<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 1998
REGISTRATION NO. 333-51355
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
NUMATICS, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MICHIGAN 3492 38-2955710
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
AND THE FOLLOWING ADDITIONAL REGISTRANTS, EACH A GUARANTOR:
<TABLE>
<CAPTION>
<S> <C> <C>
MICHIGAN NUMATION, INC. 38-3165223
MICHIGAN NUMATECH, INC. 38-3170243
MICHIGAN MICRO-FILTRATION, INC 38-2796518
MICHIGAN ULTRA AIR PRODUCTS, INC 38-2565104
ARIZONA MICROSMITH, INC. 86-0639032
MICHIGAN I.A.E. INCORPORATED -
(STATE OR OTHER JURISDICTION OF (EXACT NAME OF GUARANTOR (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) AS SPECIFIED IN ITS CHARTER) IDENTIFICATION NUMBER)
</TABLE>
1450 NORTH MILFORD ROAD, HIGHLAND, MICHIGAN 48357, (248) 887-4111
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
For Each Registrant:
JOHN H. WELKER
1450 NORTH MILFORD ROAD
HIGHLAND, MICHIGAN 48357
(248) 887-4111
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
with copies to:
KENT E. SHAFER, ESQ.
MILLER, CANFIELD, PADDOCK AND STONE, P.L.C.
150 WEST JEFFERSON AVENUE
DETROIT, MICHIGAN 48226
(313) 963-6420
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
consummation of the Exchange Offer referred to herein.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
--------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
OFFER TO EXCHANGE
ALL OUTSTANDING LOGO
($115,000,000 PRINCIPAL AMOUNT OUTSTANDING)
9 5/8% SENIOR SUBORDINATED NOTES DUE 2008
FOR
9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008
($115,000,000 PRINCIPAL AMOUNT)
OF
NUMATICS, INCORPORATED
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON SEPTEMBER
3, 1998, UNLESS EXTENDED.
--------------
Numatics, Incorporated, a Michigan corporation (the "Issuer"), hereby offers
(the "Exchange Offer"), upon the terms and subject to the conditions set forth
in this Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange up to an aggregate principal amount of $115,000,000
of its 9 5/8% Series B Senior Subordinated Notes due 2008 (the "Exchange
Notes") for an equal principal amount of its outstanding 9 5/8% Senior
Subordinated Notes due 2008 (the "Notes"), in integral multiples of $1,000.
The Exchange Notes will be substantially identical (including principal
amount, interest rate, maturity and redemption rights) to the Notes for which
they may be exchanged pursuant to the Exchange Offer, except that (i) the
offer and sale of the Exchange Notes will have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and (ii) holders of
Exchange Notes will not be entitled to certain rights of holders of the Notes
under the A/B Exchange Registration Rights Agreement of the Issuer and the
Guarantors (as defined) dated as of March 23, 1998 (the "Registration Rights
Agreement"). The Notes have been, and the Exchange Notes will be, issued under
an indenture (the "Indenture") dated as of March 23, 1998 among the Issuer,
the Guarantors and U.S. Bank Trust National Association (formerly known as
First Trust National Association), as trustee (the "Trustee"). See
"Description of Exchange Notes." There will be no proceeds to the Issuer from
this offering; however, pursuant to the Registration Rights Agreement, the
Issuer will bear certain offering expenses. The Exchange Notes mature on April
1, 2008, unless previously redeemed. Interest on the Exchange Notes is payable
semi-annually on April 1 and October 1 of each year, commencing October 1,
1998. The Exchange Notes will be redeemable at the option of the Company, in
whole or in part, on or after April 1, 2003, at the redemption prices set
forth herein, plus accrued and unpaid interest and Liquidated Damages (as
defined), if any, to the redemption date. In addition, on or prior to April 1,
2001, the Company may redeem up to $40,250,000 aggregate principal amount of
Notes and Exchange Notes with the net proceeds of a public offering of common
stock of the Company at the redemption prices set forth herein, plus accrued
and unpaid interest and Liquidated Damages, if any, to the redemption date;
provided that at least $74,750,000 aggregate principal amount of Notes and
Exchange Notes will remain outstanding immediately after the occurrence of
such redemption. Upon a Change of Control (as defined), the Company will be
required to offer to repurchase all outstanding Exchange Notes at 101% of the
principal amount thereof plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of repurchase.
The Exchange Notes will be general unsecured obligations of the Company and
will rank pari passu with all existing and future senior subordinated
indebtedness of the Company and subordinated in right of payment to all
existing and future Senior Debt (as defined) of the Company, including
indebtedness under the New Credit Facility (as defined). The obligations of
the Company under the New Credit Facility are secured by substantially all of
the assets of the Company and its domestic subsidiaries, as well as all of the
outstanding capital stock of the domestic subsidiaries of the Company and 66%
of the capital stock of the foreign subsidiaries of the Company, and such
indebtedness ranks senior in right of payment to the Exchange Notes. The
Company's payment of principal, premium, if any, interest and Liquidated
Damages, if any, on the Exchange Notes will be fully and unconditionally,
jointly and severally guaranteed on a senior subordinated basis (the
"Subsidiary Guarantees") by all existing and future domestic Restricted
Subsidiaries (as defined) of the Company and each other Restricted Subsidiary
of the Company that guarantees debt of the Company or of any other domestic
Restricted Subsidiary of the Company (the "Guarantors"). The Subsidiary
Guarantees will rank pari passu in right of payment with all existing and
future senior subordinated indebtedness of the Guarantors and subordinated to
all existing and future Senior Debt of the Guarantors. The Exchange Notes and
the Notes will rank equally with one another, and each Guarantor's guarantee
of the Exchange Notes will rank equally with its guarantee of the Notes. As of
May 31, 1998, the Company had approximately $44.6 million of Senior Debt
outstanding (including approximately $40.5 million of secured indebtedness
outstanding under the New Credit Facility), and the Company had an additional
approximately $26.8 million of Senior Debt available to be incurred under the
New Credit Facility, subject to borrowing base limitations. In addition, the
Company conducts certain operations through foreign subsidiaries which will
not guarantee the Exchange Notes, and the Exchange Notes will be effectively
subordinated to all liabilities of such subsidiaries (which aggregated $11.9
million as of May 31, 1998). See "Description of Exchange Notes" and
"Description of Other Indebtedness." The terms of the Indenture permit the
Company and its subsidiaries to incur additional indebtedness (including
Senior Debt), subject to certain limitations.
(Cover text continued on next page)
--------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE EXCHANGE NOTES.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------
The date of this Prospectus is August 4, 1998.
<PAGE>
The Issuer will accept for exchange any and all validly tendered Notes on or
prior to 5:00 p.m., New York City time, on September 3, 1998 (the "Expiration
Date"), unless the Exchange Offer is extended. Tenders of Notes may be
withdrawn at any time prior to 5:00 p.m. on the Expiration Date; otherwise,
such tenders are irrevocable. U.S. Bank Trust National Association will act as
exchange agent (in such capacity, the "Exchange Agent") in connection with the
Exchange Offer. The Exchange Offer is not conditioned on any minimum principal
amount of Notes being tendered for exchange but is subject to certain other
customary conditions.
The Notes were sold by the Issuer on March 23, 1998 (the "Offering") in
transactions not registered under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act. The Notes were
subsequently resold to qualified institutional buyers in reliance upon Rule
144A under the Securities Act, to a limited number of other institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under
the Securities Act) that executed and delivered a letter containing certain
representations and agreements and pursuant to offers and sales that occurred
outside the United States within the meaning of Regulation S under the
Securities Act. Accordingly, the Notes may not be reoffered, resold or
otherwise transferred in the United States unless registered under the
Securities Act or unless an applicable exemption from the registration
requirements of the Securities Act is available. The Exchange Notes are being
offered in order to satisfy certain obligations of the Issuer under the
Registration Rights Agreement. See "The Exchange Offer."
The Company employed the net proceeds of the Offering and of the initial
borrowing under the New Credit Facility by using approximately $98.7 million
to repay its indebtedness under its prior bank credit facility (the "Old
Credit Facility"), approximately $46.6 million to prepay its previously
outstanding senior subordinated notes (the "Old Subordinated Notes") and
approximately $6.0 million to pay a dividend on its common shares.
The Exchange Offer is being made in reliance on certain no-action positions
that have been published by the staff of the Securities and Exchange
Commission (the "Commission") which require each tendering noteholder to
represent that it is acquiring the Exchange Notes in the ordinary course of
its business and that such holder noes not intend to participate and has no
arrangement or understanding with any person to participate in a distribution
of the Exchange Notes. In some cases, certain broker-dealers may be required
to deliver a prospectus in connection with the resale of Exchange Notes that
they receive in the Exchange Offer. See "The Exchange Offer" and "Plan of
Distribution."
There has not previously been any public market for the Exchange Notes. The
Issuer does not intend to list the Exchange Notes on any securities exchange
or to seek approval for quotation through any automated quotation system.
There can be no assurance that an active market for the Exchange Notes will
develop. To the extent that an active market for the Exchange Notes does
develop, the market value of the Exchange Notes will depend on market
conditions (such as yields on alternative investments), general economic
conditions, the Issuer's financial condition and other factors. Such
conditions might cause the Exchange Notes, to the extent that they are
actively traded, to trade at a significant discount from face value. See "Risk
Factors--Absence of a Public Market."
ANY NOTES NOT TENDERED AND ACCEPTED IN THE EXCHANGE OFFER WILL REMAIN
OUTSTANDING. TO THE EXTENT ANY NOTES ARE TENDERED AND ACCEPTED IN THE EXCHANGE
OFFER, A HOLDER'S ABILITY TO SELL UNTENDERED NOTES COULD BE ADVERSELY
AFFECTED. FOLLOWING CONSUMMATION OF THE EXCHANGE OFFER, THE HOLDERS OF NOTES
WILL CONTINUE TO BE SUBJECT TO THE EXISTING RESTRICTIONS ON TRANSFER THEREOF.
HOLDERS WHO DO NOT TENDER THEIR NOTES GENERALLY WILL NOT HAVE ANY FURTHER
REGISTRATION RIGHTS UNDER THE REGISTRATION RIGHTS AGREEMENT OR OTHERWISE. SEE
"THE EXCHANGE OFFER--CONSEQUENCES OF FAILURE TO EXCHANGE."
The Exchange Notes generally will be issued in registered, global form
without interest coupons (the "Global Exchange Notes"), which will be
deposited with, or on behalf of, The Depository Trust Company ("DTC") and
registered in its name or in the name of Cede & Co., its nominee. Beneficial
interests in the Global Exchange Notes representing the Exchange Notes will be
shown on, and transfers thereof will be effected through, records maintained
by DTC and its participants. After the initial issuance of the Global Exchange
Notes, Exchange Notes in certificated form will be issued in exchange for the
Global Exchange Notes only on the terms set forth in the Indenture. See
"Description of Exchange Notes--Book Entry, Delivery and Form."
--------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE ISSUER OR SUBSIDIARY GUARANTORS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE EXCHANGE NOTES OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
OF THE EXCHANGE NOTES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL NOVEMBER 3, 1998 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE OFFER),
ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
<PAGE>
ADDITIONAL INFORMATION
As a result of the Exchange Offer, the Issuer will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports and
other information with the Commission. Such reports and other information
filed by the Issuer can be inspected and copied at the public reference
facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and the regional offices of the Commission located at 7 World Trade Center,
New York, New York 10048 and 500 West Madison Street, 14th Floor, Chicago,
Illinois 60661. Copies of such materials may be obtained from the Public
Reference Section of the Commission, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at its public reference facilities in New York, New
York and Chicago, Illinois at prescribed rates. The Issuer will make its
filings with the Commission electronically. The Commission maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically, which information
can be accessed at http://www.sec.gov.
The Guarantors' obligations under the informational requirements of the
Exchange Act will be fulfilled by including information regarding the
Guarantors in the Issuer's periodic reports.
The Issuer has agreed in the Indenture that, whether or not required by the
rules of the Commission, so long as any Notes or Exchange Notes are
outstanding, it will furnish to the holders of Notes and Exchange Notes (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Issuer
were required to file such forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that describes the
financial condition and results of operations of the Issuer and its
consolidated subsidiaries and, with respect to the annual information only, a
report thereon by the Issuer's independent accountants and (ii) all current
reports that would be required to be filed with the Commission if the Issuer
were required to file such reports. The Issuer has also agreed that, following
consummation of the Exchange Offer, whether or not required by the rules of
the Commission, it will file a copy of all such information and reports with
the Commission for public availability within the time periods specified in
the Commission's rules (unless the Commission will not accept such a filing)
and make such information available to securities analysts and prospective
investors upon request.
In addition, the Issuer and the Guarantors have agreed that, for so long as
any Notes or Exchange Notes remain outstanding, they will furnish to the
holders of the Notes and Exchange Notes and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
The Issuer has filed with the Commission a Registration Statement on Form S-
4 under the Securities Act for the registration of the Exchange Notes offered
hereby (the "Registration Statement"). This Prospectus, which constitutes a
part of the Registration Statement, does not contain all the information set
forth in the Registration Statement, certain items of which are contained in
exhibits and schedules to the Registration Statement as permitted by the rules
and regulations of the Commission. For further information about the Issuer
and the Exchange Notes offered hereby, reference is made to the Registration
Statement, including the exhibits and financial statement schedules thereto,
which may be inspected without charge at the public reference facility
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of which may be obtained from the Commission at prescribed
rates or from the Web site described above. Statements made in this Prospectus
concerning the contents of any documents referred to herein are not
necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement is qualified in its entirety by such reference.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, including the "Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
sections, contains forward-looking statements, which can
i
<PAGE>
be identified by the use of the future tense or other forward-looking terms
such as "may," "intend," "will," "expect," "anticipate," "plan," "management
believes," "estimate," "continue," "should," "strategy" or "position" or the
negatives of those terms or other variations on them or by comparable
terminology. In particular, any statements, express or implied, concerning
future operating results or the ability to generate net sales, income or cash
flow to service the Exchange Notes are forward-looking statements. Investors
in the Exchange Notes are cautioned that reliance on any forward-looking
statements involves risks and uncertainties and that, although the Company
believes that the assumptions on which the forward-looking statements
contained herein are based are reasonable, any of those assumptions could
prove to be inaccurate. As a result, the forward-looking statements based on
those assumptions also could be incorrect, and actual results may differ
materially from any results indicated or suggested thereby. The uncertainties
in this regard include, but are not limited to, those identified herein under
"Risk Factors." In light of these and other uncertainties, the inclusion of a
forward-looking statement herein should not be regarded as a representation by
the Company that the Company's plans and objectives will be achieved. All
forward-looking statements are expressly qualified by the cautionary
statements contained in this paragraph and in the "Risk Factors" section
below. The Company undertakes no duty to update such forward-looking
statements.
BASIS FOR STATEMENTS ABOUT MARKET SHARE
Statements in this Prospectus about the Company's share of the U.S. market
for directional control, base mounted, 4-way pneumatic valves are based on a
study of 1997 market information performed by an independent market research
firm. Every few years the same firm, on its own initiative, prepares and
markets reports on the entire pneumatics industry. The most recent such report
on the full industry was based on 1991 market information. The 1997 market
information study (which was limited to the market for pneumatic directional
control valves) was commissioned and paid for by the Company for the purpose
of updating the most recent full industry report.
ii
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the notes thereto, appearing elsewhere in this Prospectus. Unless the context
requires otherwise, the terms "Numatics" or the "Company" hereafter refer to
Numatics, Incorporated (or, with respect to events occurring prior to its
incorporation in 1990, its predecessor) and its subsidiaries. Prospective
investors should carefully consider the information set forth under the caption
"Risk Factors."
THE COMPANY
The Company is a leading global manufacturer and marketer of pneumatic valves
and related products. According to the most recently available information from
the National Fluid Power Association ("NFPA"), the worldwide market, as of
1995, for all pneumatic components was approximately $8.8 billion. The Company
has the largest U.S. market share, approximately 29.0%, in directional control,
base mounted, 4-way pneumatic valves. This type of valve is the Company's core
product and represents the largest segment of the pneumatic valve market in the
United States. The Company's products are key components in automated and other
manufacturing processes in industries as diverse as packaging, consumer
products, semiconductor and automotive. The Company's customers include over
9,000 direct customers and over 110 specialized distributors, with no one
customer representing more than 3.0% of total net sales in 1997. The Company's
products are used by such well known corporations as Stone Container, Johnson &
Johnson, Hewlett Packard and the "Big 3" automotive manufacturers. The Company
has increased its net sales from 1993 to 1997 at a compound annual growth rate
of 14.7%, outpacing the overall pneumatic components industry growth rate in
that period. For the fiscal year ended December 31, 1997, the Company's net
sales were $147.1 million.
The Company provides a full line of pneumatic products to address its
customers' fluid power needs worldwide. In the late 1980s, the Company began
expanding its product line to complement its traditional leadership position in
valve products. The Company now engineers, manufactures and markets a wide
range of pneumatic components used in automated and other manufacturing
processes. The Company's complementary set of products includes valves,
actuators and specialty products. While the Company's net sales in core valve
products have increased significantly over the past five years, its overall
dependence on valves has decreased through its product diversification
strategy. For 1997, valves represented 61.2% of the Company's total net sales,
and actuators and specialty products represented 38.8%.
Since its inception in 1945, Numatics has earned a reputation as an innovator
in engineering, manufacturing and new product development. The Company's
proprietary "lapped spool and sleeve" manufacturing technology for pneumatic
valves has been continuously refined and continues to provide a competitive
advantage in terms of product quality, reliability and durability. By working
closely with its customers to meet their specific needs, the Company has
introduced numerous industry firsts in manufacturing and new product
technologies.
The Company has greatly enhanced its international presence since it opened a
manufacturing facility in Germany in 1965. Other non-U.S. facilities include a
manufacturing plant in Ontario, Canada and sales and distribution facilities in
Canada, England, Italy, France, the Netherlands, Hungary, Taiwan and Mexico. In
1997, the Company's products were sold internationally to customers in over 45
countries. International net sales grew to $47.6 million in 1997 from $22.8
million in 1993.
THE FLUID POWER INDUSTRY
The fluid power industry has grown out of manufacturers' need to automate
repetitive tasks that had previously been performed manually. The industry can
generally be divided into two major segments: hydraulics
1
<PAGE>
(use of liquids) and pneumatics (use of air or inert gas). While hydraulics can
produce higher forces and, in some applications, better control, pneumatics
generally provide faster speeds, lower cost, greater ease of use and a more
environmentally clean process. The Company competes only in the pneumatics
segment of the fluid power market.
The Company believes there are a number of general industry trends favoring
the increasing use of automation, such as greater emphasis on productivity,
factory utilization and continuing cost reduction efforts. Additionally,
certain market segments to which the Company sells its products have been
reducing the number of suppliers they deal with, including pneumatic component
suppliers. As a result, companies within these market segments have
increasingly used suppliers that can provide a full line of pneumatic
components. The Company believes its array of products provides a competitive
advantage against single component suppliers.
COMPETITIVE STRENGTHS
Market Leadership Position. The Company has the largest U.S. market share,
approximately 29.0%, in its core product, directional control, base mounted, 4-
way pneumatic valves. The Company believes it has become a leader primarily
because of its innovative engineering, consistently high quality products and
customer service. Additionally, the Company has significantly increased its
market presence in related products, including actuators and specialty products
such as filters, regulators and lubricators ("FRLs") and specialty valves. The
Company believes its market leadership position in valve products has
benefitted and will continue to benefit its non-valve product sales.
Additionally, the Company believes it can further enhance its position as a
market leader by continuing to expand its pneumatic product line to offer
complete pneumatic systems to its customers.
Innovative Manufacturing and Engineering Processes. The Company has developed
a long-standing reputation as a leader in pneumatic valve technology due to its
history of manufacturing, design and engineering innovations. The Company's
proprietary "lapped spool and sleeve" valve manufacturing technology, first
developed over 45 years ago and continuously refined, still provides a
competitive advantage in terms of product quality, durability and reliability.
As an example, a "lapped spool and sleeve" used by Proctor & Gamble was still
within original specifications (which are expressed in millionths of an inch)
after operating in excess of one billion cycles. The Company closely guards the
"lapped spool and sleeve" process and limits the number of its own employees
who have access to its proprietary production method. Recent engineering
innovations have included on-board electronics, new generation direct solenoid
products, die cast magnesium valves and the development of smaller, more
compact valves for specific applications. In addition, the Company has
developed a customer focused, empirically based, analytic sizing system, called
"Numasizing," which allows the Company to assist customers in tailoring their
pneumatic systems.
Strong Customer Relationships. The Company enjoys strong, interactive
relationships with its direct customers and distributors. While the Company
generally does not have binding long-term contracts with its direct customers,
many of them have been customers for substantial periods of time. The Company
has maintained relationships with the Big 3 automotive manufacturers for over
40 years, and its relationships with certain other customers, such as 3M and
Frito-Lay, have continued for over 20 years. The Company has established a
network of over 110 distributors worldwide, including 78 in North America, 14
in Europe, 14 in Asia and 6 in South America. These distributors have been
identified by the Company as specialists in fluid power technology. The
Company's arrangements with its North American distributors require them, among
other things, to carry exclusively the Company's pneumatic valves among their
overall product offerings. A number of distributors have been customers of the
Company for at least 40 years, with the average tenure of the Company's U.S.
distributors being 20 years. Since 1990, no U.S. distributor has voluntarily
discontinued the Numatics product line in favor of a competitor's product. The
Company holds periodic distributor meetings and intensive training sessions to
enhance communication, introduce new products and discuss strategy. The
distributors provide service support and application knowledge to customers,
which gives Numatics a competitive advantage in introducing new products. The
Company believes its expanded product line has further enhanced its already
strong distributor network and its relationships with direct customers.
2
<PAGE>
All of the Company's distributors in North America and Europe have formal
written agreements, and substantially all of its distributors in other parts of
the world are parties to such agreements. All of these agreements provide for
the purchase of Company products by the distributor at specified prices for
resale to the distributors' customers, and the agreements with North American
distributors also provide for their acting as sales representatives to arrange
direct sales by the Company (for which the distributors receive specified
commissions). Most of the Company's distributor agreements have specified terms
of one year, though a few of its most successful distributors have five-year
agreements. All of the agreements are terminable by either party, with or
without cause, upon specified notice (30 days for North American distributors
and 60 days for others).
Diversity of Products and Markets. In recent years, the Company has
introduced several products which complement its traditional pneumatic valve
business. These products are actuators and specialty products, such as FRLs and
other air preparation equipment, specialty valves and grippers and guiding
units for material handling applications. As a result, the Company has enhanced
its ability to provide a full line of products for its customers, many of which
are increasingly looking to a single source provider of pneumatic components.
Net sales from actuators and specialty products constituted 38.8% of total net
sales for the fiscal year ended December 31, 1997, as compared to 20.7% in
1993. The Company's products have applications in almost every industry,
particularly those utilizing automated manufacturing processes. As Numatics has
broadened its product line, it has also expanded the number of markets it
serves. For example, in recent years the Company has developed customized
pneumatic components for applications in industries such as medical equipment
and semiconductor. Additionally, the Company has expanded its presence in
foreign markets through additional sales and distribution facilities.
Management believes this diversification could reduce the impact on the Company
of a downturn in any single industry or market.
BUSINESS STRATEGY
Expand Product Lines and Industries Served. The Company believes there are
numerous additional opportunities to build upon its successful product line
expansion. The Company is taking advantage of recent trends toward more
widespread automation, on-board electronics, non-lubricated (dry air) fluid
power systems and miniaturization by designing, manufacturing and marketing
products meeting such customer needs. The Company believes it is well-
positioned to capitalize on these opportunities because of its proven
engineering expertise, manufacturing capabilities and strong distribution
network.
Emphasize Optimizing Manufacturing Efficiencies. The Company has adopted
"lean manufacturing" and "kaizen" initiatives to improve quality, production
efficiencies and customer service by reducing waste, inventory levels, floor
space and lead times. The Company believes its commitment to continuous
improvement will further enhance its competitive position and allow the Company
to execute its growth strategy while minimizing the need for significant
additional capacity. Although in the relatively early stage of implementation,
the Company's lean manufacturing initiatives have already resulted in facility
consolidation, improved manufacturing throughput, increased on time shipping
performance and supplier rationalization. As an example, in 1997, the Company
moved the production of solenoids from its 12,250 square foot facility in
Angola, Indiana into 5,000 square feet within its Sandusky, Michigan facility.
This move allowed the Company to close its Angola facility with no decrease in
solenoid production.
Increase Global Presence. In response to existing customer needs and new
opportunities, the Company plans to continue to increase its presence
internationally. The Company believes the market for international sales of
pneumatic products is even larger than the U.S. market, particularly in Europe
and Asia. The Company already has established manufacturing plants in Germany
and Canada and sales and distribution facilities in Canada, England, Italy,
France, the Netherlands, Hungary, Taiwan and Mexico. The Company plans to add
distribution facilities in several more countries in Europe and believes it can
capture additional market share in Asia and South America, where the Company
currently has minimal presence.
3
<PAGE>
Pursue Selective Acquisitions. The Company's product line expansion has
primarily resulted from start-up operations. In some instances, however, the
Company has complemented existing product offerings through selective
acquisitions, such as its 1995 acquisition of Ultra Air Products, Inc. ("Ultra
Air"), a manufacturer of air preparation products. In 1995, the Company also
acquired a minority stock ownership interest in Univer S.p.A. ("Univer"),
Italy's largest pneumatic components manufacturer, which has allowed it, among
other things, to benefit from Univer's rodless cylinder technologies which have
worldwide applications. The Company intends to pursue selective strategic
acquisitions that can enhance its ability to deliver total pneumatic system
solutions.
MANAGEMENT AND OWNERSHIP
In 1990, the Company's senior management, led by current Chairman, CEO and
President, John Welker, purchased the Company from its founder William Carls
(the "1990 Buyout"). Mr. Welker, who has been President of the Company since
1983, and his management team held a 20.0% ownership interest in the Company
subsequent to the 1990 Buyout, with the remaining 80.0% held primarily by two
venture capital investors. The 1990 Buyout, for a total consideration of $85.0
million, was funded with $61.8 million in debt, $8.0 million in junior
subordinated convertible debt, $6.0 million in equity contributions and $9.2
million in cash.
By 1995, through performance incentives, senior management had earned an
additional 10.0% ownership interest, increasing its share of the Company's
common equity to 30.0%. Effective December 31, 1995, the Company redeemed the
remaining equity interests of the outside investors (the "1995
Recapitalization"), and the management team, again led by Mr. Welker, became
100.0% owners of the outstanding shares. The redemption of such equity
interests in the 1995 Recapitalization was funded with $97.3 million in debt,
including $30.0 million in senior subordinated notes (which were repaid with
proceeds of the Offering) with a detachable warrant for 6.0% of the Company's
common shares (which was exercised on March 24, 1998).
From December 31, 1991 through December 31, 1997, the Company's management
team has more than doubled net sales and operating income and greatly enhanced
the diversity of the Company's product lines and markets served, while
operating through a variety of economic conditions and leverage created from
the 1990 Buyout and the 1995 Recapitalization.
The Company's and Guarantors' principal executive offices are located at 1450
North Milford Road, Highland, Michigan 48357. The telephone number for each of
them is (248) 887-4111.
4
<PAGE>
THE NOTES OFFERING
The Notes................. The Notes were sold by the Issuer in the Offering
on March 23, 1998 to First Chicago Capital Markets,
Inc. and BancBoston Securities Inc. (the "Initial
Purchasers") and were subsequently resold by the
Initial Purchasers to qualified institutional
buyers pursuant to Rule 144A under the Securities
Act, to a limited number of other institutional
"accredited investors" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities
Act) and pursuant to offers and sales that occurred
outside the United States within the meaning of
Regulation S under the Securities Act.
Registration Rights In connection with the Offering, the Issuer and the
Agreement................. Guarantors entered into the Registration Rights
Agreement, which grants owners of the Notes certain
exchange and registration rights. The Exchange
Offer is intended to satisfy such exchange and
registration rights, which generally terminate upon
the consummation of the Exchange Offer.
THE EXCHANGE OFFER
Securities Offered........ $115,000,000 aggregate principal amount of 9 5/8%
Series B Senior Subordinated Notes due 2008.
The Exchange Offer........ $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of Notes.
As of the date hereof, $115,000,000 aggregate
principal amount of Notes are outstanding. The
Issuer will issue the Exchange Notes on or promptly
after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Issuer believes that Exchange
Notes issued pursuant to the Exchange Offer in
exchange for Notes may be offered for resale,
resold and otherwise transferred by any owner
thereof (other than any such owner which is an
"affiliate" of the Issuer within the meaning of
Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the
ordinary course of such owner's business and that
such owner does not intend to participate and has
no arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes.
Each broker-dealer that receives Exchange Notes for
its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales
of Exchange Notes received in exchange for Notes
where such Notes were acquired by such broker-
dealer as a result of market-making activities or
other trading activities. The Issuer has agreed
that for a period of one year after the Exchange
Offer is consummated it will make this Prospectus
available to any broker-dealer for use in
connection with any such resale.
5
<PAGE>
Any owner of Notes who tenders in the Exchange
Offer with the intention to participate, or for
the purpose of participating, in a distribution
of the Exchange Notes could not rely on the
position of the staff of the Commission
enunciated in Exxon Capital Corporation (April
13, 1988) and Morgan Stanley & Co., Incorporated
(June 5, 1991) or similar no-action letters and,
in the absence of an exemption therefrom, must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with the resale of the Exchange Notes.
Failure to comply with such requirements in such
instance may result in liability under the
Securities Act for which the seller of the
Exchange Notes is not indemnified by the Issuer
or any Guarantor.
In any state where the Exchange Offer does not
fall under a statutory exemption to such state's
blue sky laws, the Issuer has filed the
appropriate registrations and notices and has
made the appropriate requests to permit the
Exchange Offer to be made in such state.
Expiration Date...........
5:00 p.m., New York City time, on September 3,
1998, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer
is extended.
Interest on the Exchange
Notes and the Notes......
The Exchange Notes will bear interest from March
23, 1998, the date of issuance of the Notes that
are tendered in exchange for the Exchange Notes
(or the most recent interest payment date to
which interest on such Notes has been paid).
Accordingly, holders of Notes that are accepted
for exchange will not receive interest on the
Notes that is accrued but unpaid at the time of
tender, but such interest will be payable on the
first interest payment date after the Expiration
Date.
Conditions to the The Exchange Offer is subject to certain
Exchange Offer............ customary conditions, which may be waived by the
Issuer. See "The Exchange Offer--Conditions." No
federal or state regulatory requirements (other
than securities laws) must be complied with and
no approvals must be obtained in connection with
the Exchange Offer.
Procedures for Tendering Each holder of Notes (or, in the case of
Notes..................... interests in the Global Notes held by DTC, each
DTC participant listed in an official DTC proxy)
wishing to accept the Exchange Offer must
complete, sign and date the accompanying Letter
of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver the
Letter of Transmittal, or such facsimile,
together with the Notes and any other required
documentation, to the Exchange Agent at the
address set forth in the Letter of Transmittal.
By executing the Letter of Transmittal, such
holder or DTC participant will represent to the
Issuer and Guarantors that, among other things,
the holder or DTC participant or the person
receiving the Exchange Notes, whether or not such
person is the holder of the Notes or DTC
participant, is acquiring
6
<PAGE>
the Exchange Notes in the ordinary course of
business and neither the holder or DTC
participant nor any such other person has any
arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes. In lieu of physical delivery of the
certificates representing Notes, tendering DTC
participants may transfer Notes pursuant to the
procedure for book-entry transfer as set forth
under "The Exchange Offer--Book Entry Transfer;
ATOP."
Special Procedures for
Beneficial Owners........
Any beneficial owner whose Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such nominee promptly and
instruct such nominee to tender on such
beneficial owner's behalf. Such instructions
should be given in sufficient time to ensure that
the nominee will be able to take the necessary
steps to tender such Notes before the Expiration
Date.
Guaranteed Delivery Holders of Notes who wish to tender their Notes
Procedures................ and whose Notes are not immediately available or
who cannot deliver their Notes, the Letter of
Transmittal or any other documents required by
the Letter of Transmittal to the Exchange Agent
(or comply with the procedures for book-entry
transfer) prior to the Expiration Date must
tender their Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures."
Withdrawal Rights......... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date pursuant to the procedures described under
"The Exchange Offer--Withdrawals of Tenders."
Acceptance of Notes and
Delivery of Exchange
Notes.................... The Issuer will accept for exchange any and all
Notes that are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on
the Expiration Date. However, the Issuer reserves
the right to make any determination, in its sole
discretion, as to whether or not Notes have been
properly tendered. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer."
Federal Income Tax The issuance of the Exchange Notes to holders of
Consequences.............. the Notes pursuant to the terms set forth in this
Prospectus will not constitute an exchange for
federal income tax purposes. Consequently, no
gain or loss would be recognized by holders of
the Notes upon receipt of the Exchange Notes. See
"Certain Federal Income Tax Consequences of the
Exchange Offer."
Effect on Holders of As a result of the making of the Exchange Offer,
Notes..................... the Issuer and the Guarantors will have fulfilled
certain of their obligations under the
Registration Rights Agreement, and holders of
Notes who do not
7
<PAGE>
tender their Notes will generally not have any
further registration rights under the
Registration Rights Agreement or otherwise. Such
holders will continue to hold the untendered
Notes and will be entitled to all the rights and
subject to all the limitations applicable thereto
under the Indenture, except to the extent such
rights or limitations by their terms terminate or
cease to have further effectiveness as a result
of the Exchange Offer. All untendered Notes will
continue to be subject to certain restrictions on
transfer. Accordingly, if any Notes are tendered
and accepted in the Exchange Offer, the trading
market for the untendered Notes could be
adversely affected.
Exchange Agent............ U.S. Bank Trust National Association
SUMMARY OF TERMS OF EXCHANGE NOTES
The form and terms of the Exchange Notes are the same as the form and terms
of the Notes (which they replace) except that (i) the Exchange Notes have been
registered under the Securities Act and therefore will not bear legends
restricting the transfer thereof, and (ii) the holders of Exchange Notes
generally will not be entitled to further registration rights under the
Registration Rights Agreement, which rights generally will be satisfied when
the Exchange Offer is consummated. The Exchange Notes will evidence the same
debt as the Notes and will be entitled to the benefits of the Indenture. See
"Description of Exchange Notes."
Securities Offered........ $115,000,000 aggregate principal amount of 9 5/8%
Series B Senior Subordinated Notes due 2008 (the
"Exchange Notes").
Maturity Date............. April 1, 2008.
Interest Payment Dates.... Interest on the Exchange Notes will accrue at the
rate of 9 5/8% per annum, payable semi-annually in
cash in arrears on April 1 and October 1 of each
year, commencing October 1, 1998.
Optional Redemption....... On or after April 1, 2003, the Company may redeem
the Exchange Notes, at the redemption prices set
forth herein, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of
redemption. Notwithstanding the foregoing, at any
time prior to April 1, 2001, the Company may redeem
up to $40,250,000 of the aggregate principal amount
of the Notes and Exchange Notes with the net
proceeds of one or more public equity offerings of
the Company at a redemption price equal to 109.625%
of the principal amount thereof plus accrued and
unpaid interest and Liquidated Damages, if any, to
the date of redemption; provided that at least
$74,750,000 aggregate principal amount of the Notes
and Exchange Notes remains outstanding after each
such redemption and that any such redemption occurs
within 45 days of such equity offering. See
"Description of Exchange Notes--Optional
Redemption."
8
<PAGE>
Ranking...................
The Exchange Notes will be subordinated in right of
payment to all existing and future Senior Debt of
the Company, including all obligations under the
New Credit Facility, and pari passu in right of
payment to all existing and future subordinated
indebtedness of the Company. As of May 31, 1998 the
Company had approximately $44.6 million of Senior
Debt outstanding (including approximately $40.5
million of secured Senior Debt outstanding under
the New Credit Facility), and the Company had an
additional approximate $26.8 million of Senior Debt
available to be incurred under the New Credit
Facility, subject to borrowing base limitations. In
addition, the Company conducts certain operations
through foreign subsidiaries which will not
guarantee the Exchange Notes, and the Exchange
Notes will be effectively subordinated to all
liabilities of such subsidiaries (which aggregated
$11.9 million as of May 31, 1998). The Exchange
Notes and the Notes will rank equally with one
another.
Subsidiary Guarantees..... The Exchange Notes will be fully and
unconditionally, jointly and severally guaranteed
on a senior subordinated basis by all of the
Guarantors. The Subsidiary Guarantees will be
subordinated in right of payment to all Senior Debt
of the Guarantors to the same extent that the
Exchange Notes are subordinated to Senior Debt of
the Company, and pari passu in right of payment to
all existing or future senior subordinated
indebtedness of the Guarantors. Each Guarantor's
guarantee of the Exchange Notes will rank equally
with its guarantee of the Notes.
Change of Control......... Upon a Change of Control, each holder of Exchange
Notes will have the right to require the Company to
make an offer to purchase all of such holder's
Exchange Notes at a price equal to 101% of the
principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, to the
date of repurchase. See "Description of Exchange
Notes--Certain Covenants--Repurchase of Exchange
Notes at the Option of Holders upon a Change of
Control."
Certain Covenants......... The Indenture contains certain covenants which,
among other things, limit the ability of the
Company and its Restricted Subsidiaries to: (i) pay
dividends or make certain other distributions; (ii)
repurchase equity interests; (iii) prepay
subordinated Indebtedness; (iv) incur additional
Indebtedness and issue preferred stock; (v) incur
liens; (vi) merge or consolidate with any other
person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of
the assets of the Company; (vii) consummate certain
asset sales; (viii) enter into certain transactions
with affiliates; or (ix) enter into sale and
leaseback transactions. In addition, under certain
circumstances, the Company will be required to make
an offer to purchase the Exchange Notes at a price
equal to the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any,
to the date of purchase, with the proceeds of
certain asset sales. See "Description of Exchange
Notes."
9
<PAGE>
Exchange Offer;
Registration Rights......
Pursuant to the Registration Rights Agreement, the
Company and the Guarantors have agreed to: (i) file
with the Securities and Exchange Commission (the
"Commission") within 45 days of the consummation of
the Offering a registration statement with respect
to an offer to exchange the Notes for a new issue
of debt securities of the Company, including the
related Subsidiary Guarantees, registered under the
Securities Act, with terms substantially identical
to those of the Notes (which agreement has been
satisfied by filing the Registration Statement);
(ii) use their best efforts to cause the
Registration Statement to become effective within
135 days of the consummation of the Offering; and
(iii) cause the Exchange Offer to be consummated
within 30 business days after the Registration
Statement has been declared effective. In addition,
the Company and the Guarantors may be required to
provide a resale shelf registration statement for
the Notes and/or the Exchange Notes (the "Shelf
Registration Statement") under certain
circumstances. If the Company fails to satisfy
these registration obligations, the Company will be
required to pay Liquidated Damages to affected
holders of the Notes and/or Exchange Notes under
certain circumstances. See "Registration Rights;
Liquidated Damages."
RISK FACTORS
Holders of the Notes should carefully consider the information set forth
under the caption "Risk Factors" and all other information set forth in this
Prospectus in evaluating the Exchange Offer and an investment in the Exchange
Notes.
