<PAGE>
As filed with the Securities and Exchange Commission on May 7, 1996
Registration No. 333-2600
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
ALVEY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1796, 7373, 3535, 3537 43-0157210
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Numbers) Identification No.)
</TABLE>
101 S. HANLEY ROAD, SUITE 1300
ST. LOUIS, MISSOURI 63105
(314) 863-5776
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------------
WILLIAM R. MICHAELS
Chairman of the Board and Chief Executive Officer
Alvey Systems, Inc.
101 S. Hanley Street, Suite 1300
St. Louis, Missouri 63105
(314) 863-5776
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
WITH A COPY TO:
KENNETH M. DORAN, ESQ.
Gibson, Dunn & Crutcher
333 South Grand Avenue
Los Angeles, California 90071-3197
(213) 229-7000
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ALVEY SYSTEMS, INC.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K showing location in the Prospectus
of Information Required by Items in Form S-4
<TABLE>
<CAPTION>
ITEM IN FORM S-4 CAPTION IN PROSPECTUS
- ---------------------------------------------------------------- -------------------------------------------------------------
<S> <C>
1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus. . . . . . . . . . . . . . . . . . Facing Page; Cross-Reference Sheet; Outside Front Cover Page
of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus . . Available Information; Table of Contents; Inside Front Cover
Pages of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Charges and Other
Information . . . . . . . . . . . . . . . . . . . . . . . . Summary; Risk Factors; Transactions Related to the Offering;
The Exchange Offer; Selected Historical Condensed Consolidated
Financial and Other Data
4. Terms of the Transaction. . . . . . . . . . . . . . . . . . Summary; Risk Factors; Description of Notes; Incorporation of
Certain Documents by Reference
5. Pro Forma Financial Information . . . . . . . . . . . . . . Not Applicable
6. Material Contacts with the Company Being Acquired . . . . . Not Applicable
7. Additional Information Required for Reoffering by Persons
and Parties Deemed to be Underwriters . . . . . . . . . . . Not Applicable
8. Interests of Named Experts and Counsel. . . . . . . . . . . Legal Matters; Independent Auditors
9. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities. . . . . . . . . . . . . . . . . Not Applicable
10. Information with Respect to S-3 Registrants . . . . . . . . Not Applicable
11. Incorporation of Certain Information by Reference . . . . . Incorporation of Certain Documents by Reference
12. Information with Respect to S-2 or S-3 Registrants. . . . . Not Applicable
13. Incorporation of Certain Information by Reference . . . . . Not Applicable
14. Information with Respect to Registrants Other than S-3 or
S-2 Registrants . . . . . . . . . . . . . . . . . . . . . . Prospectus Cover Page; Available Information; Summary;
Unaudited Pro Forma Condensed Consolidated Financial
Statements; Selected Historical Condensed Consolidated
Financial and Other Data; Management's Discussion and Analysis
of Financial Condition and Results of Operations; Business;
Index to Financial Statements
15. Information with Respect to S-3 Companies . . . . . . . . . Not Applicable
16. Information with Respect to S-2 or S-3 Companies. . . . . . Not Applicable
17. Information with Respect to Companies other than S-3 or S-2
Companies . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
18. Information if Proxies, Consents or Authorizations are to be
Solicited . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
19. Information if Proxies, Consents or Authorizations are not
to be Solicited or in an Exchange Offer . . . . . . . . . . Management; Certain Transactions; Principal Stockholders
</TABLE>
2
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 7, 1996
ALVEY SYSTEMS, INC.
OFFER TO EXCHANGE
ALL OUTSTANDING
11 3/8% SENIOR SUBORDINATED NOTES DUE 2003
($100,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR 11 3/8% SENIOR SUBORDINATED NOTES DUE 2003
The Exchange Offer and withdrawal rights will expire at 5:00 p.m., New York
City time, on , 1996 (as such date may be extended, the "Expiration
Date").
Alvey Systems, Inc., a Delaware corporation (the "Company") and a wholly
owned subsidiary of Pinnacle Automation, Inc., a Delaware corporation
("Pinnacle"), 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 $1,000 in principal
amount of its 11 3/8% Senior Subordinated Notes due 2003 (the "New Notes") for
each $1,000 in principal amount of its outstanding 11 3/8% Senior Subordinated
Notes due 2003 (the "Old Notes") (the Old Notes and the New Notes are
collectively referred to herein as the "Notes"). An aggregate principal amount
of $100,000,000 of Old Notes is outstanding. See "The Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. 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 New 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 Company has agreed that, starting on the Expiration Date (as
defined herein) and ending on the close of business one year after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution."
The Company will accept for exchange any and all Old Notes that are validly
tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders
of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Offer is not conditioned upon any
minimum principal amount of the Old Notes being tendered for exchange. However,
the Exchange Offer is subject to the terms and provisions of the Registration
Rights Agreement, dated as of January 24, 1996 (the "Registration Rights
Agreement"), among the Company, Pinnacle and NationsBanc Capital Markets, Inc.
(the "Initial Purchaser"). The Old Notes may be tendered only in multiples of
$1,000. See "The Exchange Offer."
(continued on next page)
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 22 HEREIN FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY HOLDERS IN EVALUATING THE EXCHANGE OFFER
---------------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
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 , 1996
<PAGE>
The Old Notes were issued in a transaction (the "Prior Offering")
pursuant to which the Company issued an aggregate of $100,000,000 principal
amount of the Old Notes to the Initial Purchaser on January 24, 1996 (the
"Closing Date") pursuant to a Purchase Agreement, dated January 19, 1996 (the
"Purchase Agreement"), among the Company, Pinnacle and the Initial Purchaser.
The Initial Purchaser subsequently resold the Old Notes in reliance on Rule 144A
under the Securities Act of 1933, as amended (the "Securities Act"). The
Company and the Initial Purchaser also entered into the Registration Rights
Agreement, pursuant to which the Company granted certain registration rights for
the benefit of the holders of the Old Notes. The Exchange Offer is intended to
satisfy certain of the Company's obligations under the Registration Rights
Agreement with respect to the Old Notes. See "The Exchange Offer - Purpose and
Effect."
The Old Notes were, and the New Notes will be, issued under the
Indenture, dated as of January 24, 1996 (the "Indenture"), among the Company and
The Bank of New York, as trustee (in such capacity, the "Trustee"). The form
and terms of the New Notes will be identical in all material respects to the
form and terms of the Old Notes, except that (i) the New Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof, (ii) holders of New Notes will not be entitled
to liquidated damages equal to $.05 per week per $1,000 principal amount of Old
Notes held by such holders (up to a maximum amount of $0.30 per week per $1,000
principal amount) otherwise payable under the terms of the Registration Rights
Agreement in respect of the Old Notes held by such holders during any period in
which a Registration Default (as defined) is continuing (the "Liquidated
Damages") and (iii) holders of New Notes will not be, and upon the consummation
of the Exchange Offer, holders of Old Notes will no longer be, entitled to
certain rights under the Registration Rights Agreement intended for the holders
of unregistered securities. The Exchange Offer shall be deemed consummated upon
the occurrence of the delivery by the Company to The Bank of New York, as
registrar of the Old Notes (in such capacity, the "Registrar") under the
Indenture of New Notes in the same aggregate principal amount as the aggregate
principal amount of Old Notes that are validly tendered by holders thereof
pursuant to the Exchange Offer. See "The Exchange Offer - Termination of
Certain Rights" and "Procedures for Tendering Old Notes" and "Description of
Notes."
The New Notes will bear interest at a rate equal to 11 3/8% per annum.
Interest on the New Notes is payable semiannually, commencing July 31, 1996, on
January 31 and July 31 of each year (each, an "Interest Payment Date") and shall
accrue from January 24, 1996 or from the most recent Interest Payment Date with
respect to the Old Notes to which interest was paid or duly provided for. The
New Notes will mature on January 31, 2003. See "Description of Notes."
The New Notes will not be redeemable at the Company's option prior to
January 31, 2000. Thereafter, the New Notes will be redeemable by the Company
at the redemption prices and subject to the conditions set forth in "Description
of Notes - Optional Redemption." Notwithstanding the foregoing, at any time on
or before January 31, 1999, the Company may (but shall not have the obligation
to) redeem up to 35% of the original aggregate principal amount of the New Notes
at a redemption price of 111.375% of the principal amount thereof, plus accrued
and unpaid interest thereon to the redemption date, with the net proceeds of an
Equity Offering (as defined herein) made by the Company or of a capital
contribution made by Pinnacle to the common equity capital of the Company with
the net proceeds of an Equity Offering made by Pinnacle; PROVIDED that at least
65% of the aggregate principal amount of New Notes originally issued remain
outstanding immediately after the occurrence of such redemption; and PROVIDED,
FURTHER, that such redemption shall occur within 75 days of the date of the
closing of such Equity Offering. Upon the occurrence of a Change of Control (as
defined herein), the Company will be required to make an offer to repurchase all
outstanding New Notes at 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the date of purchase. There is
no assurance that the Company will have adequate funds to repurchase the New
Notes upon a Change in Control. See "Description of Notes - Repurchase of New
Notes at the Option of the Holders - Change of Control."
The New Notes will be general unsecured obligations of the Company
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined herein) of the Company, including borrowings under the Credit
Agreement (as defined herein). The New Notes will also be effectively
subordinated to all of the indebtedness of the Company's Subsidiaries. As of
March 31, 1996, the Notes were subordinate to approximately $_________ of Senior
Indebtedness,
2
<PAGE>
including approximately $2.0 million of outstanding letters of credit and
$______ million of Senior Bank Debt outstanding under the Credit Agreement (with
an unfunded commitment of $_____ million at March 31, 1996 which, if funded,
would be Senior Indebtedness). See "Description of Notes." See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." The Indenture permits the
Company and its subsidiaries to incur additional indebtedness, including
additional Senior Indebtedness, subject to certain financial covenants.
Based on existing interpretations of the Securities Act by the staff
of the Securities and Exchange Commission (the "Commission") set forth in "no-
action" letters issued to third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer to any holder of Old Notes in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by such
holder (other than a broker-dealer who purchased Old Notes directly from the
Company for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such holder is not an affiliate of the Company, is acquiring the New Notes
in the ordinary course of business and is not participating, and has no
arrangement or understanding with any person to participate, in the distribution
of the New Notes. Holders wishing to accept the Exchange Offer must represent
to the Company, as required by the Registration Rights Agreement, that such
conditions have been met. In addition, if such holder is not a broker-dealer,
it must represent that it is not engaged in, and does not intend to engage in, a
distribution of the New Notes. Each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. See "The
Exchange Offer - Resales of the New Notes." This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
or other trading activities.
As of March 20, 1996, 1996, Cede & Co. ("Cede"), as nominee for The
Depository Trust Company, New York, New York ("DTC"), was the sole registered
holder of the Old Notes and held the Old Notes for 1 of its participants. The
Company believes that no such participant is an affiliate (as such term is
defined in Rule 405 of the Securities Act) of the Company. There has previously
been only a limited secondary market, and no public market, for the Old Notes.
The Old Notes are eligible for trading in the Private Offering, Resales and
Trading through Automatic Linkages ("PORTAL") market. In addition, the Initial
Purchaser has advised the Company that it currently intends to make a market in
the New Notes; however, the Initial Purchaser is not obligated to do so and any
market making activities may be discontinued by the Initial Purchaser at any
time. Therefore, there can be no assurance that an active market for the New
Notes will develop. If such a trading market develops for the New Notes, future
trading prices will depend on many factors, including, among other things,
prevailing interest rates, the Company's results of operations and the market
for similar securities. Depending on such factors, the New Notes may trade at a
discount from their face value. See "Risk Factors - Lack of Public Market."
The Company will not receive any proceeds from this Exchange Offer.
Pursuant to the Registration Rights Agreement, the Company will bear certain
registration expenses.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The Old Notes were issued originally in global form (the "Global Old
Note"). The Global Old Note was deposited with, or on behalf of, DTC, as the
initial depository with respect to the Old Notes (in such capacity, the
"Depository"). The Global Old Note is registered in the name of Cede, as
nominee of DTC, and beneficial interests in the Global Old Note are shown on,
and transfers thereof are effected only through, records maintained by the
Depository and its participants. The use of the Global Old Note to represent
certain of the Old Notes permits the Depository's participants, and anyone
holding a beneficial interest in an Old Note registered in the name of such a
participant, to transfer interests in the Old Notes electronically in accordance
with the
3
<PAGE>
Depository's established procedures without the need to transfer a physical
certificate. New Notes issued in exhange for the Global Old Note will also be
issued initially as a note in global form (the "Global New Note," and, together
with the Global Old Note, the "Global Notes") and deposited with, or on behalf
of, the Depository. After the initial issuance of the Global New Note, New
Notes in certificated form will be issued in exchange for a holder's
proportionate interest in the Global New Note only as set forth in the
Indenture.
TABLE OF CONTENTS
PAGE
----
Available Information. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
22
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Pro Forma Financial Data . . . . . . . . . . . . . . . . . . . . . . . . 36
Selected Consolidated Financial
Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Management's Discussion and
Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 44
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Recapitalization of Pinnacle . . . . . . . . . . . . . . . . . . . . . . 70
Certain Relationships and
Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . 76
Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . . 77
Description of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Description of Credit Agreement. . . . . . . . . . . . . . . . . . . . . 108
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F-1
4
<PAGE>
AVAILABLE INFORMATION
The Company has filed a registration statement on Form S-4 (together with
any amendments thereto, the "Registration Statement") with the Commission under
the Securities Act with respect to the New Notes. This Prospectus, which
constitutes a part of the Registration Statement, omits certain information
contained in the Registration Statement and reference is made to the
Registration Statement and the exhibits and schedules thereto for further
information with respect to the Company and the New Notes offered hereby. This
Prospectus contains summaries of the material terms and provisions of certain
documents and in each instance reference is made to the copy of such document
filed as an exhibit to the Registration Statement. Each such summary is
qualified in its entirety by such reference.
The Company is not currently subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company has agreed that, so long as any Notes are outstanding (i) the Company
will furnish to Holders of Notes all annual and quarterly reports and the
information, documents, and other reports required to be filed with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC
Reports") if the Company were required to file SEC Reports and, 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 (unless the Commission will not accept such a filing) and
(ii) (a) prior to the effectiveness of the Registration Statement of which this
Prospectus constitutes a part, the Company will furnish to Holders of Notes all
annual financial information that would be required to be contained in a filing
with the Commission on Form 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" of the Company and (b) after the effectiveness of the
Registration Statement of which this Prospectus constitutes a part, the Company
will furnish to Holders of Notes SEC Reports that would be required to be filed
with the Commission if the Company were required to file SEC Reports and,
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 (unless the Commission will not accept such a filing).
The Company has also agreed that, for so long as any Notes remain outstanding,
it will furnish to Holders of Notes and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
The Registration Statement (including the exhibits and schedules
thereto) and the periodic reports and other information filed by the Company
with the Commission may be inspected without charge at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
7 World Trade Center, 13th Floor, New York, New York 10048, and Suite 1400,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. Copies of such materials may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and its public reference facilities in New York, New York and Chicago, Illinois,
at prescribed rates.
5
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING THE FINANCIAL STATEMENTS AND
PRO FORMA FINANCIAL DATA AND NOTES THERETO, APPEARING ELSEWHERE HEREIN. UNLESS
THE CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" INCLUDES ALVEY SYSTEMS, INC.
("ALVEY") AND ITS SUBSIDIARIES, EACH OF WHICH OPERATES AS A SUBSIDIARY OF
PINNACLE AUTOMATION, INC. ("PINNACLE"), A DELAWARE CORPORATION THAT OWNS ALL OF
THE OUTSTANDING CAPITAL STOCK OF ALVEY. FOR A DISCUSSION OF CERTAIN MATTERS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PARTICIPANTS IN THE EXCHANGE OFFER, SEE
"RISK FACTORS."
THE COMPANY
Alvey, together with its five operating subsidiaries, is a MATERIALS
HANDLING AND INFORMATION SYSTEMS company which produces equipment and related
software and controls that enable manufacturers, distributors and retailers to
operate their manufacturing plants, distribution centers and warehouses more
efficiently. The combination of Alvey and its five operating subsidiaries
creates synergies that enable the Company to offer its customers a breadth of
technology and products, innovative solutions and superior technology. In
connection with providing equipment and software, the Company's engineers and
sales force work closely with its customers to analyze their specific
manufacturing, distribution and warehousing needs and to design customized
systems that improve its customers' efficiency and reduce their costs. As a
full-service provider of materials and information handling products and
services, the Company is uniquely positioned to offer to its customers
integrated systems comprised of combinations of equipment, software and
controls. The Company believes that its ability to offer both engineering design
services as well as the equipment and related software necessary to implement
integrated solutions to materials handling needs provides a distinct competitive
advantage. See "Business - Overview; Products."
The Company manufactures a broad range of materials handling equipment
such as palletizers, depalletizers, conveyors, carousels and sorters which
automate the physical acts of loading, unloading, sorting and transporting raw
materials and finished products. In addition to moving materials, the Company's
integrated systems incorporate advanced software and controls developed by the
Company to collect data, process information and provide real-time feedback with
respect to equipment performance and materials processing. While a majority of
the Company's revenues are attributable to the manufacture and sale of
equipment, approximately 45% of total revenues result from product support
functions and non-manufactured products delivered in connection with sales of
the Company's equipment. Such revenues are generated from engineering, software
license fees, computer support services, systems and equipment maintenance,
computer hardware and peripheral equipment, and the integration and installation
of these products. See "Business - Overview; Products."
The Company's customers include many of the largest companies in the
United States, including many Fortune 500 and INC. 100 companies, such as
General Electric, Procter & Gamble and Coca-Cola. In addition, the Company has
successfully forged "value-added partnerships" with customers such as
Anheuser-Busch, ConAgra, Gerber, Kellogg, Quaker Oats and Target. The Company
believes that these partnerships demonstrate proven systems to potential new
customers and serve as a source of new product ideas. Many of the Company's
customers have reduced their engineering staffs and consequently look to the
Company for design and engineering services with respect to their materials
handling requirements. See "Business - Products; Customers."
The Company's sales have increased from $72.3 million in 1989 to
$288.0 million for the year ended December 31, 1995. The principal factors
contributing to the Company's rapid growth in sales and operating performance
listed in their order of importance include new product offerings and management
initiatives, and acquisitions of complementary businesses. Net income increased
from a net loss of $0.8 million in 1991 to net income of $4.4 million for the
year ended December 31, 1995. Earnings before interest, taxes, extraordinary
items, depreciation and amortization ("EBITDA") has increased from $4.2 million
in 1989 to $20.1 million for the year ended December 31, 1995. As of
December 31, 1995, the Company's backlog reached $143.9 million, an increase of
approximately 25% from a backlog of $114.5 million at December 31, 1994. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
6
<PAGE>
The Company's growth is also benefiting from certain market trends
which the Company expects to continue. Constant changes in consumer demands and
buying trends continuously offer new opportunities for materials handling and
information systems applications as the need for a quick response to supply
consumer needs is heightened. Trends such as third-party distribution,
point-of-sale ordering, mixed-load shipments and more frequent, smaller quantity
deliveries create new opportunities while enhancing the need for advanced
software and integrated systems. Similarly, changes in packaging shapes and the
elimination of secondary packaging create new challenges for manufacturers and
distributors alike. The Company believes that the need to increase employee
productivity, improve worker safety, improve margins and meet customer demands
are factors which lead manufacturers and distributors to upgrade and replace
their existing materials handling systems.
The materials handling and related information systems industry is
highly fragmented and very competitive. While certain competitors are larger
than the Company and also offer materials handling systems and integrated
solutions, the industry includes numerous small to medium sized suppliers who
focus on specific market niches and/or singular applications. The suppliers in
this group generally do not offer systems or integrated solutions, but instead
offer individual kits, machines and applications. The Company believes that each
of its operating entities is a leading manufacturer in each of its principal
markets. See "Business - Industry Overview; Competition."
In addition to the properties owned and operated by Alvey, Alvey owns
five operating subsidiaries, including McHugh, Freeman & Associates, Inc.
("MFA"), located in Waukesha, Wisconsin, which was acquired in May 1989; Busse
Bros., Inc. ("Busse"), located in Randolph, Wisconsin, which was acquired in
April 1992; The Buschman Company ("Buschman"), located in Cincinnati, Ohio,
which was acquired in October 1992; White Storage & Retrieval Systems, Inc.
("White"), located in Kenilworth, New Jersey, which was acquired in
December 1993; and Weseley Software Development Corp. ("Weseley"), located in
Shelton, Connecticut, which was acquired in January 1996. In addition, Alvey
acquired Automation Equipment Company ("AEC"), which operates as a division of
Alvey, in August 1994. Alvey is a wholly owned subsidiary of Pinnacle. Pinnacle
has no assets or operations other than ownership of the outstanding capital
stock of Alvey. The Company's executive offices are located at 101 S. Hanley,
Suite 1300, St. Louis, Missouri 63105 and its phone number is (314) 863-5776.
BUSINESS STRATEGY
The Company's business objective is to build on its position as a
full-service provider of materials handling and information management products
and services tailored to meet the individual needs of its customers. To achieve
this objective, the Company is pursuing a growth strategy designed to increase
its sales and further enhance its operating performance. Elements of the
Company's strategy include product line expansions through internal development,
further development of the Company's integrated systems approach, margin
enhancement initiatives, enhancement of software and controls capabilities,
exploitation of new and emerging market niches and the expansion of
international sales. Material impediments to the implementation of the
Company's strategy include, among other things, the continued availability of
capital, the continued ability of the Company to attract and retain qualified
personnel and the continued ability of the Company to effectively manage its
growth and the costs thereof without lessening its emphasis on quality control
and customer service. See "Business - Business Strategy."
RECENT TRANSACTIONS BY ALVEY
The outstanding $100.0 million principal amount of Old Notes were sold
by the Company to the Initial Purchaser on the Closing Date pursuant to the
Purchase Agreement. The Initial Purchaser subsequently resold the Old Notes in
reliance on Rule 144A under the Securities Act. The Company, Pinnacle and the
Initial Purchaser also entered into the Registration Rights Agreement, pursuant
to which the Company granted certain registration rights for the benefit of the
holders of the Old Notes. The Exchange Offer is intended to satisfy certain of
the Company's obligations under the Registration Rights Agreement with respect
to the Old Notes. See "The Exchange Offer" and "The Exchange Offer - Purpose
and Effect."
The net proceeds of the Prior Offering were used (i) to repay and
fully discharge the approximately $46.2 million of outstanding senior secured
indebtedness owing under Alvey's existing credit facilities, including accrued
and unpaid interest (the "Credit Facility Repayment"); (ii) to repay the
$2.3 million outstanding amount of the 11.95% Senior Subordinated Notes of Alvey
(the "11.95% Notes"), including accrued and unpaid interest (the "Note
Repayment"); and (iii) to facilitate a recapitalization of Pinnacle (the
"Recapitalization") through the funding of a $21.5 million dividend
7
<PAGE>
to Pinnacle (the "Recapitalization Dividend"). Upon repayment of approximately
$0.3 million principal amount of the 11.95% Notes held by executive officers and
management of Pinnacle or Alvey in the Note Repayment, such executive officers
and management purchased shares of a newly created class of preferred stock of
Pinnacle (the "Pinnacle Series B Preferred Stock") with the proceeds received by
them in the Note Repayment (the "Note Repayment Investment"). Concurrently with
the consummation of the Prior Offering, Alvey and Pinnacle entered into a Credit
Agreement with NationsBank, N.A., as administrative agent (the "Credit
Agreement"), pursuant to which Alvey obtained a revolving credit facility in the
amount of $30 million which is guaranteed by Pinnacle and the subsidiaries of
Alvey. See "Description of Credit Agreement" for a description of the terms of
the Credit Agreement. In addition, the Company used $15.0 million of the net
proceeds of the Prior Offering to consummate the Weseley Acquisition (as defined
below) and intends to use borrowings under the Credit Agreement to finance
approximately $8.0 million of capital expenditures, of which approximately
$6.5 million will be spent in 1996, related to the construction and equipping of
two new manufacturing facilities to provide additional manufacturing capacity in
response to increased demand for the Company's products.
RECAPITALIZATION OF PINNACLE
Upon consummation of the Prior Offering, the members of the Boards of
Directors and executive officers of Pinnacle and Alvey ("Management") and an
investor group (the "Investors") consisting of Vestar Equity Partners, L.P.
("Vestar"), Chemical Equity Associates, A California Limited Partnership
("Chemical") and Hancock Venture Partners IV-Direct Fund L.P. ("Hancock")
effected the Recapitalization, pursuant to which the Investors purchased a
substantial equity interest in Pinnacle. The Recapitalization consisted of the
following transactions: (i) 48.9% of the common stock of Pinnacle (the "Pinnacle
Common Stock") on a fully-diluted basis and outstanding warrants to purchase
9.1% of the fully-diluted outstanding shares of Pinnacle Common Stock (the
"Pinnacle Original Warrants") were exchanged (the "Common Equity Exchange") for
a combination of cash and shares of Pinnacle Series B Preferred Stock; (ii) each
of the outstanding shares of Cumulative Exchangeable Preferred Stock of Pinnacle
(the "Pinnacle Original Preferred Stock") and certain of the outstanding shares
of Series A Senior Cumulative Exchangeable Preferred Stock of Pinnacle (the
"Pinnacle Original Senior Preferred Stock") were redeemed (the "Redemption");
(iii) the remaining shares of Pinnacle Original Senior Preferred Stock were
exchanged for Pinnacle Series B Preferred Stock (the "Preferred Stock
Exchange"); and (iv) the Note Repayment Investment was effected. The Common
Equity Exchange, the Redemption, the Preferred Stock Exchange and the Note
Repayment Investment are collectively referred to herein as the
"Recapitalization Transactions." See "Recapitalization of Pinnacle" for a more
complete description of the Recapitalization Transactions. No member of
Management exchanged or redeemed any equity interests in Pinnacle pursuant to
the Common Equity Exchange or the Redemption. Members of Management that held
shares of Pinnacle Original Senior Preferred Stock exchanged all of such shares
for shares of Pinnacle Series B Preferred Stock pursuant to the Preferred Stock
Exchange. As a result of the Recapitalization, Management and employees of
Pinnacle and Alvey increased their ownership interest in Pinnacle Common Stock
from approximately 42% to approximately 91% of the outstanding shares of
Pinnacle Common Stock (or 65% on a fully-diluted basis, including giving effect
to the exercise of the Pinnacle Warrants (as defined below)), and the Investors
acquired preferred stock of Pinnacle with an aggregate stated liquidation value
of $30 million and warrants to purchase 30% of the Pinnacle Common Stock on a
fully-diluted basis.
The total amount of cash required to fund the Recapitalization
Transactions was $49.1 million. Pinnacle obtained the funds necessary to effect
the Recapitalization from the Recapitalization Dividend and the proceeds from
the sale to the Investors of 23,000 shares of Series A 9% Cumulative Convertible
Preferred Stock of Pinnacle (the "Pinnacle Series A Preferred Stock") and 7,000
shares of Series C 9% Cumulative Convertible Preferred Stock of Pinnacle (the
"Pinnacle Series C Preferred Stock" and, collectively with the Pinnacle Series A
Preferred Stock, the "Pinnacle Investor Preferred Stock"), together with
warrants to purchase up to 256,075 shares of Pinnacle Common Stock, representing
30% of the issued and outstanding shares of Pinnacle Common Stock on a
fully-diluted basis after giving effect to the Recapitalization Transactions and
the Weseley Acquisition (the "Pinnacle Warrants"), for an aggregate purchase
price of $30 million (the "Pinnacle Preferred Stock and Warrants Offering").
Vestar, Chemical (and/or its successors and assigns) and Hancock hold
approximately 70%, 23% and 7% of the Pinnacle Investor Preferred Stock and the
Pinnacle Warrants, respectively.
The Credit Facility Repayment, Note Repayment, Recapitalization
Dividend, Credit Agreement, Pinnacle Preferred Stock and Warrants Offering,
Recapitalization Transactions and the Prior Offering are collectively referred
to herein as the "Financing Transactions."
8
<PAGE>
Pinnacle, Alvey and MFA entered into a definitive stock purchase
agreement, dated as of December 20, 1995, pursuant to which, on January 29,
1996, MFA purchased all of the outstanding capital stock (the "Weseley
Acquisition") of Weseley Software Development Corp. ("Weseley") for a purchase
price of $15.0 million in cash. As a result of the Weseley Acquisition, Weseley
has become a wholly owned subsidiary of MFA. In addition, subject to the
continued employment of the former principal owner of Weseley and certain other
conditions, certain designated employees of Weseley have an opportunity to earn
stay bonuses in the aggregate amount of $625,000 per year for each of eight
years and performance-based employee incentive compensation up to an aggregate
maximum of $13 million which would be payable over time as described below.
The performance-based incentive compensation will be paid on an annual
basis to eligible employees of Weseley and will be equal to 38.5% of Weseley's
EBITDA (excluding stay bonuses and incentive compensation for such year and
certain other adjustments) in excess of $2.5 million until the first to occur of
(i) payments in the aggregate amount of $13 million have been made or (ii) the
eighth anniversary of the Weseley Acquisition. All or a portion of the
performance-based incentive compensation would be deemed "earned" in the event
that Weseley meets or exceeds certain financial targets established by the
Company in any of the years ending December 31, 1996, 1997 or 1998, or meets or
exceeds 90% of the targeted amount on a cumulative basis over such three-year
period.
Weseley develops, markets and supports transportation management
products and services which enable companies to better manage their shipping
processes, leading to lower annual freight bills and improved customer service.
Pinnacle plans to integrate Weseley's transportation management systems with
MFA's warehouse management systems, creating a high-quality, seamless supply
chain logistics product.
The Weseley Acquisition is part of the Company's strategy to enhance
its information systems expertise and to provide integrated solutions to a wide
array of materials handling problems. The combination of MFA's warehouse
management system with Weseley's transportation management system, which the
Company believes can be integrated to operate as a single system, would link two
integral stages of the materials handling chain.
9
<PAGE>
COMPANY STRUCTURE
Each of Alvey and its five subsidiaries are managed by Pinnacle. The
following diagram depicts the Company's legal structure and capital infusions.
[Graphic]
- -------------
(1) This diagram does not depict certain inactive or non-operating direct or
indirect subsidiaries of Alvey.
10
<PAGE>
THE PRIOR OFFERING
The outstanding $100.0 million principal amount of Old Notes were sold
by the Company to the Initial Purchaser on the Closing Date pursuant to the
Purchase Agreement among the Company, Pinnacle and the Initial Purchaser. The
Initial Purchaser subsequently resold the Old Notes in reliance on Rule 144A
under the Securities Act. The Company, Pinnacle and the Initial Purchaser also
entered into the Registration Rights Agreement pursuant to which the Company
granted certain registration rights for the benefit of the holders of the Old
Notes. The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement with respect to the Old
Notes. See "The Exchange Offer" and "The Exchange Offer - Purpose and Effect."
THE EXCHANGE OFFER
The Exchange Offer . . . . . . . . . The Company is offering upon the terms
and subject to the conditions set forth
herein and in the accompanying letter of
transmittal (the "Letter of
Transmittal"), to exchange $1,000 in
principal amount of its 11 3/8% Senior
Subordinated Notes due 2003 (the "New
Notes," with the Old Notes and the New
Notes collectively referred to herein as
the "Notes") for each $1,000 in
principal amount of the outstanding Old
Notes (the "Exchange Offer"). As of the
date of this Prospectus, $100.0 million
in aggregate principal amount of the Old
Notes is outstanding, the maximum amount
authorized by the Indenture for all
Notes. As of March 20, 1996, there was
one registered holder of the Old Notes,
Cede & Co. ("Cede"), which held the Old
Notes for 20 of its participants. See
"The Exchange Offer - Terms of the
Exchange Offer."
Expiration Date. . . . . . . . . . . 5:00 p.m., New York City time, on
________ ___, 1996 as the same may be
extended. See "The Exchange Offer -
Expiration Date; Extensions;
Amendments."
Conditions of the Exchange Offer . . The Exchange Offer is not conditioned
upon any minimum principal amount of Old
Notes being tendered for exchange. The
only condition to the Exchange Offer is
the declaration by the Commission of the
effectiveness of the Registration
Statement of which this Prospectus
constitutes a part. See "The Exchange
Offer - Conditions of the Exchange
Offer."
11
<PAGE>
Termination of Certain Rights. . . . Pursuant to the Registration Rights
Agreement and the Old Notes, holders of
Old Notes (i) have rights to receive
Liquidated Damages and (ii) have certain
rights intended for the holders of
unregistered securities. "Liquidated
Damages" means damages of $0.05 per week
per $1,000 principal amount of Old Notes
(up to a maximum of $0.30 per week per
$1,000 principal amount) during the
period in which a Registration Default
is continuing pursuant to the terms of
the Registration Rights Agreement.
Holders of New Notes will not be and,
upon consummation of the Exchange Offer,
holders of Old Notes will no longer be,
entitled to (i) the right to receive the
Liquidated Damages or (ii) certain other
rights under the Registration Rights
Agreement intended for holders of
unregistered securities. See "The
Exchange Offer - Termination of Certain
Rights" and "Procedures for Tendering
Old Notes."
Accrued Interest . . . . . . . . . . The New Notes will bear interest at a
rate equal to 11 3/8% per annum.
Interest shall accrue from January 24,
1996 or from the most recent Interest
Payment Date with respect to the Old
Notes to which interest was paid or duly
provided for. See "Description of
Notes--Principal, Maturity and
Interest."
Procedures for Tendering Old Notes . Unless a tender of Old Notes is effected
pursuant to the procedures for book-
entry transfer as provided herein, each
holder desiring to accept the Exchange
Offer must complete and sign the Letter
of Transmittal, have the signature
thereon guaranteed if required by the
Letter of Transmittal, and mail or
deliver the Letter of Transmittal,
together with the Old Notes or a Notice
of Guaranteed Delivery and any other
required documents (such as evidence of
authority to act, if the Letter of
Transmittal is signed by someone acting
in a fiduciary or representative
capacity), to the Exchange Agent (as
defined) at the address set forth on the
back cover page of this Prospectus prior
to 5:00 p.m., New York City time, on the
Expiration Date. Any Beneficial Owner
(as defined) of the Old Notes whose Old
Notes are registered in the name of a
nominee, such as a broker, dealer,
commercial bank or trust company and who
wishes to tender Old Notes in the
Exchange Offer, should instruct such
entity or person to promptly tender on
such Beneficial Owner's behalf. See
"The Exchange Offer - Procedures for
Tendering Old Notes."
12
<PAGE>
Guaranteed Delivery Procedures . . . Holders of Old Notes who wish to tender
their Old Notes and (i) whose Old Notes
are not immediately available or
(ii) who cannot deliver their Old Notes
or any other documents required by the
Letter of Transmittal to the Exchange
Agent prior to the Expiration Date (or
complete the procedure for book-entry
transfer on a timely basis), may tender
their Old Notes according to the
guaranteed delivery procedures set forth
in the Letter of Transmittal. See "The
Exchange Offer - Guaranteed Delivery
Procedures."
Acceptance of Old Notes and Delivery
of New Notes. . . . . . . . . . . Upon effectiveness of the Registration
Statement of which this Prospectus
constitutes a part and consummation of
the Exchange Offer, the Company will
accept any and all Old Notes that are
properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time,
on the Expiration Date. The New Notes
issued pursuant to the Exchange Offer
will be delivered promptly after
acceptance of the Old Notes. See "The
Exchange Offer - Acceptance of Old Notes
for Exchange; Delivery of New Notes."
Withdrawal Rights. . . . . . . . . . Tenders of Old Notes may be withdrawn at
any time prior to 5:00 p.m., New York
City time, on the Expiration Date. See
"The Exchange Offer - Withdrawal
Rights."
The Exchange Agent . . . . . . . . . The Bank of New York is the exchange
agent (in such capacity, the "Exchange
Agent"). The address and telephone
number of the Exchange Agent are set
forth in "The Exchange Offer - The
Exchange Agent; Assistance."
Fees and Expenses. . . . . . . . . . All expenses incident to the Company's
consummation of the Exchange Offer and
compliance with the Registration Rights
Agreement will be borne by the Company.
The Company will also pay certain
transfer taxes applicable to the
Exchange Offer. See "The Exchange Offer
- Fees and Expenses."
13
<PAGE>
Resales of the New Notes . . . . . . Based on existing interpretations by the
staff of the Commission set forth in no-
action letters issued to third parties,
the Company believes that New Notes
issued pursuant to the Exchange Offer to
a holder in exchange for Old Notes may
be offered for resale, resold and
otherwise transferred by a holder (other
than (i) a broker-dealer who purchased
the Old Notes directly from the Company
for resale pursuant to Rule 144A under
the Securities Act or any other
available exemption under the Securities
Act or (ii) a person that is an
affiliate of the Company 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 holder is acquiring
the New Notes in the ordinary course of
business and is not participating, and
has no arrangement or understanding with
any person to participate, in a
distribution of the New Notes. Each
broker-dealer that receives New Notes
for its own account in exchange for Old
Notes, where such Old Notes were
acquired by such broker as a result of
market-making or other trading
activities, must acknowledge that it
will deliver a prospectus in connection
with any resale of such New Notes. See
"The Exchange Offer - Resales of the New
Notes" and "Plan of Distribution."
Effect of Not Tendering Old Notes for
Exchange . . . . . . . . . . . . . . Old Notes that are not tendered or that
are not properly tendered will,
following the expiration of the Exchange
Offer, continue to be subject to the
existing restrictions upon transfer
thereof. The Company will have no
further obligations to provide for the
registration under the Securities Act of
such Old Notes and such Old Notes will,
following the expiration of the Exchange
Offer, bear interest at the same rate as
the New Notes.
DESCRIPTION OF NEW NOTES
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of the New Notes will not
be entitled to Liquidated Damages and (iii) holders of the New Notes will not
be, and upon consummation of the Exchange Offer, holders of the Old Notes will
no longer be, entitled to certain rights under the Registration Rights Agreement
intended for the holders of unregistered securities, except in limited
circumstances. See "Exchange Offer - Termination of Certain Rights." The
Exchange Offer shall be deemed consummated upon the occurrence of the delivery
by the Company to the Registrar under the Indenture of the New Notes in the same
aggregate principal amount as the aggregate principal amount of Old Notes that
are tendered by holders thereof pursuant to the Exchange Offer. See "The
Exchange Offer - Termination of Certain Rights" and "Procedures for Tendering
Old Note;" and "Description of Notes."
Securities Offered . . . . . . . . . $100.0 million aggregate principal
amount of 11 3/8% Senior Subordinated
Notes Due 2003.
Maturity Date. . . . . . . . . . . . January 31, 2003.
Interest Payment Dates . . . . . . . January 31 and July 31, commencing
July 31, 1996.
14
<PAGE>
Optional Redemption. . . . . . . . . On or after January 31, 2000, Alvey may
redeem the Notes, in whole or in part,
at the redemption prices set forth
herein, plus accrued and unpaid
interest, if any, to the date of
redemption. Notwithstanding the
foregoing, any time on or before
January 31, 1999, Alvey may redeem up to
35% of the original aggregate principal
amount of the Notes with the net
proceeds of an Equity Offering (as
defined herein) at a redemption price
equal to 111.375% of the principal
amount thereof, plus accrued and unpaid
interest, if any, to the date of
redemption, provided that at least 65%
of the original aggregate principal
amount of the Notes remain outstanding
immediately after such redemption.
Mandatory Redemption.. . . . . . . . None, except at maturity on January 31,
2003.
Ranking. . . . . . . . . . . . . . . The Notes will be general unsecured
obligations of Alvey, subordinated in
right of payment to all existing and
future Senior Indebtedness, which will
include borrowings under the Credit
Agreement. As of December 31, 1995, on a
pro forma basis after giving effect to
the Pro Forma Transactions (as defined
herein), Alvey would have had
approximately $2.9 million of
outstanding Senior Indebtedness,
including $2.0 million of outstanding
letters of credit, which would rank
senior in right of payment to the Notes.
The Notes also will be effectively
subordinated to all indebtedness and
other liabilities of Alvey's
subsidiaries. The indenture pursuant to
which the New Notes will be issued (the
"Indenture") permits Alvey and its
subsidiaries to incur additional
indebtedness, including additional
Senior Indebtedness, subject to certain
limitations.
Change of Control. . . . . . . . . . Upon a Change of Control (as defined
herein), Alvey will be required to make
an offer to repurchase all outstanding
Notes at 101% of the principal amount
thereof plus accrued and unpaid interest
to the date of redemption.
15
<PAGE>
Covenants. . . . . . . . . . . . . . The Indenture restricts, among other
things, Alvey's ability to incur
additional indebtedness and issue
preferred stock, incur liens to secure
PARI PASSU or subordinated indebtedness,
pay dividends or make certain other
restricted payments, apply net proceeds
from certain asset sales, enter into
certain transactions with affiliates,
incur indebtedness that is subordinate
in right of payment to any Senior
Indebtedness and senior in right of
payment to the Notes, merge or
consolidate with any other person, sell
stock of Subsidiaries or sell, assign,
transfer, lease, convey or otherwise
dispose of substantially all of the
assets of Alvey. The Indenture permits,
under certain circumstances, MFA and its
Subsidiaries to be deemed Unrestricted
Subsidiaries (as defined herein) and
thus not subject to the restrictions of
the Indenture. See "Description of Notes
- Certain Covenants."
Absence of a Public Market for the
New Notes. . . . . . . . . . . . . The New Notes are a new issue of
securities with no established market.
Accordingly, there can be no assurance
as to the development or liquidity of
any market for the New Notes. The
Initial Purchaser has advised the
Company that it currently intends to
make a market in the New Notes.
However, the Initial Purchaser is not
obligated to do so, and any market
making with respect to the New Notes may
be discontinued at any time without
notice. The Company does not intend to
apply for listing of the New Notes on a
securities exchange.
16
<PAGE>
RISK FACTORS
For a discussion of certain matters that should be considered by
prospective investors in connection with the Exchange Offer, see "Risk Factors."
