
Certain revenues, costs and other deductions in the consolidated statements
of income for MotivePower and WABCO have been reclassified to conform to the
line item presentation in the pro forma condensed combined statements of
income. Certain assets and liabilities in the consolidated balance sheets for
MotivePower and WABCO have been reclassified to conform to the line item
presentation in the pro forma condensed combined balance sheet.
Note 3. Earnings Per Share (as reported), Pro Forma Earnings Per Share and
Dividends Per Share
The MotivePower earnings per share (as reported) have been restated to
reflect a three-for-two common stock split in the form of a 50 percent stock
dividend effective April 2, 1999.
The pro forma combined net income per common share is based on net income
and the weighted average number of outstanding common shares. Net income per
common share--diluted includes the dilutive effect of stock options and
restricted stock awards. The pro forma combined weighted average number of
outstanding common shares has been adjusted to reflect the exchange ratio of
1.3 shares of MotivePower common stock for each share of WABCO common stock.
The pro forma combined dividends per share reflect the sum of the dividends
paid by MotivePower and WABCO divided by the number of shares that would have
been outstanding for the periods, after adjusting the WABCO shares for the
exchange ratio of 1.3 shares of MotivePower common stock.
Note 4. Intercompany Transactions
Intercompany sales and purchase transactions were not material between the
two companies and therefore are not reflected as adjustments to the unaudited
pro forma condensed combined financial statements.
Note 5. Merger-Related and Integration-Related Expenses
Merger-related fees and expenses, consisting primarily of SEC filing fees,
fees and expenses of investment bankers, attorneys and accountants, and
financial printing and other related charges, are estimated to be approximately
$20-25 million.
51
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
We estimate that costs of approximately $35-$40 million will be incurred for
severance and other integration-related expenses, including the elimination of
duplicate facilities and excess capacity, operational realignment and related
workforce reductions. These expenditures are necessary to reduce costs and
operate efficiently. The unaudited pro forma condensed combined financial
statements do not reflect the benefits from the expected synergies.
A one time pooling related charge of $41.0 million has been reflected in the
Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 1999 and
is not reflected in the Unaudited Pro Forma Condensed Combined Statements of
Income due to its non-recurring nature. The $41.0 million charge was based on
the maximum estimate of the costs of merger-related and integration-related
expenses, net of a 37% tax effect.
Note 6. Other Pro Forma Adjustments
A pro forma adjustment has been made to reflect the cancellation of WABCO
common stock accounted for as treasury stock and the assumed issuance of
MotivePower common stock in exchange for all of the outstanding WABCO common
stock (based on the exchange ratio of 1.3 shares of MotivePower shares of
common stock for each WABCO share of common stock). The actual number of shares
of MotivePower common stock to be issued in connection with the merger will be
based on the number of shares of WABCO common stock issued and outstanding at
the effective time.
52
<PAGE>
MANAGEMENT
The following table provides information concerning our executive officers
and directors as of April 1, 1999.
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
William E. Kassling.......... 55 Director, Chairman of the Board and Chief
Executive Officer
Emilio A. Fernandez.......... 54 Director and Vice Chairman
Gregory T.H. Davies.......... 52 Director, President and Chief Operating
Officer
Robert J. Brooks............. 55 Director, Chief Financial Officer and Chief
Accounting Officer
Kevin P. Conner.............. 41 Vice President--Human Resources
Alvaro Garcia-Tunon.......... 46 Vice President--Treasurer
Timothy J. Logan............. 46 Vice President--International
John M. Meister.............. 51 Executive Vice President and General Manager,
transit product group
George A. Socher............. 50 Vice President and Corporate Controller
Kim G. Davis................. 45 Director
James C. Huntington, Jr. .... 71 Director
James P. Kelley.............. 44 Director
James V. Napier.............. 62 Director
</TABLE>
William E. Kassling has been a director, Chairman and Chief Executive
Officer of WABCO since the 1990 American Standard acquisition. Mr. Kassling was
also our President 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 Aearo Corporation, Scientific Atlanta, Inc. and Commercial
Intertech, Inc.
Emilio A. Fernandez was named Vice Chairman in March 1998. He has been a
Director and was Executive Vice President of WABCO since our 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.
Gregory T. H. Davies joined WABCO in March 1998 as President and Chief
Operating Officer and in February 1999, became a director. 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. Danaher designs,
manufactures and markets industrial and consumer products with strong brand
names, proprietary technology and major market positions in both tolls and
components and process/environmental controls. Prior to that, Mr. Davies held
executive positions at Cummins Engine Company and Ford Motor Company.
Robert J. Brooks has been a director and Chief Financial Officer of WABCO
since the 1990 American Standard 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.
Kevin P. Conner has been Vice President of Human Resources of WABCO since
the 1990 American Standard 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 and Treasurer of WABCO since
August 1995. From 1990 until August 1995 Mr. Garcia-Tunon was Vice President of
Business Development of Pulse Electronics, Inc.
53
<PAGE>
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. Ajax Magnethermic
manufactures and services electromagnetic inductive equipment that is used for
the heating of, heat treating, and melting of metals.
John M. Meister has been Vice President and General Manager of our passenger
transit unit since the 1990 America Standard acquisition. In 1997, he was
appointed to the newly created position of Executive Vice President and General
Manager, 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.
George A. Socher has been Vice President and Corporate Controller of WABCO
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.
The executive officers are elected annually by our board of directors at an
organizational meeting, which is held immediately after each Annual Meeting of
Stockholders.
Kim G. Davis has served as a director since 1997. Mr. Davis has served as
the Managing Director of Charlesbank Capital Partners, LLC, which serves as the
investment advisor to Harvard Private Capital Holdings, Inc., since 1998.
Mr. Davis was a private investor from 1994 to 1998, and was a partner of
Kohlberg & Co. prior thereto.
James C. Huntington, Jr. has served as a director since 1995. Mr. Huntington
has been an independent businessman since prior to 1993. He was formerly Senior
Vice President of American Standard, Inc. WABCO was formed in 1990 by acquiring
American Standard's railway products group. Mr. Huntington retired from
American Standard in 1994. He is also a former director of Cyprus Amax Minerals
Company, Alumax, Inc. and Dravo Corporation.
James P. Kelley has served as director since 1990. Mr. Kelley has served as
the Managing Director of Vestar Capital Partners, Inc., a private equity
investment firm since prior to 1993. Mr. Kelley also serves as a Director of
LaPetite Academy, Inc. and Celestial Seasonings, Inc.
James V. Napier has served as a director since 1995. Mr. Napier has served
as the Chairman of Scientific Atlanta, Inc. since July 1994, and served as
Chairman and interim Chief Executive Officer of Scientific Atlanta, Inc. from
November 1993 to July 1994. Mr. Napier served as Chairman and Chief Executive
Officer of Commercial Tel. Group from prior to 1993 to November 1993. Mr.
Napier also serves as a director of Engelhard Corporation, Vulcan Materials
Company, HBO and Company, Personnel Group of America, Inc. and Intelligent
Systems, Inc.
54
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of December 31, 1998, information
concerning each person believed to be the beneficial owner of more than 5% of
our common stock, as well as information concerning the beneficial ownership of
common stock by each named director, executive officer and all directors and
executive officers as a group believed to be a beneficial owner of our common
stock.
<TABLE>
<CAPTION>
Number of
Name Shares Percentage
---- ---------- ----------
<S> <C> <C>
U.S. Trust Company, N.A. ........................ 9,297,409(1) 27.43%
as trustee for Westinghouse Air Brake
Company Employee Stock Ownership
Plan and Trust
515 S. Flower Street
Suite 2700
Los Angeles, CA 90071
William E. Kassling.............................. 3,551,424(2) 10.48
c/o Westinghouse Air Brake Company
1001 Air Brake Avenue
Wilmerding, PA 15148
RAC Voting Trust................................. 3,498,819(3) 10.40
c/o Westinghouse Air Brake Company
1001 Air Brake Avenue
Wilmerding, PA 15148
James P. Kelley.................................. 2,545,548(4)(5) 7.51
c/o Westinghouse Air Brake Company
1001 Air Brake Avenue
Wilmerding, PA 15148
Kim G. Davis..................................... 2,407,000(5)(6) 7.10
c/o Westinghouse Air Brake Company
1001 Air Brake Avenue
Wilmerding, PA 15148
Harvard Private Capital Holdings, Inc............ 2,401,000 7.08
c/o Charlesbank Capital Partners, LLC
600 Atlantic Avenue, 26th Floor
Boston, MA 02210
Vestar Equity Partners, L.P. .................... 2,400,000 7.08
c/o Vestar Capital Partners, Inc.
Seventeenth Street Plaza
1225 17th Street, Suite 1660
Denver, Colorado 80202
Shapiro Capital Management Company, Inc. ........ 2,139,500 6.31
3060 Peachtree Road,
N.W. Atlanta, GA 30305
First Manhattan Co............................... 1,753,950 5.17
437 Madison Avenue
New York, NY 10022
Emilio A. Fernandez.............................. 665,072(7) 1.96
John M. Meister.................................. 455,216(8) 1.34
Robert J. Brooks................................. 381,589(9) 1.13
Gregory T.H. Davies.............................. 59,192(5) *
James C. Huntington, Jr.......................... 18,000(5) *
James V. Napier.................................. 12,500(5)(10) *
All directors and executive officers as a group 10,405,106(11) 30.70
(13 persons)....................................
</TABLE>
55
<PAGE>
- --------
(1) Under the terms of the Westinghouse Air Brake Company Employee Stock
Ownership Plan and Trust, U.S. Trust Company, N.A., as sole trustee for
the ESOP, is required to vote the shares held by the ESOP in accordance
with the instructions from the ESOP participants for all shares allocated
to such participants' accounts. Shares not allocated to the account of any
employee are voted by the ESOP trustee in the same proportion as the votes
for which participant instructions are given. Allocated shares for which
the ESOP trustee does not receive instructions are voted in the manner
directed by the ESOP Committee, an administrative committee comprised of
persons appointed by the our board of directors (currently Messrs.
Kassling, Brooks and Conner). As of December 31, 1998, 771,189 shares were
allocated, including accrued amounts, to participants' accounts, and
8,564,811 shares were not allocated.
(2) Includes 52,105 shares beneficially owned by William E. Kassling, of which
6,500 shares are deposited in the management voting trust. Also includes
1,443,336 shares beneficially owned by Davideco, a Pennsylvania business
trust, which are all deposited in the management voting trust. Also
includes 500 shares beneficially owned by Mr. Kassling's son, beneficial
ownership of which shares is disclaimed, and 3,498,819 shares held of
record by the management voting trust, of which Messrs. Kassling, Brooks
and Conner are trustees, beneficial ownership of which shares is
disclaimed. See note 2 for further discussion on the management voting
trust.
(3) Pursuant to the Second Amended Westinghouse Air Brake Company Voting
Trust/Disposition Agreement dated as of December 13, 1995, certain of our
employees have delivered their shares of our common stock to the trustees
of the management voting trust. The current trustees are Messrs. Kassling,
Brooks and Conner. The trustees of the management voting trust have sole
voting power with respect to all shares reported as beneficially owned by
the management voting trust. The amended management voting trust agreement
expires January 1, 2000 and can be terminated by an affirmative vote of
two-thirds of the shares held by the management voting trust or by the
unanimous vote of the trustees.
(4) Includes 105,548 shares beneficially owned by James P. Kelley. Also
includes 40,000 shares beneficially owned by Vestar Capital Partners,
Inc., of which Mr. Kelley is a Managing Director, beneficial ownership of
which shares is disclaimed. Also includes 2,400,000 shares beneficially
owned by Vestar Equity Partners, L.P., beneficial ownership of which
shares is disclaimed. Vestar Associates, L.P. is the sole general partner
of Vestar Equity Partners, L.P., and Vestar Associates Corporation is the
sole general partner of Vestar Associates, L.P. Mr. Kelley is also
Managing Director of Vestar Associates Corporation.
(5) Includes options that are exercisable within 60 days of March 22, 1999.
(6) Includes 2,401,000 shares beneficially owned by Harvard Private Capital
Holdings, Inc. Charlesbank Capital Partners, LLC acts as the investment
advisor to Harvard Private Capital Holdings. Kim G. Davis is a Managing
Director of Charlesbank Capital Partners, beneficial ownership of which
shares is disclaimed.
(7) Includes 395,476 shares beneficially owned by Emilio A. Fernandez. Also
includes 257,175 shares beneficially owned by Mr. Fernandez's wife and
12,421 shares beneficially owned by his son, beneficial ownership of which
shares is disclaimed.
(8) Includes 255,216 shares beneficially owned by John M. Meister, of which
250,000 shares are deposited in the management voting trust. Also includes
200,000 shares held in trust for Mr. Meister's children, beneficial
ownership of which shares is disclaimed. Mr. Meister is trustee of such
trust.
(9) Includes 21,589 shares beneficially owned by Robert J. Brooks, of which
9,300 shares are deposited in the management voting trust. Also includes
360,000 shares beneficially owned by Suebro, Inc., a Delaware holding
company, which are all deposited in the management voting trust. Does not
include 3,498,819 shares held of record by the management voting trust.
Such shares are included in the reported holdings of William E. Kassling.
(10) Includes 7,000 shares beneficially owned by James V. Napier and 500 shares
held in Mr. Napier's Keogh account.
(11) Includes notes 2 and 4 through 10.
* Less than 1%
56
<PAGE>
DESCRIPTION OF INDEBTEDNESS
Credit Agreement
Our credit agreement with a consortium of banks provides for an aggregate
credit facility of $350 million, consisting of up to $170 million of June 1998
term loans, up to $40 million of September 1998 term loans, and up to $140
million of revolving loans. The credit agreement provides for swingline loans,
which are very short-term loans, of up to an aggregate amount of $5 million. It
also provides for the issuance of letters of credit. The letters of credit are
for an aggregate face amount of up to $50 million. Swingline loans and the
issuance of letters of credit will reduce the amount of revolving loans that
may be incurred under the revolving credit facility.
As of December 31, 1998, we had outstanding $162.5 million of June 1998 term
loans, $40.0 million of the September 1998 term loans and $105.6 million of the
revolving loans, plus $24.5 million of outstanding letters of credit. We used
the June 1998 term loans to:
. refinance term loans originally made in 1995 which were used to purchase
shares of common stock from existing stockholders;
. make a $140 million loan to our ESOP which was used to fund purchases of
common stock from the management voting trust established by our
management shareholders;
. pay the fees and expenses incurred in connection with such share
purchase, ESOP loan and the acquisition of Pulse Electronics; and
. repay a portion of the seller note issued in connection with the
acquisition of Pulse.
We used the September 1998 term loans to finance a portion of the
acquisition of Rockwell Railroad Electronics. We used the revolving loans to
repay the outstanding revolving loans under our 1995 revolving credit facility
and to finance a portion of the Rockwell acquisition. We may use the balance of
the revolving loans for general corporate purposes and the making of
acquisitions. As of December 31, 1998, we had approximately $12.0 million of
revolving loans availability.
The net proceeds of the offering related to the old notes were used to repay
a $30 million unsecured credit facility the proceeds of which were used to
finance a portion of the Rockwell acquisition. The balance of the proceeds was
used to reduce revolving credit borrowings under the credit agreement. See "Use
of Proceeds."
The following summary sets forth the principal terms of the credit
agreement:
The June 1998 term loans under the credit agreement are due in semi-annual
payments, commencing on December 31, 1998 with the final payment due June 30,
2003. The September 1998 term loans will be due in semi-annual payments
commencing on June 30, 2000 with the final payment due June 30, 2003. Revolving
loans will be due December 31, 2003. Our scheduled debt payments under the
credit agreement for the periods ending December 31, 1999, 2000, 2001, 2002 and
2003 will be $20.0 million, $32.5 million, $40.0 million, $50.0 million, and
$60.0 million, respectively.
For either term loans or revolving loans, we can choose from the following
interest rate options:
. The alternate base rate, which is the greater of:
. Chase Manhattan Bank's prime rate;
. the Base CD Rate plus 1%; and
. the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by
federal funds brokers plus .50 of 1%, plus an applicable margin
ranging from 0% to .50% based on our leverage ratio, as described
below, or
. The adjusted LIBO rate, which is the London interbank overseas rate for
dollar deposits, as adjusted for statutory reserve requirements, plus an
applicable margin ranging from .625% to 1.50% based on our leverage
ratio.
57
<PAGE>
Swingline loans are subject exclusively to the alternate base rate.
Interest is payable periodically. In addition, we are required to pay fees to
the administrative agents and participating lending institutions, including a
commitment fee. This commitment fee ranges from .25% to .375% and is on the
unborrowed amount of the revolving credit commitment based upon our leverage
ratio. We also are required to pay fees relating to the issuance of letters of
credit.
In addition to the scheduled principal payments described above, the credit
agreement requires principal prepayments equal to:
(1) 100% of the net cash proceeds, as described below, of any prepayment
event, as also described below, other than a prepayment event arising under
clause (3) in the description below, in which case the credit agreement
requires principal prepayments equal to 50% of the net cash proceeds
therefrom, and
(2) 50% of excess cash flow, as described below, for each fiscal year if
the leverage ratio exceeds 3.25 to 1.00.
The following is a general description of the definitions in the credit
agreement of certain terms used above.
A prepayment event is:
(1) any sale, transfer or other disposition of any business units,
assets or other properties of WABCO;
(2) the issuance or incurrence of any indebtedness or debt securities by
us; or
(3) the issuance or sale of any equity securities by us, other than the
sale, transfer or other disposition of used or surplus equipment in the
ordinary course of business (except for sales, transfers or other
dispositions in excess of $3 million in any year), sales of inventory in
the ordinary course, the receipt of insurance or condemnation proceeds
(except for receipt of proceeds in excess of $3 million in any year), the
receipt of condemnation or insurance proceeds in respect of mortgaged
properties, and the receipt of net cash proceeds in an aggregate amount not
in excess of $150 million in respect to any of these events.
Net cash proceeds are our gross cash proceeds from any prepayment event,
less taxes, reserves and customary fees, commissions and expenses.
Excess cash flow means, for any period, EBITDA, as defined in the credit
agreement, for such period minus capital expenditures, increases in net
working capital, decreases in long-term reserves, income taxes added back to
net income to determine EBITDA, cash interest expense, scheduled debt
amortization payments and certain other amounts for such period plus decreases
in net working capital for such period and increases in long-term reserves for
such period.
Interest expense coverage ratio means, for any period, the ratio of EBITDA
to cash interest expense for such period.
Cash interest expense means, for any period, our gross interest expense for
such period less our gross interest income for such period.
Leverage ratio means, as of any day, the ratio of:
. the sum of the aggregate amount of all loans under the credit agreement
and all of our other indebtedness on such day to
. EBITDA for the 12-month period ending on such day.
The credit agreement limits us with respect to declaring or making cash
dividend payments and prohibits us from declaring or making other
distributions whether in cash, property, securities or a combination thereof,
with respect to any shares of our capital stock, subject to exceptions. These
include an exception pursuant to which we
58
<PAGE>
will be permitted to pay cash dividends on our common stock in any fiscal year
in an aggregate amount up to $15 million over the aggregate amount of
prepayments of the Pulse seller note and the unsecured credit facility loans
being repaid with the proceeds hereof during such fiscal year. We can do so so
long as there is no default in the payment of interest or fees. The credit
agreement contains various other covenants and restrictions including the
following:
. a limitation on the incurrence of additional indebtedness;
. a limitation on mergers;
. a limitation on consolidations and sales of assets and acquisitions
other than mergers and consolidations with subsidiaries, sales of assets
in the ordinary course of business, and acquisitions for which the
consideration paid by WABCO does not exceed $50 million individually or
$150 million in the aggregate;
. a limitation on liens;
. a limitation on sale and leasebacks;
. a limitation on investments, loans and advances;
. a limitation on debt payments;
. a limitation on capital expenditures;
. a minimum interest expense coverage ratio; and
. a maximum leverage ratio.
All debt incurred under the credit agreement will be secured by
substantially all of the our assets and those of our domestic subsidiaries and
is guaranteed by our domestic subsidiaries.
The credit agreement contains customary events of default, including:
. payment defaults;
. failure of representations to be true in any material respect;
. covenant defaults;
. defaults with respect to our other indebtedness;
. bankruptcy;
. judgments against us;
. ERISA defaults; and
. "change of control" of WABCO.
The occurrence of an event of default will give the lenders under the credit
agreement the right to terminate the commitment to make additional loans and
declare the outstanding loans to be due and payable, as well as the right to
exercise foreclosure on the collateral granted to the lenders under the credit
agreement and related security documents.
Existing Notes
In June 1995, we issued $100 million of 9 3/8% Senior Notes due 2005. The
proceeds of the notes were used to prepay term loans outstanding under our then
existing credit agreement. The terms of the 1995 notes are the same in all
material respects as the notes which are subject to the exchange offer. They
were issued pursuant to an indenture which is substantially the same as the
indenture pursuant to which the notes which are subject to the exchange offer
were issued, subject to differences to reflect the manner of sale.
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<PAGE>
Pulse Notes
As partial payment for the Pulse acquisition, we issued a $17.0 million note
due January 31, 2004. Interest is payable semiannually, and:
. accrued until February 1, 1998 at the per annum rate of 9.5%;
. accrues until January 31, 2001 at the prime rate charged by Chase
Manhattan Bank on December 31, 1997 plus 1%; and
. accrues from February 1, 2001 until January 31, 2004, at the prime rate
charged by Chase Manhattan Bank on December 31, 2000 plus 1%.
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<PAGE>
TERMS OF THE EXCHANGE OFFER
The exchange offer is being made by us to satisfy our obligations pursuant
to the exchange and registration rights agreement, which requires us to use our
best efforts to effect the exchange offer.
We are making the exchange offer in reliance upon the position of the SEC's
staff set forth in no-action letters addressed to other parties in other
transactions, including Exxon Capital Holdings Corporation (available April 13,
1989), Morgan Stanley & Co., Inc. (available June 5, 1991) and Shearman &
Sterling (available July 2, 1993). However, we have not sought our own no-
action letter for this transaction so we cannot assure you that the SEC's staff
would make a similar determination with respect to this exchange offer as in
other circumstances. Based on these interpretations by the staff of the SEC,
the new notes issued pursuant to the exchange offer may be offered for resale,
resold and otherwise transferred by holders, other than
. any holder that is our "affiliate" within the meaning of Rule 405 under
the Securities Act,
. an initial purchaser who acquired the old notes directly from us solely
in order to resell pursuant to Rule 144A under the Securities Act or any
other available exemption under the Securities Act, or
. a broker-dealer who acquired the old notes as a result of market making
or other trading activities,
without compliance with the registration and prospectus delivery requirements
of the Securities Act, but only if the old notes were acquired in the ordinary
course of such holder's business and such holder was not participating and had
no arrangement or understanding with any person to participate in a
distribution, within the meaning of the Securities Act, of the notes. Any
holder who tenders old notes in the exchange offer for the purpose of
participating in a distribution of the notes can not rely on the above
described interpretations by the SEC's staff. Instead, such holder must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with a secondary resale transaction, unless such sale is made
pursuant to an exemption from such requirements.
Holders of old notes not tendered will not have continuing registration
rights and the old notes not exchanged will continue to be subject to
restrictions on transfer. Accordingly, the liquidity of the markets for the old
notes could be adversely affected.
Neither our board of directors nor WABCO makes any recommendation to holders
of old notes as to whether to tender or refrain from tendering all or any
portion of their old notes pursuant to the exchange offer. In addition, no one
has been authorized to make any such recommendation. Holders of old notes must
make their own decision whether to tender pursuant to the exchange offer and,
if so, the aggregate amount of old notes to tender, after reading this
prospectus and the letter of transmittal and consulting their advisers, if any,
based on their own financial position and requirements.
Period for Tendering Old Notes
We will accept for exchange old notes properly tendered on or prior to the
expiration date and not withdrawn as permitted below. The expiration date is
5:00 p.m., New York City time, on [ ], 1999. In our sole discretion, we
can extend the period of time for which the exchange offer is open, in which
case, the expiration date will be the latest time and date to which the
exchange offer is extended. We will not extend the exchange offer beyond [
], 1999. We may extend the exchange offer at any time and from time to time by
giving oral or written notice to the exchange agent and by timely public
announcement. Without limiting the manner in which we may choose to make any
public announcement and subject to applicable law, we have no obligation to
publish, advertise or otherwise communicate any such public announcement other
than by issuing a release to an appropriate news agency. During any extension
of the exchange offer, all old notes previously tendered pursuant to the
exchange offer will remain subject to the exchange offer. We intend to conduct
the exchange offer in accordance with applicable law.
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<PAGE>
As of the date of this prospectus, there is $75,000,000 aggregate principal
amount of the old notes outstanding. This prospectus, together with the letter
of transmittal, is first being sent on or about [ ], 1999, to all holders
of old notes known to us. Our obligation to accept old notes for exchange
pursuant to the exchange offer is subject to conditions as set forth under "--
Conditions" below.
The terms of the new notes and the old notes are identical in all material
respects, except that the new notes will not contain terms with respect to
transfer restrictions, and will be registered under the Securities Act. The old
notes were, and the new notes will be, issued under the indenture and both the
old notes and the new notes are entitled to the benefits of the indenture.
Old notes tendered in the exchange offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof. Any old notes not
accepted for exchange for any reason will be returned without expense to the
tendering holder as promptly as practicable after the expiration or termination
of the exchange offer.
We expressly reserve the right to amend or terminate the exchange offer, and
not to accept for exchange any old notes not previously accepted for exchange,
upon the occurrence of any of the conditions of the exchange offer specified
below under "--Conditions." We will give oral or written notice of any
amendment, nonacceptance or termination to the holders of the old notes as
promptly as practicable. Any amendment to the exchange offer will not limit the
right of holders to withdraw tendered old notes prior to the expiration date.
See "--Withdrawal of Tenders."
Procedures For Tendering Old Notes
The tender to us of old notes by a holder thereof as set forth below and the
acceptance by us will constitute a binding agreement. The terms and conditions
of such agreement are as set forth in this prospectus and in the accompanying
letter of transmittal.
A holder of old notes may tender the old notes by:
. properly completing and signing the letter of transmittal or a facsimile
thereof (all references in this prospectus to the letter of transmittal
include a facsimile thereof) and delivering the same, together with the
certificate or certificates representing the old notes being tendered
and any required signature guarantees and any other documents required
by the letter of transmittal, to the exchange agent at its address set
forth below on or prior to the expiration date;
. or complying with the procedure for book-entry transfer described below;
. or complying with the guaranteed delivery procedures described below.
The method of delivery of old notes, letters of transmittal and all other
required documents is at the election and risk of the holders. If such delivery
is by mail, we recommend that you use registered mail properly insured, with
return receipt requested. In all cases, you should allow sufficient time to
ensure timely delivery. Do not send old notes or letters of transmittal to
WABCO.
If tendered old notes are registered in the name of the signer of the letter
of transmittal and the new notes to be issued in exchange therefor are to be
issued in the name of the registered holder whose name appears on a security
listing as the owner of old notes, the signature of such signer need not be
guaranteed. In any other case, the tendered old notes must be endorsed or
accompanied by written instruments of transfer in form satisfactory to us and
duly executed by the registered holder, and the signature on the endorsement or
instrument of transfer must be guaranteed by an eligible institution. An
eligible institution may be a bank, broker, dealer, credit union, savings
association, clearing agency or other institution that is a member of a
recognized signature guarantee medallion program within the meaning of Rule
17Ad-15 under the Securities Exchange Act of 1934. If the new notes and/or old
notes not exchanged are to be delivered to an address other than that of the
registered holder appearing on the note register for the old notes, the
signature in the letter of transmittal must be guaranteed by an eligible
institution.
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<PAGE>
The exchange agent will make a request within two business days after the
date of receipt of this prospectus to establish accounts with respect to the
old notes at the book-entry transfer facility for the purpose of facilitating
the exchange offer. Subject to the establishment of these accounts, any
financial institution that is a participant in the book-entry transfer
facility's system may make book-entry delivery of old notes. This can be done
by causing such book-entry transfer facility to transfer such old notes into
the exchange agent's account with respect to the old notes in accordance with
the book-entry transfer facility's procedures for such transfer. Although
delivery of old notes may be effected through book-entry transfer into the
exchange agent's account at the book-entry transfer facility, an appropriate
letter of transmittal with any required signature guarantee and all other
required documents must in each case be transmitted to, and received or
confirmed by, the exchange agent on or prior to the expiration date.
If a holder desires to accept the exchange offer and time will not permit a
letter of transmittal or old notes to reach the exchange agent before the
expiration date, or if the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may still be effected. In such a case, an
eligible institution must send the exchange agent on or prior to the expiration
date a letter or facsimile transmission (receipt confirmed by telephone and an
original delivered by guaranteed overnight courier). Such letter should set
forth the following:
. the name and address of the tendering holder,
. the names in which the old notes are registered and,
. if possible, the certificate numbers of the old notes to be tendered,
and stating that the tender is being made. The letter must also guarantee that
within three business days after the expiration date, the eligible institution
will deliver such old notes in proper form for transfer, together with a
properly completed and duly executed letter of transmittal. Unless old notes
being tendered by the above-described method are deposited with the exchange
agent within the time period set forth above (accompanied or preceded by a
properly completed letter of transmittal and any other required documents), we
may, at our option, reject the tender. A form of the notice of guaranteed
delivery that may be used by eligible institutions for the purposes described
in this paragraph is attached as an exhibit to this prospectus.
A tender will be deemed to have been received as of the date when:
. the tendering holder's properly completed and duly signed letter of
transmittal accompanied by the old notes, or a confirmation of book-
entry transfer of such old notes into the exchange agent's account at
the book-entry transfer facility, is received by the exchange agent; or
. a notice of guaranteed delivery or letter or facsimile transmission to
similar effect, as provided above, from an eligible institution is
received by the exchange agent. Issuances of new notes in exchange for
old notes tendered pursuant to a notice of guaranteed delivery or letter
or facsimile transmission to similar effect, as provided above, by an
eligible institution will be made only against deposit of the letter of
transmittal, and any other required documents, and the tendered old
notes.
We will determine in our sole discretion all questions as to the validity,
form, eligibility, including time of receipt, and acceptance of old notes
tendered for exchange. Such determination will be final and binding. We reserve
the absolute right to reject any and all tenders of any particular old notes
not properly tendered or not to accept any particular old notes which
acceptance might, in our or our counsel's judgment, be unlawful.
We also reserve the absolute right to waive any defects or irregularities or
conditions of the exchange offer as to any particular old notes either before
or after the expiration date, including the right to waive the ineligibility of
any holder who seeks to tender old notes in the exchange offer. Our
interpretation of the terms and conditions of the exchange offer, including the
letter of transmittal and the instructions thereto, shall be final and binding
on all parties. Unless waived, any defects or irregularities must be cured
within such reasonable period of time as we shall determine. Neither WABCO, the
exchange agent nor any other person shall be under any duty to give
notification of any defect or irregularity with respect to any tender of old
notes for exchange, nor shall any of them have any liability for failure to
give such notification.
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<PAGE>
If the letter of transmittal is signed by a person or persons other than the
registered holder or holders of old notes, such old notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the old notes.
If the letter of transmittal, any old notes, or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing. Unless waived by us,
proper evidence satisfactory to us of their authority to so act must be
submitted.
By tendering, each holder will represent to us that, among other things, the
new notes acquired pursuant to the exchange offer are being acquired in the
ordinary course of business of the person receiving such new notes, whether or
not such person is the holder. Each holder will also represent that neither the
holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such new notes and that neither
the holder nor any such other person is our "affiliate," as defined under Rule
405 of the Securities Act, or, if it is our affiliate, it will comply with the
registration and prospectus requirements of the Securities Act to the extent
applicable.
Each broker-dealer that receives new notes for its own account in exchange
for old notes acquired by such broker-dealer as a result of market-making
activities or other trading activities must acknowledge that it will deliver a
prospectus in connection with any resale of such new notes. See "Plan of
Distribution."
Terms and Conditions of the Letter of Transmittal
The letter of transmittal contains, among other things, the following terms
and conditions:
. The party tendering old notes for exchange transfers the old notes to us
and irrevocably appoints the exchange agent as the transferor's agent
and attorney-in-fact to cause the old notes to be exchanged.
. The transferor represents that it has full power and authority to
tender, exchange, assign and transfer the old notes and to acquire new
notes issuable upon the exchange of such tendered notes.
. The transferor represents that, when the same are accepted for exchange,
we will acquire good and unencumbered title to the tendered old notes,
free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim.
. The transferor also represents that it will, upon request, execute and
deliver any additional documents deemed by the exchange agent or us to
be necessary or desirable to complete the transfer of tendered old notes
or transfer ownership of such old notes on the account books maintained
by a book-entry transfer facility.
. The transferor further agrees that acceptance of any tendered old notes
by us and the issuance of new notes in exchange therefor constitutes
performance in full by us of certain of our obligations under the
exchange and registration rights agreement.
All authority conferred by the transferor will survive the death or
incapacity of the transferor and every obligation of the transferor shall be
binding upon the heirs, legal representatives, successors, assigns, executors
and administrators of such transferor.
The transferor certifies that:
. it is not our "affiliate" within the meaning of Rule 405 under the
Securities Act;
. it is acquiring the new notes in the ordinary course of its business and
that it has no arrangement with any person to participate in the
distribution of such new notes; and
. unless it is a broker-dealer, it is not engaged in, and does not intend
to engage in, a distribution of new notes.
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<PAGE>
Each transferor which is a broker-dealer receiving new notes for its own
account must acknowledge that it will deliver a prospectus in connection with
any resale of such new notes. By so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of new notes if the old notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities. We will make copies of this prospectus available to any broker-
dealer for use in connection with any such resale for a period of 90 days after
the expiration date.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of old notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the expiration date.
To withdraw a tender, a letter or facsimile transmission notice of
withdrawal must be received by the exchange agent prior to 5:00 p.m., New York
City time, on the expiration date. Any notice of withdrawal must:
. specify the name of the person having deposited the old notes to be
withdrawn;
. identify the old notes to be withdrawn, including the certificate
number(s) and principal amount of such old notes, or, in the case of old
notes transferred by book-entry transfer, the name and number of the
account at the book-entry transfer facility to be credited;
. be signed by the holder in the same manner as the original signature on
the letter of transmittal by which such old notes were tendered,
including any required signature guarantees, or be accompanied by
documents of transfer sufficient to have the trustee with respect to the
old notes register the transfer of such old notes into the name of the
person withdrawing the tender; and
. specify the name in which any such old notes are to be registered, if
different from that of the person withdrawing such tender.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of such notices. Such determination will be final
and binding on all parties. Any old notes withdrawn will be deemed not to have
been validly tendered for purposes of the exchange offer and no new notes will
be issued with respect thereto unless the old notes so withdrawn are validly
retendered. Any old notes which have been tendered but which are not accepted
for exchange will be returned to the holder thereof without cost to such holder
as soon as practicable after withdrawal, rejection of tender or termination of
the exchange offer. Properly withdrawn old notes may be retendered by following
one of the procedures described above under "--Procedures for Tendering Old
Notes" at any time prior to the expiration date.
Conditions
Notwithstanding any other term of the exchange offer, we are not required to
accept for exchange, or exchange new notes and may terminate or amend the
exchange offer as provided herein before the acceptance of such old notes if:
. any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in our reasonable judgment, might materially impair our ability
to proceed with the exchange offer or any material adverse development
has occurred in any existing action or proceeding with respect to us or
any of our subsidiaries;
. any law, statute, rule, regulation or interpretation by the SEC's staff
is proposed, adopted or enacted, which, in our reasonable judgment,
might materially impair our ability to proceed with the exchange offer
or materially impair the contemplated benefits of the exchange offer to
us; or
. any governmental approval has not been obtained, which approval we
shall, in our reasonable discretion, deem necessary for the consummation
of the exchange offer as contemplated hereby.
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If we determine in our reasonable discretion that any of the conditions are
not satisfied, we may:
. refuse to accept any old notes and return all tendered old notes to the
tendering holders;
. extend the exchange offer and retain all old notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
holders to withdraw such old notes (see "--Withdrawal of Tenders"); or
. waive such unsatisfied conditions with respect to the exchange offer and
accept all properly tendered old notes which have not been withdrawn.
Exchange Agent
The Bank of New York has been appointed as the exchange agent for the
exchange offer. All executed letters of transmittal should be directed to the
exchange agent at one of the addresses set forth below:
<TABLE>
<S> <C>
BY HAND/OVERNIGHT COURIER: BY MAIL:
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street, Floor 7E
Corporate Trust Services Window New York, New York 10286
Ground Level Attention: Nathalie Simon,
Attention: Nathalie Simon, Reorganization
Reorganization Section
Section
BY FACSIMILE:
(212) 815-6339
</TABLE>
Questions and requests for assistance, requests for additional copies of
this prospectus or of the letter of transmittal and requests for notices of
guaranteed delivery should be directed to the exchange agent at the address and
telephone number set forth in the letter of transmittal.
Delivery to an address other than as set forth on the letter of transmittal,
or transmissions of instructions via a facsimile number other than the ones set
forth on the letter of transmittal, will not constitute a valid delivery.