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary historical and pro forma financial data presented below have been
derived from the Company's audited consolidated financial statements for each
of the three years ended December 31, 1995, 1996 and 1997 and from its
unaudited consolidated financial statements for the three months ended March
31, 1998 and 1997. In the Company's opinion, the unaudited data presented for
the three months ended March 31, 1998 and 1997 reflect all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of that data. Results for the three-month periods ended March 31,
1998 and 1997 are not necessarily indicative of the results to be expected for
any other interim period or the year as a whole. The operating data for all
periods presented has been derived from the accounting and financial records of
the Company. The summary pro forma balance sheet data is included to show the
effect of the Offering and the application of the proceeds therefrom as if they
had occurred on the date of the balance sheet. The pro forma data is presented
for informational purposes only and may not be indicative of the financial
position of the Company that would have been obtained had the Offering and the
application of the proceeds therefrom in fact been completed as of those dates
or to project the results of operations or financial condition of the Company
for any future date or period. The information set forth below should be read
in conjunction with, and is qualified by reference to, "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's consolidated financial statements and the notes
thereto and other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------- ------------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................ $125,808 $132,015 $147,097 $36,065 $37,823
Cost of sales............ 77,967 81,676 93,785 22,921 23,665
-------- -------- -------- ------- -------
Gross profit........... 47,841 50,339 53,312 13,144 14,158
Marketing, engineering,
general and
administrative
expenses................ 29,567 28,253 31,830 7,648 7,847
Michigan Single Business
Tax..................... 872 885 945 232 (926)
-------- -------- -------- ------- -------
Operating income......... 17,402 21,201 20,537 5,264 7,237
Interest expense......... 5,040 15,999 16,470 3,991 4,273
Amortization of deferred
financing costs......... 520 764 551 138 137
Other expenses........... 1,436 535 1,348 776 542
-------- -------- -------- ------- -------
Income before income
taxes and extraordinary
item.................... 10,406 3,903 2,168 359 2,285
Income tax provision..... 4,837 1,895 904 273 883
-------- -------- -------- ------- -------
Income before
extraordinary item...... 5,569 2,008 1,264 86 1,402
Extraordinary item, net
of $2,534,000 of income
taxes (Extinguishment of
debt)................... -- -- -- -- (4,918)
-------- -------- -------- ------- -------
Net income (loss)...... $ 5,569 $ 2,008 $ 1,264 $ 86 $(3,516)
======== ======== ======== ======= =======
OTHER FINANCIAL DATA:
Cash provided by (used
in) operating
activities.............. $ 6,142 $ 13,096 $ 11,047 $ 2,335 $(1,005)
Cash used in investing
activities.............. (6,750) (5,392) (7,808) (1,761) (1,008)
Cash provided by (used
in) financing
activities.............. 201 (7,429) (3,391) (148) 2,959
EBITDA(1)................ 24,167 25,811 25,931 6,634 7,633
EBITDA margin(2)......... 19.2% 19.6% 17.6% 18.4% 20.2%
Depreciation and
amortization............ 6,413 4,489 5,000 1,276 1,459
Capital expenditures..... 3,744 5,594 7,881 1,761 1,008
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ---------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.............................. $ 27,469 $ 38,665
Total assets................................. 98,535 107,135
Total debt................................... 142,756 162,537
Total shareholders' equity (deficit)(3)...... (69,930) (76,357)
F</TABLE>
11
<PAGE>
- --------
(1) "EBITDA" represents the sum of operating income plus depreciation and
amortization (less amortization of deferred financing costs) and Michigan
Single Business Tax. EBITDA for the year ended December 31, 1997 was
adversely affected by special charges consisting of: (a) fees related to a
onetime lean manufacturing consulting project of $1.1 million; (b) costs
related to an unsuccessful acquisition attempt of $0.5 million; and (c)
facility closing and moving costs totaling $0.3 million. Information
regarding EBITDA is presented because management believes (i) it is a
widely accepted financial indicator of a company's ability to incur and
service debt, (ii) it reflects the non-cash effect on earnings of
amortization and depreciation expense, and (iii) it is the basis on which
compliance with certain of the financial covenants contained in the New
Credit Facility is principally determined. However, EBITDA does not purport
to represent cash provided by operating activities as reflected in the
Company's consolidated statements of cash flow, is not a measure of
financial performance under generally accepted accounting principles and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles. Also, the measure of EBITDA may not be comparable to similar
measures reported by other companies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Represents the ratio of EBITDA to net sales.
(3) Actual shareholders' deficit results primarily from the 1995
Recapitalization. Pro forma adjustments to shareholders' deficit result
from a write off of unamortized deferred financing costs of $3.4 million,
the unamortized original issue discount on Old Subordinated Notes of $2.5
million, a prepayment premium on the Old Subordinated Notes of $1.7 million
and a dividend to shareholders of $6.0 million.
12
<PAGE>
RISK FACTORS
Holders of Notes should carefully consider the Risk Factors set forth below
prior to tendering their Notes for Exchange Notes in the Exchange Offer. This
Prospectus, including the "Summary," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" sections,
includes forward-looking statements. See "Cautionary Statements Regarding
Forward-Looking Statements" above. Although the Company believes that its
plans, intentions and expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such plans,
intentions or expectations will be achieved. Important factors that could
cause actual results to differ materially from those included in or suggested
by any forward-looking statements are set forth below and elsewhere in this
Prospectus. All forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
Risk Factors set forth below.
LEVERAGE
The Company is highly leveraged. On May 31, 1998, the Company had total
indebtedness of approximately $159.6 million and an accumulated deficiency of
approximately $79.0 million. As of May 31, 1998, the aggregate Senior Debt of
the Company (including borrowings under the New Credit Facility) was
approximately $44.6 million, and approximately $26.8 million would have been
available for additional borrowing under the New Credit Facility, subject to
borrowing base limitations. All outstanding Senior Debt was owed by the
Company and its German and Canadian subsidiaries and none by the Guarantors
(except that the Guarantors have guaranteed the Company's borrowings under the
New Credit Facility). The Indenture permits the incurrence of additional
indebtedness, including Senior Debt, by the Company and its subsidiaries in
the future, subject to certain limitations. See "Capitalization," "Selected
Consolidated Financial Information" and "Description of Exchange Notes."
Historically, the Company has utilized cash from operations and borrowings
under its credit facilities to satisfy its operating and capital needs and to
service its indebtedness. The Company's current annual debt service
requirement is approximately $17.0 million.
The Company's ability to make scheduled payments of principal of, or to pay
the interest or Liquidated Damages, if any, on or to refinance its
indebtedness (including the Exchange Notes) will depend on its future
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond its control. Based upon the Company's current level of operations and
future business which has been awarded, management believes that cash flow
from operations and available cash, together with available borrowings under
the New Credit Facility, will be adequate to meet the Company's future
liquidity needs until the scheduled expiration of the New Credit Facility, at
which time the Company would expect to replace the New Credit Facility. There
can be no assurance that the Company's business will generate sufficient cash
flow from operations, that anticipated growth opportunities and operating
improvements will be realized or that future borrowings will be available
under the New Credit Facility in an amount sufficient to enable the Company to
service its indebtedness, including the Exchange Notes, or to fund its other
liquidity needs. The New Credit Facility, the term loans thereunder and the
IRB mature prior to the maturity of the Exchange Notes, and there can be no
assurance that the Company will be able to replace the New Credit Facility, or
refinance any other indebtedness, on commercially reasonable terms or at all.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
The degree to which the Company is leveraged could have important
consequences to holders of the Exchange Notes, including, but not limited to:
(i) making it more difficult for the Company to satisfy its obligations with
respect to the Exchange Notes, (ii) increasing the Company's vulnerability to
general adverse economic and industry conditions, (iii) limiting the Company's
ability to obtain additional financing to fund future working capital, capital
expenditures and other general corporate requirements, or to fund
acquisitions, (iv) requiring the dedication of a substantial portion of the
Company's cash flow from operations to the payment of principal of, and
interest on, its indebtedness, thereby reducing the availability of such cash
flow to fund
13
<PAGE>
working capital, capital expenditures, research and development or other
general corporate purposes, (v) limiting the Company's flexibility in planning
for, or reacting to, changes in its business and the industries it serves, and
(vi) placing the Company at a competitive disadvantage compared to less
leveraged competitors. In addition, the Indenture and the New Credit Facility
contain financial and other restrictive covenants that limit the ability of
the Company to, among other things, borrow additional funds. Failure by the
Company to comply with such covenants could result in an event of default
which, if not cured or waived, could have a material adverse effect on the
Company. See "Description of Exchange Notes" and "Description of Other
Indebtedness--New Credit Facility."
SUBORDINATION
The Note are, and the Exchange Notes will be, subordinated in right of
payment to all current and future Senior Debt of the Company, and the
Subsidiary Guarantees of the Notes are, and the Subsidiary Guarantees of the
Exchange Notes will be, subordinated in right of payment to all current and
future Senior Debt of the Guarantors. In addition, the New Credit Facility
(which constitutes Senior Debt of the Company and the Guarantors' guarantees
of which constitute Senior Debt of the Guarantors) is secured by substantially
all of the assets of the Company and its domestic subsidiaries, as well as all
of the outstanding capital stock of the domestic subsidiaries of the Company
and 66% of the capital stock of the Company's foreign subsidiaries. Upon any
distribution to creditors of the Company or any Guarantor in a liquidation or
dissolution of the Company or any Guarantor or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or such Guarantor or its property, the holders of Senior Debt of the
Company or such Guarantor, respectively, will be entitled to be paid in full
before any payment may be made with respect to the Exchange Notes or the
related Subsidiary Guarantee. In addition, the subordination provisions of the
Indenture provide that payments with respect to the Exchange Notes and the
Subsidiary Guarantees will be blocked in the event of a payment default on
Designated Senior Debt (as defined) and may be blocked for up to 179 days each
year in the event of certain non-payment defaults on Designated Senior Debt.
In the event of a bankruptcy, liquidation or reorganization of the Company,
holders of the Notes and Exchange Notes will participate ratably with all
holders of subordinated indebtedness of the Company that is deemed to be of
the same class as the Notes and Exchange Notes, and potentially with all
general creditors of the Company other than holders of Senior Debt, based upon
the respective amounts owed to each holder or creditor, in the remaining
assets of the Company. In any of the foregoing events, there can be no
assurance that the Company or the Guarantors would have sufficient assets to
pay amounts due on the Notes and Exchange Notes. As a result, holders of
Exchange Notes may receive less, ratably, than the holders of other debt of
the Company or of a Guarantor, including Senior Debt.
The Company derives a significant portion of its revenue from its foreign
subsidiaries, which will not guarantee the Exchange Notes. Holders of
indebtedness of, and trade creditors of, such foreign subsidiaries of the
Company would generally be entitled to payment of their claims from the assets
of the affected subsidiaries before such assets were made available for
distribution to the Company. The Indenture permits the incurrence of
substantial additional indebtedness by such foreign subsidiaries and permits
investments by the Company in such subsidiaries. In the event of a bankruptcy,
liquidation or reorganization of a subsidiary that does not guarantee the
Exchange Notes, holders of any of such subsidiary's indebtedness will have a
claim to the assets of the subsidiary that is prior to the Company's interest
in those assets. As of May 31, 1998, the total liabilities of subsidiaries
that will not guarantee the Exchange Notes was $11.9 million.
As of May 31, 1998, the aggregate Senior Debt of the Company (including
borrowings under the New Credit Facility) was approximately $44.6 million, and
approximately $26.8 million would have been available for additional borrowing
under the New Credit Facility, subject to borrowing base limitations. All
outstanding Senior Debt was owed by the Company and its German and Canadian
subsidiaries and none by the Guarantors (except that the Guarantors have
guaranteed the Company's borrowings under the New Credit Facility). The
Indenture permits the incurrence of additional indebtedness, including Senior
Debt, by the Company and its subsidiaries in the future, subject to certain
limitations. See "Description of Exchange Notes--Certain Covenants--Incurrence
of Indebtedness and Issuance of Preferred Stock" and "Description of Other
Indebtedness--New Credit Facility."
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RESTRICTIVE DEBT COVENANTS
The New Credit Facility contains a number of significant covenants. Among
other things, it restricts the ability of the Company and its subsidiaries to
(i) declare dividends or redeem or repurchase capital stock, (ii) prepay,
redeem or purchase debt, including the Exchange Notes, (iii) incur liens and
engage in sale-leaseback transactions, (iv) make loans and investments, (v)
incur additional indebtedness, (vi) amend or otherwise alter debt and other
material agreements, (vii) make capital expenditures, (viii) engage in
mergers, acquisitions and asset sales, (ix) enter into transactions with
affiliates and (x) alter the business it conducts. There can be no assurance
that those restrictive covenants will not adversely affect the Company's
ability to operate its business. In addition, the New Credit Facility contains
restrictive covenants and requires the Company to maintain specified financial
ratios and satisfy certain financial tests. If the Company is unable to meet
those tests or is otherwise unable to borrow under the New Credit Facility due
to a default or failure to meet certain specified borrowing base prerequisites
for borrowing, the Company could be materially adversely affected.
COST OF RAW MATERIALS
The principal raw materials on which the Company depends are stainless steel
and aluminum. Although these materials are available from a number of sources,
there can be no assurance that the Company will continue to receive these raw
materials on favorable terms. A substantial interruption in the Company's
supply of stainless steel or aluminum could have a material adverse effect on
the Company. In addition, although the prices of stainless steel and aluminum
have not been volatile in recent periods, and the Company has had success in
passing through any price increases to its customers, there can be no
assurance that there will not be rapid and significant changes in the prices
of these materials or that the Company will be able to pass on any such
increases to its customers.
COMPETITION
The Company operates in an industry which is highly competitive.
Manufacturers compete on the basis of quality, price, timeliness of delivery
and service. While the Company believes it is one of the largest suppliers of
directional control pneumatic valves in North America, there can be no
assurance that it will continue to compete successfully for this business or
that its actuators and specialty products will be successful in further
penetrating their respective markets. Many of the Company's competitors are
significantly larger and have greater financial and other resources than the
Company. See "Business--Competition."
DEPENDENCE ON SENIOR MANAGEMENT AND CONTROLLING SHAREHOLDER
The Company's continued success will be substantially dependent upon the
efforts of Mr. John Welker, its Chairman, President and Chief Executive
Officer, and of the other members of its senior management team. The Company
maintains $15.0 million of key-man life insurance on the life of Mr. Welker.
The Company could be adversely affected, however, if Mr. Welker were unwilling
or unable to continue to be employed by the Company. Mr. Welker owns over
74.0% and controls the vote of 94.0% of the Company's outstanding shares. As a
result, he is in a position to elect the Company's Board of Directors and to
control its management, policies and operations. Mr. Welker does not owe
fiduciary duties to the holders of the Exchange Notes when acting in his
capacity as a shareholder. In addition, it is an event of default under the
New Credit Facility if Mr. Welker ceases to be the President and Chief
Executive Officer of the Company or ceases to have the ability to elect a
majority of its directors and if he is not replaced by a person satisfactory
to the New Credit Facility lenders. See "Management and Directors," "Security
Ownership of Certain Beneficial Owners and Management" and "Description of
Other Indebtedness--New Credit Facility."
FOREIGN OPERATIONS AND CURRENCY FLUCTUATIONS
International sales accounted for approximately 32.4% of the Company's 1997
net sales, and international assets accounted for approximately 28.2% of its
total assets as of March 31, 1998. International sales and operations are
subject to significant risks, including political and economic instability,
restrictive trade policies,
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economic conditions in local markets, the imposition of product tariffs and
the burden of complying with a wide variety of international and U.S. export
laws. Additionally, to the extent the Company's net sales and expenses are
denominated in currencies other than U.S. dollars, changes in exchange rates
could have a material adverse impact on the Company. Approximately 32.1% of
the Company's net sales and approximately 22.8% of its expenses for 1997 are
denominated in currencies other than U.S. dollars. The Company currently
engages only in limited currency hedging programs because its international
assets and liabilities in a given geographic area are denominated in
substantially the same currencies.
INTELLECTUAL PROPERTY PROTECTION
The Company relies on unpatented proprietary technology to produce its core
products, particularly its "lapped spool and sleeve" valve manufacturing
technology, and there can be no assurance that others may not independently
develop the same or similar technology or otherwise obtain access to the
Company's unpatented technology. To protect its trade secrets and other
proprietary information, the Company requires employees, consultants, advisors
and collaborators who have access to this technology to enter into
confidentiality agreements and limits access to certain of its proprietary
processes. There can be no assurance that these agreements or procedures will
provide meaningful protection for the Company's trade secrets, know-how or
other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other
proprietary information. If the Company is unable to maintain the proprietary
nature of its technology, particularly its "lapped spool and sleeve" valve
manufacturing technology, the Company could be materially adversely affected.
POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES
The Company's operations are subject to various foreign, federal, state and
local environmental laws, ordinances and regulations, including those
governing discharges into the air and water, the storage, handling and
disposal of solid and hazardous wastes, the remediation of soil and
groundwater contaminated by petroleum products or hazardous substances or
wastes and the health and safety of employees ("Environmental Laws"). The
nature of the Company's current and former operations and the history of
industrial uses at some of its facilities expose the Company to the risk of
liabilities or claims with respect to environmental and related worker health
and safety matters. The Company is currently engaged in a ground water
remediation program at its site located on North Milford Road in Highland,
Michigan (for which the Company has spent approximately $110,000 annually over
the last two years and expects to spend approximately $70,000 annually for
approximately ten additional years). The Company has recorded a reserve for
these future expenditures, which at December 31, 1997 was approximately
$700,000, which the Company believes will be adequate to complete this
remediation. Although the cost of this cleanup is currently expected to be
relatively modest, continued compliance with Environmental Laws, stricter
interpretations of or amendments to such laws or more vigorous enforcement
policies by regulatory agencies may require material expenditures by the
Company, this site or others. See "Business--Environmental Matters."
In addition, under certain Environmental Laws a current or previous owner or
operator of property may be liable for the costs of removal or remediation of
certain hazardous substances or petroleum products on, under or in such
property, without regard to whether the owner or operator knew of, or caused,
the presence of the contaminants, and regardless of whether the practices that
resulted in the contamination were legal at the time they occurred. The
presence of, or failure to remediate properly, such substances may adversely
affect the ability to sell or rent such property or to borrow using such
property as collateral. Most of the Company's facilities have been in
operation for many years, and several of such facilities have undergone little
or no invasive testing to determine the presence or absence of environmental
contamination. Persons who generate, arrange for the disposal or treatment of,
or dispose of hazardous substances may be liable for the costs of
investigation, remediation or removal of such hazardous substances at or from
the disposal or treatment facility, regardless of whether such facility is
owned or operated by such person. Finally, the owner of a site may be subject
to common law claims by third parties based on damages and costs resulting
from environmental contamination emanating from a site.
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The Company cannot predict what Environmental Laws will be enacted in the
future, how existing or future Environmental Laws will be administered or
interpreted or what environmental conditions may be found to exist on its
properties. Compliance with more stringent Environmental Laws, as well as more
vigorous enforcement policies of the regulatory agencies or stricter
interpretation of those Laws, and discovery of new conditions may require
additional expenditures by the Company. There can be no assurance that one or
more of the foregoing will not have a material adverse affect on the Company.
FRAUDULENT CONVEYANCE AND LIMITATIONS ON AMOUNT GUARANTEED
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer or conveyance law, if, among other
things, the Company or any Guarantor, at the time it incurred the indebtedness
evidenced by the Notes and Exchange Notes, the Indenture, or its Subsidiary
Guarantee, (i) (a) was or is insolvent or rendered insolvent by reason of such
occurrence or (b) was, is, or was about to be, engaged in a business or
transaction for which the assets remaining with the Company or such Guarantor
constituted unreasonably small capital or (c) intended or intends to incur, or
believed or believes that it would incur, debts beyond its ability to pay such
debts as they mature, and (ii) the Company, or such Guarantor, received or
receives less than reasonably equivalent value or fair consideration for the
incurrence of such indebtedness, then the Notes and Exchange Notes, the
Indenture and a Subsidiary Guarantee, and any pledge or other security
interest securing such indebtedness, could be voided or avoided, or claims in
respect of the Notes and Exchange Notes, the Indenture or a Subsidiary
Guarantee could be subordinated to all other debts of the Company or such
Guarantor, as the case may be. Furthermore, applicable state law may limit the
amount which a Guarantor can lawfully guarantee pursuant to its Subsidiary
Guarantee. In addition, the payment of interest and principal by the Company
pursuant to the Notes and Exchange Notes or the payment of amounts by a
Guarantor pursuant to a Subsidiary Guarantee could be voided or avoided and
required to be returned to the person making such payment, or to a fund for
the benefit of the creditors of the Company or such Guarantor, as the case may
be.
The measures which a court would apply for purposes of determining the
foregoing considerations will vary depending upon the law applied in any
proceeding with respect to the foregoing. Generally, however, the Company or a
Guarantor would be considered insolvent and the issuance of the guarantee not
be permitted if (i) the sum of its debts, including contingent liabilities,
unliquidated liabilities and unmatured liabilities, were greater than the
saleable value of all of its assets at a fair valuation or if the present fair
saleable value of its assets were less than the amount that would be required
to pay its probable liability on its existing debts, including contingent
liabilities, as they become absolute and mature or (ii) it could not pay its
debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, the Company and each Guarantor believes that, after giving
effect to the indebtedness incurred in connection with the Offering and the
establishment of the New Credit Facility, it was not insolvent, did not have
unreasonably small capital for the business in which it is engaged and did not
incur debts beyond its ability to pay such debts as they mature. There can be
no assurance, however, as to what standard a court would apply in making such
determinations or that a court would agree with the Company's or the
Guarantors' conclusions in this regard. In addition, the liability of each
Guarantor under the Indenture is limited to the amount that will result in its
Subsidiary Guarantee not constituting a fraudulent conveyance or improper
corporate distribution, and there can be no assurance as to what standard a
court would apply in making a determination as to what would be the maximum
liability of each Guarantor. See "Description of Exchange Notes--Subsidiary
Guarantees."
POTENTIAL RELEASE OF GUARANTORS
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition,
by way of such a merger, consolidation or otherwise, of all of the capital
stock of such Guarantor) or the corporation acquiring the property (in the
event of a sale or other disposition of all of the assets of such Guarantor)
will be released and relieved of
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any obligations under its Subsidiary Guarantee. The obligation to apply the
Net Proceeds (as defined in the Indenture) of such sale or other disposition
in accordance with the applicable provisions of the Indenture, including
without limitation the provisions discussed under "Description of Exchange
Notes--Certain Covenants--Limitations on Asset Sales," shall continue and be
enforceable, however.
POSSIBLE INABILITY TO REPURCHASE EXCHANGE NOTES UPON A CHANGE OF CONTROL OFFER
Upon a Change of Control, the Company will be required to offer to
repurchase all outstanding Exchange Notes at 101% of the principal amount
thereof plus accrued and unpaid interest and Liquidated Damages, if any, to
the date of repurchase. However, there can be no assurance that sufficient
funds will be available at the time of any Change of Control to make any
required repurchases of Exchange Notes tendered or that restrictions in the
New Credit Facility will allow the Company to make such required repurchases.
In addition, the Company could enter into certain transactions, including
certain recapitalizations, that would not constitute a Change of Control but
would increase the amount of debt outstanding at such time. See "Description
of Exchange Notes--Certain Covenants--Repurchase of Exchange Notes at the
Option of Holders upon a Change in Control."
ABSENCE OF A PUBLIC MARKET
The Exchange Notes will constitute a new class of securities with no
established trading market. Although the Exchange Notes will generally be
permitted to be resold or otherwise transferred by nonaffiliates of the Issuer
without compliance with the registration requirements of the Securities Act,
there is no existing market for the Exchange Notes, and there can be no
assurance as to the liquidity of any markets that may develop for the Exchange
Notes, the ability of holders of the Exchange Notes to sell their Exchange
Notes or the prices at which holders would be able to sell their Exchange
Notes. Future trading prices of the Exchange Notes will depend on many
factors, including, among other things, prevailing interest rates, the
Company's operating results and the market for similar securities. The Initial
Purchasers have advised the Company that they currently intend to make a
market in the Exchange Notes. However, they are not obligated to do so, and
any market making may be discontinued at any time without notice. The Company
does not intend to apply for listing of the Exchange Notes on any securities
exchange.
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Exchange Agent
of such Notes, a properly completed and duly executed Letter of Transmittal
and all other required documents. Therefore, owners of the Notes desiring to
tender such Notes in exchange for Exchange Notes should allow sufficient time
to ensure timely delivery. The Issuer is under no duty to give notification of
defects or irregularities with respect to the tenders of Notes for exchange.
Notes that are not tendered or are tendered but not accepted will, following
the consummation of the Exchange Offer, continue to be subject to the existing
restrictions on transfer thereof, and on consummation of the Exchange Offer,
the registration rights under the Registration Rights Agreement generally will
terminate. In addition, any owner of Notes who tenders in the Exchange Offer
for the purpose of participating in a distribution of the Exchange Notes, in
the absence of an exemption therefrom, must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the Exchange Notes. Each broker-dealer that receives Exchange Notes
for its own account in exchange for Notes, where such Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. To the extent that Notes are tendered
and accepted in the Exchange Offer, the trading market for untendered and
tendered but unaccepted Notes could be adversely affected. See "The Exchange
Offer."
RESTRICTIONS ON TRANSFER
The Notes were offered and sold by the Issuer in a private offering exempt
from registration under the Securities Act and have been resold pursuant to
Rule 144A under the Securities Act, to a limited number of
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other institutional "accredited investors" (as defined in Rule 501(a)(1), (2),
(3) or (7) under the Securities Act) and pursuant to offers and sales that
occurred outside the United States within the meaning of Regulation S under
the Securities Act. As a result, the Notes may not be reoffered or resold by
purchasers except pursuant to an effective registration statement under the
Securities Act or pursuant to an applicable exemption from the requirement for
such registration, and the Notes bear legends reflecting those restrictions.
Each owner of Notes (other than any owner who is an affiliate of the Issuer)
who duly exchanges Notes for Exchange Notes in the Exchange Offer generally
will receive Exchange Notes that are freely transferable under the Securities
Act. Owners of Notes who participate in the Exchange Offer should be aware,
however, that if they accept the Exchange Offer for the purpose of engaging in
a distribution, the Exchange Notes may not be publicly reoffered or resold
without complying with the registration and prospectus delivery requirements
of the Securities Act. As a result, each owner of Notes accepting the Exchange
Offer will be deemed to have represented, by its acceptance of the Exchange
Offer, that it acquired the Exchange Notes in the ordinary course of business
and that it is not engaged in, and does not intend to engage in, a
distribution of the Exchange Notes.
The Notes currently may be sold pursuant to the restrictions set forth in
Rule 144A under the Securities Act or pursuant to another available exemption
under the Securities Act without registration under the Securities Act. To the
extent that Notes are tendered and accepted in the Exchange Offer, the trading
market for the untendered and tendered but unaccepted Notes could be adversely
affected.
COMPANY OPTION TO PURCHASE COMMON STOCK
The Company, Mr. Welker and all of the Company's other employee-shareholders
are parties to an agreement under which the Company has the option, but not
the obligation, to redeem the shares of any such shareholder upon the
happening of certain events, including death, disability or termination of
employment. This agreement covers 94.0% of the Company's shares currently
outstanding (100.0% at December 31, 1997). At December 31, 1997, the total
redemption value of these optioned shares was $55.0 million. The Indenture
contains substantial limitations on the Company's ability to redeem shares but
does permit redemptions, including limited cash redemptions, in certain cases.
See "Description of Exchange Notes--Certain Covenants--Restricted Payments."
If one of the triggering events were to occur, the Company's Board of
Directors would decide whether to exercise the option based on the facts and
circumstances existing at that time. In making such a determination, the Board
could be expected to consider the following factors, among others: the
limitations contained in the Indenture, the Company's ability to pay or
finance the redemption price, the Company's other anticipated cash needs and
other then existing business and economic conditions.
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THE EXCHANGE OFFER
The following discussion sets forth or summarizes what the Company believes
to be the material terms of the Exchange Offer, including those set forth in
the Letter of Transmittal distributed with this Prospectus. This summary is
qualified in its entirety by reference to the full text of the documents
underlying the Exchange Offer, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part and are incorporated
herein by reference. The term "Holder" with respect to the Exchange Offer
means any person in whose name the Notes are registered on the books of the
Issuer or any other person who has obtained a properly completed bond power
from the registered holder.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Notes were sold by the Issuer on the Issue Date and were subsequently
resold to qualified institutional buyers pursuant to Rule 144A under the
Securities Act, to a limited number of other institutional "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act) and pursuant to offers and sales that occurred outside the United States
within the meaning of Regulation S under the Securities Act. In connection
with the Offering, the Issuer and the Guarantors entered into the Registration
Rights Agreement, which requires, among other things, that the Issuer and the
Guarantors (i) file with the Commission a registration statement under the
Securities Act with respect to the Exchange Notes (which obligation has been
satisfied by the filing of the Registration Statement), (ii) use their best
efforts to cause such registration statement to become effective under the
Securities Act at the earliest possible time and in any event within 135 days
after the Issue Date and (iii) upon the effectiveness of that registration
statement, commence and consummate the Exchange Offer. A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement.
Any Notes tendered and exchanged in the Exchange Offer will reduce the
principal amount of Notes outstanding. Following the consummation of the
Exchange Offer, Holders of the Notes who did not tender their Notes generally
will not have any further registration rights under the Registration Rights
Agreement, and such Notes will continue to be subject to certain restrictions
on transfer. Accordingly, the liquidity of the market for such Notes could be
adversely affected. The Notes are currently eligible for sale pursuant to Rule
144A through the PORTAL System of the National Association of Securities
Dealers, Inc. Because the Issuer anticipates that most Holders will elect to
exchange their Notes for Exchange Notes due to the absence of restrictions on
the resale of Exchange Notes under the Securities Act, the Issuer anticipates
that the liquidity of the market for any Notes remaining after the
consummation of the Exchange Offer may be substantially limited.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Issuer will accept any and all Notes
validly tendered and not withdrawn prior to 5:00 p.m. New York City time on
the Expiration Date. The Issuer will issue $1,000 principal amount of Exchange
Notes in exchange for each $1,000 principal amount of outstanding Notes
accepted in the Exchange Offer. Holders may tender some or all of their Notes
pursuant to the Exchange Offer. However, Notes may be tendered only in
integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Notes except that (i) the Exchange Notes have been registered under the
Securities Act and hence will not bear legends restricting the transfer
thereof and (ii) the holders of the Exchange Notes generally will not be
entitled to certain rights under the Registration Rights Agreement, which
rights generally will terminate upon consummation of the Exchange Offer. The
Exchange Notes will evidence the same debt as the Notes and will be entitled
to the benefits of the Indenture.
Holders of Notes do not have any appraisal or dissenters' rights under the
Michigan Business Corporation Act or the Indenture in connection with the
Exchange Offer. The Issuer intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder, including Rule 14e-1 thereunder.
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The Issuer will be deemed to have accepted validly tendered Notes when, as
and if the Issuer has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering Holders for the
purpose of receiving the Exchange Notes from the Issuer.
If any tendered Notes are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth herein or otherwise,
the certificates for any such unaccepted Notes will be returned, without
expense, to the tendering Holder thereof as promptly as practicable after the
Expiration Date.
Holders who tender Notes in the Exchange Offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Notes pursuant to
the Exchange Offer. The Issuer will pay all charges and expenses, other than
transfer taxes in certain circumstances, in connection with the Exchange
Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time, on the
expiration date for the Exchange Offer set forth on the cover page of this
Prospectus unless the Issuer, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" will mean the latest date and
time to which the Exchange Offer is extended.
To extend the Exchange Offer, the Issuer will notify the Exchange Agent of
any extension by oral or written notice, followed by a public announcement
thereof no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
The Issuer reserves the right, in its reasonable judgment, (i) to delay
accepting any Notes, to extend the Exchange Offer or to terminate the Exchange
Offer if any of the conditions set forth below under
"--Conditions" shall not have been satisfied, by giving oral or written notice
of such delay, extension or termination to the Exchange Agent or (ii) to amend
the terms of the Exchange Offer in any manner. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as
practicable by a public announcement thereof. If the Exchange Offer is amended
in a manner determined by the Issuer to constitute a material change, the
Issuer will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered Holders, and depending
upon the significance of the amendment and the manner of disclosure to the
registered Holders, the Issuer will extend the Exchange Offer for a period of
five to ten business days if the Exchange Offer would otherwise expire during
such five to ten business-day period.
If the Issuer does not consummate the Exchange Offer or, in lieu thereof,
the Issuer does not file and cause to become effective the Shelf Registration
Statement within the time periods set forth herein, liquidated damages will
accrue and be payable to Holders of affected Notes in the amounts specified in
the Registration Rights Agreement ("Liquidated Damages"). See "Registration
Rights; Liquidated Damages."
Without limiting the manner in which the Issuer may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Issuer shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely
release to the Dow Jones News Service.
INTEREST ON EXCHANGE NOTES
The Exchange Notes will bear interest from the Issue Date (or the most
recent interest payment date to which interest on the Notes has been paid).
Accordingly, holders of Notes that are accepted for exchange will not receive
interest that is accrued but unpaid on the Notes at the time of tender, but
such interest will be payable on the first interest payment date after the
Expiration Date. Interest on the Exchange Notes will be payable semiannually
on each April 1 and October 1, commencing on October 1, 1998.
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PROCEDURES FOR TENDERING
Only a Holder of Notes (or, in the case of Global Notes held by DTC, a DTC
participant listed in an official DTC proxy) may tender such Notes in the
Exchange Offer. To tender in the Exchange Offer, a Holder or DTC participant
must complete, sign and date the Letter of Transmittal, or a facsimile
thereof, have the signatures thereon guaranteed if required by the Letter of
Transmittal and mail or otherwise deliver such Letter of Transmittal or such
facsimile, together with the Notes and any other required documents, to the
Exchange Agent so as to be received by the Exchange Agent at the address set
forth below prior to 5:00 p.m., New York City time, on the Expiration Date.
Delivery of the Notes may be made by book-entry transfer in accordance with
the procedures described below. Confirmation of such book-entry transfer must
be received by the Exchange Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Holder or DTC participant will
make to the Issuer and Guarantors the representation set forth below in the
second paragraph under the heading "--Resale of Exchange Notes."
The tender by a Holder or DTC participant and the acceptance thereof by the
Issuer will constitute an agreement between such Holder or DTC participant and
the Issuer in accordance with the terms and subject to the conditions set
forth herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER OR DTC PARTICIPANT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT
HOLDERS AND DTC PARTICIPANTS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE
AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE
SENT TO THE ISSUER. BENEFICIAL OWNERS MAY REQUEST THEIR RESPECTIVE BROKERS,
DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE
TRANSACTIONS FOR SUCH BENEFICIAL OWNERS.
Any beneficial owner whose Notes are held through a broker, dealer,
commercial bank, trust company or other nominee and who wishes to tender
should contact such nominee promptly and instruct such nominee to tender on
such beneficial owner's behalf. Such instructions should be given in
sufficient time to ensure that the nominee will be able to take the necessary
steps to tender such Notes before the Expiration Date.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined later
in this paragraph) unless the Notes tendered pursuant thereto are tendered (i)
by a registered Holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by a member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act (an "Eligible Institution").
If the Letter of Transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or
others acting in a fiduciary or representative capacity, such persons should
so indicate when signing, and unless waived by the Issuer, evidence
satisfactory to the Issuer of their authority to so act must be submitted with
the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Notes and withdrawal of tendered Notes will
be determined by the Issuer in its sole discretion, which determination will
be final and binding. The Issuer reserves the absolute right to reject any and
all Notes not properly tendered or any Notes the Issuer's acceptance of which
would, in the opinion of counsel for the Issuer, be unlawful. The
22
<PAGE>
Issuer also reserves the right to waive any defects, irregularities or
conditions of tender as to particular Notes. The Issuer's interpretation of
the terms and conditions of the Exchange Offer (including the instructions in
the Letter of Transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Notes must
be cured within such time as the Issuer determines. Although the Issuer
intends to notify Holders of defects or irregularities with respect to tenders
of Notes, none of the Issuer, any Guarantor, the Exchange Agent or any other
person will incur any liability for failure to give such notification. Tenders
of Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
BOOK-ENTRY TRANSFER; ATOP
The Issuer understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish an account with respect to the
Notes at DTC for the purpose of facilitating the Exchange Offer, and subject
to the establishment thereof, any financial institution that is a participant
in DTC may make book-entry delivery of the Notes by causing DTC to transfer
such Notes into the Exchange Agent's account with respect to the Notes in
accordance with DTC's procedures for such transfer.
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for the Book-Entry Facility Automated Tender Offer Program ("ATOP").
Accordingly, DTC participants listed on an official DTC proxy may
electronically transmit their acceptance of the Exchange Offer by causing DTC
to transfer Notes to the Exchange Agent in accordance with DTC's ATOP
procedures for transfer. DTC will then send an Agent's Message to the Exchange
Agent.
The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the confirmation of a book-entry
transfer, which states that DTC has received an express acknowledgement from
the participant in DTC tendering Notes which are the subject of such book-
entry confirmation, that such participant has received and agrees to be bound
by the terms of the Letter of Transmittal and that the Issuer and Guarantors
may enforce such agreement against the participant. In the case of an Agent's
Message relating to guaranteed delivery, the term means a message transmitted
by DTC and received by the Exchange Agent which states that DTC has received
an express acknowledgement from the participant in DTC tendering Notes that
such participant has received and agrees to be bound by the Notice of
Guaranteed Delivery.
Each DTC participant transmitting an acceptance of the Exchange Offer
through the ATOP procedures will be deemed to have agreed to be bound by the
terms of the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Notes and (i) whose Notes are not
immediately available, (ii) who cannot deliver their Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Notes and the principal amount of Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within three New York
Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof), together with the certificate(s)
representing the Notes (or a confirmation of book-entry transfer of such
Notes into the Exchange Agent's account at DTC) and any other documents
required by the Letter of Transmittal, will be deposited by the Eligible
Institution with the Exchange Agent; and
23
<PAGE>
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Notes in proper form for transfer (or a confirmation of book-entry transfer
of such Notes into the Exchange Agent's account at DTC) and all other
documents required by the Letter of Transmittal, are received by the
Exchange Agent within three New York Stock Exchange trading days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Notes in the Exchange Offer, a written or facsimile
transmission notice of withdrawal must be received by the Exchange Agent at
the address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Notes to be withdrawn (the "Depositor"), (ii)
identify the Notes to be withdrawn (including the certificate number(s) and
principal amount of such Notes or, in the case of Notes transferred by book-
entry transfer, the name and number of the account at DTC to be credited),
(iii) be signed by the Holder or DTC participant in the same manner as the
original signature on the Letter of Transmittal by which such Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee register the transfer of
such Notes into the name of the person withdrawing the tender and (iv) specify
the name in which any such Notes are to be registered, if different from that
of the Depositor. All questions as to the validity, form and eligibility
(including time or receipt) of such notices will be determined by the Issuer,
whose determination will be final and binding on all parties. Any Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer, and no Exchange Notes will be issued with respect thereto
unless the Notes so withdrawn are validly retendered. Any Notes which have
been tendered but which are not accepted for exchange will be returned to the
Holder thereof without cost to such Holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Notes may be retendered by following one of the procedures described
above under "--Procedures for Tendering" at any time prior to the Expiration
Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Issuer will not be
required to accept for exchange, or to exchange Exchange Notes for, any Notes,
and may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Notes, if:
(a) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted which, in the reasonable
judgment of the Issuer, might materially impair the ability of the Issuer
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Issuer; or
(b) any governmental approval has not been obtained, which approval the
Issuer, in its reasonable judgment, deems necessary for the consummation of
the Exchange Offer as contemplated hereby.
If the Issuer determines in its reasonable judgment that any of the
conditions are not satisfied, the Issuer may (i) refuse to accept any Notes
and return all tendered Notes to the tendering Holders, (ii) extend the
Exchange Offer and retain all Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of Holders to withdraw such
Notes (see "--Withdrawals of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Notes which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Issuer will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the registered
Holders, and
24
<PAGE>
depending upon the significance of the waiver and the manner of disclosure to
the registered Holders, the Issuer will extend the Exchange Offer for a period
of five to ten business days if the Exchange Offer would otherwise expire
during such five to ten business-day period.
EXCHANGE AGENT
U.S. Bank Trust National Association will act as Exchange Agent for the
Exchange Offer with respect to the Notes.
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal for the Notes and requests for
copies of Notice of Guaranteed Delivery should be directed to the Exchange
Agent, addressed as follows:
By Registered,
Certified, or Overnight By Hand: By First Class Mail:
Mail or Courier: U.S. Bank Trust N.A. U.S. Bank Trust N.A.
U.S. Bank Trust N.A. 4th Floor Bond Drop P.O. Box 64485
Attn: Specialized Window 180 East Fifth St. Paul, MN 55164-
Finance SPFT0414 Street 9549
180 East Fifth Street St. Paul, MN 55101
St. Paul, MN 55101
By facsimile:
612-244-1537
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Issuer. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telephone, facsimile or in person by employees of the Issuer
and its affiliates.
The Issuer has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or other persons
soliciting acceptances of the Exchange Offer. However, the Issuer will pay the
Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith
and pay other registration expenses, including fees and expenses of the
Trustee, filing fees, blue sky fees and printing and distribution expenses.
The Issuer will pay all transfer taxes, if any, applicable to the exchange
of the Notes pursuant to the Exchange Offer. If, however, Exchange Notes or
the Notes for principal amounts not tendered or accepted for exchange are to
be delivered to, or are to be issued in the name of, any person other than the
registered Holder of the Notes tendered, or if tendered Notes are registered
in the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of the Notes pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered Holder or any other
person) will be payable by the tendering Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Notes,
which is the aggregate principal amount of the Notes, as reflected in the
Company's accounting records on the date of exchange. Accordingly, no gain or
loss for accounting purposes will be recognized in connection with the
Exchange Offer. The expenses of the Exchange Offer will be amortized over the
term of the Exchange Notes.