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary historical consolidated and unaudited pro forma
consolidated financial data were derived from the historical Consolidated
Financial Statements included elsewhere in this Prospectus and the Pro Forma
Financial Data (as defined herein) of Alvey. The consolidated financial
statements of Alvey at and for the fiscal years ended December 31, 1995, 1994
and 1993 have been audited by Price Waterhouse LLP, independent accountants.
The following unaudited pro forma consolidated statement of operations data for
the year ended December 31, 1995 give effect to the Financing Transactions,
including the Prior Offering and the Exchange Offer and the application of the
net proceeds therefrom, the Weseley Acquisition and the termination of the
Acadia Agreement (as defined herein) and the Raebarn Agreement (as defined
herein) (collectively, the "Pro Forma Transactions") as if such events had
occurred on January 1, 1995. See "Certain Relationships and Transactions." The
following unaudited pro forma consolidated balance sheet data at December 31,
1995 give effect to the Pro Forma Transactions as if such events had occurred as
of December 31, 1995. The Pro Forma Financial Data reflect a preliminary
purchase price allocation for the Weseley Acquisiton. The Pro Forma Financial
Data do not purport to be indicative of Alvey's financial position or results of
operations that would actually have been obtained had the Pro Forma Transactions
been completed as of the dates assumed, or to project Alvey's financial position
or results of operations at any future date. The information contained in this
table should be read in conjunction with "Capitalization," "Pro Forma Financial
Data," "Selected Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," Alvey's Consolidated
Financial Statements and related Notes to the Consolidated Financial Statements
and Weseley's Financial Statements and related Notes to such Financial
Statements included elsewhere in this Prospectus.
17
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF ALVEY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
RESULTS OF OPERATIONS (1):
Net sales. . . . . . . . . . . . . . . . $288,018 $248,177 $164,022
Cost of goods sold . . . . . . . . . . . 217,297 189,007 123,033
-------- -------- --------
Gross profit . . . . . . . . . . . . . 70,721 59,170 40,989
Selling, general and administrative
expenses . . . . . . . . . . . . . . . 51,630 43,402 30,421
Research and development expenses. . . . 2,051 2,538 1,436
Amortization expense . . . . . . . . . . 1,737 1,836 1,479
Other (income) expense, net (2). . . . . (108) 2,279 (11)
-------- -------- --------
Operating income . . . . . . . . . . . . 15,411 9,115 7,664
Interest expense . . . . . . . . . . . . 6,896 5,921 4,053
-------- -------- --------
Income before income taxes and
extraordinary loss . . . . . . . . . 8,515 3,194 3,611
Income taxes . . . . . . . . . . . . . . 4,109 1,516 1,560
-------- -------- --------
Income before extraordinary loss . . . 4,406 1,678 2,051
Extraordinary loss, net (3). . . . . . . 0 0 (6,203)
-------- -------- --------
Net income (loss). . . . . . . . . . . $ 4,406 $ 1,678 $ (4,152)
-------- -------- --------
Earnings per share (4) . . . . . . . . . -- -- --
Net cash provided by operating
activities . . . . . . . . . . . . . . $ 18,939 $ 12,091 $ 6,712
Net cash used for investing activities . (7,143) (7,477) (31,793)
Net cash provided by (used for)
financing activities . . . . . . . . . (10,971) (3,764) 26,039
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA(1):
Working capital (deficit). . . . . . . . $ (401) $ 7,152 $ 8,155
Total assets . . . . . . . . . . . . . . 150,285 138,536 129,658
Long-term debt, less current maturities. 42,460 54,754 59,341
Redeemable preferred stock (5) . . . . . 27,322 23,435 20,034
Net investment of Pinnacle (6) . . . . . (15,719) (16,332) (15,015)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OTHER CONSOLIDATED FINANCIAL DATA (1):
Depreciation expense . . . . . . . . . . $ 2,952 $ 2,752 $ 2,583
Capital expenditures, net (7). . . . . . 4,496 5,091 3,471
OTHER PERFORMANCE MEASURES (NON-GAAP) (8)
EBITDA (9) . . . . . . . . . . . . . . . 20,100 15,877 11,726
Ratio of earnings to fixed charges plus
preferred stock dividends(10). . . . . 1.07 (10) (10)
Ratio of earnings to fixed charges (11). 2.06 1.47 1.80
Ratio of EBITDA to cash interest
expense (12) . . . . . . . . . . . . . 3.27 2.77 3.17
Ratio of long-term debt to EBITDA. . . . 2.11 3.45 5.06
EBITDAM (13) . . . . . . . . . . . . . . $ 20,706 $ 16,379 $ 12,391
Ratio of EBITDAM to cash interest
expense (12) . . . . . . . . . . . . . 3.37 2.86 3.35
Ratio of long-term debt to EBITDAM . . . 2.05 3.34 4.79
</TABLE>
- -----------
(1) Includes various acquisitions from the date of such acquisition,
including AEC in fiscal 1994 and White in fiscal 1993.
(2) Amount in fiscal 1994 includes the payment of a one-time stay bonus in
the amount of $2.2 million to an executive of White in connection with
the acquisition of White.
(3) Reflects the write-off of unamortized deferred financing fees of
approximately of approximately $0.8 million, net of applicable income
tax benefits, resulting from the early extinguishment of debt during
1993. Amount also includes $5.4 million, net of applicable income tax
benefits, for the accrual
18
<PAGE>
of operating losses and other related costs associated with the
disposal of a carousel manufacturing plant in Lewiston, Maine pursuant
to a Federal Trade Commission order in 1993 (See Note 5 to the
Consolidated Financial Statements of Alvey).
(4) Given the historical organization and capital structure of Alvey,
earnings per share information is not considered meaningful or
relevant and therefore has not been presented.
(5) Represents redeemable preferred stock of Pinnacle. Due to the
exchangeable feature of the preferred stock which allows the holder to
exchange the preferred stock for subordinated notes of Alvey, the
preferred stock has been pushed down to the financial statements of
Alvey. See "Description of Capital Stock."
(6) Net investment of Pinnacle represents the basis of Pinnacle's
investment in Alvey, which has been pushed down to the financial
statements of Alvey, and includes cumulative contributions of capital
and cumulative income before extraordinary losses offset by
extraordinary losses and aggregate accreted/paid preferred stock
dividends. The historical amount at December 31, 1995 consists of
cumulative contributions of capital to Alvey by Pinnacle of $3.0
million and cumulative income before extraordinary losses of $2.9
million offset by extraordinary losses of $7.5 million and an
aggregate accretion/payment of $14.1 million of paid-in-kind dividends
on preferred stock.
(7) Capital expenditures include amounts related to investments in fixed
assets and costs of software development.
(8) Other performance measures such as EBITDA and EBITDAM (discussed
further below) should not be construed as an alternative to operating
income or net income calculated in accordance with generally accepted
accounting principles ("GAAP") or as an indicator of operating
performance or liquidity. However, the Company believes such non-GAAP
performance measures are commonly used to evaluate a company's ability
to service debt.
(9) EBITDA consists of earnings before interest, income taxes,
extraordinary items and depreciation and amortization expense. In
1994, EBITDA also excludes a $2.2 million one-time payment of a stay
bonus in connection with the acquisition of White which is included in
"Other (income) expense, net" above. Management fees serve to reduce
EBITDA by $606,000, $502,000 and $665,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
(10) For purposes of this computation, fixed charges consist of interest
expense, amortization of deferred financing fees, one-third of rental
expenses (representative of that portion of rental expense
attributable to interest) and accretion/payment of preferred stock
dividends. Earnings consist of income before income taxes plus all
fixed charges, except for the accretion/payment of preferred stock
dividends. Fixed charges exceeded earnings by $3.1 million and
$1.3 million for the years ended December 31, 1994 and 1993.
(11) For purposes of this computation, fixed charges consist of interest
expense, amortization of deferred financing fees and one-third of
rental expenses (representative of that portion of rental expense
attributable to interest) and excludes the accretion/payment of
preferred stock dividends. Earnings consist of income before income
taxes plus all fixed charges, except for the accretion/payment of
preferred stock dividends.
(12) For purposes of this computation, interest expense consists of
interest on indebtedness and does not include amortization of deferred
financing fees and other noncash charges to interest which have been
capitalized.
(13) EBITDAM consists of earnings before interest, income taxes,
extraordinary items, depreciation and amortization expense and
management fees. In 1994, EBITDAM also excludes a $2.2 million
one-time payment of a stay bonus in connection with the acquisition of
White which is included in "Other expense (income), net" above.
EBITDAM excludes management fees of $606,000, $502,000 and $665,000
for the years ended December 31, 1995, 1994 and 1993, respectively.
19
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA OF ALVEY
<TABLE>
<CAPTION>
PRO FORM DATA (1)
-------------------
YEAR ENDED
DECEMBER 31, 1995
-------------------
(DOLLARS IN THOUSANDS)
<S> <C>
RESULTS OF OPERATIONS:
Net sales. . . . . . . . . . . . . . . . . . . . . . $ 291,415
Cost of goods sold . . . . . . . . . . . . . . . . . 218,232
-------
Gross profit . . . . . . . . . . . . . . . . . . . 73,183
Selling, general and administrative expenses . . . . 56,821
Research and development expenses. . . . . . . . . . 2,666
Amortization expense . . . . . . . . . . . . . . . . 1,650
Other income, net. . . . . . . . . . . . . . . . . . (258)
-------
Operating income . . . . . . . . . . . . . . . . . 12,304
Interest expense . . . . . . . . . . . . . . . . . . 12,389
-------
Income before income taxes . . . . . . . . . . . . (85)
Income taxes . . . . . . . . . . . . . . . . . . . . 821
-------
Net income . . . . . . . . . . . . . . . . . . . . $ (906)
-------
Earnings per share (2) . . . . . . . . . . . . . . . __
<CAPTION>
BALANCE SHEET DATA: AT
DECEMBER
31, 1995
---------------------
<S> <C>
Working capital. . . . . . . . . . . . . . . . . . . $ 10,692
Total assets . . . . . . . . . . . . . . . . . . . . 167,761
Long-term debt, less current maturities. . . . . . . 100,633
Net investment of Pinnacle (3) . . . . . . . . . . . (24,149)
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
----------------------
<S> <C>
OTHER PRO FORMA FINANCIAL DATA: (1)
Depreciation expense . . . . . . . . . . . . . . . . $ 3,020
Capital expenditures, net (4). . . . . . . . . . . . 4,709
OTHER PERFORMANCE
MEASURES (NON-GAAP) (5)
EBITDA (6) . . . . . . . . . . . . . . . . . . . . . 16,974
Ratio of earnings to fixed charges (7) . . . . . . . (7)
Ratio of EBITDA to cash interest expense (8) . . . . 1.49
Ratio of long-term debt to EBITDA. . . . . . . . . . 5.93
EBITDAM (9). . . . . . . . . . . . . . . . . . . . . $17,430
Ratio of EBITDAM to cash interest expense (8). . . . 1.53
Ratio of long-term debt to EBITDAM . . . . . . . . . 5.77
----------------
</TABLE>
20
<PAGE>
(1) Gives effect to the Pro Forma Transactions. See "Pro Forma Financial
Data," including the footnotes thereto, for further information
regarding certain adjustments made in preparing the pro forma data.
(2) Given the historical organization and capital structure of Alvey,
earnings per share information is not considered meaningful or
relevant and therefore has not been presented.
(3) Net investment of Pinnacle represents the basis of Pinnacle's
investment in Alvey, which has been pushed down to the financial
statements of Alvey, and includes cumulative contributions of capital
and cumulative income before extraordinary losses offset by
extraordinary losses and aggregate accreted/paid preferred stock
dividends. The historical amount at December 31, 1995 consists of
cumulative contributions of capital to Alvey by Pinnacle of $3.0
million, and cumulative income before extraordinary losses of $2.9
million offset by extraordinary losses of $7.5 million and an
aggregate accretion/payment of $14.1 million of paid-in-kind dividends
on preferred stock. The pro forma, as adjusted, amount reflects the
net effects ($27.3 million) of the Recapitalization Transactions at
Pinnacle, the $21.4 million dividend from Alvey to Pinnacle (the
amount that would have been necessary if the Recapitalization
Transactions took place as of December 31, 1995), approximately
$223,000 of prepayment penalties, net of applicable income taxes,
incurred in the Credit Facility Repayment, the write-off of
unamortized deferred financing fees of $1.58 million, net of
applicable income taxes, the charge to income of $866,000, net of
applicable income taxes, for the termination of the Raebarn Agreement
(such write-off and termination occurred concurrently with the Prior
Offering), and the charge to income of $11.7 million for purchased
research and development costs, which will be reflected as research
and development expense immediately subsecquent to the purchase of
Weseley by Pinnacle, Alvey and MFA.
(4) Capital expenditures include amounts related to investments in fixed
assets and costs of software development.
(5) Other performance measures such as EBITDA and EBITDAM (discussed
further below) should not be construed as an alternative to operating
income or net income calculated in accordance with generally accepted
accounting principles ("GAAP") or as an indicator of operating
performance or liquidity. However, the Company believes such non-GAAP
performance measures are commonly used to evaluate a company's ability
to service debt.
(6) EBITDA consists of earnings before interest, income taxes,
extraordinary items and depreciation and amortization expense. EBITDA
also excludes a charge to income of $866,000, net of applicable income
taxes, for the termination of the Raebarn Agreement (such termination
occurred concurrently with the Prior Offering). Management fees of
$456,000 reduce EBITDA on a pro forma basis for the year ended
December 31, 1995.
(7) For purposes of this computation, fixed charges consist of interest
expense, amortization of deferred financing fees and one-third of
rental expenses (representative of that portion of rental expense
attributable to interest). Earnings consist of income before income
taxes plus fixed charges. Preferred stock dividends are payable with
respect to each of Pinnacle Series A, B and C Preferred Stock (see
"Recapitalization of Pinnacle"). Alvey will not guarantee nor be
contingently obligated with respect to any such series of preferred
stock. As a result, on a pro forma basis, such preferred stock has not
been pushed down to Alvey's financial statements, nor has the
accretion/payment of related preferred stock dividends been reflected
in the ratio of earnings to fixed charges. Fixed charges exceeded
earnings for pro forma calculations for the year ended December 31,
1995 by $85,000.
(8) For purposes of this computation, interest expense consists of
interest on indebtedness and does not include amortization of deferred
financing fees and other noncash charges to interest which have been
capitalized.
(9) EBITDAM consists of earnings before interest, income taxes,
extraordinary items, depreciation and amortization expense and
management fees. EBITDAM excludes management fees of $456,000 for the
year ended December 31, 1995.
21
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
holders of Notes should consider carefully the following risk factors affecting
the business of the Company.
SIGNIFICANT LEVERAGE AND DEBT SERVICE
After consummation of the Financing Transactions, Alvey became highly
leveraged. At December 31, 1995, after giving effect to the Pro Forma
Transactions, including the application of the net proceeds from the Prior
Offering, Alvey would have had total consolidated outstanding debt of
approximately $102.9 million on a pro forma basis, including approximately $2.0
million of outstanding letters of credit. In addition, subject to the
restrictions in the Credit Agreement and the Indenture, Alvey and its
subsidiaries may incur additional indebtedness (including additional Senior
Indebtedness) from time to time to finance acquisitions or capital expenditures
or for other purposes.
The level of Alvey's indebtedness could have important consequences to
holders of the Notes, including: (i) a substantial portion of Alvey's cash flow
from operations must be dedicated to debt service and will not be available for
other purposes; (ii) Alvey's ability to obtain additional debt financing in the
future for working capital, capital expenditures, research and development or
acquisitions may be limited; and (iii) Alvey's level of indebtedness could limit
its flexibility in reacting to changes in its industry and economic conditions
generally.
Alvey's ability to pay interest on the Notes and to satisfy its other
debt obligations will depend upon its future operating performance, which will
be affected by prevailing economic conditions and financial, business and other
factors, certain of which are beyond its control, as well as the availability of
revolving credit borrowings under the Credit Agreement or a successor facility.
Alvey anticipates that its operating cash flow, together with dividends and
other payments from its subsidiaries, and borrowing under the Credit Agreement,
will be sufficient to meet its operating expenses and to service its debt
requirements as they become due. However, Alvey may be required to refinance a
portion of the principal of the Notes prior to their maturity and, if Alvey is
unable to service its indebtedness, it will be forced to take actions such as
reducing or delaying capital expenditures, selling assets, restructuring or
refinancing its indebtedness or seeking additional equity capital. There is no
assurance that any of these remedies can be effected on satisfactory terms, if
at all. In addition, Alvey's ability to repay the principal amount of the Notes
at maturity may depend on its ability to refinance the Notes. There can be no
assurance that Alvey would be able to refinance the Notes at maturity, if
necessary, on satisfactory terms, if at all.
SUBORDINATION OF NOTES
The Notes will be subordinated in right of payment to all Senior
Indebtedness of Alvey. In the event of bankruptcy, liquidation or reorganization
of Alvey, the assets of Alvey will be available to pay obligations on the Notes
only after all Senior Indebtedness has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on any or all of the Notes then
outstanding. The aggregate principal amount of Senior Indebtedness of Alvey, as
of December 31, 1995, would have been $2.9 million, including approximately $2.0
million of outstanding letters of credit on a pro forma basis after giving
effect to the Pro Forma Transactions. Additional Senior Indebtedness may be
incurred by Alvey from time to time, subject to certain restrictions. Apart from
its own operations, Alvey must rely on dividends and other payments from its
subsidiaries (I.E., Buschman, Busse, MFA, White and Weseley) to generate the
funds necessary to meet its obligations, including the payment of principal and
interest on the Notes. The ability of Alvey's subsidiaries to make such payments
may be restricted by, among other things, applicable state corporate laws and
other laws and regulations. In addition, the Notes will be effectively
subordinated to all indebtedness and all other liabilities of Alvey's
subsidiaries. See "Description of Notes" and "Description of Credit Agreement."
22
<PAGE>
RESTRICTIONS IMPOSED BY TERMS OF ALVEY'S INDEBTEDNESS
The Indenture restricts, among other things, Alvey's ability to incur
additional indebtedness and issue preferred stock, incur liens to secure PARI
PASSU or subordinated indebtedness, pay dividends or make certain other
restricted payments, apply net proceeds from certain asset sales, enter into
certain transactions with affiliates, incur indebtedness that is subordinate in
right of payment to any Senior Indebtedness and senior in right of payment to
the Notes, merge or consolidate with any other person, sell stock of
Subsidiaries or sell, assign, transfer, lease, convey or otherwise dispose of
substantially all of the assets of Alvey. The Indenture permits, under certain
circumstances, MFA and its Subsidiaries to be deemed Unrestricted Subsidiaries
(as defined herein) and thus not subject to the restrictions of the Indenture.
In addition, the Credit Agreement contains other and more restrictive covenants
and will prohibit Alvey from prepaying other indebtedness (including the Notes).
See "Description of Notes - Certain Covenants" and "Description of Credit
Agreement." The Credit Agreement also requires Alvey to maintain specified
financial ratios and satisfy certain financial condition tests. Alvey's ability
to meet those financial ratios and tests can be affected by events beyond its
control, and there can be no assurance that Alvey will meet those tests. A
breach of any of these covenants could result in a default under the Credit
Agreement and/or the Indenture. Upon the occurrence of an event of default
under the Credit Agreement, the lenders could elect to declare all amounts
outstanding under the Credit Agreement, together with accrued interest, to be
immediately due and payable. If Alvey were unable to repay those amounts, the
lenders could proceed against the collateral granted to them to secure that
indebtedness. If the Credit Agreement were to be accelerated, there can be no
assurance that the assets of Alvey would be sufficient to repay in full that
indebtedness and the other indebtedness of Alvey, including the Notes.
Substantially all assets of Alvey have been be pledged as security under the
Credit Agreement. See "Description of Credit Agreement." Such assets may also
be pledged in the future to secure other Indebtedness.
FRAUDULENT TRANSFER CONSIDERATIONS
If a court in an action brought by an unpaid creditor of Alvey or
Pinnacle under state fraudulent transfer law or by a bankruptcy trustee of Alvey
or Pinnacle (or Alvey or Pinnacle, as a debtor in possession under Chapter 11 of
the Bankruptcy Code) in a case under the Bankruptcy Code were to find that
either (i) Alvey, at the time it (A) incurred its indebtedness under the Notes
or (B) transferred proceeds from the sale of the Notes to Pinnacle to fund, in
whole or in part, the Redemption or the cash payments made in the Common Equity
Exchange, or (ii) Pinnacle, at the time it paid the aggregate redemption price
owing in respect of the Redemption or the aggregate cash payment made in the
Common Equity Exchange, (a) received less than reasonably equivalent value in
exchange for such incurrence or transfer, and (b) was insolvent (based on a fair
valuation of its assets) or was rendered insolvent by reason of such incurrence
or transfer or its financial condition at such time or as a result of such
incurrence or transfer satisfied one or both of two other applicable tests
involving an inability to pay debts as they become due or an inadequacy of
capital (each an "Adverse Financial Condition"), the obligations of Alvey under
the Notes could be voided or, alternatively, subordinated to other liabilities
of Alvey or, under certain limited circumstances, Pinnacle (in addition to
Senior Indebtedness of Alvey, to which the Notes are expressly subordinated).
Based on various valuations and projections (which necessarily involve a number
of assumptions and choices of methodologies), Alvey believes that none of the
Adverse Financial Conditions will be applicable either to Alvey or to Pinnacle
at the time of or as a result of the issuance of the Notes, the Redemption, the
Common Equity Exchange or the other transactions consummated as part of the
Financing Transactions.
FLUCTUATIONS IN EARNINGS
The price of certain of the Company's systems can exceed several
million dollars, and therefore a relatively small number of orders can
constitute a significant percentage of the Company's revenues in any one period.
Similarly, a relatively small reduction in the number of large orders can have a
material impact on the Company's revenues in any one quarter or year. The timing
of shipments and revenue recognition could affect the Company's operating
results for a particular period. In addition, most of the Company's revenues
come from fixed price contracts. To the extent that the original cost estimates
prove to be
23
<PAGE>
inaccurate, profitability from a particular contract may be adversely affected.
As a result, the Company's operating results can vary significantly from quarter
to quarter and the financial results for any particular quarter are not
necessarily indicative of results in any subsequent quarter or fiscal year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITIVE INDUSTRY
The materials handling and related industries are highly competitive
and fragmented, with a large number of competitors offering similar products.
Many of the Company's competitors are large and have significant financial,
marketing and technical resources. In addition, the Company may encounter
competition from new market entrants. Most of the Company's products are subject
to changes in design which could place the Company at a competitive disadvantage
if competitors introduce alternative products. While management believes that
the Company is one of the strongest competitors in terms of research and
development, there can be no assurance that the Company will be able to achieve
the design advances that may be necessary to remain competitive. Although the
Company believes that it has been able to successfully compete in its markets to
date, there can be no assurance that the Company will be able to continue to do
so in the future. See "Business - Competition."
PRODUCT LIABILITY
Inherent in the manufacture and use of materials handling equipment is
the potentially significant risk of physical injury to persons which could
result in product liability or other claims based upon injuries or alleged
injuries associated with one of the Company's products. The Company maintains
liability insurance coverage that it believes to be adequate which provides that
the Company self insures the first $200,000 of any claim. There can be no
assurance that the Company will be able to maintain adequate coverage or obtain
alternate coverage in the future at a reasonable cost, or that such coverage
will be sufficient to satisfy future claims, if any. The inability of the
Company to maintain adequate insurance coverage as well as any product liability
or personal injury claims in excess of the Company's insurance coverage could
have a material adverse effect on the Company's business, financial condition
and results of operations.
ACQUISITION STRATEGY
The Company expects to continue a strategy of identifying and
acquiring companies with complementary products or services which could be
expected to enhance the Company's operations and profitability. There can be no
assurance that the Company will continue to acquire businesses on satisfactory
terms or that any business acquired by the Company will be integrated
successfully into the Company's operations or prove profitable.
CONTROL OF THE COMPANY
Alvey is a wholly owned subsidiary of Pinnacle and is the sole source
of Pinnacle's financial resources. As a result of the Financing Transactions,
Pinnacle is controlled collectively by members of Alvey's and Pinnacle's boards
of directors, management and other employees, who hold in the aggregate
approximately 86% of the outstanding Pinnacle Common Stock on a fully-diluted
basis (which percentage includes by attribution to the two nominees of Vestar to
the Board of Directors the shares issuable upon exercise of the Pinnacle
Warrants held by Vestar). In addition, the holders of the Pinnacle Series A
Preferred Stock have substantial rights with respect to the management of
Pinnacle. See "Principal Stockholders" and "Description of Capital Stock -
Pinnacle Preferred Stock - Pinnacle Series A Preferred Stock."
POTENTIAL INABILITY TO FUND A CHANGE OF CONTROL OFFER
Upon a Change of Control as defined in the Indenture (such as, for
example, the acquisition of a majority of the outstanding voting stock of Alvey
by a third party), Alvey will be required to offer to repurchase all outstanding
Notes at 101% of the principal amount thereof plus accrued and unpaid interest
to
24
<PAGE>
the date of repurchase. The source of funds for any such repurchase will be
Alvey's available cash or cash generated from operating or other sources,
including borrowing, sales of equity or funds provided by a new controlling
person. 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 Notes tendered, or that restrictions in the Credit Agreement will allow Alvey
to make such required repurchases. The effect of such requirements may make it
more difficult or delay attempts by others to obtain control of Alvey. In
addition, the selling stockholders in the Recapitalization Transactions have a
right to additional consideration for a period of one year following the
consummation of the Recapitalization in the event of certain sales of Pinnacle
or Alvey, which may impact the ability of Alvey to fund a Change of Control
offer. See "Recapitalization of Pinnacle."
ABSENCE OF PUBLIC MARKET
The New Notes are a new issue of securities, have no established
trading market and may not be widely distributed. The Company does not intend
to list the New Notes on any national securities exchange or to seek the
admission thereof to trading in the National Association of Securities Dealers
Automation Quotation system. The Company has been advised by the Initial
Purchaser that it presently intends to make a market in the New Notes. However,
the Initial Purchaser is not obligated to do so and any market making activities
with respect to the New Notes may be discontinued at any time without notice.
In addition, such market making activity will be subject to the limitations
imposed by the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and may be limited during the Exchange Offer and,
if required, the pendency of the Shelf Registration Statement (as defined
below). No assurance can be given that an active public or other market will
develop for the New Notes or as to the liquidity of or the trading market for
the New Notes. If a trading market does not develop or is not maintained,
holders of the New Notes may experience difficulty in reselling the New Notes or
may be unable to sell them at all. If a market for the New Notes develops, any
such market may be discontinued at any time. If a public trading market
develops for the New Notes, future trading prices of the New Notes will depend
on many factors, including, among other things, prevailing interest rates, the
Company's results of operations and the market for similar securities.
Depending on prevailing interest rates, the market for similar securities and
other facts, including the financial condition of the Company, the New Notes may
trade at a discount from their principal amount.
25
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company to the Initial Purchaser on
January 24, 1996, pursuant to the Purchase Agreement. The Initial Purchaser
subsequently resold the Old Notes in reliance on Rule 144A under the Securities
Act. The Company, Pinnacle and the Initial Purchaser also entered into the
Registration Rights Agreement, pursuant to which the Company agreed, with
respect to the Old Notes and subject to the Company's determination that the
Exchange Offer is permitted under applicable law, to (i) cause to be filed, on
or prior to March 31, 1996, a registration statement with the Commission under
the Securities Act concerning the Exchange Offer, (ii) use its best efforts (a)
to cause such registration statement to be declared effective by the Commission
on or prior to 45 days after such filing and (b) to cause the Exchange Offer to
be consummated on or prior to 30 days after the date such registration statement
is declared effective by the Commission. The Company will keep the Exchange
Offer open for a period of not less than 30 days and not more than 45 days.
This Exchange Offer is intended to satisfy the Company's exchange offer
obligations under the Registration Rights Agreement.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Following the expiration of the Exchange Offer, holders of Old Notes
not tendered, or not properly tendered will not have any further registration
rights and such Old Notes will continue to be subject to the existing
restrictions on transfer thereof. Accordingly, the liquidity of the market for
a holder's Old Notes could be adversely affected upon expiration of the Exchange
Offer if such holder elects to not participate in the Exchange Offer.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the
conditions set forth herein and in the accompanying Letter of Transmittal, to
exchange $1,000 in principal amount of the New Notes for each $1,000 in
principal amount of the outstanding Old Notes. The Company will accept for
exchange any and all Old Notes that are validly tendered on or prior to
5:00 p.m., New York City time, on the Expiration Date. Tenders of the Old Notes
may be withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange. However, the
Exchange Offer is subject to the terms and provisions of the Registration Rights
Agreement. See "Conditions of the Exchange Offer."
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, holders of Old Notes may tender less than the aggregate principal
amount represented by the Old Notes held by them, provided that they
appropriately indicate this fact on the Letter of Transmittal accompanying the
tendered Old Notes (or so indicate pursuant to the procedures for book-entry
transfer).
As of the date of this Prospectus, $100 million in aggregate principal
amount of the Old Notes is outstanding, the maximum amount authorized by the
Indenture for all Notes. As of March 20, 1996, there was one registered holder
of the Old Notes, Cede, which held the Old Notes for 20 of its participants.
Solely for reasons of administration (and for no other purpose), the Company has
fixed the close of business on _________ ___, 1996, as the record date (the
"Record Date") for purposes of determining the persons to whom this Prospectus
and the Letter of Transmittal will be mailed initially. Only a holder of the
Old Notes (or such holder's legal representative or attorney-in-fact) may
participate in the Exchange Offer. There will be no fixed record date for
determining holders of the Old Notes entitled to participate in the Exchange
Offer. The Company believes that, as of the date of this Prospectus, no such
holder is an affiliate (as defined in Rule 405 under the Securities Act) of the
Company.
26
<PAGE>
The Company shall be deemed to have accepted validly tendered Old
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders of Old Notes and for the purposes of receiving the New Notes from the
Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be _________ ___, 1996 at 5:00 p.m., New
York City time, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the Expiration Date shall be the latest date and time to
which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the
Exchange Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the
conditions set forth below under "Conditions of the Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension, or termination to the Exchange Agent, and
(iv) to amend the terms of the Exchange Offer in any manner. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendments by means of a
prospectus supplement that will be distributed to the registered holders of the
Old Notes. Modification of the Exchange Offer, including, but not limited to,
(i) extension of the period during which the Exchange Offer is open and
(ii) satisfaction of the conditions set forth below under "Conditions of the
Exchange Offer" may require that at least five business days remain in the
Exchange Offer.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer is not conditioned upon any minimum principal
amount of the Old Notes being tendered for exchange. However, the Exchange
Offer is conditioned upon the declaration by the Commission of the effectiveness
of the Registration Statement of which this Prospectus constitutes a part.
TERMINATION OF CERTAIN RIGHTS
The Registration Rights Agreement provides that, subject to certain
exceptions, in the event of a Registration Default (as defined below), holders
of Old Notes are entitled to receive Liquidated Damages of $0.05 per week per
$1,000 principal amount of Old Notes held by such holders (up to a maximum of
$0.30 per week per $1,000 principal amount of Old Notes). A "Registration
Default" with respect to the Exchange Offer shall occur if: (i) the
registration statement concerning the exchange offer (the "Exchange Offer
Registration Statement") has not been filed with the Commission on or prior to
March 31, 1996; (ii) the Exchange Offer Registration Statement is not declared
effective on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (iii) the Company fails to consummate the Exchange
Offer within 30 days after the Effectiveness Target Date with respect to the
Exchange Offer Registration Statement, or (d) the Exchange Offer Registration
Statement is declared effective but thereafter ceases to be effective during the
period specified in the Registration Rights Agreement. Holders of New Notes will
not be and, upon consummation of the Exchange Offer, holders of Old Notes will
no longer be, entitled to (i) the right to receive the Liquidated Damages or
(ii) certain other rights under the Registration Rights Agreement intended for
holders of Old Notes. The Exchange Offer shall be deemed consummated upon the
occurrence of the delivery by the Company to the Registrar under the Indenture
of New Notes in the same aggregate principal
27
<PAGE>
amount as the aggregate principal amount of Old Notes that are tendered by
holders thereof pursuant to the Exchange Offer.
ACCRUED INTEREST
The New Notes will bear interest at a rate equal to 11 3/8% per annum,
which interest shall accrue from January 24, 1996 or from the most recent
Interest Payment Date with respect to the Old Notes to which interest was paid
or duly provided for. See "Description of Notes--Principal, Maturity and
Interest."
PROCEDURES FOR TENDERING OLD NOTES
The tender of a holder's Old Notes as set forth below and the
acceptance thereof by the Company will constitute a binding agreement between
the tendering holder and the Company upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, a holder who wishes to tender Old Notes
for exchange pursuant to the Exchange Offer must transmit such Old Notes,
together with a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal, to the
Exchange Agent at the address set forth on the back cover page of this
Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date. THE
METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT
THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account in
accordance with DTC's procedures for such transfer. In connection with a book-
entry transfer, a Letter of Transmittal need not be transmitted to the Exchange
Agent, provided that the book-entry transfer procedure must be complied with
prior to 5:00 p.m., New York City time, on the Expiration Date.
Each signature on a Letter of Transmittal or a notice of withdrawal,
as the case may be, must be guaranteed unless the Old Notes surrendered for
exchange pursuant hereto are tendered (i) by a registered holder of the Old
Notes who has not completed either the box entitled "Special Exchange
Instructions" or the box entitled "Special Delivery Instructions" in the Letter
of Transmittal, or (ii) by an Eligible Institution (as defined). In the event
that a signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, is required to be guaranteed, such guarantee must be by a firm
which is a member of a registered national securities exchange or the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or otherwise be an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (collectively, "Eligible Institutions"). If the Letter of
Transmittal is signed by a person other than the registered holder of the Old
Notes, the Old Notes surrendered for exchange must either (i) be endorsed by the
registered holder, with the signature thereon guaranteed by an Eligible
Institution, or (ii) be accompanied by a bond power, in satisfactory form as
determined by the Company in its sole discretion, duly executed by the
registered holder, with the signature thereon guaranteed by an Eligible
Institution. The term "registered holder" as used herein with respect to the
Old Notes means any person in whose name the Old Notes are registered on the
books of the Registrar.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and
all Old Notes not properly tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or
28
<PAGE>
after the Expiration Date (including the right to waive the ineligibility of any
holder who seeks to tender Old Notes in the Exchange Offer). The interpretation
of the terms and Conditions of the Exchange Offer (including the Letter of
Transmittal and the instructions thereto) by the Company shall be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes for exchange must be cured within such
period of time as the Company shall determine. The Company will use reasonable
efforts to give notification of defects or irregularities with respect to
tenders of Old Notes for exchange but shall not incur any liability for failure
to give such notification. Tenders of the Old Notes will not be deemed to have
been made until such irregularities have been cured or waived.
If any Letter of Transmittal, endorsement, bond power, power of
attorney or any other document required by the Letter of Transmittal is signed
by a trustee, executor, corporation or other person acting in a fiduciary or
representative capacity, such person should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company, in
its sole discretion, of such person's authority to so act must be submitted.
Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender Old Notes in the Exchange Offer should
contact such registered holder promptly and instruct such registered holder to
tender on such Beneficial Owner's behalf. If such Beneficial Owner wishes to
tender directly, such Beneficial Owner must, prior to completing and executing
the Letter of Transmittal and tendering Old Notes, make appropriate arrangements
to register ownership of the Old Notes in such Beneficial Owner's name.
Beneficial Owners should be aware that the transfer of registered ownership may
take considerable time.
By tendering, each registered holder will represent to the Company
that, among other things (i) the New Notes to be acquired in connection with the
Exchange Offer by the holder and each Beneficial Owner of the Old Notes are
being acquired by the holder and each Beneficial Owner in the ordinary course of
business of the holder and each Beneficial Owner, (ii) the holder and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in the
distribution of the New Notes, (iii) the holder and each Beneficial Owner
acknowledge and agree that any person participating in the Exchange Offer for
the purpose of distributing the New Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the New Notes acquired by such person and cannot
rely on the position of the staff of the Commission set forth in no-action
letters that are discussed herein under "Resales of New Notes," (iv) that if the
holder is a broker-dealer that acquired Old Notes as a result of market making
or other trading activities, it will deliver a prospectus in connection with any
resale of New Notes acquired in the Exchange Offer, (v) the holder and each
Beneficial Owner understand that a secondary resale transaction described in
clause (iii) above should be covered by an effective registration statement
containing the selling security holder information required by Item 507 of
Regulation S-K of the Commission, and (vi) neither the holder nor any Beneficial
Owner is an "affiliate," as defined under Rule 405 of the Securities Act, of the
Company except as otherwise disclosed to the Company in writing. In connection
with a book-entry transfer, each participant will confirm that it makes the
representations and warranties contained in the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are
not immediately available or (ii) who cannot deliver their Old Notes or any
other documents required by the Letter of Transmittal to the Exchange Agent
prior to the Expiration Date (or complete the procedure for book-entry transfer
on a timely basis), may tender their Old Notes according to the guaranteed
delivery procedures set forth in the Letter of Transmittal. Pursuant to such
procedures: (i) such tender must be made by or through an Eligible Institution
and a Notice of Guaranteed Delivery (as defined in the Letter of Transmittal)
must be signed by such Holder, (ii) on or prior to the Expiration Date, the
Exchange Agent must have received from the Holder and the 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
29
<PAGE>
certificate number or numbers of the tendered Old Notes, and the principal
amount of tendered Old Notes, stating that the tender is being made thereby and
guaranteeing that, within four (4) business days after the date of delivery of
the Notice of Guaranteed Delivery, the tendered Old Notes, a duly executed
Letter of Transmittal and any other required documents will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) such properly completed
and executed documents required by the Letter of Transmittal and the tendered
Old Notes in proper form for transfer (or confirmation of a book-entry transfer
of such Old Notes into the Exchange Agent's account at DTC) must be received by
the Exchange Agent within four (4) business days after the Expiration Date. Any
Holder who wishes to tender Old Notes pursuant to the guaranteed delivery
procedures described above must ensure that the Exchange Agent receives the
Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old
Notes prior to 5:00 p.m., New York City time, on the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the Exchange
Offer, the Company will accept any and all Old Notes that are properly tendered
in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration
Date. The New Notes issued pursuant to the Exchange Offer will be delivered
promptly after acceptance of the Old Notes. For purposes of the Exchange Offer,
the Company shall be deemed to have accepted validly tendered Old Notes, when,
as, and if the Company has given oral or written notice thereof to the Exchange
Agent.
In all cases, issuances of New Notes for Old Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of such Old Notes, a properly completed and duly
executed Letter of Transmittal and all other required documents (or of
confirmation of a book-entry transfer of such Old Notes into the Exchange
Agent's account at DTC); provided, however, that the Company reserves the
absolute right to waive any defects or irregularities in the tender or
conditions of the Exchange Offer. If any tendered Old Notes are not accepted
for any reason, such unaccepted Old Notes will be returned without expense to
the tendering Holder thereof as promptly as practicable after the expiration or
termination of the Exchange Offer.
WITHDRAWAL RIGHTS
Tenders of the Old Notes may be withdrawn by delivery of a written
notice to the Exchange Agent, at its address set forth on the back cover page of
this Prospectus, at any time 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 Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes, as applicable), (iii) be signed
by the Holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by a bond power in the name of the
person withdrawing the tender, in satisfactory form as determined by the Company
in its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution together with the other
documents required upon transfer by the Indenture, and (iv) specify the name in
which such Old Notes are to be re-registered, if different from the Depositor,
pursuant to such documents of transfer. Any questions as to the validity, form
and eligibility (including time of receipt) of such notices will be determined
by the Company, in its sole discretion. The Old Notes so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Old Notes which have been tendered for exchange but which
are withdrawn will be returned to the Holder thereof without cost to such Holder
as soon as practicable after withdrawal. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "The Exchange
Offer--Procedures for Tendering Old Notes" at any time on or prior to the
Expiration Date.
30
<PAGE>
THE EXCHANGE AGENT; ASSISTANCE
The Bank of New York is the Exchange Agent. All tendered Old Notes,
executed Letters of Transmittal and other related documents should be directed
to the Exchange Agent. Questions and requests for assistance and requests for
additional copies of the Prospectus, the Letter of Transmittal and other related
documents should be addressed to the Exchange Agent as follows:
BY HAND, REGISTERED OR CERTIFIED MAIL OR OVERNIGHT COURIER:
The Bank of New York
101 Barclay Street, 7 East
Reorganization Section
New York, New York 10286
BY FACSIMILE:
(212) 571-3080
Attention: Reorganization Section
Confirm by Telephone (212) 815-2742
FEES AND EXPENSES
All expenses incident to the Company's consummation of the Exchange
Offer and compliance with the Registration Rights Agreement will be borne by the
Company, including, without limitation: (i) all registration and filing fees
(including, without limitation, fees and expenses of compliance with state
securities or Blue Sky laws), (ii) printing expenses (including, without
limitation, expenses of printing certificates for the New Notes in a form
eligible for deposit with DTC and of printing Prospectuses), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for the
Company, (v) fees and disbursements of independent certified public accountants,
(vi) rating agency fees, (vii) internal expenses of the Company (including,
without limitation, all salaries and expenses of officers and employees of the
Company performing legal or accounting duties), and (ix) fees and expenses
incurred in connection with the listing of the New Notes on a securities
exchange.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, 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.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however, a transfer
tax is imposed for any reason other than the exchange of Old Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old
Notes, as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss will be recognized by the Company for
accounting purposes. The expenses of the Exchange Offer will be amortized over
the term of the New Notes.
