-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DPS9Whfk6UfY6blkr72NFfJZNS3dvwqXo7jAhhZzw3peS1IuuRceUCfr2oZHP+XY 0jC4N88+vxQO0cbTJ47SMw== 0000950152-99-001620.txt : 19990305 0000950152-99-001620.hdr.sgml : 19990305 ACCESSION NUMBER: 0000950152-99-001620 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990304 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOODRICH B F CO CENTRAL INDEX KEY: 0000042542 STANDARD INDUSTRIAL CLASSIFICATION: GUIDED MISSILES & SPACE VEHICLES & PARTS [3760] IRS NUMBER: 340252680 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-40291 FILM NUMBER: 99556975 BUSINESS ADDRESS: STREET 1: 4020 KINROSS LAKES PKWY CITY: RICHFIELD STATE: OH ZIP: 44286-9368 BUSINESS PHONE: 3306597600 MAIL ADDRESS: STREET 1: 4020 KINROSS LAKES PARKWAY CITY: RICHFIELD STATE: OH ZIP: 44286-9368 10-K 1 THE B.F.GOODRICH COMPANY 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998. 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 1-892 THE B.F.GOODRICH COMPANY (Exact name of registrant as specified in its charter) New York 34-0252680 (State of incorporation) (I.R.S. Employer Identification No.) 4020 Kinross Lakes Parkway Richfield, Ohio 44286-9368 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 659-7600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH REGISTERED TITLE OF EACH CLASS --------------------- Common Stock, $5 par value New York Stock Exchange 9 5/8% Notes, maturing in 2001 8.30% Cumulative Quarterly Income Preferred Securities, Series A* New York Stock Exchange
- --------------- * Issued by BFGoodrich Capital and the payments of trust distributions and payments on liquidation or redemption are guaranteed under certain circumstances by The B.F.Goodrich Company. The B.F.Goodrich Company is the owner of 100% of the common securities issued by BFGoodrich Capital, a Delaware statutory business trust. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [ ] The aggregate market value of the voting stock, consisting solely of common stock, held by nonaffiliates of the registrant as of February 18, 1999 was $2,436.2 million ($32.75 per share). On such date, 74,387,028 of such shares were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement dated March 4, 1999 are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 (THIS PAGE INTENTIONALLY LEFT BLANK) 3 PART I ITEM 1. BUSINESS Recent Development On November 22, 1998, the Company and Coltec Industries Inc ("Coltec"), a Pennsylvania company, entered into an Agreement and Plan of Merger ("Merger Agreement"). Under the terms of the Merger Agreement, upon consummation of the Merger each share of Coltec common stock issued and outstanding immediately prior to the effective time of the Merger shall be converted into the right to receive 0.56 of a share of BFGoodrich common stock. The Merger, which will be accounted for as a pooling of interests, is expected to close in early April of 1999. The Merger Agreement has been approved by the Board of Directors of both companies. Consummation of the Merger is subject to certain customary conditions, including, among others, approval of the Merger Agreement by both companies' shareholders and the receipt of regulatory approvals. When the Company and Coltec entered into the Merger Agreement, both also entered into Reciprocal Stock Option Agreements pursuant to which each granted the other an option to purchase 19.9% of the outstanding shares of its common stock upon the occurrence of certain specified events. The Reciprocal Stock Option Agreements were entered into as a condition of the Merger Agreement and serve as an inducement for each of the companies to consummate the Merger. The headquarters of the new combined company will be located in Charlotte, NC. For additional information regarding the Merger, Merger Agreement and the Reciprocal Stock Option Agreements, see the Joint Proxy Statement/Prospectus, including Annex A, B and C. General Development of Business The Company manufactures and supplies a wide variety of systems and component parts for the aerospace industry and provides maintenance, repair and overhaul services on commercial, regional, business and general aviation aircraft. The Company also manufactures specialty plastics and specialty additives products for a variety of end-user applications. A further description of the Company's business is provided below. The Company, with 1998 sales of $4.0 billion, is organized into two principal business segments: BFGoodrich Aerospace ("Aerospace") and BFGoodrich Performance Materials ("Performance Materials"). The Company maintains patent and technical assistance agreements, licenses and trademarks on its products, process technologies and expertise in most of the countries in which it operates. The Company conducts its business through numerous divisions and 98 wholly and majority-owned subsidiaries worldwide. The principal executive offices of BFGoodrich are located at 4020 Kinross Lakes Parkway, Richfield, Ohio 44286-9368 (telephone (330) 659-7600). The Company was incorporated under the laws of the State of New York on May 2, 1912 as the successor to a business founded in 1870. In March 1998, the Company acquired Freedom Chemical Company for approximately $378.0 million in cash. Freedom Chemical is a leading global manufacturer of specialty and fine chemicals that are sold to a variety of customers who use them to enhance the performance of their finished products. Freedom Chemical has leadership positions as a supplier of specialty chemical additives used in personal care, food and beverage, pharmaceutical, textile, graphic arts, paints, colorants and coatings applications and as chemical intermediates. The Company also acquired a small manufacturer of textile chemicals and a small manufacturer of energetic materials systems during 1998. On December 22, 1997, the Company completed a merger with Rohr, Inc. ("Rohr") which was accounted for as a pooling of interests. Accordingly, all prior period consolidated financial statements were restated to include the results of operations, financial position and cash flows of Rohr as though Rohr had always been a part of the Company. 1 4 During 1997, the Company acquired five additional businesses (four of which were acquired during the fourth quarter) for cash consideration of $133.4 million in the aggregate, which included $65.3 million of goodwill. One of the acquired businesses is a manufacturer of data acquisition systems for satellites and other aerospace applications. A second business manufactures diverse aerospace products for commercial and military applications. A third business is a manufacturer of dyes, chemical additives and durable press resins for the textiles industry. A fourth business manufactures thermoplastic polyurethanes and is located in the United Kingdom. The remaining acquisition is a small specialty chemicals business. On August 15, 1997, the Company sold its chlor-alkali and olefins ("CAO") business to The Westlake Group for $92.7 million, resulting in an after-tax gain of $14.5 million, or $.19 per diluted share. The disposition of the CAO business represents the disposal of a segment of a business under APB Opinion No. 30 ("APB 30"). Accordingly, the Consolidated Statement of Income reflects the CAO business (previously reported as Other Operations) as a discontinued operation. On February 3, 1997, the Company sold Tremco Incorporated to RPM, Inc. for $230.7 million, resulting in an after-tax gain of $59.5 million, or $.80 per diluted share. The sale of Tremco Incorporated completed the disposition of the Company's Sealants, Coatings and Adhesives ("SC&A") Group, which also represented a disposal of a segment of a business under APB 30. Accordingly, the SC&A Group is also reflected as a discontinued operation in the Consolidated Statement of Income. Also during 1997, the Company completed the sale of its Engine Electrical Systems Division, which was part of the Sensors and Integrated Systems Group in the Aerospace Segment. The Company received cash proceeds of $72.5 million, which resulted in a pretax gain of $26.4 million ($16.4 million after tax). During 1996, the Company acquired five specialty chemicals businesses for cash consideration of $107.9 million, which included $80.0 million of goodwill. One of the businesses acquired is a European-based supplier of emulsions and polymers for use in paint and coatings for textiles, paper, graphic arts and industrial applications. Two of the acquisitions represented product lines consisting of water-borne acrylic resins and coatings and additives used in the graphic arts industry. The fourth acquisition consisted of water-based textile coatings product lines. The remaining acquisition was a small supplier of anti-static compounds. Financial Information About Industry Segments In 1998, 1997 and 1996, sales to Boeing, solely by the Aerospace Segment, totaled 14 percent, 14 percent and 13 percent, respectively, of consolidated sales. For financial information concerning the Company's sales, operating income, identifiable assets, property additions, depreciation and amortization and geographic information, see Note N to Consolidated Financial Statements. Narrative Description of Business AEROSPACE The Company's Aerospace Segment is conducted through four major business groups. Aerostructures Group (formerly Rohr) primarily designs, develops and integrates aircraft engine nacelle and pylon systems for commercial and general aviation customers. Landing Systems Group manufactures aircraft landing gear; aircraft wheels and brakes; high-temperature composites; and aircraft evacuation slides and rafts for commercial, military, regional and business aviation customers and for space programs. Sensors and Integrated Systems Group manufactures sensors and sensor-based systems; fuel measurement and management systems; electromechanical actuators; aircraft windshield wiper systems; health and usage management systems; electronic test equipment; ice protection systems; specialty heated products; collision warning systems; weather detection systems; standby attitude indicators; aircraft lighting components; and polymer and composite products for commercial, military, regional, business and general aviation customers, and for aircraft engine and space programs. 2 5 Maintenance, Repair and Overhaul Group ("MRO") provides maintenance, repair and overhaul of commercial airframes, components, wheels and brakes, landing gear, instruments and avionics for commercial, regional, business and general aviation customers. The Company is among the largest suppliers of aircraft systems and components and aircraft maintenance repair and overhaul services in the world. It competes with other aerospace industry manufacturers to supply parts and provide service on specific fleets of aircraft, frequently on a program-by-program bid basis. Competition is primarily based on product performance, service capability and price. Contracts to supply systems and components and provide service are generally with aircraft manufacturers, airlines and airfreight businesses worldwide. The Company also competes on U.S. Government contracts, generally as a subcontractor. Competition is principally based on product performance and price. PERFORMANCE MATERIALS The Company's Performance Materials Segment is conducted through three major business groups. Textile and Industrial Coatings Group manufactures acrylic textile coatings and industrial formulations of Carbopol(R) polymers for textile printing; durable press resins, dyes and softeners; and paper saturants and coatings in wood, metal and other surface finishing products and in graphic arts applications. Consumer Specialties Group manufactures thickening, suspension and emulsion polymers for personal care products, household and pharmaceutical applications. Polymer Additives & Specialty Plastics Group manufactures thermoplastic polyurethane and alloys; high-heat-resistant and low-combustibility plastics; static-dissipating polymers; antioxidants for rubber, plastic and lubricants applications; and reaction-injection molding resins. Products are marketed and sold to manufacturers for film and sheet applications; wire and cable jacketing; and magnetic media. Specialty plastics are also used in the manufacture of automotive products; recreational vehicles and products; agricultural equipment; industrial equipment; tire and rubber goods; plumbing and industrial pipe; fire sprinkler systems and building material components. The Company competes with other major chemical manufacturers. Products are sold primarily based on product performance. Frequently, products are manufactured or formulated to order for specific customer applications and often involve considerable technical assistance from the Company. Backlogs At December 31, 1998, the Company had a backlog of approximately $2.8 billion, principally related to the Aerospace Segment, of which approximately 59 percent is expected to be filled during 1999. The amount of backlog at December 31, 1997 was approximately $2.4 billion. Backlogs in the Aerospace Segment are subject to delivery delays or program cancellations, which are beyond the Company's control. Raw Materials Raw materials used in the manufacture of Aerospace products, including steel and carbon, are available from a number of manufacturers and are generally in adequate supply. Availability of all major monomers and chemicals used in the Performance Materials Segment is anticipated to be adequate for 1999. While chemical feedstocks are currently in adequate supply, in past years, from time-to-time for limited periods, various chemical feedstocks were in short supply. The effect of any future shortages on the Company's operations will depend upon the duration of any such shortages and possibly on future U.S. government policy, which cannot be determined at this time. Environmental Federal, state and local statutes and regulations relating to the protection of the environment and the health and safety of employees and other individuals have resulted in higher operating costs and capital investments by the industries in which the Company operates. Because of a focus toward greater environmental awareness and increasingly stringent environmental regulations, the Company believes that expenditures for compliance with environmental, health and safety regulations will continue to have a significant impact on the conduct of its 3 6 business. Although it cannot predict accurately how these developments will affect future operations and earnings, the Company does not believe these costs will vary significantly from those of its competitors. For additional information concerning environmental matters, see Note V to Consolidated Financial Statements. Research and Development The Company conducts research and development under Company-funded programs for commercial products and under contracts with others. Total research and development expense amounted to $182.7 million in 1998, which included $63.1 million related to amounts funded by customers. For additional information concerning research and development expense, see Note A to Consolidated Financial Statements. Patents and Licenses The Company has many patents of its own and has acquired licenses under patents of others. While such patents in the aggregate are important to the Company, neither the primary business of the Company nor any of its industry segments is dependent on any single patent or group of related patents. The Company uses a number of trademarks important either to its business as a whole or to its industry segments considered separately. The Company believes that these trademarks are adequately protected. Human Resources As of December 31, 1998, the Company had 17,175 employees in the United States. An additional 1,239 people were employed overseas. Approximately 8,400 employees were hourly paid. The Company believes it has good relationships with its employees. The hourly employees who are unionized are covered by collective bargaining agreements with a number of labor unions and with varying contract termination dates ranging from March 1999 to August 2003. There were no material work stoppages during 1998. Foreign Operations The Company is engaged in business in foreign markets. Manufacturing and service facilities for Aerospace and Performance Materials are located in Belgium, Canada, England, France, Germany, Japan, India, Australia, Hong Kong, Korea, The Netherlands, Scotland, Singapore and Spain. The Company also markets its products and services through sales subsidiaries and distributors in a number of foreign countries. The Company also has technical fee, patent royalty agreements and joint venture agreements with various foreign companies. Outside North America, no single foreign geographic area is currently significant, although the Company continues to expand its business in Europe. Currency fluctuations, tariffs and similar import limitations, price controls and labor regulations can affect the Company's foreign operations, including foreign affiliates. Other potential limitations on the Company's foreign operations include expropriation, nationalization, restrictions on foreign investments or their transfers, and additional political and economic risks. In addition, the transfer of funds from foreign operations could be impaired by the unavailability of dollar exchange or other restrictive regulations that foreign governments could enact. The Company does not believe that such restrictions or regulations would have a materially adverse effect on its business, in the aggregate. For additional financial information about U.S. and foreign sales, see Note N to Consolidated Financial Statements. ITEM 2. PROPERTIES The manufacturing and service operations of the Company are carried on at facilities, all of which are owned, unless otherwise indicated, at the following locations: AEROSPACE Albuquerque, New Mexico Amelot, France* Arkadelphia, Arkansas Austin, Texas* Bangalore, India Basingstoke, England* Bedford, Massachusetts Burnsville, Minnesota Cedar Knolls, New Jersey 4 7 Chula Vista, California** Cleveland, Ohio** Columbus, Ohio Dallas, Texas* Dewsbury, England East Brunswick, New Jersey* Eagan, Minnesota Everett, Washington** Fairhope, Alabama* Foley, Alabama* Fort Lauderdale, Florida Grand Rapids, Michigan Green, Ohio ** Hagerstown, Maryland Hamburg, Germany Harrow, England* Heber Springs, Arkansas Irvine, California* Jacksonville, Florida Karnataka, India Louisville, Kentucky* Lynnwood, Washington* Memphis, Tennessee Miami, Florida* Middletown, Connecticut* New Century, Kansas** Oldsmar, Florida Ontario, California* Paris, France Phoenix, Arizona Prestwick, Scotland** Pueblo, Colorado Riverside, California San Marcos, Texas Santa Fe Springs, California** Sheridan, Arkansas* Singapore* Spencer, West Virginia Taipo, Hong Kong* Tempe, Arizona* Tokyo, Japan Toulouse, France** Troy, Ohio Tullahoma, Tennessee Union, West Virginia Villawood, Australia Vergennes, Vermont Wichita, Kansas PERFORMANCE MATERIALS Akron, Ohio Antwerp, Belgium Avon Lake, Ohio Barcelona, Spain Calvert City, Kentucky Cartersville, Georgia Chagrin Falls, Ohio Charlotte, North Carolina Chennai, India Cincinnati, Ohio*** Cowpens, South Carolina Delfzijl, The Netherlands Dewsbury, England Elyria, Ohio Gastonia, North Carolina Greenville, South Carolina Henry, Illinois Kalama, Washington Kallo, Belgium Lawrence, Massachusetts Leominster, Massachusetts Louisville, Kentucky Madras, India*** Munich, Germany* Oevel, Belgium Pedricktown, New Jersey Pohang, Korea Raubling, Germany** Shepton Mallet, England Taylors, South Carolina Twinsburg, Ohio Vadodara, India Williston, South Carolina RESEARCH FACILITIES AND ADMINISTRATIVE OFFICES OTHER THAN MANUFACTURING FACILITY OFFICES Avon Lake, Ohio* Brecksville, Ohio Brussels, Belgium* Chula Vista, California** Cleveland, Ohio* Hong Kong* Hurricane Mesa, Utah Manyunck, Pennsylvania Montrose, Ohio North Canton, Ohio* Richfield, Ohio Seattle Washington* Tokyo, Japan Uniontown, Ohio* Washington, D.C.* Waterloo, Ontario, Canada* - --------------- * Leased ** Leased in Part *** Land is Leased; Building is Owned The Company considers that its properties are well maintained and in good operating condition. The Company and its subsidiaries are lessees under a number of cancelable and non-cancelable leases for certain real properties, used primarily for administrative, retail, maintenance, repair and overhaul of aircraft, aircraft wheels and brakes and evacuation systems and warehouse operations, and for certain equipment (see Note K to the Consolidated Financial Statements). ITEM 3. LEGAL PROCEEDINGS There are pending or threatened against BFGoodrich or its subsidiaries various claims, lawsuits and administrative proceedings, all arising from the ordinary course of business with respect to commercial, product liability and environmental matters, which seek remedies or damages. The Company believes that any liability 5 8 that may finally be determined with respect to commercial and product liability claims should not have a material effect on the Company's consolidated financial position or results of operations. The Company is also involved in legal proceedings as a plaintiff involving contract, environmental and other matters. Gain contingencies, if any, are recognized when realized. The Company and its subsidiaries are generators of both hazardous and non-hazardous wastes, the treatment, storage, transportation and disposal of which are subject to various laws and governmental regulations. Although past operations were in substantial compliance with the then-applicable regulations, the Company has been designated as a potentially responsible party ("PRP") by the U.S. Environmental Protection Agency ("EPA") in connection with approximately 43 sites, most of which related to businesses previously discontinued. The Company believes it may have continuing liability with respect to not more than 19 sites. The Company initiates corrective and/or preventive environmental projects of its own to ensure safe and lawful activities at its current operations. The Company believes that compliance with current governmental regulations will not have a material adverse effect on its capital expenditures, earnings or competitive position. The Company's environmental engineers and consultants review and monitor past and existing operating sites. This process includes investigation of National Priority List sites, where the Company is considered a PRP, review of remediation methods and negotiation with other PRPs and governmental agencies. At December 31, 1998, the Company has recorded in Accrued Expenses and in Other Non-current Liabilities a total of $57.4 million to cover future environmental expenditures, principally for remediation of the aforementioned sites and other environmental matters. The Company believes that it has adequately reserved for all of the above sites based on currently available information. Management believes that it is reasonably possible that additional costs may be incurred beyond the amounts accrued as a result of new information. However, the amounts, if any, cannot be estimated and management believes that they would not be material to the Company's financial condition but could be material to the Company's results of operations in a given period. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The number of common shareholders of record at December 31, 1998, was 11,244. The discussions of the limitations and restrictions on the payment of dividends on common stock are included in Notes J and T to the Consolidated Financial Statements. Common Stock Prices and Dividends The table below lists dividends per share and quarterly price ranges for the common stock of The BFGoodrich Company based on New York Stock Exchange prices as reported on the consolidated tape.
1998 1997 ------------ ----------- QUARTER HIGH LOW DIVIDEND QUARTER HIGH LOW DIVIDEND - ------- ---- --- -------- ------- ---- --- -------- First.. 54 1/2 38 3/8 $.275 First 43 1/8 36 1/2 $.275 Second.. 56 44 11/16 .275 Second 48 1/4 35 1/8 .275 Third.. 50 1/4 26 1/2 .275 Third 47 1/4 41 5/8 .275 Fourth.. 40 1/2 28 13/16 .275 Fourth 46 40 3/4 .275
6 9 ITEM 6. SELECTED FINANCIAL DATA SELECTED FIVE-YEAR FINANCIAL DATA
1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF INCOME DATA: Sales.................................... $3,950.8 $3,373.0 $2,845.8 $2,661.8 $2,601.4 Operating income......................... 476.8 250.1 310.3 247.4 217.0 Income from continuing operations........ 228.1 113.2 115.5 94.8 66.4 BALANCE SHEET DATA: Total assets............................. $4,192.6 $3,493.9 $3,579.8 $3,387.5 $3,435.4 Non-current long-term debt and capital lease obligations..................... 995.2 564.3 881.4 963.0 1,001.1 Mandatorily redeemable preferred securities of Trust................... 123.6 123.1 122.6 122.2 -- Total shareholders' equity............... 1,599.6 1,422.6 1,225.8 975.9 979.2 OTHER FINANCIAL DATA: Total segment operating income........... $ 532.2 $ 388.5 $ 363.1 $ 303.9 $ 270.0 EBITDA(1)................................ 634.6 484.4 420.9 346.7 319.8 Operating cash flow...................... 356.6 209.6 265.5 221.0 264.2 Capital expenditures..................... 208.5 159.9 197.1 155.8 136.1 Dividends (common and preferred)......... 75.7 59.5 58.8 61.6 64.6 Distributions on Trust preferred securities............................ 10.5 10.5 10.5 5.1 -- PER SHARE OF COMMON STOCK: Income from continuing operations, diluted............................... $ 3.04 $ 1.53 $ 1.65 $ 1.34 $ .91 Dividends declared....................... 1.10 1.10 1.10 1.10 1.10 Book value............................... 21.51 19.56 17.66 14.97 13.54 RATIOS: Operating income as a percent of sales (%)................................... 12.1 7.4 10.9 9.3 8.3 Return on common shareholders' equity (%)................................... 15.0 13.5 15.8 14.7 10.8 Debt-to-capitalization ratio (%)......... 39.8 33.0 44.3 49.3 53.8 Dividend payout-common stock (%)......... 33.4 33.4 33.9 40.6 55.9 OTHER DATA: Common shareholders of record at end of year.................................. 11,244 13,550 n/a n/a n/a Common shares outstanding at end of year (millions)............................ 74.4 72.7 69.4 65.2 64.2 Number of employees at end of year....... 18,414 16,838 17,960 17,275 18,292
- --------------- (1) "EBITDA" as used herein means income from continuing operations before distributions on Trust preferred securities, income tax expense, net interest expense, depreciation and amortization and special items. Special items for 1998, 1997 and 1996 are described on page 9 of this Form 10-K. Special items in 1995 included a net gain of $12.5 million from an insurance settlement; a net gain of $2.2 million from the sale of a business; and a charge of $1.9 million relating to a voluntary early retirement program. Special items in 1994 included a charge of $6.4 million attributable to unamortized pension prior service costs related to a reduction in employment levels and a net gain of $1.6 million on the sale of a business. 7 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis contains forward-looking statements. See the last section for certain risks and uncertainties. Results of Operations PENDING MERGER On November 22, 1998, the Company and Coltec Industries, Inc. ("Coltec"), a Pennsylvania company, entered into an Agreement and Plan of Merger ("Merger Agreement"). Under the terms of the Merger Agreement, upon consummation of the Merger, each share of Coltec common stock issued and outstanding immediately prior to the effective time of the Merger shall be converted into the right to receive 0.56 of a share of BFGoodrich common stock. The Merger, which will be accounted for as a pooling of interests, is expected to close in early April of 1999. Upon consummation of the Merger, all prior period financial statements will be restated to include the financial information of Coltec as if it had always been a part of the Company. For more information regarding the Merger, see Note C to the Consolidated Financial Statements. TOTAL COMPANY BFGoodrich achieved the fourth year of solid sales and earnings growth since the new company effectively came into being on January 1, 1994, following the sale of the Geon Vinyl Products Segment in 1993. In addition, the largest business combination in its 128-year history was accomplished at the end of 1997. Consolidated Operations The Company achieved strong double-digit sales and income growth from continuing operations in 1998. Income from continuing operations climbed 25 percent, excluding the impact of merger-related costs. The Company experienced continued strong demand in many markets in both the Aerospace and Performance Materials Segments.
1998 1997 1996 -------- -------- -------- (IN MILLIONS) SALES Aerospace........................................ $2,755.2 $2,468.3 $2,021.4 Performance Materials............................ 1,195.6 904.7 824.4 -------- -------- -------- Total....................................... $3,950.8 $3,373.0 $2,845.8 ======== ======== ======== OPERATING INCOME Aerospace........................................ $ 386.4 $ 260.3 $ 253.6 Performance Materials............................ 145.8 128.2 109.5 -------- -------- -------- Total Reportable Segments................... 532.2 388.5 363.1 Corporate........................................ (55.4) (138.4) (52.8) -------- -------- -------- Total....................................... $ 476.8 $ 250.1 $ 310.3 ======== ======== ========
Cost of sales was 72.2 percent in 1998 compared with 73.8 percent of sales in 1997 and 71.8 percent of sales in 1996. Margin improvement in the Aerospace Segment in 1998 was partially offset by a margin decline in the Performance Materials Segment. Cost of sales in 1997 was also negatively impacted by the MD-90 write-off as compared to 1998 and 1996 levels (see detailed group discussions below). Selling, general and administrative costs were 15.5 percent of sales in 1998, compared with 16.5 percent in 1997 and 16.9 percent in 1996. The decrease in 1998 as compared to 1997 was a result of additional long-term incentive compensation expense in 1997 that resulted from exceeding the three year goals and achieving a maximum payout under the plan. The leverage that resulted from the increase in sales at each of the segments also resulted in a reduction in SG&A costs as a percentage of sales from 1996 to 1997. (See detailed group discussions below). Income from continuing operations included various charges or gains (referred to as special items) which affected reported earnings. Excluding the effects of special items, income from continuing operations in 1998 was $234.6 million, or $3.13 per diluted share, compared with $179.3 million, or $2.42 per diluted share in 1997, and 8 11 $127.7 million, or $1.83 per diluted share in 1996. The following table presents the impact of special items on earnings per diluted share.
EARNINGS PER DILUTED SHARE 1998 1997 1996 -------------------------- ----- ----- ----- Income from continuing operations.......................... $3.04 $1.53 $1.65 Net (gain) loss on sold businesses....................... -- (.22) .03 Gain on issuance of subsidiary stock..................... -- (.10) -- MD-90 write-off.......................................... -- .28 -- Merger-related costs..................................... -- .93 -- Asset impairment and restructuring charges............... .09 -- .10 Exchange of convertible debt............................. -- -- .05 ----- ----- ----- Income from continuing operations, excluding special items................................................. $3.13 $2.42 $1.83 ===== ===== =====
Income from continuing operations for the year ended December 31, 1998 includes $6.5 million ($0.09 per share) for costs associated with the Aerostructures Group's closure of three facilities and the impairment of a fourth facility. Income from continuing operations for the year ended December 31, 1997 includes (i) merger costs of $69.3 million ($0.93 per share) in connection with our merger with Rohr, Inc., (ii) a net gain of $8.0 million ($0.10 per share) resulting from an initial public offering of common stock by BFGoodrich's subsidiary, DTM Corporation, (iii) a net gain of $16.4 million ($0.22 per share) from the sale of a business, and (iv) a charge of $21.0 million ($0.28 per share) related to the Aerostructures Group's production contract with IAE International Aero Engines AG to produce nacelles for McDonnell Douglas Corporation's MD-90 aircraft. Income from continuing operations for the year ended December 31, 1996 includes (i) a charge of $2.6 million ($0.04 per share) relating to a voluntary early retirement program, (ii) a net gain of $1.0 million ($0.01 per share) from the sale of a business, (iii) a loss of $3.1 million ($0.04 per share) on the sale of a wholly-owned aircraft leasing subsidiary, (iv) a charge of $4.3 million ($0.06 per share) for an impairment write-down on a facility in Arkadelphia, Arkansas, and (v) a charge of $3.2 million ($0.05 per share) for the exchange of convertible notes. The Company is continuing to evaluate realignment of its operations to improve efficiencies and reduce costs. ACQUISITIONS On December 22, 1997, BFGoodrich completed a merger with Rohr, Inc. by exchanging 18,588,004 shares of BFGoodrich common stock for all of the common stock of Rohr (the term Company is used to refer to BFGoodrich including Rohr). Each share of Rohr common stock was exchanged for .7 of one share of BFGoodrich common stock. The merger was accounted for as a pooling of interests, and all prior period financial statements were restated to include the financial information of Rohr as though Rohr had always been a part of BFGoodrich. Prior to the merger, Rohr's fiscal year ended on July 31. For purposes of the combination, Rohr's financial results for its fiscal year ended July 31, 1997, were restated to the year ended December 31, 1997, to conform with BFGoodrich's calendar year end. Financial results for Rohr's fiscal years ended July 31, 1996 and earlier were not restated to conform to BFGoodrich's calendar year end. For periods prior to 1997, Rohr's fiscal years ended July 31 have been combined with BFGoodrich's calendar years ended December 31. As a result, Rohr's results of operations for the period August 1, 1996 to December 31, 1996, do not appear in the Consolidated Statement of Income and instead are recorded as a direct adjustment to equity. Rohr's revenues, expenses and net loss for this five-month period were $341.3 million, $359.3 million and $18.0 million, respectively. Included in expenses during this period was a $49.3 million pretax charge ($29.5 million after tax) relating to the McDonnell Douglas MD-90 program (see discussion under Aerostructures Group). The following acquisitions were recorded using the purchase method of accounting. Their results of operations were included in the Company's results since their respective dates of acquisition. 9 12 In March 1998, the Company acquired a global manufacturer of specialty and fine chemicals that are sold to a variety of customers who use them to enhance the performance of their finished products. The Company also acquired a small manufacturer of textile chemicals used for fabric preparation and finishing and a small manufacturer of energetic materials systems during 1998. During 1997, the Company acquired five businesses for cash consideration of $133.4 million in the aggregate, which included $65.3 million of goodwill. One of the acquired businesses is a manufacturer of data acquisition systems for satellites and other aerospace applications. A second business manufactures diverse aerospace products for commercial and military applications. A third business is a manufacturer of dyes, chemical additives and durable press resins for the textiles industry. A fourth business manufactures thermoplastic polyurethane and is located in the United Kingdom. The remaining acquisition is a small specialty chemicals business. During 1996, the Company acquired five specialty chemicals businesses for cash consideration of $107.9 million, which included $80.0 million of goodwill. One of the businesses acquired is a European-based supplier of emulsions and polymers for use in paint and coatings for textiles, paper, graphic arts and industrial applications. Two of the acquisitions represented product lines consisting of water-borne acrylic resins and coatings and additives used in the graphic arts industry. The fourth acquisition consisted of water-based textile coatings product lines. The remaining acquisition was a small supplier of anti-static compounds. 1998 COMPARED WITH 1997 AEROSPACE Market Overview The aerospace industry recorded another strong year in 1998, elevating BGoodrich Aerospace to its highest ever levels of sales and operating income. Deliveries of large commercial aircraft increased 42 percent over 1997, while deliveries of regional aircraft increased 23 percent in 1998. Revenue passenger miles, a key indicator of market demand, also rose during the year despite the softening of Asia-Pacific demand. World airline passenger traffic increased an estimated 2.3 percent over the prior year, while U.S. domestic revenue passenger miles increased by 3.9 percent. Military spending remained relatively flat in 1998. Segment Performance The Aerospace Segment's sales in 1998 were $2,755.2 million. Forty-two percent of sales were to commercial transport programs (Boeing and Airbus). Sales to civil aviation customers were 89 percent in 1998, an increase from 86 percent in 1997. Military sales comprised 9 percent of Aerospace sales, the same level as last year. The Aerospace Segment's operating income improved 48.4 percent during 1998. In addition to the Group-specific results discussed below, the Segment as a whole benefited principally from higher volume supplemented by the continued implementation of productivity initiatives, including lean manufacturing and procurement improvement efforts.
% OF SALES ------------- 1998 1997 % CHANGE 1998 1997 -------- -------- -------- ---- ----- (IN MILLIONS) SALES Aerostructures........................... $1,144.2 $1,039.7 10.1 Landing Systems.......................... 598.2 509.6 17.4 Sensors and Integrated Systems........... 574.6 550.7 4.3 MRO...................................... 438.2 368.3 19.0 -------- -------- Total Sales......................... $2,755.2 $2,468.3 11.6 ======== ======== OPERATING INCOME Aerostructures........................... $ 178.7 $ 102.6 74.3 15.6 9.9 Landing Systems.......................... 77.5 72.0 7.6 13.0 14.1 Sensors and Integrated Systems........... 111.6 89.0 25.4 19.4 16.2 MRO...................................... 18.6 (3.3) N/A 4.2 (0.9) -------- -------- Total Operating Income.............. $ 386.4 $ 260.3 48.4 14.0 10.5 ======== ========
Aerostructures Group Aerostructures Group sales for 1998 of $1,144.2 million were $104.5 million, or 10.1 percent, higher than in 1997. Contributing to the increased sales were higher aftermarket spares sales and 10 13 accelerated deliveries on many commercial programs, including the V-2500 (A319/320/321 aircraft) and the start up of production deliveries on the 737-700 program. These increases were partially offset by reduced deliveries on the A340 program. The Aerostructures Group's 1998 operating income of $178.7 million included a $10.5 million pretax special charge for costs associated with the closure of three facilities and the impairment of a fourth (see Note E to the Consolidated Financial Statements). Operating income of $102.6 million in 1997 was adversely impacted by a $35.2 million pretax charge on the MD-90 contract. Excluding these special items, operating income increased in 1998 by $51.5 million, or 37 percent, primarily as a result of increased sales volume and by the proportionately higher ratio of aftermarket spares sales to production sales. Aftermarket spare sales generally carry a higher margin than production sales. Landing Systems Group Sales in the Landing Systems Group of $598.2 million were $88.6 million, or 17.4 percent, higher than in 1997. Sales growth reflected higher original-equipment demand for landing gear and evacuation products, as well as stronger than expected aftermarket demand for aircraft wheels and brakes. Principal landing gear programs were the B767 and B737 (nose gear). Landing gear sales volumes also reflected the establishment of a facility in Seattle to provide fully dressed landing gears to Boeing on the B747-400 program. Commercial wheel and brake demand was strongest on the A320, B737, and B747 programs. Evacuation product sales increased on the B747-400 and A330/A340 programs. The evacuation systems business also completed in October 1998 the acquisition of Universal Propulsion Company ("UPCo") which is expected to enhance the business's safety systems offerings through its direct thermal inflation technology. UPCo manufactures energetic materials systems used to activate ejection seats, airplane evacuation slides and related products. Operating income in the Landing Systems Group increased 7.6 percent in 1998. Higher sales and favorable product mix benefited the Group's operating income. Certain factors, however, constrained income growth. Those factors included higher wheel and brake strategic sales incentives, principally for the B777, B737, and Airbus programs; higher product development costs, offset in part by cost reduction initiatives in operations; and increased landing gear manufacturing costs associated with the increase in production to match original-equipment manufacturers' build rates. Sensors and Integrated Systems Group Sensors and Integrated Systems Group sales of $574.6 million were $23.9 million, or 4.3 percent, higher than in 1997. Sales of the Group were split nearly equally between the large commercial transport customers (30 percent), regional, business and general aviation (25 percent), military (25 percent) and space (20 percent). All four markets experienced increased sales for the year. Demand for sensor and avionics products was particularly strong. Increased sales of sensor products were driven by rate increases on major Boeing programs, retrofit of competitors' products on Airbus programs and the application of products to new regional and business programs such as Embraer 145, Gulfstream V, and Bombardier Global Express. The higher sales of avionics products was fueled by greater than anticipated acceptance of a new, low cost collision avoidance product -- SkyWatch(R) -- and strong associated sales of our StormScope(R) line of lightning detectors. Expansion of our ice protection product line, including new specialty heated products, also contributed to the results. The Group's sales performance was further enhanced by higher demand for satellite products (acquired in the March 1997 purchase of Gulton Data Systems) that was driven by expansion of our capabilities and product offerings. The Group's operating income improved 25.4 percent in 1998, to $111.6 million, compared with $89.0 million in 1997. The increase reflects the higher sales volumes, the impact of productivity initiatives, a favorable sales mix, and new products introduced during the year. Maintenance, Repair and Overhaul (MRO) Group The MRO Group's sales of $438.2 million were $69.9 million, or 19 percent, higher than in 1997. During 1998, the MRO Group achieved higher sales volumes compared with 1997, successfully replacing the sales which were lost after the bankruptcy (in early 1998) of Western Pacific Airlines and the termination of an America West Airlines maintenance contract. New business included long-term service contracts with, in addition to others, Qantas, Continental, Northwest, United, and Virgin Atlantic Airlines. Sales improved due to higher volumes in the airframe and component services businesses. The performance of the component services business reflects strong demand for wheels and brakes 11 14 and nacelles services. New business assisting Boeing in paint and other component services also contributed to the improved results. The MRO Group reported significantly higher operating income in 1998, even after giving consideration to the $11.8 million bad debt charge recognized in 1997 due to the bankruptcy of Western Pacific Airlines. Increased operating income in 1998 was attributable to improved operating efficiencies in the component services business and the introduction of new higher-margin specialized services. The Group also benefited from substantially reduced turnover of the certified airframe and powerplant mechanics work force in the airframe business, compared with the prior two years. Although the Group's operating income margin increased during 1998 compared with 1997 (4.2 percent versus 2.2 percent--excluding the 1997 bad debt charge), several factors constrained the growth of operating income and margins in 1998. First, the Group's landing gear services business in Miami completed the construction of a new world-class service facility (also in the Miami area) in mid 1998. Much of the second half of 1998 was spent transitioning operations from the old facility to the new one, during which time duplicate facility costs and production inefficiencies were incurred. This business also incurred significant charges to resolve several customer billing disputes, largely from the prior year. Management believes the impact of these items is nonrecurring. Second, start-up costs were incurred by the Group's airframe business in connection with a new major customer, resulting from servicing aircraft new to the business. Finally, the airframe business commenced in 1998 the development of a major new business system, the implementation of which is expected to be completed by mid 1999. As a result, the business increased inventory valuation reserves and expensed development-related costs. Excluding the impact of the above charges, operating income margins in 1998 would have been slightly above 6 percent rather than 4.2 percent. OUTLOOK Despite well-founded concerns about Asian and Latin American economies, the aerospace industry is expected to experience continued growth in 1999. Deliveries of large commercial transport aircraft--a common barometer of the health of the industry--are anticipated to increase by 13.5 percent over 1998's record levels per the January/February 1999 edition of The Airline Monitor. Airline traffic is also expected to remain strong since the general economy is healthy and business and leisure travel have become more affordable. Additionally, the demand for aftermarket replacement parts should remain steady as airlines continue to retrofit older airplanes to meet FAA Stage III noise regulations and to comply with stricter safety guidelines. The regional market is expected to remain strong in 1999 with revenue passenger miles anticipated to grow approximately 6 percent per the January/February 1999 edition of The Airline Monitor. The average number of seats in regional/commuter aircraft is expected to increase as longer-range turbo-jet aircraft replace older turbo-props within regional airline fleets. This trend is substantiated by the regional jet forecast, which reveals declining turbo-prop production and increasing turbo-jet production in the long term. BFGoodrich Aerospace had anticipated the shifting mix of regional aircraft and currently participates on the latest regional jet programs such as the Global Express, Dornier family, Embraer 145 and the Canadair RJ. Unlike the regional market, production of business jets is expected to remain flat in 1999. However, BFGoodrich Aerospace believes that its position on such new platforms as the Cessna Citation X, the Canadair Challenger, and the Gulfstream G-V bode well for success in the aftermarket. BFGoodrich Aerospace expects to maintain its current level of participation in the military aerospace market at approximately 10 percent of total Aerospace sales. As in 1998, military spending is expected to decline slightly in real terms in 1999. Although funding for additional programs is limited, the Segment participates in many of the newest military programs, including the Joint Strike Fighter and the V-22. Furthermore, an opportunity exists for the Segment to increase sales of replacement products to defense customers. The Segment is well positioned to capture a larger share of the military aftermarket with products currently on the F-15, F-16, F/A-18, C-17, H-60, C-130J, and AH-64 programs. The airline industry enjoyed a profitable year in 1998 and anticipates another strong year in 1999. With their success has come continued outsourcing of non-core functions, including maintenance, repair, and overhaul. BFGoodrich Aerospace expects to sustain its role as a leader in the third party maintenance industry by providing the highest quality, comprehensive nose-to-tail services. The MRO Group expects to achieve greater efficiencies in 1999 after the investment in 1998 in a new landing gear repair and overhaul facility in Miami. In addition to process improvements, the new facility is expected to bring about faster turn-around times and better service to our customers. 12 15 PERFORMANCE MATERIALS Market Overview The markets for most of the Performance Materials Segment's products softened throughout 1998. Market pressures included the Asian and other emerging market financial crises as well as slowing demand in most of the other markets served by the Segment. Segment Performance As a result of the more competitive market conditions noted above, the Segment's 32.2 percent increase in sales only resulted in a 13.7 percent increase in operating income. While the acquisition of Freedom Chemical in March 1998 contributed significantly to the increase in sales during the year, its concentrations in these areas of particular market weakness resulted in a less-than-expected contribution to operating income in 1998. The acquisition has, however, better positioned the segment for future growth by expanding its global reach, adding to its product portfolio and extending its market breadth. Excluding acquisitions, the Segment experienced a 1.0 percent increase in sales and a 4.8 percent increase in operating income due to favorable raw material costs and production efficiencies. The impact of foreign exchange was not significant to 1998's results.
% OF SALES COMPARABLE ------------- 1998 1997 % CHANGE % CHANGE 1998 1997 -------- ------ -------- ---------- ---- ----- (IN MILLIONS) SALES Textile and Industrial Coatings.................... $ 606.2 $401.2 51.1 (0.4) Polymer Additives and Specialty Plastics.................... 431.3 420.9 2.5 1.3 Consumer Specialties........... 158.1 82.6 91.4 6.2 -------- ------ Total.................. $1,195.6 $904.7 32.2 1.0 ======== ====== OPERATING INCOME Textile and Industrial Coatings.................... $ 63.0 $ 48.6 29.6 8.0 10.4 12.1 Polymer Additives and Specialty Plastics.................... 58.8 57.3 2.6 1.6 13.6 13.6 Consumer Specialties........... 24.0 22.3 7.6 5.8 15.2 27.0 -------- ------ Total.................. $ 145.8 $128.2 13.7 4.8 12.2 14.2 ======== ======
The following discussion and analysis of fluctuations in sales and operating income for the Performance Materials Segment excludes the impact of acquisitions (see Comparable % Change column). Textile and Industrial Coatings Group Sales in the Textile and Industrial Coatings group decreased 0.4 percent from the prior year. The decrease resulted from volume shortfalls in the Company's textile markets offset by increased volumes in the Group's industrial specialty products and increased sales prices in the Group's coatings products. Domestic textile mills demand has been lower due to an increase in imports and a general slowdown in the apparel markets. In addition, the export of fabrics to Asian and European countries slowed in 1998. The Russian currency crisis and the European Union furniture fabric tariffs all had negative revenue effects on this Group. Operating income for the Textile and Industrial Coatings Group increased by $3.9 million, or 8 percent, in 1998 despite the slight reduction in sales due to reduced raw material pricing and other manufacturing cost efficiencies. Polymer Additives and Specialty Plastics Group Sales in the Polymer Additives and Specialty Plastics Group increased $5.5 million, or 1.3 percent, over the prior year. Sales volumes increased in the Group's Estane(R) thermoplastic polyurethanes (TPU) driven by strength in static control polymers and European TPU demand and Telene(R) DCPD monomer markets but decreased in the Group's TempRite(R) high heat resistant plastics due to weakness in middle east markets as well as increased competition from other materials. Sales prices remained relatively stable with the exception of some Polymer Additives' products used for the rubber and polymer industries and Estane(R) TPU, where two competitors commissioned new U.S. production facilities in 1998. Operating income increased slightly over the prior year mostly as a result of increased volume and favorable raw material pricing. 13 16 Consumer Specialties Group The $5.1 million, or 6.2 percent, increase in sales in the Consumer Specialties Group was driven by increased volumes in the Group's pharmaceutical and personal care products. Sales prices generally increased in all of the Group's product lines. The 5.8 percent increase in operating income was mainly attributable to a favorable sales mix and higher volumes. OUTLOOK The Performance Materials Segment will face challenges in 1999. The Asian economic downturn, other emerging market financial crises as well as adverse competitive pressures all combined to pose a challenging operating environment. However, the segment expects demand to strengthen during the second half of 1999 and is optimistic about continued cost reduction benefits from acquisition integration and its process improvement and productivity programs. In order to strengthen its customer and market focus, simplify its business structure and enhance productivity, the Performance Materials Segment announced in February 1999 a realignment of business processes. The realignment is expected to result in the elimination of approximately 160 positions and is expected to result in annual cost savings of $10-$12 million. The Segment expects to obtain six months of these cost savings during 1999. The Segment's Textile and Industrial Coatings Group enters 1999 with 1998 total domestic textile sales 7 percent below 1997 levels, and United States textile exports approximately 25 percent lower than 1997 levels. The Group expects to benefit from the continued integration of the Segment's recent acquisitions during 1999. The Polymer Additives and Specialty Plastics Group foresees moderate revenue increases in 1999. Sales volumes in the Group's Estane(R) thermoplastic polyurethanes and Telene(R) DCPD monomer markets are expected to grow in 1999. The Group's TempRite(R) high heat resistant plastic and Polymer Additives revenue base is expected to remain stable with limited growth in 1999. Productivity improvements are expected to benefit operating income levels as well during 1999. The Consumer Specialties Group expects to continue to benefit from strong growth in North America and foresees limited growth in Asia, Latin America and Eastern Europe over the short-term. The Group also expects to benefit from acquisition integration synergies in 1999. 1997 COMPARED TO 1996 AEROSPACE Aerospace achieved sales growth of 22 percent over 1996. Sixty percent of Aerospace's 1997 sales were to original-equipment manufacturers, up from 51 percent in 1996. The increase in original-equipment sales was due to stronger demand for new commercial aircraft in the marketplace. Sales to civil aviation customers were 86 percent of total Aerospace sales in 1997, compared with 87 percent in 1996. Military sales decreased to 9 percent of Aerospace sales, from 12 percent a year earlier. Aerospace achieved a 3 percent increase in operating income, despite a $35.2 million charge related to the MD-90 program, a large increase in strategic sales incentives related to wheels and brakes, and an $11.8 million bad debt write-off due to a customer's bankruptcy and productivity problems in the MRO Group.