RESALE OF EXCHANGE NOTES
Based on an interpretation by the staff of the Commission set forth in no-
action letters issued to third parties, the Issuer believes that Exchange
Notes issued pursuant to the Exchange Offer in exchange for Notes may be
25
<PAGE>
offered for resale, resold and otherwise transferred by any owner of such
Exchange Notes (other than any such owner which is an "affiliate" of the
Issuer within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such owner's business and such owner does not intend to participate,
and has no arrangement or understanding with any person to participate, in the
distribution of such Exchange Notes. Any owner of Notes who tenders in the
Exchange Offer with the intention to participate, or for the purpose of
participating, in a distribution of the Exchange Notes may not rely on the
position of the staff of the Commission enunciated in Exxon Capital Holdings
Corporation (April 13, 1988) and Morgan Stanley & Co., Incorporated (June 5,
1991) or similar no-action letters but rather must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. In addition, any such resale
transaction should be covered by an effective registration statement
containing the selling security holders information required by Item 507 of
Regulation S-K under the Securities Act. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Notes, where such Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, may be a statutory underwriter and must acknowledge
that it will deliver a prospectus meeting the requirements of the Securities
Act in connection with any resale of such Exchange Notes.
By tendering in the Exchange Offer, each Holder (or DTC participant, in the
case of tenders of interests in the Global Notes held by DTC) will represent
to the Issuer and Guarantors that, among other things, (i) the Exchange Notes
acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such Exchange Notes, whether or not
such person is the registered Holder or DTC participant, (ii) neither the
Holder or DTC participant nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes and (iii) the Holder or DTC participant and such other person
acknowledge that if they participate in the Exchange Offer for the purpose of
distributing the Exchange Notes (a) they must, in the absence of an exemption
therefrom, comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale of the Exchange Notes and
cannot rely on the no-action letters referenced above and (b) failure to
comply with such requirements in such instance could result in such Holder or
DTC participant or such other person incurring liability under the Securities
Act for which such Holder or DTC participant or such other person is not
indemnified by the Issuer or any Guarantor. Further, by tendering in the
Exchange Offer, each Holder or DTC participant and such other person that may
be deemed an "affiliate" (as defined under Rule 405 of the Securities Act) of
the Issuer will represent to the Issuer and Guarantors that such Holder or DTC
participant and such other person understand and acknowledge that the Exchange
Notes may not be offered for resale, resold or otherwise transferred by that
Holder or DTC participant or such other person without registration under the
Securities Act or an exemption therefrom.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Issuer and Guarantors
will have fulfilled one of their obligations under the Registration Rights
Agreement, and Holders of Notes who do not tender their Notes generally will
not have any further registration rights under the Registration Rights
Agreement or otherwise. Accordingly, any Holder of Notes that does not
exchange that Holder's Notes for Exchange Notes will continue to hold the
untendered Notes and will be entitled to all the rights and limitations
applicable thereto under the Indenture, except to the extent that such rights
or limitations, by their terms, terminate or cease to have further
effectiveness as a result of the Exchange Offer.
The Notes that are not exchanged for Exchange Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Notes may be
reoffered, resold, pledged or otherwise transferred only (i) to a person whom
the Holder reasonably believes is a qualified institutional buyer in a
transaction meeting the requirements of Rule 144A, (ii) in an offshore
transaction complying with Rule 903 or 904 of Regulation S, (iii) pursuant to
an exemption from registration under the Securities Act provided by Rule 144
thereunder (if available), (iv) to an institutional "accredited investor" (as
defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the
Securities Act) that, prior to such transfer, furnishes the Trustee with a
signed letter containing certain
26
<PAGE>
representations and agreements relating to such transfer and an opinion of
counsel acceptable to the Issuer that such transfer is in compliance with the
Securities Act, (v) in accordance with another exemption from the registration
requirements of the Securities Act (and in based upon an opinion of counsel
acceptable to the Issuer), (vi) to the Issuer or any of its subsidiaries,
(vii) pursuant to an effective registration statement under the Securities
Act, and, in each case, in accordance with all applicable securities laws of
the states of the United States. See "Risk Factors--Restrictions on Transfer."
OTHER
Participation in the Exchange Offer is voluntary, and Holders should
carefully consider whether to accept. Holders of the Notes are urged to
consult their financial and tax advisers in making their own decision on what
action to take.
The Issuer may in the future seek to acquire untendered Notes in open market
or privately negotiated transactions, through subsequent exchange offers or
otherwise. The Issuer has no present plans to acquire any Notes that are not
tendered in the Exchange Offer or to file a registration statement to permit
resales of any untendered Notes.
In any state where the Exchange Offer does not fall under a statutory
exemption to the blue sky rules, the Issuer by the date the Exchange Offer
commences will have filed the appropriate registrations and notices and will
have made the appropriate requests to permit the Exchange Offer to be made in
such state.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF THE EXCHANGE OFFER
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service (the "IRS") will not take a contrary view,
and no ruling from the IRS has been or will be sought. Legislative, judicial
or administrative changes or interpretations may be forthcoming that could
alter or modify the statements and conditions set forth herein. Any such
changes or interpretations may or may not be retroactive and could affect the
tax consequences to Holders. Certain Holders of the Notes (including insurance
companies, tax-exempt organizations, financial institutions, broker-dealers,
foreign corporations and persons who are not citizens or residents of the
United States) may be subject to special rules not discussed below. Each
Holder of a Note should consult its own tax adviser as to the particular tax
consequences of exchanging such Holder's Notes for Exchange Notes, including
the applicability and effect of any state, local or foreign tax laws.
The issuance of the Exchange Notes to Holders of the Notes pursuant to the
terms set forth in this Prospectus will not constitute an exchange for United
States federal income tax purposes. Consequently, no gain or loss would be
recognized by Holders of the Notes upon receipt of the Exchange Notes, and
ownership of the Exchange Notes will be considered a continuation of ownership
of the Notes. For purposes of determining gain or loss on the subsequent sale
or exchange of the Exchange Notes, a Holder's basis in the Exchange Notes
should be the same as such Holder's basis in the Notes exchanged therefor. A
Holder's holding period for the Exchange Notes should include the Holder's
holding period for the Notes exchanged therefor. The issue price, original
issue discount inclusion and other tax characteristics of the Exchange Notes
should be identical to the issue price, original issue discount inclusion and
other tax characteristics of the Notes exchanged therefor.
27
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1998 and gives effect to the issuance of the Notes and
the application of the net proceeds thereof on March 23, 1998. This table
should be read in conjunction with "Selected Consolidated Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's consolidated financial statements and
the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................ $ 1,647
========
Long-Term Debt:
New Credit Facility(1)................................. $ 41,268
Other Debt............................................. 3,162
The Notes.............................................. 115,000
--------
Total long-term debt................................... 159,430
Shareholders' equity (deficit)........................... (76,357)
--------
Total capitalization..................................... $ 83,073
========
</TABLE>
- --------
(1) The New Credit Facility provides for borrowings up to $70.0 million.
Availability under a portion of the New Credit Facility is subject to
satisfaction of a borrowing base requirement. See "Description of Other
Indebtedness--New Credit Facility."
28
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma statement of operations for the year ended
December 31, 1997 and the three months ended March 31, 1998 has been prepared
to illustrate the effect of the issuance of the Notes as if it had occurred at
the beginning of each period. The unaudited pro forma statement of operations
includes only the results of ongoing operations and excludes such impacts as
extraordinary items related to the early extinguishment of other debt.
The unaudited pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the results of operations
which may occur in the future or that would have occurred had the Notes been
issued on the date indicated, nor is it necessarily indicative of the
Company's future results of operations. The unaudited pro forma financial
information should be read in conjunction with the audited consolidated
financial statements of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED YEAR ENDED
DECEMBER 31, PRO FORMA DECEMBER 31,
1997 ADJUSTMENT 1997
------------ ---------- ------------
<S> <C> <C> <C>
Net sales............................... $147,097 $ -- $147,097
Cost and expenses:
Cost of products sold................. 93,785 -- 93,785
Marketing, engineering, general and
administrative....................... 31,830 -- 31,830
Single business tax................... 945 -- 945
-------- ------- --------
Operating income 20,537 -- 20,537
Other expenses:
Interest and other financing
expenses............................. 17,021 (2,121)(1) 14,900
Other................................. 1,348 -- 1,348
-------- ------- --------
Income before income taxes and
extraordinary item..................... 2,168 2,121 4,289
Income taxes............................ 904 742(3) 1,646
-------- ------- --------
Income before extraordinary item........ $ 1,264 $ 1,379 $ 2,643
======== ======= ========
<CAPTION>
PRO FORMA
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, PRO FORMA MARCH 31,
1998 ADJUSTMENT 1998
------------ ---------- ------------
<S> <C> <C> <C>
Net sales............................... $ 37,823 $ -- $ 37,823
Cost and expenses (credits):
Cost of products sold................. 23,665 -- 23,665
Marketing, engineering, general and
administrative....................... 7,847 -- 7,847
Single business tax................... (926) -- (926)
-------- ------- --------
Operating income........................ 7,237 -- 7,237
Other expenses:
Interest and other financing
expenses............................. 4,411 (283)(2) 4,128
Other................................. 542 -- 542
-------- ------- --------
Income before income taxes and
extraordinary item..................... 2,285 283 2,568
Income taxes............................ 883 99(3) 982
-------- ------- --------
Income before extraordinary item........ $ 1,402 $ 184 $ 1,586
======== ======= ========
</TABLE>
29
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(1) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Decrease interest expense--eliminate pay-in-kind ("PIK") interest
related to Senior Subordinated Notes due in 2004, which were
repaid with proceeds from issuance of the Notes (the "Old
Subordinated Notes")............................................. (7,313)
Decrease interest expense--eliminate amortization of debt issuance
costs and original issue discount related to the Company's former
senior credit facility and the Old Subordinated Notes............ (861)
Increase interest expense--record amortization of costs of
issuance of the Notes and of the New Credit Facility............. 500
Increase interest expense--record interest expense related to the
Notes............................................................ 11,069
Decrease interest expense--result of reduction in senior bank
debt............................................................. (5,516)
------
(2,121)
======
</TABLE>
(2) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Decrease interest expense--eliminate PIK interest related to the
Old Subordinated Notes........................................... $(1,665)
Decrease interest expense--eliminate amortization of debt issuance
costs and original issue discount related to the Company's former
senior credit facility and the Old Subordinated Notes............ (70)
Increase interest expense--record amortization of costs of
issuance of the Notes and of the New Credit Facility............. 152
Increase interest expense--record interest expense related to the
Notes............................................................ 2,729
Decrease interest expense--result of reduction in senior bank
debt............................................................. (1,429)
-------
$ (283)
=======
</TABLE>
(3) To record the income tax effects of the statement of operations adjustment.
30
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected historical financial data presented below have been derived
from the Company's audited consolidated financial statements for each of the
five years ended December 31, 1993, 1994, 1995, 1996 and 1997 and from its
unaudited consolidated financial statements for the three months ended March
31, 1998 and 1997. In the Company's opinion, the unaudited data presented for
the three months ended March 31, 1998 reflect all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of
that data. Results for the three-month periods ended March 31, 1998 and 1997
are not necessarily indicative of the results to be expected for any other
interim period or for the year as a whole. The operating data for all periods
presented has been derived from the accounting and financial records of the
Company. The information set forth below should read in conjunction with, and
is qualified by reference to, "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Company's
consolidated financial statements and the notes thereto and other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
------- -------- -------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $85,025 $104,649 $125,808 $132,015 $147,097 $ 36,065 $ 37,823
Cost of sales........... 52,921 64,284 77,967 81,676 93,785 22,921 23,665
------- -------- -------- -------- -------- -------- ---------
Gross profit.......... 32,104 40,365 47,841 50,339 53,312 13,144 14,158
Marketing, engineering,
general and
administrative
expenses............... 20,075 23,964 29,567 28,253 31,830 7,648 7,847
Michigan Single Business
Tax(1)................. 662 708 872 885 945 232 (926)
------- -------- -------- -------- -------- -------- ---------
Operating income...... 11,367 15,693 17,402 21,201 20,537 5,264 7,237
Interest expense........ 4,370 2,905 5,040 15,999 16,470 3,991 4,273
Amortization of deferred
financing costs........ 173 131 520 764 551 138 137
Other (income)
expenses............... 818 (119) 1,436 535 1,348 776 541
------- -------- -------- -------- -------- -------- ---------
Income before income
taxes and extraordinary
items.................. 6,006 12,776 10,406 3,903 2,168 359 2,285
Income tax provision.... 2,237 5,358 4,837 1,895 904 273 883
------- -------- -------- -------- -------- -------- ---------
Income before
extraordinary items.... 3,769 7,418 5,569 2,008 1,264 86 1,402
Extraordinary items, net
of income tax(2)....... 1,065 -- -- -- -- -- (4,918)
------- -------- -------- -------- -------- -------- ---------
Net income............ $ 2,704 $ 7,418 $ 5,569 $ 2,008 $ 1,264 $ 86 $ (3,516)
======= ======== ======== ======== ======== ======== =========
OTHER FINANCIAL DATA:
Cash provided by (used
in) operating
activities............. $11,035 $ 10,700 $ 6,142 $ 13,096 $ 11,047 $ 2,335 $ (1,005)
Cash used in investing
activities............. (2,420) (4,378) (6,750) (5,392) (7,808) (1,761) (1,008)
Cash provided by (used
in) financing
activities............. (8,504) (6,285) 201 (7,429) (3,391) (148) 2,959
EBITDA(3)............... 18,803 23,090 24,167 25,811 25,931 6,634 7,633
Depreciation and
amortization........... 8,585 6,820 6,413 4,489 5,000 1,276 1,459
Capital expenditures.... 3,004 4,379 3,744 5,594 7,881 1,761 1,008
Ratio of earnings to
fixed charges(4)....... 2.32x 5.21x 2.87x 1.23x 1.13x 1.09x 1.52x
BALANCE SHEET DATA:
Working capital......... $18,441 $ 22,495 $ 28,109 $ 28,189 $ 27,469 $ 38,665
Total assets............ 71,115 75,967 93,441 93,987 98,535 107,135
Total debt.............. 43,392 38,937 141,816 140,805 142,756 162,537
Total shareholders'
equity (deficit)(6).... 13,478 19,944 (72,637) (70,864) (69,930) (76,357)
Preferred stock
dividend(7)............ 1,023 1,023 1,200 -- -- --
</TABLE>
31
<PAGE>
- --------
(1) The Michigan Single Business Tax is a state tax which is calculated based
on operating activity and capital expenditure levels and is in lieu of a
state income tax.
(2) In 1993, represents write off of $1.1 million (net of income taxes) for
unamortized debt issuance costs. In the three months ended March 31, 1998,
represents $1.6 million (net of income taxes) write off of deferred
financing costs, $2.1 million (net of income taxes) for the amortization
of the previously unamortized discount on the Old Subordinated Notes and
$1.2 million (net of income taxes) for prepayment penalties associated
with the repayment of the Old Subordinated Notes.
(3) "EBITDA" represents the sum of operating income plus depreciation and
amortization (less amortization of deferred financing costs) and Michigan
Single Business Tax. 1997 EBITDA was adversely affected by special charges
consisting of: (a) fees related to a onetime lean manufacturing consulting
project of $1.1 million; (b) costs related to an unsuccessful acquisition
attempt of $0.5 million; and (c) facility closing and moving costs
totaling $0.3 million. Information regarding EBITDA is presented because
management believes (i) it is a widely accepted financial indicator of a
company's ability to incur and service debt, (ii) it reflects the non-cash
effect on earnings of amortization and depreciation expense, and (iii) it
is the basis on which compliance with certain of the financial covenants
contained in the New Credit Facility is principally determined. However,
EBITDA does not purport to represent cash provided by operating activities
as reflected in the Company's consolidated statements of cash flow, is not
a measure of financial performance under generally accepted accounting
principles and should not be considered in isolation or as a substitute
for measures of performance prepared in accordance with generally accepted
accounting principles. Also, the measure of EBITDA may not be comparable
to similar measures reported by other companies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(4) For purposes of calculating this ratio, "earnings" represents earnings
from continuing operations before income taxes plus fixed charges. "Fixed
charges" consists of interest expense and amortization of debt issuance
costs.
(5) Actual shareholders' deficit results primarily from the 1995
Recapitalization.
(6) Preferred stock was redeemed in 1995.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and the notes thereto, included elsewhere in this
Prospectus.
OVERVIEW
The Company is a leading global manufacturer and marketer of pneumatic
components. The Company's net sales are principally derived from the sale of
its products worldwide to over 9,000 customers, including a network of over
110 distributors. In recent years, the Company has diversified its revenue
base through its expanded product lines and increase in international sales.
In the U.S., the Company's products are principally sold through a network of
48 distributors who purchase and stock Numatics' products. In non-U.S.
markets, a majority of sales are derived from direct customers.
The Company's cost of sales consists primarily of raw materials, labor,
manufacturing overhead and purchased product costs. The Company has generally
had success in passing through price increases in raw materials to its
customers, although there can be no assurance that it will be able to continue
to do so. The Company has recently implemented "lean manufacturing" and
"kaizen" initiatives which it believes can provide benefits through reduced
waste, lower inventory levels and better utilization of plant floor space.
While the Company has experienced growth through its expanded product lines,
certain newer products generally have lower gross margins during periods of
development and introduction than the Company's traditional valve products.
Marketing, engineering, general and administrative expenses have been
impacted in recent years by, among other things, the opening of certain sales
offices in Europe, as the Company identifies opportunities to further grow its
international net sales. In 1997, marketing, engineering, general and
administrative expenses included costs related to a facility closure and the
move of a major facility.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
consolidated statements of income expressed as a percentage of net sales.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
-----------------------------------------------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales.................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................ 62.0 61.9 63.8 63.6 62.6
------- ------- ------- --------- ---------
Gross profit................. 38.0 38.1 36.2 36.4 37.4
Marketing, engineering,
general and administrative.. 23.5 21.4 21.6 21.2 20.7
Michigan Single Business
Tax......................... 0.7 0.6 0.6 0.6 (2.4)
------- ------- ------- --------- ---------
Operating income............. 13.8% 16.1% 14.0% 14.6% 19.1%
======= ======= ======= ========= =========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Net Sales. The Company's net sales for the first quarter of 1998 increased
4.9%, or $1.8 million, to $37.8 million from $36.1 million in 1997. Net sales
of traditional valve products increased .8% or $.2 million, and net sales of
other products increased 10.8%, or $1.6 million, including a 29.3% increase in
net sales of actuators. International net sales were unchanged despite the
strengthening of the U.S. dollar relative to the German mark and certain other
foreign currencies. North American net sales increased 5.9%, or $1.7 million.
Gross Profits. Gross profit for the first quarter of 1998 increased 7.7%, or
$1.0 million, to $14.2 million from $13.1 million in the first quarter of
1997. The increase in gross profit was attributable to higher net sales in the
1998 quarter compared to the 1997 quarter and lower production costs at
certain locations. As a percentage
33
<PAGE>
of net sales, gross profit increased to 37.4% in the first quarter of 1998
compared to 36.4% in the first quarter of 1997 due to production cost
reductions at various locations.
Marketing, Engineering, General and Administrative. Marketing, engineering,
and general and administrative expenses for the first quarter of 1998
increased 2.6%, or $.2 million, to $7.8 million from $7.6 million in the first
quarter of 1997. As a percentage of net sales, marketing, engineering, general
and administrative expenses decreased to 20.7% in the 1998 quarter compared to
21.2% in the 1997 quarter. The increase in marketing, engineering, general and
administrative expenses for 1998 was primarily attributable to additional
sales and engineering personnel at various locations.
Single Business Tax. Single business tax expense for the quarter was a
credit of $.9 million in 1998 compared to an expense of $.2 million in 1997.
This credit resulted from filing amended tax returns during March 1998 for the
years 1992 to 1996 due to a tax ruling that redefined the reported sales which
are included in the calculation of the tax, which favorably impacted the
Company.
Operating Income. As a result of the foregoing, operating income in the
first quarter of 1998 increased 37.5%, or $2.0 million, to $7.2 million from
$5.2 million in the first quarter of 1997. As a percentage of net sales,
operating income increased to 19.1% in the 1998 quarter compared to 14.6% in
the 1997 quarter.
Interest and Other Financing Expenses. Interest expense for the first
quarter increased 6.8%, or $.3 million, to $4.4 million from $4.1 million in
the first quarter of 1997 due to the increase in subordinated debt during 1998
as compared to 1997.
Other (Income) Expenses. Other expenses for the quarter decreased 30.2% or
$.3 million, to $.5 million from $0.8 million in the first quarter of 1997.
The unrealized foreign exchange loss was less during the 1998 quarter due to
the stabilization of the U.S. dollar against certain foreign currencies.
Extraordinary Item. The extraordinary item occurring during the first
quarter of 1998, which relates to the closing and application of the net
proceeds of the Notes offering and the entry into the New Credit Facility on
March 23, 1998, resulted from a write off of unamortized debt financing costs
of $1.6 million, net of taxes, relating to the refinancing of the Company's
former senior credit facility and the Old Subordinated Notes, a $2.1 million,
net of taxes, write off of previously unamortized discount on the Old
Subordinated Notes and a prepayment penalty of $1.2 million, net of taxes,
associated with repayment of the Old Subordinated Notes. The aggregate $4.9
million extraordinary expense is reported net of $2.5 million tax benefit.
Net Income (Loss). Due to the factors discussed above, net income decreased
$3.6 million, to a loss of $3.5 million from $.1 million.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net Sales. The Company's net sales for 1997 increased 11.4%, or $15.1
million, to $147.1 million from $132.0 million in 1996. Net sales of
traditional valve products increased 7.4%, or $6.2 million, and net sales of
other products increased 18.5%, or $8.9 million, including a 24.4% increase in
net sales of actuators. International net sales increased 19.9%, or $7.9
million despite the strengthening of the U.S. dollar relative to the German
mark and certain other foreign currencies. North American net sales increased
7.8%, or $7.2 million.
Gross Profit. Gross profit for 1997 increased 5.9%, or $3.0 million, to
$53.3 million from $50.3 million in 1996. The increase in gross profit was
attributable to higher net sales in 1997 compared to 1996. As a percentage of
net sales, gross profit declined to 36.2% in 1997 compared to 38.1% in 1996.
The decline in gross profit percentage was primarily the result of pricing
pressures on product sales at the Company's European operations due to
difficult economic conditions in Europe. Additionally, costs associated with a
facility move and new product startup costs contributed to the lower gross
margin percentage in 1997.
Marketing, Engineering, General and Administrative. Marketing, engineering,
general and administrative expenses for 1997 increased 12.7%, or $3.6 million,
to $31.8 million from $28.3 million in 1996. As a percentage of net sales,
marketing, engineering, general and administrative expenses increased to 21.6%
in 1997 compared
34
<PAGE>
to 21.4% in 1996. The increase in marketing, engineering, general and
administrative expenses for 1997 was primarily attributable to expenses
associated with a special lean manufacturing project consulting fee, costs
related to the closure of a facility and the move of a facility. The remainder
of the increase was principally due to higher marketing and engineering costs
to support the Company's product lines and geographic expansion.
Operating Income. Principally as a result of the foregoing, operating income
in 1997 decreased 3.1%, or $0.7 million, to $20.5 million from $21.2 million
in 1996. As a percentage of net sales, operating income decreased to 14.0% in
1997 compared to 16.1% in 1996.
Interest Expense. Interest expense increased 3.1%, or $0.5 million, to $16.5
million from $16.0 million in 1996 due to the issuance of additional Old
Subordinated Notes in 1997. This increase was partially offset by a reduction
of bank debt in 1997.
Other (Income) Expenses. Other expenses increased 152.0%, or $0.8 million,
to $1.3 million from $0.5 million in 1996. Included in other expenses for 1997
is a $1.2 million unrealized foreign exchange loss related to intercompany
loans.
Net Income. Due to the factors discussed above, net income decreased 37.1%,
or $0.7 million, to $1.3 million from $2.0 million in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Net Sales. The Company's net sales increased 4.9%, or $6.2 million, to
$132.0 from $125.8 million in 1995. The increase in net sales was due to the
growth in net sales of grippers and guiding units and other specialty
products, which collectively increased 15.5%, or $4.7 million, and an increase
in net sales of actuators, of 23.6%, or $2.5 million. These increases were
partially offset by a decrease in traditional valve products of 1.2%, or $1.0
million due to major customers' projects which were completed in 1995.
International net sales increased 1.4%, or $0.5 million, while North American
net sales increased 6.5%, or $5.7 million.
Gross Profit. Gross profit for 1996 increased 5.2%, or $2.5 million, to
$50.3 million from $47.8 million in 1995. The increase in gross profit was
attributable to higher net sales. As a percentage of net sales, gross profit
remained substantially unchanged at 38.1% in 1996 compared to 38.0% in 1995.
Marketing, Engineering, General and Administrative. Marketing, engineering,
general and administrative expenses decreased 4.4%, or $1.3 million, to $28.3
million from $29.6 million in 1995. As a percentage of sales, marketing,
engineering, general and administrative expenses decreased to 21.4% in 1996
compared to 23.5% in 1995. This decrease was primarily due to cost reduction
efforts by the Company.
Operating Income. Principally as a result of the foregoing, operating income
increased 21.8%, or $3.8 million, to $21.2 million from $17.4 million in 1995.
As a percentage of net sales, operating income increased to 16.1% in 1996 from
13.8% in 1995.
Interest Expense. Interest expense increased 217.4%, or $11.0 million, to
$16.0 million from $5.0 million in 1995, as a result of increased bank debt
and the issuance of Old Subordinated Notes related to the 1995
Recapitalization.
Other (Income) Expenses. Other expenses decreased 62.7%, or $0.9 million, to
$0.5 million from $1.4 million in 1995. In 1995, other expenses included an
accrual of $1.1 million for a deferred compensation plan which was adopted.
Net Income. Due to the factors described above, net income decreased 63.9%,
or $3.6 million, to $2.0 million from $5.6 million in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has utilized cash from operations and borrowings
under its credit facilities to satisfy its operating and capital needs and to
service its indebtedness.
35
<PAGE>
Cash provided by operating activities was $11.0 million in fiscal 1997
compared to $13.1 million in fiscal 1996. The decrease in cash provided by
operating activities was primarily the result of increased inventories
relating to initial inventory buildups associated with new product
introductions during 1997. Cash used in investing activities was $7.8 million
in fiscal 1997 compared to $5.4 million in fiscal 1996. The increase was
principally the result of greater capital expenditures, primarily due to the
construction of the new 68,000 square foot manufacturing facility for the
Actuator Division in Franklin, Tennessee. Net cash used in financing
activities was $3.3 million in fiscal 1997 compared to $7.3 million in fiscal
1996. This represents the net paydown of outstanding debt. The decreased
paydown in fiscal 1997 compared to fiscal 1996 was the result of increased
capital expenditures in 1997 relating to the new manufacturing facility in
Franklin, Tennessee.
Cash used by operating activities was $1.0 million in the first quarter of
1998 compared to cash provided by operating activity of $2.3 million in the
first quarter of 1997. The decrease in cash provided by operating activities
was primarily the result of increased inventories relating to buildups
associated with new product introductions. Cash used in investing activities
was $1.0 million in the first quarter of 1998 compared to $1.8 million in the
first quarter of 1997. The decrease was principally the result of greater
capital expenditures during the first quarter of 1997, primarily due to the
construction of the new manufacturing facility for the Actuator Division. Net
cash provided by financing activities was $3.0 million in the first quarter of
1998 compared to the use of $.1 million in the first quarter of 1997. This
represents the net results of the refinancing of the Company's debt.
Working capital was $38.7 million at March 31, 1998 compared to $27.5
million at December 31, 1997 and $28.2 million at December 31, 1996, and total
assets were $107.1 million at March 31, 1998 compared to $98.5 million at
December 31, 1997 and $94.0 million at December 31, 1996. The increase during
the first quarter was due to a $4.0 million decrease in the current portion of
long term debt, $3.1 million increase in accounts payable and taxes receivable
and an overall reduction in current liabilities.
Total debt outstanding was $162.5 million at March 31, 1998 compared to
$142.8 million at December 31, 1997 and $140.8 million at December 31, 1996.
The increase during the first quarter was caused by the costs of refinancing
the Company's prior senior debt and the Old Subordinated Notes and a dividend,
all of which were financed. The increase from December 31, 1996 to December
31, 1997 was caused by $7.3 million of payment-in-kind interest on the Old
Subordinated Notes in 1997, which was partially offset by payments made during
the year on bank debt.
The Company does not have any material commitments for capital expenditures.
The New Credit Facility includes (i) term loans of $29.0 million, $4.0
million, and $2.0 million to the Company and its German and Canadian
subsidiaries, respectively and (ii) revolving credit facilities, including
letters of credit, of $32.0 million and $3.0 million to the Company and its
German subsidiary, respectively. The revolving credit facilities permit each
of the Company and its German subsidiary to borrow up to the lesser of the
total amount of its respective revolving credit facility or a borrowing base
computed as a percentage of inventory and accounts receivable. Interest on
term loans to the Company's Canadian and German subsidiaries and the revolving
facilities accrues at an annual rate based on an applicable margin over NBD
Bank's prime rate, or LIBOR. The Company estimates that the borrowing base
limitation would have limited the Company's revolving credit availability to
approximately $25.9 million as of May 31, 1998. All borrowings under the
Revolving Credit Facilities will mature six years after the Issue Date. The
term loans are payable in quarterly installments which quarterly installments
in 1998 will aggregate $1.6 million, in 1999, $2.5 million, in 2000, $3.0
million, in 2001, $3.5 million, in 2002, $4.0 million, in 2003, $4.9 million,
in 2004, $8.4 million, and in 2005, $7.1 million. This credit facility, and
the guarantees thereof by the Company's domestic subsidiaries, is secured by
substantially all of the Company's domestic and, with respect to the loans to
the Company's foreign subsidiaries, substantially all the assets of such
subsidiaries. This credit facility includes certain financial and operating
covenants which, among other things, restrict the ability of the Company to
incur additional indebtedness, make investments and take other actions. See
"Description of Other Indebtedness--New Credit Facility".
36
<PAGE>
On March 26, 1998, the Company paid a dividend of $6.0 million in respect of
its common stock. The Company does not plan to pay additional dividends within
the forseeable future, and its ability to do so would in any event be
significantly limited by covenants in the Indenture and the New Credit
Facility.
Harvard Private Capital Holdings, Inc. ("Harvard") owns 6.0% of the
outstanding common stock of the Company. The Company has entered into an
agreement with Harvard which requires the Company to purchase those shares (i)
upon a change in control of the Company, (ii) upon Mr. Welker's no longer
performing the duties of Chief Executive Officer of the Company or failing to
devote substantially all of his professional time and efforts to the Company,
and (iii) on January 3, 2003, if certain liquidity events specified in such
agreement have not occurred. Upon the occurrence of any such event, the
Company will be required to purchase the shares for a price based on a
multiple of earnings less total indebtedness. Harvard has agreed with the
Company that to the extent the Company is prohibited by the Indenture or the
New Credit Facility from consummating any such purchase in cash, Harvard will
accept a note in consideration for the shares. Such note will rank pari passu
with the Exchange Notes, will contain covenants no more restrictive than those
of the Indenture, will mature one year after the Exchange Notes and will bear
interest at 18.0% per annum payable in cash increasing to 25.0% per annum on
the first anniversary of the note. These shares are presented in the Company's
March 31, 1998 balance sheet at the redemption value of $3.1 million. However,
there can be no assurance that the purchase of the Harvard shares in the
future would not have a material adverse effect on the Company.
The management shareholders of certain subsidiaries of the Company
(Numation, Numatech, Micro-Filtration, Ultra Air and Microsmith) are required
to sell their shares to the Company upon such shareholder's (i) death, (ii)
permanent disability or (iii) termination of employment with the Company. The
price to be paid by the Company for such shares will be determined by a
formula based upon a multiple of earnings of the relevant subsidiary. The
obligations of the Company to purchase such shares are not subject to any
limitations. However, the payment of these amounts may be prohibited by the
terms of the Indenture. Currently, the amounts that would be payable under
these agreements are not material to the Company. However, no assurance can be
given that these subsidiaries will not grow in such a manner that payment of
these amounts (or required payment of these amounts) would not violate the
terms of the Indenture or otherwise have a material adverse effect on the
Company.
The Company and its shareholders other than Harvard are parties to an
agreement under which the Company has the option, but not the obligation, to
redeem the shares of any such shareholder upon the happening of certain
events, including death, disability or termination of employment, at a formula
price based on a multiple of the Company's earnings. At December 31, 1997, the
total redemption value of these optioned shares was $55.0 million. The
Indenture contains substantial limitations on the Company's ability to redeem
shares for cash or promissory notes but does permit unlimited redemptions paid
for with "Management Notes" (as defined in the Indenture), which would be
subordinated to the Exchange Notes. See "Description of Exchange Notes--
Certain Covenants--Restricted Payments." This agreement covers 94.0% of the
Company's shares, 74.12% of which are held by Mr. Welker and the remainder of
which are held by other employees of the Company.
The Company's ability to make scheduled payments of principal of, or to pay
the interest or Liquidated Damages, if any, on, or to refinance, its
indebtedness (including the Exchange Notes), or to fund planned capital
expenditures will depend on its future performance, which, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond its control. Based upon the
current level of operations and anticipated cost savings and revenue growth,
management believes that cash flow from operations and available cash,
together with available borrowings under the New Credit Facility, will be
adequate to meet the Company's anticipated liquidity needs over the next year.
The Company may, however, need to refinance all or a portion of the principal
of the Exchange Notes on or prior to maturity. There can be no assurance that
the Company's business will generate sufficient cash flow from operations,
that anticipated revenue growth and operating improvements will be realized or
that future borrowings will be available under the New Credit Facility in an
amount sufficient to enable the Company to service its indebtedness, including
the Exchange Notes, or to fund its other liquidity needs. In addition, there
can be no assurance that the Company will be able to effect any such
refinancing on commercially reasonable terms or at all.
37
<PAGE>
Minimum contractual maturities of long-term liabilities for the years
following 1997 are as follows: 1998-- $7,060,000; 1999--$9,421,000; 2000--
$11,744,000; 2001--$14,097,000; thereafter--$100,434,000. In addition, the
Company is required to make a payment on the term loans under the New Credit
Facility in an amount equal to 50% of excess cash flow, as therein defined.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software 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.
Based on a recent assessment, the Company has determined that it will be
required to modify or replace significant portions of its software so that its
computer system will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue can be mitigated. However, if
such modifications and conversions are not made, or not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. The Company's total Year 2000 project cost and estimates to complete
include the estimated costs and time associated with the impact of a third
party's Year 2000 Issue, and are based on presently available information.
However, there can be no guarantee that the systems of other companies on
which the Company's systems rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company. The
Company has determined it has no exposure to contingencies related to the Year
2000 Issue for the products it has sold.
The Company will utilize both internal and external resources to reprogram,
or replace, and test the software for Year 2000 modifications. The Company
plans to complete the Year 2000 project not later than December 31, 1998. The
total remaining cost of the Year 2000 project is estimated at $3.0 million and
is being funded through operating cash flows. Of the total project cost,
approximately $2.5 million is attributable to the purchase of new software and
hardware which will be capitalized. The remaining $0.5 million will be
expensed as incurred over the next year. As of June 30, 1998, the Company has
expended approximately $1.0 million related to the assessment of, and
preliminary efforts in connection with, its Year 2000 project and the
development of a remediation plan.
The costs of the project and the date on which the Company plans to complete
the Year 2000 modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes, and similar
uncertainties.
38
<PAGE>
BUSINESS
THE COMPANY
The Company is a leading global manufacturer and marketer of pneumatic
valves and related products. According to the most recently available
information from the NFPA, the worldwide market, as of 1995, for all pneumatic
components was approximately $8.8 billion. The Company has the largest U.S.
market share, approximately 29.0%, in directional control, base mounted, 4-way
pneumatic valves. This type of valve is the Company's core product and
represents the largest segment of the pneumatic valve market in the United
States. The Company's products are key components in automated and other
manufacturing processes in industries as diverse as packaging, consumer
products, semiconductor and automotive. The Company's customers include over
9,000 direct customers and over 110 specialized distributors, with no one
customer representing more than 3.0% of total net sales in 1997. The Company's
products are used by such well known corporations as Stone Container, Johnson
& Johnson, Hewlett Packard and the Big 3 automotive manufacturers. The Company
has increased its net sales from 1993 to 1997 at a compound annual growth rate
of 14.7%, outpacing the overall pneumatic components industry growth rate in
that period. For the fiscal year ended December 31, 1997, the Company's net
sales and Adjusted EBITDA were $147.1 million and $27.9 million, respectively.
The Company provides a full line of pneumatic products to address its
customers' fluid power needs worldwide. In the late 1980s, the Company began
expanding its product line to complement its traditional leadership position
in valve products. The Company now engineers, manufactures and markets a wide
range of pneumatic components used in automated and other manufacturing
processes. The Company's complementary set of products includes valves,
actuators and specialty products. While the Company's net sales in core valve
products have increased significantly over the past five years, its overall
dependence on valves has decreased through its product diversification
strategy. For 1997, valves represented 61.2% of the Company's total net sales,
and actuators and specialty products represented 38.8%. Most of the Company's
speciality products are manufactured and sold by its subsidiaries. See "--
Products--Speciality Products" for more information about the businesses
conducted by the Company's operating subsidiaries.
Since its inception in 1945, Numatics has earned a reputation as an
innovator in engineering, manufacturing and new product development. The
Company's proprietary "lapped spool and sleeve" manufacturing technology for
pneumatic valves has been continuously refined and continues to provide a
competitive advantage in terms of product quality, reliability and durability.
By working closely with its customers to meet their specific needs, the
Company has introduced numerous industry firsts in manufacturing and new
product technologies.
The Company has greatly enhanced its international presence since it opened
a manufacturing facility in Germany in 1965. Other non-U.S. facilities include
a manufacturing plant in Ontario, Canada and sales and distribution facilities
in Canada, England, Italy, France, the Netherlands, Hungary, Taiwan and
Mexico. In 1997, the Company's products were sold internationally to customers
in over 45 countries. International net sales grew to $47.6 million in 1997
from $22.8 million in 1993.
COMPETITIVE STRENGTHS
Market Leadership Position. The Company has the largest U.S. market share,
approximately 29.0%, in its core product, directional control, base mounted,
4-way pneumatic valves. The Company believes it has become a leader primarily
because of its innovative engineering, consistently high quality products and
customer service. Additionally, the Company has significantly increased its
market presence in related products, including actuators and specialty
products such as FRLs and specialty valves. The Company believes its market
leadership position in valve products has benefitted and will continue to
benefit its non-valve product sales. Additionally, the Company believes it can
further enhance its position as a market leader by continuing to expand its
pneumatic product line to offer complete pneumatic systems to its customers.
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Innovative Manufacturing and Engineering Processes. The Company has
developed a long-standing reputation as a leader in pneumatic valve technology
due to its history of manufacturing, design and engineering innovations. The
Company's proprietary "lapped spool and sleeve" valve manufacturing
technology, first developed over 45 years ago and continuously refined, still
provides a competitive advantage in terms of product quality, durability and
reliability. As an example, a "lapped spool and sleeve" used by Proctor &
Gamble was still within original specifications (which are expressed in
millionths of an inch) after operating in excess of one billion cycles. The
Company closely guards the "lapped spool and sleeve" process and limits the
number of its own employees who have access to its proprietary production
method. Recent engineering innovations have included on-board electronics, new
generation direct solenoid products, die cast magnesium valves and the
development of smaller, more compact valves for specific applications. In
addition, the Company has developed a customer focused, empirically based,
analytic sizing system, called "Numasizing," which allows the Company to
assist customers in tailoring their pneumatic systems.
Strong Customer Relationships. The Company enjoys strong, interactive
relationships with its direct customers and distributors. While the Company
generally does not have binding long-term contracts with its direct customers,
many of them have been customers for substantial periods of time. The Company
has maintained relationships with the Big 3 automotive manufacturers for over
40 years, and its relationships with certain other customers, such as 3M and
Frito-Lay, have continued for over 20 years. The Company has established a
network of over 110 distributors worldwide, including 78 in North America, 14
in Europe, 14 in Asia and 6 in South America. These distributors have been
identified by the Company as specialists in fluid power technology. The
Company's arrangements with its North American distributors require them,
among other things, to carry exclusively the Company's pneumatic valves among
their overall product offerings. A number of distributors have been customers
of the Company for at least 40 years, with the average tenure of the Company's
U.S. distributors being 20 years. Since 1990, no U.S. distributor has
voluntarily discontinued the Numatics product line in favor of a competitor's
product. The Company holds periodic distributor meetings and intensive
training sessions to enhance communication, introduce new products and discuss
strategy. The distributors provide service support and application knowledge
to customers, which gives Numatics a competitive advantage in introducing new
products. The Company believes its expanded product line has further enhanced
its already strong distributor network and its relationships with direct
customers.