31
<PAGE>
RESALES OF THE NEW NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer to a holder in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by such holder
(other than (i) a broker-dealer who purchased Old Notes directly from the
Company for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act, or (ii) a person that is an
affiliate of the Company 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 holder is acquiring the New Notes in
the ordinary course of business and is not participating, and has no arrangement
or understanding with any person to participate, in the distribution of the New
Notes. The Company has not requested or obtained an interpretive letter from
the Commission staff with respect to this Exchange Offer, and the Company and
the holders are not entitled to rely on interpretive advice provided by the
staff to other persons, which advice was based on the facts and conditions
represented in such letters. However, the Exchange Offer is being conducted in
a manner intended to be consistent with the facts and conditions represented in
such letters. If any holder acquires New Notes in the Exchange Offer for the
purpose of distributing or participating in a distribution of the New Notes,
such holder cannot rely on the position of the staff of the Commission
enunciated in MORGAN STANLEY & CO., INCORPORATED (available June 5, 1991) and
EXXON CAPITAL HOLDINGS CORPORATION (available April 13, 1989), or interpreted in
the Commission's letter to SHEARMAN AND STERLING (available July 2, 1993), or
similar no-action or interpretive letters and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction, unless an exemption from registration is otherwise
available. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market making or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
See "Plan of Distribution."
It is expected that the New Notes will be freely transferable by the
holders thereof, subject to the limitations described in the immediately
preceding paragraph. Sales of New Notes acquired in the Exchange Offer by
holders who are "affiliates" of the Company within the meaning of the Securities
Act will be subject to certain limitations on resale under Rule 144 of the
Securities Act. Such persons will only be entitled to sell New Notes in
compliance with the volume limitations set forth in Rule 144, and sales of New
Notes by affiliates will be subject to certain Rule 144 requirements as to the
manner of sale, notice and the availability of current public information
regarding the Company. The foregoing is a summary only of Rule 144 as it may
apply to affiliates of the Company. Any such persons must consult their own
legal counsel for advice as to any restrictions that might apply to the resale
of their Notes.
32
<PAGE>
CAPITALIZATION
ALVEY
The following table sets forth the capitalization of Alvey at December
31, 1995 on a historical basis and as adjusted on a pro forma basis (unaudited)
to reflect the Financing Transactions, the Prior Offering and the Exchange
Offer. All of the indebtedness shown in the table below is indebtedness of Alvey
or, in the case of the capital leases, obligations of Alvey and its
subsidiaries. Pro forma adjustments are described in the accompanying notes.
This table should be read in conjunction with "Pro Forma Financial Data" and
"Description of Capital Stock" appearing elsewhere herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------
PRO FORMA AS
HISTORICAL ADJUSTED(1)
---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SHORT-TERM DEBT. . . . . . . . . . . . . . . . . . . . $ 6,915 $ 290
------- ----------
LONG-TERM DEBT:
Senior bank loans (2) . . . . . . . . . . . . . . 39,574 0
11.95% Subordinated Notes . . . . . . . . . . . . 2,253 0
11 3/8% Senior Subordinated Notes due 2003. . . . 0 100,000
Capital leases and other debt . . . . . . . . . . 633 633
------ -------
Total long-term debt . . . . . . . . . . . . . 42,460 100,633
------ -------
PREFERRED STOCK: (3)
Series A Senior Cumulative Exchangeable
Preferred Stock (250,000 shares designated,
210,770 shares issued and 210,697 shares
outstanding; 0 shares issued and outstanding,
pro forma as adjusted) . . . . . . . . . . . . . 21,070 0
Cumulative Exchangeable Preferred Stock (100,000
shares designated, 62,524 shares issued and
outstanding; 0 shares issued and outstanding,
pro forma as adjusted) . . . . . . . . . . . . . 6,252 0
------ -------
Total redeemable preferred stock . . . . . . . 27,320 0
NET INVESTMENT OF PINNACLE (4) . . . . . . . . . . . . (15,719) (24,149)
------ -------
CAPITALIZATION. . . . . . . . . . . . . . . . . . $60,978 $ 76,774
------- ---------
------- ---------
</TABLE>
___________
(1) Pro forma adjustments include the effect of the Pro Forma Transactions.
See "Pro Forma Financial Data."
(2) Pro Forma amount does not include approximately $6.5 million which the
Company expects to spend in 1996 ($1.5 million is also expected to be
spent in 1997) in connection with the expansion of manufacturing
facilities for Alvey and Busse. See "Credit Agreement" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein.
(3) See "Description of Capital Stock." Represents redeemable preferred
stock of Pinnacle. Due to the exchangeable feature of the preferred
stock which allows the holder to exchange the preferred stock for notes
of Alvey, the preferred stock has been pushed down to the financial
statements of Alvey.
(4) Net investment of Pinnacle represents the basis of Pinnacle's investment
in Alvey, which has been pushed down to the financial statements of
Alvey, and includes cumulative contributions of capital and cumulative
income before extraordinary losses offest by extraordinary losses and
aggregate accreted/paid preferred stock dividends. The historical
amount at December 31, 1995 consists of cumulative contributions of
capital to Alvey by Pinnacle of $3.0 million and cumulative income
before extraordinary losses of $2.9 million offset by extraordinary
losses of $7.5 million and an aggregate accretion/payment of
$14.1 million of paid-in-kind dividends on preferred stock. The pro
forma, as adjusted, amount reflects the net effects ($27.3 million) of
the Recapitalization Transactions at Pinnacle, the $21.4 million
dividend from Alvey to Pinnacle (the amount that would have been
necessary if the Recapitalization Transactions took place as of December
31, 1995), approximately $223,000 of prepayment penalties, net of
applicable income taxes, incurred in the Credit Facility Repayment, the
write-off of unamortized deferred financing fees of $1.58 million, net
of applicable income taxes, the charge to income of $866,000, net of
applicable income taxes, for the termination of the Raebarn Agreement
(such write-off and termination occurred concurrently with the Prior
Offering), and the charge to income of $11.7 million for purchased
research and development costs, which will
33
<PAGE>
be reflected as research and development expense immediately subsecquent
to the purchase of Weseley by Pinnacle, Alvey and MFA.
PINNACLE
The following table sets forth the consolidated capitalization of
Pinnacle at December 31, 1995 on a historical basis and as adjusted on a pro
forma basis (unaudited) to reflect the Financing Transactions, the Prior
Offering and the Exchange Offer and the application of the net proceeds
therefrom. Pro forma adjustments are described in the accompanying notes. This
table should be read in conjunction with "Pro Forma Financial Data" and
"Description of Capital Stock" appearing elsewhere herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------
PRO FORMA AS
HISTORICAL ADJUSTED(1)
---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt. . . . . . . . . . . . . . . . . . $ 6,915 $ 290
-------- ---------
LONG-TERM DEBT:
Senior bank loans (2). . . . . . . . . . . . . . 39,574 0
11.95% Subordinated Notes. . . . . . . . . . . . 2,253 0
11-3/8% Senior Subordinated Notes due 2003 . . . 0 100,000
Capital leases and other debt. . . . . . . . . . 633 633
-------- ---------
Total long-term debt . . . . . . . . . . . . . 42,460 100,633
-------- ---------
REDEEMABLE PREFERRED STOCK:
Series A Senior Cumulative Exchangeable
Preferred Stock (250,000 shares designated,
210,770 shares issued and 210,697 shares
outstanding; 0 shares issued and outstanding,
pro forma as adjusted) . . . . . . . . . . . . 21,070 0
Cumulative Exchangeable Preferred Stock
(100,000 shares designated, 62,524 shares issued
and outstanding; 0 shares issued and outstanding,
pro forma as adjusted) . . . . . . . . . . . . 6,252 0
Series A 9% Cumulative Convertible Preferred Stock
(30,000 shares designated, 0 shares issued and
outstanding; 23,000 shares issued and outstanding,
pro forma as adjusted) (4) . . . . . . . . . . 0 21,300
Series B 9% Cumulative Preferred (15,000 shares
designated, 0 shares issued and outstanding;
11,287 shares issued and outstanding, pro forma
as adjusted) (3) . . . . . . . . . . . . . . . 0 11,287
Series C 9% Cumulative Convertible Preferred Stock
(30,000 shares designated, 0 shares issued and
outstanding; 7,000 shares issued and outstanding,
pro forma as adjusted) (4) . . . . . . . . . . 0 6,500
-------- ---------
Total redeemable preferred stock . . . . . . . 27,322 39,087
-------- ---------
COMMON STOCK AND OTHER STOCKHOLDERS' DEFICIT:
Common Stock, $.01 par value; 2,100,000 shares
authorized, 1,112,246 shares issued and outstanding;
485,516 shares issued and outstanding, pro forma as
adjusted (5) . . . . . . . . . . . . . . . . . . 11 5
Warrants (5). . . . . . . . . . . . . . . . . . . 1 2,200
Notes receivable for common stock . . . . . . . . (972) (972)
Additional paid-in capital. . . . . . . . . . . . 4,081 1,381
Recapitalization adjustment (6) . . . . . . . . . 0 (32,638)
Accumulated deficit (7) . . . . . . . . . . . . . (18,746) (33,118)
Treasury stock. . . . . . . . . . . . . . . . . . (94) (94)
-------- ---------
</TABLE>
34
<PAGE>
<TABLE>
<S> <C> <C>
Total stockholders' deficit . . . . . . . . . . . (15,719) (63,236)
-------- ---------
Capitalization. . . . . . . . . . . . . . . . . . $ 60,978 $ 76,774
-------- ---------
-------- ---------
</TABLE>
- -----------
(1) Pro forma adjustments include the effect of the Pro Forma
Transactions. See "Pro Forma Financial Data."
(2) Pro Forma amount does not include approximately $6.5 million which the
Company expects to spend in 1996 ($1.5 million is also expected to be
spent in 1997) in connection with the expansion of manufacturing
facilities for Alvey and Busse. See "Credit Agreement" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere herein.
(3) All (a) holders of Pinnacle Original Senior Preferred Stock who did
not participate in the Redemption and (b) holders of 11.95% Notes who
did not participate in the Note Repayment elected to exchange and/or
purchase Pinnacle Series B Preferred Stock. See "Description of
Capital Stock."
(4) The preliminary value of warrants included in the Pinnacle Preferred
Stock and Warrants Offering totalling $2.2 million has been reduced
from the value of the Preferred Stock.
(5) Pro forma amount does not include (a) outstanding options to purchase
67,200 shares of Pinnacle Common Stock, (b) outstanding warrants to
purchase an aggregate of 14,917 shares of Pinnacle Common Stock and
(c) options to purchase 29,875 shares of Pinnacle Common Stock issued
in the Weseley Acquisition. Warrants to purchase 256,075 shares of
Pinnacle Common Stock issued in the Pinnacle Preferred Stock and
Warrants Offering have been preliminarily valued at $2.2 million in
the aggregate. Such amount is subject to further adjustment pending
finalization of the valuation. See "Certain Transactions."
(6) Amount represents the value paid as a result of the Common Equity
Exchange in excess of the historical carrying value of the Pinnacle
Common Stock. See "Recapitalization of Pinnacle."
(7) The pro forma, as adjusted, amount reflects the net effects ($27.3
million) of the Recapitalization Transactions at Pinnacle, the
$21.4 million dividend from Alvey to Pinnacle (the amount that would
have been necessary if the Recapitalization Transactions took place as
of December 31, 1995), approximately $223,000 of prepayment penalties,
net of applicable income taxes, incurred in the Credit Facility
Repayment, the write-off of unamortized deferred financing fees of
$1.58 million, net of applicable income taxes, the charge to income of
$866,000, net of applicable income taxes, for the termination of the
Raebarn Agreement (such write-off and termination occurred
concurrently with the Prior Offering), and the charge to income of
$11.7 million for purchased research and development costs, which will
be reflected as research and development expense immediately
subsecquent to the purchase of Weseley by Pinnacle, Alvey and MFA.
35
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data of Alvey (the "Pro
Forma Financial Data") have been derived by the application of pro forma
adjustments to the historical Consolidated Financial Statements of Alvey
included elsewhere in this Prospectus. The following unaudited pro forma
consolidated statement of operations data for the year ended December 31, 1995
give effect to the Financing Transactions, the Prior Offering and the Exchange
Offer and the application of the net proceeds therefrom, the Weseley
Acquisition, and the termination of the Acadia Agreement (as defined herein)
and the Raebarn Agreement (as defined herein) (collectively, the "Pro Forma
Transactions") as if such events had occurred on January 1, 1995. See "Certain
Relationships and Transactions." The following unaudited pro forma consolidated
balance sheet data at December 31, 1995 gives effect to the Pro Forma
Transactions as if such events had occurred as of December 31, 1995. The Pro
Forma Financial Data reflect a preliminary purchase price allocation for the
Weseley Acquisition; however, no significant adjustments to the Weseley purchase
price allocation shown herein are expected. The Pro Forma Financial Data do not
purport to be indicative of Alvey's financial position or results of operations
that would actually have been obtained had the Pro Forma Transactions been
completed as of the dates assumed, or to project Alvey's financial position or
results of operations at any future date. The Pro Forma Financial Data should be
read in conjunction with "Capitalization," "Selected Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Alvey's Consolidated Financial Statements and the related
Notes to the Consolidated Financial Statements and Weseley's Financial
Statements and the related Notes to the Financial Statements included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR 1995
Weseley Pro
Forma and
Financing Financing Purchase
Transactions Transactions Historical Accounting
Historical Adjustments Pro Forma Weseley Adjustments (1) Pro Forma
---------- ----------- --------- ------- --------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . $288,018 $0 $288,018 $3,397 $0 $ 291,415
Cost of goods sold . . . . . . . . . . . . . 217,297 0 217,297 935 0 218,232
Gross profit . . . . . . . . . . . . . . . 70,721 0 70,721 2,462 0 73,183
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . 51,630 0 51,630 4,539 652(2) 56,821
Research and development expenses. . . . . 2,051 0 2,051 615 0 2,666
Amortization expense . . . . . . . . . . . 1,737 (558)(4) 1,179 0 471 (5) 1,650
Other income, net. . . . . . . . . . . . . (108) (150)(3) (258) 0 0 (258)
Operating income (loss). . . . . . . . . 15,411 708 16,119 (2,692) (1,123) 12,304
Interest expense. . . . . . . . . . . . . . 6,896 3,806 (6) 10,702 (19) 1,706 (7) 12,389
Income (loss) before income taxes. . . . 8,515 (3,098) 5,417 (2,673) (2,829) (85)
Income tax expense (benefit). . . . . . . . 4,109 (1,239)(8) 2,870 (1,105) (944)(8) 821
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations . . . . . . . . . . . . . . $4,406 $ (1,859) $ 2,547 $ (1,568) $ (1,885) $ (906)(2)
Earnings per share (9). . . . . . . . . . . -- -- -- -- -- --
OTHER CONSOLIDATED AND PRO FORMA DATA AND
OTHER PERFORMANCE MEASURES (NON-GAAP) (11):
Depreciation expense . . . . . . . . . . . $2,952 $ 0 $ 2,952 $ 68 $ 0 $ 3,020
Capital expenditures, net (10) . . . . . . $4,496 $ 0 $ 4,496 $ 213 $ 0 $ 4,709
</TABLE>
- ----------
(1) The Weseley Acquisition will be accounted for as a purchase. The
purchase price will be allocated to the acquired assets and
liabilities based on their relative fair values as of the date of
acquisition based on valuations and other studies which are
essentially complete. Based on the results of an independent
appraisal, it is expected that approximately $11.7 million of the
Weseley purchase price will be allocated to purchased research and
development costs. Such research and development costs will be
recorded as research and development expense in Alvey's consolidated
statement of operations during the quarter ended March 31, 1996. This
research and development expense has been excluded from the pro forma
statement of operations for the year ended December 31, 1995, as it
represents a non-recurring charge to income which results directly
from the Weseley Acquisition. No significant adjustments to the
Weseley purchase price allocation shown herein are expected.
(2) Amount principally includes the stay bonuses payable to certain
designated employees of Weseley ($625,000 on an annual basis) The
adjustment does not eliminate the payment by Weseley and charge to
expense on December 31, 1995 (prior to the purchase of Weseley by
Pinnacle, Alvey and MFA) of an aggregate of $3.0 million in one-time,
nonrecurring bonuses to certain employees of Weseley. Had such amount
been included in this adjustment, Alvey's pro forma net income for
fiscal year 1995 would have been $894.
(3) Adjustment includes the effect of the termination of the Acadia
Agreement and the Raebarn Agreement, resulting in an annual reduction
in expense of $500,000, offset by new management fees of $150,000 and
$200,000 annually payable to Vestar and Mammoth (as defined herein),
respectively. The pro forma income statement does not include a
nonrecurring charge of $866,000, net of applicable tax benefits,
resulting from the termination of the Raebarn Agreement (total
payments of $2.0 million to be paid over 8 years will be expensed at
the time of termination of the Raebarn Agreement which occured
concurrently with the Prior Offering, less $510,000 which was accrued
at December 31, 1995). See "Certain Transactions."
(4) Reflects the reduction in amortization of certain unamortized deferred
financing fees associated with a previous debt issuance to be
written-off as a result of the Financing Transactions. The pro forma
income statement does not reflect a one-time $1.58 million
extraordinary charge, net of tax, for the write-off of such
unamortized deferred financing fees and for certain nonrecurring
prepayment penalties which resulted from the Credit Facility
Repayment.
(5) Reflects the additional goodwill amortization to be recorded under the
preliminary purchase price allocation as a result of the Weseley
Acquisition; such goodwill is being amortized over a period of 10
years.
(6) Reflects the additional interest which will result from the Financing
Transactions, excluding interest at a rate of 11-3/8% relating to the
financing of the Weseley Acquisition. Amount includes additional
expense ($1,014,000 for the year ended December 31, 1995) to result
from the amortization of deferred financing fees associated with the
Prior Offering over the term thereof.
(7) Reflects the additional interest expense resulting from the Weseley
Acquisition at a rate of 11-3/8%; $15 million of the proceeds of the
Prior Offering was used to fund the Weseley Acquisition.
(8) Reflects estimated income tax effect of pro forma adjustments. The
increase in the effective tax rate over the statutory federal rate in
the "Weseley Pro Forma and Purchase Accounting Adjustments" column is
due primarily to non-deductible goodwill amortization.
(9) Given the historical organization and capital structure of Alvey,
earnings per share information is not considered meaningful or
relevant and therefore has not been presented.
(10) Capital expenditures include amounts related to investments in fixed
assets and costs of software development.
(11) Other performance measures such as EBITDA and EBITDAM as shown below
should not be construed as an alternative to operating income or net
income calculated in accordance with GAAP or as an indicator of
operating performance or liquidity. However, the Company believes
such non-GAAP performance measures are commonly used to evaluate a
company's ability to service debt.
37
<PAGE>
<TABLE>
<CAPTION>
Weseley Pro
Forma and
Financing Financing Purchase
Transactions Transactions Historical Accounting
Historical Adjustments Pro Forma Weseley Adjustments Pro Forma
---------- ------------ ----------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
EBITDA (12) $ 20,100 $ 150 $ 20,250 $ (2,624) $ (652) $ 16,974
EBITDAM (13) 20,706 0 20,706 (2,624) (652) 17,430
</TABLE>
(12) EBITDA consists of earnings before interest, income taxes,
extraordinary items and depreciation and amortization expense. EBITDA
also excludes a charge to income of $866,000, net of applicable income
taxes, for the termination of the Raebarn Agreement (such termination
occurred concurrently with the Prior Offering). Management fees of
$456,000 reduce EBITDA on a pro forma basis for the year ended
December 31, 1995.
(13) EBITDAM consists of earnings before interest, income taxes,
extraordinary items, depreciation and amortization expense and
management fees. EBITDAM excludes management fees of $456,000 for the
year ended December 31, 1995.
38
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Financial Statements of Alvey
Weseley Pro
Forma and
Financing Financing Purchase
Transactions Transactions Historical Accounting Pro Forma
Historical Adjustments Pro Forma Weseley Adjustments As Adjusted
---------- ------------ ----------- --------- --------------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . $ 3,405 $ 22,698 (2) $ 26,103 $ 216 $ (15,000)(3) $ 11,319
Receivables:
Trade. . . . . . . . . . . . . . . 42,567 0 42,567 341 0 42,908
Unbilled and other . . . . . . . . 6,211 0 6,211 39 0 6,250
Accumulated costs and earnings
in excess of billings on
uncompleted contracts . . . . . . . . 8,317 0 8,317 0 0 8,317
Inventories:
Raw materials. . . . . . . . . . . 13,966 0 13,966 0 0 13,966
Work in process. . . . . . . . . . 5,720 0 5,720 0 0 5,720
Deferred income taxes. . . . . . . . . 4,699 0 4,699 1,375 (1,595) 4,479
Prepaid expenses and other assets. . . 1,665 0 1,665 10 0 1,675
Total current assets . . . . . . . . . 86,550 22,698 109,248 1,981 (16,595) 94,634
Property, plant and equipment net. . . . 25,675 0 25,675 223 0 25,898
Other assets . . . . . . . . . . . . . . 6,031 4,460 (4) 10,491 0 0 10,491
Goodwill . . . . . . . . . . . . . . . . 32,029 0 32,029 0 4,709 (3) 36,738
Total assets . . . . . . . . . . . . . $ 150,285 $ 27,158 $ 177,443 $ 2,204 $ (11,886) $ 167,761
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND NET INVESTMENT OF PINNACLE
Current liabilities:
Current portion of long-term debt. . . $ 6,915 $ (6,625)(5) $ 290 $ 0 $ 0 $ 290
Accounts payable . . . . . . . . . . . 24,368 0 24,368 104 0 24,472
Accrued expenses . . . . . . . . . . . 27,764 250 (6) 28,014 164 0 28,178
Customer deposits. . . . . . . . . . . 12,107 0 12,107 0 0 12,107
Billings in excess of accumulated
costs and earnings on uncompleted
contracts . . . . . . . . . . . . . . 13,904 0 13,904 0 0 13,904
Deferred revenues. . . . . . . . . . . 899 0 899 3,042 0 3,941
Taxes payable. . . . . . . . . . . . . 994 0 994 56 0 1,050
Total current liabilities. . . . . 86,951 (6,375) 80,576 3,366 0 83,942
Long-term debt . . . . . . . . . . . . . 42,460 58,173 (5) 100,633 0 0 100,633
Other long-term liabilities. . . . . . . 5,075 1,193 (6) 6,268 26 0 6,294
Deferred income taxes. . . . . . . . . . 4,196 (1,781)(7) 2,415 221 (1,595) 1,041
Redeemable preferred stock (8):
Series A Senior Cumulative
Exchangeable Preferred Stock. . . 21,070 (21,070)(9) 0 0 0
Cumulative Exchangeable Preferred
Stock. . . . . . . . . . . . . . . . . . 6,252 (6,252)(9) 0 0 0
Net investment of Pinnacle and Weseley
stockholders' deficit (10) . . . . . . . (15,719) 3,270 (11) (12.449) (1,409) (10,291) (24,149)
39
<PAGE>
Total liabilities, redeemable preferred
stock and net investment of Pinnacle . $ 150,285 $ 27,158 $ 177,443 $ 2,204 $ (11,886) $ 167,761
</TABLE>
- -----------
(1) The Weseley Acquisition will be accounted for as a purchase. The
purchase price will be allocated to the acquired assets and
liabilities based on their relative fair values as of the date of
acquisition based on valuations and other studies which are
essentially complete. Based on the results of an independent
appraisal, it is expected that approximately $11.7 million of the
Weseley purchase price will be allocated to purchased research and
development costs. Such research and development costs will be
recorded as research and development expense in Alvey's consolidated
statement of operations during the quarter ended March 31, 1996. This
research and development expense has been excluded from the pro forma
statement of operations for the year ended December 31, 1995, as it
represents a non-recurring charge to income which results directly
from the Weseley Acquisition. No significant adjustments to the
Weseley purchase price allocation shown herein are expected.
(2) Amounts (in thousands) as of December 31, 1995 are comprised of the
proceeds of the Prior Offering offset by payments as follows:
<TABLE>
<S> <C>
Proceeds from the Offering (net of transaction costs
of $7.1 million) . . . . . . . . . . . . . . . . . . $92,900
Recapitalization Dividend. . . . . . . . . . . . . . . (21,380)
Credit Facility Repayment. . . . . . . . . . . . . . . (46,199)
Prepayment penalties . . . . . . . . . . . . . . . . . (370)
Note Repayment . . . . . . . . . . . . . . . . . . . . (2,253)
--------
$22,698
-------
</TABLE>
See additional description of the above events in the "Prospectus
Summary--Recent Transactions by Alvey." The $21.4 million
Recapitalization Dividend from Alvey to Pinnacle reflects the amount
that would have been necessary if the Recapitalization Transactions
took place as of December 31, 1995.
(3) The purchase price and preliminary allocation of the excess of cost
over the net book value of assets acquired of Weseley is as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Purchase price . . . . . . . . . . . . . . . . . . . . $15,000
Purchased research and development costs . . . . . . . (11,700)
--------
Book value of net liabilities assumed. . . . . . . . . 1,409
------
Goodwill . . . . . . . . . . . . . . . . . . . . . . . $4,709
------
</TABLE>
The $14.8 million adjustment to cash reflects the $15.0 million purchase
price net of $0.2 million cash acquired. Purchased research and
development costs will be immediately charged to expense. See footnote
(10) below.
(4) Reflects $7.1 million in costs associated with the Financing
Transactions offset by the reduction in unamortized deferred financing
fees of $2.6 million associated with a previous debt issuance to be
written-off as a result of the Financing Transactions.
(5) Amount reflects the proceeds from the Prior Offering offset by the
Credit Facility Repayment and the Note Repayment. Pro Forma amount
does not include approximately $6.5 million which the Company expects
to spend in 1996 ($1.5 million is also expected to be spent in 1997)
in connection with the expansion of manufacturing facilities for Alvey
and Busse. No borrowings are expected to be drawn under the Credit
Agreement in order to effect the Pro Forma Transactions. See "Credit
Agreement" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(6) Adjustment includes the effect of the termination of the Raebarn
Agreement, which contemplates total payments of $2.0 million to be
paid over 8 years (but is partially offset by existing accruals for
such payments of $510,000). See "Certain Transactions."
(7) Reflects estimated income tax effect of pro forma adjustments for
Financing Transactions.
(8) Represents redeemable preferred stock of Pinnacle. Due to exchangeable
feature of the preferred stock which allows the holder to exchange the
preferred stock for subordinated notes of Alvey, the preferred stock
has been pushed down to the financial statements of Alvey. See
"Description of Capital Stock."
(9) Amounts reflect the Redemption. See "Recapitalization of Pinnacle."
40
<PAGE>
(10) Net investment of Pinnacle represents the basis of Pinnacle's
investment in Alvey, which has been pushed down to the financial
statements of Alvey, and includes cumulative contributions of capital
and cumulative income before extraordinary losses offset by
extraordinary losses and aggregate accreted/paid preferred stock
dividends. The historical amount at December 31, 1995 consists of
cumulative contributions of capital to Alvey by Pinnacle of
$3.0 million and cumulative income before extraordinary losses of
$2.9 million offset by extraordinary losses of $7.5 million and an
aggregate accretion/payment of $14.1 million of paid-in-kind dividends
on preferred stock. The pro forma, as adjusted, amount reflects the
net effects ($27.3 million) of the Recapitalization Transactions at
Pinnacle, the $21.4 million dividend from Alvey to Pinnacle (the
amount that would have been necessary if the Recapitalization
Transactions took place as of December 31, 1995), approximately
$223,000 of prepayment penalties, net of applicable income taxes,
incurred in the Credit Facility Repayment, the write-off of
unamortized deferred financing fees of $1.58 million, net of
applicable income taxes, the charge to income of $866,000, net of
applicable income taxes, for the termination of the Raebarn Agreement
(such write-off and termination occurred concurrently with the Prior
Offering), and the charge to income of $11.7 million for purchased
research and development costs, which will be reflected as research
and development expense immediately subsecquent to the purchase of
Weseley by Pinnacle, Alvey and MFA.
(11) The adjustment reflects the net effects ($27.3 million) of the
Recapitalization Transactions at Pinnacle, the $21.4 million
Recapitalization Dividend from Alvey to Pinnacle (the amount that
would have been necessary if the Recapitalization Transactions took
place as of December 31, 1995), the write-off of unamortized deferred
financing fees of $1.58 million, net of applicable income taxes, the
charge to income of $223,000, net of applicable income taxes, related
to approximately $370,000 of prepayment penalties incurred in the
Credit Facility Repayment and the charge to income of $866,000, net of
applicable income taxes, for the termination of the Raebarn Agreement
(such write-off and termination occurred concurrently with the Prior
Offering).
41
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data presented below at
and for the five years ended December 31, 1995 have been derived from the
historical Consolidated Financial Statements of Alvey which have been audited by
Price Waterhouse LLP, independent accountants. Alvey's historical consolidated
financial statements at and for the three years ended December 31, 1995, 1994
and 1993 are included elsewhere in this Prospectus.
The information below is qualified in its entirety by the detailed
information included elsewhere herein and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements and related Notes to
Consolidated Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS (1):
Net sales. . . . . . . . . . . . . . . . . . . . . . $ 288,018 $ 248,177 $ 164,022 $ 106,579 $ 80,947
Cost of goods sold . . . . . . . . . . . . . . . . . 217,297 189,007 123,033 75,343 60,666
----------- ---------- ---------- ---------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . 70,721 59,170 40,989 31,236 20,281
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . . . 51,630 43,402 30,421 22,467 16,582
Research and development expenses. . . . . . . . . . 2,051 2,538 1,436 930 602
Amortization expense . . . . . . . . . . . . . . . . 1,737 1,836 1,479 1,095 1,002
Other expense (income) net (2) . . . . . . . . . . . (108) 2,279 (11) (335) (308)
Restructuring and plant consolidation
expense (3). . . . . . . . . . . . . . . . . . . . 0 0 0 1,801 0
----------- ---------- ---------- ---------- ---------
Operating income . . . . . . . . . . . . . . . . . 15,411 9,115 7,664 5,278 2,403
Interest expense . . . . . . . . . . . . . . . . . . 6,896 5,921 4,053 2,690 2,512
----------- ---------- ---------- ---------- ---------
Income (loss) before income taxes and
extraordinary losses . . . . . . . . . . . . . . . 8,515 3,194 3,611 2,588 (109)
Income taxes . . . . . . . . . . . . . . . . . . . . 4,109 1,516 1,560 1,126 32
----------- ---------- ---------- ---------- ---------
Income (loss) before extraordinary losses. . . . . 4,406 1,678 2,051 1,462 (141)
Extraordinary losses, net (4). . . . . . . . . . . . 0 0 6,203 614 657
----------- ---------- ---------- ---------- ---------
Net income (loss). . . . . . . . . . . . . . . . . $ 4,406 $ 1,678 $ (4,152) $ 848 $ (798)
----------- ---------- ---------- ---------- ---------
Earnings per share (5) . . . . . . . . . . . . . . . . _ _ _ _ _
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Working capital (deficit). . . . . . . $ (401) $ 7,152 $ 8,155 $ (928) $(1,035)
Total assets . . . . . . . . . . . . . 150,285 138,536 129,658 83,021 45,349
Long-term debt, less current
maturities . . . . . . . . . . . . . 42,460 54,754 59,341 35,508 18,194
Redeemable preferred stock (6) . . . . 27,322 23,435 20,034 16,902 12,299
Net investment of Pinnacle (7) . . . . (15,719) (16,332) (15,015) (9,729) (8,475)
</TABLE>
42
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF ALVEY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED FINANCIAL DATA (1):
Depreciation expense . . . . . . . . . . . . . . $ 2,952 $ 2,752 $ 2,583 $ 1,724 $ 1,433
Capital expenditures, net (8). . . . . . . . . . 4,496 5,091 3,471 1,920 491
OTHER PERFORMANCE MEASURES (NON-GAAP) (9):
EBITDA (10). . . . . . . . . . . . . . . . . . . 20,100 15,877 11,726 8,097 4,838
Ratio of earnings to fixed charges plus
preferred stock dividends(11). . . . . . . . . 1.07 (11) (11) (11) (11)
Ratio of earnings to fixed charges (12). . . . . 2.06 1.47 1.80 1.83 (12)
Ratio of EBITDA to cash interest expense (13). . 3.27 2.77 3.17 3.30 1.93
Ratio of long-term debt to EBITDA. . . . . . . . 2.11 3.45 5.06 4.33 3.76
EBITDAM (14) . . . . . . . . . . . . . . . . . . $20,706 $16,379 $12,391 $ 8,597 $ 5,151
Ratio of EBITDAM to cash interest expense (13) . 3.37 2.86 3.35 3.50 2.05
Ratio of long-term debt to EBITDAM . . . . . . . 2.05 3.34 4.79 4.08 3.53
</TABLE>
- -----------
(1) Includes various acquisitions from the date of such acquisition,
including Busse and Buschman in fiscal 1992, White in fiscal 1993 and AEC
in fiscal 1994.
(2) Amount in fiscal 1994 includes the payment of a one-time stay bonus in
the amount of $2.2 million to an executive of White in connection with
the acquisition of White.
(3) Reflects nonrecurring restructuring and plant consolidation expenses
associated with the closure of a Company-owned manufacturing plant.
(4) Reflects the write-off of unamortized deferred financing fees, net of
applicable income tax benefits, resulting from the early extinguishment
of debt during 1993, 1992 and 1991. Amount in 1993 also includes
approximately $5.4 million, net of applicable income tax benefits, for
the accrual of operating losses and other related costs associated with
the disposal of a carousel manufacturing plant in Lewiston, Maine
pursuant to a Federal Trade Commission order in 1993 (See Note 5 to the
Consolidated Financial Statements of Alvey).
(5) Given the historical organization and capital structure of Alvey,
earnings per share information is not considered meaningful or relevant
and therefore has not been presented.
(6) Represents redeemable preferred stock of Pinnacle. Due to the
exchangeable feature of the preferred stock which allows the holder to
exchange the preferred stock for subordinated notes of Alvey, the
preferred stock has been pushed down to the financial statements of
Alvey. See "Description of Capital Stock."
(7) Net investment of Pinnacle represents the basis of Pinnacle's investment
in Alvey, which has been pushed down to the financial statements of
Alvey, and includes cumulative contributions of capital and cumulative
income before extraordinary losses offset by extraordinary losses and
aggregate accreted/paid preferred stock dividends. The historical amount
at December 31, 1995 consists of cumulative contributions of capital to
Alvey by Pinnacle of $3.0 million and cumulative income before
extraordinary losses of $2.9 million offset by extraordinary losses of
$7.5 million and an aggregate accretion/payment of $14.1 million of
paid-in-kind dividends on preferred stock.
(8) Capital expenditures include amounts related to investments in fixed
assets and costs of software development.
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(9) Other performance measures such as EBITDA and EBITDAM (discussed further
below) should not be construed as an alternative to operating income or
net income calculated in accordance with generally accepted accounting
principles ("GAAP") or as an indicator of operating performance or
liquidity. However, the Company believes such non-GAAP performance
measures are commonly used to evaluate a company's ability to service
debt.
(10) EBITDA consists of earnings before interest, income taxes, extraordinary
items and depreciation and amortization expense. In 1994, EBITDA also
excludes a $2.2 million one-time payment of a stay bonus in connection
with the acquisition of White which is included in "Other expense
(income) net" above. Management fees serve to reduce EBITDA by $606,000,
$502,000, $665,000, $500,000 and $313,000 for the years ended
December 31, 1995, 1994, 1993, 1992 and 1991, respectively.
(11) For purposes of this computation, fixed charges consist of interest
expense, amortization of deferred financing fees, one-third of rental
expenses (representative of that portion of rental expense attributable
to interest) and accretion/payment of preferred stock dividends. Earnings
consist of income before income taxes plus all fixed charges, except for
the accretion/payment of preferred stock dividends. Fixed charges
exceeded earnings by $3.1 million, $1.3 million, $1.1 million and $1.1
million for the years ended December 31, 1994, 1993, 1992 and 1991,
respectively.
(12) For purposes of this computation, fixed charges consist of interest
expense, amortization of deferred financing fees, and one-third of rental
expenses (representative of that portion of rental expense attributable
to interest) and excludes the accretion/payment of preferred stock
dividends. Earnings consist of income before income taxes plus all fixed
charges, except for the accretion/payment of preferred stock dividends.
Fixed charges exceeded earnings by $109,000 for the year ended December
31, 1991.
(13) For purposes of this computation, interest expense consists of interest
on indebtedness and does not include amortization of deferred financing
fees and other noncash charges to interest which have been capitalized.
(14) EBITDAM consists of earnings before interest, income taxes, extraordinary
items, depreciation and amortization expense and management fees. In
1994, EBITDAM also excludes a $2.2 million one-time payment of a stay
bonus in connection with the acquistion of White which is included in
"Other expense (income) net" above. EBITDAM excludes management fees of
$606,000, $502,000, $665,000, $500,000 and $313,000 for the years ended
December 31, 1995, 1994, 1993, 1992 and 1991, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" INCLUDES
ALVEY SYSTEMS, INC. ("ALVEY") AND ITS SUBSIDIARIES, EACH OF WHICH OPERATES AS A
SUBSIDIARY OF PINNACLE AUTOMATION, INC. ("PINNACLE"), A DELAWARE CORPORATION
THAT OWNS ALL OF THE OUTSTANDING CAPITAL STOCK OF ALVEY.
When used in the following discussion, the words "believes",
"anticipates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected,
including, but not limited to, those set forth in "Risk Factors." Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
GENERAL OVERVIEW
The following discussion summarizes the significant factors affecting
the consolidated operating results and financial condition of the Company for
the three fiscal years ended December 31, 1995.
Subsequent to the acquisition of Alvey by Pinnacle in August 1988,
Alvey and Pinnacle completed a succession of five complementary acquisitions
which has resulted in expanded product lines and an ability to provide
integrated solutions in a wide range of manufacturing and distribution
applications. Set forth below is certain information with respect to the
Company's acquisitions:
ACQUISITION ACQUISITION DATE
McHugh, Freeman & Associates, Inc.. . . . . . . . . . May 1989
Busse Bros., Inc. . . . . . . . . . . . . . . . . . . April 1992
The Buschman Company. . . . . . . . . . . . . . . . . October 1992
White Storage & Retrieval Systems, Inc. . . . . . . . December 1993
Automation Equipment Company. . . . . . . . . . . . . August 1994
Weseley Software Development Corp.. . . . . . . . . . January 1996
The Company believes that its emphasis on complementary acquisitions
of companies serving either targeted markets or providing niche products has
enabled it to provide customers a single source for complete integrated
materials handling and information flow systems. Further, the Company believes
that in 1995 it began to benefit from, and in 1996 continues to benefit from,
productivity and integration gains resulting from its succession of
complementary acquisitions combined with a stategy of integrating the operations
of each newly-acquired company with the operations of Alvey and its other
operating subsidiaries, which strategy is more fully described in the next
succeeding paragraph.
Shortly after acquiring each of its operating subsidiaries, management
reviewed each newly-acquired subsidiary with respect to the possible integration
of operations with Alvey and its other operating subsidiaries in order to
improve operating efficiencies. As a result of such previous reviews, the
Company initiated changes in each operating subsidiary's production processes
that were targeted at the improvement of manufacturing efficiencies, the
increase in facility capacity and ultimately the reduction of product cost.
Additionally, in recent years, management has undertaken a number of programs
targeted at reducing the cost to produce a specific product by simplifying and
standardizing components and assemblies, thereby improving the productivity of
the manufacturing process. The following is a brief summary of some of the
actions taken and programs initiated in order to improve operating efficiencies:
45
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- Each of the manufacturing facilities of Alvey, Busse and Buschman
have been reorganized to modify the flow of product and raw
materials through the manufacturing process. Within three to 12
months after completing these changes, each of Alvey, Busse and
Buschman recorded meaningful improvements in labor productivity
and facility capacity.
- In 1993, Alvey began production of the series 920 palletizers,
which was designed to be manufactured in modules rather than one
large piece, thus reducing the labor requirements. As with most
new products, the manufacture of the initial units resulted in
cost overruns; however, by early 1994, Alvey produced these units
more efficiently than originally estimated. The result of this
engineering process was to produce a state-of-the-art machine
that could be sold at a price 15-25% below the machine it
replaced, yet generate a gross margin percentage significantly
higher than that of its predecessor.
- Alvey also began production of the series 880 palletizers in late
1994. This machine was redesigned to incorporate many of the
same assemblies used on the 920 series, resulting in labor
efficiencies and reduced inventories. While production of the
series 880 palletizer has not produced operating results that are
as significant as those realized in the production of the
920 palletizer, the production of the series 880 is beginning to
realize similar cost improvements and efficiency trends.
- Busse introduced the "Turbo" series depalletizer in 1993. Busse
has realized similar results on the production of the Turbo
series depalletizers as Alvey experienced with the series 920
palletizer. Busse has been able to reduce its sales price while
actually improving gross margin dollars and percentages.
Furthermore, the production changes initiated in 1993 have
enabled Busse to increase sales by approximately 300% over 1992
results (the year that Busse was acquired by Alvey), with the
number of employees increasing by approximately 200%.
- The Company has substantially completed the process of combining
the conveyor product line of Alvey with that of Buschman. The
best products from each company were selected and then re-
engineered to incorporate current technologies and manufacturing
capabilities. The effect of this program was to greatly reduce
the number of parts required to support two separate products and
to simplify the manufacture of the new enhanced product. As a
result of this undertaking, and other programs targeted at
specific issues, productivity at Buschman began increasing in the
last half of 1994 and has continued to do so throughout 1995 and
into the first quarter of 1996. Buschman increased 1995
equipment sales by 37.3% over 1994 with only a minimal increase
in factory employment.
While no assurance may be given with respect to future productivity performance,
management believes additional efficiencies will be realized from these
programs.
Each of the Company's acquisitions was accounted for under the
purchase method of accounting, with the purchase prices allocated to the
estimated fair market value of the assets acquired and liabilities assumed. In
each acquisition, the excess of the purchase price paid over the estimated fair
value of the net assets acquired was allocated to goodwill. The Company has
allocated an aggregate of $35.7 million to goodwill since 1988, $32.0 million of
which is recorded on Alvey's balance sheet at December 31, 1995. Such goodwill
is amortized over a period of 40 years and will result in future annual goodwill
amortization expense of approximately $0.9 million per year. See "Pro Forma
Financial Data" for additional goodwill amortization estimated to result from
the acquisition of Weseley. The acquisitions were financed primarily through
bank
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borrowings, resulting in increases in the Company's debt and interest expense.
Results of operations of each acquired company have been included in the
Company's consolidated statement of operations from the dates of the respective
acquisition.