SALES BY GROUP 1997 1996 -------------- -------- -------- (IN MILLIONS) Aerostructures.............................................. $1,039.7 $ 744.4 Landing Systems............................................. 509.6 414.8 Sensors and Integrated Systems.............................. 550.7 493.2 MRO......................................................... 368.3 369.0 -------- -------- Total............................................. $2,468.3 $2,021.4 ======== ========
Aerostructures Group (Rohr) The group's sales were $1,039.7 million in 1997, a $295.3 million, or 40 percent, increase from 1996. Contributing to increased sales were accelerated delivery rates on most commercial programs, reflecting increased production rates of commercial aircraft and increased deliveries of spare parts. The 14 17 CFM56-5 and V2500 programs (which power the A320 family), A340, RR535-E4 (primarily for the Boeing 757), and MD-90 programs all reflected significant volume increases. The Aerostructures Group 1997 operating income of $102.6 million included a $35.2 million pretax charge on the MD-90 contract. Operating income increased in 1997 primarily as a result of increased sales. Operating income of $89.8 million in 1996 was adversely impacted by a $7.2 million pretax impairment charge on the group's Arkadelphia, Arkansas, facility. Operating income in 1996 benefited from the recognition of profit on the MD-90 program (1996 MD-90 sales were $68.8 million). In 1997, however, no profit was recognized on MD-90 sales (totaling $109.9 million), adversely affecting margins, in addition to the $35.2 million pretax charge recognized on that program in 1997, as discussed below. In 1990, the Company entered into a contract with International Aero Engines to produce nacelles for The Boeing Company's (formerly the McDonnell Douglas Corporation's) MD-90 aircraft. Under the terms of the contract, the Company agreed to recover its preproduction costs, and the higher-than-average production costs associated with early production shipments, over a specified number of deliveries. In light of the wide market acceptance of the MD-80 series, which was the predecessor aircraft, the Company believed sufficient MD-90 aircraft would be sold to allow it to recover its costs. Starting in 1996, a series of developments created market uncertainties regarding future sales of the MD-90 aircraft. The most significant of these developments included: McDonnell Douglas' termination of the MD-XX program and the doubts this action raised regarding McDonnell Douglas' continued presence in the commercial aircraft industry; the decision of several large airlines that had traditionally operated McDonnell Douglas aircraft to order aircraft that compete with the MD-90; the announced (and subsequently completed) acquisition of McDonnell Douglas by Boeing, which produces a family of competing aircraft; the announcement by Delta Air Lines (launch customer for the MD-90) of its intent to replace its existing fleet of MD-90s and to seek a business resolution with McDonnell Douglas with respect to its remaining orders for the aircraft; and the lack of significant new MD-90 orders. In recognition of these developments, the Company reduced its estimates of future MD-90 aircraft deliveries in December 1996 to include only deliveries which were supported by firm orders, options and letters of intent for the aircraft. Based on its reduced estimate of future aircraft deliveries, the Company believed that future MD-90 sales would not be sufficient to recover its contract investment plus the costs it would be required to spend in the future to complete the contract. As a result, the Company recorded a $49.3 million pretax charge ($29.5 million after tax) in December of 1996 (this charge did not impact the income statement; rather, it was recognized as a direct adjustment to equity as a result of aligning Rohr's fiscal year with BFGoodrich's). In July 1997, the Company further reduced its market estimate of future MD-90 sales to existing firm aircraft orders (excluding firm orders from Delta Air Lines) and recorded an additional $35.2 million pretax charge ($21.0 million after tax, or $.28 per diluted share).
OPERATING INCOME (LOSS) BY GROUP 1997 1996 -------------------------------- ------ ------ (IN MILLIONS) Aerostructures.............................................. $102.6 $ 89.8 Landing Systems............................................. 72.0 61.2 Sensors and Integrated Systems.............................. 89.0 72.6 MRO......................................................... (3.3) 30.0 ------ ------ Total............................................. $260.3 $253.6 ====== ======
Landing Systems Group The Group's sales were $509.6 million, an increase of $94.8 million, or 23 percent, from 1996. The continued sales growth in 1997 primarily reflected higher original-equipment volumes of landing gear and evacuation products and higher wheel and brake replacement sales. Landing gear programs providing the largest increased volume contribution included the B737 (nose gear), B767 and MD-11. Key evacuation systems programs included the B747-400 and the A330/340. Aftermarket demand for commercial wheels and brakes was also strong, primarily for the B777, B737, B747-400 and A330/340 programs. In addition, demand for regional, business, and military wheels and brakes significantly improved during the year, particularly for the F-16 retrofit program. 15 18 The Landing Systems Group achieved significantly higher operating income during the year, due primarily to greater sales of landing gear and evacuation slides to the original-equipment market and more aftermarket sales of wheels and brakes. This result was achieved by the group despite a three-week strike at the landing gear business in the second quarter and substantially higher strategic sales incentive costs in the wheel and brake business. Operating margins (operating income as a percent of sales) declined modestly, reflecting the lower margins associated with original-equipment sales relative to aftermarket sales and significantly higher strategic sales incentive costs. Sensors and Integrated Systems Group The Group's sales were $550.7 million in 1997, an increase of $57.5 million, or 11.7 percent, from 1996. The increased sales volumes of the Sensors and Integrated Systems Group reflected increased demand from commercial original-equipment manufacturers for aircraft sensors, principally on the B777 and B747 commercial transport programs and the Embraer and Gulfstream GV regional and business jet programs. Stronger demand for aftermarket spares also boosted sales, particularly for aircraft sensors and aircraft fuel systems. In addition, the group benefited from the March completion of the Gulton Data Systems acquisition, a transaction which offset lost sales resulting from the engine electrical systems business divestiture in June 1997. Gulton Data Systems sells products primarily to the space industry. Operating income for the group increased 23 percent over 1996 results due to increased volumes of higher-margin aftermarket spares that were sold to the commercial markets. Operating income improvement also reflects productivity initiatives, including business and plant consolidations. In addition, the income contribution of Gulton Data Systems more than offset the lost income from the divested engine electrical systems business.
OPERATING MARGIN BY GROUP 1997 1996 ------------------------- ---- ---- Aerostructures.............................................. 9.9% 12.1% Landing Systems............................................. 14.1% 14.8% Sensors and Integrated Systems.............................. 16.2% 14.7% MRO......................................................... (0.9)% 8.1% Total Segment........................................ 10.5% 12.5%
Maintenance, Repair and Overhaul (MRO) Group The Group's sales were $368.3 million in 1997, a decrease of $0.7 million from 1996. Sales declined modestly compared with 1996, largely reflecting decreased sales volume in the component services business due to reduced demand from a major customer and, to a lesser extent, the bankruptcy of two customers early in 1997. The group's airframe business, however, posted higher sales during the year. Despite the negative effects of the UPS strike during the summer of 1997 and productivity issues throughout the year, the airframe business achieved a 5 percent sales growth. This growth was due to increased demand for services from airline customers throughout the year and the addition of two new customers -- United and Northwest Airlines. The MRO Group, however, recorded an operating loss in 1997. The group recognized an $11.8 million bad debt charge related to all amounts receivable from Western Pacific Airlines. Western Pacific filed for Chapter 11 protection under the Bankruptcy Code last October. On February 4, 1998, Western Pacific abruptly ceased its operations, resulting in the bankruptcy court ordering liquidation of the airline. In addition to the Western Pacific matter, the airframe business continued to face challenges in retaining skilled technical workers, as competition for skilled workers significantly increased due to hiring at Boeing and the airlines. This resulted in higher costs for training new workers, lower productivity and higher wage and benefit rates for retained skilled workers. Although turnover of the labor force declined progressively during 1997, turnover levels at year end were still higher than historical levels. In addition, lower customer demand and higher operating costs in the component services business contributed to the operating income decline. Finally, the group's 1996 sales included approximately $7.0 million of high-margin product sales by the component services business which are not normally made by the service businesses. PERFORMANCE MATERIALS Sales increased 10 percent in 1997, to $904.7 million. Excluding acquisitions, sales increased 7 percent. Segment operating income increased 17 percent, largely reflecting strong volume growth. Adverse foreign exchange effects tempered the segment's income growth, which would have been 21 percent excluding the impact 16 19 of the stronger U.S. dollar. The 1996 information has been reclassified from the two groups previously reported into the current three group structure of the Segment.
SALES BY GROUP 1997 1996 -------------- ------ ------ (IN MILLIONS) Textile and Industrial Coatings............................. $401.2 $362.6 Polymer Additives and Specialty Plastics.................... 420.9 386.0 Consumer Specialties........................................ 82.6 75.8 ------ ------ $904.7 $824.4 ====== ======
Textile and Industrial Coatings Sales for the Group increased by $38.6 million, or 10.6 percent, from $362.6 million in 1996 to $401.2 million in 1997. Excluding the negative impact of a stronger dollar during 1997, sales increased 11.5 percent. The increase in sales was attributable to increased volumes and prices across all product lines, especially in the coatings and industrial markets served by the Group. Excluding acquisitions, sales increased by 3 percent. Operating income increased 24 percent during 1997 as compared to 1996. The increase in operating income was due to increases in volume and price as well as the impact of acquisitions. These increases were partially offset by the negative impact of a stronger U.S. dollar. Excluding acquisitions and the impact of foreign exchange, operating income increased by 19.4 percent.
OPERATING INCOME 1997 1996 ---------------- ------ ------ (IN MILLIONS) Textile and Industrial Coatings............................. $ 48.6 $ 39.2 Polymer Additives and Specialty Plastics.................... 57.3 55.4 Consumer Specialties........................................ 22.3 14.9 ------ ------ $128.2 $109.5 ====== ======
Polymer Additives and Specialty Plastics Group Sales in 1997 rose 9 percent, from $386.0 million in 1996 to $420.9 million in 1997, despite the stronger U.S. dollar effects during the year. Adjusted for exchange rate changes, principally against European currencies, sales increased 13 percent over 1996. Solid volume gains in the group's TempRite(R) high-heat-resistant plastics were achieved, most of which were in North America, while significantly higher volumes for Estane(R) thermoplastic polyurethanes occurred in both North America and Europe. Static-control polymer sales growth was achieved in North America and Asia. 1997 was a transitional year for Specialty Plastics from an operating income perspective. Operating income growth of 3.4 percent relating mostly to volume increases was offset principally by start-up costs in connection with investments in domestic and global expansions in all divisions. Also, the negative foreign exchange impact of the stronger U.S. dollar and higher raw material costs reduced operating income. The group's operating income increased 11.0 percent over 1996 without the foreign exchange impact. Operating income growth was achieved by the thermoplastic polyurethane business. Significant operating margin erosion occurred, however, in the high-heat-resistant plastics business, principally caused by the significant start-up costs associated with the construction of two new European plants.
OPERATING MARGIN BY GROUP 1997 1996 ------------------------- ---- ---- Textile and Industrial Coatings............................. 12.1% 10.8% Polymer Additives and Specialty Plastics.................... 13.6% 14.4% Consumer Specialties........................................ 27.0% 19.7%
Consumer Specialties Group Sales for the Group increased by $6.8 million, or 9 percent, from $75.8 million in 1996 to $82.6 million in 1997. Excluding the impact of a stronger dollar during 1997, sales increased 14.1 percent. Synthetic thickener sales for personal-care, household and pharmaceutical applications in Europe and Asia were particularly strong. Selling prices were also generally higher across all product lines. 17 20 Operating income increased $7.4 million, or 49.7 percent, from $14.9 million in 1996 to $22.3 million in 1997 driven by increased volumes and prices, as well as an improved sales mix. These increases were partially offset by the negative impact of a stronger U.S. dollar. Excluding the impact of foreign exchange, operating income increased 66.4 percent. IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES The Company has recorded impairment, restructuring and other charges during each of the last three years. See additional discussion in Note E to the Consolidated Financial Statements. NET INTEREST EXPENSE Net interest expense increased by $12.8 million in 1998. The increase in interest expense-net is due to increased indebtedness resulting from the acquisition of CH Patrick at the end of 1997 and Freedom Chemical in March of 1998, offset by savings that resulted from the refinancing of Rohr's higher cost debt in late 1997. ISSUANCE OF SUBSIDIARY STOCK In May 1997, the Company's subsidiary, DTM Corporation, issued 2,852,191 shares of its authorized but previously unissued common stock in an initial public offering ("IPO"). The Company recognized a pretax gain of $13.7 million ($8.0 million after tax, or $.10 per diluted share, including provision for deferred income taxes) in accordance with the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin 84. In February 1999, the Company sold its remaining interest in DTM for approximately $3.5 million. The Company's net investment in DTM approximated $0.5 million at December 31, 1998. The gain will be recorded within Other Income (Expense) during the first quarter of 1999. OTHER INCOME (EXPENSE) -- NET Excluding the impact of a one-time pre-tax gain of $26.4 million in 1997 related to the sale of a business, other expenses increased by $6.7 million in 1998. The increase related primarily to costs associated with executive life insurance. DISCONTINUED OPERATIONS During the 1998 first quarter, the company recognized a $1.6 million after-tax charge related to a business previously divested and reported as a discontinued operation. Discontinued operations during 1997 reflect the gain on the sale of Tremco Incorporated in February 1997 and the results of operations and gain on the sale of the chlor-alkali and olefins business in August 1997. For additional information see Note B to the Consolidated Financial Statements. EXTRAORDINARY ITEMS During 1997, the Company incurred a charge of $19.3 million (net of a $13.1 million income tax benefit), or $.25 per diluted share, to extinguish certain debt of Rohr. For additional information see Note F to the Consolidated Financial Statements. RETURN ON EQUITY The Company's objective is to achieve and maintain a return on equity of 15 percent. In 1998, the Company achieved a return on equity of 15.0 percent, compared with 13.5 percent in 1997 and 15.8 percent in 1996. Adjusted for the special items previously mentioned, return on equity for 1998, 1997 and 1996 was 15.5 percent, 13.5 percent and 11.6 percent, respectively. CAPITAL RESOURCES AND LIQUIDITY Current assets less current liabilities were $623.7 million at December 31, 1998, compared with $466.4 million a year earlier -- an increase of $157.3 million. The Company's current ratio was 1.63X at December 31, 1998, compared with 1.50X a year ago. In addition, the quick ratio was 0.67X at the end of 1998, compared with 0.62X at the end of 1997. These increases/decreases principally reflect the impact of the Company's refinancing activities. The Company's total debt less cash and cash equivalents was $1,110.4 million at December 31, 1998, compared with $713.3 million at December 31, 1997. The Company has adequate cash flow from operations to satisfy its operating requirements and capital spending programs. In addition, the Company has the credit facilities described in the following paragraphs to finance growth opportunities as they arise. SHORT-TERM DEBT The Company maintains $300.0 million of committed domestic revolving credit agreements with various banks, expiring in the year 2000. At December 31, 1998, and throughout the year, these facilities were not in use. 18 21 In addition, the Company had available formal foreign lines of credit and overdraft facilities, including the committed European revolver, of $100.2 million at December 31, 1998, of which $32.5 million was available. The Company's $75.0 million committed multi-currency revolving credit facility with various international banks, expires in the year 2003. The Company intends to use this facility for short- and long-term local currency financing to support European operations growth. At December 31, 1998, the Company had borrowed $64.0 million ($37.2 million on a short-term basis and $26.8 million on a long-term basis) denominated in various European currencies at floating rates. The Company has effectively converted the $26.8 million long-term debt portion into fixed-rate debt with an interest rate swap. The Company also maintains $380 million of uncommitted domestic money market facilities with various banks to meet its short-term borrowing requirements. As of December 31, 1998, $277 million of these facilities were unused and available. The Company's uncommitted credit facilities are provided by a small number of commercial banks that also provide the Company with all of its domestic committed lines of credit and the majority of its cash management, trust and investment management requirements. As a result of these established relationships, the Company believes that its uncommitted facilities are a highly reliable and cost-effective source of liquidity. LONG-TERM DEBT In 1998, the Company issued $100.0 million of 6.45 percent notes due in 2008, $130.0 million of 6.9 percent notes due in 2018 and $200.0 million of 7.0 percent notes due in 2038, primarily for the financing of the Freedom Chemical acquisition (see Note D to the Consolidated Financial Statements). The Company believes that its credit facilities are sufficient to meet longer-term capital requirements, including normal maturities of long-term debt. The Company's senior debt is currently rated A- by Standard and Poor's Ratings Group, A- by Duff & Phelps Credit Rating Co. and Baa1 by Moody's Investors Service. At December 31, 1998, the Company's debt-to-capitalization ratio was 39.8 percent. For purposes of this ratio, the QUIPS (see Note T to the Consolidated Financial Statements) are treated as capital. EBITDA EBITDA is income from continuing operations before distributions on Trust preferred securities, income tax expense, net interest expense, depreciation and amortization and special items. EBITDA for the Company is summarized as follows:
1998 1997 1996 ------ ------ ------ Income from continuing operations before taxes and trust distributions......................................... $384.9 $217.8 $194.4 Add: Net interest expense.................................. 73.8 61.0 85.1 Depreciation and amortization......................... 165.4 133.5 121.3 Special items......................................... 10.5 72.1 20.1 ------ ------ ------ EBITDA.................................................. $634.6 $484.4 $420.9 ====== ====== ======
OPERATING CASH FLOWS Operating cash flows of $356.6 million in 1998 were $147.0 million higher than in 1997. Excluding net gains on the sale of businesses in 1997, net income increased by $187.1 million in 1998. Changes in assets and liabilities, however, resulted in approximately $48 million of additional cash outflows in 1998. INVESTING CASH FLOWS The Company used $631.5 million of cash in 1998 related to investing activities, primarily in the acquisition of various businesses. In 1997, investing activities provided the Company with $119.1 million of cash, primarily from the sale of various businesses. The Company expects to acquire additional businesses as circumstances warrant and as opportunities arise and also expects to continue to evaluate its portfolio of businesses that are not considered strategic in the future. 19 22 FINANCING CASH FLOWS Financing activities provided the Company with $259.0 million in cash in 1998, as compared to using cash of $382.9 million in 1997. The Company increased its borrowings in 1998 to finance the acquisitions discussed above. Likewise, the Company used the proceeds from the sale of various businesses in 1997 to repay certain higher cost debt. The Company also spent approximately $40 million to terminate a receivables sales program in 1998. Cash flow from operations has been more than adequate to finance capital expenditures in each of the past three years. The Company expects to have sufficient cash flow from operations to finance planned capital spending for 1999. Environmental Matters Federal, state and local statutes and regulations relating to the protection of the environment and the health and safety of employees and other individuals have resulted in higher operating costs and capital investments by the industries in which the Company operates. Because of a focus toward greater environmental awareness and increasingly stringent environmental regulations, the Company believes that expenditures for compliance with environmental, health and safety regulations will continue to have a significant impact on the conduct of its business. Although it cannot predict accurately how these developments will affect future operations and earnings, the Company does not believe its costs will vary significantly from those of its competitors. The Company expects to incur capital expenditures and future costs for environmental, health and safety improvement programs. These expenditures are customary operational costs and are not expected to have a material adverse effect on the financial position, liquidity or results of operations of the Company. BFGoodrich and its subsidiaries are generators of both hazardous and non-hazardous wastes, the treatment, storage, transportation and disposal of which are subject to various laws and governmental regulations. Although past operations were in substantial compliance with the then-applicable regulations, the Company has been designated as a potentially responsible party ("PRP") by the U.S. Environmental Protection Agency ("EPA") in connection with approximately 43 sites, most of which related to businesses previously discontinued. The Company believes it may have continuing liability with respect to not more than 19 sites. The Company initiates corrective and/or preventive environmental projects of its own to ensure safe and lawful activities at its current operations. The Company believes that compliance with current governmental regulations will not have a material adverse effect on its capital expenditures, earnings or competitive position. The Company's environmental engineers and consultants review and monitor past and existing operating sites. This process includes investigation of National Priority List sites where the Company is considered a PRP, review of remediation methods and negotiation with other PRPs and governmental agencies. At December 31, 1998, the Company has recorded in Accrued Expenses and in Other Non-current Liabilities a total of $57.4 million to cover future environmental expenditures, principally for remediation of the aforementioned sites and other environmental matters. The Company believes that its environmental matters are adequately reserved based on currently available information. Management believes that it is reasonably possible that additional costs may be incurred beyond the amounts accrued as a result of new information. However, the amounts, if any, cannot be estimated and management believes that they would not be material to the Company's financial condition, but could be material to the Company's results of operations in a given period. In addition, the Company expects to incur capital expenditures and future costs for environmental, health and safety improvement programs. These expenditures relate to anticipated projects to change process systems or to install new equipment to reduce ongoing emissions, improve efficiencies and promote greater worker health and safety. These expenditures are customary operational costs and are not expected to have a material adverse effect on the financial position, liquidity or results of operations of the Company. Certain Aerospace Contracts The Company's Aerostructures Group has a contract with Boeing on the 717-200 program and a contract with Pratt & Whitney on the PW4000 program that are subject to certain risks and uncertainties. The Company has pre-production inventory of $83.0 million related to design and development costs on the 717-200 program 20 23 through December 31, 1998. In addition, the Company has excess-over-average inventory of $30.3 million related to costs associated with the production of the flight test inventory and the first production units. The Company expects to spend approximately $4.0 million more for preproduction costs through mid-1999, the aircraft's scheduled Federal Aviation Administration ("FAA") certification date. If the contract is cancelled prior to FAA certification, the Company expects substantial recovery of these costs. If the aircraft is certified and actively marketed, the amount of these costs and initial production start-up costs recovered by the Company will depend upon the number of aircraft delivered. In 1993, the Company revised its contract with Pratt & Whitney on the PW4000 for A300/A310 and MD-11 programs. The revised contract provides that if Pratt & Whitney accepts delivery of less than 500 units from 1993 through 2003, an "equitable adjustment" will be made. Recent market projections on the PW4000 contract indicate that less than 500 units will be delivered. The Company has submitted a "request of equitable adjustment" to the customer and believes it will achieve a recovery such that there should not be a material adverse effect on the financial position, liquidity or results of operations of the Company. If the Company does not receive the equitable adjustment it believes it is entitled to, it is possible that there may be a material adverse effect on earnings in a given period. At December 31, 1998, the Company had $49.2 million of contract costs ($44.7 million of in-process and $4.5 million of finished products) in inventory for the PW4000 program. Year 2000 Computer Costs General The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company's computer equipment and software and devices with embedded technology that are date-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has assessed how it may be impacted by the Year 2000 issue and has formulated and commenced implementation of a comprehensive plan to address all known aspects of the issue. The Plan The Company's plan encompasses its information systems, production and facilities equipment that utilize date/time oriented software or computer chips, products, vendors and customers and is being carried out in four phases: 1) assessment and development of a plan; 2) remediation; 3) testing; and 4) implementation. The Company's plan includes purchasing new information systems where circumstances warrant. The Company's plan also includes contracting with independent experts as considered necessary. To date, the Company has engaged independent experts to evaluate its Year 2000 plan, including its identification, assessment, remediation and testing efforts at certain locations. With regard to information systems, production and facilities equipment and products, the Company is substantially complete with the assessment and plan development phase and is approximately 70 percent, 60 percent and 90 percent complete, respectively with its total planned efforts including remediation, testing and implementation. The Company expects that its remediation efforts in these areas will be substantially completed by September 30, 1999. The Company is also reviewing the efforts of its vendors and customers to become Year 2000 compliant. Letters and questionnaires have been sent to all critical entities with which the Company does business to assess their Year 2000 readiness. The Company anticipates that its activities will be on-going for all of 1999 and will include follow-up telephone interviews and on-site meetings as considered necessary in the circumstances. The Company believes the Year 2000 Information and Readiness Disclosure Act of 1998 will facilitate the exchange of Year 2000 information between it and its suppliers in 1999. Although this review is continuing, the Company is not currently aware of any vendor or customer circumstances that may have a material adverse impact on the Company. The Company will be looking for alternative suppliers where circumstances warrant. The Company can provide no assurance that Year 2000 compliance plans will be successfully completed by suppliers and customers in a timely manner. Cost The Company's preliminary estimate of the total cost for Year 2000 compliance is approximately $55 million, of which approximately $38 million has been incurred through December 31, 1998. The Company's estimate of total costs to be spent has increased by approximately $10 million from the third quarter due to the inclusion of estimated internal labor costs. The Company capitalized approximately $26 million and expensed approximately $12 million of the $38 million spent to date. The Company's cost estimates include the amount 21 24 specifically related to remedying Year 2000 issues as well as costs for improved systems which are Year 2000 compliant and would have been acquired in the ordinary course but whose acquisition has been accelerated to ensure compliance by the Year 2000. Incremental spending has not been, and is not expected to be, material because most Year 2000 compliance costs include items that are part of the standard procurement and maintenance of the Company's information systems and production and facilities equipment. Other non-Year 2000 efforts have not been materially delayed or impacted by the Company's Year 2000 initiatives. Risks The Company believes that the Year 2000 issue will not pose significant operational problems for the Company. However, if all Year 2000 issues are not properly identified, or assessment, remediation and testing are not effected in a timely manner with respect to problems that are identified, there can be no assurance that the Year 2000 issue will not have a material adverse impact on the Company's results of operations or adversely affect the Company's relationships with customers, vendors, or others. Additionally, there can be no assurance that the Year 2000 issues of other entities will not have a material adverse impact on the Company's systems or results of operations. Contingency Plan The Company has begun, but not yet completed, a comprehensive analysis of the operational problems and costs (including loss of revenues) that would be reasonably likely to result from the failure by the Company and certain third parties to complete efforts necessary to achieve Year 2000 compliance on a timely basis. A contingency plan has not been developed for dealing with the most reasonably likely worst case scenario as such scenario has not yet been clearly identified. The Company currently plans to complete such analysis and contingency planning by March 31, 1999. (The foregoing analysis contains forward-looking information. See cautionary statement at the end of the Management's Discussion and Analysis section.) Transition To The Euro Although the Euro was successfully introduced on January 1, 1999, the legacy currencies of those countries participating will continue to be used as legal tender through January 1, 2002. Thereafter, the legacy currencies will be canceled and Euro bills and coins will be used in the eleven participating countries. Transition to the Euro creates a number of issues for the Company. Business issues that must be addressed include product pricing policies and ensuring the continuity of business and financial contracts. Finance and accounting issues include the conversion of accounting systems, statutory records, tax books and payroll systems to the Euro, as well as conversion of bank accounts and other treasury and cash management activities. The Company continues to address these transition issues and does not expect the transition to the Euro to have a material effect on the results of operations or financial condition of the Company. Actions taken to date include the ability to quote its prices; invoice when requested by the customer; and issue pay checks to its employees on a dual currency basis. The Company has not yet set conversion dates for its accounting systems, statutory reporting and tax books, but will do so in 1999 in conjunction with its efforts to be Year 2000 compliant. The financial institutions in which the Company has relationships have transitioned to the Euro successfully as well and are issuing statements in dual currencies. New Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. 22 25 The Company has not yet determined what the effect of Statement No. 133 will be on its earnings and financial position and has not yet determined the timing or method of adoption. However, the Statement could increase volatility in earnings and comprehensive income. On April 3, 1998, the Accounting Standards Executive Committee of the AICPA issued Statement of Position 98-5 -- Reporting on the Costs of Start-Up Activities (the SOP). The SOP is effective for the Company in 1999 and would require the write-off of any amounts deferred within the balance sheet related to start-up activities, as defined within the SOP. The Company has reviewed the provisions of this SOP and does not believe its adoption will have a material adverse impact on earnings or on its financial condition. Forward-Looking Information Is Subject To Risk And Uncertainty This document includes certain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, that involve risk and uncertainty. With respect to Aerospace, the continuing recovery of the worldwide civil aviation market could be adversely affected if customers cancel or delay current orders or original-equipment manufacturers reduce the rate they build or expect to build products for such customers. Such cancellations, delays or reductions may occur if there is a substantial change in the health of the airline industry or in the general economy, or if a customer were to experience financial or operational difficulties. There have been weak new aircraft orders and actual cancellation of orders from Asian carriers due to the Asian financial crisis. There are financial difficulties in Russia and Latin America as well. If these developments should continue or accelerate, it could have an adverse effect upon the Company. Even if orders remain strong, original-equipment manufacturers could reduce the rate at which they build aircraft due to inability to obtain adequate parts from suppliers and/or because of productivity problems relating to a recent rapid build-up of the labor force to increase the build rate of new aircraft. Boeing announced a temporary cessation of production in the fall of 1997 for these reasons. A change in levels of defense spending could curtail or enhance prospects in the Company's military business. If the trend towards increased outsourcing or reduced number of suppliers in the airline industry changes, it could affect the Company's business. If the Boeing 717 program is not as successful as anticipated, or the Company cannot work out an equitable adjustment on the PW4000 program, it could adversely affect the Company's business. (See Note I to the Consolidated Financial Statements for additional information.) If the Company is unable to continue to acquire and develop new systems and improvements, it could affect future growth rates. There has been a higher-than-normal historical turnover rate of technicians in the MRO business due to hiring by Boeing and the airlines, although recently the turnover rate has been returning closer to historical levels. If this trend were again to reverse, it could have an adverse effect on the Company. Such events could be exacerbated if there is a substantial change in the health of the airline industry, or in the general economy, or if a customer were to experience major financial difficulties. If the development and sale of direct thermal inflation technology devices does not proceed as contemplated, future growth could be adversely impacted. If the operating efficiencies anticipated for the new Miami, Florida landing gear overhaul facility do not materialize, margins in this business could be adversely affected. Various industry estimates of future growth of revenue passenger miles, new original equipment deliveries and estimates of future deliveries of regional, business, general aviation and military orders may prove optimistic, which could have an adverse affect on operations. With respect to Performance Materials, if the expected growth in volume demand does not materialize, results could be adversely impacted. Expected sales increases in the Far East and Latin America could be adversely impacted by recent turmoil in financial markets in those regions. If demand does not increase during the second half of 1999 as anticipated or cost reduction benefits do not materialize, the results of the Performance Materials Segment could be adversely affected. If cost benefits from continued integration of recent acquisitions and realignment activities do not occur as expected, results could be adversely impacted. Revenue growth in various businesses may not materialize as expected. With respect to the entire Company, if customers or outside vendors are unable to make their computer systems Year 2000 compliant in time, or if the magnitude of the Year 2000 issue is greater than presently anticipated, it could have a material adverse impact on the Company. If there are unexpected developments with respect to environmental matters involving the Company, it could have an adverse effect upon the Company. The Company's financial template sets forth goals, but they are not forecasts. 23 26 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Derivative Financial Instruments The Company does not hold or issue derivative financial instruments for trading purposes. The Company uses derivative financial instruments to manage its exposure to fluctuations in interest rates and foreign exchange rates. The aggregate value of derivative financial instruments held or issued by the Company is not material to the Company nor is the market risk posed. For additional discussion of the Company's use of such instruments see Notes A and P to Consolidated Financial Statements. Interest Rate Exposure Based on the Company's overall interest rate exposure as of and during the year ended December 31, 1998, a near-term change in interest rates, within a 95% confidence level based on historical interest rate movements, would not materially affect the Company's consolidated financial position, results of operations or cash flows. Foreign Currency Exposure The Company's international operations expose it to translation risk when the local currency financial statements are translated to U.S. dollars. As currency exchange rates fluctuate, translation of the statements of income of international businesses into U.S. dollars will affect comparability of revenues and expenses between years. None of the components of the Company's consolidated statements of income was materially affected by exchange rate fluctuations in 1998, 1997, or 1996. The Company hedges a significant portion of its net investments in international subsidiaries by financing the purchase and cash flow requirements through local currency borrowings. See Notes A and P to the Consolidated Financial Statements for a discussion of the Company's exposure to foreign currency transaction risk. At December 31, 1998, a hypothetical 10 percent movement in foreign exchange rates applied to the hedging agreements and underlying exposures would not have a material effect on earnings. 24 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The Consolidated Financial Statements and Notes to Consolidated Financial Statements of The BFGoodrich Company and subsidiaries have been prepared by management. These statements have been prepared in accordance with generally accepted accounting principles and, accordingly, include amounts based upon informed judgments and estimates. Management is responsible for the selection of appropriate accounting principles and the fairness and integrity of such statements. The Company maintains a system of internal controls designed to provide reasonable assurance that accounting records are reliable for the preparation of financial statements and for safeguarding assets. The Company's system of internal controls includes: written policies, guidelines and procedures; organizational structures, staffed through the careful selection of people that provide an appropriate division of responsibility and accountability; and an internal audit program. Ernst & Young LLP, independent auditors, were engaged to audit and to render an opinion on the Consolidated Financial Statements of The BFGoodrich Company and subsidiaries. Their opinion is based on procedures believed by them to be sufficient to provide reasonable assurance that the Consolidated Financial Statements are not materially misstated. The report of Ernst & Young LLP follows. The Board of Directors pursues its oversight responsibility for the financial statements through its Audit Committee, composed of Directors who are not employees of the Company. The Audit Committee meets regularly to review with management and Ernst & Young LLP the Company's accounting policies, internal and external audit plans and results of audits. To ensure complete independence, Ernst & Young LLP and the internal auditors have full access to the Audit Committee and meet with the Committee without the presence of management. /s/ D. L. Burner D. L. Burner Chairman and Chief Executive Officer /s/ L.C. Vinney L. C. Vinney Senior Vice President and Chief Financial Officer /s/ R.D. Koney, Jr. R. D. Koney, Jr. Vice President and Controller 25 28 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors of The BFGoodrich Company: We have audited the accompanying Consolidated Balance Sheet of The BFGoodrich Company and subsidiaries as of December 31, 1998 and 1997, and the related Consolidated Statements of Income, 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 did not audit the financial statements as of and for the year ended July 31, 1996 of Rohr, Inc., which statements reflect total sales constituting 27 percent of total consolidated sales for 1996. Those financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for Rohr, Inc. for 1996, is based solely on the report of the other auditors. 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and, for 1996, the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The BFGoodrich Company and subsidiaries at December 31, 1998 and 1997, and the consolidated 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. /s/ ERNST & YOUNG LLP Cleveland, Ohio February 5, 1999 26 29 CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 -------------------------------- 1998 1997 1996 -------- -------- -------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) SALES....................................................... $3,950.8 $3,373.0 $2,845.8 Operating costs and expenses: Cost of sales............................................. 2,853.1 2,454.7 2,042.5 Charge for MD-90 contract................................. -- 35.2 -- Selling and administrative costs.......................... 610.4 556.0 481.8 Restructuring costs and asset impairment.................. 10.5 -- 11.2 Merger-related costs...................................... -- 77.0 -- -------- -------- -------- 3,474.0 3,122.9 2,535.5 -------- -------- -------- OPERATING INCOME............................................ 476.8 250.1 310.3 Interest expense............................................ (79.0) (73.0) (89.3) Interest income............................................. 5.2 12.0 4.2 Gain on issuance of subsidiary stock........................ -- 13.7 -- Other income (expense)--net................................. (18.1) 15.0 (30.8) -------- -------- -------- Income from continuing operations before income taxes and Trust distributions....................................... 384.9 217.8 194.4 Income tax expense.......................................... (146.3) (94.1) (68.4) Distributions on Trust preferred securities................. (10.5) (10.5) (10.5) -------- -------- -------- INCOME FROM CONTINUING OPERATIONS........................... 228.1 113.2 115.5 Income (loss) from discontinued operations -- net of taxes..................................................... (1.6) 84.3 58.4 -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEMS........................... 226.5 197.5 173.9 Extraordinary losses on debt extinguishment -- net of taxes..................................................... -- (19.3) -- -------- -------- -------- NET INCOME.................................................. $ 226.5 $ 178.2 $ 173.9 ======== ======== ======== BASIC EARNINGS PER SHARE: Continuing operations..................................... $ 3.09 $ 1.59 $ 1.74 Discontinued operations................................... (.02) 1.19 .87 Extraordinary losses...................................... -- (.27) -- -------- -------- -------- Net income................................................ $ 3.07 $ 2.51 $ 2.61 ======== ======== ======== DILUTED EARNINGS PER SHARE: Continuing operations..................................... $ 3.04 $ 1.53 $ 1.65 Discontinued operations................................... (.02) 1.13 .83 Extraordinary losses...................................... -- (.25) -- -------- -------- -------- Net income................................................ $ 3.02 $ 2.41 $ 2.48 ======== ======== ========
See Notes to Consolidated Financial Statements. 27 30 CONSOLIDATED BALANCE SHEET
DECEMBER 31 ---------------------- 1998 1997 --------- --------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) CURRENT ASSETS Cash and cash equivalents................................. $ 31.7 $ 47.0 Accounts and notes receivable............................. 629.0 532.6 Inventories............................................... 772.5 652.6 Deferred income taxes..................................... 142.1 132.4 Prepaid expenses and other assets......................... 39.2 36.7 -------- -------- Total Current Assets.............................. 1,614.5 1,401.3 Property.................................................... 1,255.9 1,065.1 Deferred Income Taxes....................................... 39.7 86.0 Prepaid Pension............................................. 148.0 148.3 Goodwill.................................................... 771.0 546.2 Identifiable Intangible Assets.............................. 112.4 51.1 Other Assets................................................ 251.1 195.9 -------- -------- Total Assets...................................... $4,192.6 $3,493.9 ======== ======== CURRENT LIABILITIES Short-term bank debt...................................... $ 144.1 $ 192.8 Accounts payable.......................................... 364.4 327.6 Accrued expenses.......................................... 420.1 411.3 Income taxes payable...................................... 59.4 -- Current maturities of long-term debt and capital lease obligations............................................ 2.8 3.2 -------- -------- Total Current Liabilities......................... 990.8 934.9 Long-term Debt and Capital Lease Obligations................ 995.2 564.3 Pension Obligations......................................... 43.6 39.6 Postretirement Benefits Other Than Pensions................. 338.1 343.7 Other Non-current Liabilities............................... 101.7 65.7 Commitments and Contingent Liabilities...................... -- -- Mandatorily Redeemable Preferred Securities of Trust........ 123.6 123.1 SHAREHOLDERS' EQUITY Common stock-$5 par value Authorized, 200,000,000 shares; issued, 76,213,081 shares in 1998 and 73,946,160 shares in 1997.......... 381.1 369.7 Additional capital........................................ 543.7 500.7 Income retained in the business........................... 736.8 591.5 Accumulated other comprehensive income.................... 3.6 (3.5) Unearned portion of restricted stock awards............... -- (.7) Common stock held in treasury, at cost (1,846,894 shares in 1998 and 1,204,022 shares in 1997).................. (65.6) (35.1) -------- -------- Total Shareholders' Equity........................ 1,599.6 1,422.6 -------- -------- Total Liabilities and Shareholders' Equity........ $4,192.6 $3,493.9 ======== ========
See Notes to Consolidated Financial Statements. 28 31 CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 -------------------------- 1998 1997 1996 ------ ------ ------ (DOLLARS IN MILLIONS) OPERATING ACTIVITIES Net income.................................................. $226.5 $178.2 $173.9 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary losses on debt extinguishment............ -- 19.3 -- Depreciation and amortization.......................... 165.4 138.8 139.8 Deferred income taxes.................................. 27.8 33.2 29.0 Net gains on sale of businesses........................ -- (138.8) (4.5) Charge for exchange of 7.75% Convertible Notes......... -- -- 5.3 Asset impairment write-down............................ 6.5 -- 7.2 Change in assets and liabilities, net of effects of acquisitions and dispositions of businesses: Receivables....................................... (2.5) (41.7) (36.9) Inventories....................................... (70.7) (53.3) (29.9) Other current assets.............................. 1.0 1.1 2.0 Accounts payable.................................. -- 26.0 7.2 Accrued expenses.................................. (13.1) 86.2 6.2 Income taxes payable.............................. 61.9 (11.2) (19.5) Other non-current assets and liabilities.......... (46.2) (28.2) (14.3) ------ ------ ------ Net cash provided by operating activities................... 356.6 209.6 265.5 ------ ------ ------ INVESTING ACTIVITIES Purchases of property....................................... (208.5) (159.9) (197.1) Proceeds from sale of property.............................. 4.2 8.5 8.8 Proceeds from sale of businesses............................ -- 395.9 28.9 Sale of short-term investments.............................. -- 8.0 -- Payments made in connection with acquisitions, net of cash acquired.................................................. (427.2) (133.4) (107.9) ------ ------ ------ Net cash provided (used) by investing activities............ (631.5) 119.1 (267.3) ------ ------ ------ FINANCING ACTIVITIES Net (decrease) increase in short-term debt.................. (52.6) 68.9 122.5 Proceeds from issuance of long-term debt.................... 433.0 150.0 71.1 Repayment of long-term debt and capital lease obligations... (8.6) (543.0) (155.5) Cash collateral for receivable sales program................ -- 5.0 13.5 Termination of receivable sales program..................... (40.0) -- -- Proceeds from issuance of capital stock..................... 26.7 14.8 11.2 Purchases of treasury stock................................. (13.3) (9.7) (.1) Dividends................................................... (75.7) (59.5) (58.8) Distributions on Trust preferred securities................. (10.5) (10.5) (10.5) Other....................................................... -- 1.1 1.3 ------ ------ ------ Net cash provided (used) by financing activities............ 259.0 (382.9) (5.3) ------ ------ ------ Effect of Exchange Rate Changes on Cash and Cash Equivalents............................................... 0.6 (2.2) (.7) ------ ------ ------ Net Decrease in Cash and Cash Equivalents................... (15.3) (56.4) (7.8) Cash and Cash Equivalents at Beginning of Year(1)........... 47.0 103.4 144.9 ------ ------ ------ Cash and Cash Equivalents at End of Year.................... $ 31.7 $ 47.0 $137.1 ====== ====== ======
- --------------- (1) Cash and cash equivalents at the beginning of 1997 does not agree with the amount at the end of 1996 due to the net cash transactions of Rohr from August 1, 1996 to December 31, 1996, which are not reflected in the 1996 column above (see Note D). See Notes to Consolidated Financial Statements. 29 32 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ACCUMULATED UNEARNED COMMON STOCK INCOME OTHER PORTION OF THREE YEARS ENDED --------------- ADDITIONAL RETAINED IN COMPREHENSIVE RESTRICTED TREASURY DECEMBER 31, 1998 SHARES AMOUNT CAPITAL THE BUSINESS INCOME STOCK AWARDS STOCK TOTAL ----------------- ------ ------ ---------- ------------ ------------- ------------ -------- -------- (IN MILLIONS) Balance December 31, 1995...... 33.113 $165.6 $536.8 $375.7 $(57.6) $(16.2) $(28.3) $ 976.0 Net income..................... 173.9 173.9 Other comprehensive income: Unrealized translation adjustments................ (3.7) (3.7) Minimum pension liability adjustment................. 40.8 40.8 -------- Total comprehensive income..... 211.0 Employee award programs........ 0.600 3.0 19.0 7.2 (1.8) 27.4 Two-for-one common stock split........................ 33.256 166.3 (166.3) Contribution to pension plans........................ 0.755 3.8 26.2 30.0 Conversion of 7.75% Convertible Subordinated Notes........... 2.806 14.0 28.3 42.3 Purchases of stock for treasury..................... (2.1) (2.1) Dividends (per share -- $1.10).............. (58.8) (58.8) ------ ------ ------ ------ ------ ------ ------ -------- Balance December 31, 1996...... 70.530 352.7 444.0 490.8 (20.5) (9.0) (32.2) 1,225.8 Net income..................... 178.2 178.2 Other comprehensive income: Unrealized translation adjustments, net of reclassification adjustment for loss included in net income of $2.3............. (7.6) (7.6) Minimum pension liability adjustment................. (1.8) (1.8) -------- Total comprehensive income..... 168.8 Employee award programs........ 0.826 4.1 12.8 8.3 (0.7) 24.5 Adjustment to conform Rohr's fiscal year.................. 2.071 10.3 39.6 (18.0) 26.4 58.3 Conversion of 7.75% Convertible Subordinated Notes........................ 0.099 0.5 1.0 1.5 Exercise of warrants........... 0.420 2.1 3.3 5.4 Purchases of stock for treasury..................... (2.2) (2.2) Dividends (per share -- $1.10).............. (59.5) (59.5) ------ ------ ------ ------ ------ ------ ------ -------- Balance December 31, 1997...... 73.946 369.7 500.7 591.5 (3.5) (0.7) (35.1) 1,422.6 Net income..................... 226.5 226.5 Other comprehensive income: Unrealized translation adjustments................ 5.9 5.9 Minimum pension liability adjustment................. 1.2 1.2 -------- Total comprehensive income..... 233.6 Employee award programs........ 1.032 5.2 30.9 0.7 (0.7) 36.1 Conversion of 7.75% Convertible Subordinated Notes........... 1.235 6.2 12.1 18.3 Purchases of stock for treasury..................... (29.8) (29.8) Dividends (per share -- $1.10).............. (81.2) (81.2) ------ ------ ------ ------ ------ ------ ------ -------- Balance December 31, 1998...... 76.213 $381.1 $543.7 $736.8 $ 3.6 $ -- $(65.6) $1,599.6 ====== ====== ====== ====== ====== ====== ====== ========
