EXHIBIT 99
RISK FACTORS
Investors should consider the following risk factors, in addition to the
other information presented in the Company's Report on Form 10-Q for the quarter
ended June 30, 2002 and the other reports and registration statements we file
from time to time with the Securities and Exchange Commission, in evaluating us,
our business and an investment in our securities. Any of the following risks, as
well as other risks and uncertainties, could harm our business and financial
results and cause the value of our securities to decline, which in turn could
cause investors to lose all or part of their investment in our company. The
risks below are not the only ones facing our company. Additional risks not
currently known to us or that we currently deem immaterial also may impair our
business.
RISKS RELATED TO OUR RECENT SPIN-OFF FROM GOODRICH CORPORATION
COLTEC'S HISTORICAL CONSOLIDATED FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE
OF OUR HISTORICAL RESULTS AS AN INDEPENDENT COMPANY; THEREFORE, IT MAY NOT BE
RELIABLE AS AN INDICATOR OF HISTORICAL OR FUTURE RESULTS.
The historical consolidated financial information of our wholly owned
subsidiary Coltec Industries Inc included in this Report may not reflect what
our financial condition, results of operations and cash flows would have been on
a historical basis had we operated the EnPro business as an independent company
during the periods presented or what our financial condition, results of
operations and cash flows will be in the future. This is because Coltec's
historical consolidated financial statements include allocations for services
provided or procured by Goodrich, which we may not be able to procure or provide
ourselves on the same basis. In addition, we have not made adjustments to
Coltec's historical consolidated financial information to reflect other changes
that will occur in our cost structure, financing and operations as a result of
the distribution of our common stock to Goodrich shareholders on May 31, 2002
(the "Distribution"). These changes could potentially include increased costs
associated with reduced economies of scale and a higher cost of capital, and
also changes in how we fund our operations, conduct research and development and
pursue our strategic objectives. Finally, as a result of the Distribution,
Goodrich, not EnPro, owns Coltec's aerospace business which is reflected in
Coltec's historical consolidated financial information as a discontinued
operation. Therefore, Coltec's historical consolidated financial statements may
not be indicative of our future performance as an independent company.
WE HAVE NO HISTORY OPERATING AS AN INDEPENDENT COMPANY AND WE MAY BE UNABLE TO
IMPLEMENT SUFFICIENT OPERATING SYSTEMS AND BUSINESS FUNCTIONS TO ALLOW US TO
OPERATE EFFECTIVELY AS AN INDEPENDENT COMPANY.
Prior to the Distribution, Goodrich provided certain services to the EnPro
business as a part of Goodrich's broader corporate organization. Goodrich
performed various corporate functions for us, including the following:
- public and investor relations;
- accounting consolidation;
- treasury administration;
- insurance administration;
- internal audit;
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- human resources functions;
- information technology services;
- telecommunications;
- corporate income tax administration; and
- selected legal functions.
Goodrich will not provide such services to us in the future, other than
certain transition services. In addition, if Goodrich does not perform the
transition services it has agreed to provide for us at the same level as it did
when we were part of Goodrich, these services may not be sufficient to meet our
needs. This may adversely affect our ability to operate our business
effectively.
WE COULD INCUR SIGNIFICANT INDEMNITY OBLIGATIONS TO GOODRICH FOR U.S. FEDERAL
INCOME TAX LIABILITY IF ACQUISITIONS OR ISSUANCES OF ENPRO STOCK CAUSE THE
DISTRIBUTION TO BE TAXABLE.