47
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RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, net
sales and categories of expenses, including "Other expense (income) net", in
thousands of dollars and as a percentage of net sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . $288,018 100.0% $248,177 100.0% $164,022 100.0%
Cost of goods sold . . . . . . . . . . . 217,297 75.4 189,007 76.2 123,033 75.0
-------- -------- --------
Gross profit . . . . . . . . . . . . . 70,721 24.6 59,170 23.8 40,989 25.0
Selling, general & adminis-
trative expenses . . . . . . . . . . 51,630 17.9 43,402 17.5 30,421 18.5
Research & development
expenses . . . . . . . . . . . . . . 2,051 0.7 2,538 1.0 1,436 0.9
Amortization expense . . . . . . . . . 1,737 0.6 1,836 0.7 1,479 0.9
Other expense (income) net . . . . . . (108) (0.0) 2,279 0.9 (11) (0.0)
Operating income . . . . . . . . . . . 15,411 5.4 9,115 3.7 7,664 4.7
Interest expense . . . . . . . . . . . . 6,896 2.4 5,921 2.4 4,053 2.5
-------- -------- --------
Income before income taxes and
extraordinary loss . . . . . . . . . 8,515 3.0 3,194 1.3 3,611 2.2
Income taxes . . . . . . . . . . . . . . 4,109 1.5 1,516 0.6 1,560 0.9
-------- -------- --------
Income before extraordinary
loss . . . . . . . . . . . . . . . . 4,406 1.5 1,678 0.7 2,051 1.3
Extraordinary loss, net. . . . . . . . . 0 0.0 0 0.0 6,203 3.8
-------- -------- --------
Net income (loss). . . . . . . . . . . . $ 4,406 1.5 $ 1,678 0.7% $ (4,152) (2.5)%
-------- -------- --------
-------- -------- --------
</TABLE>
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER 31,
1994
NET SALES were $288.0 million for the year ended December 31, 1995,
representing an increase of $39.8 million, or 16.1%, over net sales of $248.2
million for the year ended December 31, 1994. Because the Company completed no
acquisitions during 1994, this increase in net sales is due to sales growth at
each of the Company's operating subsidiaries. In particular, the strong demand
for Alvey's redesigned mid-range and high-speed palletizers and its success in
providing integrated systems resulted in record shipments and sales and produced
an increase of $17.1 million, or 19.3%, in net sales over 1994. At MFA,
continued strong demand for warehouse management systems caused sales to grow by
$11.9 million, or 42.6%, compared to 1994. Buschman also realized significant
revenue gains from integrated and systems projects as sales of these systems
increased $6.0 million, or 16.6%.
On a consolidated basis, new order bookings were $318.9 million for
1995, representing an increase of $50.3 million, or 18.7%, over bookings for
1994. Increases in 1995 new order bookings were realized by each of the
Company's operating subsidiaries other than White, with new order bookings at
Alvey and Buschman increasing by $33.5 million and $9.5 million, or 36.4% and
13.7%, respectively. This significant increase in customer demand created a
record year-end sales backlog of $143.9 million at December 31, 1995, which
represents an increase of $29.4 million, or 25.7%, over the backlog at
December 31, 1994. The most significant increases in year-end backlog were
recorded at Alvey, which recorded an increase of $20.2 million, or 46.3%, and
Buschman, which recorded an increase of $8.6 million, or 31.1%. Alvey's backlog
is driven by the increasing number and size of integrated and palletizing
systems while Buschman's success has resulted from significant bookings
increases in major warehouse systems.
GROSS PROFIT was $70.7 million for 1995, an increase of $11.6 million,
or 19.5%, over 1994. This increase was primarily the result of increased sales
volume offset by a slightly less favorable mix of products resulting in
additional margins of approximately $9.5 million. In addition, improved
operating
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<PAGE>
efficiencies at each manufacturing entity (other than White) offset somewhat by
project cost overruns, produced additional margins of $1.7 million. The gross
profit margin as a percent of sales increased to 24.6% for 1995 from 23.8% for
1994 due to operating efficiencies and the effects of re-engineering certain
major products. These gains were partially offset by product and project
overruns caused by over-committed manufacturing and engineering resources at
Alvey and, to a lesser degree, at Busse, during portions of 1995. However,
management of the Company believes the expansion of its facilities, the
integration of the Company's systems and the productivity enhancement and
engineering programs initiated in recent years have resulted in manufacturing
efficiency and productivity gains. Specifically, the gross margin percentage at
Buschman increased 6.7 percentage points in 1995 compared to 1994. This
increase is primarily a result of the efficiency and productivity gains and
targeted marketing programs attributable to the efforts of the new management
team that was put in place during the second and third quarter of 1994. Since
the second half of 1994, "as sold" margins (the estimated gross margin an a
specific project at the time of sale) on new orders have improved, resulting in
an increase in Buschman's gross profit of approximately $800,000 during 1995.
More importantly, the standardization of Buschman's product line and
manufacturing engineering programs have generated substantial changes in the
manufacturing process and have resulted in significant improvements in labor
efficiencies, product deliveries and inventory levels. These improvements
increased gross profit in 1995 by approximately $2.5 million over 1994 results.
Gross profit at White decreased 21.6% from 1994. This decrease is
primarily attributable to an under utilization of the manufacturing and
engineering resources in the first half of 1995, and an over-utilization of the
same resources during the last four months of 1995 as sales significantly
increased. This significant deviation in the demand for these resources caused
an under-absorption of overhead costs during the first half of 1995 and
inefficiencies during the fourth quarter and resulted in various product and
project cost overruns. In response to the difficulties encountered at White
during 1995, the Company has hired or transferred three senior executives and
realigned certain management functions at White to conform to policies and
structures in place and proven to be successful at other operating companies of
the Company.
While no assurance may be made with respect to future productivity
performance, the Company believes the recent productivity gains at Buschman are
sustainable and may be improved upon. The ability of the Company to increase
favorable productivity performance depends primarily upon (i) the ability of
White to fully realize the benefits of new systems and organizational changes,
(ii) the addition of capacity at Alvey and Busse during 1996, (iii) the
increased expertise and efficiency of the large number of new engineering and
production employees of the Company, and (iv) the implementation and success of
additional programs aimed at reducing project cycle times and engineering
productivity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $51.6 million for
1995, representing an increase of $8.2 million, or 18.9%, over 1994. This
increase is primarily attributable to expenses associated with increased sales,
the creation of two new marketing and sales support teams responsible for
integrated systems and international sales and approximately $1.7 million of
performance-based incentive compensation and profit sharing distributions. As a
percentage of sales, selling, general and administrative expenses increased to
17.9% for 1995 from 17.5% for 1994. This increase reflects the cost of
increased marketing staff to secure the record bookings and the higher levels of
incentive compensation and profit sharing.
RESEARCH AND DEVELOPMENT EXPENSES were $2.1 million for 1995, a
decrease of $487,000, or 19.2%, compared to $2.5 million for 1994. Research and
development expenses were higher for 1994 as compared to 1995 as a result of
expenses incurred prior to the establishment of technological feasibility
related to the development of a standard warehouse management software system at
MFA.
OTHER EXPENSE (INCOME) NET was income of $108,000 for 1995,
representing a difference of $2.4 million, as compared to $2.3 million in
expense in 1994. The difference is primarily attributable to the one-time
payment of stay bonus to an executive at White during 1994 in connection with
the acquisition of that entity.
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OPERATING INCOME increased to $15.4 million for 1995, representing an
increase of $6.3 million, or 69.1%, as compared to $9.1 million for 1994. As a
percentage of net sales, operating income increased to 5.4% for 1995 from 3.7%
in 1994. This increase is due primarily to the increase in gross profit margin
in 1995 and the payment of the one-time stay bonus in 1994 as described above.
INTEREST EXPENSE increased to $6.9 million for 1995, representing an
increase of $1.0 million or 16.5%, as compared to $5.9 million for 1994. This
increase is due primarily to an increase in the base borrowing rate under the
Company's credit facilities, interest incurred with respect to the 11.95% Notes
which were issued in January 1995 and bank fees incurred in the first quarter of
1995 in connection with an amendment of the Company's credit facility.
INCOME TAXES ON CONTINUING OPERATIONS were $4.1 million for 1995,
representing an increase of $2.6 million from $1.5 million for 1994. The
effective income tax rate of 48.3% in 1995 increased from an effective rate of
47.5% experienced in 1994 due to the absence of foreign tax credits in 1995,
offset by somewhat lesser effects of (i) state income taxes, (ii) goodwill
amortization and (iii) non-deductible meals and entertainment.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1994 TO THE YEAR ENDED DECEMBER 31,
1993
NET SALES were $248.2 million for the year ended December 31, 1994,
representing an increase of $84.2 million, or 51.3%, over net sales of $164.0
million for the year ended December 31, 1993. The full year inclusion of White,
acquired in December 1993, accounted for $49.6 million of the increase. Record
sales at each entity, other than the recently acquired White, represented an
aggregate $34.6 million, or 21.1%, increase over 1993 sales for such entities.
This increase was primarily attributable to the strong demand for warehouse
management systems software, with respect to which sales increased by $11.2
million, or 67.1%, from 1993. In addition, the introduction of new and enhanced
products and a targeted marketing effort resulted in increased sales of $8.6
million, or 10.7%, and $5.3 million, or 62.9%, at Alvey and Busse, respectively.
GROSS PROFIT was $59.2 million in fiscal 1994, an increase of $18.2
million, or 44.4%, from $41.0 million in 1993. Of that increase, $11.5 million
reflects the full year inclusion of White. The remainder of the increase was
primarily attributable to increased sales volumes at entities other than White.
The gross profit margin, as a percentage of sales, decreased to 23.8% (24.1%
excluding White) from 25.0% in 1993 due (i) to additional costs incurred as the
Company continued its implementation of various manufacturing integration
programs at Buschman and (ii) to reduced margins on two major projects, booked
in 1993, in order to better strategically position the Company. This decrease in
gross profit margin was partially offset by productivity gains at the Company's
more established operating units. The Company believes that the integration and
productivity enhancement programs initiated in recent years are now resulting in
manufacturing efficiencies and productivity gains.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $43.4 million in
1994, representing an increase of $13.0 million, or 42.8%, from $30.4 million in
1993. Of that increase, $9.2 million is attributable to the full year inclusion
of White. As a percentage of sales, selling, general and administrative expenses
decreased to 17.5% in fiscal 1994 compared to 18.5% in fiscal 1993. This
decrease was primarily attributable to the realization of administrative
synergies related to the Company's acquisition of White and the successful
efforts of the Company to increase certain sales without adding selling, general
and administrative expenses.
RESEARCH AND DEVELOPMENT EXPENSES were $2.5 million for 1994,
representing an increase of $1.1 million, or 78.6%, compared to $1.4 million for
fiscal 1993. The full year inclusion of White reflects $500,000 of this
increase. The remaining increase is attributable to increased product
development efforts at Busse, Alvey and MFA.
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<PAGE>
OTHER EXPENSE, NET was $2.3 million in 1994, representing an increase
of $2.3 million over 1993. This increase is almost entirely attributable to the
one-time payment of a stay bonus to an executive of White in connection with the
acquisition of that entity.
AMORTIZATION EXPENSE was $1.8 million in 1994, representing an
increase of $357,000, or 24.1%, from $1.5 million in fiscal 1993. This increase
is primarily attributable to the full year inclusion of goodwill amortization
resulting from the acquisition of White.
OPERATING INCOME increased to $9.1 million in 1994, representing an
increase of $1.4 million, or 18.2%, from $7.7 million for 1993. As a percentage
of net sales, operating income decreased to 3.7% in fiscal 1994 from 4.7% in
fiscal 1993. This decrease is due primarily to the decrease in the gross profit
margin percentage and the payment of the one-time stay bonus as described above.
INTEREST EXPENSE increased to $5.9 million in 1994, representing an
increase of $1.8 million, or 43.9%, from $4.1 million in 1993. This increase is
due primarily to the $27 million of additional debt incurred in connection with
the acquisition of White in December 1993 and an increase in interest rates on
the Company's floating rate debt, resulting from the general rate increase
experienced throughout the economy in 1994.
INCOME TAXES ON CONTINUING OPERATIONS were $1.52 million in 1994,
representing a decrease of $44,000 from $1.56 million in 1993. The related
effective income tax rate increased to 47.5% in fiscal 1994 from 43.2% in 1993.
The increase in the effective rate is attributable primarily to increased
nondeductible goodwill amortization and increased state income taxes relating to
the acquisition of White.
EXTRAORDINARY LOSS was $6.2 million in 1993 and there was no
extraordinary loss in 1994. Approximately $5.4 million, net of applicable tax
benefits, was charged as an expense as a result of losses incurred in 1993 and
to accrue anticipated future losses with respect to the disposal of the
Lewiston, Maine manufacturing plant. As a result of Alvey's acquisition of
Buschman in 1992, the Company made a decision to close Buschman's carousel
manufacturing plant in Lewiston, Maine. The Company was subsequently ordered by
the Federal Trade Commission, beginning December 6, 1993, to hold the Lewiston,
Maine operation separate from operations of the Company, to fund all operations
of Lewiston without participating in the daily management of the operations and
to ultimately dispose of the facility. As a result of the Federal Trade
Commission intervention, an extraordinary loss was recorded in 1993. The Company
sold the carousel manufacturing plant in July 1995 to a third party which
currently operates the plant. In addition, approximately $803,000, net of
applicable tax benefits, resulted from the write-off of the unamortized portion
of deferred financing fees associated with indebtedness that was refinanced
during the year.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. During the three years ended December 31, 1995, the
Company generated approximately $37.7 million of cash from operations, which has
been adequate to fund the Company's ongoing capital expenditure and debt service
requirements. Increases in working capital requirements (primarily related to
accounts receivable and inventory) over this period, as the Company's business
has expanded internally and through acquisitions, were significantly offset by
funds the Company received from its customers in the form of deposits and
progress billings. Annual first quarter funding of qualified profit sharing
plans, incentive compensation and bonus plans, disproportionate tax withholding
requirements and certain insurance and professional services generally result in
an increased use of cash in the first quarter.
CASH PROVIDED BY OPERATIONS. Cash flows from operations were $18.9
million, $12.1 million and $6.7 million for the years ended December 31, 1995,
1994 and 1993, respectively.
LEWISTON OPERATION. In connection with the acquisition of Buschman in
1992, the Company made a decision to close Buschman's carousel manufacturing
plant in Lewiston, Maine. In connection with the acquisition of White in
December 1993, the Company was ordered by the Federal Trade Commission to
51
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hold Buschman's Lewiston operation separate and to find a suitable buyer for the
business. In the course of pursuing a buyer and pursuant to the FTC order, the
Company was required to fund the Lewiston operation and, as a result, has
incurred expenditures in the amount of $2.3 million for the year ended December
31, 1995 and $2.7 million and $1.8 million for the years ended December 31, 1994
and 1993, respectively. The Lewiston operation was ultimately divested on
July 31, 1995, at which time the Company agreed to assist in funding the
operation through July 31, 1997. A third party currently operates the plant.
As of December 31, 1995, the remaining expenditures to assist in the funding are
expected to approximate an aggregate of $1.1 million. Upon its initial decision
to close the Lewiston plant, the Company accrued losses of $1.4 million at
December 31, 1992, net of applicable income taxes, with respect to plant closure
costs and the write-off of related assets, with an offsetting charge to
goodwill. As a result of the Federal Trade Commission intervention, all
subsequent losses, including those anticipated through ultimate disposal of the
facility, were charged to earnings as an extraordinary loss, net of tax
benefits, in fiscal 1993.
CAPITAL EXPENDITURES. Capital expenditures for the years ended
December 31, 1995, 1994 and 1993 were approximately $4.5 million, $5.1 million
and $3.5 million, respectively. These expenditures were used primarily to
finance the acquisition of computer and powder paint equipment and the
administrative restructuring at White (fiscal 1994), plant expansion and
reorganization at Buschman (fiscal 1993 and 1994), software development,
computer systems and equipment at MFA (fiscal 1994 and 1995) and normal
recurring replacements of machinery and equipment. The Company intends to use
approximately $6.5 million of borrowings under the Credit Agreement in 1996 and
$8.0 million in total to construct and equip two manufacturing facilities. See
"Business--Facilities."
RESEARCH AND DEVELOPMENT COSTS. As described in Note 15 to Alvey's
Consolidated Financial Statements, approximately $11.7 million of the Weseley
purchase price will be allocated to purchased research and development and
charged to expense in the quarter ended March 31, 1996. The purchased research
and development relates to the TRACS Version 3.0 product of Weseley. The
Company expects to incur between $600,000 and $900,000 of additional research
and development expenditures in fiscal 1996 in connection with TRACS Version
3.0.
ACQUISITIONS AND DIVESTITURES. The Company expended $0.1 million and
$24.1 million of cash, including payments of outstanding indebtedness, for
acquisitions in 1994 (AEC) and 1993 (White), respectively. These acquisitions
were financed primarily with increased bank borrowings. The Company received
$0.7 million of proceeds in 1994 from the sale of its closed facility in
Cassville, Missouri.
DEBT AND EQUITY INFUSIONS. In connection with the acquisition of
White in December 1993, the Company added $27 million to its existing debt
facilities and Pinnacle contributed $1.5 million in proceeds from the sale of
preferred and common stock to employees. Also in fiscal 1993, Pinnacle Common
Stock was sold to other employees for cash of $285,000 and notes of $545,000;
such cash is contributed to Alvey as it is collected from employees. On
January 3, 1995, $2.0 million principal amount of Alvey's 11.95% Notes were sold
to certain shareholders of Pinnacle.
DEBT STRUCTURE RESULTING FROM THE FINANCING TRANSACTIONS. Since the
Financing Transactions of January 1996, Alvey has had senior bank debt available
with NationsBank, N.A. consisting of a $30 million revolving credit facility
which matures in 2001. Borrowings under the credit facility initially bear
interest at the Base Rate (as defined in the Credit Agreement) plus 1.50% or the
Eurodollar Rate (as defined in the Credit Agreement) plus 2.50%, at Alvey's
option, with a step down in rates based upon achieving predefined earnings
objectives. Borrowings under the credit facility are guaranteed by Pinnacle and
subsidiaries of Alvey. Pursuant to the Prior Offering, Alvey has $100 million of
Notes outstanding which are due in January 2003. Interest on the Notes is
payable semiannually commencing in July 1996.
After the Recapitalization, Pinnacle has $21.3 million of Pinnacle
Series A Preferred Stock, $6.5 million of Pinnacle Series C Preferred Stock and
approximately $11.3 million of Pinnacle Series B Preferred Stock outstanding,
together with warrants to purchase up to 256,075 shares of Pinnacle Common
Stock. Dividends on the Pinnacle Series A, B and C Preferred Stock are payable
quarterly. While Alvey has
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not guaranteed nor is it contingently obligated with respect to any such series
of Preferred Stock, Pinnacle has no financial resources, other than from Alvey
and Alvey's operating subsidiaries, to satisfy cash requirements relative to
these preferred shares.
USE OF PROCEEDS. The Company applied the net proceeds of the Prior
Offering in the following manner: (i) approximately $46.2 million was used to
repay the Company's outstanding senior indebtedness; (ii) approximately $2.3
million was used to repay the Company's outstanding 11.95% Notes;
(iii) approximately $21.5 million was distributed as the Recapitalization
Dividend to Pinnacle which, together with the net proceeds from the Pinnacle
Preferred Stock and Warrants Offering, was used by Pinnacle to fund, in part,
the cash necessary to effect the Recapitalization through the Common Equity
Exchange ($23.8 million) and the Redemption ($25.3 million); and
(iv) approximately $8.9 million will be used for general corporate purposes.
Prepayment penalties of $370,000 were incurred in connection with the repayment
of debt. In addition, the Company used $15.0 million of the proceeds of the
Prior Offering to consummate the Weseley Acquisition in January 1966 and intends
to use borrowings under the Credit Agreement to finance approximately $8.0
million of capital expenditures, of which approximately $6.5 million will be
spent in 1996, related to the construction and equipping of two new
manufacturing facilities.
ONGOING CASH FLOWS FROM OPERATIONS. Based on its ability to generate
funds from operations and upon completion of the Financing Transactions, the
Company believes that it will have sufficient funds available to meet its
currently anticipated operating, debt service and capital expenditure
requirements with minimal, if any, additional borrowings. In addition, the
Company expects to continue to acquire businesses, although, no acquisitions are
pending or contemplated. The Company believes that its funds from operations
will be sufficient to meet its short-term capital requirements and that such
funds, together with available funds under the Credit Agreement, will be
sufficient to meet its long-term capital requirements, including capital
requirements related to potential acquisitions.
SEASONALITY AND QUARTERLY RESULTS
The price of certain of the Company's systems can exceed several
million dollars, and therefore a relatively small number of orders can
constitute a significant percentage of the Company's revenues in any one period.
Similarly, a relatively small reduction in the number of large orders can have a
material impact on the Company's revenues in any one quarter or year. The timing
of shipments and product revenue recognition could affect the Company's
operating results for a particular period. In addition, most of the Company's
revenues come from fixed price contracts. To the extent that the original cost
estimates prove to be inaccurate, profitability from a particular contract may
be adversely affected. As a result, the Company's operating results can vary
significantly from quarter to quarter, and the financial results for any
particular quarter are not necessarily indicative of results in any subsequent
quarter or fiscal year.
EFFECT OF INFLATION
Fluctuations in commodity prices may periodically affect the results
of the Company's operations. However, inflation has not had a material effect on
the Company's business or results of operations.
NEW ACCOUNTING STANDARDS
The Company does not expect that the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 121, related to the accounting for
impairments of long-lived assets, and SFAS No. 123, related to the accounting
for stock-based compensation, will have a material effect on the Company's
financial position or results of operations.
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BUSINESS
OVERVIEW
Alvey, together with its five operating subsidiaries, is a MATERIALS
HANDLING AND INFORMATION SYSTEMS company which produces equipment and related
software and controls that enable manufacturers, distributors and retailers to
operate their manufacturing plants, distribution centers and warehouses more
efficiently. In connection with providing equipment and software, the Company's
engineers and sales force work closely with its customers to analyze their
specific manufacturing, distribution and warehousing needs and to design
customized systems that improve its customers' efficiency and reduce their
costs. As a full-service provider of materials and information handling products
and services, the Company is uniquely positioned to offer to its customers
integrated systems comprised of combinations of equipment, software and
controls. The Company believes that its ability to offer both engineering design
services as well as the equipment and related software necessary to implement
integrated solutions to materials handling needs provides a distinct competitive
advantage.
The Company manufactures a broad range of materials handling equipment
such as palletizers, depalletizers, conveyors, carousels and sorters which
automate the physical acts of loading, unloading, sorting and transporting raw
materials and finished products. In addition to moving materials, the Company's
integrated systems incorporate advanced software and controls developed by the
Company to collect data, process information and provide real-time feedback with
respect to equipment performance and materials processing. While a majority of
the Company's revenues are attributable to the manufacture and sale of
equipment, approximately 45% of total revenues result from product support
functions and non-manufactured products delivered in connection with sales of
the Company's equipment. Such revenues are generated from engineering, software
license fees, computer support services, systems and equipment maintenance,
computer hardware and peripheral equipment, and the integration and installation
of these products.
For customers applying materials handling and information solutions to
manufacturing applications, the Company offers products designed to (i) automate
and accelerate the input of materials into a manufacturing line, (ii) track and
transport finished products within a manufacturing facility, distribution center
or warehouse and (iii) automate the palletizing of finished goods. The Company's
customers, in large part, use the Company's products to sort (as used herein,
the terms "sort" and "sortation" mean the segregation of packages destined for
different locations), transport and palletize large quantities of relatively
small-sized products, such as beverages, canned and bottled goods and personal
consumer goods. For warehousing and distribution applications, the Company
offers conveyor and carousel systems to sort, track and transport goods, and
advanced software systems which monitor and optimize the movement and shipment
of products.
The Company's sales have increased from $72.3 million in 1989 to
$288.0 million for the year ended December 31, 1995. The principal factors
contributing to the Company's rapid growth in sales and operating performance
listed in their order of importance include new product offerings and management
initiatives, and acquisitions of complementary businesses EBITDA has increased
from $4.2 million in 1989 to $20.1 million for the year ended December 31, 1995.
As of December 31, 1995, the Company's backlog reached $143.9 million, an
increase of approximately 26% from a backlog of $114.5 million at December 31,
1994.
PRODUCTS
The Company believes that each of its operating entities is a leading
manufacturer in each of its principal markets. The Company operates through the
entities described below:
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ALVEY SYSTEMS, INC.: Manufactures and sells case palletizers and
depalletizers, case and pallet conveyors, related custom products and software
and controls which are sold to end users by a nationwide network of direct sales
personnel and independent representatives. Palletizers are large machines,
operated by programmable controls, that receive packaged products (typically
case goods) from a conveyor delivery system and deliver them to a pallet
conveyor take away system. The palletizer sequentially arranges individual
packages and groups them into rows and layers to form predetermined patterns
which are stacked onto a pallet or into a unit load, producing a stable cube for
efficient handling and shipping. Depalletizers unload palletized products for
further handling in the distribution process. Conveyor systems are used to move
products from one location to another and can be designed to sort, feed or
perform a number of different applications. Alvey primarily serves the segment
of the materials handling market that focuses on manufacturers of food,
beverages, paper, soap, detergent and other consumer products.
Alvey's annual net sales (excluding net sales of AEC) have increased
126% since its acquisition by Pinnacle in August 1988 and currently represent
approximately 36% of the Company's total net sales. The Company believes that
this increased revenue is virtually entirely attributable to management's
initiatives which include the development and introduction of new or improved
products. Management's primary initiative to increase revenues at Alvey was to
assemble experienced and highly qualified sales and marketing personnel and
develop the necessary products to support their efforts. Management believed
this would provide Alvey the means to further penetrate its traditional
manufacturing market and provide the sales and consulting expertise to become a
significant competitor in the more rapidly growing warehousing and distribution
segment of the materials handling market. To fully support marketing efforts,
Alvey found it necessary to re-engineer many of its conveyor products and
develop new equipment such as the case depalletizer used primarily in warehouse
applications. In addition, the engineering and manufacturing managers recruited
subsequent to 1988 brought new ideas and processes which have resulted in a
complete redesign of Alvey's entire palletizer and pallet conveyor product
lines. With the acquisition of Buschman in 1992, responsibility for marketing
major systems to the warehouse and distribution market segments was shifted from
Alvey to Buschman, and a number of senior marketing managers were transferred to
Buschman. This shift of responsibilities and transfer of personnel has resulted
in lower sales growth at Alvey, while increasing Buschman's sales growth for
1993 and each subsequent year.
EBITDAM (as defined above) at Alvey has increased by approximately
184% since 1988. While benefiting from the significant increase in volume,
EBITDAM, as a percentage of sales, has increased approximately 2.6 percentage
points from 22.4% to 25% during the same period, as a result of certain cost
reduction and productivity programs initiated by management. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
AUTOMATION EQUIPMENT COMPANY: Manufactures gantry robots which can be
utilized in stacking applications, including the rapidly growing mixed-load and
multi-station palletizer market. Gantry robots are machines that access a large
rectangular work area. They can be customized and combined with a variety of
control software to accomplish various tasks such as in-process materials
handling and the stacking of cases, bags, drums and pails. One gantry robot can
service ten or more stacking positions. Gantry robots generally have slower
cycle times than Alvey's high-speed palletizers, but offer flexibility in
product handling and can handle extremely heavy product loads. AEC operates as a
division of Alvey. AEC's robots are sold directly and in conjunction with
Alvey's sales force.
AEC's annual net sales have increased 220% since its acquisition in
August 1994 and currently represent approximately 0.8% of the Company's total
net sales. The Company believes that this dramatic increase in sales resulted
from the ability to offer AEC's products through Alvey's much larger marketing
organization and the benefits attendant to being associated with a larger and
more diversified company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
BUSSE BROS., INC.: Manufactures bulk palletizing and depalletizing
systems which are sold directly and in conjunction with Alvey's sales force.
Busse's bulk palletizers palletize empty containers, such as cans and bottles,
for shipment to consumer product manufacturers, by building layers of containers
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separated by plastic or paperboard sheets. Depending upon specifications, the
palletizer will build a designated number of layers. The pallet load of
containers will then be strapped down to secure and stabilize the load. When a
pallet of containers arrives at the filling location, containers must be removed
from the pallet and fed into a production line where they will be washed, filled
and then capped or seamed. Busse's bulk depalletizers accept the pallet of
containers and systematically sweep each layer of containers off the pallet and
onto conveyors that take the containers into the production line. Busse's
products serve the manufacturing phase of the industry segments as to which
Alvey serves the distribution phase, and Busse also serves the container
manufacturers that supply these industries.
Busse's annual net sales have increased 195% since its acquisition in
April 1992 and currently represent approximately 6% of the Company's total net
sales. The Company believes that this significant sales growth is primarily
attributable to the recruitment of experienced marketing personnel at Busse and
utilizing Alvey's much larger sales force to offer Busse products to existing
customers of Alvey. Another factor contributing to this increase in sales was
the availability in 1993 of Busse's redesigned bulk depalletizers which has
accounted for 40-60% of Busse's sales in recent years. Busse has grown from
basically a break-even operation 1991 and 1992 to generate EBITDAM of
approximately 9% of sales in 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
THE BUSCHMAN COMPANY: Manufactures and sells a broad range of case
conveyors, controls, related products and software which are sold to end users
through its direct sales force, through a national network of independent
distributors and systems integrators and through the sales forces of Alvey and
White. Buschman sells standard conveyor and sortation products and modified
conveyor equipment as well as high-speed sortation systems, engineering,
controls, outside-purchased subsystems (such as bar code scanners) and/or
installation services. In addition, Buschman sells materials flow systems for
warehouses and distribution centers which are more complex in design and include
high-speed sortation, sophisticated control software and communications and
involve sophisticated engineering, project management and installation services.
These systems are designed to customer and/or consultant specifications through
Buschman's "design and build" process. Buschman primarily serves the warehouse
and distribution systems markets that perform the logistics operations required
to deliver a finished product from a warehouse or distribution center to a
retail store. Buschman also provides case conveyors used in systems sold by
White and provides case conveyors for systems sold by Alvey to the extent the
conveyors used in such systems are not directly manufactured by Alvey.
Buschman's annual net sales have increased approximately 78% since its
acquisition in October 1992 and currently represent approximately 24% of the
Company's total net sales. The Company believes that this increase in net
revenues has resulted primarily from management's initiative to reposition the
Company as a premier supplier of material handling solutions to the warehouse
and distribution market segment. This repositioning has been accomplished by an
aggressive marketing effort targeted at those customers requiring complex
solutions and ongoing services. Buschman's marketing efforts have benefited
from the transfer of senior managers from Alvey in 1992 and the recruitment of
additional highly qualified personnel. To support these marketing efforts and
provide superior solutions capabilities, Buschman redesigned its product line,
including products previously manufactured by Alvey, and introduced what it
believes to be state-of-the-art sortation equipment and systems software.
Buschman's EBITDAM (as defined above) were depressed in 1993 and 1994
primarily due to the costs associated with (i) consolidating the manufacture of
Alvey's conveyor products in Buschman's expanded facility, (ii) redesigning and
standardizing the product lines, (iii) recruiting additional marketing
personnel, (iv) recruiting and training approximately 200 additional product
employees, net of turnover and (v) pursuing aggressive marketing efforts,
particularly with strategic national accounts. However, in 1995, management's
efforts produced significant results as Buschman recorded record earnings. As a
percentage of gross sales, earnings increased to levels above those realized
before its 1992 acquisition. This is particularly significant in that Buschman
now supplies large quantities of hardware sold at negotiated lower margins,
which supports Alvey's case conveyor requirements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
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WHITE STORAGE & RETRIEVAL SYSTEMS, INC.: Manufactures and sells a
broad line of horizontal carousels, vertical carousels, power columns, movable
aisle systems and related software and controls which are sold to end users
through its direct sales force and through a national dealer network. Horizontal
carousels are rotating storage devices which store and move parts to the point
of need, whether an operator workstation, an automated inserter/extractor or
another robotic interface device. Vertical carousels are similar to horizontal
carousels except that the carousel travels in a vertical plane, like a ferris
wheel. The power column is a modular automated vertical lift device within which
an inserter/extractor retrieves trays from internal shelving and delivers them
to an accessible location. Movable aisle storage systems double the storage
density of an area by enabling existing fixed shelving to move on rollers,
allowing an operator to open an aisle between any two rows of shelves. White
also manufactures a heavy duty pallet moveable aisle system for warehousing
applications which utilizes a customer's existing pallets or racking. White has
developed, and continues to develop, a line of standard software products which
interface with carousels, power columns and other systems. These software
products range from basic systems that bring a designated carousel bin to an
operator, to more advanced inventory management systems that control multiple
operations and interface with the user's central computer system. White serves
the warehouse and distribution systems markets, and, in addition, its storage
and retrieval products are used in a broad range of manufacturing and office
applications.
White's net sales have decreased 11% since its acquisition in
December 1993 and currently represent approximately 19% of the Company's total
net sales. Prior to its acquisition by the Company, White purchased equipment
for resale to its customers and included the sales price of such purchased
equipment in its annual net sales. Subsequent to its acquisition by the Company,
various product and customer responsibilities have been realigned. This has
resulted in certain products previously purchased and resold by White to be
produced or otherwise furnished by other operating units of the Company.
Accordingly, the net annual sales of these products are now reflected at the
respective operating unit rather than White. The effect of this change in
product and customer responsibility accounts for a portion of the reduction in
White's annual net sales since its acquisition by the Company. Since its
acquisition in December 1993, earnings at White have decreased primarily as a
result of lower sales volumes as discussed above and the investments in
additional resources and information systems undertaken during this period.
Although no assurances can be given, management believes the initiatives
introduced since the acquisition of White will ultimately produce a favorable
earnings trend similar to those realized from each prior acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MCHUGH, FREEMAN & ASSOCIATES, INC.: Designs and installs warehouse
management software systems which incorporate radio frequency equipment and
computers. Warehouse management systems maintain control over inventory storage
locations, people and equipment. These systems track inventory on an
interactive, real-time basis from the point of receiving through shipping. The
systems communicate with a central computer to obtain and provide strategic
data. Systems employ barcoded "license plates" which identify and allow the
tracking of items, lot or model, storage locations, employees and picking
containers. The license plates are read by a bar code scanner and transmitted by
a radio frequency terminal. MFA provided custom systems until late 1994, when it
introduced its DMPLUS "standard product," which has been selected by General
Electric as its warehouse management system of choice. In the future, MFA will
offer both custom and "standard product" solutions. For the twelve months ended
December 31, 1995, custom and "standard product" warehouse management systems
represented 77% and 23%, respectively, of MFA's total net sales. The Company
anticipates that "standard product" sales will represent a larger percentage of
MFA's total net sales in the future. MFA designs and installs warehouse
management software systems primarily for the distribution marketplace.
MFA's annual net sales have increased 1,530% since its acquisition in
May 1989 and currently represent approximately 13% of the Company's total net
sales. The Company believes that this significant increase in revenues was
originally attributable to management's efforts to position MFA as a provider of
high quality, functional software to Fortune 500 customers requiring systems at
a number of locations. This strategy has allowed MFA to create customer-
specific systems which can be implemented throughout an organization while
requiring less customization, thus leveraging MFA's resources. More
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recently, the development of DM+ (a standardized product requiring little
customization) has allowed MFA to reduce the cost to deliver a system which
opens additional markets and improves MFA's competitive position.
Since the acquisition of MFA in 1989, EBITDAM has grown at a rate
higher than sales. In the years immediately following its acquisition, the
growth in EBITDAM was suppressed by significant costs incurred in connection
with the development of additional software offerings, the aggressive pursuit of
multi-site accounts and the training of new employees, as employment was
increasing at a rate of approximately 50% per year. Since 1992, EBITDAM, as a
percentage of sales, has significantly exceeded that of any of the other
manufacturing companies in the Pinnacle family. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
WESELEY SOFTWARE DEVELOPMENT CORP.: Pursuant to the stock purchase
agreement, dated as of December 20, 1995, among Pinnacle, Alvey, MFA and
Weseley, Weseley became a wholly owned subsidiary of MFA on January 29, 1996.
MFA paid $15.0 million in cash for the outstanding capital stock of Weseley on
the date of acquisition; in addition, subject to the continued employment of the
former principal owner of Weseley and certain other conditions, certain
designated employees of Weseley will have an opportunity to earn stay bonuses in
the aggregate amount of $625,000 per year for each of eight years and
performance-based employee incentive compensation up to an aggregate maximum of
$13 million which would be payable over time as described below.
The performance-based incentive compensation will be paid on an annual
basis to eligible employees of Weseley and will be equal to 38.5% of Weseley's
EBITDA (excluding stay bonuses and incentive compensation for such year and
certain other adjustments) in excess of $2.5 million until the first to occur of
(i) payments in the aggregate amount of $13 million have been made or (ii) the
eighth anniversary of the Weseley Acquisition. All or a portion of the
performance-based incentive compensation would be deemed "earned" in the event
that Weseley meets or exceeds certain financial targets established by the
Company in any of the years ending December 31, 1996, 1997 or 1998, or meets or
exceeds 90% of the targeted amount on a cumulative basis over such three-year
period.
Weseley develops, markets and supports transportation management
products and services which enable companies to better manage their shipping
processes, leading to lower freight costs and improved customer service.
Pinnacle plans to integrate Weseley's transportation management systems with
MFA's warehouse management systems, creating a high-quality, seamless supply
chain logistics product. Weseley has successfully installed software systems at
131 sites for 29 leading companies in the United States, including General
Electric and Sara Lee.
The Weseley Acquisition is part of the Company's strategy to enhance
its information systems expertise and to provide integrated solutions to a wide
array of materials handling problems. The combination of MFA's warehouse
management system with Weseley's transportation management system, which the
Company believes can be integrated to operate as a single system, would link two
integral stages of the materials handling chain.
For the three years ended December 31, 1995, revenues at Weseley grew
significantly. The introduction of Weseley's TRACS Version 3.0 product (a
client server object-based operating system) in 1996 is expected to provide the
product base to continue Weseley's growth. Earnings at Weseley prior to the
date of its acquisition are not considered meaningful as Weseley generally
followed a policy of paying employee bonuses and making profit-sharing
contributions based upon available cash rather than earnings. Accordingly, in
1995, these significant payments exceeded earnings, which resulted in an
operating loss. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
For integrated systems, where the products and expertise of the
Company's subsidiaries are combined, a conveyor is typically the "linkage" that
permits the movement of products through the manufacturing line or distribution
system and software is the "enabler" that drives the entire system and provides
needed information. Company systems typically include significant design and
engineering work and
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turnkey installation services. Examples of some of the most common integrated
systems sold by the Company include:
CONSUMER PRODUCT MANUFACTURING LINES: Systems used by beverage
manufacturers including Coca-Cola and food manufacturers such as Kellogg. These
systems could include Alvey case palletizers, AEC robotic palletizers, Busse
bulk depalletizers, Buschman conveyors and related software designed by MFA,
Alvey or Buschman. Such systems typically range in price from $1 million to
$10 million.
WAREHOUSE AND DISTRIBUTION SYSTEMS: Systems used by retailers
including Sears and Target, by independent wholesalers or by manufacturers in
conjunction with a consumer product manufacturing line. A typical system could
include Buschman conveyors, White carousels and related software designed by
MFA, Alvey, Buschman or White. Such systems typically range in price from $1
million to $10 million.
CONTAINER MANUFACTURING PLANTS: Systems used by can manufacturers
including Metal Container Corporation (an Anheuser-Busch subsidiary), or bottle
manufacturers including Ball Corporation. These systems could include Busse bulk
palletizers and Alvey conveyors and related software. Such systems typically
range in price from $300,000 to $1 million.
MEAT PRODUCTION SYSTEMS: Systems used by each of the four industry
leaders in meat production. These specialized distribution systems could include
Alvey case palletizers, Buschman conveyors, White carousels and related software
designed by MFA, Alvey or White. Such systems typically range in price from
$8 million to $12 million. The Company's initial success installing a
revolutionary frozen meat distribution system for ConAgra's Monfort Beef
division in 1994 is an example of the opportunities available in integrated
systems. After the development and implementation of the integrated system for
ConAgra, the Company has received orders for approximately $24 million of
similar systems from ConAgra and other industry participants.
ENGINEERING AND SUPPORT SERVICES
While a majority of the Company's revenues are attributable to the
manufacture and sale of equipment, approximately 45% of total revenues result
from product support functions and non-manufactured products delivered in
connection with sales of the Company's equipment. Such revenues are generated
from engineering, software license fees, computer support services, systems and
equipment maintenance, computer hardware and peripheral equipment, and the
integration and installation of these products. The Company's sales process
generally starts with a consultation between Company engineers and a customer
during which the Company assesses the customer's specific materials handling
needs and designs a system consisting of the Company's equipment, including
related software and controls, specifically tailored to meet such needs. The
Company installs the system and works with the customer to insure that the
system performs satisfactorily. After the system is operational, the Company
continues to provide ongoing support and maintenance for the system and works
with the customer in response to changes in the customer's materials handling
needs. These services are regularly provided to the Company's customers,
including through the "value-added" partnerships that the Company has formed
with certain large customers. See "Customers."
Through its Company-wide Customer One Protection ("COP") program, the
Company provides aggressive ongoing support and maintenance for its installed
base of equipment and integrated systems. COP provides the Company's customers
with comprehensive service and support including 24-hour assistance, field
service, training, parts and maintenance and warranty programs. The COP program
generated approximately $23.2 million of revenues during the year ended December
31, 1995.
BUSINESS STRATEGY
The Company's business objective is to build on its position as a
full-service provider of materials handling and information management products
and services tailored to meet the individual needs of its customers. To achieve
this objective, the Company intends to implement the following strategies:
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- Continue to build the Company's integrated project capabilities.
Each of the Company's operating companies was previously a
stand-alone enterprise, and management continually modifies the
ways in which the subsidiaries work together to design, market
and implement solutions. By combining the expertise of its
subsidiaries, the Company will be able to provide manufacturers
and distributors with equipment and systems which represent the
next step in materials handling and information systems
applications. Integrated solutions exhibit a high degree of
creativity and represent a partnership with the customer,
incorporating flexibility in design and solution and thorough
understanding of the customer's business. These integrated
solutions are also designed to meet the increasing information
needs of the Company's customers.
