-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, JaWMjhcOoPMXVBj5s1nYU5calz5IpVRXK1jyMkyxLQk1cO2+aVhI29I70GoLgH4H UJJGMHaZMhmOQ+/fQe3pog== 0000201493-94-000018.txt : 19940812 0000201493-94-000018.hdr.sgml : 19940812 ACCESSION NUMBER: 0000201493-94-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940703 FILED AS OF DATE: 19940810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLTEC INDUSTRIES INC CENTRAL INDEX KEY: 0000201493 STANDARD INDUSTRIAL CLASSIFICATION: 3728 IRS NUMBER: 131846375 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07568 FILM NUMBER: 94542549 BUSINESS ADDRESS: STREET 1: 430 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2129400400 MAIL ADDRESS: STREET 1: 430 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: COLT INDUSTRIES INC DATE OF NAME CHANGE: 19900913 FORMER COMPANY: FORMER CONFORMED NAME: PENN TEXAS CORP DATE OF NAME CHANGE: 19680318 FORMER COMPANY: FORMER CONFORMED NAME: FAIRBANKS WHITNEY CORP DATE OF NAME CHANGE: 19680318 10-Q 1 COLTEC IND INC 2ND QTR 10-Q. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act of 1934 For the quarterly period ended July 3, 1994 OR ( ) Transition Report Pursuant To Section 13 Or 15(d) Of the Securities Exchange Act of 1934 For the transition period from __________________ to __________________ Commission file number 1-7568 COLTEC INDUSTRIES INC (Exact name of Registrant as specified in its charter) PENNSYLVANIA 13-1846375 (State or other jurisdiction of incorporation IRS Employer or organization) Identification No.) 430 PARK AVENUE, NEW YORK, N.Y. 10022 (Address of principal executive offices) (Zip code) (212) 940-0400 (Registrant's telephone number, including area code) ________________________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) ________________________________ On July 31, 1994, there were outstanding 69,815,968 shares of common stock, par value $.01 per share. Page 1 of 28 PART I FINANCIAL INFORMATION Item I Financial Statements COLTEC INDUSTRIES INC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET July 3, December 31, 1994 1993 ___________ ____________ (Unaudited) (In thousands, except share data) A S S E T S Current assets - Cash and cash equivalents $ 6,795 $ 5,749 Accounts and notes receivable - net 189,718 161,521 Inventories - Finished goods 39,286 39,206 Work in process and finished parts 109,518 103,166 Raw materials and supplies 25,387 25,405 ___________ ___________ 174,191 167,777 Deferred income taxes 15,061 17,036 Other current assets 8,712 8,587 ___________ ___________ Total current assets 394,477 360,670 Property, plant and equipment 639,249 657,237 Less accumulated depreciation and amortization 424,420 431,908 ___________ ___________ 214,829 225,329 Costs in excess of net assets acquired, net of amortization 132,479 132,550 Other assets 83,041 87,863 ___________ ___________ $ 824,826 $ 806,412 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities - Current maturities of long-term debt $ 519 $ 1,543 Accounts payable 65,627 64,791 Accrued expenses 145,946 127,208 Current portion of liabilities of discontinued operations 4,000 4,000 ___________ ___________ Total current liabilities 216,092 197,542 Long-term debt 992,691 1,032,089 Deferred income taxes 33,401 27,543 Other liabilities 131,992 132,367 Liabilities of discontinued operations 31,832 42,361 Shareholders' equity - Preferred stock, $.01 par value, 2,500,000 shares authorized, shares outstanding - none - - Common stock, $.01 par value, 100,000,000 shares authorized, 69,943,341 shares issued (excluding 25,000,000 shares held by a wholly owned subsidiary) 699 699 Capital in excess of par value 637,016 636,846 Retained earnings (deficit) (1,207,454) (1,251,465) Unearned compensation - restricted stock awards (3,928) (5,552) Minimum pension liability (4,205) (4,205) Foreign currency translation adjustments (1,251) 1,077 ___________ ___________ (579,123) (622,600) Less: Cost of 127,373 and 179,309 shares of common stock in treasury at July 3, 1994 and December 31, 1993, respectively (2,059) (2,890) ___________ ___________ (581,182) (625,490) ___________ ___________ $ 824,826 $ 806,412 =========== =========== The accompanying notes to financial statements are an integral part of this statement. 2. COLTEC INDUSTRIES INC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (Unaudited) Three Months Ended Six Months Ended __________________ __________________ July 3, July 4, July 3, July 4, 1994 1993 1994 1993 ________ ________ ________ ________ (In thousands, except per share data) Net sales $337,018 $334,591 $668,868 $674,525 ________ ________ ________ ________ Costs and expenses - Cost of sales 226,812 226,862 454,453 458,893 Selling and administrative 49,515 45,470 99,045 98,406 Restructuring charge - 25,219 - 25,219 ________ ________ ________ ________ Total costs and expenses 276,327 297,551 553,498 582,518 ________ ________ ________ ________ Operating income 60,691 37,040 115,370 92,007 Interest and debt expense, net 22,593 27,789 45,017 55,848 ________ ________ ________ ________ Earnings before income taxes and extraordinary item 38,098 9,251 70,353 36,159 Provision for income taxes 13,715 3,238 25,327 12,656 ________ ________ ________ ________ Earnings before extraordinary item 24,383 6,013 45,026 23,503 Extraordinary item (1,015) (375) (1,015) (639) ________ ________ ________ ________ Net earnings $ 23,368 $ 5,638 $ 44,011 $ 22,864 ======== ======== ======== ======== Earnings per common share - Before extraordinary item $ .35 $ .09 $ .65 $ .34 Extraordinary item (.02) (.01) (.02) (.01) _____ _____ _____ _____ Net earnings $ .33 $ .08 $ .63 $ .33 ===== ===== ===== ===== Weighted average number of common and common equivalent shares 69,799 69,526 69,798 69,563 ====== ====== ====== ====== The accompanying notes to financial statements are an integral part of this statement. 3. COLTEC INDUSTRIES INC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended ______________________ July 3, July 4, 1994 1993 _________ ________ (In thousands) Cash flows from operating activities - Net earnings $ 44,011 $ 22,864 Adjustments to reconcile net earnings to cash - Extraordinary item 1,015 639 Restructuring charge - 25,219 Depreciation and amortization 21,721 25,375 Deferred income taxes 5,858 (5,254) Receivable from insurance carriers 23,071 (9,873) Payment of liabilities of discontinued operations (1,218) (2,627) Other operating items (4,435) (812) _________ ________ 90,023 55,531 _________ ________ Changes in assets and liabilities - Accounts and notes receivable (19,171) (11,923) Inventories (9,499) (15,376) Deferred income taxes 1,975 396 Other current assets (404) (1,269) Accounts payable 3,341 1,418 Accrued expenses (13,667) (4,252) _________ ________ Changes in assets and liabilities (37,425) (31,006) _________ ________ Cash provided by operating activities 52,598 24,525 _________ ________ Cash flows from investing activities - Capital expenditures (14,726) (11,985) Other - net 1,282 6,925 _________ ________ Cash used in investing activities (13,444) (5,060) _________ ________ Cash flows from financing activities - Issuance of long-term debt 329,000 28,609 Payments of long-term debt (367,108) (41,678) Distribution to Holdings pursuant to tax sharing procedure - (4,624) _________ ________ Cash used in financing activities (38,108) (17,693) _________ ________ Cash and cash equivalents - Increase 1,046 1,772 At beginning of period 5,749 7,155 _________ ________ At end of period $ 6,795 $ 8,927 ========= ======== The accompanying notes to financial statements are an integral part of this statement. 