The Distribution was intended to be tax-free to Goodrich and its
shareholders under Section 355 of the Internal Revenue Code. Generally, Goodrich
may recognize a taxable gain on the Distribution if there are one or more
acquisitions or issuances of our capital stock representing 50% or more of our
then-outstanding capital, measured by vote or value, and the acquisitions or
issuances are deemed to be part of a plan or series of related transactions that
include the Distribution. Any shares of our stock acquired or issued within two
years before or after the Distribution will generally be presumed to be part of
such a plan unless we can rebut that presumption. If the acquisition or issuance
of our stock causes the Distribution to be taxable to Goodrich, we will be
required to indemnify Goodrich against any tax payable under the tax matters
arrangements we entered into with Goodrich as part of the Distribution. In
addition, aside from the tax matters arrangements, under U.S. federal income tax
laws, we and Goodrich would be severally liable for Goodrich's federal income
taxes from the Distribution being taxable. This means that even if we do not
have to indemnify Goodrich for any tax liabilities if the Distribution fails to
be tax-free, we may still be liable for any part of, including the whole amount
of, these liabilities and expenses if Goodrich fails to pay them.
RISKS RELATED TO OUR BUSINESS
CERTAIN OF OUR SUBSIDIARIES ARE DEFENDANTS IN ASBESTOS LITIGATION.
The historical business operations of two Coltec subsidiaries, Garlock
Sealing Technologies LLC and The Anchor Packing Company, have resulted in a
substantial volume of asbestos litigation in which plaintiffs have alleged
personal injury or death as a result of exposure to asbestos fibers. Those
subsidiaries manufactured and/or sold industrial sealing products, predominately
gaskets, which contained encapsulated asbestos fibers. Although those
subsidiaries actively manage their exposure to asbestos litigation and their
relationships with insurance carriers through another Coltec subsidiary,
Garrison Litigation Management Group, Ltd., several risks and uncertainties may
result in potential liabilities to us in the future that could have a material
adverse effect on our business, financial condition, results of operations and
cash flows. Those risks and uncertainties include the following:
- the potential for a large volume of future asbestos claims to the
extent such claims are not covered by insurance because insurance
coverage is, or will be, depleted;
- the uncertainty of the per claim value of current and potential
future asbestos claims;
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- the timing of payout of claims relative to recoveries of amounts
covered by insurance from our subsidiaries' insurance carriers and
limitations imposed on the amount that may be recovered in any given
year;
- the financial viability of our subsidiaries' insurance carriers and
their reinsurance carriers, and our subsidiaries' ability to collect
on claims from them;
- an increase in litigation or other costs that are not covered by
insurance;
- the unavailability of any insurance for claims alleging first
exposure to asbestos after July 1, 1984; and
- bankruptcies of other defendants.
Potential liability for asbestos claims may adversely affect our ability
to retain and attract customers and quality personnel. To the extent our
subsidiaries' insurance is depleted or the payments required in any given year
exceed the annual limitations on insurance recoveries from our subsidiaries'
carriers, our subsidiaries would be required to fund these obligations from
available cash, even if such amounts are recoverable under these insurance
policies in later years. This could adversely affect our ability to use cash for
other purposes, including growth of our business, and adversely affect our
financial condition.
OUR BUSINESS AND SOME OF THE MARKETS WE SERVE ARE CYCLICAL AND CHANGES IN
GENERAL MARKET CONDITIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
The markets in which we sell our products, particularly chemical
companies, petroleum refineries and the automotive industry, are, to varying
degrees, cyclical and have historically experienced periodic downturns. Prior
downturns have been characterized by diminished product demand, excess
manufacturing capacity and subsequent erosion of average selling prices in these
markets resulting in negative effects on our net sales, gross margins and net
income. Economic downturns or other material weakness in demand in any of these
markets could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
The U.S. and other world markets are currently experiencing a severe
economic downturn and many of the markets that we serve have been affected by
this downturn. As a result, our business and financial results have been
adversely affected. If this economic slowdown were to continue for an extended
period or if conditions were to worsen, the negative impact on our business and
financial results could be further exacerbated.
WE FACE INTENSE COMPETITION THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
We encounter intense competition in almost all areas of our business.