- Continue margin enhancement measures. While the margins of its
early acquisitions have increased over time, the margins of
Buschman and White are generally lower than those of the other
operating companies. The Company believes that as Buschman and
White are further integrated into the Company, the margins of
these companies should continue to improve, resulting in higher
margins for the Company as a whole. In order to further improve
margins, the Company has sought the services of a leading
industry consultant to assist it in implementing margin enhancing
improvements at Alvey, Buschman and White.
- Exploit the Company's strategic opportunity to expand its
information systems expertise and significantly increase the
Company's ability to provide integrated solutions to warehousing,
transportation and related demand planning problems. Merging a
warehouse management system with a transportation management
system through the Weseley Acquisition would link two integral
stages of the supply chain.
- Exploit new and emerging market opportunities. The manufacturing
and distribution markets are constantly changing. The Company
intends to exploit new market opportunities through its ability
to create new and revised custom and standard products that
provide solutions to market changes. In particular, the Company
provides products that respond to recent trends towards
third-party warehousing, point-of-sale ordering, mixed-load
requirements, mail order purchasing, improved occupational safety
measures and other customer needs.
- Build upon the Company's success in supplying integrated systems
to the meat production industry. The Company intends to build
upon its success in developing meat production systems by
aggressively pursuing the potentially large meat production
market.
- Continue to seek product line expansions including nonroller
conveyor products, systems to automate distribution centers and
new software products.
- Expand the Company's international business. The Company has
significant opportunities for such expansion through its
U.S.-based, international customers, as well as through new
international customers. The Company believes that the
international markets present significant opportunities for Alvey
and Busse palletizer/depalletizer systems, for MFA software
systems and for White storage and retrieval systems. The Company
intends to focus initially on Latin America, Asia and Europe.
During 1995, the Company hired additional U.S. based
international marketing and support personnel and established
marketing relationships with independent representatives in Latin
and South America and Asia. The Company intends to add
additional marketing personnel to support these
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geographical areas as new order bookings and sales increase.
Through its subsidiary MFA, the Company plans to establish a
marketing and software engineering site in Europe during 1996.
It is intended that costs associated with this startup be
minimized by "boot strapping" the operation and providing
services in Europe to MFA's existing U.S. based customers while
marketing to new European customers.
INDUSTRY OVERVIEW
Constant changes in consumer demands and buying trends offer new
opportunities for materials handling and information systems applications as the
need for a quick response to supply consumer needs is heightened. Trends such as
third-party distribution, point-of-sale ordering, mixed-load shipments and more
frequent, smaller quantity deliveries create new opportunities while enhancing
the need for advanced software and integrated systems. Similarly, changes in
packaging shapes and the elimination of secondary packaging create new
challenges for manufacturers and distributors alike. The Company believes that
the need to increase employee productivity, improve worker safety, improve
margins and meet customer demands are factors which lead manufacturers and
distributors to upgrade and replace their existing materials handling equipment.
The materials handling industry is highly fragmented with many small,
single-product companies providing storage, transportation, software and other
products and services. Customers increasingly seek to satisfy their materials
handling requirements through fully integrated solutions consisting of the
equipment necessary to load, unload, sort and transport raw materials and
finished products, as well as related software and controls to monitor and
optimize the movement and shipment of products. Customers are also seeking
systems to manage manufacturing, warehousing and distribution logistics.
Companies able to provide complex integrated systems to satisfy materials
handling and logistics management requirements, such as the Company, are
experiencing new growth opportunities, and the Company believes that its broad
range of products and services provides it with a distinct competitive position.
CUSTOMERS
The Company's product leadership has resulted in sales to a diverse
customer base which includes many of the largest corporations in the United
States. In addition, the Company has successfully forged important "value-added
partnerships" with customers such as Anheuser-Busch, ConAgra, Gerber, Kellogg,
Quaker Oats and Target. Many of the Company's customers have reduced their
engineering staffs and consequently look to the Company for design and
engineering services with respect to their materials handling requirements. The
Company has a large installed base of equipment and systems with these customers
which provides reference sites which are critical for attracting potential new
customers. The Company believes that these value-added partnerships are a
significant competitive advantage, as they serve as sources of new product
ideas, generate ongoing, relatively high margin sales and demonstrate proven
systems capabilities to potential new customers.
Each of the customers listed below was one of the top 20 customers of
one of the Company's operating subsidiaries during the last three years. The
customers on the list accounted for 44% and 33% of the Company's sales in 1995
and 1994, respectively. While a minority of the customers listed below are not
current customers of the Company, the Company has no reason to believe that all
customers listed below will not continue to be customers of the Company in the
future.
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<PAGE>
The following table sets forth a list of selected customers of the
Company by industry group:
BREWING CONSUMER GOODS
- ------- --------------
Anheuser-Busch Amway
Coors Johnson & Johnson
Labatts Lever Bros.
Miller Brewing Procter & Gamble
Reckett & Colman
SOFT DRINKS Russell Corp.
- -----------
Coca-Cola CONSUMER PRODUCTS
Pepsi-Cola -----------------
Royal Crown Black & Decker
Cadbury-Schwepps General Electric
Starter
FOOD Sunbeam-Oster
- ----
Campbell TOBACCO
ConAgra -------
Farmland Brown and Williamson
Frito-Lay Philip Morris
Gerber Products
Hershey Foods THIRD PARTY DISTRIBUTION
Kellogg ------------------------
Kraft/General Foods Federal Express
Nestle Tibbets & Britten
Pillsbury Co.
Quaker Oats WINE AND DISTILLED SPIRITS
Ralston Purina --------------------------
Tropicana Gallo
Tyson United Distillers
Vlasic Foods
GENERAL DISTRIBUTION/RETAIL
INDUSTRIAL ---------------------------
- ---------
DISTRIBUTION/MANUFACTURING Autozone
- -------------------------- BJ's Stores
Alcon Consolidated Stores
Chrysler Dayton Hudson
Crown Cork and Seal Dollar General
DEC Famous Footwear
DuPont J.C. Penney
Foxmeyer Meijer
Hewlett-Packard Ross Stores
Libbey Glass Sears
Libbey-Owens-Ford Spiegel/Eddie Bauer
Reynolds Metal Tandy
Schering Plough Target Stores
The Ball Corporation United Stationers
Thomas & Betts Wal-Mart
Warner Lambert Warner Brothers
During the year ended December 31, 1995, the Company's largest
customer was Procter & Gamble, which accounted for 3.5% of the Company's total
sales. For the year ended December 31, 1994, the Company's largest customer was
Target Stores, which accounted for 5.0% of the Company's total sales. For the
same periods, the Company's largest ten customers accounted for 23.6% and 24.9%
of the Company's total sales, respectively.
The Company focuses its research and development on key customers and
applications. These customers serve as significant funding sources for such
research and development efforts, with most of the cost paid for through
contracts which focus on solving specific problems or technical requirements.
These contracts also provide the Company with opportunities to enhance its
competitive position without additional
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capital investments. The Company expects to create additional value-added
relationships as it extends its product offerings and installs new, integrated
systems which can serve as additional reference sites.
The Company believes that it has excellent working relationships with
its customers. These relationships include proprietary accounts where projects
are generally awarded without a competitive bid process and non-proprietary
accounts where projects are typically awarded through a bid process among two or
three potential suppliers.
SALES AND DISTRIBUTION
The Company has developed strong domestic sales channels, including
over 100 direct salespeople and 260 independent distributors and independent
manufacturer's representatives. This sales force covers the entire United
States, with especially strong coverage in the major industrial centers.
Management believes that the Company has the strongest combination of direct and
independent sales networks in the materials handling industry.
International sales accounted for approximately $21.3 million or 7.4%
of the Company's sales for the year ended December 31, 1995, a 58% increase from
$13.5 million in international sales for the year ended December 31, 1994. The
Company is pursuing a strategy to significantly increase international sales as
a percentage of the Company's total net sales. An international division has
been established within the Company to develop and implement strategies to
achieve this goal. The Company expects to leverage its existing relationships
with major multinational corporations in the United States in order to follow
and support their activities throughout the global market.
MANUFACTURING AND FACILITIES
The Company occupies almost 1,000,000 square feet of manufacturing and
office space. Primary production facilities are located in St. Louis, Missouri;
Cincinnati, Ohio; Randolph, Wisconsin; and Kenilworth, New Jersey. Software
facilities are located in Waukesha, Wisconsin; San Diego, California, Grand
Rapids, Michigan and Shelton, Connecticut.
In order to meet customer demand and improve manufacturing
efficiencies, the Company plans to complete two new manufacturing facilities in
1996: a 62,000 square foot addition to the Busse facility in Randolph, Wisconsin
and an 82,000 square foot facility for Alvey in St. Louis, Missouri. The Company
estimates that these facilities will require a total of approximately $8.0
million for construction and related equipment, of which $6.5 million will be
spent in 1996. The additions will enable the Company to meet strong growth in
customer orders, centralize operations to eliminate cost duplications, implement
manufacturing process and efficiency improvements and eliminate the need to
out-source manufacturing and assembly operations.
The location and size of each of the Company's significant facilities
is summarized below:
<TABLE>
<CAPTION>
OPERATING COMPANY LOCATION SIZE (SQ. FT.) OWNED/LEASED LEASE EXPIRATION
----------------- -------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Alvey Olivette, MO 250,000 Owned _
Busse Randolph, WI 60,000 Owned _
Busse Randolph, WI 10,000 Leased December 1996
Busse Beaver Dam, WI 14,000 Leased July 1996
Buschman Cincinnati, OH 286,000 Owned _
White Kenilworth, NJ 263,000 Leased December 2006
White San Diego, CA 19,000 Leased May 1999
MFA Waukesha, WI 45,000 Leased October 2005
Weseley Shelton, CT 7,300 Leased May 2000
</TABLE>
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<PAGE>
BACKLOG
The Company's backlog is based upon firm customer orders that are
supported by purchase orders, other contractual documents and cash payments. As
of December 31, 1995, the Company's backlog reached $143.9 million, compared to
a backlog of approximately $114.5 million at December 31, 1994. While the level
of backlog at any particular time may be an indication of future sales, it is
not necessarily indicative of the future operating performance of the Company.
Additionally, certain backlog orders may be subject to cancellation in certain
circumstances. The Company believes that approximately 99% of orders in backlog
at December 31, 1995 will be shipped within one year.
RESEARCH AND DEVELOPMENT
Strong research and development efforts are the basis of the Company's
product and market leadership. In the fiscal years ended December 31, 1995,
1994 and 1993, the Company incurred $2.1 million, $2.5 million and $1.4 million,
respectively, in research and development expenses. By utilizing customer
inputs, research with respect to competitors and research with respect to
externally available engineering to establish future product needs, the Company
focuses its research and development on key customers and applications. Based on
such data and subsequent analysis, the Company establishes product plans that
are continually reviewed and updated. To facilitate an integrated solutions
approach, the Company's research and development activities address three
engineering disciplines: mechanical, controls and computer software.
In addition to the Company's research and development expenses
identified above, customers serve as a significant funding source for these
research and development efforts, with much of the cost paid for through
customer contracts that focus on solving specific problems or technical
requirements. These contracts also provide the Company with opportunities to
enhance its competitive position without additional capital investments.
The Company holds 28 active U.S. patents, 12 active foreign patents
and 15 U.S. registered trademarks and has 6 pending patent applications. In
addition to its extensive patent and trademark portfolio, the Company also
licenses certain intellectual property rights from third parties and owns a wide
array of unpatented proprietary engineering. The Company's U.S. patents have
remaining terms ranging from one to 16 years.
RAW MATERIALS AND COMPONENTS
The Company's principal raw materials and components purchased from
third parties are steel and electric motors and reducers. The Company avoids
some of the price volatility of these products by purchasing most of its
requirements through annual contracts. The Company does not rely on any single
supplier for these materials and believes it has the ability to quickly switch
sources for any of these materials should the need arise.
COMPETITION
The materials handling and related information systems industry is
highly fragmented and very competitive. The industry includes numerous small to
medium size suppliers who focus on specific market niches and/or singular
applications. The suppliers in this group generally do not offer systems or
integrated solutions, but instead offer individual kits, machines and
applications. Certain other competitors are larger, with significant financial
and marketing resources, and offer materials handling systems and integrated
solutions.
Although the Company believes it is one of the preeminent suppliers of
integrated materials handling systems, many of the Company's competitors are
large and have significant financial, marketing and technical resources. In
addition, the Company may encounter competition from new market entrants.
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<PAGE>
EMPLOYEES
As of March 31, 1996, the Company had over 2,000 employees,
approximately 700 of whom are engineers and other professional staff. The
Company operates through a decentralized organizational structure,
interconnected by a corporate staff of eleven professionals located at
Pinnacle's headquarters in St. Louis, Missouri. The Company is subject to
collective bargaining agreements at all of its manufacturing facilities except
the Busse facility. The Company has not experienced any work stoppages related
to labor matters for more than 20 years. The Company considers its employee
relations to be good.
ENVIRONMENTAL MATTERS
The Company's operations are subject to a variety of federal, state
and local environmental laws and regulations which have become increasingly
stringent. The Company believes its current operations are in material
compliance with current environmental laws and regulations. However, the scope
of environmental laws is very broad and is subject to change.
LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal
proceedings arising in the ordinary course of business. None of the matters in
which the Company is currently involved, either individually or in the
aggregate, is expected to have a material adverse effect on the Company's
business, financial condition or results of operations.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning Alvey's
directors and executive officers.
<TABLE>
<CAPTION>
YEARS IN
NAME AGE INDUSTRY POSITION WITH ALVEY
---- --- -------- -------------------
<S> <C> <C> <C>
William R. Michaels (1) 61 21 Chairman of the Board and Chief Executive Officer
Stephen J. O'Neill 54 25 President
Michael J. Tilton 46 16 Senior Vice President and Secretary
James A. Sharp 48 12 Vice President, Chief Financial Officer, Treasurer and
Assistant Secretary
Frederick R. Ulrich, Jr. (1) 52 _ Director
Prakash A. Melwani (2) 37 _ Director
Daniel S. O'Connell (1) 41 _ Director
Charles A. Dill (2) 56 _ Director
The following table sets forth certain information concerning certain
executive officers and directors of Pinnacle and the Company as of
April 30, 1996. Each of Alvey and its five subsidiaries are managed by Pinnacle.
</TABLE>
<TABLE>
<CAPTION>
YEARS IN
NAME AGE INDUSTRY PRINCIPAL POSITION IN PINNACLE ORGANIZATION
- ---- --- -------- -------------------------------------------
<S> <C> <C> <C>
William R. Michaels (1) 61 21 Chairman of the Board, President and Chief Executive
Officer of Pinnacle
Michael J. Tilton 46 16 Executive Vice President - Operations and Secretary of
Pinnacle
James T. McHugh 50 27 Senior Vice President of Pinnacle
Armen G. Oumedian 72 39 Senior Vice President of Pinnacle
Richard D. Sampson 57 6 Senior Vice President of Pinnacle
Thomas J. Young 47 25 Senior Vice President of Pinnacle
James A. Sharp 48 12 Vice President - Finance and Chief Financial Officer of
Pinnacle
Christopher C. Cole 40 6 President of Buschman
Ritch J. Durheim 48 24 President of MFA
Kenneth D. Matson 37 14 President of Busse
Stephen J. O'Neill 54 25 President of Alvey
Frederick R. Ulrich, Jr. (1) 52 _ Director of Pinnacle and Alvey
Prakash A. Melwani (2) 37 _ Director of Pinnacle and Alvey
Daniel S. O'Connell (1) 41 _ Director of Pinnacle and Alvey
Charles A. Dill (2) 56 _ Director of Pinnacle and Alvey
</TABLE>
___________
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Upon completion of the Prior Offering, Curtice A. Cornell and James M.
Schloeman, who prior to such time served on the Boards of Directors of Pinnacle
and Alvey, resigned from such boards. The holders of the Pinnacle Series A
Preferred Stock nominated Prakash A. Melwani and Daniel S. O'Connell to be
elected to the Boards of Directors of Pinnacle and Alvey as their nominees upon
completion of the Prior Offering. For a discussion of the rights of the holders
of the Pinnacle Series A Preferred Stock to nominate directors and, under
certain circumstances, to take control of the Board of Directors, see
"Description of Capital Stock - Pinnacle Preferred Stock." The terms of the
Pinnacle Series A Preferred Stock require a
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<PAGE>
supermajority vote of the Board of Directors of Pinnacle with respect to certain
transactions. See "Description of Capital Stock- Supermajority Board Action."
In April 1996, Donald J. Weiss, pursuant to a Memorandum of Understanding,
resigned from his position as an officer and director of Pinnacle, Alvey and
White. Mr. Scotto was elected to the Boards of Pinnacle and Alvey as the
nominee of the holder of the Series B Preferred Stock affiliated with Acadia
Partner, L.P. ("Acadia"). In April 1996, Acadia sold the Series B Preferred
Stock, and as a result no longer has the contractual right to nominate a
director to such Boards. Effective April 26, 1996, Mr. Scotto resigned from his
position as a director of Pinnacle and Alvey. The Company intends to fill the
vacancies created by such resignations as soon as possible and expects to fill
at least one of such vacancies with an independent director.
WILLIAM R. MICHAELS has served as Chairman, President and Chief
Executive Officer of Pinnacle since September 1988. From 1984 to 1988,
Mr. Michaels served as the President and Chief Executive Officer of Rapistan
Corp. Mr. Michaels is a member of the Board of Governors of the Material
Handling Institute of America, the materials handling industry's trade
association. In addition to his Pinnacle duties, from July 1989 to January 1992
Mr. Michaels was the Chairman of the board of directors of Holophane
Company, Inc., a Columbus, Ohio company in the lighting industry. Mr. Michaels
continues as a director of Holophane. Mr. Michaels is a graduate of the State
University of New York.
STEPHEN J. O'NEILL has served as President of Alvey since
November 1992. Previously, Mr. O'Neill served as Senior Vice President of Alvey
since September 1988. Mr. O'Neill served as a Vice President of Rapistan Corp.
from 1986 to 1988. Mr. O'Neill earned a B.S. degree in Electrical Engineering
from Rose Polytechnic Institute.
MICHAEL J. TILTON has served as Executive Vice President of Pinnacle
since April 1994. Previously, Mr. Tilton served as Senior Vice President and
Chief Financial Officer from September 1988 to April 1994. Mr. Tilton served as
a Vice President of Rapistan Corp. from 1985 to 1988. Mr. Tilton graduated from
the University of Iowa with a B.B.A. degree in Finance and earned an M.B.A.
degree from Drake University. Mr. Tilton currently serves on the board of
directors of the Caring Center.
JAMES A. SHARP has served as Vice President of Finance and Chief
Financial Officer since April 1994. Previously, Mr. Sharp held various
accounting and financial positions with Pinnacle and its subsidiaries, including
Controller, Treasurer and Chief Financial Officer of Alvey, since 1983.
Mr. Sharp graduated from Southern Illinois University with a B.S. degree in
Accounting and is a Certified Public Accountant in the state of Missouri.
FREDERICK R. ULRICH, JR. has been a Director of Pinnacle and Alvey
since August 1988. Mr. Ulrich has served as Chairman of the Board and Chief
Executive Officer of Raebarn Corporation since 1988 and of Buttonwood Capital
Inc. since December 1992. Mr. Ulrich is Chairman of the Board of Ames
Company, Inc. and a director of Paul Sebastian, Incorporated. Mr. Ulrich is a
graduate of the United States Military Academy and holds an M.B.A. degree from
Harvard University.
PRAKASH A. MELWANI has served as a director of Pinnacle and Alvey
since the consummation of the Financing Transactions. Mr. Melwani is a Managing
Director of Vestar. He has been associated with Vestar since its founding in
1988. Mr. Melwani is also Chairman of the Board of Anvil Knitwear, Inc. and a
director of Argo-Tech Corporation and International AirParts Corporation.
Mr. Melwani graduated from Cambridge University with a B.A. degree and received
an M.B.A. degree from Harvard University.
DANIEL S. O'CONNELL has served as a director of Pinnacle and Alvey
since the consummation of the Financing Transactions. Mr. O'Connell has served
as the Chief Executive Officer of Vestar since its founding in 1988.
Mr. O'Connell also serves as a director of Anvil Knitwear, Inc., Cabot Safety
Corporation, La Petite Academy, Inc., Prestone Products Corporation, Pyramid
Communications, Inc. and Russell-Stanley Corporation. Mr. O'Connell graduated
from Brown University with an A.B. degree and Yale University School of
Management with an M.P.P.M. degree.
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<PAGE>
CHARLES A. DILL became a director of Pinnacle and Alvey on February
28, 1996. Mr. Dill is currently a General Partner in Gateway Associates, L.P.,
a leading St. Louis-based equity management partnership. Previously, from April
1991 through April 1995, Mr. Dill was President and, from October 1992 through
April 1995, Chief Executive Officer of Bridge Information Systems, Inc. (a
leading provider of on-line financial information and databases to institutional
securities markets). From February 1988 to September 1990, he was President and
a Director of AVX Corporation (a ceramic electronic devices manufacturer). Mr.
Dill serves as a director of Stifel Financial, a securities brokerage and
investment banking form, and Zoltec, a specialty producer of carbon fiber
composite materials. Mr. Dill graduated from Yale University with a B.S. degree
in mechanical engineering and received an M.B.A. degree from Harvard University.
JAMES T. MCHUGH has served as Senior Vice President of Pinnacle since
May 1995. Mr. McHugh served as Chief Executive Officer of MFA from 1975 until
May 1995. Previously, Mr. McHugh served as a director of S.R. Sales Company,
Inc. Mr. McHugh earned his undergraduate and M.B.A. degrees from Marquette
University.
ARMEN G. OUMEDIAN has served as a Senior Vice President of Pinnacle
since January 1995. Mr. Oumedian joined Alvey in 1988 as Vice President-System
Sales and subsequently served as Senior Vice President-System Sales of Buschman
from 1992 to 1995. Previously, Mr. Oumedian held various positions with Rapistan
Corp. for 32 years and with General Motors for 11 years. Mr. Oumedian graduated
with a B.S.I.E. degree from General Motors Institute.
RICHARD D. SAMPSON has served as Senior Vice President of
Manufacturing of Pinnacle since June 1989. Mr. Sampson is a graduate engineer
from the University of North Dakota and also holds an M.B.A. degree from
Michigan State University.
THOMAS J. YOUNG has served as a Senior Vice President of Pinnacle
since April 1994 and was appointed President of Pinnacle Automation
International in September 1994. Previously, Mr. Young served as President of
Busse from 1992 to 1994. From 1991 to his joining Pinnacle, Mr. Young was a
principal of the Sandringham Group, a corporation he formed to seek acquisitions
in the packaging and packaging machinery industries. From 1989 to 1991,
Mr. Young served as Vice President of Goldco Industries, a supplier of
high-speed bulk container palletizing and bulk depalletizing equipment.
Mr. Young graduated with a B.S. degree from St. John's University.
CHRISTOPHER C. COLE has served as President of Buschman since
March 1994. Prior to joining Buschman, Mr. Cole served in a variety of executive
positions at Cincinnati Milacron Inc. since 1979 and was Vice President since
1987. Mr. Cole graduated from Wesleyan University with a B.A. degree and
received an M.B.A. degree from Harvard University. Mr. Cole has served on the
board of directors of the Cincinnati chapter of the American Red Cross since
1989 and is currently a member of the executive committee of such board.
RITCH J. DURHEIM has served as President and Chief Executive Officer
of MFA since May 1995. From April 1994 to May 1995 Mr. Durheim served as
President and Chief Operating Officer of MFA. Prior to 1994, Mr. Durheim held
various positions with MFA since 1978. Mr. Durheim graduated from Marquette
University with a B.S. degree.
KENNETH D. MATSON has served as President of Busse since
September 1994. Prior to joining Busse, Mr. Matson was Vice President
Marketing & Business Development for the Material Handling Division of Western
Atlas since October 1993. From January 1991 to 1993, Mr. Matson was Vice
President/General Manager-Process & Packaging Systems of Western Atlas.
Mr. Matson graduated from Georgia Institute of Technology with a B.S. degree in
Industrial & Systems Engineering.
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<PAGE>
BOARD OF DIRECTORS COMMITTEES AND COMPENSATION
Pinnacle and Alvey each have a Compensation Committee and an Audit
Committee. During 1995, neither Pinnacle nor Alvey paid any compensation to
members of their Boards of Directors. In 1996, Pinnacle and Alvey expect to pay
to non-employee directors, except directors elected or nominated by the
Investors and Acadia Partners, L.P., an annual fee of $25,000 and intend to
reimburse each of its directors for their out-of-pocket expenses incurred in
connection with serving as a director. Directors who are employed by Pinnacle or
the Company do not receive a fee for serving as directors.
EXECUTIVE COMPENSATION
The following table sets forth, for the year ended December 31,
1995, the earned compensation of the Chief Executive Officer and the next six
highly compensated executive officers of Pinnacle (the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION FOR 1995
------------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(a) COMPENSATION (b) COMPENSATION
- --------------------------------------------------- --------- ---------- ---------------- ------------
<S> <C> <C> <C> <C>
WILLIAM R. MICHAELS
President and Chief Executive Officer of Pinnacle $302,500 $301,200 $26,506 $2,106
RITCH J. DURHEIM
President of MFA 173,750 185,905 12,084 170
JAMES T. MCHUGH
Senior Vice President of Pinnacle 167,000 74,000 13,189 170
STEPHEN J. O'NEILL
President of Alvey 191,750 187,040 9,990 864
DONALD J. WEISS(c)
President of White 225,000 35,000 0 0
CHRISTOPHER C. COLE
President of Buschman 185,000 216,800 3,264 102
MICHAEL J. TILTON
Executive Vice President of Pinnacle 191,750 205,500 11,071 2,538
</TABLE>
- -----------
(a) Reflects amount earned in 1995, of which amount portions have been paid in
1996.
(b) Perquisites or other personal benefits which in the aggregate were less
than the lesser of $50,000 and 10% of an officer's annual salary and bonus
in 1995 have been omitted.
(c) Mr. Weiss resigned from his position as President of White in April 1996.
PENSION PLAN
The Company maintains 401(k) savings plans for virtually all employees
who meet certain eligibility requirements, except those certain union employees
who participate in multi-employer pension plans. Under the plans, the employees
may defer receipt of a portion of their eligible compensation, with the Company
matching a defined percentage of the employees' deferral. The Company's matching
contributions were $614,000 and $429,000 for the year ended December 31, 1995
and the year ended December 31, 1994, respectively. The Company may also elect
to make discretionary profit sharing contributions for virtually all employees,
except those union employees who participate in multi-employer pension plans.
EMPLOYMENT AGREEMENTS
On May 31, 1995, Pinnacle, Alvey and William R. Michaels entered
into an amended and restated employment agreement pursuant to which Mr.
Michaels will serve as Chairman of the Board, President and Chief Executive
Officer of Pinnacle and Chairman of the Board and Chief Executive Officer of
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<PAGE>
Alvey at a base annual salary of $302,500. Mr. Michaels' base salary will be
reviewed annually to consider an upward adjustment for each subsequent year
during the term of the agreement. The agreement entitles Mr. Michaels to an
automobile, club membership, an annual bonus, disability and health insurance
and to other benefit plans provided by Alvey and Pinnacle to their employees.
The agreement also provides for deferred compensation, whereby following
termination of Mr. Michaels' employment with Pinnacle and Alvey because of
death, disability or retirement or upon Mr. Michaels having attained age 65,
or for any other reason excluding voluntary resignation to accept a
comparable position before Mr. Michaels attains age 65, Pinnacle and Alvey
will pay to Mr. Michaels, for at least 10 years and during the remainder of
his life, an annual amount calculated by (a) dividing Mr. Michaels' total
compensation from Alvey and Pinnacle over the thirty-six (36) month period
prior to the termination of his employment by three and (b) multiplying the
result by twenty percent (20%) plus an additional two percent (2%) for each
year between September 1988 (the date of the original employment agreement)
and the termination of his employment. In addition, the agreement requires
Pinnacle and Alvey to provide to Mr. Michaels a $3,000,000 life insurance
policy for the remainder of his lifetime, unless he voluntarily terminates
his employment with Pinnacle and Alvey to accept a comparable position, at
which time Pinnacle and Alvey's obligation to pay premiums will cease.
On May 10, 1989, MFA entered into employment agreements with James T.
McHugh and Ritch Durheim. Pursuant to the agreements, Mr. McHugh served as Chief
Executive Officer of MFA until May 1995 and Mr. Durheim serves as President and,
subsequently, Chief Executive Officer of MFA for annual base salaries of
$167,000 and $172,250, respectively. The base salaries of each will be reviewed
annually to consider an upward adjustment for each subsequent year. Each of the
agreements entitles Messrs. McHugh and Durheim to an automobile allowance, club
membership, an annual bonus, life, disability and health insurance and to other
benefit plans provided by MFA to its other employees. Each of the agreements
contains a non-disclosure and non-competition provision which is effective for
the term of each of Messrs. McHugh and Durheim's employment with MFA.
On June 27, 1995, Pinnacle and Alvey entered into an amended and
restated employment agreement with Michael J. Tilton and Alvey entered into an
amended and restated employment agreement with Stephen J. O'Neill. Pursuant to
the agreements, Mr. Tilton will continue to serve as Executive Vice President -
Operations and Finance of Pinnacle and Senior Vice President and Secretary of
Alvey at a base salary of $191,750 and Mr. O'Neill will continue to serve as
President of Alvey at a base salary of $191,750. The base salaries of each will
be reviewed annually to consider an upward adjustment for each subsequent year.
Each of the agreements entitles Messrs. Tilton and O'Neill to an automobile,
club membership, an annual bonus, life, disability and health insurance and to
other benefit plans provided by Pinnacle and Alvey to their other employees. In
addition, Pinnacle and Alvey are obliged to provide a $1,000,000 life insurance
policy for each of Messrs. Tilton and O'Neill for the remainder of their
lifetimes, unless they voluntarily terminate their employment with Pinnacle and
Alvey to accept a comparable position, at which time Pinnacle and Alvey's
obligation to pay such premiums will cease.
On December 14, 1993, White entered into an employment agreement with
Donald J. Weiss, pursuant to which Mr. Weiss agreed to serve as President of
White at a base annual salary of $215,000. Mr. Weiss' base salary will be
reviewed annually to consider an upward adjustment for each subsequent year
during the term of the agreement. The agreement entitles Mr. Weiss, among other
things, to an automobile, club membership, an annual bonus, life, disability and
health insurance and to other benefit plans provided by White to its other
employees. The agreement with Mr. Weiss contains a non-disclosure and
non-competition provision which is effective for the term of his employment with
White. Upon execution of the agreement, Mr. Weiss purchased 10,197 shares of
Pinnacle Common Stock and 1,025 shares of Pinnacle Original Senior Preferred
Stock. In April 1996, Mr. Weiss, pursuant to a Memorandum of Understanding,
resigned from his position as an officer and director of Pinnacle, Alvey and
White.
On March 9, 1994, Buschman entered into an employment agreement with
Christopher C. Cole, pursuant to which Mr. Cole agreed to serve as President and
Chief Executive Officer of Buschman and Executive Vice President of Pinnacle at
a base annual salary of $175,000. Mr. Cole's base salary will be reviewed
annually to consider an upward adjustment for each subsequent year during the
term of the
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agreement. The agreement entitles Mr. Cole to an automobile, club membership, an
annual bonus, life, disability and health insurance, reimbursement of legal and
accounting services and to other benefit plans provided by Buschman to its other
employees. The agreement with Mr. Cole contains a non-disclosure and
non-competition provision which is effective for the term of his employment with
Buschman. Upon execution of the agreement, Mr. Cole was granted an option to
purchase 18,700 shares of Pinnacle Common Stock at an exercise price of $31.28
per share.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102 of the Delaware General Corporation Law (the "DGCL")
authorizes a Delaware corporation to include a provision in its certificate of
incorporation limiting or eliminating the personal liability of its directors to
the corporation and its stockholders for monetary damages for breach of the
directors' fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors exercise an informed business judgment
based on all material information reasonably available to them. Absent the
limitations authorized by such provision, directors are accountable to
corporations and their stockholders for monetary damages for conduct
constituting gross negligence in the exercise of their duty of care. Although
Section 102 of the DGCL does not change a director's duty of care, it enables
corporations to limit available relief to equitable remedies such as injunction
or rescission. Alvey and Pinnacle's Certificate of Incorporation and Bylaws
include provisions which limit or eliminate the personal liability of their
directors to the fullest extent permitted by Section 102 of the DGCL.
Consequently, a director or officer will not be personally liable to Alvey or
Pinnacle, as applicable, or their stockholders for monetary damages for breach
of fiduciary duty as a director, except for (i) any breach of the director's
duty of loyalty to Alvey or Pinnacle, as applicable, or their stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) unlawful payments of dividends or unlawful
stock repurchases, redemptions or other distributions and (iv) any transaction
from which the director derived an improper personal benefit.
Alvey and Pinnacle's certificates of incorporation and bylaws also
provide, in effect, that, to the fullest extent and under the circumstances
permitted by Section 145 of the DGCL, Alvey and Pinnacle will indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or she
is a director or officer of Alvey or Pinnacle, as applicable, or is or was
serving at the request of Alvey or Pinnacle, as applicable, as a director or
officer of another corporation or enterprise. The inclusion of these
indemnification provisions in Alvey and Pinnacle's certificates of incorporation
and bylaws is intended to enable Alvey and Pinnacle, as applicable, to attract
qualified persons to serve as directors and officers who might otherwise be
reluctant to do so. Alvey and Pinnacle may, in each of their discretion,
similarly indemnify their employees and agents.
Depending upon the character of the proceeding, Pinnacle or Alvey, as
applicable, may indemnify against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with any action, suit or proceeding if the person indemnified
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of Pinnacle or Alvey, as applicable, and, with
respect to any criminal action or proceeding, had no cause to believe his or her
conduct was unlawful. To the extent that a director or officer of Pinnacle or
Alvey, as applicable, has been successful in the defense of any action, suit or
proceeding referred to above, Pinnacle or Alvey, as applicable, would have the
obligation to indemnify him or her against expenses (including attorneys' fees)
actually and reasonably incurred in connection therewith.
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RECAPITALIZATION OF PINNACLE
Upon consummation of the Prior Offering, Management and the Investors
effected the Recapitalization pursuant to which the Investors purchased a
substantial equity interest in Pinnacle. The following transactions occurred
simultaneously with the consummation of the Prior Offering as part of the
Recapitalization: (i) each of 626,730 shares of Pinnacle Common Stock and the
Pinnacle Original Warrants to purchase 116,575 shares of Pinnacle Common Stock
were exchanged (the "Common Equity Exchange") for a combination of $32.00 in
cash and $12.00 in stated liquidation value of Pinnacle Series B Preferred
Stock, subject to adjustment in certain circumstances in the event of a sale of
all or substantially all of Pinnacle within one year from the date of issuance;
(ii) each of the 62,524.4 outstanding shares of Pinnacle Original Preferred
Stock and certain shares of Pinnacle Original Senior Preferred Stock were
redeemed (the "Redemption") for its stated liquidation value, $100.00, plus
accrued but unpaid dividends from December 31, 1995 through the date of
redemption; (iii) the remaining shares of Pinnacle Original Senior Preferred
Stock were exchanged for Pinnacle Series B Preferred Stock (the "Preferred Stock
Exchange"); and (iv) the Note Repayment Investment was effected. Pursuant to
the Common Equity Exchange, Pinnacle paid an aggregate of $23,785,784 in cash
and issued 8,920 shares of Pinnacle Series B Preferred Stock. Pursuant to the
Redemption, Pinnacle paid an aggregate of $25,328,911. No member of Management
exchanged or redeemed any equity interests in Pinnacle pursuant to the Common
Equity Exchange or the Redemption. Members of Management holding shares of
Pinnacle Original Senior Preferred Stock exchanged all of such shares for shares
of Pinnacle Series B Preferred Stock pursuant to the Preferred Stock Exchange.
As a result of the Recapitalization, Management and employees of Pinnacle and
Alvey increased their ownership interest in Pinnacle Common Stock from
approximately 42% to approximately 91% of the outstanding shares of Pinnacle
Common Stock (or 65% on a fully-diluted basis, including giving effect to the
exercise of the Pinnacle Warrants), and the Investors hold preferred stock of
Pinnacle with an aggregate stated liquidation value of $30 million and warrants
to purchase 30% of the Pinnacle Common Stock on a fully-diluted basis. The
selling stockholders in the Recapitalization Transactions (the "Selling
Stockholders") included Acadia Partners, L.P. and certain of its affiliates
("Acadia"), Citicorp North America, Inc., Equitable Capital Private Income and
Equity Partnership II, L.P. and James M. Schloeman, the owner of Alvey prior to
its acquisition by Pinnacle in 1988.
Pinnacle obtained the funds necessary to effect the Recapitalization
from the Recapitalization Dividend and the proceeds from the Pinnacle Preferred
Stock and Warrants Offering in which Pinnacle sold to the Investors 23,000
shares of Pinnacle Series A Preferred Stock and 7,000 shares of Pinnacle
Series C Preferred Stock, together with the Pinnacle Warrants to purchase up to
256,075 shares of Pinnacle Common Stock, representing 30% of the issued and
outstanding shares of Pinnacle Common Stock on a fully-diluted basis giving
effect to the Recapitalization Transactions and the Weseley Acquisition, for an
aggregate purchase price of $30 million. Vestar, Chemical (and its successors or
assigns) and Hancock hold approximately 70%, 23% and 7% of the Pinnacle Investor
Preferred Stock and Pinnacle Warrants, respectively.
In the event a Sale Event (as defined below) occurs within the six
month period following the closing of the Recapitalization Transactions, the
Selling Stockholders will receive an additional payment in cash (or in such
other form of consideration as may be paid by the buyer in the Sale Event),
calculated on a PRO RATA basis relative to their beneficial ownership of the
Pinnacle Common Stock and Pinnacle Original Warrants immediately prior to the
consummation of the Recapitalization Transactions, in an amount equal to 20% of
the excess, if any, of the Enterprise Value (as defined below) of Pinnacle over
$165,000,000 (the "Enterprise Differential"). The "Enterprise Value" is
calculated as of the Sale Event to include the total common equity value, total
debt value and total preferred stock value of Pinnacle, all amounts payable in
connection with the Sale Event under noncompetition agreements or any other
extraordinary employment or compensation agreements, arrangements or
understandings and all contingent or deferred payments in connection with the
Sale Event at their stated amount, discounted to present value using a discount
factor of 8% per annum. In the event a Sale Event occurs subsequent to such six
month period but within the one year period following the closing of the
Recapitalization Transactions, the Selling Stockholders will receive a
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payment in cash (or in such other form of consideration as may be paid by such
buyer) in an aggregate amount equal to 10% of the Enterprise Differential. A
"Sale Event" is any of the following transactions (or series of related
transactions): (i) a sale or other disposition of all or substantially all of
the assets of Pinnacle and its subsidiaries, taken as a whole; (ii) a sale or
other disposition of capital stock of Pinnacle (either by Pinnacle or its
existing stockholders) which has the effect, on a pro forma basis after giving
effect to such transaction, of transferring at least 50% of the outstanding
capital stock of Pinnacle in a transaction other than an underwritten initial
public offering of the Pinnacle Common Stock (except to the extent that such
initial public offering includes a secondary tranche which would have the effect
of clause (iii) below); (iii) a sale or other disposition of at least a majority
of the capital stock of Pinnacle held immediately after the closing of the
Recapitalization Transactions by management; and (iv) a "change of control" or
other transaction which has the effect of giving the holders of certain debt
securities the right to "put," to accelerate or otherwise cause Pinnacle and/or
its subsidiaries to repurchase, the debt securities prior to maturity.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
STOCKHOLDERS AGREEMENT AND REGISTRATION RIGHTS
In connection with the 1988 acquisition of Alvey by Pinnacle (the
"1988 Acquisition"), entities affiliated with Acadia (the "Acadia
Stockholders"), individuals affiliated with Raebarn Corporation (the "Raebarn
Stockholders"), certain management stockholders and Pinnacle entered into a
Stock Purchase and Stockholders Agreement which has been amended and restated
several times through the date hereof (the "Initial Stockholders Agreement"). In
connection with the Financing Transactions, the Initial Stockholder Agreement
was amended and restated again pursuant to the Amended and Restated Stockholders
Agreement by and among Pinnacle, the Management Stockholders (as defined
therein), the Raebarn Stockholders (as defined therein) and the Investors (the
"Amended and Restated Stockholders Agreement").
The Initial Stockholders Agreement provides for certain rights of
Pinnacle to repurchase shares from employees whose employment has been
terminated, various provisions regarding the "vesting" of shares held by the
management stockholders, certain rights of first refusal by the stockholders
upon the proposed sale of Pinnacle Common Stock by any other stockholder,
certain subscription rights by stockholders in the event of a private placement
by Pinnacle and certain rights by the Acadia Stockholders to "drag-along" the
other stockholders upon receipt of an offer to purchase all of the Pinnacle
Common Stock and certain rights by all stockholders to "tag-along" upon the sale
of Pinnacle Common Stock by the Acadia Stockholders or the Raebarn Stockholders.
The Initial Stockholders Agreement provides that the Board of Directors of
Pinnacle consists of eleven members, two of whom will be nominated by the
Raebarn Stockholders, one of whom (who will be the President of Pinnacle) will
be nominated by the management stockholders, one of whom will be James M.
Schloeman, one of whom will be Donald J. Weiss, and six of whom will be
nominated by the Acadia Stockholders. The stockholders must vote their shares to
elect such nominees to the Board of Directors. Management stockholders do not
have any demand registration rights under the Initial Stockholders Agreement;
however, management stockholders are permitted to "piggyback" on to any other
registration statement filed by Pinnacle.