4. COLTEC INDUSTRIES INC AND SUBSIDIARIES Notes to Financial Statements July 3, 1994 (Unaudited) 1. The unaudited financial statements included herein reflect in the opinion of Coltec Industries Inc ("Coltec") all normal recurring adjustments necessary to present fairly the financial position and results of operations for the periods indicated. The unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated balance sheet as of December 31, 1993 has been derived from the audited financial statements as of that date. For further information, refer to the financial statements and footnotes included in Coltec's annual report to shareholders for the year ended December 31, 1993. 2. In the first quarter of 1994, Coltec adopted the requirements of Financial Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts." In accordance with Interpretation No. 39, Coltec recorded its liabilities for asbestos-related matters that are deemed probable and can be reasonably estimated (settled actions and actions in advanced stages of processing), and separately recorded an asset equal to the amount expected to be recovered by insurance. In addition, Coltec has recorded a receivable for that portion of payments previously made for asbestos product liability actions and related litigation costs that is recoverable from its insurance carriers. Liabilities for asbestos related matters and the receivable from insurance carriers included in the Consolidated Balance Sheet are as follows: July 3, December 31, 1994 1993 ______ ___________ (In thousands) Accounts and notes receivable - net $51,117 $35,838 Other assets 24,026 23,697 Accrued expenses 35,101 - Other liabilities 10,580 - 3. Coltec recorded a restructuring charge of $25,219,000 in the second quarter 1993 to cover the cost of consolidation and rearrangement of certain manufacturing facilities and related reductions in work force. 5. COLTEC INDUSTRIES INC AND SUBSIDIARIES Notes to Financial Statements July 3, 1994 (Unaudited) 4. Interest paid and federal and state income taxes paid and refunded were as follows: Six Months Ended _________________ July 3, July 4, 1994 1993 _______ _______ (In thousands) Interest paid $47,219 $53,107 Income taxes: Paid 18,886 22,851 Refunded 1,567 920 5. During the second quarter of 1994, Coltec incurred an extraordinary charge of $1,015,000, net of a tax benefit of $547,000, in connection with the early retirement of debt. During the second quarter and six months of 1993, Coltec incurred extraordinary charges of $375,000, net of a tax benefit of $193,000, and $639,000, net of a tax benefit of $328,000, respectively, in connection with the early retirement of debt. 6. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations The following table shows financial information by industry segment for the three months and six months ended July 3, 1994 and July 4, 1993. Three Months Ended Six Months Ended __________________ __________________ July 3, July 4, July 3, July 4, 1994 1993 1994 1993 _______ _______ _______ _______ (In millions) Sales: Aerospace/Government $105.3 $108.9 $204.4 $222.1 Automotive 133.7 114.2 262.1 227.3 Industrial 98.5 111.7 203.2 225.7 Intersegment elimination (.5) (.2) (.8) (.6) ______ ______ ______ ______ Total $337.0 $334.6 $668.9 $674.5 ====== ====== ====== ====== Operating income: Aerospace/Government $ 16.4 $ .5 $ 30.0 $ 18.2 Automotive 31.2 28.2 59.5 54.4 Industrial 22.6 17.7 44.9 38.5 ______ ______ ______ ______ Total segments 70.2 46.4 134.4 111.1 Corporate unallocated (9.5) (9.4) (19.0) (19.1) ______ ______ ______ ______ Operating income $ 60.7 $ 37.0 $115.4 $ 92.0 ====== ====== ====== ====== Operating income for the second quarter of 1993 included a restructuring charge of $25.2 million. This charge included $17.7 million in the Aerospace/Government segment, $3.8 million in the Automotive segment and $3.7 million in the Industrial segment. Excluding the restructuring charge, 1993 operating income by industry segment would have been as follows: Three Six Months Months ______ ______ (In millions) Aerospace/Government $18.2 $ 35.9 Automotive 32.0 58.2 Industrial 21.4 42.2 _____ ______ Total segments $71.6 $136.3 _____ ______ 7. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Results of Operations Three Months Ended July 3, 1994 Compared With Three Months Ended July 4, 1993. Earnings per share before extraordinary item increased to $.35 in the second quarter of 1994 from $.09 per share in the 1993 second quarter, or $.31 cents per share excluding a restructuring charge. Sales for the 1994 second quarter were $337.0 million compared with $334.6 million in the comparable period last year. Operating income was $60.7 million compared with $37.0 million in the 1993 second quarter and the operating margin was 18.0%, compared with 11.1% last year. Excluding a restructuring charge of $25.2 million recorded in the second quarter of 1993, operating income was $62.3 million and the operating margin was 18.6% in the second quarter of 1993. In the Aerospace/Government segment, 1994 second quarter operating income increased significantly over the like quarter last year on a 3% sales decline. Operating income in the Automotive segment improved 11% on a 17% sales increase and, in the Industrial segment, operating income was higher by 28% on a 12% decline in sales. Excluding the 1993 restructuring charge, operating income in the second quarter of 1994 declined 10% in the Aerospace/Government segment and 3% in the Automotive segment. Included in 1993 second quarter operating income for the Automotive segment was a recovery of previously incurred engineering expense. Excluding such recovery and the 1993 restructuring charge, Automotive segment operating income was up 9%. Excluding the 1993 restructuring charge and the operating results of Central Moloney, which was sold in January 1994, Industrial segment sales were up 2% and operating income improved 6% in the second quarter of 1994. For Coltec, excluding the 1993 restructuring charge and Central Moloney, operating income in the 1993 second quarter was $62.1 million on sales of $319.7 million. Coltec sold Central Moloney at a price approximating book value. Coltec believes that this divestiture will contribute to improved results in the Industrial segment. Operating results for the Aerospace/Government segment in the second quarter of 1994 continued to reflect the general weakness in the aerospace industry and a gap in production and sales of engines for U.S. Navy programs. Operating results in the Automotive segment continue to benefit from a strong automotive industry and increasing application for segment products. In the Industrial segment, higher earnings were reported by Quincy Compressor, Garlock Bearings, Delavan Commercial Products and Garlock Mechanical Packing, while Garlock Plastomer and France Compressor Products reported lower results. Order input in the second quarter of 1994 increased over the same quarter last year by 13% in the Automotive segment and 6% in the Industrial segment, after excluding Central Moloney. 8. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Following is a discussion of the results of operations for the three months ended July 3, 1994 compared with the three months ended July 4, 1993. Sales. In the Aerospace/Government segment, sales were $105.3 million compared with $108.9 million a year ago. This decline results from the general weakness in the aerospace industry as reflected in lower sales volume at Walbar, Chandler Evans Control Systems and Delavan Gas Turbine. Sales were also down at Fairbanks Morse Engine due to a gap in sales of engines for U.S. Navy programs. These declines were partially offset by increased shipments of landing gear assemblies at Menasco Aerosystems for the military market and for new commercial programs, including the Boeing 777 jetliner. Automotive segment sales increased 17% to $133.7 million in the three months ended July 3, 1994 as all divisions within the segment reported higher sales. The sales improvement was due to higher new car and truck production and increased applications for segment components. Contributing to the higher sales at Coltec Automotive was the acquisition in late 1993 of General Motors' air pump manufacturing operations and this division becoming the sole source of these components to the auto maker's North American Operations. Sales for the Industrial segment were $98.5 million for the three months ended July 3, 1994, compared with $111.7 million last year. Excluding the sales of Central Moloney, Industrial segment sales were $96.8 million in the second quarter of 1993. Higher sales were reported by Quincy Compressor on increased shipments of both reciprocating and rotary screw air compressors and greater demand for compressor parts and accessories. Sales were higher at Garlock Bearings, Sterling Die and Haber on increased demand from the automotive market. At Delavan Commercial Products, sales of fuel spray nozzles were up to the home heating market, primarily reflecting increased market penetration. Lower sales were reported in the second quarter of 1994 by Garlock Mechanical Packing, Garlock Plastomer Products and Garlock Valves & Industrial Plastics. Cost of Sales. Cost of sales in the second quarter of 1994 remained at the same level as in 1993; however, excluding Central Moloney, cost of sales was 6% higher. This increase primarily reflects the higher sales volume in the Automotive segment. As a percentage of sales, cost of sales increased to 67.3% from 66.8%, after excluding Central Moloney. Selling and Administrative Expense. Selling and administrative expense, including other income and expense, increased 9% in the three months ended July 3, 1994 and 13% excluding Central Moloney. This increase was due to higher state and local income taxes and to the recovery, in the second quarter of 1993, of $3.5 million of previously incurred engineering expense. The increase in 1994 second quarter 9. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 selling and administrative expense was offset in part by reductions in the sales force at Garlock Mechanical Packing. As a percent of sales, selling and administrative expense was 14.7% in the second quarter of 1994 compared with 14.8% last year, after excluding Central Moloney and the recovery of engineering expense. Restructuring Charge. The $25.2 million restructuring charge recorded in the second quarter of 1993 covered the cost of consolidation and rearrangement of certain manufacturing facilities and related reductions in work force by approximately 570 employees, primarily in the Aerospace/Government segment, as well as at Central Moloney. These actions are intended to reduce annual operating costs, primarily salaries, wages and related employee benefit costs by approximately $10.0 million beginning in 1994 and thereby improve Coltec's competitiveness. Coltec believes that the cost efficiencies gained from the restructuring will permit Coltec to maintain or improve operating margins. Significant progress has been made toward achieving the objectives of the restructuring program, and the program is expected to be completed in 1994. Interest and Debt Expense, Net. Interest and debt expense, net declined $5.2 million or 19%, in the three months ended July 3, 1994 due to lower borrowing costs, under the 1994 Credit Agreement entered into in January 1994, and to repayments of long-term debt. Provision for Income Taxes. The provision for income taxes for the three months ended July 3, 1994 resulted in an effective income tax rate of 36.0% compared with 35.0% for the like period last year. Extraordinary Item. The extraordinary charges in both the second quarters of 1994 and 1993 resulted from early retirement of debt. Six Months Ended July 3, 1994 Compared With Six Months Ended July 4, 1993. Earnings per share before extraordinary items for the six months ended July 3, 1994 were $.65 compared with $.34 per share in 1993, or $.56 per share excluding the 1993 restructuring charge. Sales for the six months of 1994 were $668.9 million compared with $674.5 million a year ago. Operating income was $115.4 million and the operating margin was 17.2% compared with operating income of $92.0 million and an operating margin of 13.6% for the like period last year. Excluding the 1993 restructuring charge, operating income was $117.2 million and the operating margin was 17.4% for the six months of 1993. 10. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 For the six months ended July 3, 1994, operating income in the Aerospace/Government segment increased significantly on an 8% decline in sales. Automotive segment operating income improved 9% on a 15% sales increase and in the Industrial segment, operating income was up 17% and sales were down 10%. Excluding the 1993 restructuring charge, operating income in the six months of 1994 declined 16% in the Aerospace/Government segment and increased 2% in the Automotive segment. Excluding from 1993 the recovery of previously incurred engineering expense and the 1993 restructuring charge, Automotive segment operating income increased 9% in 1994. Excluding the 1993 restructuring charge and the operating results of Central Moloney, Industrial segment sales and operating income increased 2% and 3%, respectively, in the six months of 1994. For Coltec, excluding the 1993 restructuring charge and Central Moloney, sales and operating income were $664.0 million and $115.3 million, respectively, in the six months of 1994, compared with $643.9 million and $118.7 million, respectively, in the like period last year. Operating results for the Aerospace/Government segment in the six months of 1994 continued to reflect the general weakness in the aerospace industry and a gap in production and sales of engines for U.S. Navy programs. Operating results in the Automotive segment continue to benefit from a strong automotive industry and increasing application for segment products. In the Industrial segment, higher earnings were reported by Quincy Compressor, Garlock Bearings and Delavan Commercial Products, while Garlock Plastomer and France Compressor Products reported lower results. Following is a discussion of the results of operations for the six months ended July 3, 1994 compared with the six months ended July 4, 1993. Sales. In the Aerospace/Government segment, sales were $204.4 million compared with $222.1 million a year ago. This decline results from the general weakness in the aerospace industry as reflected in lower sales volume at Walbar, Chandler Evans Control Systems and Delavan Gas Turbine. Sales were also down at Fairbanks Morse Engine due to a gap in sales of engines for U.S. Navy programs. These declines were partially offset by increased shipments of landing gear assemblies at Menasco Aerosystems for the military market and for new commercial programs, including the Boeing 777 jetliner. Automotive segment sales were $262.1 million for the six months of 1994 compared with $227.3 million a year ago. The sales improvement was due to higher new car and truck production and increased applications for segment components. Contributing to the higher sales at Coltec Automotive was the acquisition of General Motors' air pump manufacturing operations and this division becoming the sole source of these components to the auto maker's North American Operations. 11. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Sales for the Industrial segment were $203.2 million compared with $225.7 in 1993. Excluding the sales of Central Moloney, Industrial segment sales were $198.4 million in the six months of 1994 compared with $195.0 million last year. Higher sales were reported by Quincy Compressor on increased shipments of both reciprocating and rotary screw air compressors and greater demand for compressor parts and accessories. Sales were higher at Garlock Bearings, Sterling Die and Haber on increased demand from the automotive market. At Delavan Commercial Products, sales of fuel spray nozzles were up to the home heating market, primarily reflecting increased market penetration. Lower sales were reported in the six months of 1994 by Garlock Mechanical Packing, Garlock Plastomer Products and Garlock Valves & Industrial Plastics. Cost of Sales. Cost of sales declined 1% during the six months ended July 3, 1994, however excluding Central Moloney, cost of sales was 5% higher. This increase primarily reflects the higher sales volume in the Automotive segment. Cost of sales as a percent of sales increased to 67.7% from 66.8%, after excluding Central Moloney. Selling and Administrative Expense. Selling and administrative expense, including other income and expense, increased slightly in the six months ended July 3, 1994 and 4%, excluding Central Moloney. This increase was due to higher state and local income taxes and to the recovery in 1993 of previously incurred engineering expense. The increase in selling and administrative expense during the six months of 1994 was offset in part by reductions in the sales force at Garlock Mechanical Packing. As a percent of sales, selling and administrative expense was 14.9% in 1994 compared with 15.3% in 1993, after excluding Central Moloney and the recovery of engineering expense. Interest and Debt Expense, Net. Interest and debt expense, net declined $10.8 million or 19% in the six months of 1994 due to lower borrowing costs, under the 1994 Credit Agreement, and to repayments of long-term debt. Provision for Income Taxes. The provision for income taxes for the six months of 1994 resulted in an effective income tax rate of 36.0% compared with 35.0% for 1993. Extraordinary Item. The extraordinary charges in both the six months of 1994 and 1993 resulted from early retirement of debt. 12. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Liquidity and Financial Position On January 11, 1994, Coltec entered into a $415.0 million reducing revolving credit facility (the "1994 Credit Agreement"). This facility was used to prepay borrowings outstanding and replace letters of credit issued under a credit agreement entered into in 1992. On January 11, 1994, borrowings of $324.0 million were outstanding and letters of credit of $43.6 million were issued under the 1994 Credit Agreement. The remaining balance of the 1994 Credit Agreement is being used for working capital and general corporate purposes. The 1994 Credit Agreement, which expires June 30, 1999, provides up to $100.0 million for issuance of letters of credit and will be reduced $50.0 million on January 11, 1997 and 1998. On July 3, 1994, borrowings of $295.0 million were outstanding and letters of credit of $30.3 million were issued under the 1994 Credit Agreement leaving $89.7 million available for additional borrowings and issuances of letters of credit. In the first quarter of 1994, Coltec adopted the requirements of Financial Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts." In accordance with Interpretation No. 39, Coltec has recorded liabilities for asbestos- related matters that are deemed probable and can be reasonably estimated (settled actions and actions in advanced stages of processing), and separately recorded an asset equal to the amount expected to be recovered by insurance. As of July 3, 1994, Coltec has recorded a liability of $45.7 million, of which $35.1 million is included in accrued expenses, with the balance in other liabilities in the Consolidated Balance Sheet. In addition, Coltec has recorded a receivable for that portion of payments previously made for asbestos product liability actions and related litigation costs that is recoverable from its insurance carriers. At July 3, 1994 and December 31, 1993, the receivable balance was $75.1 million and $59.5 million, respectively, of which $51.1 million and $35.8 million, respectively, is included in accounts and notes receivable - net, with the remaining balance included in other assets. During the six months ended July 3, 1994, Coltec generated $52.6 million of cash from operating activities compared with $24.5 million for the six months of 1993. The improvement resulted primarily from the net receipt in 1994 of $23.1 million from insurance carriers for asbestos-related matters compared with a $9.9 million net payment to claimants last year. Partially offsetting this improvement were higher working capital requirements. The $52.6 million of cash generated in 1994 along with available cash were used to reduce indebtedness by $38.1 million and invest $14.7 million in capital expenditures. Excluding the current receivable due from insurance carriers of $51.1 million at July 3, 1994 and $35.8 million at December 31, 1993, receivables increased 10% to $138.6 million compared with $125.7 million at the end of 1993 and receivable days outstanding were 39 days at July 3, 1994 compared with 36 days at December 31, 1993. 13. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Inventories of $174.2 million at July 3, 1994 were 4% higher than at December 31, 1993. Excluding Central Moloney, inventories were 6% higher. At July 3, 1994, total debt was $993.2 million compared with $1,033.6 million at year-end 1993. The negative balance in shareholders' equity of $581.2 million compares with a negative balance of $625.5 million at year-end 1993. Cash and cash equivalents at July 3, 1994 were $6.8 million compared with $5.7 million at December 31, 1993. Working capital at July 3, 1994 was $178.4 million and the current ratio was 1.83. This compares with working capital of $163.1 million and a current ratio of 1.83 at December 31, 1993. 14. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 PART II OTHER INFORMATION Item 1. Legal Proceedings. As of July 3, 1994, two subsidiaries of Coltec were among a number of defendants (typically 15 to 40) in approximately 65,400 actions (including approximately 11,700 actions in advanced stages of processing) filed in various states by plaintiffs alleging injury or death as a result of asbestos fibers. Through July 3, 1994, approximately 104,400 of the approximately 169,800 total actions brought have been settled or otherwise disposed of. The damages claimed for personal injury or death vary from case to case and in many cases plaintiffs seek $1 million or more in compensatory damages and $2 million or more in punitive damages. Although the law in each state differs to some extent, it appears, based on advice of counsel, that liability for compensatory damages would be shared among all responsible defendants, thus limiting the potential monetary impact of such judgments on any individual defendant. Following a decision of the Pennsylvania Supreme Court, in a case in which neither Coltec nor any of its subsidiaries were parties, that held insurance carriers are obligated to cover asbestos-related bodily injury actions if any injury or disease process, from first exposure through manifestation, occurred during a covered policy period (the "continuous trigger theory of coverage"), Coltec settled litigation with its primary and most of its first-level excess insurance carriers, substantially on the basis of the Court's ruling. Coltec is currently negotiating with its remaining excess carriers to determine, on behalf of its subsidiaries, how