Additionally, customers for many of our products are attempting to reduce the
number of vendors from which they purchase in order to reduce inventories. To
remain competitive, we need to invest continuously in manufacturing, marketing,
customer service and support and our distribution networks. We may not have
sufficient resources to continue to make such investments or maintain our
competitive position. Additionally, some of our competitors, such as Smiths
Group plc, Flowserve Corporation and Ingersoll-Rand Company, are larger than we
are and have substantially greater financial resources than we do. As a result,
they may be better able to withstand the effects of periodic economic downturns.
Pricing and other competitive pressures could adversely affect our business,
financial condition, results of operations and cash flows.
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IF WE FAIL TO RETAIN THE INDEPENDENT AGENTS AND DISTRIBUTORS UPON WHOM WE RELY
TO MARKET OUR PRODUCTS, WE MAY BE UNABLE TO EFFECTIVELY MARKET OUR PRODUCTS AND
OUR REVENUE AND PROFITABILITY MAY DECLINE.
Our marketing success in the U.S. and abroad depends largely upon our
independent agents' and distributors' sales and service expertise and
relationships with customers in our markets. Many of these agents have developed
strong ties to existing and potential customers because of their detailed
knowledge of our products. A loss of a significant number of these agents or
distributors, or of a particular agent or distributor in a key market or with
key customer relationships, could significantly inhibit our ability to
effectively market our products, which could have a material adverse effect on
our business, financial condition, results of operations and cash flows.
WE HAVE EXPOSURE TO SOME CONTINGENT LIABILITIES RELATING TO DISCONTINUED
OPERATIONS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
CONDITION, RESULTS OF OPERATIONS OR CASH FLOWS IN ANY FISCAL PERIOD.
We have some contingent liabilities related to discontinued operations of
our predecessors, including environmental liabilities and liabilities for
certain products and other matters. In some instances, we have indemnified
others against those liabilities, and in other instances, we have received
indemnities from third parties against those liabilities.
Under federal and state environmental laws, Coltec or one of its
subsidiaries has been named as a potentially responsible party at 17 sites where
the costs to it at each site are expected to exceed $100 thousand.
Investigations have been completed or are near completion for 14 of these sites
and are in progress at the other three sites. The majority of these sites relate
to remediation projects at former operating facilities that have been sold or
closed and primarily deal with soil and groundwater contamination. We believe
that any liability incurred for cleanup at these sites will be satisfied over a
number of years, and, in some cases, the costs will be shared with other
potentially responsible parties.
In addition, there is the potential for claims to arise relating to
products or other matters related to discontinued operations. Some of these
claims could seek substantial monetary damages. Specifically, we may potentially
be subject to the liabilities related to the firearms manufactured prior to 1990
by Colt Firearms, a former operation of Coltec, and for electrical transformers
manufactured prior to 1994 by Central Maloney, another former Coltec operation.
Coltec also has ongoing obligations with regard to workers compensation, retiree
medical and other retiree benefit matters associated with discontinued
operations that relate to Coltec' s periods of ownership of those operations.
We have insurance and reserves to address these liabilities. However, if
our insurance coverage is depleted or our reserves are not adequate,
environmental and other liabilities relating to discontinued operations could
have a material adverse effect on our financial condition, results of operations
and cash flows.
WE CONDUCT A SIGNIFICANT AMOUNT OF OUR SALES ACTIVITIES OUTSIDE OF THE U.S.,
WHICH SUBJECTS US TO ADDITIONAL BUSINESS RISKS THAT MAY CAUSE OUR PROFITABILITY
TO DECLINE.
Because we sell our products in a number of foreign countries, we are
subject to risks associated with doing business internationally. In 2001, we
derived approximately 30% of our revenues from sales of our products outside of
the U.S. Our international operations are, and will continue to be, subject to a
number of risks, including:
- unfavorable fluctuations in foreign currency exchange rates;
- adverse changes in foreign tax, legal and regulatory requirements;
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- difficulty in protecting intellectual property;
- trade protection measures and import or export licensing
requirements;
- differing labor regulations;
- political and economic instability; and
- acts of hostility, terror or war.
Any of these factors, individually or together, could have a material adverse
effect on our business, financial condition, results of operations and cash
flows.