See Notes to Consolidated Financial Statements. 30 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The Consolidated Financial Statements reflect the accounts of The BFGoodrich Company and its majority-owned subsidiaries ("the Company" or "BFGoodrich"). Investments in 20- to 50-percent-owned affiliates and majority-owned companies in which investment is considered temporary are accounted for using the equity method. Equity in earnings (losses) from these businesses is included in Other income (expense)-net. Intercompany accounts and transactions are eliminated. Cash Equivalents Cash equivalents consist of highly liquid investments with a maturity of three months or less at the time of purchase. Inventories Inventories other than inventoried costs relating to long-term contracts are stated at the lower of cost or market. Certain domestic inventories are valued by the last-in, first-out (LIFO) cost method. Inventories not valued by the LIFO method are valued principally by the average cost method. Inventoried costs on long-term contracts include certain preproduction costs, consisting primarily of tooling and design costs and production costs, including applicable overhead. The costs attributed to units delivered under long-term commercial contracts are based on the estimated average cost of all units expected to be produced and are determined under the learning curve concept, which anticipates a predictable decrease in unit costs as tasks and production techniques become more efficient through repetition. This usually results in an increase in inventory (referred to as "excess-over average") during the early years of a contract. In the event that in-process inventory plus estimated costs to complete a specific contract exceeds the anticipated remaining sales value of such contract, such excess is charged to current earnings, thus reducing inventory to estimated realizable value. In accordance with industry practice, costs in inventory include amounts relating to contracts with long production cycles, some of which are not expected to be realized within one year. Long-Lived Assets Property, plant and equipment, including amounts recorded under capital leases, are recorded at cost. Depreciation and amortization is computed principally using the straight-line method over the following estimated useful lives: buildings and improvements, 15 to 40 years; machinery and equipment, 5 to 15 years. In the case of capitalized lease assets, amortization is computed over the lease term if shorter. Repairs and maintenance costs are expensed as incurred. Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses and is being amortized by the straight-line method, in most cases over 20 to 40 years. The weighted average number of years that goodwill is being amortized over is 28 years. Goodwill amortization is recorded in cost of sales. Identifiable intangible assets are recorded at cost, or when acquired as a part of a business combination, at estimated fair value. These assets include patents and other technology agreements, trademarks, licenses and non-compete agreements. They are amortized using the straight-line method over estimated useful lives of 5 to 25 years. Impairment of long-lived assets and related goodwill is recognized when events or changes in circumstances indicate that the carrying amount of the asset, or related groups of assets, may not be recoverable and the Company's estimate of undiscounted cash flows over the assets remaining estimated useful life are less than the assets carrying value. Measurement of the amount of impairment may be based on appraisal, market values of similar assets or estimated discounted future cash flows resulting from the use and ultimate disposition of the asset. Revenue and Income Recognition For revenues not recognized under the contract method of accounting, the Company recognizes revenues from the sale of products at the point of passage of title, which is at the time of shipment. Revenues earned from providing maintenance service are recognized when the service is complete. 31 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED A significant portion of the Company's sales in the Aerostructures Group of the Aerospace Segment are under long-term, fixed-priced contracts, many of which contain escalation clauses, requiring delivery of products over several years and frequently providing the buyer with option pricing on follow-on orders. Sales and profits on each contract are recognized primarily in accordance with the percentage-of-completion method of accounting, using the units-of-delivery method. The Company follows the guidelines of Statement of Position 81-1 ("SOP 81-1"), "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" (the contract method of accounting) except that the Company's contract accounting policies differ from the recommendations of SOP 81-1 in that revisions of estimated profits on contracts are included in earnings under the reallocation method rather than the cumulative catch-up method. Profit is estimated based on the difference between total estimated revenue and total estimated cost of a contract, excluding that reported in prior periods, and is recognized evenly in the current and future periods as a uniform percentage of sales value on all remaining units to be delivered. Current revenue does not anticipate higher or lower future prices but includes units delivered at actual sales prices. Cost includes the estimated cost of the preproduction effort (primarily tooling and design), plus the estimated cost of manufacturing a specified number of production units. The specified number of production units used to establish the profit margin is predicated upon contractual terms adjusted for market forecasts and does not exceed the lesser of those quantities assumed in original contract pricing or those quantities which the Company now expects to deliver in the periods assumed in the original contract pricing. Option quantities are combined with prior orders when follow-on orders are released. The contract method of accounting involves the use of various estimating techniques to project costs at completion and includes estimates of recoveries asserted against the customer for changes in specifications. These estimates involve various assumptions and projections relative to the outcome of future events, including the quantity and timing of product deliveries. Also included are assumptions relative to future labor performance and rates, and projections relative to material and overhead costs. These assumptions involve various levels of expected performance improvements. The Company reevaluates its contract estimates periodically and reflects changes in estimates in the current and future periods under the reallocation method. Included in sales are amounts arising from contract terms that provide for invoicing a portion of the contract price at a date after delivery. Also included are negotiated values for units delivered and anticipated price adjustments for contract changes, claims, escalation and estimated earnings in excess of billing provisions, resulting from the percentage-of-completion method of accounting. Certain contract costs are estimated based on the learning curve concept discussed under Inventories above. Financial Instruments The Company's financial instruments recorded on the balance sheet include cash and cash equivalents, accounts and notes receivable, accounts payable and debt. Because of their short maturity, the carrying amount of cash and cash equivalents, accounts and notes receivable, accounts payable and short-term bank debt approximates fair value. Fair value of long-term debt is based on rates available to the Company for debt with similar terms and maturities. Off balance sheet derivative financial instruments at December 31, 1998, include an interest rate swap agreement, foreign currency forward contracts and foreign currency swap agreements. Interest rate swap agreements are used by the Company, from time to time, to manage interest rate risk on its floating rate debt portfolio. Each interest rate swap is matched as a hedge against a specific debt instrument and has the same notional amount and maturity as the related debt instrument principal. Interest rate swap agreements are generally entered into at the time the related floating rate debt is issued in order to convert the floating rate to a fixed rate. The cost of interest rate swaps is recorded as part of interest expense and accrued expenses. Fair value of these instruments is based on estimated current settlement cost. The Company enters into foreign currency forward contracts (principally against the British pound, Italian lira, Spanish peseta, French franc, Dutch gilder and U.S. dollar) to hedge the net receivable/payable position arising from trade sales and purchases and intercompany transactions by its European businesses. Foreign 32 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED currency forward contracts reduce the Company's exposure to the risk that the eventual net cash inflows and outflows resulting from the sale of products and purchases from suppliers denominated in a currency other than the functional currency of the respective businesses will be adversely affected by changes in exchange rates. Foreign currency gains and losses under the above arrangements are not deferred and are reported as part of cost of sales and accrued expenses. Foreign currency forward contracts are entered into with major commercial European banks that have high credit ratings. From time to time, the Company uses foreign currency forward contracts to hedge purchases of capital equipment. Foreign currency gains and losses for such purchases are deferred as part of the basis of the asset. Also, the Company has used forward contracts, on a limited basis, to manage its exchange risk on a portion of its purchase commitments from vendors of aircraft components denominated in foreign currencies and to manage its exchange risk for sums paid to a French subsidiary for services. Forward gains and losses associated with contracts accounted for under contract accounting are deferred as contract costs. The Company also enters into foreign currency swap agreements (principally for the Belgian franc, French franc and Dutch gilder) to eliminate foreign exchange risk on intercompany loans between European businesses. The fair value of foreign currency forward contracts and foreign currency swap agreements is based on quoted market prices. Stock-Based Compensation The Company accounts for stock-based employee compensation in accordance with the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Issuance of Subsidiary Stock The Company recognizes gains and losses on the issuance of stock by a subsidiary in accordance with the U.S. Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin 84. Earnings Per Share Earnings per share is computed in accordance with SFAS No. 128, "Earnings per Share." Research and Development Expense The Company performs research and development under Company-funded programs for commercial products, and under contracts with others. Research and development under contracts with others is performed by the Aerospace Segment for military and commercial products. Total research and development expenditures from continuing operations in 1998, 1997 and 1996 were $182.7 million, $141.2 million and $137.5 million, respectively. Of these amounts, $63.1 million, $39.4 million and $29.4 million, respectively, were funded by customers. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. New Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has not yet determined what the effect of Statement No. 133 will be on its earnings and financial position and has not yet determined the timing or method of adoption. However, the Statement could increase volatility in earnings and comprehensive income. 33 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED On April 3, 1998, the Accounting Standards Executive Committee of the AICPA issued Statement of Position 98-5 -- Reporting on the Costs of Start-Up Activities (the SOP). The SOP is effective for the Company in 1999 and would require the write-off of any amounts deferred within the balance sheet related to start-up activities, as defined within the SOP. The Company has reviewed the provisions of this SOP and does not believe its adoption will have a material adverse impact on earnings or on its financial condition. NOTE B DISCONTINUED OPERATIONS On August 15, 1997, the Company completed the disposition of its chlor-alkali and olefins ("CAO") business to The Westlake Group for $92.7 million, resulting in an after-tax gain of $14.5 million, or $.19 per diluted share. The disposition of the CAO business represents the disposal of a segment of a business under APB Opinion No. 30 ("APB 30"). Accordingly, the Consolidated Statement of Income reflects the CAO business (previously reported as Other Operations) as a discontinued operation, in addition to the following discontinued operations. On February 3, 1997, the Company completed the sale of Tremco Incorporated to RPM, Inc. for $230.7 million, resulting in an after-tax gain of $59.5 million, or $.80 per diluted share. The sale of Tremco Incorporated completed the disposition of the Company's Sealants, Coatings and Adhesives ("SC&A") Group which also represented a disposal of a segment of a business under APB 30. A summary of the results of discontinued operations is as follows:
1998 1997 1996 ----- ----- ------ (IN MILLIONS) Sales: CAO..................................................... $ -- $98.0 $160.6 SC&A.................................................... -- -- 316.8 ----- ----- ------ $ -- $98.0 $477.4 Pretax income from operations: CAO..................................................... $ -- $16.1 $ 21.0 SC&A(1)................................................. -- -- 27.0 ----- ----- ------ -- 16.1 48.0 Income tax expense........................................ -- (5.8) (19.6) ----- ----- ------ Net income from operations................................ -- 10.3 28.4 Gains on sale of discontinued operations: CAO(2).................................................. -- 14.5 -- SC&A(3)................................................. -- 59.5 -- Adjustment to gain of 1993 discontinued operation......... -- -- 30.0 Adjustment to 1997 gain on the sale of SC&A............... (1.6) -- -- ----- ----- ------ Income (loss) from discontinued operations................ $(1.6) $84.3 $ 58.4 ===== ===== ======
- --------------- (1) Includes $6.4 million gain on the sale of a business in 1996. (2) Net of $7.8 million of income taxes. (3) Net of $22.8 million of income taxes; includes provision of $7.9 million for operating losses during the phase-out period. NOTE C PENDING MERGER (UNAUDITED) On November 22, 1998, the Company and Coltec Industries, Inc. ("Coltec"), a Pennsylvania company, entered into an Agreement and Plan of Merger ("Merger Agreement"). Under the terms of the Merger Agreement, upon consummation of the Merger, each share of Coltec common stock issued and outstanding 34 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED immediately prior to the effective time of the Merger shall be converted into the right to receive 0.56 of a share of BFGoodrich common stock. The Merger will be accounted for as a pooling of interests, and as such, future consolidated financial statements will include Coltec's financial data as if Coltec had always been a part of BFGoodrich. The Merger is expected to close in early April of 1999. The unaudited pro forma combined financial data is presented for informational purposes only. They are not necessarily indicative of the results of operations or of the financial position which would have occurred had the Merger been completed during the periods or as of the date for which the pro forma data are presented. They are also not necessarily indicative of the Company's future results of operations or financial position. In particular, the Company expects to realize significant operating cost savings as a result of the Merger. No adjustment has been included in the pro forma combined financial data for these anticipated operating cost savings nor for the one-time merger and consolidation costs expected to be incurred upon consummation of the Merger. Pro forma per share amounts for the combined company are based on the Exchange Ratio of 0.56 of a share of BFGoodrich common stock for each share of Coltec common stock. UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL DATA
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Pro Forma Combined Statement of Income Data: Sales............................................ $5,454.9 $4,687.9 $4,005.5 Income from continuing operations................ 350.4 208.1 170.1 Income from continuing operations per diluted common share.................................. 3.08 1.86 1.57 Weighted average number of common shares and assumed conversions (on a fully diluted basis) (millions).................................... 113.9 112.1 109.8
DECEMBER 31, 1998 ------------ Pro Forma Combined Balance Sheet Data: Total assets.............................................. $5,293.5 Total shareholders' equity................................ 1,299.3 Book value per common share............................... 11.84
NOTE D OTHER ACQUISITIONS AND DISPOSITIONS Acquisitions On December 22, 1997, BFGoodrich completed a merger with Rohr, Inc. by exchanging 18,588,004 shares of BFGoodrich common stock for all of the common stock of Rohr (the term Company is used to refer to BFGoodrich including Rohr). Each share of Rohr common stock was exchanged for .7 of one share of BFGoodrich common stock. The merger was accounted for as a pooling of interests. Accordingly, all prior period Consolidated Financial Statements and notes thereto were restated to include the results of operations, financial position and cash flows of Rohr as though Rohr had always been a part of BFGoodrich. Prior to the merger, Rohr's fiscal year ended on July 31. For purposes of the combination, Rohr's financial results for its fiscal year ended July 31, 1997, were restated to the year ended December 31, 1997, to conform with BFGoodrich's calendar year end. Financial results for Rohr's fiscal years ended July 31, 1996 and earlier were not restated to conform to BFGoodrich's calendar year end. For periods prior to 1997, Rohr's fiscal years ended July 31 have been combined with BFGoodrich's calendar years ended December 31. As a result, Rohr's 35 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED results of operations for the period August 1, 1996 to December 31, 1996 do not appear in the Consolidated Statement of Income and instead are recorded as a direct adjustment to equity. Rohr's revenues, expenses and net loss for this five-month period were $341.3 million, $359.3 million and $18.0 million, respectively. Included in expenses during this period was a $49.3 million pretax charge ($29.5 million after tax) relating to the McDonnell Douglas MD-90 program (see Note E). There were no transactions between BFGoodrich and Rohr prior to the combination. Certain reclassifications were made to Rohr's financial statements to conform to BFGoodrich's presentation. The Company recognized pretax merger-related costs of $105.0 million ($86.0 million after tax, or $1.15 per diluted share). Merger-related costs consisted primarily of costs of investment bankers, attorneys, accountants, financial printing, debt extinguishment and payments due under contractual employee arrangements. Of the $105.0 million, $28.0 million related to debt extinguishment costs ($16.7 million after tax, or $.22 per diluted share) which have been reported as an extraordinary item (see Note F). Of the $86.0 million after-tax merger-related costs above, $7.9 million was recorded by BFGoodrich and $78.1 million was recorded by Rohr. The following acquisitions were recorded using the purchase method of accounting. Their results of operations, which are not material, have been included in the Consolidated Financial Statements since their respective dates of acquisition. In March 1998, the Company acquired Freedom Chemical Company for approximately $378 million in cash. Freedom Chemical is a leading global manufacturer of specialty and fine chemicals that are sold to a variety of customers who use them to enhance the performance of their finished products. Freedom Chemical has leadership positions as a supplier of specialty chemical additives used in personal-care, food and beverage, pharmaceutical, textile, graphic arts, paints, colorants and coatings applications and as chemical intermediates. The Company also acquired a small textile manufacturer and a small manufacturer of energetic materials systems during 1998. During 1997, the Company acquired five businesses for cash consideration of $133.4 million in the aggregate, which includes $65.3 million of goodwill. One of the acquired businesses is a manufacturer of data acquisition systems for satellites and other aerospace applications. A second business manufactures diverse aerospace products for commercial and military applications. A third business is a manufacturer of dyes, chemical additives and durable press resins for the textiles industry. A fourth business manufactures thermoplastic polyurethanes and is located in the United Kingdom. The remaining acquisition is a small Performance Materials business. During 1996, the Company acquired five specialty chemicals businesses for cash consideration of $107.9 million, which included $80.0 million of goodwill. One of the businesses acquired is a European-based supplier of emulsions and polymers for use in paint and coatings for textiles, paper, graphic arts and industrial applications. Two of the acquisitions represented product lines consisting of water-borne acrylic resins and coatings and additives used in the graphic arts industry. The fourth acquisition consisted of water-based textile coatings product lines. The remaining acquisition was a small supplier of anti-static compounds. Dispositions During 1997, the Company completed the sale of its Engine Electrical Systems Division, which was part of the Sensors and Integrated Systems Group in the Aerospace Segment. The Company received cash proceeds of $72.5 million, which resulted in a pretax gain of $26.4 million ($16.4 million after tax) reported in Other income (expense) -- net. NOTE E IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES The Aerostructures Group's fourth quarter special charge in 1998 of $10.5 million before tax ($6.5 million after tax, or $.09 per share), relates to costs associated with the closure of three facilities and an asset impairment charge. The charge includes $4.0 million for employee termination benefits; $1.8 million related to writing down 36 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED the carrying value of the three facilities to their fair value less cost to sell and $4.7 million for an asset impairment related to an assembly-service facility in Hamburg, Germany. The employee termination benefits primarily represents severance payments that will be made to approximately 700 employees (approximately 600 wage and 100 salaried). The shutdowns, expected to be completed by the fourth quarter of 1999, will affect a composite bonding facility in Hagerstown, Maryland and two assembly sites in Heber Springs and Sheridan, Arkansas. Production work performed at these facilities will be absorbed by the Aerostructures Group's remaining facilities. The $1.8 million restructuring charge relates to the write-down of the Hagerstown, Heber Springs and Sheridan facilities to their fair value less cost to sell. The carrying amount of the assets related to these three facilities, net of machinery and equipment that will be transferred to other Aerostructures facilities, approximated $10.0 million at December 31, 1998. The effect of suspending depreciation on these assets will approximate $0.9 million annually. The $4.7 million impairment charge resulted from management's review of the business for possible disposition. The entire asset impairment charge related to tangible assets and was based on independent third party appraisals of the facility's fair value. The charge has been recorded in the restructuring costs and asset impairment line item within operating income. In 1997, the Company recognized a $35.2 million pretax charge ($21.0 million after tax, or $.28 per diluted share) to write off that portion of its contract investment in the McDonnell Douglas MD-90 aircraft program, including the costs it will be required to spend in the future to complete the contract, that the Company determined would not be recoverable from future MD-90 sales represented by firm aircraft orders. In addition, the Company recognized a $49.3 million pretax charge ($29.5 million after tax) in December 1996, related to the MD-90 program. This charge did not impact the income statement; rather, it was recognized as a direct adjustment to equity as a result of aligning Rohr's fiscal year with BFGoodrich's. In 1996, the Company recognized a $7.2 million pretax impairment charge on its Arkadelphia, Arkansas, facility. Also during 1996, the Company recognized a $4.0 million pretax charge for a voluntary early retirement program for eligible employees of the Performance Materials Segment. NOTE F EXTRAORDINARY ITEMS During 1997, the Company incurred an extraordinary charge of $19.3 million (net of a $13.1 million income tax benefit), or $.25 per diluted share, to extinguish certain indebtedness previously held by Rohr. Costs incurred include debt premiums and other direct costs associated with the extinguishment of the related debt. The Company used a combination of existing cash funds and proceeds from new lower-cost long-term debt to extinguish the debt. Of the $19.3 million, $2.6 million (net of a $1.8 million income tax benefit) was incurred during the third quarter in connection with Rohr's 9.33 percent Senior Notes and 9.35 percent Senior Notes. The remaining $16.7 million (net of an $11.3 million income tax benefit) relates to debt extinguishment costs incurred in connection with the Rohr merger during the fourth quarter for refinancing Rohr's 11.625 percent Senior Notes, 9.25 percent Subordinated Debentures, 7.00 percent Convertible Subordinated Debentures and 7.75 percent Convertible Subordinated Notes. 37 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE G EARNINGS PER SHARE The computation of basic and diluted earnings per share for income from continuing operations is as follows:
1998 1997 1996 ------ ------ ------ (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Numerator: Numerator for basic earnings per share-income from continuing operations.............................. $228.1 $113.2 $115.5 Effect of dilutive securities: 7.75% Convertible Notes............................... -- .9 1.9 ------ ------ ------ Numerator for diluted earnings per share--income from continuing operations available to common stockholders after assumed conversions........... $228.1 $114.1 $117.4 ====== ====== ====== Denominator: Denominator for basic earnings per share--weighted-average shares..................... 73.7 71.0 66.6 Effect of dilutive securities: Stock options and warrants......................... .7 1.6 1.4 Contingent shares.................................. .1 .7 .5 7.75% Convertible Notes............................ .5 1.3 2.4 ------ ------ ------ Dilutive potential common shares...................... 1.3 3.6 4.3 ------ ------ ------ Denominator for diluted earnings per share--adjusted weighted-average shares and assumed conversions.............................. 75.0 74.6 70.9 ====== ====== ====== Per share income from continuing operations: Basic............................................ $ 3.09 $ 1.59 $ 1.74 ====== ====== ====== Diluted.......................................... $ 3.04 $ 1.53 $ 1.65 ====== ====== ======
NOTE H ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable consist of the following:
1998 1997 ------ ------ (IN MILLIONS) Amounts billed.............................................. $610.0 $490.6 Recoverable costs and accrued profit on units delivered but not billed................................................ 7.9 10.0 Recoverable costs and accrued profit on progress completed but not billed............................................ 0.5 -- Unrecovered costs and estimated profit subject to future negotiations.............................................. 20.2 19.2 Notes and other receivables................................. 13.0 34.1 ------ ------ $651.6 $553.9 Less allowance for doubtful accounts...................... (22.6) (21.3) ------ ------ Total.................................................. $629.0 $532.6 ====== ======
"Recoverable costs and accrued profit on units delivered but not billed" represents revenue recognized on contracts for amounts not billable to customers at the balance sheet date. This amount principally represents delayed payment terms along with escalation and repricing predicated upon deliveries and final payment after acceptance. 38 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED "Recoverable costs and accrued profit on progress completed but not billed" represents revenue recognized on contracts based on the percentage-of-completion method of accounting and is anticipated to be billed and collected in accordance with contract terms. "Unrecovered costs and estimated profit subject to future negotiations" consists of contract tasks completed for which a final price has not been negotiated with the customer. Amounts in excess of agreed-upon contract prices are recognized when it is probable that the claim will result in additional contract revenue and the amounts can be reliably estimated. Included in this amount are estimated recoveries on constructive change claims related to government-imposed redefined acceptance criteria on the Grumman F-14 contract. Management believes that amounts reflected in the financial statements are reasonable estimates of the ultimate settlements. NOTE I INVENTORIES Inventories consist of the following:
1998 1997 ------ ------ (IN MILLIONS) FIFO or average cost (which approximates current costs): Finished products......................................... $236.0 $173.4 In process................................................ 416.9 411.2 Raw materials and supplies................................ 189.8 161.4 ------ ------ 842.7 746.0 Reserve to reduce certain inventories to LIFO basis......... (54.1) (57.5) Progress payments and advances.............................. (16.1) (35.9) ------ ------ Total.................................................. $772.5 $652.6 ====== ======
At December 31, 1998 and 1997, approximately 28 percent and 27 percent, respectively, of inventory was valued by the LIFO method. In-process inventories as of December 31, 1998, which include significant deferred costs for long-term contracts accounted for under contract accounting, are summarized by contract as follows (in millions, except quantities which are number of aircraft):
AIRCRAFT ORDER STATUS(1) COMPANY ORDER STATUS ---------------------------- ---------------------------------------------- DELIVERED UN- UN- (3)FIRM TO FILLED FILLED (2)CONTRACT UN-FILLED (5)YEAR CONTRACT AIRLINES ORDERS OPTIONS QUANTITY DELIVERED ORDERS COMPLETE -------- --------- ------ ------- ----------- --------- --------- -------- PW4000 for the A300/A310 and MD-11(4) 287 10 9 325 303 19 2000 737-700................. 167 952 1,078 1,000 212 488 2002 717-200................. -- 115 100 300 1 54 2007 Others.................. In-process inventory related to long-term contracts............. In-process inventory not related to long-term contracts............. Balance at December 31, 1998.................. IN-PROCESS INVENTORY ------------------------------------ PRE- EXCESS PRO- PRO- OVER- CONTRACT DUCTION DUCTION AVERAGE TOTAL -------- ------- ------- ------- ------ PW4000 for the A300/A310 and MD-11(4) $ 10.7 $ 8.0 $ 26.0 $ 44.7 737-700................. 8.5 -- 3.6 12.1 717-200................. 13.1 83.0 30.3 126.4 Others.................. 71.6 5.3 .8 77.7 ------ ----- ------ ------ In-process inventory related to long-term contracts............. $103.9 $96.3 $ 60.7 260.9 ====== ===== ====== In-process inventory not related to long-term contracts............. 156.0 ------ Balance at December 31, 1998.................. $416.9 ======
- --------------- (1) Represents the aircraft order status as reported by Case and/or other sources the Company believes to be reliable for the related aircraft and engine option. The Company's orders frequently are less than the announced orders shown above. (2) Represents the number of aircraft used to obtain average unit cost. (3) Represents the number of aircraft for which the Company has firm unfilled orders. (4) Contract quantity represents the lesser of those quantities assumed in original contract pricing or those quantities which the Company now expects to deliver in the periods assumed in original contract pricing. (5) The year presented represents the year in which the final production units included in the contract quantity are expected to be delivered. The contract may continue in effect beyond this date. 39 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED In-process inventories include significant deferred costs related to production, pre-production and excess-over-average costs for long-term contracts. The company has pre-production inventory of $83.0 million related to design and development costs on the 717-200 program through December 31, 1998. In addition, the Company has excess-over-average inventory of $30.3 million related to costs associated with the production of the flight test inventory and the first production units. The Company expects to spend approximately $4.0 million more for preproduction costs through mid-1999, the aircraft's scheduled Federal Aviation Administration ("FAA") certification date. If the contract is cancelled prior to FAA certification, the Company expects substantial recovery of these costs. If the aircraft is certified and actively marketed, the amount of these costs and initial production start-up costs recovered by the Company will depend upon the number of aircraft delivered. In 1993, the Company revised its contract with Pratt & Whitney on the PW4000 for A300/A310 and MD-11 programs. The revised contract provides that if Pratt & Whitney accepts delivery of less than 500 units from 1993 through 2003, an "equitable adjustment" will be made. Recent market projections on the PW4000 contract indicate that less than 500 units will be delivered. The Company has submitted a "request of equitable adjustment" to the customer and believes it will achieve a recovery such that there should not be a material adverse effect on the financial position, liquidity or results of operations of the Company. If the Company does not receive the equitable adjustment it believes it is entitled to, it is possible that there may be a material adverse effect on earnings in a given period. At December 31, 1998, the Company had $49.2 million of contract costs ($44.7 million of in-process and $4.5 million of finished products) in inventory for the PW4000 program. NOTE J FINANCING ARRANGEMENTS Short-Term Bank Debt At December 31, 1998, the Company had separate committed revolving credit agreements with certain banks providing for domestic lines of credit aggregating $300.0 million. Borrowings under these agreements can be for any period of time until the expiration date and bear interest, at the Company's option, at rates tied to the banks' certificate of deposit, Eurodollar or prime rates. The lines expire on June 30, 2000, unless extended by the banks at the request of the Company. Under the agreements, the Company is required to pay a facility fee of 12 basis points per annum on the total $300.0 million committed line. At December 31, 1998, no amounts were outstanding pursuant to these agreements. In addition, the Company had available formal foreign lines of credit and overdraft facilities, including a committed European revolver, of $100.2 million at December 31, 1998, of which $32.5 million was available. The Company also maintains uncommitted domestic money market facilities with various banks aggregating $380.0 million, of which $277.0 million of these lines were unused and available at December 31, 1998. Weighted-average interest rates on outstanding short-term borrowings were 5.2 percent and 6.4 percent at December 31, 1998 and 1997, respectively. Weighted-average interest rates on short-term borrowings were 5.6 percent, 5.0 percent and 5.9 percent during 1998, 1997 and 1996, respectively. Long-Term Debt At December 31, 1998 and 1997, long-term debt and capital lease obligations payable after one year consisted of:
1998 1997 ------ ------ (IN MILLIONS) 9.625% Notes, maturing in 2001.............................. $175.0 $175.0 MTN notes payable........................................... 699.0 269.0 European revolver........................................... 26.8 25.5 IDRBs, maturing in 2023, 6.0%............................... 60.0 60.0 Other debt, maturing to 2015 (interest rates from 3.0% to 11.625%).................................................. 28.0 26.8 ------ ------ 988.8 556.3 Capital lease obligations (Note K).......................... 6.4 8.0 ------ ------ Total............................................. $995.2 $564.3 ====== ======
40 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED MTN Notes Payable The Company has periodically issued long-term debt securities in the public markets through a medium term note program (referred to as the MTN program), which commenced in 1995. MTN notes outstanding at December 31, 1998, consist entirely of fixed-rate non-callable debt securities. In 1998, the Company issued $100.0 million of 6.45 percent MTN notes due in 2008, $130.0 million of 6.9 percent MTN notes due in 2018 and $200.0 million of 7.0 percent notes due in 2038, primarily for the financing of the Freedom Chemical acquisition (see Note D). During 1997, and in connection with the refinancing of Rohr's debt, the Company issued $150.0 million of 7.2 percent MTN notes, due in 2027. All other MTN notes outstanding were issued during 1995 and 1996, with interest rates ranging from 7.3 percent to 8.7 percent and maturity dates ranging from 2025 to 2046. European Revolver The Company has a $75.0 million committed multi-currency revolving credit facility with various international banks, expiring in the year 2003. The Company uses this facility for short and long-term, local currency financing to support the growth of its European operations. At December 31, 1998, the Company's long-term borrowings under this facility were $26.8 million denominated in Spanish pesetas at a floating rate that is tied to Spanish LIBOR (3.56 percent at December 31, 1998). The Company has effectively converted the $26.8 million long-term borrowing into fixed rate debt with an interest rate swap. IDRBs The industrial development revenue bonds maturing in 2023 were issued to finance the construction of a hangar facility in 1993. Property acquired through the issuance of these bonds secures the repayment of the bonds. Aggregate maturities of long-term debt, exclusive of capital lease obligations, during the five years subsequent to December 31, 1998, are as follows (in millions): 1999--$.8; 2000--$1.0; 2001--$202.6; 2002--$0.7 and 2003 -- $0.7. The Company's debt agreements contain various restrictive covenants that, among other things, place limitations on the payment of cash dividends and the repurchase of the Company's capital stock. Under the most restrictive of these agreements, $863.3 million of income retained in the business and additional capital was free from such limitations at December 31, 1998. NOTE K LEASE COMMITMENTS The Company leases certain of its office and manufacturing facilities as well as machinery and equipment under various leasing arrangements. The future minimum lease payments from continuing operations, by year and in the aggregate, under capital leases and under noncancelable operating leases with initial or remaining noncancelable lease terms in excess of one year, consisted of the following at December 31, 1998:
CAPITAL NONCANCELABLE LEASES OPERATING LEASES ------- ---------------- (IN MILLIONS) 1999....................................................... $2.6 $ 32.7 2000....................................................... 2.1 28.7 2001....................................................... 1.8 23.2 2002....................................................... 1.5 17.6 2003....................................................... 1.0 12.8 Thereafter................................................. 1.4 20.6 ---- ------ Total minimum payments..................................... 10.4 $135.6 ====== Amounts representing interest.............................. (2.0) ---- Present value of net minimum lease payments................ 8.4 Current portion of capital lease obligations............... (2.0) ---- Total............................................ $6.4 ====
41 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Net rent expense from continuing operations consisted of the following:
1998 1997 1996 ----- ----- ----- (IN MILLIONS) Minimum rentals............................................ $36.8 $28.2 $26.0 Contingent rentals......................................... .3 3.9 2.9 Sublease rentals........................................... (.1) (.1) (.1) ----- ----- ----- Total............................................ $37.0 $32.0 $28.8 ===== ===== =====
NOTE L PENSIONS AND POSTRETIREMENT BENEFITS The Company has several noncontributory defined benefit pension plans covering substantially all employees. Plans covering salaried employees generally provide benefit payments using a formula that is based on an employee's compensation and length of service. Plans covering hourly employees generally provide benefit payments of stated amounts for each year of service. The Company also sponsors several unfunded defined benefit postretirement plans that provide certain health-care and life insurance benefits to eligible employees. The health-care plans are contributory, with retiree contributions adjusted periodically, and contain other cost-sharing features, such as deductibles and coinsurance. The life insurance plans are generally noncontributory. The Company's general funding policy for pension plans is to contribute amounts at least sufficient to satisfy regulatory funding standards. The Company's qualified pension plans were fully funded on an accumulated benefit obligation basis at December 31, 1998 and 1997. Assets for these plans consist principally of corporate and government obligations and commingled funds invested in equities, debt and real estate. At December 31, 1998, the pension plans held 2.9 million shares of the Company's common stock with a fair value of $99.8 million. Amortization of unrecognized transition assets and liabilities, prior service cost and gains and losses (if applicable) are recorded using the straight-line method over the average remaining service period of active employees, or approximately 12 years. The following table sets forth the status of the Company's funded defined benefit pension plans and unfunded defined benefit postretirement plans as of December 31, 1998 and 1997, and the amounts recorded in the Consolidated Balance Sheet at these dates. This table excludes accrued pension costs for unfunded, non-qualified pension plans of $37.2 million in 1998 and $73.2 million in 1997, and the related projected benefit obligations of $48.0 million in 1998 and $82.2 million in 1997. 42 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
PENSION BENEFITS OTHER BENEFITS -------------------- ------------------ 1998 1997 1998 1997 -------- -------- ------- ------- (IN MILLIONS) CHANGE IN PROJECTED BENEFIT OBLIGATIONS Projected benefit obligation at beginning of year........................................ $1,251.9 $1,146.8 $ 326.9 $ 312.4 Service cost................................... 22.4 19.8 2.8 2.2 Interest cost.................................. 89.6 90.3 21.5 23.7 Amendments..................................... 2.1 (1.4) -- -- Actuarial (gains) losses....................... 36.9 98.4 (1.2) 15.9 Acquisitions................................... 4.6 -- 3.3 -- Benefits paid.................................. (97.5) (102.0) (28.9) (27.3) -------- -------- ------- ------- Projected benefit obligation at end of year.... $1,310.0 $1,251.9 $ 324.4 $ 326.9 -------- -------- ------- ------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $1,263.1 $1,121.8 $ -- $ -- Actual return on plan assets................... 168.1 178.9 -- -- Acquisitions................................... 4.6 -- -- -- Company contributions.......................... 25.4 64.4 28.9 27.3 Benefits paid.................................. (97.5) (102.0) (28.9) (27.3) -------- -------- ------- ------- Fair value of plan assets at end of year....... $1,363.7 $1,263.1 $ -- $ -- -------- -------- ------- ------- FUNDED STATUS (UNDERFUNDED) Funded status.................................. $ 53.7 $ 11.2 $(324.4) $(326.9) Unrecognized net actuarial loss................ 67.5 101.6 (37.9) (36.6) Unrecognized prior service cost................ 36.0 40.0 (5.8) (6.3) Unrecognized net transition obligation......... 9.5 9.6 -- -- -------- -------- ------- ------- Prepaid (accrued) benefit cost................. $ 166.7 $ 162.4 $(368.1) $(369.8) ======== ======== ======= ======= AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION CONSIST OF: Prepaid benefit cost........................... $ 166.7 $ 163.6 $ -- $ -- Accrued benefit liability...................... -- (1.2) (368.1) (369.8) -------- -------- ------- ------- Net amount recognized.......................... $ 166.7 $ 162.4 $(368.1) $(369.8) ======== ======== ======= ======= WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount rate.................................. 7.0% 7.25% 7.00% 7.25% Expected return on plan assets................. 9.0% 9.0% -- -- Rate of compensation increase.................. 3.5% 3.5% -- --
For measurement purposes, a 6.5 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 4.75 percent for 2002 and remain at that level thereafter. 43 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
PENSION BENEFITS OTHER BENEFITS ------------------------- ----------------------- 1998 1997 1996 1998 1997 1996 ------- ----- ----- ----- ----- ----- (IN MILLIONS) COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost.......................... $ 22.4 $19.8 $23.8 $ 2.8 $ 2.2 $ 2.4 Interest cost......................... 89.6 90.3 82.9 21.5 23.7 22.7 Expected return on plan assets........ (102.6) (96.4) (85.6) -- -- -- Amortization of prior service cost.... 5.9 6.3 5.4 (0.5) (0.5) (0.6) Amortization of transition obligation......................... 0.1 0.1 0.5 -- -- -- Recognized net actuarial (gain) loss............................... 5.4 5.1 5.7 (1.3) (1.0) (1.7) ------- ----- ----- ----- ----- ----- Benefit cost.......................... 20.8 25.2 32.7 22.5 24.4 22.8 Curtailment (gain)/loss............... -- 5.4 -- -- (2.5) -- ------- ----- ----- ----- ----- ----- $ 20.8 $30.6 $32.7 $22.5 $21.9 $22.8 ======= ===== ===== ===== ===== =====
The table below quantifies the impact of a one percentage point change in the assumed health care cost trend rate.
1 PERCENTAGE POINT 1 PERCENTAGE POINT INCREASE DECREASE ------------------ ------------------ Effect on total of service and interest cost components in 1998......................... $ 1.5 million $ 1.3 million Effect on postretirement benefit obligation as of December 31, 1998.................... $18.2 million $15.9 million
The Company also maintains voluntary retirement savings plans for U.S. salaried and wage employees. Under provisions of these plans, eligible employees can receive Company matching contributions on up to the first 6 percent of their eligible earnings. The Company generally matches 1 dollar for each 1 dollar of employee contributions invested in BFGoodrich common stock, and 50 cents for each dollar of eligible employee contributions invested in other available investment options (up to 6 percent of eligible earnings). For 1998, 1997 and 1996, Company contributions amounted to $16.5 million, $15.3 million and $15.9 million, respectively. In addition, the Company contributed $10.1 million, $8.9 million and $12.4 million in 1998, 1997 and 1996, respectively, under other defined contribution plans for employees not covered under the aforementioned defined benefit pension and voluntary retirement savings plans. Contributions are determined based on various percentages of eligible earnings and a profit sharing formula. NOTE M INCOME TAXES Income from continuing operations before income taxes and Trust distributions as shown in the Consolidated Statement of Income consists of the following:
1998 1997 1996 -------- ------ ------ (IN MILLIONS) Domestic......................................... $ 361.3 $199.9 $167.1 Foreign.......................................... 23.6 17.9 27.3 -------- ------ ------ Total.................................. $ 384.9 $217.8 $194.4 ======== ====== ======
44 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED A summary of income tax (expense) benefit from continuing operations in the Consolidated Statement of Income is as follows:
1998 1997 1996 ------- ------ ------ (IN MILLIONS) Current: Federal......................................... $ (89.8) $(52.2) $(25.8) Foreign......................................... (10.1) (5.8) (9.0) State........................................... (18.6) (2.9) (4.6) ------- ------ ------ (118.5) (60.9) (39.4) ------- ------ ------ Deferred: Federal......................................... (27.4) (31.3) (27.6) Foreign......................................... (1.0) (1.3) .8 State........................................... .6 (.6) (2.2) ------- ------ ------ (27.8) (33.2) (29.0) ------- ------ ------ Total................................... $(146.3) $(94.1) $(68.4) ======= ====== ======
Significant components of deferred income tax assets and liabilities at December 31, 1998 and 1997, are as follows:
1998 1997 ------ ------ (IN MILLIONS) Deferred income tax assets: Accrual for postretirement benefits other than pensions.............................................. $128.8 $127.8 Inventories.............................................. 30.7 64.2 Other nondeductible accruals............................. 62.7 59.3 Tax credit and net operating loss carryovers............. 91.8 95.6 Other.................................................... 51.8 44.4 ------ ------ Total deferred income tax assets................. 365.8 391.3 ------ ------ Deferred income tax liabilities: Tax over book depreciation............................... (90.8) (72.3) Tax over book intangible amortization.................... (40.3) (17.2) Pensions................................................. (41.0) (47.7) Other.................................................... (11.9) (35.7) ------ ------ Total deferred income tax liabilities............ (184.0) (172.9) ------ ------ Net deferred income taxes................................ $181.8 $218.4 ====== ======
Management has determined, based on the Company's history of prior earnings and its expectations for the future, that taxable income of the Company will more likely than not be sufficient to recognize fully these net deferred tax assets. In addition, management's analysis indicates that the turnaround periods for certain of these assets are for long periods of time or are indefinite. In particular, the turnaround of the largest deferred tax asset related to accounting for postretirement benefits other than pensions will occur over an extended period of time and, as a result, will be realized for tax purposes over those future periods and beyond. The tax credit and net operating loss carryovers, principally relating to Rohr, are primarily comprised of federal net operating loss carryovers of $220.0 million which expire in the years 2005 through 2013, and investment tax credit and other credits of $15.1 million which expire in the years 2003 through 2014. The remaining deferred tax assets and liabilities approximately match each other in terms of timing and amounts and should be realizable in the future, given the Company's operating history. 45 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The effective income tax rate from continuing operations varied from the statutory federal income tax rate as follows:
PERCENT OF PRETAX INCOME -------------------------- 1998 1997 1996 ------ ------ ------ Statutory federal income tax rate........................... 35.0% 35.0% 35.0% Corporate-owned life insurance investments.................. (.2) -- (1.0) Amortization of nondeductible goodwill...................... 1.3 .9 1.0 Difference in rates on consolidated foreign subsidiaries.... .7 (.1) (.4) State and local taxes, net of federal benefit............... 3.0 1.3 2.5 Tax exempt income from foreign sales corporation............ (1.6) (3.3) (.1) QUIPS distributions......................................... (.8) (1.7) (1.9) Nondeductible merger-related costs.......................... -- 9.2 -- Other items................................................. .6 1.9 .1 ---- ---- ---- Effective income tax rate................................... 38.0% 43.2% 35.2% ==== ==== ====
The Company has not provided for U.S. federal and foreign withholding taxes on $133.7 million of foreign subsidiaries' undistributed earnings as of December 31, 1998, because such earnings are intended to be reinvested indefinitely. It is not practical to determine the amount of income tax liability that would result had such earnings actually been repatriated. On repatriation, certain foreign countries impose withholding taxes. The amount of withholding tax that would be payable on remittance of the entire amount of undistributed earnings would approximate $6.4 million. NOTE N BUSINESS SEGMENT INFORMATION The Company's operations are classified into two reportable business segments: BFGoodrich Aerospace ("Aerospace") and BFGoodrich Performance Materials ("Performance Materials"). The Company's two reportable business segments are managed separately based on fundamental differences in their operations. Aerospace consists of four business groups: Aerostructures; Landing Systems; Sensors and Integrated Systems; and Maintenance, Repair and Overhaul. They serve commercial, military, regional, business and general aviation markets. Aerospace's major products are aircraft engine nacelle and pylon systems; aircraft landing gear and wheels and brakes; sensors and sensor-based systems; fuel measurement and management systems; aircraft evacuation slides and rafts; ice protection systems, and collision warning systems. Aerospace also provides maintenance, repair and overhaul services on commercial airframes and components. Performance Materials consists of three business groups: Textile and Industrial Coatings, Polymer Additives and Specialty Plastics, and Consumer Specialties. They serve various markets such as personal-care, pharmaceuticals, printing, textiles, industrial, construction and automotive. Performance Materials' major products are thermoplastic polyurethane; high-heat-resistant plastics; synthetic thickeners and emulsifiers; polymer emulsions, resins and additives, and textile thickeners, binders, emulsions and compounds. The Company's business is conducted on a global basis with manufacturing, service and sales undertaken in various locations throughout the world. Aerospace's products and services and Performance Materials' products are principally sold to customers in North America and Europe. Segment operating income is total segment revenue reduced by operating expenses identifiable with that business segment. Corporate includes general corporate administrative costs and Advanced Technology Group research expenses. 46 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The Company evaluates performance and allocates resources based on operating income. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. There are no intersegment sales.