Fees and Expenses
We will bear expenses of soliciting tenders. The principal solicitation is
being made by mail. Additional solicitation may be made by telecopy, telephone
or in person by us and our affiliates' officers and regular employees.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers, or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection with its services.
We will pay cash expenses to be incurred in connection with the exchange
offer. Such expenses include fees and expenses of the exchange agent and
trustee, accounting and legal fees and printing costs, among others.
Accounting Treatment
The new notes will be recorded at the carrying value of the old notes as
reflected in our accounting records on the date of the exchange. Accordingly,
no gain or loss for accounting purposes will be recognized by us upon the
exchange. Expenses incurred in connection with the issuance of the new notes
will be amortized over the term of the new notes.
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Consequences of Failure to Exchange
The old notes that are not exchanged pursuant to the exchange offer will
remain restricted securities. Accordingly, such old notes may be resold only:
. to us, upon redemption thereof or otherwise;
. so long as the old notes are eligible for resale pursuant to Rule 144A,
to a person inside the United States whom the seller reasonably believes
is a qualified institutional buyer, commonly referred to as a "QIB,"
within the meaning of Rule 144A under the Securities Act in a
transaction meeting the requirements of Rule 144A, in accordance with
Rule 144 under the Securities Act, or pursuant to another exemption from
the registration requirements of the Securities Act, and based upon an
opinion of counsel reasonably acceptable to us;
. outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act; or
. pursuant to an effective registration statement under the Securities
Act, in each case in accordance with any applicable securities laws of
any state of the United States.
Resale of the New Notes
With respect to resales of new notes, based on interpretations by the staff
of the SEC set forth in no-action letters issued to third parties, including
Exxon Capital Holding Corporation (available April 13, 1989), Morgan Stanley
Co., Inc. (available June 5, 1999) and Shearman & Sterling (available July 2,
1993), we believe that a holder or other person who receives new notes, whether
or not such person is the holder, will be allowed to resell the new notes to
the public without further registration under the Securities Act and without
delivering to the purchasers of the new notes a prospectus that satisfies the
requirements of Section 10 of the Securities Act. Such person must not be our
"affiliate" within the meaning of Rule 405 under the Securities Act, must
receive new notes in exchange for new notes in the ordinary course of business
and must not be participating, must not intend to participate, and must have no
arrangement or understanding with any person to participate, in the
distribution of the new notes. However, if any holder acquires new notes in the
exchange offer for the purpose of distributing or participating in a
distribution of the new notes, such holder cannot rely on the position of the
staff of the SEC enunciated in such no-action letters or any similar
interpretive letters, and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction, unless an exemption from registration is otherwise available.
Further, each participating broker-dealer that receives new notes for its own
account in exchange for old notes, where such old notes were acquired by such
participating broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes.
As contemplated by these no-action letters and the exchange and registration
rights agreement, each holder accepting the exchange offer is required to
represent to us in the letter of transmittal that:
. the new notes are to be acquired by the holder or the person receiving
such new notes, whether or not such person is the holder, in the
ordinary course of business;
. the holder or any such other person, other than a broker-dealer referred
to in the next paragraph, is not engaging and does not intend to engage,
in the distribution of the new notes;
. the holder or any such other person has no arrangement or understanding
with any person to participate in the distribution of the new notes;
. neither the holder nor any such other person is our "affiliate" within
the meaning of Rule 405 under the Securities Act; and
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. if such holder or other person participates in the exchange offer for
the purpose of distributing the new notes, it will comply with the
registration and prospectus delivery requirements of the Securities Act
in connection with any resale of the new notes and will not rely on
those no-action letters.
As indicated above, each participating broker-dealer that receives an new
note for its own account in exchange for old notes must acknowledge that it
will deliver a prospectus in connection with any resale of such new notes. For
a description of the procedures for such resales by participating broker-
dealers, see "Plan of Distribution."
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DESCRIPTION OF THE NEW NOTES
Generally
The old notes were and the new notes offered hereby will be issued under an
indenture dated as of January 12, 1999 by and among WABCO and The Bank of New
York, as trustee. References to the notes include the new notes unless the
context otherwise requires. The following is a summary of the material
provisions of the indenture, a copy of the form of which is filed as an exhibit
to the registration statement of which this prospectus is a part, and which may
be obtained upon request to us or Chase Securities. The definitions of certain
capitalized terms used in the following summary are set forth below under
"Certain Definitions." For purposes of this section, references to "WABCO,"
"we," "us," and "our" include only WABCO and not our subsidiaries.
On January 12, 1999, we issued $75 million aggregate principal amount of old
notes under the indenture. The terms of the new notes are identical in all
material respects to the old notes, except for transfer restrictions and
registration and other rights relating to the exchange of the old notes for new
notes. The trustee under the indenture will authenticate and deliver new notes
for original issue only in exchange for a like principal amount of old notes.
Any old notes that remain outstanding after the consummation of the exchange
offer, together with the new notes, will be treated as a single class of
securities under the indenture. Accordingly, all references herein to specified
percentages in aggregate principal amount of the outstanding new notes shall be
deemed to mean, at any time after the exchange offer is consummated, such
percentage in aggregate principal amount of the old notes and new notes then
outstanding.
The notes will be our unsecured obligations. The notes are not guaranteed by
our subsidiaries. Our credit agreement is unconditionally guaranteed by all of
our domestic subsidiaries. So long as the old notes remain outstanding, this
guarantee is limited to $250 million in the aggregate. See "Risk Factors--The
notes are effectively subordinated . . . ."
Optional Redemption
The notes will be redeemable, at our option, in whole or in part, at any
time on or after June 15, 2000, and prior to maturity, upon not less than 30
nor more than 60 days prior notice mailed by first-class mail to each note
holder's registered address, at the following redemption prices (expressed in
percentages of principal amount), plus accrued interest to the redemption date
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date), if redeemed during
the 12-month period commencing on or after June 15 of the years set forth
below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2000............................................................ 104.688%
2001............................................................ 102.344%
2002 and thereafter............................................. 100.000%
</TABLE>
In the case of any redemption of notes or the existing notes issued in 1995,
we will redeem notes or the existing notes, as the case may be, on a pro rata
basis.
In the case of any partial redemption, selection of the notes for redemption
will be made by the trustee on a pro rata basis, by lot or by such other method
as the trustee in its sole discretion shall deem to be fair and appropriate,
although no note of $1,000 in original principal amount or less will be
redeemed in part. If any note is to be redeemed in part only, the notice of
redemption relating to such note will state the portion of the principal amount
thereof to be redeemed. A new note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the holder thereof upon
cancellation of the original note.
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Ranking
The notes will:
. be our senior unsecured obligations;
. rank pari passu in right of payment with all of our existing and future
unsecured Senior Indebtedness; and
. be senior in right of payment to our future Subordinated Indebtedness.
The notes will be effectively subordinated to liabilities of our
subsidiaries, including trade payables, and to the debt under our senior
secured credit facility. See "Risk Factors--The notes are effectively
subordinated . . . ."
The indenture limits the amount of indebtedness that may be incurred by us
and our subsidiaries which may rank pari passu in right of payment with the
notes or which may be secured. See "Description of Indebtedness."
Certain Definitions
We have included herein certain key definitions from the indenture, but not
definitions of all the capitalized terms used therein. Reference is made to the
indenture for the definition of terms not defined herein.
"Additional Assets" means:
. any property or assets, other than Indebtedness and Capital Stock, in a
Related Business;
. the capital stock of a person that becomes a Restricted Subsidiary as a
result of the acquisition of such capital stock by WABCO or another
Restricted Subsidiary; or
. capital stock constituting a minority interest in any person that at
such time is a Restricted Subsidiary; provided, however, that any such
Restricted Subsidiary described in this and the immediately preceding
clause is primarily engaged in a related business.
"Asset Disposition" means any sale, lease, transfer or other disposition, or
series of related sales, leases, transfers or dispositions by WABCO or any
Restricted Subsidiary, other than permitted Sale/Leaseback Transactions,
including any disposition by means of a merger, consolidation or similar
transaction, each referred to for the purposes of this definition as a
"disposition", of:
. any shares of capital stock of a Restricted Subsidiary, other than
directors' qualifying shares or shares required by applicable law to be
held by a person other than WABCO or a Restricted Subsidiary;
. all or substantially all the assets of any division or line of business
of WABCO or any Restricted Subsidiary; or
. any other assets of WABCO or any Restricted Subsidiary outside of the
ordinary course of business of WABCO or such Restricted Subsidiary.
Asset Disposition does not include in the case of the above clauses:
. a disposition by a Restricted Subsidiary to WABCO or by WABCO or a
Subsidiary to a wholly-owned subsidiary; and
. for purposes of the covenant described under "Certain Covenants--
Limitation on Sales of Assets and Subsidiary Stock" only, a disposition
that constitutes a Restricted Payment permitted by the covenant
described under "Certain Covenants--Limitation on Restricted Payments".
The receipt of any insurance proceeds in connection with any casualty, however,
will not be included within the meaning of "Asset Disposition" except to the
extent more than $3,000,000 in the aggregate in any fiscal year. To the extent
that WABCO reinvests on the date of any required Excess Proceeds Offer, or
certified to the trustee that it intends to reinvest within 180 days of such
Excess Proceeds Offer, any of such excess proceeds in equipment, vehicles or
other assets used in WABCO's principal lines of business, however, the
resultant Excess Proceeds Offer is reduced by the amount so reinvested or to be
reinvested.
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"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value, discounted at the interest rate
borne by the notes, compounded annually of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction, including any period for which such lease has been
extended.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or preferred stock, the quotient obtained by dividing
. the sum of the products of numbers of years from the date of
determination to the dates of each successive scheduled principal
payment of such Indebtedness or redemption or similar payment with
respect to such Preferred Stock multiplied by the amount of such payment
by
. the sum of all such payments.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined
in accordance with GAAP; and the stated maturity thereof shall be the date of
the last payment of rent or any other amount due under such lease prior to the
first date upon which such lease may be terminated by the lessee without
payment of a penalty.
"Cash Equivalents" means, at any time:
. any evidence of Indebtedness with a maturity of 180 days or less from
the date of acquisition issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality
thereof (provided that the full faith and credit of the United States of
America is pledged in support thereof);
. certificates of deposit or acceptances with a maturity of 180 days or
less from the date of acquisition of any financial institution that is a
member of the Federal Reserve System having combined capital and surplus
and undivided profits of not less than $300,000,000 and a Keefe Bank
Watch (or successor) Rating of B (or subsequent equivalent rating) or
better;
. commercial paper with a maturity of 180 days or less from the date of
acquisition issued by a corporation that is not an affiliate of WABCO
organized under the laws of any state of the United States or the
District of Columbia and rated at least A-1, or subsequent equivalent
rating, by Standard & Poor's Corporation and its successors or at least
P-1, or subsequent equivalent rating, by Moody's Investors Service, Inc.
and its successors; and
. repurchase agreements and reverse repurchase agreements with terms of
more than 30 days relating to obligations of the types described in the
first clause above entered into with a financial institution of the type
described in the second clause above, provided that the terms of such
agreements comply with the guidelines set forth in the Federal Financial
Agreements of Depository Institutions With Securities Dealers and
Others, as adopted by the Comptroller of the Currency on October 31,
1985.
"Change of Control" means the occurrence of any of the following events:
. any "person", as such term is used in Sections 13 (d) and 14 (d) of the
Exchange Act, other than any Designated Person or combination of
Designated Persons, is or becomes the beneficial owner (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that for purposes
of this clause such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 35% of the total voting
power of voting stock;
. during any period of two consecutive years, individuals who at the
beginning of such period constituted board of directors, together with
any new directors whose election by such board of directors or whose
nomination for election by WABCO's stockholders was approved by a vote
of a majority of WABCO's directors then still in office who were either
directors at the beginning of such
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period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority of WABCO's board
of directors then in office;
. WABCO conveys, transfers or leases all or substantially all its assets
to any person or group, in one transaction or a series of transactions
other than any conveyance, transfer or lease between WABCO and a wholly-
owned subsidiary; or
. the stockholders of WABCO shall approve any plan or proposal for the
liquidation or dissolution of WABCO.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of the aggregate amount of Adjusted EBITDA for the four most recent
fiscal quarters for which WABCO has filed financial statements with the SEC
pursuant to the requirements of the Exchange Act prior to the date of such
determination to Consolidated Interest Expense for such four fiscal quarters;
provided, however, that:
(1) if WABCO or any Restricted Subsidiary has incurred any Indebtedness
since the beginning of such period that remains outstanding or if the
transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an incurrence of Indebtedness, or both, Adjusted EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving effect on a pro forma basis to such Indebtedness as if such
Indebtedness has been incurred on the first day of such period and the
discharge of any other Indebtedness repaid, repurchased, defeased or
otherwise discharged with the proceeds of such new Indebtedness as if such
discharge had occurred on the first day of such period, except that, in
making such calculation, Indebtedness incurred under a revolving credit or
similar arrangement to finance seasonal fluctuations in working capital
needs shall be computed on the average daily balance of such Indebtedness
during such period unless such Indebtedness is projected in the reasonable
judgment of senior management of WABCO to remain outstanding for a period
in excess of 12 months from the date of incurrence of such Indebtedness, in
which case such Indebtedness will be assumed to have been incurred on the
first day of such coverage period,
(2) if since the beginning of such period WABCO or any Restricted
Subsidiary shall have made any Asset Disposition, the Adjusted EBITDA for
such period shall be reduced by an amount equal to the Adjusted EBITDA, if
positive, directly attributable to the assets which are the subject of such
Asset Disposition for such period, or increased by an amount equal to the
Adjusted EBITDA, if negative, directly attributable thereto for such period
and Consolidated Interest Expense for such period shall be reduced by an
amount equal to the Consolidated Interest Expense directly attributable to
any Indebtedness of WABCO or any Restricted Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to WABCO and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period, or, if the capital stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent WABCO and its
continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale,
(3) if since the beginning of such period WABCO or any Restricted
Subsidiary, by merger or otherwise, shall have made an investment in any
Restricted Subsidiary, or any person which becomes a Restricted Subsidiary,
or an acquisition of assets, including any acquisition of assets occurring
in connection with a transaction causing a calculation to be made
hereunder, which constitutes all or substantially all of an operating unit
of a business, Adjusted EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving pro forma effect thereto, including
the incurrence of any Indebtedness, as if such Investment or acquisition
occurred on the first day of such period, and
(4) if since the beginning of such period any person that subsequently
became a Restricted Subsidiary or was merged with or into WABCO or any
Restricted Subsidiary since the beginning of such period shall have made
any Asset Disposition, any Investment or acquisition of assets that would
have required an
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adjustment pursuant to clause (2) or (3) above if made by WABCO or a
Restricted Subsidiary during such period, Adjusted EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto as if such Asset Disposition, Investment or acquisition
occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to
an acquisition of assets, the amount of income or earnings relating thereto,
and the amount of Consolidated Interest Expense associated with any
Indebtedness incurred in connection therewith, the pro forma calculations shall
be determined in good faith by a responsible financial or accounting officer of
WABCO. If any Indebtedness bears a floating rate of interest and is being given
pro forma effect, the interest of such Indebtedness shall be calculated as if
the rate in effect on the date of determination had been the applicable rate
for the entire period, taking into account any Interest Rate Protection
Agreement applicable to such Indebtedness if such Interest Rate Protection
Agreement has a remaining term in excess of 12 months.
"Consolidated Current Liabilities" as of the date of determination means the
aggregate amount of liabilities of WABCO and its consolidated Restricted
Subsidiaries which may properly be classified as current liabilities, including
taxes accrued as estimated, on a consolidated basis, after eliminating all
intercompany items between WABCO and any Restricted Subsidiary and between
Restricted Subsidiaries, and all current maturities of long-term Indebtedness,
all as determined in accordance with GAAP consistently applied.
"Consolidated Interest Expense" means, for any period, the total interest
expense of WABCO and its consolidated Restricted Subsidiaries,
. plus to the extent not included in such total interest expense, and to
the extent incurred by WABCO or its Restricted Subsidiaries,
. interest expense attributable to capital leases,
. amortization of debt discount and debt issuance cost, excluding debt
issuance cost relating to the notes,
. capitalized interest,
. non-cash interest payments,
. commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing,
. net costs under Interest Rate Protection Agreements including
amortization of fees,
. Preferred Stock dividends in respect of all Preferred Stock held by
persons other than WABCO or a Wholly-Owned Subsidiary,
. interest incurred in connection with Investments in discontinued
operations, and
. interest actually paid by WABCO or any of its consolidated
Restricted Subsidiaries under any Guarantee of Indebtedness of any
person,
. and minus, to the extent included in such total interest expense, any
amortization by WABCO and its consolidated Restricted Subsidiaries of
capitalized interest or commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing.
Consolidated Net Income" means, for any period, the net income of WABCO and
its consolidated Restricted Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income:
(1) any net income of any person if such person is not a Restricted
Subsidiary, except that
. subject to the limitations contained in clause (4) below, WABCO's
equity in the net income of any such person for such period shall be
included in such Consolidated Net Income up to the aggregate amount
of cash actually distributed by such person during such period to
WABCO or a Restricted Subsidiary as a dividend or other
distribution, subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the limitations
contained in clause (3) below and
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. WABCO's equity in a net loss of any person, other than an
Unrestricted Subsidiary, for such period shall be included in
determining such Consolidated Net Income;
(2) any net income (or loss) of any person acquired by WABCO or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition;
(3) the net income of any Restricted Subsidiary to the extent that such
Restricted Subsidiary is subject to restrictions, directly or indirectly,
on the payment of dividends or the making of distributions, directly or
indirectly, to WABCO, except that WABCO's equity in a net loss of any such
Restricted Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(4) any gain (but not loss) realized upon the sale or other disposition
of any property, plant or equipment of WABCO or its consolidated Restricted
Subsidiaries, including pursuant to any sale-and-leaseback arrangement,
which is not sold or otherwise disposed of in the ordinary course of
business and any gain (but not loss) realized upon the sale or other
disposition of any capital stock of any person;
(5) extraordinary gains or losses; and
(6) the cumulative effect of a change in accounting principles.
"Consolidated Net Tangible Assets" as of any date of determination means the
total amount of assets, less accumulated depreciation and amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items, which would appear on a consolidated balance sheet
of WABCO and its consolidated Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, and after giving effect to purchase
accounting and after deducting therefrom, to the extent otherwise included, the
amounts of:
. Consolidated Current Liabilities;
. minority interests in consolidated Subsidiaries held by persons other
than WABCO or a Restricted Subsidiary;
. excess of cost over fair value of assets of businesses acquired, as
determined in good faith by the board of directors;
. any revaluation or other write-up in book value of assets subsequent to
the Existing Notes Issue Date as a result of a change in the method of
valuation in accordance with GAAP consistently applied;
. unamortized debt discount and expenses and other unamortized deferred
charges, goodwill, patents, trademarks, service marks, trade names,
copyrights, licenses, organization or developmental expenses and other
intangible items, if included in total assets;
. treasury stock, if included in total assets;
. Unallocated ESOP Shares; and
. cash set apart and held in a sinking or other analogous fund established
for the purpose of redemption or other retirement of capital stock to
the extent such obligation is not reflected in Consolidated Current
Liabilities.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of WABCO and its consolidated Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter for which WABCO has filed financial statements with the SEC
pursuant to the requirements of the Exchange Act, prior to the taking of any
action for the purpose of which the determination is being made, as
. the par or stated value of all outstanding capital stock of WABCO, plus
. paid-in capital or capital surplus relating to such capital stock, plus
. any retained earnings or earned surplus, less, to the extent otherwise
included,
. any accumulated deficit,
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. any amounts attributable to Disqualified Stock,
. Unallocated ESOP Shares,
. treasury stock, and
. any cumulative translation adjustment.
"Credit Agreement" means the Credit Agreement dated as of January 31, 1995,
as amended and restated as of February 15, 1995, among WABCO, the financial
institutions named therein, Chemical Bank, as Swingline Lender, Issuing Bank,
Administrative Agent and Collateral Agent, Chemical Bank Delaware, as Issuing
Bank, The Bank of New York and Credit Suisse, as Co-Administrative Agents, and
The Bank of New York, as Documentation Agent, as the same may be amended or
modified from time to time, and any agreement evidencing any refunding,
replacement, refinancing or renewal, in whole or in part, of the Credit
Agreement.
"Designated Person" means Incentive AB, a corporation organized under the
laws of the Kingdom of Sweden, or any of its subsidiaries, Vestar or Vestar
Capital or any of their respective Controlled Affiliates, the ESOP, the Pulse
Shareholders and any of their respective Affiliates, the Voting Trust and any
person or entity holding a beneficial interest in the Voting Trust or the
Capital Stock of WABCO held by the Voting Trust on the Existing Notes Issue
Date, or, in the case of any such person or entity, their permitted
transferees.
"Disqualified Stock" means, with respect to any person, any capital stock
which by its terms, or by the terms of any security into which it is
convertible or for which it is exchangeable, or upon the happening of any
event:
. matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise,
. is convertible or exchangeable for Indebtedness or Disqualified Stock or
. is redeemable at the option of the holder thereof, in whole or in part,
in each case on or prior to the first anniversary of the Stated Maturity
of the notes.
"Adjusted EBITDA" for any period means Consolidated Net Income plus the
following to the extent deducted in calculating such Consolidated Net Income:
. all income tax expense of WABCO;
. Consolidated Interest Expense;
. depreciation expense;
. amortization expense; and
. other noncash charges, including any charges resulting from the write-up
of inventory, deducted in determining Consolidated Net Income, and not
already excluded from the definition of the term "Consolidated Net
Income", in each case for such period.
"ESOP Loan" means the loan made by WABCO to the ESOP in an aggregate
principal amount equal to $140,040,000 pursuant to the ESOP Loan Agreement,
dated as of January 31, 1995, between WABCO and the trust, as such loan may be
amended, modified, extended, renewed, replaced or refinanced from time to time
without increase in such aggregate principal amount.
"Fully Traded Common Stock" means common stock issued by any corporation
whose common stock is listed on either The New York Stock Exchange or The
American Stock Exchange or included for trading privileges in the National
Market System of the National Association of Securities Dealers Automated
Quotation System; provided, however, that either such common stock is freely
tradable under the Securities Act upon issuance or the holder thereof has
contractual registration rights that will permit the sale of such common stock
pursuant to an effective registration statement not later than nine months
after issuance to WABCO or
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one of its Subsidiaries, and provided, further such common stock is also so
listed or included for trading privileges.
"Guarantee" means any obligation, contingent or otherwise, of any person
directly or indirectly guaranteeing any Indebtedness of any person and any
obligation, direct or indirect, contingent or otherwise, of such person:
. to purchase or pay, or advance or supply funds for the purchase or
payment of, such Indebtedness of such person, whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase
assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise; or
. entered into for the purpose of assuring in any other manner the obligee
of such Indebtedness of the payment thereof or to protect such obligee
against loss in respect thereof, in whole or in part; provided, however,
that the term "Guarantee" does not include endorsements for collection
or deposit in the ordinary course of business. The term "Guarantee" used
as a verb has a corresponding meaning. The term "Guarantor" shall mean
any person Guaranteeing any obligation.
"Indebtedness" of any person means, without duplication,
(1) the principal of and premium, if any, in respect of (A) indebtedness
of such person for money borrowed and (B) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of which
such person is responsible or liable;
(2) all Capital Lease Obligations of such person and all Attributable
Debt in respect of Sale/Leaseback Transactions entered into by such person;
(3) all obligations of such person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such person
and all obligations of such person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of
business);
(4) all obligations of such person for the reimbursement of any obligor
on any letter of credit, banker's acceptance or similar credit transaction
(other than obligations with respect to letters of credit securing
obligations (other than obligations described in (1) through (3) above)
entered into in the ordinary course of business of such person to the
extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the third business day
following receipt by such person of a demand for reimbursement following
payment on the letter of credit);
(5) the amount of all obligations of such person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock, but
excluding, in each case, any accrued dividends;
(6) all obligations of the type referred to in clauses (1) through (5)
of other persons and all dividends of other persons for the payment of
which, in either case, such person is responsible or liable, directly or
indirectly, as Guarantor or otherwise; and
(7) all obligations of the type referred to in clauses (1) through (6)
of other persons secured by any Lien on any property or asset of such
person (whether or not such obligation is assumed by such person), the
amount of such obligation being deemed to be the lesser of the value of
such property and assets or the amount of the obligation so secured.
"Interest Rate Protection Agreement" means any interest rate swap agreement,
interest rate cap agreement or other financial agreement or arrangement
designed to protect WABCO or any Restricted Subsidiary against fluctuations in
interest rates.
"Net Available Cash" from an Asset Disposition means cash payments, Cash
Equivalents and Fully Traded Common Stock received therefrom, including any
cash payments, Cash Equivalents and Fully Traded Common Stock received by way
of deferred payment of principal pursuant to a note or installment receivable
or otherwise, but only as and when received, but excluding any other
consideration received in the form of assumption by the acquiring person of
Indebtedness or other obligations relating to such properties or assets or
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received in any other noncash form, in each case net of all legal, title and
recording tax expenses, commissions and other fees and expenses incurred, and
all federal, state, provincial, foreign and local taxes required to be accrued
as a liability under GAAP, as a consequence of such Asset Disposition, and in
each case net of all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of any
Lien upon or other security agreement of any kind with respect to such assets,
or which must by its terms, or in order to obtain a necessary consent to such
Asset Disposition, or by applicable law be repaid out of the proceeds from such
Asset Disposition, and net of all distributions and other payments required to
be made to minority interest holders in Subsidiaries or joint ventures as a
result of such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Permitted Investments" means any of the following:
(1) any investment in direct obligations of the United States of America
or any agency thereof or obligations guaranteed by the United States of
America or any agency thereof;
(2) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws
of the United States of America, any state thereof or any foreign country
recognized by the United States, and, in the case of investments in excess
of $100,000 in any one bank or trust company, which bank or trust company
has capital, surplus and undivided profits aggregating in excess of
$50,000,000, or the foreign currency equivalent thereof, and has
outstanding debt which is rated "A", or such similar equivalent rating, or
higher by at least one nationally recognized statistical rating
organization, as defined in Rule 436 under the Securities Act, or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2) above;
(4) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an
affiliate of WABCO) organized and in existence under the laws of the United
States of America or any foreign country recognized by the United States of
America with a rating at the time as of which any investment therein is
made of "P-l" or higher according to Moody's Investors Service, Inc. or "A-
l" or higher according to Standard and Poor's Corporation; and
(5) investments in securities with maturities of six months or less from
the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by Standard & Poor's Corporation or "A" by Moody's Investors Service, Inc.
"Permitted Liens" means, with respect to any person,
(1) Liens existing on the date of the Indenture, including Liens
securing borrowings up to the amount of the commitments under the Credit
Agreement on the Existing Notes Issue Date and other obligations under or
expressly permitted by the Credit Agreement;
(2) Liens subsequently created, whether under the Credit Agreement or
otherwise; provided that such Liens, together with any Liens under clause
(1) that secure Indebtedness under the Credit Agreement, do not secure
Indebtedness with a principal amount that is greater than the amount of the
commitments under the Credit Agreement on the Existing Notes Issue Date
except to the extent such Liens are permitted under any of clauses (3)
through (20) of this definition of Permitted Liens;
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(3) Liens securing borrowings of up to $60 million permitted pursuant to
item (6) of the second paragraph of the covenant described under "Certain
Covenants--Limitation on Indebtedness";
(4) Liens on property at the time such person or any of its subsidiaries
acquires the property, including any acquisition by means of a merger or
consolidation with or into such person or a subsidiary of such person;
provided, however, that the Liens may not extend to any other property
owned by such person or any of its subsidiaries;
(5) Liens securing Purchase Money Indebtedness;
(6) additional Liens for any purpose of up to 15% of WABCO's
Consolidated Net Tangible Assets;
(7) pledges or deposits by such person under workmen's compensation
laws, unemployment insurance laws or similar legislation, or good faith
deposits in connection with bids, tenders, contracts, other than for the
payment of Indebtedness or leases to which such person is a party, or
deposits to secure public or statutory obligations of such person or
deposits of cash or United States government bonds to secure surety or
appeal bonds to which such person is a party, or deposits as security for
contested taxes or import duties or for the payment of rent, in each case
Incurred in the ordinary course of business;
(8) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due or being contested in
good faith by appropriate proceedings or other Liens arising out of
judgments or awards against such person with respect to which such person
shall then be proceeding with an appeal or other proceedings for review;
(9) Liens for property taxes not yet subject to penalties for non-
payment or which are being contested in good faith and by appropriate
proceedings;
(10) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such person in the
ordinary course of its business; provided, however, that such letters of
credit, and reimbursement obligations thereunder, do not constitute
Indebtedness;
(11) survey exceptions, encumbrances, easements or reservations of, or
rights of others for, licenses, rights of way, sewers, electric lines,
telegraph and telephone lines and other similar purposes, or zoning or
other restrictions as to the use of real properties or Liens incidental to
the conduct of the business of such person or to the ownership of its
properties which were not Incurred in connection with Indebtedness and
which do not in the aggregate materially adversely affect the value of said
properties or materially impair their use in the operation of the business
of such person;
(12) Liens securing Indebtedness incurred to finance the construction,
purchase or lease of, or repairs, improvements or additions to, property of
such person; provided, however, that the Lien may not extend to any other
property owned by such person or any of its Restricted Subsidiaries at the
time the Lien is Incurred, and the Indebtedness secured by the Lien may not
be Incurred more than 180 days after the later of the acquisition,
completion of construction, repair, improvement, addition or commencement
of full operation of the property subject to the Lien;
(13) Liens on inventory and receivables and the products and proceeds
thereof;
(14) Liens on property or shares of stock of another person at the time
such other person becomes a subsidiary of such person; provided, however,
that any such Lien may not extend to any other property owned by such
person or any of its Restricted Subsidiaries;
(15) Liens securing Indebtedness or other obligations of a subsidiary of
such person owing to such person or a wholly-owned subsidiary of such
person (other than an Unrestricted Subsidiary);
(16) Liens Incurred by another person on assets that are the subject of
a Capital Lease Obligation to which such person or a subsidiary of such
person is a party; provided, however, that any such Lien may not secure
Indebtedness of such person or any of its Restricted Subsidiaries (except
by virtue of clause (vii) of the definition of "Indebtedness") and may not
extend to any other property owned by such person or any subsidiary of such
person;
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(17) Liens securing Interest Rate Protection Agreements so long as the
related Indebtedness is, and is permitted to be under the Indenture,
secured by a Lien on the same property securing the Interest Rate
Protection Agreement;
(18) Liens to secure any Refinancing (or successive Refinancings) as a
whole, or in part, of any Indebtedness secured by any Lien referred to in
the foregoing clauses (1), (2), (12) and (14); provided, however, that such
new Lien shall be limited to all or part of the same property that secured
the original Lien (plus improvements on such property) and the Indebtedness
secured by such Lien at such time is not increased (other than by an amount
necessary to pay fees and expenses, including premiums, related to the
Refinancing of such Indebtedness);
(19) Liens incurred in connection with any Sale/Leaseback Transaction
permitted pursuant to the covenant described under "Certain Covenants--
Limitation on Sale/Leaseback Transactions" securing borrowings of up to $10
million; and
(20) Liens with respect to any Indebtedness Incurred by any Restricted
Subsidiary pursuant to clause (7) of the covenant described under "Certain
Covenants--Limitation on Indebtedness and Capital Stock of Restricted
Subsidiaries;" provided that such Lien shall only be a "Permitted Lien" so
long as such Indebtedness requires a restriction on distributions referred
to under clause (7) of the covenant described under "Certain Covenants--
Limitation on Restrictions on Distributions from Restricted Subsidiaries."
"Purchase Money Indebtedness" means Indebtedness
. consisting of the deferred purchase price of property, conditional sale
obligations, obligations under any title retention agreement and other
purchase money obligations, including borrowings, in each case where the
maturity of such Indebtedness does not exceed the anticipated useful
life of the asset being financed, and
. Incurred to finance the acquisition or construction by any subsidiary of
such asset, including additions and improvements; provided, however,
that any Lien arising in connection with any such Indebtedness shall be
limited to the specified asset being financed or, in the case of real
property or fixtures, including additions and improvements, the real
property on which such asset is attached; and provided further, however,
that the principal amount of such Indebtedness does not exceed the
lesser of 85% of the cost or 85% of the fair market value of the asset
being financed (such fair market value as determined in good faith by
the board of directors, as evidenced by a resolution).
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of WABCO or any Restricted Subsidiary existing on the date of the
Existing Notes Indenture or incurred in compliance with the Indenture;
provided, however, that
. such Refinancing Indebtedness has a stated maturity no earlier than the
stated maturity of the Indebtedness being Refinanced,
. such Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than
the Average Life of the Indebtedness being Refinanced,
. such Refinancing Indebtedness has an aggregate principal amount (or if
incurred with original issue discount, an aggregate issue price) that is
equal to or less than the aggregate principal amount (or if incurred
with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium
and defeasance costs) under the Indebtedness being Refinanced; provided
further, however, that Refinancing Indebtedness shall not include
. Indebtedness of a subsidiary that refinances Indebtedness of WABCO,
or
. Indebtedness of WABCO or a Restricted Subsidiary that refinances
Indebtedness of an Unrestricted Subsidiary, and
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. such Refinancing Indebtedness is subordinated in right of payment to the
notes at least to the extent that the Indebtedness to be Refinanced is
subordinated in right of payment to the notes.
"Restricted Payment" with respect to any person means:
. the declaration or payment of any dividends or any other distributions
of any sort in respect of its capital stock, including any payment in
connection with any merger or consolidation involving such person) or
similar payment to the direct or indirect holders of its capital stock,
other than dividends or distributions payable solely in its capital
stock, other than Disqualified Stock, or rights to acquire its capital
stock, other than Disqualified Stock, and dividends or distributions
payable solely to WABCO or a Restricted Subsidiary, and other than pro
rata dividends or other distributions made by a subsidiary to minority
stockholders or owners of an equivalent interest in the case of a
subsidiary that is an entity other than a corporation,
. the purchase, redemption or other acquisition or retirement for value of
any capital stock of WABCO or of any Restricted Subsidiary held by any
person or of any capital stock of a Restricted Subsidiary held by any
Affiliate of WABCO, other than a wholly-owned subsidiary, including the
exercise of any option to exchange any capital stock (other than into
capital stock of WABCO that is not Disqualified Stock),
. any principal payment on, or purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund
payment of any Subordinated Indebtedness, other than the purchase,
repurchase or other acquisition of Indebtedness purchased in
anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the
date of acquisition, or
. the making of any Investment in any person, other than a Permitted
Investment or any Investment made to acquire a Restricted Subsidiary.
"Restricted Subsidiary" means any subsidiary of WABCO that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby WABCO or a Restricted Subsidiary transfers
such property to a person and leases it back from such person, other than
leases for a term of not more than 12 months or between WABCO and a wholly-
owned subsidiary or between wholly-owned subsidiaries.
"Senior Indebtedness" means:
. Indebtedness of WABCO, whether outstanding on the date of the existing
notes indenture or thereafter incurred, and
. accrued and unpaid interest, including interest accruing on or after the
filing of any petition in bankruptcy or for reorganization relating to
WABCO, to the extent post-filing interest is allowed in such proceeding,
in respect of
. indebtedness of WABCO for money borrowed, and
. indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which WABCO is responsible or liable
unless, 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.
Provided, however, that Senior Indebtedness shall not include:
. any obligation of WABCO to any subsidiary,
. any liability for federal, state, local or other taxes owed or owing by
WABCO,
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. any accounts payable or other liability to trade creditors arising in
the ordinary course of business, including guarantees thereof or
instruments evidencing such liabilities,
. any Indebtedness of WABCO, and any accrued and unpaid interest in
respect thereof, which is expressly subordinate in right of payment to
any other Indebtedness or other obligation of WABCO, or
. that portion of any Indebtedness which at the time of incurrence is
incurred in violation of the indenture.
"Subordinated Indebtedness" means any Indebtedness of WABCO, whether
outstanding on the existing notes issue date or thereafter incurred, which is
subordinate or junior in right of payment to the notes pursuant to a written
agreement to that effect.
"Unallocated ESOP Shares" means shares of common stock of WABCO which are
held by the ESOP but have not yet been allocated to participants' accounts.
"Unrestricted Subsidiary" means:
. any subsidiary of WABCO that at the time of determination shall be
designated an Unrestricted Subsidiary by the board of directors in the
manner provided below, and
. any subsidiary of an Unrestricted Subsidiary.
The board of directors may designate any subsidiary of WABCO, including any
newly acquired or newly formed subsidiary, to be an Unrestricted Subsidiary
unless such subsidiary or any of its subsidiaries owns any capital stock or
Indebtedness of, or holds any lien on any property of, WABCO or any other
subsidiary of WABCO that is not a subsidiary of the subsidiary to be so
designated; provided, however, that either:
. the subsidiary to be so designated has total assets of $1,000 or less,
or
. if such subsidiary has assets greater than $1,000, such designation
would be permitted under the covenant entitled "Certain Covenants--
Limitation on Restricted Payments".