We intend to continue to pursue international growth opportunities, which
could increase our exposure to risks associated with international sales and
operations. As we expand our international operations, we may also encounter new
risks that could adversely affect our revenues and profitability. For example,
as we focus on building our international sales and distribution networks in new
geographic regions, we must continue to develop relationships with qualified
local agents, distributors and trading companies. If we are not successful in
developing these relationships, we may not be able to increase sales in these
regions. We could also face increased costs associated with staffing and
managing foreign operations.
WE MAY NOT ACHIEVE OUR STRATEGIC OBJECTIVES, WHICH COULD ADVERSELY AFFECT OUR
GROWTH.
Our strategic objectives include expansion of our product lines into new
industrial and geographic markets. We may not be able to expand into these new
markets effectively or at all.
Additionally, our short-term strategy includes realizing cost savings by
increasing the efficiency of our manufacturing processes and focusing on
opportunities for cost reduction throughout our business. We may not, however,
be able to fully achieve increased efficiencies or reduce our costs. If we are
not able to achieve the cost savings we expect, our profitability could be
adversely affected.
We expect to realize certain synergies, business opportunities and new
prospects for growth through product development and geographic market expansion
resulting from Coltec's September 2001 acquisition of Glacier Garlock Bearings,
or Glacier, an industrial metal polymer bearing business. We are in the process
of integrating the Glacier business with our existing business. Even if we are
able to integrate the operations of the two companies successfully, we may never
fully realize these expected benefits, or we may not realize these benefits
within the time frame that we currently expect. We may experience increased
competition that will limit our ability to expand our business, our assumptions
underlying our estimates of expected cost savings may prove to have been
inaccurate, or general industry and business conditions may deteriorate. In
addition, we may not be successful in integrating the operations, resulting in
excess costs, operational problems and write-offs. The integration will also
require significant effort from our personnel and the personnel of the Glacier
business. Furthermore, our management may have its attention diverted while
trying to integrate the Glacier business successfully or in a timely manner,
which could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
In addition, our longer-term strategy contemplates growth through
selective acquisitions to broaden the products and services we offer and to
expand our customer base. If we were to make any acquisitions, we may not be
able to integrate these acquisitions successfully into our existing business.
Moreover, although we expect to perform a diligence investigation before
acquiring any new business, an acquisition could result in unforeseen
liabilities being assumed by us. If the unforeseen liabilities prove
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to be significant, our business, financial condition, results of operations and
cash flows could be adversely affected and our growth may be impaired.
A CATASTROPHIC EVENT AT ONE OR MORE OF OUR SPECIALIZED PRODUCTION FACILITIES
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
As part of our business strategy, we have consolidated and expect to
continue to consolidate production of some of our product lines at one or more
specialized facilities. As a result, we have some products that are manufactured
exclusively in one production facility. Should there be a catastrophic event,
such as a fire, affecting one of these production facilities, we could be
prevented from manufacturing the product that was manufactured in that facility.
If we are not able to timely or effectively shift production to one of our other
facilities, we could lose customers as a result and may incur significant
additional costs, which could affect our profitability. Our property and
business interruption insurance may not adequately compensate us for any losses
that may occur.
OUR BUSINESS COULD SUFFER IF WE ARE UNSUCCESSFUL IN NEGOTIATING NEW COLLECTIVE
BARGAINING AGREEMENTS.
We currently employ approximately 4,500 employees worldwide. Approximately
3,000 employees are located within the U.S. and approximately 1,500 employees
are located outside of the U.S., primarily in Europe and Canada. Approximately
40% of our U.S. employees are represented by unions. Our material collective
bargaining agreements with these unions expire between October 1, 2002 and
August 13, 2005. Although we believe that our relations with our employees are
satisfactory and we have not experienced any material strikes or work stoppages
since a strike at one of our facilities in 1996, which lasted approximately ten
weeks, we cannot assure you that we will be successful in negotiating new
collective bargaining agreements, that such negotiations will not result in
significant increases in the cost of labor or that a breakdown in such
negotiations will not result in the disruption of our operations. In addition,
planned closures of some of our facilities as part of our short-term strategy
may create the risk of strikes or work stoppages at those and other facilities.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND KNOWLEDGE
RELATING TO OUR PRODUCTS, OUR BUSINESS AND PROSPECTS MAY BE NEGATIVELY IMPACTED.