1998 1997 1996 -------- -------- -------- (IN MILLIONS) SALES Aerospace.......................................... $2,755.2 $2,468.3 $2,021.4 Performance Materials.............................. 1,195.6 904.7 824.4 -------- -------- -------- Total Sales................................ $3,950.8 $3,373.0 $2,845.8 ======== ======== ======== OPERATING INCOME Aerospace.......................................... $ 386.4 $ 260.3 $ 253.6 Performance Materials.............................. 145.8 128.2 109.5 -------- -------- -------- 532.2 388.5 363.1 Corporate General and Administrative Expenses(2)... (55.4) (138.4) (52.8) -------- -------- -------- Total Operating Income..................... $ 476.8 $ 250.1 $ 310.3 ======== ======== ======== ASSETS Aerospace.......................................... $2,372.5 $2,347.0 $2,169.2 Performance Materials.............................. 1,369.5 877.3 784.6 Corporate.......................................... 450.6 269.6 626.0 -------- -------- -------- Total Assets............................... $4,192.6 $3,493.9 $3,579.8 ======== ======== ======== CAPITAL EXPENDITURES Aerospace.......................................... $ 134.1 $ 81.9 $ 64.6 Performance Materials.............................. 70.6 73.2 97.5 Corporate.......................................... 3.8 4.8 35.0 -------- -------- -------- Total Capital Expenditures................. $ 208.5 $ 159.9 $ 197.1 ======== ======== ======== DEPRECIATION AND AMORTIZATION EXPENSE Aerospace.......................................... $ 87.3 $ 82.6 $ 79.3 Performance Materials.............................. 75.3 48.2 39.0 Corporate.......................................... 2.8 8.0 21.5 -------- -------- -------- Total Depreciation and Amortization........ $ 165.4 $ 138.8 $ 139.8 ======== ======== ======== GEOGRAPHIC AREAS NET SALES United States................................... $2,631.7 $2,307.8 $1,989.7 Europe(1)....................................... 843.8 723.7 525.2 Other Foreign................................... 475.3 341.5 330.9 -------- -------- -------- Total...................................... $3,950.8 $3,373.0 $2,845.8 ======== ======== ======== PROPERTY United States................................... $1,104.8 $ 947.3 $1,015.1 Europe.......................................... 148.3 116.5 108.3 Other Foreign................................... 2.8 1.3 18.6 -------- -------- -------- Total...................................... $1,255.9 $1,065.1 $1,142.0 ======== ======== ========
- --------------- (1) European sales in 1998, 1997 and 1996 included $262.3 million, $418.9 million and $248.5 million, respectively, of sales to customers in France. Sales were allocated to geographic areas based on where the product was shipped to. (2) Corporate general and administrative expenses in 1997 include merger costs of $77.0 million. 47 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED In 1998, 1997 and 1996, sales to Boeing, solely by the Aerospace Segment, totaled 14 percent, 14 percent and 13 percent, respectively, of consolidated sales. Sales to Boeing include sales to McDonnell Douglas which merged with Boeing in 1997. NOTE O PUBLIC OFFERING OF SUBSIDIARY STOCK In May 1997, the Company's subsidiary, DTM Corporation ("DTM"), issued 2,852,191 shares of its authorized but previously unissued common stock in an initial public offering ("IPO"). As a result of the IPO, the Company's interest declined from approximately 92 percent to approximately 50 percent (the Company did not sell any of its interest in the IPO). The Company recognized a pretax gain of $13.7 million ($8.0 million after tax) in accordance with the SEC's Staff Accounting Bulletin 84. In February 1999, the Company sold its remaining interest in DTM for approximately $3.5 million. The Company's net investment in DTM approximated $0.5 million at December 31, 1998. The gain will be recorded within Other Income (Expense) during the first quarter of 1999. NOTE P SUPPLEMENTAL BALANCE SHEET INFORMATION
BALANCE CHARGED BALANCE BEGINNING TO COSTS AT END OF YEAR AND EXPENSE OTHER DEDUCTIONS (1) OF YEAR --------- ----------- ----- -------------- -------- ACCOUNTS RECEIVABLE ALLOWANCE (DOLLARS IN MILLIONS) Year ended December 31, 1998............... $21.3 $ 5.8 $ .9(2) $ (5.4) $22.6 Year ended December 31, 1997............... 26.2 15.6 .7(2) (2.1)(3) (19.1) 21.3 Year ended December 31, 1996............... 24.7 6.0 2.9(2) (7.4) 26.2
- --------------- (1) Write-off of doubtful accounts, net of recoveries (2) Allowance related to acquisitions (3) Allowance related to operations that were sold
1998 1997 --------- --------- (IN MILLIONS) PROPERTY Land........................................................ $ 50.2 $ 41.8 Buildings and improvements.................................. 666.0 632.9 Machinery and equipment..................................... 1,417.2 1,215.7 Construction in progress.................................... 164.7 125.0 --------- --------- $ 2,298.1 $ 2,015.4 Less allowances for depreciation and amortization........... (1,042.2) (950.3) --------- --------- Total............................................. $ 1,255.9 $ 1,065.1 ========= =========
Property includes assets acquired under capital leases, principally buildings and machinery and equipment, of $17.0 million and $33.4 million at December 31, 1998 and 1997, respectively. Related allowances for depreciation and amortization are $5.4 million and $15.5 million, respectively. Interest costs capitalized from continuing operations were $3.5 million in 1998, $5.3 million in 1997 and $6.3 million in 1996. Amounts charged to expense for depreciation and amortization from continuing operations during 1998, 1997 and 1996 were $128.0 million, $111.3 million and $101.2 million, respectively. 48 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1998 1997 ------ ------ (IN MILLIONS) GOODWILL Accumulated amortization.................................... $100.2 $ 71.4 ====== ====== IDENTIFIABLE INTANGIBLE ASSETS Accumulated amortization.................................... $ 29.3 $ 26.0 ====== ======
Amortization of goodwill and identifiable intangible assets from continuing operations was $37.4 million, $22.2 million and $20.1 million in 1998, 1997 and 1996, respectively.
1998 1997 ------ ------ (IN MILLIONS) ACCRUED EXPENSES Wages, vacations, pensions and other employment costs....... $149.4 $164.9 Postretirement benefits other than pensions................. 30.0 26.1 Taxes, other than federal and foreign taxes on income....... 53.7 42.3 Accrued environmental liabilities........................... 18.8 18.0 Accrued interest............................................ 34.9 27.0 Other....................................................... 133.3 133.0 ------ ------ Total............................................. $420.1 $411.3 ====== ======
FAIR VALUES OF FINANCIAL INSTRUMENTS The Company's accounting policies with respect to financial instruments are described in Note A. The carrying amounts of the Company's significant on balance sheet financial instruments approximate their respective fair values at December 31, 1998 and 1997, except for the Company's long-term debt.
1998 1997 -------- ------ (IN MILLIONS) Long-term debt (including current portion) Carrying Amount........................................... $ 998.0 $567.5 Fair Value................................................ $1,183.5 $605.6
Off balance sheet derivative financial instruments at December 31, 1998 and 1997, held for purposes other than trading, were as follows:
1998 1997 ------------------------ ------------------------ CONTRACT/ FAIR CONTRACT/ FAIR NOTIONAL AMOUNT VALUE NOTIONAL AMOUNT VALUE --------------- ----- --------------- ----- (IN MILLIONS) Interest rate swaps.................. $26.8 $(2.1) $25.5 $(1.3) Foreign currency forward contracts... 4.2 -- 12.2 (.1) Foreign currency swap agreements..... -- -- .7 --
At December 31, 1998, the Company had one interest rate swap agreement, wherein the Company pays a fixed rate of interest and receives a LIBOR-based floating rate. Foreign currency forward contracts mature over the next two months coincident with the anticipated settlement of accounts receivable and accounts payable in Europe. No additional cash requirements are necessary with respect to outstanding agreements. The counterparties to each of these agreements are major commercial banks. Management believes that losses related to credit risk are remote. 49 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1998 1997 1996 ------ ------ ------ (IN MILLIONS) ACCUMULATED OTHER COMPREHENSIVE INCOME Unrealized foreign currency translation................... $ 4.2 $ (1.7) $ 5.9 Minimum pension liability................................. (0.6) (1.8) (26.4) ------ ------ ------ Total........................................... $ 3.6 $ (3.5) $(20.5) ====== ====== ======
NOTE Q SUPPLEMENTAL CASH FLOW INFORMATION The following tables set forth non-cash financing and investing activities and other cash flow information. Acquisitions accounted for under the purchase method are summarized as follows:
1998 1997 1996 ------- ------- ------- (IN MILLIONS) Estimated fair value of tangible assets acquired....... $ 232.0 $ 70.1 $ 46.4 Goodwill and identifiable intangible assets acquired... 315.4 75.8 81.7 Cash paid.............................................. (427.2) (133.4) (107.9) ------- ------- ------- Liabilities assumed or created......................... $ 120.2 $ 12.5 $ 20.2 ======= ======= ======= Liabilities disposed of in connection with sales of businesses........................................... $ -- $ 44.2 $ 1.5 Assets acquired in connection with sale of business.... -- -- 27.6 Interest paid (net of amount capitalized).............. 68.0 81.5 88.6 Income taxes paid...................................... 27.6 145.9 34.8 Contribution of common stock to pension trust.......... -- -- 30.0 Exchange of 7.75% Convertible Notes.................... -- (1.3) (37.8) Change in equity due to exchange of 7.75% Convertible Notes................................................ -- 1.5 43.1
NOTE R PREFERRED STOCK There are 10,000,000 authorized shares of Series Preferred Stock -- $1 par value. Shares of Series Preferred Stock that have been redeemed are deemed retired and extinguished and may not be reissued. As of December 31, 1998, 2,401,673 shares of Series Preferred Stock have been redeemed, and no shares of Series Preferred Stock were outstanding. The Board of Directors establishes and designates the series and fixes the number of shares and the relative rights, preferences and limitations of the respective series of the Series Preferred Stock. Cumulative Participating Preferred Stock -- Series F The Company has 200,000 shares of Junior Participating Preferred Stock-Series F -- $1 par value authorized at December 31, 1998. Series F shares have preferential voting, dividend and liquidation rights over the Company's common stock. At December 31, 1998, no Series F shares were issued or outstanding and 81,812 shares were reserved for issuance. On August 2, 1997, the Company made a dividend distribution of one Preferred Share Purchase Right ("Right") on each share of the Company's common stock. These Rights replace previous shareholder rights which expired on August 2, 1997. Each Right, when exercisable, entitles the registered holder thereof to purchase from the Company one one-thousandth of a share of Series F Stock at a price of $200 per one one-thousandth of a share (subject to adjustment). The one one-thousandth of a share is intended to be the functional equivalent of one share of the Company's common stock. The Rights are not exercisable or transferable apart from the common stock until an Acquiring Person, as defined in the Rights Agreement without the prior consent of the Company's Board of Directors, acquires 20 percent or more of the voting power of the Company's common stock or announces a tender offer that would result in 20 percent ownership. The Company is entitled to redeem the Rights at 1 cent per Right any time before 50 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED a 20 percent position has been acquired or in connection with certain transactions thereafter announced. Under certain circumstances, including the acquisition of 20 percent of the Company's common stock, each Right not owned by a potential Acquiring Person will entitle its holder to purchase, at the Right's then-current exercise price, shares of Series F Stock having a market value of twice the Right's exercise price. Holders of the Right are entitled to buy stock of an Acquiring Person at a similar discount if, after the acquisition of 20 percent or more of the Company's voting power, the Company is involved in a merger or other business combination transaction with another person in which its common shares are changed or converted, or the Company sells 50 percent or more of its assets or earnings power to another person. The Rights expire on August 2, 2007. NOTE S COMMON STOCK During 1998, 1997 and 1996, 1,031,870; 826,388 and 600,057 shares, respectively, of authorized but unissued shares of common stock were issued under the Stock Option Plan and other employee stock ownership plans. On December 22, 1997, 18,588,004 shares of common stock were issued in connection with the merger with Rohr (see Note D). During 1998, 1,235,051 shares of authorized but previously unissued shares of common stock were issued upon conversion of Rohr debentures that were extinguished in late 1997. During 1996, 754,717 shares ($30.0 million) of authorized but previously unissued shares of common stock were issued and contributed to the Company's defined benefit wage and salary pension plans. In addition, 2,006,868 shares ($48.0 million) of common stock related to Rohr's pension plans were contributed during the period between August 1 and December 31, 1996 and, as a result, are included in equity as part of the adjustment to conform Rohr's fiscal year. The Company acquired 627,539; 53,137 and 52,949 shares of treasury stock in 1998, 1997 and 1996, respectively, and reissued none in 1998; 5,000 in 1997 and 22,500 shares in 1996, in connection with the Stock Option Plan and other employee stock ownership plans. In 1998, 1997 and 1996, 15,333; 19,900 and 60,400 shares, respectively, of common stock previously awarded to employees were forfeited and restored to treasury stock. As of December 31, 1998, there were 5,598,814 shares reserved for future issuance under the Stock Option Plan. NOTE T PREFERRED SECURITIES OF TRUST On July 6, 1995, BFGoodrich Capital, a wholly owned Delaware statutory business trust (the "Trust") which is consolidated by the Company, received $122.5 million, net of the underwriting commission, from the issuance of 8.3 percent Cumulative Quarterly Income Preferred Securities, Series A ("QUIPS"). The Trust invested the proceeds in 8.3 percent Junior Subordinated Debentures, Series A, due 2025 ("Junior Subordinated Debentures") issued by the Company, which represent approximately 97 percent of the total assets of the Trust. The Company used the proceeds from the Junior Subordinated Debentures primarily to redeem all of the outstanding shares of the $3.50 Cumulative Convertible Preferred Stock, Series D. The QUIPS have a liquidation value of $25 per Preferred Security, mature in 2025 and are subject to mandatory redemption upon repayment of the Junior Subordinated Debentures. The Company has the option at any time on or after July 6, 2000, to redeem, in whole or in part, the Junior Subordinated Debentures with the proceeds from the issuance and sale of the Company's common stock within two years preceding the date fixed for redemption. The Company has unconditionally guaranteed all distributions required to be made by the Trust, but only to the extent the Trust has funds legally available for such distributions. The only source of funds for the Trust to make distributions to preferred security holders is the payment by the Company of interest on the Junior 51 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Subordinated Debentures. The Company has the right to defer such interest payments for up to five years. If the Company defers any interest payments, the Company may not, among other things, pay any dividends on its capital stock until all interest in arrears is paid to the Trust. NOTE U STOCK OPTION PLAN At December 31, 1998, the Company had stock-based compensation plans described below that include the pre-merger plans of Rohr. Effective with the merger, outstanding Rohr options were assumed by the Company and converted to fully-vested options to purchase BFGoodrich common stock at a ratio of .7 of one share of BFGoodrich common stock for each Rohr option and at an appropriately revised exercise price. The Stock Option Plan, which will expire on April 5, 2001, unless renewed, provides for the awarding of or the granting of options to purchase 3,200,000 shares of common stock of the Company. Generally, options granted are exercisable at the rate of 35 percent after one year, 70 percent after two years and 100 percent after three years. Certain options are fully exercisable immediately after grant. The term of each option cannot exceed 10 years from the date of grant. All options granted under the Plan have been granted at not less than 100 percent of market value (as defined) on the date of grant. Pro forma information regarding net income and earnings per share is required by FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
1998 1997 1996 ------ ------ ------ Risk-Free Interest Rate (%)...................... 4.68 5.75 5.39 Dividend Yield (%)............................... 2.8 2.7 2.5 Volatility Factor (%)............................ 31.0 16.2 19.0 Weighted Average Expected Life of the Options (years)........................................ 4.7 5.2 5.0
The assumptions used were comparable for BFGoodrich's and Rohr's stock options, except that for the Rohr options, the dividend yield assumption was zero and the volatility factor was 43.8 percent in 1997 and 43.1 percent in 1996. The option valuation model requires the input of highly subjective assumptions, primarily stock price volatility, changes in which can materially affect the fair value estimate. The weighted-average fair values of stock options granted during 1998, 1997 and 1996 were $10.62, $7.59 and $7.28, respectively. For purposes of the pro forma disclosures required by SFAS 123, the estimated fair value of the options is amortized to expense over the options' vesting period. In addition, the grant-date fair value of performance shares (discussed below) is amortized to expense over the three-year plan cycle without adjustments for subsequent 52 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED changes in the market price of the Company's common stock. The Company's pro forma information is as follows:
1998 1997 1996 ----------- ----------- ----------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Net income: As reported................................... $226.5 $178.2 $173.9 Pro forma..................................... 221.3 170.6 172.8 Earnings per share: Basic As reported................................ $ 3.07 $ 2.51 $ 2.61 Pro forma.................................. 3.00 2.40 2.59 Diluted As reported................................ $ 3.02 $ 2.41 $ 2.48 Pro forma.................................. 2.95 2.30 2.45
The pro forma effect on net income for 1996 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. In addition, the pro forma effect on net income in 1997 is not representative of the pro forma effect on net income in future years because 1997 includes $4.5 million of after-tax compensation expense related to the Rohr options which became fully vested upon the consummation of the merger with Rohr. A summary of the Company's stock option activity and related information follows:
YEAR ENDED DECEMBER 31, 1998 WEIGHTED-AVERAGE (OPTIONS IN THOUSANDS) OPTIONS EXERCISE PRICE ---------------------------- ------- ---------------- Outstanding at beginning of year..................... 4,018.0 $29.25 Granted.............................................. 990.7 41.92 Exercised............................................ (871.6) 28.56 Forfeited............................................ (80.2) 35.46 Expired.............................................. (2.1) 38.04 ------- Outstanding at end of year........................... 4,054.8 32.27 =======
YEAR ENDED DECEMBER 31, 1997 WEIGHTED-AVERAGE (OPTIONS IN THOUSANDS) OPTIONS EXERCISE PRICE ---------------------------- -------- ---------------- Outstanding at beginning of year.................... 4,943.8 $25.16 Granted............................................. 846.7 40.51 Exercised........................................... (1,661.1) 22.44 Forfeited........................................... (97.1) 33.96 Expired............................................. (14.3) 43.64 -------- Outstanding at end of year.......................... 4,018.0 29.25 ========
YEAR ENDED DECEMBER 31, 1996 WEIGHTED-AVERAGE (OPTIONS IN THOUSANDS) OPTIONS EXERCISE PRICE ---------------------------- ------- ---------------- Outstanding at beginning of year..................... 4,212.6 $22.96 Granted.............................................. 1,612.2 28.85 Exercised............................................ (842.4) 21.33 Forfeited............................................ (96.4) 26.64 Expired.............................................. (54.2) 39.24 ------- Outstanding at end of year........................... 4,831.8 24.96 =======
53 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The number of options outstanding at the end of 1996 does not agree with the beginning amount for 1997 due to option activity for Rohr during the five-month period ended December 31, 1996, not reflected in the 1996 activity above. The following table summarizes information about the Company's stock options outstanding at December 31, 1998:
WEIGHTED- OPTIONS OPTIONS WEIGHTED- AVERAGE OUTSTANDING EXERCISEABLE AVERAGE REMAINING GRANT (IN (IN EXERCISE CONTRACTUAL DATE THOUSANDS) THOUSANDS) PRICE LIFE (YEARS) ----- ----------- ------------ --------- ------------ 1998............................... 943.3 217.6 $41.94 9.0 1997............................... 741.2 490.5 40.58 8.2 1996............................... 735.3 611.6 33.66 7.1 1995............................... 753.1 753.1 21.58 6.2 1994............................... 161.5 161.5 18.26 5.1 All other.......................... 720.4 720.5 23.95 2.5 ------- ------- Total.................... 4,054.8 2,954.8 ======= =======
Stock options in the "All other" category were outstanding at prices ranging from $15.00 to $45.18. During 1998, 1997 and 1996, restricted stock awards for 500; 9,761 and 26,103 shares, respectively, were made under the Stock Option Plan. During 1998, 1997 and 1996, stock awards for 4,977; 5,500 and 25,400 restricted shares, respectively, were forfeited. Restricted stock awards may be subject to conditions established by the Board of Directors. Under the terms of the restricted stock awards, the granted stock vests three years after the award date. The cost of these awards, determined as the market value of the shares at the date of grant, is being amortized over the three-year period. In 1998, 1997 and 1996, $0.1 million, $1.8 million and $1.9 million, respectively, were charged to expense for restricted stock awards. The Stock Option Plan also provides that shares of common stock may be awarded as performance shares to certain key executives having a critical impact on the long-term performance of the Company. In 1995, the Compensation Committee of the Board of Directors awarded 566,200 shares and established performance objectives that are based on attainment of an average return on equity over the three-year plan cycle ending in 1997. Since the company exceeded all of the performance objectives established in 1995, an additional 159,445 shares were awarded to those key executives in 1998. In 1997 and 1996, 5,000 and 14,560 performance shares, respectively were granted to certain key executives that commenced employment during those years. During 1998, 1997 and 1996, 10,356; 14,400 and 35,000 performance shares, respectively, were forfeited. Prior to 1998, the market value of performance shares awarded under the plan was recorded as unearned restricted stock. In 1998, the Company changed the plan to a phantom performance share plan and issued 207,800 phantom performance shares. Under this plan, compensation expense is recorded based on the extent performance objectives are expected to be met. In 1998, 1997 and 1996, $1.7 million, $14.3 million and $8.3 million, respectively, were charged to expense for performance shares. If the provisions of SFAS 123 had been used to account for awards of performance shares, the weighted-average grant-date fair value of performance shares granted in 1998, 1997 and 1996 would have been $45.47, $41.44 and $38.54 per share, respectively. NOTE V COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries have numerous purchase commitments for materials, supplies and energy incident to the ordinary course of business. There are pending or threatened against BFGoodrich or its subsidiaries various claims, lawsuits and administrative proceedings, all arising from the ordinary course of business with respect to commercial, product liability and environmental matters, which seek remedies or damages. The Company believes that any liability 54 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED that may finally be determined with respect to commercial and product liability claims, should not have a material effect on the Company's consolidated financial position or results of operations. The Company is also involved in legal proceedings as a plaintiff involving contract, patent protection, environmental and other matters. Gain contingencies, if any, are recognized when realized. At December 31, 1998, the Company was a party to various obligations assumed or issued by others, including guarantees of debt and lease obligations, principally relating to businesses previously disposed. The aggregate contingent liability, should the various third parties fail to perform, is approximately $35.1 million. The Company has not previously been required to assume any responsibility for these financial obligations as a result of defaults and is not currently aware of any existing conditions which would cause a financial loss. As a result, the Company believes that risk of loss relative to these contingent obligations is remote. The Company and its subsidiaries are generators of both hazardous and non-hazardous wastes, the treatment, storage, transportation and disposal of which are subject to various laws and governmental regulations. Although past operations were in substantial compliance with the then-applicable regulations, the Company has been designated as a potentially responsible party ("PRP") by the U.S. Environmental Protection Agency ("EPA") in connection with approximately 43 sites, most of which related to businesses previously discontinued. The Company believes it may have continuing liability with respect to not more than 19 sites. The Company initiates corrective and/or preventive environmental projects of its own to ensure safe and lawful activities at its current operations. The Company believes that compliance with current governmental regulations will not have a material adverse effect on its capital expenditures, earnings or competitive position. The Company's environmental engineers and consultants review and monitor past and existing operating sites. This process includes investigation of National Priority List sites, where the Company is considered a PRP, review of remediation methods and negotiation with other PRPs and governmental agencies. At December 31, 1998, the Company has recorded in Accrued Expenses and in Other Non-current Liabilities a total of $57.4 million to cover future environmental expenditures, principally for remediation of the aforementioned sites and other environmental matters. The Company believes that it has adequately reserved for all of the above sites based on currently available information. Management believes that it is reasonably possible that additional costs may be incurred beyond the amounts accrued as a result of new information. However, the amounts, if any, cannot be estimated and management believes that they would not be material to the Company's financial condition but could be material to the Company's results of operations in a given period. In addition, the Company expects to incur capital expenditures and future costs for environmental, health and safety improvement programs. These expenditures relate to anticipated projects to change process systems or to install new equipment to reduce ongoing emissions, improve efficiencies and promote greater worker health and safety. These expenditures are customary operational costs and are not expected to have a material adverse effect on the financial position, liquidity or results of operations of the Company. At December 31, 1998, approximately 19 percent of the Company's labor force was covered by collective bargaining agreements. Approximately 4 percent of the labor force is covered by collective bargaining agreements that will expire during 1999. 55 58 QUARTERLY FINANCIAL DATA (UNAUDITED)
1998 QUARTERS 1997 QUARTERS ------------------------------------- --------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH ------ -------- ------ -------- ------ ------ ------ ------ (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) BUSINESS SEGMENT SALES: Aerospace.......................... $685.3 $ 670.1 $681.4 $ 718.4 $541.5 $618.1 $646.5 $662.2 Performance Materials.............. 252.4 340.9 304.8 297.5 222.7 228.4 223.7 229.9 ------ -------- ------ -------- ------ ------ ------ ------ Total Sales...................... $937.7 $1,011.0 $986.2 $1,015.9 $764.2 $846.5 $870.2 $892.1 ====== ======== ====== ======== ====== ====== ====== ====== Gross Profit..................... $254.2 $ 278.0 $276.2 $ 289.3 $203.0 $228.5 $218.5 $233.1 ====== ======== ====== ======== ====== ====== ====== ====== BUSINESS SEGMENT OPERATING INCOME: Aerospace.......................... $ 87.9 $ 90.9 $101.1 $ 106.5 $ 55.0 $ 73.3 $ 63.5 $ 68.5 Performance Materials.............. 36.6 40.2 37.4 31.6 31.1 31.1 31.8 34.2 Corporate.......................... (13.8) (13.7) (12.9) (15.0) (14.8) (15.2) (16.3) (92.1) ------ -------- ------ -------- ------ ------ ------ ------ Total Operating Income........... $110.7 $ 117.4 $125.6 $ 123.1 $ 71.3 $ 89.2 $ 79.0 $ 10.6 ====== ======== ====== ======== ====== ====== ====== ====== INCOME (LOSS) FROM: Continuing Operations.............. $ 54.2 $ 55.9 $ 59.7 $ 58.3 $ 29.8 $ 64.5 $ 37.4 $(18.5) Discontinued Operations............ (1.6) -- -- -- 64.1 3.4 16.8 -- Extraordinary Items................ -- -- -- -- -- -- (2.6) (16.7) ------ -------- ------ -------- ------ ------ ------ ------ Net Income (Loss)................ $ 52.6 $ 55.9 $ 59.7 $ 58.3 $ 93.9 $ 67.9 $ 51.6 $(35.2) ====== ======== ====== ======== ====== ====== ====== ====== Basic Earnings (Loss) Per Share: Continuing operations.............. $ .74 $ .76 $ .80 $ .78 $ .42 $ .91 $ .53 $ (.26) Net income (loss).................. $ .72 $ .76 $ .80 $ .78 $ 1.33 $ .96 $ .73 $ (.49) Diluted Earnings (Loss) Per Share: Continuing operations.............. $ .72 $ .74 $ .80 $ .78 $ .40 $ .87 $ .50 $ (.26) Net income (loss).................. $ .70 $ .74 $ .80 $ .78 $ 1.27 $ .91 $ .69 $ (.49)
The fourth quarter of 1998 includes a $6.5 million after-tax loss from a restructuring charge and a write-down of an impaired asset in the Aerospace Segment. The first quarter of 1997 includes a $59.5 million after-tax gain in discontinued operations from the sale of the SC&A Group. The second quarter includes a pretax gain of $26.4 million from the sale of the Company's engine electrical business and a $13.7 million pretax gain on the issuance of a subsidiary's stock. In the third quarter of 1997, the Company recognized a $35.2 million pretax loss to write off a portion of the MD-90 contract and recognized a $2.6 million after-tax charge from the early extinguishment of certain Rohr debt (reported as an extraordinary item). In the fourth quarter of 1997, the Company recognized pretax charges of $77.0 million for merger costs and $10.9 million from the write-off of accounts receivable from a bankrupt customer. The fourth quarter of 1997 also includes a $16.7 million after-tax charge for the early extinguishment of certain Rohr debt refinanced in connection with the merger, also reported as an extraordinary item. 56 59 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Biographical information concerning the Company's Directors appearing under the caption "Election of Directors" in the Company's proxy statement dated March 4, 1999 is incorporated herein by reference. Biographical information concerning the Company's Executive Officers is as follows: David L. Burner, Age 59, Chairman, President and Chief Executive Officer Mr. Burner joined the Company in 1983 as Vice President, Finance, for the Company's Engineered Products Group. He served in several other management positions before being named Executive Vice President of BFGoodrich Aerospace in 1985. He was appointed President of BFGoodrich Aerospace in 1987. Mr. Burner was elected a Senior Vice President in 1990, an Executive Vice President in 1993, President in December 1995, assumed the additional title of Chief Executive Officer in December 1996 and became Chairman in July 1997. Before joining BFGoodrich he was Executive Vice President and Chief Financial Officer of ABS Industries in Willoughby, Ohio. Mr. Burner received a B.S.C. degree in accounting from Ohio University. Marshall O. Larsen, Age 50, Executive Vice President and President and Chief Operating Officer, BFGoodrich Aerospace Mr. Larsen joined the Company in 1977 as an Operations Analyst. He served in various management positions until 1986 when he became Assistant to the President of the Company. He later served as General Manager of several divisions of BFGoodrich Aerospace. In 1994, Mr. Larsen was elected a Vice President of the Company and named Group Vice President, Safety Systems, BFGoodrich Aerospace. In December 1995 he was elected Executive Vice President of the Company and named President and Chief Operating Officer of BFGoodrich Aerospace. Mr. Larsen has a B.S. in engineering from the U.S. Military Academy and an M.S. in industrial administration from the Krannert Graduate School of Management at Purdue University. David B. Price, Jr., Age 53, Executive Vice President and President and Chief Operating Officer, BFGoodrich Performance Materials Mr. Price joined BFGoodrich in July 1997 in his present capacity. Prior to joining BFGoodrich, he was President of Performance Materials of Monsanto Company since 1995. Prior positions held by Mr. Price at Monsanto include Vice President and General Manager of commercial operations for the Industrial Products Group from 1993 to 1995, Vice President and General Manager of the Performance Products Group from 1991 to 1993, and Vice President and General Manager of Specialty Chemicals Division from 1987 to 1991. Mr. Price has a B.S. in civil engineering from the University of Missouri and an M.B.A. from Harvard University. Laurence A. Chapman, Age 49, Senior Vice President -- Finance Mr. Chapman was elected to his current position in February 1999. He had been Senior Vice President and Chief Financial Officer of BFGoodrich Aerospace -- Aerostructures Group, formerly Rohr, Inc. from December 1997 until February 1999. Previously, Mr. Chapman was Senior Vice President and Chief Financial Officer of Rohr, Inc. since 1994. From 1987 to 1994, Mr. Chapman held various executive positions at Westinghouse Electric Company, most recently Vice President and Treasurer and Chief Financial Officer of Westinghouse Financial Services. Mr. Chapman received a BA in accounting from McGill University and an MBA from Harvard Graduate School of Business. Terrence G. Linnert, Age 52, Senior Vice President and General Counsel Mr. Linnert joined BFGoodrich in November 1997. Prior to joining BFGoodrich, Mr. Linnert was senior vice president of corporate administration, chief financial officer and general counsel at Centerior Energy Corporation. 57 60 At BFGoodrich, Mr. Linnert has responsibilities for the Company's legal, internal auditing, environmental and federal government relations organizations. Mr. Linnert joined The Cleveland Electric Illuminating Company in 1968, holding various engineering, procurement and legal positions until 1986, when CEI and The Toledo Edison Company became affiliated as wholly owned subsidiaries of Centerior Energy Corporation. Subsequently, Mr. Linnert had a variety of legal responsibilities until he was named director of legal services in 1990. In 1992, he was appointed a vice president, with responsibilities for legal, governmental and regulatory affairs. Prior to joining the Company, his responsibilities at Centerior included managing the legal, finance, human resources, regulatory and governmental affairs, internal auditing and corporate secretary functions. Mr. Linnert received a bachelor of science degree in electrical engineering from the University of Notre Dame in 1968 and a juris doctor degree from the Cleveland-Marshall School of Law at Cleveland State University in 1975. Les C. Vinney, Age 50, Senior Vice President and Chief Financial Officer Mr. Vinney joined the Company in 1991 as Vice President of Finance and Chief Financial Officer, Specialty Polymers and Chemicals Division. In 1993, he was named Senior Vice President, Finance and Administration, BFGoodrich Specialty Chemicals. In 1994, he was named Group Vice President, Sealants, Coatings and Adhesives Group, and President, Tremco Incorporated, and elected a Vice President of the Company. In January 1997, Mr. Vinney was elected Vice President and Treasurer of the Company. In April 1998, Mr. Vinney was elected Senior Vice President and was named Chief Financial Officer in July 1998. Prior to joining the Company, he was with Engelhard Corporation in a number of senior operating and financial management positions, including Group Vice President of the Engineered Materials Division. He also held various management positions with Exxon Corporation. Mr. Vinney has a B.A. in economics and political science and an M.B.A. from Cornell University. Robert D. Koney, Jr., Age 42, Vice President and Controller Mr. Koney joined the Company in 1986 as a financial accounting manager. He became Assistant Controller for BFGoodrich Aerospace in 1992 before being appointed Vice President and Controller for the Commercial Wheels and Brakes business in 1994. He was elected Vice President and Controller in April 1998. Prior to joining BFGoodrich, he held management positions with Picker International and Arthur Andersen & Company. Mr. Koney received a B.A. in accounting from the University of Notre Dame and an M.B.A. in business administration from Case Western Reserve University. ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation appearing under the captions "Compensation Committee Report" and "Compensation of Directors" in the Company's proxy statement dated March 4, 1999 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security ownership data appearing under the captions "Holdings of Company Equity Securities by Directors and Executive Officers" and "Beneficial Ownership of Securities" in the Company's proxy statement dated March 4, 1999 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 58 61 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: (1) Consolidated Financial Statements of The BFGoodrich Company and its subsidiaries
PAGE ----- Management's Responsibility for Financial Statements........ 25 Report of Independent Auditors.............................. 26 Consolidated Statement of Income for the years ended December 31, 1998, 1997, and 1996......................... 27 Consolidated Balance Sheet at December 31, 1998 and 1997.... 28 Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997, and 1996......................... 29 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1998, 1997, and 1996................... 30 Notes to Consolidated Financial Statements.................. 31-55 Quarterly Financial Data (Unaudited)........................ 56
(2) Consolidated Financial Statement Schedules: Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes to the Consolidated Financial Statements. (3) Listing of Exhibits: A listing of exhibits is on pages II-1 to II-3 of this Form 10-K. (b) Reports on Form 8-K filed in the fourth quarter of 1998: Filed November 24, 1998, relating to the merger with Coltec Industries, Inc. 59 62 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) 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 ON FEBRUARY 15, 1999. THE BFGOODRICH COMPANY (Registrant) By /s/ DAVID L. BURNER ------------------------------------ (David L. Burner, Chairman and Chief Executive Officer) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW ON FEBRUARY 15, 1999 BY THE FOLLOWING PERSONS (INCLUDING A MAJORITY OF THE BOARD OF DIRECTORS) ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED. /s/ DAVID L. BURNER /s/ JODIE K. GLORE - -------------------------------------------- -------------------------------------------- (David L. Burner) (Jodie K. Glore) Chairman and Chief Executive Officer Director and Director (Principal Executive Officer) /s/ LES C. VINNEY /s/ DOUGLAS E. OLESEN - -------------------------------------------- -------------------------------------------- (Les C. Vinney) (Douglas E. Olesen) Senior Vice President and Chief Financial Director Officer (Principal Financial Officer) /s/ ROBERT D. KONEY, JR. /s/ RICHARD DE J. OSBORNE - -------------------------------------------- -------------------------------------------- (Robert D. Koney, Jr.) (Richard de J. Osborne) Vice President and Controller Director (Principal Accounting Officer) /s/ JEANETTE GRASSELLI BROWN /s/ ALFRED M. RANKIN, JR. - -------------------------------------------- -------------------------------------------- (Jeanette Grasselli Brown) (Alfred M. Rankin, Jr.) Director Director /s/ DIANE C. CREEL /s/ ROBERT H. RAU - -------------------------------------------- -------------------------------------------- (Diane C. Creel) (Robert H. Rau) Director Director /s/ GEORGE A. DAVIDSON, JR. /s/ JAMES R. WILSON - -------------------------------------------- -------------------------------------------- (George A. Davidson, Jr.) (James R. Wilson) Director Director /s/ JAMES J. GLASSER /s/ A. THOMAS YOUNG - -------------------------------------------- -------------------------------------------- (James J. Glasser) (A. Thomas Young) Director Director
60 63 ITEM 14(a)(3) INDEX TO EXHIBITS
TABLE II EXHIBIT NO. - ----------- 3(A) The Company's Restated Certificate of Incorporation, with amendments filed August 4, 1997 and May 6, 1998. 3(B) The Company's By-Laws, as amended, through April 20, 1998, which was filed with the same designation as an exhibit to the Company's 10-Q Report for the Quarter ended March 31, 1998, and is incorporated herein by reference. 4 Information relating to the Company's long-term debt is set forth in Note J -- "Financing Arrangements" on pages 40 and 41 of this Form 10-K. Instruments defining the rights of holders of such long-term debt are not filed herewith since no single debt item exceeds 10% of consolidated assets. Copies of such instruments will be furnished to the Commission upon request. 10(A) Stock Option Plan. 10(B) Form of Disability Income Agreement. This exhibit was filed as Exhibit 10(B)(4) to the Company's Form 10-K Annual Report for the year ended December 31, 1998, and is incorporated herein by reference. 10(C) Form of Supplemental Executive Retirement Plan Agreement. 10(D) Management Incentive Program. 10(E) Form of Management Continuity Agreement entered into by The B.F.Goodrich Company and certain of its employees. 10(F) Senior Executive Management Incentive Plan. This exhibit was filed as Appendix B to the Company's 1995 Proxy Statement dated March 2, 1995 and is incorporated herein by reference. 10(G) Rights Agreement, dated as of June 2, 1997, between The B.F.Goodrich Company and The Bank of New York which includes the form of Certificate of Amendment setting forth the terms of the Junior Participating Preferred Stock, Series F, par value $1 per share, as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C which was filed as Exhibit 1 to Form 8-A filed June 19, 1997 is incorporated herein by reference. 10(H) Employee Protection Plan. This exhibit was filed as Exhibit 10(I) to the Company's Form 10-Q for the quarter ended June 30, 1997, and is incorporated herein by reference. 10(I) Benefit Restoration Plan. This exhibit was filed as Exhibit 10(J) to the Company's Form 10-K Annual Report for the year ended December 31, 1992, and is incorporated herein by reference. 10(J) The B.F.Goodrich Company Savings Benefit Restoration Plan was filed as Exhibit 4(b) to the Company's Registration Statement No. 333-19697 on Form S-8 and is incorporated herein by reference. 10(K) Long-Term Incentive Plan Summary Plan Description and form of award. 10(L) Amended and Restated Assumption of Liabilities and Indemnification Agreement between the Company and The Geon Company, which was filed as exhibit 10.3 to Registration Statement No. 33-70998 on Form S-1 of The Geon Company, is incorporated herein by reference. 10(M) Outside Directors' Phantom Share Plan. This exhibit was filed with the same designation as an exhibit to the Company's Form 10-K Annual Report for the year ended December 31, 1997, and is incorporated herein by reference. 10(N) Directors Deferred Compensation Plan. This exhibit was filed with the same designation as an exhibit to the Company's Form 10-K Annual Report for the year ended December 31, 1997, and is incorporated herein by reference. 10(O) Rohr, Inc. Supplemental Retirement Plan (Restated 1997) which was filed as an exhibit to Rohr, Inc.'s Form 10-Q for the quarterly period ended May 4, 1997, is incorporated herein by reference.