The board of directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation:
. WABCO could incur $1.00 of additional Indebtedness under the first
paragraph of the covenant described under "Certain Covenants--Limitation
on Indebtedness", and
. no Default shall have occurred and be continuing.
Any such designation by the board of directors shall be evidenced to the
trustee by promptly filing with the trustee a copy of the board resolution
giving effect to such designation and an officers' certificate certifying that
such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations, or certificates
representing an ownership interest in such obligations, of the United States of
America, including any agency or instrumentality thereof, for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
Certain Covenants
The indenture contains covenants including, among others, the covenants
described below.
Limitation on Indebtedness. We agree not to, and not to permit any
Restricted Subsidiary to, incur any Indebtedness unless the Consolidated
Coverage Ratio at the date of such incurrence exceeds 2.5 to 1.0; and no
Default or Event of Default shall have occurred and be continuing at the time
or as a consequence of the incurrence of such Indebtedness.
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Notwithstanding the foregoing paragraph, we may incur any or all of the
following Indebtedness:
(1) Indebtedness incurred pursuant to the Credit Agreement so long as
the aggregate principal amount of such Indebtedness outstanding at any time
shall not exceed $250 million;
(2) Subordinated Indebtedness owed to and held by a wholly-owned
subsidiary; provided, however, that any subsequent issuance or transfer of
any capital stock or any other event which results in any such wholly-owned
subsidiary ceasing to be a wholly-owned subsidiary or any subsequent
transfer of such Subordinated Indebtedness, other than to another wholly-
owned subsidiary, is deemed, in each case, to constitute the incurrence of
such Subordinated Indebtedness by WABCO;
(3) the notes and the existing 1995 notes;
(4) Indebtedness outstanding on the date of the Existing Notes
Indenture, other than Indebtedness described in clause (1), (2) or (3) of
this covenant;
(5) Refinancing Indebtedness in respect of Indebtedness incurred
pursuant to foregoing paragraph or pursuant to clause (3) or (4) or this
clause (5) of this covenant;
(6) additional Indebtedness in an aggregate principal amount outstanding
at any time not exceeding $60 million incurred pursuant to the Credit
Agreement or any replacement thereof;
(7) Indebtedness in an aggregate principal amount which, together with
all other Indebtedness of our company then outstanding, other than
Indebtedness permitted by clauses (1) through (5) above of this covenant
does not exceed $80 million, less the aggregate amount of any Indebtedness
incurred pursuant to clause (6) of this covenant; and
(8) Indebtedness arising out of Capital Lease Obligations, Purchase
Money Indebtedness and Sale/Leaseback Transactions permitted pursuant to
the covenant described under "Limitation on Sale/Leaseback Transactions" in
an aggregate principal amount outstanding at any one time not exceeding $20
million.
Notwithstanding the foregoing, we agree not to incur any Indebtedness
pursuant to the foregoing paragraph if the proceeds thereof are used, directly
or indirectly, to Refinance any Subordinated Indebtedness unless such
Indebtedness shall be subordinated to the notes to at least the same extent as
such Subordinated Indebtedness.
Limitation on Indebtedness and Capital Stock of Restricted Subsidiaries. We
agree not to permit any Restricted Subsidiary to incur, directly or indirectly,
any Indebtedness or capital stock except:
(1) Indebtedness or capital stock issued to and held by us or a wholly-
owned subsidiary; provided, however, that any subsequent issuance or
transfer of any capital stock or any other event which results in any such
wholly-owned subsidiary ceasing to be a wholly-owned subsidiary or any
subsequent transfer of such Indebtedness or capital stock (other than to
WABCO or a wholly-owned subsidiary) is deemed, in each case, to constitute
the issuance of such Indebtedness or capital stock by the issuer thereof;
(2) Indebtedness or capital stock of a subsidiary incurred and
outstanding on or prior to the date on which such subsidiary was acquired
by us, other than Indebtedness or capital stock incurred in connection
with, or to provide all or any portion of the funds or credit support
utilized to consummate, the transaction or series of related transactions
pursuant to which such subsidiary became a subsidiary or was acquired by
us, and Refinancing Indebtedness incurred in respect thereof; provided,
however, that such Refinancing Indebtedness is only permitted under this
clause (2) to the extent incurred by the subsidiary that originally
incurred such Indebtedness;
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(3) Indebtedness or capital stock issued and outstanding on or prior to
the date of the Existing Notes Indenture other than Indebtedness described
in clauses (1) or (2) of this covenant;
(4) Purchase Money Indebtedness; provided, however, that the aggregate
amount of Purchase Money Indebtedness outstanding after giving pro forma
effect to any incurrence of Purchase Money Indebtedness may not exceed $30
million unless, after giving effect to the incurrence of such Purchase
Money Indebtedness, we would be able to incur an additional $1.00 of
Indebtedness pursuant to paragraph (1) of the covenant described under
"Limitation on Indebtedness";
(5) Indebtedness incurred by any Restricted Subsidiary that is a Foreign
Subsidiary; provided, however, that any such Indebtedness incurred by such
Restricted Subsidiary cannot exceed 20% of the Consolidated Net Tangible
Assets of such Restricted Subsidiary;
(6) Refinancing Indebtedness incurred in respect of Indebtedness or
capital stock referred to in clauses (3) or (4) or this clause (6); and
(7) Indebtedness incurred by any Restricted Subsidiary that is a Foreign
Subsidiary for the purpose of acquiring a Restricted Subsidiary that is a
Foreign Subsidiary; provided, the principal amount of such Indebtedness may
not exceed the purchase price for such subsidiary; provided further, that
after giving effect to the incurrence of such Indebtedness, we would be
able to incur an additional $1.00 of Indebtedness pursuant to the first
paragraph of the covenant described under "Limitation on Indebtedness."
Limitation on Restricted Payments. We agree not to, and agree not to permit
any Restricted Subsidiary to, directly or indirectly, make a Restricted
Payment if at the time we make or such Restricted Subsidiary makes such
Restricted Payment:
(1) a Default or Event of Default shall have occurred and be continuing
or would result therefrom; or
(2) we are not able to incur an additional $1.00 of Indebtedness
pursuant to paragraph (1) of the covenant described under "Limitation on
Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Existing Notes Issue Date would exceed the
sum of
(A) 50% of the Consolidated Net Income accrued during the period,
treated as one accounting period, from April 1, 1995 to the end of
the most recent fiscal quarter ending prior to the date of such
Restricted Payment, or, in case such Consolidated Net Income shall be
a deficit, minus 100% of such deficit, and
(B) the aggregate Net Cash Proceeds received by us from the issuance or
sale of our capital stock, excluding Disqualified Stock and including
capital stock issued upon conversions of convertible debt or upon
exercise of options or warrants, subsequent to the Existing Notes
issue date, excluding an issuance or sale to our Subsidiary and
excluding an issuance or sale to the ESOP. As of September 30, 1998,
we would have been able to make a Restricted Payment of $15.1 million.
The provisions of the foregoing paragraph do not prohibit:
(1) dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividend would have complied with this
covenant; provided, however, that at the time of payment of such dividend,
no other Default has occurred and be continuing, or result therefrom;
provided further, however, that such dividend will be included in the
calculation of the amount of Restricted Payments;
(2) WABCO and its Restricted Subsidiaries from making loans or
advancements to, or investments in, any Joint Venture in an aggregate
amount not exceeding $15 million plus the lesser of any amounts received as
repayment of any such loan, advancement or investment and the initial
amount thereof;
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(3) the declaration or payment of dividends on our common stock
following a public offering of its common stock of up to 6% per annum of
the Net Cash Proceeds received by us in such public offering;
(4) WABCO and its Restricted Subsidiaries from making any contribution
to the ESOP or refinancing the ESOP Loan;
(5) any purchase or redemption of our capital stock or Subordinated
Indebtedness made by exchange for, or out of the proceeds of the
substantially concurrent sale of, our capital stock (other than
Disqualified Stock and other than capital stock issued or sold to our
subsidiary or the ESOP); provided, however, that (A) such purchase or
redemption is excluded in the calculation of the amount of Restricted
Payments and (B) the net cash proceeds from such sale shall be excluded
from the calculation of amounts under clause (3)(B) of the paragraph above;
(6) any purchase or redemption of Subordinated Indebtedness made by
exchange for, or out of the proceeds of the substantially concurrent sale
of, our Indebtedness which is permitted to be incurred pursuant to the
covenant described under "Limitation on Indebtedness"; provided, however,
that such purchase or redemption is excluded in the calculation of the
amount of Restricted Payments;
(7) loans and advances to our employees or any of our Restricted
Subsidiaries for travel, entertainment and relocation expenses in the
ordinary course of business in an aggregate amount outstanding at any one
time not to exceed $5 million;
(8) 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 clause (3) of the paragraph above, would not exceed $44,000,000;
provided, however, that Restricted Payments made pursuant to this clause
(8) are included in the calculation of Restricted Payments for all purposes
under clause (3) of the paragraph above (this redemption occurred in March
1997); and
(9) up to an aggregate amount of $2,000,000 of additional Restricted
Payments from and after March 21, 1997 until such time as we have the
authority under the paragraph above to make such Restricted Payments;
provided, however, that Restricted Payments made pursuant to this clause
(9) shall be included in the calculation of Restricted Payments for all
purposes under clause (3) of the paragraph above. For purposes of
performing the calculation specified in clause (3) of the paragraph above,
amounts paid in respect of clauses (1) and (3) of this paragraph shall be
counted as Restricted Payments and amounts paid in respect of clauses (2),
(4) and (5) of this paragraph shall not be counted as a Restricted
Payments. Any sale or transfer of property by an Unrestricted Subsidiary to
our company or a Restricted Subsidiary with the intention of taking back a
lease of that property will be considered a loan to that Unrestricted
Subsidiary for this purpose.
Limitation on Restrictions on Distributions from Restricted Subsidiaries. We
agree not to, and agree not to permit any Restricted Subsidiary to, create or
otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary:
. to pay dividends or make any other distributions on its capital stock or
pay any Indebtedness owed to our company or any Restricted Subsidiary;
. to make any loans or advances to WABCO or any Restricted Subsidiary;
. to transfer any of its property or assets to WABCO or any Restricted
Subsidiary; or
. to make payments in respect of any Indebtedness owed to us or any
Restricted Subsidiary, except
(1) any such encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Existing Notes Issue Date,
(2) any such encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness
incurred by such Restricted Subsidiary on or prior to the
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date on which such Restricted Subsidiary was acquired by us (other
than Indebtedness incurred as consideration in, or to provide all or
any portion of the funds or credit support utilized to consummate,
the transaction or series of related transactions pursuant to which
such Restricted Subsidiary became a Restricted Subsidiary or was
acquired by us) and outstanding on such date,
(3) any such encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness incurred pursuant to an
agreement referred to in clause (1) or (2) of this covenant or
contained in any amendment to an agreement referred to in clause (1)
or (2) of this covenant; provided, however, that the encumbrances
and restrictions with respect to such Restricted Subsidiary
contained in any such refinancing agreement or amendment are no less
favorable to the noteholders than any such encumbrances and
restrictions with respect to such Restricted Subsidiary contained in
such agreements,
(4) any such encumbrance or restriction consisting of customary
nonassignment provisions in leases governing leasehold interests to
the extent such provisions restrict the transfer of the lease or the
property leased thereunder,
(5) in the case of the third bullet point above, encumbrances and
restrictions contained in security agreements or mortgages securing
Indebtedness of a Restricted Subsidiary to the extent such
restrictions restrict the transfer of the property subject to such
security agreements or mortgages,
(6) any such encumbrance or restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the
sale or disposition of all or substantially all the capital stock or
assets of such Restricted Subsidiary pending the closing of such
sale or disposition,
(7) any such encumbrance or restriction with respect to any Restricted
Subsidiary that is a Foreign Subsidiary pursuant to an agreement
relating to Indebtedness permitted to be incurred pursuant to clause
(7) of the covenant described under "Limitation on Indebtedness and
Capital Stock of Restricted Subsidiaries," and
(8) restrictions imposed by applicable law.
Limitation on Sales of Assets. We agree not to, and agree not to permit any
Restricted Subsidiary to, make any Asset Disposition unless:
. we or our Restricted Subsidiary, as the case may be, receive
consideration at the time of such sale or other disposition at least
equal to the Fair Market Value thereof;
. at least 75% of the consideration received by us or such Restricted
Subsidiary, as the case may be, consists of cash or Cash Equivalents or
Fully Traded Common Stock; provided, however, that the amount of any
Senior Indebtedness of us or such Restricted Subsidiary that is assumed
by the transferee in any such transaction is deemed to be cash for
purposes of this provision and
. the Net Available Cash received by us or such Restricted Subsidiary, as
the case may be, from such Asset Disposition is applied in accordance
with the following paragraphs.
In the event and to the extent that we make one or more Asset Dispositions
on or after the Existing Notes Issue Date in any period of 12 consecutive
months with respect to assets the Fair Market Value of which exceeds $20
million as of the beginning of such 12-month period, then we will:
(1) within 365 days after the date the Net Available Cash so received
from such Asset Dispositions exceeds $20 million (such excess being
referred to as "Excess Net Available Cash") and to the extent we elect (or
are required by the terms of any Indebtedness) (A) apply an amount equal to
such Excess Net Available Cash to repay Senior Indebtedness or (B) invest
an equal amount, or the amount not so applied pursuant to clause (A), in
Additional Assets; and
(2) apply such Excess Net Available Cash to the extent not applied
pursuant to clause (1) as provided in the following paragraphs of this
covenant. The amount of such Excess Net Available Cash required to
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be applied during the applicable period and not applied as so required by
the end of such period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer, as defined
below, totals at least $5 million, we must, not later than the fifteenth
Business Day of such month, make an offer (an "Excess Proceeds Offer") to
purchase from the Holders on a pro rata basis an aggregate principal amount of
notes equal to the Excess Proceeds, rounded down to the nearest multiple of
$1,000, on such date, at a purchase price equal to 100% of the principal amount
of such notes, plus, in each case, accrued interest, if any, to the date of
purchase (the "Excess Proceeds Payment").
If any Excess Net Available Cash is used to repay either notes or existing
1995 notes, we will make an offer to repurchase existing 1995 notes or notes,
as the case may be, on a pro rata basis.
We will comply, to the extent applicable, with the requirements of Section
14(e) of the Securities Exchange Act of 1934 and any other applicable laws or
regulations thereunder in the event that such Excess Proceeds are received by
us under this covenant and we are required to repurchase notes as described
above. To the extent that the provisions of any applicable laws or regulations
conflict with the provisions of this covenant, we shall comply with the
applicable laws and regulations and shall not be deemed to have breached its
obligations under this covenant by virtue thereof.
In the event of the transfer of substantially all, but not all, of our
property and assets as an entirety to a person in a transaction permitted under
"Merger and Consolidation," the Successor Company, as defined therein, shall be
deemed to have sold our properties and assets not so transferred for purposes
of this covenant, and will comply with the provisions of this covenant with
respect to such deemed sale as if it were an Asset Disposition and the
Successor Company shall be deemed to have received Net Available Cash in an
amount equal to the fair market value, as determined in good faith by the board
of directors, of the properties and assets not so transferred or sold.
Limitation on Affiliate Transactions. We agree not to, and agree not to
permit any Restricted Subsidiary to, enter into or permit to exist any
transaction or series of transactions, including the purchase, sale, lease or
exchange of any property, employee compensation arrangements or the rendering
of any service, with any affiliate of us (an "Affiliate Transaction") unless
the terms thereof are no less favorable to us or such Restricted Subsidiary
than those which could be obtained at the time of such transaction in arm's-
length dealings with a person who is not such an affiliate.
In addition, we agree not to, and agree not to permit any Restricted
Subsidiary to, enter into any Affiliate Transaction unless:
. with respect to such Affiliate Transaction involving the aggregate
value, remuneration or other consideration of more than $1 million but
less than or equal to $5 million, we have obtained approval of a
majority of our board of directors, including a majority of the
disinterested directors; and
. with respect to such Affiliate Transaction involving the aggregate
value, remuneration or other consideration of more than $5 million, we
have delivered to the trustee an opinion of a nationally recognized
investment banking firm to the effect that such Affiliate Transaction
is fair to us or such Restricted Subsidiary, as the case may be, from a
financial point of view.
The provisions of the foregoing paragraph shall not prohibit:
. any Restricted Payment permitted to be paid pursuant to the covenant
described under "Limitation on Restricted Payments;"
. any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans
approved by the board of directors;
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. the grant of stock options or similar rights to our employees and
directors pursuant to plans approved by the board of directors;
. any Affiliate Transaction between us and a wholly-owned subsidiary or
between wholly-owned subsidiaries; and
. any transaction entered into by us or any Restricted Subsidiary with
the Plan.
Change of Control. Upon the occurrence of a Change of Control, each holder
shall have the right to require that we repurchase such holder's notes at a
purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase, subject to the
right of holders of record on the relevant record date to receive interest on
the relevant interest payment date, in accordance with the terms contemplated
in the paragraph below.
Within 30 days following any Change of Control, we will mail a notice to
each holder with a copy to the trustee stating:
. that a Change of Control has occurred and that such holder has the
right to require us to purchase such holder's notes at a purchase price
in cash equal to 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase, subject to the right
of holders of record on the relevant record date to receive interest on
the relevant interest payment date;
. the circumstances and relevant facts regarding such Change of Control,
including information with respect to pro forma historical income, cash
flow and capitalization after giving effect to such Change of Control;
. the repurchase date, which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed; and
. the instructions determined by us, consistent with this covenant, that
a holder must follow in order to have its notes purchased.
We agree to comply, to the extent applicable, with the requirements of
Section 14(e) of the Securities Exchange Act of 1934 and any other applicable
laws or regulations in connection with the purchase of notes pursuant to this
covenant. To the extent that the provisions of any applicable laws or
regulations conflict with the provisions of this covenant, we shall comply with
the applicable laws and regulations and shall not be deemed to have breached
its obligations under this covenant by virtue thereof.
The Change of Control purchase feature of the notes may in certain
circumstances make more difficult or discourage a takeover of WABCO and, thus,
the removal of incumbent management. In addition, we may be prohibited under
the terms of its other financing instruments from repurchasing the notes upon a
Change of Control. Finally, we can not assure that we will have the financial
ability to purchase the notes upon a Change of Control.
Limitation on Liens. We agree not to, and agree not to permit any Restricted
Subsidiary to, directly or indirectly, incur or permit to exist any Lien of any
nature whatsoever on any of its properties (including capital stock of a
Restricted Subsidiary), whether owned at the Existing Notes Issue Date or
thereafter acquired, other than Permitted Liens, without effectively providing
that the notes shall be secured equally and ratably with (or prior to) the
obligations so secured for so long as such obligations are so secured.
Limitation on Sale/Leaseback Transactions. We agree not to, and agree not to
permit any Restricted Subsidiary to, enter into any Sale/Leaseback Transaction
with respect to any property unless:
. we or such Restricted Subsidiary would be entitled to create a Lien on
such property without equally and ratably securing the notes pursuant
to the covenant described under "Limitation on Liens"; or
. the net proceeds of such sale are at least equal to the fair value, as
determined by the board of directors, of such property and we or such
Restricted Subsidiary shall apply or cause to be applied an
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amount in cash equal to the net proceeds of such sale to the retirement,
within 30 days of the effective date of such Sale/Leaseback Transaction,
of our Senior Indebtedness, including the notes, or Indebtedness or
Preferred Stock of a Restricted Subsidiary.
Merger and Consolidation. We agree not to consolidate with or merge with or
into, or convey, transfer or lease all or substantially all our assets to, any
person, unless:
. the resulting, surviving or transferee person (the "Successor Company")
shall be a person organized and existing under the laws of the United
States of America, any state thereof or the District of Columbia and
the Successor Company, if not us, shall expressly assume, by an
indenture supplemental to the indenture, executed and delivered to the
trustee, in form reasonably satisfactory to the trustee, all the
obligations of WABCO under the notes and the indenture;
. immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or
any subsidiary as a result of such transaction as having been incurred
by such Successor Company or such subsidiary at the time of such
transaction), no Event of Default shall have occurred and be
continuing;
. immediately after giving effect to such transaction, the Consolidated
Coverage Ratio of the Successor Company is at least 1:1; provided,
however, that, if our Consolidated Coverage Ratio before giving effect
to such transaction is within a range set forth in column (A) below,
then the Consolidated Coverage Ratio of the Successor Company shall be
at least equal to the lesser of the ratio determined by multiplying the
relevant percentage set forth in column (B) below by the Consolidated
Coverage Ratio prior to such transaction and the relevant ratio set
forth in column (C) below:
<TABLE>
<CAPTION>
(A) (B) (C)
----------------- --- -----------
<S> <C> <C>
1.11:1 to 1.99:1 90% 1.50:1
2.00:1 to 2.99:1 80% 2.10:1
3.00:1 to 3.99:1 70% 2.40:1
4.00:1 or greater 60% 2.50:1; and
</TABLE>
. immediately after giving effect to such transaction, the Successor
Company shall have Consolidated Net Worth in an amount that is not less
than our Consolidated Net Worth prior to such transaction.
We agree to deliver to the trustee prior to the consummation of the proposed
transaction an officer's certificate to the foregoing effect and an opinion of
counsel stating that the proposed transaction and such supplemental indenture
comply with the indenture.
The Successor Company shall be our successor and shall succeed to, and be
substituted for, and may exercise every right and power of, us under the
indenture, but the predecessor company in the case of a conveyance, transfer or
lease shall not be released from the obligation to pay the principal of and
interest on the notes.
SEC Reports. Notwithstanding that we may not be required to remain subject
to the reporting requirements of Section 13 or 15 (d) of the Exchange Act, we
agree to file with the SEC and provide the trustee and noteholders with such
annual reports and such information, documents and other reports specified in
Sections 13 and 15(d) of the Exchange Act.
Defaults
An Event of Default is defined in the indenture as:
. a default in the payment of interest on the notes when due, continued
for 30 days;
. a default in the payment of principal of any note when due at its
Stated Maturity, upon optional redemption, upon required repurchase,
upon declaration or otherwise;
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. the failure by WABCO to comply for 30 days after notice with its
obligations under "Certain Covenants" and its other agreements
contained in the indenture, except in the case of a default with
respect to the covenants described under "Certain Covenants--Change of
Control" and "Certain Covenants--Merger and Consolidation," which will
constitute Events of Default with notice but without passage of time;
. our Indebtedness is accelerated by the holders thereof because of a
default and the total amount of such Indebtedness accelerated exceeds
$5 million, or its foreign currency equivalent, with respect to any
individual Indebtedness or, together with all Indebtedness unpaid or
accelerated, aggregates $10 million, or its foreign currency equivalent
(the "cross acceleration provision");
. certain events of bankruptcy, insolvency or reorganization of our
company (the "bankruptcy provisions"); or
. any judgment or decree for the payment of money in excess of $5
million, or its foreign currency equivalent, to the extent not covered
by insurance, with respect to any individual judgment or decree or
aggregating $10 million, or its foreign currency equivalent, is
rendered against us or any Restricted Subsidiary and is not discharged
within a period of 60 days following such judgment (the "judgment
default provision").
If an Event of Default occurs and is continuing, the trustee or the holders
of at least 25% in principal amount of the outstanding notes may declare the
principal of and accrued but unpaid interest on all the notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of WABCO occurs and is continuing, the
principal of and interest on all the notes will automatically become
immediately due and payable without any declaration or other act on the part of
the trustee or any holders of the notes. Under certain circumstances, the
holders of a majority in principal amount of the outstanding notes may rescind
any such acceleration with respect to the notes and its consequences.
Subject to the provisions of the indenture relating to the duties of the
trustee, in case an Event of Default occurs and is continuing, the trustee will
be under no obligation to exercise any of the rights or powers under the
indenture at the request or direction of any of the holders of the notes unless
such holders have offered to the trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a
note may pursue any remedy with respect to the indenture or the notes unless:
. such holder has previously given the trustee notice that an Event of
Default is continuing;
. holders of at least 25% in principal amount of the outstanding notes
have requested the trustee to pursue the remedy;
. such holders have offered the trustee reasonable security or indemnity
against any loss, liability or expense;
. the trustee has not complied with such request within 60 days after the
receipt thereof and the offer of security or indemnity; and
. the holders of a majority in principal amount of the outstanding notes
have not given the trustee a direction inconsistent with such request
within such 60-day period. Subject to certain restrictions, the holders
of a majority in principal amount of the outstanding notes are given
the right to direct the time, method and place of conducting any
proceeding for any remedy available to the trustee or of exercising any
trust or power conferred on the trustee. The trustee, however, may
refuse to follow any direction that conflicts with law or the indenture
or that the trustee determines is unduly prejudicial to the rights of
any other holder of a note or that would involve the trustee in
personal liability.
The indenture provides that if a Default occurs and is continuing and is
known to the trustee, the trustee must mail to each holder of the notes notice
of the Default within 90 days after it occurs. Except in the case of
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a Default in the payment of principal of, premium, if any, or interest on any
note, the trustee may withhold notice if and so long as a committee of its
trust officers in good faith determines that withholding notice is not opposed
to the interest of the holders of the notes. In addition, we are required to
deliver to the trustee, within 120 days after the end of each fiscal year, a
certificate indicating whether the signers thereof know of any Default that
occurred during the previous year. We are also required to deliver to the
trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action we
are taking or propose to take in respect thereof.
Amendments and Waivers
Subject to certain exceptions, the indenture may be amended with the consent
of the holders of at least a majority in aggregate principal amount of the
notes then outstanding and any past default or compliance with any provisions
may be waived with the consent of the holders of a majority in principal amount
of the notes then outstanding, subject to certain exceptions. However, without
the consent of each affected holder of an outstanding note, no amendment may,
among other things:
. reduce the principal amount of notes whose holders must consent to an
amendment;
. reduce the rate of or change the time for payment of interest on any
note;
. reduce the principal of, any installment of interest on or any premium
with respect to any note, change the stated maturity of any note or
change the periods during which any note may be redeemed as described
under "Optional Redemption" above;
. make any note payable in currency other than that stated in the note;
. impair the right of any holder of the notes to receive payment of
principal of and interest on notes on or after the due dates therefor
or to institute suit for the enforcement of any payment on or with
respect to such holder's notes; or
. reduce the percentage in principal amount of outstanding notes the
consent of the holders of which is necessary to amend the indenture, to
waive compliance with certain provisions of the indenture or to waive
certain defaults.
Without the consent of any holder of the notes, we and the trustee may amend
the indenture to cure any ambiguity, defect or inconsistency, to provide for
the assumption by a successor corporation of the obligations of our company
under the indenture, to provide for uncertificated notes in addition to or in
place of certificated notes, to secure the notes, to provide for a replacement
trustee, to add to our covenants and agreements for the benefit of the holders
of the notes or to surrender any right or power conferred upon, or to make any
change that does not adversely affect the legal rights of any holder of the
notes.
After an amendment, supplemental indenture or waiver under the indenture
becomes effective, we are required to mail to holders of the notes affected
thereby a copy of such amendment, supplemental indenture or waiver and a notice
briefly describing such amendment, supplemental indenture or waiver. However,
the failure to give such notice, or any defect therein, will not impair or
affect the validity of the amendment, supplemental indenture or waiver.
Transfer
The old notes were issued in registered form and are transferable only upon
the surrender of the old notes being transferred for registration of transfer.
We may require payment of a sum sufficient to cover any tax, assessment or
other governmental charge payable in connection with certain transfers and
exchanges.
Defeasance
The indenture will cease to be of further effect as to all outstanding
notes, except as to
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. rights of registration of transfer and exchange and our right of
optional redemption,
. substitution of apparently mutilated, defaced, destroyed, lost or
stolen notes,
. rights of holders of the notes to receive payments of principal and
interest on the notes,
. rights, obligations and immunities of the trustee under the
indenture, and
. rights of the holders of the notes as beneficiaries of the indenture
with respect to the property so deposited with the trustee payable
to all or any of them.
if
. we will have paid or caused to be paid the principal of and interest on
the notes as and when the same will have become due and payable,
. all outstanding notes, except lost, stolen or destroyed notes which have
been replaced or paid, have been delivered to the trustee for
cancellation, or
. the notes not previously delivered to the trustee for cancellation will
have become due and payable or are by their terms to become due and
payable within one year or are to be called for redemption under
arrangements satisfactory to the trustee upon delivery of notice and we
will have irrevocably deposited with the trustee, as trust funds, cash,
in an amount sufficient to pay principal of and interest on the
outstanding notes, to maturity or redemption, as the case may be. Such
trust may only be established if such deposit will not result in a
breach or violation of, or constitute a default under, any agreement or
instrument pursuant to which we are party or by which it is bound and we
have delivered to the trustee an officer's certificate and an opinion of
counsel, each stating that all conditions related to such defeasance
have been complied with.
The indenture will also cease to be in effect, except as described in the
arrows in the immediately preceding paragraph, and the Indebtedness on all
outstanding notes will be discharged on the 123rd day after the irrevocable
deposit by us with the trustee, in trust, specifically pledged as security for,
and dedicated solely to, the benefit of the holders of the notes, of cash, U.S.
government obligations, or a combination thereof, in an amount sufficient, in
the opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the trustee, to pay
the principal of and interest on the notes then outstanding in accordance with
the terms of the indenture and the notes. Such a trust may only be established
if:
. such deposit will not result in a breach or violation of, or constitute
a default under, any agreement or instrument to which we are a party or
by which it is bound;
. we have delivered to the trustee an opinion of counsel stating that we
have received from, or there has been published by, the Internal
Revenue Service a ruling, or since the date of the Indenture there has
been a change in the applicable federal income tax law, in either case
to the effect that, based thereon such opinion shall confirm that, the
holders of the notes will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit, defeasance and
discharge and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the
case if such deposit, defeasance and discharge had not occurred;
. we have delivered to the trustee an opinion of counsel to the effect
that after the 123rd day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
and
. we have delivered to the trustee an officers' certificate and an
opinion of counsel, each stating that all conditions related to the
defeasance have been complied with.
We may also be released from its obligations under "Certain Covenants" and
shall cease to be subject to third, fourth and sixth bullet point of the first
paragraph under "Defaults," with respect to the notes outstanding on the 123rd
day after our irrevocable deposit with the trustee, in trust, specifically
pledged as
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security for, and dedicated solely to, the benefit of the holders of the notes,
cash, U.S. government obligations, or a combination thereof, in an amount
sufficient, in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to
the trustee, to pay the principal of and interest on the notes then outstanding
in accordance with the terms of the indenture and the notes ("covenant
defeasance"). Such covenant defeasance may only be effected if:
. such deposit will not result in a breach or violation of, or constitute
a default under, any agreement or instrument to which we are a party or
by which it is bound;
. we deliver to the trustee an officers' certificate and an opinion of
counsel to the effect that the holders of the notes will not recognize
income, gain or loss for federal income tax purposes as a result of
such deposit and covenant defeasance and will be subject to federal
income tax on the same amount, in the same manner and at the same times
as would have been the case if such deposit and covenant defeasance had
not occurred;
. we have delivered to the trustee an opinion of counsel to the effect
that after the 123rd day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
and
. we have delivered to the trustee an officers' certificate and an
opinion of counsel, each stating that all conditions related to the
covenant defeasance have been complied with.
Following such covenant defeasance, we may omit to comply with and will have
no liability in respect of any term, condition or limitation set forth in such
sections of the indenture, whether directly or indirectly by reason of any
reference elsewhere in the indenture to such sections or by reason of any
reference in such sections to any other provisions in the indenture or in any
other document, and such omission will not constitute an Event of Default.
Transfer and Exchange
A holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and we may require a
holder to pay any taxes and fees required by law or permitted by the indenture.
We are not required to transfer or exchange any note selected for redemption.
We are also not required to transfer or exchange any note for a period of 15
days before a selection of notes to be redeemed.
The registered holder will be treated as the owner of it for all purposes.
Governing Law
The indenture provides that it and the notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
BOOK-ENTRY; DELIVERY AND FORM
The old notes offered and sold in connection with the initial offering were
sold solely to QIBs, as defined in Rule 144A under the Securities Act, pursuant
to Rule 144A and in offshore transactions to persons other than "U.S. persons,"
as defined in Regulation S under the Securities Act ("non-U.S. Persons"), in
reliance on Regulation S. Following the offering of the old notes, the old
notes may have been sold to QIBs pursuant to Rule 144A, non-U.S. Persons in
reliance on Regulation S and pursuant to other exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act, as described under "Transfer
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Restrictions," including sales to institutional "accredited investors," as
defined in Rule 501(a)(1), (2), (3) and (7) under the Securities Act
("institutional accredited investors"), that are not QIBs.
The Global Notes
Rule 144A Global Note. The old notes offered and sold to QIBs pursuant to
Rule 144A were issued in the form of one or more registered notes in global
form, without interest coupons. The Rule 144A global note was deposited on the
date of the closing of the sale of the old notes with, or on behalf of, DTC and
registered in the name of Cede & Co., as nominee of DTC, but remain in the
custody of the Trustee pursuant to the FAST Balance Certificate Agreement
between DTC and the Trustee.
Regulation S Global Notes. The old notes offered and sold in the initial
offering in offshore transactions to non-U.S. Persons in reliance on Regulation
S were issued in the form of one or more registered notes in global form,
without interest coupons. The Regulation S global note was deposited upon
issuance with, or on behalf of, a custodian for DTC in the manner described in
the preceding paragraph for credit to the respective accounts of the
purchasers, or to such other accounts as they may have directed, at Morgan
Guaranty Trust Company of New York, Brussels Office, as operator of the
Euroclear System, or Cedel Bank, societe anonyme.
Investors may hold their interests in the Regulation S global note directly
through Euroclear or Cedel, if they are participants in such systems, or
indirectly through organizations which are participants in such systems.
Investors may also hold such interests through organizations other than
Euroclear or Cedel that are participants in the DTC system. Euroclear and Cedel
hold such interests in the Regulation S global note on behalf of their
participants through customers' securities accounts in their respective names
on the books of their respective depositories. Such depositories, in turn, hold
such interests in the Regulation S global note in customers' securities
accounts in the depositories' names on the books of DTC.
Institutional Accredited Investor Global Note. In connection with the sale
of the old notes to an Institutional Accredited Investor in the initial
offering, beneficial interests in any of the Global Notes (as defined below)
may have been exchanged for interests in a separate note in registered form,
without interest coupons, which were deposited on the Closing Date with, or on
behalf of, a custodian for DTC in the manner described in the preceding
paragraphs.
Except as set forth below, the Rule 144A global note, the Regulation S
global note and the Institutional Accredited Investor global note
(collectively, the "Global Notes") may be transferred, in whole and not in
part, solely to another nominee of DTC or to a successor of DTC or its nominee.
Beneficial interests in the Global Notes may not be exchanged for notes in
physical, certificated form ("Certificated Notes") except in the limited
circumstances described below.
The old notes are subject to restrictions on transfer and bear a restrictive
legend as set forth under "Transfer Restrictions."
All interests in the Global Notes, including those held through Euroclear or
Cedel, may be subject to the procedures and requirements of DTC. Those
interests held through Euroclear or Cedel may also be subject to the procedures
and requirements of such systems.
Form of New Notes
The new notes will be available initially only in book-entry form. We expect
that the new notes will be represented by a global note which will be deposited
with, or on behalf of, DTC (with links to Euroclear and Cedel) and registered
in its name or in the name of its nominee. Beneficial interests in the global
note representing the new notes will be shown on, and transfers thereof will be
effected through, records maintained by DTC and its participants. After the
initial issuance of the global note, notes in certificated form will be issued
in exchange for the global note only under limited circumstances described
below.
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Book-Entry Procedures for the Global Notes
The descriptions of the operations and procedures of DTC, Euroclear and
Cedel set forth below are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to change by them from time to time. Neither
WABCO nor Chase Securities take any responsibility for these operations or
procedures, and investors are urged to contact the relevant system or its
participants directly to discuss these matters.
DTC has advised us that it is
. a limited purpose trust company organized under the laws of the State of
New York,
. a "banking organization" within the meaning of the New York Banking Law,
. a member of the Federal Reserve System,
. a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended, and
. a "clearing agency" registered pursuant to Section 17A of the Exchange
Act.
DTC was created to hold securities for its participants and facilitates the
clearance and settlement of securities transactions between its participants
through electronic book-entry changes to the accounts of its participants,
thereby eliminating the need for physical transfer and delivery of
certificates. DTC's participants include securities brokers and dealers,
including Chase Securities, banks and trust companies, clearing corporations
and other organizations. Indirect access to DTC's system is also available to
other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a participant, either
directly or indirectly. Investors who are not participants may beneficially own
securities held by or on behalf of DTC only through participants or entities
with indirect access to DTC's system.
We expect that pursuant to procedures established by DTC
. upon deposit of each Global Note, DTC will credit the accounts of its
participants designated by Chase Securities with an interest in the
Global Note and
. ownership of the notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC, with
respect to the interests of its participants, and the records of its
participants and the entities with indirect access to its system, with
respect to the interests of persons other than its participants.