The following is a summary of the Amended and Restated Stockholders
Agreement:
VESTING OF MANAGEMENT STOCKHOLDER SHARES. Shares of Pinnacle Common
Stock issued to Management Stockholders (as defined in the Amended and Restated
Stockholders Agreement) vest in equal installments over a period generally
ranging between three and five years (depending on the terms set by the Board of
Directors at the time of issuance). Any shares of Pinnacle Common Stock held by
a Management Stockholder that are unvested at the time of the death, permanent
disability, resignation or termination (for whatever reason) of such Management
Stockholder will remain unvested and will not vest; PROVIDED, HOWEVER, that in
the event of the death or permanent disability of the holder, 50% of the shares
which are unvested at that time will become vested. In addition, all unvested
shares will become vested upon the acquisition of all of the outstanding shares
of Pinnacle by any third party or upon the sale of all of the assets of
Pinnacle.
REPURCHASE OF MANAGEMENT STOCKHOLDER SHARES. In the event of the
termination of any Management Stockholder's employment with Pinnacle, whether by
reason of death, permanent disability, termination for cause or without cause,
retirement or for any other reason, Pinnacle will have the right to repurchase
all or any portion of the unvested shares. To the extent that Pinnacle elects
not to repurchase all of the unvested shares held by a terminated Management
Stockholder, the other stockholders will have the right to purchase the
remaining shares on a PRO RATA basis.
RESTRICTIONS ON TRANSFER; RIGHT OF FIRST REFUSAL. Unvested shares may
not be transferred under any circumstances. With respect to vested shares,
Pinnacle and, to the extent that Pinnacle fails to exercise its first refusal
right in full, the other Management Stockholders and Raebarn Stockholders, have
a right of first refusal if any Management Stockholder or Raebarn Stockholder
receives a bona fide offer from an independent unrelated third party that such
stockholder wishes to accept. Despite the general restrictions on
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transfers by Management Stockholders and Raebarn Stockholders, transfers to
affiliates, officers, directors, certain family members or family trusts and
pledges of the shares to a bank as security for a loan used to buy the shares
are expressly permitted.
TAG-ALONG RIGHTS. The Amended and Restated Stockholders Agreement
provides that stockholders have a right to "tag along" upon the sale of Pinnacle
Common Stock or Pinnacle Warrants by any stockholder or holder of Pinnacle
Warrants prior to an initial public offering by Pinnacle and provides the
stockholders with "tag-along" rights with respect to a sale of a significant
amount of Pinnacle Common Stock or Pinnacle Warrants after an initial public
offering by Pinnacle. In addition, in the event any such sales would result in a
change of control of Pinnacle, the holders of the Pinnacle Investor Preferred
Stock and the Pinnacle Series B Preferred Stock have the right to cause any such
stock which is not redeemed by Pinnacle in accordance with its terms to be
purchased by the purchaser of such Pinnacle Common Stock or Pinnacle Warrants.
PRIORITY SUBSCRIPTION RIGHTS. If Pinnacle decides to effect a private
placement of shares of Pinnacle Common Stock or securities convertible into
Pinnacle Common Stock for less than Fair Market Value (as defined in the Amended
and Restated Stockholders Agreement) at any time prior to its initial public
offering, the stockholders will have a right, subject to certain exceptions
(which exceptions include the Financing Transactions, the Weseley Acquisition
and the issuance of financing warrants to institutional lenders), to purchase
their respective PRO RATA portions of the shares to be sold by Pinnacle.
VOTING AGREEMENT. The Amended and Restated Stockholders Agreement
provides that the Board of Directors of Pinnacle shall initially consist of
seven members, subject to increase or decrease upon certain specified events.
The stockholders are required to vote their shares to elect specified nominees
to the Board of Directors. See "Management."
On and after the eighth anniversary of the date of issuance of the
Pinnacle Investor Preferred Stock and Pinnacle Warrants, if any shares of
Pinnacle Series A Preferred Stock and any Pinnacle Warrants are outstanding, the
number of directors of Pinnacle shall be increased by the Control Number (as
defined below), with such additional directors to be nominated by the holders of
the Pinnacle Warrants. In addition, if such directors are required to be
elected, from and after such date, each stockholder party to the Amended and
Restated Stockholders Agreement has agreed to (i) vote all shares held by such
stockholder to ratify, approve and adopt all actions adopted or approved by the
Board of Directors of Pinnacle and (ii) subject to certain conditions, be
"dragged along" in the event that the holders of the Pinnacle Warrants desire to
accept a third party offer for all of the outstanding shares of Pinnacle Common
Stock.
REGISTRATION RIGHTS. Management Stockholders shall be entitled to a
single "demand" and certain "piggyback" registration rights, subject to
customary conditions.
CONSULTING AGREEMENT WITH ACADIA
Since the 1988 Acquisition, Alvey and Pinnacle have been parties to a
consulting agreement with an affiliate of Acadia pursuant to which Pinnacle has
been obliged, among other things, to pay consulting and transaction fees and to
reimburse Acadia for its out-of-pocket expenses. The current agreement with
Acadia is the Amended and Restated Consulting Agreement, dated as of October 14,
1992, as amended, among Pinnacle, Alvey and Penobscot-NB Partners ("Penobscot"),
an affiliate of Acadia (the "Acadia Agreement"). Pursuant to the Acadia
Agreement, Pinnacle is required to pay an annual fee of $250,000 to Penobscot,
in addition to reimbursement of its out-of-pocket expenses, through the earlier
to occur of February 1, 2000 or certain change of control transactions. In
addition, the Acadia Agreement provides that if Pinnacle or Alvey or any of
their affiliated companies engage in a transaction such as a merger,
consolidation or a sale of more than 10% of its assets or outstanding securities
or the acquisition of assets or stock of another company (a "Transaction"),
Penobscot would have the right to act as a financial advisor to Pinnacle or
Alvey. In addition, Pinnacle is required to consult with Penobscot with respect
to any prospective or actual public or private offering of debt or equity
securities of Pinnacle or Alvey and is required to pay to Penobscot an
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investment banking fee in an amount equal to 1% of (i) the aggregate
consideration paid or received in each Transaction or (ii) in the case of an
initial public offering, the gross proceeds from the sale of the primary shares
sold by Pinnacle or Alvey. In connection with the Acadia Agreement, Pinnacle
paid $312,000 in 1992 (not including $250,000 of a $500,000 fee relating to the
acquisition of Buschman which was deferred), $510,000 in 1993 (which includes a
fee of $260,000 in connection with the acquisition of White), $250,000 in 1994
and $250,000 in 1995, in each case plus the reimbursement of out-of-pocket
expenses.
The Acadia Agreement terminated upon the completion of the Financing
Transaction and is no further force and effect. At such time, Pinnacle paid
Penobscot any theretofore unpaid regular monthly consulting fees and all unpaid
or unreimbursed expenses. As part of the Recapitalization Transactions, Acadia
waived any right to receive any other fee which may have been due under the
Acadia Agreement including any transaction fee by reason of the Recapitalization
Transactions.
CONSULTING AGREEMENT WITH RAEBARN
Since the 1988 Acquisition, Alvey and Pinnacle have also been parties
to a consulting agreement with Raebarn Corporation or a predecessor entity
("Raebarn"), each of which is or was beneficially owned by Mr. Ulrich and a
former director of Pinnacle, pursuant to which Pinnacle has been obliged, among
other things, to pay consulting and transaction fees, and to reimburse Raebarn
for its out-of-pocket expenses. The current agreement with Raebarn is the
Amended and Restated Consulting Agreement, dated as of October 14, 1992, as
amended, among Pinnacle, Alvey and Raebarn (the "Raebarn Agreement"). Pursuant
to the Raebarn Agreement, Pinnacle is required to pay an annual fee of $250,000
to Raebarn, in addition to reimbursement of its out-of-pocket expenses, through
the earlier to occur of December 31, 2002 or certain change of control
transactions. In addition, the Raebarn Agreement provides that if Pinnacle or
Alvey or any of their affiliated companies engage in a transaction such as a
merger, consolidation or a sale of more than 10% of its assets or outstanding
securities or the acquisition of assets or stock of another company (a
"Transaction"), Raebarn would have the right to act as a financial advisor to
Pinnacle or Alvey. In addition, Pinnacle is required to consult with Raebarn
with respect to any prospective or actual public or private offering of debt or
equity securities of Pinnacle or Alvey and is required to pay to Raebarn an
investment banking fee in an amount equal to 1% of (i) the aggregate
consideration paid or received in each Transaction or (ii) in the case of an
initial public offering, the gross proceeds from the sale of the primary shares
sold by Pinnacle or Alvey. In connection with the Raebarn Agreement, Pinnacle
paid $550,000 in 1992 (not including $250,000 of a $500,000 fee relating to the
acquisition of Buschman which was deferred), $250,000 in 1993 (not including a
fee of $260,000 relating to the acquisition of White which was deferred),
$250,000 in 1994, $250,000 in 1995 and an aggregate of $1,500,000 (upon
completion of the Financing Transactions), in each case plus the reimbursement
of out-of-pocket expenses.
Alvey, Pinnacle and Raebarn terminated the Raebarn Agreement in its
entirety upon completion of the Financing Transactions. In connection with such
termination, Pinnacle and Alvey agreed to make termination payments to Raebarn
or its designees in the amount of $250,000 per year through the eighth
anniversary of the completion of the Financing Transactions. In April 1995,
Raebarn changed its name to Lafarick, Inc. Pinnacle and Alvey intend to expense
the payments of $2.0 million ($1.4 million net of tax), less $510,000 already
accrued at December 31, 1995, in the first quarter of 1996, the quarter in which
the Financing Transactions were consummated.
CONSULTING AGREEMENT WITH MAMMOTH CAPITAL INC.
On December 31, 1995, Pinnacle and Alvey entered into a consulting
agreement with Mammoth Capital Inc., a corporation owned by Mr. Ulrich, pursuant
to which Pinnacle and Alvey agreed to pay an annual fee of $200,000, subject to
an annual increase at a rate of 3%, in addition to the reimbursement for its
out-of-pocket expenses (the "Mammoth Agreement"). The Mammoth Agreement also
provides for the payment of a transaction fee in the amount of 1% of the
aggregate consideration paid or received in connection with specified merger and
acquisition transactions (the "M&A Fee") and 1/2 of 1% of the gross
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proceeds received in connection with financing transactions involving the public
or private offering of debt or equity securities of Pinnacle and Alvey or the
incurrence of bank debt, other than financing transactions solely involving
amendments, modifications or extensions of the Credit Agreement or the Notes
(the "Financing Fee"); PROVIDED, HOWEVER, that the Financing Fee shall not
exceed $250,000. Pinnacle and Alvey are not obliged to pay duplicate M&A Fees
and Financing Fees in connection with any single transaction or series of
related transactions. The Mammoth Agreement will terminate on the earlier to
occur of (i) the eighth anniversary of the completion of the Financing
Transactions, (ii) the sale of all or substantially all of the capital stock or
assets of either Pinnacle or Alvey or (iii) the death or retirement of Mr.
Ulrich. In addition, the Mammoth Agreement will be terminable by Pinnacle and
Alvey in the event that Mr. Ulrich fails, or is otherwise unwilling, to perform
the services required by such agreement in a manner reasonably acceptable to
Pinnacle and Alvey and consistent with past practices.
CONSULTING AGREEMENT WITH VESTAR
On January 24, 1996, Pinnacle and Alvey entered into a consulting
agreement with Vestar Capital Partners ("Vestar Capital"), an affiliate of
Vestar, pursuant to which Pinnacle and Alvey agreed to pay an annual fee of
$150,000 to Vestar Capital (the "Vestar Agreement"). The Vestar Agreement
terminates on the earlier to occur of (i) the completion of an initial public
offering by Pinnacle of the Pinnacle Common Stock, (ii) the occurrence of a
change of control (as defined) or (iii) the date on which the Investors or
certain specified transferees cease to meet a certain minimum investment level.
In addition, upon consummation of the Pinnacle Preferred Stock and Warrants
Offering, Pinnacle paid to Vestar Capital a one-time fee of $750,000 and
reimbursed the Investors for all reasonable out-of-pocket costs and expenses
(including reasonable attorneys' fees and related expenses) incurred by the
Investors in connection with the Pinnacle Preferred Stock and Warrants Offering.
LEASE OF WHITE FACILITIES
The Company leases the manufacturing facility used by White in
Kenilworth, New Jersey from a partnership controlled by Donald J. Weiss,
formerly a director of Pinnacle and Alvey. Pursuant to the terms of the lease,
the Company paid rent in the amount of $900,000 in 1995. The term of the lease
extends through December 2006. The Company believes that the terms of the lease
are substantially similar to terms that would have been obtained from a third
party in an arms'-length negotiation.
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PRINCIPAL STOCKHOLDERS
Pinnacle owns 100% of the outstanding capital stock of 76. The following
table sets forth certain information regarding the beneficial ownership of the
Pinnacle Common Stock as of April 30, 1996 (i) by each person who is known by
the Company to own beneficially more than 5% of the Pinnacle Common Stock, (ii)
by each of Alvey and Pinnacle's directors, (iii) by each Executive Officer named
below and (iv) by all directors and executive officers as a group.
<TABLE>
<CAPTION>
PINNACLE COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER (1)(2)
- ------------------------------------------- FULLY-DILUTED
SHARES OWNED PERCENTAGE (3) PERCENTAGE (4)
------------ -------------- --------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Prakash A. Melwani (5)(6). . . . . . . . 179,253 27.0% 21.0%
Daniel S. O'Connell (5)(6) . . . . . . . 179,253 27.0 21.0
William R. Michaels (7). . . . . . . . . 72,187 14.8 8.5
Frederick R. Ulrich, Jr. (8) . . . . . . 27,867 5.7 3.3
Charles A. Dill. . . . . . . . . . . . . 0 0 0
Christopher C. Cole (9). . . . . . . . . 20,000 4.0 2.3
Ritch J. Durheim (10). . . . . . . . . . 5,407 1.1 0.6
James T. McHugh (10)(11) . . . . . . . . 5,407 1.1 0.6
Stephen J. O'Neill (12). . . . . . . . . 48,902 10.0 5.7
Michael J. Tilton. . . . . . . . . . . . 44,400 9.1 5.2
OTHER BENEFICIAL OWNERS. . . . . . . . . . .
Vestar Equity Partners, L.P. (6)(13) . . 179,253 27.0 21.0
Chase Equity Associates, L.P. (13)(14)
All Executive Officers and Directors
as a Group (15 Persons). . . . . . 403,423 (15) 58.8 47.2
</TABLE>
- -----------
(1) Unless otherwise noted, the address of each of the foregoing is c/o
Pinnacle at 101 S. Hanley, Suite 1300, St. Louis, Missouri 63105.
(2) Unless otherwise noted, sole voting and dispositive power are
possessed with respect to all shares shown.
(3) The percentages under the heading "Percentages" are based upon 485,866
shares of Pinnacle Common Stock outstanding and takes into account all
derivative securities held by such Beneficial Owner that are
convertible into shares of Pinnacle Common Stock.
(4) The percentages under the heading "Fully-Diluted Percentages" are
based upon 853,933 shares of Pinnacle Common Stock outstanding, which
gives effect to the exercise of outstanding (i) options to purchase
67,200 shares of Pinnacle Common Stock, (ii) warrants to purchase
14,917 shares of Pinnacle Common Stock, (iii) warrants issued in the
Weseley Acquisition that are exercisable to purchase 29,875 shares of
Pinnacle Common Stock and (iv) the Pinnacle Warrants that are
exercisable to purchase 256,075 shares of Pinnacle Common Stock.
(5) Includes 179,253 shares issuable upon exercise of Pinnacle Warrants
held by Vestar Equity Partners, L.P., as to which Messrs. Melwani and
O'Connell disclaim beneficial ownership.
(6) Address is c/o Vestar Capital Partners, 245 Park Avenue, 41st Floor,
New York, New York 10167-4098.
(7) Includes 601 shares of Pinnacle Common Stock issuable upon exercise of
outstanding Series C Warrants of Pinnacle.
(8) Includes 401 shares of Pinnacle Common Stock issuable upon exercise of
outstanding Series C Warrants of Pinnacle. Includes the following
number of shares held by or in trust for Mr. Ulrich's children: 505
shares of Pinnacle Common Stock; 705 shares of Pinnacle Common Stock
held by the Lauren T. Ulrich Trust '89; 706 shares of Pinnacle Common
Stock held by the Farrell Ulrich Trust '89; and 700 shares of Pinnacle
Common Stock held by the Frederick Ulrich III Trust '92.
(9) Includes 18,700 shares of Pinnacle Common Stock issuable upon exercise
of outstanding exercisable options.
(10) Includes 235 shares of Pinnacle Common Stock issuable upon exercise of
outstanding Series C Warrants of Pinnacle.
(11) Includes 5,172 shares of Pinnacle Common Stock held by the James T.
McHugh and Catherine A. McHugh Revocable Trust.
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(12) Includes 902 shares of Pinnacle Common Stock issuable upon exercise of
outstanding Series C Warrants of Pinnacle.
(13) All of such shares are issuable upon exercise of Pinnacle Warrants.
(14) c/o Chemical Venture Partners, 270 Park Avenue, New York, New York
10017.
(15) The 179,253 shares of Pinnacle Common Stock issuable upon exercise of
Pinnacle Warrants held by Vestar Equity Partners, L.P., as to which
Messrs. Melwani and O'Connell disclaim beneficial ownership, are
counted once in this total.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Alvey consists of 1,000 shares of
Common Stock, par value $0.01 per share, of which 1,000 shares are outstanding
and held by Pinnacle. The authorized capital stock of Pinnacle consists of
2,100,000 shares of voting Common Stock, par value $.01 per share ("Voting
Common Stock"), 100,000 shares of Class B Common Stock, par value $.01 per share
(the "Class B Common Stock" and together with the Voting Common Stock, the
"Pinnacle Common Stock"), and 500,000 shares of preferred stock, par value $.01
per share. As of December 31, 1995, 1,112,246 shares of Voting Common Stock were
issued and outstanding and were held of record by 88 stockholders. As of
December 31, 1995, 60,191.96 shares of Pinnacle Original Preferred Stock and
202,836.73 shares of Pinnacle Original Senior Preferred Stock were issued and
outstanding. Pinnacle redeemed all of the outstanding Pinnacle Original
Preferred Stock and redeemed or exchanged for Pinnacle Series B Preferred Stock
all of the outstanding Pinnacle Original Senior Preferred Stock upon
consummation of the Prior Offering. See "Recapitalization of Pinnacle" and "Use
of Proceeds."
COMMON STOCK OF ALVEY
Each holder of common stock of Alvey is entitled to one vote for each
share held of record on each matter submitted to a vote of stockholders. Subject
to preferences that may be granted to the holders of preferred stock, each
holder of common stock of Alvey is entitled to share ratably in distributions to
stockholders and to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor and, in the event of
the liquidation or dissolution of Alvey is entitled to share ratably in all
assets of Alvey remaining after payment of liabilities. Holders of common stock
of Alvey have no conversion, preemptive or other subscription rights, and there
are no redemption rights or sinking fund provisions with respect to common
stock. The outstanding common stock of Alvey is validly issued, fully paid and
non-assessable. Additional shares of Alvey's common stock may be issued from
time to time by Alvey.
COMMON STOCK OF PINNACLE
The Voting Common Stock and Class B Common Stock are identical in all
respects, except with respect to voting rights, as further described below. Each
holder of Pinnacle Common Stock is entitled under certain limited circumstances
to convert any or all of such holder's shares into the same number of shares of
Pinnacle Common Stock of the other class. Each holder of Voting Common Stock is
entitled to one vote for each share held of record on each matter submitted to a
vote of stockholders. Except with respect to any alteration or amendment of
Pinnacle's Certificate of Incorporation in a manner that materially and
adversely affects the Pinnacle Common Stock or as required by law, holders of
Class B Common Stock have no voting rights in respect of their shares of Class B
Common Stock. Subject to preferences that may be granted to the holders of
preferred stock, each holder of Pinnacle Common Stock is entitled to share
ratably in distributions to stockholders and to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor and, in the event of the liquidation or dissolution of Pinnacle is
entitled to share ratably in all assets of Pinnacle remaining after payment of
liabilities. Holders of Pinnacle Common Stock have no conversion, preemptive or
other subscription rights (except as set forth in the Amended and Restated
Stockholders Agreement), and there are no redemption rights or sinking fund
provisions with respect to Pinnacle Common Stock. The outstanding Pinnacle
Common Stock is validly issued, fully paid and non-assessable.
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The outstanding Pinnacle Common Stock is subject to the terms of the
Amended and Restated Stockholders Agreement. See "Certain Relationships and
Transactions - Stockholders Agreement and Registration Rights."
PINNACLE PREFERRED STOCK
Pinnacle's Certificate of Incorporation authorizes Pinnacle to issue
500,000 shares of preferred stock in series and authorizes the Board of
Directors of Pinnacle to provide, without further stockholder action, for the
issuance of one or more series of preferred stock. The Board of Directors of
Pinnacle has the power to fix various terms with respect to each such series,
including voting powers, designations, preferences, dividend rates, conversion
and exchange provisions, redemption provisions and the amounts that holders are
entitled to receive upon any liquidation, dissolution or winding up of Pinnacle.
The Board of Directors of Pinnacle has authorized the issuance of
23,000 shares of Pinnacle Series A Preferred Stock and 7,000 shares of Pinnacle
Series C Preferred Stock, which were issued in the Pinnacle Preferred Stock and
Warrants Offering, and up to 11,299 shares of Pinnacle Series B Preferred Stock
(the "Pinnacle Series B Preferred Stock"), which were issued in the
Recapitalization (collectively, the "Pinnacle Preferred Stock").
PINNACLE SERIES A PREFERRED STOCK
RANKING. The Pinnacle Series A Preferred Stock ranks prior to the
Pinnacle Common Stock with respect to dividend rights and rights on liquidation,
winding up or dissolution of Pinnacle, and to all other classes and series of
equity securities of Pinnacle as may hereafter be issued, other than any class
or series of equity securities of Pinnacle expressly designated as being on a
parity with or senior to the Pinnacle Series A Preferred Stock. The Pinnacle
Series A Preferred Stock ranks on a parity with the Pinnacle Series B Preferred
Stock and Pinnacle Series C Preferred Stock. Such other classes or series of
equity securities of Pinnacle not expressly designated as being on a parity with
or senior to the Pinnacle Preferred Stock are referred to hereafter as "Junior
Stock." The rights of holders of shares of Pinnacle Series A Preferred Stock
are subordinate to the rights of Pinnacle's general creditors. Pinnacle may not
create or issue additional Pinnacle Series A Preferred Stock or other classes of
stock ranking on a parity with or senior to the Pinnacle Series A Preferred
Stock unless it receives approval or consent of the holders of Pinnacle Series A
Preferred Stock and Pinnacle Series C Preferred Stock voting together as a
single series. See "VOTING RIGHTS" below.
DIVIDEND RIGHTS. Holders of Pinnacle Series A Preferred Stock are
entitled to receive, out of funds legally available therefor, cumulative cash
dividends at the annual rate of 9% of the sum of (i) $1,000 and (ii) accrued but
unpaid dividends as of the immediately preceding Dividend Payment Date (as
defined below) (the "Series A Base Dividend Amount"). If any quarterly dividend
is not paid on the Dividend Payment Date therefor, there also accrues with
respect to each quarterly dividend period thereafter until all dividends in
arrears are paid, additional dividends (the "Series A Additional Dividends")
equal to the product of 4% and the sum of (i) $1,000 and (ii) accrued but unpaid
dividends as of the immediately preceding Dividend Payment Date.
Dividends on the Pinnacle Series A Preferred Stock are payable
quarterly on each March 31, June 30, September 30 and December 31 (each a
"Dividend Payment Date"), commencing March 31, 1996. Dividends payable for any
period less than a full quarter are computed on the basis of a 360-day year with
equal months of 30 days. Dividends for the first dividend period accrue from
the original issue date. Dividends are fully cumulative and (whether or not
declared) on a quarterly basis. Dividends declared are payable to holders of
record as they appear on the stock books of Pinnacle at the close of business on
such record dates, not exceeding 30 days nor fewer than 10 days preceding the
Dividend Payment Date therefor.
Upon default in the making of any required redemption in the Pinnacle
Series A Preferred Stock or any optional redemption called by Pinnacle, for so
long as such default remains uncured, the per
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annum dividend rate used for purposes of calculating the Series A Base Dividend
Amount increases from 9% to 13% and no Series A Additional Dividends are
payable.
No dividends in any form shall be declared or paid or set apart for
payment on any class or series of equity securities ranking on a parity with or
junior to the Pinnacle Series A Preferred Stock for any dividend period unless
full dividends on the Pinnacle Series A Preferred Stock for the then current
dividend period shall have been paid or declared and set aside, provided that on
any date on which the Series A Base Dividend Amount is paid the base dividend
amount with respect to the Pinnacle Series B Preferred Stock and the Pinnacle
Series C Preferred Stock may also be paid even if dividends on the Pinnacle
Series A Preferred Stock for prior quarterly dividend periods remain in arrears.
Except as noted in the prior sentence, when dividends on the Pinnacle Series A
Preferred Stock are in arrears, dividends declared upon shares of Pinnacle
Series A Preferred Stock and other equity securities ranking on a parity shall
be declared pro rata based upon the respective amounts that would have been paid
on the Pinnacle Series A Preferred Stock and such other equity security had
dividends been paid in full.
Except as set forth in the preceding paragraph, Pinnacle shall not
declare or pay any dividend or other distribution (other than in Pinnacle Common
Stock or other Junior Stock) with respect to any Junior Stock, including
Pinnacle Common Stock or any securities ranking on a parity with the Series A
Preferred Stock, unless and until Pinnacle has paid all accrued and unpaid
dividends for past dividend periods and has declared and paid or set apart for
payment the Series A Base Dividend Amount for the then current dividend period.
Pinnacle shall not redeem or set apart funds for the purchase,
redemption or retirement of any Junior Stock through a sinking fund or
otherwise, or purchase any shares of Junior Stock (except for limited purchases
from Management Stockholders pursuant to the Amended and Restated Stockholders
Agreement or as consented to by the holders of the Series A Preferred Stock).
Pinnacle shall not, and shall not permit any entity controlled by it
to, redeem or set apart funds for the purchase, redemption or retirement of any
securities ranking on a parity with the Pinnacle Series A Preferred Stock, or
any warrants, rights, calls or options exercisable for or convertible into any
such parity securities (other than in exchange solely for Junior Stock) unless
prior to or at the time of such purchase, redemption or retirement, Pinnacle
shall have repurchased, redeemed or retired shares of Pinnacle Series A
Preferred Stock on a pro rata basis.
LIQUIDATION PREFERENCE. Holders of shares of Pinnacle Series A
Preferred Stock are entitled to receive the liquidation preference of $1,000 per
share ($23 million in the aggregate based on 23,000 shares of Pinnacle Series A
Preferred Stock issued and outstanding after the Pinnacle Preferred Stock and
Warrants Offering), plus an amount per share equal to any dividends accrued but
unpaid, without interest, in the event of any liquidation, dissolution or
winding up of Pinnacle, whether voluntary or involuntary, out of or to the
extent of the net assets of Pinnacle legally available for distribution, before
any distributions are made with respect to any Pinnacle Common Stock or any
other Junior Stock. After payment of the full amount of the liquidation
distribution to which they are entitled, holders of shares of Pinnacle Series A
Preferred Stock will not be entitled to any further participation in any
distribution of assets of Pinnacle.
Upon any such liquidation, dissolution or winding up of Pinnacle, such
preferential amounts with respect to the Pinnacle Series A Preferred Stock and
any class or series ranking on a parity with the Pinnacle Series A Preferred
Stock if not paid in full shall be distributed pro rata in accordance with the
aggregate preferential amounts of the Pinnacle Series A Preferred Stock and such
other classes or series of stock.
VOTING RIGHTS. The holders of shares of Pinnacle Series A Preferred
Stock are not entitled to any voting rights, except as required by applicable
law and as set forth below. So long as the Investors and certain specified
transferees maintain the Minimum Investment (as defined below), holders of
Pinnacle Series A Preferred Stock, voting separately as a class, have a right to
elect two directors to the Board of
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Directors of Pinnacle. See "Management." At least one seat on each committee of
the Board of Directors of Pinnacle will be held by a director elected by the
holders of the Pinnacle Series A Preferred Stock so long as the Investors or
such specified transferees maintain the Minimum Investment. In the event that
the Investors and such transferees fail to maintain the Minimum Investment, the
number of directors nominated by the holders of the Pinnacle Series A Preferred
Stock shall be reduced to one director. "Minimum Investment" means, as of any
measurement date, ownership of either (i) shares of Pinnacle Investor Preferred
Stock having an aggregate stated liquidation value of at least $10 million or
(ii) shares of Pinnacle Common Stock and/or Pinnacle Warrants to purchase such
number of shares of Pinnacle Common Stock as shall aggregate at least the
greater of (A) 10% of the aggregate number of shares of Pinnacle Common Stock
that would have been outstanding on the date of issuance of the Pinnacle Series
A Preferred Stock on a fully-diluted basis assuming all transactions
contemplated by the Recapitalization and the Weseley Acquisition occurred on
such date and (B) 7.5% of the aggregate number of shares of Pinnacle Common
Stock outstanding on the measurement date on a fully-diluted basis.
Upon default in the making of any required redemption of the Pinnacle
Series A Preferred Stock or any optional redemption called by Pinnacle, the
number of directors of Pinnacle shall be increased by the Control Number (as
defined below), such additional directors to be elected by the holders of the
Pinnacle Series A Preferred Stock, voting separately as a class. In addition,
upon the failure of Pinnacle to maintain a level of EBITDA (subject to certain
adjustments) of at least $17 million for any fiscal year (unless such failure is
the result of any natural disaster or other national or international calamity
or emergency materially impairing the operation of the facilities of Pinnacle
and its subsidiaries), the number of directors of Pinnacle shall be increased by
the Control Number, with such additional directors to be elected by the holders
of the Pinnacle Series A Preferred Stock, voting separately as a class. Such
additional directors shall remain in office until such time as the Pinnacle
Series A Preferred Stock is redeemed as required or Pinnacle's EBITDA for the
most recently ended fiscal year shall have exceeded $17 million, as the case may
be. "Control Number" means such number of additional directors of Pinnacle
which, when added to the number of directors otherwise nominated by the holders
of Pinnacle Series A Preferred Stock or holders of Pinnacle Warrants or Pinnacle
Common Stock issuable upon exercise of Pinnacle Warrants, as the case may be,
shall result in the number of directors nominated by such holders constituting a
majority of the members of the Board of Directors of Pinnacle.
Pinnacle may not amend its Certificate of Incorporation in any way
that would materially and adversely alter or change the powers, preferences or
special rights of the Pinnacle Series A Preferred Stock or the Pinnacle Series C
Preferred Stock without the consent of holders of at least two-thirds of the
Pinnacle Series A Preferred Stock and Pinnacle Series C Preferred Stock voting
together as a single series. In addition, Pinnacle may not create, authorize or
issue any shares of capital stock ranking senior to or on a parity with the
Pinnacle Series A Preferred Stock without the consent of holders of a majority
of the outstanding Pinnacle Series A Preferred Stock and Pinnacle Series C
Preferred Stock, voting together as a single class.
OPTIONAL REDEMPTION. The Pinnacle Series A Preferred Stock is
redeemable at the option of Pinnacle at any time, in whole or in part, at the
liquidation value thereof, plus accrued but unpaid dividends (including Series A
Additional Dividends), if any, on the Pinnacle Series A Preferred Stock, without
interest.
MANDATORY REDEMPTION. On the date of the completion of any Equity
Financing (as defined below), Pinnacle shall redeem pro rata, out of the funds
legally available therefor, a number of shares of Pinnacle Series A Preferred
Stock, Pinnacle Series B Preferred Stock and Pinnacle Series C Preferred Stock
equal to one third of the net proceeds to Pinnacle of such Equity Financing at a
redemption price equal to the liquidation value thereof, plus accrued and unpaid
dividends thereon. "EQUITY FINANCING" means any issuance (whether pursuant to a
public or private offering or otherwise) of securities of Pinnacle ranking on a
parity with or junior to the Pinnacle Series A Preferred Stock (such securities,
"Equity Securities"), other than (i) the issuance of Equity Securities (in one
transaction or a series of related transactions) resulting in aggregate proceeds
to Pinnacle of less than $1 million, (ii) the issuance of Equity Securities as
consideration in an acquisition transaction approved in accordance with
supermajority procedures described below under
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"Supermajority Board Action" and (iii) the sale of shares of Voting Common Stock
(or options or warrants to purchase Voting Common Stock) to any officer,
director or employee of Pinnacle, or its subsidiaries, provided that in the case
of clause (iii), (A) the aggregate amount of all such sales shall not exceed 2%
of the Pinnacle Common Stock outstanding on the date of issuance of the Pinnacle
Series A Preferred Stock, calculated on a fully-diluted basis after giving
effect to all transactions contemplated by the Recapitalization and (B) the
price for such sale shall be no less than the then-prevailing fair market value
of the shares sold (any such sale referred to in this clause (iii), a "Permitted
Management Sale").
CONVERSION. Each holder of Pinnacle Series A Preferred Stock is
entitled under certain circumstances to convert any or all of such holder's
shares into the same number of shares of Pinnacle Series C Preferred Stock.
TRANSFER RESTRICTIONS. There are no restrictions on the
transferability of the Pinnacle Series A Preferred Stock, except as required by
applicable securities laws, provided that transferees (other than certain
specified transferees) of the Pinnacle Series A Preferred Stock are not entitled
to elect members of the Board of Directors of Pinnacle.
REGISTRATION RIGHTS. The holders of Pinnacle Series A Preferred Stock
are entitled to a single "demand" and "piggy-back" registration rights, subject
to customary limitations.
CHANGE OF CONTROL. Holders of the Pinnacle Series A Preferred Stock
have the right to require Pinnacle to redeem shares of Pinnacle Series A
Preferred Stock for cash at 101% of the per share liquidation value thereof,
plus accrued and unpaid dividends thereon, upon a Change of Control (as such
term is defined in the certificate of designations with respect to the Series A
Preferred Stock).
PINNACLE SERIES B PREFERRED STOCK
The Pinnacle Series B Preferred Stock ranks on a parity with the
Pinnacle Series A Preferred Stock. The terms of the Pinnacle Series B Preferred
Stock are identical in all respects to the Pinnacle Series A Preferred Stock
except that the Pinnacle Series B Preferred Stock does not provide for (i) the
separate class vote to elect directors, (ii) the ability to nominate additional
directors to the Board of Directors upon a default by Pinnacle in the making of
any mandatory redemption or any optional redemption called by Pinnacle or upon
Pinnacle's failure to maintain consolidated EBITDA of $17 million or (iii)
conversion of the Pinnacle Series B Preferred Stock into any other securities.
PINNACLE SERIES C PREFERRED STOCK
The Pinnacle Series C Preferred Stock ranks on a parity with the
Pinnacle Series A Preferred Stock. The terms of the Pinnacle Series C Preferred
Stock are identical in substantially all respects to the Pinnacle Series A
Preferred Stock except that the Pinnacle Series C Preferred Stock does not
provide for (i) the separate class vote to elect directors or (ii) the ability
to nominate additional directors to the Board of Directors upon a default by
Pinnacle in the making of any mandatory redemption or any optional redemption
called by Pinnacle or upon Pinnacle's failure to maintain consolidated EBITDA of
$17 million. Chemical, which holds Pinnacle Series C Preferred Stock (or certain
specified transferees of Chemical), is entitled to designate one person who is
entitled to attend all meetings of the Board of Directors of Pinnacle but who is
not a director and therefor is not entitled to vote on any matter presented at
such meetings. Each holder of Pinnacle Series C Preferred Stock is entitled
subject to any law, regulation, rule or other requirement of any governmental
authority applicable to such holder regarding ownership, control or voting
limitations with respect to the Series A Preferred Stock, to convert any or all
of such holder's shares into the same number of shares of Pinnacle Series A
Preferred Stock.
The authority possessed by the Board of Directors of Pinnacle to issue
preferred stock could potentially be used to discourage attempts by others to
obtain control of Pinnacle through a merger, tender offer, proxy contest or
otherwise by making such attempts more difficult to achieve or more costly. The
Board
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of Directors of Pinnacle may issue preferred stock with voting and conversion
rights that could adversely affect the voting power of the holders of the
Pinnacle Common Stock. There are no agreements or understandings for the
issuance of additional preferred stock of Pinnacle and the Board of Directors of
Pinnacle has no present intention to issue any additional preferred stock.
PINNACLE WARRANTS
The Pinnacle Warrants issued in connection with the issuance and sale
of the Pinnacle Series A Preferred Stock and Pinnacle Series C Preferred Stock
entitle the holders thereof to purchase in the aggregate up to approximately
256,075 shares of Pinnacle Common Stock (the "Warrant Shares"), or 30% of the
outstanding Pinnacle Common Stock on a fully-diluted basis. The Pinnacle
Warrants are exercisable at an exercise price of $0.01 per share. The exercise
price and number of Warrant Shares are both subject to adjustment in certain
events. The Pinnacle Warrants are transferable separately from the Pinnacle
Series A Preferred Stock and Pinnacle Series C Preferred Stock.
In the event that the Investors (and certain specified transferees)
cease to own shares of Pinnacle Series A Preferred Stock, so long as the
Investors and such transferees maintain the Minimum Investment, the holders of
the Pinnacle Warrants or Warrant Shares issuable upon exercise of the Pinnacle
Warrants (the "Pinnacle Warrantholders") shall be entitled to nominate two
members of the Board of Directors of Pinnacle. At such time as the Investors and
such specified transferees no longer hold any shares of Pinnacle Series A
Preferred Stock and no longer maintain the Minimum Investment, the number of
directors so nominated by the Pinnacle Warrantholders shall be reduced to one
director; provided, however, that the Pinnacle Warrantholders shall cease to be
entitled to designate any nominees at such time as such holders shall fail to
hold any shares of Pinnacle Series A Preferred Stock and shall fail to hold
Warrant Shares and/or Pinnacle Warrants which will convert into a number of
shares of Pinnacle Common Stock equal to not less than the greater of (i) 5% of
the aggregate number of shares of Pinnacle Common Stock that would have been
outstanding on the date of issuance of the Pinnacle Warrants, on a fully-diluted
basis, assuming all transactions contemplated by the Recapitalization and the
Weseley Acquisition occurred on such date and assuming exercise of all Pinnacle
Warrants and other securities convertible into or exercisable for Pinnacle
Common Stock and (ii) 3.75% of the aggregate number of shares of Pinnacle Common
Stock outstanding on the measurement date on a fully-diluted basis. At least one
director nominated by the Pinnacle Warrantholders shall serve on each committee
of the Board of Directors so long as the Investors or such specified transferees
maintain the Minimum Investment. In no event (other than when the holders of
Pinnacle Series A Preferred Stock or Pinnacle Warrantholders are entitled to
nominate a Control Number of directors) shall the holders of the Pinnacle Series
A Preferred Stock and Pinnacle Warrantholders be entitled to more than two
members of the Board of Directors of Pinnacle.
There are no restrictions on the transferability of the Pinnacle
Warrants, except as required by applicable securities laws; provided that
transferees (other than certain specified transferees) of the Pinnacle Warrants
or the Warrant Shares are not entitled to nominate members of the Board of
Directors of Pinnacle.
The holders of the shares of Pinnacle Common Stock issuable upon
exercise of the Warrants are entitled to two "demand" and "piggy-back"
registration rights, subject to customary limitations.
Except as provided above, the holders of the Pinnacle Warrants have no
right to vote on matters submitted to the stockholders of Pinnacle and have no
right to receive dividends. The holders of the Pinnacle Warrants are not
entitled to share in the assets of Pinnacle in the event of liquidation or
dissolution of Pinnacle or the winding up of Pinnacle's affairs.
SUPERMAJORITY BOARD ACTION
For so long as the Investors or certain specified transferees maintain
a Supermajority Investment (as defined below), the following corporate matters
must be approved by at least six of the seven
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members of the Board of Directors of Pinnacle (or in the event that the number
of members of the Board of Directors has been increased by the Control Number,
by a majority of the Board of Directors): (i) incurrence of Indebtedness (as
defined in Pinnacle's Certificate of Incorporation) by Pinnacle or any
subsidiary, other than the Notes offered hereby or in the Prior Offering, in
excess of $40 million at any one time outstanding; (ii) authorization or
issuance of any class or series of capital stock of Pinnacle ranking senior to
or pari passu with the Pinnacle Series A Preferred Stock (including any
additional shares of Pinnacle Investor Preferred Stock or Pinnacle Series B
Preferred Stock) or any class or series of capital stock of any subsidiary of
Pinnacle; (iii) issuance of shares of Pinnacle Common Stock, except in a
Qualified IPO (as defined below) or pursuant to Permitted Management Sales; (iv)
payment of dividends on, or redemption of, any class or series of capital stock
of Pinnacle (other than the Pinnacle Investor Preferred Stock and other than the
payment of regularly scheduled dividends on the Series B Preferred Stock and
certain purchases from Management Stockholders pursuant to the Amended and
Restated Stockholders Agreement); (v) amendments to the charter or by-laws of
Pinnacle or any subsidiary; (vi) changes in the size or composition of Board of
Directors of Pinnacle; (vii) material changes in the nature of the business of
Pinnacle or any subsidiary; (viii) transactions with affiliates, except (A)
transactions in the ordinary course of business on terms no less favorable to
Pinnacle or the applicable subsidiary than it would obtain in a comparable arm's
length transaction with a third party that is not an affiliate and (B)
agreements in effect on the date of issuance of the Pinnacle Investor Preferred
Stock; (ix) acquisitions by Pinnacle or any subsidiary of assets or businesses,
unless the present value of all payments to be made and all obligations to be
assumed by Pinnacle or such subsidiary in connection with the transaction are
less than $10 million in the aggregate; and (x) mergers, consolidations or other
business combinations by Pinnacle or any subsidiary, or sales or other
dispositions of assets, securities or businesses of Pinnacle or any subsidiary,
unless the value of all such assets, securities or businesses so sold in any
transaction (or series of related transactions) is less than $10 million in the
aggregate. "Supermajority Investment" means, (i) prior to the occurrence of a
Qualified IPO, the Minimum Investment, and (ii) after the occurrence of a
Qualified IPO, ownership of shares of Pinnacle Investor Preferred Stock having
an aggregate stated liquidation value of at least $10 million. "Qualified IPO"
means an initial public offering of Pinnacle Common Stock in which (i) the
aggregate market value of the Pinnacle Common Stock so offered is at least $20
million, (ii) the market value of the common stockholders' equity of Pinnacle
prior to giving effect to such offering is at least $50 million (in each case of
clause (i) and (ii) assuming that the market value per share of Pinnacle Common
Stock is equal to the public offering price) and (iii) the managing underwriters
for such offering are reasonably acceptable to Pinnacle and the Investors.