64
TABLE II EXHIBIT NO. - ----------- 10(P) Rohr, Inc. 1991 Stock Compensation for Non-Employee Directors which was filed as an exhibit to Rohr, Inc.'s Form 10-K for fiscal year ended July 31, 1992, is incorporated herein by reference. 10(Q) Rohr Industries, Inc., Management Incentive Plan (Restated 1982), as amended through the Fifteenth Amendment, as set forth in Rohr, Inc.'s Form 10-K for fiscal year ended July 31, 1994, is incorporated herein by reference. 10(R) Sixteenth Amendment to Rohr, Inc. Management Incentive Plan (Restated 1982), dated June 7, 1996, which was filed as an exhibit to Rohr, Inc.'s Form 10-K for the fiscal year ended July 31, 1996, is incorporated herein by reference. 10(S) Seventeenth Amendment to Rohr Industries, Inc. Management Incentive Plan (Restated 1982), dated September 13, 1996, which was filed as an exhibit to Rohr, Inc.'s Form 10-K for the fiscal year ended July 31, 1996, is incorporated herein by reference. 10(T) Employment Agreement with Robert H. Rau, which was filed as an exhibit to Rohr, Inc.'s Form 10-Q for the period ended May 2, 1993, is incorporated herein by reference. 10(U) First Amendment to Employment Agreement with Robert H. Rau, which was filed as an exhibit to Rohr, Inc.'s Form 10-K for fiscal year ended July 31, 1996, is incorporated herein by reference. 10(V) Rohr, Inc. 1989 Stock Option Plan filed as exhibit 10.18 to the Rohr Industries, Inc. Form 10-K for the fiscal year ended July 31, 1990, is incorporated herein by reference. 10(W) Rohr, Inc. 1995 Stock Incentive Plan filed as exhibit 4.1 to Rohr, Inc. Registration Statement No. 33-65447 filed on December 28, 1995, is incorporated herein by reference. 10(X) Employment Agreement with Robert H. Rau. This exhibit was filed with the same designation as an exhibit to the Company's Form 10-K Annual Report for the year ended December 31, 1997, and is incorporated herein by reference. 10(Y) Consulting Agreement with Robert H. Rau. 21 Subsidiaries 23(a) Consent of Independent Auditors -- Ernst & Young LLP 23(b) Consent of Independent Auditors -- Deloitte & Touche LLP 27 Financial Data Schedule 99 Independent Auditors Report -- Deloitte & Touche LLP
The Company will supply copies of the foregoing exhibits to any shareholder upon receipt of a written request addressed to the Secretary of The B.F.Goodrich Company, 4020 Kinross Lakes Parkway, Richfield, Ohio 44286-9368, and the payment of $.50 per page to help defray the costs of handling, copying and postage. EX-3.A 2 EXHIBIT 3(A) 1 EXHIBIT 3(A) RESTATED CERTIFICATE OF INCORPORATION OF THE B.F.GOODRICH COMPANY UNDER SECTION 807 OF THE BUSINESS CORPORATION LAW We, the undersigned, Jon V. Heider and Nicholas J. Calise, being respectively Senior Vice President and Secretary of THE B.F.GOODRICH COMPANY, do hereby certify as follows: 1. The name of the corporation is THE B.F.GOODRICH COMPANY, hereinafter referred to as the "Company". 2. The Certificate of Incorporation was filed by the Department of State on the 2nd day of May, 1912. 3. The Certificate of Incorporation is hereby amended to modify paragraph A of Article ELEVENTH relating to repurchases from an Interested Shareholder (as defined) in three respects. First, it requires that any proposed repurchase of shares from an Interested Shareholder requiring the approval of shareholders also requires the approval of a majority of the non-officer directors. Second, it requires the cost of any such shareholder solicitation to be at the expense of the Interested Shareholder. Finally, the amendment further limits the price at which a purchase of shares could be made from an Interested Shareholder without shareholder approval to the higher of (i) the closing price on the last trading day immediately preceding the earlier of public disclosure of the repurchase or the signing of a definitive repurchase agreement and (ii) the average closing price during the 20 trading days immediately preceding the date of such disclosure or agreement. 4. The text of the Certificate of Incorporation, as amended heretofore, and as further amended, hereby is restated to read as herein set forth in full: CERTIFICATE OF INCORPORATION OF THE B.F.GOODRICH COMPANY We, the undersigned, all being persons of full age and at least two-thirds being citizens of the United States and at least one of us a resident of the State of New York, desiring to form a stock corporation (other than a moneyed corporation, or a corporation provided for by the banking, the insurance, the 2 railroad and the transportation corporation laws, or an educational institution or corporation which may be incorporated as provided in the education law) pursuant to the provisions of the Business Corporation Law of the State of New York, do hereby make, sign, acknowledge and file this certificate for that purpose as follows: FIRST - The name of the corporation shall be THE B.F.GOODRICH COMPANY, hereinafter referred to as the "Company." SECOND - The location of its principal office in the State of New York shall be at the City of New York, in the Borough of Manhattan, in the County of New York, and State of New York. THIRD - The purpose for which the Company is formed is to engage in any lawful act or activity for which corporations may be organized under the Business Corporation Law of the State of New York, provided that the Company is not formed to engage in any act or activity requiring the consent or approval of any state official, department, board, agency or other body without such consent or approval first being obtained. FOURTH - The aggregate number of shares which the Company shall have authority to issue is 110,000,000, divided into 10,000,000 shares of Series Preferred Stock of the par value of $1 per share (hereafter called "Series Preferred Stock"), and 100,000,000 shares of Common Stock of the par value of $5 per share (hereafter called "Common Stock"). A statement of the designations, preferences, privileges and voting powers of the shares of each class and the restrictions and qualifications thereof shall be as follows: (a) Series Preferred Stock (1) Board Authority: The Series Preferred Stock may be issued from time to time by the Board of Directors as herein provided in one or more series. The designations, relative rights, preferences and limitations of the Series Preferred Stock, and particularly of the shares of each series thereof, may be similar to or may differ from those of any other series. The Board of Directors of the Company is hereby expressly granted authority, subject to the provisions of this Article FOURTH, to issue from time to time Series Preferred stock in one or more series and to fix from time to time before issuance thereof, by filing a certificate pursuant to the Business Corporation Law, the number of shares in each such series of such class and all designations, relative rights, (including the right to convert into shares of any class or into shares of any series of any class), preferences and limitations of the shares in each such series, including, but without limiting the generality of the foregoing, the following: 2 3 (i) The number of shares to constitute such series (which number may at any time, or from time to time, be increased or decreased by the Board of Directors, notwithstanding that shares of the series may be outstanding at the time of such increase or decrease, unless the Board of Directors shall have otherwise provided in creating such series) and the distinctive designation thereof; (ii) The dividend rate on the shares of such series, whether or not dividends on the shares of such series shall be cumulative, and the date or dates, if any, from which dividends thereon shall be cumulative; (iii) Whether or not the shares of such series shall be redeemable, and, if redeemable, the date or dates upon or after which they shall be redeemable, the amount per share (which shall be, in the case of each share, not less than its preference upon involuntary liquidation, plus an amount equal to all dividends thereon accrued and unpaid, whether or not earned or declared) payable thereon in the case of the redemption thereof, which amount may vary at different redemption dates or otherwise as permitted by law; (iv) The right, if any, of holders of such series to convert the same into, or exchange the same for Common Stock or other stock as permitted by law, and the terms and conditions of such conversion or exchange, as well as provisions for adjustment of the conversion rate in such events as the Board of Directors shall determine; (v) The amount per share payable on the shares of such series upon the voluntary and involuntary liquidation, dissolution or winding up of the Company. (vi) Whether the holders of shares of such series shall have voting power, full or limited, in addition to the voting powers provided by law, and in case additional voting powers are accorded to fix the extent thereof; and (vii) Generally to fix the other rights and privileges and any qualifications, limitations or restrictions of such rights and privileges of such series, provided, however, that no such rights, privileges, qualifications, limitations or restrictions shall be in conflict with the Restated Certificate of Incorporation of the Company or with the resolution or resolutions adopted by the Board of Directors, as 3 4 hereinabove provided, providing for the issue of any series for which there are shares then outstanding. All shares of Series Preferred Stock of the same series shall be identical in all respects, except that shares of any one series issued at different times may differ as to dates, if any, from which dividends thereon may accumulate. All shares of Series Preferred Stock of all series shall be of equal rank and shall be identical in all respects except that to the extent not otherwise limited in this Article FOURTH any series may differ from any other series with respect to any one or more of the designations, relative rights, preferences and limitations (including, without limitations, the designations, relative rights, preferences and limitations described or referred to in subparagraphs (i) to (vii) inclusive above) which may be fixed by the Board of Directors pursuant to this paragraph 1. 2. Dividends: Dividends on the outstanding Series Preferred Stock of each series shall be declared and paid or set apart for payment before any dividends shall be declared and paid or set apart for payment on the Common Stock with respect to the same quarterly dividend period. Dividends on any shares of Series Preferred Stock shall be cumulative only if and to the extent set forth in a certificate filed pursuant to law. After dividends on all shares of Series Preferred Stock (including cumulative dividends if and to the extent any such shares shall be entitled thereto) shall have been declared and paid or set apart for payment with respect to any quarterly dividend period, then and not otherwise so long as any shares of the Series Preferred Stock shall remain outstanding, dividends may be declared and paid or set apart for payment with respect to the same quarterly dividend period on the Common Stock out of the assets or funds of the Company legally available therefor. All shares of Series Preferred Stock of all series shall be of equal rank, preference and priority as to dividends irrespective of whether or not the rates of dividends to which the same shall be entitled shall be the same and when the stated dividends are not paid in full, the shares of all series of the Series Preferred Stock shall share ratable in the payment thereof in accordance with the sums which would be payable on such shares if all dividends were paid in full provided, however, that any two or more series of the Series Preferred Stock may differ from each other as to the existence and extent of the right to cumulative dividends, as aforesaid. 3. Voting Rights: Except as otherwise specifically provided herein or in the certificate filed pursuant to law with respect to any series of the Series Preferred Stock, or as otherwise provided by law, the Series Preferred Stock shall not have any right to vote for the election of directors or for any other purpose and the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes; 4 5 provided, however, that at any time when six (6) quarterly dividends on any one or more series of Series Preferred Stock entitled to receive cumulative dividends shall be in default, the holders of all such cumulative series at the time or times outstanding as to which such default shall exist shall be entitled, at the next annual meeting of stockholders for the election of directors, voting as a class, whether or not the holders thereof shall be entitled otherwise to vote by certificate filed pursuant to law, to the exclusion of the holders of Common Stock and the holders of any series of non-cumulative Series Preferred Stock, to vote for and elect two members of the Board of Directors of the Company, and provided, further that at any time when six (6) quarterly dividends on any one or more series of non-cumulative Series Preferred Stock shall be in default, the holders of all such non-cumulative series at the time or times outstanding as to which such default shall exist shall be entitled, at the next annual meeting of stockholders for the election of directors, voting as a class, whether or not the holders thereof shall be entitled otherwise to vote by certificate filed pursuant to law, to the exclusion of the holders of Common Stock and the holders of any series of cumulative Series Preferred Stock, to vote for and elect two members of the Board of Directors of the Company. All rights of all series of Series Preferred Stock to participate in the election of directors pursuant to this paragraph 3 shall continue in effect, in the case of all series of Series Preferred Stock entitled to receive cumulative dividends, until cumulative dividends have been paid in full or set apart for payment on each cumulative series which shall have been entitled to vote at the previous annual meeting of stockholders, or in the case of all series of non-cumulative Series Preferred Stock, until non-cumulative dividends have been paid in full or set apart for payment for four consecutive quarterly dividend periods on each non-cumulative series which shall have been entitled to vote at the previous annual meeting of stockholders. Directors elected by the holders of any one or more series of stock voting separately as a class, may be removed only by a majority vote of such series, voting separately as a class, so long as the voting power of such series shall continue. Subject to the voting rights, if any, of any other series of Series Preferred Stock, the holders of the Common Stock, voting as a class, to the exclusion of the holders of such series so entitled to vote for and elect members of the Board pursuant to this paragraph 3, shall be entitled to vote for and elect the balance of the Board of Directors. Each stockholder entitled to vote at any particular time in accordance with the foregoing provisions shall not have more than one vote for each share of stock held of record by him at the time entitled to voting rights. 4. Liquidation: In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, each series of Series Preferred Stock shall have preference and priority over the Common Stock for payment of the amount to which such series of Series 5 6 Preferred Stock shall be entitled in accordance with the provisions thereof and each holder of Series Preferred Stock shall be entitled to be paid in full his share of such amount, or have a sum sufficient for the payment in full set aside, before any payments shall be made to the holders of the Common Stock. If, upon liquidation, dissolution or winding up of the Company, the assets of the Company or proceeds thereof, distributable among the holders of the shares of all series of the Series Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributed among such holders ratably in accordance with the respective amounts which would be payable if all amounts payable thereon were paid in full. After the payment to the holders of Series Preferred Stock of all such amounts to which they are entitled, as above provided, the remaining assets and funds of the Company shall be divided and paid to the holders of the Common Stock. 5. Redemption: In the event that the Series Preferred Stock of any one or more series shall be made redeemable as provided in clause (iii) of paragraph 1 of section (a) of Article FOURTH herein, the Company, at the option of the Board of Directors, may redeem, at the time or times specified in the certificate filed pursuant to law with respect to any such series, all or any part of any such series of Series Preferred Stock outstanding upon notice duly given as hereinafter specified, by paying for each share the then applicable redemption price fixed by the Board of Directors as provided herein, plus an amount equal to accrued and unpaid dividends to the date fixed for redemption, provided, however, that a notice specifying the shares to be redeemed, and the time and place of redemption (and, if less than the total outstanding shares are to be redeemed, specifying the certificate numbers and number of shares to be redeemed) shall be published once in a daily newspaper printed in the English language and published and of general circulation in the Borough of Manhattan, the City of New York, and shall be mailed, addressed to the holders of record of the Series Preferred Stock to be redeemed at their respective addresses as the same shall appear upon the books of the Company, not less than thirty (30) days nor more than ninety (90) days previous to the date fixed for redemption. If less than the whole amount of any outstanding series of Series Preferred Stock is to be redeemed, the shares of such series to be redeemed shall be selected by lot or pro rata in any manner determined by resolution of the Board of Directors to be fair and proper. From and after the date fixed in any such notice as the date of redemption (unless default shall be made by the Company in providing moneys at the time and place of redemption for the payment of the redemption price) all dividends upon the Series Preferred Stock so called for redemption shall cease to accrue, and all rights of the holders of said Series Preferred Stock as stockholders in the Company, except the right to receive the redemption price upon surrender of the certificate 6 7 representing the Series Preferred Stock so called for redemption, duly endorsed for transfer, if required, shall cease and determine. With respect to any shares of Series Preferred Stock so called for redemption, if, before the redemption date, the Company shall deposit with a bank or trust company in the Borough of Manhattan, City of New York, having a capital and surplus of at least $25,000,000, funds necessary for such redemption, in trust, to be applied to the redemption of the shares of Series Preferred Stock so called for redemption, then from and after the date of such deposit, all rights of the holders of such shares of Series Preferred Stock, so called for redemption, shall cease and determine, except the right to receive, on and after the date of such deposit, the redemption price upon surrender of the certificates representing such shares of Series Preferred Stock, so called for redemption, duly endorsed for transfer, if required, and except as might otherwise be provided in the certificate filed pursuant to law with respect to any such shares of Series Preferred Stock, so called for redemption. Any interest accrued on such funds shall be paid to the Company from time to time. Any funds so deposited and unclaimed at the end of six (6) years from such redemption date shall be released or repaid to the Company, after which the holders of such shares of Series Preferred Stock so called for redemption shall look only to the Company for payment of the redemption price. Notwithstanding the foregoing, no redemption of any shares of any series of Series Preferred Stock shall be made by the Company (1) which as of the date of mailing of the notice of such redemption would, if such date were the date fixed for redemption, reduce the net assets of the Company remaining after such redemption below the aggregate amount payable upon voluntary or involuntary liquidation, dissolution or winding up to the holders of shares having rights senior or equal to the Series Preferred Stock in the assets of the Company upon liquidation, dissolution or winding up; or (2) unless all cumulative dividends for the current and all prior dividend periods have been declared and paid or declared and set apart for payment on all shares of the Company having a right to cumulative dividends. 6. $7.85 Cumulative Preferred Stock, Series A. (i) The distinctive serial designation of the first series of Series Preferred Stock, which shall be a closed series, shall be "$7.85 Cumulative Preferred Stock, Series A ($1 par value)" (hereinafter called "Series A Stock"). (ii) The number of shares of Series A Stock shall be 250,000. (iii) The annual rate of dividends payable on shares of Series A Stock shall be $7.85 per year and no more, payable quarterly on the last days of March, June, September and December, respectively, in each year with respect to the quarterly dividend 7 8 period (or portion thereof) ending on such dividend payment date; provided, however, that in the case of any shares of Series A Stock issued prior to October 1, 1972, the first dividend payment, of dividends accrued since the date of issue, shall be made on December 31, 1972. (iv) Dividends on the shares of Series A Stock shall be cumulative from the date or dates of issue thereof. The holders of Series A Stock, in preference to the holders of any junior stock, shall be entitled to receive, as and when declared by the Board of Directors out of any funds legally available therefor, cash dividends at the rate fixed in subdivision (iii) hereof. The term "junior stock" as used herein means Common Stock or any other stock of the Company which by its terms is junior to Series Preferred Stock in respect of dividends or payments in liquidation. In no event, so long as any Shares of Series A Stock shall be outstanding, shall any dividend, whether in cash or property, be paid or declared, nor shall any other distribution be ordered or made, on any junior stock, nor shall any shares of any capital stock of the Company be purchased, redeemed or otherwise acquired for value by the Company or by any subsidiary of the Company, unless (A) all dividends on Series A Stock for all past quarterly dividend periods and in the case of a dividend or distribution, for the then current quarterly period, shall have been paid or declared and a sum sufficient for the payment thereof set apart and (B) the Company shall have set aside all funds required for the Sinking Fund for Series A Stock provided for in clause (vii) of this paragraph 6 through the date of such payment, declaration, distribution, purchase, redemption or other acquisition. The provisions of this paragraph shall not, however, apply to a dividend payable in any junior stock, to the acquisition of shares of any junior stock in exchange for shares of any other junior stock or to the acquisition of shares of capital stock other than junior stock pursuant to a tender offer made on a pro rata basis for all shares of capital stock of the Company other than junior stock. (v) In the event of any voluntary liquidation, dissolution or winding up of the affairs of the Company, then before any distribution or payment shall be made to the holders of any junior stock, the holders of Series A Stock shall be entitled to be paid in full the redemption price in effect at the time of the distribution or payment date as provided in clause (vi) of this paragraph 6, together with accrued dividends to such distribution or payment date whether or not earned or declared. In the event of any involuntary liquidation, dissolution or winding up of the affairs of the 8 9 Company, then, before any distribution or payment shall be made to the holders of any junior stock, the holders of Series A Stock shall be entitled to be paid in full an amount equal to $100 per share, together with accrued dividends to such distribution or payment date whether or not earned or declared. (vi) Series A Stock may be redeemed, as a whole or in part, at the option of the Company by vote of its Board of Directors, at any time or from time to time, at the redemption price in effect at the redemption date as provided in this clause (vi), together with accrued dividends to the redemption date; provided however, that no such redemption may be made prior to August 15, 1982 directly or indirectly from the proceeds of, or as a part of, or in anticipation of, any refunding operation involving the incurring of indebtedness, or issuance of stock ranking prior to or on a parity with Series A Stock in respect of dividends or upon liquidation, at an interest cost on indebtedness or dividend yield on capital stock of less than 7.85% both calculated in accordance with accepted financial practice. The redemption prices per share for shares of Series A Stock redeemed at any time during the twelve months' periods indicated shall be as follows:
12 MONTHS BEGINNING 12 MONTHS BEGINNING AUGUST 15 PRICE AUGUST 15 PRICE 1972 $107.85 1982 $103.92 1973 107.46 1983 103.53 1974 107.06 1984 103.14 1975 106.67 1985 102.75 1976 106.28 1986 102.36 1977 105.89 1987 101.96 1978 105.50 1988 101.57 1979 105.10 1989 101.18 1980 104.71 1990 100.78 1981 104.32 1991 100.39 and $100 per share thereafter.
The provisions of paragraph 5 of this section (a) of Article FOURTH applicable to redemption of all Series Preferred Stock shall apply to Series A Stock, provided that, in addition, in the case of any redemption of Series A Stock the Company shall deposit, before the redemption date, with a bank or trust company in the Borough of Manhattan, City of New York, having a capital and surplus of at least $25,000,000, funds necessary for such redemption, in trust, to 9 10 be applied to such redemption, and the amounts shall be made payable at the office of such bank or trust company. (vii) There shall be a sinking fund (hereinafter called the "Sinking Fund") for the benefit of the shares of Series A Stock. For the purposes of the Sinking Fund, out of any net assets of the Company legally available therefor, before any dividends, in cash or property, shall be paid or declared, or any distribution ordered or made on any junior stock, and before any shares of any capital stock of the Company shall be purchased, redeemed, or otherwise acquired for value by the Company or any subsidiary, the Company shall set aside in cash annually on July 16 in each year commencing with July 16, 1979, so long as there shall be outstanding any shares of Series A Stock, an amount sufficient to redeem 12,500 shares of Series A Stock (or such lesser number as remains outstanding), at a price (the `Sinking Fund Redemption Price") of $100 per share plus an amount equal to dividends accrued thereon to the date fixed for redemption; provided, however, that there shall be allowed to the Company as a credit thereagainst any shares of Series A Stock which the Company may have acquired or redeemed (otherwise than through the operation of the Sinking Fund) which have not theretofore been used for the purpose of any such credit and which shares shall have been set aside by the Company for the purpose of the Sinking Fund. The Sinking Fund shall be cumulative so that if on any such July 16 the net assets of the Company legally available therefor shall be insufficient to permit any such amount to be set aside in full, or if for any other reason such amount shall not have been set aside in full, the amount of the deficiency shall be set aside, but without interest, before any dividend, in cash or property, shall be paid or declared, or any other distribution ordered or made, on any junior stock and before any shares of any capital stock of the Company shall be purchased, redeemed or otherwise acquired for value by the Company or by any subsidiary of the Company, subject to the exceptions provided in the last sentence of clause (iv) of this paragraph 6. Moneys in the Sinking Fund shall be applied within thirty days after having been set aside to the redemption of shares of Series A Stock as above provided. The Company may elect to redeem, on any Sinking Fund redemption date, up to an additional 12,500 shares of Series A Stock at the Sinking Fund Redemption Price. Such optional redemption privilege shall not be cumulative from year to year. The provisions of paragraph 5 of this section (a) of Article FOURTH shall apply to all Sinking Fund redemptions of Series A Stock 10 11 provided that, in addition, in the case of Sinking Fund redemptions of Series A Stock the Company shall deposit, before the redemption date, with a bank or trust company meeting the requirements of clause (vi) of this paragraph 6, funds necessary for such redemption, and the amounts shall be made payable at the office of such bank or trust company. (viii) The holders of Series A Stock shall be entitled to vote only as hereinafter and in paragraph 3 of this section (a) of Article FOURTH provided. Each stockholder of Series A Stock entitled to vote at any particular time shall have one vote for each share of Series A Stock held of record by him and entitled to voting rights. So long as any shares of Series A Stock are outstanding, in addition to any other vote or consent of shareholders required in this Certificate of Incorporation or by law, the approval of the holders of at least sixty-six and two-thirds percent (66-2/3%) of Series A Stock at the time outstanding, shall be necessary for effecting or validating: (a) any amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation, or of the By-Laws, of the Company, which affects adversely the voting powers of any other rights or preferences of the holders of Series A Stock; (b) authorization or creation of any class of stock of the Company ranking prior to or on a parity with Series Preferred Stock in respect of dividends or payments in liquidation, or any increase in the number of authorized shares of Series Preferred Stock; (c) issuance of any shares of any other series of Series Preferred Stock unless, after giving pro forma effect to the issuance of such shares and any concurrent stock or debt retirement, net income of the Company for any period of twelve consecutive months within the preceding eighteen calendar months exceeds two times the aggregate of all annual dividend requirements of Series A Stock and all shares (outstanding pro forma) ranking prior to or on a parity with Series A Stock with respect to dividends; or (d) any merger, consolidation, sale of assets or other transaction the effect of which, in any such case, is to accomplish an event otherwise requiring approval by holders of 66-2/3% of Series B Stock under this clause (viii). 11 12 7. $.975 Cumulative Preferred Stock, Series B. (i) The distinctive serial designation of the second series of Series Preferred Stock, which shall be a closed series, shall be "$.975 Cumulative Preferred Stock, Series B ($1 par value)" (hereinafter called "Series B Stock"). (ii) The number of shares of Series B Stock shall be 450,000. (iii) The annual rate of dividends payable on shares of Series B Stock shall be $.975 per year and no more, payable quarterly on the last day of March, June, September and December, respectively, in each year with respect to the quarterly dividend period (or portion thereof) ending on such dividend payment date; provided, however, that in the case of any shares of Series B Stock issued prior to October 1, 1978, the first dividend payment, which shall be of dividends accrued since the date of issue, shall be made on December 31, 1978. (iv) Dividends on the shares of Series B Stock shall be cumulative from the date or dates of issue thereof. The holders of Series B Stock, in preference to the holders of any junior stock, shall be entitled to receive, as and when declared by the Board of Directors out of any funds legally available therefor, cash dividends at the rate fixed in subdivision (iii) hereof. The term "junior stock" as used herein means Common Stock or any other stock of the Company which by its terms is junior to Series Preferred Stock in respect of dividends or payments in liquidation. In no event, so long as any shares of Series B Stock shall be outstanding, shall any dividend, whether in cash or property, be paid or declared, nor shall any other distribution be ordered or made, on any junior stock, nor shall any shares of any capital stock of the Company be purchased, redeemed or otherwise acquired for value by the Company or by any subsidiary of the Company, unless (A) all dividends on Series B Stock for all past quarterly dividend periods and, in the case of a dividend or distribution, for the then current quarterly period, shall have been paid or declared and a sum sufficient for the payment thereof set apart, and (B) the Company shall have set aside all funds required for the Sinking Fund for Series B Stock provided for in clause (vii) of this paragraph 7 through the date of such payment, declaration, distribution, purchase, redemption or other acquisition. The provisions of this paragraph shall not, however, apply to a dividend payable in any junior 12 13 stock, to the acquisition of shares of any junior stock in exchange for shares of any other junior stock or to the acquisition of shares of capital stock other than junior stock pursuant to a tender offer made on a pro rata basis for all shares of capital stock of the Company other than junior stock. (v) In the event of any voluntary liquidation, dissolution or winding up of the affairs of the Company, then before any distribution or payment shall be made to the holders of any junior stock, the holders of Series B Stock shall be entitled to be paid in full the redemption price in effect at the time of the distribution or payment date as provided in clause (vi) of this paragraph 7 (or at the redemption price for the 12 months beginning July 15, 1983 in the event of a distribution or payment date prior to July 15, 1983), together with accrued dividends to such distribution or payment date whether or not earned or declared. In the event of any involuntary liquidation, dissolution or winding up of the affairs of the Company, then, before any distribution or payment shall be made to the holders of any junior stock, the holders of Series B Stock shall be entitled to be paid in full an amount equal to $10 per share, together with accrued dividends to such distribution or payment date whether or not earned or declared. (vi) Series B Stock may be redeemed, as a whole or in part, at the option of the Company by vote of its Board of Directors, at any time or from time to time, at the redemption price in effect at the redemption date as provided in this clause (vi), together with accrued dividends to the redemption date; provided, however, that no such redemption may be made prior to July 15, 1983 or the date five years from the original issue date of the Series B Stock, whichever is later. The redemption prices per share for shares of Series B Stock redeemed at any time during the twelve month periods indicated shall be as follows:
12 MONTHS 12 MONTHS BEGINNING BEGINNING JULY 15 PRICE JULY 15 PRICE 1983 $10.49 1988 $10.24 1984 10.44 1989 10.20 1985 10.39 1990 10.15 1986 10.34 1991 10.10 1987 10.29 1992 10.05 and $10 per share thereafter.
The provisions of paragraph 5 of this section (a) of Article FOURTH applicable to redemption of all Series Preferred Stock shall apply to Series B Stock, provided that, in addition, in the case of any 13 14 redemption of Series B Stock the Company shall deposit, before the redemption date, with a bank or trust company in the Borough of Manhattan, City of New York, having a capital and surplus of at least $25,000,000, funds necessary for such redemption, in trust, to be applied to such redemption and the amounts shall be made payable at the office of such bank or trust company. (vii) There shall be a sinking fund (hereinafter called the "Series B Sinking Fund") for the benefit of the shares of Series B Stock. For the purposes of the Series B Sinking Fund, out of any net assets of the company legally available therefor, before any dividends, in cash or property, shall be paid or declared, or any distribution ordered or made on any junior stock, and before any shares of any capital stock of the Company shall be purchased, redeemed, or otherwise acquired for value by the Company or any subsidiary, the Company shall set aside in cash annually on June 15 in each year commencing with June 15, 1983 (provided the first such date shall be on the fifth anniversary of the original issue date of the Series B Stock if such original issue date is later than June 15, 1978), so long as there shall be outstanding any shares of Series B Stock, an amount sufficient to redeem 30,000 shares of Series B Stock (or such lesser number as remains outstanding), at a price (the "Series B Sinking Fund Redemption Price") of $10 per share plus an amount equal to dividends accrued thereon to the date fixed for redemption; provided, however, that there shall be allowed to the Company as a credit thereagainst any shares of Series B Stock which the Company may have acquired or redeemed (otherwise than through the operation of the Series B Sinking Fund) which have not theretofore been used for the purpose of any such credit and which shares shall have been set aside by the Company for the purpose of the Series B Sinking Fund. The Series B Sinking Fund shall be cumulative so that if on any such June 15 or the fifth anniversary date referred to above, in the case of June 15, 1983, the net assets of the Company legally available therefor shall be insufficient to permit any such amount to be set aside in full, or if for any other reason such amount shall not have been set aside in full, the amount of the deficiency shall be set aside, but without interest, before any dividend, in cash or property shall be paid or declared, or any other distribution ordered or made, on any junior stock and before any shares of any capital stock of the Company shall be purchased, redeemed or otherwise acquired for value by the Company or by an subsidiary of the Company, subject to the exceptions provided in the last sentence of clause (iv) of this paragraph 7. Moneys in the Series B Sinking Fund shall be applied within thirty days after having been set aside to the redemption of shares of Series B Stock as above provided. The 14 15 Company may elect to redeem, on any Series B Sinking Fund Redemption Date, up to an additional 30,000 shares of Series B Stock at the Series B Sinking Fund Redemption Price. Such optional redemption privilege shall not be cumulative from year to year. The provisions of paragraph 5 of this section (a) of Article FOURTH shall apply to all Sinking Fund redemption of Series B Stock provided that, in addition, in the case of Series B Sinking Fund redemption of Series B Stock the Company shall deposit, before the redemption date, with a bank or trust company meeting the requirements of clause (vi) of this paragraph 7, funds necessary for such redemption, and the amounts shall be made payable at the office of such bank or trust company. (viii) The holders of Series B Stock shall be entitled to vote only as hereinafter provided and as provided in paragraph 3 of this section (a) of Article FOURTH. Each stockholder of Series B Stock entitled to vote at any particular time shall have one vote for each share of Series B Stock held of record by him and entitled to voting rights. So long as any shares of Series B Stock are outstanding, in addition to any other vote or consent of shareholders required in this Certificate of Incorporation or by law, the approval of the holders of at least sixty-six and two-thirds percent (66-2/3%) of Series B Stock at the time outstanding shall be necessary for effecting or validating: (a) any amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation, or of the By-Laws, of the company, which affects adversely the voting powers or any other rights or preferences of the holders of Series B Stock; (b) authorization or creation of any class of stock of the Company ranking prior to or on a parity with Series Preferred Stock in respect of dividends or payments in liquidation, or any increase in the number of authorized shares of Series Preferred Stock; (c) issuance of any shares of any other series of Series Preferred Stock unless, after giving pro forma effect to the issuance of such shares and any concurrent stock or debt retirement, net income of the Company for any period of twelve consecutive months within the preceding eighteen 15 16 calendar months exceeds two times the aggregate of all annual dividend requirements of Series B Stock and all shares (outstanding pro forma) ranking prior to or on a parity with Series B Stock with respect to dividends; or (d) any merger, consolidation, sale of assets or other transaction the effect of which, in any such case, is to accomplish an event otherwise requiring approval by holders of 66-2/3% of Series B Stock under this clause (viii). 8. $3.125 Cumulative Convertible Preferred Stock, Series C. (i) The distinctive serial designation of the third series of Series Preferred Stock, which shall be a closed series, shall be "$3.125 Cumulative Convertible Preferred Stock, Series C ($1 par value)" (hereinafter called "Series C Stock"). (ii) The number of shares of Series C Stock shall be 3,538,936. (iii) The annual rate of dividends payable on shares of Series C Stock shall be $3.125 per year and no more, payable quarterly on the last day of march, June, September and December in each year with respect to the quarterly dividend period (or portion thereof) ending on such dividend payment date; provided, however, that in the case of any shares of Series C Stock issued prior to June 30, 1981, the first dividend payment, which shall be of dividends accrued since February 15, 1981, shall be made on June 30, 1981. (iv) Dividends on the shares of Series C Stock shall be cumulative from February 15, 1981. The holders of Series C Stock, in preference to the holders of any junior stock, shall be entitled to receive, as and when declared by the Board of Directors out of any funds legally available therefor, cash dividends at the rate fixed in clause (iii) of this paragraph 8. The term "junior stock" as used herein means Common Stock or any other stock of the Company which by its terms is junior to Series Preferred Stock in respect of dividends or payments in liquidation. In no event, so long as any shares of Series C Stock shall be outstanding, shall, any dividend, whether in cash or property, be paid or declared, nor shall any other distribution be ordered or made, on any junior stock, nor shall any shares of any capital stock of the Company be purchased, redeemed or otherwise acquired for value by the Company or by any subsidiary of the Company, unless all dividends on Series C Stock for all past quarterly dividend 16 17 periods and, in the case of a dividend or distribution, for the then current quarterly period, shall have been paid or declared and a sum sufficient for the payment thereof set apart. The provisions of this clause (iv) shall not however, apply to a dividend payable in any junior stock, to the acquisition of shares of any junior stock in exchange for shares of any other junior stock or to the acquisition of shares of capital stock other than junior stock pursuant to a tender offer made on a pro rata basis for all shares of capital stock of the Company other than junior stock (based on the aggregate involuntary liquidation value of each series of such capital stock outstanding). (v) In the event of any voluntary liquidation, dissolution or winding up of the affairs of the Company, then before any distribution or payment shall be made to the holders of any junior stock, the holders of Series C Stock shall be entitled to be paid in full the redemption price in effect at the time of the distribution or payment date as provided in clause (vi) of this paragraph 8, together with accrued dividends to such distribution or payment date, whether or not earned or declared. In the event of any involuntary liquidation, dissolution or winding up of the affairs of the Company, then, before any distribution or payment shall be made to the holders of any junior stock, the holders of Series C Stock shall be entitled to be paid in full an amount equal to $25 per share, together with accrued dividends to such distribution or payment date, whether or not earned or declared. (vi) Series C Stock may be redeemed, as a whole or in part, at the option of the Company by vote of its Board of Directors, at any time or from time to time, at the redemption price in effect at the redemption date as provided in this clause (vi), together with accrued dividends to the redemption date, whether or not earned or declared. The redemption prices per share for shares of Series C Stock redeemed at any time during the twelve-month periods indicated shall be as follows:
12 MONTHS 12 MONTHS BEGINNING BEGINNING FEBRUARY 15 PRICE FEBRUARY 15 PRICE 1981 $28.125 1986 $26.563 1982 27.813 1987 26.250 1983 27,500 1988 25.938 1984 27.188 1989 25.625 1985 26.875 1990 25.313 and $25 per share thereafter.
17 18 The provisions of paragraph 5 of this section (a) of article FOURTH applicable to redemption of all Series Preferred Stock shall apply to Series C Stock, provided that, in addition, in the case of any redemption of Series C Stock the Company shall deposit, before the redemption date, with a bank or trust company in the Borough of Manhattan, City of New York, having a capital and surplus of at least $25,000,000, funds necessary for such redemption, in trust, to be applied to such redemption and the amounts shall be made payable at the office of such bank or trust company. (vii) The holders of Series C Stock shall be entitled to vote only as hereinafter provided and as provided in paragraph 3 of this section (a) of Article FOURTH. Each stockholder of Series C Stock entitled to vote at any particular time shall have one vote for each share of Series C Stock held of record by him and entitled to voting rights. So long as any shares of Series C Stock are outstanding, in addition to any other vote or consent of stockholders required in this Certificate of Incorporation or by law, the approval of the holders of at least sixty-six and two-thirds percent (66-2/3%) of Series C Stock at the time outstanding shall be necessary for effecting or validating: (a) any amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation, or of the By-Laws, of the Company, which affects adversely the voting powers or any other rights or preferences of the holders of Series C Stock; (b) authorization or creation of any class of stock of the Company ranking prior to or on a parity with Series Preferred Stock in respect of dividends or payments in liquidation, or any increase in the number of authorized shares of Series Preferred Stock; (c) issuance of any shares of any other series of Series Preferred Stock unless, after giving pro forma effect to the issuance of such shares and any concurrent stock or debt retirement, net income of the Company for any period of twelve consecutive months within the preceding eighteen calendar months exceeds two times the aggregate of all annual dividend requirements of Series C Stock and all 18 19 shares (outstanding pro forma) ranking prior to or on a parity with Series C Stock with respect to dividends; or (d) any merger, consolidation, sale of assets or other transaction the effect of which, in any such case, is to accomplish an event otherwise requiring approval by holders of 66-2/3% of Series C Stock under this clause (vii). (viii) (A) Subject to the provisions for adjustment hereinafter set forth, each share of Series C Stock shall be convertible at the option of the holder thereof, upon surrender at the principal office of the Company and at such other office or offices as the Board of Directors may designate, of the certificate for the share so to be converted, duly endorsed or assigned to the Company in blank, into .833 fully paid and nonassessable shares of Common Stock of the Company. The right to convert shares of Series C Stock called for redemption shall terminate at the close of business on the date fixed for redemption. Upon conversion, no allowance or adjustment shall be made for dividends on either class of stock. (B) The number of shares of Common Stock and the number of any other shares of the Company, if any, into which each share of Series C Stock is convertible shall be adjusted from time to time as follows: (1) In case the Company shall (x) pay a dividend on its Common Stock in other shares, (y) subdivide its outstanding Common Stock or (z) combine its outstanding Common Stock into a smaller number of shares of Common Stock, or issue by reclassification of its shares of Common Stock (whether pursuant to a merger or consolidation or otherwise) any other shares of the Company, then the holder of each share of Series C Stock shall be entitled to receive, upon the conversion of such share, the number of shares of the Company which he would have owned or have been entitled to receive after the happening of any of the events described above had such share been converted immediately prior to the happening of such event. Such adjustment shall be made whenever any of the events listed above shall occur. An adjustment made pursuant to this subclause (B)(1) shall become effective retroactively with respect to conversions made subsequent to the record date in the case of a 19 20 dividend and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification; (2) In case the Company shall issue rights or warrants to the holders of its Common Stock as such entitling them to subscribe for a purchase Common Stock at a price per share less than the current market price per share (as defined in subclause (C) below) on such record date, then in each such case the number of shares of Common Stock into which each share of Series C Stock shall thereafter be convertible shall be determined by multiplying the number of shares of Common Stock into which such share of Series C Stock was theretofore convertible by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of shares of Common Stock which the aggregate offering price of the total number of shares so offered would purchase at such current market price. For the purposes of this subclause (B)(2), the issuance of rights or warrants to subscribe for or purchase securities convertible into shares of Common Stock shall be deemed to be the issuance of rights or warrants to purchase the shares of Common Stock into which such securities are convertible at an aggregate offering price equal to the aggregate offering price of such securities plus the minimum aggregate amount (if any) payable upon conversion of such securities into shares of Common Stock. Such adjustment shall be made whenever any such rights or warrants are issued and shall become effective retroactively with respect to conversions made subsequent to the record date for the determination of shareholders entitled to receive such rights or warrants. For purposes of this subclause (B)(2) the granting of the right to purchase shares of Common Stock (whether from treasury shares or otherwise) pursuant to any dividend or interest reinvestment plan and/or any Common Stock purchase plan providing 20 21 for the reinvestment of dividends or interest payable on securities of the Company and/or the investment of periodic optional payments at a price per share of not less than 95 percent of the current market price per share (determined as provided in such plans) of the Common Stock (so long as such right to purchase is in no case evidenced by the delivery of rights and warrants) shall not be deemed to constitute an issue of rights or warrants by the Company within the meaning of this subclause (B)(2); and (3) In case the Company shall distribute to holders of its shares of Common Stock (whether pursuant to a merger or consolidation or otherwise) evidences of its indebtedness or assets (excluding cash distributions after December 31, 1979 not exceeding (x) $100,000,000 plus (y) the aggregate net income of the Company and its subsidiaries on a consolidated basis after such date determined in accordance with generally accepted accounting principals, less (z) dividends paid after such date on shares other than shares of Common Stock) or rights to subscribe (excluding those referred to in subclause (B)(2) above) then in each such case the number of shares of Common Stock into which each share of Series C Stock shall thereafter be convertible shall be determined by multiplying the number of shares of Common Stock into which such share of Series C Stock was theretofore convertible by a fraction, of which the numerator shall be the current market price per share of Common Stock (as defined in subclause (C) below) on the record date for determination of shareholders entitled to receive such distribution, and of which the denominator shall be such current market price per share of Common Stock less the fair value (as determined by a resolution of the Board of Directors of the Company filed with each transfer agent for the Series C Stock, which determination shall be conclusive) of the portion of the evidences of indebtedness or assets or rights to subscribe applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective retroactively with respect to conversions made subsequent to the record date for the determination of stockholders entitled to receive such distribution. 21 22 (C) For the purpose of any computation under subclause (B) above, the current market price per share of Common Stock on any date shall be deemed to be the average of the daily Closing Prices for 30 consecutive Trading Days selected by the Company commencing not more than 45 Trading Days before the date in question. The term "Closing Price" on any day shall mean the reported last sale price per share of Common Stock regular way on such day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices regular way, in each case on the New York Stock Exchange or, if the shares of Common Stock are not listed or admitted to trading on such Exchange, on the American Stock Exchange or, if the shares of Common Stock are not listed or admitted to trading on such Exchange, the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading or, if the shares of Common Stock are not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices in the over-the-counter market as reported by the National Association of Securities Dealers' Automated Quotation System, or, if not so reported, as reported by the National Quotation Bureau, Incorporated, or any successor thereof, or, if not so reported, the average of the closing bid and asked prices as furnished by any member of the National Association of Securities Dealers, Inc. selected from time to time by the Company for that purpose; and the term "Trading Day" shall mean a day on which the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading is open for the transaction of business or, if the shares of Common Stock are not listed or admitted to trading on any national securities exchange, a Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in the Borough of Manhattan, City and State of New York, are not authorized or obligated by law or executive order to close. (D) No adjustment in the conversion rate shall be required unless such adjustment (plus any adjustments not previously made by reason of this subclause (D)) would require an increase or decrease of at least 1% in the number of shares of Common Stock into which each share of Series C Stock is then convertible; provided, however, that any adjustments which by reason of this subclause (D) are not required to be made shall be carried forward and taken into account in any 22 23 subsequent adjustment. All calculations under this clause (viii) of paragraph 8 shall be made to the nearest one hundred thousandth of a share. (E) The Board of Directors may make such increases in the conversion rate, in addition to those required by this clause (viii) of paragraph 8, as shall be determined by the Board, as evidenced by a Board resolution, to be advisable in order to avoid taxation so far as practicable of any dividend of stock or stock rights or any event treated as such for Federal income tax purposes to the recipients. The Board shall have the power to resolve any ambiguity or correct any error in this clause (viii) of paragraph 8 and its actions in so doing, as evidenced by a Board resolution, shall be final and conclusive. (F) In the event that at any time, as a result of an adjustment made pursuant to subclause (B)(1) above, the holder of any shares of Series C Stock thereafter surrendered for conversion shall become entitled to receive any shares of capital stock of the Company other than shares of Common Stock, thereafter the number of shares so receivable upon conversion of such shares of Series C Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Common Stock contained in subclauses (B)(1) to (B)(3), inclusive, above, and the other provisions of this clause (viii) of paragraph 8 with respect to the shares of Common Stock shall apply on like terms to any such other shares. (G) Whenever the conversion rate is adjusted as herein provided: (1) The Company shall compute the adjusted conversion rate and shall cause to be prepared a certificate signed by the Company's treasurer setting forth the adjusted conversion rate and a brief statement of the facts requiring such adjustment and the computation thereof; such certificate shall forthwith be filed with each transfer agent for the Series C Stock; and (2) A notice stating that the conversion rate has been adjusted and setting forth the adjusted conversion rate shall, as soon as practicable, be 23 24 mailed to the holders of record of outstanding shares of the Series C Stock. (H) In case: (1) The Company shall declare a dividend or other distribution on its Common Stock, other than in cash; (2) The Company shall authorize the issuance to all holders of its Common Stock of rights or warrants entitling them to subscribe for or purchase any Common Stock or any other subscription rights or warrants; or (3) Of any reclassification of the capital stock of the Company (other than a subdivision or combination of its outstanding Common Stock), or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the sale, lease, exchange or other disposition of all or substantially all the property and assets of the Company; or (4) Of the voluntary or involuntary liquidation, dissolution or winding up of the Company; then the Company shall cause to be mailed to each transfer agent for the Series C Stock and to the holders of record of the outstanding shares of Series C Stock, at least 20 days (or 10 days in any case specified in subclauses (H)(1) or (H)(2) above) prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date as of which the holders of record of Common Stock to be entitled to such dividend, distribution rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, lease, exchange, disposition, liquidation, dissolution or winding up is expected to become effective, and the date as of which it is expected that holders of record of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, sale, lease, exchange, disposition, liquidation, dissolution or winding up. The failure to give the notice required by this subclause (H), or any defect therein, shall not affect the legality or validity of 24 25 any such dividend, distribution, right, warrant, reclassification, consolidation, merger, sale, lease, exchange, disposition, liquidation, dissolution or winding up, or the vote on any action authorizing such. (I) The Company shall at all times reserve and keep available out of its authorized but unissued Common Stock, for the purpose of issuance upon conversion of the Series C Stock, the full number of shares of Common Stock then deliverable upon the conversion of all shares of Series C Stock then outstanding. (J) The Company will pay any and all taxes that may be payable in respect of the issuance or delivery of shares of Common Stock on conversion of shares of Series C Stock. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Series C Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person requesting such issuance has paid to the Company the amount of any such tax or has established to the satisfaction of the Company that such tax has been paid. (K) For the purpose of this clause (viii) of paragraph 8, the term "Common Stock" shall include any shares of the Company of any class or series which has no preference or priority in the payment of dividends or in the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the Company and which is not subject to redemption by the Company. However, shares of Common Stock issuable upon conversion of Series C Stock shall include only shares of the class designated as Common Stock as of the original date of issuance of the Series C Stock, or shares of the Company of any classes or series resulting from any reclassification or reclassifications thereof and which have no preference or priority in the payment of dividends or in the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the Company and which are not subject to redemption by the company, provided that if at any time there shall be more than one such resulting class or series, the shares of such class and series then so issuable shall be substantially in the proportion which the total number of 25 26 shares of such class and series resulting from all such reclassifications bears to the total number of shares of all such classes and series resulting from all such reclassifications. (L) No fractional shares or scrip representing fractional shares shall be issued upon the conversion of Series C Stock. If any such conversion would otherwise require the issuance of a fractional share, an amount equal to such fraction multiplied by the Closing Price (determined as provided in subclause (C) above) of the Common Stock on the day of conversion shall be paid to the holder in cash by the Company. (M) The certificate of any independent firm of public accountants of recognized standing selected by the Board of Directors shall be presumptive evidence of the correctness of any computation made under this clause (viii) of paragraph 8. 9. $3.50 Cumulative Convertible Preferred Stock, Series D. (i) The distinctive serial designation of the fourth series of Series Preferred Stock, which shall be a closed series, shall be "$3.50 Cumulative Convertible Preferred Stock, Series D ($1 par value)" (hereinafter called "Series D Stock"). (ii) The number of shares of Series D Stock shall be 2,200,000. (iii) The annual rate of dividends payable on shares of Series D Stock shall be $3.50 per year and no more, payable quarterly on the last day of March, June, September and December in each year with respect to the quarterly dividend period (or portion thereof) ending on such dividend payment date; provided, however, that in the case of any shares of Series D Stock issued prior to December 31, 1986, the first dividend payment, which shall be of dividends accrued since November 21, 1986 shall be made on March 31, 1987. (iv) Dividends on the shares of Series D Stock shall be cumulative from November 21, 1986. The holders of Series D Stock, in preference to the holders of any junior stock, shall be entitled to receive, as and when declared by the Board of Directors out of any funds legally available therefor, cash dividends at the rate fixed in clause (iii) of this paragraph 9. The term "junior stock" as used herein means Common Stock or any other stock of the 26 27 Company which by its terms is junior to Series Preferred Stock in respect of dividends or payments in liquidation. In no event, so long as any shares of Series D Stock shall be outstanding, shall any dividend, whether in cash or property, be paid or declared, nor shall any other distribution be ordered or made, on junior stock, nor shall any shares of any capital stock of the Company be purchased, redeemed or otherwise acquired for value by the Company or by any subsidiary of the Company, unless all dividends on Series D Stock for all past quarterly dividend periods and, in the case of a dividend or distribution, for the then current quarterly period, shall have been paid or declared and a sum sufficient for the payment thereof set apart. The provisions of this clause (iv) shall not however, apply to a dividend payable in any junior stock, to the acquisition of shares of any junior stock in exchange for shares of any other junior stock or to the acquisition of shares of capital stock other than junior stock pursuant to a tender offer made on a pro rata basis for all shares of capital stock of the Company other than junior stock (based on the aggregate involuntary liquidation value of each series of such capital stock outstanding). (v) In the event of any voluntary liquidation, dissolution or winding up of the affairs of the Company, then before any distribution or payment shall be made to the holders of any junior stock, the holders of Series D Stock shall be entitled to be paid in full the redemption price in effect at the time of the distribution or payment date as provided in clause (vi) of this paragraph 9 (and if prior to January 2, 1990, then at the redemption price in effect on January 2, 1990), together with accrued dividends to such distribution or payment date, whether or not earned or declared. In the event of any involuntary liquidation, dissolution or winding up of the affairs of the Company, then, before any distribution or payment shall be made to the holders of any junior stock, the holders of Series D Stock shall be entitled to be paid in full an amount equal to $50 per share, together with accrued dividends to such distribution or payment date, whether or not earned or declared. (vi) Series D Stock may be redeemed, as a whole or in part, at the option of the Company by vote of its Board of Directors, at any time or from time to time, on or after January 2, 1990, at the redemption price in effect at the redemption date as provided in this clause (vi), together with accrued dividends to the redemption date, whether or not earned or declared. The redemption prices per share for shares of Series D Stock redeemed at any time during the twelve month periods indicated shall be as follows: 27 28
12 MONTHS 12 MONTHS BEGINNING BEGINNING JANUARY 1 PRICE JANUARY 1 PRICE 1990 $52.45 1994 $51.05 1991 52.10 1995 50.70 1992 51.75 1996 50.35 1993 51.40 and $50 per share thereafter.