The laws of some jurisdictions may require that purchasers of securities
take physical delivery of such securities in definitive form. Accordingly, the
ability to transfer interests in the notes represented by a Global Note to such
persons may be limited. In addition, because DTC can act only on behalf of its
participants, who in turn act on behalf of persons who hold interests through
such participants, the ability of a person having an interest in notes
represented by a Global Note to pledge or transfer such interest to persons or
entities that do not participate in DTC's system, or to otherwise take actions
in respect of such interest, may be affected by the lack of a physical
definitive security in respect of such interest.
So long as DTC or its nominee is the registered owner of a Global Note, DTC
or such nominee, as the case may be, will be considered the sole owner or
holder of the notes represented by the Global Note for all purposes under the
indenture. Except as provided below, owners of beneficial interests in a Global
Note will not be entitled to have notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of Certificated Notes, and will not be considered the owners or
holders thereof under the indenture for any purpose, including with respect to
the giving of any direction, instruction or approval to the trustee thereunder.
Accordingly, each holder owning a beneficial interest in a Global Note must
rely on the procedures of DTC and, if such holder is not a participant or an
entity with indirect access to DTC's system, on the procedures of the
participant through which such holder owns its interest, to exercise any rights
of a holder of notes under the indenture or such Global Note. We understand
that under existing industry practice, in the event that we request any action
of holders of notes, or a holder that is an owner of a beneficial
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interest in a Global Note desires to take any action that DTC, as the holder of
such Global Note, is entitled to take, DTC would authorize its participants to
take such action and the participants would authorize holders owning through
such participants to take such action or would otherwise act upon the
instruction of such holders. Neither WABCO nor the trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of notes by DTC, or for maintaining, supervising or
reviewing any records of DTC relating to such notes.
Payments with respect to the principal of, and premium, if any, liquidated
damages, if any, and interest on, any notes represented by a Global Note
registered in the name of DTC or its nominee on the applicable record date will
be payable by the trustee to or at the direction of DTC or its nominee in its
capacity as the registered holder of the Global Note representing such notes
under the indenture. Under the terms of the indenture, we and the trustee may
treat the persons in whose names the notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving payment thereon
and for any and all other purposes whatsoever. Accordingly, neither we nor the
trustee have or will have any responsibility or liability for the payment of
such amounts to owners of beneficial interests in a Global Note (including
principal, premium, if any, liquidated damages, if any, and interest). Payments
by DTC's participants and the entities with indirect access to its system to
the owners of beneficial interests in a Global Note will be governed by
standing instructions and customary industry practice and will be the
responsibility of those persons and DTC.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
notes, cross-market transfers between the participants in DTC, on the one hand,
and Euroclear or Cedel participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or Cedel, as
the case may be, by its respective depositary; however, such cross-market
transactions will require delivery of instructions to Euroclear or Cedel, as
the case may be, by the counterparty in such system in accordance with the
rules and procedures and within the established deadlines (Brussels time) of
such system. Euroclear or Cedel, as the case may be, will, if the transaction
meets its settlement requirements, deliver instructions to its respective
depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Notes in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Euroclear participants and Cedel
participants may not deliver instructions directly to the depositories for
Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Note from a participant in
DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or Cedel participant, during the securities settlement processing
day, which must be a business day for Euroclear and Cedel, immediately
following the settlement date of DTC. Cash received in Euroclear or Cedel as a
result of sales of interest in a Global Note by or through a Euroclear or Cedel
participant to a participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or Cedel
cash account only as of the business day for Euroclear or Cedel following DTC's
settlement date.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Notes among participants in
DTC, Euroclear and Cedel, they are under no obligation to perform or to
continue to perform such procedures, and such procedures may be discontinued at
any time. Neither WABCO nor the trustee will have any responsibility for the
performance by DTC, Euroclear or Cedel or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
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Certificated Notes
If
. we notify the trustee in writing that DTC is no longer willing or able
to act as a depositary or DTC ceases to be registered as a clearing
agency under the Securities Exchange Act of 1934 and a successor
depositary is not appointed within 90 days of such notice or cessation,
. we, at our option, notify the trustee in writing that we elect to cause
the issuance of notes in definitive form under the indenture, or
. upon the occurrence of certain other events as provided in the
indenture,
then, upon surrender by DTC of the Global Notes, certificated notes will be
issued to each person that DTC identifies as the beneficial owner of the notes
represented by the Global Notes. Upon any such issuance, the trustee is
required to register such certificated notes in the name of such person or
persons (or the nominee of any thereof) and cause the same to be delivered
thereto.
Neither WABCO nor the trustee shall be liable for any delay by DTC or any
participant or indirect participant in identifying the beneficial owners of the
related notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes, including with
respect to the registration and delivery, and the respective principal amounts,
of the notes to be issued.
EXCHANGE AND REGISTRATION RIGHTS
In connection with the issuance of the old notes, we entered into the
exchange and registration rights agreement with Chase Securities, the initial
purchaser of the old notes.
We encourage note holders to review all provisions of the exchange and
registration rights agreement. We will provide a copy of the exchange and
registration rights agreement to prospective purchasers of notes identified to
us by Chase Securities upon request.
We entered into the exchange and registration rights agreement with Chase
Securities concurrently with the issuance of the old notes. Pursuant to the
exchange and registration rights agreement, we agreed to
. file with the SEC on or prior to 105 days after the date of issuance of
the old notes a registration statement on Form S-1 or Form S-4, if the
use of such form is then available relating to this registered exchange
offer for the old notes under the Securities Act, and
. use our reasonable best efforts to cause the exchange offer registration
statement to be declared effective under the Securities Act within 150
days after the issue date.
As soon as practicable after the effectiveness of the exchange offer
registration statement, we will offer to the holders of Transfer Restricted
Securities (as defined below) who are not prohibited by any law or policy of
the SEC from participating in the exchange offer the opportunity to exchange
their Transfer Restricted Securities for an issue of a second series of notes
(i.e., the new notes) that are identical in all material respects to the old
notes, except that the new notes do not contain terms with respect to transfer
restrictions, and that would be registered under the Securities Act. We will
keep the exchange offer open for not less than 30 days or longer, if required
by applicable law after the date on which notice of the exchange offer is
mailed to the holders of the old notes.
If
. because of any change in law or applicable interpretations thereof by
the staff of the SEC, we are not permitted to effect the exchange offer
as contemplated hereby,
. any old notes validly tendered pursuant to the exchange offer are not
exchanged for new notes within 180 days after the issue date,
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. Chase Securities so requests with respect to old notes not eligible to
be exchanged for new notes in the exchange offer,
. any applicable law or interpretations do not permit any holder of old
notes to participate in the exchange offer,
. any holder of old notes that participates in the exchange offer does not
receive freely transferable new notes in exchange for tendered old
notes, or
. we so elect,
then we will file with the SEC a shelf registration statement to cover resales
of Transfer Restricted Securities by such holders who satisfy conditions
relating to the provision of information in connection with the shelf
registration statement. For purposes of the foregoing, "Transfer Restricted
Securities" means each note until
. the date on which such note has been exchanged for a freely transferable
new note in the exchange offer,
. the date on which such note has been effectively registered under the
Securities Act and disposed of in accordance with the shelf registration
statement, or
. the date on which such note is distributed to the public pursuant to
Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k)
under the Securities Act.
We agreed to use our reasonable best efforts to have the exchange offer,
registration statement or, if applicable, the shelf registration statement
(each, a "registration statement") declared effective by the SEC as promptly as
practicable after the filing thereof. Unless the exchange offer would not be
permitted by a policy of the SEC, we will commence the exchange offer and will
use our reasonable best efforts to consummate the exchange offer as promptly as
practicable, but in any event prior to 180 days after the issue date. If
applicable, we will use our reasonable best efforts to keep the shelf
registration statement effective for a period ending on the earliest of
. two years from the issue date or such shorter period that will terminate
when all the transfer restricted securities covered by the registration
statement have been sold pursuant thereto, and
. the date on which the securities become eligible for resale without
volume restrictions pursuant to Rule 144.
If
. the registration statement has not been filed with the SEC on or prior
to 90 days after the issue date;
. the exchange offer registration statement or the shelf registration
statement, as the case may be, has not been declared effective within
150 days after the issue date, or in the case of a shelf registration
statement required to be filed in response to a change in law or the
applicable interpretations of the SEC's staff, if later, within 45 days
after publication of the change in law or interpretation;
. the exchange offer is not consummated on or prior to 180 days after the
issue date or
. the shelf registration statement is filed and declared effective within
150 days after the issue date, or in the case of a Shelf Registration
Statement required to be filed in response to a change in law or the
applicable interpretations of the SEC's staff, if later, within 45 days
after publication of the change in law or interpretation, but shall
thereafter cease to be effective at any time that we are obligated to
maintain the effectiveness thereof without being succeeded within 30
days by an additional registration statement filed and declared
effective (each such event referred to in the above clauses, a
"registration default"),
we would have been, or will be, obligated to pay liquidated damages to each
holder of Transfer Restricted Securities, during the period of one or more such
registration defaults, in an amount equal to $0.192 per week per $1,000
principal amount of the notes constituting Transfer Restricted Securities held
by such holder until the applicable registration statement has been filed, the
exchange offer registration statement is declared
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effective and the exchange offer is consummated or the shelf registration
statement is declared effective or again becomes effective, as the case may be.
All accrued liquidated damages shall be paid to holders in the same manner as
interest payments on the notes on semi-annual payment dates which correspond to
interest payment dates for the notes. Following the cure of all registration
defaults, the accrual of liquidated damages will cease.
Holders of Transfer Restricted Securities will be required to deliver
information to be used in connection with the shelf registration statement and
to provide comments on the shelf registration statement within the time periods
set forth in the exchange and registration rights agreement in order to have
their Transfer Restricted Securities included in the shelf registration
statement and benefit from the provisions regarding liquidated damages set
forth above.
FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material United States federal income
tax consequences of the purchase, ownership and disposition of the notes. This
discussion is based on provisions of the Internal Revenue Code of 1986, as
amended, Treasury regulations promulgated thereunder, and administrative and
judicial interpretations thereof, all as in effect on the date hereof and all
of which are subject to change, possibly with retroactive effect. This
discussion applies only to those persons who acquire the notes for cash and is
limited to investors who hold the notes as capital assets. Furthermore, this
discussion does not address all aspects of United States federal income
taxation that may be applicable to investors in light of their particular
circumstances, or to investors subject to special treatment under United States
federal income tax law. Such investors include without limitation, certain
financial institutions, insurance companies, tax-exempt entities, dealers in
securities, persons who have acquired notes as part of a straddle, hedge,
conversion transaction or other integrated investment, persons whose functional
currency is not the United States dollar, persons owning notes through
partnerships or other pass-through entities, or former citizens or residents of
the United States.
Except as the context otherwise requires, reference in this Section to the
notes shall apply to both the old notes and the new notes received therefor.
See "Exchange and Registration Rights".
Each prospective investor should consult its tax advisor as to the
particular tax consequences to such purchaser of the purchase, ownership and
disposition of the notes, including the applicability of any federal estate or
gift tax laws or any state, local or foreign tax laws, any changes in
applicable tax laws and any pending or proposed legislation or regulations.
United States Taxation of United States Holders
As used herein, the term "United States Holder" means a beneficial owner of
a note that is, for United States federal income tax purposes,
. a citizen or resident of the United States,
. a corporation created or organized in or under the laws of the United
States or of any political subdivision thereof,
. an estate the income of which is subject to United States federal income
taxation regardless of its source and
. a trust if a United States court is able to exercise primary supervision
over the administration of such trust and one or more United States
Fiduciaries have the authority to control all substantial decisions of
such trust; and
the term "Non-U.S. Holder" means a beneficial owner of a note that is not a
United States Holder.
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Payments of Interest
Stated interest payable on the notes generally will be included in the gross
income of a United States Holder as ordinary interest income at the time
accrued or received, in accordance with such United States Holder's method of
accounting for United States federal income tax purposes.
Market Discount
If a United States Holder purchases a note for an amount that is less than
its "stated redemption price at maturity" (which, in the case of the notes,
will be their principal amount), the amount of the difference will be treated
as "market discount" for the federal income tax purposes, unless such
difference is less than a specified de minimus amount. Under the market
discount rules, a United States Holder is required to treat any principal
payment on, or any gain on the sale, exchange, retirement or other disposition
of, a note as ordinary income to the extent of the accrued market discount
which has not previously been included in income at the time of such payment or
disposition. In addition, such a United States Holder may be required to defer
until maturity of the notes or its earlier disposition in a taxable transaction
the deduction of all or a portion of the interest expense of any indebtedness
incurred or continued to purchase or carry such note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the note, unless the
United States Holder elects to accrue the market discount on a constant
interest method. A United States Holder of a note may elect to include market
discount in income currently as it accrues (on either a ratable or constant
interest method), in which case the rule described above regarding deferral of
interest deductions will not apply. This election to include market discount in
income currently, once made, applies to all market discount obligations
acquired during or after the first taxable year to which the election applies
and may not be revoked without the consent of the Internal Revenue Service.
Bond Premium
If a United States Holder purchases a note (in the Offering or at any time
thereafter) for an amount that exceeds the sum of all amounts payable on the
instrument after the purchase date (other than qualified stated interest), the
note has "bond premium." A United States Holder may elect to amortize such bond
premium over the remaining term of such note (or if it results in a smaller
amount of amortizable bond premium, until an earlier call date) using a
constant yield method.
If bond premium is amortized, the amount of interest that must be included
in the United States Holder's income for each period ending on an interest
payment date or at the stated maturity, as the case may be, will be reduced by
the portion of premium allocable to such period based on the note's yield to
maturity. If such an election to amortize bond premium is not made, a United
States Holder must include the full amount of each interest payment in income
in accordance with its regular method of accounting and will receive a tax
benefit from the premium only in computing such United States Holder's gain or
loss upon the sale or other disposition or payment of the principal amount of
the note.
An election to amortize premium will apply to amortizable bond premium on
all notes and other bonds, the interest on which is includable in the United
States Holder's gross income, held at the beginning of the United States
Holder's first taxable year to which the election applies or which election
applies or that there are thereafter acquired and may be revoked only with the
consent of the IRS.
Solely for purpose of applying the foregoing rules on bond premium, if an
issuer of a note has an option to redeem the note prior to maturity, it will be
assumed that the issuer will exercise the option in a manner that maximizes the
yield to maturity on the note (the "Deemed Exercise Rule"). If the Deemed
Exercise Rule applies, the amount of amortizable bond premium with respect to
the notes will be determined as if the notes matured on the deemed exercise
date (as opposed to the stated maturity date). If the Deemed Exercise Rule
applies and the optional redemption does not occur by the date that it was
deemed to occur, the notes will be treated (solely for purposes of computing
amortizable bond premium) as if the notes were retired on the
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deemed exercise date and immediately reissued for their adjusted acquisition
price on such date. The adjusted acquisition price is the amount the Holder
paid for the notes less any previously amortized bond premium.
Disposition of the Notes
A United States Holder's adjusted tax basis in a note generally will equal
the purchase price paid therefor, increased by market discount previously
included in income by such U.S. Holder and reduced by any amortized premium on
the note. Upon the sale, exchange, retirement at maturity or other disposition
of a note (collectively, a "disposition"), a United States Holder generally
will recognize gain or loss equal to the difference between the amount realized
by such holder (except to the extent such amount is attributable to accrued
interest, which will be treated as ordinary interest income) and such holder's
adjusted tax basis in the note. Such gain or loss generally will be capital
gain or loss, except to the extent that the market discount rules otherwise
provide. Under current law, net capital gain of individuals for property held
for more than one year is generally subject to a maximum Federal tax rate of
20%. The deductibility of capital losses is subject to limitation.
The exchange of an old note for an new note pursuant to the exchange offer
will not constitute a "significant modification" of the old note for United
States federal income tax purposes and, accordingly, the new note received will
be treated as a continuation of the old note in the hands of such holder. As a
result,
. a holder will not recognize taxable gain or loss as a result of
exchanging old notes for Exchange notes pursuant to the exchange offer,
. the holding period of the new notes will include the holding period of
the old notes exchanged therefor and
. the adjusted tax basis of the new notes immediately after the exchange
will be the same as the adjusted tax basis immediately prior to the
exchange of the old notes exchanged therefor.
United States Taxation of Non-U.S. Holders
Payments of Interest
In general, under the "portfolio interest" exception payments of interest
received or accrued by a Non-U.S. Holder will not be subject to United States
federal withholding tax, provided;
. that,
. the Non-U.S. Holder does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of
WABCO entitled to vote,
. the Non-U.S. Holder is not a controlled foreign corporation that is
related to WABCO actually or constructively through stock ownership,
and
. the beneficial owner of the note, under penalties of perjury,
provides WABCO or its agent with the beneficial owner's name and
address and certifies, under penalties of perjury, that it is not a
United States Holder, or otherwise satisfies applicable
certification requirements;
. that the interest received on the note is effectively connected with the
conduct by the Non-U.S. Holder of a trade or business within the United
States and the Non-U.S. Holder complies with reporting requirements
(effectively connected interest income will, however, be subject to
regular United States federal income tax unless exempt under an
applicable income tax treaty); or
. that the Non-U.S. Holder is entitled to the benefits of an income tax
treaty under which the interest is exempt from United States withholding
tax and the Non-U.S. Holder complies with reporting requirements.
Payments of interest not exempt from United States federal withholding
tax as described above will be subject to such withholding tax at the
rate of 30% (subject to reduction under an applicable income tax
treaty).
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Disposition of the Notes
A Non-U.S. Holder generally will not be subject to United States federal
income tax (and generally no tax will be withheld) with respect to gain
realized on the disposition of a note, unless (i) the gain is effectively
connected with a United States trade or business conducted by the Non-U.S.
Holder or (ii) the Non-U.S. Holder is an individual who is present in the
United States for 183 or more days during the taxable year of the disposition
and other requirements are satisfied. In addition, an exchange of a note for an
Exchange Note pursuant to the exchange offer will not constitute a taxable
exchange of the note for Non-U.S. Holders. See "United States Taxation of
United States Holders--Disposition of the Notes."
Effectively Connected Income
If interest and other payments received by a Non-U.S. Holder with respect to
the notes (including proceeds from the disposition of the notes) are
effectively connected with the conduct by the Non-U.S. Holder of a trade or
business within the United States (or the Non-U.S. Holder is otherwise subject
to United States federal income taxation on a net basis with respect to such
holder's ownership of the notes), such Non-U.S. Holder will generally be
subject to the rules described above under "United States Taxation of United
States Holders" (subject to any modification provided under an applicable
income tax treaty). Such Non-U.S. Holder may also be subject to the "branch
profits tax" if such holder is a non-U.S. corporation. The branch profits tax
is a United States income tax imposed upon the "dividend equivalent amount" and
the interest expense allocable to a United States trade or business operated by
the unincorporated branch or division of a foreign corporation with the result
that the United States federal income tax treatment of such an unincorporated
branch or division is comparable to the treatment of a foreign corporation that
owns its United States trade or business operations through a subsidiary
incorporated within the United States.
Backup Withholding and Information Reporting
Certain non-corporate United States Holders may be subject to backup
withholding at a rate of 31% on payments of principal, premium and interest on,
and the proceeds of the disposition of, the notes. In general, backup
withholding will be imposed only if the United States Holder
. fails to furnish its taxpayer identification number, which, for an
individual, would be his or her Social Security number,
. furnishes an incorrect tax identification number,
. is notified by the IRS that it has failed to report payments of interest
or dividends or
. under certain circumstances, fails to certify, under penalty of perjury,
that it has furnished a correct tax identification number and has been
notified by the IRS that it is subject to backup withholding tax for
failure to report interest or dividend payments.
In addition, such payments of principal and interest to United States Holders
will generally be subject to information reporting. United States Holders
should consult their tax advisors regarding their qualification for exemption
from backup withholding and the procedure for obtaining such an exemption, if
applicable.
WABCO must report annually to the IRS and to each Non-U.S. Holder any
interest that is subject to U.S. withholding tax or that is exempt from
withholding pursuant to a tax treaty or the portfolio interest exception.
Copies of these information returns may also be made available under the
provisions of a specific treaty or agreement to the tax authorities of the
country in which the Non-U.S. Holder resides.
Backup withholding and other information reporting generally will not apply
to payments made to a Non-U.S. Holder of a note who provides the requisite
certification or otherwise establishes an exemption from backup withholding.
Payments by a United Stares office of a broker of the proceeds of a disposition
of the notes generally will be subject to backup withholding at a rate of 31%
unless the Non-U.S. Holder certifies it is a Non-U.S. Holder under penalties of
perjury or otherwise establishes an exemption.
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The amount of any backup withholding imposed on a payment to a holder of a
note will be allowed as a credit against such holder's United States federal
income tax liability and may entitle such holder to a refund, provided that the
required information is furnished to the IRS.
Recently Issued Treasury Regulations
The U.S. Treasury Department recently issued final Treasury regulations
governing information reporting and the certification procedures regarding
withholding and backup withholding on certain amounts paid to Non-U.S. Holders
after December 31, 1999. The new Treasury regulations generally would not alter
the treatment of Non-U.S. Holders described above. The new Treasury regulations
would alter the procedures for claiming the benefits of an income tax treaty
and may change the certification procedures relating to the receipt by
intermediaries of payments on behalf of a beneficial owner of a note.
Prospective investors should consult their tax advisors concerning the effect,
if any, of such new Treasury regulations on an investment in the notes.
WABCO believes that the exchange of old notes for new notes pursuant to the
exchange offer will not be treated as an "exchange" for federal income tax
purposes because the new notes will not be considered to differ materially in
kind or extent from the old notes. Rather, the new notes received by a holder
will be treated as a continuation of the old notes in the hands of such holder.
As a result, there will be no federal income tax consequences to holders
exchanging old notes for new notes pursuant to the exchange offer.
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making activities or other
trading activities. A broker-dealer may not participate in the exchange offer
with respect to old notes acquired other than as a result of market-making
activities or other trading activities. To the extent any such broker-dealer
participates in the exchange offer and so notifies us, or causes us to be so
notified in writing, we have agreed for a period of 90 days after the date of
this prospectus, will make this prospectus, as amended or supplemented,
available to such broker-dealer for use in connection with any such resale, and
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. In addition, until [ ], 1999, 90 days after
the date of this prospectus, all dealers effecting transactions in the new
notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of new notes by broker-
dealers. New notes received by broker-dealers for their own account pursuant to
the exchange offer may be sold from time to time in one or more transactions in
the over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or a combination of such methods of resale, at
prevailing market prices at the time of resale, at prices related to such
prevailing market prices or at negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer or the purchasers or any such new notes. Any broker-dealer that resells
new notes that were received by it for its own account pursuant to the exchange
offer and any broker or dealer that participates in a distribution of such new
notes may be deemed to be an "underwriter" within the meaning of the Securities
Act, and any profit on any such resale of new notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal states that,
by acknowledging that it will deliver and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
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We have agreed to pay all expenses incident to the exchange offer, other
than commissions and concessions of any broker-dealers, subject to prescribed
limitations, and will indemnify the holders of the old notes against certain
liabilities, including certain liabilities that may arise under the Securities
Act.
By its acceptance of the exchange offer, any broker-dealer that receives new
notes pursuant to the exchange offer hereby agrees to notify us prior to using
the prospectus in connection with the sale or transfer of new notes, and
acknowledges and agrees that, upon receipt of notice from us of the happening
of any event which makes any statement in the prospectus untrue in any material
respect or which requires the making of any changes in the prospectus in order
to make the statements therein not misleading or which may impose upon us
disclosure obligations that may have a material adverse effect on us (which
notice we agree to deliver promptly to such broker-dealer), such broker-dealer
will suspend use of the prospectus until we have notified such broker-dealer
that delivery of the prospectus may resume and has furnished copies of any
amendment or supplement to the prospectus to such broker-dealer.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or
other information we file at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-
SEC-0330 for further information on the public reference rooms. Our SEC filings
are also available to the public from commercial document retrieval services
and at the web site maintained by the SEC at http://www.sec.gov.
We have filed a registration statement on Form S-4 to register the new notes
with the SEC. This prospectus is a part of that registration statement. As
allowed by SEC rules, this prospectus does not contain all the information you
can find in the registration statement or the exhibits to the registration
statement.
The SEC allows us to "incorporate by reference" information into this
prospectus, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this prospectus,
except for any information superseded by information in, or incorporated by
reference in, this prospectus. This prospectus incorporates by reference the
documents set forth below that we have previously filed with the SEC. These
documents contain important information about our company and its finances.
<TABLE>
<CAPTION>
WABCO SEC Filings (File No. 001-
13782) Period
-------------------------------- ------
<S> <C>
Annual Report on Form 10-K Fiscal Year ended December 31, 1998
Proxy Statement Filed on March 31, 1999
Quarterly Report on Form 10-Q Filed on May 5, 1999
Current Report on Form 8-K Filed on June 3, 1999
</TABLE>
We are also incorporating by reference additional documents that we file
with the SEC between the date of this prospectus and the date of the exchange
offer.
If you are a stockholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them through the SEC or
us. Documents incorporated by reference are available from us without charge,
excluding all exhibits unless we have specifically incorporated by reference an
exhibit in this prospectus. You may obtain documents incorporated by reference
in this prospectus by requesting them in writing or by telephone at the
following address:
Westinghouse Air Brake Company
1001 Air Brake Avenue
Wilmerding, PA 15148
Tel: (412) 825-1000
Attention: Alvaro Garcia-Tunon
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If you would like to request documents from us, please do so by ,
1999, five business days prior to the expiration date, to receive them before
the exchange offer.
You can also get more information by visiting our web site at www.wabco-
rail.com. Web site materials are not part of this prospectus.
In addition to the foregoing, you can find more information about our
pending merger with MotivePower in a registration statement that MotivePower
has filed with the SEC. That document is available from the SEC as described in
the first paragraph of this section.
You should rely only on the information contained or incorporated by
reference in this prospectus to determine whether to complete the exchange
offer. We have not authorized anyone to provide you with information that is
different from what is contained in this prospectus. The date of this
prospectus is set forth at the bottom of the front and back cover. You should
not assume that the information contained in the prospectus is accurate as of
any date other than such date.
LEGAL MATTERS
The validity of the new notes offered hereby will be passed upon for us by
Reed Smith Shaw & McClay LLP, Pittsburgh, Pennsylvania.
EXPERTS
WABCO's consolidated financial statements and schedules as of December 31,
1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996
incorporated in this prospectus and elsewhere in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and have been so incorporated
in reliance upon the authority of said firm as experts in giving said reports.
MotivePower's financial statements as of December 31, 1998 and 1997, and for
each of the years in the period ended December 31, 1998 included in this
prospectus which is part of this registration statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein, and have been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
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INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
The financial statements, financial statement schedule and exhibits listed
below are filed as part of this prospectus:
WESTINGHOUSE AIR BRAKE COMPANY
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements of WABCO
Condensed Consolidated Balance Sheet as of March 31, 1999 and December
31, 1998................................................................ F-2
Condensed Consolidated Statement of Operations for the three months ended
March 31, 1999 and 1998................................................. F-3
Condensed Consolidated Statement of Cash Flows for the three months ended
March 31, 1999 and 1998................................................. F-4
Notes to Condensed Consolidated Financial Statements..................... F-5
Report of Independent Public Accountants................................. F-9
Consolidated Balance Sheet as of December 31, 1998 and 1997.............. F-10
Consolidated Statement of Operations for the three years ended December
31, 1998, 1997 and 1996................................................. F-11
Consolidated Statement of Cash Flows for the three years ended December
31, 1998, 1997 and 1996................................................. F-12
Consolidated Statement of Shareholders' Equity for the three years ended
December 31, 1998, 1997 and 1996........................................ F-13
Notes to Consolidated Financial Statements............................... F-14
Financial Statement Schedule
Report of Independent Public Accountants................................. F-34
Schedule II--Valuation and Qualifying Accounts........................... F-35
</TABLE>
MOTIVEPOWER INDUSTRIES, INC.
<TABLE>
<S> <C>
Financial Statements of MotivePower
Condensed Consolidated Statements of Income for the three months ended
March 31, 1999 and 1998 (Unaudited)..................................... F-36
Condensed Consolidated Balance Sheets as of March 31, 1999 (Unaudited)
and December 31, 1998................................................... F-37
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 (Unaudited)............................... F-38
Notes to Condensed Consolidated Financial Statements (Unaudited)......... F-39
Independent Auditors' Report............................................. F-43
Consolidated Statements of Income for the three years ended December 31,
1998, 1997 and 1996..................................................... F-44
Consolidated Balance Sheets as of December 31, 1998 and 1997............. F-45
Consolidated Statements of Cash Flows for the three years ended December
31, 1998, 1997 and 1996................................................. F-46
Consolidated Statements of Changes in Stockholders' Equity for the three
years ended December 31, 1998, 1997 and 1996............................ F-48
Notes to Consolidated Financial Statements............................... F-49
</TABLE>
F-1
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
----------- -----------
(Unaudited)
Dollars in thousands,
except par value
<S> <C> <C>
Assets
Current Assets
Cash $ 4,627 $ 3,323
Accounts receivable.................................. 137,921 132,901
Inventories.......................................... 107,703 103,560
Other................................................ 21,573 23,177
--------- ---------
Total current assets............................... 271,824 262,961
Property, plant and equipment.......................... 223,849 214,461
Accumulated depreciation............................... (95,783) (89,480)
--------- ---------
Property, plant and equipment, net................. 128,066 124,981
Other Assets
Prepaid pension costs................................ 6,526 5,724
Goodwill............................................. 151,797 151,658
Other intangibles.................................... 44,738 46,021
Other noncurrent assets.............................. 6,509 4,839
--------- ---------
Total other assets................................. 209,570 208,242
--------- ---------
Total Assets..................................... $ 609,460 $ 596,184
========= =========
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term debt.................... $ 20,264 $ 30,579
Accounts payable..................................... 51,347 62,974
Accrued income taxes................................. 10,039 8,352
Accrued interest..................................... 5,240 1,616
Customer deposits.................................... 17,310 20,426
Other accrued liabilities............................ 46,562 43,603
--------- ---------
Total current liabilities.......................... 150,762 167,550
Long-term debt......................................... 450,226 437,238
Reserve for postretirement benefits.................... 16,543 16,238
Accrued pension costs.................................. 3,911 3,631
Other long-term liabilities............................ 7,380 5,380
--------- ---------
Total liabilities.................................. 628,822 630,037
Shareholders' Equity
Preferred stock, 1,000,000 shares authorized, no
shares issued....................................... -- --
Common stock, $.01 par value; 100,000,000 shares
authorized:
47,426,600 shares issued............................ 474 474
Additional paid-in capital........................... 108,066 107,720
Treasury stock, at cost, 13,482,148 and 13,532,092
shares.............................................. (187,014) (187,654)
Unearned ESOP shares, at cost, 8,493,131 and
8,564,811 shares.................................... (127,397) (128,472)
Retained earnings.................................... 193,965 182,291
Unamortized restricted stock award................... (103) (162)
Accumulated other comprehensive income (loss)........ (7,353) (8,050)
--------- ---------
Total shareholders' equity......................... (19,362) (33,853)
--------- ---------
Liabilities and Shareholders' Equity............. $ 609,460 $ 596,184
========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-2
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------
1999 1998
---------- ----------
(Unaudited)
In thousands, except
per share data
<S> <C> <C>
Net sales............................................... $ 191,204 $ 158,136
Cost of sales........................................... 129,659 106,340
---------- ----------
Gross profit........................................ 61,545 51,796
Selling and marketing expenses.......................... 8,503 6,914
General and administrative expenses..................... 12,828 11,584
Engineering expenses.................................... 8,907 6,438
Amortization expense.................................... 2,410 2,105
---------- ----------
Total operating expenses............................ 32,648 27,041
Income from operations.............................. 28,897 24,755
Other income and expenses
Interest expense...................................... 9,096 7,373
Other expense (income), net........................... 66 (131)
---------- ----------
Income before income taxes and extraordinary item... 19,735 17,513
Income taxes............................................ 7,346 6,655
---------- ----------
Income before extraordinary item.................... 12,389 10,858
Loss on early extinguishment of debt, net of tax........ 469 --
---------- ----------
Net income.......................................... $ 11,920 $ 10,858
========== ==========
Earnings Per Common Share
Basic
Income before extraordinary item.................... $ .49 $ .43
Extraordinary item.................................. (.02) --
========== ==========
Net income.......................................... $ .47 $ .43
========== ==========
Diluted
Income before extraordinary item.................... $ .48 $ .42
Extraordinary item.................................. (.02) --
---------- ----------
Net income.......................................... $ .46 $ .42
========== ==========
Weighted Average Shares Outstanding
Basic............................................... 25,371 24,962
Diluted............................................. 25,776 25,669
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------
1999 1998
--------- ---------
(Unaudited)
In thousands
<S> <C> <C>
Operating Activities
Net income.............................................. $ 11,920 $ 10,858
Adjustments to reconcile net income to cash provided by
operations
Extraordinary loss on extinguishment of debt........... 469
Depreciation and amortization.......................... 6,785 6,384
Provision for ESOP contribution........................ 1,380 1,188
Changes in operating assets and liabilities, net of
acquisitions
Accounts receivable................................... (5,427) (11,327)
Inventories........................................... (4,020) (3,941)
Accounts payable...................................... (11,542) 5,407
Accrued income taxes.................................. 1,882 5,038
Accrued liabilities and customer deposits............. 2,899 (443)
Other assets and liabilities.......................... 1,569 (697)
--------- ---------
Net cash provided by operating activities............ 5,915 12,467
Investing Activities
Purchase of property, plant and equipment, net.......... (6,533) (5,329)
Acquisitions of businesses, net of cash acquired........ (960) (3,900)
--------- ---------
Net cash used for investing activities............... (7,493) (9,229)
Financing Activities
Proceeds from Senior Note offering...................... 76,875
Debt issuance costs..................................... (1,926)
Net (repayments of) proceeds from revolving credit
facility............................................... (31,955) 120
Repayments of other borrowings.......................... (40,372) (135)
Cash dividends.......................................... (246) (244)
Proceeds from exercise of stock options and employee
stock purchases........................................ 577 544
--------- ---------
Net cash provided by financing activities............ 2,953 285
Effect of changes in currency exchange rates............. (71) 33
--------- ---------
Increase in cash........................................ 1,304 3,556
Cash, beginning of year................................ 3,323 836
--------- ---------
Cash, end of year...................................... $ 4,627 $ 4,392
========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
(Unaudited)
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 ("OEM") 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, transit
car builders and public transit systems.
2. Accounting Policies
Basis of Presentation. The unaudited condensed consolidated interim
financial statements have been prepared in accordance with generally accepted
accounting principles and the rules and regulations of the Securities and
Exchange Commission and include the accounts of Westinghouse Air Brake Company
and its majority owned subsidiaries ("WABCO"). These condensed interim
financial statements do not include all of the information and footnotes
required for complete financial statements. In management's opinion, these
financial statements reflect all adjustments, which are of a normal recurring
nature, necessary for a fair presentation of the results for the interim
periods presented. Results for these interim periods are not necessarily
indicative of results to be expected for the full year. Certain prior period
amounts have been reclassified, where necessary, to conform to the current
period presentation.
The notes included herein should be read in conjunction with the audited
consolidated financial statements included in WABCO's Annual Report on Form 10-
K for the year ended December 31, 1998.
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.
Other Comprehensive Income. Comprehensive income is defined as net income
and all nonowner changes in shareholders' equity. The Company's accumulated
other comprehensive income (loss) consists entirely of foreign currency
translation adjustments. Total comprehensive income for the first quarter
ending March 31, 1999 and 1998 was $12.6 million and $10.9 million
respectively.
3. Acquisitions
On October 5, 1998, the Company purchased the railway electronics business
of Rockwell Collins, Inc. ("RRE"), a wholly owned subsidiary of Rockwell
International Corporation, for approximately $80 million in cash. The purchase
was initially financed by obtaining additional term debt of $40 million through
an amendment to the Company's existing credit facility, an unsecured bank loan
of $30 million and additional borrowings under the Company's revolving credit
agreement. RRE is a leading manufacturer and supplier of mobile electronics
(display and positioning systems), data communications, and electronic braking
systems for the railroad industry and its operations are in the United States.
Revenues of the acquired business for its fiscal year ended September 30, 1998
were approximately $46 million.
F-5
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 (Unaudited)--(Continued)
The Company also completed the following:
i) The October 1998 acquisition of the United States railway service
center business of Comet Industries, Inc. ("Comet"), for $13.2 million,
financed through the issuance of $12.2 million of promissory notes. Annual
revenue for its most recent fiscal year was approximately $20 million.
ii) In July 1998, the purchase of assets and assumption of certain
liabilities of U.S.-based Lokring Corporation ("Lokring"), for $5.1 million
in cash. Lokring develops, manufactures and markets patented non-welded
connectors and sealing, products for railroad and other industries. Annual
sales in 1997 were approximately $10 million.
iii) The acquisition in April 1998, of 100% of the stock of RFS (E)
Limited ("RFS") of England, for approximately $10.0 million including the
assumption of certain debt. RFS is a leading provider of vehicle overhaul,
conversion and maintenance services to Britain's railway industry. Annual
revenue for its most recent fiscal year was approximately $27.5 million.
iv) The acquisition in April 1998, of the transit coupler product line
of Hadady Corporation ("Hadady") located in the United States for $4.6
million in cash.
v) In February 1999, the acquisition of the mass transit electrical
inverter and converter product line of AGC System & Technologies, Inc. of
Canada for approximately $960 thousand.