All of the Company's distributors in North America and Europe have formal
written agreements, and substantially all of its distributors in other parts
of the world are parties to such agreements. All of these agreements provide
for the purchase of the Company products by the distributor at specified
prices for resale to the distributors' customers, and the agreements with
North American distributors also provide for their acting as sales
representatives to arrange direct sales by the Company (for which the
distributors receive specified commissions). Most of the Company's distributor
agreements have specified terms of one year, though a few of its most
successful distributors have five-year agreements. All of the agreements are
terminable by either party, with or without cause, upon specified notice (30
days for North American distributors and 60 days for others).
Diversity of Products and Markets. In recent years, the Company has
introduced several products which complement its traditional pneumatic valve
business. These products are actuators and specialty products, such as FRLs
and other air preparation equipment, specialty valves and grippers and guiding
units for material handling applications. As a result, the Company has
enhanced its ability to provide a full line of products for its customers,
many of which are increasingly looking to a single source provider of
pneumatic components. Net sales from actuators and specialty products
constituted 38.8% of total net sales for the fiscal year ended December 31,
1997, as compared to 20.7% in 1993. The Company's products have applications
in almost every industry, particularly those utilizing automated manufacturing
processes. As Numatics has broadened its product line, it has also expanded
the number of markets it serves. For example, in recent years the Company has
developed customized pneumatic components for applications in industries such
as medical equipment and semiconductor. Additionally, the Company has expanded
its presence in foreign markets through additional sales and distribution
facilities. Management believes this diversification could reduce the impact
on the Company of a downturn in any single industry or market.
40
<PAGE>
BUSINESS STRATEGY
Expand Product Lines and Industries Served. The Company believes there are
numerous additional opportunities to build upon its successful product line
expansion. The Company is taking advantage of recent trends toward more
widespread automation, on-board electronics, non-lubricated (dry air) fluid
power systems and miniaturization by designing, manufacturing and marketing
products meeting such customer needs. The Company believes it is well-
positioned to capitalize on these opportunities because of its proven
engineering expertise, manufacturing capabilities and strong distribution
network.
Emphasize Optimizing Manufacturing Efficiencies. The Company has adopted
"lean manufacturing" and "kaizen" initiatives to improve quality, production
efficiencies and customer service by reducing waste, inventory levels, floor
space and lead times. The Company believes its commitment to continuous
improvement will further enhance its competitive position and allow the
Company to execute its growth strategy while minimizing the need for
significant additional capacity. Although in the relatively early stage of
implementation, the Company's lean manufacturing initiatives have already
resulted in facility consolidation, improved manufacturing throughput,
increased on time shipping performance and supplier rationalization. As an
example, in 1997, the Company moved the production of solenoids from its
12,250 square foot facility in Angola, Indiana into 5,000 square feet within
its Sandusky, Michigan facility. This move allowed the Company to close its
Angola facility with no decrease in solenoid production.
Increase Global Presence. In response to existing customer needs and new
opportunities, the Company plans to continue to increase its presence
internationally. The Company believes the market for international sales of
pneumatic products is even larger than the U.S. market, particularly in Europe
and Asia. The Company already has established manufacturing plants in Germany
and Canada and sales and distribution facilities in Canada, England, Italy,
France, the Netherlands, Hungary, Taiwan and Mexico. The Company plans to add
distribution facilities in several more countries in Europe and believes it
can capture additional market share in Asia and South America, where the
Company currently has minimal presence.
Pursue Selective Acquisitions. The Company's product line expansion has
primarily resulted from start-up operations. In some instances, however, the
Company has complemented existing product offerings through selective
acquisitions, such as its 1995 acquisition of Ultra Air, a manufacturer of air
preparation products. In 1995, the Company also acquired a minority stock
ownership interest in Univer, Italy's largest pneumatic components
manufacturer, which has allowed it, among other things, to benefit from
Univer's rodless cylinder technologies which have worldwide applications. The
Company intends to pursue selective strategic acquisitions that can enhance
its ability to deliver total pneumatic system solutions.
INDUSTRY OVERVIEW
The fluid power industry has grown out of manufacturers' need to automate
repetitive tasks that had previously been performed manually. The industry can
generally be divided into two major segments: hydraulics (use of liquids) and
pneumatics (use of air or inert gas). While hydraulics can produce higher
forces and, in some applications, better control, pneumatics generally provide
faster speeds, lower cost, greater ease of use and a more environmentally
clean process. The Company competes only in the pneumatic segment of the fluid
power market.
41
<PAGE>
Major components utilized in the pneumatic fluid power process include
valves, actuators (cylinders) and air preparation equipment. A more detailed
description of this process is set forth below:
Pneumatic Fluid Power Process
LOGO
The pneumatic system begins when air enters a compressor and the
volume of air is reduced. The air then flows through a dryer and excess
moisture is removed. Typically, a pneumatic system contains a single
compressor and an air dryer. The dry air then flows through a system
header to multiple workstations in a plant. At a workstation, the dry
air flows initially through a FRL (filter, regulator and lubricator).
In the FRL, a filter removes particulates from the air, a regulator
reduces and stabilizes downstream pressure and a lubricator adds the
appropriate amount of oil to the air, when necessary. This conditioned
air then enters a valve. A valve is the primary pneumatic component
that controls the intake and withdrawal of air into the actuator, with
the valve's movement typically controlled by a solenoid. In the
Company's "lapped spool and sleeve" valve, the position of the spool
determines the direction of the air as it flows into the actuator. The
flow of air from the valve causes the actuator rod to extend or
retract, thereby moving a specific load. In many cases, an automated
component, such as a gripper or guiding unit, may be attached to the
actuator for material handling purposes.
Applications for pneumatic fluid power are numerous and diverse and can be
found in virtually every major industry. Some of the largest industries that
use pneumatic fluid power systems in their manufacturing processes include
packaging, automotive, machine tool, material handling, food and beverage,
textile, printing, electronics/semiconductor, robotics, paper and medical
equipment. Pneumatic components are primarily used in automated manufacturing
applications, but can also serve other functions, as do certain of the
Company's specialty valves used in oxygen concentrators sold by medical
equipment manufacturers. The Company believes there are a number of general
industry trends favoring the increasing use of automation, such as greater
emphasis on productivity, factory utilization and continuing cost reduction
efforts.
The Company is a leading global manufacturer and marketer of pneumatic
valves and related products. The Company's principal market is the United
States, in which it is the largest manufacturer in its core product of
directional control, base mounted, 4-way pneumatic valves. In the U.S., sales
of directional control valves make up the largest segment of pneumatic valve
sales, and 4-way valves are the dominant type of directional control valves
utilized. Because of their versatility, base mounted valves make up the large
majority of pneumatic valve sales in the United States.
In the United States, it is common for manufacturers of pneumatic components
to market their products through a distributor network. While some competitors
of the Company work with distributors that carry both
42
<PAGE>
hydraulic and pneumatic components, all of the Company's North American
distributors handle exclusively pneumatic components and, importantly, sell
only the Company's pneumatic valves.
Certain market segments to which the Company sells its products have been
reducing the number of suppliers they deal with, including pneumatic component
suppliers. As a result, companies within these market segments have
increasingly used suppliers that can provide a full line of pneumatic
components. The Company began a product line expansion in the late 1980s and
now offers its customers a full line of pneumatic components, including
valves, actuators and specialty products such as air preparation products,
specialty valves and grippers and guiding units. The Company believes its
array of products provides a competitive advantage against single component
suppliers.
PRODUCTS
The Company offers a complete line of pneumatic components, which can be
described in three groups: valves, actuators and specialty products. The
Company's core product historically has been pneumatic valves. Over recent
years, the Company has expanded into additional product lines. While the
Company's net sales in core valve products have increased significantly over
the past five years, its overall dependence on valves has decreased through
its product diversification strategy. The table illustrates this
diversification trend since 1993.
<TABLE>
<CAPTION>
1993 1997
----- ------
<S> <C> <C>
Net Sales..................................... $85.0 million $147.1 million
Valves...................................... 79.3% 61.2%
Actuators................................... 7.3% 11.1%
Specialty Products.......................... 13.4% 27.7%
----- ------
Total......................................... 100.0% 100.0%
</TABLE>
Valves
The Company is widely regarded as a leading manufacturer of high quality
pneumatic valves used in fluid power applications. In a pneumatic system, the
valve controls the flow of compressed air to an actuator (cylinder). The valve
is the most important and complex component in any pneumatic system.
The Company's success is largely derived from its proprietary "lapped spool
and sleeve" technology developed by the Company's founder in the 1950s. The
original design is used in the Company's valves today. However, the "lapped
spool and sleeve" manufacturing process has been improved continuously. The
inner (spool) and outer (sleeve) components are a matched set, with the sleeve
remaining stationary and the spool moving inside it to produce the switching
of air flow. The sealing of the spool and sleeve is accomplished by the minute
clearance between the two parts, measured in millionths of an inch, rather
than by using soft rubber seals as in other designs. This minute clearance
provides an air bearing, which avoids any metal-to-metal contact and allows
frictionless movements, virtually eliminating heat and wear. This results in
extremely long product life. Numatics' "lapped spool and sleeve" has been
found to operate within original manufacturing tolerances after more than one
billion cycles.
The patent on the "lapped spool and sleeve" product expired in 1973.
However, the process for manufacturing the "lapped spool and sleeve" to the
required tolerances remains a trade secret. The Company continues to closely
guard this trade secret and limits the number of visitors and employees who
have access to the manufacturing process. Several competitors have attempted
to imitate the process, but the Company believes none has been able to
duplicate the "lapped spool and sleeve" to the same high quality tolerances.
The Company manufactures a wide variety of valves, most of which can broadly
be described as directional control, 4-way valves. Additionally, the Company
manufactures and markets 3-way valves and a variety of other valves for
specific customer applications. As part of its product line expansion
strategy, the Company has recently increased its offering of both 4-way and 3-
way valves.
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The Company's valve sales were $84.9 million, $83.9 million and $90.0
million in 1995, 1996 and 1997, respectively.
Actuators
In 1988, Numatics began offering actuators (cylinders) to complement its
well-established line of valves. In the pneumatic system, the actuator serves
as an "arm" for an automated task, allowing an object to be moved.
The Company's first actuators were standard tie-rod cylinders, made to NFPA
specifications. During 1994, the Company introduced its "M" series actuator, a
non-repairable miniature cylinder. In 1995, it introduced a new rodless
cylinder based on technology acquired in connection with its purchase for $2.0
million of 12.0% of the stock of Univer, the largest manufacturer of pneumatic
products in Italy with sales in 1996 of approximately $30.0 million.
The Company's actuator sales have grown each year since 1988. The Company
believes this is due to its ability to manufacture and deliver high quality
products on a consistent basis and to successfully launch new products. New
products include rotary actuators and a variety of small actuators. The
Company believes that actuators will continue to be an area of growth as it
further leverages its existing distribution network and strong name
recognition in valves.
The Company's actuator sales were $10.6 million, $13.1 million and $16.3
million in 1995, 1996 and 1997, respectively.
Specialty Products
The Company's specialty products include air preparation products, such as
FRLs and air dryers, and other specialty products, such as specialty valves
and grippers and guiding units. Air preparation products condition the air for
use in the pneumatic system. Specialty valves are miniature valves for custom
applications. Grippers and guiding units are material handling components,
often serving as the "hands" of an automated process.
The Company began offering FRLs in 1987. For several years, FRLs have been
produced for the Company under a private label arrangement by an independent
manufacturer. In 1997, the Company began manufacturing some of its own FRL
products, which are expected to replace a majority of the private label
products within the next few years.
In 1995, Numatics acquired for $2.9 million an 80.0% equity interest in
Ultra Air, a manufacturer of air dryers used to remove water from compressed
air systems. Ultra Air distributes its products primarily through industrial
compressor distributors, rather than through the Company's valve distribution
network, which has presented the Company with some opportunities for cross-
selling between the two distributor groups. Also in 1995, the Company acquired
an 80.0% equity interest in MicroSmith, Inc. ("MicroSmith"), a designer and
fabricator of electronic componentry. The Company uses this componentry in its
valve products and also markets it to independent customers.
Through its 88.0%-owned subsidiary Numatech, Inc. ("Numatech"), formed in
1994, the Company manufactures specialty valves, many of which have been
designed by the Company for specific customer applications. Numatech's
principal products include miniature valves used primarily in the medical and
electronics industries. The Company believes these valves have potential
applications in other industries. Through its 90.0%-owned subsidiary Numation,
Inc. ("Numation"), also formed in 1994, the Company manufactures grippers and
guiding units for the materials handling industry.
In 1992, the Company acquired an 80.0% equity interest in Micro Filtration,
Inc. ("Micro Filtration"), a manufacturer of coalescing filtration products
that remove contaminants from an air line.
In accordance with the Company's management philosophy, the managers of
Ultra Air, MicroSmith, Numatech, Numation and Micro Filtration own all of the
equity in these subsidiaries not owned by the Company.
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The Company's specialty products sales were $30.4 million, $35.0 million and
$40.7 million in 1995, 1996 and 1997, respectively.
ENGINEERING INNOVATIONS
The Company is widely recognized as an innovator in the design, engineering
and manufacture of pneumatic components. The Company has a dedicated group of
engineers, both domestically and internationally. Beginning with the "lapped
spool and sleeve," the Company has continued to produce engineering
innovations which include the following:
. On-board electronics, which allows electronic signals to be passed
through a single input/output source at faster transmission speeds.
.Electrical plug-in connections, which allow assembly of systems without
the need for costly wiring.
. Integral speed controls and integral pressure controls, which are mounted
between the valve and manifold to provide a complete control package.
.Manifolding, which reduced piping and space and allowed factory assembly,
reducing cost.
.Direct solenoid, which eliminated unnecessary pilot valves, improving
reliability due to fewer parts.
.Die cast magnesium valves, providing maximum weight reduction and cost
savings.
. ""Nu-Plex," the first fully integrated serial control system for fluid
power applications.
. Aluminum cast valve bodies, which reduced the weight and cost of valves
that had previously been made of bronze, cast iron and brass.
. ""Numasizing," the first precise method of determining component size so
as to accurately match desired performance with a valve configuration
that uses the smallest amount of energy to get the job done.
The Numasizing process is based on a computerized database containing
empirical data from more than 250,000 test firings of pneumatic cylinders
under different conditions. Numasizing is used at all of the Company's
locations throughout the world. The Company conducts seminars on Numasizing
for its customers, and offers its distributors a proprietary program to enable
them to use Numasizing in helping to design efficient systems for their
customers.
CUSTOMERS, MARKETING AND DISTRIBUTION
The Company's customers consist of end users, machinery manufacturers (which
incorporate the Company's products in their machines) and distributors. As is
common practice in the U.S. market, end users and machinery manufacturers
generally purchase the Company's products through its network of distributors.
Alternatively, in international markets, customers typically purchase directly
from the Company. In some cases, the end user will specify the Company's
products, regardless of distribution channel. The products sold by the Company
are utilized in a diverse group of industries, and no one customer accounted
for more than 3.0% of total net sales in 1997.
Approximately 59.0% of the Company's net sales in 1997 were from sales to
distributors. The Company believes it maintains excellent relationships with
its distributor network, which consists of over 110 distributors, including
over 78 in North America, 14 in Europe, 14 in Asia and 6 in South America.
Some of these distributors have been with the Company at least 40 years, and
the average tenure of its distributors in the United States is 20 years.
The Company's North American distributors are pneumatics specialists who
sell only pneumatic components and do not sell hydraulic components. In most
cases, the Company's products represent these distributors' principal source
of income. Additionally, the only pneumatic valves these distributors carry
are Numatics' valves. The Company maintains an interactive relationship with
its distributors, conducting periodic meetings in several cities and intensive
training programs while encouraging feedback. The Company employs
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<PAGE>
8 regional managers in North America to train and assist its distributors. The
Company's distributors purchase products from the Company and maintain their
own inventories.
The Company has a direct sales force of 107 employees, who sell to over
9,000 direct customers worldwide, of which a significant portion are outside
the United States. The Company has also maintained direct selling efforts with
certain large end users and machinery manufacturers in North America. Some of
the Company's largest direct customers include Sunrise Medical, Progressive
Tool & Manufacturing and the Big 3 automotive manufacturers.
MANUFACTURING
The Company has eight domestic manufacturing facilities, including six in
Michigan and one each in Ohio and Tennessee. The Company also has
manufacturing plants in Ontario, Canada and in Germany. The Company's core
valve products are primarily manufactured in its Highland, Michigan facility,
which is also the Company's headquarters. The final machining and matching of
the Company's proprietary "lapped spool and sleeve" valve components are
carried out in a specially designed, temperature and humidity controlled area.
This process is highly confidential. Visitors and employees who do not require
access are not permitted in the facility, nor are equipment suppliers. All
equipment setup for such operations is performed by the Company's own
employees.
The Company has adopted "lean manufacturing" and "kaizen" initiatives to
improve quality, production efficiencies and customer service by reducing
waste, inventory levels, floor space and lead times. The Company believes its
commitment to continuous improvement will further enhance its competitive
position and allow the Company to execute its growth strategy while minimizing
the need for significant additional capacity. The Company has converted many
facilities from a traditional batch process to a flow system utilizing
manufacturing "cells" based on specific product categories. Although in the
relatively early stage of implementation, the Company's lean manufacturing
initiatives have already resulted in facility consolidation, improved
manufacturing throughput, increased on time shipping performance and supplier
rationalization.
The Company stresses quality control in all of its manufacturing and
distribution facilities, and each valve is individually tested to meet
specific tolerances before it can be shipped. Currently, the facilities in
Germany and Canada are ISO certified. The majority of the Company's domestic
facilities are anticipated to be ISO certified by the end of 1998, and all its
facilities are scheduled to be ISO certified by the end of 1999. The Company
believes that achieving ISO certification at each of its manufacturing
facilities is a significant factor in maintaining its competitive position.
COMPONENTS AND RAW MATERIALS
The principal raw materials and components used in manufacturing the
Company's products are aluminum castings, stainless steel, solenoids and screw
machine parts. All of these items are readily available from multiple
suppliers, and the Company also produces a substantial portion of its own
requirements of solenoids and screw machine parts. The Company purchases a
significant portion of its aluminum castings from Taiwanese suppliers through
its subsidiary in Taiwan, which has a dedicated staff of professionals
responsible for sourcing and quality control. The Company has never
experienced significant difficulty in acquiring needed parts and raw materials
and does not believe it is substantially dependent on any particular supplier.
COMPETITION
The markets in which the Company operates are highly competitive.
Competition is based primarily on quality, price, timely delivery and breadth
of product line. The markets in which the Company competes are highly
fragmented, and many of its competitors do not currently offer the full range
of products sold by the Company. Certain of the Company's competitors,
however, are significantly larger and have greater financial and other
resources than the Company. Nevertheless, the Company has competed
successfully in its core pneumatic valve business, and it has been able to
increase net sales with its actuators and specialty products as well.
The Company has the largest U.S. market share in its core product of
directional control, base mounted, 4-way pneumatic valves. The Company's most
significant competitors in North America are Parker Hannifin,
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<PAGE>
SMC Pneumatics and MAC Valves. Some of the Company's major competitors in the
valve market outside North America are SMC Pneumatics, Festo and CKD. The
actuator and specialty products markets have different competitors such as
Norgren IMI, Wilkerson, Phd., Robohand, Lee and Clippard.
INTERNATIONAL OPERATIONS
The Company conducts operations in several foreign countries including
Germany, Canada, England, Italy, France, the Netherlands, Hungary, Taiwan and
Mexico. International net sales represented 32.4% of net sales in 1997.
Numatics, Ltd. in Ontario, Canada and Numatics GmbH in Germany operate
manufacturing facilities, both of which are ISO certified. Numatics, Ltd.
markets a full line of the Company's products to the Canadian market and
manufactures, among other products, lockout valves for the Company's worldwide
needs. Numatics GmbH manufactures certain of the Company's products and
markets a full line of Numatics' components to customers in Europe and Africa.
Numatics GmbH maintains a dedicated engineering staff which works together
with the Company's North American engineering personnel. The Company's other
foreign operations are primarily sales and distribution facilities. For
additional financial information regarding foreign sales and exports, see Note
7 of the notes to the Company's audited consolidated financial statements
included elsewhere in this Offering Memorandum.
EMPLOYEES
At June 30, 1998, the Company had 945 employees. Approximately 100 of those
employees at that time were represented by the United Auto Workers under a
contract expiring in March 1999. The Company considers its employee relations
to be good.
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<PAGE>
PROPERTIES
The Company conducts its business in Company-owned facilities, totaling
approximately 299,850 square feet, and leased facilities, totaling
approximately 111,800 square feet, of office, engineering, manufacturing and
warehouse space. All of these facilities are suitable to meet the current
capacity needs of the Company's various business units. Leases expire at
various times through 2003, and the Company generally has extension options.
The table below provides additional information concerning each of these
facilities.
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE TYPE OF INTEREST DESCRIPTION OF USES
-------- -------------- ---------------- -------------------
<S> <C> <C> <C>
United States
N. Milford Rd., High- 76,000 Owned Company headquarters;
land, MI............... valve components
Franklin, TN............ 68,000 Owned Actuators
Sandusky, MI............ 46,800 Owned Valves and solenoids
Detroit, MI............. 36,000 Leased Air dryers
Owosso, MI.............. 22,100 Owned Valve part processing;
warehousing
FRLs and specialty
Wixom, MI............... 20,900 Leased valves
E. Highland Rd., High-
land, MI............... 12,250 Owned Warehousing
Grippers and guiding
Westlake, OH............ 12,000 Leased units
Wixom, MI............... 8,400 Owned Distribution facility
Lapeer, MI.............. 5,000 Leased Filters
Scottsdale, AZ.......... 2,000 Leased Electronic componentry
design and fabrication
International
St. Augustin, Germany... 33,300 Owned Valves and actuators
London, ON, Canada...... 21,700 Owned Valves and actuators
Leighton Buzzard, En-
gland.................. 11,300 Owned Distribution and sales
Taipei, Taiwan.......... 8,000 Leased Distribution and sales
Brescia, Italy.......... 7,700 Leased Distribution and sales
Vancouver, BC, Canada... 6,000 Leased Distribution and sales
Puebla, Mexico.......... 5,000 Leased Distribution and sales
Montreal, QB, Canada.... 3,600 Leased Distribution and sales
Paris, France........... 3,400 Leased Distribution and sales
Waardenburg, The Nether-
lands.................. 1,600 Leased Distribution and sales
Budapest, Hungary....... 600 Leased Distribution and sales
</TABLE>
ENVIRONMENTAL MATTERS
One of the Company's plants, located on North Milford Road in Highland,
Michigan, is the site of a groundwater contamination problem that became known
in the early 1980s. The contamination was caused by a chemical
(trichloroethylene) that was used for many years to degrease parts but which
has not been used by the Company since the early 1970s. A soil vapor
extraction system was used to clean up the soil contamination, and a pump and
treat system has been installed to purge the groundwater. The soil cleanup has
been completed, but completion of the groundwater remediation is expected to
take approximately another ten years. Based on past expenditures and its
current evaluation of site conditions, the Company expects to spend
approximately $70,000 annually to complete the groundwater remediation. The
Company has recorded a reserve for these future expenditures, which at
December 31, 1997 was approximately $700,000. The Company believes this
reserve will be adequate to complete the remediation, although actual
expenditures will depend on actual site conditions and other factors and are
subject to change.
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In 1989, the Company became aware of a fluid spill site, containing PCBs, at
its East Highland Road site in Highland, Michigan. The source of the PCBs is
believed to be a transformer that was accidentally ruptured in 1973 while
sitting on the ground awaiting disposal. The area of the spill has been
disturbed by subsequent paving of a portion of the area and soil removal
following a non-PCB waste oil spill. The Company estimates that future soils
remedial work at this site will cost approximately $250,000 to $300,000.
In 1982, a spill of chromic acid and water occurred at the Company's Owosso,
Michigan site. Soils contaminated by this spill have been remediated, and
groundwater tested on a monthly basis. Test data shows no future remediation
is required. The Company has submitted a closure report to the Michigan
Department of Environmental Quality, and is awaiting agency approval of the
report.
Except for the matters discussed above, compliance by the Company with
federal, state and local laws and regulations pertaining to the discharge of
material into the environment has not and is not anticipated to have any
material effect upon the Company in conducting its business. However, due to
the nature of its current and former operations, the Company does face some
risk of exposure to environmentally-related liabilities.
LEGAL PROCEEDINGS
Various legal matters arising during the normal course of business are
pending against the Company. Management does not expect that the ultimate
liability, if any, of these matters will have a material effect on future
consolidated financial statements.
49
<PAGE>
MANAGEMENT AND DIRECTORS
EXECUTIVE OFFICERS AND DIRECTORS
The table that follows sets forth the name, age at December 31, 1997,
position with the Company and years in the pneumatics industry of each person
who is an executive officer or director of the Company. Information concerning
the business experience for at least the past five years of each of the
persons named is provided after the table. All Company directors are elected
for terms of one year and until their successors are elected and qualified.
<TABLE>
<CAPTION>
YEARS IN
PNEUMATICS
NAME AGE POSITION INDUSTRY
---- --- -------- ----------
<S> <C> <C> <C>
John H. Welker............... 57 Chairman, President and Chief 34
Executive Officer
Robert P. Robeson............ 51 Vice President, Treasurer, 10
Secretary and Chief Financial
Officer
David K. Dodds............... 49 Vice President--Sales & Marketing 31
Henry Fleischer.............. 74 Vice President--Research & 30
Development
Donald E. McGeachy........... 62 Vice President--Engineering 40
David M. Tenniswood.......... 61 Director
Albert A. Koch............... 55 Director
John P. Musat................ 52 Director
Tim R. Palmer................ 40 Director
</TABLE>
John H. Welker has been with the Company for 32 years and has been Chairman
of the Board and CEO since 1990. He has been President of the Company since
1983 and prior to then held a variety of management positions within the
Company.
Robert P. Robeson joined the Company as Chief Financial Officer in 1988. In
1990, he was also named Vice President, Treasurer and Secretary. Prior to
joining the Company, Mr. Robeson was CFO of Gelman Sciences, a publicly traded
company.
David K. Dodds has been Vice President-Sales & Marketing since 1994. Prior
to that, he was President of Numatics, Ltd., the Company's Canadian
subsidiary, a position he was appointed to in 1980.
Henry Fleischer has been Vice President-Research & Development since 1992.
He joined Numatics in 1968 as Chief Engineer and held a variety of positions
from then until his appointment to Vice President in 1992. He is the author of
Manual of Pneumatic Systems Optimization (McGraw-Hill 1995), the authoritative
treatise on that subject.
Donald E. McGeachy has been Vice President-Engineering since 1992. He has
been with the Company since 1964 and was its Chief Engineer from 1975 to 1992.
David M. Tenniswood was Vice President-European Operations of the Company
from 1996 through March 31, 1998. He has been a Director of the Company since
1990. Prior to 1996, Mr. Tenniswood was President of the Controls Group at
MascoTech for ten years.
Albert A. Koch has been a Director of the Company since 1990. He has been a
Managing Principal of Jay Alix & Associates since 1995. Prior to joining Jay
Alix & Associates, he was a Managing Director of Equity Partners of America,
Ltd. (investment banking and financial consulting).
John P. Musat has been a Director of the Company since 1996. He is a Senior
Vice President at MascoTech Forming Technologies-Braun and has been with them
since 1982.
50
<PAGE>
Tim R. Palmer has been a Director of the Company since 1997. He is currently
a Managing Director of Harvard Private Capital Group, Inc., which manages the
private equity and real estate investment portfolios of the Harvard University
endowment fund. He has been with Harvard Private Capital Group, Inc. since
1990 and also serves on the boards of The WMF Group, Ltd. and several private
companies.
EXECUTIVE COMPENSATION
Summary Compensation Information.
The table that follows provides information, for the Company's last
completed fiscal year concerning the compensation of John H. Welker, the
Company's CEO, and the four other individuals who were the highest paid
executive officers of the Company during 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
--------------- ALL OTHER
SALARY BONUS COMPENSATION(2)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)
--------------------------- ---- ------- ------- ---------------
<S> <C> <C> <C> <C>
John H. Welker............................ 1997 251,020 160,500 5,000
Chairman, President and CEO
Robert P. Robeson......................... 1997 134,600 62,008 5,000
Vice President, Treasurer and CFO
David M. Tenniswood....................... 1997 175,000 22,166 2,000
Vice President--European Operations
(through 3/31/98)
David K. Dodds............................ 1997 125,760 56,444 5,000
Vice President--Sales and Marketing
Donald E. McGeachy........................ 1997 107,800 48,430 5,000
Vice President--Engineering
</TABLE>
- --------
(1) Does not include prerequisites and other personal benefits provided to
named executives, the incremental cost of which to the Company in each
case was less than 10% of the executive's 1997 salary and bonus.
(2) Includes a $2,000 Company contribution for each executive to the Company's
deferred contribution and employee savings plan and, except for Mr.
Tenniswood, also includes a $3,000 Company matching contribution to that
plan.
Welker Employment Agreement. The Company has an agreement with Mr. Welker
for his employment as CEO through December 31, 2003, under which he is
entitled to salary at specified rates ($300,000 for 1998, increasing annually
thereafter to $440,000 for 2003), and to a cash performance bonus
supplementing his salary determined pursuant to a formula based on the
Company's operating performance relative to its operating budget. The
agreement also contemplates that the Company's Board annually will consider
whether he should be paid a discretionary bonus, whether or not a performance
bonus also is payable.
During the term of the agreement, the Company is entitled to terminate Mr.
Welker's employment at any time for any reason, upon 60 days' prior notice to
him, and also is entitled to terminate him for "cause" or in certain cases of
"permanent disability" (as therein defined), upon less prior notice. If the
Company were to terminate him not for cause or permanent disability, or
terminated him for permanent disability without having maintained certain
disability insurance in effect for his benefit, he would be entitled to
continuation of his regular salary for a one-year period commencing on his
termination date. In addition, if Mr. Welker were to die while employed by the
Company, the equivalent of his regular salary for a 60-day period thereafter
would be payable to his estate.
The agreement imposes non-competition obligations upon Mr. Welker during his
employment and for one year thereafter and also imposes confidentiality
obligations upon him, which continue for five years after his employment
termination date.
51
<PAGE>
Tenniswood Employment Agreement. The Company has an agreement with Mr.
Tenniswood for his employment as Vice President--European Operations through
September 15, 1998, under which he is entitled to a $200,000 per year salary
and to discretionary bonuses at times and in amounts commensurate with such
discretionary bonus compensation as from time to time may be awarded to other
executive officers. The circumstances under which he can be terminated by the
Company and the compensation, if any, payable to him upon a termination of his
employment are comparable to those described above for Mr. Welker. Mr.
Tenniswood's agreement also imposes non-competition and confidentiality
obligations upon him comparable to those for Mr. Welker.
Deferred Compensation Plan. In connection with the 1990 Buyout, the Company
adopted a "top-hat" non-qualified deferred compensation plan, under which a
small group of management-level employees could become entitled to receive
future distributions of equity interests in the Company if certain conditions
thereafter were satisfied. In connection with the 1995 Recapitalization, the
plan was amended to change the type of distributions to be made under the plan
to cash, limit the employees eligible to participate in the plan to those then
participating, specify a fixed distribution amount for each participating
employee, and change the terms and conditions for payouts.
In general, under the plan as currently in effect, if a plan participant's
employment with the Company continues until his death, retirement at or after
age 65 or disability (determined as specified in the plan), or if a
participant remains in active Company service through the later of (a)
November 29, 2002 or (b) the twelfth anniversary of the commencement of his
employment and his employment thereafter terminates other than in an
Involuntary Discharge for Cause (as therein defined), which involuntary
discharge would cause the forfeiture of his right to any distribution, then
the Company would become obligated to pay his distribution, without interest,
in regular installments over a five-year period commencing within 60 days of
his employment termination date. Similar five-year installment payment
obligations also would arise under the plan with respect to all participants
if the Company elected to terminate the plan or if a Company Change in Control
(as therein defined) should occur.
However, the current terms of the plan also provide for a pro rata reduction
in the amounts of annual installment payments to distributees and for
lengthening the installment payment period, if the Company becomes obligated
to make payments to more than one distributee at the same time, to the extent
(if any) necessary to prevent total annual payments to the distributees in
excess of 3.0% of the Company's prior year earnings before interest, taxes,
depreciation and amortization. In addition, the plan provides that no
distribution payments whatsoever may be made prior to January 31, 2004.
Eight of the Company's employees participate in this plan, including all of
the Company's current executive officers other than Mr. Tenniswood. The
distribution amounts for the executive officer participants named in the
Summary Compensation Table are as follows: Mr. Welker, $2,643,546; Mr.
Robeson, $105,398; Mr. Dodds, $151,757; Mr. McGeachy, $151,757.
DIRECTORS' COMPENSATION
The Company pays a meeting fee of $1,600 to each of its non-employee
directors for each meeting of the Board of Directors that he attends. Employee
directors are not paid any additional compensation for Board service. Mr.
Palmer's compensation is paid to Harvard Management Company pursuant to
Harvard's policies.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All decisions concerning the 1997 compensation of the Company's executive
officers were made by the Company's Board of Directors. The current directors,
Messrs. Welker, Tenniswood, Koch, Musat and Palmer, served on the Board
throughout 1997; no other person served as a director at any time during the
year. Except as described below, no current or former officer and no current
employee of the Company or of any of its subsidiaries participated in
deliberations of the Board concerning executive compensation during 1997.
52
<PAGE>
Mr. Welker is the controlling shareholder of the Company and the Company's
Chairman, CEO and President. Mr. Tenniswood also is an executive officer of
the Company. None of the other directors is or ever has been an officer or
employee of the Company or any of its subsidiaries.
Mr. Palmer is a Managing Director of an affiliate of the company that held
the Old Subordinated Notes, which were prepaid from the proceeds of the
Offering.
The Company advanced $185,000 to Mr. Welker during 1996 to purchase the
stock of a departing executive, all of which loan remains outstanding. In
February 1998, the Company advanced an additional $400,000 to Mr. Welker,
which also remains outstanding. These loans are unsecured, bear interest at
6.5% per annum and are payable on demand.
The Company, Mr. Welker, each other current executive officer and all of the
other current shareholders of the Company other than Harvard (all of whom also
are Company employees) are party to a shareholder agreement that gives the
Company the option, but not the obligation, to purchase the shares of any
shareholder party, including Mr. Welker, if the shareholder ceases to be a
Company employee due to his death, his Total and Permanent Disability or
Involuntary Discharge Without Cause (each as therein defined), his retirement
at or after age 65 or his resignation (if after the later of (i) November 29,
2002 or (ii) the twelfth anniversary of his date of hire by the Company) for a
redemption price to be determined by a formula intended to approximate the
shares' fair market value at the time of employment termination. This
agreement covers 94.0% of the Company's shares, 74.12% of which are held by
Mr. Welker.
The management shareholders of certain subsidiaries of the Company
(Numation, Numatech, Micro- Filtration, Ultra Air and Microsmith) are required
to sell their shares to the Company upon such shareholder's (i) death, (ii)
permanent disability or (iii) termination of employment with the Company. The
price to be paid by the Company for such shares will be determined by a
formula based upon a multiple of earnings of the relevant subsidiary. The
obligations of the Company to purchase such shares are not subject to any
limitations. However, the payment of these amounts may be prohibited by the
terms of the Indenture. Currently, the amounts that would be payable under
these agreements are not material to the Company.
53
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
So far as is known to the Company, the only persons who are beneficial
owners (within the meaning of Commission Rule 13d-3) of over 5.0% of the
Company's common stock are: (a) John H. Welker, whose ownership information is
set forth below under "--Security Ownership of Management and Directors" and
who maintains an address at the Company's principal executive office; and (b)
Harvard Private Capital Holdings, Inc. (the address of which is c/o Harvard
Private Capital Group, Inc., 600 Atlantic Avenue, Boston, Massachusetts
02210), which holds 1,276.60 shares, which shares represent 6.0% of the
Company's outstanding stock.
SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS
The following table sets forth the beneficial ownership (for purposes of
Rule 13d-3) of shares of the Company's common stock by each director of the
Company, each executive officer named in the Summary Compensation Table above,
and all directors and current executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE OF OWNERSHIP OF
NAME OF BENEFICIAL OWNER COMMON STOCK SHARES OF COMMON STOCK
------------------------ ------------ --------------------------
<S> <C> <C>
John H. Welker(1)..................... 20,000.00 94.00%
Robert P. Robeson..................... 627.13 2.95%
David K. Dodds........................ 903.05 4.24%
Donald E. McGeachy.................... 903.05 4.24%
David M. Tenniswood................... 0 --
Albert A. Koch........................ 0 --
John P. Musat......................... 0 --
Tim R. Palmer(2)...................... 0 --
All directors and executive officers
as a group (9 persons)(1)(2)......... 20,000.00 94.00%
</TABLE>
- --------
(1) Mr. Welker has sole voting and dispositive power over 15,769.57 (74.12%)
of the Company's outstanding shares, which are his own, and sole voting
power over all other outstanding shares, excluding those owned by Harvard,
pursuant to a voting agreement among the Company, Mr. Welker and all of
the Company's other shareholders other than Harvard.
(2) Excludes shares owned by Harvard. Mr. Palmer is a Managing Director of an
affiliate of Harvard. He disclaims beneficial ownership of these shares.
54
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS
The following is a summary of the material terms of the Company's existing
debt agreements other than the Notes and the Indenture.
NEW CREDIT FACILITY
General. The Company and its subsidiaries, Numatics, Ltd. (the Company's
Canadian subsidiary) and Numatics GmbH (the Company's principal German
subsidiary), are borrowers under the New Credit Facility with NBD Bank as
agent for a group of lenders. The purposes of the loans under the New Credit
Facility are to refinance previously existing debt and for general corporate
purposes.
The New Credit Facility provides for (a) a term loan to the Company in the
amount of $16.0 million, a term loan to Numatics, Ltd. in the amount of $2.0
million, and a term loan to Numatics GmbH in the amount of $2.0 million
(collectively, "Term Loans A"), (b) a revolving credit facility for the
Company of $32.0 million, including letters of credit, and revolving credit
facility for Numatics GmbH of $3.0 million (each of the foregoing, a
"Revolving Credit Facility"), and (c) a term loan to the Company in the amount
of $13.0 million and a term loan to Numatics GmbH in the amount of $2.0
million (collectively, "Term Loans B"). The Revolving Credit Facilities permit
the Company to borrow up to the lesser of the total amount of its Revolving
Credit Facility or a borrowing base amount computed as a percentage of
inventory and accounts receivable (less outstanding letters of credit and
subject to certain limitations) and permit Numatics GmbH to borrow up to the
lesser of the total amount of its Revolving Credit Facility or a borrowing
base amount.
Guarantees and Security Interests. Each borrower under the New Credit
Facility has secured its obligations thereunder by substantially all of its
assets. The Company also pledged all the shares owned by it of its domestic
Subsidiaries and 66.0% of the shares of its foreign subsidiaries. The
borrowers' obligations under the New Credit Facility are guaranteed by the
Company's domestic subsidiaries, which guarantees are secured by substantially
all of their assets. The New Credit Facility also provides that, upon the
occurrence of an event of default, the lenders may require the Company to
cause all of its foreign subsidiaries to issue guarantees secured by
substantially all of their assets. In addition, the Company has guaranteed all
obligations of the other borrowers under the New Credit Facility, which
guaranty is secured by substantially all of the Company's assets.
Interest and Commitment Fees. Interest on the Revolving Credit Facilities
and Term Loans A accrues at an annual rate of interest equal to, at the
borrower's option, either (a) the higher of a federal funds rate plus 0.50%
and the prime rate of NBD Bank plus, in either case, an applicable margin
(which applicable margin will initially be 0.75% and thereafter may range from
0% to 0.75%), (the "floating rate") or (b) at a London Interbank Offered Rate
(adjusted) for a specified interest period ("LIBOR") plus an applicable margin
(which applicable margin will initially be 2.50% and thereafter may range from
1.25% to 2.50%).
Interest on Term Loans B accrues at an annual rate of interest equal to
LIBOR plus an applicable margin (which applicable margin will initially be
2.75% and thereafter may range from 2.50% to 2.75%).
Interest on all borrowings under the New Credit Facility bearing interest at
a floating is payable quarterly and interest on all borrowings under the New
Credit Facility bearing interest based on LIBOR is payable at the end of the
interest period pertaining thereto unless the interest period is six-months,
in which case it also is payable three-months after the interest period
commences.
The Company also pays an unused commitment fee on the Revolving Credit
Facilities which commitment fee initially is 0.50% of the unused amount of the
Revolving Credit Facilities and thereafter may range from 0.25% to 0.50%.
55
<PAGE>
The margins set forth above and the percentage used to determine the
commitment fees are determined based on the ratio of the Company's net total
debt to a trailing four-quarter adjusted EBITDA.