We believe that proprietary products and technology are important to our
success. If we are unable to adequately protect our intellectual property and
know-how, our business and prospects could be negatively impacted. Our efforts
to protect our intellectual property through patents, trademarks, service marks,
domain names, trade secrets, copyrights, confidentiality, non-compete and
nondisclosure agreements and other measures may not be adequate to protect our
proprietary rights. Patents issued to third parties, whether before or after the
issue date of our patents, could render our intellectual property less valuable.
Our ownership of our intellectual property and questions as to whether our
competitors' products infringe our intellectual property rights may be disputed.
In addition, intellectual property rights may be unavailable, limited or
difficult to enforce in some jurisdictions, which could make it easier for
competitors to capture market share in those jurisdictions.
Our competitors may capture market share from us by selling products that
claim to mirror the capabilities of our products or technology without
infringing upon our intellectual property rights. Without sufficient protection
nationally and internationally for our intellectual property, our
competitiveness worldwide could be impaired, which would negatively impact our
growth and future revenue. As a result, we may be required to spend significant
resources to monitor and police our intellectual property rights.
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A LOSS OF CERTAIN OF OUR INTELLECTUAL PROPERTY LICENSES OR FAILURE ON THE PART
OF OUR LICENSORS TO PROTECT THEIR OWN INTELLECTUAL PROPERTY UNDER SUCH LICENSE
AGREEMENTS MAY NEGATIVELY IMPACT OUR BUSINESS AND REVENUES.
We license certain intellectual property from third parties and we are
dependent on the ability of these third parties to diligently protect their
intellectual property rights. In several cases, such as Fairbanks Morse's
technology licenses from Cooper Cameron Corporation relating to the Enviro
Design engine and from MAN Aktiengesellschaft for the Pielstick four-stroke
engine and Quincy Compressor's license from Svenska Rotor Maskiner AB for their
rotary screw compressor design and technology, the intellectual property
licenses are integral to the manufacture of our products. A loss of these
licenses or a failure on the part of the third party to protect its own
intellectual property could negatively impact our revenues. Although these
licenses are all long-term and subject to renewal, it is possible that we may
not successfully renegotiate these licenses or that they could be terminated for
a material breach on our part. If this were to occur, our business, financial
condition, results of operation and cash flows could be adversely affected.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
BECAUSE THERE HAS NOT LONG BEEN A PUBLIC MARKET FOR OUR COMMON STOCK, THE MARKET
PRICE AND TRADING VOLUME OF OUR COMMON STOCK MAY BE VOLATILE.
There has been a trading market for our common stock only since May 31,
2002. We cannot at this point predict the extent to which investors' interest
will lead to a liquid trading market or whether the market price of our common
stock will be volatile. The market price of our common stock could fluctuate
significantly for many reasons, including in response to the risks described in
this section and elsewhere in this information statement or for reasons
unrelated to our operations, such as reports by industry analysts, investor
perceptions or negative announcements by our customers, competitors or suppliers
regarding their own performance, as well as industry conditions and general
financial, economic and political instability. For example, to the extent that
other large companies within our industry experience declines in their stock
price, our stock price may decline as well.
BECAUSE OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY VARY SIGNIFICANTLY IN
FUTURE PERIODS, OUR STOCK PRICE MAY FLUCTUATE.