All of the above acquisitions were accounted for under the purchase method.
Accordingly, the results of operations of the applicable acquisition are
included in the Company's financial statements prospectively from the
acquisition date.
4. 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>
March 31 December 31
1999 1998
-------- -----------
Dollars in thousands
<S> <C> <C>
Raw materials........................................... $ 48,455 $ 47,853
Work-in-process......................................... 40,741 29,965
Finished goods.......................................... 18,507 25,742
-------- --------
Total inventory....................................... $107,703 $103,560
======== ========
</TABLE>
5. Debt Offering and Extraordinary Item
In January 1999, WABCO completed the private placement of $75 million of 9
3/8% Senior Notes which mature in June 2005. The Senior Notes were issued at a
premium resulting in an effective rate of 8.5%. The premium is being amortized
over the life of the instruments.
The issuance improved WABCO's financial liquidity by i) using a portion of
the proceeds to repay $30 million of debt associated with the RRE acquisition
that bore interest at 9.56%, and; ii) using a portion of the proceeds to repay
variable-rate revolving credit borrowings thereby increasing amounts available
under the revolving credit facility. As a result of the issuance and retirement
of certain term debt, the Company wrote-off previously capitalized debt
issuance costs of approximately $469 thousand, ($.02 per diluted share), net of
tax, in the first quarter of 1999.
F-6
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 (Unaudited)--(Continued)
6. Earnings Per Share
The computation of earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31
-----------------
1999 1998
-------- --------
In thousands,
except per share
<S> <C> <C>
Basic earnings per share
Income before extraordinary item applicable to common
shareholders............................................ $ 12,389 $ 10,858
Divided by
Weighted average shares outstanding.................... 25,371 24,962
Basic earnings per share before extraordinary item....... $ .49 $ .43
-------- --------
Diluted earnings per share
Income before extraordinary item applicable to common
shareholders............................................ $ 12,389 $ 10,858
Divided by sum of
Weighted average shares outstanding.................... 25,371 24,962
Conversion of dilutive stock options................... 405 707
-------- --------
Diluted shares outstanding............................. 25,776 25,669
Diluted earnings per share before extraordinary item..... $ .48 $ .42
======== ========
</TABLE>
7. Legal Proceedings
On February 12, 1999, GE Harris Railway Electronics, LLC and GE Harris
Railway Electronic Services, LLC (collectively, "GE Harris") brought suit
against the Company for alleged patent infringement and unfair competition
related to a communications system installed in one of the Company's products.
GE Harris is seeking to prohibit the Company from future infringement and is
seeking an unspecified amount of money damages to recover, in part, royalties.
While this lawsuit is in the earliest stages, the Company believes the
technology developed by the Company does not infringe on the GE Harris patents.
The Company plans to contest the infringement claims vigorously, in order to
present alternative product lines to customers in the rail industry.
8. Segment Information
The Company evaluates its business segments' operating results based on
income from operations. Corporate activities include general corporate
expenses, elimination of intersegment transactions, interest income and expense
and other unallocated charges. Since certain administrative and other operating
expenses and other items have not been allocated to business segments, the
results in the below tables are not necessarily a measure computed in
accordance with generally accepted accounting principles and may not be
comparable to other companies.
WABCO has three reportable segments--Railroad Group, Transit Group and
Molded Products Group. The key factors used to identify these reportable
segments are the organization and alignment of the Company's internal
operations, the nature of the products and services and customer type. The
business segments are:
Railroad Group consists of products geared to the production of freight cars
and locomotives, including braking control equipment and train couplers as well
as operating freight railroads. Revenues are derived from OEM and aftermarket
sales and from repairs and services.
F-7
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 (Unaudited)--(Continued)
Transit Group consists of products for passenger transit vehicles (typically
subways, rail and buses) that include braking, coupling, electrification and
monitoring equipment, climate control and door equipment that are engineered to
meet individual customer specifications. Revenues are derived from OEM and
aftermarket sales as well as from repairs and services.
Molded Products Group include manufacturing and distribution of brake shoes
and discs and other rubberized products. Revenues are generally derived from
the aftermarket.
Segment financial information for the three months ended March 31, 1999 is
as follows:
<TABLE>
<CAPTION>
Molded
Railroad Transit Products Corporate
Group Group Group Activities Total
-------- ------- -------- ---------- --------
In thousands
<S> <C> <C> <C> <C> <C>
Sales to external customers...... $118,316 $54,862 $18,026 $191,204
Intersegment sales............... 2,255 41 2,591 $ (4,887) --
-------- ------- ------- -------- --------
Total sales.................... $120,571 $54,903 $20,617 $ (4,887) $191,204
======== ======= ======= ======== ========
Income from operations........... $ 22,423 $ 4,370 $ 5,446 $ (3,342) $ 28,897
Interest expense and other....... 9,162 9,162
-------- ------- ------- -------- --------
Income before income taxes and
extraordinary item............ $ 22,423 $ 4,370 $ 5,446 $(12,504) $ 19,735
======== ======= ======= ======== ========
</TABLE>
Segment financial information for the three months ended March 31, 1998 is
as follows:
<TABLE>
<CAPTION>
Molded
Railroad Transit Products Corporate
Group Group Group Activities Total
-------- ------- -------- ---------- --------
In thousands
<S> <C> <C> <C> <C> <C>
Sales to external customers...... $87,686 $51,531 $18,919 $158,136
Intersegment sales............... 2,061 119 2,504 $(4,684) --
------- ------- ------- ------- --------
Total sales.................... $89,747 $51,650 $21,423 $(4,684) $158,136
======= ======= ======= ======= ========
Income from operations........... $17,494 $ 4,382 $ 5,500 $(2,621) $ 24,755
Interest expense and other....... -- -- -- 7,242 7,242
------- ------- ------- ------- --------
Income before income taxes and
extraordinary item............ $17,494 $ 4,382 $ 5,500 $(9,863) $ 17,513
======= ======= ======= ======= ========
</TABLE>
9. Subsequent Event
On June 2, 1999 WABCO agreed to merge with MotivePower Industries, Inc.
MotivePower will be the surviving corporation. Each share of our common stock
will be converted into 1.3 shares of MotivePower's common stock. Immediately
upon completion of the merger, WABCO stockholders will own approximately 55% of
MotivePower's common stock. The merger is intended to be a tax-free
reorganization for federal income tax purposes. For accounting purposes, it
will be accounted for as a pooling of interests. Completion of the merger is
subject to various conditions, including approval by WABCO stockholders and the
stockholders of MotivePower.
F-8
<PAGE>
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,
1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Pittsburgh, Pennsylvania,
February 17, 1999
F-9
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31
----------------------
1998 1997
---------- ----------
Dollars in thousands,
except par value
<S> <C> <C>
Assets
Current Assets
Cash................................................. $ 3,323 $ 836
Accounts receivable.................................. 132,901 91,438
Inventories.......................................... 103,560 69,297
Deferred taxes....................................... 13,006 11,169
Other................................................ 10,171 7,759
---------- ----------
Total current assets............................... 262,961 180,499
Property, plant and equipment.......................... 214,461 186,534
Accumulated depreciation............................... (89,480) (78,167)
---------- ----------
Property, plant and equipment, net................. 124,981 108,367
Other Assets
Prepaid pension costs................................ 5,724 5,061
Goodwill............................................. 151,658 66,599
Other intangibles.................................... 46,021 42,466
Other noncurrent assets.............................. 4,839 7,887
---------- ----------
Total other assets................................. 208,242 122,013
---------- ----------
Total Assets..................................... $ 596,184 $ 410,879
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term debt.................... $ 30,579 $ 32,600
Accounts payable..................................... 62,974 37,582
Accrued income taxes................................. 8,352 488
Customer deposits.................................... 20,426 21,210
Accrued compensation................................. 12,769 13,080
Accrued warranty..................................... 12,657 12,851
Accrued interest..................................... 1,616 3,038
Other accrued liabilities............................ 18,177 10,931
---------- ----------
Total current liabilities.......................... 167,550 131,780
Long-term debt......................................... 437,238 332,334
Reserve for postretirement benefits.................... 16,238 14,860
Accrued pension costs.................................. 3,631 4,700
Deferred income taxes.................................. 3,463 5,561
Other long-term liabilities............................ 1,917 907
---------- ----------
Total liabilities.................................. 630,037 490,142
Shareholders' Equity
Preferred stock, 1,000,000 shares authorized, no
shares issued....................................... -- --
Common stock, $.01 par value; 100,000,000 shares
authorized: 47,426,600 shares issued................ 474 474
Additional paid-in capital........................... 107,720 105,522
Treasury stock, at cost, 13,532,092 and 13,743,924
shares.............................................. (187,654) (190,657)
Unearned ESOP shares, at cost, 8,564,811 and
8,751,531 shares.................................... (128,472) (131,273)
Retained earnings...................................... 182,291 141,617
Unamortized restricted stock award..................... (162) --
Accumulated other comprehensive income (loss).......... (8,050) (4,946)
---------- ----------
Total shareholders' equity......................... (33,853) (79,263)
---------- ----------
Liabilities and Shareholders' Equity............. $ 596,184 $ 410,879
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-10
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1998 1997 1996
----------- ----------- -----------
In thousands, except per share data
<S> <C> <C> <C>
Net sales............................... $ 670,909 $ 564,441 $ 453,512
Cost of sales........................... 451,730 378,323 300,163
----------- ----------- -----------
Gross profit........................ 219,179 186,118 153,349
Selling and marketing expenses.......... 30,711 25,364 18,643
General and administrative expenses..... 45,337 38,153 28,890
Engineering expenses.................... 30,436 24,386 18,244
Amortization expense.................... 8,029 8,240 7,854
----------- ----------- -----------
Total operating expenses............ 114,513 96,143 73,631
Income from operations.............. 104,666 89,975 79,718
Other income and expenses
Interest expense...................... 31,217 29,729 26,152
Other expense (income), net........... 919 (344) (82)
----------- ----------- -----------
Income before income taxes and
extraordinary item................. 72,530 60,590 53,648
Income taxes............................ 27,561 23,327 20,923
----------- ----------- -----------
Income before extraordinary item.... 44,969 37,263 32,725
Loss on early extinguishment of debt,
net of tax............................. 3,315 -- --
----------- ----------- -----------
Net income.......................... $ 41,654 $ 37,263 $ 32,725
=========== =========== ===========
Earnings Per Common Share
Basic
Income before extraordinary item.... $ 1.79 $ 1.45 $ 1.15
Extraordinary item.................. (.13) -- --
----------- ----------- -----------
Net income.......................... $ 1.66 $ 1.45 $ 1.15
=========== =========== ===========
Diluted
Income before extraordinary item.... $ 1.75 $ 1.42 $ 1.15
Extraordinary item.................. (.13) -- --
----------- ----------- -----------
Net income.......................... $ 1.62 $ 1.42 $ 1.15
=========== =========== ===========
Weighted Average Shares Outstanding
Basic............................... 25,081 25,693 28,473
Diluted............................. 25,708 26,173 28,473
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-11
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1998 1997 1996
-------- ------- -------
Dollars in thousands
<S> <C> <C> <C>
Operating Activities
Net income........................................ $ 41,654 $37,263 $32,725
Adjustments to reconcile net income to cash
provided by operations
Extraordinary loss on extinguishment of debt..... 3,315
Depreciation and amortization.................... 25,208 24,624 22,249
Provision for ESOP contribution.................. 4,472 3,229 2,870
Deferred income taxes............................ (3,935) (3,506) 2,456
Changes in operating assets and liabilities, net
of acquisitions
Accounts receivable............................. (26,161) (6,623) (9,868)
Inventories..................................... (16,957) 1,817 8,100
Accounts payable................................ 20,385 5,900 (6,574)
Accrued income taxes............................ 12,025 (1,349) (411)
Accrued liabilities and customer deposits....... (11,856) 5,522 9,740
Other assets and liabilities.................... (6,083) 97 (2,376)
-------- ------- -------
Net cash provided by operating activities...... 42,067 66,974 58,911
Investing Activities
Purchase of property, plant and equipment, net.... (28,957) (29,196) (12,855)
Acquisitions of businesses, net of cash acquired.. (112,514) (13,492) (78,890)
-------- ------- -------
Net cash used for investing activities......... (141,471) (42,688) (91,745)
Financing Activities
Proceeds from term debt obligations............... 64,500 65,000
Repayments of term debt........................... (7,500) (18,200) (26,300)
Net proceeds from (repayments of) revolving credit
arrangements..................................... 4,675 39,880 (2,935)
Proceeds from other borrowings.................... 43,208
Repayments of other borrowings.................... (2,000) (555) (10)
Debt issuance fees................................ (2,251) (2,068) (492)
Purchase of treasury stock........................ (44,000) (1,629)
Cash dividends.................................... (980) (1,009) (1,127)
Proceeds from exercise of stock options and
employee stock purchases......................... 2,546 3,513
-------- ------- -------
Net cash provided by (used for) financing
activities.................................... 102,198 (22,439) 32,507
Effect of changes in currency exchange rates....... (307) (1,629) 735
-------- ------- -------
Increase in cash................................. 2,487 218 408
Cash, beginning of year........................ 836 618 210
-------- ------- -------
Cash, end of year.............................. $ 3,323 $ 836 $ 618
======== ======= =======
Supplemental Cash Flow Disclosures
Interest paid during the year..................... $ 32,639 $30,223 $25,624
Income taxes paid during the year................. 19,471 28,182 20,452
======== ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-12
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Unallocated Unamortized Other
Comprehensive Common Paid-in Treasury ESOP Retained Restricted Comprehensive
Income Stock Capital Stock Shares Earnings Stock Award Income (Loss)
------------- ------ ---------- --------- ----------- -------- ----------- -------------
In thousands, except share data
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $474 $104,776 $(147,702) $(137,239) $ 73,765 $ -- $(2,772)
Cash dividends ($.04 per
share)................. (1,127)
Purchase of treasury
stock.................. (1,629)
Allocation of ESOP
shares................. (455) 3,325
Net income.............. $32,725 32,725
Translation adjustment.. (336) (336)
------- -------- --------- --------- -------- ----- -------
$32,389
=======
Balance, December 31,
1996................... 474 104,321 (149,331) (133,914) 105,363 -- (3,108)
Cash dividends ($.04 per
share)................. (1,009)
Purchase of treasury
stock.................. (44,000)
Stock issued under
option, benefit and
other plans............ 839 2,674
Allocation of ESOP
shares................. 362 2,641
Net income.............. $37,263 37,263
Translation adjustment.. (1,838) (1,838)
------- -------- --------- --------- -------- ----- -------
$35,425
=======
Balance, December 31,
1997................... 474 105,522 (190,657) (131,273) 141,617 -- (4,946)
Cash dividends ($.04 per
share)................. (980)
Stock issued under
option, benefit and
other plans............ 1,162 3,003 (162)
Allocation of ESOP
shares................. 1,036 2,801
Net income.............. $41,654 41,654
Translation adjustment.. (3,104) (3,104)
------- -------- --------- --------- -------- ----- -------
$38,550
=======
Balance, December 31,
1998................... $474 $107,720 $(187,654) $(128,472) $182,291 $(162) (8,050)
==== ======== ========= ========= ======== ===== =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-13
<PAGE>
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 after-market, 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 railroad transportation companies, locomotive and
freight car original equipment manufacturers, railroads and transit car
builders and public transit systems.
A portion of the Company's Railroad Group's operations and revenue base is
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
---------------------
1998 1997
---------- ----------
Dollars in thousands
<S> <C> <C>
Raw materials........................................... $ 47,853 $ 27,395
Work-in-process......................................... 29,965 26,640
Finished goods.......................................... 25,742 15,262
---------- ---------
Total inventory....................................... $ 103,560 $ 69,297
========== =========
</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>
F-14
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The
percentage of completion method of accounting for revenues on long-term sales
contracts is applied on a relatively small amount of contracts when
appropriate. Sales returns are infrequent and not material in relation to the
Company's net sales.
Stock-Based Compensation The Company accounts for stock-based compensation,
including stock options and employee stock purchases, under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." See Note 11 for related pro forma
disclosures.
Research and Development Research and development costs are charged to
expense as incurred. Such costs totaled $30.4 million, $24.4 million and $18.2
million in 1998, 1997 and 1996, 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 $6.2 million, $9.9 million
and $5.5 million for 1998, 1997 and 1996, respectively. Warranty reserves were
$12.7 million and $12.9 million at December 31, 1998 and 1997, 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). In addition, the
Company periodically enters into foreign currency exchange forward and options
contracts to mitigate the effects of fluctuations in foreign exchange rates in
countries where it has significant operations.
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 8).
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. The
effects of currency exchange rate changes on intercompany transactions that are
non U.S. dollar amounts are charged or credited to earnings.
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
F-15
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 (such as employee stock options) (See Note 11).
Other Comprehensive Income In 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" which established standards for reporting and displaying comprehensive
income and its components in financial statements. Comprehensive income is
defined as net income and all other nonowner changes in shareholders' equity.
The Company's accumulated other comprehensive income (loss) consists entirely
of foreign currency translation adjustments.
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 1998, 1997 or
1996. The allowance for doubtful accounts was $2.9 million and $2.0 million as
of December 31, 1998 and 1997, respectively.
Employees As of December 31, 1998, approximately 28% of the Company's
workforce is covered by collective bargaining agreements. These agreements are
generally effective through 2001 and 2002.
Recent Accounting Pronouncements In June 1998, the Financial Accounting
Standards Board issued Statement of Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities". The Statement establishes
accounting and reporting standards requiring that every derivative instrument
be measured at its fair value and the changes in fair value be recorded
currently in earnings unless specific hedge accounting criteria are met.
Statement No. 133 is effective for fiscal years beginning after June 15, 1999,
and accordingly, the Company anticipates adopting this standard January 1,
2000. Management continues to evaluate the impact this standard will have on
results of operations and financial condition.
3. Acquisitions
On October 5, 1998, the Company purchased the railway electronics business
(Rockwell Railroad Electronics) (RRE) of Rockwell Collins, Inc., a wholly-owned
subsidiary of Rockwell International Corporation, for approximately $80 million
in cash. The purchase was initially financed by obtaining additional term debt
of $40 million through an amendment to the Company's existing credit facility,
an unsecured bank loan of $30 million and additional borrowings under the
Company's revolving credit agreement. RRE is a leading manufacturer and
supplier of mobile electronics (display and positioning systems), data
communications, and electronic braking systems for the railroad industry and
its operations are in the United States. Revenues of the acquired business for
its fiscal year ended September 30, 1998 were approximately $46 million. The
acquisition was accounted for under the purchase accounting method and,
accordingly, its results are included in WABCO's consolidated financial
statements since the date of acquisition.
The excess of the purchase price over the fair value of the net assets
acquired was approximately $63 million and was allocated to goodwill. This
amount is based upon an independent appraisal and may decrease as a result of
adjustments to purchase price.
F-16
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma results of operations, including the
effects of pro forma adjustments related to the acquisition of RRE have been
prepared as if this transaction had occurred at the beginning of 1997:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------
1998 1997
----------- -----------
Dollars in thousands,
except per share
(Unaudited)
<S> <C> <C>
Net sales........................................... $ 707,840 $ 597,948
Income before extraordinary income.................. 41,414 32,575
Net income.......................................... 38,099 32,575
Diluted earnings per share
As reported....................................... 1.62 1.42
Pro forma......................................... 1.48 1.24
=========== ===========
</TABLE>
The pro forma financial information above does not purport to present what
the Company's results of operations would have been if the acquisition of RRE
had actually occurred on January 1, 1997, or to project the Company's results
of operations for any future period, and does not reflect anticipated cost
savings through the combination of these operations.
In the past three years, the Company also completed the following
acquisitions:
i) The October 1998 acquisition of the United States railway service
center business of Comet Industries, Inc., for $13.2 million, financed
through the issuance of $12.2 million of promissory notes. Annual revenue
for its most recent fiscal year was approximately $20 million.
ii) On July 30, 1998, purchased assets and assumed certain liabilities
of U.S.-based Lokring Corporation, for $5.1 million in cash. Lokring
develops, manufactures and markets patented non-welded connectors and
sealing products for railroad and other industries. Annual sales in 1997
were approximately $10 million.
iii) Acquired in April 1998, 100% of the stock of RFS (E) Limited
("RFS(E)") of England, for approximately $10.0 million including the
assumption of certain debt. RFS(E) is a leading provider of vehicle
overhaul, conversion and maintenance services to Britain's railway
industry. Annual revenue for its most recent fiscal year was approximately
$27.5 million.
iv) Acquired in April 1998, the transit coupler product line of Hadady
Corporation located in the United States for $4.6 million in cash.
v) In October 1997, the Company purchased the rail products business
and related assets of Sloan Valve Company for $2.5 million.
vi) Effective July 31, 1997 the Company acquired 100% of the stock of
HP s.r.l. ("HP"), an Italian transit 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. Annual revenues
approximated $9 million.
vii) Acquired in May 1997 Stone Safety Service Corporation, New
Jersey, and Stone U.K. Limited ("Stone"), a supplier of transit air
conditioning equipment and in June 1997, the Company acquired the heavy
rail air conditioning business of Thermo King Corporation ("Thermo King")
from Westinghouse Electric. The aggregate purchase price for the Stone and
Thermo King acquisitions was approximately $7.7 million. Annual revenues of
the these acquisitions prior to purchase were approximately $30 million.
F-17
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
viii) On September 19, 1996, the Company purchased the Vapor Group
("Vapor") for approximately $63.9 million in cash. 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 totaled $65 million.
ix) In January 1996, the Company acquired Futuris Industrial Products
Pty. Ltd., an Australian molded products manufacturer, for approximately
$15 million. Annual revenues prior to acquisition were approximately $10.5
million.
All of these other acquisitions were accounted for under the purchase
method. Accordingly, the results of operations of the applicable acquisition
are included in the Company's financial statements prospectively from the
acquisition date. The excess of the purchase price over the fair value of net
assets was allocated to goodwill. Such recorded amounts totaled approximately
$24 million, $7 million and $17 million, in 1998, 1997 and 1996, respectively.
4. Intangibles
Intangible assets of the Company, other than goodwill, consist of the
following:
<TABLE>
<CAPTION>
December 31
---------------------
1998 1997
---------- ----------
Dollars in thousands
<S> <C> <C>
Patents, tradenames and trademarks, net of accumulated
amortization of $22,874 and $19,768 (4-40 years)..... $ 35,251 $ 35,942
Covenants not to compete, net of accumulated
amortization of $10,144 and $9,333 (5 years)......... 6,092 1,133
Other intangibles, net of accumulated amortization of
$7,356 and $7,052 (3-7 years)........................ 4,678 5,391
---------- ----------
$ 46,021 $ 42,466
========== ==========
</TABLE>
At December 31, 1998 and 1997, goodwill, net of accumulated amortization of
$7.7 million and $5.4 million, respectively, totaled $151.7 million and $66.6
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.
F-18
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Long-Term debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------
1998 1997
---------- ----------
Dollars in thousands
<S> <C> <C>
Credit Agreement
Revolving credit....................................... $ 105,555 $ 100,880
Term loan.............................................. 202,500 145,500
9 3/8% Senior notes due June 5, 2005..................... 100,000 100,000
Unsecured credit facility................................ 30,000 --
Pulse.................................................... 16,990 16,990
Comet.................................................... 10,200 --
Other.................................................... 2,572 1,564
---------- ----------
Total.................................................. 467,817 364,934
Less--current portion.................................. 30,579 32,600
---------- ----------
Long-term portion...................................... $ 437,238 $ 332,334
========== ==========
</TABLE>
Credit Agreement
In June 1998, the Company refinanced its credit facility with a consortium
of commercial banks and amended it in October 1998 in connection with the RRE
acquisition. The credit agreement provides for an aggregate credit facility of
$350 million, consisting of up to $170 million of June 1998 term loans, up to
$40 million of September 1998 term loans, and up to $140 million of revolving
loans. In addition, the credit agreement provides for swingline loans of up to
an aggregate amount of $5 million, and for the issuance of letters of credit in
an aggregate face amount of up to $50 million. Swingline loans and the issuance
of letters of credit will reduce the amount of revolving loans which may be
incurred under the revolving credit facility.
At December 31, 1998, the Company had available borrowing capacity, net of
letters of credit, of approximately $12 million. The Company repaid a portion
of its borrowings under the credit agreement in January 1999 with proceeds of
the offering of $75 million of 9 3/8% Senior Notes, as further described below,
resulting in increased borrowing capacity of $47 million. (See Note 19).
The credit agreement limits the Company with respect to declaring or making
cash dividend payments and prohibits the Company from declaring or making other
distributions whether in cash, property, securities or a combination thereof,
with respect to any shares of the Company's capital stock subject to certain
exceptions, including an exception pursuant to which the Company will be
permitted to pay cash dividends on its Common Stock in any fiscal year in an
aggregate amount up to $15 million minus the aggregate amount of prepayments of
the Pulse note during such fiscal year so long as no default in the payment of
interest or fees has occurred thereunder. The credit agreement contains various
other covenants and restrictions including, without limitation, the following:
a limitation on the incurrence of additional indebtedness; a limitation on
mergers, consolidations and sales of assets and acquisitions (other than
mergers and consolidations with certain subsidiaries, sales of assets in the
ordinary course of business, and acquisitions for which the consideration paid
by the Company does not exceed $50 million individually or $150 million in the
aggregate); a limitation on liens; a limitation on sale and leasebacks; a
limitation on investments, loans and advances; a limitation on certain debt
payments; a limitation on capital expenditures; a minimum interest expense
coverage ratio; and a maximum leverage ratio. All debt incurred under the
credit agreement is secured by substantially all of the assets of the Company
and its domestic subsidiaries and is guaranteed by the Company's domestic
subsidiaries.
F-19
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The credit agreement contains customary events of default, including payment
defaults, failure of representations to be true in any material respect,
covenant defaults, defaults with respect to other indebtedness of the Company,
bankruptcy, certain judgments against the Company, ERISA defaults and "change
of control" of the Company.
Credit agreement borrowings bear variable interest rates indexed to common
indexes such as LIBOR. The weighted-average contractual interest rate on credit
agreement borrowings was 6.71% on December 31, 1998. To reduce the impact of
interest rate changes on a portion of 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 during the term of the swap
contracts. On December 31 1998, the notional value of interest rate swaps
outstanding totaled $50 million and effectively changed the Company's interest
rate from a variable rate to a fixed rate of 7.09%. The interest rate swap
agreements mature in 2000 and 2001. 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.
Scheduled term loan principal repayments required under the credit agreement
as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Dollars in millions
-------------------
<S> <C>
1999..................................................... $ 20.0
2000..................................................... 32.5
2001..................................................... 40.0
2002..................................................... 50.0
2003..................................................... 60.0
------
$202.5
======
</TABLE>
9 3/8% Senior Notes Due June 2005
In June 1995 the Company issued $100 million of 9 3/8% Senior Notes due 2005
(the "Existing Notes"). In January 1999, the Company issued an additional $75
million of 9 3/8% Senior Notes due 2005 (the "Additional Notes"; the Existing
Notes and the Additional Notes are collectively, the "Notes"). See "Subsequent
Event" Note 19.
The terms of the Existing Notes and the Additional Notes are substantially
the same, and the Existing Notes and the Additional Notes were issued pursuant
to indentures that are substantially the same. The Notes bear interest at the
rate of 9 3/8% and mature in June 2005. The net proceeds of the Existing Notes
were used to prepay term loans outstanding under the then existing credit
agreement. The net proceeds of the Additional Notes were used to repay the
unsecured credit facility and to reduce revolving credit borrowings.
The Notes are senior unsecured obligations of the Company and rank pari
passu in right of payment with all existing and future indebtedness under (i)
capitalized lease obligations, (ii) the credit agreement, (iii) indebtedness of
the Company for money borrowed and (iv) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of which the
Company is responsible or liable unless, in the case of clause (iii) or (iv),
in the instrument creating or evidencing the same or pursuant to which the same
is outstanding, it is provided that such obligations are subordinate in right
of payment to the notes.
Unsecured Credit Facility
In October 1998, the Company obtained a $30 million unsecured credit
facility from a group of commercial banks for the purpose of financing the RRE
acquisition. At December 31, 1998, the interest rate on
F-20
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the note was 9.75% per annum. In January 1999, this facility was repaid with
proceeds of the Additional Note offering. See "Subsequent Event" Note 19.
Pulse Note
As partial payment for the Pulse acquisition, the Company issued a $17.0
million note due January 31, 2004. Interest is payable semiannually and accrues
at 9.5% until February 1, 2001; 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%.
Comet Notes
In connection with the Comet acquisition, the Company issued notes totaling
$12.2 million, of which unsecured notes totaling $6.2 million were delivered by
the Company and a note in the amount of $6 million was delivered by a
subsidiary of the Company and secured by the acquired assets. The notes bore
interest at the rate of 10% per annum and were scheduled to mature on October
8, 1999. These notes were repaid in January 1999 (See Note 19).
Capitalized debt issuance costs of $4.8 million, net of accumulated
amortization, are being amortized over the terms of the borrowings.
F-21
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Employee Benefit Plans
<TABLE>
<CAPTION>
Pension Plans Postretirement Plan
------------------ --------------------
As of or for the year ended December 31 1998 1997 1998 1997
- --------------------------------------- -------- -------- --------- ---------
Dollars in thousands
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit (obligation) at beginning of
year.................................. $(39,424) $(34,126) $ (17,750) $ (14,980)
Service cost........................... (1,363) (1,176) (300) (289)
Interest cost.......................... (2,904) (2,720) (1,273) (1,226)
Participant contributions.............. (32) (35)
Actuarial gain (loss).................. (4,796) (3,964) (1,348) (1,526)
Plan amendments........................ (1,480) (1,025)
Benefits paid.......................... 2,725 2,797 392 271
Effect of currency rate changes........ 1,748 825
-------- -------- --------- ---------
Benefit (obligation) at end of year.. $(45,526) $(39,424) $ (20,279) $ (17,750)
======== ======== ========= =========
Change in plan assets
Fair value of plan assets at beginning
of year............................... $ 37,884 $ 33,702 $ -- $ --
Actual return on plan assets........... 5,335 5,519
Employer contribution.................. 3,688 2,550
Participant contribution............... 32 35
Administrative expenses................ (116) (213)
Benefits paid.......................... (2,725) (2,797)
Effect of currency rate changes........ (1,741) (912)
-------- -------- --------- ---------
Fair value of plan assets at end of
year................................ $ 42,357 $ 37,884 $ -- $ --
======== ======== ========= =========
Funded status
Funded status at year end.............. $ (3,169) $ (1,540) $ (20,279) $ (17,750)
Unrecognized net actuarial (gain)
loss.................................. 2,111 (261) 3,960 2,856
Unrecognized prior service cost........ 3,151 2,162 (221) (290)
Unrecognized transition obligation..... 302 324
-------- -------- --------- ---------
Prepaid (accrued) benefit cost....... $ 2,093 $ 361 $ (16,238) $ (14,860)
======== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Pension Plans Postretirement Plan
---------------------- ----------------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net periodic benefit cost
Service cost.................. $1,505 $1,305 $1,054 $ 340 $ 289 $ 267
Interest cost................. 2,904 2,675 2,394 1,351 1,226 935
Expected return on plan
assets....................... (3,717) (4,463) (2,482)
Net amortization/deferrals.... 755 1,865 302 195 155 13
Special event................. 696
------ ------ ------ ------ ------ ------
Net periodic benefit cost... $1,447 $1,382 $1,964 $1,886 $1,670 $1,215
====== ====== ====== ====== ====== ======
Assumptions
Discount rate................. 6.75% 7.25% 8.50% 6.75% 7.25% 7.50%
Expected long-term rate of
return....................... 10.00 9.25 9.25 -- -- --
</TABLE>
The Company sponsors defined benefit pension plans which cover substantially
all union employees and certain non-union Canadian employees and provide
pension benefits of stated amounts for each year of service
F-22
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the employee. In connection with the establishment of the ESOP (see Note 7)
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.
Within the analysis above, the pension plan for U.S. salaried employees has
a benefit obligation of $22,338 and plan assets of $20,708 as of December 31,
1998. In 1996, as the result of an early retirement package offered to certain
union employees, the Company incurred a charge of $696,000 reflected as a
special event.
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 7), 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.
A one percentage point increase in the assumed health care cost trend rates
for each future year increases annual postretirement benefit expense by
$290,832 and the accumulated postretirement benefit obligation by $3.3 million.
A one percentage point decrease in the assumed health care cost trends for each
future year decreases annual postretirment benefit expense by $230,163 and the
accumulated postretirement benefit obligation by $2.6 million.
7. 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 Note 6, 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 approximately $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 $128.5 million at December 31, 1998,
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. Total compensation expense recognized for allocated ESOP
shares was $4.5 million, $3.2 million and $2.9 million in 1998, 1997 and 1996,
respectively.
F-23
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Income Taxes
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------
1998 1997 1996
------- ------- -------
Dollars in thousands
<S> <C> <C> <C>
Current taxes
Federal......................................... $19,629 $18,490 $17,498
State........................................... 1,330 1,849 2,138
Foreign......................................... 10,537 6,494 2,372
------- ------- -------
31,496 26,833 22,008
Deferred taxes
Federal......................................... (1,964) (1,375) (2,432)
State........................................... (282) (137) (278)
Foreign......................................... (1,689) (1,994) 1,625
------- ------- -------
(3,935) (3,506) (1,085)
------- ------- -------
Total provision............................... $27,561 $23,327 $20,923
======= ======= =======
The 1998 provision excludes a $2.0 million income tax effect on the
extraordinary loss (see Note 9) 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 $49.9 million and $22.6 million,
respectively, for 1998, $47.9 million and $12.7 million, respectively, for
1997, and $42.4 million and $11.3 million, respectively, for 1996.
A reconciliation of the United States federal statutory income tax rate to
the effective income tax rate is provided below:
<CAPTION>
Year ended December 31
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
U.S. federal statutory rate....................... 35.0% 35.0% 35.0%
State taxes....................................... 2.1 2.7 3.5
Foreign........................................... .9 .8 .5
------- ------- -------
Effective rate.................................... 38.0% 38.5% 39.0%
======= ======= =======
</TABLE>
The sources of deferred income taxes were as follows:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------
1998 1997 1996
------- ------- -------
Dollars in thousands
<S> <C> <C> <C>
Deferred debt costs.............................. $(1,673) -- --
ESOP............................................. (1,513) $(1,150) $ (919)
Depreciation..................................... (964) 176 782
Postretirement benefits.......................... (593) (851) (171)
Inventory........................................ (350) 451 (1,450)
Accrued warranty................................. 1,157 (1,697) (497)
Pension.......................................... 31 958 (319)
Other liabilities and reserves................... (30) (1,393) 1,489
------- ------- -------
Deferred tax benefits............................ $(3,935) $(3,506) $(1,085)
======= ======= =======
</TABLE>
F-24
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Components deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31
----------------------
1998 1997
---------- ----------
Dollars in thousands
<S> <C> <C>
ESOP................................................ $ 4,539 $ 3,026
Postretirement benefits............................. 3,508 2,915
Inventory........................................... 3,461 3,111
Accrued warranty.................................... 3,021 4,178
Deferred debt costs................................. 1,673 --
Pension............................................. 749 780
Depreciation........................................ (7,458) (8,422)
Other............................................... 50 20
---------- ----------
Net deferred tax asset............................ $ 9,543 $ 5,608
========== ==========
</TABLE>
9. Extraordinary Item
In June 1998, the Company refinanced its credit agreement and subsequently
amended the agreement in October 1998. This resulted in a write off of
previously deferred financing costs of approximately $3.3 million, net of tax
($.13 per diluted share), which has been reported as an extraordinary item.
10. Earnings Per Share
The computation of earnings per share is as follows:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------
1998 1997 1996
------- ------- -------
Dollars in thousands,
except per share
<S> <C> <C> <C>
Basic
Income before extraordinary item applicable to
common shareholders............................. $44,969 $37,263 $32,725
Divided by
Weighted average shares outstanding.............. 25,081 25,693 28,473
Basic earnings per share, before extraordinary
item............................................ $ 1.79 $ 1.45 $ 1.15
------- ------- -------
Diluted
Income before extraordinary item applicable to
common shareholders............................. $44,969 $37,263 $32,725
Divided by sum of
Weighted average shares outstanding.............. 25,081 25,693 28,473
Conversion of dilutive stock options............. 627 480
------- -------
Diluted shares outstanding....................... 25,708 26,173 28,473
Diluted earnings per share, before extraordinary
item............................................ $ 1.75 $ 1.42 $ 1.15
======= ======= =======
</TABLE>
Options to purchase .2 million, .5 million and 2.2 million shares of common
stock were outstanding in 1998, 1997, and 1996, 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.