The provisions of paragraph 5 of this section (a) of Article FOURTH applicable to redemption of all Series Preferred Stock shall apply to Series D Stock, provided that, in addition, in the case of any redemption of Series D Stock the Company shall deposit, before the redemption date, with a bank or trust company in the Borough of Manhattan, City of New York, having a capital and surplus of at least $25,000,000, funds necessary for such redemption, in trust, to be applied to such redemption and the amounts shall be made payable at the office of such bank or trust company. (vii) The holders of Series D Stock shall be entitled to vote only as hereinafter provided and as provided in paragraph 3 of this section (a) of Article FOURTH. Each stockholder of Series D Stock entitled to vote at any particular time shall have one vote for each share of Series D Stock held of record by him and entitled to voting rights. So long as any shares of Series D Stock are outstanding, in addition to any other vote or consent of stockholders required in this Certificate of Incorporation or by law, the approval of the holders of at least sixty-six and two-thirds percent (66-2/3%) of Series D Stock at the time outstanding shall be necessary for effecting or validating: (A) any amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation, or of the By-Laws, of the Company, which affects adversely the voting powers or any other rights or preferences of the holders of Series D Stock; (B) authorization or creation of any class of stock of the Company ranking prior to or on a parity with Series Preferred Stock in respect of dividends or payments in liquidation, or any increase in the number of authorized shares of Series Preferred Stock; 28 29 (C) any merger, consolidation, sale of assets or other transaction the effect of which, in any such case, is to accomplish an event otherwise requiring approval by holders of 66-2/3% of Series D Stock under this clause (vii). (viii) (A) Subject to the provisions for adjustment hereinafter set forth, each share of Series D Stock shall be convertible at the option of the holder thereof, upon surrender at the principal office of the Company and at such other office or offices as the Board of Directors may designate, of the certificate for the share so to be converted, duly endorsed or assigned to the Company in blank, into 0.909 fully paid and nonassessable shares of Common Stock of the Company. The right to convert shares of Series D Stock called for redemption shall terminate at the close of business on the date fixed for redemption. Upon conversion, no allowance or adjustment shall be made for dividends on either class of stock, except to the extent set forth in the next paragraph. Any holder of shares of Series D Stock desiring to convert such shares into shares of Common Stock shall surrender the certificate or certificates for the shares of Series D Stock being converted, duly endorsed or assigned to the Company or in blank, at the principal office of the Company or at a bank or trust company appointed by the Company for that purpose, accompanied by a written notice of conversion specifying the number (in whole shares) of shares of Series D Stock to be converted and the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued; in case such notice shall specify a name or names other than that of such holder, such notice shall be accompanied by payment of all transfer taxes payable upon the issue of shares of Common Stock in such name or names. In case less than all of the shares of Series D Stock represented by a certificate are to be converted by a holder, upon such conversion the Company shall issue and deliver or cause to be issued and delivered to such holder a certificate or certificates for the shares of Series D Stock not so converted. A holder of Series D Stock on a dividend record date who (or whose transferee) converts Series D Stock on a dividend payment date will be entitled to receive and retain the dividend payable on such Series D Stock. A holder of Series D Stock at the close of business on a dividend record date will be entitled to receive the dividend payable on such Series D Stock on the corresponding dividend payment date notwithstanding the 29 30 conversion thereof or the Company's default in payment of the dividend due on the dividend payment date, but Series D Stock surrendered for conversion during the period from the close of business on any dividend record date to the opening of business on the corresponding dividend payment date (except Series D Stock called for redemption on a redemption date during such period) must be accompanied by payment to the Company of an amount equal to the dividend payable on such dividend payment date. A holder of Series D Stock called for redemption on a redemption date between a dividend record date and the corresponding dividend payment date who (or whose transferee) convert such Series D Stock will be entitled to receive such dividend and need not repay the dividend upon surrender of such Series D Stock for conversion. (B) The number of shares of Common Stock and the number of any other shares of the Company, if any, into which each share of Series D Stock is convertible shall be adjusted from time to time as follows: (1) In case the Company shall (x) pay a dividend on its Common Stock in other shares, (y) subdivide its outstanding Common Stock or (z) combine its outstanding Common Stock into a smaller number of shares of Common Stock, or issue by reclassification of its shares of Common Stock (whether pursuant to a merger or consolidation or otherwise) any other shares of the Company, then the holder of each share of Series D Stock shall be entitled to receive, upon the conversion of such share, the number of shares of the Company which he would have owned or have been entitled to receive after the happening of any of the events described above had such share been converted immediately prior to the happening of such event. Such adjustment shall be made whenever any of the events listed above shall occur. An adjustment made pursuant to this subclause (B)(1) shall become effective retroactively with respect to conversions made subsequent to the record date in the case of a dividend and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification; (2) In case the Company shall issue rights or warrants to the holders of its Common Stock as such 30 31 entitling them to subscribe for or purchase Common Stock at a price per share less than the current market price per share (as defined in subclause (c) below) on such record date, then in each such case the number of shares of Common Stock into which each share of Series D Stock shall thereafter be convertible shall be determined by multiplying the number of shares of Common Stock into which such share of Series D Stock was theretofore convertible by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of shares of Common Stock which the aggregate offering price of the total number of shares so offered would purchase at such current market price. For the purposes of this subclause (B)(2), the issuance of rights or warrants to subscribe for or purchase securities convertible into shares of Common Stock shall be deemed to be the issuance of rights or warrants to purchase the shares of Common Stock into which such securities are convertible at an aggregate offering price equal to the aggregate offering price of such securities plus the minimum aggregate amount (if any) payable upon conversion of such securities into shares of Common Stock. Such adjustment shall be made whenever any such rights or warrants are issued and shall become effective retroactively with respect to conversions made subsequent to the record date for the determination of shareholders entitled to receive such rights or warrants. For purposes of this subclause (B)(2) the granting of the right to purchase shares of Common Stock (whether from treasury shares or otherwise) pursuant to any dividend or interest reinvestment plan and/or any Common Stock purchase plan providing for the reinvestment of dividends or interest payable on securities of the Company and/or the investment of periodic optional payments at a price per share of not less than 95 percent of the current market price per share (determined as provided in such plans) of the Common Stock (so long as such right to purchase is 31 32 in no case evidenced by the delivery of rights and warrants) shall not be deemed to constitute an issue of rights or warrants by the Company within the meaning of this subclause (B)(2); and (3) In case the Company shall distribute to holders of its shares of Common Stock (whether pursuant to a merger or consolidation or otherwise) evidences of its indebtedness or assets (excluding cash distributions) or rights to subscribe (excluding those referred to in subclause (B)(2) above) then in each such case the number of shares of Common Stock into which each share of Series D Stock shall thereafter be convertible shall be determined by multiplying the number of shares of Common Stock into which such share of Series D Stock was theretofore convertible by a fraction, of which the numerator shall be the current market price per share of Common Stock (as defined in subclause (C) below) on the record date for determination of shareholders entitled to receive such distribution, and of which the denominator shall be such current market price per share of Common Stock on the date fixed for such determination less the fair value (as determined by a resolution of the Board of Directors of the Company filed with each transfer agent for the Series D Stock, which determination shall be conclusive) of the portion of the evidences of indebtedness or assets or rights to subscribe applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective retroactively with respect to conversions made subsequent to the record date for the determination of stockholders entitled to receive such distribution. (C) For the purpose of any computation under subclause (B) above, the current market price per share of Common Stock on any date shall be deemed to be the average of the daily Closing Prices for 30 consecutive Trading Days selected by the Company commencing not more than 45 Trading Days before the date in question. The term "Closing Price" on any day shall mean the reported last sale price per share of Common Stock regular way on such day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices regular way, in each case as reported on the New York Stock Exchange 32 33 Composite Transactions or, if the shares of Common Stock are not listed or admitted to trading on such Exchange, on the American Stock Exchange or, if the shares of Common Stock are not listed or admitted to trading on such Exchange, the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading or, if the shares of Common Stock are not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices in the over-the-counter market as reported by the National Association of Securities Dealers' Automated Quotation System, or, if not so reported, as reported by the National Quotation Bureau, Incorporated, or any successor thereof, or, if not so reported, the average of the closing bid and asked prices as furnished by any member of the National Association of Securities Dealers, Inc. selected from time to time by the Company for that purpose; and the term "Trading Day" shall mean a day on which the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading is open for the transaction of business or, if the shares of Common Stock are not listed or admitted to trading on any national securities exchange, a Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in the Borough of Manhattan, City and State of New York, are not authorized or obligated by law or executive order to close. (D) No adjustment in the conversion rate shall be required unless such adjustment (plus any adjustments not previously made by reason of this subclause (D)) would require an increase or decrease of at least 1% in the number of shares of Common Stock into which each share of Series D Stock is then convertible; provided, however, that any adjustments which by reason of this subclause (D) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this clause (viii) of paragraph 9 shall be made to the nearest one-hundred thousandth of a share. (E) In the event that at any time, as a result of an adjustment made pursuant to subclause (B)(1) above, the holder of any shares of Series D Stock thereafter surrendered for conversion shall become entitled to receive any shares of capital stock of the Company other than shares of Common Stock, thereafter the number of shares so receivable upon conversion of such shares of Series D 33 34 Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Common Stock contained in subclauses (B)(1) to (B)(3), inclusive, above, and the other provisions of this clause (viii) of paragraph 9 with respect to the shares of Common Stock shall apply on like terms to any such other shares. (F) The Company may, but shall not be required to, make such increases in the conversion rate, in addition to those required by this clause (viii) of paragraph 9 as it considers to be advisable in order to avoid or diminish any income tax to any holder of shares of Common Stock resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes or for any other reasons. The Company shall have the power to resolve any ambiguity or correct any error in this clause (viii) of paragraph 9 and its actions in so doing shall be final and conclusive. (G) In case the Company shall effect any capital reorganization of the Common Stock (other than a subdivision, combination, capital reorganization or reclassification provided for in paragraph (B)) or shall consolidate, merge or engage in a statutory share exchange with or into any other corporation (other than a consolidation, merger or share exchange in which the Company is the surviving corporation and each share of Common Stock outstanding immediately prior to such consolidation or merger is to remain outstanding immediately after such consolidation or merger) or shall sell or transfer all or substantially all its assets to any other corporation, lawful provision shall be made as a part of the terms of such transaction whereby the holders of shares of Series D Stock shall receive upon conversion thereof, in lieu of each share of Common Stock which would have been issuable upon conversion of such shares if converted immediately prior to the consummation of such transaction, the same kind and amount of stock (or other securities, cash or property, if any) as may be issuable or distributable in connection with such transaction with respect to each share of Common Stock outstanding at the effective time of such transaction, subject to subsequent adjustments for subsequent stock dividends and distributions, subdivisions or combinations of shares, capital reorganizations, reclassifications, consolidations, 34 35 mergers or share exchanges, as nearly equivalent as possible to the adjustments provided for in this clause (viii) of paragraph 9. (H) Whenever the conversion rate is adjusted as herein provided: (1) The Company shall compute the adjusted conversion rate and shall cause to be prepared a certificate signed by the Company's treasurer setting forth the adjusted conversion rate and a brief statement of the facts requiring such adjustment and the computation thereof; such certificate shall forthwith be filed with each transfer agent for the Series D Stock; and (2) A notice stating that the conversion rate has been adjusted and setting forth the adjusted conversion rate shall, as soon as practicable, be mailed to the holders of record of outstanding shares of the Series D Stock. (I) In case: (1) The Company shall declare a dividend or other distribution on its Common Stock, other than in cash; (2) The Company shall authorize the issuance to all holders of its Common Stock of rights or warrants entitling them to subscribe for or purchase any Common Stock or any other subscription rights or warrants; or (3) Of any reclassification of the capital stock of the Company (other than a subdivision or combination of its outstanding Common Stock), or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the sale, lease, exchange or other disposition of all or substantially all the property and assets of the Company; or (4) Of the voluntary or involuntary liquidation, dissolution or winding up of the Company; 35 36 then the Company shall cause to be mailed to each transfer agent or for the Series D Stock and to the holders of record of the outstanding shares of Series D Stock, at least 20 days (or 10 days in any case specified in subclauses (I)(1) or (I)(2) above) prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date as of which the holders of record of Common Stock to be entitled to such dividend, distribution, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, lease, exchange, disposition, liquidation, dissolution or winding up is expected to become effective, and the date as of which it is expected that holders of record of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, sale, lease, exchange, disposition, liquidation, dissolution or winding up. The failure to give the notice required by this subclause (I), or any defect therein, shall not affect the legality or validity of any such dividend, distribution, right, warrant, reclassification, consolidation, merger, sale, lease, exchange, disposition, liquidation, dissolution or winding up, or the vote on any action authorizing such. (J) The Company shall at all times reserve and keep available out of its authorized but unissued Common Stock, or Common Stock held as treasury shares, or a combination of both, for the purpose or issuance upon conversion of the Series D Stock, the full number of shares of Common Stock then deliverable upon the conversion of all shares of Series D Stock then outstanding. (K) For the purpose of this clause (viii) of paragraph 9, the term "Common Stock" shall include any shares of the Company of any class or series which has no preference or priority in the payment of dividends or in the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the Company and which is not subject to redemption by the Company. However, shares of Common Stock issuable upon conversion of Series D Stock shall include only shares of the class designated as Common Stock as of the original date of issuance of the Series D Stock, or shares of the Company of any classes or series resulting from any reclassification or reclassifications thereof and which have no preference or priority in the payment of dividends or in the distribution of assets upon any voluntary or involuntary liquidation, dissolution or 36 37 winding up of the Company and which are not subject to redemption by the Company, provided that if at any time there shall be more than one such resulting class or series, the shares of such class and series then so issuable shall be substantially in the proportion which the total number of shares of such class and series, resulting from all such reclassifications bears to the total number of shares of all such classes and series resulting from all such reclassifications. (L) No fractional shares or scrip representing fractional shares shall be issued upon the conversion of Series D Stock. If any such conversion would otherwise require the issuance of a fractional share, an amount equal to such fraction multiplied by the Closing Price (determined as provided in subclause (C) above) of the Common Stock on the day of conversion shall be paid to the holder in cash by the Company. (M) The certificate of any independent firm of public accountants of recognized standing selected by the Board of Directors shall be presumptive evidence of the correctness of any computation made under this clause (viii) of paragraph 9. (ix) Shares of Series D Preferred Stock which are called for redemption as hereinabove provided, but which shall be converted into Common Stock as hereinabove provided prior to their actual redemption, shall not be deemed to have been redeemed for the purposes of this Article FOURTH. 10. Cumulative Participating Preferred Stock, Series E. Section 1. Designation and Amount. There shall be a series of the Series Preferred Stock of the Company which shall be designated as the "Cumulative Participating Preferred Stock, Series E ($1 par value)" ("Series E Stock"), and the number of shares constituting such series shall be 350,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series E Stock to a number less than that of the shares then outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Company Section 2. Dividends and Distributions. 37 38 (A) The holders of shares of Series E Stock, in preference to the holders of shares of Common Stock, $5.00 par value (the "Common Stock"), of the Company, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series E Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00, or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, since the immediately preceding Quarterly Dividend Payable Date, or, with respect to the first quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series E Stock. In the event the Company shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series E Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of common Stock outstanding immediately after such event and the denominator of which is the number of shares of common Stock that were outstanding immediately prior to such event. (B) The Company shall declare a dividend or distribution on the Series E Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series E Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series E Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series E Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series E Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date in either of which events such 38 39 dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series E Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. Section 3. Voting Rights. The holders of shares of Series E Stock shall have the following voting rights: (A) Each share of Series E Stock shall entitle the holder thereof to one hundred votes, subject to adjustment as provided in paragraph B below, on all matters submitted to a vote of the shareholders of the Company. (B) Except as otherwise provided herein or by law, the holders of shares of Series E Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of shareholders of the Company. In the event the Company shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes to which holders of shares of Series E Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (C) Notwithstanding paragraph A above, each holder of Series E Stock when voting as a class with the holders of all cumulative series of Series Preferred Stock for the election of two members of the Board of Directors when six (6) quarterly dividends on any one or more series of Series Preferred Stock entitled to receive cumulative dividends shall be in default as provided in paragraph 3 of Article FOURTH shall have one vote for each share of Series E Stock held of record. (D) Except as set forth herein, holders of Series E Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series E Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not 39 40 declared, on shares of Series E Stock outstanding shall have been paid in full, the Company shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series E Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series E Stock, except dividends paid ratably on the Series E Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; or (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series E Stock, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Company ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series E Stock; (B) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series E Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. The Company shall cause all such shares upon their cancellation to become authorized but unissued shares of Preferred Stock which may be reissued as part of a new series of Preferred Stock, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Company, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series E Stock unless, prior thereto, the holders of shares of Series E Stock shall have received $20,000 per share, plus an amount equal to 40 41 accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series E Liquidation Preference"). Following the payment of the full amount of the Series E Liquidation Preference, no additional distributions shall be made to the holders of shares of Series E Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the series E Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph C below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series E Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series E Stock and Common Stock, respectively, holders of Series E Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event there are not sufficient assets available to permit payment in full of the Series E Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series E Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the Company shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series E Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Company shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock 41 42 payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series E Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that are outstanding immediately prior to such event. Section 8. Redemption. The shares of Series E Stock shall not be redeemable. Section 9. Amendment. The Certificate of Incorporation of the Company shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series E Stock so as to affect them adversely without the affirmative vote of the holders of a majority of the outstanding shares of Series E Stock, voting separately as a class. Section 10. Fractional Shares. Series E Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series E. Stock. (b) Common Stock 1. Issuance: From time to time Common Stock may be issued in such amounts and for such purposes as shall be determined by the Board of Directors. 2. Dividends: Subject to all the rights of the Series Preferred Stock, such dividends as may be determined by the Board of Directors may be declared and paid on the Common Stock from time to time out of the surplus of the Company legally available for the payment of dividends. The Board of Directors shall, however, have power from time to time to fix and determine and to vary the amount of the working capital of the Company, and to direct and determine the use and disposition of any surplus of the Company. 3. Voting Rights: Except as otherwise expressly provided with respect to the Series Preferred Stock or with respect to any series of the Series Preferred Stock, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, each holder of the Common Stock being entitled to one vote for each share thereof held. 4. Liquidation: Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, and after the 42 43 holders of the Series Preferred Stock of each series shall have been paid in full the amounts to which they respectively shall be entitled, or an amount sufficient to pay the aggregate amount to which the holders of the Series Preferred Stock of each series shall be entitled shall have been deposited with a bank or trust company having its principal office in the Borough of Manhattan, the City of New York, and having a capital, surplus and undivided profits of at least Twenty-Five Million Dollars ($25,000,000) as a trust fund for the benefit of the holders of such Series Preferred Stock, the remaining net assets of the Company shall be distributed pro rata to the holders of the Common Stock in accordance with their respective rights and interests, to the exclusion of the holders of the Series Preferred Stock. (c) General Provisions 1. Shares of Series Preferred Stock of the Company redeemed as hereinabove provided shall be deemed retired and extinguished and may not be reissued. 2. A consolidation or merger of the Company with or into another corporation or corporations or a sale, whether for cash, shares of stock, securities or properties, of all or substantially all of the assets of the Company shall not be deemed or construed to be a liquidation, dissolution or winding up of the Company within the meaning of this Article. 3. No stockholder of the Company shall be entitled, as such, as a matter of right, to subscribe for or purchase any part of any new or additional issue of stock of any class or series whatsoever, any rights or options to purchase stock of any class or series whatsoever, or any securities convertible into any stock of any class or series whatsoever, whether now or hereafter authorized, and whether issued for cash or other consideration, or by way of dividend. 4. The Board of Directors may from time to time issue scrip in lieu of fractional shares of stock. Such scrip shall not confer upon the holder any right to dividends or any voting or other rights of a stockholder of the Company, but the Company shall from time to time, within such time as the Board of Directors may determine or without limit of time if the Board of Directors so determines, issue one or more whole shares of stock upon the surrender of scrip for fractional shares aggregating the number of whose shares issuable in respect of the scrip so surrendered, provided that the scrip so 43 44 surrendered shall be properly endorsed for transfer if in registered form. FIFTH - The name and post-office address of each of the incorporators and original subscribers to the capital stock, and the number of shares of Common Stock subscribed for by each, are as follows:
NUMBER OF POST-OFFICE SHARES NAME ADDRESS Bertram G. Work...................... Akron, Ohio....................... 18 Charles B. Raymond................. Akron, Ohio....................... 1 David M. Goodrich.................... New York, New York................ 1 20 Total
SIXTH - The duration of the Company shall be perpetual. SEVENTH - the directors shall have power, amongst other things: (a) From time to time, to determine whether, and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Company, or any of them, shall be open to the inspection of stockholders; and no stockholder shall have any right to inspect any book or account or document of the Company except as conferred by the statutes of New York or authorized by the directors; (b) Subject to the provisions of the aforesaid Stock Corporation Law, to hold their meetings either within or without the State of New York, and to have one or more offices, and to keep the books of the Company (except the stock and transfer books and correct books of account of all its business and transactions) outside the State of New York, and at such place or places, as may from time to time be designated by them; (c) To provide by the By-Laws, or otherwise, for the selection, from among their own number, of an executive committee of such number as they may from time to time designate, and to delegate to such executive committee all or any of the powers of the Board of Directors, when the Board is not in session, provided that such delegation of power is not contrary to law; (d) To appoint such other standing committees as they may determine, with such powers as shall be conferred by them or as may be authorized by the By-Laws; and 44 45 (e) To appoint or elect officers and assistant officers of the Company. EIGHTH - The Secretary of State of the State of New York is designated as the agent of the Company upon whom process in any action or proceeding against it may be served within the State of New York. The address to which the Secretary of State shall mail a copy of process in any action or proceeding against the Company which may be served upon him is c/o CT Corporation System, 1633 Broadway, New York, New York 10009. The name and address of the registered agent which is to be the agent of the Company upon whom process against it may be served are, CT Corporation System, 1633 Broadway, New York, New York 10009. NINTH - No contract or other transaction between the Company and any other corporation shall be affected by the fact that the directors of this Company are interested in or are directors or officers of such other corporation, and any director individually may be a party to or may be interested in any contract or transaction of this Company; and no contract or transaction of this Company with any person or persons, firm or association shall be affected by the fact that any director or directors of this Company is a party to or interested in such contract or transaction, or in any way connected with such person or persons, firm or association, provided that the interest in any such contract or other transaction of any such director shall be fully disclosed and that such contract or other transaction shall be authorized or ratified by the vote of a sufficient number of directors of the Company not so interested; and each and every person who may become a director of this Company is hereby relieved from any liability that might otherwise exist from contracting with the Company for the benefit of himself or any firm, association or corporation in which he may be in any wise interested. TENTH - Subject always to the By-Laws made by the stockholders, the Board of Directors may make By-Laws, and, from time to time, may alter, amend or repeal any By-Laws; but any By-Laws made by the Board of Directors may be altered, amended or repealed by the stockholders at any annual meeting, or at any special meeting provided notice of such proposed alteration or repeal be included in the notice of meeting. ELEVENTH - Transactions with Shareholders. A. Certain Purchases of Company Shares. Any direct or indirect purchase or other acquisition by the Company of any class of the Company's shares from any person or persons known by the Company to be an Interested Shareholder (as hereinafter defined) who has beneficially owned, directly or indirectly, any such securities for less than two years prior to the date of such purchase or any agreement in respect thereof shall, except as hereinafter expressly provided, require the approval of a majority of the non-officer-directors of the Company and the affirmative 45 46 vote, to be solicited at the expense of such Interested Shareholder, of not less than a majority of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock (as hereafter defined), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage of separate class vote may be specified, by law or any other provision of this Certificate of Incorporation or the By-Laws of this Company or otherwise. Notwithstanding the foregoing, no such affirmative vote shall be required with respect to: (a) any offer to purchase made by the Company which is made on the same terms and conditions to holders of all shares of the same class of the Company, (b) any purchase by the Company of its shares at a price no higher than the higher of (i) the Closing Price (as hereinafter defined) on the last trading date immediately preceding the earlier of public disclosure of the repurchase or the signing of a definitive repurchase agreement and (ii) the average Closing Price during the 20 trading days immediately preceding the date of such disclosure or agreement. The term "Closing Price" on the day in question means the closing sale price on such day of a share of the Company's stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if the stock is not quoted on the Composite Tape, on the New York Stock Exchange, or if the stock is not listed on such Exchange, on the principal United States Securities Exchange registered under the Securities Exchange Act of 1934 in which the stock is listed, or if the stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of the stock on the National Association of Securities Dealers, Inc. Automated Quotations System or any similar system then in use, or if no such quotations are available, the market value of the stock as determined in good faith by a majority of the non-officer-directors of the Company present at a meeting of the Board of Directors at which a quorum is present. B. Business combinations with Substantial Shareholders. In addition to any affirmative vote required by law or this Certificate of Incorporation or the By-Laws of the Company, and except as otherwise expressly provided in Section C of this Article ELEVENTH, a Business Combination (as hereinafter defined) shall require the affirmative vote of not less than eighty percent (80%) of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock (as hereinafter defined), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a 46 47 lesser percentage or separate class vote may be specified, by law or any other provision of this Certificate of Incorporation or the By-Laws of this Company or otherwise. C. When Higher Vote is Not Required. The provisions of Section B of this Article ELEVENTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote, if any, as is required by law or by any other provision of this Certificate of Incorporation or the By-Laws of this Company, if all of the conditions specified in either of the following Paragraphs 1 or 2 are met: 1. Approval by Disinterested Directors. The Business Combination shall have been recommended by a majority (whether such recommendation is made prior to or subsequent to the acquisition of beneficial ownership of the Voting Stock that caused the Substantial Shareholder [as hereinafter defined] to become a Substantial Shareholder) of the Disinterested Directors (as hereinafter defined) present at a meeting of the Board of Directors at which a quorum is present. 2. Price and Procedure Requirements. All of the following conditions shall have been met: a. The aggregate amount of cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination (the "Consummation Date") of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the highest amount determined under clauses (i) and (ii) below: (i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Substantial Shareholder for any share of Common Stock in connection with (A) the acquisition by the Substantial Shareholder of beneficial ownership of shares of Common Stock within the period beginning two years immediately prior to the first public announcement of the proposed Business Combination (the "Announcement Date") and terminating on the Consummation Date, or (B) in the transaction in which it became a Substantial Shareholder, which ever is higher; and 47 48 (ii) the fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Substantial Shareholder became a Substantial Shareholder (such latter date the "Determination Date"), whichever is higher. b. The aggregate amount of cash, plus the Fair Market Value as of the Consummation Date of consideration other than cash, to be received per share by holders of shares of any class or series of outstanding Preferred Stock, shall be at least equal to the highest amount determined under clauses (i), (ii) and (iii) below); (i) (if applicable) the highest per share price including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Substantial Shareholder for any share of such class or series of Preferred Stock in connection with the acquisition by the Substantial Shareholder of beneficial ownership of shares of such class or series of Preferred Stock within the period beginning two years immediately prior to the Announcement Date and terminating on the Consummation Date, or in the transaction in which it became a Substantial Shareholder, whichever is higher; (ii) the Fair Market Value per share of such Preferred Stock on the Announcement Date or on the Determination Date, whichever is higher; and (iii) (if applicable) the highest preferential amount per share to which the holders of shares of such class or series of Preferred Stock would be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, regardless of whether the Business Combination to be consummated constitutes such an event. The provisions of Paragraphs C.2.a. and C.2.b. shall be required to be met with respect to every class or series of outstanding shares, whether or not the Substantial Shareholder has previously acquired beneficial ownership of any shares of a particular class or series. 48 49 c. The consideration to be received by holders of a particular class or series of outstanding shares shall be in cash or in the same form and in the same relative proportion as previously has been paid by or on behalf of the Substantial Shareholder or any person referred to in Paragraph 6 of Section D of this Article ELEVENTH in connection with its direct or indirect acquisition of beneficial ownership of shares of such class or series. If the consideration so paid for shares of any class or series varied as to form, the form of consideration for such class or series of shares shall be either cash or the form and in the same relative proportion used to acquire beneficial ownership of the largest number of shares of such class or series previously acquired by the Substantial Shareholder or any person referred to in Paragraph 6 of Section D of this Article ELEVENTH. The price determined in accordance with Paragraphs (C).2.a. and (C).2.b. shall be subject to appropriate adjustment in the event of any stock dividend, stock split, reclassification of shares or similar event. d. After such Substantial Shareholder has become a Substantial Shareholder and prior to the consummation of such Business Combination: (i) except as recommended by a majority of the Disinterested Directors present at a meeting of the Board of Directors at which a quorum is present, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) payable in accordance with the terms of any outstanding Preferred Stock; (ii) there shall have been no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any stock split, stock dividend or subdivision of the Common Stock), except as recommended by a majority of the Disinterested Directors present at a meeting of the Board of Directors at which a quorum is present; (iii) there shall have been an increase in the annual rate of dividends paid on the Common Stock as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction that has the 49 50 effect of reducing the number of outstanding shares of Common Stock, unless the failure so to increase such annual rate is recommended by a majority of the Disinterested Directors present at a meeting of the Board of Directors at which a quorum is present. e. After such Substantial Shareholder has become a Substantial Shareholder, such Substantial Shareholder shall not have received the benefit, directly or indirectly (except as employee benefits or proportionately as a shareholder of the Company), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Company, whether in anticipation of or in connection with such Business Combination or otherwise. f. A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (the "Act") (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to all shareholders of the Company at least 30 days prior to the consummation of such business combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). The proxy or information statement shall contain on the first page thereof, in a prominent place, any statement as to the advisability (or inadvisability) of the Business Combination that the Disinterested Directors, or any of them, may choose to make and, if deemed advisable by a majority of the Disinterested Directors, the opinion of an investment banking firm selected by a majority of such Disinterested Directors as to the fairness (or lack of fairness) of the terms of the Business Combination from a financial point of view to the holders of the outstanding shares other than the Substantial Shareholder and its Affiliates or Associates (both terms as hereinafter defined), such investment banking firm to be paid a reasonable fee for its services by the Company. g. Such substantial Shareholder shall not have made any material change in the Company's business or equity capital structure without the recommendation of a majority of the Disinterested Directors present at a meeting of the Board of Directors at which a quorum is present. 50 51 D. Certain Definitions. For the purposes of this Article ELEVENTH: 1. The term "Business Combination" shall mean: (a) any merger or consolidation of the Company or any Subsidiary (as hereinafter defined) with (i) any Substantial Shareholder or (ii) any other corporation (whether or not itself a Substantial Shareholder) which is or after such merger or consolidation would be an Affiliate or Associate of a Substantial Shareholder; or (b) the adoption of any plan or proposal for the liquidation or dissolution of the Company proposed by or on behalf of a Substantial Shareholder or any Affiliate or Associate of any Substantial Shareholder; or (c) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Substantial Shareholder or any Affiliate or Associate of any Substantial Shareholder involving any assets or securities of the Company or any Subsidiary having an aggregate Fair Market Value of $25,000,000 or more; or (d) any reclassification of securities (including any reverse stock split), or recapitalization of the Company, or any merger or consolidation of the Company with any of its Subsidiaries or any other transaction (whether or not with or otherwise involving a Substantial Shareholder) that has the effect, directly or indirectly, of increasing the proportionate share of any class or series, or any securities convertible into shares or into equity securities of any Subsidiary, that is beneficially owned by any Substantial Shareholder or any Affiliate or Associate of any Substantial Shareholder; or (e) any agreement, contract or other arrangement providing for any one or more of the actions specified in the foregoing clauses (a) to (d). 2. The term "Voting Stock" shall mean all shares issued from time to time under Article FOURTH of this Certificate of Incorporation and which by its terms may be voted generally in the election of directors of the Company (it being understood that each share of Voting Stock shall have the number of votes granted to it pursuant to Article FOURTH). 51 52 3. The term "person" shall mean any individual, firm, corporation or other entity and shall include any group comprised of any person and any other person with whom such person or any Affiliate or Associate of such person has any agreement, arrangement or understanding, directly or indirectly, for the purpose of acquiring, holding, voting or disposing of shares. 4. The term "interested Shareholder" shall mean any person (other than the Company or any Subsidiary) who or which: (a) is the beneficial owner (as hereinafter defined), directly or indirectly, in the aggregate of three percent (3%) or more of the class of securities to be acquired; or (b) is an Affiliate or Associate of the Company and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, in the aggregate of three percent (3%) or more of the class of securities to be acquired; or (c) is an assignee or has otherwise succeeded to any shares of the class of securities to be acquired which were at any time within the two-year period immediately prior to the date in question beneficially owned by an Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or transactions not involving a public offering within the meaning of the Securities Act of 1933. 5. The term "Substantial Shareholder" shall mean any person (other than the Company or any subsidiary) who or which: (a) is the beneficial owner, directly or indirectly, in the aggregate of more than twenty percent (20%) of the voting power of the outstanding Voting Stock; or (b) is an Affiliate or Associate of the Company and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, in the aggregate of twenty percent (20%) or more of the voting power of the then outstanding Voting Stock; or (c) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Substantial Shareholder, if such 52 53 assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. 6. A person shall be a "beneficial owner" of any Voting Stock: (a) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or (b) which such person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding; or (c) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. 