Our revenue and operating results may vary significantly from quarter to
quarter. A high proportion of our costs are fixed, due in part to significant
selling and manufacturing costs. Small declines in revenues could
disproportionately affect operating results in a quarter and the price of our
common stock may fall. Other factors that could affect quarterly operating
results include, but are not limited to:
- demand for our products;
- the timing and execution of customer contracts;
- the timing of sales of our products;
- payments related to asbestos litigation or annual costs related to
asbestos litigation that are not covered by insurance or that exceed
the annual limits in place with our insurance;
- changes in the fair value of call options on Goodrich common stock
purchased by Coltec to reduce the economic risk of the conversion
feature of the convertible preferred securities;
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- increases in manufacturing costs due to equipment or labor issues;
- changes in foreign currency exchange rates;
- unanticipated delays or problems in introducing new products;
- announcements by competitors of new products, services or
technological innovations;
- changes in our pricing policies or the pricing policies of our
competitors;
- increased expenses, whether related to sales and marketing, raw
materials or supplies, product development or administration;
- major changes in the level of economic activity in the U.S., Canada,
Europe and other major regions in which we do business;
- costs related to possible future acquisitions of technologies or
businesses;
- an increase in the number or magnitude of product liability claims;
- our ability to expand our operations; and
- the amount and timing of expenditures related to expansion of our
operations.
VARIOUS AGREEMENTS AND LAWS COULD DELAY OR PREVENT A CHANGE OF CONTROL THAT YOU
MAY FAVOR.
The terms of some of our agreements relating to the Distribution,
particularly the tax matters arrangements with Goodrich, anti-takeover
provisions of our articles of incorporation and bylaws, our shareholder rights
plan and provisions of North Carolina law could delay or prevent a change of
control that you may favor or may impede the ability of the holders of our
common stock to change our management. An acquisition or further issuance of our
stock in connection with a change-of-control transaction or otherwise could
cause the Distribution and associated restructuring activities to be taxable to
Goodrich and Coltec. Under the tax matters arrangements, we would be required to
indemnify Goodrich for the resulting tax and this indemnity obligation might
discourage, delay or prevent a change of control that you may favor.
In particular, the provisions of our articles of incorporation and bylaws,
among other things, will:
- require a supermajority shareholder vote to approve any business
combination transaction with an owner of 5% or more of our shares
unless the transaction is recommended by disinterested directors;
- divide our board of directors into three classes, with members of
each class to be elected for staggered three-year terms, if our
board is expanded to nine members;
- limit the right of shareholders to remove directors and fill
vacancies;
- regulate how shareholders may present proposals or nominate
directors for election at shareholders' meetings; and
- authorize our board of directors to issue preferred stock in one or
more series, without shareholder approval.
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Our shareholder rights plan will also make an acquisition of a controlling
interest in EnPro in a transaction not approved by our board of directors more
difficult.
OUR DEBT AGREEMENTS IMPOSE LIMITATIONS ON OUR OPERATIONS, WHICH COULD IMPEDE OUR
ABILITY TO RESPOND TO MARKET CONDITIONS, ADDRESS UNANTICIPATED CAPITAL
INVESTMENTS AND/OR PURSUE BUSINESS OPPORTUNITIES.
The agreements relating to the TIDES and to $3.1 million of 7-1/2% Senior
Notes due April 15, 2008 of Coltec impose limitations on our operations. Our
primary U.S. operating subsidiaries have a senior secured revolving credit
facility. The agreements relating to the revolving credit facility impose
additional and, in some cases, more restrictive limitations. These limitations
could impede our ability to respond to market conditions, address unanticipated
capital investments and/or pursue business opportunities.
WE MAY INCREASE OUR DEBT OR RAISE ADDITIONAL CAPITAL IN THE FUTURE, WHICH COULD
AFFECT THE FINANCIAL HEALTH OF OUR COMPANY, AND MAY DECREASE OUR PROFITABILITY.
We may increase our debt or raise additional capital in the future,
subject to restrictions in our debt agreements. If our cash flow from operations
is less than we anticipate, or if our cash requirements, including those of our
subsidiaries to pay asbestos claims, are more than we expect, we may require
more financing. However, debt or equity financing may not be available to us on
terms acceptable to us, if at all. If we incur additional debt or raise equity
through the issuance of preferred stock, the terms of the debt or preferred
stock issued may give the holders rights, preferences and privileges senior to
those of holders of our common stock, particularly in the event of a
liquidation. The terms of the debt may also impose additional and more stringent
restrictions on our operations than we currently have. If we raise funds through
the issuance of additional equity, any ownership you have in us will be diluted.