F-25
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Stock-Based Compensation Plans
Stock Options Under the 1995 Stock Incentive Plan, as amended in 1998, the
Company may grant options to employees of Westinghouse Air Brake Company and
Subsidiaries for up to 4.7 million shares of Westinghouse Air Brake Company
Common Stock. The 1998 amendment increased the number of stock options
available for grant, from 3.1 million to 4.7 million. Options to purchase
approximately 3.8 million shares of Westinghouse Air Brake Company Common Stock
under the plan have been granted to employees of Westinghouse Air Brake Company
at, or in excess of, fair market value at the date of grant. Generally, the
options become exercisable over three and five-year vesting periods and expire
ten years from the date of grant.
As part of a long-term incentive program, in 1998 and 1996 the Company
granted options to purchase up to 500,020 and 684,206 shares, respectively, 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
$20 and $14, respectively. The options vest 100% after eight years and 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.
The Company also has 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 1998, the Company granted nonstatutory stock options
to nonemployee directors to purchase a total of 35,000 shares.
Employee Stock Purchase Plan In 1998, the Company adopted an employee stock
purchase plan (ESPP). The ESPP has 500,000 shares available for issuance.
Participants purchase the Corporation's Common Stock at 85% of the lesser of
fair market value on the first or last day of each offering period. Shares
issued pursuant to the ESPP in 1998 were 6,998 shares and the average purchase
price per share was $16.575.
The Company applies APB 25 and related interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation expense has been
recognized under these plans. Had compensation expense for these plans been
determined based on the fair value at the grant dates for awards 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
-----------------------
1998 1997 1996
------- ------- -------
Dollars in thousands,
except per share
<S> <C> <C> <C>
Net income
As reported....................................... $41,654 $37,263 $32,725
Pro forma......................................... 38,324 34,007 31,117
Diluted earnings per share
As reported....................................... $ 1.62 $ 1.42 $ 1.15
Pro forma......................................... 1.49 1.30 1.09
</TABLE>
Since compensation expense associated with option grants would be recognized
over the vesting period, the initial impact of applying SFAS No. 123 on pro
forma net income is not 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.
F-26
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Dividend yield.................................... .20% .23% .32%
Risk-free interest rate........................... 4.56 5.80 6.25
Stock price volatility............................ 29.10 29.22 30.43
Expected life (years)............................. 5.0 5.3 7.3
</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>
1998 1997 1996
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year....... 2,778,443 $14.64 2,222,456 $13.63 1,279,500 $14.00
Granted............... 813,520 20.99 748,126 17.84 958,956 13.14
Exercised............. (169,025) 14.39 (135,139) 13.75
Canceled.............. (134,951) 15.86 (57,000) 14.00 (16,000) 14.00
--------- --------- ---------
End of year........... 3,287,987 16.29 2,778,443 14.64 2,222,456 13.63
========= ========= =========
Exercisable at end of
year................... 1,148,134 671,971 332,992
Available for future
grant.................. 1,107,849 186,418 877,544
Weighted average fair
value of options
granted during the
year................... $ 8.98 $ 8.07 $ 4.05
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 ranged from
$11.00 to $27.66. The weighted-average remaining contractual life of those
options is 8 years.
Restricted Stock Award In 1998, the Company granted 15,000 shares of
restricted Common Stock to an officer. The shares vest according to a vesting
schedule over a three-year period. The grant date market value totaled $372
thousand and is being amortized to expense over the vesting period. Unamortized
compensation is recorded as a component of shareholders' equity.
Executive Retirement Plan Under the 1997 Executive Retirement Plan, the
Company may award its Common Stock to certain employees including certain
executives who do not participate in the ESOP. Through December 31, 1998,
19,555 shares have been awarded with a fair market value of approximately $400
thousand.
With respect to the Restricted Stock Award and the Executive Retirement
Plan, compensation expense is recognized in the consolidated statement of
operations.
F-27
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 millions
-------------------
<S> <C>
1999..................................................... $ 3.2
2000..................................................... 2.6
2001..................................................... 2.2
2002..................................................... 1.2
2003..................................................... .7
Thereafter............................................... 2.1
-----
$12.0
=====
</TABLE>
Rental expense under all leases was approximately $3.8 million, $3.3 million
and $2.8 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Operating leases relate principally to facilities, transportation
equipment and communication systems.
13. Stock Repurchase
In March 1997, the Company repurchased from Scandinavian Incentive Holdings,
B.V., ("SIH"), 4 million 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 Agreement (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 million shares of WABCO Common
Stock to investors consisting of Vestar Equity Partners, L.P., Charlesbank
Capital Partners, LLC, f/k/a Harvard Private Capital Holdings, Inc., American
Industrial Partners Capital Fund II, L.P. 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 the Existing 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.
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>
Reported Pro Forma
-------- ---------
In thousands,
except per share
<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
Diluted................................................. 26,173 25,198
</TABLE>
F-28
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Stockholders' and Voting Trust Agreements
As of December 31, 1998, the approximate ownership interests in the
Company's common stock are held by management and the ESOP (58%), the investors
referred to in Note 13 (17%), and all others including public shareholders
(25%). The investors referred to in Note 13 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 13 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 7.
15. 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, 1998 and 1997 there was no preferred stock issued or
outstanding.
16. 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. If ASI was unable to honor or meet these indemnifications, the Company
would be responsible for such items. In the opinion of management, ASI
currently has the ability to meet its indemnification obligations. ASI has not
disputed any coverage or reimbursement under these provisions.
The Company, through one of its operating subsidiaries, has been named,
along with other parties, as a Potentially Responsible Party (PRP) under the
North Carolina Inactive Sites Response Act because of an alleged release or
threat of release of hazardous substances at the "Old James Landfill" site in
North Carolina. 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
F-29
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the "Old James Landfill" and Rocky Mountain 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.
On February 12, 1999, GE Harris Railway Electronics, LLC and GE Harris
Railway Electronic Services, LLC (collectively, "GE Harris") brought suit
against the Company for alleged patent infringement and unfair competition
related to a communications system installed in one of the Company's products.
GE Harris is seeking to prohibit the Company from future infringement and is
seeking an unspecified amount of money damages to recover, in part, royalties.
While this lawsuit is in the earliest stages, the Company believes the
technology developed by the Company does not infringe on the GE Harris patents.
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 that the Company believes
will have a material adverse effect on its financial condition, results of
operations or liquidity. The Company historically has not been required to pay
any material liability claims.
17. Segment Information
WABCO has three reportable segments--Railroad Group, Transit Group and
Molded Products Group. The key factors used to identify these reportable
segments are the organization and alignment of the Company's internal
operations, the nature of the products and services and customer type. The
business segments are:
Railroad Group consists of products geared to the production of freight cars
and locomotives, including braking control equipment and train coupler systems
and operating freight railroads. Revenues are derived from OEM and after-market
sales and from repairs and services.
Transit Group consists of products for passenger transit vehicles (typically
subways, rail and busses) that include braking and monitoring systems, climate
control and door equipment, that are engineered to meet individual customer
specifications. Revenues are derived from OEM and after-market sales as well as
from repairs and services.
Molded Products Group include manufacturing and distribution of brake shoes
and other rubberized products. Revenues are generally derived from the after-
market.
The Company evaluates its business segments' operating results based on
income from operations. Corporate activities include general corporate
expenses, elimination of intersegment transactions, interest
F-30
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
income and expense and other unallocated charges. Since certain administrative
and other operating expenses and other items have not been allocated to
business segments, the results in the below tables are not necessarily a
measure computed in accordance with generally accepted accounting principles
and may not be comparable to other companies.
Segment financial information for 1998 is as follows:
<TABLE>
<CAPTION>
Molded
Railroad Transit Products Corporate
Group Group Group Activities Total
-------- -------- -------- ---------- --------
In thousands
<S> <C> <C> <C> <C> <C>
Sales to external
customers.................. $388,797 $211,801 $70,311 $670,909
Intersegment sales.......... 14,137 1,276 8,805 $(24,218)
-------- -------- ------- --------
Total sales............... $402,934 $213,077 $79,116 $(24,218) $670,909
======== ======== ======= ======== ========
Income from operations...... $ 78,987 $ 16,047 $20,713 $(11,081) $104,666
Interest expense and other.. 32,136 32,136
-------- --------
Income before income taxes
and extraordinary item... $ 78,987 $ 16,047 $20,713 $(43,217) $ 72,530
======== ======== ======= ======== ========
Depreciation and
amortization............... $ 7,401 $ 4,742 $ 1,952 $ 11,113 $ 25,208
Capital expenditures........ 12,111 8,470 5,393 2,983 28,957
Working capital............. 75,516 41,856 9,762 (31,723) 95,411
Segment assets.............. 325,585 182,398 48,550 39,651 596,184
</TABLE>
Segment financial information for 1997 is as follows:
<TABLE>
<CAPTION>
Molded
Railroad Transit Products Corporate
Group Group Group Activities Total
-------- -------- -------- ---------- --------
In thousands
<S> <C> <C> <C> <C> <C>
Sales to external
customers.................. $310,295 $189,541 $64,605 $564,441
Intersegment sales.......... 8,977 1,247 7,323 $(17,547)
-------- -------- ------- --------
Total sales............... $319,272 $190,788 $71,928 $(17,547) $564,441
======== ======== ======= ======== ========
Income from operations...... $ 63,840 $ 19,907 $18,364 $(12,136) $ 89,975
Interest expense and other.. 29,385 29,385
-------- --------
Income before income taxes
and extraordinary item... $ 63,840 $ 19,907 $18,364 $(41,521) $ 60,590
======== ======== ======= ======== ========
Depreciation and
amortization............... $ 6,284 $ 4,168 $ 2,029 $ 12,143 $ 24,624
Capital expenditures........ 19,236 5,341 3,254 1,365 29,196
Working capital............. 42,485 29,553 8,401 (31,720) 48,719
Segment assets.............. 175,586 149,669 42,865 42,759 410,879
</TABLE>
F-31
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment financial information for 1996 is as follows:
<TABLE>
<CAPTION>
Molded
Railroad Transit Products Corporate
Group Group Group Activities Total
-------- -------- -------- ---------- --------
In thousands
<S> <C> <C> <C> <C> <C>
Sales to external
customers.................. $294,021 $100,902 $58,589 $453,512
Intersegment sales.......... 12,707 863 6,089 $(19,659)
-------- -------- ------- --------
Total sales............... $306,728 $101,765 $64,678 $(19,659) $453,512
======== ======== ======= ======== ========
Income from operations...... $ 62,839 $ 12,865 $15,057 $(11,043) $ 79,718
Interest expense and other.. 26,070 26,070
-------- --------
Income before income taxes
and extraordinary item... $ 62,839 $ 12,865 $15,057 $(37,113) $ 53,648
======== ======== ======= ======== ========
Depreciation and
amortization............... $ 5,893 $ 2,785 $ 1,563 $ 12,008 $ 22,249
Capital expenditures........ 8,759 2,306 1,663 127 12,855
Working capital............. 46,705 21,862 7,922 (28,313) 48,176
Segment assets.............. 157,768 117,274 40,890 47,304 363,236
</TABLE>
The following geographic area data include trade revenues based on product
shipment destination and long-lived assets consists of plant, property and
equipment, net of depreciation, that are resident in their respective
countries.
<TABLE>
<CAPTION>
Sales Long-Lived Assets
-------------------------- -------------------------
Year ended December 31 1998 1997 1996 1998 1997 1996
- ---------------------- -------- -------- -------- -------- -------- -------
In thousands
<S> <C> <C> <C> <C> <C> <C>
United States.............. $486,010 $421,057 $333,405 $ 78,720 $ 71,030 $63,348
Canada..................... 74,066 72,618 76,301 38,775 34,529 30,178
Other international........ 110,833 70,766 43,806 7,486 2,808 2,318
-------- -------- -------- -------- -------- -------
Total.................... $670,909 $564,441 $453,512 $124,981 $108,367 $95,844
======== ======== ======== ======== ======== =======
</TABLE>
18. 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>
1998 1997
------------ ------------
Carry Fair Carry Fair
Value Value Value Value
----- ----- ----- -----
Dollars in millions
<S> <C> <C> <C> <C>
9 3/8% Senior Notes............................. $(100) $(106) $(100) $(106)
Unsecured credit facility....................... (30) (30) -- --
Note Payable Pulse 9 1/2%....................... (17) (18) (17) (18)
Comet Notes..................................... (10) (10) -- --
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.
F-32
<PAGE>
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. Subsequent Event
In January 1999, WABCO completed the private placement of $75 million of 9
3/8% Senior Notes which mature in 2005. The Senior Notes were issued at a
premium resulting in an effective rate of 8.5%. The issuance improved WABCO's
financial liquidity by i) using a portion of the proceeds to repay $30 million
of debt associated with the RRE acquisition that bore interest at 9.56%; ii)
using a portion of the proceeds to repay variable-rate revolving credit
borrowings thereby increasing amounts available under the revolving credit
facility; and iii) repay the remaining unpaid principal of $10.2 million from
the Comet acquisition. As result of the issuance, the Company will write-off
previously capitalized debt issuance costs of approximately $.02 per diluted
share, in the first quarter of 1999.
20. Selected Quarterly Financial Data
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
(Unaudited)
Dollars in thousands, except per share data
<S> <C> <C> <C> <C>
1998
Net sales........................ $ 158,136 $ 172,052 $ 160,476 $ 180,245
Operating income................. 24,755 26,084 25,181 28,646
Income before taxes.............. 17,513 18,871 17,493 18,653
Income before extraordinary
item............................ 10,858 11,700 10,846 11,565
Net income....................... 10,858 8,970 10,846 10,980
Diluted earnings per common share
before extraordinary item....... 0.42 0.45 0.42 0.45
Diluted earnings per common
share........................... 0.42 0.34 0.42 0.43
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
</TABLE>
In the second quarter of 1998, the Company refinanced its credit agreement
and wrote-off deferred financing costs of approximately $2.7 million, net of
tax, or $.11 per diluted share. In the fourth quarter of 1998, the Company
amended its credit agreement and wrote-off deferred financing costs of
approximately $.6 million, net of tax, or $.02 per diluted share. Such charges
were recorded as extraordinary items.
F-33
<PAGE>
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, and
have issued our report thereon dated February 17, 1999. Our audits were made
for the purpose of forming an opinion on those statements taken as a whole. The
schedule listed in the index to the financial statements and schedules 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 data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Pittsburgh, Pennsylvania,
February 17, 1999
F-34
<PAGE>
SCHEDULE II
WESTINGHOUSE AIR BRAKE COMPANY
VALUATION AND QUALIFYING ACCOUNTS
For each of the three years ended December 31
<TABLE>
<CAPTION>
Balance at Charged/ Deductions Balance
beginning of (credited) to Charged to other from at end of
period expense accounts (1) reserves (2) period
------------ ------------- ---------------- ------------ ---------
Dollars in thousands
<S> <C> <C> <C> <C> <C>
1998
Accrued warranty...... $12,851 $6,238 $4,936 $11,368 $12,657
Allowance for doubtful
accounts............. 2,045 528 712 428 2,857
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
</TABLE>
- --------
(1) Reserves of acquired companies.
(2) Actual disbursements and/or charges
F-35
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net sales............................................... $107,274 $ 82,853
Cost of sales........................................... (79,751) (61,497)
--------- ---------
Gross profit............................................ 27,523 21,356
Selling, general and administrative expenses............ (12,718) (10,353)
--------- ---------
Operating income........................................ 14,805 11,003
Investment income....................................... 246 279
Interest expense........................................ (2,194) (1,213)
Other income............................................ 91 90
Foreign exchange (loss) gain............................ (538) 588
--------- ---------
Income before income taxes and extraordinary item....... 12,410 10,747
Income tax expense...................................... (4,532) (3,627)
--------- ---------
Income before extraordinary item........................ 7,878 7,120
Extraordinary loss on extinguishment of debt, net of
income tax benefit of $265 in 1998..................... -- (472)
--------- ---------
Net income.............................................. $ 7,878 $ 6,648
========= =========
EARNINGS PER COMMON SHARE--BASIC:
(Adjusted to reflect the 3-for-2 stock split effective
April 2, 1999)
Income before extraordinary item........................ $ .29 $ .27
Extraordinary item...................................... -- (.02)
--------- ---------
Net income.............................................. $ .29 $ .25
========= =========
Adjusted weighted average common shares outstanding..... 26,986 26,709
EARNINGS PER COMMON SHARE--ASSUMING DILUTION:
(Adjusted to reflect the 3-for-2 stock split effective
April 2, 1999)
Income before extraordinary item........................ $ .28 $ .26
Extraordinary item...................................... -- (.02)
--------- ---------
Net income.............................................. $ .28 $ .24
========= =========
Adjusted weighted average common shares outstanding..... 28,146 27,824
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-36
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 1999 AND DECEMBER 31, 1998 (UNAUDITED)
(In thousands except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 11,170 $ 5,660
Receivables from customers:
Billed, net of allowance for doubtful accounts of $717
and $673, respectively............................... 56,518 54,428
Unbilled.............................................. 97 2,831
Inventories............................................. 99,539 92,993
Deferred income taxes................................... 7,639 6,765
Income tax receivable................................... 2,220 5,216
Other................................................... 5,441 4,230
-------- --------
Total current assets................................ 182,624 172,123
-------- --------
Locomotive lease fleet, net............................. 1,168 1,189
-------- --------
Property, plant and equipment:
Land.................................................. 2,512 2,420
Buildings and improvements............................ 53,144 50,997
Machinery and equipment............................... 97,902 94,143
-------- --------
Property, plant and equipment, cost................... 153,558 147,560
Less accumulated depreciation......................... 58,249 54,492
-------- --------
Property, plant and equipment, net...................... 95,309 93,068
Underbillings--MPI de Mexico............................ 26,868 26,775
Goodwill and other intangibles, net..................... 87,571 63,593
Other................................................... 14,272 14,450
-------- --------
Total assets........................................ $407,812 $371,198
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt....................... $ 557 $ 549
Accounts payable--trade................................. 32,780 34,293
Accrued expenses and other current liabilities.......... 33,453 30,919
Revolving credit agreement borrowings................... -- 10,000
Advances from customers................................. 282 1,174
-------- --------
Total current liabilities........................... 67,072 76,935
Long-term debt.......................................... 133,607 95,249
Commitments and contingencies........................... 17,692 19,205
Deferred income taxes................................... 1,419 559
Other................................................... 1,385 1,321
-------- --------
Total liabilities................................... 221,175 193,269
-------- --------
Stockholders' Equity:
Common Stock, par value $.01 per share................ 260 179
Additional paid-in capital............................ 207,418 206,434
Deficit............................................... (15,368) (23,156)
Accumulated other comprehensive income................ (5,321) (5,105)
Deferred compensation................................. 5,634 4,113
-------- --------
192,623 182,465
Less--Treasury stock, at cost........................... 5,986 4,536
-------- --------
Total stockholders' equity.............................. 186,637 177,929
-------- --------
Total liabilities and stockholders' equity.............. $407,812 $371,198
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-37
<PAGE>
MOTIVEPOWER INDUSTRIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Operating Activities
Net income............................................... $ 7,878 $ 6,648
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation........................................... 2,843 1,653
Amortization........................................... 971 826
Extraordinary loss on extinguishment of debt, net of
tax................................................... -- 472
Changes in operating assets and liabilities exclusive
of effects of 1999 purchase of G&G Locotronics and Q-
Tron:
Receivables from customers........................... 6,721 (8,202)
Inventories.......................................... (978) (8,408)
Underbillings--MPI de Mexico......................... (93) 4,576
Accounts payable and accrued expenses................ (3,831) (7,358)
Advances from customers.............................. (892) 438
Other, net........................................... 550 4,090
--------- ---------
Net cash provided by (used in) operating activities...... 13,169 (5,265)
--------- ---------
Investing Activities
Payment for purchase of G&G Locotronics.................. (17,770) --
Payment for purchase of Q-Tron........................... (14,854) --
Additions to property, plant and equipment............... (3,769) (6,177)
Other, net............................................... 243 38
--------- ---------
Net cash used in investing activities.................... (36,150) (6,139)
--------- ---------
Financing Activities
Increase in intangibles.................................. (704) --
Net borrowings under credit facilities................... 28,366 326
Proceeds from exercise of stock options including tax-
related benefit......................................... 985 164
Other, net............................................... (156) --
--------- ---------
Net cash provided by financing activities................ 28,491 490
--------- ---------
Net increase (decrease) in cash and cash equivalents..... 5,510 (10,914)
Cash and cash equivalents at beginning of period......... 5,660 16,897
--------- ---------
Cash and cash equivalents at end of period............... $ 11,170 $ 5,983
========= =========
Supplemental Disclosures of Cash Flow Information
Interest paid............................................ $ 1,936 $ 376
Income taxes paid (refunded), net........................ 44 (659)
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-38
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Financial Statements
The condensed consolidated financial statements included herein are
unaudited. In the opinion of management, these statements include all
adjustments, consisting of normal, recurring adjustments, necessary for a fair
presentation of the financial position of MotivePower Industries, Inc. and
subsidiaries (the "Company") at March 31, 1999 and the results of its
operations and its cash flows for the three months ended March 31, 1999 and
1998. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto for the year ended December 31, 1998 included in the Company's 1998
Form 10-K. The results of operations for the three months ended March 31, 1999
are not necessarily indicative of the results to be expected for the full year.
The Company is a leader in the manufacturing and distribution of products
for rail and other power-related industries. Through its subsidiaries, the
Company manufactures and distributes engineered locomotive components and
parts; provides locomotive and freight car fleet maintenance; overhauls and
remanufactures locomotives and diesel engines; manufactures environmentally
friendly, switcher, commuter and mid-range DC and AC traction, diesel-electric
and liquefied natural gas locomotives up to 4,000 horsepower; and manufactures
components and software for power, marine and industrial markets. The Company's
primary customers are freight and passenger railroads, including every Class I
railroad in North America.
On February 16, 1999, the Company's Board of Directors approved a three-for-
two common stock split in the form of a 50 percent stock dividend effective
April 2, 1999. Shareholders of record as of March 17, 1999 received one
additional share of stock for each two shares they own. All share and per-share
amounts in the accompanying condensed consolidated statement of income have
been restated to give effect to the stock split.
The Company operates on a four- four- five-week accounting quarter. The
Company's quarters end on or about March 31, June 30, and September 30. The
Company's fiscal year ends December 31.
Certain reclassifications have been made to the 1998 condensed consolidated
financial statements to conform to the 1999 presentation.
Derivative Instruments and Hedging Activities: In June 1998, Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activity," was issued. SFAS No. 133 is effective for
financial statements for fiscal quarters of fiscal years beginning after June
15, 1999. The Company has not yet determined the effect of this standard on its
financial statements.
Changes In Line-of-Credit or Revolving-Debt Arrangements: In January 1999,
the Emerging Issues Task Force ("EITF") reached a tentative conclusion
regarding EITF Issue No. 98-14, "Debtor's Accounting for Changes in Line-of-
Credit or Revolving-Debt Arrangements" ("EITF 98-14"). The Company has
reflected the adoption of EITF 98-14 in its March 31, 1999 financial
statements. Under EITF 98-14, the Company has capitalized the costs related to
the first quarter 1999 amendment of its revolving credit agreement and will
amortize these costs along with previously capitalized costs over the life of
the amended agreement.
2. Comprehensive Income
The components of comprehensive income, net of related tax effects, are as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Net income.............................................. $7,878 $6,648
Foreign currency translation adjustment................. (216) --
--------- ---------
Comprehensive income.................................... $7,662 $6,648
========= =========
</TABLE>
F-39
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
SFAS No. 130, "Reporting Comprehensive Income," was effective for fiscal
years beginning after December 15, 1997. With the Company's acquisition of Q-
Tron in January 1999, the Company is required to report the translation
adjustment relating to Q-Tron (whose functional currency is the Canadian
dollar) as a component of comprehensive income, as defined per SFAS 130. Prior
to the acquisition of Q-Tron, the Company's comprehensive income equaled net
income.
3. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(In thousands)
<S> <C> <C>
Cores................................................. $13,238 $11,854
Raw materials......................................... 49,616 46,646
Work in progress...................................... 15,921 14,411
Finished goods........................................ 20,764 20,082
------- -------
$99,539 $92,993
======= =======
</TABLE>
Approximately $36.8 million and $38.3 million of total inventories at March
31, 1999 and December 31, 1998, respectively, were valued on the last-in first-
out ("LIFO") cost method. The excess of current replacement cost of these
inventories over the stated LIFO value was $2 million and $1.9 million at March
31, 1999 and December 31, 1998, respectively. Costs for other inventories have
been determined principally by the first-in first-out method. The Company
defines cores as inventory designated for unit exchange programs.
4. Indebtedness
On March 2, 1999, MotivePower amended and restated the terms of its
revolving credit facilities with a syndicate of 12 lenders led by ABN AMRO Bank
as agent. The amendment increases the amount of the credit line from $200
million to $350 million, available as a five-year $175 million revolving credit
facility, and a 364-day $175 million revolving credit facility, which the
Company may renew annually with the approval of the lenders.
The facilities provide for revolving borrowings at a variable margin over
the London Interbank Offered Rate ("LIBOR"), or at Prime Rate, at the Company's
option. The margin over LIBOR at which the Company may borrow is adjusted each
fiscal quarter based on the ratio obtained when the Company's debt at the end
of the quarter is divided by the Company's cash flow over the past four
quarters, as measured by earnings before interest and income taxes, plus
depreciation and amortization ("EBITDA"). At March 31, 1999, the Company had
$127 million drawn under its LIBOR option at an effective annual interest rate
of 5.8%.
The Company's maximum borrowings under the facilities are limited to the
lesser of $350 million or 3.5 times trailing 12-month EBITDA. At March 31,
1999, the Company's gross availability under its domestic credit facilities was
approximately $270 million. After deducting outstanding debt and other
reserves, the Company has calculated its net available domestic borrowing
capacity on March 31, 1999 as $130 million.
On July 15, 1998, a domestic subsidiary of the Company entered into a 10-
year $7.5 million debt obligation. This obligation consists of an Industrial
Revenue Bond ("IRB") and bears interest at a rate of 5.5%.
Maturities under long-term obligations at March 31, 1999 were as follows:
1999--$368,000; 2000--$577,000; 2001--$610,000; 2002--$644,000; 2003--$680,000;
thereafter--$131.3 million.
F-40
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
5. Commitments and Contingencies
The Company has commitments and performance guarantees arising from
locomotive remanufacturing contracts and maintenance agreements, and warranties
from the sale of new locomotives, remanufactured locomotives and components for
locomotives and engines.
Environmental: The Company is subject to a RCRA Part B Closure Permit (the
"Permit") issued by the Environmental Protection Agency and the Idaho
Department of Health and Welfare, Division of Environmental Quality relating to
the monitoring and treatment of groundwater contamination on, and adjacent to,
the Company's Boise Locomotive facility. In compliance with the Permit, the
Company has drilled wells onsite to retrieve and treat contaminated
groundwater, and onsite and offsite to monitor the amount of hazardous
constituents. The Company has estimated the expected aggregate undiscounted
costs to be incurred over the next 23 years, adjusted for inflation at 3% per
annum, to be $4 million, based on the Permit's Corrective Action Plan, and $3.7
million for contingent additional Permit compliance requirements related to
offsite groundwater contamination. The discounted liability at March 31, 1999,
using a discount rate of 5.25%, was $2.2 million based on the Permit's
Corrective Action Plan, and $2 million for contingent additional Permit
compliance requirements related to offsite groundwater contamination. The
estimated outlays for each of the five succeeding years from 1999 to 2003 are:
$245,000, $290,000, $260,000, $268,000, and $276,000. The Company was in
compliance with the Permit at March 31, 1999.
Legal Proceedings: The Company is involved in legal proceedings incident to
the normal conduct of its business, including contract claims and employee
matters. Although the outcome of any pending legal proceeding cannot be
predicted with certainty, management believes that such legal proceedings are
adequately provided for in the condensed consolidated financial statements and
that the proceedings, individually and in the aggregate, will not have a
material adverse effect on the consolidated operations or financial condition
of the Company.
6. Reportable Segments
The Company has two reportable segments: Locomotive and Components Groups of
subsidiaries. The reportable segments are comprised of strategic business units
which offer different products and services. The Locomotive Group provides
locomotive and freight car fleet maintenance; overhauls locomotives, freight
cars and diesel engines; and manufactures environmentally friendly switcher,
commuter and mid-range DC and AC traction, diesel-electric and liquefied
natural gas locomotives up to 4,000 horsepower. The Components Group
manufactures and distributes primarily aftermarket, or replacement, new and
remanufactured components and parts, for freight and passenger railroads,
including every Class I Railroad in North America, metropolitan transit and
commuter rail authorities, original equipment manufacturers, industrial power-
related markets and other customers internationally.
The Company evaluates segment performance based primarily on operating
income, excluding unusual items. The Company accounts for intercompany sales
and transfers as if the sales or transfers were to third parties at current
market prices.
Following is unaudited condensed segment financial information for the three
months ended March 31, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
Locomotive Components Total Locomotive Components Total
---------- ---------- -------- ---------- ----------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross sales............. $33,864 $79,460 $113,324 $38,994 $52,009 $91,003
Intercompany sales...... 288 5,762 6,050 1,774 6,376 8,150
Operating income........ 4,999 12,624 17,623 6,622 7,618 14,240
Segment assets.......... 116,351 270,552 386,903 139,582 139,226 278,808
</TABLE>
F-41
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
The following reconciles segment information presented above to the
unaudited condensed consolidated financial statements:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Net Sales:
Gross sales from segments............................... $113,324 $ 91,003
Intercompany sales elimination.......................... (6,050) (8,150)
--------- ---------
Net sales............................................. $107,274 $ 82,853
========= =========
Operating Income:
Segment operating income................................ $ 17,623 $ 14,240
Unallocated corporate expenses.......................... (2,818) (3,237)
--------- ---------
Operating income...................................... $ 14,805 $ 11,003
========= =========
Assets:
Segment assets.......................................... $386,903 $278,808
Corporate assets, including domestic deferred income
taxes.................................................. 20,909 6,799
--------- ---------
Total assets........................................ $407,812 $285,607
========= =========
</TABLE>
7. Subsequent Events
On June 2, 1999, the Company agreed to merge with Westinghouse Air Brake
Company ("WABCO"). The Company will be the surviving corporation. Each share of
WABCO common stock will be converted into 1.3 shares of the Company's common
stock. At December 31, 1998, WABCO had outstanding 33,894,508 shares of common
stock (including 8,564,811 unearned ESOP shares). The merger is intended to be
a tax-free reorganization for federal income tax purposes. The Company will
account for the merger using the pooling of interests accounting method.
Completion of the merger is subject to various conditions, including approval
of the merger by the stockholders of each of the Company and WABCO.
F-42
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of MotivePower Industries, Inc.:
We have audited the accompanying consolidated balance sheets of MotivePower
Industries, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of income, cash flows and stockholders' equity
for each of the three years in the period ended December 31, 1998. 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 audits 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, such consolidated financial statements present fairly, in
all material respects, the financial position of MotivePower Industries, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 11, 1999 (June 2, 1999 as to Note 18)
F-43
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(In thousands except per share data)
<S> <C> <C> <C>
Net sales........................... $ 365,218 $ 305,930 $ 291,407
Cost of sales....................... (283,896) (233,588) (234,560)
------------ ------------ ------------
Gross profit........................ 81,322 72,342 56,847
Selling, general and administrative
expenses........................... (40,959) (37,724) (32,615)
------------ ------------ ------------
Operating income.................... 40,363 34,618 24,232
Investment income................... 1,781 761 1,981
Interest expense.................... (5,894) (5,163) (9,143)
Other income--Argentina............. 10,362 2,003 1,565
Gain on sale of assets.............. -- -- 1,483
Foreign exchange gain (loss)........ 2,169 (230) 169
------------ ------------ ------------
Income before income taxes and
extraordinary item................. 48,781 31,989 20,287
Income tax expense.................. (14,554) (11,713) (7,714)
------------ ------------ ------------
Income before extraordinary item.... 34,227 20,276 12,573
Extraordinary loss on extinguishment
of debt, net of income tax benefit
of $1,104 and $687 in 1998 and
1996, respectively................. (2,030) -- (1,064)
------------ ------------ ------------
Net income and comprehensive
income............................. $ 32,197 $ 20,276 $ 11,509
============ ============ ============
EARNINGS PER COMMON SHARE--BASIC:
(Adjusted to reflect the 3-for-2
stock split effective April 2,
1999)
Income before extraordinary item... $ 1.28 $ .76 $ .48
Extraordinary item................. (.08) -- (.04)
------------ ------------ ------------
Net income......................... $ 1.20 $ .76 $ .44
============ ============ ============
Adjusted weighted average common
shares outstanding................ 26,771 26,541 26,345
EARNINGS PER COMMON SHARE--ASSUMING
DILUTION:
(Adjusted to reflect the 3-for-2
stock split effective April 2,
1999)
Income before extraordinary item... $ 1.23 $ .74 $ .48
Extraordinary item................. (.08) -- (.04)
------------ ------------ ------------
Net income......................... $ 1.15 $ .74 $ .44
============ ============ ============
Adjusted weighted average common
shares outstanding................ 27,929 27,314 26,349
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-44
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
------------- -------------
(In thousands except share
and per share data)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 5,660 $ 16,897
Receivables from customers:
Billed, net of allowance for doubtful accounts
of $673 and $394, respectively................ 54,428 34,588
Unbilled....................................... 2,831 450
Inventories...................................... 92,993 81,448
Deferred income taxes............................ 6,765 7,596
Income tax receivable............................ 5,216 953
Other............................................ 4,230 3,358
------------- -------------
Total current assets......................... 172,123 145,290
Locomotive lease fleet, net...................... 1,189 1,468
Property, plant and equipment:
Land........................................... 2,420 1,408
Buildings and improvements..................... 50,997 36,095
Machinery and equipment........................ 94,143 64,862
------------- -------------
Property, plant and equipment, cost............ 147,560 102,365
Less accumulated depreciation.................. (54,492) (49,942)
------------- -------------
Property, plant and equipment, net............... 93,068 52,423
Underbillings--MPI de Mexico..................... 26,775 32,298
Deferred income taxes............................ -- 7,724
Goodwill and other intangibles, net.............. 63,593 27,362
Other............................................ 14,450 16,537
------------- -------------
Total assets................................. $371,198 $283,102
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt................ $ 549 $ 10,725
Accounts payable--trade.......................... 34,293 30,340
Accrued expenses and other current liabilities... 30,919 36,065
Revolving credit agreement borrowings............ 10,000 5,000
Advances from customers.......................... 1,174 426
------------- -------------
Total current liabilities.................... 76,935 82,556
Long-term debt................................... 95,249 34,782
Commitments and contingencies.................... 19,205 15,552
Deferred income taxes............................ 559 --
Other............................................ 1,321 5,664
------------- -------------
Total liabilities............................ 193,269 138,554
------------- -------------
Stockholders' Equity:
Common Stock, par value $.01 per share,
authorized 55,000,000 shares; 26,911,677
shares issued and 26,550,416 shares
outstanding at December 31, 1998, and
26,661,140 shares issued and outstanding at
December 31, 1997............................. 179 178
Additional paid-in capital..................... 206,434 205,609
Deficit........................................ (23,156) (55,353)
Accumulated other comprehensive income......... (5,105) (5,105)
Deferred compensation.......................... 4,113 (781)
------------- -------------
182,465 144,548
Less--Treasury stock, at cost (361,262 shares at
December 31, 1998).............................. 4,536 --
------------- -------------
Total stockholders' equity....................... 177,929 144,548
------------- -------------
Total liabilities and stockholders' equity....... $371,198 $283,102
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-45
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
--------- -------- -------
(In thousands)
<S> <C> <C> <C>
Operating Activities
Net income....................................... $ 32,197 $ 20,276 $11,509
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 7,981 6,634 6,950
Amortization................................... 3,426 3,333 3,407
Extraordinary loss on extinguishment of debt
(net of tax).................................. 2,030 -- 1,064
Gain on sale of assets......................... -- -- (1,483)
Deferred income taxes.......................... 10,218 6,486 5,402
Other, net..................................... -- 261 83
Changes in operating assets and liabilities net
of effects from 1998 purchase of Young, 1997
purchases of Jomar and Microphor, and 1996
sale of Alert and Sign:
Receivables from customers................... (16,258) (6,048) 5,787
Inventories.................................. (3,469) (85) 19,088
Other current assets......................... (872) (578) (2,919)
Underbillings--MPI de Mexico................. 5,523 (12,737) (9,233)
Accounts payable--trade...................... 1,931 16,219 (4,162)
Accrued expenses and other current
liabilities................................. (11,501) 7,081 (2,928)
Income taxes receivable...................... (4,263) (2,974) 1,708
Advances from customers...................... 748 426 --
Commitments and contingencies................ 3,653 (2,842) 9,095
--------- -------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES........ 31,344 35,452 43,368
--------- -------- -------
Investing Activities
Payment for purchase of Young, net of cash
acquired........................................ (67,685) -- --
Additions to property, plant and equipment....... (28,881) (15,001) (4,063)
Proceeds from locomotive lease fleet............. -- -- 10,071
Proceeds from sale of assets..................... -- 1,815 4,838
Payment for purchase of Jomar.................... -- (8,158) --
Payment for purchase of Microphor, net of cash
acquired........................................ -- (3,120) --
Other, net....................................... (5,758) 1,992 1,561
--------- -------- -------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES...................................... (102,324) (22,472) 12,407
--------- -------- -------
Financing Activities
Net borrowings (repayments) under credit
agreements...................................... 55,291 9,568 (16,970)
Decrease (increase) in restricted cash........... 5,194 (2,550) (2,043)
Proceeds from exercise of stock options including
tax-related benefit............................. 826 2,409 --
Increase in intangibles.......................... (1,568) (2,093) (1,228)
Repayment of long-term debt...................... -- (8,653) (2,461)
Redemption of preferred stock.................... -- -- (1,056)
Change in payable to Morrison Knudsen............ -- -- (32,477)
--------- -------- -------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES...................................... 59,743 (1,319) (56,235)
--------- -------- -------
Net (decrease) increase in cash and cash
equivalents..................................... (11,237) 11,661 (460)
Cash and cash equivalents at beginning of year... 16,897 5,236 5,696
--------- -------- -------
Cash and cash equivalents at end of year......... $ 5,660 $ 16,897 $ 5,236
========= ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-46
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997 1996
-------- ------- --------
(In thousands)
<S> <C> <C> <C>
Supplemental Disclosures of
Cash Flow Information:
Interest paid............... $ 4,752 $ 3,311 $ 1,126
Income taxes paid
(refunded)................. 7,963 7,811 (169)
Young acquisition:
Fair value of assets
acquired................. 89,594 -- --
Liabilities assumed....... (10,188) -- --
-------- ------- --------
Cash paid............... 79,406 -- --
Less cash acquired........ 11,721 -- --
-------- ------- --------
Net cash paid........... 67,685 -- --
-------- ------- --------
Jomar acquisition:
Fair value of assets
acquired................. -- 9,351 --
Liabilities assumed....... -- (1,193) --
-------- ------- --------
Cash paid............... -- 8,158 --
-------- ------- --------
Microphor acquisition:
Fair value of assets
acquired................. -- 4,935 --
Liabilities assumed....... -- (1,115) --
-------- ------- --------
Cash paid............... -- 3,820 --
Less cash acquired........ -- (700) --
-------- ------- --------
Net cash paid........... -- 3,120 --
======== ======= ========
Noncash Investing and
Financing Activities:
Deferred compensation....... $ 4,536 $ 1,541 $ 78
Treasury stock.............. (4,536) -- --
Reduction of payable to
Morrison Knudsen:
Payable to Morrison
Knudsen.................. -- -- 18,816
Additional paid-in
capital.................. -- -- (14,902)
Deferred income taxes..... -- -- (3,914)
======== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-47
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Retained Other
Common Paid-In Earnings Comprehensive Deferred Treasury
Stock Capital (Deficit) Income Compensation Stock
------ ---------- --------- ------------- ------------ --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance December 31,
1995................... $176 $186,681 $(87,107) $(5,105) $ (118) $ --
---- -------- -------- ------- ------ -------
Net income.............. -- -- 11,509 -- -- --
Capital contribution,
reduction of payable to
Morrison Knudsen, net
of deferred taxes of
$3,914................. -- 14,902 -- -- -- --
Accretion of preferred
stock.................. -- -- (31) -- -- --
Compensatory stock
options granted........ -- 78 -- -- (78) --
Compensation expense.... -- -- -- -- 73 --
---- -------- -------- ------- ------ -------
Balance December 31,
1996................... $176 $201,661 $(75,629) $(5,105) $ (123) $ --
---- -------- -------- ------- ------ -------
Net income.............. -- -- 20,276 -- -- --
Compensatory stock
options granted........ -- 1,541 -- -- (1,541) --
Compensation expense.... -- -- -- -- 883 --
Stock options exercised,
including tax-related
benefit of $215........ 2 2,407 -- -- -- --
---- -------- -------- ------- ------ -------
Balance December 31,
1997................... $178 $205,609 $(55,353) $(5,105) $ (781) $ --
---- -------- -------- ------- ------ -------
Net income.............. -- -- 32,197 -- -- --
Compensation expense.... -- -- -- -- 358 --
Treasury stock, at
cost................... -- -- -- -- 4,536 (4,536)
Stock options exercised,
including tax-related
benefit of $149........ 1 825 -- -- -- --
---- -------- -------- ------- ------ -------
Balance December 31,
1998................... $179 $206,434 $(23,156) $(5,105) $4,113 $(4,536)
==== ======== ======== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-48
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Operations and Basis of Accounting
The consolidated financial statements include the accounts of MotivePower
Industries, Inc. and its subsidiaries (collectively, the "Company").