7. For the purposes of determining whether a person is an Interested Shareholder pursuant to Paragraph 4 of this Section D, or a Substantial Shareholder pursuant to Paragraph 5 of this Section D, the number of shares of Voting Stock deemed to be outstanding shall include all shares deemed owned by such person through application of Paragraph 6 of this Section D but shall not include any other shares of Voting Stock which may be issuable to others pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 8. The terms "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on February 1, 1985. 53 54 9. The term "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Company; provided, however, that for the purposes of the definition of a Substantial Shareholder set forth in Paragraph 5 of this Section D, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Company. 10. The term "Disinterested Director" means any member of the Board of Directors of the Company who is unaffiliated with the Substantial Shareholder and was a member of the Board of Directors prior to the time that the Substantial Shareholder became a Substantial Shareholder, and any successor of a Disinterested Director who is unaffiliated with the Substantial Shareholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board of Directors. 11. The term "Fair Market Value" means: (a) in the case of cash, the amount of such cash; (b) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any similar system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined in good faith by a majority of the Disinterested Directors present at a meeting of the Board of Directors at which a quorum is present; and (c) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Disinterested Directors present at a meeting of the Board of Directors at which a quorum is present. 54 55 12. In the event of any Business Combination in which the Company survives, the phrase "consideration other than cash to be received" as used in paragraphs 2.a. and 2.b. of Section C of this Article ELEVENTH shall include the shares of Common Stock and/or the shares of any other class of series of shares retained by the holders of such shares. E. Powers of the Board of Directors. A majority of the Disinterested Directors present at a meeting of the Board of Directors at which a quorum is present shall have the power and duty to determine for the purposes of this Article ELEVENTH, on the basis of information known to them after reasonable inquiry, (a) whether a person is an Interested Shareholder or a Substantial Shareholder, (b) the number of shares of Voting Stock beneficially owned by any person, (c) the length of time such shares are beneficially owned by any person, (d) whether a person is an Affiliate or Associate of another, (e) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Company or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $25,000,000 or more, and (f) such other matters with respect to which a determination or interpretation required under this Article ELEVENTH. F. No Effect on Fiduciary Obligation of Interested Shareholder or Substantial Shareholder. Nothing contained in this Article ELEVENTH shall be construed to relieve any Interested Shareholder or Substantial Shareholder from any fiduciary obligation imposed by law. G. Amendment, Repeal, etc. Notwithstanding any other provisions of this Certificate of Incorporation or the By-Laws (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation or the By-Laws of this Company or otherwise), the affirmative vote of not less than eighty percent (80%) of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock, voting together as a single class, shall be required to amend, repeal or adopt any provisions inconsistent with this Article ELEVENTH; provided, however, that this Section G shall not apply to, and such eighty percent (80%) vote shall not be required for, any amendment, repeal or adoption recommendation by a majority of the Disinterested Directors present at a meeting of the Board of Directors at which a quorum is present. TWELFTH - No member of the Board of Directors shall have any personal liability to the company or its shareholders for damages for any breach of duty in such capacity, provided that this Article shall not eliminate or limit: 55 56 (i) the liability of any Director if a judgment or other final adjudication adverse to him or her establishes that his or her acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled or that his or her acts violated section 719 of the Business Corporation Law; or (ii) the liability of any Director for any act or omission prior to the adoption of this Article. Neither the amendment nor repeal of this Article, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article, shall eliminate or reduce the effect of this Article in respect of any act or omission occurring prior to such amendment, repeal or adoption of an inconsistent provision. 5. This amendment and restatement of the Certificate of Incorporation of The B.F.Goodrich Company was authorized by the unanimous vote of the Board of Directors of the Company at a meeting duly called and held, a quorum being present, on the 6th day of June, 1988 and by the shareholders of the Company at a special meeting duly called and held, a quorum being present, on the 27th day of July, 1988. IN WITNESS WHEREOF, the undersigned have executed and signed their names and affirm that the statements made herein are true under the penalties of perjury, this 29th day of July, 1988. THE B.F.GOODRICH COMPANY Jon V. Heider Senior Vice President Nicholas J. Calise Secretary 56 57 CERTIFICATE OF AMENDMENT of THE CERTIFICATE OF INCORPORATION of THE B.F.GOODRICH COMPANY (Under Section 805 of the Business Corporation Law) ------------------------- Pursuant to the provisions of Section 805 of the Business Corporation Law, the undersigned hereby certify: 1. The name of the corporation is The B.F.Goodrich Company (the "Company"), 2. The Certificate of Incorporation of the Company was filed by the Department of State on 2nd day of May, 1912. 3. The Certificate of Incorporation of the Company is hereby amended by the addition of the following provision stating the number, designations, relative rights, preferences and limitations of a series of Series Participating Preferred Stock of the Company, designated as Junior Participating Preferred Stock, Series F, par value $1 per share, as unanimously approved by the Board of Directors of the Company at a meeting on June 2, 1997 pursuant to the authority vested in it by the Certificate of Incorporation of the Company. Junior Participating Preferred Stock, Series F: Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Junior Participating Preferred Stock, Series F" (the "Series F Preferred Stock") and the number of shares constituting the Series F Preferred Stock shall be 100,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; PROVIDED, that no decrease shall reduce the number of shares of Series F Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Company convertible into Series F Preferred Stock. 58 Section 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series F Preferred Stock with respect to dividends, the holders of shares of Series F Preferred Stock, in preference to the holders of Common Stock, par value $5 per share (the "Common Stock"), of the Company, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series F Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $10 or (b) subject to the provision for adjustment hereinafter set forth, 1000 times the aggregate per share amount of all cash dividends, and 1000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series F Preferred Stock. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series F Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Company shall declare a dividend or distribution on the Series F Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $10 per share on the Series F Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series F Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series F Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. 2 59 Dividends paid on the shares of Series F Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series F Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 50 days prior to the date fixed for the payment thereof. Section 3. VOTING RIGHTS. The holders of shares of Series F Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series F Preferred Stock shall entitle the holder thereof to 1000 votes on all matters submitted to a vote of the shareholders of the Company. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series F Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in any other Certificate of Designations creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series F Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Company having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Company. (C) Except as set forth herein, or as otherwise provided by law, holders of Series F Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series F Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series F Preferred Stock outstanding shall have been paid in full, the Company shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series F Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon 3 60 liquidation, dissolution or winding up) with the Series F Preferred Stock, except dividends paid ratably on the Series F Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series F Preferred Stock, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Company ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series F Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series F Preferred Stock, or any shares of stock ranking on a parity with the Series F Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. REACQUIRED SHARES. Any shares of Series F Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation, dissolution or winding up of the Company, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series F Preferred Stock unless, prior thereto, the holders of shares of Series F Preferred Stock shall have received $1000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series F Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1000 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series F Preferred Stock, except distributions made ratably on the Series F Preferred Stock and all such parity stock in proportion to the total 4 61 amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Company shall at any time declare or pay any dividend on the common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series F Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. CONSOLIDATION, MERGER, ETC. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series F Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series F Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. NO REDEMPTION. The shares of Series F Preferred Stock shall not be redeemable. Section 9. RANK. The Series F Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Company's Preferred Stock. Section 10. AMENDMENT. The Certificate of Incorporation of the Company shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series F Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series F Preferred Stock, voting together as a single class. 62 IN WITNESS WHEREOF, we have executed and subscribed this Certificate of Amendment, and do affirm the foregoing as true, under penalties of perjury this 31st day of July, 1997. -------------------------------------- Name: David L. Burner Title: Chairman, President and Chief Executive Officer -------------------------------------- Name: Nicholas J. Calise Title: Secretary 63 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF THE B.F.GOODRICH COMPANY (Under Section 805 of the Business Corporation Law) ------------------------------ Pursuant to the provisions of Section 805 of the Business Corporation Law, the undersigned hereby certify: 1. The name of the corporation is The B.F.Goodrich Company (the "Company"). 2. The Certificate of Incorporation of the Company was filed by the Department of State on the 2nd day of May, 1912. 3. The Certificate of Incorporation of the Company is hereby amended to modify Article FOURTH to increase the number of authorized shares of Common Stock from 100,000,000 to 200,000,000 shares by deleting the existing Article Fourth in its entirety and substituting the following: "FOURTH -- The aggregate number of shares which the Company shall have authority to issue is 210,000,000, divided into 10,000,000 shares of Series Preferred Stock of the par value of $1 per share (hereafter called "Series Preferred Stock"), and 200,000,000 shares of Common Stock of the par value of $5 per share (hereafter called "Common Stock")." 4. This amendment of the Certificate of Incorporation of The B.F.Goodrich Company was authorized by the unanimous vote of the Board of Directors of the Company at a meeting duly called and held, a quorum being present, on the 16th day of 64 February 1998 and by a vote of the holders of a majority of the outstanding shares of the Company's Common Stock at a meeting duly called and held, a quorum being present, on the 20th day of April 1998. IN WITNESS WHEREOF, we have executed and subscribed this Certificate of Amendment, and do affirm the foregoing as true, under penalties of perjury this 30th day of April, 1998. /s/ DAVID L. BURNER ------------------------------- David L. Burner, Chairman, President and Chief Executive Officer /s/ NICHOLAS J. CALISE ------------------------------- Nicholas J. Calise, Secretary EX-10.A 3 EXHIBIT 10(A) 1 Exhibit 10(A) THE B.F.GOODRICH COMPANY STOCK OPTION PLAN (Amended February 16, 1998) 1. PURPOSE. The purpose of the Plan is to promote the interests of the shareholders by providing stock-based incentives to selected employees to align their interests with shareholders and to motivate them to put forth maximum efforts toward the continued growth, profitability and success of the Company. In furtherance of this objective, stock options, stock appreciation rights, performance shares, restricted shares, common stock, and/or other incentive awards may be granted in accordance with the provisions of this Plan. 2. ADMINISTRATION. The Plan is to be administered by the Compensation Committee or any successor committee (the "Committee") of the Board of Directors of the Company. The Committee shall consist of at least three members who shall not be eligible to participate in the Plan. The Committee shall have full power and authority to construe, interpret and administer the Plan. All decisions, actions or interpretations of the Committee shall be final, conclusive and binding on all parties. The Committee may delegate to the Chief Executive Officer and to other senior officers of the Company the authority to make awards under the Plan with respect to not more than ten percent of the shares authorized under the Plan, pursuant to such conditions and limitations as the Committee may establish, except that only the Committee may make awards to Participants who are subject to Section 16 of the Securities Exchange Act of 1934. 3. SHARES AVAILABLE FOR THE PLAN. An aggregate of 3,200,000 shares of common stock of the Company shall be available for delivery pursuant to the provisions of the Plan. Such shares may be either authorized but unissued shares or treasury shares. Any shares awarded under the Plan which are not issued or otherwise are returned to the Company, whether because awards have been forfeited, lapsed, expired, been canceled, withheld to satisfy withholding tax obligations or otherwise, shall again be available for other awards under the Plan. However, upon surrender of a stock option or exercise of any related stock appreciation right, the number of shares subject to the surrendered option shall be charged against the maximum number of shares issuable under the Plan and shall not be available for future awards. 4. LIMITATION ON AWARDS. No individual employee may receive awards under this Plan with respect to more than 200,000 shares in any calendar year. 5. TERM. No awards may be made under this Plan after April 15, 2001. 2 6. ELIGIBILITY. Awards under the Plan may be made to any salaried, full-time employee of the Company or any subsidiary corporation of which more than 50% of the voting stock is owned by the Company. Directors who are not full-time employees are not eligible to participate. 7. STOCK OPTIONS. The Committee may in its discretion from time to time grant to eligible employees options to purchase, at a price not less than 100% of the fair market value on the date of grant (the "option price"), common stock of the Company, subject to the conditions set forth in this Plan. The Committee may not reduce the option price of any stock option grant after it is made, except in connection with a Corporate Reorganization, nor may the Committee agree to exchange a new lower priced option for an outstanding higher priced option The Committee, at the time of granting to any employee an option to purchase shares or any related stock appreciation right or limited stock appreciation right under the Plan, shall fix the terms and conditions upon which such option or appreciation right may be exercised, and may designate options incentive stock options pursuant to Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") or any other statutory stock option that may be permitted under the Internal Revenue Code from time to time, provided, however that (i) the date on which such options and related appreciation rights shall expire, if not exercised, may not be later than ten years after the date of grant of the option, (ii) in the case of options designated as incentive stock options (as defined in Section 422 of the Internal Revenue Code), the aggregate fair market value of stock optioned to an employee (determined at time of grant) under this plan or any other plan of this Company and its subsidiaries with respect to which incentive stock options are exercisable for the first time by such employee during any calendar year shall be limited to $100,000 (unless such Section 422 limit is revised, then in conformance with such revision) and (iii) in case of any other statutory stock option permitted under the Internal Revenue Code, then in accordance with such provisions as in effect from time to time. Within the foregoing limitations, the Committee shall have the authority in its discretion to specify all other terms and conditions, including but not limited to provisions for the exercise of options in installments, the time limits during which options may be exercised, and in lieu of payment in cash, the exercise in whole or in part of options by tendering common stock of the Company owned by the employee, valued at the fair market value on the date of exercise or other acceptable forms of consideration equal in value to the option price. The Committee may, in its discretion, issue rules or conditions with respect to utilization of common stock for all or part of the option price, including limitations on the pyramiding of shares. 8. STOCK APPRECIATION RIGHTS. The Committee may, in its discretion, grant stock appreciation rights and limited stock appreciation rights (as hereinafter described) in connection with any stock option, either at the time of grant of such stock option or any -2- 3 time thereafter during the term of such stock option. Except for the terms of this Plan with respect to limited stock appreciation rights, each stock appreciation right shall be subject to the same terms and conditions as the related stock option and shall be exercisable at such times and to such extent as the Committee shall determine, but only so long as the related option is exercisable. The number of stock appreciation rights or limited stock appreciation rights shall be reduced not only by the number of appreciation rights exercised but also by the number of shares purchased upon the exercise of a related option. A related stock option shall cease to be exercisable to the extent the stock appreciation rights or limited stock appreciation rights are exercised. Upon surrender to the Company of the unexercised related stock option, or any portion thereof, a stock appreciation right shall entitle the optionee to receive from the Company in exchange therefor (a) a payment in stock as determined below, or (b) to the extent determined by the Committee, the cash equivalent of the fair market value of such payment in stock on the exercise date had the employee been awarded a payment in stock instead of cash, or any combination of stock and cash. The number of shares which shall be issued pursuant to the exercise of stock appreciation rights shall be determined by dividing (1) the total number of stock appreciation rights being exercised multiplied by the amount by which the fair market value of a share of common stock of the Company on the exercise date exceeds the option price of the related option, by (2) the fair market value of a share of common stock of the Company on the exercise date. No fractional shares shall be issued. The grant of limited stock appreciation rights will permit a grantee to exercise such limited stock appreciation rights for cash during a sixty-day period commencing on the date on which any of the events described in the definition of Change of Control occurs. The amount of cash received upon the exercise of any limited stock appreciation rights shall equal the excess, if any, of the fair market value of a share of the Company's common stock on the date of exercise of the limited stock appreciation rights, over the option price of the stock option to which the limited stock appreciation rights relate. 9. PERFORMANCE SHARE AWARDS. The Committee may make awards in common stock subject to conditions established by the Committee which may include attainment of specific performance objectives ("Performance Share Awards"). Performance Share Awards may include the awarding of additional shares upon attainment of the specified performance objectives. 10. PERFORMANCE OBJECTIVES. Performance objectives that may be used under the Plan include Net Income, Pretax Income, Consolidated Operating Income, Segment Operating Income, Return on Equity, Operating Income Return on Net Capital Employed, Return on Assets, Cash Flow, Working Capital and Earnings per Share of Common Stock of the Company (the "Performance Objectives"). The Performance Objectives shall be calculated without regard to any change in accounting standards adopted pursuant to the Financial Accounting Standards Board after the goal for a Performance Objective is adopted which will affect the performance measure by 10 percent or more. -3- 4 11. RESTRICTED SHARES. The Committee may make awards in common stock subject to conditions, if any, established by the Committee which may include continued service with the Company or its subsidiaries. Any award of Restricted Shares which is conditioned upon continued employment shall be conditioned upon continued employment for a minimum period of two years and ten months following the award, except in the case of death, disability or retirement. The maximum number of Restricted Shares that may be awarded under the plan shall be 800,000 shares. 12. OTHER AWARDS. The Committee may make awards authorized under this Plan in Units, the value of which is based, in whole or in part, on the value of the Company's common stock, in lieu of making such awards in common stock. The Committee may provide for the deferral of cash-based awards under such terms and conditions as in its discretion it deems appropriate. 12A. DEFERRED AWARDS. The Committee may permit recipients of awards to elect to defer receipt of such awards under such terms and conditions that the Committee may prescribe. The Committee may authorize the Company to establish various trusts or make other arrangements with respect to any deferred awards. 13. FAIR MARKET VALUE. For all purposes of this Plan the fair market value of a share of stock shall be the mean of the high and low prices of the Company's common stock on the relevant date as reported on the New York Stock Exchange -- Composite Transactions listing (or similar report), or, if no sale was made on such date, then on the next preceding day on which such a sale was made. 14. TERMINATION OF EMPLOYMENT. Upon the termination of employment of any employee for any reason, his or her options and any related appreciation rights shall terminate at that time with respect to all shares which were not then purchasable by him or her, provided, however, that if the termination of employment is by reason of death, disability or retirement the Committee may in its sole discretion provide that such options and related appreciation rights shall not terminate upon death, disability or retirement and may become immediately exercisable or continue to become exercisable in accordance with the terms of the original grant. 15. ASSIGNABILITY. Options and any related appreciation rights and other awards granted under this Plan shall not be transferable other than by will or the laws of descent and distribution or by such other means as the Committee may approve from time to time. 16. CORPORATE REORGANIZATION. The number and kind of shares authorized for delivery under the Plan and the price at which shares may be purchased may be adjusted appropriately in the event of any stock split, stock dividend, combination of -4- 5 shares, merger, consolidation, reorganization, or other change in the structure of the Company or the nature of the shares of the Company. The determination of what adjustments, if any, are appropriate shall be made in the discretion of the Board of Directors or the Committee. In the event of a dissolution or liquidation of the Company or a merger, consolidation, sale of all or substantially all of its assets, or other corporate reorganization in which the Company is not the surviving corporation or any merger in which the Company is the surviving corporation but the holders of its common stock receive securities of another corporation, any outstanding options hereunder shall terminate, provided that each optionee shall, in such event, have the right immediately prior to such dissolution, liquidation, merger, consolidation, sale of assets or reorganization in which the Company is not the surviving corporation or any merger in which the Company is the surviving corporation but the holders of its common stock receive securities of another corporation, to exercise any unexpired option and/or stock appreciation right in whole or in part without regard to the exercise date contained in such option. Nothing herein contained shall prevent the assumption and continuation of any outstanding option or the substitution of a new option by the surviving corporation. 17. COMMITTEE'S DETERMINATION. The Committee's determinations under the Plan including without limitation, determinations of the employees to receive awards or grants, the form, amount and timing of such awards or grants, the terms and provisions of such awards or grants and the agreements evidencing same, and the establishment of Performance Objectives need not be uniform and may be made by it selectively among employees who receive, or are eligible to receive awards or grants under the Plan whether or not such employees are similarly situated. 18. LEAVE OF ABSENCE OR OTHER CHANGE IN EMPLOYMENT STATUS. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by an employee or any other change in employment status, such as a change from full time employment to a consulting relationship, of an employee relative to any grant or award. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (i) whether or not any such leave of absence or other change in employment status shall constitute a termination of employment within the meaning of the Plan and (ii) the impact, if any, of any such leave of absence or other change in employment status on awards under the Plan theretofore made to any employee who takes such leave of absence or otherwise changes his or her employment status. 19. WITHHOLDING TAXES. The Committee shall have the right to require any Federal, state or local withholding tax requirements to be satisfied by withholding shares of common stock or other amounts which would otherwise be payable under the Plan. -5- 6 20. RETENTION OF SHARES. If shares of common stock are awarded subject to attainment of Performance Objectives, continued service with the Company or other conditions, the shares may be registered in the employees' names when initially awarded, but possession of certificates for the shares shall be retained by the Secretary of the Company for the benefit of the employees, or shares may be registered in book entry form only, in both cases subject to the terms of this Plan and the conditions of the particular awards. In either event, each employee shall have the right to receive all dividends and other distributions made with respect to such awards registered in his or her name and shall have the right to vote or execute proxies with respect to such registered shares. 21. FORFEITURE OF AWARDS. Any awards or parts thereof made under this plan which are subject to Performance Objectives or other conditions which are not satisfied, shall be forfeited, and any shares of common stock issued shall revert to the Treasury of the Company. 22. CONTINUED EMPLOYMENT. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any employee the right to continue in the employment of the Company or affect any right which the Company may have to terminate the employment of such employee. 23. CHANGE IN CONTROL. For purposes of the Plan, a Change in Control shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company (other than by exercise of a conversion privilege), (B) any acquisition by the Company or any of its subsidiaries, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries or (D) any acquisition by any corporation with respect to which, following such acquisition, more than 70% of, respectively, the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Company Voting Securities immediately prior to such acquisition in substantially the same proportions as their ownership, immediately prior to such acquisition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or -6- 7 (ii) During any period of two consecutive years, individuals who, as of the beginning of such period, constitute the Board (the "Incumbent Board"), cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the beginning of such period whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act); or (iii) approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, with respect to which all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation, do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 70% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (iv) Approval by the shareholders of the Company of (A) a complete liquidation or dissolution of the Company or (B) a sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, more than 70% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be. 24. EFFECT OF CHANGE IN CONTROL. Options and any related appreciation rights that are not then exercisable shall become immediately exercisable in the event of a Change in Control. The Committee may make such provision with respect to other awards under this Plan as it deems appropriate in its discretion. 25. COMPLIANCE WITH LAWS AND REGULATIONS. Notwithstanding any other provisions of the Plan, the issuance or delivery of any shares may be postponed for -7- 8 such period as may be required to comply with any applicable requirements of any national securities exchange or any requirements under any other law or regulation applicable to the issuance or delivery of such shares, and the Company shall not be obligated to issue or deliver any such shares if the issuance or delivery thereof shall constitute a violation of any provision of any law or any regulation of any governmental authority, whether foreign or domestic, or any national securities exchange. 26. AMENDMENT. The Board of Directors of the Company may alter or amend the Plan, in whole or in part, from time to time, or terminate the Plan at any time, provided however, that no amendment shall be made without the approval of the shareholders which has the effect of increasing the number of shares subject to this Plan (other than in connection with a Corporate Reorganization), but no such action shall adversely affect any rights or obligations with respect to awards previously made under the Plan. -8- EX-10.C 4 EXHIBIT 10(C) 1 Exhibit 10(C) SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT ------------------------------------------------ THIS AGREEMENT dated as of the day of , , by and between The B.F.Goodrich Company, a New York corporation (the "Company"), and (the "Executive Employee"); WITNESSETH: WHEREAS, the Employee will not receive the same level of benefits under The B.F.Goodrich Retirement Program for Salaried Employees (together with any successor Pension Plan, the "Goodrich Pension Plan") as will employees who commenced employment with the Company at an early age; and WHEREAS, the Compensation Committee of the Board of Directors of the Company desires that the Executive Employee receive the benefits of a Supplemental Executive Retirement Plan Agreement authorized by the Board of Directors, which provides certain supplemental pension and retiree medical benefits; NOW THEREFORE, in consideration of the services rendered and to be rendered by the Executive Employee and of the covenants contained herein, the parties agree as follows: -1- 2 1. Alternative, Supplemental and Health Benefits --------------------------------------------- In the event that the employment of the Executive Employee is terminated for any reason, including termination by reason of death, disability, retirement or voluntary or involuntary termination, the Company agrees that, pursuant to the terms and conditions of this Agreement: (a) The Company shall pay or cause to be paid an Alternative Pension Benefit as provided in Section 2, et seq., hereof; and (b) The Company shall pay or cause to be paid a Supplemental Pension Benefit as provided in Section 3, et seq., hereof; and (c) The Company shall pay or cause to be paid a Supplemental Retiree Medical Benefit as provided in Section 4, et seq., hereof. 2. Alternative Pension Benefit --------------------------- The Company shall pay or cause to be paid a monthly pension benefit (the "Alternative Pension Benefit") which shall be calculated and paid as if it had been determined and paid according to the provisions of the Goodrich Pension Plan or any successor pension plan which is in effect at the time of such termination of employment without regard to any limitation contained in Sections 401(a)(17) or 415 of the Internal Revenue Code of 1986, as amended, or any similar subsequent -2- 3 provisions thereof, notwithstanding that the Executive Employee may not have sufficient service with the Company to qualify for a pension benefit pursuant to the Goodrich Pension Plan. (a) For purposes of such calculation, the Executive Employee shall be considered to have earned and to be eligible to receive a vested pension benefit without regard to the years of service requirement for vesting under the Goodrich Pension Plan. (b) The Executive Employee's service for pension benefit computation purposes shall be the Executive Employee's continuous period of service (in completed years and months as calculated under the Goodrich Pension Plan) with the Company from the date of such employee's employment to the date of termination of such employment. (c) In the event that the Executive Employee has less than four years of continuous service at the termination of employment, the Executive Employee's "Final Average Earnings" (as that term or similar subsequent term is defined in the Goodrich Pension Plan) will be the result obtained by dividing such employee's aggregate "Earnings" (as that term or similar subsequent term is defined in the Goodrich Pension Plan) paid to such employee during the period of the Executive Employee's employment by the Company by the number of full months in such period of employment and multiplying such intermediate result by twelve. (d) From that amount which is determined according to this Section 2 to be the Executive Employee's Alternative Pension Benefit, an amount will be subtracted which is actuarially equivalent to the aggregate benefit, if any, which is actually paid to the Executive -3- 4 Employee or eligible beneficiaries from the Goodrich Pension Plan and Benefit Restoration Plan. (e) The Alternative Pension Benefit shall be payable according to the same payment option elected by the Executive Employee for benefit payments under the Goodrich Pension Plan, or which could be elected if the Executive Employee were eligible for a benefit under the Goodrich Pension Plan. 3. Supplemental Pension Benefit ---------------------------- In addition to such monthly benefits as are owing to the Executive Employee or eligible beneficiaries either pursuant to the Goodrich Pension Plan and/or Section 2 of this Agreement, the Company shall pay or cause to be paid, a supplemental pension benefit (the "Supplemental Pension Benefit") which shall be calculated and paid according to the Goodrich Pension Plan without regard to any limitation contained in Sections 401(a)(17) or 415 of the Internal Revenue Code of 1986, as amended, or any similar subsequent provisions thereof and which shall be based upon a full one and six tenths percent (1.6%) of Final Average Earnings for each full year and a pro rata share of one and six tenths percent (1.6%) for each partial year in completed months of employment (in each case as calculated under the Goodrich Pension Plan) of the Executive Employee's employment with the Company, up to a maximum of twenty-four percent of Final Average Earnings. The Supplemental Pension Benefit shall be payable according to the same payment option elected by the Executive Employee for benefit payments under Section 2(e) of this Agreement. -4- 5 4. Supplemental Retiree Medical Benefit ------------------------------------ In the event and to the extent the Executive Employee or eligible beneficiaries are not eligible to participate in or otherwise do not receive the full benefits of The BFGoodrich Health Care and Prescription Drug Plan for retired salaried employees or any successor qualified health care plan for retired salaried employees (the "Goodrich Retiree Medical Plan") following termination of the Executive Employee's employment with the Company, the Executive Employee and eligible beneficiaries shall be entitled to a supplemental retiree medical benefit (the "Supplemental Retiree Medical Benefit") which shall be equal to the full benefits of the Goodrich Retiree Medical Plan which is in effect on the date of the termination of the Executive Employee's employment with the Company with any changes which may be implemented in the Goodrich Retiree Medical Plan from time to time thereafter. The Supplemental Medical Benefit shall be payable to the Executive Employee and eligible beneficiaries from and after the later of (a) the date of the Executive Employee's termination of employment with the Company for any reason, or (b) the date the Executive Employee reaches, or in the event of death would have reached, such employee's fifty-fifth birthday. 5. Relationship with Management Continuity Agreement ------------------------------------------------- In the event that (i) a "Change in Control", as that term is defined in a certain Letter Agreement dated November 3, 1997 between the Company and the Executive Employee or any similar successor agreement (the "Management Continuity Agreement") occurs, and (ii) the Executive Employee's employment with the Company is thereafter terminated and such employee thereby -5- 6 becomes entitled to receive, inter alia, the compensation specified in the Management Continuity Agreement, then for purposes of this Agreement: (a) No additional service with respect to the "Payment Period" (as that term or similar subsequent term is defined in the Management Continuity Agreement) as stated the Management Continuity Agreement shall be added to the Alternative Pension Benefit referred to in Section 2 of this Agreement so long as the Executive Employee receives the equivalent of a pension benefit with respect to such Payment Period; but if the Executive Employee for any reason does not receive such benefit under the Management Continuity Agreement then the number of months in the aforesaid Payment Period shall be added to the Executive Employee's years of service with the Company to calculate the Alternative Pension Benefit; and (b) To the years of service used to calculate the Supplemental Pension Benefit referred to in Section 3 of this Agreement there shall be added the number of months in the aforesaid Payment Period. 6. Miscellaneous ------------- (a) The Company shall pay from its general assets or cause to be paid to the Executive Employee or eligible beneficiaries the Alternate Retirement Benefit, the Supplemental Retirement Benefit and the Supplemental Retiree Medical Benefit in the same manner, and with respect to each -6- 7 of such pension benefits with the same actuarial reductions, as such benefit would be payable if it had been paid pursuant to the relevant Plan. (b) Nothing in this Agreement shall prevent the Company from terminating or amending the Goodrich Pension Plan, the Goodrich Health Care Plan or the Goodrich Retiree Medical Plan, except that no such termination or amendment shall deprive the Executive Employee or eligible beneficiaries of (i) with respect to the Alternative Retirement Benefit, the right to receive benefits under the Goodrich Pension Plan without regard to vesting; (ii) with respect to the Supplemental Retirement Benefit, the right to receive such benefit as provided in this Agreement; and (iii) with respect to the Supplemental Retiree Medical Benefit, the right to receive the benefits under the Goodrich Retiree Medical Plan as provided herein with any changes which may be implemented in such plan from time to time. (c) Nothing in this Agreement shall be construed to confer upon the Executive Employee any right of continuing employment by the Company, nor shall this Agreement interfere in any way with the right of the Company to assign the Executive Employee to other duties or responsibilities or to terminate such employee's employment at any time. Termination of employment for any reason, however, shall not terminate this Agreement. -7- 8 (d) No right to payment or any other interest under this Agreement shall be assignable by the Executive Employee or by any spouse or beneficiary and no such right or other interest shall be subject to attachment, execution or levy of any kind. This Agreement may and shall be assigned or transferred to, and shall be binding upon any successor of the Company, and such successor shall be deemed substituted for the "Company" under the terms of this Agreement. (e) This Agreement shall be construed, administered and enforced in accordance with the laws of the State of Ohio with respect to agreements made and to be performed in the State of Ohio. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by an officer thereunder duly authorized so to do, and the Executive Employee has accepted and executed this Agreement, all as of the day and year first above written. THE B.F.GOODRICH COMPANY By Direction of the Compensation Committee: By ---------------------------------------- Accepted: ------------------------------------------- -8- EX-10.D 5 EXHIBIT 10(D) 1 Exhibit 10(D) THE BFGOODRICH COMPANY MANAGEMENT INCENTIVE PROGRAM ---------------------------- PURPOSE - ------- The BFGoodrich Management Incentive Program (the Program) has been established to provide opportunities to certain key management personnel to receive incentive compensation as a reward for high levels of personal performance above the ordinary performance standards compensated by base salary, and for their contributions to strong performance of the business units to which they are assigned. The Program is designed to provide a competitive level of rewards when all relevant performance objectives are achieved. ELIGIBILITY - ----------- Participation in the Program will be limited to those key executives that have the potential to influence significantly and positively the performance of the Company or the business unit to which they are assigned. Participants will be selected by management annually. Inclusion of a key manager as a participant does not, however, assure that an incentive award will be paid to the participant for the year since actual awards are determined at the sole discretion of management. To be eligible for participation in a particular year, a key manager must have assumed the duties of an incentive-eligible position and have been selected for participation in the Program by July 1 of that year. To receive an award, the participant must remain employed by The BFGoodrich Company through December 15 of the Program year, subject to the Change in Control provisions. PARTICIPANT CATEGORIES - ---------------------- Each participant will be assigned each year to an incentive category based on organizational level and potential impact on important Company or business unit results. The participant categories define the target level of incentive opportunity, stated as a percentage of salary midpoint, that will be available to the participant. Category assignments are initiated on the recommendation of the appropriate Division head and approved by the Corporate Executive Office. 2 MANAGEMENT INCENTIVE PROGRAM GUIDELINES FOR CATEGORIES -------------------------
TARGET BONUS AS PERCENT OF BASE SALARY CATEGORY MIDPOINT ELIGIBILITY GUIDELINES - -------- ------------- ---------------------- A 85% Chairman and Chief Executive Officer B 75% Vice Chairman; President; Chief Operating Officer C 70% Executive Vice Presidents D N/A Not Currently Used E 60% Corporate Senior Vice Presidents F 55% Other Company officers B Corporate Vice Presidents and Operating Segment Group Vice Presidents G 45% 1) 1800 or more Hay Points; or 2) Direct Report to Operating Segment President and Hay Points Above 1300 H 40% 1) 1400 - 1799 Hay Points; or 2) Treasurer, Controller or Corporate Staff VP I 35% 1200 - 1399 Hay Points J 30% 1000 - 1199 Hay Points K 25% 900 - 999 Hay Points L 20% Less than 900 Hay Points
INCENTIVE PROGRAM ELEMENTS -------------------------- FINANCIAL GOAL(S) - ----------------- A single measure of current year financial performance by the unit such as Operating Income for a Division and Net Income or Pre-Tax Income for Corporate staff is used to determine financial goals. The actual number selected as an incentive plan goal need not coincide with the Operating Plan, but -2- 3 will be determined by management as representing a performance level which merits full target level incentive payout. A threshold level is selected on the same basis representing the minimum acceptable performance level to qualify for any financial performance incentives and a maximum is set at a level judged as deserving of maximum incentive payout. STRATEGIC/OPERATIONAL GOALS - --------------------------- Strategic and operational goals are specific, current-year business and non-financial objectives. While their achievement may not be measurable mathematically, they must be accomplished in order to meet the current year's Operating Plan or to successfully implement longer term strategies. Performance of the unit against these goals will be evaluated by the Executive Office on a scale of 0 to 150% accomplishment with at least a 50% rating required to qualify for any incentive payment under this factor. WEIGHTING FACTORS - ----------------- The weighting of financial vs. strategic/operational performance reflects their relative importance to the unit in the current year. The weightings may vary between 80% / 20% and 50% / 50% and determine the portion of the target incentive amount allocated to each performance measure. If a unit falls short of the threshold level of financial performance, the amount of incentive available for strategic/operational performance is limited to half the allocated amount. INCENTIVE EARNINGS SCHEDULE - --------------------------- Generally, threshold levels of performance will earn 50% of target incentive amounts and maximum levels will earn 150%. Attainment below threshold levels will earn no incentives. The actual award will be based on both the individual and the units attainment of previously established goals and objectives.