DIVIDEND POLICY
Pinnacle has not paid cash dividends on the Pinnacle Common Stock to
date. Because Pinnacle intends to retain any earnings to provide funds for the
operation and expansion of Pinnacle's business and to repay outstanding
indebtedness, Pinnacle does not intend to pay cash dividends on the Pinnacle
Common Stock in the foreseeable future. Furthermore, as a holding company with
no independent operations, the ability of Pinnacle to pay cash dividends will be
dependent on the receipt of dividends or other payments from Alvey. Under the
terms of the Indenture, Alvey is not permitted to pay sufficient dividends to
Pinnacle to enable Pinnacle to pay any dividends on the Pinnacle Common Stock
for the foreseeable future. In addition, the Credit Agreement contains covenants
which, among other things, restrict the payment of dividends by Alvey. In
addition, Delaware law limits Pinnacle's ability to pay dividends from current
or historical earnings or profits or capital surplus. Any determination to pay
cash dividends on the Pinnacle Common Stock in the future will be at the
discretion of Pinnacle's Board of Directors.
ANTI-TAKEOVER STATUTE
Section 203 of the Delaware General Corporation Law generally
prohibits a Delaware corporation from engaging in a "business combination" with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i)
prior to such date, the transaction or the business combination is approved by
the board of directors of the corporation, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock or (iii) on or after the
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date such stockholder became an interested stockholder, the business combination
is approved by the board and by the affirmative vote of at least 662 3% of the
outstanding voting stock which is not owned by the interested stockholder. A
"business combination" includes mergers, certain asset sales and certain other
transactions resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
in certain cases within three years, did own) 15% or more of the corporation's
voting stock, unless the acquisition by such person of such voting stock is the
result of action taken solely by the corporation.
SHARES ELIGIBLE FOR FUTURE SALE
As of March 20, 1996, 485,516 shares of Pinnacle Common Stock are
outstanding, all of which are "restricted" shares under the Securities Act.
In general, Rule 144 under the Securities Act provides that a person,
including affiliates of Pinnacle, may sell an amount of shares which were last
purchased from the issuer or an affiliate of the issuer a minimum of two years
prior to such sales, such that, within any three-month period, such person's
sales do not exceed the greater of 1% of the then outstanding shares of Pinnacle
Common Stock or the average weekly trading volume in Pinnacle Common Stock
during the four calendar weeks preceding such sale. In addition, sales under
Rule 144 may be made only through unsolicited "broker's transactions" or
transactions directly with a "market maker" and are subject to various other
conditions. A person who is not deemed an affiliate is entitled to sell shares
which were last purchased from the issuer or an affiliate of the issuer a
minimum of at least three years prior to such sales under Rule 144 without
regard to the volume and other limitations described above. Substantially all of
the outstanding Pinnacle Common Stock was issued more than three years prior to
the Prior Offering.
Prior to the date hereof, there has not been, and is not expected to
be, a market for the Pinnacle Common Stock and there can be no assurance that a
meaningful trading market will develop. No prediction can be made as to the
effect, if any, that market sales of shares of Pinnacle Common Stock or the
availability of such shares for sale will have on the market price of the
Pinnacle Common Stock prevailing from time to time. Nevertheless, sales of
substantial amounts of Pinnacle Common Stock in the public market may have an
adverse impact on such market price.
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DESCRIPTION OF NOTES
EXCEPT AS OTHERWISE INDICATED BELOW, THE FOLLOWING SUMMARY APPLIES TO BOTH THE
OLD NOTES AND THE NEW NOTES. AS USED HEREIN, THE TERM "NOTES" SHALL MEAN THE
OLD NOTES AND THE NEW NOTES, UNLESS OTHERWISE INDICATED.
The form and terms of the New Notes are substantially identical to the
form and terms of the Old Notes, except that (i) the exchange of the New Notes
pursuant to the Exchange Offer will be registered under the Securities Act, (ii)
the New Notes will not provide for payment of penalty interest as Liquidated
Damages, which terminate upon consummation of the Exchange Offer, and (iii) the
New Notes will not bear any legends restricting transfer thereof. The New Notes
will be issued solely in exchange for an equal principal amount of Old Notes.
As of the date hereof, $100 million aggregate principal amount of Old Notes is
outstanding. See "The Exchange Offer."
GENERAL
The New Notes will be issued pursuant to the Indenture between the
Company and the Trustee. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the Trust Indenture Act for a statement thereof. The following summary of
certain provisions of the Indenture 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. A copy of the Indenture is
available as set forth under "Additional Information." The definitions of
certain terms used in the following summary are set forth below under the
caption "Certain Definitions."
As of the date of the Indenture, none of the Company's Subsidiaries is
an Unrestricted Subsidiary. However, under certain circumstances, the Company
will be able to designate McHugh, Freeman & Associates, Inc. ("MFA") and its
Subsidiaries as Unrestricted Subsidiaries. If so designated, MFA and its
Subsidiaries will not be subject to many of the restrictive covenants set forth
in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes will be unsecured senior subordinated general obligations of
the Company, limited in aggregate principal amount to $100 million and will
mature on January 31, 2003. Interest on the Notes will accrue at the rate of 11
3 8% per annum and will be payable semiannually in arrears on January 31 and
July 31, commencing on July 31, 1996, to Holders of record on the immediately
preceding January 15 and July 15. Interest on the Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from January 24, 1996. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months. Principal, premium, if any, and interest
and Liquidated Damages on the 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 Notes at their respective
addresses set forth in the register of Holders of Notes; PROVIDED that all
payments with respect to Global Notes and Certificated Securities the Holders of
whom 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 in the office of the Trustee maintained for
such purpose. The 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, on the Notes will be subordinated in right of payment, as set
forth in the Indenture, to the prior payment in full of
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Senior Indebtedness, which will include borrowings under the Credit Agreement,
whether outstanding on the date of the Indenture or thereafter incurred. The
Notes will also be effectively subordinated to all Indebtedness of the Company's
Subsidiaries. Further, claims of creditors against the Company's Subsidiaries,
including trade creditors, will have priority with respect to the property and
earnings of such Subsidiaries over claims of creditors of the Company, including
the Holders.
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 marshaling of the Company's
assets and liabilities, the holders of Senior Indebtedness will be entitled to
receive payment in full in cash of all Obligations due in respect of such Senior
Indebtedness (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Indebtedness) before the Holders
of Notes will be entitled to receive any payment with respect to the Notes, and
until all Obligations with respect to Senior Indebtedness are paid in full in
cash, any distribution to which the Holders of Notes would be entitled shall be
made to the holders of Senior Indebtedness (except that Holders of Notes may
receive securities that are subordinated at least to the same extent as the
Notes to Senior Indebtedness and any securities issued in exchange for Senior
Indebtedness and Holders of Notes may recover 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
Notes (except in such subordinated 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, 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 which 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 holders
or the representative of the holders of any Designated Senior Indebtedness.
Payments on the 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 the
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. No new period of payment blockage may
be commenced by a Payment Blockage Notice 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.
The Indenture further requires that the Company promptly notify
holders of Senior Indebtedness if payment of the Notes is accelerated because of
any Event of Default.
As a result of the subordination provisions described above, in the
event of an insolvency, bankruptcy, reorganization or liquidation of the
Company, or upon the occurrence of a Change of Control or an Asset Sale
requiring repurchase by the Company of any Notes, there may not be sufficient
assets remaining to satisfy the claims of the Holders after satisfying the
claims of creditors of the Company who are holders of Senior Indebtedness and
claims of creditors of the Company's Subsidiaries. See "Risk Factors -
Subordination of Notes." On a pro forma basis, after giving effect to the
Financing Transactions and the Weseley Acquisition, the principal amount of
Senior Indebtedness outstanding at December 31, 1995 would have been
approximately $2.9 million (including $2.0 million in outstanding letters of
credit). 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."
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OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to
January 31, 2000. Thereafter, the Notes will be subject to redemption 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 accrued and unpaid interest and Liquidated Damages
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on January 31 of the years indicated below:
Year Percentage
---- ----------
2000 105.6875%
2001 102.8437%
2002 AND THEREAFTER 100.0000%
Notwithstanding the foregoing, at any time on or before January 31,
1999, the Company may (but shall not have the obligation to) redeem up to 35% of
the original aggregate principal amount of the Notes at a redemption price of
111.375% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages thereon to the redemption date, with the net proceeds of an
Equity Financing made by the Company or of a capital contribution made by
Pinnacle to the common equity capital of the Company with the net proceeds of an
Equity Financing made by Pinnacle; PROVIDED that at least 65% of the aggregate
principal amount of Notes originally issued remain outstanding immediately after
the occurrence of such redemption; and PROVIDED, FURTHER, that such redemption
shall occur within 75 days of the date of the closing of such Equity Financing.
If less than all of the Notes are to be redeemed at any time,
selection of Notes for redemption will be made by the Trustee on a pro rata
basis; PROVIDED that no 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 Notes to be
redeemed at its registered address. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note shall state the portion of
the principal amount thereof to be redeemed. A new Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest ceases to accrue on Notes or portions of them called for
redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking
fund payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will
have the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's 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 (the "Change of Control Purchase Price")
to the date of purchase (the "Change of Control Payment Date"). Within 30 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 Notes pursuant to the procedures required by the
Indenture and described in such notice. The Change of Control Payment Date shall
be a business day not less than 30 days nor more than 60 days after such notice
is mailed. 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 Notes as a result of a Change of Control.
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On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all 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 Purchase Price in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; PROVIDED that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture provides that,
prior to complying with the provisions of this covenant, but in any event within
30 days following a Change of Control, 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 Notes required by this covenant. 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.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the Holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar restructuring.
The Credit Agreement provides that certain change of control events
with respect to the Company would constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Indebtedness to which
the Company becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Company is prohibited
from purchasing Notes, the Company could seek the consent of its lenders to the
purchase of 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 purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the Credit Agreement. In such circumstances, the subordination provisions in the
Indenture would likely restrict payments to the Holders of Notes.
ASSET SALES
The Indenture provides that the Company will not, and will not permit
any of its Subsidiaries to, engage in an Asset Sale in excess of $1.0 million
unless (i) the Company (or such Subsidiary) receives consideration at the time
of such Asset Sale at least equal to the fair market value, and in the case of a
lease of assets, a lease providing for rent and other conditions which are no
less favorable to the Company (or such Subsidiary) in any material respect than
the then prevailing market conditions (evidenced in each case by a resolution of
the Board of Directors of such entity set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests sold or otherwise
disposed of, and (ii) at least 75% (100% in the case of lease payments) of the
consideration therefor received by the Company or such Subsidiary is in the form
of cash or Cash Equivalents.
The Company may apply Net Proceeds of an Asset Sale, at its option,
(a) to permanently reduce Senior Indebtedness other than Senior Revolving Debt,
(b) to permanently reduce Senior Revolving Debt (and to correspondingly reduce
commitments with respect thereto), (c) to acquire another business or other
long-term assets, in each case, in, or used or useful in, the same or a similar
line of business as the Company or any of its Subsidiaries was engaged in on the
date of the Indenture or any reasonable extensions or expansions thereof, or (d)
to reimburse the Company or its Subsidiaries for expenditures made, and costs
incurred, to repair, rebuild, replace or restore property subject to loss,
damage or taking to the extent that the Net Proceeds consist of insurance
proceeds received on account of such loss, damage or taking. Pending the final
application of any such Net Proceeds, the Company may temporarily reduce Senior
Revolving Debt 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 within 365 days after the consummation of an Asset Sale as provided in
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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 (an "Asset
Sale Offer") to purchase the maximum principal amount of Notes that may be
purchased out of the Excess Proceeds, at a purchase price in cash in an amount
equal to 100% of the principal amount thereof plus accrued and unpaid interest
and Liquidated Damages thereon to the date of purchase, in accordance with the
procedures set forth in the Indenture. If the aggregate principal amount of
Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes 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.
CERTAIN COVENANTS
OWNERSHIP OF AND LIENS ON CAPITAL STOCK
The Indenture provides that the Company will not permit any Person
(other than the Company or any Wholly Owned Subsidiary of the Company) to own
any Capital Stock of any Subsidiary of the Company or any lien or security
interest therein, and will not permit any Subsidiary of the Company to issue
Capital Stock (except to the Company or to a Wholly Owned Subsidiary) or create,
incur, assume or suffer to exist any lien or security interest therein, in each
case except (a) directors' qualifying shares, (b) Capital Stock issued prior to
the time such Person becomes a Subsidiary of the Company, (c) if such Subsidiary
merges with or into another Subsidiary, (d) if another Subsidiary merges with or
into such Subsidiary, (e) if such Subsidiary ceases to be a Subsidiary (as a
result of the sale of 100% of the shares of such Subsidiary, the Net Proceeds
from which are applied in accordance with "Repurchase at the Option of Holders-
Asset Sales"), (f) liens or security interests on Capital Stock of any
Subsidiary to secure Indebtedness under the Credit Agreement or other Senior
Indebtedness incurred in compliance with the Fixed Charge Coverage Ratio test
set forth in the first paragraph of the covenant described under the caption
"Incurrence of Indebtedness and Issuance of Preferred Stock," or (g) liens on
Capital Stock of Busse Bros., Inc. to secure payments made in connection with
covenants not to compete made by the former owners of Busse.
UNRESTRICTED SUBSIDIARIES
The Board of Directors of the Company may designate all of (but not
some of) MFA and its Subsidiaries as Unrestricted Subsidiaries. MFA and its
Subsidiaries may only be so designated if (i) immediately after giving effect to
such designation no Default or Event of Default exists, (ii) the Company would,
at the time of such designation and after giving pro forma effect thereto as if
such designation had occurred 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 under the caption "Incurrence of
Indebtedness and Issuance of Preferred Stock," (iii) after the date of the
Indenture and prior to such designation, no assets of the Company or of any
Subsidiary of the Company (including, without limitation, Capital Stock of any
such Subsidiary) shall have been transferred, directly or indirectly, to MFA or
any of its Subsidiaries, other than assets transferred in the ordinary course of
business and on terms that are no less favorable to the Company or the relevant
Subsidiary than those that would have been obtained in a comparable transaction
by the Company or such Subsidiary with an unrelated Person, and (iv) such
designation is made in connection with the issuance or sale of 10% or more of
the Capital Stock of MFA and the Net Proceeds therefrom are applied in
accordance with the covenant set forth under the caption "Repurchase at the
Option of Holders-Asset Sales" as if MFA and its Subsidiaries were then
Subsidiaries of the Company. Any such designation by the Board of Directors of
the Company 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.
MFA and its Subsidiaries shall continue to be Unrestricted
Subsidiaries only if each of them (a) has no Indebtedness other than
Non-Recourse Debt; (b) is a Person with respect to which neither the Company nor
any of its Subsidiaries has any direct or indirect obligation (x) to subscribe
for additional Equity
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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 (c)
has not guaranteed or otherwise directly or indirectly provided credit support
for any Indebtedness of the Company or any of its Subsidiaries. If, at any time,
any of MFA and its Subsidiaries fails to meet the foregoing requirements, MFA
and its Subsidiaries shall thereafter cease to be Unrestricted Subsidiaries for
purposes of the Indenture and any Indebtedness of MFA and its Subsidiaries shall
be deemed to be incurred by a 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 MFA
and its Subsidiaries, if previously designated as Unrestricted Subsidiaries, to
be Subsidiaries; PROVIDED that such designation shall be deemed to be an
incurrence of Indebtedness by a Subsidiary of the Company of any outstanding
Indebtedness of MFA and its Subsidiaries and such designation shall only be
permitted if (i) such Indebtedness is permitted under the covenant described
under the caption "Incurrence of Indebtedness and Issuance of Preferred Stock,"
and (ii) no Default or Event of Default would be in existence following such
designation.
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any distribution on account of the Company's or any of its
Subsidiaries' Equity Interests (including, without limitation, any payment to
stockholders of the Company in connection with a merger or consolidation
involving the Company), other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company or dividends or
distributions payable to the Company or any Wholly Owned Subsidiary of the
Company; (ii) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of the Company or any direct or indirect parent of the Company
or Subsidiary or Unrestricted Subsidiary or other Affiliate of the Company
(other than any such Equity Interests owned by the Company); (iii) make any
principal payment on, or purchase, redeem, defease or otherwise acquire or
retire for value any Indebtedness that is PARI PASSU with or subordinated to the
Notes (other than Notes), except at final maturity, other than through the
purchase, redemption or acquisition by the Company of Indebtedness through the
issuance in exchange therefor of Equity Interests (other than Disqualified
Stock) or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) 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 of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(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 of all other
Restricted Payments made by the Company and its Subsidiaries after the date of
the Indenture (excluding Restricted Payments permitted by clauses (ii), (iii),
(iv) and (v) of the next succeeding paragraph), is less than the sum of (i) $3.7
million, plus (ii) 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 (iii) 100%
of the aggregate net cash proceeds received by the Company from the issue or
sale after the date of the Indenture of Equity Interests of the Company or of
debt securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or convertible
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debt securities) sold to a Subsidiary or an Unrestricted Subsidiary of the
Company and other than Disqualified Stock or debt securities that have been
converted into Disqualified Stock).
The foregoing clauses (b) and (c), however, 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 making of any Restricted Investment in exchange for,
or out of the proceeds of, the substantially concurrent sale (other than to a
Subsidiary or any Unrestricted Subsidiary of the Company) of Equity Interests of
the Company (other than Disqualified Stock); PROVIDED, that any net cash
proceeds that are utilized for any such Restricted Investment, and any Net
Income resulting therefrom, shall be excluded from clause (c) of the preceding
paragraph; (iii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company (or distribution of cash by the Company to
Pinnacle to permit Pinnacle to redeem, repurchase, retire or otherwise acquire
any Equity Interests of Pinnacle) in exchange for, or out of the proceeds of,
the substantially concurrent sale (other than to a Subsidiary or any
Unrestricted Subsidiary of the Company) of other Equity Interests of the Company
(other than any Disqualified Stock); PROVIDED that any net cash proceeds that
are utilized for any such redemption, repurchase, retirement or other
acquisition, and any Net Income resulting therefrom, shall be excluded from
clause (c) of the preceding paragraph; (iv) the defeasance, redemption or
repurchase of PARI PASSU or subordinated Indebtedness with the net cash proceeds
from an incurrence of Permitted Refinancing Indebtedness or the substantially
concurrent sale (other than to a Subsidiary or any Unrestricted Subsidiary of
the Company) of Equity Interests of the Company (other than Disqualified Stock);
PROVIDED, that any net cash proceeds that are utilized for any such defeasance,
redemption or repurchase, and any Net Income resulting therefrom, shall be
excluded from clause (c) of the preceding paragraph; and (v) any payment by the
Company or any of its Subsidiaries pursuant to any agreement described in clause
(f), (g), (h), (i), (j), (k), (l) or (m) of the definition of "Exempt Affiliate
Transactions," in each case as in effect on the date of the Indenture.
The amount of all Restricted Payments (other than cash) shall be the
fair market value (evidenced by a resolution of the Board of Directors set forth
in an Officers' Certificate delivered to the Trustee) on the date of the
Restricted Payment of the asset(s) proposed to be transferred by the Company or
such Subsidiary, as the case may be, pursuant to the Restricted Payment. 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 described under the caption "Restricted Payments" were computed,
which calculations may be based upon the Company's latest available financial
statements.
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, guaranty or otherwise become directly or indirectly liable, contingently
or otherwise, with respect to (collectively, "incur") any Indebtedness
(including Acquired Indebtedness) 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 and its
Subsidiaries may incur Indebtedness (including Acquired Indebtedness) and the
Company may issue shares of Disqualified Stock if: (i) 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 is
issued would have been at least 2 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 had been
issued, as the case may be, at the beginning of such four-quarter period; and
(ii) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof; PROVIDED, that no Guarantee may be
incurred pursuant to this paragraph, unless the guaranteed Indebtedness is
incurred by the Company or a Subsidiary pursuant to this paragraph.
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The foregoing provisions will not apply to:
(i) the incurrence by the Company of Indebtedness under the
Credit Agreement (and the incurrence by Subsidiaries of Guarantees thereof) in
an aggregate principal amount at any time outstanding (with letters of credit
being deemed to have a principal amount equal to the maximum potential liability
of the Company and its Subsidiaries thereunder) not to exceed $30 million, less
the aggregate amount of all Net Proceeds of Asset Sales applied to permanently
reduce the outstanding amount or the commitments with respect to such
Indebtedness pursuant to the covenant described above under the caption "-Asset
Sales";
(ii) the incurrence by the Company and its Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by
the Notes;
(iv) the incurrence by the Company or any of its 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 used in the business of the Company or such Subsidiary or any Permitted
Refinancing Indebtedness thereof (provided that the requirements of clause (ii)
of the definition of Permitted Refinancing Indebtedness need not be met for the
purposes of this clause (iv)), in an aggregate principal amount not to exceed
$10 million at any time outstanding (of which an aggregate principal amount of
not more than $5 million at any time outstanding shall have been incurred by
Subsidiaries of the Company);
(v) the incurrence by the Company or any of its Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund, any
Indebtedness described in the first paragraph and clause (ii) of this
covenant;
(vi) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its Wholly
Owned Subsidiaries or between or among any Wholly Owned Subsidiaries; PROVIDED
that, in the case of Indebtedness of the Company, such obligations shall be
unsecured and subordinated in case of an event of default in all respects to the
Company's obligations pursuant to the Notes; and PROVIDED, HOWEVER, that (i) any
subsequent issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than a Wholly Owned Subsidiary and
(ii) any sale or other transfer of any such Indebtedness to a Person that is not
either the Company or a Wholly Owned Subsidiary shall be deemed, in each case,
to constitute an incurrence of such Indebtedness by the Company or such
Subsidiary, as the case may be;
(vii) the incurrence by the Company of Hedging Obligations that
are incurred for the purpose of fixing or hedging interest rate risk with
respect to any floating rate Indebtedness that is permitted by the Indenture to
be incurred; and
(viii) the incurrence by the Company and its Subsidiaries of
Indebtedness (in addition to Indebtedness permitted by any other clause of this
paragraph) in an aggregate principal amount at any time outstanding not to
exceed $10.0 million.
Notwithstanding the foregoing, (a) the aggregate principal amount
outstanding of Indebtedness incurred by Subsidiaries of the Company, other
than Indebtedness consisting of Guarantees of the Company's Indebtedness
incurred under clause (i) of this covenant or Guarantees of Permitted
Refinancing Indebtedness of the Company specified in clause (b) of this
sentence and other than Indebtedness incurred under clauses (ii), (iv), (v)
and (vi) of this covenant, shall not exceed $5.0 million, and (b) no
Subsidiary shall incur Indebtedness consisting of a Guarantee of the
Company's Indebtedness, except a Guarantee of Permitted Refinancing
Indebtedness of the Company where the Company's Indebtedness being refinanced
was Guaranteed at least in the same amount and to the same extent by such
Subsidiary and except a Guarantee permitted pursuant to clause (a) of this
sentence.
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LIENS
The Indenture provides that the Company will not, directly or
indirectly, create, incur, assume or suffer to exist any Lien on any of its
assets, now owned or hereafter acquired, securing any Indebtedness other than
Senior Indebtedness or Indebtedness specified in clauses (w) or (y) of the
second sentence of the definition of "Senior Indebtedness," unless the Notes are
secured equally and ratably with such other Indebtedness; PROVIDED that, if such
Indebtedness is by its terms expressly subordinate to the Notes, the Lien
securing such subordinate or junior Indebtedness shall be subordinate and junior
to the Lien securing the Notes with the same relative priority as such
subordinated or junior Indebtedness shall have with respect to the Notes.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit
any of its 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 Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries on its Capital Stock or
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
Subsidiaries, (ii) make loans or advances to the Company or any of its
Subsidiaries or (iii) transfer any of its properties or assets to the Company or
any of its Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (A) Existing Indebtedness as in effect on the date of the
Indenture consisting of capital leases whose encumbrances or restrictions are
limited to the property subject to such leases, (B) the Indenture and the Notes,
(C) applicable law, (D) any instrument governing Acquired Indebtedness or
Capital Stock of a Person acquired by the Company or any of its Subsidiaries as
in effect at the time of such acquisition (except to the extent such Acquired
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 the Consolidated
EBITDA of such Person is not taken into account in determining whether such
acquisition was permitted by the terms of the Indenture, (E) any document or
instrument governing Indebtedness incurred pursuant to clause (iv) of the second
paragraph under the caption "Incurrence of Indebtedness and Issuance of
Preferred Stock," PROVIDED that any such restriction contained therein relates
only to the asset or assets constructed or acquired in connection therewith, or
(F) Permitted Refinancing Indebtedness, PROVIDED that the restrictions contained
in the agreements governing such Permitted Refinancing Indebtedness are no more
restrictive than those contained in the agreements governing the Indebtedness
being refinanced.
LIMITATION ON LAYERING DEBT
The Indenture provides that 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 Notes.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture provides that the Company will not, and will not permit
any Subsidiary to, in a single transaction or series of related transactions
consolidate or merge with or into (other than the consolidation or merger of a
Wholly Owned Subsidiary of the Company with another Wholly Owned Subsidiary of
the Company or into the Company) (whether or not the Company or such Subsidiary
is the surviving corporation), or directly and/or indirectly through its
Subsidiaries sell, assign, transfer, lease, convey or otherwise dispose of all
or substantially all of its properties or assets (determined on a consolidated
basis for the Company and its Subsidiaries taken as a whole) in one or more
related transactions to, another corporation, Person or entity unless (i) either
(a) the Company, in the case of a transaction involving the Company, or such
Subsidiary, in the case of a transaction involving a Subsidiary, is the
surviving corporation or (b) in the case of a transaction involving the Company,
the entity or the Person formed by or surviving any
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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 and assumes all the obligations of
the Company under the Notes and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee; (ii) immediately
after such transaction no Default or Event of Default exists; and (iii) the
Company or, if other than the Company, the entity or Person formed by or
surviving any such consolidation or merger, 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 Charge 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."
Notwithstanding the foregoing, the Company may merge with or into
Pinnacle even if the requirements of clauses (iii)(A) and (iii)(B) of the
preceding paragraph are not met if (i) all the other requirements of the
preceding paragraph are met, (ii) the entity surviving any such merger will have
Consolidated Net Tangible Assets immediately after such merger equal to or
greater than the Consolidated Net Tangible Assets of the Company immediately
preceding such merger, (iii) at the time of such merger, Pinnacle has no
Indebtedness other than Guarantees of Indebtedness of the Company or of
Subsidiaries of the Company, and (iv) such merger is effected in connection with
an Equity Offering of the surviving entity where the market value of the common
stock so offered is at least $20 million and the implied value of the entire
common stock of such entity is at least $50 million. For the purposes of this
paragraph, Consolidated Net Tangible Assets means the excess of (i)
consolidated assets (other than intangible assets) over (ii) consolidated
liabilities, in each case of the Company and its consolidated Subsidiaries or
the surviving entity and its consolidated Subsidiaries, as the case may be,
all determined in accordance with GAAP.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit
any of its Subsidiaries to, after the date of the Indenture, sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or make any
payment to, or purchase any property or assets from, or enter into or make any
agreement, loan, advance or guarantee with, or for the benefit of, any Affiliate
(each of the foregoing, an "Affiliate Transaction"), other than Exempt Affiliate
Transactions, unless (i) such Affiliate Transaction is on terms that are no less
favorable to the Company or the relevant Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Subsidiary with
an unrelated Person and (ii) the Company delivers to the Trustee (a) with
respect to any Affiliate Transaction entered into after the date of the
Indenture 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 involving aggregate consideration in excess of $5.0
million, an opinion as to the fairness to the Company or such Subsidiary of such
Affiliate Transaction from a financial point of view issued by an investment
banking firm of national standing.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes within 15 days after it is or would have
been required to file such with the Commission (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" 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
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addition, whether or not required by the rules and regulations of the
Commission, at any time after the Company files a registration statement with
respect to the Exchange Offer or a Shelf Registration Statement, the Company
will file a copy of all such information and reports with the Commission for
public availability (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 has agreed that, for so long as any Notes
remain outstanding, it will furnish to the Holders and to securities analysts
and prospective investors, upon their request, the information specified in Rule
144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides 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 (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 (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Company to
comply with the provisions described under the captions
"Repurchase at Option of Holders-Change of Control," "Repurchase at
Option of Holders-Asset Sales," "Ownership of and Liens on Capital Stock,"
"Restricted Payments" or "Incurrence of Indebtedness and Issuance of Preferred
Stock"; (iv) failure by the Company for 60 days after notice to comply with any
of its other agreements in the Indenture or the 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 Subsidiaries (or the payment of which is guaranteed by the
Company or any of its 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 such Indebtedness at final maturity
thereof (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 Subsidiaries to pay final judgments (not fully
covered by insurance) aggregating in excess of $5.0 million, which judgments are
not paid, discharged or stayed for a period of 60 days; and (vii) certain events
of bankruptcy or insolvency with respect to the Company or any of its
Subsidiaries or any Unrestricted Subsidiary.
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 may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to the Company or any Subsidiary or any
Unrestricted Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The
Indenture provides that if a Default occurs and is continuing, generally the
Trustee must, within 90 days after the occurrence of such default, give to the
Holders notice of such Default. The Trustee may withhold from Holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or premium, if any, or
interest) if it determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all of
the 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 or premium or Liquidated Damages on, or the principal of,
the Notes or in respect of a provision that cannot be amended or waived without
the consent of the Holder affected. See "Amendment, Supplement and Waiver."
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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 Notes or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Notes by accepting
a Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the 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 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 Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated, destroyed,
lost or stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust, (iii) the Company's obligations under
the Registration Rights Agreement, (iv) the rights, powers, trusts, duties and
immunities of the Trustee, and the Company's obligations in connection therewith
and (v) 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 Notes. In the event Covenant Defeasance occurs, certain events (not
including nonpayment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
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, cash in U.S. dollars, noncallable
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 on the stated maturity or on the
applicable redemption date, as the case may be, and the Company must specify
whether the 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 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 same 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 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 123rd day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
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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
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 over
other creditors of the Company with the intent of defeating, hindering, delaying
or defrauding creditors of the Company or others; and (vii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the
Indenture. The Company, the Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents
as well as certifications, legal opinions and other information 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 Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a 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 Notes may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the Notes then outstanding
(including consents obtained in connection with a tender offer or exchange offer
for Notes), and any existing default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver
may not (with respect to any Notes held by a nonconsenting Holder): (i) reduce
the principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any 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 Note, (iv) waive a Default or
Event of Default in the payment of principal of or premium, if any, or interest
on the Notes (except a rescission of acceleration of the Notes by the Holders of
at least a majority in aggregate principal amount of the Notes and a waiver of
the payment default that resulted from such acceleration), (v) make any Note
payable in money other than that stated in the Notes, (vi) make any change in
the provisions of the Indenture relating to waivers of past Defaults or the
rights of Holders of Notes to receive payments of principal of or premium, if
any, or interest on the Notes, (vii) waive a redemption payment with respect to
any Note (other than a payment required by one of the covenants described above
under the caption "Repurchase at the Option of Holders") or (viii) make any
change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of
Notes, the Company and the Trustee may amend or supplement the Indenture or the
Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of the Company's obligations to Holders of Notes in
the case of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the Holders of 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.
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CONCERNING THE TRUSTEE
The Bank of New York is the Trustee under the Indenture. The Trustee's
current address is 101 Barclay Street, Floor 21 West, New York, New York 10286.
The Holders of a majority in principal amount of the then outstanding
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 Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to Alvey Systems, Inc., 101 South Hanley, St. Louis,
Missouri 63105, Attention: Chief Financial Officer.
BOOK-ENTRY, DELIVERY AND FORM
The New Notes will initially be issued in the form of one Global Note
(the "Global Note"). The Global Note will be deposited on the date of the
consummation of the Exchange Offer (the "Closing Date") with the Trustee as
custodian for The Depository Trust Company (the "Depositary") and registered in
the name of Cede & Co., as nominee of the Depositary (such nominee being
referred to herein as the "Global Note Holder").
The Depositary is a limited-purpose trust company that was created to
hold securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between Participants
through electronic book-entry changes in accounts of its Participants. The
Depositary's Participants include securities brokers and dealers, banks and
trust companies, clearing corporations and certain other organizations. Access
to the Depositary's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect Participants"
or the "Depositary's Indirect Participants") that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
Persons who are not Participants may beneficially own securities held by or on
behalf of the Depositary only through the Depositary's Participants or the
Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants exchanging Old Notes for New Notes with portions of the
principal amount of the Global Note and (ii) ownership of the Notes evidenced by
the Global Note will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by the Depositary (with respect to the
interests of the Depositary's Participants), the Depositary's Participants and
the Depositary's Indirect Participants. Holders are advised that 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 Notes
evidenced by the Global Note will be limited to such extent.
So long as the Global Note Holder is the registered owner of any
Notes, the Global Note Holder will be considered the sole Holder under the
Indenture of any Notes evidenced by the Global Note. Beneficial owners of Notes
evidenced by the Global Note will not be considered the owners or Holders
thereof under the Indenture for any purpose, including with respect to the
giving of any directions, instructions or approvals to the Trustee thereunder.
Neither the Company nor the Trustee will have any responsibility or
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liability for any aspect of the records of the Depositary or for maintaining,
supervising or reviewing any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, and
interest, if any, on any Notes registered in the name of the Global Note Holder
on the applicable record date will be payable by the Trustee to or at the
direction of the Global Note Holder in its capacity as the registered Holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee may treat the persons in whose names Notes, including the Global Note,
are registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial owners
of Notes. The Company believes, however, that it is currently the policy of the
Depositary to immediately credit the accounts of the relevant Participants with
such payments, in amounts proportionate to their respective holdings of
beneficial interests in the relevant security as shown on the records of the
Depositary. Payments by the Depositary's Participants and the Depositary's
Indirect Participants to the beneficial owners of Notes will be governed by
standing instructions and customary practice and will be the responsibility of
the Depositary's Participants or the Depositary's Indirect Participants.
CERTIFICATED NOTES
Any beneficial owner of Notes evidenced by the Global Note may obtain
Notes in the form of registered definitive Notes ("Certificated New Notes"). If
the Company notifies the Trustee in writing that the Depositary is no longer
willing or able to act as a depositary and the Company is unable to locate a
qualified successor within 90 days then, upon surrender by the Global Note
Holder of its Global Note, Notes in such form will be issued to each person that
the Global Note Holder and the Depositary identify as being the beneficial owner
of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by
the Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes
represented by the Global Note (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 Note Holder. With
respect to Certificated Notes, 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. Secondary trading in long-term notes and debentures of
corporate issuers is generally settled in clearing-house or next-day funds. In
contrast, the Notes represented by the Global Note are expected to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in the Certificated Notes will also be settled in
immediately available funds.
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 INDEBTEDNESS" means, with respect to any specified Person,
(i) any Indebtedness or Disqualified Stock of any other Person existing at the
time such other Person is merged with or into or becomes 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
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such specified Person, and (ii) Indebtedness secured by a Lien encumbering any
asset acquired by such specified Person.
"AFFILIATE" of any specified Person means (i) any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person or (ii) any other Person who is a
director or executive officer of (a) such specified Person or (b) any Person
described in the preceding clause (i) (but not including directors or officers
of the Approved Pinnacle Preferred Stockholders). 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 any class, or
any series of any class, of equity securities of a Person, whether or not
voting, shall be deemed to be control.
"APPROVED PINNACLE PREFERRED STOCKHOLDERS" means Vestar, Chemical,
Hancock and any Person who controls or is controlled by or is under common
control with any of them including, in the case of Chemical, any Person who is a
surviving entity resulting from the merger of Chemical Banking Corporation and
The Chase Manhattan Corporation or any of their respective Subsidiaries.
"APPROVED PINNACLE STOCKHOLDERS" means Employee Stockholders and
Approved Pinnacle Preferred Stockholders.
"ASSET SALE" means with respect to any Person, the sale, lease,
conveyance or other disposition, that does not constitute a Restricted Payment
or an Investment, by such Person of any of its assets (including, without
limitation, by way of a sale and leaseback and including the issuance, sale or
other transfer of any Equity Interests in any Subsidiary or the sale or other
transfer of any Equity Interests in any Unrestricted Subsidiary of such Person)
other than to the Company (including the receipt of proceeds of insurance paid
on account of the loss of or damage to any asset and awards of compensation for
any asset taken by condemnation, eminent domain or similar proceeding, and
including the receipt of proceeds of business interruption insurance), in each
case, in one or a series of related transactions; PROVIDED, that notwithstanding
the foregoing, the term "Asset Sale" shall not include: (a) the sale, lease,
conveyance, disposition or other transfer of all or substantially all of the
assets of the Company, as permitted pursuant to the covenant entitled "Merger,
Consolidation or Sale of Assets," (b) the sale or lease of equipment, inventory,
accounts receivable or other assets in the ordinary course of business
consistent with past practice, (c) a transfer of assets by the Company to a
Wholly Owned Subsidiary of the Company or by a Wholly Owned Subsidiary of the
Company to the Company or to another Wholly Owned Subsidiary of the Company, (d)
an issuance of Equity Interests by a Wholly Owned Subsidiary of the Company to
the Company or to another Wholly Owned Subsidiary of the Company, PROVIDED that
the consideration paid by the Company or such Wholly Owned Subsidiary of the
Company for such Equity Interests shall be deemed to be an Investment, or (e)
sale or other disposition of cash or Cash Equivalents.
"BENEFICIARY", when used with respect to any individual, means the
spouse, lineal descendants, parents and siblings of any such individual, the
estates and the legal representatives of any such individual and any of the
foregoing and the trustee of any bona fide trust of which any such individual
and any of the foregoing are the sole beneficiaries or grantors.
"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.
"CAPITAL STOCK" means (i) in the case of a corporation, capital
stock, (ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of capital stock, (iii) in the case of partnership, partnership
interests (whether general or limited)
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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 EQUIVALENT" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities not more than twelve
months from the date of acquisition, (b) U.S. dollar denominated (or foreign
currency fully hedged) time deposits, certificates of deposit, Eurodollar time
deposits or Eurodollar certificates of deposit of (i) any domestic commercial
bank of recognized standing having capital and surplus in excess of $500 million
or (ii) any bank whose short-term commercial paper rating from S&P is at least
A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent
thereof (any such bank being an "Approved Lender"), in each case with maturities
of not more than twelve months from the date of acquisition, and (c) commercial
paper issued by any Approved Lender (or by the parent company thereof) or any
variable rate notes issued by, or guaranteed by, any domestic corporation rated
A-2 (or the equivalent thereof) or better by S&P or P-2 (or the equivalent
thereof) or better by Moody's and maturing within twelve months of the date of
acquisition.
"CHANGE OF CONTROL" means such time as either:
(i) prior to the initial public offering by the Company or
Pinnacle of its common stock, (a) Pinnacle ceases to be, directly or indirectly,
the beneficial owner of 100% of the voting power of the Voting Stock of the
Company (unless the Company has merged with or into Pinnacle in compliance with
the covenant set forth under the caption "Merger, Consolidation or Sale of
Assets") or (b) the Approved Pinnacle Stockholders cease to be, directly or
indirectly, the beneficial owners, in the aggregate, of more than 50% of the
voting power of the Voting Stock of the Company and of Pinnacle, in each case on
a fully-diluted basis, after giving effect to the conversion and exercise of all
outstanding warrants, options and other securities of the Company or Pinnacle,
as the case may be, convertible into or exercisable for Voting Stock of the
Company or Pinnacle, as the case may be (whether or not such securities are then
currently convertible or exercisable); or
(ii) after the initial public offering by the Company or Pinnacle
of its common stock, (a) any Schedule 13D, Form 13F or Schedule 13G under the
Exchange Act, or any amendment to such Schedule or Form, is received by the
Company or Pinnacle which indicates that, or the Company or Pinnacle otherwise
becomes aware that, a person or group (within the meaning of Section 13(d) or
14(d) of the Exchange Act) (other than one or more Approved Pinnacle
Stockholders) has become, directly or indirectly, the beneficial owner, by way
of merger, consolidation or otherwise, of 35% or more of the voting power of the
Voting Stock of the Company or Pinnacle on a fully-diluted basis, after giving
effect to the conversion and exercise of all outstanding warrants, options and
other securities of the Company or Pinnacle, as the case may be, convertible
into or exercisable for Voting Stock of the Company or Pinnacle, as the case may
be (whether or not such securities are then currently convertible or
exercisable) and (b) such person or group has become, directly or indirectly,
the beneficial owner of a greater percentage of the voting power of the Voting
Stock of the Company or of Pinnacle, as the case may be, calculated on such
fully-diluted basis, than the percentage beneficially owned by the Approved
Pinnacle Stockholders; or
(iii) the sale, lease or transfer of all or substantially all of
the assets of the Company to any Person or group; or
(iv) during any period of two consecutive calendar years,
individuals who at the beginning of such period constituted either the Board of
Directors of the Company or the Board of Directors of Pinnacle, as the case may
be, together with any new members of such Board of Directors (a) whose election
by such Board of Directors or whose nomination for election by the stockholders
of the Company or the stockholders of Pinnacle, as the case may be, was approved
by a vote of a majority of the members of such Board of Directors then still in
office who either were directors at the beginning of such period or whose
election or nomination for election was previously so approved or (b) elected by
the Approved Pinnacle
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Preferred Stockholders, cease for any reason to constitute a majority of the
directors of the Company or of Pinnacle, as the case may be, then in office.