The Company is a leader in the manufacturing of products for rail and other
power-related industries. Through its subsidiaries, the Company manufactures
and distributes engineered locomotive components and parts; provides locomotive
fleet maintenance; overhauls and remanufactures locomotives and diesel engines;
manufactures environmentally friendly switcher, commuter and mid-range DC and
AC traction, diesel-electric and liquefied natural gas locomotives up to 4,000
horsepower; and manufactures components for power, marine and industrial
markets. The Company's primary customers are freight and passenger railroads,
including every Class I railroad in North America.
Subsidiaries (Wholly Owned):
Locomotive Group: Boise Locomotive Company ("Boise Locomotive"), formed in
1972, performs locomotive remanufacturing, overhauling and manufacturing, and
locomotive fleet maintenance as its principal business.
MPI Noreste S.A. de C.V. ("MPI de Mexico"), a Mexican variable stock
corporation formed in 1994, performs locomotive fleet maintenance and
overhauls.
MotivePower Foreign Sales Corporation ("MPFSC"), formed in 1997, is a
Barbados corporation whose purpose is to take advantage of allowable U.S. tax
benefits regarding export sales and expenses.
Components Group: Motor Coils Manufacturing Company ("Motor Coils"),
acquired in 1991, is a remanufacturer of locomotive traction motors, and a
manufacturer of rotating electrical components and gearing.
Power Parts Company ("Power Parts"), acquired in 1992, is a supplier of new
and replacement engine and nonengine parts for locomotives, and inventory
management services.
Engine Systems Company, Inc. ("Engine Systems"), acquired in 1992,
remanufactures turbochargers for locomotive, industrial and marine engines.
Touchstone Company ("Touchstone"), acquired in 1994, manufactures,
remanufactures and distributes locomotive radiators, oil coolers, brake
adjusters and other industrial heat exchangers.
Microphor Inc. ("Microphor"), acquired in 1997, is a manufacturer of self-
contained sanitation and waste retention systems, primarily for the rail and
marine industries.
MotivePower Investments Limited ("MPIL"), formed in 1997, is a Delaware
holding company which holds the investment in Touchstone, Motor Coils,
Microphor and Young.
Young Radiator Company ("Young"), acquired in 1998, manufactures radiators,
air coolers, and heat exchange systems for rail and industrial power-related
markets.
January 1999 Acquisitions: G&G Locotronics ("G&G") designs and assembles
high-voltage electrical cabinets and control stands for locomotives.
Q-Tron Limited ("Q-Tron") designs and manufactures a complete line of
locomotive electronic equipment, including event recorders, speed controls,
excitation control computers, speedometers and related software products.
F-49
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Affiliates: On December 18, 1998, MotivePower completed the sale of its 19%
investment in Trenes de Buenos Aires S.A. ("TBA"), a company based in Buenos
Aires, Argentina, which, under a concession contract, operates the Mitre and
Sarmiento passenger railway lines in Buenos Aires.
On July 6, 1995, the Company sold its interest in Morrison Knudsen of
Australia, Ltd. ("MKA") to Morrison Knudsen, a former majority shareholder of
the Company. In consideration, the Company received a nominal cash payment and
MKA's redeemable preferred stock bearing a 9% cumulative dividend. The Company
sold the preferred stock to Morrison Knudsen in December 1997 for a nominal
cash payment.
On October 25, 1996, the Company sold substantially all of the assets of the
Company's Power Parts Sign Co. ("Sign") for $1.3 million plus the assumption of
certain trade payables. In addition, on July 26, 1996, the Company sold
substantially all of the assets of the Company's Alert Manufacturing and Supply
Co. ("Alert") for $3.9 million plus the assumption of trade payables of
$750,000. The Company recorded gains of $783,000 and $700,000 on the sale of
the assets of Sign and Alert, respectively.
2. Significant Accounting Policies Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Sales between the Company and its subsidiaries are billed
at prices consistent with sales to third parties and are eliminated in
consolidation. Investments in affiliates in which the Company's ownership is
less than 20% are accounted for using the cost method.
Revenue Recognition
The Company recognizes revenues on locomotive remanufacturing and
manufacturing contracts on the percentage of completion-units delivered method,
and on component part sales when product is shipped to the customer. Contract
revenues and cost estimates are reviewed and revised quarterly and adjustments
are reflected in the accounting period when known. Provisions are made
currently for estimated losses on uncompleted contracts. Unbilled accounts
receivable represent shipments for which invoices have not been processed.
Revenue recognized on the MPI de Mexico long-term maintenance contract is
based upon a percentage of the expected gross margin. Under the terms of the
maintenance contract, significant costs are incurred in the early years
(locomotive overhauls and fleet normalization), while payments from the
customers remain relatively constant throughout the life of the contract. By
using a percentage of the expected gross margin to recognize revenue under the
maintenance contract appropriate consideration is given to the risks associated
with the contract. Costs and estimated earnings in excess of billings
("Underbillings") and billings in excess of costs and estimated earnings
("Overbillings") on the contract in progress are recorded on the balance sheet
and are classified as current or non-current based upon the expected timing of
their realization or liquidation.
Remanufactured and overhauled locomotives are warranted for a period from
one to three years, and component parts are warranted for a period from one to
four years. Additionally, the Company provides an overhaul reserve on owned
locomotives. Estimated costs for product warranty are recognized at the time
the products are sold. Overhaul reserves are recorded on a straight-line basis
over the period of time from acquisition of the locomotive to the estimated
date of the related overhaul. Warranty and overhaul reserves are included in
accrued expenses and other current liabilities in the consolidated balance
sheet.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
F-50
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. On an ongoing basis, management reviews its estimates
based on currently available information. Changes in facts and circumstances
may result in revised estimates.
Cash Equivalents
Cash equivalents consist of investments in highly liquid debt securities
having an original maturity of three months or less. Such securities are
considered to be held to maturity.
Inventories
Inventories are stated at the lower of cost or market. Locomotive
inventories under long-term contracts consist of actual direct material, labor
and manufacturing overhead and are allocated to individual units based on the
estimated average production costs of units to be produced under a contract.
Locomotive inventories under contract were $3.6 million and $8.7 million at
December 31, 1998 and 1997, respectively. Component part inventories are valued
at production cost using either the last-in first-out ("LIFO") method or the
first-in, first-out ("FIFO") method.
Market, Concentrations and Credit Risks
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash equivalents and accounts
receivable. The Company, by its policy, limits the amount of credit exposure to
any one financial institution and places its investments with financial
institutions that the Company believes are financially sound.
The Company provides its products and services to the Class I railroads in
North America, metropolitan transit and commuter rail authorities, Amtrak,
original equipment manufacturers, short lines and other customers
internationally. Collectively, the Company's top five customers accounted for
51%, 66% and 63% of net sales in the years ended December 1998, 1997 and 1996,
respectively. Net sales to three customers exceeded 10% of total net sales for
each of the years ended December 31, 1998, 1997 and 1996, respectively
(Burlington Northern Santa Fe--18%, 19%, 19%; Union Pacific--10%, 13%, 16%;
Transportacion Ferroviaria Mexicana ("TFM")--10%, 20%, 14%). The Company
performs ongoing credit evaluations of its customers' accounts and historically
has not incurred any significant credit-related losses.
The Company's Boise Locomotive, Motor Coils and MPI de Mexico subsidiaries
have union labor contracts expiring at various times through June 2002. The
Company considers the renegotiation of these contracts under terms and
conditions consistent with market conditions for similar U.S. based labor
forces to be an important factor in the maintenance of operations.
Foreign Exchange Forward Contracts
Foreign exchange forward contracts are legal agreements between two parties
to purchase and sell a foreign currency for a price specified at the contract
date, with delivery and settlement in the future. The Company uses such
contracts to hedge the risk of changes in foreign currency exchange rates
associated with certain assets and obligations denominated primarily in the
Mexican peso ("MXP"). Changes in the market value of the forward contracts are
recognized in income when the effects of related changes in the price of the
hedged item are recognized.
Locomotive Lease Fleet
Equipment on operating leases includes the Company's locomotive lease fleet.
The locomotives are depreciated on a straight-line basis over their estimated
useful lives of five to 15 years. Cost and accumulated
F-51
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
depreciation at December 31, 1998 were $2.4 million and $1.3 million,
respectively. Cost and accumulated depreciation at December 31, 1997 were $2.9
million and $1.4 million, respectively.
Property, Plant and Equipment
Buildings and improvements and machinery and equipment are recorded at cost
and depreciated on the straight-line method over periods from three to 30
years. The cost and accumulated depreciation associated with property and
equipment that is disposed of are removed from the accounts, and gains or
losses from such disposals are included in income. Leasehold improvements are
capitalized and amortized on the straight-line method over the terms of the
related leases. Included in buildings and improvements is the Company's
Mountaintop facility, which is an asset held for sale. The book value of this
Locomotive Group asset was $1.9 million at December 31, 1998 and 1997.
Expenditures for repairs and maintenance are charged to expense as incurred.
Goodwill and Other Intangibles
Significant components of goodwill and other intangibles are the following:
Goodwill--Cost in excess of tangible assets of businesses acquired in
purchase transactions is amortized on the straight-line method over 15 to 40
years from the date of acquisition. The unamortized cost of goodwill was $59.7
million at December 31, 1998 and $20.2 million at December 31, 1997.
Covenants Not To Compete--These agreements are recorded at cost and
amortized on the straight-line method over the terms of the agreements. Terms
of the agreements range from three to 10 years. The unamortized cost was $3.3
million at December 31, 1998 and $4.2 million at December 31, 1997.
Loan Origination Fees--These fees are associated with the origination of the
Company's debt. The fees are recorded at cost and amortized on the straight-
line method over the terms of the respective loan agreements. The unamortized
cost was $575,000 at December 31, 1998 and $2.9 million at December 31, 1997.
Accumulated amortization at December 31, 1998 and 1997 was $14.5 million and
$12 million, respectively. The Company evaluates the realization of intangible
assets on a quarterly basis and adjusts, if necessary, the carrying value or
useful life accordingly.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated at the rate of
exchange in effect on the balance sheet date while income and expenses are
translated at the average rates of exchange prevailing during the year. Foreign
currency gains and losses resulting from transactions, and the translation of
financial statements are recorded in the Company's consolidated financial
statements based upon the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 52, "Foreign Currency Translation." The accumulated
other comprehensive income included in the consolidated balance sheets consists
of cumulative translation adjustments net of tax.
MPI de Mexico has contracts that provide for escalation adjustments based
upon, among other things, changes in the exchange rate. Such escalation
adjustments are included in revenues when realized.
Income Taxes
The provision for income taxes includes Federal, state and local, and
foreign income taxes currently payable and those deferred or prepaid because of
temporary differences between the financial statement and tax bases of assets
and liabilities. The carrying amounts of deferred tax assets and liabilities
are determined based
F-52
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
on differences between the financial statement amounts and the tax bases of
assets and liabilities using the enacted tax rates in effect in the years in
which the differences are expected to reverse.
Deferred Compensation Arrangements
In May 1998, a consensus on Emerging Issues Task Force Issue No. 97-14,
"Accounting for Deferred Compensation Arrangements Where Amounts Earned Are
Held in a Rabbi Trust and Invested" ("EITF 97-14"), was issued. The Company has
reflected the adoption of EITF 97-14 in the December 31, 1998 financial
statements. The adoption of EITF 97-14 required the Company to record as
treasury stock the historical value of the Company's stock maintained in its
deferred compensation plans.
Derivative Instruments and Hedging Activities
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activity", was issued. SFAS 133 is effective for financial statements
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company has not yet determined the effect of this standard on its financial
statements.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform to the current year presentation.
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Cores........................................................ $11,854 $ 7,477
Raw materials................................................ 46,646 35,421
Work in process.............................................. 14,411 21,396
Finished goods............................................... 20,082 17,154
------- -------
Total inventories.......................................... $92,993 $81,448
======= =======
</TABLE>
Approximately $38.3 million and $30.7 million of total inventories at
December 31, 1998 and 1997, respectively, were valued on the LIFO cost method,
and the excess of current replacement cost of these inventories over the stated
LIFO value was $1.9 million and $1.2 million at December 31, 1998 and December
31, 1997, respectively. Costs for other inventories have been determined
principally by the FIFO method. The Company defines cores as inventory units
designated for unit exchange programs.
F-53
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Accrued payroll and benefits................................. $10,906 $13,125
Warranty and overhaul accruals............................... 10,328 8,622
Reserve for future losses.................................... 954 1,760
Other accrued liabilities.................................... 8,731 12,558
------- -------
Total accrued expenses and other current liabilities....... $30,919 $36,065
======= =======
</TABLE>
5. Underbillings--MPI De Mexico
MPI de Mexico has a long-term contract to provide maintenance and other
locomotive services. Details relative to cumulative costs incurred and revenues
recognized are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Costs incurred........................................... $198,921 $148,433
Estimated earnings....................................... 39,686 17,633
-------- --------
238,607 166,066
Less billings to date.................................... (211,832) (133,768)
-------- --------
Total underbillings...................................... $ 26,775 $ 32,298
======== ========
</TABLE>
6. Indebtedness
Revolving Credit Borrowings
<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
------- ------
(In thousands)
<S> <C> <C>
Variable rate $100,000 revolving 364-day credit facility,
effective interest rate 6.95% as of December 31, 1998....... $10,000 $ --
Domestic revolver under Second Amended and Restated Credit
Agreement, effective interest rate 6.47% as of December 31,
1997........................................................ -- 5,000
------- ------
Total revolving credit borrowings............................ $10,000 $5,000
======= ======
</TABLE>
F-54
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Term Debt
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Variable rate $100,000 revolving credit facility, expires
2002, effective interest rate 6.19% as of December 31,
1998..................................................... $88,500 $ --
5.5% Industrial revenue bonds due 2008.................... 7,298 --
MPI de Mexico credit facility, due 2000, effective
interest rate 8.8% as of December 31, 1997............... -- 27,508
Domestic term loan under Second Amended and Restated
Credit Agreement, effective interest rate 6.47% as of
December 31, 1997........................................ -- 17,999
------- -------
95,798 45,507
Less current portion of long-term debt.................... (549) (10,725)
------- -------
Total long-term debt...................................... $95,249 $34,782
======= =======
</TABLE>
Scheduled Maturities of Long-Term Debt
<TABLE>
<CAPTION>
Year of Maturity
---------------------------
1999 2000 2001 2002 2003
---- ---- ---- ------- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Long-term debt................................... $549 $580 $613 $89,147 $683
==== ==== ==== ======= ====
</TABLE>
In August 1995, the Company and its subsidiaries entered into a $75 million
loan agreement with BankAmerica Business Credit ("BABC"). In 1996, the Company
repaid amounts owed certain participating lenders who were no longer lenders
under the loan agreement, as modified, and paid early termination fees to those
lenders. The early termination fees and the unamortized portion of previously
incurred deferred debt issuance costs were expensed as an extraordinary item of
$1.1 million, net of tax.
In February 1997, the Company and a syndicate of lenders led by Bank of
America NT and SA entered into a Second Amended and Restated Credit Agreement
to replace the Company's loan agreement with BABC. In May 1997, the Company
entered into Amendment No. 1 to the Second Amended and Restated Credit
Agreement. The amendment increased the limit on the issuance of performance
bonds from $10 million to $30 million, increased the limit on the issuance of
letters of credit in support of performance bonds from $2.5 million to $10
million and increased the limit on the aggregate amount of letters of credit
from $15 million to $20 million.
In January 1998, the Company closed two new revolving credit facilities
("the facilities") with ABN AMRO Bank, N.V. and Mellon Bank N.A. totaling $200
million. ABN AMRO and Mellon Bank subsequently sold participations in these
facilities to a syndicate of 10 additional banks. The facilities consist of a
$100 million five-year revolving loan and a 364-day $100 million revolving loan
which the Company may renew annually with the approval of the lenders. Under
the new facilities, the Company may issue up to $35 million in letters of
credit. The Company has issued $5.7 million in letters of credit as of December
31, 1998. In connection with the establishment of the two new revolving credit
facilities, the Company incurred a one-time, non-cash charge of approximately
$472,000, net of tax in the first quarter of 1998 to write off the unamortized
portion of previously incurred deferred debt issuance costs under the Company's
Second Amended and Restated Credit Agreement.
F-55
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The facilities provide for revolving borrowings at a variable margin over
the London Interbank Offered Rate ("LIBOR"), or at Prime Rate, at the Company's
option. The margin over LIBOR at which the Company may borrow is adjusted each
fiscal quarter based on the ratio obtained when the Company's debt at the end
of the quarter is divided by the Company's cash flow over the past four
quarters, as measured by earnings before interest and tax, plus depreciation
and amortization ("EBITDA"). The Company's maximum borrowings under the
facilities are limited to the lesser of $200 million or 3.5 times trailing 12-
month EBITDA. At December 31, 1998, the Company's gross availability under its
revolving credit facilities was $200 million. After deducting outstanding debt
and other reserves, the Company calculates its net available borrowing capacity
on December 31, 1998 to be $88.5 million.
The Company had a U.S. dollar-denominated credit facility with a Mexican
bank, Bancomer S.A., to support its operations in Mexico. The facility was a
$30 million, five-year term loan with support from the Export-Import Bank of
the United States. The facility required certain cash balances to be held in
trust. Amounts held in trust at the balance sheet date are classified as
restricted cash and have been included in other non-current assets in the
accompanying consolidated balance sheets at December 31, 1998 and 1997. In
December 1998, the Company repaid amounts owed on the term loan. The early
termination fees and the unamortized portion of previously incurred deferred
debt issuance costs were expensed as an extraordinary item of $1,558,000, net
of tax in the 1998 fourth quarter.
7. Redeemable Preferred Stock
In September 1995, the Company deposited 10,000 shares of Preferred Stock
into a joint settlement account in connection with the settlement of certain
class action suits. On December 6, 1996, the Company exercised its option to
redeem all of the outstanding shares of Preferred Stock at a price of $1.1
million including accrued dividends.
8. Stock Option Plans
The Company has established two stock option plans, which are described
below. The Company applies Accounting Principles Board Opinion Number 25 and
related Interpretations in accounting for its plans.
The compensation cost that has been charged against income was $495,000,
$2.7 million and $775,000 for 1998, 1997 and 1996, respectively. Had
compensation cost for the Company's plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
method of SFAS No. 123 "Accounting for Stock-Based Compensation," the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997 1996
-------- -------- --------
(In thousands except
earnings per share data)
<S> <C> <C> <C>
Net income ...................................... $ 32,197 $ 20,276 $ 11,509
As reported Pro forma............................ $ 30,926 $ 19,444 $ 11,104
-------- -------- --------
Earnings per diluted share....................... $ 1.15 $ .74 $ .44
As reported Pro forma............................ $ 1.11 $ .71 $ .42
======== ======== ========
</TABLE>
The following weighted-average assumptions were used to estimate the fair
value of each option grant on the grant date using the Black-Scholes option-
pricing model in 1998, 1997 and 1996, respectively: dividend yield of zero
percent for all years; expected volatility of 63%, 65% and 72%; risk free
interest rates of 5.3%, 6.26% and 6.5%; and expected lives of six years, 10
years and 10 years.
F-56
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the MotivePower Industries, Inc. Stock Incentive Plan (the "Incentive
Plan"), a maximum of 3.75 million shares may be issued upon the exercise of
stock options granted or through limited stock appreciation rights. Officers
and other key employees of the Company or its subsidiaries are eligible to
receive awards. The exercise price, term and other conditions applicable to
each award are determined by the Compensation Committee of the Board of
Directors at the time of the grant of each award and may vary with each award
granted. Awards are generally made at not less than current market prices at
date of grant, and have been granted to executives and directors under the
Incentive Plan in the form of stock options. Options granted generally vest
either over a five-year period, 20% on each anniversary date following the
grant, or a four-year period, 25% on each anniversary date following the grant.
All unexercised options expire 10 years from the date of grant, subject to
acceleration in certain cases.
Restricted stock awards for a total of 187,500 shares of the Company's
Common Stock have been granted to certain key management employees. The
weighted average grant date fair value of restricted stock was $3.57 per share.
Sale restrictions on the restricted stock lapse between January 1, 1997 and
January 1, 2007. The Company recorded expense of $156,000, $193,000 and
$155,000 for 1998, 1997 and 1996, respectively, related to the restricted
stock.
In the MotivePower Industries, Inc. Stock Option Plan for Non-Employee
Directors (the "Non-Employee Directors Plan"), a maximum of 225,000 shares may
be granted. Under the Non-Employee Directors Plan, each non-employee director
was entitled to receive options to purchase shares of the Company's common
stock upon their election to the Board at an exercise price equal to 50% of the
market price of the common stock based on the date awarded. In 1998, the Board
resolved that it would cease the practice of discounting the initial options by
50%. In addition to the initial grant date, each director is awarded an annual
stock option award on January 2, at an exercise price equal to the fair market
value of such common stock as of the date of the grant. All options granted
vest over a three-year period, one-third on each anniversary date.
A summary of the status of the Company's two stock option plans as of
December 31, 1998, 1997 and 1996, and the changes during the years ending on
those dates, is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 2,978,925 $ 5.29 2,610,750 $ 4.72 1,906,500 $3.51
Granted................. 421,800 16.41 822,000 8.58 1,892,250 3.31
Exercised............... (163,838) 5.49 (316,950) 6.62 -- --
Surrendered/Canceled.... (127,500) 9.97 (136,875) 5.71 (1,188,000) 7.06
--------- ------ --------- ------ ---------- -----
Outstanding at end of
year................... 3,109,387 6.65 2,978,925 5.29 2,610,750 4.72
========= ====== ========= ====== ========== =====
Options exercisable at
year end............... 1,467,707 -- 1,160,738 -- 686,094 --
Weighted average fair
value of options
granted during the
year................... $12.64 $ 6.79 $2.65
</TABLE>
F-57
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ------------ ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 3.17 to $10.67.. 357,000 5.5 $ 9.57 357,000 $ 9.57
$ 2.54 to $ 7.15.. 560,625 6.7 6.45 540,000 6.49
$ 1.89 to $ 5.17.. 1,159,463 7.3 3.65 433,088 3.61
$ 5.29 to $16.77.. 641,250 8.1 8.66 137,619 8.73
$14.98 to $19.55.. 391,050 9.2 16.53 -- --
--------- --- ------ --------- ------
3,109,388 1,467,707
========= =========
</TABLE>
9. Taxes on Income
The Company and its domestic subsidiaries file a consolidated Federal income
tax return and certain combined or separate state income tax returns. MPI de
Mexico and certain other subsidiaries file an income tax return in Mexico.
The components of income tax (expense) benefit are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
U.S. Federal:
Current....................................... $ (3,242) $ (3,862) $(1,687)
Deferred...................................... (7,275) (1,166) (4,235)
-------- -------- -------
(10,517) (5,028) (5,922)
-------- -------- -------
State and local:
Current....................................... (532) (1,365) (625)
Deferred...................................... 105 (384) 345
-------- -------- -------
(427) (1,749) (280)
-------- -------- -------
Foreign:
Current....................................... (562) -- --
Deferred...................................... (3,048) (4,936) (1,512)
-------- -------- -------
Income tax expense.............................. $(14,554) $(11,713) $(7,714)
======== ======== =======
</TABLE>
Income before income taxes and extraordinary item for the Company's foreign
and domestic operations were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Domestic............................................. $31,284 $21,084 $14,116
Foreign.............................................. 17,497 10,905 6,171
------- ------- -------
Total.............................................. $48,781 $31,989 $20,287
======= ======= =======
</TABLE>
F-58
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes differs from tax calculated by applying the
U.S. Federal statutory income tax rate to income before income taxes due to the
following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. Federal statutory tax rate.......................... 35.0% 35.0% 35.0%
State income tax effect, net of Federal benefit.......... 0.6 3.6 4.2
Differences between U.S. Federal statutory and foreign
tax rates............................................... (5.9) 5.7 --
Valuation allowance...................................... -- (6.4) (8.7)
Other, net............................................... 0.1 (1.3) 7.5
---- ---- ----
Total.................................................. 29.8% 36.6% 38.0%
==== ==== ====
</TABLE>
Deferred income taxes result from temporary differences in the financial
bases and tax bases of assets and liabilities. The types of differences that
give rise to significant portions of deferred income tax assets and liabilities
at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Accrued expenses and reserves............................. $ 9,690 $11,078
Inventory reserves, capitalized costs..................... 53 1,046
Plant and equipment, intangibles.......................... 3,318 3,912
Employee benefit/compensation accruals.................... 2,427 2,952
Allowance for doubtful accounts........................... 157 164
Net operating loss carryforwards.......................... 15,258 22,395
Other..................................................... 137 --
------- -------
Deferred tax assets........................................ 31,040 41,547
Valuation allowance....................................... (17,204) (17,204)
------- -------
Net deferred tax asset.................................... 13,836 24,343
Deferred tax liabilities:
Underbillings............................................. (6,802) (7,978)
Prepaid insurance......................................... (828) (1,045)
------- -------
Total deferred tax liabilities........................... (7,630) (9,023)
------- -------
Deferred income taxes, net................................. $ 6,206 $15,320
======= =======
</TABLE>
The Company's effective tax rate for the year was reduced to 29.8%,
primarily due to the Company changing the legal structure of its Mexican
operations.
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company has
established a valuation allowance for certain net operating loss carryforwards
and for losses anticipated to produce no tax benefit. Although realization of
the net deferred tax asset is not assured, management believes that it is more
likely than not that the net deferred tax asset will be realized.
F-59
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's net operating loss carryforward for the year ended December
31, 1998 is $39.5 million. The net operating losses expire in various amounts,
as follows:
<TABLE>
<CAPTION>
U.S. Mexico Total
------- ------- -------
(In thousands)
<S> <C> <C> <C>
2004................................................. $ -- $ 9,807 $ 9,807
2005................................................. -- 4,515 4,515
2010................................................. 25,222 -- 25,222
------- ------- -------
Total.............................................. $25,222 $14,322 $39,544
======= ======= =======
</TABLE>
10. Benefit Plans Retirement
In May 1994, the Company established a defined contribution, 401(k) savings
plan. In January 1996, the Company suspended Company contributions to the
401(k) savings plan. On July 1, 1997 the Company reinstated those contributions
equal to 2% of an eligible employee's gross wages in the form of Company stock.
In addition, beginning January 1, 1998 the Company matches 50% of an eligible
employee's contributions into the 401(k) savings plan to a maximum total of 3%
per an eligible employee's gross wages. The Company match is in the form of
Company stock. The Company's contributions were $1.3 million, $357,000 and
$71,000 for 1998, 1997 and 1996, respectively.
The Company participates in multiemployer pension, and health and welfare
plans. The plans are defined contribution plans and provide benefits for craft
employees covered under collective bargaining agreements at Boise Locomotive
and Motor Coils. Costs under the plans amounted to $3.8 million, $3.1 million
and $2.1 million for 1998, 1997 and 1996, respectively. The Company adopted two
long-term incentive plans for selected employees in 1994. The plans provide
deferred compensation based upon total shareholder return or return on total
capital. No compensation expense was recognized in connection with these plans
in 1998, 1997 or 1996.
Young Retirement Benefits
In connection with the acquisition of Young, the Company assumed liability
for Young's defined benefit pension plan (the "Young Plan"), covering
substantially all of the employees of Young. The benefits under the Young Plan
are based on years of service. The Company intends to suspend future benefits
accruing under the Young Plan as of April 1, 1999, and to terminate the Young
Plan in accordance with the provisions of the Internal Revenue Code as of June
1, 1999. This treatment of the Young Plan was contemplated when accounting for
the acquisition of Young under Accounting Principles Board Opinion No. 16,
"Business Combinations."
The Company recognized net periodic pension (income) cost for 1998 as
follows:
<TABLE>
<CAPTION>
1998
----
(In thousands)
<S> <C>
Service cost for 1998......................................... $ 47
Interest cost on projected benefit obligation................. 128
Expected return on Young Plan assets.......................... (251)
-----
Net periodic pension income................................. $ (76)
=====
</TABLE>
F-60
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the Young Plan's funded status and amounts
recognized at November 18, 1998 (date of acquisition), which approximates the
funded status at December 31, 1998, based upon actuarial data and the market
value of Young Plan assets (primarily fixed income mutual funds):
<TABLE>
<CAPTION>
1998
----
(In thousands)
<S> <C>
Projected benefit
obligation for service
rendered to date....... $(22,769)
Plan assets at fair
value.................. 25,393
--------
Young Plan assets in
excess of projected
benefit obligation..... $ 2,624
========
</TABLE>
The actuarial assumptions used to determine net periodic pension income and
the projected benefit obligation at December 31, 1998 were:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Discount rate.......................................................... 4.75%
Expected long-term rate of return...................................... 8.50%
</TABLE>
The discount rate reflects the rate expected to be received in connection
with annuities to be purchased at the termination of the Young Plan.
Postretirement Healthcare Benefits for Former Employees
Effective December 31, 1998, the Company transferred its current and future
liabilities associated with its employee postretirement health care plan to
Morrison Knudsen for cash consideration of $1.5 million. The resulting
settlement gain was immaterial to the 1998 statement of income. At December 31,
1997 the Company had a postretirement healthcare obligation of $1.4 million.
11. Related Party Transactions
The Company leases certain facilities from entities controlled by former
directors and officers of the Company. Lease payments, including utilities, to
these entities totaled $836,000, $999,000 and $1.1 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
The Company incurred $505,000, $829,000 and $1.9 million of legal fees and
expenses from a firm in which a former officer of the Company is a shareholder,
for the years ended December 31, 1998, 1997 and 1996, respectively.
In September 1996, the Company repurchased for $34.6 million all of the debt
of the Company owed to Morrison Knudsen. The amount of the debt outstanding as
of the date of repurchase, including accrued interest, was $56.6 million. The
effect of this transaction was an increase to additional paid-in capital of
$14.9 million, a decrease in the net deferred tax asset of $3.9 million and a
reduction in amounts due to Morrison Knudsen of $56.6 million.
12. Commitments and Contingencies
The Company has commitments and performance guarantees arising from
locomotive remanufacturing contracts and maintenance agreements, and warranties
from the sale of new locomotives, remanufactured locomotives and locomotive
components.
F-61
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Environmental
The Company is subject to Federal, state, local and foreign environmental
laws and regulations concerning the discharge, storage, handling and disposal
of hazardous or toxic substances and petroleum products. Examples of regulated
activities are the disposal of lubricating oil, the discharge of water used to
clean parts and to cool machines, the maintenance of underground storage tanks
and the release of particulate emissions produced by Company operations. The
Company has a Chief Compliance Officer who audits the Company policies and
reports directly to the Audit Committee of the Board of Directors.
Boise, Idaho
The Company is subject to a RCRA Part B Closure Permit ("the Permit") issued
by the Environmental Protection Agency and the Idaho Department of Health and
Welfare, Division of Environmental Quality relating to the monitoring and
treatment of groundwater contamination on, and adjacent to, the Company's Boise
Locomotive facility. In compliance with the Permit, the Company has drilled
wells onsite to retrieve and treat contaminated groundwater, and onsite and
offsite to monitor the amount of hazardous constituents. The Company has
estimated the expected aggregate undiscounted costs to be incurred over the
next 23 years, adjusted for inflation at 3% per annum, to be $4 million, based
on the Permit's Corrective Action Plan, and $3.7 million for contingent
additional Permit compliance requirements related to offsite groundwater
contamination. The discounted liability at December 31, 1998, using a discount
rate of 5.25%, was $2.2 million based on the Permit's Corrective Action Plan,
and $2 million for contingent additional Permit compliance requirements related
to offsite groundwater contamination. The estimated outlays for each of the
five succeeding years from 1999 to 2003 are: $245,000, $290,000, $260,000,
$268,000 and $276,000. The Company was in compliance with the Permit at
December 31, 1998.
Mexico
Through its MPI de Mexico subsidiary, the Company has operational
responsibility for facilities in Acambaro and San Luis Potosi, Mexico, pursuant
to a contract with TFM. Under the contract, MPI de Mexico is responsible for
performing certain work related to environmental protection at the facilities,
such as waste water treatment, storm water control, tank repair, and spill
prevention and control. The costs of this work are either to be directly
reimbursed to MPI de Mexico by TFM or recoverable through fees payable under
the contract, which has been structured to account for such cost. No assurance
can be given, however, that TFM will not dispute any submissions for
reimbursement or that the fee structure under the contract will, in fact, cover
MPI de Mexico's costs.