Maturities and Prepayments. All borrowings under each Revolving Credit
Facility mature six years after the Issue Date. Term Loans A have a final
maturity of six-years and Term Loans B have a final maturity of seven and one-
half years with aggregate quarterly principal payments on Term Loans A and
Term Loans B of $1.6 million in 1998, $2.5 million in 1999, $3.0 million in
2000, $3.5 million in 2001, $4.0 million in 2002, $4.9 million in 2003, $8.4
million in 2004 and $7.1 million in 2005.
All loans under the New Credit Facility are prepayable at the option of the
Company without premium or penalty, except that any prepayment of a loan
bearing interest based on LIBOR that is made before the end of the applicable
interest period will be subject to reimbursement of breakage costs.
The New Credit Facility requires prepayments of the term loans in amounts
equal to (a) 50.0% of "excess cash flow" for each fiscal year beginning with
1998, (b) 100.0% of net cash proceeds from sale of assets over a base amount
unless the proceeds are used to purchase specified other assets, (c) 75.0% of
the net cash proceeds from the issuance of subordinated debt (other than the
Notes and Exchange Notes) and (d) 50.0% of net cash proceeds from the issuance
of equity. The New Credit Facility also requires prepayments of revolving
credit loans (with an equal reduction in the commitment amount) in amounts
equal to 50.0% of the net cash proceeds from the issuance of equity once the
term loans are fully repaid.
Covenants. The New Credit Facility contains customary covenants, including:
reporting and other affirmative covenants; financial covenants, including
requirements that the Company maintain specified fixed charge coverage ratios,
specified interest coverage ratios, minimum shareholders' equity, and a ratio
of net total debt to adjusted EBITDA; and negative covenants, including
restrictions on incurring other indebtedness, payment of cash dividends and
other distributions, existence of liens, making investments, affiliate
transactions, issuing guarantees or making advances to others, modifications
to the terms of the Notes and Exchange Notes and related documents, sales of
assets not in the ordinary course of business, mergers and acquisitions, and
entering into agreements inconsistent with the New Credit Facility.
Events of Default. The New Credit Facility contains customary events of
default, including: non-payment of principal, interest or fees; violations of
covenants; inaccuracy of representations or warranties; judgments; ERISA
violations; cross-defaults to other indebtedness; change of control and
bankruptcy. It also is an event of default if Mr. Welker ceases to be the
President and Chief Executive Officer of the Company or ceases to have the
ability to elect a majority of its directors and if he is not replaced within
120 days by a person satisfactory to the New Credit Facility lenders.
INDUSTRIAL DEVELOPMENT REVENUE BONDS
The IRBs are limited obligation variable rate demand industrial development
revenue bonds issued in 1996 by the Industrial Development Board of Williamson
County, Tennessee (the "IDBW") for the benefit of the Company in the principal
amount of $2.5 million. The Company is obligated to pay to the IDBW all
amounts necessary to pay principal, interest, purchase price and premium, if
any, on the IRBs. The IRBs are due on December 1, 2011.
Letter of Credit. The Company has supplied a letter of credit issued by NBD
Bank on which the trustee for the holders of the IRBs can draw to pay
principal of the IRBs, principal and interest on IRBs tendered for purchase
and an amount equal to 110 days' interest. Under a reimbursement agreement
with NBD Bank, the Company has agreed to reimburse NBD Bank for all payments
made by it under the letter of credit and to indemnify NBD Bank from any and
all losses, costs, and damages which it may suffer in connection with the
letter of credit. The reimbursement agreement is part of the New Credit
Facility.
Interest Rates. The interest rate on the IRBs is set weekly by a remarketing
agent at the rate it determines to be the lowest at which it can remarket the
IRBs at par, which in 1997 ranged from 3.4% to 4.1%.
56
<PAGE>
Purchase and Redemption. Each holder has the right to require his IRBs to be
purchased at par at any time. To the extent that purchased IRBs are not
remarketed, the purchase price is to be paid by drawing on the letter of
credit or otherwise by the Company. The IRBs are subject to mandatory purchase
upon the occurrence of certain events. The Company has agreed in the
reimbursement agreement that it will exercise its option to partially redeem
IRBs in the amount of (a) $200,000 on each December 1 from 2002 through 2006
and (b) $300,000 on each December 1 from 2007 through 2010.
Events of Default. The IRB indenture and the loan agreement between the
Company and the IDBW contain various customary events of default. The
reimbursement agreement presently incorporates the events of default under the
Old Credit Facility and will incorporate the events of default under the New
Credit Facility.
57
<PAGE>
DESCRIPTION OF EXCHANGE NOTES
Set forth below is a summary of certain provisions of the Exchange Notes.
The Exchange Notes will be issued pursuant to the same Indenture (the
"Indenture") among the Company, the Guarantors and U.S. Bank Trust National
Association (formerly known as First Trust National Association), as trustee
(the "Trustee"), under which the Notes were issued. The terms of the Exchange
Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939 (the "Trust
Indenture Act"). The Exchange Notes are subject to all such terms, and Holders
of Exchange Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. The following summary of the material provisions of
the Indenture and the Registration Rights Agreement does not purport to be
complete and is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. Copies of the
Indenture and Registration Rights Agreement have been filed as Exhibits to the
Registration Statement. The definitions of certain terms used in the following
summary are set forth below under "--Certain Definitions." For purposes of
this summary, the term "Company" refers only to Numatics, Inc. and not to any
of its Subsidiaries.
GENERAL
The Exchange Notes will be general unsecured obligations of the Company,
will be subordinated in right of payment to all existing and future Senior
Indebtedness of the Company, including Senior Indebtedness under the New
Credit Facility, and will rank pari passu or senior in right of payment will
all existing and future subordinated indebtedness of the Company. The Exchange
Notes and the Notes will rank equally with one another. As of May 31, 1998 the
aggregate principal amount of Senior Indebtedness (excluding trade payables
and other accrued liabilities) of the Company was approximately $44.6 million,
approximately $40.5 million of which was Indebtedness secured by substantially
all of the assets of the Company and its Subsidiaries pursuant to the New
Credit Facility. Of such amount, $7.4 million was Indebtedness of Restricted
Subsidiaries which was guaranteed by the Company. The terms of the Indenture
limit the ability of the Company and its Subsidiaries to incur additional
Indebtedness.
The Exchange Notes will be guaranteed on a senior subordinated basis by each
domestic Restricted Subsidiary of the Company. See "Subsidiary Guarantees."
However, the Exchange Notes will be effectively subordinated to all
indebtedness and other liabilities (including trade payables and lease
obligations) of the Company's foreign Subsidiaries. Any right to receive
assets of any of the Company's foreign Subsidiaries after the latter's
liquidation or reorganization will be effectively subordinated to the claims
of the Subsidiary's creditors. Each Guarantor's guarantee of the Exchange
Notes will rank equally with its guarantee of the Notes. As of May 31, 1998
the liabilities (including trade payables and lease obligations) of the
Company's foreign Subsidiaries was $11.9 million (including $7.4 million of
debt guaranteed by the Company).
All of the Company's Subsidiaries currently are Restricted Subsidiaries.
However, under certain circumstances, the Company will be able to designate
current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants set
forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes will mature on April 1, 2008. The Indenture provides for
the issuance of up to $100.0 million aggregate principal amount of additional
notes having identical terms and conditions to the Notes and Exchange Notes
(the "Additional Notes"), subject to compliance with the covenants contained
in the Indenture. Any Additional Notes will be part of the same issue as the
Notes and Exchange Notes and will vote on all matters with the Notes and
Exchange Notes. For purposes of this "Description of Exchange Notes,"
references to the Notes and Exchange Notes do not include Additional Notes.
Interest on the Exchange Notes will accrue at the rate of 9 5/8% per annum and
will be payable semi-annually in arrears on April 1 and October 1, commencing
on October 1, 1998, to Holders of record on the immediately preceding March 15
and September 15. Interest on the Exchange Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the date of original issuance. Interest will be computed on the basis of
a 360-day year comprised of twelve 30-day months.
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<PAGE>
Principal, premium, if any, and interest and Liquidated Damages on the
Exchange Notes will be payable at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest and Liquidated Damages may be made
by check mailed to the Holders of the Exchange Notes at their respective
addresses set forth in the register of Holders of Exchange Notes; provided
that all payments of principal, premium, interest and Liquidated Damages with
respect to Exchange Notes the Holders of which have given wire transfer
instructions to the Company will be required to be made by wire transfer of
immediately available funds to the accounts specified by the Holders thereof.
Until otherwise designated by the Company, the Company's office or agency in
New York will be the office of the Trustee maintained for such purpose. The
Exchange Notes will be issued in denominations of $1,000 and integral
multiples thereof.
SUBORDINATION
The payment of principal of, premium, if any, interest and Liquidated
Damages, if any, and all other Obligations on the Exchange Notes will be
subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full in cash or Cash Equivalents of all Senior Indebtedness,
whether outstanding on the date of the Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Indebtedness will be entitled to
receive payment in full in cash or Cash Equivalents of all Obligations due in
respect of such Senior Indebtedness (including, without limitation, interest
after the commencement of any such proceeding at the rate specified in the
applicable Senior Indebtedness) before the Holders of Exchange Notes will be
entitled to receive any payment with respect to the Exchange Notes, including,
without limitation, Obligations in respect thereof, and any redemption,
defeasance or other acquisition thereof, and until all Obligations with
respect to Senior Indebtedness are paid in full in cash or Cash Equivalents,
any distribution to which the Holders of Exchange Notes would be entitled
shall be made to the holders of Senior Indebtedness (except that Holders of
Exchange Notes may receive and retain Permitted Junior Securities and payments
made from the trust described under the caption "--Legal Defeasance and
Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Exchange
Notes (except in Permitted Junior Securities or from the trust described under
the caption "--Legal Defeasance and Covenant Defeasance") if (i) a default in
the payment of the principal of, premium, if any (a "Payment Default"), or
interest on Designated Senior Indebtedness occurs and is continuing beyond any
applicable period of grace or (ii) any other default occurs and is continuing
with respect to Designated Senior Indebtedness that permits holders of the
Designated Senior Indebtedness as to which such default relates to accelerate
its maturity and the Trustee receives a notice of such default (a "Payment
Blockage Notice") from the Company or the holders of any Designated Senior
Indebtedness. Payments on the Exchange Notes may and shall be resumed (a) in
the case of a payment default, upon the date on which such default is cured or
waived and (b) in case of a nonpayment default, the earlier of the date on
which such nonpayment default is cured or waived or 179 days after the date on
which the applicable Payment Blockage Notice is received, unless the maturity
of any Designated Senior Indebtedness has been accelerated or a Payment
Default has occurred. No new period of payment blockage pursuant to a Payment
Blockage Notice may be commenced unless and until 360 days have elapsed since
the effectiveness of the immediately prior Payment Blockage Notice. No
nonpayment default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustee shall be, or be made, the basis for
a subsequent Payment Blockage Notice unless such default shall have been cured
or waived for a period of not less than 90 days.
The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness if payment of the Exchange Notes is accelerated because of
an Event of Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Exchange Notes may recover less
ratably than other creditors of the Company including holders of Senior
Indebtedness. On a pro forma basis, after giving effect to the Offering and
the application of the proceeds
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therefrom, the principal amount of Senior Indebtedness outstanding at December
31, 1997 would have been approximately $43.0 million. The Indenture limits,
subject to certain financial tests, the amount of additional Indebtedness,
including Senior Indebtedness, that the Company and its Subsidiaries can
incur. See "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock."
SUBSIDIARY GUARANTEES
General. The Company's payment obligations under the Exchange Notes will be
fully and unconditionally, jointly and severally guaranteed on a senior
subordinated basis (the "Subsidiary Guarantees") by the Guarantors. The
Subsidiary Guarantees will be subordinated in right of payment to all existing
and future Senior Indebtedness of the Guarantors, including all obligations of
the Guarantors under the New Credit Facility, and will rank pari passu in
right of payment with all existing and future senior subordinated indebtedness
of the Guarantors. The obligation of each Guarantor under its Subsidiary
Guarantee will be limited with the intention that such Subsidiary Guarantee
not constitute a fraudulent conveyance or transfer or an improper distribution
under applicable law. The maximum liability of each Subsidiary Guarantor as a
result of the foregoing will vary depending upon the law and the legal
standards applied in any proceeding with respect to the Subsidiary Guarantee.
There can be no assurance as to what standard or law a court would apply in
making a determination as to what the maximum liability would be for each
Guarantor under its Subsidiary Guarantee.
Merger, Consolidation, etc. The Indenture provides that no Guarantor may
consolidate with or merge with or into (whether or not such Guarantor is the
surviving Person) another corporation, Person or entity whether or not
affiliated with such Guarantor unless (i) subject to the provisions of the
following paragraph, the Person formed by or surviving any such consolidation
or merger (if other than such Guarantor) assumes all the obligations of such
Guarantor pursuant to a supplemental indenture in form and substance
reasonably satisfactory to the Trustee, under the Exchange Notes and the
Indenture, (ii) immediately after giving effect to such transaction, no
Default or Event of Default exists and (iii) the Company would be permitted,
by virtue of the Company's pro forma Fixed Charge Coverage Ratio, immediately
after giving effect to such transaction, to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test described below
under the caption "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock."
Release. The Indenture provides that in the event of a sale or other
disposition of all of the assets of any Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the
capital stock of any Guarantor, then such Guarantor (in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the capital stock of such Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Guarantor) will be released and relieved of any obligations under its
Subsidiary Guarantee. The obligation to apply Net Proceeds of such sale or
other disposition in accordance with the applicable provisions of the
Indenture, including without limitation the provisions described below under
the caption "--Certain Covenants--Limitations on Asset Sales" shall continue
and be enforceable, however.
OPTIONAL REDEMPTION
The Exchange Notes will not be redeemable at the Company's option prior to
April 1, 2003, except as provided in the following paragraph. Thereafter, the
Exchange Notes will be subject to redemption at any time at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus (subject to the right of Holders of record on a
Record Date to receive interest due on an Interest Payment Date that is on or
prior to such redemption date) accrued and unpaid interest and Liquidated
Damages thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on April 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003.......................................................... 104.8125%
2004.......................................................... 103.2083%
2005.......................................................... 101.6042%
2006 and thereafter........................................... 100.00%
</TABLE>
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Notwithstanding the foregoing, at any time on or before, April 1, 2001, the
Company may redeem up to $40,250,000 aggregate principal amount of Notes and
Exchange Notes at a redemption price of 109.625% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages thereon, if
any, to the redemption date, with the cash proceeds to the Company of one or
more Public Offerings; provided that at least $74,750,000 aggregate principal
amount of Notes and Exchange Notes remain outstanding immediately after the
occurrence of such redemption (excluding Notes and Exchange Notes held by the
Company or any of its Subsidiaries); and provided, further, that such
redemption shall occur within 45 days of the date of the closing of such
Public Offering.
SELECTION AND NOTICE
If less than all of the Exchange Notes are to be redeemed at any time,
selection of Exchange Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities
exchange, if any, on which the Exchange Notes were listed, or, if the Exchange
Notes are not so listed, on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate; provided that no Exchange Notes of
$1,000 or less shall be redeemed in part. Notices of redemption shall be
mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Exchange Notes to be redeemed at its
registered address. Notices of redemption may not be conditional. If any
Exchange Note is to be redeemed in part only, the notice of redemption that
relates to such Exchange Note shall state the portion of the principal amount
thereof to be redeemed. A new Exchange Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Exchange Note. Exchange Notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Exchange Notes or portions of
them called for redemption unless the Company defaults in the payment thereof.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Exchange Notes.
CERTAIN COVENANTS
Repurchases of Exchange Notes at the Option of Holders upon a Change of
Control
Upon the occurrence of a Change of Control, each Holder of Exchange Notes
will have the right to require the Company to purchase all or any part (equal
to $1,000 or an integral multiple thereof) of such Holder's Exchange Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest and Liquidated Damages thereon, if any, to
the date of purchase (the "Change of Control Payment"). Within ten days
following any Change of Control, the Company will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of
Control and offering to repurchase Exchange Notes on the date specified in
such notice, which date shall be no earlier than 30 days and no later than 60
days from such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the Indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Exchange Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Exchange Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Exchange Notes or portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustee the Exchange Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of Exchange Notes
or portions thereof being purchased by the Company. The Paying Agent will
promptly mail to each holder of Exchange Notes so tendered the Change of
Control Payment for such Exchange Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each
Holder a new Exchange Note equal in principal amount to any unpurchased
portion of the Exchange Notes surrendered, if any; provided that each such
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new Exchange Note will be in a principal amount of $1,000 or an integral
multiple thereof. The Indenture will provide that, prior to complying with the
provisions of this covenant, but in any event within 90 days following a
Change of Control, if agreements governing Senior Indebtedness prohibit the
purchase of the Exchange Notes, the Company will either repay all outstanding
Senior Indebtedness or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Indebtedness to permit the repurchase
of Exchange Notes required by this covenant if such agreements prohibit such
purchase. However, there can be no assurance that the Company will be able to
either repay all such Senior Indebtedness or obtain all required consents. The
Company will publicly announce the results of the Change of Control Offer on
or as soon as practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change in Control, the Indenture does not
contain provisions that permit the Holders of the Exchange Notes to require
that the Company repurchase or redeem the Exchange Notes in the event of a
takeover, recapitalization or similar transaction.
The New Credit Facility provides that certain change of control events with
respect to the Company would constitute a default thereunder. The New Credit
Facility prohibits the Company from purchasing any Exchange Note prior to
maturity. Any future credit agreements or other agreements relating to the
Senior Indebtedness to which the Company becomes a party may contain similar
restrictions and provisions and the agreement of the Company thereto is not a
default under the Indenture. In the event a Change of Control occurs at a time
when the Company is prohibited from repurchasing Exchange Notes, the Company
could seek the consent of its lenders to the repurchase of Exchange Notes or
could attempt to refinance the borrowings that contain such prohibition. If
the Company does not obtain such a consent or repay such borrowings, the
Company will remain prohibited from repurchasing Exchange Notes. There can be
no assurance that the Company will be able to obtain such consents or repay
such Indebtedness. In such case, the Company's failure to repurchase tendered
Exchange Notes would constitute an Event of Default under the Indenture which
would, in turn, constitute a default under the New Credit Facility. See
"Description of Other Indebtedness--New Credit Facility." In such
circumstances, the subordination provisions in the Indenture would likely
restrict payments to Holders of Exchange Notes.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Exchange Notes validly tendered and not withdrawn
under such Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under
applicable law. Accordingly, the ability of a Holder of Exchange Notes to
require the Company to repurchase such Exchange Notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the
assets of the Company and its Subsidiaries taken as a whole to another Person
or group may be uncertain.
Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation
involving the Company or any of its Restricted Subsidiaries) or to the direct
or indirect holders of the Company's or any of its Restricted Subsidiaries'
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
the Company or dividends or other distributions payable to the Company or a
Restricted Subsidiary of the Company); (ii) purchase, redeem or otherwise
acquire or retire for value (including, without limitation, in connection with
any merger or consolidation involving the Company) any Equity Interests of the
Company or any direct or indirect parent of the Company or other Affiliate of
the Company (other than any such
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Equity Interests owned by the Company or any Wholly Owned Restricted
Subsidiary of the Company; (iii) make
any payment on or with respect to, or purchase, redeem, defease or otherwise
acquire or retire for value any Indebtedness that is pari passu with or
subordinated to the Exchange Notes (other than Exchange Notes), except a
payment of interest or principal at Stated Maturity; (iv) make any Restricted
Investment; or (v) make any payment of principal, premium or interest on or in
respect of or otherwise purchase, redeem, defease or otherwise acquire or
retire for value any Management Notes (all such payments and other actions set
forth in clauses (i) through (v) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event or Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (ii), (iii), (iv), (vii) and (viii) of the next
succeeding paragraph), is less than the sum, without duplication, of (i)
50% of the Consolidated Net Income of the Company for the period (taken as
one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company since
the date of the Indenture as a contribution to its common equity capital or
from the issue or sale of Equity Interests of the Company (other than
Disqualified Stock) or from the issue or sale of Disqualified Stock or debt
securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Company), plus
(iii) to the extent that any Restricted Investment that was made after the
date of the Indenture is sold for cash or otherwise liquidated or repaid
for cash (including through the redesignation of an Unrestricted Subsidiary
as a Restricted Subsidiary in accordance with the Indenture), the lesser of
(A) the cash return of capital with respect to such Restricted Investment
(less the cost of disposition, if any) and (B) the initial amount of such
Restricted Investment plus (iv) 50% of any cash dividends received by the
Company or an 80% Restricted Subsidiary that is a Guarantor after the date
of the Indenture from an Unrestricted Subsidiary of the Company, to the
extent that such dividends were not otherwise included in Consolidated Net
Income of the Company for such period, plus (v) to the extent that any
Unrestricted Subsidiary is redesignated as a Restricted Subsidiary after
the date of the Indenture, the lesser of (A) the fair market value of the
Company's Investment in such Subsidiary as of the date of such
redesignation or (B) such fair market value as of the date on which such
Subsidiary was originally designated as an Unrestricted Subsidiary, plus
(vi) $2.5 million.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture: (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any pari passu or subordinated Indebtedness or Equity Interests
of the Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary of the
Company) of, other Equity Interests of the Company (other than any
Disqualified Stock); provided that the amount of any such net cash proceeds
that are utilized for any such redemption, repurchase, retirement, defeasance
or other acquisition shall be excluded from clause (c) (ii) of the preceding
paragraph; (iii) the defeasance, redemption, repurchase or other acquisition
of pari passu or subordinated Indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any
dividend by a Restricted Subsidiary of the Company to the holders of its
common Equity Interests on a pro rata basis; (v) the repurchase, redemption or
other
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acquisition or retirement for value of any Equity Interests of the Company or
any Restricted Subsidiary of the Company held by any member of the Company's
(or any of its Restricted Subsidiaries') management pursuant to any management
equity subscription agreement or stock option agreement in effect as of the
date of the Indenture; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not exceed
$5.0 million in the aggregate since the Issue Date; (vi) the repurchase of the
Harvard Warrant required pursuant to agreements in effect on the Issue Date
(as in effect on such date), provided that the consideration paid by the
Company shall consist solely of Harvard Notes; (vii) the purchase of common
stock held by management of the Company required pursuant to the Shareholders'
Agreement, provided that the consideration paid by the Company shall consist
solely of Management Notes; and (viii) the payment on or after the Issue Date
of dividends in respect of the Company's common stock in an aggregate amount
not exceeding $6.0 million. The Company paid a $6.0 million dividend on its
common stock on March 26, 1998.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated will be deemed to be Restricted Payments at
the time of such designation and will reduce the amount available for
Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the fair market value of such Investments at the time of such
designation. Such designation will only be permitted if such Restricted
Payment would be permitted at such time if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined
by the Board of Directors whose resolution with respect thereto shall be
delivered to the Trustee, such determination to be based upon an opinion or
appraisal issued by an accounting, appraisal or investment banking firm of
national standing if such fair market value exceeds $1.0 million. Not later
than the date of making any Restricted Payment, the Company shall deliver to
the Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed, together with a copy of any
fairness opinion or appraisal required by the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock and
will not permit any of its Subsidiaries to issue any shares of preferred
stock; provided, however, that the Company may incur Indebtedness (including
Acquired Debt) or issue shares of Disqualified Stock and any Guarantor may
incur Indebtedness or issue preferred stock if the Fixed Charge Coverage Ratio
for the Company's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred or such Disqualified Stock or
preferred stock is issued would have been at least 2.0 to 1, determined on a
pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock or preferred stock had been issued, as the case may be, at
the beginning of such four-quarter period.
The foregoing provisions will not apply to the incurrence of any of the
following items of Indebtedness (collectively, "Permitted Debt"):
(i) the incurrence by the Company and its Restricted Subsidiaries of (A)
revolving credit Indebtedness and letters of credit pursuant to Credit
Facilities; provided that the aggregate principal amount of all revolving
credit Indebtedness (with letters of credit being deemed to have a
principal amount equal to the
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maximum potential liability of the Company and its Restricted Subsidiaries
thereunder) at any time outstanding under all Credit Facilities pursuant to
this clause (i) after giving effect to such incurrence does not exceed an
amount equal to the greater of (x) $35.0 million of such Indebtedness less
the aggregate amount of all Net Proceeds of Asset Sales applied to
permanently reduce commitments with respect to Credit Facilities pursuant
to the covenant described below under the caption "--Limitations on Asset
Sales" and (y) the amount of the Borrowing Base of the Company as of the
date of incurrence; and (B) term Indebtedness under Credit Facilities,
provided that the aggregate principal amount of all term Indebtedness
outstanding under all Credit Facilities after giving effect to such
incurrence does not exceed $35.0 million less the aggregate amount of all
Net Proceeds of Asset Sales that have been applied since the date of the
Indenture to repay term Indebtedness under a Credit Facility pursuant to
the covenant described below under the caption "--Limitations on Asset
Sales"; provided that the aggregate principal amount of all Indebtedness
incurred under all Credit Facilities (with letters of credit being deemed
to have a principal amount equal to the maximum potential liability of the
Company and its Restricted Subsidiaries thereunder) by any Restricted
Subsidiary that is not a Guarantor pursuant to this clause (i) after giving
effect to such incurrence does not exceed an amount equal to the greater of
(x) the amount of the Borrowing Base of such Restricted Subsidiary at the
time of such incurrence and (y) the amount which, when combined with all
outstanding Indebtedness incurred under Credit Facilities by Restricted
Subsidiaries that are not Guarantors at or prior to the time of such
incurrence does not exceed $35.0 million:
(ii) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Notes (other than any Additional Notes) and the Exchange Notes (other than
any Additional Notes) and the incurrence by the Guarantors of Indebtedness
represented by the Subsidiary Guarantees;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of the Company or such Subsidiary, in an aggregate principal
amount not to exceed $5.0 million at any time outstanding;
(v) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that is either the Existing Indebtedness or was
permitted by the Indenture to be incurred under the first paragraph hereof
or clauses (iii), (iv), (v) or (vii) of this paragraph;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
80% Restricted Subsidiaries; provided, however, that (i) if the Company is
the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all Obligations with
respect to the Notes (it being understood that payments under intercompany
Indebtedness shall be permitted as long as no Default has occurred and is
continuing), and (ii)(A) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being held by a Person
other than the Company or an 80% Restricted Subsidiary thereof and (B) any
sale or other transfer of any such Indebtedness to a Person that is not
either the Company or an 80% Restricted Subsidiary thereof shall be deemed,
in each case, to constitute an incurrence of such Indebtedness by the
Company or such Restricted Subsidiary, as the case may be, that was not
permitted by this clause (vi);
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness in connection with the acquisition by the Company or a
Restricted Subsidiary of assets or a new Restricted Subsidiary; provided
that such Indebtedness was incurred by the prior owner of such assets or
such Restricted Subsidiary prior to such acquisition by the Company or a
Restricted Subsidiary and was not incurred in connection with, or in
contemplation of, such acquisition by the Company or a Restricted
Subsidiary; and provided further that the principal amount of such
Indebtedness does not exceed $5.0 million at any time outstanding.
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(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging (i) interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of this Indenture to be
outstanding; (ii) the value of foreign currencies purchased or received by
the Issuer in the ordinary course of business, or (iii) commodities
purchased in the ordinary course of business for use in a Permitted
Business and not for speculation;
(ix) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company that
was permitted to be incurred by another provision of this covenant;
(x) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (x), not to exceed $5.0
million;
(xi) the incurrence by the Company's Unrestricted Subsidiaries of Non-
Recourse Debt, provided, however, that if any such Indebtedness ceases to
be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company that was not permitted by this clause (xi); and
(xii) the issuance of Harvard Notes and Management Notes required to be
issued in accordance with agreements as in effect on the Issue Date;
provided that such Harvard Notes and Management Notes are issued in
accordance with clauses (vi) and (vii), respectively, of the second
paragraph of the covenant described under "--Restricted Payments."
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Debt described in clauses (i) through (xii) above or is entitled
to be incurred pursuant to the first paragraph of this covenant, the Company
shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant. Accrual of interest, accretion or
amortization of original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the same terms, and
the payment of dividends on Disqualified Stock in the form of additional
shares of the same class of Disqualified Stock will not be deemed to be an
incurrence of Indebtedness or an issuance of Disqualified Stock for purposes
of this covenant; provided, in each such case, that the amount thereof is
included in Fixed Charges of the Company as accrued.
Liens
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien securing Indebtedness or trade payables on any assets now
owned or hereafter acquired, or any income or profits therefrom or assign or
convey any right to receive income therefrom, except Permitted Liens, unless
all payments due under the Indenture and the Notes and Exchange Notes are
secured on an equal and ratable basis with the Indebtedness so secured until
such time as such is no longer secured by a Lien; provided that if such
Indebtedness is by its terms expressly subordinated to the Notes and Exchange
Notes or any Subsidiary Guarantee, the Lien securing such Indebtedness shall
be subordinate and junior to the Lien securing the Notes and Exchange Notes
and the Subsidiary Guarantees with the same relative priority as such
subordinate or junior Indebtedness shall have with respect to the Notes and
Exchange Notes and the Subsidiary Guarantees.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay
dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (b) pay
any indebtedness owed to the Company or any of its Restricted Subsidiaries,
(ii) make loans or advances to the Company or any of its Restricted
Subsidiaries or (iii)
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transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries. However, the foregoing restrictions will not apply to
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of the Indenture, (b) the Indenture and
the Notes and Exchange Notes, (c) applicable law, (d) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of
its Restricted Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so acquired,
provided that, in the case of Indebtedness, such Indebtedness was permitted by
the terms of the Indenture to be incurred, (e) customary non-assignment
provisions in leases entered into in the ordinary course of business and
consistent with past practices, (f) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired, (g) any
agreement for the sale of a Restricted Subsidiary that restricts distributions
by that Restricted Subsidiary pending its sale, (h) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive,
taken as a whole, than those contained in the agreements governing the
Indebtedness being refinanced, (i) Credit Facilities provided that the
restrictions contained therein are no more restrictive, taken as a whole, with
respect to such dividends and other payments than those contained in Credit
Facilities as in effect on the date of the Indenture, (j) agreements for the
sale of assets that restrict the transfer of such assets pending such sale (k)
restrictions on cash or other deposits or net worth imposed by customers under
contracts entered into in the ordinary course of business, (l) Liens securing
Indebtedness otherwise permitted to be incurred pursuant to the provisions of
the covenant described above under the caption "--Liens" that limits the right
of the debtor to dispose of the assets securing such Indebtedness, (m)
provisions with respect to the disposition or distribution of assets or
property in joint venture agreements and other similar agreements entered into
in the ordinary course of business and (n) restrictions on cash or other
deposits or net worth imposed by customers under contracts entered into in the
ordinary course of business.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
another corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Registration Rights Agreement, the Notes
and Exchange Notes and the Indenture pursuant to a supplemental indenture in a
form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly Owned Restricted Subsidiary
of the Company, the Company or the entity or Person formed by or surviving any
such consolidation or merger (if other than the Company), or to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made (A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transaction and (B) will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction
had occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charged Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock."
Limitations on Asset Sales
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
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consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary
is in the form of cash; provided that the amount of (x) any liabilities (as
shown on the Company's or such Restricted Subsidiary's most recent balance
sheet), of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes
or any guarantee thereof) that are assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases the Company or
such Restricted Subsidiary from further liability and (y) any securities,
notes or other obligations received by the Company or any such Restricted
Subsidiary from such transferee that are contemporaneously (subject to
ordinary settlement periods) converted by the Company or such Restricted
Subsidiary into cash (to the extent of the cash received), shall be deemed to
be cash for purposes of this provision.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds (or an amount of cash equal thereto),
at its option, (a) to permanently repay (and, if applied to revolving credit
loans, reduce the commitments under) Senior Indebtedness of the Company or a
Guarantor or (b) to the acquisition of a majority of the assets of, or a
majority of the Voting Stock of, another Permitted Business, the making of a
capital expenditure or the acquisition of other long-term assets that are used
or useful in a Permitted Business. Pending the final application of any such
Net Proceeds, the Company may temporarily reduce revolving credit borrowings
or otherwise invest such Net Proceeds in any manner that is not prohibited by
the Indenture. Any Net Proceeds from Asset Sales that are not applied or
invested as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $5.0 million, the Company will be required to make an offer to all
Holders of Notes and Exchange Notes and all holders of other Indebtedness
containing provisions similar to those set forth in the Indenture with respect
to offers to purchase or redeem with the proceeds of sales of assets (an
"Asset Sale Offer") to purchase the maximum principal amount of Notes and
Exchange Notes and such other Indebtedness that may be purchased out of the
Excess Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the date of purchase, in accordance with the
procedures set forth in the Indenture and such other Indebtedness. To the
extent that any Excess Proceeds remain after consummation of an Asset Sale
Offer, the Company may use such Excess Proceeds for any purpose not otherwise
prohibited by the Indenture. If the aggregate principal amount of Notes and
such other Indebtedness tendered into such Asset Sale Offer surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall
select the Notes and Exchange Notes and such other Indebtedness to be
purchased on a pro rata basis. Upon completion of such offer to purchase, the
amount of Excess Proceeds shall be reset at zero.
Transactions with Affiliates
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms
that are no less favorable to the Company or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an unrelated
Person and (ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $1.0 million, a resolution of the Board
of Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the disinterested members of
the Board of Directors and (b) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $5.0 million, an opinion as to the fairness to the Holders of such
Affiliate Transaction from a financial point of view issued by an accounting,
appraisal or investment banking firm of national standing. Notwithstanding the
foregoing, the following items shall not be deemed to be Affiliate
Transactions: (i) any
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employment agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business and consistent with the past
practice of the Company or such Restricted Subsidiary, (ii) transactions
between or among the Company and/or its Restricted Subsidiaries, (iii) payment
of reasonable directors fees to Persons who are not otherwise Affiliates of
the Company, (iv) transactions pursuant to agreements in effect on the Issue
Date (as in effect on such date), and (v) Restricted Payments (other than
Restricted Investments) that are permitted by the provisions of the Indenture
described above under the caption "--Restricted Payments."
Limitation on Issuances and Sales of Equity Interests in Restricted
Subsidiaries
The Indenture provides that the Company (i) will not, and will not permit
any Restricted Subsidiary of the Company to, transfer, convey, sell, lease or
otherwise dispose of any Equity Interests in any Restricted Subsidiary of the
Company to any Person (other than the Company or a Restricted Subsidiary of
the Company), unless (a) such transfer, conveyance, sale, lease or other
disposition is of all the Equity Interests in such Restricted Subsidiary and
(b) the cash Net Proceeds from such transfer, conveyance, sale, lease or other
disposition are applied in accordance with the covenant described above under
the caption "--Asset Sales," and (ii) will not permit any Restricted
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares and issuances of Preferred Stock in accordance with the covenant
described above under the caption "--Incurrence of Indebtedness and Issuance
of Preferred Stock") to any Person other than to the Company or a Restricted
Subsidiary of the Company.
Business Activities
The Company will not, and will not permit any Subsidiary to, engage in any
business other than Permitted Businesses, except to such extent as would not
be material to the Company and its Subsidiaries taken as a whole.
No Senior Subordinated Debt
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Indebtedness and
senior in any respect in right of payment to the Exchange Notes and (ii) no
Guarantor will incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness of such Guarantor that is subordinate or junior in
right of payment to any Indebtedness of such Guarantor and senior in any
respect in right of payment to the Subsidiary Guarantee of such Guarantor.
Payments for Consent
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any Holder of any Exchange
Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the Exchange Notes unless such
consideration is offered to be paid or is paid to all Holders of the Notes and
Exchange Notes that consent, waive or agree to amend in the time frame set
forth in the solicitation documents relating to such consent, waiver or
agreement.
Reports
The Indenture provides that, for periods ending after December 31, 1997,
whether or not required by the rules and regulations of the Securities and
Exchange Commission (the "Commission"), so long as any Notes or Exchange Notes
are outstanding, the Company will furnish to the Holders of Notes and Exchnage
Notes (i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-
K if the Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
describes the financial condition and results of operations of the Company and
its consolidated Subsidiaries (showing in reasonable detail, either on the
face of the financial statements or in the footnotes thereto and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the financial condition and results of operations of the
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Company and its Restricted Subsidiaries separate from the financial condition
and results of operation of the Unrestricted Subsidiaries of the Company) and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports, in each case within the time periods specified
in the Commission's rules and regulations. In addition, following the
consummation of the exchange offer contemplated by the Registration Rights
Agreement, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability within the time periods specified
in the Commission's rules and regulations (unless the Commission will not
accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, the Company and
the Guarantors have agreed that, for so long as any Notes remain outstanding,
they will furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
Additional Subsidiary Guarantees
The Indenture provides that (i) the Company will not permit any of its
Subsidiaries that is not a Guarantor to incur, guarantee or secure through the
granting of Liens the payment of any Indebtedness of the Company or any
Guarantor and (ii) the Company will not, and will not permit any of its
Subsidiaries to, pledge any intercompany notes representing obligations of any
of its Subsidiaries, to secure the payment of any Indebtedness of the Company
or any Guarantor, in each case unless such Subsidiary, the Company and the
Trustee execute and deliver a supplemental indenture evidencing such
Subsidiary's Guarantee (providing for the unconditional guarantee by such
Subsidiary, on a senior subordinated basis, of the Exchange Notes).
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes or Exchange Notes (whether or
not prohibited by the subordination provisions of the Indenture); (ii) default
in payment when due of the principal of or premium, if any, on the Notes or
Exchange Notes (whether or not prohibited by the subordination provisions of
the Indenture); (iii) failure by the Company or any of its Restricted
Subsidiaries to comply with the provisions described under the captions "--
Change of Control," "--Restricted Payments" or "--Incurrence of Indebtedness
and Issuance of Preferred Stock", (iv) failure by the Company or any of its
Restricted Subsidiaries for 60 days after notice to comply with any of its
other agreements in the Indenture or the Notes or Exchange Notes; (v) default
under any mortgage, indenture or instrument under which there may be issued or
by which there may be secured or evidenced any Indebtedness for money borrowed
by the Company or any of its Restricted Subsidiaries (or the payment of which
is guaranteed by the Company or any of its Restricted Subsidiaries) whether
such Indebtedness or guarantee now exists, or is created after the date of the
Indenture, which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness
prior to its express maturity and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $5.0 million or more; (vi) failure
by the Company or any of its Restricted Subsidiaries to pay final judgments
aggregating in excess of $5.0 million, which judgments are not paid,
discharged or stayed for a period of 60 days; (vii) except as permitted by the
Indenture, any Subsidiary Guarantee shall be held in any judicial proceeding
to be unenforceable or invalid or shall cease for any reason to be in full
force and effect or any Guarantor, or any Person acting on behalf of any
Guarantor, shall deny or disaffirm its obligations under its Subsidiary
Guarantee; and (viii) certain events of bankruptcy or insolvency with respect
to the Company or any of its Restricted Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes and Exchange
Notes may declare all the Notes and Exchange Notes to be due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default
arising from
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certain events of bankruptcy or insolvency, with respect to the Company, any
significant Restricted Subsidiary or any group of Restricted Subsidiaries
that, taken together, would constitute a Significant Restricted Subsidiary,
all outstanding Notes and Exchange Notes will become due and payable without
further action or notice. Holders of the Exchange Notes may not enforce the
Indenture or the Exchange Notes except as provided in the Indenture. Subject
to certain limitations, Holders of a majority in principal amount of the then
outstanding Notes and Exchange Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Exchange
Notes notice of any continuing Default or Event of Default (except a Default
or Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Exchange Notes
pursuant to the optional redemption provisions of the Indenture, an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law upon the acceleration of the Exchange Notes. If an Event of
Default occurs prior to April 1, 2003 by reason of any willful action (or
inaction) taken (or not taken) by or on behalf of the Company with the
intention of avoiding the prohibition on redemption of the Exchange Notes
prior to April 1, 2003 then the premium specified in the Indenture shall also
become immediately due and payable to the extent permitted by law upon the
acceleration of the Exchange Notes.