INDIVIDUAL PERFORMANCE INCENTIVE GUIDELINE ----------- ------------------- Acceptable 50% Satisfactory Plus 75% Good l00% Very Good l25% Excellent l50%
TARGET INCENTIVE AMOUNT - ----------------------- The incentive target is the dollar amount of target level incentive opportunity for each plan participant. It is the product of the participant's range midpoint and the target incentive percentage determined by his incentive category designation. -3- 4 PROVISIONS - ---------- A. The Management Incentive Program is a discretionary compensation plan. While performance is an important element in determining incentive under the Program, actual payments, if any, are made at the sole discretion of management. No awards under the Program are to be considered earned until received. B. Awards to participants who serve in incentive-eligible positions for less than a full year, or who serve in two or more positions in a year that are of significantly different size, will be adjusted on a roughly PRO RATA basis. PAYMENT UPON CHANGE IN CONTROL - ------------------------------ Anything to the contrary notwithstanding, within five days following the occurrence of a Change in Control, the Company shall pay to each participant an interim lump-sum cash payment (the "Interim Payment") with respect to his or her participation in the Management Incentive Program. The amount of the Interim Payment shall equal the product of (x) the number of months, including fractional months, that have elapsed until the occurrence of the Change in Control in the calendar year in which the Change of Control occurs and (y) one-twelfth of the greater of (i) the amount most recently paid to each participant for a full calendar year, or (ii) the "target incentive amount" for each participant in effect prior to the Change in Control for the calendar year in which the Change in Control occurs, in each case under the Program. The Interim Payment shall not reduce the obligation of the Company to make a final payment under the terms of the Program, but any Interim Payment made shall be offset against any later payment required under the terms of the Program for the calendar year in which a Change in Control occurs. Notwithstanding the foregoing, in no event shall any participant be required to refund to the Company, or have offset against any other payment due any participant from or on behalf of the Company, all or any portion of the Interim Payment. For purposes of the Program, a Change in Control shall mean (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company (other than by exercise of a conversion privilege), (B) any acquisition by the Company or any of its subsidiaries, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries or (D) any acquisition by any corporation with respect to which, following such acquisition, more than 70% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities -4- 5 of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Company Voting Securities immediately prior to such acquisition in substantially the same proportions as their ownership, immediately prior to such acquisition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (ii) During any period of two consecutive years, individuals who, as of the beginning of such period, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the beginning of such period whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act); or (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, with respect to which all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation, do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 70% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (iv) Approval by the shareholders of the Company of (A) a complete liquidation or dissolution of the Company or (B) a sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, more than 70% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be. -5- EX-10.E 6 EXHIBIT 10(E) 1 Exhibit 10(E) June 1, 1998 Dear : The BFGoodrich Company (the "Company") considers the establishment and maintenance of a sound and vital senior management to be essential to protecting and enhancing the best interests of the Company and its shareholders. In this connection, the Company recognizes that, as is the case with many publicly-held corporations, the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the distraction and even the departure of senior management personnel to the detriment of the Company and its shareholders. Accordingly, the Company's Board of Directors has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's senior management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company. In order to induce you to remain in the employ of the Company, and to continue your employment notwithstanding the occurrence or threat of occurrence of a transaction that results in a change in control of the Company, this letter agreement ("Agreement") sets forth the employment arrangement and benefits which the Company agrees will be provided to you in the event a Change in Control (as hereinafter defined in Paragraph 3) should occur during the term of this Agreement and in the event that your employment is thereafter terminated under such circumstances as are expressly provided in Paragraph 5 hereof. In making provision for the payment of these benefits, it is not the Company's intention to alter in any way the compensation and benefits that would be paid to you in the absence of a Change in Control. 1. TERM. This Agreement shall commence on the date hereof and shall continue through December 31 of this year, provided, however, that commencing on January 1 of the following year and each January 1st thereafter, the term of this Agreement shall automatically be extended for one additional year, unless at least 90 days prior to such January 1st date, the Company shall have given notice that it does not wish to extend this Agreement. Upon the occurrence of a Change in Control during the term of this Agreement, including any extensions thereof, this Agreement shall automatically be extended until the end of your Period of Employment (as hereinafter defined in Paragraph 2), and may not be terminated by the Company during such time. 2. PERIOD OF EMPLOYMENT. Your "Period of Employment" shall commence on the date on which a Change in Control occurs and shall end on the later to occur of (i) the date which is - 1 - 2 24 months after the date on which such Change in Control occurs, or (ii) the date which is 24 months after the first date on which a majority of the Board of Directors (the "Board") of the Company consists of persons who were not members of the Board on the date immediately preceding the date on which a Change in Control occurs. Notwithstanding the foregoing, however, your Period of Employment shall not extend beyond either any Mandatory Retirement Date (as hereinafter defined in Paragraph 3) applicable to you or the date which is 48 months after the date on which a Change in Control occurs. 3. CERTAIN DEFINITIONS. For purposes of this Agreement: (a) A "Change in Control" shall mean (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company (other than by exercise of a conversion privilege), (B) any acquisition by the Company or any of its subsidiaries, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries or (D) any acquisition by any corporation with respect to which, following such acquisition, more than 70% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Company Voting Securities immediately prior to such acquisition in substantially the same proportions as their ownership, immediately prior to such acquisition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (ii) During any period of two consecutive years, individuals who, as of the beginning of such period, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the beginning of such period whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act); or - 2 - 3 (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, with respect to which all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation, do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 70% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (iv) Approval by the shareholders of the Company of (A) a complete liquidation or dissolution of the Company or (B) a sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, more than 70% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be. (b) The term "Mandatory Retirement Date" shall mean the compulsory retirement date, if any, established by the Company for those executives of the Company who, by reason of their positions and the size of their nonforfeitable annual retirement benefits under the Company's pension, profit-sharing, and deferred compensation plans, are exempt from the provisions of the Age Discrimination in Employment Act, 29 U.S.C. Sections 621, et seq, which date shall not in any event be earlier for any executive than the last day of the month in which such executive reaches age 65. 4. COMPENSATION DURING PERIOD OF EMPLOYMENT. For so long during your Period of Employment as you are an employee of the Company, the Company shall be obligated to compensate you as follows: (a) You shall continue to receive your full base salary at the rate in effect immediately prior to the Change in Control. Your base salary shall be increased annually, with each such increase due on the anniversary date of your most recent previous increase. Each such increase shall be no less than an amount which at least equals on a percentage basis the mean of the annualized percentage increases in base salary for all elected officers of the Company during the two full calendar years immediately preceding the Change in Control. - 3 - 4 (b) You shall continue to participate in all benefit and compensation plans (including but not limited to the Stock Option Plan, Long-Term Incentive Plan, Management Incentive Program, Non-Qualified Benefit Security Plan, Executive Life Insurance Program, Savings Benefit Restoration Plan, Performance Share Deferred Compensation Plan, pension plan, savings plan, flexible benefits plan, life insurance plan, health and accident plan or disability plan) in which you were participating immediately prior to the Change in Control, or in plans providing substantially similar benefits, in either case upon terms and conditions and at levels at least as favorable as those provided to you under the plans in which you were participating immediately prior to the Change in Control; (c) You shall continue to receive all fringe benefits, perquisites, and similar arrangements which you were entitled to receive immediately prior to the Change in Control; and (d) You shall continue to receive annually the number of paid vacation days and holidays which you were entitled to receive immediately prior to the Change in Control. 5. COMPENSATION UPON TERMINATION OF EMPLOYMENT. If, during the Period of Employment, the Company shall terminate your employment for any reason (other than for a reason and as expressly provided in Paragraph 6 hereof), or if you shall terminate your employment for "Good Reason" (as hereinafter defined in subparagraph 5(f)), or without any reason during the "Window Period" (as hereinafter defined in subparagraph 5(g)) then the Company shall be obligated to compensate you as follows: (a) The Company shall pay to you in a lump sum, by not later than the fifth day following the Date of Termination (as hereinafter defined in Paragraph 8), an amount equal to one-twelfth of your annualized base salary in effect immediately prior to the Date of Termination, multiplied by the number of months, including fractional months, in the Payment Period which shall be the shorter of (A) three (3) years, commencing on the Date of Termination, or (B) the period from the Date of Termination to your Mandatory Retirement Date, if any; (b) By not later than the fifth day following the Date of Termination, the Company shall pay you in a lump sum an amount equal to the product of (x) the number of months, including fractional months, in the Payment Period and (y) the sum of (i) under the Company's Management Incentive Program the greatest of one-twelfth of: (A) the amount most recently paid to you for a full calendar year; (B) your "target incentive amount" for the calendar year in which your Date of Termination occurs; or (C) your "target incentive amount" in effect prior to the Change in Control for the calendar year in which the Change in Control occurs; plus, if applicable, (ii) under the Company's Long-Term Incentive Plan the greatest of (A) one-thirty-sixth of the "calculated market value" of the sum of (1) the Restricted Shares awarded to you, (2) the Performance Shares as to which restrictions were removed, if any, and (3) the awarding of Additional Shares, if any, (including the value of any Performance Shares you may have elected to defer under the Performance Share Deferred Compensation Plan) under the Long-Term Incentive Plan for the Plan Cycle 1995-1997 (if you were a participant in such - 4 - 5 Plan Cycle); (B) with respect to the most recently completed Plan Cycle commencing with the 1998-2000 Plan Cycle (if completed), one-twelfth of the "calculated market value" of the Performance Shares actually awarded to you (including the value of any Performance Shares you may have elected to defer under the Performance Share Deferred Compensation Plan); (C) with respect to the most recently commenced Plan Cycle under the Long-Term Incentive Plan (if you are a participant in such Plan Cycle) prior to your Date of Termination, the sum of one-twelfth of the "calculated market value" of the phantom Performance Shares, if any, awarded to you; or (D) with respect to the most recently commenced Plan Cycle prior to the date of the occurrence of the Change in Control, the sum of one-twelfth of the "calculated market value" of the phantom Performance Shares, if any, awarded to you. Your "target incentive amount" under the Management Incentive Program is determined by multiplying your salary range midpoint by the incentive target percentage which is applicable to your incentive category under such Program. The "calculated market value" of Restricted Shares, Performance Shares, Additional Shares, shares deferred under the Performance Share Deferred Compensation Plan or phantom Performance Shares under the Long-Term Incentive Plan shall be the mean of the high and low prices of the Company's common stock on the relevant date as reported on the New York Stock Exchange Composites Transactions listing (or similar report), or, if no sale was made on such date, then on the next preceding day on which a sale was made multiplied by the number of shares involved in the calculation. The relevant date for clauses 5(b)(ii)(A)(1), 5(b)(ii)(C) and 5(b)(ii)(D) is the date upon which the Compensation Committee ("Committee") of the Board of Directors awarded the shares of stock in question; for clauses 5(b)(ii)(A)(2) and 5(b)(ii)(A)(3) is the date on which the Committee made a determination of attainment of financial objectives and removed restrictions on Performance Shares and, if applicable, awarded Additional Shares and for clause 5(b)(ii)(B) is the date on which the Committee made a determination of attainment of financial objectives and awarded Performance Shares (including any Performance Shares you may have elected to defer under the Performance Share Deferred Compensation Plan); (c) If you are under age 55, or over the age of 55 but not eligible to retire, at the Date of Termination, the Company shall maintain in full force and effect, for your continued benefit, for the Payment Period, all health and welfare benefit plans and programs or arrangements in which you were entitled to participate immediately prior to the Date of Termination, as long as your continued participation is possible under the general terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred, the Company shall provide you with benefits substantially similar to those to which you would have been entitled to receive under such plans and programs, had you continued to participate in them as an executive of the Company plus an amount in cash equal to the amount necessary to cause the amount of the aggregate after-tax compensation and employee benefits you receive pursuant to this provision to be equal to the aggregate after-tax value of the benefits which you would have received if you continued to receive such benefits as an employee. If you are age 55 or over and eligible to retire on the Date of Termination, the Company shall provide you with those health and welfare benefits to which you would be entitled under the Company's general retirement policies if you retired on the Termination Date with the Company paying that percentage of the premium cost of the plans which it would have paid under the terms of the plans in effect immediately prior to the Change of Control with respect to individuals who retire at age 65, regardless of your actual age on the Termination Date, provided - 5 - 6 such benefits would be at least equal to those which would have been payable if you had been eligible to retire and had retired immediately prior to the Change in Control; (d) The Company shall, for the Payment Period, continue and you shall be entitled to receive each and every fringe benefit program, perquisite, and similar arrangement which you were entitled to receive or in which you were entitled to participate immediately prior to the Date of Termination; and (e) The Company shall, in addition to the benefits to which you are entitled under the retirement plans or programs in which you participate, pay you in a lump sum in cash at your normal retirement date (or earlier retirement date should you so elect), as defined in the retirement plans or programs in which you participate, an amount equal to the actuarial equivalent of the retirement pension to which you would have been entitled under the terms of such retirement plans or programs had you accumulated additional years of continuous service under such plans equal in length to your Payment Period. The length of the Payment Period will be added to total years of continuous service for determining vesting, the amount of benefit accrual, to the age which you will be considered to be for the purposes of determining eligibility for normal or early retirement calculations and the age used for determining the amount of any actuarial reduction. For the purposes of calculating benefit accrual, the amount of compensation you will be deemed to have received during each month of your Payment Period shall be equal to the sum of your annual base salary prorated on a monthly basis as provided for under subparagraph 4(a) immediately prior to the Date of Termination (including salary increases), plus under the Company's Management Incentive Program the greatest of one-twelfth of: (i) the amount most recently paid to you for a full calendar year, (ii) your "target incentive amount" for the calendar year in which your Date of Termination occurs, or (iii) your "target incentive amount" in effect prior to the Change in Control for the calendar year in which the Change in Control occurs reduced by the actuarial equivalent of any amounts to which you are actually entitled pursuant to the provisions of said retirement plans and programs. For purposes of illustration, but not intending to be exhaustive, the following are examples of how inclusion of the Payment Period may affect the calculation of your retirement benefit. A. If as of your Date of Termination your actual years of service plus the length of your Payment Period is at least 10, then 1) If as of your Date of Termination your age plus the length of your Payment Period is at least 65, your retirement benefit under subparagraph 5(e) will be calculated as a "normal retirement" benefit to which you would have been entitled - 6 - 7 under the terms of the retirement plan in which you participate had you accumulated continuous service equal to such sum; and 2) If as of your Date of Termination your age plus the length of your Payment Period is at least 55 but less than 65, your retirement benefit under subparagraph 5(e) will be calculated as an "early retirement" benefit to which you would have been entitled under the terms of the retirement plan in which you participate had you accumulated continuous service equal to such sum. The actuarial reduction used shall be the actuarial reduction factor for early retirement, calculated to your actual age plus the length of your Payment Period at your Date of Termination. Furthermore, if you were on the active rolls of the Company as of December 31, 1989 and if the sum of your actual years of service plus the length of your Payment Period is at least 10 but less than 24, then for purposes of subparagraph 5(e) you will also receive an Additional Credit for up to 4 years. The Additional Credit you will receive will depend upon the sum of the years of your actual service plus the length of your Payment Period and will be equal to the lesser of: (x) 4 years of Additional Credit; or (y) The amount of Additional Credit needed such that, when added to the sum of your actual years of service plus the length of your Payment Period, it will create a total of exactly 24. No Additional Credit will be applied if the sum of your actual years of service plus the length of your Payment Period is 24 or greater. You will not receive any Additional Credit if you commenced employment with the Company on or after January 1, 1990. B. If as of your Date of Termination the sum of your actual years of service plus the length of your Payment Period is less than 10, or your age plus the length of your Payment Period is less than 55, your retirement benefit under subparagraph 5(e) will be calculated as a "deferred vested pension" to which you would have been entitled under the terms of the retirement plan in which you participate had you accumulated continuous service equal to such sum. The actuarial reduction used shall be the actuarial reduction factor for a deferred vested pension, calculated to your actual age at your Date of Termination plus the length of your Payment Period. For purposes of this subparagraph 5(e), "actuarial equivalent" shall be determined using the same methods and assumptions as those utilized under the Company's retirement plans and programs immediately prior to the Change in Control. (f) For purposes of this Agreement, "Good Reason" shall mean: (i) except as a result of the termination of your employment pursuant to Paragraph 6 hereof and without your express written consent, (A) the assignment to you of any new - 7 - 8 duties or responsibilities inconsistent with your positions, duties, responsibilities, and reporting relationships and status within the Company immediately prior to a Change in Control, (B) a change in your duties, responsibilities, reporting relationships, titles or offices as in effect immediately prior to a Change in Control, except that a reduction in your duties or responsibilities which occurs solely because the Company is no longer an independent publicly-held entity shall not be deemed to be a reduction in your duties, or (C) any removal of you from or any failure to re-elect you to any of such positions; (ii) the failure of the Company to comply with any of its obligations under Paragraph 4 herein; (iii) the relocation of the offices of the Company at which you were employed immediately prior to the Change in Control to a location which is more than twenty (20) miles from such prior location, any increase in your obligation to travel on the Company's business over your present business travel obligations, or the failure of the Company to (A) pay or reimburse you, in accordance with the Company's presently existing relocation policy for its employees, for all reasonable costs and expenses, plus "gross-ups" referred to in such policy incurred by you relating to a change of your principal residence in connection with any relocation of the Company's offices to which you consent, and (B) indemnify you against any loss (defined as the difference between the actual sale price of such residence and the higher of (1) your aggregate investment in such residence or (2) the fair market value of such residence as determined by the relocation management organization used by the Company immediately prior to the Change in Control (or other real estate appraiser designated by you and reasonably satisfactory to the Company)) realized in the sale of your principal residence in connection with any such change of residence; (iv) the failure of the Company to obtain the assumption of and the agreement to perform this Agreement by any successor as contemplated in Paragraph 11 hereof; or (v) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Paragraph 7 hereof. (g) For purposes of this Agreement, the "Window Period" shall mean the thirty (30) day period immediately following the first anniversary of the date on which the Change in Control occurs. 6. TERMINATION FOR CAUSE. If your employment is terminated for any of the following reasons and in accordance with the provisions of this Paragraph 6, you shall not be entitled by virtue of this Agreement to any of the benefits provided in the foregoing Paragraph 5: (a) If, as a result of your incapacity due to physical or mental illness, you shall have been absent from your duties with the Company on a full-time basis for 120 consecutive business days, and within thirty (30) days after a written Notice of Termination (as hereinafter defined in Paragraph 7) is given, you shall not have returned to the full-time performance of your duties; (b) If the Company shall have Cause. For the purposes of this Agreement, the Company shall have "Cause" to terminate your employment hereunder upon (i) the willful and continued failure by - 8 - 9 you to substantially perform your duties with the Company, which failure causes material and demonstrable injury to the Company (other than any such failure resulting from your incapacity due to physical or mental illness), after a demand for substantial performance is delivered to you by the Board which specifically identifies the manner in which the Board believes that you have not substantially performed your duties, and after you have been given a period (hereinafter known as the "Cure Period") of at least thirty (30) days to correct your performance, or (ii) the willful engaging by you in other gross misconduct materially and demonstrably injurious to the Company. For purposes of this paragraph, no act, or failure to act, on your part shall be considered "willful" unless conclusively demonstrated to have been done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interests of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (i), including the expiration of the Cure Period without the correction of your performance, or (ii) of the preceding subparagraph and specifying the particulars thereof in detail. (c) If you die while employed by the Company or if you retire from such employment during your Period of Employment, then you shall not be entitled to any of the benefits provided by this Agreement and the benefits to which you or your beneficiary shall be entitled shall be determined without regard to the provisions hereof. 7. NOTICE OF TERMINATION. Any termination of your employment by the Company or any termination by you either without any reason during the Window Period or for Good Reason shall be communicated by written notice to the other party hereto. For purposes of this Agreement, such notice shall be referred to as a "Notice of Termination." Such notice shall, to the extent applicable, set forth the specific reason for termination, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. 8. DATE OF TERMINATION. "Date of Termination" shall mean: (a) If you terminate your employment for Good Reason, the date specified in the Notice of Termination, but in no event more than sixty (60) days after Notice of Termination is given. (b) If you terminate your employment without any reason during the Window Period, unless otherwise specified in the Notice of Termination, as of the first day during the Window Period. (c) If your employment is terminated for Cause under subparagraph 6(b), the date on which a Notice of Termination is given, except that the Date of Termination shall not be any date prior to the date on which the Cure Period expires without the correction of your performance. - 9 - 10 (d) If your employment pursuant to this Agreement is terminated following absence due to physical incapacity, under subparagraph 6(a), then the Date of Termination shall be thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period). A termination of employment by either the Company or by you shall not affect any rights you or your surviving spouse may have pursuant to any other agreement or plan of the Company providing benefits to you, except as provided in such agreement or plan. 9. CERTAIN ADDITIONAL PAYMENTS. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to you or for your benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this paragraph 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 (or any successor provisions) of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by you with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then you shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by you of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed on the Gross-Up Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of subparagraph 9(c), all determinations required to be made under this paragraph 9, including whether and when such a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young (or their successors) (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and to you within fifteen (15) business days of the receipt of notice from you that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, you shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this paragraph 9, shall be paid by the Company to you within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by you, it shall furnish you with a written opinion that failure to report the Excise Tax on your applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and you. As a result of the uncertainty of the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and you thereafter are required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has - 10 - 11 occurred and any such Underpayment shall be promptly paid by the Company to you or for your benefit. (c) You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after you are informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. You shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this subparagraph 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of any such claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and you agree to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs you to pay such claim and sue for a refund, the Company shall advance the amount of such payment to you, on an interest-free basis and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for your taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. - 11 - 12 (d) If, after the receipt by you of an amount advanced by the Company pursuant to subparagraph 9(c), you become entitled to receive any refund with respect to such claim, you shall (subject to the Company's complying with the requirements of subparagraph 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by you of an amount advanced by the Company pursuant to subparagraph 9(c), a determination is made that you shall not be entitled to any refund with respect to such claim and the Company does not notify you in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. NO OBLIGATION TO MITIGATE DAMAGES; NO EFFECT ON OTHER CONTRACTUAL RIGHTS. You shall not be required to refund the amount of any payment or employee benefit provided for or otherwise mitigate damages under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for under this Agreement be reduced by any compensation or the value of any benefits earned by you as the result of any employment by another employer after the date of termination of your employment with the Company, or otherwise. The provisions of this Agreement, and any payment or benefit provided for hereunder, shall not reduce any amount otherwise payable, or in any way diminish your existing rights, or rights which would occur solely as a result of the passage of time, under any other agreement, contract, plan or arrangement with the Company. 11. SUCCESSORS AND BINDING AGREEMENT. (a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to you, to assume and agree to perform this Agreement. (b) This Agreement shall be binding upon the Company and any successor of or to the Company, including, without limitation, any person acquiring directly or indirectly all or substantially all of the assets of the Company whether by merger, consolidation, sale or otherwise (and such successor shall thereafter be deemed "the Company" for the purposes of this Agreement), but shall not otherwise be assignable by the Company. (c) This Agreement shall inure to the benefit of and be enforceable by you and your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amounts would still be payable to you pursuant to Paragraph 5 hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee, or other designee or, if there be no such designee, to your estate. 12. NOTICES. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, - 12 - 13 addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Chief Executive Officer of the Company with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 13. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Ohio, without giving effect to the principles of conflict of laws of such State. 14. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in a writing signed by you and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof, have been made by either party which are not set forth expressly in this Agreement. 15. VALIDITY. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement which shall remain in full force and effect. 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same agreement. 17. WITHHOLDING OF TAXES The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or government regulation or ruling. 18. NONASSIGNABILITY. This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder, except as provided in Section 11 above. Without limiting the foregoing, your right to receive payments hereunder shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by your will or by the laws of descent and distribution and in the event of any attempted assignment or transfer contrary to this Section the Company shall have no liability to pay any amounts so attempted to be assigned or transferred. 19. LEGAL FEES AND EXPENSES. If a Change in Control shall have occurred, thereafter the Company shall pay and be solely responsible for any and all attorneys' and related fees and expenses incurred by you to successfully (in whole or in part, and whether by modification of the Company's position, agreement, compromise, settlement, or administrative or judicial determination) enforce this Agreement or any provision hereof or as a result of the Company or any shareholder of the Company contesting the validity or enforceability of this Agreement or any provision hereof. To - 13 - 14 secure the foregoing obligation, the Company shall, within 90 days after being requested by you to do so, enter into a contract with an insurance company, open a letter of credit or establish an escrow in a form satisfactory to you. 20. EMPLOYMENT RIGHTS. Nothing expressed or implied in this Agreement shall create any right or duty on your part or on the part of the Company to have you remain in the employment of the Company prior to the commencement of the Period of Employment; provided, however, that any termination of your employment, for any reason other than those set forth in Paragraph 6, following the commencement of any discussion with a third party, or the announcement by a third party of the commencement of, or the intention to commence, a tender offer, or other intention to acquire all or a portion of the equity securities of the Company that ultimately results in a Change in Control shall (unless such termination is conclusively demonstrated to have been wholly unrelated to any such activity relating to a Change in Control) be deemed to be a termination of your employment after a Change in Control for purposes of this Agreement and both the Period of Employment and the Payment Period shall be deemed to have begun on the date of such termination. 21. RIGHT OF SETOFF. There shall be no right of setoff or counterclaim against, or delay in, any payment by the Company to you or your designated beneficiary or beneficiaries provided for in this Agreement in respect of any claim against you or any debt or obligation owed by you, whether arising hereunder or otherwise. 22. RIGHTS TO OTHER BENEFITS. The existence of this Agreement and your rights hereunder shall be in addition to, and not in lieu of, your rights under any other of the Company's compensation and benefit plans and programs, and under any other contract or agreement between you and the Company. 23. SUPERSEDED AGREEMENT. The agreement between you and the Company dated June 1, 1992 relating to the same subject matter as this Agreement (the ?Original Agreement?), is hereby amended and superseded in its entirety by this Agreement, and the Original Agreement shall be of no further force or effect as of the date of this Agreement. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, THE BFGOODRICH COMPANY ACCEPTED AND AGREED TO By direction of the Compensation AS OF THE DATE HEREOF. Committee on behalf of the Board of Directors ___________________________________ By ___________________________________ Employee Signature - 14 - EX-10.K 7 EXHIBIT 10(K) 1 Exhibit 10(K) SUMMARY PLAN DESCRIPTION ------------------------ BFGOODRICH LONG-TERM INCENTIVE PLAN ----------------------------------- THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. The Long-Term Incentive Plan is designed to provide long-term incentive compensation to key executives who are in positions to influence the performance of the Company, and thereby enhance shareholder value over time. The Plan provides a significant additional financial opportunity and complements other parts of the Company's total compensation program for executives (base salary, Management Incentive Program, stock options and benefits). The following is a summary of the main provisions of the Long-Term Incentive Plan. The official and controlling provisions of the Plan are contained in the text of the Stock Option Plan and the Long-Term Incentive Plan. In case of any discrepancies, the Plan documents will govern. In this summary, BFGoodrich is referred to as the "Company", and the Long-Term Incentive Plan is referred to as the "LTIP" or the "Plan". The benefits described in this summary have been structured to be in compliance with current tax law. Any change in legislation or the interpretation of tax laws which affect the tax nature of the benefits provided may necessitate revisions in the Plan. The Company reserves the right to amend, modify, suspend or partially or completely terminate the Plan at any time. PLAN OVERVIEW - ------------- - - Participation in the LTIP will be approved by the Compensation Committee of the Board of Directors. -1- 2 - - The LTIP will provide for annual grants of Performance Shares with three-year overlapping cycles. Every year, a separate three-year performance cycle will begin. - - At the beginning of each three-year cycle, a grant of Performance Shares will be made to each participant. Grants will be credited as phantom Performance Shares in a book account for each participant. Each phantom Performance Share will be equivalent to one share of BFGoodrich common stock. - - The Compensation Committee of the Board of Directors will establish a consolidated Company goal based on average ROE over each three-year cycle. All LTIP participants will be measured against the same ROE goal which will reflect consolidated Company results. No separate goals will be set for operating segment participants. - - During the Plan cycle, dividend equivalents will be accrued on all phantom Performance Shares. Such dividend equivalents will be credited to each participant?s account in the form of additional phantom Performance Shares at the same time and in the same amount as actual dividend payments on BFGoodrich common stock. - - Participants will be entitled to a payout of shares at the end of each Plan cycle only if a threshold performance standard is met. The number of shares to be received free of further restrictions will range from 50% to 150% of the total phantom Performance Share account (including shares credited through dividend equivalents), based on attainment against goals set by the Committee. - - Payments from the Plan, if any, at the end of the Plan cycle, will be made in actual shares of BFG common stock, less the number of shares to satisfy applicable withholding taxes. - - Participants may elect to defer all or a portion of their award until termination of employment as described in the Performance Share Deferred Compensation Plan. - - The Compensation Committee of the Board of Directors retains the right in its sole discretion to reduce any award which would otherwise be payable, unless there has been a Change in Control, as defined in the Stock Option Plan. -2- 3 PLAN PROVISIONS - --------------- ELIGIBILITY - ----------- Eligibility to participate in the LTIP will be determined by the Compensation Committee of the Board of Directors. AWARD GRANTS - ------------ The LTIP rewards financial performance for three-year overlapping cycles. Every year, a separate three-year performance cycle will begin. At the beginning of each three-year cycle, a grant of Performance Shares will be made to each participant. Grants will be credited as phantom Performance Shares in a book account for each participant. Each phantom Performance Share will be equivalent to one share of BFGoodrich common stock. The Company will maintain a phantom Performance Share account for each participant for each separate three-year cycle. The account will be used solely for record keeping purposes. No actual BFGoodrich common shares will be registered in participants' names. DIVIDENDS - --------- Dividend equivalents will be accrued on all phantom Performance Shares in each participant's account for each Plan cycle. Such dividend equivalents will be credited to each participant's account in the form of additional phantom Performance Shares at the same time and in the same amount as actual dividend payments on BFGoodrich common stock. PERFORMANCE GOALS - ----------------- The performance goal used to determine the number of Performance Shares earned by each participant at the end of each Plan cycle will be based on average return on equity (ROE) over each three-year cycle. The Compensation Committee of the Board of Directors will establish a consolidated Company goal for each three-year cycle. All LTIP participants will be measured against the same ROE goal which will reflect consolidated Company results. PLAN PAYOUTS - ------------ -3- 4 Payments from the Plan, if any, at the end of the Plan cycle, will be made in actual shares of BFG common stock, less the number of shares to satisfy applicable withholding taxes. At the end of each three-year cycle, if a participant is still employed by the Company, he or she will receive a payment from the Plan after the Compensation Committee determines the final payout based upon specific financial performance goals established for participants. Participants will be entitled to a payout of shares at the end of each Plan cycle only if a threshold performance standard is met. If threshold performance is achieved, the number of shares to be received free of further restrictions will range from 50% to 150% of a participant's total phantom Performance Share account (including shares credited through dividend equivalents) for that Plan cycle, based on attainment against goals set by the Committee. TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, RETIREMENT - -------------------------------------------------------------- If a participant becomes totally disabled under the Company's Long-Term Disability Plan, or retires under the Company's Retirement Program for Salaried Employees during a Plan cycle, the participant will receive a pro rata payout at the end of the Plan cycle, based upon the time portion of the cycle during which he or she was employed. The actual payout will not occur until after the end of the three-year cycle, at which time the financial performance for the entire three-year cycle will be used to determine the size of the award in that event. If a participant dies during a Plan cycle, the participant will receive a pro rata payout of the shares originally awarded to him or her, including a pro rata payout of dividends credited to the participant's account, based upon financial results calculated for the portion of the cycle through the end of the fiscal quarter following the participant's death. OTHER TERMINATION OF EMPLOYMENT - ------------------------------- If a participant terminates employment prior to the end of a Plan cycle for reasons other than death, disability or retirement, he or she will forfeit all Performance Shares, unless the Compensation Committee determines otherwise. -4- 5 NEW HIRES OR PROMOTIONS INTO ELIGIBLE POSITIONS - ----------------------------------------------- Participants will become eligible for participation in the Plan at their new position level beginning with the Plan cycle which begins on the January 1 immediately following their hire or promotion date. No new Performance Share awards or adjustments to Performance Share awards for Plan cycles that commenced prior to a participant's hire or promotion date will be made. CHANGE IN CONTROL - ----------------- Generally, participants will not receive a payout under the Plan until the end of a three-year Plan cycle. An exception will occur, however, if there is a Change in Control of the Company. A Change in Control is defined in the Stock Option Plan. The effect of a Change in Control on a participant's ability to receive Performance Shares is described in the Long-Term Incentive Plan. Generally, that Plan provides that, as of the date of the Change in Control, a participant will become entitled to a prorated portion of the shares originally awarded to him or her, based upon financial performance for the portion of the cycle which ends on the date of the Change in Control. A participant's entitlement to additional shares will be based upon financial performance for the portion of the three-year cycle which occurs after the Change in Control. DEFERRAL OF PAYOUTS - ------------------- Participants may elect to defer all or a portion of Performance Shares that may be earned and payable at the end of a Plan cycle as described in the Performance Share Deferred Compensation Plan. A deferral election must be made before the Plan cycle begins, using a form provided by the Company. PLAN ADMINISTRATION - ------------------- The Plan is administered by the Compensation Committee of the Board of Directors. The Committee has full power and authority to construe, interpret and administer the Plan. All decisions, actions or interpretations of the Committee shall be final, conclusive and binding on all parties. The Committee retains the right in its sole discretion to reduce any award which would otherwise be payable, unless there has been a Change in Control. -5- 6 The Committee reserves the right to amend, modify, suspend or partially or completely terminate the Plan, unless there has been a Change in Control. TAX INFORMATION - --------------- Generally, participants are not taxed on Performance Shares until the date on which they become entitled to a payout of their Performance Shares. Under current tax law, on the date participants become entitled to receive the shares following completion of a three-year performance cycle, the market value of the shares (net of any shares deferred) at that time is considered to be ordinary income and they will be taxed on that amount. If participants hold the shares and later sell them, any appreciation over the market value of the shares when they received them at the end of the three-year cycle will be taxed based on capital gains tax rules. EARNINGS FOR BENEFIT PURPOSES - ----------------------------- Any income participants derive from Performance Share payouts will not be considered eligible earnings for Company or subsidiary pension plans, savings plans, profit sharing plans or any other benefit plans. WITHHOLDING TAX INFORMATION - --------------------------- At the end of the three-year performance period, the number of actual BFGoodrich common shares participants will receive will be net of an amount of shares sufficient to satisfy any federal, state and local withholding tax requirements with which the Company must comply. Participants should consult their tax advisor for a complete explanation of the tax impact of their participation in the Long-Term Incentive Plan. -6- 7 1998 - 2000 BFGOODRICH LONG-TERM INCENTIVE PLAN ----------------------------------- THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. Name: AWARD GRANT - ----------- You have been granted the following Long-Term Incentive Plan shares for the three-year performance period 1998 through 2000: phantom Performance Shares Grants are credited as phantom Performance Shares in a book account for you. Each phantom Performance Share will be equivalent to one share of BFGoodrich common stock. PLAN GOALS - ---------- The number of phantom Performance Shares you earn will depend on the three-year performance of the total Company, as measured against specific Return on Equity (ROE) targets. At the end of the three-year performance period, you will earn phantom Performance Shares based on the following schedule:
Total Company Percent Payout of Three-Year Phantom Performance Average ROE Share Account ------------- ------------------- Below 15.0% 0% (Threshold) 15.0% 50% (Target) 16.0% 100% (Maximum) 17.0% and above 150%
-7- 8 (Note: If performance for the three-year period is between the percentage attainment levels listed on this chart, your Performance Share award will be prorated accordingly. For example, an average ROE of 16.3% will pay out Performance Shares equal to 115.0% of the phantom Performance Share Account.) For assessing performance against 1998 - 2000 Long-Term Incentive Plan goals, the Compensation Committee will use ROE as reported to shareholders with the following adjustments: - exclude the income and equity effect of any acquisition which is not included in the Plan and which affects net income by 5% or more; - exclude the income and equity effect of gains or losses from any divestiture which is not included in the Plan and which affects net income by 5% or more; - exclude the effect of any change in accounting standards which is not included in the Plan if it will affect net income by 5% or more. OTHER IMPORTANT INFORMATION - --------------------------- - Grants will be credited as phantom Performance Shares in a book account for you. Each phantom Performance Share will be equivalent to one share of BFGoodrich common stock. - Dividend equivalents will be accrued on all phantom Performance Shares in your account during the Plan cycle. Such dividend equivalents will be credited to your account in the form of additional phantom Performance Shares at the same time and in the same amount as actual dividend payments on BFGoodrich common stock. - You will not earn any phantom Performance Shares if the Company's average ROE during the 1998 - 2000 period is below 15.0% (threshold performance). - If threshold performance is achieved, the number of shares to be received free of further restrictions will range from 50% to 150% of your total phantom Performance Share account (including shares credited through dividend equivalents), based on attainment against goals set by the Compensation Committee. -8- 9 - Payments from the Plan, if any, at the end of the Plan cycle, will be made in actual shares of BFG common stock, less the number of shares to satisfy applicable withholding taxes. - New phantom Performance Share grants and performance targets are expected to be established for another three-year Plan period beginning in 1999. - If you become totally disabled under the Company's Long-Term Disability Plan, or retire under the Company's Retirement Program for Salaried Employees during the Plan cycle, you will receive a pro rata payout at the end of the Plan cycle, based upon the time portion of the cycle during which you were employed. The actual payout will not occur until after the end of the three-year cycle, at which time the financial performance for the entire three-year cycle will be used to determine the size of the award in that event. - If you die during a Plan cycle, you will receive a pro rata payout of your account, based upon financial results calculated for the portion of the cycle through the end of the fiscal quarter following your death. - If you terminate employment prior to the end of the Plan cycle for reasons other than death, disability or retirement, you will forfeit all Performance Shares. - The Compensation Committee of the Board of Directors retains the right in its sole discretion to reduce any award which would otherwise be payable, unless there has been a Change in Control, as defined in the Stock Option Plan. - Any income you derive from a payout of Performance Shares will not be considered eligible earnings for Company or subsidiary pension plans, savings plans, profit sharing plans or other benefit plans. FOR MORE INFORMATION - -------------------- If you have questions about the Long-Term Incentive Plan or need additional information, contact Gary Habegger at (330) 659-7855. -9- EX-10.Y 8 EXHIBIT 10(Y) 1 EXHIBIT 10(Y) CONSULTING AGREEMENT This Consulting Agreement is entered into between The B.F.Goodrich Company ("BFGoodrich") and Robert H. Rau ("Rau"), as follows: 1. Services. In consideration of the Compensation, Rau will provide consulting services as required by the BFGoodrich Chief Executive Officer, the President of the BFGoodrich Aerospace Segment , or their designees ("the Services"). While it is not contemplated by the parties that Rau will provide the Services on a full-time basis, Rau shall be reasonably available to BFGoodrich. Rau shall also be reasonably available to travel on business for BFGoodrich. In rendering the Services, Rau shall comply with all BFGoodrich policies and procedures. 2. Term. This Agreement shall become effective on January 1, 1999 (regardless of the date on which it is signed) and shall continue through December 31, 2001. This Agreement shall not be renewed by its own terms, and any further rendition of services by Rau beyond December 31, 2001 shall require the execution of a new consulting agreement. 3. Compensation. Rau shall receive Twenty-Eight Thousand Dollars ($28,000.00) (the "Compensation") per month during the term of this Agreement. The Compensation shall be paid monthly. Rau shall be solely responsible for the payment of all taxes and like obligations with respect to the Compensation. At the end of each year of this Agreement, BFGoodrich shall issue a Form 1099 to Rau with respect to the Compensation. BFGoodrich shall reimburse Rau for first-class air travel and other expenses incurred in connection with his rendering of the Services in accordance with its normal policies applicable thereto. 4. Independent Contractor. Rau shall render the Services hereunder as an independent contractor and not as an employee, agent, partner, or joint venturer of BFGoodrich or any of its subsidiaries, divisions, affiliates or related entities. Rau is not authorized to, nor shall he make any attempt to, make any commitments, agreements or binding obligations for or on behalf of BFGoodrich unless previously authorized by the Chief Executive Officer, the President of the BFGoodrich Aerospace Segment or their designees. As an independent contractor, Rau shall not be eligible by reason of this Consulting Agreement to participate in any benefit, insurance, compensation, bonus or retirement program offered at any time by BFGoodrich. This Agreement shall not, however, affect any rights Rau has by virtue of his prior status as an employee of BFGoodrich or Rohr, Inc. or other agreements entered into by Rau and BFGoodrich and/or Rohr, Inc. prior to the effective date of this Agreement. 5. Confidential Information. It is anticipated that Rau will be privy to certain data or information which is confidential or proprietary to BFGoodrich and/or its subsidiaries, Page 1 of 3 2 divisions, affiliates or related entities ("Confidential Information"). By entering into this Agreement, Rau agrees that all Confidential Information furnished or disclosed to him (as well as work product developed by Rau during the term of this Agreement) shall be maintained in confidence by Rau and shall not be disclosed to any person or entity or used by Rau in any way, except as specifically authorized in advance by BFGoodrich. Rau's obligation in this respect shall continue indefinitely and shall survive the termination of this Agreement. The parties agree that unauthorized disclosure and/or use of such information would be harmful to BFGoodrich and that BFGoodrich may enforce the provisions hereof through an injunction without proof of damage. Rau further agrees that at the termination of this Agreement, he will immediately return all data, documents or other information he received from or used during the term of this Agreement to BFGoodrich. This paragraph is not intended to supersede any agreements entered into by Rau during his employment by Rohr, Inc. or BFGoodrich and any such agreements shall remain in full force and effect according to their terms. 6. Work Product. All Work Product (as defined herein) created by Rau under this Agreement is "work for hire" and is the exclusive property of BFGoodrich, and may not be shared with or disclosed to any other party without BFGoodrich's consent. Rau hereby assigns to BFGoodrich all right, title and interest in and to the Work Product. "Work Product" means everything that is produced, conceived or developed by Rau in the course of performing Services for BFGoodrich under this Agreement, including, without limitation, any and all reports, analyses, studies, documentation, notes, drawings, computer programs (source code, object code and listings), customer lists, inventions, creations and deliverables. During and after the term of this Agreement, Rau will assist BFGoodrich in every reasonable way, at BFGoodrich's expense, to secure, maintain and defend for BFGoodrich's benefit all copyrights, patent rights, mask work rights, trade secret rights and other proprietary rights in and to the Work Product. To the extent that Rau has property rights that are incorporated in or necessary to the use of the Work Product, Rau grants BFGoodrich and its subsidiaries, divisions, affiliates, and related entities a royalty-free, irrevocable, worldwide, non-exclusive license to use, disclose, reproduce, modify, license and distribute such Work Product. Upon termination of this Agreement, or upon any earlier request of BFGoodrich, the Work Product and all copies thereof shall be provided to BFGoodrich. 7. Compliance With Laws/Conflict of Interest. Rau warrants that he will comply with all applicable state, federal and local laws in rendering services to BFGoodrich. Rau shall at all times conduct himself in good faith and in accordance with the highest ethical standards. Rau will not, during the term of this Agreement, accept employment with, render services to, or act as a member of the board of directors of other entities without the prior written consent of the BFGoodrich Chief Executive Officer. Rau shall provide such information as may be reasonably requested by the Chief Executive Officer in deciding whether consent is appropriate. Such consent shall not be unreasonably withheld. 8. Death or Disability. If Rau dies or becomes disabled during the term of this Agreement such that he cannot perform the Services, he or his beneficiary shall Page 2 of 3 3 nonetheless continue to receive the Compensation. 9. Termination. This Agreement shall terminate as specified in Paragraph 2 above. BFGoodrich may also terminate this Agreement on thirty days' notice without liability for any remaining Compensation if Rau violates any law or BFGoodrich policy, is disloyal or dishonest or acts in bad faith toward BFGoodrich, has been grossly derelict in the performance of his job duties or responsibilities, or has violated his undertakings in Paragraph 5, 6 or 7 hereof. 10. Modification. Any modification of this Agreement shall be made only by a specific written amendment to this Agreement signed by Rau and the Chief Executive Officer of BFGoodrich. 11. Severability. If any provision of this Agreement or the application thereof is held invalid, such invalidity shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid provisions or application, and to this end, the provisions of this Agreement are declared to be severable. 12. Complete Agreement. This Agreement constitutes the full and complete agreement between the parties with respect to the subject matter hereof. The parties represent that they have read this entire Agreement and that its terms and conditions are fully understood by them. 13. Governing Law. The parties expressly agree that this Agreement shall be construed and governed by the law of the state of Ohio. IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the dates set forth below. THE B.F.GOODRICH COMPANY BY: _________________________________ Gary L. Habegger DATE: ______________________________ _____________________________________ ROBERT H. RAU ADDRESS: _____________________________________ _____________________________________ Date: ______________________________ Page 3 of 3 EX-21 9 EXHIBIT 21 1 EXHIBIT 21 THE B.F.GOODRICH COMPANY PARENT AND SUBSIDIARIES OF REGISTRANT
PERCENTAGE OF PLACE OF VOTING SECURITIES CONSOLIDATED SUBSIDIARY COMPANIES INCORPORATION OWNED --------------------------------- ------------- ----------------- The B.F.Goodrich Company (Registrant; there are no parents of the registrant) New York BFGoodrich Aerospace Aircraft Evacuation Systems Private Limited India 100.00 BFGoodrich Aerospace Asia-Pacific, Limited Hong Kong 51.00 BFGoodrich Aerospace Component Overhaul & Repair, Inc. Delaware 100.00 BFGoodrich Aerospace MRO Group, Inc. Washington 100.00 BFGoodrich Aerospace Pte. Ltd. Singapore 100.00 BFGoodrich Aerospace Pty. Limited Australia 100.00 BFGoodrich Avionics Systems, Inc. Delaware 100.00 B.F.Goodrich Chemical Italia, S.R.L. Italy 100.00 BFGoodrich China, Inc. Delaware 100.00 The B.F.Goodrich Company of Japan, Ltd. Japan 100.00 BFGoodrich de Mexico, S.A. de C.V. Mexico 100.00 BFGoodrich FCC, Inc. Delaware 100.00 BFGoodrich Diamalt GmbH Germany 51.00 BFGoodrich Hilton Davis, Inc. Delaware 100.00 BFGoodrich Diamalt GmbH Germany 49.00 Diamo Handelsgesellschaft mbH Germany 100.00 Freedom Chemical Diamalt Beteiligungs GmbH Germany 100.00 Diamalt S.r.l. Italy 100.00 BFGoodrich Diamalt Pvt. Ltd. India 100.00 BFGoodrich Kalama, Inc. Washington 100.00 Kalama Foreign Sales Corporation Guam 100.00 Kalama Specialty Chemical, Inc. Washington 100.00 BFGoodrich Textile Chemicals, Inc. Delaware 100.00 FCC Acquisition Corporation Delaware 100.00 Freedom Textile Chemical Company (South Carolina), Inc. Delaware 100.00 HEJ Holding, Inc. Delaware 1.00 BFGoodrich Diamalt, Inc. Delaware 100.00 The Freedom Europe B.V. Netherlands 100.00 BFGoodrich Diamalt S.A. France 100.00 BFGoodrich FlightSystems, Inc. Ohio 100.00 BFGoodrich Performance Materials Asia Pacific Limited Hong Kong 100.00 BFGoodrich Specialty Chemicals (M) SDN. BHD. Malaysia 100.00 The Delfzijl Resin C.V. Netherlands 99.00 First Charter Insurance Company Vermont 100.00 GKS, Inc. Delaware 100.00 HEJ Holding, Inc. Delaware 69.90 The B.F.Goodrich Chemical Holding B.V. Netherlands 100.00 B.F.Goodrich Realty Europe N.V. Belgium 100.00 The BFGoodrich TempRite Resin B.V. Netherlands 100.00 B.F.Goodrich Chemical (Belgie) N.V. Belgium 100.00 BFGoodrich Chemical Spain, S.A. Spain .0001 B.F.Goodrich Europe Coordination Center N.V. Belgium 62.50 The B.F.Goodrich Chemical Sales Company B.V. Netherlands 100.00
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PERCENTAGE OF PLACE OF VOTING SECURITIES CONSOLIDATED SUBSIDIARY COMPANIES INCORPORATION OWNED --------------------------------- ------------- ----------------- BFGoodrich Chemical Spain, S.A. Spain 99.9999 B.F.Goodrich Europe Coordination Center N.V. Belgium 37.50 BFGoodrich Holding S.A. France 100.00 B.F.Goodrich Aerospace Europe S.A. France 100.00 BFGoodrich Aerospace Services S.A. France 100.00 Rosemount Aerospace S.A.R.L. France 100.00 E.P.P.C. Polyplastic S.A. France 100.00 The JcAir, B.V. Netherlands 100.00 B.F.Goodrich Holding GmbH Germany 100.00 B.F.Goodrich Chemical (Deutschland) GmbH Germany 100.00 Rosemount Aerospace GmbH Germany 100.00 Goodrich Holding UK Limited United Kingdom 100.00 A-Chem (U.K.) Limited United Kingdom 100.00 BFGoodrich Aerospace UK Limited United Kingdom 100.00 B.F.Goodrich Chemical (U.K.) Limited United Kingdom 100.00 BFGoodrich Component Services Limited United Kingdom 100.00 Rohr Aero Services Limited United Kingdom 100.00 Rosemount Aerospace Limited United Kingdom 100.00 Simmonds Precision Limited United Kingdom 100.00 Godfrey Engineering, Inc. Florida 100.00 Goodrich Canada Inc. Canada 100.00 Goodrich Holding Corporation Delaware 100.00 BFGoodrich Korea, Inc. Korea 100.00 HEJ Holding, Inc. Delaware 5.10 International BFGoodrich Technology Corporation Delaware 100.00 Goodrich FSC, Inc. Barbados 100.00 JcAir, Inc. Kansas 100.00 JMSI Corporation Delaware 100.00 The Delfzijl Resin C.V. Netherlands 1.00 ALA Corporation Delaware 100.00 CMK Corporation Delaware 100.00 Kinsman Road Realty Corporation Ohio 100.00 Mitech Corporation Ohio 100.00 Rohr, Inc. Delaware 100.00 RE Components Inc. Delaware 100.00 Rohr Aero Services, Inc. Delaware 100.00 Rohr Aero Services, Europe France 100.00 B.F.Goodrich Aerospace Europe, Inc. Delaware 100.00 HEJ Holding, Inc. Delaware 24.00 B.F.Goodrich Aerospace Europe GmbH Germany 100.00 Rohr Finance Corporation Delaware 100.00 Rohr Foreign Sales Corporation Guam 100.00 Rohr, Inc. Maine 100.00 Rohr International Sales Corporation Delaware 100.00 Rohr International Service Corporation Delaware 100.00 Transportation Insurance Limited Bermuda 100.00 Rohr Industries, Inc. Kentucky 100.00 Rohr Southern Industries, Inc. Delaware 100.00 Tolo Incorporated California 100.00 Rosemount Aerospace Inc. Delaware 100.00
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PERCENTAGE OF PLACE OF VOTING SECURITIES CONSOLIDATED SUBSIDIARY COMPANIES INCORPORATION OWNED --------------------------------- ------------- ----------------- Runway Acquisition Corporation Pennsylvania 100.00 Safeway Products Inc. Connecticut 100.00 Siltown Realty, Inc. Alabama 100.00 Simmonds Precision Products, Inc. New York 100.00 Simmonds Precision Engine Systems, Inc. New York 100.00 Simmonds Precision Motion Controls, Inc. New Jersey 100.00 TSA Holdings Inc. Delaware 100.00 The TSA-rina Holding B.V. Netherlands 100.00 Universal Propulsion Company, Inc. Delaware 100.00 Statutory trust in BFGoodrich Capital Delaware 100.00
All of the above subsidiaries are included in the 1998 consolidated financial statements. The Registrant also owns 50.22% of DTM Corporation, incorporated in Texas; DTM Corporation owns 100% of DTM GmbH, incorporated in Germany; 50% of BFGoodrich -- Messier, Inc., incorporated in Delaware; 50% of Messier -- BFGoodrich S.A., incorporated in France; 50% of Telenor S.A., incorporated in France; 50% of Port Systems, L.L.C., a Michigan limited liability company; Goodrich Holding Corporation owns 21.9% of Taysung Enterprises Co., Ltd., incorporated in Korea; Rohr, Inc. owns 50% of Rohr Aero Services -- Asia Pte. Ltd., incorporated in Singapore; BFGoodrich China, Inc. owns 28.75% of Youli Piping Co. Ltd., incorporated in China; Transportation Insurance Limited owns 4.35% of Tortuga Casualty Co. and 5.56% of United Insurance Co., both incorporated in the Caymans; Freedom Chemical Diamalt Beteiligungs GmbH owns 70% of Chongqing Diamalt Biochemical Co. Ltd., incorporated in China; BFGoodrich Diamalt GmbH owns the following: 50% of HackerMalt Proteine Verwaltungs GmbH, incorporated in Germany; 50% of HackerMalt Proteine GmbH & Co., incorporated in Germany; 33.4% of Lyomark Pharma GmbH, incorporated in Germany; 40% of Srinivasa Cystine Limited, incorporated in India; 74% of Indiamalt Pvt. Ltd., incorporated in India; and 50% of Yantal Prince Chemical Co. Ltd., incorporated in China. These companies are accounted for on the equity method. EX-23.A 10 EXHIBIT 23(A) 1 EXHIBIT 23(a) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated February 5, 1999, with respect to the consolidated financial statements of The BFGoodrich Company included in the Annual Report (Form 10-K) for the year ended December 31, 1998, in the following Registration Statements and in the related Prospectuses:
REGISTRATION NUMBER DESCRIPTION OF REGISTRATION STATEMENT FILING DATE - ------------ ------------------------------------- ----------- 33-20421 The B.F.Goodrich Company Key Employees' March 1, 1988 Stock Option Plan -- Form S-8 2-88940 The B.F.Goodrich Company Retirement Plus April 28, 1989 Savings Plan -- Post-Effective Amendment No. 2 to Form S-8 33-29351 The Rohr Industries, Inc. 1988 Non-Employee June 19, 1989 Director Stock Option Plan -- Form S-8 33-49052 The B.F.Goodrich Company Key Employees' June 26, 1992 Stock Option Plan -- Form S-8 33-59580 The B.F.Goodrich Company Retirement Plus March 15, 1993 Savings Plan for Wage Employees -- Form S-8 333-03293 The B.F.Goodrich Company Stock Option Plan -- Form S-8 May 8, 1996 333-03343 Common Stock -- Form S-3 May 8, 1996 333-19697 The B.F.Goodrich Company Savings January 13, 1997 Benefit Restoration Plan -- Form S-8 333-53877 Pretax Savings Plan for the Salaried Employees of May 29, 1998 Rohr, Inc. (Restated 1994) and Rohr, Inc. Savings Plan for Employees Covered by Collective Bargaining Agreements (Restated 1994) -- Form S-8 333-53879 Directors' Deferred Compensation Plan -- Form S-8 May 29, 1998 333-53881 Rohr, Inc. 1982 Stock Option Plan, May 29, 1998 Rohr, Inc. 1989 Stock Incentive Plan and Rohr, Inc. 1995 Stock Incentive Plan -- Form S-8
/s/ ERNST & YOUNG LLP Cleveland, Ohio March 3, 1999 EX-23.B 11 EXHIBIT 23(B) 1 EXHIBIT 23(b) INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statements on Form S-3 (No. 333-03343) and Form S-8 (Nos. 2-88940, 33-20421, 33-29351, 33-49052, 33-59580, 333-03293, 333-19697, 333-53877, 333-53879 and 333-53881) of The BFGoodrich Company, of our report dated September 11, 1997, on our audit of Rohr, Inc. for the year ended July 31, 1996, appearing in this Annual Report on Form 10-K of The BFGoodrich Company for the year ended December 31, 1998. /s/ DELOITTE & TOUCHE LLP San Diego, California March 3, 1999 EX-27 12 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME OF THIS FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 DEC-31-1998 31,700 0 651,600 22,600 772,500 1,614,500 2,298,100 1,042,200 4,192,600 990,800 995,200 123,600 0 381,100 1,218,500 4,192,600 3,950,800 3,950,800 2,853,100 2,853,100 10,500 5,800 79,000 384,900 146,300 228,100 (1,600) 0 0 226,500 3.07 3.02
EX-99 13 EXHIBIT 99 1 EXHIBIT 99 INDEPENDENT AUDITORS' REPORT We have audited the consolidated statements of operations, shareholders' equity, and cash flows of Rohr, Inc. and its subsidiaries for the year ended July 31, 1996 (such statements are not separately presented). 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material aspects, the results of operations and cash flows of Rohr, Inc. and its subsidiaries for the year ended July 31, 1996, in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP San Diego, California September 11, 1997 -----END PRIVACY-ENHANCED MESSAGE-----