Mountaintop, Pennsylvania
The Comprehensive Environmental Response, Compensation and Liability Act
(also known as "CERCLA" or "Superfund") is a federal law regarding abandoned
hazardous waste sites which imposes joint and several liability, without regard
to fault or the legality of the original act, on certain classes of persons,
including those who contribute to the release of a "hazardous substance" into
the environment. Foster Wheeler Energy Corporation ("FWEC") is named as a
potentially responsible party with respect to the Company's Mountaintop,
Pennsylvania plant, which has been listed by the EPA in its database of
potential hazardous waste sites. FWEC, the seller of the Mountaintop property
to the Company's predecessor in 1989, agreed to indemnify the Company's
predecessor against any liabilities associated with this Superfund site.
Management believes that this indemnification arrangement is enforceable for
the benefit of the Company and, although such obligation is unsecured and
therefore structurally subordinate to secured indebtedness of FWEC, that FWEC
has the financial resources to honor its obligations under this indemnification
arrangement. This indemnification does not alter the Company's potential
liability to third parties (other than FWEC) or governmental agencies under
CERCLA but creates contractual obligations on the part of FWEC for such
liabilities.
F-62
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mattoon, Illinois
Young had received a notice from the current owners of a plant previously
owned and operated by Young indicating that Young is the responsible party for
contamination at the plant site. The current owner seeks to recover the
estimated costs of cleaning up the alleged contamination. To resolve this
matter, the Company has entered into a formal agreement with the current owners
to assume full responsibility for environmental restoration of this property.
Although management has not fully completed its investigation of this matter,
it believes this matter could ultimately have an unfavorable impact on the
Company's financial position. The Company has accrued $1 million for this
matter as management's best estimate of the ultimate financial restoration
costs. This accrual was based on management's expectation that the property
will be included in the state of Illinois Site Remediation Program as a
commercial/industrial property. While the estimated accrued costs are
considered adequate by management, actual results could differ materially from
this estimate.
Leases
The Company leases office and manufacturing facilities under operating
leases with terms ranging from one to 14 years, excluding renewal options.
The Company has also financed its locomotive lease fleet with operating
leases arising from sale and leaseback transactions. The Company has sold
remanufactured locomotives to various financial institutions and leased them
back under operating leases with terms from five to 20 years.
Total net rental expense (income) charged (or credited) to operations in
1998, 1997 and 1996 was $2.4 million, $2.8 million and $(799,000),
respectively. Certain of the Company's equipment rental obligations under
operating leases pertain to locomotives, which are subleased to customers under
both short-term and long-term agreements. The above amounts are shown net of
sublease rentals of $7.6 million, $7.2 million and $8.7 million for the years
1998, 1997 and 1996, respectively. Future minimum rental payments under
operating leases with remaining noncancelable terms in excess of one year are
as follows:
<TABLE>
<CAPTION>
Real Sublease
Year Estate Equipment Rentals Total
---- ------ --------- -------- -------
(in thousands)
<S> <C> <C> <C> <C>
1999....................................... $1,703 $ 6,862 $(2,901) $ 5,664
2000....................................... 1,636 5,756 (2,901) 4,491
2001....................................... 1,561 4,849 (2,599) 3,811
2002....................................... 1,570 4,807 (2,190) 4,187
2003....................................... 1,452 4,791 (2,190) 4,053
2004 and after............................. 3,704 26,522 (9,399) 20,827
</TABLE>
Legal Proceedings
The Company is engaged in a commercial dispute with a former supplier,
Samyoung Machinery Industrial Co. and Samyoung (America), Inc. (collectively,
"Samyoung"). The Company filed suit on April 16, 1996 alleging delivery of
defective product and seeking damages in excess of $1 million. Samyoung denies
that the product was defective and countersued to recover $300,000 under the
contract, and $10 million for trade libel and interference with prospective
economic relationships as a result of the Company allegedly making false
disparaging statements concerning the diesel engine cylinder liners to
potential Samyoung customers. The Company believes that Samyoung's claims are
without merit, and, to date, no evidence supporting Samyoung's counterclaims
has come to light through the discovery being conducted by the parties. The
Company intends to vigorously prosecute its own claims and defend against
Samyoung's counterclaims. The Company has tendered the counterclaims to its
liability insurers, which have been provided a partial defense subject to a
reservation of rights.
F-63
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is involved in legal proceedings incident to the normal conduct
of its business, including contract claims and employee matters. Although the
outcome of any pending legal proceeding cannot be predicted with certainty,
management believes that such legal proceedings are adequately provided for in
the consolidated financial statements and that the proceedings, individually
and in the aggregate, will not have a material adverse effect on the
consolidated operations or financial condition of the Company.
13. Segment Information
The Company has two reportable segments: Locomotive and Components. The
reportable segments are comprised of strategic business units which offer
different products and services. The Locomotive Group provides fleet
maintenance, overhauling and remanufacturing, and manufacturing of
environmentally friendly switcher, commuter and mid-range, DC and AC traction,
diesel-electric and liquefied natural gas locomotives up to 4,000 horsepower.
The Components Group manufactures and distributes primarily aftermarket, or
replacement, new and remanufactured components and parts for freight and
passenger railroads, including every Class I railroad in North America,
metropolitan transit and commuter rail authorities, original equipment
manufacturers, industrial power-related markets and other customers
internationally.
The Company evaluates segment performance based primarily on operating
income, excluding unusual items. The Company accounts for intersegment sales
and transfers as if the sales or transfers were to third parties at current
market prices. The accounting policies of the segments are the same as those
described in the summary of significant policies.
Following is condensed segment financial information for the years ending
December 31.
<TABLE>
<CAPTION>
1998
------------------------------
Locomotive Components Total
---------- ---------- --------
(In thousands)
<S> <C> <C> <C>
Gross sales..................................... $186,859 $213,763 $400,622
Intercompany sales.............................. 9,065 26,339 35,404
Interest expense................................ 2,643 188 2,831
Depreciation and amortization................... 3,885 7,056 10,941
Operating income................................ 28,362 22,912 51,274
Segment assets.................................. 134,369 229,726 364,095
Capital expenditures............................ 9,045 19,498 28,543
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------
Locomotive Components Total
---------- ---------- --------
(In thousands)
<S> <C> <C> <C>
Gross sales..................................... $153,572 $179,338 $332,910
Intercompany sales.............................. 8,602 18,378 26,980
Interest expense................................ 3,298 37 3,335
Depreciation and amortization................... 3,117 6,259 9,376
Operating income................................ 23,530 25,258 48,788
Segment assets.................................. 131,925 131,892 263,817
Capital expenditures............................ 7,107 7,828 14,935
======== ======== ========
</TABLE>
F-64
<PAGE>
MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1996
------------------------------
Locomotive Components Total
---------- ---------- --------
(In thousands)
<S> <C> <C> <C>
Gross sales..................................... $156,320 $162,544 $318,864
Intercompany sales.............................. 9,562 17,895 27,457
Interest expense................................ 1,779 141 1,920
Depreciation and amortization................... 3,141 6,449 9,590
Operating income................................ 16,728 17,812 34,540
Segment assets.................................. 95,882 116,145 212,027
Capital expenditures............................ 2,748 1,425 4,173
</TABLE>
The following reconciles segment information presented above to the
consolidated financial statements for the years ending December 31.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net sales:
Gross sales from segments....................... $400,622 $332,910 $318,864
Intercompany sales elimination.................. (35,404) (26,980) (27,457)
-------- -------- --------
Net sales....................................... $365,218 $305,930 $291,407
======== ======== ========
Income before income taxes and extraordinary
item:
Operating income from segments.................. $ 51,274 $ 48,788 $ 34,540
Unallocated corporate expenses and elimination
of intercompany profit......................... (8,911) (14,170) (10,308)
Allocated corporate expenses.................... (2,000) -- --
Investment income............................... 1,781 761 1,981
Interest expense................................ (5,894) (5,163) (9,143)
Other income--Argentina......................... 10,362 2,003 1,565
Gain on sale of assets.......................... -- -- 1,483
Foreign exchange gain (loss).................... 2,169 (230) 169
-------- -------- --------
Income before income taxes and extraordinary
item........................................... $ 48,781 $ 31,989 $ 20,287
======== ======== ========
Assets:
Assets from segments............................ $364,095 $263,817 $212,027
Corporate assets................................ 7,103 19,285 22,017
-------- -------- --------
Total assets................................... $371,198 $283,102 $234,044
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------
Consolidated
Segments Corporate Totals
-------- --------- ------------
(In thousands)
<S> <C> <C> <C>
Other significant items:
Interest expense............................... $ 2,831 $3,063 $ 5,894
Depreciation and amortization.................. 10,941 466 11,407
Capital expenditures........................... 28,543 338 28,881
</TABLE>
F-65
<PAGE>
MOTIVEPOWER INDUSTIRES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1997
-------------------------------
Consolidated
Segments Corporate Totals
-------- --------- ------------
(In thousands)
<S> <C> <C> <C>
Other significant items:
Interest expense............................... $ 3,335 $1,828 $ 5,163
Depreciation and amortization.................. 9,376 591 9,967
Capital expenditures........................... 14,935 66 15,001
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------
Consolidated
Segments Corporate Totals
-------- --------- ------------
(In thousands)
<S> <C> <C> <C>
Other significant items:
Interest expense............................... $1,920 $7,223 $ 9,143
Depreciation and amortization.................. 9,590 767 10,357
Capital expenditures........................... 4,173 (110) 4,063
</TABLE>
Geographic Information
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
Long- Long- Long-
Lived Lived Lived
Net Sales Assets Net Sales Assets Net Sales Assets
--------- -------- --------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
United States......... $245,787 $145,296 $195,173 $ 81,258 $225,908 $ 80,264
Mexico................ 85,579 53,779 80,773 56,554 50,877 36,611
Other................. 33,852 -- 29,984 -- 14,622 --
-------- -------- -------- -------- -------- --------
Total............... $365,218 $199,075 $305,930 $137,812 $291,407 $116,875
======== ======== ======== ======== ======== ========
</TABLE>
14. Financial Instruments
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. The fair value of the financial
instruments disclosed herein is not necessarily representative of the amount
that could be realized or settled, nor does the fair value amount consider the
tax consequences of realization or settlement.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
Cash and cash equivalents, trade receivables, certain other current assets,
current portion of long-term debt, and certain other current liabilities The
carrying amounts approximate fair value because of the short maturity of these
instruments.
Long-term debt The carrying amount of the Company's bank borrowings under
its revolving credit agreement approximate fair value because the interest
rates are based on floating rates identified by reference to market rates.
Foreign currency contracts At December 31, 1998 and 1997 the Company had 30
million MXP and 20 million MXP of notional value foreign currency forward
contracts. Notional amounts do not quantify risk or
F-66
<PAGE>
MOTIVEPOWER INDUSTIRES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
represent assets or liabilities of the Company, but are used in the calculation
of cash settlements under the contracts. The estimated fair value of the
foreign currency forward contracts in excess of the contract value was $240,000
in 1998 and $8,000 in 1997.
15. Acquisitions
On November 18, 1998, the Company acquired 100% of the common stock of
Young, a manufacturer of radiators, air coolers and heat exchange systems for
rail and industrial power-related markets, through MPIL, a subsidiary of the
Company, for $67.7 million, net of cash and marketable securities acquired. The
acquisition has been accounted for by the purchase method of accounting, and
accordingly, the results of operations of Young have been included in the
Company's consolidated financial statements from the date of acquisition. The
$41 million excess of the purchase price over the fair value of the net
identifiable assets acquired has been recorded as goodwill and is being
amortized on a straight-line basis over 40 years.
Pro-forma results assuming Young was included in the Company's Statements of
Income for the 12 months ended December 31, 1998 and 1997, respectively are
included below by significant line items:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
(Unaudited)
(In thousands except
per share data)
<S> <C> <C>
Net sales............................................. $ 409,006 $ 354,099
Income before income taxes and extraordinary items.... 37,919 32,368
Net income............................................ 32,884 20,518
Earnings per share--assuming dilution................. $ 1.18 $ .75
========== ==========
</TABLE>
16. Earnings Per Share
The following table reflects the earnings per share calculations for the
years ended December 31, 1998, 1997 and 1996. Antidilutive securities for the
years ended December 31, 1998, 1997 and 1996 were 123,000, 75,000 and 2,448,000
shares, respectively.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
------- ------- -------
(In thousands, except
per share data)
<S> <C> <C> <C>
Earnings per common share--basic:
Net income............................................ $32,197 $20,276 $11,509
Weighted average common shares outstanding............ 26,733 26,504 26,345
Contingently issuable shares.......................... 38 38 --
------- ------- -------
Adjusted weighted average common shares outstanding.... 26,771 26,541 26,345
======= ======= =======
Earnings per common share--basic....................... $ 1.20 $ 0.76 $ 0.44
======= ======= =======
Earnings per common share--assuming dilution:
Net income............................................ $32,197 $20,276 $11,509
Adjusted weighted average common shares outstanding... 26,771 26,541 26,345
Effect of dilutive securities Stock options and
restricted stock..................................... 1,158 773 5
------- ------- -------
Adjusted weighted average common shares outstanding... 27,929 27,314 26,349
======= ======= =======
Earnings per common share--assuming dilution........... $ 1.15 $ 0.74 $ 0.44
======= ======= =======
</TABLE>
F-67
<PAGE>
MOTIVEPOWER INDUSTIRES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Quarterly Financial Information (unaudited)
The following information summarizes the Company's quarterly financial
results.
<TABLE>
<CAPTION>
Quarter
-----------------------------------------
1998 First Second Third Fourth Total
- ---- ------- ------- ------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales........................... $82,853 $88,461 $87,406 $106,498 $365,218
Gross profit........................ 21,356 21,336 19,082 19,548 81,322
Income before extraordinary item.... 7,120 7,870 7,712 11,525 34,227
Net income.......................... 6,648 7,870 7,712 9,967 32,197
Earnings per common share before
extraordinary item--basic.......... .27 .29 .29 .43 1.28
Earnings per common share before
extraordinary item--assuming
dilution........................... .25 .28 .27 .41 1.23
Earnings per common share--basic.... .25 .29 .29 .38 1.20
Earnings per common share--assuming
dilution........................... .24 .28 .28 .38 1.15
</TABLE>
<TABLE>
<CAPTION>
1997 First Second Third Fourth Total
- ---- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales............................ $69,658 $73,813 $73,849 $88,610 $305,930
Gross profit......................... 15,825 19,315 17,499 19,703 72,342
Net income........................... 3,477 5,409 5,377 6,013 20,276
Earnings per common share--basic..... .13 .21 .20 .23 .76
Earnings per common share--assuming
dilution............................ .13 .20 .19 .22 .74
</TABLE>
18. Subsequent Events
On January 11, 1999, the Company acquired certain assets of G&G Locotronics,
Inc. (Itasca, Illinois), a privately held designer and manufacturer of high-
voltage electrical cabinets and control stands for locomotives, for total
consideration of $17.8 million. G&G Locotronics, Inc. had sales of
approximately $22 million for its fiscal year ended December 31, 1998.
On January 14, 1999, the Company acquired 100% of the common shares of Q-
Tron Ltd., (Calgary, Canada), a privately held designer and manufacturer of
locomotive electronics equipment, for total consideration of $14.9 million. Q-
Tron Ltd., had sales of approximately $10 million for its fiscal year ended
December 31, 1998.
Pro forma results of operations have not been presented for 1998 as the
effects of these acquisitions are not significant to the Company's consolidated
financial statements.
On March 2, 1999, MotivePower amended and restated the terms of its
revolving credit facilities with a syndicate of 12 lenders led by ABN AMRO Bank
as agent. The amendment increases the amount of the credit line from $200
million to $350 million, available as a five-year $175 million revolving credit
facility, and a 364-day $175 million revolving credit facility, which the
Company may renew annually with the approval of the lenders. Under the amended
facilities, interest rates paid on borrowed money and the total amount of
credit available to the Company are determined as they were under the
facilities prior to amendment. The Company continues to have the option to
borrow at a spread over LIBOR rates, or to borrow at prime rate.
On April 2, 1999 a stock split in the form of a 50% stock dividend was
effective. All per share information in the accompanying financial statements
has been restated to reflect the stock split.
F-68
<PAGE>
MOTIVEPOWER INDUSTIRES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 2, 1999, the Company agreed to merge with Westinghouse Air Brake
Company ("WABCO"). The Company will be the surviving corporation. Each share of
WABCO common stock will be converted into 1.3 shares of the Company's common
stock. At December 31, 1998, WABCO had outstanding 33,894,508 shares of common
stock (including 8,564,811 unearned ESOP shares). The merger is intended to be
a tax-free reorganization for federal income tax purposes. The Company will
account for the merger using the pooling of interests accounting method.
Completion of the merger is subject to various conditions, including approval
of the merger by the stockholders of each of the Company and WABCO.
F-69
<PAGE>
[LOGO]
Westinghouse Air Brake Company
Offer To Exchange Its
9 3/8% Senior Subordinated Notes
Due 2005, Series B2
For Any and All Outstanding
9 3/8% Senior Subordinated Notes
Due 2005, Series B
----------------
PROSPECTUS
----------------
We have not authorized any dealer, salesperson or other person to give any
information or to make any representations other than those contained in this
prospectus. You must not rely on any unauthorized information. This prospectus
does not constitute an offer to sell or the solicitation of an offer to buy any
Notes in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this prospectus nor any offer or sale made with this
prospectus shall, under any circumstances, create any implication that there
has been no change in the affairs of WABCO since the date of this prospectus or
that the information contained herein is correct as of any time subsequent to
its date.
The information in this prospectus is current as of , 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Company is incorporated under the laws of the State of Delaware. Section
145 of the General Corporation Law of the State of Delaware ("Section 145")
provides that a Delaware corporation may indemnify any persons who are, or are
threatened to be made, parties to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation), by reason of the
fact that such person is or was an officer, director, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding, provided such person acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was illegal. A
Delaware corporation may indemnify any persons who are, or are threatened to be
made, a party to any threatened, pending or completed action or suit by or in
the right of the corporation by reason of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses
(including attorney's fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests except that no indemnification
is permitted without judicial approval if the officer or director is adjudged
to be liable to the corporation. Where an officer or director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred. The certificate of
incorporation, as amended, of the Company provides that no director of the
corporation shall be liable to such corporation or its stockholders for
monetary damages arising from a breach of fiduciary duty owed to the
corporation or its stockholders.
The by-laws of the Company provide that the Company shall indemnify any
person who was or is a party or is threatened to be made a party to or is
involved in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that he is or was a director or officer of such corporation or other entity, or
is or was serving at the request of such corporation as a director, officer or
member of another corporation, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding and that
such indemnification shall continue as to an indemnitee who has ceased to a be
a director or officer and shall inure to the benefit of the indemnitee's heirs,
executors and administrators. The by-laws of the Company further provide that
the Company may, to the extent authorized from time to time by the directors,
indemnify any employee or agent of such corporation in the same manner as a
director or officer of such entity.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him and incurred by him in
any such capacity, arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
The by-laws of the Company provide that WABCO may purchase and maintain
insurance on behalf of any person who is or was a director or officer of WABCO
or was serving at the request of WABCO as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him in any such, or arising out of his status as
such, whether or not WABCO would have the right or obligation to indemnify him
against such liability under its by-laws.
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Filing
Exhibits Method
-------- ------
<C> <S> <C>
3.1 Restated Certificate of Incorporation of the Company dated
January 30, 1995, as amended March 30, 1995 2
3.2 Amended and Restated By-Laws of the Company, effective March
31, 1997 (Originally filed as Exhibit 4.2) 5
4.1 Form of Indenture between the Company and The Bank of New York
with respect to the public offering of $100,000,000 of 9 3/8%
Senior Notes due 2005 2
4.2 Form of Note (included in Exhibit 4.1) 2
4.3 First Supplemental Indenture dated as of March 21, 1997 between
the Company and The Bank of New York 6
4.4 Indenture dated as of January 12, 1999 by and between the
Company and The Bank of New York with respect to the private
offering of $75,000,000 of 9 3/8% Senior Notes due 2005, Series
B 8
4.5 Form of Note (included in Exhibit 4.4) 8
5.1 Opinion of Reed Smith Shaw & McClay LLP as to the Legality of
the Notes 10
9 Second Amended WABCO Voting Trust/Disposition Agreement dated
as of December 13, 1995 among the Management Investors
(Schedules and Exhibits omitted) 3
10.1 Westinghouse Air Brake Company Employee Stock Ownership Plan
and Trust, effective January 31, 1995 2
10.2 ESOP Loan Agreement dated January 31, 1995 between Westinghouse
Air Brake Company Employee Stock Ownership Trust ("ESOT") and
the Company (Exhibits omitted) 2
10.3 Employee Stock Ownership Trust Agreement dated January 31, 1995
between the Company and U.S. Trust Company of California, N.A. 2
10.4 Pledge Agreement dated January 31, 1995 between ESOT and the
Company 2
10.5 Credit Agreement dated as of June 30, 1998, and Amended and
Restated as of October 2, 1998 among the Company, various
financial institutions, The Chase Manhattan Bank, Chase
Manhattan Bank Delaware, and The Bank of New York (Schedules
and Exhibits omitted) 8
10.6 Amended and Restated Stockholders Agreement dated as of March
5, 1997 among the RAC Voting Trust ("Voting Trust"), Vestar
Equity Partners, L.P. ("Vestar Equity"), Charlesbank Capital
Partners f/k/a Harvard Private Capital Holdings, Inc.
("Charlesbank"), American Industrial Partners Capital Fund II,
L.P. ("AIP") and the Company 6
10.7 Common Stock Registration Rights Agreement dated as of January
31, 1995 among the Company, Scandinavian Incentive Holding B.V.
("SIH"), Voting Trust, Vestar Capital, Pulse Electronics, Inc.,
Pulse Embedded Computer Systems, Inc., the Pulse Shareholders
and ESOT (Schedules and Exhibits omitted) 2
10.8 Indemnification Agreement dated January 31, 1995 between the
Company and the Voting Trust trustees 2
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) 2
10.10 Letter Agreement (undated) between the Company and American
Standard Inc. on environmental costs and sharing 2
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) 2
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) 2
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Filing
Exhibits Method
-------- ------
<C> <S> <C>
10.13 License Agreement dated as of December 31, 1993 between SAB
WABCO Holdings B.V. and the Company 2
10.14 Letter Agreement dated as of January 19, 1995 between the
Company and Vestar Capital Partners, Inc. 2
10.15 Westinghouse Air Brake Company 1995 Stock Incentive Plan, as
amended 8
10.16 Westinghouse Air Brake Company 1995 Non-Employee Directors' Fee
and Stock Option Plan 8
10.17 Form of Employment Agreement between William E. Kassling and
the Company 2
10.18 Letter Agreement dated as of January 1, 1995 between the
Company and Vestar Capital Partners, Inc. 2
10.19 Form of Indemnification Agreement between the Company and
Authorized Representatives 2
10.20 Share Purchase Agreement between Futuris Corporation Limited
and the Company (Exhibits omitted) 2
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) (Originally filed as Exhibit
2.01) 4
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) (Originally
filed as Exhibit 2.02) 4
10.23 Amendment No. 1 to Amended and Restated Stockholders Agreement
dated as of March 5, 1997 among the Voting Trust, Vestar
Equity, Charlesbank, AIP and the Company 6
10.24 Common Stock Registration Rights Agreement dated as of March 5,
1997 among the Company, Charlesbank, AIP and the Voting Trust 6
10.25 1998 Employee Stock Purchase Plan 8
10.26 Sale Agreement dated as of August 7, 1998 by and between
Rockwell Collins, Inc. and the Company (Schedules and Exhibits
omitted) (Originally filed as Exhibit 2.1) 7
10.27 Amendment No. 1 dated as of October 5, 1998 to Sale Agreement
dated as of August 7, 1998 by and between Rockwell Collins,
Inc. and the Company (Originally filed as Exhibit 2.2) 7
10.28 Agreement and Plan of Merger between MotivePower Industries,
Inc. and the Company dated as of June 2, 1999 (Originally filed
as Exhibit 2.1) 9
10.29 WABCO Stock Option Agreement between the Company and
MotivePower Industries, Inc. dated as of June 2, 1999
(Originally filed as Exhibit 2.2) 9
10.30 MotivePower Industries, Inc. Stock Option Agreement between the
Company and MotivePower Industries, Inc. dated as of June 2,
1999 (Originally filed as Exhibit 2.3) 9
12 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges 10
21 List of subsidiaries of the Company 8
23.1 Consent of Arthur Andersen LLP 1
23.2 Consent of Reed Smith Shaw & McClay LLP (included in the
opinion filed as Exhibit 5.1) 10
23.3 Consent of Deloitte & Touche LLP 1
24 Powers of Attorney (filed herewith as part of signature pages) 10
25 Statement of Eligibility of Trustee 10
27 Financial Data Schedule 8
99 Annual Report on Form 11-K for the year ended December 31, 1998
of the Westinghouse Air Brake Company Employee Stock Ownership
Plan and Trust 8
99.1 Form of Letter of Transmittal 10
99.2 Form of Notice of Guaranteed Delivery 10
99.3 Form of Exchange Agreement between the Company and the Exchange
Agent 10
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Filing Method
-------------
<C> <S>
1 Filed herewith
2 Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-90866),
and incorporated herein by reference.
3 Filed as an exhibit to the Company's Annual Report on Form 10-K for the
period ended December 31, 1995, and incorporated herein by reference.
4 Filed as an exhibit to the Company's Current Report on Form 8-K, dated
October 3, 1996, and incorporated herein by reference.
5 Filed as an exhibit to the Company's Registration Statement on Form S-8
(No. 333-39159),
and incorporated herein by reference.
6 Filed as an exhibit to the Company's Annual Report on Form 10-K for the
period ended December 31, 1997, and incorporated herein by reference.
7 Filed as an exhibit to the Company's Current Report on Form 8-K, dated
October 5, 1998, and incorporated herein by reference.
8 Filed as an exhibit to the Company's Current Report on Form 10-K for the
period ended December 31, 1998, and incorporated herein by reference.
9 Filed as an Exhibit to the Company's Current Report on Form 8-K, dated
June 2, 1999 and incorporated herein by reference.
10 Previously filed.
</TABLE>
(b) Financial Statement Schedules.
Schedule II--Valuation Accounts and Reserves
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a twenty percent
(20%) change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
II-4
<PAGE>
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Westinghouse Air
Brake Company has duly caused this registration statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, on July 2,
1999.
Westinghouse Air Brake Company
/s/ William E. Kassling
By: _________________________________
William E. Kassling,
Director, Chairman of the
Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form S-4 has been signed by the following persons in
the capacities indicated as of July 2, 1999.
*
By: _________________________________
William E. Kassling,
Director, Chairman of the
Board and
Chief Executive Officer
By: _________________________________
Emilio A. Fernandez,
Director and Vice Chairman
*
By: _________________________________
Gregory T.H. Davies
President, Chief Operating
Officer and Director
*
By: _________________________________
Robert J. Brooks
Director, Chief Financial Officer
and Chief Accounting Officer
*
By: _________________________________
Kim G. Davis
Director
By: _________________________________
James C. Huntington, Jr.
Director
II-6
<PAGE>
*
By: _________________________________
James P. Kelley
Director
By: _________________________________
James V. Napier
Director
*/s/ William E. Kassling
_____________________________________
William E. Kassling for himself
and as attorney-in-fact for the
indicated directors
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Filing
Exhibits Method
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<C> <S> <C>
3.1 Restated Certificate of Incorporation of the Company dated
January 30, 1995, as amended March 30, 1995 2
3.2 Amended and Restated By-Laws of the Company, effective March
31, 1997 (Originally filed as Exhibit 4.2) 5
4.1 Form of Indenture between the Company and The Bank of New York
with respect to the public offering of $100,000,000 of 9 3/8%
Senior Notes due 2005 2
4.2 Form of Note (included in Exhibit 4.1) 2
4.3 First Supplemental Indenture dated as of March 21, 1997 between
the Company and The Bank of New York 6
4.4 Indenture dated as of January 12, 1999 by and between the
Company and The Bank of New York with respect to the private
offering of $75,000,000 of 9 3/8% Senior Notes due 2005, Series
B 8
4.5 Form of Note (included in Exhibit 4.4) 8
5.1 Opinion of Reed Smith Shaw & McClay LLP as to the Legality of
the Notes 10
9 Second Amended WABCO Voting Trust/Disposition Agreement dated
as of December 13, 1995 among the Management Investors
(Schedules and Exhibits omitted) 3
10.1 Westinghouse Air Brake Company Employee Stock Ownership Plan
and Trust, effective January 31, 1995 2
10.2 ESOP Loan Agreement dated January 31, 1995 between Westinghouse
Air Brake Company Employee Stock Ownership Trust ("ESOT") and
the Company 2
10.3 Employee Stock Ownership Trust Agreement dated January 31, 1995
between the Company and U.S. Trust Company of California, N.A. 2
10.4 Pledge Agreement dated January 31, 1995 between ESOT and the
Company 2
10.5 Credit Agreement dated as of June 30, 1998, and Amended and
Restated as of October 2, 1998 among the Company, various
financial institutions, The Chase Manhattan Bank, Chase
Manhattan Bank Delaware, and The Bank of New York (Schedules
and Exhibits omitted) 8
10.6 Amended and Restated Stockholders Agreement dated as of March
5, 1997 among the RAC Voting Trust ("Voting Trust"), Vestar
Equity Partners, L.P. ("Vestar Equity"), Charlesbank Capital
Partners f/k/a Harvard Private Capital Holdings, Inc.
("Charlesbank"), American Industrial Partners Capital Fund II,
L.P. ("AIP") and the Company 6
10.7 Common Stock Registration Rights Agreement dated as of January
31, 1995 among the Company, Scandinavian Incentive Holding B.V.
("SIH"), Voting Trust, Vestar Capital, Pulse Electronics, Inc.,
Pulse Embedded Computer Systems, Inc., the Pulse Shareholders
and ESOT (Schedules and Exhibits omitted) 2
10.8 Indemnification Agreement dated January 31, 1995 between the
Company and the Voting Trust trustees 2
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) 2
10.10 Letter Agreement (undated) between the Company and American
Standard Inc. on environmental costs and sharing 2
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) 2
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) 2
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Exhibits Method
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10.13 License Agreement dated as of December 31, 1993 between SAB
WABCO Holdings B.V. and the Company 2
10.14 Letter Agreement dated as of January 19, 1995 between the
Company and Vestar Capital Partners, Inc. 2
10.15 Westinghouse Air Brake Company 1995 Stock Incentive Plan, as
amended 8
10.16 Westinghouse Air Brake Company 1995 Non-Employee Directors' Fee
and Stock Option Plan 8
10.17 Form of Employment Agreement between William E. Kassling and
the Company 2
10.18 Letter Agreement dated as of January 1, 1995 between the
Company and Vestar Capital Partners, Inc. 2
10.19 Form of Indemnification Agreement between the Company and
Authorized Representatives 2
10.20 Share Purchase Agreement between Futuris Corporation Limited
and the Company (Exhibits omitted) 2
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) (Originally filed as Exhibit
2.01) 4
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)
(Originally filed as Exhibit 2.02) 4
10.23 Amendment No. 1 to Amended and Restated Stockholders Agreement
dated as of March 5, 1997 among the Voting Trust, Vestar
Equity, Charlesbank, AIP and the Company 6
10.24 Common Stock Registration Rights Agreement dated as of March 5,
1997 among the Company, Charlesbank, AIP and the Voting Trust 6
10.25 1998 Employee Stock Purchase Plan 8
10.26 Sale Agreement dated as of August 7, 1998 by and between
Rockwell Collins, Inc. and the Company (Schedules and Exhibits
omitted) (Originally filed as Exhibit 2.1) 7
10.27 Amendment No. 1 dated as of October 5, 1998 to Sale Agreement
dated as of August 7, 1998 by and between Rockwell Collins,
Inc. and the Company (Originally filed as Exhibit 2.2) 7
10.28 Agreement and Plan of Merger between MotivePower Industries,
Inc. and the Company dated as of June 2, 1999 (Originally filed
as Exhibit 2.1) 9
10.29 WABCO Stock Option Agreement between the Company and
MotivePower Industries, Inc. dated as of June 2, 1999
(Originally filed as Exhibit 2.2) 9
10.30 MotivePower Industries, Inc. Stock Option Agreement between the
Company and MotivePower Industries, Inc. dated as of June 2,
1999 (Originally filed as Exhibit 2.3) 9
12 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges 10
21 List of subsidiaries of the Company 8
23.1 Consent of Arthur Andersen LLP 1
23.2 Consent of Reed Smith Shaw & McClay LLP (included in the
opinion filed as Exhibit 5.1) 10
23.3 Consent of Deloitte & Touche LLP 1
24 Powers of Attorney (filed herewith as part of signature pages) 10
25 Statement of Eligibility of Trustee 10
27 Financial Data Schedule 8
99 Annual Report on Form 11-K for the year ended December 31, 1998
of the Westinghouse Air Brake Company Employee Stock Ownership
Plan and Trust 10
99.1 Form of Letter of Transmittal 10
99.2 Form of Notice of Guaranteed Delivery 10
99.3 Form of Exchange Agreement between the Company and the Exchange
Agent 9
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1 Filed herewith
2 Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-90866), and incorporated herein by reference
3 Filed as an exhibit to the Company's Annual Report on Form 10-K for the
period ended December 31, 1995, and incorporated herein by reference
4 Filed as an exhibit to the Company's Current Report on Form 8-K, dated
October 3, 1996, and incorporated herein by reference
5 Filed as an exhibit to the Company's Registration Statement on Form S-8
(No. 333-39159), and incorporated herein by reference
6 Filed as an exhibit to the Company's Annual Report on Form 10-K for the
period ended December 31, 1997, and incorporated herein by reference
7 Filed as an exhibit to the Company's Current Report on Form 8-K, dated
October 5, 1998, and incorporated herein by reference
8 Filed as an exhibit to the Company's Current Report on Form 10-K for the
period ended December 31, 1998, and incorporated herein by reference
9 Filed as an Exhibit to the Company's Current Report on Form 8-K, dated
June 2, 1999, and incorporated herein by reference.
10 Previously filed.
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EXHIBIT 12
Westinghouse Air Brake Company
Statement Regarding Computation of Ratio of Earnings to Fixed Charges
COMPUTATION OF EARNINGS TO FIXED CHARGES
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(Unaudited)
Three Months Ended
March 31 Year Ended December 31,
------------------ -------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
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Consolidated Earnings:
Income before income taxes $28,897 $24,755 $ 72,530 $80,590 $53,648 $58,509 $62,454
Interest expense 9,096 7,373 31,217 29,729 26,152 30,998 10,898
Debt fee amortization 236 542 1,375 1,993 1,844 1,638 0
33.33% of lease expense 281 321 1,254 1,089 924 924 627
Total Earnings $38,510 $32,991 $106,376 $93,401 $82,568 $92,069 $73,979
Consolidated Fixed Charges:
Interest expense $ 9,096 $ 7,373 31,217 $29,729 $26,152 $30,998 $10,898
Debt fee amortization 236 542 1,375 1,993 1,844 1,638 0
33.33% of lease expense 281 321 1,254 1,089 924 924 627
Total Fixed Charges $ 9,613 $ 8,236 $ 33,846 $32,811 $28,920 $33,560 $11,525
Earnings/Fixed Charges 4.0 4.0 3.1 2.8 2.9 2.7 6.4
</TABLE>
PROFORMA COMPUTATION OF EARNINGS TO FIXED CHARGES
TO ADJUST FOR THE MERGER WITH MOTIVE POWER
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Three Months Ended Year Ended
March 31, 1999 December 31, 1998
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Consolidated Earnings:
Income before income taxes $ 41,307 $ 121,311
Interest expense 11,290 37,111
Debt fee amortization 282 2,200
33.33% of lease expense 443 2,043
Total Earnings $ 53,322 $ 162,665
Consolidated Fixed Charges:
Interest expense $ 11,290 $ 37,111
Debt fee amortization 282 2,200
33.33% of lease expense 443 2,043
Total Fixed Charges $ 12,015 $ 41,354
Earnings/Fixed Charges 4.4 3.9
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[LETTERHEAD OF ARTHUR ANDERSEN LLP]
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports dated February 17, 1999
included in Westinghouse Air Brake Company's Form 10-K for the year ended
December 31, 1998 and to all references to our Firm in this registration
statement.
/s/ Arthur Andersen LLP
Pittsburgh, Pennsylvania
July 2, 1999
<PAGE>
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-77017 of Westinghouse Air Brake Company on Form S-4 of our report dated
February 11, 1999 (June 2, 1999 as to Note 18) relating to the consolidated
financial statements of MotivePower Industries, Inc. as of December 31, 1998 and
1997 and for each of the years in the three year period ended December 31, 1998,
appearing in the Prospectus, which is a part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte and Touche LLP
Pittsburgh, PA
July 2, 1999