The Holders of a majority in aggregate principal amount of the Notes and
Exchange Notes then outstanding by notice to the Trustee may on behalf of the
Holders of all of the Notes and Exchange Notes waive any existing Default or
Event of Default and its consequences under the Indenture except a continuing
Default or Event of Default in the payment of interest on, or the principal
of, the Notes and Exchange Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Exchange Notes, the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Exchange Notes
by accepting an Exchange Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Exchange
Notes. Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Exchange Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Exchange
Notes to receive payments in respect of the principal of, premium, if any, and
interest and Liquidated Damages on such Exchange Notes when such payments are
due from the trust referred to below, (ii) the Company's obligations with
respect to the Exchange Notes concerning issuing temporary Exchange Notes,
registration of Exchange Notes, mutilated, destroyed, lost or stolen Exchange
Notes and the maintenance of an office or agency for payment and money for
security payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Exchange Notes. In the event Covenant Defeasance
occurs, certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Exchange Notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes and Exchange Notes, cash in U.S. dollars, non-
callable Government Securities, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest and Liquidated Damages on the outstanding Notes and Exchange Notes on
the stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Notes and Exchange Notes are being
defeased to maturity or to a particular redemption date; (ii) in the case of
Legal Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of counsel
shall confirm that, the Holders of the outstanding Notes and Exchange Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax on
the sale amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred; (iii) in the case of
Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes and Exchange Notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of
funds to be applied to such deposit) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit; (v) such Legal Defeasance or
Covenant Defeasance will not result in a breach or violation of, or constitute
a default under any material agreement or instrument (other than the
Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
have delivered to the Trustee an opinion of counsel to the effect that after
the 91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally; (vii) the Company must deliver to
the Trustee an Officers' Certificate stating that the deposit was not made by
the Company with the intent of preferring the Holders of Notes and Exchange
Notes over the other creditors of the Company with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others; and
(viii) the Company must deliver to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent provided for
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or
exchange any Exchange Note selected for redemption. Also, the Company is not
required to transfer or exchange any Exchange Note for a period of 15 days
before a selection of Notes to be redeemed.
The registered Holder of an Exchange Note will be treated as the owner of it
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Exchange Notes may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the Notes and Exchange
Notes then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes
and Exchange Notes), and any existing default or compliance with any provision
of the Indenture or the Notes and Exchange Notes may be waived with the
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consent of the Holders of a majority in principal amount of the then
outstanding Notes and Exchange Notes (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Notes and Exchange Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Exchange Notes held by a non-consenting Holder): (i)
reduce the principal amount of Notes and Exchange Notes whose Holders must
consent to an amendment, supplement or waiver, (ii) reduce the principal of or
change the fixed maturity of any Exchange Note or alter the provisions with
respect to the redemption of the Notes (other than provisions relating to the
covenants described above under the caption "--Repurchase at the Option of
Holders"), (iii) reduce the rate of or change the time for payment of interest
on any Exchange Note, (iv) waive a Default or Event of Default in the payment
of principal of or premium, if any, or interest on the Exchange Notes (except
a rescission of acceleration of the Notes and Exchange Notes by the Holders of
at least a majority in aggregate principal amount of the Notes and Exchange
Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Exchange Note payable in money other than that
stated in the Exchange Notes, (vi) make any change in the provisions of the
indenture relating to waivers of past Defaults or the rights of Holders of
Exchange Notes to receive payments of principal of or premium, if any, or
interest on the Exchange Notes, (vii) waive a redemption payment with respect
to any Exchange Note (other than a payment required by one of the covenants
described above under the caption "--Repurchase at the Option of Holders"),
(viii) release any Guarantor from any of its obligations under its Subsidiary
Guarantee or the Indenture, except in accordance with the terms of the
Indenture or (ix) make any change in the foregoing amendment and waiver
provisions. In addition, any amendment to the provisions of Article 10 of the
Indenture (which relate to subordination) will require the consent of the
Holders of at least 75% in aggregate principal amount of the Notes and
Exchange Notes then outstanding if such amendment would adversely affect the
rights of Holders of Notes and Exchange Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes
and Exchange Notes, the Company, the Guarantors and the Trustee may amend or
supplement the Indenture or the Exchange Notes to cure any ambiguity, defect
or inconsistency, to provide for uncertificated Exchange Notes in addition to
or in place of certificated Exchange Notes, to provide for the assumption of
the Company's or any Guarantor's obligations to Holders of Exchange Notes in
the case of a merger or consolidation or sale of all or substantially all of
the Company's assets, to provide for the issuance of Additional Notes in
accordance with the provisions set forth in the Indenture on the Issue Date,
to make any change that would provide any additional rights or benefits to the
Holders of Exchange Notes or that does not adversely affect the legal rights
under the Indenture of any such Holder, or to comply with requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue, or resign.
The Holders of a majority in principal amount of the then outstanding Notes
and Exchange Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required,
in the exercise of its power, to use the degree of care of a prudent man in
the conduct of his own affairs. Subject to such provisions, the Trustee will
be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Exchange Notes, unless such Holder
shall have offered to the Trustee security and indemnity satisfactory to it
against any loss, liability or expense.
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CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole will be governed by the provisions of the Indenture described
above under the caption "--Certain Covenants--Repurchases of Notes at the
Option of Holders upon a Change of Control" and/or the provisions described
above under the caption "--Certain Covenants--Merger, Consolidation or Sale of
Assets" and not by the provisions of the Asset Sale covenant), and (ii) the
issue by any Restricted Subsidiaries of the Company of any Equity Interests of
such Restricted Subsidiary and the sale by the Company or any of its
Restricted Subsidiaries of Equity Interest of any of the Company's
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of
$1.0 million. Notwithstanding the foregoing, the following items shall not be
deemed to be Asset Sales: (i) a transfer of assets by the Company to an 80%
Restricted Subsidiary or by a Restricted Subsidiary to the Company or to an
80% Restricted Subsidiary, (ii) an issuance of Equity Interests by a
Restricted Subsidiary to the Company or to an 80% Restricted Subsidiary, and
(iii) a Restricted Payment that is permitted by the covenant described above
under the caption "--Restricted Payments."
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Borrowing Base" means, as of any date, with respect to any Person, an
amount equal to the sum of 85% of accounts receivable of such Person and its
Restricted Subsidiaries as of such date that are not more than 120 days past
due, plus 65% of the book value of all inventory owned by such Person and its
Restricted Subsidiaries as of such date, in each case calculated on a
consolidated basis and in accordance with GAAP. To the extent that information
is not available as to the amount of accounts receivable or inventory as of a
specific date, the Company may utilize the most recent available information
for purposes of calculating the Borrowing Base.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
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"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less
from the date of acquisition, bankers' acceptances with maturities not
exceeding six months and overnight bank deposits, in each case with any lender
party to the New Credit Facility or with any domestic commercial bank having
capital and surplus in excess of $500 million and a Thompson Bank Watch Rating
of "B" or better, (iv) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clauses (ii)
and (iii) above entered into with any financial institution meeting the
qualifications specified in clause (iii) above, (v) commercial paper having
the highest rating obtainable from Moody's Investors Service, Inc. or Standard
& Poor's Corporation and in each case maturing within six months after the
date of acquisition and (vi) money market funds the assets of which constitute
Cash Equivalents of the kinds described in clauses (i)-(v) of this definition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole to any "person" (as such term is used in Section
13(d)(3) of the Exchange Act); (ii) the adoption of a plan relating to the
liquidation or dissolution of the Company; (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above) other than a Permitted
Transferee becomes the "beneficial owner" (as such term is defined in Rule
13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has
the right to acquire, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition), directly or
indirectly, of more than 50% of the Voting Stock of the Company (measured by
voting power rather than number of shares); (iv) the first day on which a
majority of the members of the Board of Directors of the Company are not
Continuing Directors; or (v) the Company consolidates with, or merges with or
into, any Person, or any Person consolidates with, or merges with or into, the
Company, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of the Company is converted into or exchanged for
cash, securities or other property, other than any such transaction where the
Voting Stock of the Company outstanding immediately prior to such transaction
is converted into or exchanged for Voting Stock (other than Disqualified
Stock) of the surviving or transferee Person constituting a majority of the
outstanding shares of such Voting Stock of such surviving or transferee Person
(immediately after giving effect to such issuance).
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such
Consolidated Net Income, plus (iii) consolidated interest expense of such
Person and its Restricted Subsidiaries for such period, whether paid or
accrued and whether or not capitalized (including, without limitation,
amortization of debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations commissions, discounts and other fees and charges incurred in
respect of letter of credit of bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including
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amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other non-cash
expenses (including unrealized foreign exchange losses recorded during such
period by such Person and its Restricted Subsidiaries provided, however, that
any such losses that are realized in a subsequent period shall be deducted
from Consolidated Cash Flow in the period when so realized and excluding any
other non-cash expense to the extent that it represents an accrual of or
reserve for cash expenses in any future period or amortization of a prepaid
cash expense that was paid in a prior period) of such Person and its
Restricted Subsidiaries for such period to the extent that such depreciation,
amortization and other non-cash expenses were deducted in computing such
Consolidated Net Income, minus (v) non-cash items increasing such Consolidated
Net Income for such period, in each case, on a consolidated basis and
determined in accordance with GAAP. Notwithstanding the foregoing, the amounts
described in clause (ii) and clause (iv) relating to any Restricted Subsidiary
that is party to any agreement that has not been legally waived that restricts
the declaration or payment of dividends or similar distributions shall be
included in EBITDA only to the extent (and in the same proportion) that the
Net income of such Restricted Subsidiary was included in calculating
Consolidated Net Income (without giving effect to clause (ii) of the
definition thereof) for so long as such Restricted Subsidiary is party to any
agreement that has not been legally waived that restricts the declaration or
payment of dividends or similar distributions.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a 80% Restricted
Subsidiary thereof that is a Guarantor, (ii) the Net Income of any Restricted
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable
to that Restricted Subsidiary or its stockholders, (iii) the Net Income of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded, (iv) the cumulative effect of
a change in accounting principles shall be excluded and (v) the Net Income
(but not loss) of any Unrestricted Subsidiary shall be excluded, whether or
not distributed to the Company or one of its Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translation
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the date of the
Indenture in the book value of any asset owned by such Person or a
consolidated Subsidiary of such Person, (y) all Investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments), and (z) all unamortized debt discount
and expense and unamortized deferred charges as of such date, all of the
foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time such
nomination or election.
"Credit Facilities" means, with respect to the Company or a Restricted
Subsidiary, one or more debt facilities (including, without limitation, the
New Credit Facility) or commercial paper facilities with banks or
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other institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such
lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time. Indebtedness under Credit Facilities outstanding on
the date on which Notes were first issued and authenticated under the
Indenture shall be deemed to have been incurred on such date in reliance on
the exception provided by clause (i) of the definition of Permitted Debt.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Indebtedness" means (i) any Indebtedness outstanding
under the New Credit Facility and (ii) any other Senior Indebtedness permitted
under the Indenture that has been designated by the Company as "Designated
Senior Indebtedness" and which Indebtedness, at the time of such designation,
was in the aggregate principal amount of $25.0 million or more.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes and Exchange Notes mature, provided, however, that any Capital
Stock that would constitute Disqualified Stock solely because the holders
thereof have the right to require the Company to repurchase such Capital Stock
upon the occurrence of a Change of Control or an Asset Sale shall not
constitute Disqualified Stock if the terms of such Capital Stock provide that
the Company may not repurchase or redeem any such Capital Stock pursuant to
such provisions unless such repurchase or redemption complies with the
covenant described above under the caption "--Certain Covenants--Restricted
Payments."
"80% Restricted Subsidiary" means any Restricted Subsidiary of the Company
at least 80% of each outstanding class of Equity Interests of which shall at
the time be owned by the Company or one or more 80% Restricted Subsidiaries of
the Company.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges incurred
in respect of letter of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated
interest of such Person and its Restricted Subsidiaries that was capitalized
during such period, and (iii) any interest expense on Indebtedness of another
Person that is Guaranteed by such Person or one of its Restricted Subsidiaries
or secured by a Lien on assets of such Person or one of its Restricted
Subsidiaries and (iv) the product of (a) all dividend payments, whether or not
in cash, on any series of preferred stock of such Person or any of its
Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests of the Company (other than Disqualified
Stock) or to the Company or a Restricted Subsidiary of the Company, times (b)
a fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal statutory, effective state and local
statutory tax rates of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
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"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person
and its Restricted Subsidiaries for such period. In the event that the
referent Person or any of its Restricted Subsidiaries incurs, assumes,
Guarantees or redeems any Indebtedness (other than revolving credit or similar
borrowings) or issues or redeems preferred stock subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the date on which the event for which the calculation
of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the
Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to
such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that
have been made by the Company or any of its Restricted Subsidiaries, including
through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to
have occurred on the first day of the four-quarter reference period and
Consolidated Cash Flow for such reference period shall be calculated without
giving effect to clause (iii) of the proviso set forth in the definition of
Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded,
and (iii) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, but only to the extent that
the obligations giving rise to such Fixed Charges will not be obligations of
the referent Person or any of its Restricted Subsidiaries following the
Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Harvard Notes" means notes of the Company which (i) are pari passu in right
of payment with the Notes and Exchange Notes, (ii) mature one year following
the final maturity date of the Notes and Exchange Notes, (iii) are on terms,
including covenants, no more restrictive than those contained in the Notes and
Exchange Notes and (iv) bear non-default interest at a rate not in excess of
25% per annum in cash.
"Harvard Warrant" means the warrant to purchase up 6.0% of the common stock
of the Company that was held by Harvard Private Capital Holdings, Inc. on the
Issue Date, and the common stock of the Company subsequently issued upon
exercise thereof.
"Guarantors" means (i) each domestic Subsidiary of the Company on the Issue
Date and (ii) any other subsidiary that executes a Subsidiary Guarantee in
accordance with the provisions of the Indenture, and their respective
successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money (whether or
not borrowed by such Person) or evidenced by bonds, notes, debentures or
similar instruments or letters of credit (or reimbursement agreements in
respect thereof) or banker's acceptances or representing Capital Lease
Obligations or the balance deferred and unpaid of the
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purchase price of any property or representing any Hedging Obligations,
excepting from the foregoing any such balance that constitutes an accrued
expense or trade payable, if and to the extent any of the foregoing (other
than letters of credit and Hedging Obligations) would appear as a liability
upon a balance sheet of such Person prepared in accordance with GAAP, as well
as all Indebtedness of others secured by a Lien on any asset of such Person
(whether or not such indebtedness is assumed by such Person) and, to the
extent not otherwise included, the Guarantee by such Person of any
indebtedness of any other Person. The amount of any Indebtedness outstanding
as of any date shall be (i) the accreted value thereof, in the case of any
Indebtedness issued with original issue discount, and (ii) the principal
amount thereof, together with any interest thereon that is more than 30 days
past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Subsidiary of the Company sells or otherwise disposes of
any Equity Interests of any direct or indirect Subsidiary of the Company such
that, after giving effect to any such sale or disposition, such Person is no
longer a Subsidiary of the Company, the Company shall be deemed to have made
an Investment on the date of any such sale or disposition equal to the fair
market value of the Equity Interests of such Subsidiary not sold or disposed
of in an amount determined as provided in the final paragraph of the covenant
described above under the caption "--Certain Covenants--Restricted Payments."
"Issue Date" means the closing date for the sale and original issuance of
the Notes under the Indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Management Notes" means subordinated promissory notes required to be issued
to members of management of the Company pursuant to the Shareholder's
Agreement which are subordinated to the Notes and Exchange Notes on the terms
set forth in the Indenture, contain no covenants or events of default (other
than with respect to payments thereon which do not violate the Indenture and
certain bankruptcy events) and bear interest at the rate specified in the
Shareholder's Agreement.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain
(but not loss), together with any related provision for taxes on such
extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Indebtedness (other than debt under the New Credit
Facility) secured by a Lien on
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the asset or assets that were the subject of such Asset Sale and any reserve
for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"New Credit Facility" means that certain Amended and Restated Loan Agreement
dated as of March 23, 1998 among the Company, the lenders and other parties
thereto from time to time and NBD Bank, as Agent, together with all related
documents executed or delivered pursuant thereto at any time (including,
without limitation, all mortgages, guarantees, security agreements and all
other collateral and security documents), in each case as such agreements may
be amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder provided that such
increase in borrowings is within the definition of Permitted Debt or is
otherwise permitted under the covenant described under "--Incurrence of
Indebtedness and Issuance of Preferred Stock") or adding Subsidiaries as
additional borrowers or guarantors thereunder in accordance with the terms of
the Indenture) all or any portion of the Indebtedness and other Obligations
under such agreement or agreements or any successor or replacement agreement
or agreements, and whether by the same or any other agent, lender or group of
lenders.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender, and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity, and (iii) as to which the lenders have been
notified in writing that they will not have any recourse to the stock or
assets of the Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means the business conducted by the Company and its
Restricted Subsidiaries on the Issue Date and businesses reasonably related
thereto.
"Permitted Investments" means (a) any Investment in the Company or in an 80%
Restricted Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any 80% Restricted Subsidiary of the
Company in a Person, if as a result of such investment (i) such Person becomes
an 80% Restricted Subsidiary of the Company or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or an
80% Restricted Subsidiary of the Company; (d) any Investment made as a result
of the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "--Certain Covenants--Limitations on Asset Sales"; (e) any acquisition
of assets solely in exchange for the issuance of Equity Interests (other than
Disqualified Stock) of the Company; and (f) other Investments in any Person
having an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause
(f) that are at the time outstanding, not to exceed $5.0 million.
"Permitted Junior Securities" means Equity Interests in the Company or debt
securities that are subordinated to all Senior Indebtedness (and any debt
securities issued in exchange for Senior Indebtedness) to substantially the
same extent as, or to a greater extent than, the Notes are subordinated to
Senior Indebtedness pursuant to the Indenture.
"Permitted Liens" means (i) Liens on assets of the Company or any of the
Guarantors securing Senior Indebtedness under the New Credit Facility which
Indebtedness was permitted by the terms of the Indenture to be incurred, and
Liens on assets of Restricted Subsidiaries that are not Guarantors securing
Indebtedness under
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the New Credit Facility which Indebtedness was permitted by the terms of the
Indenture to be incurred; (ii) Liens in favor of the Company; (iii) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Subsidiary of the Company; provided that
such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (iv) Liens on property existing
at the time of acquisition thereof by the Company or any Subsidiary of the
Company, provided that such Liens were in existence prior to the contemplation
of such acquisition; (v) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other obligations of
a like nature incurred in the ordinary course of business; (v) Liens to secure
Indebtedness (including Capital Lease Obligations) permitted by clause (iv) of
the second paragraph of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock" covering only the assets acquired with such
Indebtedness; (vi) Liens existing on the date of the Indenture; (vii) Liens
for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (viii) Liens incurred in the ordinary
course of business of the Company or any Subsidiary of the Company with
respect to obligations that do not exceed $5.0 million at any one time
outstanding and that (a) are not incurred in connection with the borrowing of
money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (b) do not in the aggregate materially
detract from the value of the property or materially impair the use thereof in
the operation of business by the Company or such Subsidiary; (ix) Liens on
assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of
Unrestricted Subsidiaries; (x) Liens on assets of the Company securing Senior
Indebtedness of the Company that was permitted to be incurred by the terms of
the Indenture and Liens on assets of a Guarantor securing Senior Indebtedness
of such Guarantor which Indebtedness was permitted to be incurred by the terms
of the Indenture; and (xi) Liens on assets of Restricted Subsidiaries securing
Indebtedness which is not subordinated to any other Indebtedness of such
Restricted Subsidiary and which is permitted to be incurred under the
Indenture.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); provided that: (i) the principal
amount (or accreted value, if applicable) of such Permitted Refinancing
Indebtedness does not exceed the principal amount of (or accreted value, if
applicable), plus accrued interest on, the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of
reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either
by the Company or by the Restricted Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Permitted Transferees" means (i) the heirs, executors, administrators,
personal representative of the estate of, testamentary trustees, legatees or
beneficiaries of John H. Welker and (ii) a trust, the vested beneficiaries of
which, or a corporation or partnership, the stockholders or general or limited
partners of which, include only John H. Welker or his spouse or lineal
descendants.
"Public Offering" means an underwritten public offering of common stock
(other than Disqualified Stock) of the Company, pursuant to an effective
registration statement filed with the Commission in accordance with the
Securities Act.
"Restricted Investment" means an Investment other than a Permitted
Investment.
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"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Indebtedness" means (i) all Indebtedness of the Company or any
Subsidiary Guarantor outstanding under the New Credit Facility and all Hedging
Obligations with respect thereto, and in all cases whether now outstanding or
hereafter created, assumed or incurred and including, without limitation,
interest accruing subsequent to the filing of a petition in bankruptcy at the
rate provided in the relevant document, whether or not an allowed claim, (ii)
any other Indebtedness (other than Harvard Notes and Management Notes)
permitted to be incurred by the Company or any Subsidiary Guarantor under the
terms of the Indenture, unless the instrument under which such Indebtedness is
incurred expressly provides that it is on a parity with or subordinated in
right of payment to the Notes or any Guarantor's Subsidiary Guarantee of the
Notes and (iii) all Obligations with respect to the foregoing. Notwithstanding
anything to the contrary in the foregoing, Senior Indebtedness will not
include (w) any liability for federal, state, local or other taxes owed or
owing by the Company or any of its Subsidiaries, (x) any Indebtedness of the
Company or any of its Subsidiaries to any Subsidiary or other Affiliate, (y)
any trade payables or (z) any Indebtedness that is incurred in violation of
the Indenture.
"Shareholders' Agreement" means the Amended and Restated Stock Transfer
Agreement dated December 28, 1995 among the Company, John H. Welker and the
other shareholders party thereto, as in effect on the Issue Date.
"Significant Restricted Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date of the Indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary; (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (c) is a Person with respect to
which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional Equity Interests
or (y) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; and (d) has
not guaranteed or otherwise directly or indirectly provided credit support for
any Indebtedness of the Company or any of its Restricted Subsidiaries. Any
such designation by the Board of Directors shall be evidenced to the Trustee
by filing with the Trustee a certified copy of the Board Resolution giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "Certain Covenants--Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter
cease to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such
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Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
"Incurrence of Indebtedness and Issuance of Preferred Stock," the Company
shall be in default of such covenant). The Board of Directors of the Company
may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such
Indebtedness is permitted under the covenant described under the caption
"Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," calculated on a pro forma basis as if such designation had occurred at
the beginning of the four-quarter reference period and (ii) no Default or
Event of Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
Book-Entry, Delivery and Form
The Exchange Notes initially will be represented by one or more Exchange
Notes in registered, global form without interest coupons (the "Global
Exchange Notes"). The Global Exchange Notes will be deposited upon issuance
with the Trustee as custodian for The Depository Trust Company ("DTC"), in New
York, New York, and registered in the name of DTC or its nominee, in each case
for credit to an account of a direct or indirect participant in DTC as
described below. Except as set forth below, the Global Exchange Notes may be
transferred, in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee. Beneficial interests in the Global Exchange
Notes may not be exchanged for Exchange Notes in certificated form except in
the limited circumstances described below. See "--Exchange of Book-Entry
Exchange Notes for Certificated Exchange Notes." Except in the limited
circumstances described below, owners of beneficial interests in the Global
Exchange Notes will not be entitled to receive physical delivery of
Certificated Exchange Notes (as defined below).
Transfers of beneficial interests in the Global Exchange Notes will be
subject to the applicable rules and procedures of DTC and its direct or
indirect participants (including, if applicable, those of the Euroclear System
("Euroclear") and Cedel Bank, societe anonyme ("Cedel")), which may change
from time to time.
Initially, the Trustee will act as Paying Agent and Registrar. The Exchange
Notes may be presented for registration of transfer and exchange at the
offices of the Registrar.
Depository Procedures
The following description of the operations and procedures of DTC, Euroclear
and Cedel are provided solely as a matter of convenience. These operations and
procedures are solely within the control of the respective settlement systems
and are subject to changes by them from time to time. The Company takes no
responsibility
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for these operations and procedures and urges investors to contact the system
or their participants directly to discuss these matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Access to DTC's system is also available to
other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either
directly or indirectly (collectively, the "Indirect Participants"). Persons
who are not Participants may beneficially own securities held by or on behalf
of DTC only through the Participants or the Indirect Participants. The
ownership interests in, and transfers of ownership interests in, each security
held by or on behalf of DTC are recorded on the records of the Participants
and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global Exchange Notes, DTC will credit the
accounts of Participants designated by the Exchange Agent with portions of the
principal amount of the Global Exchange Notes and (ii) ownership of such
interests in the Global Exchange Notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC
(with respect to the Participants) or by the Participants and the Indirect
Participants (with respect to other owners of beneficial interest in the
Global Exchange Notes).
Investors in the Global Exchange Notes may hold their interests therein
directly through DTC, if they are Participants in such system, or indirectly
through organizations (including Euroclear and Cedel) which are Participants
in such system. Euroclear and Cedel will hold interests in the Global Exchange
Notes on behalf of their participants through customers' securities accounts
in their respective names on the books of their respective depositories, which
are Morgan Guaranty Trust Company of New York, Brussels office, as operator of
Euroclear, and Citibank, N.A., as operator of Cedel. All interests in a Global
Exchange Note, including those held through Euroclear or Cedel, may be subject
to the procedures and requirements of DTC. Those interests held through
Euroclear or Cedel may also be subject to the procedures and requirements of
such systems. The laws of some states require that certain persons take
physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a Global
Exchange Note to such persons will be limited to that extent. Because DTC can
act only on behalf of Participants, which in turn act on behalf of Indirect
Participants and certain banks, the ability of a person having beneficial
interests in a Global Exchange Note to pledge such interests to persons or
entities that do not participate in the DTC system, or otherwise take actions
in respect of such interests, may be affected by the lack of a physical
certificate evidencing such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTEREST IN THE GLOBAL EXCHANGE NOTES
WILL NOT HAVE EXCHANGE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE
PHYSICAL DELIVERY OF EXCHANGE NOTES IN CERTIFICATED FORM AND WILL NOT BE
CONSIDERED THE REGISTERED OWNERS OR "HOLDERS" THEREOF UNDER THE INDENTURE FOR
ANY PURPOSE.
Payments in respect of the principal of, and premium, if any, Liquidated
Damages, if any, and interest on a Global Exchange Note registered in the name
of DTC or its nominee will be payable to DTC in its capacity as the registered
Holder under the Indenture. Under the terms of the Indenture, the Company and
the Trustee will treat the persons in whose names the Exchange Notes,
including the Global Exchange Notes, are registered as the owners thereof for
the purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, neither the Company, the Trustee nor any agent of
the Company or the Trustee has or will have any responsibility or liability
for (i) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Exchange Notes,
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or for maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Exchange Notes or (ii) any other matter
relating to the actions and practices of DTC or any of its Participants or
Indirect Participants. DTC has advised the Company that its current practice,
upon receipt of any payment in respect of securities such as the Exchange
Notes (including principal and interest), is to credit the accounts of the
relevant Participants with the payment on the payment date, in amounts
proportionate to their respective holdings in the principal amount of
beneficial interest in the relevant security as shown on the records of DTC
unless DTC has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the
beneficial owners of Exchange Notes will be governed by standing instructions
and customary practices and will be the responsibility of the Participants or
the Indirect Participants and will not be the responsibility of DTC, the
Trustee or the Company. Neither the Company nor the Trustee will be liable for
any delay by DTC or any of its Participants in identifying the beneficial
owners of the Exchange Notes, and the Company and the Trustee may conclusively
rely on and will be protected in relying on instructions from DTC or its
nominee for all purposes.
Except for trades involving only Euroclear and Cedel participants, interest
in the Global Exchange Notes are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and secondary market trading activity in such
interests will, therefore, settle in immediately available funds, subject in
all cases to the rules and procedures of DTC and its Participants. See "--Same
Day Settlement and Payment."
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same day funds, and transfers between
participants in Euroclear and Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Cross-market transfers between the Participants in DTC, on the one hand, and
Euroclear or Cedel participants, on the other hand, will be effected through
DTC in accordance with DTC's rules on behalf of Euroclear or Cedel, as the
case may be, by its respective depositary; however, such cross-market
transactions will require delivery of instructions to Euroclear or Cedel, as
the case may be, by the counterparty in such system in accordance with the
rules and procedures and within the established deadlines (Brussels time) of
such system. Euroclear or Cedel, as the case may be, will, if the transaction
meets its settlement requirements, deliver instructions to its respective
depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Exchange Note in DTC,
and making or receiving payment in accordance with normal procedures for same-
day funds settlement applicable to DTC. Euroclear participants and Cedel
participants may not deliver instructions directly to the depositories for
Euroclear or Cedel.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Exchange Notes only at the direction of one or more
Participants to whose account DTC has credited the interests in the Global
Exchange Notes and only in respect of such portion of the aggregate principal
amount of the Exchange Notes as to which such Participant or Participants has
or have given such direction. However, if there is an Event of Default under
the Exchange Notes, DTC reserves the right to exchange the Global Exchange
Notes for Exchange Notes in certificated form, and to distribute such Exchange
Notes to its Participants.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Exchange Notes among
Participants in DTC, Euroclear and Cedel, they are under no obligation to
perform or to continue to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee nor any of their
respective agents will have any responsibility for the performance by DTC,
Euroclear or Cedel or their respective participants or indirect participants
of their respective obligations under the rules and procedures governing their
operations.
Exchange of Book-Entry Exchange Notes for Certificated Exchange Notes
A Global Exchange Note is exchangeable for definitive Exchange Notes in
registered certificated form ("Certificated Exchange Notes") if (i) DTC (x)
notifies the Company that it is unwilling or unable to continue as depositary
for the Global Exchange Notes and the Company thereupon fails to appoint a
successor depositary
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or (y) has ceased to be a clearing agency registered under the Exchange Act,
(ii) the Company, at its option, notifies the Trustee in writing that it
elects to cause the issuance of the Certificated Exchange Notes or (iii) there
shall have occurred and be continuing a Default or Event of Default with
respect to the Exchange Notes. In addition, beneficial interests in a Global
Exchange Note may be exchanged for Certificated Exchange Notes upon request
but only upon prior written notice given to the Trustee by or on behalf of DTC
in accordance with the Indenture. In all cases, Certificated Exchange Notes
delivered in exchange for any Global Exchange Note or beneficial interests
therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with
its customary procedures).
Exchange of Certificated Exchange Notes for Book-Entry Exchange Notes
Exchange Notes issued in certificated form may not be exchanged for
beneficial interests in any Global Exchange Note unless the transferor first
delivers to the Trustee a written certificate (in the form provided in the
Indenture) to the effect that such transfer will comply with the appropriate
transfer restrictions applicable to such Exchange Notes.
Same Day Settlement and Payment
The Indenture requires that payments in respect of the Exchange Notes
represented by the Global Exchange Notes (including principal, premium, if
any, interest and Liquidated Damages, if any) be made by wire transfer of
immediately available funds to the accounts specified by the Global Exchange
Note Holder. With respect to Exchange Notes in certificated form, the Company
will make all payments of principal, premium, if any, interest and Liquidated
Damages, if any, by wire transfer of immediately available funds to the
accounts specified by the Holders thereof or, if no such account is specified,
by mailing a check to each such Holder's registered address. The Notes
represented by the Global Exchange Notes are expected to be eligible to trade
in the Depositary's Same-Day Funds Settlement System, and any secondary market
trading activity in such Exchange Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in any certificated Exchange Notes will also be settled
in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Exchange Note from a
Participant in DTC will be credited, and any such crediting will be reported
to the relevant Euroclear or Cedel participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Cedel) immediately following the settlement date of DTC. DTC has advised the
Company that cash received in Euroclear or Cedel as a result of sales of
interests in a Global Exchange Note by or through a Euroclear or Cedel
participant to a Participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or
Cedel cash account only as of the business day for Euroclear or Cedel
following DTC's settlement date.
DESCRIPTION OF NOTES
The Notes evidence the same indebtedness as that which will be evidenced by
the Exchange Notes and are entitled to the benefits of the Indenture. The form
and terms of the Notes are the same as the form and terms of the Exchange
Notes except that none of the Notes was registered under the Securities Act.
Therefore, the Notes may not be offered or sold within the United States or
to, or for the account or benefit of, U.S. persons except pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act. Accordingly, the Notes bear legends
restricting the transfer thereof. In addition, with certain exceptions, the
Notes may not be sold or transferred to, or acquired on behalf of, any pension
or welfare plan (as described in Section 3 of the Employee Retirement Income
Security Act of 1974). For a description of the terms of the Exchange Notes,
see "Description of Exchange Notes."
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REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement, pursuant to which they agreed to file with the
Commission the Registration Statement on the appropriate form under the
Securities Act with respect to the Exchange Notes. Upon the effectiveness of
the Registration Statement, the Company and the Guarantors will offer to the
Holders of Transfer Restricted Securities pursuant to the Exchange Offer who
are able to make certain representations the opportunity to exchange their
Transfer Restricted Securities for Exchange Notes. If (i) the Company and the
Guarantors are not permitted to consummate the Exchange Offer because the
Exchange Offer is not permitted by applicable law or Commission policy or (ii)
any Holder of Transfer Restricted Securities notifies the Company prior to the
20th day following consummation of the Exchange Offer that (A) it is
prohibited by law or Commission policy from participating in the Exchange
Offer or (B) that it may not resell the Exchange Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and this
Prospectus is not appropriate or available for such resales or (C) that it is
a broker-dealer and owns Notes acquired directly from the Company or an
affiliate of the Company, the Company and the Guarantors will file with the
Commission a Shelf Registration Statement to cover resales of the Notes by the
Holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement. The Company
and the Guarantors will use their best efforts to cause the applicable
registration statement to be declared effective as promptly as possible by the
Commission. For purposes of the foregoing, "Transfer Restricted Securities"
means (i) Each Note and the related Subsidiary Guarantees, until the earliest
to occur of (a) the date on which such Note is exchanged in the Exchange Offer
for an Exchange Note which is entitled to be resold to the public by the
Holder thereof without complying with the prospectus delivery requirements of
the Act, (b) the date on which such Note has been disposed of in accordance
with a Shelf Registration Statement, or (c) the date on which such Note is
distributed to the public pursuant to Rule 144 under the Act and (ii) each
Exchange Note acquired by a broker-dealer for its own account as a result of
market making activities or other trading activities until the date on which
such Exchange Note is disposed of by a broker-dealer pursuant to the "Plan of
Distribution" section of this Prospectus (including the delivery of this
Prospectus).
The Registration Rights Agreement provides that (i) the Company will file a
registration statement relating to the Exchange Offer with the Commission on
or prior to 45 days after the Issue Date (which requirement has been satisfied
by the filing of the Registration Statement), (ii) the Company and the
Guarantors will use their best efforts to have the Registration Statement
declared effective by the Commission on or prior to 135 days after the Issue
Date, (iii) unless the Exchange Offer would not be permitted by applicable law
or Commission policy, the Company and the Guarantors will commence the
Exchange Offer and use their best efforts to issue on or prior to 30 business
days after the date on which the Registration Statement was declared effective
by the Commission, Exchange Notes in exchange for all Notes tendered prior
thereto in the Exchange Offer and (iv) if obligated to file the Shelf
Registration Statement, the Company and the Guarantors will use their best
efforts to file the Shelf Registration Statement with the Commission on or
prior to 45 days after such filing obligation arises and to cause the Shelf
Registration to be declared effective by the Commission on or prior to 135
days after such obligation arises. If (a) the Company fails to file any of the
registration statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such registration
statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), or (c) the
Company fails to consummate the Exchange Offer within 30 business days of the
Effectiveness Target Date with respect to the Registration Statement, or (d)
the Shelf Registration Statement or the Registration Statement is declared
effective but thereafter ceases to be effective or usable in connection with
resales of Transfer Restricted Securities during the periods specified in the
Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above a "Registration Default"), then the Company will pay
Liquidated Damages to each affected Holder of Transfer Restricted Securities,
with respect to the first 90-day period immediately following the occurrence
of the first Registration Default in an amount equal to $.05 per week per
$1,000 principal amount of Transfer Restricted Securities held by such Holder.
The amount of the Liquidated Damages will increase by an additional $.05 per
week per $1,000 principal amount of Transfer Restricted Securities with
respect to each subsequent 90-day period until all Registration Defaults have
been
87
<PAGE>
cured, up to a maximum amount of Liquidated Damages for all Registration
Defaults of $.50 per week per $1,000 principal amount of Transfer Restricted
Securities. All accrued Liquidated Damages will be paid by the Company on each
Damages Payment Date to the Global Note Holder by wire transfer of immediately
available funds or by federal funds check and to Holders of certificated Notes
by wire transfer to the accounts specified by them or by mailing checks to
their registered addresses if no such accounts have been specified. Following
the cure of all Registration Defaults, the accrual of Liquidated Damages will
cease.
Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer, and Holders of Transfer Restricted
Securities will be required to deliver certain information to be used in
connection with the Shelf Registration Statement and to provide comments on
the Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their Holders of Transfer
Restricted Securities included in the Shelf Registration Statement and benefit
from the provisions regarding Liquidated Damages set forth above.
88
<PAGE>
CERTAIN FEDERAL TAX CONSIDERATIONS FOR FOREIGN PERSONS
THIS SUMMARY IS OF A GENERAL NATURE AND IS INCLUDED HEREIN SOLELY FOR
INFORMATIONAL PURPOSES. IT IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED
AS BEING, LEGAL OR TAX ADVICE. NO REPRESENTATION WITH RESPECT TO THE
CONSEQUENCES TO ANY PARTICULAR PURCHASER OF THE EXCHANGE NOTES IS MADE.
PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO
THEIR PARTICULAR CIRCUMSTANCES.
The following discussion is a summary of certain United States federal
income and estate tax consequences of the ownership and disposition of the
Exchange Notes by a Foreign Person (as defined), based upon current provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), judicial
decisions, and administrative interpretations, all of which are subject to
change at any time by legislative, judicial or administrative action. Any such
changes may be applied retroactively in a manner that could adversely affect a
holder of the Exchange Notes. There can be no assurance that the Internal
Revenue Service (the "IRS") will not challenge the conclusions stated below,
and no ruling from the IRS has been or will be sought on any of the matters
discussed below.
The following discussion does not purport to be a complete analysis of all
the potential federal income tax effects relating to the ownership and
disposition of the Exchange Notes by Foreign Persons or any other person, and,
without limiting the generality of the foregoing, this summary does not
address the effect of any special rules applicable to certain types of
purchasers (including dealers in securities, insurance companies, financial
institutions, tax-exempt entities, and persons who hold Exchange Notes as part
of a straddle, hedge, or conversion transaction). This discussion is limited
to Foreign Persons other than former United States citizens described in
Section 877(a) of the Code or former residents of the United States described
in Sections 877(e) or 7701(b)(10) of the Code and is limited to Foreign
Persons who hold the Exchange Notes as capital assets within the meaning of
Section 1221 of the Code. This discussion does not address the effect of any
state, local, or foreign tax laws. Holders of Exchange Notes who are Foreign
Persons are urged to consult their own tax advisors regarding the specific tax
consequences to them of owning and disposing of Exchange Notes.
CERTAIN U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO FOREIGN PERSONS
For purposes of this discussion, the term "U.S. Person" means (i) an
individual who is a citizen or resident of the United States, (ii) a
corporation or partnership created or organized in or under the laws of the
United States or any state thereof, (iii) an estate the income of which is
subject to United States federal income taxation regardless of its source, or
(iv) a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
The term "Foreign Person" means a person other than a U.S. Person.
Any interest or Liquidation Damages earned on an Exchange Note by a holder
who is a Foreign Person will be considered "portfolio interest" and will not
be subject to United States federal income tax, and will not be subject to
United States tax withholding (except for "backup withholding" in the
circumstances described below), if:
(1) such Foreign Person is neither (i) a "controlled foreign corporation"
that is related to the Issuer as described in Section 881(c)(3)(C) of the
Code, (ii) a bank that has purchased Exchange Notes pursuant to an
extension of credit made in the ordinary course of its trade or business,
nor (iii) a person who owns, directly or under the attribution rules of
Section 871(h)(3)(C) of the Code, 10% or more of the voting power in the
Company;
(2) the person who would otherwise be required to withhold tax from
payments of such interest (the "withholding agent") is furnished an IRS
Form W-8 (or equivalent), signed under penalties of perjury, identifying
the beneficial owner of the Exchange Note and stating that the beneficial
owner of the Exchange Note is a Foreign Person; and
(3) the interest is not effectively connected with the conduct of a trade
or business within the United States by the Foreign Person.
89
<PAGE>
Any interest or Liquidated Damages (other than "portfolio interest") earned
on an Exchange Note by a Foreign Person will be subject to United States
federal income tax and withholding at a rate of 30% (or at a lower rate under
an applicable tax treaty) if this interest or Liquidated Damages is not
effectively connected with the conduct of a trade or business within the
United States by this Foreign Person.
Any interest or Liquidated Damages earned on an Exchange Note, and any gain
realized on a sale or exchange (including a redemption) of an Exchange Note,
that is effectively connected with the conduct of a trade or business within
the United States by the Foreign Person will be subject to United States
federal income tax at regular graduated rates (and, if the Foreign Person is a
corporation, may also be subject to a United States branch profits tax). Such
income will not be subject to United States income tax withholding, however,
if the Foreign Person furnishes the proper certificate to the withholding
agent.
Any gain realized by a Foreign Person on a sale or exchange (including a
redemption) of an Exchange Note will not be subject to United States federal
income tax or withholding if (i) the gain is not effectively connected with
the conduct of a trade or business within the United States by the Foreign
Person, and (ii) in the case of a Foreign Person who is an individual, such
individual is not present in the United States for 183 days or more in the
taxable year of the sale or exchange, or the individual does not have a "tax
home" in the United States and the gain is not attributable to an office or
other fixed place of business maintained in the United States by the
individual.