payments will be made with respect to such insurance coverage for asbestos claims. Coltec is currently receiving payments pursuant to an interim agreement with certain of its excess carriers. Coltec believes that a final agreement can be achieved without litigation, and on substantially the same basis that it has resolved the issues with its primary and first-level excess carriers. Coltec believes it will have available to it a significant amount of coverage from its solvent carriers for asbestos claims. Settlements are generally made on a group basis with payments made to individual claimants over periods of one to four years. In the first six months of 1994, two subsidiaries of Coltec received approximately 10,200 new actions. Payments were made with respect to asbestos liability and related costs aggregating $19.0 million in the first six months of 1994, substantially all of which were covered by insurance. In accordance with Coltec's internal procedures for the processing of asbestos product liability actions and due to the proximity to trial or settlement, certain outstanding actions have progressed to a stage where Coltec can reasonably estimate the cost to dispose of these 15. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Item 1. Legal Proceedings. (cont.) actions. As of July 3, 1994, Coltec estimates that the aggregate remaining cost of the disposition of the settled actions for which payments remain to be made and actions in advanced stages of processing, including associated legal costs, is approximately $45.7 million and Coltec expects that this cost will be substantially covered by insurance. With respect to the 53,700 outstanding actions as of July 3, 1994 which are in preliminary procedural stages, Coltec lacks sufficient information upon which judgments can be made as to the validity or ultimate disposition of such actions, thereby making it difficult to estimate with reasonable certainty the liability or costs to Coltec. When asbestos actions are received they are typically forwarded to local counsel to ensure that the appropriate preliminary procedural response is taken. The complaints typically do not contain sufficient information to permit a reasonable evaluation as to their merits at the time of receipt, and in jurisdictions encompassing a majority of the outstanding actions, the practice has been that little or no discovery or other action is taken until several months prior to the date set for trial. Accordingly, Coltec generally does not have the information necessary to analyze the actions in sufficient detail to estimate the ultimate liability or costs to Coltec, if any, until the actions appear on a trial calendar. A determination to seek dismissal, to attempt to settle or to proceed to trial is typically not made prior to the receipt of such information. It is also difficult to predict the number of asbestos lawsuits that Coltec's subsidiaries will receive in the future. Coltec has noted that, with respect to recently settled actions or actions in advanced stages of processing, the mix of the injuries alleged and the mix of the occupations of the plaintiffs have been changing from those traditionally associated with Coltec's asbestos-related actions. Coltec is not able to determine with reasonable certainty whether this trend will continue. Based upon the foregoing, and due to the unique factors inherent in each of the actions, including the nature of the disease, the occupation of the plaintiff, the presence or absence of other possible causes of a plaintiff's illness, the availability of legal defenses, such as the statute of limitations or state of the art, and whether the lawsuit is an individual one or part of a group, management is unable to estimate with reasonable certainty the cost of disposing of outstanding actions in preliminary procedural stages or of actions that may be filed in the future. However, Coltec believes that its subsidiaries are in a favorable position compared to many other defendants because, among other things, the asbestos fibers in its asbestos-containing products were encapsulated. Considering the foregoing, as well as the experience of Coltec's subsidiaries and other defendants in asbestos litigation, the likely sharing of judgments among multiple responsible defendants, and the significant 16. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Item 1. Legal Proceedings. (cont.) amount of insurance coverage that Coltec expects to be available from its solvent carriers, Coltec believes that pending and reasonably anticipated future claims are not likely to have a material effect on Coltec's results of operations and financial condition. Although the insurance coverage which Coltec has is substantial, it should be noted that insurance coverage for asbestos claims is not available to cover exposures initially occurring on and after July 1, 1984. In addition to claims for personal injury, the subsidiaries were among 40 named defendants in a class action seeking recovery of the cost of asbestos removal from school buildings. Twenty-nine similar school building cases have been dismissed without prejudice to the plaintiffs and without payment by Coltec's subsidiaries. Coltec's subsidiaries continue to be named as defendants in new cases. Item 4. Submission of Matters to a Vote of Security Holders. (a) The annual meeting of the shareholders of Coltec was held on June 21, 1994. (b) At the annual meeting of shareholders held on June 21, 1994, shareholders voted for: 1. The election of a Board of Directors consisting of six members. 2. The 1994 Long-Term Incentive Plan. 3. Amendment to 1992 Stock Option and Incentive Plan. 4. Amended and Restated Annual Incentive Plan. 5. 1994 Stock Option Plan For Outside Directors. 6. Appointment of Arthur Andersen & Co. as the independent auditors for 1994. There were 69,802,681 shares of Coltec Common Stock, par value $.01 per share, outstanding and entitled to one vote per share as of the record date for said meeting. The voting results were as follows: 17. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Item 4. Submission of Matters to a Vote of Security Holders. (cont.) 1. Election of Directors Number of Votes ____________________________ Name of Candidates For Withheld _______________________ __________ ________ John W. Guffey, Jr. 63,971,508 585,512 David I. Margolis 63,974,230 582,790 J. Bradford Mooney, Jr. 64,080,430 476,590 Joel Moses 64,155,930 401,090 Paul G. Schoen 63,976,030 580,990 Richard A. Stuckey 64,082,430 474,590 2. The 1994 Long-Term Incentive Plan For Against Abstain __________ __________ _______ 53,422,826 10,836,217 151,424 3. Amendment to 1992 Stock Option and Incentive Plan For Against Abstain __________ _________ _______ 56,821,251 6,238,654 170,135 4. Amended and Restated Annual Incentive Plan For Against Abstain __________ _________ _______ 56,077,368 8,145,214 187,885 5. 1994 Stock Option Plan For Outside Directors For Against Abstain __________ _________ _______ 62,279,739 791,883 158,418 6. Appointment of Arthur Andersen & Co. as the independent auditors for 1994. For Against Abstain __________ _________ _______ 64,130,496 332,010 94,514 18. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Item 5. Other Information In response to comments from the Securities and Exchange Commission, the following financial data supplements the Management's Discussion and Analysis of Financial Condition and Results of Operation and the Financial Statements incorporated by reference in Coltec's Form 10-K for the year ended December 31, 1993. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Year Ended December 31, 1993 Compared With Year Ended December 31, 1992. Earnings before extraordinary item for 1993 were $65.2 million, equal to $.94 per common share, or $80.5 million, equal to $1.16 per common share, excluding the 1993 restructuring charge of $25.2 million recorded by Coltec in the second quarter of 1993. This compared with earnings before extraordinary item of $64.7 million, or $1.11 per common share, in 1992. In January 1994, Coltec entered into the 1994 Credit Agreement. Had this facility been entered into at the beginning of 1993, earnings before extraordinary item for 1993 would have increased by $10.1 million, or $.14 per common share. Sales were $1,334.8 million in 1993 compared with $1,368.7 million in 1992. Operating income for 1993 was $211.7 million and the operating margin was 15.9%. Excluding the 1993 restructuring charge, operating income was $236.9 million and the operating margin was 17.7%. For 1992, operating income was $243.1 million and the operating margin was 17.8%. Although sales and operating income declined slightly in 1993, Coltec was able to maintain its operating margin, excluding the 1993 restructuring charge, at about the same level as in 1992. This performance was achieved despite 1993 being a difficult year for two of the major markets served by Coltec. The aerospace industry continued to be impacted by declining orders for new commercial aircraft and cuts in defense spending; and the nation's manufacturing sector, the primary market for the Industrial segment, remained weak. The Aerospace/Government segment reported a 34% decline in operating income in 1993 on a 13% sales decline and an operating margin of 15.0% compared with 19.5% last year. Excluding the 1993 restructuring charge, operating income declined 16% in 1993 and the segment's operating margin was 18.9%. Operating income for 1993 was $67.8 million, $85.5 million excluding the 1993 restructuring charge, on sales of $453.3 million, compared with operating income of $102.1 million on sales of $523.7 million in the prior year. The Automotive segment achieved a record 23.0% operating margin in 1993, compared 19. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Item 5. Other Information (cont.) with 21.1% in 1992, a 20% improvement in operating income and an 11% increase in sales. Excluding the 1993 restructuring charge, the Automotive segment's operating margin was 23.8% and operating income improved 25%. Operating income was $102.4 million, $106.2 million excluding the 1993 restructuring charge, on sales of $445.7 million compared with operating income of $85.1 million on sales of $402.6 million in 1992. This strong performance reflects higher new car and truck production, increased applications for segment components and the introduction of new automotive products. In the Industrial segment, operating income and sales were down 10% and 2%, respectively, and segment operating margin declined to 17.4% from 19.0% in 1992. Excluding the 1993 restructuring charge, Industrial segment operating income was down 6% and the operating margin for 1993 was 18.2%. Segment operating income was $75.9 million, $79.6 million excluding the 1993 restructuring charge, and sales were $436.7 million, compared with operating income of $84.4 million and sales of $443.8 million in 1992. Record sales and earnings performances were reported by the Quincy Compressor and Garlock Bearings Divisions, while the Central Moloney, Garlock Mechanical Packing and France Compressor Products Divisions and FMD Electronics reported lower results in 1993. Excluding Central Moloney, which was sold in January 1994, sales were up 2% to $372.5 million compared with $365.3 million in 1992, operating income was $80.3 million, down 2% from $81.9 million in 1992, and segment operating margin for 1993 was 21.5% compared with 22.4% in 1992. Excluding the 1993 restructuring charge and Central Moloney , 1993 operating income was $80.7 million, down slightly from 1992, and the operating margin was 21.7%. Sales. For 1993, Automotive segment sales increased 11% to $445.7 million, reflecting the recovery of the domestic automotive industry that began last year and continued to accelerate in 1993. Also contributing to the sales improvement were increased applications for segment components and the introduction of new automotive products. Higher volume, including increased applications for segment components, and new product sales, contributed 7% and 4%, respectively, to the total sales increase. Selling and Administrative Expense. Selling and administrative expense, including other income and expense, increased 6% in 1993. This increase results primarily from a full year of amortization expense on restricted stock awards granted in 1992 and from the inclusion in 1992 of a nonrecurring reduction in insurance cost and receipt of an $8.7 million license fee by Menasco Aerosystems. The increase in 1993 selling and administrative expense was offset in part by recovery of previously incurred engineering expense by Coltec Automotive. As a percent of sales, selling and administrative expense increased to 14.4% from 13.2% in 1992. 20. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Item 5. Other Information (cont.) Restructuring Charge. The 1993 restructuring charge of $25.2 million recorded in the second quarter of 1993 covers the cost of consolidation and rearrangement of certain manufacturing facilities and related reductions in work force by approximately 570 employees, primarily in the Aerospace/Government segment, as well as at Central Moloney. These actions are intended to reduce annual operating costs, primarily salaries, wages and related employee-benefit costs by approximately $10 million beginning in 1994 and thereby improve Coltec's competitiveness. Coltec believes that the cost efficiencies gained from the restructuring will permit Coltec to maintain or improve operating margins. Key elements of the restructuring program include closing a landing gear manufacturing facility and consolidation of landing gear production at two existing Menasco facilities, closing a turbine engine components facility and consolidating production of these components at three existing Walbar facilities, and closing one of two Central Moloney plants. At Chandler Evans Control Systems, the manufacturing area was reduced; and at Holley Replacement Parts, administrative offices and the distribution operation are being relocated to one of the division's manufacturing facilities. During 1993, significant progress was made toward achieving the objectives of the restructuring program, and the program is expected to be completed in 1994. Substantially all of the 1993 restructuring charge consists of provisions made in anticipation of cash expenditures to be funded from operations in approximately equal amounts in 1993 and 1994. In January 1994, Coltec sold Central Moloney at a price approximating book value. Coltec believes that this divestiture will contribute to improved results in the Industrial segment. The 1993 operating margin for the Industrial segment was 17.4%. Excluding the operating results of Central Moloney, the 1993 operating margin for the Industrial segment would have improved to 21.5%, or 21.7% excluding the 1993 restructuring charge. Liquidity and Financial Position On November 18, 1993, Holdings became a wholly owned subsidiary of Coltec as a result of a reorganization that resulted in the exchange by the Holdings shareholders of their shares of common stock of Holdings for 24,830,000 shares of common stock of Coltec (the "Holdings Reorganization"), constituting 35.5% of the shares of common stock outstanding after the exchange. Immediately before this exchange, Holdings owned 35.7%, or 25,000,000 shares, of the common stock of Coltec. The Holdings Reorganization simplified the equity capital structures of Coltec and Holdings, and enabled the Holdings stockholders to hold shares of Coltec common stock directly. The $26.7 million of cash acquired by Coltec in the Holdings Reorganization was used primarily to retire outstanding indebtedness of Coltec. 21. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Item 5. Other Information (cont.) Funds from operations continue to be the main source of financing for Coltec's businesses and for repaying its debt. In 1993, cash provided by operating activities was $105.2 million compared with $119.9 million in 1992 and $149.2 million in 1991. The lower cash from operations in 1993 was due primarily to increased working capital requirements, resulting from the buildup of inventory for new programs and to meet increased customer requirements and from payments relating to the restructuring program. The $46.4 million in liabilities of discontinued operations at December 31, 1993, represented reserves to cover postretirement benefits for the former employees of the discontinued operations and other future estimated costs of the dispositions of Crucible Materials Corporation in 1985, the steelmaking facility in Midland, Pennsylvania in 1982, and Colt Firearms in 1990. Payments covering the liabilities of discontinued operations in 1993, 1992 and 1991 were $4.4 million, $6.2 million and $4.2 million, respectively. Coltec expects future cash payments will extend over the remaining lives of the former employees of the discontinued operations. Environmental Coltec and its subsidiaries are subject to numerous federal, state and local environmental laws, many of which are becoming increasingly stringent, giving rise to increased compliance costs. For example, the Clean Air Amendments will require abatement of chemical air emissions that were previously unregulated and will require certain existing, and many newly constructed or modified, facilities to obtain air emission permits that were not previously required. Because many of the regulations under the Clean Air Amendments have not yet been promulgated, Coltec cannot estimate their impact at this time. Coltec, however, believes that it will not be at a competitive disadvantage in complying with the Clean Air Amendments and that any increase in costs to comply with the Clean Air Amendments will not have a material effect on its results of operations and financial condition. Many of the facilities of Coltec and its subsidiaries are subject to the federal Resource Conservation and Recovery Act of 1976 ("RCRA"), and its analogous state statutes. Although the costs under RCRA for the treatment, storage and disposal of hazardous materials generated at Coltec's facilities are increasing, Coltec does not believe that such costs will have a material effect on Coltec's results of operations and financial condition. 22. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Item 5. Other Information (cont.) Coltec has been notified that it is among the Potentially Responsible Parties ("PRPs") under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), or similar state laws, for the costs of investigating, and in some cases remediating, contamination by hazardous materials at several sites. CERCLA imposes joint and several liability for the costs of investigating and remediating properties contaminated with hazardous materials. Liability for these costs can be imposed on present and former owners or operators of the properties or on parties who generated the wastes that contributed to the contamination. The process of investigating and remediating contaminated properties can be lengthy and expensive. The process is also subject to the uncertainties occasioned by changing legal requirements, developing technological applications and liability allocations among PRPs. Based on the progress to date in the investigation, cleanup and allocation of responsibility for these sites, Coltec has estimated that its costs in connection with all except one of these sites approximate $20 million at December 31, 1993, and has accrued for this amount in the Consolidated Balance Sheet as of December 31, 1993. Although Coltec is pursuing insurance recovery in connection with certain of these matters, the accrual has not been reduced for potential recoveries from insurance companies or other third parties. In addition, Coltec has not recorded a receivable with respect to any potential recovery of costs in connection with any environmental matter. While progress toward the investigation, cleanup and responsibility allocation at the remaining site has not been sufficient to allow Coltec at this time to determine the extent of its potential financial responsibility, Coltec does not believe its costs in connection with such site will have a material effect on Coltec's results of operations and financial condition. Coltec's annual expenditures (including capital expenditures) relating to environmental matters over the three years ended December 31, 1993 ranged from $4 million to $6 million, and Coltec expects such expenditures to approximate $11 million in 1994 and $8 million in 1995. Capital expenditures in each of 1994 and 1995 are expected to approximate $2 million, and expenditures for recurring environmental matters are expected to approximate $2 million in each of 1994 and 1995. The balance of the anticipated expenditures in each year is expected to cover expenses for nonrecurring environmental matters. The estimate of annual environmental expenditures for 1994 and 1995 is based upon the expected timing of expenditures pursuant to currently identified environmental sites. Because environmental laws are becoming increasingly stringent, Coltec is unable to estimate future costs to comply with such laws; however, Coltec does not foresee a continuous upward trend in annual expenditures on environmental matters. 23. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Item 5. Other Information (cont.) Asbestos Litigation Although the insurance coverage that Coltec has is substantial, insurance coverage for asbestos claims is not available to cover asbestos exposures initially occurring on and after July 1, 1984. Other Financial Information Effects of Inflation and Foreign Currency Fluctuations Inflation and foreign currency fluctuations have not had a material impact on the operating results and financial position of Coltec during the past three years. Coltec generally has been able to offset the effects of inflation with price increases, cost-reduction programs and operating efficiencies. Coltec's foreign operations, which are primarily located in Canada, do not operate in hyperinflationary economies. Notes to Financial Statements For the Year Ended December 31, 1993 1. Summary of Accounting Policies Costs in Excess of Net Assets Acquired: It is Coltec's policy to amortize the excess costs arising from acquisitions on a straight- line basis over periods not to exceed 40 years. Excess costs arising from all completed acquisitions are being amortized on a straight-line basis over a 40 year period. At December 31, 1993 and 1992, accumulated amortization was $52,063,000 and $47,036,000, respectively. In evaluating the value and future benefits of the excess costs arising from acquisitions, the recoverability from operating income is measured. Under this approach, the carrying value would be reduced if it is probable that management's best estimate of future operating income from related operations before amortization will be less than the carrying amount of the excess costs arising from acquisitions over the remaining amortization period. Impact of New Accounting Standards: Coltec adopted Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", and No. 109, "Accounting for Income Taxes", effective January 1, 1993; and No. 112, "Employers' Accounting for Postemployment Benefits", effective January 1, 1994. The adoption of these standards did not have a material effect on Coltec's results of operations and financial condition. Based on preliminary analyses, Coltec does not expect that the future adoption of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan", and No. 115, "Accounting for Certain Investments in Debt and Equity Securities", will have a material effect on Coltec's results of operations and financial condition. 24. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Item 5. Other Information (cont.) 3. Restructuring Charge Coltec recorded a restructuring charge of $25,219,000 in the second quarter 1993 to cover the cost of consolidation and rearrangement of certain manufacturing facilities and related reductions in work force, primarily in the Aerospace/Government segment, as well as at Central Moloney Transformer Division. 7. Financial Instruments As of December 31, 1993, Coltec has outstanding interest rate swap agreements with major financial institutions having a total notional principal amount of $150,000,000, an average fixed interest rate of 6.34% and an average remaining life of 1-1/4 years, the fair values of which are $4,522,000. Interest rate swap agreements effectively hedge interest rate exposures and, as such, the differential to be paid or received is accrued and recognized in interest expense as market interest rates change. If an agreement is terminated prior to maturity, Coltec recognizes a gain or loss upon termination. Coltec has an outstanding contingent liability for guaranteed debt and lease payments of $27,140,000, and letters of credit, other than with respect to guaranteed debt, of $40,733,000. It was not practical to obtain independent estimates of the fair values for the contingent liability for guaranteed debt and lease payments and for letters of credit without incurring excessive costs. In the opinion of management, nonperformance by the other parties to the interest rate swap agreements and the contingent liabilities will not have a material effect on Coltec's results of operations and financial condition. 13. Related Party Transactions On November 18, 1993, Holdings became a wholly owned subsidiary of Coltec as a result of the exchange by all of the Holdings shareholders of their shares of common stock of Holdings for 35.5% or 24,830,000 shares of common stock of Coltec (the "Holdings Reorganization") in a transaction accounted for as a purchase. The net assets acquired consisted primarily of 25,000,000 shares of common stock of Coltec and $26.7 million of cash. Immediately before this exchange, Holdings owned 35.7% or 25,000,000 shares of common stock of Coltec. The 25,000,000 shares of common stock of Coltec which Holdings owned before this exchange and continues to own after the exchange are reported in the Consolidated Balance Sheet as a reduction of the total common shares issued. Expenses of $1,500,000 incurred in connection 25. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Item 5. Other Information (cont.) with this exchange were charged to capital in excess of par value. As a result of the exchange, Morgan Stanley Group Inc. became a direct shareholder of Coltec. In connection with an industrial revenue bond refinancing in 1993, Morgan Stanley & Co. Incorporated, a wholly owned subsidiary of Morgan Stanley Group Inc., received a fee of $309,000. 15. Commitments and Contingencies Coltec and certain of its subsidiaries are liable for lease payments and are defendants in various lawsuits, including actions involving asbestos-containing products, certain environmental proceedings and a fraudulent conveyance action. With respect to asbestos product liability and related litigation costs, although the insurance coverage that Coltec has is substantial, insurance coverage for asbestos claims is not available to cover exposures initially occurring on and after July 1, 1984. Coltec has been notified that it is among the Potentially Responsible Parties ("PRPs") under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), or similar state laws, for the costs of investigating, and in some cases remediating, contamination by hazardous materials at several sites. CERCLA imposes joint and several liability for the costs of investigating and remediating properties contaminated with hazardous materials. Liability for these costs can be imposed on present and former owners or operators of the properties or on parties who generated the wastes that contributed to the contamination. The process of investigating and remediating contaminated properties can be lengthy and expensive. The process is also subject to the uncertainties occasioned by changing legal requirements, developing technological applications and liability allocations among PRPs. Based on the progress to date in the investigation, cleanup and allocation of responsibility for these sites, Coltec has estimated that its costs in connection with all except one of these sites approximates $20,000,000 at December 31, 1993, and has accrued for this amount in the Consolidated Balance Sheet as of December 31, 1993. Although Coltec is pursuing insurance recovery in connection with certain of these matters, the accrual has not been reduced for potential recoveries from insurance companies or other third parties. In addition, Coltec has not recorded a receivable with respect to any potential recovery of costs in connection with any environmental matter. While 26. COLTEC INDUSTRIES INC AND SUBSIDIARIES July 3, 1994 Item 5. Other Information (cont.) progress toward the investigation, cleanup and responsibility allocation at the remaining site has not been sufficient to allow Coltec at this time to determine the extent of its potential financial responsibility, Coltec does not believe its costs in connection with such site will have a material effect on Coltec's results of operations and financial condition. On March 22, 1990, Coltec sold substantially all of the assets of Colt Firearms to the parent company of Colt's Manufacturing Company, Inc. (collectively with its parent company, "Colt's Manufacturing"), a company formed by a group of private investors, for cash and certain securities of Colt's Manufacturing. At December 31, 1993, Coltec's investment in Colt's Manufacturing was fully reserved. On March 18, 1992, Colt's Manufacturing filed a petition for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code, and on January 19, 1993, the Official Committee of Unsecured Creditors of Colt's Manufacturing Company, Inc. filed a fraudulent conveyance action against Coltec and other defendants. Coltec believes that it has adequately provided for any liabilities Coltec may incur with respect to Colt's Manufacturing and accordingly does not believe that the Chapter 11 filing, the associated financial condition of Colt's Manufacturing or the fraudulent conveyance action will have a material effect on Coltec's results of operations and financial condition. Item 6. Exhibits and Reports on Form 8-K. (b) Coltec filed three reports on Form 8-K during the second quarter of 1994. The reports were dated April 14, May 24 and June 10, 1994 and each reported under Item 5. Other Information. 27. S I G N A T U R E Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COLTEC INDUSTRIES INC (Registrant) by Paul G. Schoen ___________________________ Paul G. Schoen Executive Vice President, Finance Treasurer and Chief Financial Officer Date: August 10, 1994 28. -----END PRIVACY-ENHANCED MESSAGE-----