If we are unable to raise additional capital when needed, it could affect the
financial health of our company, which could negatively affect your investment
in us. Also, regardless of the terms of our debt or equity financing, we may be
limited in the amount of our stock that we can issue because the issuance of our
stock may cause the Distribution to be a taxable event for Goodrich under
Section 355(e) of the Internal Revenue Code, and under the tax sharing
arrangements with Goodrich we could be required to indemnify Goodrich for that
tax.
Our ability to make payments on and to refinance our indebtedness,
including the debt retained or incurred pursuant to the Distribution as well as
any future debt that we may incur, and to fund working capital, capital
expenditures, asbestos claims of our subsidiaries and strategic acquisitions and
investments, will depend on our ability to generate cash in the future from
operations, financings and asset sales. Our ability to generate cash is subject
to general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. If we are not able to repay or refinance
our debt as it becomes due, we may be forced to sell assets or take other
disadvantageous actions. The lenders who hold such debt could also accelerate
amounts due, which could trigger a default or acceleration of our other debt.
WE MAY NOT HAVE ADEQUATE CASH OR THE ABILITY TO FINANCE CONVERSIONS OF THE
TIDES.
Until April 15, 2028, each TIDES is convertible at a conversion price of
$52.34 per TIDES, at the option of the holder, into a combination of 0.955248 of
a share of Goodrich common stock and 0.1910496 of a share of EnPro common stock.
Should the holders of the TIDES exercise their right to convert the TIDES,
Coltec would be required to deliver shares of Goodrich and EnPro common stock to
the holders as promptly as practicable on or after the conversion date and in
connection therewith would be required to purchase shares of Goodrich common
stock on the open market, directly from Goodrich or by exercising its call
options on Goodrich common stock discussed below. Coltec may not have sufficient
cash on hand or the ability to finance these transactions in the time period
required by the
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agreements relating to the TIDES. Failure to honor conversion rights would be a
default under the TIDES agreements.
Further, the value of Goodrich and EnPro common stock may increase to the
level where Coltec's cost to acquire shares in a conversion could exceed, with
no maximum, the aggregate liquidation value of the TIDES of $150 million. Coltec
has purchased call options on 2,865,744 shares of Goodrich common stock with an
exercise price of $52.34 per share (the conversion price), which represents the
total Goodrich shares that would be required if all TIDES holders convert. Until
they expire in March 2007, the call options provide protection against Coltec's
risk that the cash required to finance conversions of the TIDES would exceed
their liquidation value. While Coltec has hedged its exposure to conversion
costs in excess of the aggregate liquidation value of the TIDES, as described
earlier, we cannot be certain that Coltec will have the financial resources to
redeem these securities or effectively hedge its exposure to potential
conversion costs in excess of the aggregate liquidation value of the TIDES
beyond the term of the call options.
EnPro, Goodrich, Coltec and Coltec Capital Trust have entered into an
indemnification agreement with respect to the TIDES under which EnPro, Coltec
and Coltec Capital Trust will indemnify Goodrich from any costs and liabilities
that Goodrich incurs as a result of its earlier guarantee of Coltec and Coltec
Capital Trust's obligations under the TIDES. Such indemnification obligations
may result in payments that could have a material adverse effect on our
financial condition, results of operations and cash flows.
The call options on Goodrich common stock purchased by Coltec to mitigate
its economic risk created by the conversion feature of the TIDES are derivative
instruments and are carried at fair value in our balance sheet with changes in
the fair value reflected in our earnings. Changes in the fair value of the call
options will not result in a current cash obligation to Coltec. However, the
change in fair value of the derivatives could be material to our financial
condition and results of operations in a given period.
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