For United States estate tax purposes, the gross estate of an individual who
is not a U.S. citizen or resident (as specially defined for United States
estate tax purposes) and who holds an Exchange Note at the time of his death
is not deemed to include such Exchange Note if the interest thereon
constitutes "portfolio interest" (without regard to whether the "portfolio
interest" certification requirements are satisfied).
BACKUP WITHHOLDING AND INFORMATION REPORTING
Information reporting on IRS Form 1099 and backup withholding will not apply
to payments made by the Issuer or any agent thereof to a holder of an Exchange
Note if the holder has furnished a certification under penalties of perjury
that it is a Foreign Person, or has otherwise demonstrated that it qualifies
for an applicable exemption, provided that neither the Issuer nor such agent
has actual knowledge to the contrary. The interest and any Liquidated Damages
earned by a Foreign Person will generally be reported, however, by the Issuer
on IRS Form 1042S.
If a Foreign Person sells an Exchange Note through a United States office of
a broker, the broker is required to file an information report and is required
to withhold 31% of the sale proceeds unless the Foreign Person certifies under
penalties of perjury its non-United States status (and the payor does not have
actual knowledge to the contrary) or otherwise establishes an exemption. If a
Foreign Person sells an Exchange Note through a foreign office of a broker,
backup withholding is not required; but information reporting is required if
the broker does not have documentary evidence that the holder is a Foreign
Person and if (i) the broker is a U.S. Person, (ii) the broker is a
"controlled foreign corporation" (as defined in Section 957 of the Code), or
(iii) the broker derives 50% or more of its gross income for a specified three
year period from the conduct of a trade or business in the United States.
Any amount withheld from payment to a holder under the backup withholding
rules will generally be allowed as a credit against such holder's United
States federal income tax liability, if any, and may entitle such holder to a
refund, provided that the required information is furnished to the IRS.
NEW FINAL REGULATIONS
Recently, the U.S. Treasury Department has promulgated final regulations
regarding the withholding and information reporting rules discussed above. In
general, the final regulations do not significantly alter the substantive
withholding and information reporting requirements but unify current
certification procedures and
90
<PAGE>
forms and clarify reliance standards. Special rules apply which permit the
shifting of primary responsibility for withholding to certain financial
intermediaries acting on behalf of beneficial owners. The final regulations
are generally effective for payments made after December 31, 1998, subject to
certain transition rules. Foreign Persons are urged to consult their own tax
advisors with respect to these final regulations.
PLAN OF DISTRIBUTION
Any broker or dealer registered under the Exchange Act (a "Broker-Dealer")
who holds Transfer Restricted Securities that were acquired for the account of
such Broker-Dealer as a result of market-making activities or other trading
activities (other than Notes acquired from the Issuer or any Affiliate of the
Company) may exchange such Transfer Restricted Securities pursuant to the
Exchange Offer. Each Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resale of such Exchange Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by any Broker-Dealer in connection
with resales of Exchange Notes received in exchange for Notes where such Notes
were acquired as a result of market-making activities or other trading
activities. The Issuer and Guarantors have agreed that, for a period of one
year after the Exchange Offer is consummated, they will make this Prospectus,
as amended or supplemented, available to any Broker-Dealer for use in
connection with any such resale. In addition, until November 3, 1998 (90 days
after commencement of the Exchange Offer), all dealers effecting transactions
in the Exchange Notes may be required to deliver a Prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Broker-Dealers. Exchange Notes received by Broker-Dealers for their
own account pursuant to the Exchange Offer may be sold from time to time in
one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to the purchaser or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Broker-Dealer and/or the purchasers of any such
Exchange Notes. Any Broker-Dealer that resells the Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act,
and any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that,
by acknowledging that it will deliver and by delivering a prospectus, a
Broker-Dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
For a period of one year after the date of consummation of the Exchange
Offer, the Issuer will promptly send additional copies of this Prospectus and
any amendment or supplement to this Prospectus to any Broker-Dealer that
requests such documents in the Letter of Transmittal. The Issuer has agreed to
pay certain expenses incident to the Exchange Offer, other than commission or
concessions of any brokers or dealers, and will indemnify the holders of the
Exchange Notes (including any Broker-Dealers) against certain liabilities,
including liabilities under the Securities Act.
By acceptance of the Exchange Offer, each Broker-Dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer agrees that,
upon receipt of notice from the Issuer of the happening of any event which
makes any statement in this Prospectus untrue in any material respect or which
requires the making of any changes in this Prospectus in order to make the
statements therein not misleading (which notice the Issuer agrees to deliver
promptly to such Broker-Dealer), such Broker-Dealer will suspend use of the
Prospectus until the Issuer and Guarantors have amended or supplemented this
Prospectus to correct such misstatement or omission and have furnished copies
of the amended or supplemental Prospectus to such Broker-Dealer.
91
<PAGE>
LEGAL MATTERS
The validity of the Exchange Notes will be passed on for the Company by
Miller, Canfield, Paddock and Stone, P.L.C., Detroit, Michigan.
EXPERTS
The financial statements of the Company at December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997 that are
included in this Prospectus have been audited by Ernst & Young LLP,
independent accountants, as indicated in their reports appearing herein and
elsewhere in the Registration Statement. Such financial statements have been
included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
92
<PAGE>
NUMATICS, INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets--December 31, 1997 and 1996.................. F-3
Consolidated Statements of Operations--For the Years Ended December 31,
1997, 1996 and 1995..................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficiency)--For the
Years Ended December 31, 1997, 1996 and 1995............................ F-5
Consolidated Statements of Cash Flows--For the Years Ended December 31,
1997, 1996 and 1995..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Consolidated Statements of Operations (Unaudited)--For the Three Months
Ended March 31,
1998 and 1997........................................................... F-19
Consolidated Balance Sheet (Unaudited)--March 31, 1998................... F-20
Consolidated Statements of Cash Flows (Unaudited)--For the Three Months
Ended March 31, 1998 and 1997........................................... F-21
Notes to Consolidated Financial Statements (Unaudited)................... F-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Numatics, Incorporated
We have audited the accompanying consolidated balance sheets of Numatics,
Incorporated and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Numatics,
Incorporated and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Ernst & Young llp
February 25, 1998
(except for Note 9, as to which
the date is March 23, 1998,
and Note 10, as to which the
date is June 30, 1998)
Detroit, Michigan
F-2
<PAGE>
NUMATICS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 701,072 $ 853,398
Trade receivables, less allowances of $61,000 in
1997 and $132,000 in 1996.......................... 22,174,234 20,747,103
Inventories......................................... 27,953,158 25,444,983
Income taxes refundable............................. -- 1,062,010
Other current assets................................ 2,220,852 1,478,146
------------ ------------
Total current assets.............................. 53,049,316 49,585,640
Other assets:
Goodwill, net of accumulated amortization........... 6,839,952 8,967,270
Other intangible assets, net of accumulated
amortization....................................... 4,492,380 5,233,519
Deferred income taxes............................... 2,323,362 1,894,763
Investment in affiliate............................. 2,000,000 2,000,000
Other............................................... 390,895 639,025
------------ ------------
16,046,589 18,734,577
Properties:
Land................................................ 1,631,658 1,647,523
Buildings and improvements.......................... 12,072,592 10,238,576
Machinery and equipment............................. 39,799,217 34,949,645
------------ ------------
53,503,467 46,835,744
Less accumulated depreciation....................... (24,064,119) (21,168,527)
------------ ------------
29,439,348 25,667,217
------------ ------------
$98, 535,253 $ 93,987,434
============ ============
LIABILITIES AND ACCUMULATED DEFICIENCY
Current liabilities:
Accounts payable trade.............................. $ 9,641,314 $ 8,964,766
Accrued expenses.................................... 2,225,444 2,219,963
Compensation and employee benefits.................. 4,574,794 4,248,573
Taxes, other than income and single business tax.... 427,349 350,115
Income and single business tax...................... 1,651,266 1,081,814
Current portion of long-term debt................... 7,060,060 4,531,798
------------ ------------
Total current liabilities......................... 25,580,227 21,397,029
Long-term liabilities:
Long-term debt, less current portion................ 135,696,137 136,273,233
Deferred retirement benefits........................ 3,202,440 2,464,236
Deferred income taxes............................... 536,428 1,369,486
------------ ------------
139,435,005 140,106,955
Redeemable warrant................................... 3,102,138 3,102,138
Minority interest in subsidiaries (redeemable upon
the happening of certain events outside the control
of the Company: $1,112,173 in 1997 and $640,688 in
1996)--Note 10...................................... 348,445 245,227
Accumulated deficiency:
Common stock $.01 par value, 250,000 shares
authorized; 20,000 shares outstanding and related
additional paid in capital (redeemable upon the
happening of certain events outside the control of
the Company: $54,931,000 in 1997 and $61,608,000
in 1996)--Note 10.................................. 1,500,000 1,500,000
Accumulated deficiency.............................. (71,031,763) (72,295,586)
Equity adjustments from foreign currency
translation........................................ (398,799) (68,329)
------------ ------------
(69,930,562) (70,863,915)
------------ ------------
$ 98,535,253 $ 93,987,434
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
NUMATICS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................... $147,097,265 $132,015,363 $125,807,708
Costs and expenses:
Cost of products sold................. 93,784,880 81,676,256 77,966,493
Marketing, engineering, general and
administrative....................... 31,830,324 28,253,122 29,567,306
Single business tax................... 945,450 885,150 871,600
------------ ------------ ------------
Operating income........................ 20,536,611 21,200,835 17,402,309
Other expenses:
Interest and other financing
expenses............................. 17,020,961 16,763,096 5,560,086
Other................................. 1,348,059 534,949 1,436,350
------------ ------------ ------------
Income before income taxes.............. 2,167,591 3,902,790 10,405,873
Income taxes............................ 903,768 1,895,006 4,837,000
------------ ------------ ------------
Net income.............................. $ 1,263,823 $ 2,007,784 $ 5,568,873
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
NUMATICS, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK
CLASS B CLASS C AND RELATED
8% SERIES A COMMON STOCK COMMON STOCK ADDITIONAL
PREFERRED STOCK AND RELATED AND RELATED PAID IN
$.01 PAR, ADDITIONAL ADDITIONAL CAPITAL $.01 PAR
50,000 SHARES PAID IN PAID IN 250,000 SHARES
AUTHORIZED CAPITAL $.01 PAR CAPITAL $.01 PAR AUTHORIZED RETAINED
-------------------------- ----------------------- ------------------- ------------------ EARNINGS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT (DEFICIENCY)
------------ ------------ ---------- ----------- ---------- ------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
1, 1995.......... 12,788,1246 $ 12,788,124 62,727,20 $ 1,481,277 17,272,80 $18,723 $20,000 $1,500,000 $ 4,352,388
Net income for
1995............ 5,568,873
Equity
adjustment from
foreign currency
translation.....
Dividends paid.. (1,199,631)
Redemption of
stock........... (12,788,1246) (12,788,124) (62,727,20) (1,481,277) (17,272,80) (18,723) (83,025,000)
------------ ------------ ---------- ----------- ---------- ------- ------- ---------- ------------
Balance, December
31, 1995......... -- -- -- -- -- -- 20,000 1,500,000 (74,303,370)
Net income for
1996............ 2,007,784
Equity
adjustment from
foreign currency
translation.....
------------ ------------ ---------- ----------- ---------- ------- ------- ---------- ------------
Balance, December
31, 1996......... -- -- -- -- -- -- 20,000 1,500,000 (72,295,586)
Net income for
1997............ 1,263,823
Equity
adjustment from
foreign currency
translation.....
------------ ------------ ---------- ----------- ---------- ------- ------- ---------- ------------
Balance, December
31, 1997......... -- $ -- -- $ -- -- $ -- 20,000 $1,500,000 $(71,031,763)
============ ============ ========== =========== ========== ======= ======= ========== ============
<CAPTION>
CURRENCY TOTAL
TRANSLATION AMOUNT
----------- -------------
<S> <C> <C>
Balance, January
1, 1995.......... $(196,673) $ 19,943,839
Net income for
1995............ 5,568,873
Equity
adjustment from
foreign currency
translation..... 363,251 363,251
Dividends paid.. (1,199,631)
Redemption of
stock........... (97,313,124)
----------- -------------
Balance, December
31, 1995......... 166,578 (72,636,792)
Net income for
1996............ 2,007,784
Equity
adjustment from
foreign currency
translation..... (234,907) (234,907)
----------- -------------
Balance, December
31, 1996......... (68,329) (70,863,915)
Net income for
1997............ 1,263,823
Equity
adjustment from
foreign currency
translation..... (330,470) (330,470)
----------- -------------
Balance, December
31, 1997......... $(398,799) $(69,930,562)
=========== =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
NUMATICS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................. $ 1,263,823 $ 2,007,784 $ 5,568,873
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 3,547,742 3,212,672 3,206,470
Amortization......................... 1,452,065 1,275,887 3,206,327
Deferred interest expense............ 7,313,204 6,154,299 --
Minority interest in earnings........ 103,218 93,104 38,533
Deferred taxes....................... (119,748) 499,723 (2,305,000)
Deferred retirement benefits......... 738,205 708,350 1,755,887
Unrealized foreign currency (gains)
losses.............................. 1,191,826 233,135 (125,026)
Changes in operating assets and
liabilities:
Trade receivables................... (2,200,958) (1,071,434) (1,292,348)
Inventories......................... (3,653,789) 1,733,855 (5,268,073)
Other current accounts.............. (833,655) (147,858) 304,305
Accounts payable and accrued
expenses........................... 1,006,333 (1,908,611) 2,854,251
Compensation and employee benefits.. 600,539 (156,175) 565,212
Taxes, other than income and single
business tax....................... (33,337) 19,361 (74,917)
Income and single business taxes.... 671,640 442,291 (2,292,552)
----------- ----------- -----------
Net cash provided by operating activi-
ties.................................. 11,047,108 13,096,383 6,141,942
INVESTING ACTIVITIES
Capital expenditures................... (7,880,756) (5,594,374) (3,743,664)
Other investments...................... 72,681 202,380 (3,006,378)
----------- ----------- -----------
Net cash used in investing activities.. (7,808,075) (5,391,994) (6,750,042)
FINANCING ACTIVITIES
Proceeds from long-term borrowing...... -- -- 142,300,000
Purchase of common and preferred
stock................................. -- -- (97,313,124)
Debt repayments........................ (4,915,021) (8,019,709) (38,924,416)
Debt issuance costs.................... -- (322,995) (4,481,703)
Dividends paid......................... -- -- (1,199,631)
Other.................................. 1,600,603 1,062,605 (94,053)
----------- ----------- -----------
Net cash provided by (used in) financ-
ing activities........................ (3,314,418) (7,280,099) 287,073
Effect of exchange rate changes on
cash.................................. (76,941) (149,005) (85,582)
----------- ----------- -----------
Net (decrease) increase in cash and
cash equivalents...................... (152,326) 275,285 (406,609)
Cash and cash equivalents at beginning
of year............................... 853,398 578,113 984,722
----------- ----------- -----------
Cash and cash equivalents at end of
year.................................. $ 701,072 $ 853,398 $ 578,113
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
The Company develops and manufactures pneumatic components for automated
machinery used in various industries.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Numatics,
Incorporated, its wholly owned subsidiaries and its majority owned
subsidiaries (the "Company") after elimination of intercompany accounts,
transactions and profits.
USE OF ESTIMATES
The preparation of the 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.
CONCENTRATION OF CREDIT RISK
The Company sells its products principally to domestic and international
distributors. Management performs ongoing evaluations of its accounts
receivable, and credit losses have been minimal and within management's
expectations.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
by use of the first-in, first-out method.
PROPERTIES AND DEPRECIATION
Properties are stated on the basis of cost. Properties are depreciated over
their estimated useful lives ranging from three to forty years, principally by
the straight-line method. Expenditures for repairs and maintenance which do
not extend the life of the asset are expensed as incurred.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes.
Deferred taxes are provided for the differences between financial statement
and income tax accounting.
ENVIRONMENTAL LIABILITIES
The Company recognizes estimated environmental liabilities when a loss is
probable. Such liabilities are generally not subject to insurance coverage.
The Company's environmental liabilities were not material as of December 31,
1997 and 1996.
F-7
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue when goods are shipped to the customer.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1997, the carrying amounts reported in the consolidated
balance sheets for cash and cash equivalents, accounts receivable, accounts
payable, debt, investments and swaps approximate fair value.
2. PURCHASE AND RETIREMENT OF CLASS B AND C COMMON STOCK AND PURCHASE OF
PREFERRED STOCK
In October 1995, the Company entered into an agreement with its Class B and
Class C common shareholders to acquire their respective shares of common and
preferred stock. The Company paid $84,525,000 for the common stock and
$12,788,124 for the preferred stock which was funded through the Company's
debt refinancing. The transaction was accounted for as a purchase and
retirement of treasury stock.
3. LONG-TERM DEBT
The Company's long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
Term loan payable in U.S. dollars in minimum
quarterly installments of $668,056 plus interest at
LIBOR plus 3.0% (8.96875% at December 31, 1997),
due in 2001........................................ $ 31,248,220 $ 34,944,444
Term loan payable in deutsche marks in minimum
quarterly installments of U.S. $76,507 plus
interest at LIBOR plus 2.15625% (8.125% at December
31, 1997), due in 2001............................. 3,165,473 4,001,927
Term loan payable in Canadian dollars in minimum
quarterly installments of U.S. $62,484 plus
interest at LIBOR plus 2.15625% (8.125% at December
31, 1997), due in 2001............................. 2,137,430 3,268,347
Term loan payable in U.S. dollars in minimum
quarterly installments of $125,000 plus interest at
LIBOR plus 3.5% (9.46875% at December 31, 1997),
due in 2003 ....................................... 42,898,000 44,750,000
Senior subordinated notes bearing interest at 18%
(19% effective rate), face value $30,000,000 less
discount including deferred interest due in 2004 .. 40,365,366 33,052,163
Revolving notes payable to banks, due in 2002....... 16,650,000 15,300,000
Revolving loan payable to German bank, due in 2002.. 2,020,208 1,665,726
Williamston County Tennessee Industrial Revenue
Bond............................................... 2,500,000 456,295
Other............................................... 1,771,500 3,366,129
------------ ------------
142,756,197 140,805,031
Less current maturities............................. 7,060,060 4,531,798
------------ ------------
$135,696,137 $136,273,233
============ ============
</TABLE>
The Company entered into a credit agreement with a bank in 1995 that
included two term loans payable in U.S. dollars and a revolving note payable.
The credit agreement provides for the calculation of interest based on LIBOR
plus a variable rate. The variable rate is subject to change based on a
periodic recalculation of funded debt to earnings before interest, taxes,
depreciation and amortization. The revolving loan portion of the agreement
defines a formula for a borrowing base and establishes maximum borrowing
amounts ($27,000,000 in
F-8
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the U.S. and $3,000,000 in Germany). The credit agreement contains various
covenants including requirements for minimum earning levels, leverage ratios
and cash flow ratios, and certain dividend restrictions. The Company was not
in compliance with certain of these debt covenants as of December 31, 1997,
which have been waived by the bank as of December 31, 1997. The Company has
received amended covenants for the quarters ended March 31, 1998 and June 30,
1998. The Company expects to be in compliance with all debt covenants,
including those that were amended during 1998.
The Company has pledged substantially all of its tangible and intangible
assets as collateral for the debt outstanding.
The Company has entered into interest rate swap agreements with a total
notional value of $70,000,000 all of which were effective as of December 31,
1997 in order to hedge against the risk of changes in interest rates. The
swaps result in the Company paying fixed rates of 5.055% to 5.74% and
receiving LIBOR. Payments received or made under the agreements are included
in interest expense. During 1997, $282,149 was received in connection with
these agreements. The Company does not hold or issue derivative financial
instruments for trading purposes.
The Company has an Industrial Development Revenue Bond with the County of
Williamson, Tennessee in the amount of $2,500,000. The Bond contains a
variable interest rate (4.15% at December 31, 1997) and payments are due
quarterly with scheduled principal payments commencing in 2002. The agreement
is secured by an irrevocable letter of credit.
Minimum contractual maturities of long-term liabilities for the years
following 1997 are as follows: 1998-$7,060,000; 1999-$9,421,000; 2000-
$11,744,000; 2001-$14,097,000 thereafter $100,434,000. In addition, the
Company is required to make a payment on the term loans in an amount equal to
50% of excess cash flow, which is defined in the agreement as net cash
provided by operating activities less capital expenditures and scheduled
repayments of long-term indebtedness. In 1997, $2,376,000 was paid on the term
loans relating to the excess cash flow for the year 1996. No such payments
were made during the year 1996.
Interest paid approximated $9,606,000 in 1997, $9,009,000 in 1996 and
$3,400,000 in 1995.
F-9
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets at December 31 are comprised of the following:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD
1997 1996 (YEARS)
----------- ----------- ------------
<S> <C> <C> <C>
Product drawings........................ $ 1,090,000 $ 1,090,000 15
Numasize software....................... 1,021,000 1,021,000 10
Deferred cost, debt and equity.......... 5,282,255 5,229,712 5 to 10
Goodwill................................ 9,488,996 10,477,189 25
Other................................... -- 209,900 various
----------- -----------
16,882,251 18,027,801
Less accumulated amortization........... 5,549,919 3,827,012
----------- -----------
$11,332,332 $14,200,789
=========== ===========
</TABLE>
The Company periodically evaluates intangible assets for indicators of
impairment in value. If impairment is indicated, the Company evaluates its
related undiscounted cash flows and, if appropriate, revalues the asset based
on its fair values, accordingly.
5. INCOME TAXES
The components of income before income taxes consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Domestic................................... $1,747,000 $2,102,000 $ 9,020,000
International.............................. 421,000 1,801,000 1,386,000
---------- ---------- -----------
$2,168,000 $3,903,000 $10,406,000
========== ========== ===========
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................. $1,091,000 $ 278,000 $3,991,000
Foreign................................. 888,000 976,000 1,251,000
---------- ---------- ----------
1,979,000 1,254,000 5,242,000
Deferred (credit):
Federal................................. (429,000) 620,000 (674,000)
Foreign................................. (646,000) 21,000 269,000
---------- ---------- ----------
(1,075,000) 641,000 (405,000)
---------- ---------- ----------
$ 904,000 $1,895,000 $4,837,000
========== ========== ==========
</TABLE>
F-10
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reconciliation of income taxes computed at the United States federal
statutory tax rate to income tax expense is:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ----------- ----------
<S> <C> <C> <C>
Income taxes at U.S. statutory rate...... $ 736,981 $ 1,326,949 $3,537,997
International rate differences........... (295,455) 368,757 831,085
Other.................................... 462,474 199,284 467,918
--------- ----------- ----------
$ 904,000 $ 1,895,000 $4,837,000
========= =========== ==========
</TABLE>
No provision for U.S. federal income taxes has been made on the
undistributed earnings of the Canadian subsidiary for which earnings are
considered permanently invested ($3,884,000 at December 31, 1997, $2,772,000
at December 31, 1996 and $2,029,000 at December 31, 1995).
Significant components of the Company's deferred tax assets and liabilities
as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Intangible amortization............................. $ 2,150,000 $ 2,411,000
Deferred compensation............................... 1,595,000 992,000
Inventory........................................... 329,000 124,000
Other deferred assets............................... 354,000 283,000
Net operating loss carryforward..................... 2,146,000 1,678,000
----------- -----------
6,574,000 5,488,000
Valuation allowance................................... (1,066,000) (1,371,000)
----------- -----------
5,508,000 4,117,000
Deferred tax liabilities:
Depreciation........................................ 2,513,000 2,341,000
Other deferred liabilities.......................... 369,000 109,000
Foreign currency exchange gains..................... 839,000 1,141,000
----------- -----------
Total deferred tax liabilities........................ 3,721,000 3,591,000
----------- -----------
Net deferred tax assets............................... $ 1,787,000 $ 526,000
=========== ===========
</TABLE>
Income taxes paid approximated $315,000 in 1997, $1,800,000 in 1996 and
$8,400,000 in 1995.
The Company's net operating loss carryforwards primarily exist in its German
subsidiaries and expire in 2009.
6. EMPLOYEE BENEFIT PLANS
The Company has noncontributory defined benefit pension plans covering
substantially all United States hourly employees and employees of its Canadian
subsidiary. Benefits of the plans are based on years of service. The Company's
funding policy is consistent with the funding requirements of laws and
regulations. Plan assets consist primarily of equity securities and fixed
income investments.
The Company has a noncontributory defined contribution pension plan covering
all United States salaried employees. The Company also has a contributory
401(k) Plan, whereby the Company matches certain employee contributions.
Contributions to the defined contribution plan are based on compensation.
F-11
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net pension cost in 1997, 1996 and 1995 included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Defined benefit plans:
Service cost.............................. $ 209,785 $ 209,826 $ 174,379
Interest cost on projected benefit
obligation............................... 486,379 458,543 396,542
Actual return on plan assets.............. (1,048,702) (587,199) (844,144)
Amortization of prior service cost........ 589,802 215,647 577,853
----------- --------- ---------
Net pension cost of United States plans... 237,264 296,817 304,630
Canadian plan............................. 70,285 88,128 124,977
----------- --------- ---------
Total defined benefit cost.................. 307,549 384,945 429,607
Defined contribution plan................... 620,000 550,000 530,000
----------- --------- ---------
$ 927,549 $ 934,945 $ 959,607
=========== ========= =========
</TABLE>
The assumptions used for the defined benefit plans included a discount rate
of 8.0% and an expected annual rate of return on plan assets of 9.0% for all
years presented.
The funded status of the United States defined benefit plans were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation......................... $6,195,581 $6,009,403
========== ==========
Accumulated benefit obligation.................... $6,492,321 $6,327,797
========== ==========
Projected benefit obligation...................... $6,492,321 $6,327,797
Plan assets at fair value........................... 6,676,144 5,830,177
---------- ----------
Funded status....................................... 183,823 (497,620)
Unrecognized gain................................... (925,817) (240,325)
Unrecognized prior service cost..................... 579,807 642,245
---------- ----------
Recorded pension liability.......................... $ (162,187) $ (95,700)
========== ==========
</TABLE>
The Company also provides post-retirement benefits for certain domestic
retirees covered under Company-sponsored benefit plans. Participants in these
plans may become eligible for these benefits if they reach normal retirement
age while working for the Company. The Company's policy is to fund benefit
costs as they are provided, with retirees paying a portion of the costs.
As of December 31, the accumulated post-retirement benefit obligation was as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Accumulated post-retirement benefit obligations:
Retirees....................................... $ 2,687,673 $ 2,692,548
Fully eligible employees....................... 499,521 273,690
Other active employees......................... 4,325,611 4,089,261
----------- -----------
7,512,805 7,055,499
Unrecognized net gain............................ (87,707) (56,815)
Unrecognized net transition obligation........... (4,518,419) (4,784,208)
Unrecognized prior service cost.................. (937,587) (1,010,043)
----------- -----------
Accrued post-retirement benefits liability....... $ 1,969,092 $ 1,204,433
=========== ===========
</TABLE>
F-12
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net benefit cost in 1997, 1996 and 1995 included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
Service cost................................... $ 185,468 $138,613 $128,345
Interest cost.................................. 561,871 454,509 427,055
Amortization of transition obligation.......... 338,245 265,789 265,789
---------- -------- --------
$1,085,584 $858,911 $821,189
========== ======== ========
</TABLE>
The discount rate used in determining the present value of the accumulated
postretirement benefit obligation was 8% in 1997 and 1996. The assumed health
care cost trend rate used in measuring the accumulated postretirement benefit
obligation was 9.12% declining by .45% per year to an ultimate rate of 6% in
2004. If the assumed healthcare cost trend rate was increased 1% in all future
years, the accumulated postretirement benefit obligation would increase by
$569,471 and the related expense would increase by $51,267.
7. FOREIGN OPERATIONS
The Company is a global developer and manufacturer of pneumatic components
for automated machinery used in various industries. The Company sells to
customers primarily in the United States, Canada and Europe. All of these
activities constitute a single business segment.
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales:
United States and Canada........... $118,709,172 $106,217,448 $102,002,180
Europe............................. 28,388,093 25,797,915 23,805,528
------------ ------------ ------------
$147,097,265 $132,015,363 $125,807,708
============ ============ ============
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Operating income:
United States and Canada........... $ 20,318,252 $ 19,697,892 $ 15,801,609
Europe............................. 218,359 1,502,943 1,600,700
------------ ------------ ------------
$ 20,536,611 $ 21,200,835 $ 17,402,309
============ ============ ============
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Identifiable assets:
United States and Canada........... $ 74,567,027 $ 69,853,166 $ 70,431,901
Europe............................. 23,968,226 24,134,268 23,009,592
------------ ------------ ------------
$ 98,535,253 $ 93,987,434 $ 93,441,493
============ ============ ============
</TABLE>
The information presented above was prepared in accordance with Financial
Accounting Standards Board (FASB) Statement No. 14. In 1997, the FASB issued
Statement 131, Disclosures about Segments of an Enterprise and Related
Information. The Statement supersedes Statement 14 and establishes standards
for the way public business enterprises report selected information about
operating segments in annual reports and interim financial reports issued to
shareholders. Statement 131 is effective for fiscal years beginning after
December 15, 1997. For the year ended 1998, the Company will provide financial
and description information about its reportable operating segments to conform
with the requirements.
F-13
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. ACQUISITION AND INVESTMENT
In January 1995, the Company acquired an 80% interest in Ultra Air Products,
a Michigan Corporation, for approximately $2,858,000. Ultra Air Products is
the manufacturer of compressed air purification equipment. The excess of the
purchase price over the identifiable net assets acquired, $2,500,000, was
recorded as goodwill and is being amortized over 25 years.
In May 1995, the Company acquired an approximate 12% interest in Univer,
S.p.a., an Italian Corporation, for $2,000,000. The Company is accounting for
this investment using the cost method.
9. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The Company issued $115 million of 9 5/8% Senior Subordinated Notes due 2008
subsequent to December 31, 1997. The Notes are guaranteed by the Company's
United States subsidiaries in which it owns 100% of the voting stock. Each of
the Guarantor Subsidiaries has fully and unconditionally guaranteed, on a
joint and several basis, the obligation to pay principal, premium, if any, and
interest on the Notes.
The following supplemental consolidating condensed financial statements
present:
1. Consolidating condensed balance sheets as of December 31, 1997 and
1996, consolidating condensed statements of operations for the years ended
December 31, 1997, 1996 and 1995 and consolidating condensed statements of
cash flows for the years ended December 31, 1997, 1996 and 1995.
2. Numatics, Incorporated (the Parent), combined Guarantor Subsidiaries
and combined Non-Guarantor Subsidiaries (consisting of the Company's
foreign subsidiaries).
3. Elimination entries necessary to consolidate the parent and all of its
subsidiaries.
Management does not believe that separate financial statements of the
Guarantor Subsidiaries of the proposed debt offering are material to
investors. Therefore, separate financial statements and other disclosures
concerning the Guarantor Subsidiaries are not presented.
F-14
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Trade receivables....... $ 11,078,207 $2,188,502 $ 8,907,525 $ 22,174,234
Inventories............. 15,366,392 2,607,696 10,890,070 $ (911,000) 27,953,158
Other................... 1,550,468 179,705 1,191,751 -- 2,921,924
------------ ---------- ----------- ------------ ------------
Total current assets.... 27,995,067 4,975,903 20,989,346 (911,000) 53,049,316
Goodwill, net of
accumulated
amortization........... 457,195 -- 3,704,800 2,677,957 6,839,952
Other................... 9,069,132 1,707 135,798 -- 9,206,637
Intercompany amounts.... 32,664,385 224,501 4,179,442 (37,068,328) --
Property, plant and
equipment, net of
accumulated
depreciation........... 24,183,658 670,466 4,585,224 -- 29,439,348
------------ ---------- ----------- ------------ ------------
$ 94,369,437 $5,872,577 $33,594,610 $(35,301,371) $ 98,535,253
============ ========== =========== ============ ============
Accounts payable and
accrued expenses....... $ 7,167,784 $1,356,896 $ 3,342,078 $ -- $ 11,866,758
Compensation and
employee benefits...... 3,533,317 164,571 876,906 -- 4,574,794
Current portion of long-
term debt.............. 6,172,595 -- 887,465 -- 7,060,060
Other................... 793,156 46,416 1,239,043 -- 2,078,615
------------ ---------- ----------- ------------ ------------
Total current
liabilities............ 17,666,852 1,567,883 6,345,492 25,580,227
Long-term debt less
current portion........ 129,260,490 -- 6,435,647 -- 135,696,137
Other................... 6,841,006 -- -- 348,445 7,189,451
Intercompany amounts.... 8,961,055 3,122,466 16,179,742 (28,263,263) --
Accumulated deficiency
....................... (68,359,966) 1,182,228 4,633,729 (7,386,553) (69,930,562)
------------ ---------- ----------- ------------ ------------
$ 94,369,437 $5,872,577 $33,594,610 $(35,301,371) $ 98,535,253
============ ========== =========== ============ ============
DECEMBER 31, 1996
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Trade receivables....... $ 11,016,971 $1,682,417 $ 8,047,715 $ -- $ 20,747,103
Inventories............. 13,261,077 1,653,392 11,497,514 (967,000) 25,444,983
Other................... 1,579,683 266,520 1,547,351 -- 3,393,554
------------ ---------- ----------- ------------ ------------
Trade current assets.... 25,857,731 3,602,329 21,092,580 (967,000) 49,585,640
Goodwill, net of
accumulated
amortization........... 1,700,038 -- 4,394,587 2,872,645 8,967,270
Other................... 9,391,957 1,707 373,643 -- 9,767,307
Intercompany amounts.... 28,954,731 114,399 3,672,527 (32,741,657) --
Property, plant and
equipment, net of
accumulated
depreciation........... 20,394,284 418,512 4,854,421 -- 25,667,217
------------ ---------- ----------- ------------ ------------
$ 86,298,741 $4,136,947 $34,387,758 $(30,836,012) $ 93,987,434
============ ========== =========== ============ ============
Accounts payable and
accrued expenses....... $ 6,912,457 $ 809,981 $ 3,462,291 $ -- $ 11,184,729
Compensation and
employee benefits...... 3,301,509 156,358 790,706 -- 4,248,573
Current portion of long-
term debt.............. 3,975,835 555,963 -- 4,531,798
Other................... 805,331 35,374 591,224 -- 1,431,929
------------ ---------- ----------- ------------ ------------
Total current
liabilities............ 14,995,132 1,001,713 5,400,184 21,397,029
Long-term debt less
current portion........ 127,893,196 -- 8,380,037 -- 136,273,233
Other................... 5,566,374 -- 1,369,486 245,227 7,181,087
Intercompany amounts.... 6,958,050 2,329,884 14,791,019 (24,078,953) --
Accumulated deficiency.. (69,114,011) 805,350 4,447,032 (7,002,286) (70,863,915)
------------ ---------- ----------- ------------ ------------
$ 86,298,741 $4,136,947 $34,387,758 $(30,836,012) $ 93,987,434
============ ========== =========== ============ ============
</TABLE>
F-15
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............... $104,177,704 $13,826,800 $52,979,761 $(23,887,000) $147,097,265
Costs and expenses...... 86,526,823 13,270,334 50,511,809 (23,748,312) 126,560,654
------------ ----------- ----------- ------------ ------------
Operating income........ 17,650,881 556,466 2,467,952 (138,688) 20,536,611
Interest and other...... 16,896,743 179,675 2,093,152 103,218 19,272,788
------------ ----------- ----------- ------------ ------------
Net income.............. $ 754,138 $ 376,791 $ 374,800 $ (241,906) $ 1,263,823
============ =========== =========== ============ ============
YEAR ENDED DECEMBER 31, 1996
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............... $ 93,366,673 $10,391,257 $48,338,433 $(20,081,000) $132,015,363
Costs and expenses...... 76,233,562 9,741,393 44,856,573 (20,017,000) 110,814,528
------------ ----------- ----------- ------------ ------------
Operating income........ 17,133,111 649,864 3,481,860 (64,000) 21,200,835
Interest and other...... 16,347,186 231,710 2,480,683 133,472 19,193,051
------------ ----------- ----------- ------------ ------------
Net income.............. $ 785,925 $ 418,154 $ 1,001,177 $ (197,472) $ 2,007,784
============ =========== =========== ============ ============
YEAR ENDED DECEMBER 31, 1995
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............... $ 91,822,084 $ 8,507,782 $45,913,842 $(20,436,000) $125,807,708
Costs and expenses...... 77,501,955 8,632,348 42,528,096 (20,257,000) 108,405,399
------------ ----------- ----------- ------------ ------------
Operating income........ 14,320,129 (124,566) 3,385,746 (179,000) 17,402,309
Interest and other
income................. 8,521,026 (28,175) 3,124,538 216,047 11,833,436
------------ ----------- ----------- ------------ ------------
Net income.............. $ 5,799,103 $ (96,391) $ 261,208 $ (395,047) $ 5,568,873
============ =========== =========== ============ ============
</TABLE>
F-16
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities... $11,270,566 $ (419,388) $ 195,930 $ -- $11,047,108
Cash flows from
investing activities:
Capital expenditures... (6,701,675) (320,413) (858,668) -- (7,880,756)
Other investments...... 72,681 (25,673) 25,673 -- 72,681
----------- ----------- ----------- ----------- -----------
Net cash used in
investing activities... (6,628,994) (346,086) (832,995) -- (7,808,075)
Cash flows from
financing activities:
Debt repayments........ (4,198,225) -- (716,796) -- (4,915,021)
Other.................. 1,600,603 -- (43,602) (33,339) 1,523,662
----------- ----------- ----------- ----------- -----------
Net cash used in
financing activities: (2,597,622) -- (760,398) (33,339) (3,391,359)
Intercompany accounts... (2,043,822) 679,595 1,330,888 33,339 --
----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash................ $ 128 $ (85,879) $ (66,575) $ -- $ (152,326)
Cash and cash
equivalents, at
beginning of year...... 169,183 188,359 495,856 -- 853,398
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents, at end of
year................... $ 169,311 $ 102,480 $ 429,281 $ -- $ 701,072
=========== =========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 1996
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities... $11,780,002 $ (340,559) $1,656,940 $ -- $13,096,383
Cash flows from
investing activities:
Capital expenditures... (4,723,876) (101,938) (768,560) -- (5,594,374)
Other investments...... 123,464 2,168 76,748 -- 202,380
----------- ----------- ----------- ----------- -----------
Net cash used in
investing activities... (4,600,412) (99,770) (691,812) -- (5,391,994)
Cash flows from
financing activities:
Debt repayments........ (7,805,556) -- 2,328,380 (2,542,533) (8,019,709)
Debt issuance costs.... (44,277) -- (278,718) -- (322,995)
Other.................. 1,065,533 -- 13,694 (165,627) 913,600
----------- ----------- ----------- ----------- -----------
Net cash used in
financing activities... (6,784,300) -- 2,063,356 (2,708,160) (7,429,104)
Intercompany accounts... (278,216) 589,855 (3,019,799) 2,708,160 --
----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash................ $ 117,074 $ 149,526 $ 8,685 $ -- $ 275,285
Cash and cash
equivalents, at
beginning of year...... 52,109 38,833 487,171 -- 578,113
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents, at end of
year................... $ 169,183 $ 188,359 $ 495,856 $ -- $ 853,398
=========== =========== =========== =========== ===========
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities... $ 8,604,160 $(1,006,273) $(1,455,945) $ -- $ 6,141,942
Cash flows from
investing activities:
Capital expenditures... (2,962,478) (183,455) (597,731) -- (3,743,664)
Other investments...... (3,122,187) 8,730 107,079 -- (3,006,378)
----------- ----------- ----------- ----------- -----------
Net cash used in
investing activities... (6,084,665) (174,725) (490,652) -- (6,750,042)
Cash flows from
financing activities:
Proceeds from
borrowing............. 132,800,000 -- 9,500,000 -- 142,300,000
Purchase of common and
preferred stock....... (97,313,124) -- -- -- (97,313,124)
Debt repayments........ (31,056,333) -- (7,868,083) -- (38,924,416)
Debt issuance costs.... (4,503,886) -- 22,183 -- (4,481,703)
Other.................. (1,236,017) -- (11,211) (132,038) (1,379,266)
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities... (1,309,360) -- 1,642,889 (132,038) 201,491
Intercompany accounts... (1,568,875) 1,196,768 240,069 132,038 --
----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash................ $ (358,740) $ 15,770 $ (63,639) $ -- $ (406,609)
Cash and cash
equivalents, at
beginning of year...... 410,849 23,063 550,810 -- 984,722
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents, at end of
year................... $ 52,109 $ 38,833 $ 487,171 $ -- $ 578,113
=========== =========== =========== =========== ===========
</TABLE>
YEAR ENDED DECEMBER 31, 1995
F-17
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. SHAREHOLDER'S EQUITY
In connection with the senior subordinated note issuance in 1996, the
Company issued an exercisable warrant to purchase 1,276.60 shares of Class A
common stock for $.01 per share, which warrant (or, if exercised, the
resulting shares) was redeemable at the option of the holder in January, 2003
at a price based upon a multiple (7.61) of the Company's earnings, adjusted
for depreciation, interest and certain other items as defined in the warrant
agreement. The redemption amount approximates book value at December 31, 1997.
The difference between the warrant's exercise price and the fair value of the
warrant at the time of issuance was recorded as a discount on the related
notes. The warrant expires on January 3, 2006.
At December 31, 1997 and 1996, the Company and all of its shareholders were
parties to an agreement which required the Company to redeem the shares of any
shareholder upon the happening of certain events, including death, disability
or termination of employment, at a formula price based upon a multiple of the
Company's earnings, adjusted for depreciation, interest and certain other
items as defined in the agreement. The redemption value of the common stock
subject to this agreement was approximately $55 million and $62 million at
December 31, 1997 and 1996, respectively.
This agreement was amended effective June 30, 1998 such that the Company has
the option, but not the obligation, to redeem the common shares in the future,
based upon the occurrence of the same events and at the same multiple of the
Company's adjusted earnings. If one of the triggering events were to occur,
the Company's Board of Directors would decide whether to exercise the option
based on the facts and circumstances existing at that time. In making such a
determination, the Board could be expected to consider the following factors,
among others: the limitations contained in the Indenture, the Company's
ability to pay or finance the redemption price, the Company's other
anticipated cash needs and other then existing business and economic
conditions.
The Company has agreements with each minority shareholder of any of its
subsidiaries which require the Company to redeem the shareholder's shares upon
the happening of certain events, including death, disability or termination of
employment, at a formula price based upon a multiple of the subsidiary's
earnings, as defined in the agreements. The redemption value of the minority
common stock subject to these agreements was approximately $1.1 million and
$.6 million at December 31, 1997 and 1996, respectively.
11 . QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL
1997 ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales...... $36,065,270 $37,313,418 $37,190,414 $36,528,163 $147,097,265
Gross Profit... 13,144,710 14,146,551 13,625,724 12,395,400 53,312,385
Net Income... 85,647 983,651 308,005 (113,480) 1,263,823
<CAPTION>
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL
1996 ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales...... $31,643,102 $32,931,610 $33,565,920 $33,874,731 $132,015,363
Gross Profit... 12,129,273 12,806,455 12,953,697 12,449,682 50,339,107
Net Income... 546,051 696,707 566,749 198,277 2,007,784
</TABLE>
F-18
<PAGE>
NUMATICS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Net sales............................................ $37,822,637 $36,065,270
Costs and expenses (credits):
Cost of products sold ............................. 23,664,905 22,921,412
Marketing, engineering, general and
administrative.................................... 7,846,748 7,647,907
Single business tax................................ (926,015) 231,900
----------- -----------
Operating income..................................... 7,236,999 5,264,051
Other expenses
Interest and other financing expenses.............. 4,410,488 4,129,108
Other.............................................. 541,763 776,112
----------- -----------
Income before income taxes and extraordinary item ... 2,284,748 358,831
Income taxes......................................... 882,530 273,185
----------- -----------
Income before extraordinary item..................... 1,402,218 85,646
Extraordinary item, net of $2,534,000 of income taxes
(Extinguishment of debt)............................ (4,918,000) --
----------- -----------
Net earnings (loss).................................. ($3,515,782) $ 85,646
=========== ===========
</TABLE>
See accompanying notes.
F-19
<PAGE>
NUMATICS, INCORPORATED
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents............................. $ 1,647,332 $ 701,072
Accounts receivable.............................. 24,184,619 22,174,234
Inventories...................................... 28,830,063 27,953,158
Single business taxes receivable................. 1,082,135 --
Other current assets............................. 2,686,387 2,220,852
------------ ------------
Total current assets........................... 58,430,536 53,049,316
Other assets:
Goodwill, net of accumulated amortization........ 6,685,074 6,839,952
Other intangible assets, net of accumulated
amortization.................................... 5,844,589 4,492,380
Deferred income taxes............................ 4,507,362 2,323,362
Investment in affiliate.......................... 2,000,000 2,000,000
Other............................................ 398,772 390,895
------------ ------------
19,435,797 16,046,589
Properties:
Land............................................. 1,508,826 1,631,658
Buildings and improvements....................... 11,408,828 12,072,592
Machinery and equipment.......................... 41,345,886 39,799,217
------------ ------------
54,263,540 53,503,467
Less accumulated depreciation.................... (24,994,452) (24,064,119)
------------ ------------
29,269,088 29,439,348
------------ ------------
$107,135,421 $ 98,535,253
============ ============
LIABILITIES AND ACCUMULATED DEFICIENCY
Current liabilities:
Accounts payable trade........................... $ 8,647,406 $ 9,641,314
Accrued expenses................................. 2,623,005 2,225,444
Compensation and employee benefits............... 4,254,834 4,574,794
Taxes, other than income and single business
tax............................................. 171,913 427,349
Income and single business tax................... 960,914 1,651,266
Current portion of long term debt................ 3,107,030 7,060,060
------------ ------------
Total current liabilities...................... 19,765,102 25,580,227
Long-term liabilities:
Long-term debt, less current portion............. 159,430,295 135,696,137
Deferred retirement benefits..................... 3,389,951 3,202,440
Deferred income taxes............................ 485,785 536,428
------------ ------------
163,306,031 139,435,005
Redeemable warrant................................. -- 3,102,138
Redeemable common stock............................ 3,102,150 --
Minority interest in subsidiaries (redeemable upon
the happening of certain events outside the
control of the Company: $1,313,782 in 1998 and
$1,112,173 in 1997)............................... 421,598 348,445
Accumulated deficiency:
Common stock $.01 per value, 250,000 shares
authorized; 20,000 shares outstanding and
related additional paid in capital (redeemable
upon the happening of certain events outside the
control of the Company: $42,771,000 in 1998 and
$54,931,000 in 1997)............................ 1,500,000 1,500,000
Accumulated deficiency .......................... (80,547,767) (71,031,763)
Equity adjustment from currency translation...... (411,693) (398,799)
------------ ------------
(79,459,460) (69,930,562)
------------ ------------
$107,135,421 $ 98,535,253
============ ============
</TABLE>
See accompanying notes.
F-20
<PAGE>
NUMATICS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------- ---
1998 1997
----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Operating activities
Net Income before extraordinary item............ $ 1,402,218 $ 85,646
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation................................... 1,121,103 947,349
Amortization................................... 337,931 328,333
Deferred interest expense...................... 2,059,894 1,690,536
Minority interest expense...................... 73,153 10,212
Deferred taxes................................. 363,180 (46,801)
Deferred retirement benefits................... 187,510 184,552
Unrealized foreign currency losses............. 264,211 730,172
Change in operating assets and liabilities:
Trade receivables............................. (2,115,452) (2,625,965)
Inventories................................... (1,056,099) 873,156
Other current assets.......................... (1,020,514) (536,108)
Accounts payable and accrued expenses......... (577,608) 297,726
Compensation and employee benefits............ (313,697) (393,407)
Income and single business taxes.............. (1,730,362) 789,916
----------- ----------
Net cash provided by (used in) operating
activities...................................... (1,004,532) 2,335,317
Investing activities
Capital expenses................................ (1,008,330) (1,761,137)
----------- ----------
Net cash used in operating activities........... (1,008,330) (1,761,137)
Financing activities
Proceeds from long-term borrowing............... 115,000,000 933,908
Debt repayments................................. (97,151,347) (1,026,368)
Debt issuance costs............................. (4,630,773) --
Dividends....................................... (6,000,001) --
Extraordinary item payments pertaining to early
extinguishment of debt......................... (4,194,345) --
Issuance of stock............................... 13 --
----------- ----------
Net cash provided by (used in) financing
activities..................................... 3,023,547 (92,460)
Effect of exchange rate changes on cash......... (64,425) (55,255)
----------- ----------
Net increase in cash and cash equivalents....... 946,260 426,465
Cash and cash equivalents at beginning of year.. 701,072 853,129
----------- ----------
Cash and cash equivalents at end of period...... $ 1,647,332 $1,279,594
=========== ==========
</TABLE>
See accompanying notes.
F-21
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three month
period ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1998.
2. COMPREHENSIVE INCOME
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." Statement 130
establishes new rules for the reporting and display of comprehensive income
and its components. The adoption of this Statement requires unrealized gains
or losses on foreign currency translation be included in other comprehensive
income, which prior to adoption were reported separately in shareholders'
equity. Prior year financial statements have been reclassified to conform to
the requirements of Statement 130.
The components of comprehensive income for the first quarter of 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1998 1997
----------- -------
<S> <C> <C>
Net earnings (loss)....................................... $(3,516,000) $86,000
Foreign currency translation adjustments.................. (8,000) (35,000)
----------- -------
$(3,524,000) $51,000
=========== =======
The components of accumulated comprehensive income, net of related tax, at
March 31, 1998 and December 31, 1997 are as follows:
<CAPTION>
1998 1997
----------- -------
<S> <C> <C>
Foreign currency translation adjustments.................. (269) (259)
</TABLE>
3. SENIOR SUBORDINATED NOTES AND EXTRAORDINARY ITEM
In March 1998, the Company issued $115,000,000 of 9 5/8% Senior Subordinated
Notes due 2008 (Senior Subordinated Notes) and replaced its existing credit
agreements with banks. In connection with the issuance of the Senior
Subordinated Notes and new credit agreement, the Company recognized as
extraordinary items $1,567,000, net of taxes, for the write-off of deferred
financing costs, $2,118,000, net of taxes, for the amortization of the
previously unamortized discount on its previous debt arrangement with Harvard
Capital and $1,159,000, net of taxes, for prepayment penalties associated with
the previous debt agreement.
4. SHAREHOLDERS EQUITY
On March 24, 1998 Harvard Private Capital Holdings, Inc. exercised its
warrant to purchase 1,276.6 shares of common stock at a price of $.01 each.
The redemption value of common stock subject to an agreement between the
Company and all of its shareholders at March 31, 1998 was $46 million.
F-22
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. DIVIDEND
On March 25, 1998 the Company paid a dividend on the shares of its common
stock to the holders of record on March 26, 1998. The amount of the dividend
paid in cash was $6,000,001.
6. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The $115 million of 9 5/8% Senior Subordinated Notes issued by the Company
in March 1998 are guaranteed by the Company's United States subsidiaries in
which it owns 100% of the voting stock. Each of the Guarantor Subsidiaries has
fully and unconditionally guaranteed, on a joint and several basis, the
obligation to pay principal, premium, if any, and interest and Liquidated
Damages, if any, on the Notes.
The following supplemental consolidating condensed financial statements
present:
1. Consolidating condensed balance sheets as of March 31, 1998 and
December 31, 1997, consolidating condensed statements of operations for the
three months ended March 31, 1998 and 1997 and consolidated condensed
statements of cash flows for the three months ended March 31, 1998 and
1997.
2. Numatics, Incorporated (the Parent), combined Guarantor Subsidiaries
and combined Non-Guarantor Subsidiaries (consisting of the Company's
foreign subsidiaries).
3. Elimination entries necessary to consolidate the parent and all of its
subsidiaries.
Management does not believe that separate financial statements of the
Guarantor Subsidiaries are material to investors. Therefore, separate
financial statements and other disclosures concerning the Guarantor
Subsidiaries are not presented.
F-23
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BALANCE SHEET
MARCH 31, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Trade Receivables......... $ 12,671,825 $ 2,428,079 $ 9,084,715 $ 24,184,619
Inventories............... 15,358,153 3,107,396 11,322,514 (958,000) 28,830,063
Other..................... 3,379,228 334,441 1,702,185 5,415,854
------------- ----------- ------------ ------------- -------------
Total current assets...... 31,409,206 5,869,916 22,109,414 (958,000) 58,430,536
Goodwill, net of
accumulated
amortization............. 457,195 0 3,598,594 2,629,285 6,685,074
Other..................... 10,638,716 1,707 110,300 0 12,750,723
Intercompany amounts...... 35,682,705 205,480 4,408,215 (38,296,400) 0
Property, plant and
equipment, net of
accumulated depreciation.. 24,256,503 667,467 4,345,118 0 29,269,088
------------- ----------- ------------ ------------- -------------
$ 102,444,325 $ 6,744,570 $ 34,571,641 $ (36,625,115) $ 107,135,421
============= =========== ============ ============= =============
Accounts payable and
accrued expenses......... $ 6,643,381 $ 1,294,318 $ 3,332,712 $ 11,270,411
Compensation and employee
benefits................. 3,421,667 114,978 718,189 4,254,834
Current portion of long-
term debt................ 2,689,849 417,181 3,107,030
Other..................... 508,223 289,534 335,070 1,132,827
------------- ----------- ------------ ------------- -------------
Total current
liabilities.............. 13,263,120 1,698,830 4,803,152 0 19,765,102
Long-term debt less
current portion.......... 152,632,396 0 6,797,899 0 159,430,295
Other..................... 6,492,089 0 485,785 421,598 7,399,472
Intercompany amounts...... 8,685,557 3,462,991 17,342,787 (29,491,335) 0
Accumulated deficiency.... (78,628,837) 1,582,749 5,142,018 (7,555,378) (79,459,448)
------------- ----------- ------------ ------------- -------------
$ 102,444,325 $ 6,744,570 $ 34,571,641 $ (36,625,115) $ 107,135,421
============= =========== ============ ============= =============
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Trade Receivables......... $ 11,078,207 $ 2,188,502 $ 8,907,525 $ 22,174,234
Inventories............... 15,366,392 2,607,696 10,890,070 (911,000) 27,953,158
Other..................... 1,550,468 179,705 1,191,751 2,921,924
------------ ----------- ------------ ------------- ------------
Total current assets...... 27,995,067 4,975,903 20,989,346 (911,000) 53,049,316
Goodwill, net of
accumulated
amortization............. 457,195 0 3,704,800 2,677,957 6,839,952
Other..................... 9,069,132 1,707 135,795 0 9,206,637
Intercompany amounts...... 32,664,385 224,501 4,179,442 (37,068,328) 0
Property, plant and
equipment, net of
accumulated depreciation.. 24,183,658 670,466 4,585,224 0 29,439,348
------------ ----------- ------------ ------------- ------------
$ 94,369,437 $ 5,872,577 $ 33,594,610 $ (35,301,371) $ 98,533,253
============ =========== ============ ============= ============
Accounts payable and
accrued expenses......... $ 7,167,784 $ 1,356,896 $ 3,342,078 $ 11,866,758
Compensation and employee
benefits................. 3,533,317 164,571 876,906 4,574,794
Current portion of long-
term debt................ 6,172,595 887,465 7,060,060
Other..................... 793,156 46,416 1,239,043 2,078,615
------------ ----------- ------------ ------------- ------------
Total current
liabilities.............. 17,666,852 1,567,883 6,345,492 0 25,580,227
Long-term debt less
current portion.......... 129,260,490 0 6,435,647 0 135,696,137
Other..................... 6,841,006 0 0 348,445 7,189,491
Intercompany amounts...... 8,961,055 3,122,466 16,179,742 (28,263,263) 0
Accumulated deficiency.... (68,359,966) 1,182,228 4,633,729 (7,386,553) (69,930,562)
------------ ----------- ------------ ------------- ------------
$ 94,369,437 $ 5,872,577 $ 33,594,610 $ (35,301,371) (98,535,253)
============ =========== ============ ============= ============
</TABLE>
F-24
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales............... $26,530,002 $4,628,295 $13,658,340 $(6,994,000) $37,822,637
Costs and expenses...... 21,086,428 4,018,332 12,379,207 (6,898,329) 30,585,638
----------- ---------- ----------- ----------- -----------
Operating income........ 5,443,574 609,963 1,279,133 (95,671) 7,236,999
Interest and other...... 4,794,452 209,225 757,949 73,155 5,834,781
----------- ---------- ----------- ----------- -----------
Net income (loss) before
extraordinary item..... 649,122 400,738 521,184 (168,826) 1,402,218
Extraordinary item...... (4,918,000) (4,918,000)
----------- ---------- ----------- ----------- -----------
Net income (loss)....... $(4,268,878) $400,738 $ 521,184 $ (168,826) $(3,515,782)
=========== ========== =========== =========== ===========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales............... $26,034,126 $2,445,018 $13,318,126 $(5,732,000) $36,065,270
Costs and expenses...... 21,754,642 2,535,425 12,281,480 (5,770,328) 30,801,219
----------- ---------- ----------- ----------- -----------
Operating income........ 4,279,484 (90,407) 1,036,646 38,328 5,264,051
Interest and other...... 4,170,462 (36,148) 1,033,879 10,212 5,178,405
----------- ---------- ----------- ----------- -----------
Net income.............. $ 109,022 $ (54,259) $ 2,767 $ 28,116 $ 85,646
=========== ========== =========== =========== ===========
</TABLE>
F-25
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash used by
operating activities... $ (471,552) $(245,118) $ (287,862) $ 0 $ (1,004,532)
Cash flows from
investing activities:
Capital expenditures.. (895,693) (38,046) (74,591) (1,008,330)
Other investments..... 0 0 0 0 0
------------ --------- ---------- -------- ------------
Net cash used in
investing activities... (895,693) (38,046) (74,591) 0 (1,008,330)
Cash flows from
financing activities:
Proceeds from
borrowing............ 115,000,000 0 0 115,000,000
Debt repayments....... (97,170,734) 0 19,387 (97,151,347)
Debt issuance costs... (4,609,500) 0 (21,273) (4,630,773)
Dividends............. (6,000,001) 0 0 (6,000,001)
Extraordinary item
(extinguishment of
debt)................ (4,194,345) 0 0 (4,194,345)
Issuance of stock..... 13 0 0 13
Other................. 0 0 (6,926) (57,499) (64,425)
------------ --------- ---------- -------- ------------
Net cash provided (used)
in financing
activities............. 3,025,433 0 (8,812) (57,499) 2,959,122
Intercompany accounts... (1,386,755) 359,548 969,708 57,499 0
------------ --------- ---------- -------- ------------
Net increase (decrease)
in cash................ 271,433 76,384 598,433 0 946,260
Cash and cash
equivalents, at
beginning of year...... 169,311 102,480 429,281 0 701,072
------------ --------- ---------- -------- ------------
Cash and cash
equivalents, at end of
year................... $ 440,744 $ 178,864 $1,027,724 $ 0 $ 1,647,332
============ ========= ========== ======== ============
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities... $1,836,472 $ 20,922 $477,923 $ 0 $2,335,317
Cash flows from
investing activities:
Capital expenditures.. (1,605,517) (30,775) (124,845) (1,761,137)
Other investments..... 0 0 0 0 0
---------- -------- -------- ------- ----------
Net cash used in
investing activities... (1,605,517) (30,775) (124,845) 0 (1,761,137)
Cash flows from
financing activities:
Proceeds from
borrowing............ 933,908 0 0 933,908
Purchase of common and
preferred stock...... 0 0 0 0
Debt repayments....... (893,057) 0 (133,311) (1,026,368)
Debt issuance costs... 0 0 0 0
Other................. 0 0 (35,636) (19,619) (55,255)
---------- -------- -------- ------- ----------
Net cash provided (used)
in financing
activities............. 40,851 0 (168,947) (19,619) (147,715)
Intercompany accounts... (387,390) 58,241 309,530 19,619 0
---------- -------- -------- ------- ----------
Net increase (decrease)
in cash................ (115,584) 48,388 493,661 0 426,465
Cash and cash
equivalents at
beginning of year...... 168,512 188,358 496,259 0 853,129
---------- -------- -------- ------- ----------
Cash and cash
equivalents at end of
year................... $ 52,928 $236,746 $989,920 $ 0 $1,279,594
========== ======== ======== ======= ==========
</TABLE>
F-26
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE EX-
CHANGE NOTES BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING THE OF-
FER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information................................................... i
Cautionary Statements Regarding Forward-Looking Statements............... i
Basis for Statements About Market Share.................................. ii
Summary.................................................................. 1
Risk Factors............................................................. 13
The Exchange Offer....................................................... 20
Certain Federal Income Tax Consequences of the Exchange Offer............ 27
Capitalization........................................................... 28
Pro Forma Financial Information.......................................... 29
Selected Consolidated Financial Information.............................. 31
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 33
Business................................................................. 39
Management and Directors................................................. 50
Security Ownership of Certain Beneficial Owners and Management........... 54
Description of Other Indebtedness........................................ 55
Description of Exchange Notes............................................ 58
Description of Notes..................................................... 86
Registration Rights; Liquidated Damages.................................. 87
Certain Federal Tax Considerations for Foreign Persons................... 89
Plan of Distribution..................................................... 91
Legal Matters............................................................ 92
Experts.................................................................. 92
Index to Consolidated Financial Statements............................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO OF NUMATICS APPEARS HERE]
NUMATICS, INCORPORATED
OFFER TO EXCHANGE ALL OUTSTANDING
9 5/8% SENIOR SUBORDINATED NOTES
DUE 2008
($115,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008
($115,000,000 PRINCIPAL AMOUNT)
---------------
PROSPECTUS
---------------
AUGUST 4, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Michigan Business Corporation Act ("MBCA"), under which the Issuer is
organized, empowers a corporation to indemnify any person who was or is a
party or is threatened to be made a party to any action, suit or proceeding
(each a "proceeding"), other than a proceeding by or in the right of the
corporation, by reason of the fact that he or she is or was a director,
officer, employee, or agent of the corporation or, at the corporation's
request, a director, officer, employee, or agent of another entity or
enterprise against expenses, judgments, fines, and amounts paid in settlement
actually and reasonably incurred by the indemnitee in connection with the
proceeding, if the indemnitee acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal proceeding, without reasonable
cause to believe his or her conduct was unlawful. The MBCA further empowers a
corporation to indemnify any of the same types of indemnitees against expenses
actually and reasonably incurred by him or her in connection with the defense
or settlement of a proceeding by or in the right of the corporation if the
indemnitee met the same standards of conduct, except that indemnification with
respect to any claim, issue, or matter as to which the indemnitee has been
adjudged to be liable to the corporation may be made only if and to the extent
determined to be proper by a court. In addition, the MBCA requires such a
corporation to indemnify any such indemnitee who is successful on the merits
or otherwise in defense of any proceeding of the types described above, or in
defense of any claim, issue, or matter in any such proceeding, against his or
her actual and reasonable expenses incurred in connection with such defense,
and it permits advancement by the corporation of an indemnitee's expenses
under certain circumstances. In general, Article VI of the Issuer's bylaws
requires indemnification of and expense advancement to its officers and
directors to the fullest extent permitted by the MBCA.
All of the Guarantors other than Microsmith, Inc. are also organized under
the MBCA, and all of their bylaws (other than those of Ultra Air Products,
Inc.) contain provisions substantially identical to those contained in the
Issuer's bylaws described above.
Chapter 10 of the Arizona Revised Statutes, under which Microsmith, Inc. is
organized, empowers a corporation to provide indemnification and advancement
of expenses on substantially the same basis provided for in the MBCA.
Insurance is maintained on a regular basis (and not specifically in
connection with this offering or the offering of the Notes) against
liabilities arising on the part of directors and officers out of their
performance in such capacities or arising on the part of any of the
Registrants out of the above-described indemnification provisions of such
Registrant, subject to certain exclusions and to the policy limits.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*3.1.1 Articles of Incorporation of the Issuer, as amended
*3.1.2 Bylaws of the Issuer
*3.2.1 Articles of Incorporation of Numation, Inc., as amended
*3.2.2 Bylaws of Numation, Inc., as amended
*3.3.1 Articles of Incorporation of Numatech, Inc., as amended
*3.3.2 Bylaws of Numatech, Inc., as amended
*3.4.1 Articles of Incorporation of Micro-Filtration, Inc., as amended
*3.4.2 Bylaws of Micro-Filtration, Inc., as amended
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*3.5.1 Articles of Incorporation of Ultra Air Products, Inc., as amended
*3.5.2 Bylaws of Ultra Air Products, Inc., as amended
*3.6.1 Articles of Incorporation of Microsmith, Inc., as amended
*3.6.2 Bylaws of Microsmith, Inc., as amended
*3.7.1 Articles of Incorporation of I.A.E. Incorporated
*3.7.2 Bylaws of I.A.E. Incorporated
*4.1.1 Indenture, dated as of March 23, 1998, among the Issuer, the
Guarantors, and First Trust National Association, as trustee
(including forms of Notes and related Subsidiary Guarantees)
*4.1.2 A/B Exchange Registration Rights Agreement, dated as of March 23,
1998, among the Issuer, the Guarantors, and the Initial
Purchasers
*4.1.3 Form of Exchange Notes (including related Subsidiary Guarantees)
*4.2.1 Amended and Restated Loan Agreement, dated March 23, 1998, among
the Issuer, Numatics GmbH, Numatics, Ltd., NBD Bank, as
Administrative Agent, BankBoston, N.A., as Documentation Agent,
and the Lenders party thereto
*4.2.2 Amended and Restated Guaranty Agreement, dated as of March 23,
1998, by the Issuer and the Guarantors in favor of NBD Bank, as
Administrative Agent, and BankBoston, N.A., as Documentation
Agent
*5.1 Opinion and consent of Miller, Canfield, Paddock and Stone, P.L.C.
*10.1 Purchase Agreement dated March 18, 1998 among the Initial
Purchasers, the Issuer and the Guarantors
*10.2.1 Securities Purchase Agreement, dated as of January 3, 1996,
between the Issuer and Harvard
*10.2.2 Numatics, Incorporated Tag-Along and Drag-Along Agreement, dated
January 3, 1996, among the Issuer, Harvard and shareholders of
the Issuer
*10.2.3 Registration Agreement, dated as of January 3, 1996, between the
Issuer and Harvard
*10.2.4 Form of Guaranty Agreement between Harvard and I.A.E.
Incorporated, dated as of March 23, 1998 (Each of the other
Guarantors has executed an Amended and Restated Guaranty
Agreement in substantially the same form.)
*10.2.5 Agreement, dated as of March 23, 1998, between the Issuer and
Harvard
*10.3 Amended and Restated Stock Transfer Agreement, dated December 28,
1995, among the Issuer, John H. Welker, individually and as
trustee of the John H. Welker Trust u/a dtd December 28, 1995,
David K. Dodds, Donald E. McGeachey, Henry Fleischer,
individually and as trustee of the Henry Fleischer Trust u/a dtd
March 10, 1993, Robert P. Robeson, John A. Acuff, Bruce W. Hoppe,
David King, and Philip Robinson
+10.3.1 First Amendment, dated June 30, 1998, to Amended and Restated
Stock Transfer Agreement
*10.4 Voting Agreement, dated as of November 29, 1990, among the Issuer
(under its former name, Numatics Acquisition Corporation) and
certain shareholders of the Issuer
*10.5 Employment Agreement, dated January 3, 1996, between the Issuer
and John H. Welker**
*10.6 Employment Agreement, dated September 15, 1996, between the Issuer
and David M. Tenniswood**
*10.7 Numatics, Incorporated Amended and Restated Deferred Compensation
Plan, adopted December 28, 1995, and related acknowledgements by
Eligible Employees (as therein defined)**
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*12.1 Statement re computation of ratios
*21.1 List of subsidiaries of the Issuer
23.1 Consent of Ernst & Young LLP
*23.2 Consent of Miller, Canfield, Paddock and Stone, P.L.C. (contained
in Exhibit 5.1)
*24.1 Powers of Attorney (contained in signature pages of original
Registration Statement)
*25.1 Statement of Eligibility and Qualification of Trustee on Form T-1
of First Trust National Association under the Trust Indenture Act
of 1939
*27.1 Financial Data Schedule
*99.1 Form of Letter of Transmittal with respect to the Exchange Offer
*99.2 Form of Notice of Guaranteed Delivery with respect to the Exchange
Offer
+99.3 Form of Exchange Agent Agreement
</TABLE>
- --------
*Filed with original Registration Statement on April 29, 1998
+Filed with Amendment No. 1 on July 10, 1998
**Indicates contract or compensatory plan or arrangement with one or more
Company executive officers and/or directors of the Issuer
(b) FINANCIAL STATEMENT SCHEDULE & REPORT
II-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Numatics, Incorporated
We have audited the consolidated financial statements of Numatics,
Incorporated as of December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997, and have issued our report thereon
dated February 25, 1998 (included elsewhere in this Registration Statement).
Our audits also included the financial statement schedule listed in Item 16(b)
of this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Detroit, Michigan
February 25, 1998
II-4
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- ------------ ----------- ------------ ----------
ADDITIONS--
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND DEDUCTIONS-- END OF
DESCRIPTION PERIOD EXPENSES DESCRIBE PERIOD
- ----------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Accounts receivable
allowance.................. $ 132 $ 102 $173(1) $ 61
Inventory reserve........... 1,047 509 639(2) 917
Deferred tax asset valuation
allowance.................. 1,371 -- 305(3) 1,066
Year ended December 31, 1996:
Accounts receivable
allowance.................. 222 76 166(1) 132
Inventory reserve........... 1,355 223 531(2) 1,047
Deferred tax asset valuation
allowance.................. 274 1,097 -- 1,371
Year ended December 31, 1995:
Accounts receivable
allowance.................. 230 165 173(1) 222
Inventory reserve........... 1,374 132 151(2) 1,355
Deferred tax asset valuation
allowance.................. -- 274 -- 274
</TABLE>
- --------
(1) Uncollectible accounts charged off net of recoveries.
(2) Reduction in inventory reserves for inventory disposed of during the year.
(3) Utilization of foreign net operating loss carryforwards.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of any
of the Registrants pursuant to the foregoing provisions, or otherwise, each
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by a
Registrant of expenses incurred or paid by a director, officer or controlling
person of such Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, such Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Each undersigned Registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the date of this Registration Statement (or most recent post-
effective amendment thereof) which, individual or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase
or decrease in volume of the securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective Registration Statement.
II-5
<PAGE>
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of this Registration Statement through the date of
responding to the request.
(c) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in this Registration Statement
when it became effective.
II-6
<PAGE>
NUMATICS, INCORPORATED
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
NAMED ABOVE HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HIGHLAND, STATE OF
MICHIGAN, ON AUGUST 4, 1998.
Numatics, Incorporated
/s/ John H. Welker
By: _________________________________
John H. Welker
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<S> <C> <C>
/s/ John H. Welker President and Chief August 4, 1998
____________________________________ Executive Officer and
John H. Welker Director
* Vice President, Treasurer August 4, 1998
____________________________________ and Chief Financial Officer
Robert P. Robeson (also principal accounting
officer)
* Director August 4, 1998
____________________________________
David M. Tenniswood
* Director August 4, 1998
____________________________________
A. A. Koch
* Director August 4, 1998
____________________________________
John P. Musat
* Director August 4, 1998
____________________________________
Tim R. Palmer
</TABLE>
/s/ John H. Welker
*By :__________________________
John H. Welker
Attorney-in-Fact
S-1
<PAGE>
NUMATION, INC.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
NAMED ABOVE HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HIGHLAND, STATE OF
MICHIGAN, ON AUGUST 4, 1998.
Numation, Inc.
/s/ John H. Welker
By: _________________________________
John H. Welker
Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<S> <C> <C>
/s/ John H. Welker Chairman of the Board August 4, 1998
____________________________________ (principal executive
John H. Welker officer) and Director
* Treasurer (principal August 4, 1998
____________________________________ financial officer and
Robert P. Robeson principal accounting
officer)
* Director August 4, 1998
____________________________________
Jeffrey R. Schneid
* Director August 4, 1998
____________________________________
Henry Fleischer
</TABLE>
/s/ John H. Welker
*By :__________________________
John H. Welker
Attorney-in-Fact
S-2
<PAGE>
NUMATECH, INC.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
NAMED ABOVE HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HIGHLAND, STATE OF
MICHIGAN, ON AUGUST 4, 1998.
Numatech, Inc.
/s/ John H. Welker
By: _________________________________
John H. Welker
Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<S> <C> <C>
/s/ John H. Welker Chairman of the Board August 4, 1998
____________________________________ (principal executive
John H. Welker officer) and Director
* Treasurer (principal August 4, 1998
____________________________________ financial officer and
Robert P. Robeson principal accounting
officer)
* Director August 4, 1998
____________________________________
Richard L. Dalton, Jr.
* Director August 4, 1998
____________________________________
Donald E. McGeachy
</TABLE>
/s/ John H. Welker
*By :__________________________
John H. Welker
Attorney-in-Fact
S-3
<PAGE>
MICRO-FILTRATION, INC.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
NAMED ABOVE HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HIGHLAND, STATE OF
MICHIGAN, ON AUGUST 4, 1998.
Micro-Filtration, Inc.
/s/ John H. Welker
By: _________________________________
John H. Welker
Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<S> <C> <C>
/s/ John H. Welker Chairman of the Board August 4, 1998
____________________________________ (principal executive
John H. Welker officer) and Director
* Treasurer (principal August 4, 1998
____________________________________ financial officer and
Robert P. Robeson principal accounting
officer)
* Director August 4, 1998
____________________________________
Donald E. McGeachy
* Director August 4, 1998
____________________________________
Robert D. Nuckles
</TABLE>
/s/ John H. Welker
*By :__________________________
John H. Welker
Attorney-in-Fact
S-4
<PAGE>
ULTRA AIR PRODUCTS, INC.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
NAMED ABOVE HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HIGHLAND, STATE OF
MICHIGAN, ON AUGUST 4, 1998.
Ultra Air Products, Inc.
/s/ John H. Welker
By: _________________________________
John H. Welker
Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<S> <C> <C>
/s/ John H. Welker Chairman of the Board August 4, 1998
____________________________________ (principal executive
John H. Welker officer) and Director
* Treasurer (principal August 4, 1998
____________________________________ financial officer and
Robert P. Robeson principal accounting
officer) and Director
* Director August 4, 1998
____________________________________
Robert L. McKay
</TABLE>
/s/ John H. Welker
*By: __________________________
John H. Welker
Attorney-in-Fact
S-5
<PAGE>
MICROSMITH, INC.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
NAMED ABOVE HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HIGHLAND, STATE OF
MICHIGAN, ON AUGUST 4, 1998.
Microsmith, Inc.
/s/ John H. Welker
By: _________________________________
John H. Welker
Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<S> <C> <C>
/s/ John H. Welker Chairman of the Board August 4, 1998
____________________________________ (principal executive
John H. Welker officer) and Director
* Treasurer (principal August 4, 1998
____________________________________ financial officer and
Robert P. Robeson principal accounting
officer)
* Director August 4, 1998
____________________________________
Donald E. McGeachy
Director
____________________________________
William S. Smith
</TABLE>
/s/ John H. Welker
*By: __________________________
John H. Welker
Attorney-in-Fact
S-6
<PAGE>
I.A.E. INCORPORATED
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
NAMED ABOVE HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HIGHLAND, STATE OF
MICHIGAN, ON AUGUST 4, 1998.
I.A.E. Incorporated
/s/ John H. Welker
By: _________________________________
John H. Welker
Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<S> <C> <C>
/s/ John H. Welker Chairman of the Board August 4, 1998
____________________________________ (principal executive
John H. Welker officer) and Director
* Treasurer (principal August 4, 1998
____________________________________ financial officer and
Robert P. Robeson principal accounting
officer)
</TABLE>
/s/ John H. Welker
*By: ________________________________
John H. Welker
Attorney-in-Fact
S-7
<PAGE>
EXHIBIT INDEX
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*3.1.1 Articles of Incorporation of the Issuer, as amended
*3.1.2 Bylaws of the Issuer
*3.2.1 Articles of Incorporation of Numation, Inc., as amended
*3.2.2 Bylaws of Numation, Inc., as amended
*3.3.1 Articles of Incorporation of Numatech, Inc., as amended
*3.3.2 Bylaws of Numatech, Inc., as amended
*3.4.1 Articles of Incorporation of Micro-Filtration, Inc., as amended
*3.4.2 Bylaws of Micro-Filtration, Inc., as amended
*3.5.1 Articles of Incorporation of Ultra Air Products, Inc., as amended
*3.5.2 Bylaws of Ultra Air Products, Inc., as amended
*3.6.1 Articles of Incorporation of Microsmith, Inc., as amended
*3.6.2 Bylaws of Microsmith, Inc., as amended
*3.7.1 Articles of Incorporation of I.A.E. Incorporated
*3.7.2 Bylaws of I.A.E. Incorporated
*4.1.1 Indenture, dated as of March 23, 1998, among the Issuer, the
Guarantors, and First Trust National Association, as trustee
(including forms of Notes and related Subsidiary Guarantees)
*4.1.2 A/B Exchange Registration Rights Agreement, dated as of March 23,
1998, among the Issuer, the Guarantors, and the Initial
Purchasers
*4.1.3 Form of Exchange Notes (including related Subsidiary Guarantees)
*4.2.1 Amended and Restated Loan Agreement, dated March 23, 1998, among
the Issuer, Numatics GmbH, Numatics, Ltd., NBD Bank, as
Administrative Agent, BankBoston, N.A., as Documentation Agent,
and the Lenders party thereto
*4.2.2 Amended and Restated Guaranty Agreement, dated as of March 23,
1998, by the Issuer and the Guarantors in favor of NBD Bank, as
Administrative Agent, and BankBoston, N.A., as Documentation
Agent
*5.1 Opinion and consent of Miller, Canfield, Paddock and Stone, P.L.C.
*10.1 Purchase Agreement dated March 18, 1998 among the Initial
Purchasers, the Issuer and the Guarantors
*10.2.1 Securities Purchase Agreement, dated as of January 3, 1996,
between the Issuer and Harvard
*10.2.2 Numatics, Incorporated Tag-Along and Drag-Along Agreement, dated
January 3, 1996, among the Issuer, Harvard and shareholders of
the Issuer
*10.2.3 Registration Agreement, dated as of January 3, 1996, between the
Issuer and Harvard
*10.2.4 Form of Guaranty Agreement between Harvard and I.A.E.
Incorporated, dated as of March 23, 1998 (Each of the other
Guarantors has executed an Amended and Restated Guaranty
Agreement in substantially the same form.)
*10.2.5 Agreement, dated as of March 23, 1998, between the Issuer and
Harvard
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*10.3 Amended and Restated Stock Transfer Agreement, dated December 28,
1995, among the Issuer, John H. Welker, individually and as
trustee of the John H. Welker Trust u/a dtd December 28, 1995,
David K. Dodds, Donald E. McGeachey, Henry Fleischer,
individually and as trustee of the Henry Fleischer Trust u/a dtd
March 10, 1993, Robert P. Robeson, John A. Acuff, Bruce W. Hoppe,
David King, and Philip Robinson
+10.3.1 First Amendment, dated June 30, 1998, to Amended and Restated
Stock Transfer Agreement
*10.4 Voting Agreement, dated as of November 29, 1990, among the Issuer
(under its former name, Numatics Acquisition Corporation) and
certain shareholders of the Issuer
*10.5 Employment Agreement, dated January 3, 1996, between the Issuer
and John H. Welker**
*10.6 Employment Agreement, dated September 15, 1996, between the Issuer
and David M. Tenniswood**
*10.7 Numatics, Incorporated Amended and Restated Deferred Compensation
Plan, adopted December 28, 1995, and related acknowledgements by
Eligible Employees (as therein defined)**
*12.1 Statement re computation of ratios
*21.1 List of subsidiaries of the Issuer
23.1 Consent of Ernst & Young LLP
*23.2 Consent of Miller, Canfield, Paddock and Stone, P.L.C. (contained
in Exhibit 5.1)
*24.1 Powers of Attorney (contained in signature pages of original
Registration Statement)
*25.1 Statement of Eligibility and Qualification of Trustee on Form T-1
of First Trust National Association under the Trust Indenture Act
of 1939
*27.1 Financial Data Schedule
*99.1 Form of Letter of Transmittal with respect to the Exchange Offer
*99.2 Form of Notice of Guaranteed Delivery with respect to the Exchange
Offer
+99.3 Form of Exchange Agent Agreement
</TABLE>
- --------
*Filed with original Registration Statement on April 29, 1998
+Filed with Amendment No. 1 on July 10, 1998
**Indicates contract or compensatory plan or arrangement with one or more
Company executive officers and/or directors of the Issuer
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 25, 1998 (except for Note 9, as to which the
date is March 23, 1998 and for Note 10, as to which the date is June 30, 1998),
in Amendment No. 3 to the Registration Statement on Form S-4 and related
Prospectus dated August 4, 1998 for the registration of $115,000,000 principal
amount of 9-5/8% Series B Senior Subordinated Notes due 2008 of Numatics,
Incorporated.
/s/ Ernst & Young LLP
Detroit, Michigan
August 4, 1998