"CONSOLIDATED EBITDA" means, with respect to any Person for any
period, the sum of, without duplication, (i) the Consolidated Net Income of such
Person and its Subsidiaries for such period, plus (ii) the Fixed Charges for
such period, plus (iii) amortization of deferred financing charges for such
period, plus (iv) provision for taxes based on income or profits for such period
(to the extent such income or profits were included in computing Consolidated
Net Income for such period), plus (v) consolidated depreciation, amortization
and other noncash charges of such Person and its Subsidiaries required to be
reflected as expenses on the books and records of such Person, minus (vi) cash
payments with respect to any nonrecurring, noncash charges previously added back
pursuant to clause (v), and excluding (vii) the impact of foreign currency
translations. Notwithstanding the foregoing, the provision for taxes based on
the income or profits of, and the depreciation and amortization and other
noncash charges of, a Subsidiary of a Person shall be added to Consolidated Net
Income to compute Consolidated EBITDA only to the extent (and in the same
proportion) that the Net Income of such Subsidiary was included in calculating
the Consolidated Net Income of such Person and only if a corresponding amount
would be permitted at the date of determination to be dividended to such Person
by such Subsidiary without prior approval (unless such approval has been
obtained), pursuant to the terms of its charter and all agreements, instruments,
judgments, decrees, orders, statutes, rules and governmental regulations
applicable to that Subsidiary or its stockholders.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its 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
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 Wholly Owned Subsidiary thereof, (ii) the Net
Income of any Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (unless such approval has 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 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 of, or
any dividends or other distributions from, any Unrestricted Subsidiary, to the
extent otherwise included, 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 Persons' 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 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 (other than purchase accounting
adjustments made, in connection with any acquisition of any entity that becomes
a consolidated Subsidiary of such Person after the date of the Indenture to the
book value of the assets of such entity), (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.
"CREDIT AGREEMENT" means that certain Credit Agreement, dated as of
the date of the Indenture, by and among the Company and NationsBank, N.A., as
administrative agent, and the lenders parties thereto, including any related
notes, guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced, restated or refinanced from time to time.
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"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) so long as the Senior Bank
Debt is outstanding, the Senior Bank Debt and (ii) thereafter, any other Senior
Indebtedness permitted under the Indenture the principal amount of which is
$15.0 million or more and that has been designated by the Company as "Designated
Senior Indebtedness"; PROVIDED THAT for purposes of clause (i) of the first
sentence of the third paragraph under the caption "Subordination," "Designated
Senior Indebtedness" shall also mean any other Senior Indebtedness permitted
under the Indenture the principal amount of which is $15.0 million or more.
"DISQUALIFIED STOCK" means (a) with respect to any Person, Capital
Stock of such Person that, by its terms (or by the terms of any security into
which it is convertible or for which it is exchangeable), or upon the happening
of any event (unless any redemption or repurchase of such Capital Stock upon the
occurrence of such event is required by any such terms, but only to the extent
that a payment in respect thereof would be permitted under the covenant set
forth under the caption "Restricted Payments"), matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the Holder thereof, in whole or in part, on or prior to the
date which is one year after the date on which the Notes mature and (b) with
respect to any Subsidiary of such Person (including with respect to any
Subsidiary of the Company), any Capital Stock other than any common stock with
no preference, privileges, or redemption or repayment provisions.
"EMPLOYEE STOCKHOLDERS" means all individuals who are either directors
of the Company on the date of the Indenture or employees of the Company or any
Subsidiary of the Company prior to, on or after the date of the Indenture and
their respective Beneficiaries; PROVIDED, HOWEVER, that for the purposes of
determining the percentage of the voting power of the Voting Stock of the
Company or Pinnacle owned by Approved Pinnacle Stockholders (i) the maximum
percentage that shall be included in the case of any individual who is a
director on the date of the Indenture or an employee prior to or on the date of
the Indenture (or the Beneficiaries of such individual) shall be 15%, (ii) the
maximum percentage that shall be included in the case of any individual who is
not a director on the date of the Indenture or an employee on or prior to the
date of the Indenture (or the Beneficiaries of such individual) shall be 5% and
(iii) the maximum percentage that shall be included in the aggregate for all
individuals who are not directors on the date of the Indenture or employees on
or prior to the date of the Indenture (or the Beneficiaries of such individuals)
shall be 15%.
"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), whether outstanding prior
to, on or after the date of the Indenture.
"EQUITY OFFERING" means an underwritten public offering of the common
stock of the Company or of the common stock of Pinnacle pursuant to a
registration statement filed with the Commission in accordance with the
Securities Act.
"EXEMPT AFFILIATE TRANSACTIONS" means (a) transactions between or
among the Company and/or its Wholly Owned Subsidiaries, (b) advances to officers
of the Company or any Subsidiary of the Company in the ordinary course of
business to provide for the payment of reasonable expenses incurred by such
persons in the performance of their responsibilities to the Company or such
Subsidiary or in connection with any relocation, (c) fees and compensation paid
to and indemnity provided on behalf of directors, officers or employees of the
Company or any Subsidiary of the Company in the ordinary course of business, (d)
any employment agreement that is in effect on the date of the Indenture in the
ordinary course of business and any such agreement entered into by the Company
or a Subsidiary after the date of the Indenture in the ordinary course of
business of the Company or such Subsidiary, (e) any Restricted Payment that is
not prohibited by the covenant set forth under the caption "Restricted Payments"
above, (f) payments by the Company to Pinnacle in respect of corporate expenses
of Pinnacle and operating expenses of Pinnacle attributable to its ownership of
Capital Stock of the Company and to pay taxes allocable to the net income of the
Company and its Subsidiaries, (g) so long as MFA and its Subsidiaries are
Subsidiaries of the Company, the Stock Purchase
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Agreement dated as of December 20, 1995 by and among Pinnacle, the Company,
MFA, Weseley Software Development Corp. and the stockholders signatory
thereto, as in effect on the date of the Indenture, (h) payments or
transactions pursuant to the Termination Agreement dated as of December 31,
1995 by and among Pinnacle, the Company and Lafarick, Inc. (formerly known as
Raebarn Corporation), as in effect on the date of the Indenture, (i) payments
or transactions pursuant to the Consulting Agreement dated as of December 31,
1995 by and among Pinnacle, the Company and Mammoth Capital Inc., as in
effect on the date of the Indenture, (j) payments or transactions pursuant to
the Consulting Agreement dated as of the date of the consummation of the
Prior Offering among Pinnacle, the Company and Vestar Capital Partners, as in
effect on the date of the Indenture, (k) payments or transactions pursuant to
Section 6.2 of the Recapitalization Agreement dated as of September 28, 1995
by and among Pinnacle, the Company and the selling stockholders named
therein, as in effect on the date of the Indenture, (l) payments made
pursuant to the Non-Competition, Working Capital Guarantee and Security
Agreement dated April 15, 1992 by and among the Company, Busse Bros., Inc.
and certain of the former owners of Busse Bros., Inc., as in effect on the
date of the Indenture and (m) payments made pursuant to that certain Lease,
dated December 24, 1986, by and between White Storage & Retrieval Systems,
Inc. and Boright Realty (a general partnership affiliated with Donald J.
Weiss), as in effect on the date of the Indenture.
"EXISTING INDEBTEDNESS" means the Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the date of the Indenture, until such amounts are repaid.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated EBITDA of such Person and its Subsidiaries
for such period to the Fixed Charges of such Person and its Subsidiaries for
such period. In the event that the Company or any of its Subsidiaries incurs,
assumes, Guarantees or repays or redeems any Indebtedness (other than revolving
credit borrowings) or issues or redeems preferred stock subsequent to the
commencement of the four-quarter reference period for which the Fixed Charge
Coverage Ratio is being calculated but on or 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, repayment 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. For purposes of making the computation referred to above, (i)
acquisitions that have been made by the Company or any of its 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 (ii) the
Consolidated EBITDA 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 Subsidiaries following
the Calculation Date.
"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 Subsidiaries for such period (net of any interest income)
including, without limitation, amortization of original issue discount, noncash
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 or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations, but excluding amortization of deferred
financing charges for such period and (ii) the consolidated interest expense of
such Person and its 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 Subsidiaries or secured by a Lien on assets of such
Person or one of its Subsidiaries (whether or not such Guarantee or Lien is
called upon) and (iv) the product of (a) all cash dividend payments (and noncash
dividend payments in the case of a Person that is a Subsidiary) on any series of
preferred stock of such Person payable to a party other
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than the Company or a Wholly Owned Subsidiary, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current combined federal, state and local statutory tax rate of such Person,
expressed as a decimal, on a consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of 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 on the date of the Indenture.
"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, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"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 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 purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable, if
and to the extent any of the foregoing indebtedness (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.
"INVESTMENTS" means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates) in the form of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding advances to officers and employees
of the type specified in clause (b) of the definition of Exempt Affiliate
Transactions), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities and all other items that are
or would be classified as investments on a balance sheet prepared in accordance
with GAAP; PROVIDED that an acquisition of assets, Equity Interests or other
securities by the Company for consideration consisting of common equity
securities of the Company shall not be deemed to be an Investment.
"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).
"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 Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its 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).
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"NET PROCEEDS" means the aggregate cash proceeds received by the
Company or any of its Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
noncash 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, and any
reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the
Company nor any of its 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 Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PERMITTED INVESTMENTS" means (a) any Investments in the Company; (b)
any Investments in Cash Equivalents; (c) Investments made as a result of the
receipt of noncash consideration from an Asset Sale that was made pursuant to
and in compliance with the covenant described above under the caption
"Repurchase at the Option of Holders - Asset Sales"; (d) Investments outstanding
as of the date of the Indenture; and (e) Investments in Wholly Owned
Subsidiaries and any entity that, as a result of such Investment, is a Wholly
Owned Subsidiary that is engaged in the same or a similar line of business as
the Company or any of its Subsidiaries was engaged in on the date of the
Indenture or any reasonable extensions or expansions thereof, including, without
limitation, Weseley Software Development Corp., a Connecticut corporation.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the
Company or any of its 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 Subsidiaries; PROVIDED that: (i) the
principal amount of such Permitted Refinancing Indebtedness does not exceed the
principal amount of 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
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 Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"PURCHASE MONEY OBLIGATIONS" of any Person means any obligations of
such Person to any seller or any other Person incurred or assumed to finance the
construction and/or acquisition of real or personal property to be used in the
business of such Person or any of its Subsidiaries in an amount that is not more
than 100% of the cost of such property, and incurred within 180 days after the
date of such construction or acquisition (excluding accounts payable to trade
creditors incurred in the ordinary course of business).
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"SENIOR BANK DEBT" means the Indebtedness outstanding under the Credit
Agreement.
108
<PAGE>
"SENIOR INDEBTEDNESS" means (i) the Senior Bank Debt and (ii) any
other Indebtedness permitted to be incurred by the Company under the terms of
the Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is subordinated in right of payment to any
Indebtedness for money borrowed. 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, (x) any Indebtedness
of the Company to any of its Subsidiaries, Unrestricted Subsidiaries or other
Affiliates (other than Approved Pinnacle Preferred Stockholders), (y) any trade
payables or (z) any Indebtedness that is incurred in violation of the Indenture.
"SENIOR REVOLVING DEBT" means revolving credit borrowings and letters
of credit under the Credit Agreement and/or any successor facility or
facilities.
"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). Notwithstanding the
foregoing, an Unrestricted Subsidiary shall not be a Subsidiary of the Company
for any purposes of the Indenture.
"UNRESTRICTED SUBSIDIARY" means each of MFA and its Subsidiaries, if
designated by the Board of Directors of the Company as Unrestricted Subsidiaries
pursuant to a Board Resolution.
"VOTING STOCK" of a corporation means all classes of Capital Stock of
such corporation then outstanding and normally entitled to vote in the election
of directors.
"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 product obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payments 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 SUBSIDIARY" of any Person means a 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 Subsidiaries of such Person.
Unrestricted Subsidiaries shall not be included in the definition of Wholly
Owned Subsidiary for any purposes of the Indenture.
109
<PAGE>
DESCRIPTION OF CREDIT AGREEMENT
GENERAL
Concurrently with the consummation of the Recapitalization
Transactions, Alvey entered into a Credit Agreement with NationsBank, N.A., as
administrative agent (the "Agent"), and other lending institutions party thereto
(the "Banks"), which agreement provides Alvey with a $30 million revolving
credit facility (the "Revolving Credit Facility"), guaranteed by Pinnacle and by
each direct and indirect subsidiary of Alvey (in this context, the "Guarantors")
(provided that the guarantees by MFA and its Subsidiaries will be released if
they are designated as "Unrestricted Subsidiaries" in accordance with the Credit
Agreement). The Revolving Credit Facility includes a subfacility for letters of
credit of up to $15 million. The Banks' commitments under the Credit Agreement
terminate if the initial borrowings thereunder do not occur on or prior to April
30, 1996. This information relating to the Credit Agreement is qualified in its
entirety by reference to the complete text of the documents entered into in
connection therewith. The following is a description of the general terms of the
Credit Agreement.
SECURITY
Indebtedness of Alvey under the Credit Agreement is secured by (i) a
first priority security interest in substantially all of the personal property
(including, without limitation, accounts receivable, inventory, machinery,
equipment, contracts and contract rights, trademarks, copyrights, patents,
license agreements and general intangibles) of Alvey and its subsidiaries
(direct or indirect), whether now owned or hereafter acquired, (ii) a first
priority perfected pledge of all capital stock of Alvey and (iii) a first
priority perfected pledge of 100% of the capital stock of its domestic
subsidiaries (other than the portion of the shares of capital stock of Busse
Bros., Inc. which are pledged to secure certain noncompete payments). The Banks
have a right under the Credit Agreement to request Alvey and its Subsidiaries to
grant mortgage liens on their real property.
INTEREST
Indebtedness under the Credit Agreement bears interest at a floating
rate. Indebtedness under the Revolving Credit Facility bears interest at a rate
based (at Alvey's option) upon (i) the Base Rate (as defined in the Credit
Agreement) plus 1.50% or (ii) the Eurodollar Rate (as defined in the Credit
Agreement) for one, two, three, six or, if available, nine or twelve months,
plus 2.50%; PROVIDED, HOWEVER, the interest rate margins are subject to 0.25%
reductions in the event Alvey meets certain performance targets.
MATURITY
Loans made pursuant to the Revolving Credit Facility may be borrowed,
repaid and reborrowed from time to time until the fifth anniversary of the
Closing Date, subject to the satisfaction of certain conditions on the date of
any such borrowing.
FEES
Alvey is required to pay to the Banks in the aggregate a commitment
fee equal to 1/2% per annum, payable in arrears on a quarterly basis, on the
committed undrawn amount of the Revolving Credit Facility during the preceding
quarter, subject to reduction if Alvey meets certain performance tests. Alvey
also is required to pay to the Banks participating in the Revolving Credit
Facility certain letter of credit fees, plus a fee to be paid to the issuing
bank for its own account. The Agent and the Banks shall receive such other fees
as have been separately agreed upon with the Agent.
110
<PAGE>
CONDITIONS TO CLOSING AND EXTENSIONS OF CREDIT
The Credit Agreement provides that the obligation of the Banks to make
loans or extend letters of credit will be subject to the satisfaction of certain
customary conditions including, but not limited to, the absence of a default or
event of default under the Credit Agreement, all representations and warranties
under the Credit Agreement being true and correct in all material respects and
the absence of a material adverse change.
COVENANTS
The Credit Agreement requires Alvey to meet certain financial tests,
including minimum consolidated EBITDA (as defined therein), minimum consolidated
interest coverage ratio, maximum leverage ratio and maximum amounts of capital
expenditures. The Credit Agreement also contains covenants which, among other
things, limit the incurrence of additional indebtedness, the nature of the
business of Alvey and its subsidiaries, investments, ownership of subsidiaries,
dividends, transactions with affiliates, asset sales, acquisitions, mergers and
consolidations, prepayments of subordinated indebtedness (including the Notes),
liens and encumbrances and other matters customarily restricted in such
agreements. The Credit Agreement contains additional covenants which require
Alvey to maintain its properties and those of its subsidiaries (including
corporate franchises), together with insurance thereon, to provide certain
information to the Agent, including financial statements, notices and reports
and permit inspections of the books and records of Alvey and its subsidiaries,
to comply with applicable laws, including environmental laws and ERISA, to pay
taxes and contractual obligations and to use the proceeds of the loans solely
for certain specified purposes.
EVENTS OF DEFAULT
The Credit Agreement contains customary events of default, including
payment defaults, breach of representations and warranties, covenant defaults
(subject in some cases to cure periods), cross-defaults to certain other
indebtedness in excess of $1,000,000, certain events of bankruptcy and
insolvency, ERISA, judgment defaults, failure of any guaranty or security
agreement supporting the Credit Agreement to be in full force and effect and
change of control of Alvey.
INDEMNIFICATION
Under the Credit Agreement, Alvey has agreed to indemnify the Banks
and related persons from and against any and all losses, liabilities, claims,
damages or expenses (including, without limitations, fees and disbursements of
counsel) that may be incurred by or asserted against any such indemnified party
in connection with any investigation, litigation or other proceeding relating to
the Credit Agreement or related documents, provided that Alvey is not liable for
any such losses, liabilities, claims, damages or expenses resulting from such
indemnified party's own gross negligence or willful misconduct. Finally, the
Credit Agreement contains customary provisions protecting the Banks in the event
of unavailability of funding, illegality, capital adequacy requirements,
increased costs, withholding taxes and funding losses.
111
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of New Notes received in exchange for old
Notes where such Old Notes were acquired as a result of market-making activities
or other trading activities. The Company has agreed that, starting on the
Expiration Date and ending on the close of business one year after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until ___________, 1996, all dealers effecting transactions in the New
Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of New Notes
by broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at 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 purchasers 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 New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit of any such resale of New Notes and any
commissions or concessions received by 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 Expiration Date, the Company 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 Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Notes (including any broker-
dealers) against certain liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
The legality of the New Notes will be passed upon for Alvey by Gibson,
Dunn & Crutcher, Los Angeles, California.
EXPERTS
The consolidated financial statements of Alvey included in the
Prospectus as of December 31, 1995 and 1994 and for each of the three years in
the period ended December 31, 1995 and the financial statements of Weseley
Software Development Corp. as of December 31, 1995 and 1994 and for the years
then ended, included in the Prospectus, have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said Firm as experts in auditing and accounting.
112
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants on Alvey Systems, Inc. December 31, 1995
Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet of Alvey Systems, Inc. as of December 31, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statement of Operations of Alvey Systems, Inc. for the fiscal
years ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . F-4
Consolidated Statement of Cash Flows of Alvey Systems, Inc. for the fiscal
years ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . F-5
Consolidated Statement of Net Investment of Parent of Alvey Systems, Inc.
for the fiscal years ended December 31, 1995, 1994 and 1993. . . . . . . F-7
Notes to Consolidated Financial Statements of Alvey Systems, Inc.. . . . . F-8
Report of Independent Accountants on Weseley Software Development Corp.
December 31, 1995 Financial Statements.. . . . . . . . . . . . . . . . . F-24
Balance Sheet of Weseley Software Development Corp. as of December 31,
1995 and 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-25
Statement of Operations of Weseley Software Development Corp. for the
fiscal years ended December 31, 1995 and 1994. . . . . . . . . . . . . . F-26
Statement of Stockholders' Deficit of Weseley Software Development Corp.
for the fiscal years ended December 31, 1995 and 1994. . . . . . . . . . F-27
Statement of Cash Flows of Weseley Software Development Corp. for the
fiscal years ended December 31, 1995 and 1994. . . . . . . . . . . . . . F-28
Notes to Financial Statements of Weseley Software Development Corp. . . . F-29
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and
Board of Directors of
Alvey Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of net investment of
parent present fairly, in all material respects, the financial position of Alvey
Systems, Inc. and its subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
St. Louis, Missouri
February 23, 1996
F-2
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,405 $ 2,580
Receivables:
Trade (less allowance for doubtful accounts of $824 and $595, respectively). . . . . 42,567 37,881
Unbilled and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,211 4,550
Accumulated costs and earnings in excess of billings ($54,279 and $31,125,
respectively) on uncompleted contracts . . . . . . . . . . . . . . . . . . . . . . . 8,317 6,585
Inventories:
Raw materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,966 8,506
Work in process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,720 5,544
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,699 7,443
Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,665 1,542
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,550 74,631
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,675 24,456
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,031 6,238
Goodwill (net of amortization of $3,613 and $2,548, respectively). . . . . . . . . . . . . 32,029 33,211
-------- --------
$150,285 $138,536
-------- --------
-------- --------
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND NET INVESTMENT OF PARENT:
Current liabilities:
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,915 $ 5,431
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,368 19,385
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,764 24,910
Customer deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,107 6,638
Billings in excess of accumulated costs and earnings ($31,233 and $29,133,
respectively) on uncompleted contracts . . . . . . . . . . . . . . . . . . . . . . . 13,904 8,993
Deferred revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 899 1,580
Taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 994 542
-------- --------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,951 67,479
-------- --------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,460 54,754
Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,075 4,920
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,196 4,280
Commitments and contingencies (Notes 5, 6 and 12)
Redeemable preferred stock:
Redeemable preferred stock of $.01 par value per share, authorized 500,000 shares:
Series A Senior Cumulative Exchangeable Preferred Stock of Pinnacle Automation, Inc.,
250,000 shares designated, 210,770 and 181,068 shares issued, 210,697 and 180,645
outstanding, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,077 18,107
Cumulative Exchangeable Preferred Stock of Pinnacle Automation, Inc., 100,000 shares
designated, 62,524 and 53,704 shares issued and outstanding, respectively. . . . . . 6,252 5,370
Preferred stock in treasury, 73 and 423 shares of Series A Senior Cumulative Stock of
Pinnacle Automation, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) (42)
-------- --------
Total redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . 27,322 23,435
Net investment of Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,719) (16,332)
-------- --------
$150,285 $138,536
-------- --------
-------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-3
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $288,018 $248,177 $164,022
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217,297 189,007 123,033
-------- -------- --------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,721 59,170 40,989
Selling, general and administrative expenses. . . . . . . . . . . . . . . . . . 51,630 43,402 30,421
Research and development expenses . . . . . . . . . . . . . . . . . . . . . . . 2,051 2,538 1,436
Amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,737 1,836 1,479
Other expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . (108) 2,279 (11)
-------- -------- --------
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,411 9,115 7,664
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,896 5,921 4,053
-------- -------- --------
Income before income taxes and extraordinary loss . . . . . . . . . . . . . . . 8,515 3,194 3,611
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,109 1,516 1,560
-------- -------- --------
Income before extraordinary loss. . . . . . . . . . . . . . . . . . . . . . . . 4,406 1,678 2,051
Extraordinary loss, net of income tax benefits of $2,740 (Notes 5 and 7). . . . -- -- (6,203)
-------- -------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,406 $ 1,678 $ (4,152)
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,406 $ 1,678 $ (4,152)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,952 2,752 2,583
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,737 1,836 1,479
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 196
Deferred taxes, net of effect of acquisitions. . . . . . . . . . . . . . . . 2,660 571 (2,325)
Reduction of unamortized debt issue costs included in extraordinary loss . . 1,300
Loss on disposal of Lewiston . . . . . . . . . . . . . . . . . . . . . . . . 8,637
(Increase) decrease in current assets, excluding effect of acquisitions:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,979) (6,483) (7,395)
Accumulated costs and earnings in excess of billings on uncompleted
contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,732) (1,070) (465)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,636) 1,134 (1,913)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (259) 1,409 165
(Decrease) increase in current liabilities, excluding effect of acquisitions:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,983 3,773 5,593
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,201 3,429 1,058
Customer deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,469 8 639
Billings in excess of accumulated costs and earnings on uncompleted
contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,911 2,837 (425)
Deferred revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (681) 108 518
Taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 452 (201) 646
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455 217 573
-------- -------- --------
Net cash provided by operating activities. . . . . . . . . . . . . . . . 18,939 12,091 6,712
-------- -------- --------
INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired of $106 and $529,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (101) (17,601)
Payment of debt of subsidiaries concurrent with acquisitions . . . . . . . . . . (6,513)
Cash proceeds on sale of Cassville plant . . . . . . . . . . . . . . . . . . . . 698
Payments for agreements not to compete . . . . . . . . . . . . . . . . . . . . . (300) (300) (2,400)
Cash payments to dispose of Lewiston . . . . . . . . . . . . . . . . . . . . . . (2,347) (2,683) (1,808)
Software development costs . . . . . . . . . . . . . . . . . . . . . . . . . . . (582) (1,106)
Additions to property, plant and equipment, net. . . . . . . . . . . . . . . . . (3,914) (3,985) (3,471)
-------- -------- --------
Net cash used for investing activities . . . . . . . . . . . . . . . . . $ (7,143) $ (7,477) $(31,793)
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,728 $ 42,600 $ 75,157
Payments of debt and capital leases. . . . . . . . . . . . . . . . . . . . . . . (38,538) (46,317) (47,948)
Proceeds from issuance of preferred stock. . . . . . . . . . . . . . . . . . . . 271
Investment of Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 43 1,214
Payments of debt issuance costs. . . . . . . . . . . . . . . . . . . . . . . . . (255) (89) (2,614)
Treasury preferred stock issuances (purchases) . . . . . . . . . . . . . . . . . 35 (1) (41)
-------- -------- --------
Net cash provided by (used for) financing activities . . . . . . . . . . . (10,971) (3,764) 26,039
-------- -------- --------
Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . 825 850 958
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . 2,580 1,730 772
-------- -------- --------
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . $ 3,405 $ 2,580 $ 1,730
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on financings . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,851 $ 5,534 $ 3,913
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 997 1,161 234
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Alvey Systems, Inc. purchased Automation Equipment Corporation in 1994
and White Storage & Retrieval Systems, Inc. in 1993. In conjunction
with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . $ 215 $ 22,456
Fair value assigned to goodwill. . . . . . . . . . . . . . . . . . . . . . . . 810 12,800
Cash paid concurrent with acquisitions including payments of debt of
subsidiaries and excluding cash acquired . . . . . . . . . . . . . . . . . . (101) (24,114)
-------- --------
Liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 924 $ 11,142
-------- --------
-------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET INVESTMENT OF PARENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NET INVESTMENT OF
PARENT
-----------------
<S> <C>
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Balance, December 31, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (9,729)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,152)
Net investment of Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,637
Preferred stock dividend declared (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,771)
--------
Balance December 31, 1993. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,015)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,678
Net investment of Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309
Preferred stock dividend declared (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,304)
--------
Balance December 31, 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,332)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,406
Net investment of Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Preferred stock dividend declared (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,852)
--------
Balance December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(15,719)
--------
--------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Alvey Systems, Inc. ("Alvey") is a wholly-owned subsidiary of Pinnacle
Automation, Inc. ("Pinnacle" or "Parent"). Pinnacle has no operations and no
assets other than its investment in Alvey. Alvey, with its subsidiaries (the
"Company"), is a leading materials handling and information systems company
which provides integrated solutions to a wide range of manufacturing and
distribution applications. The Company develops software and controls for
materials handling systems and manufactures a broad range of industrial
equipment such as conveyors, palletizers, depalletizers, carousels, sorters and
robotics which carry out the physical acts of loading and unloading, sorting and
transporting raw materials and finished products.
The financial statements of the Company include the accounts of Alvey,
which was incorporated in Missouri in 1911, and Alvey's five operating
subsidiaries which include: McHugh Freeman & Associates, Inc. ("MFA"), located
in Waukesha, Wisconsin, which was acquired in May 1989; Busse Bros, Inc.
("Busse"), located in Randolph, Wisconsin, which was acquired in April 1992; The
Buschman Company ("Buschman"), located in Cincinnati, Ohio, which was acquired
in October 1992; White Storage and Retrieval Systems, Inc. ("White") located in
Kenilworth, New Jersey, which was acquired in December 1993; and Automation
Equipment Corporation ("AEC"), located in St. Louis, Missouri, which was
acquired in August 1994. See Notes 3 and 4 for additional information on the
White acquisition. The acquisition of AEC was not material to the consolidated
financial statements of the Company. All of the above transactions were
accounted for under the purchase method of accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The policies utilized by the Company in the preparation of the financial
statements conform to generally accepted accounting principles, and require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual amounts
could differ from these estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Alvey and
Alvey's wholly-owned subsidiaries: MFA, Busse, Buschman, White and AEC. All
significant intercompany transactions, which primarily consist of sales, have
been eliminated.
NET INVESTMENT OF PARENT
Net investment of Parent reflects the net capital contributed by Pinnacle
as a result of the sales of its common stock, options and warrants or awards of
its common stock and options to certain employees of the Company as well as
cumulative results of operations and payment of preferred stock dividends. The
basis of Pinnacle's investment in Alvey has been pushed down to the accompanying
consolidated financial statements of Alvey. The redeemable preferred stock of
Pinnacle has also been pushed down to the accompanying consolidated financial
statements of Alvey; See Note 8.
At December 31, 1995, the net investment of Parent consists of cumulative
contributions of capital to Alvey by Pinnacle of $3.0 million plus cumulative
income before extraordinary losses of $2.9 million, offset by extraordinary
losses of $7.5 million and an aggregate accretion/payment of $14.1 million of
paid-in-kind dividends on preferred stock.
F-8
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
For purposes of financial reporting, the Company has determined that the
fair value of financial instruments approximates book value at December 31, 1995
and 1994, based on terms available to the Company in financial markets.
REVENUE RECOGNITION
The Company utilizes the percentage-of-completion method of accounting to
recognize revenue and profits on substantially all contracts, except for certain
machinery contracts for which revenue is recognized as individual pieces of
equipment are shipped under the terms of the contract and for sales of spare
parts which are recognized upon shipment. For other equipment contracts,
typically for larger machines and integrated systems, as well as the
installation phase of contracts and all consulting contracts, the percentage of
completion is determined based on the ratio of total costs incurred to date to
the estimated total costs to be incurred under the contracts. Any revisions in
the estimated total costs of the contracts during the course of the work are
reflected when the facts that require the revisions become known. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Revenues from maintenance and support contracts are
deferred and recognized ratably over the life of the related contract.
SOFTWARE DEVELOPMENT COSTS
Certain costs incurred in developing software products are capitalized and
amortized on a product-by-product basis using the greater of the ratio that
current gross revenues for a product bear to the current and anticipated future
gross revenues for that product or the straight-line method over the estimated
five year economic life of the products. The costs consist of salaries, computer
expenses and other overhead costs directly related to the development and/or
major enhancement of software products. Such costs are capitalized, to the
extent they are recoverable through future sales, from the time the product's
technological feasibility is established up to its general release to customers.
Costs incurred before or after this period are expensed as incurred except for
major product improvements, which are capitalized as described above. Net
unamortized capitalized software costs were $1,419,000 and $1,094,000 at
December 31, 1995 and 1994, respectively. Amortization of capitalized software
costs totaled $257,000 and $12,000 in 1995 and 1994, respectively.
Revenue from the sale of computer systems is recognized upon shipment to
the customer providing that no significant vendor obligations remain and
collection of the related receivable is deemed probable.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposit accounts, cash on hand and
time deposits with original maturities of less than 90 days. Such amounts are
carried at cost, which approximates market.
F-9
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY VALUATION
Work-in-process inventories consist principally of in-process palletizing
and depalletizing machines, conveyor and carousel systems, other materials
handling equipment and parts manufactured by the Company for use in these
products. Raw materials include steel, purchased parts and other materials used
in the manufacturing process. These inventories are valued at the lower of cost
(first-in, first-out) or market. Obsolete or unsalable inventories are reflected
at their estimated realizable values.
PROGRESS BILLINGS
The Company bills its customers based on the terms set forth in a sales
contract. The billing schedule does not necessarily match the stage of
completion of a customer's order for installation or software. As such, costs,
earnings and billings are accumulated for jobs in progress at period end and the
extent to which costs and earnings exceed billings and billings exceed costs and
earnings for such jobs, an asset or liability is recorded.
Unbilled receivables are those amounts recognized in revenues for completed
portions of manufacturing contracts which have not been billed to the customer.
Customer deposits represent cash received from customers in payment of billings
for equipment for which no associated revenue or cost has been recognized.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Costs assigned to
property, plant and equipment are based on estimated fair value at the date of
acquisition. Upon sale, retirement or other disposition, the cost and related
accumulated depreciation are removed from the respective accounts and any
resulting gain or loss is included in income.
Depreciation of property, plant and equipment, including equipment under
capital lease agreements, is charged to expense over the estimated useful lives
of the related assets using the straight-line method.
Useful lives by major asset category are as follows:
Building and improvements. . . . . . . . 7 to 25 years
Machinery and equipment. . . . . . . . . 3 to 12 years
Office furniture and equipment . . . . . 3 to 7 years
GOODWILL AND OTHER INTANGIBLE ASSETS
The excess of cost over the fair market value of net assets acquired in
purchase business transactions has been recorded as goodwill to be amortized
over a period of 40 years. The carrying value of goodwill is assessed for
recoverability by management based on an analysis of future expected
undiscounted cash flows from the underlying operations. Management believes
that there has been no impairment of goodwill at December 31, 1995.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"). SFAS 121 specifies that an impairment review be
performed, using undiscounted cash flows resulting from the use of long-lived
assets, whenever events or changes in circumstances indicate that the amount of
a long-lived asset may not be recoverable. The Company anticipates that
SFAS 121 will have no material effect on the Company's financial position or
results of operations when adopted in 1996.
F-10
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Debt issuance costs and agreements not to compete are amortized over the
life of the related agreements. All intangible assets are amortized using the
straight-line method.
INCOME TAXES
Income taxes are based upon income for financial reporting purposes and
deferred income taxes are provided for the temporary differences between the
financial reporting bases and the income tax bases of the Company's assets and
liabilities. The tax rates expected to be in effect when such differences are
reflected in the Company's income tax returns are used in calculating the
deferred tax asset or liability. The major temporary differences that give rise
to deferred taxes include retainage, depreciation, warranty and inventory costs,
deferred compensation, plant closing and various other reserves. See Note 9 for
additional information.
CONCENTRATIONS OF CREDIT RISK
The Company sells its products to a wide range of companies in the food,
beverage, national retailing and distribution industries, as well as certain
government entities. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral, although many customers pay
deposits to the Company prior to commencement of production in accordance with
terms of the sales contract. The Company maintains reserves for potential
credit losses based upon factors surrounding the credit risk of specific
customers, historical trends and other information; historically, such losses
have been within management's expectations.
EARNINGS PER SHARE INFORMATION
Given the historical organization and capital structure of the Company,
earnings per share information is not considered meaningful or relevant and has
not been presented in the accompanying consolidated financial statements or the
notes thereto.
3. ACQUISITION OF WHITE STORAGE & RETRIEVAL SYSTEMS, INC.
On December 14, 1993, Alvey purchased all of the outstanding shares of
White for cash of $17.9 million and stock with an estimated value of $550,000
plus acquisition and other transaction costs of $366,000. In addition, Alvey
advanced $7.9 million to White concurrent with the acquisition in order to repay
debt obligations and employee bonuses. The transaction was accounted for as a
purchase and, accordingly, the excess of the cost of the acquisition over the
fair value of net assets acquired of $12.8 million was recorded as goodwill.
Employee bonuses of cash and stock paid out by White totaling $2.3 million were
capitalized and amortized over one year, the length of the related employment
agreement; accordingly, $2.2 million and $94,000 were charged to other expense
(income), net in 1994 and 1993, respectively. The purchase agreement between
Alvey and the former shareholder of White provides for a reduction in the
purchase price in the event that the valuation of certain assets or liabilities
is not as represented by such shareholder. The adjustment provisions extend to
three years from the date of purchase with scheduled assessment and payment
dates throughout the period; one adjustment which reduced the purchase price by
$413,000 was made during 1995. Such adjustment was recorded as a reduction of
the related goodwill. The consolidated financial statements of the Company
include the results of operations and cash flows of White from December 14,
1993. See Note 4 for pro forma consolidated income statement data (unaudited)
for the year ended December 31, 1993.
This acquisition was financed primarily with increased bank indebtedness.
See Note 7 for further discussion.
F-11
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUPPLEMENTAL ACQUISITION INFORMATION (UNAUDITED)
The following table sets forth pro forma income statement data for Alvey as
if the White acquisition had taken place on January 1, 1993. This income
statement data is unaudited and does not purport to represent the results of
operations had the acquisition actually occurred on January 1, 1993.
Pro forma Information
(in thousands)
<TABLE>
<CAPTION>
12 MONTHS ENDED
DECEMBER 31,
1993
---------------
(UNAUDITED)
<S> <C>
Net sales . . . . . . . . . . . . . . . . . . . . $220,789
Cost of goods sold. . . . . . . . . . . . . . . . 166,583
--------
Gross profit. . . . . . . . . . . . . . . . . . 54,206
Selling, general and administrative expenses. . . 40,961
Research and development expenses . . . . . . . . 1,436
Amortization expense. . . . . . . . . . . . . . . 1,774
Other income, net . . . . . . . . . . . . . . . . 349
--------
Operating income. . . . . . . . . . . . . . . . 10,384
Interest expense. . . . . . . . . . . . . . . . . 5,923
--------
Income before income taxes. . . . . . . . . . . 4,461
Income taxes. . . . . . . . . . . . . . . . . . . 2,007
--------
Income before extraordinary loss. . . . . . . . $ 2,454
--------
--------
</TABLE>
Amortization of a non-recurring employee bonus paid under an employment
agreement resulting from the acquisition of White totaling $2.2 million has not
been reflected in the 1993 pro forma income statement data presented above.
5. FTC ORDER TO DISPOSE OF THE LEWISTON, MAINE MANUFACTURING PLANT
As a result of Alvey's acquisition of Buschman in 1992, the Company made a
decision to close Buschman's carousel manufacturing plant in Lewiston, Maine
("Lewiston"). Alvey was subsequently ordered by the Federal Trade Commission
(the "FTC"), beginning December 6, 1993, to hold the Lewiston operation separate
from operations of the Company and to ultimately dispose of the facility. Until
such time as a buyer suitable to Alvey and the FTC could be found for Lewiston,
Alvey was required to fund all cash requirements of Lewiston. However, pursuant
to the FTC order, the Company had no authority to make operating decisions for
Lewiston. Since its determination to close the Lewiston plant and through
December 31, 1995, Alvey has contributed approximately $6.8 million in cash to
fund the operation.
Upon its initial decision to close the Lewiston plant, the Company accrued
$1.4 million, net of applicable income taxes, for closing costs and the write-
off of assets; such amount was recorded under purchase accounting as goodwill
during 1992. Operating losses and other costs of closure incurred subsequent to
Federal Trade Commission intervention ($5.4 million, net of income tax benefits)
have been accrued and charged to income as an extraordinary loss in fiscal 1993,
including estimates of amounts expected to be incurred through fiscal 1995 and
in future periods, as discussed below.
F-12
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FTC ORDER TO DISPOSE OF THE LEWISTON, MAINE MANUFACTURING PLANT (CONTINUED)
The sale of this operation was finalized on July 31, 1995. During 1995,
1994 and 1993, $2.3 million, $2.7 million and $1.8 million, respectively, was
paid and charged against the balance sheet accrual for the operations of
Lewiston and related sale agreement obligations. In addition, in 1995, $780,000
of related asset write-offs were also charged against the balance sheet accrual.
At December 31, 1995, $1.1 million is accrued to fund obligations resulting from
the sale agreement which extend through May 1, 1997. Management believes that
the remaining accrual is sufficient to cover future anticipated charges.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . $ 3,140 $ 2,539
Buildings and improvements . . . . . . . . . 15,783 15,534
Machinery and equipment. . . . . . . . . . . 6,986 6,300
Office and other equipment . . . . . . . . . 11,126 9,426
Construction in progress . . . . . . . . . . 178
Property held under capital lease. . . . . . 1,277 848
------- -------
38,490 34,647
Less: Accumulated depreciation and
amortization, including $666 and $563,
respectively, related to property held
under capital lease. 12,815 10,191
------- -------
$25,675 $24,456
------- -------
------- -------
</TABLE>
Depreciation expense for leased equipment was $103,000, $143,000 and
$193,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Future minimum lease payments under the capital leases and the present value of
the net minimum lease payments (in thousands) at December 31, 1995 are as
follows:
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $197
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 105
----
Total minimum lease payments . . . . . . . . . . . . . . . . 768
Less: Amount representing interest . . . . . . . . . . . . . 144
----
Present value of minimum lease payments at December 31, 1995,
including current portion of $157,000. . . . . . . . . . . . $624
----
----
F-13
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Certain other office equipment, automobiles and office space are utilized
by the Company under operating leases which resulted in rental expense of
$3.4 million, $2.7 million and $1.3 million in 1995, 1994 and 1993,
respectively. Commitments under these leases total $2.9 million in 1996,
$2.7 million in 1997, $2.7 million in 1998, $2.4 million in 1999, $2.3 million
in 2000 and $11.1 million in the aggregate in years thereafter.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Term A Facility - weighted average rate of 9.2% and
9.6%, respectively, at December 31, 1995 and 1994,
scheduled quarterly reductions through March 31, 1999. . . $24,817 $29,942
Term C Facility - 13%, quarterly reductions March 31,
1999 through September 30, 2000. . . . . . . . . . . . . . 12,382 12,382
Working Capital Facility - weighted average rate of 9.2%
and 9.7%, respectively, at December 31, 1995 and 1994,
balance due on March 31, 1999. . . . . . . . . . . . . . . 9,000 17,100
Unsecured Subordinated Debt Agreement - 11.95%,
balance due December 31, 2001. . . . . . . . . . . . . . . 2,253
Lease obligations and other. . . . . . . . . . . . . . . . . 923 761
------- -------
49,375 60,185
Less: Current portion. . . . . . . . . . . . . . . . . . . . 6,915 5,431
------- -------
$42,460 $54,754
------- -------
------- -------
</TABLE>
Aggregate maturities of long-term debt (in thousands), excluding capital
leases, are:
<TABLE>
<CAPTION>
WORKING UNSECURED
TERM A TERM C CAPITAL SUBORDINATED
FACILITY FACILITY FACILITY DEBT TOTAL
-------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
1996 . . . . . $ 6,625 -- -- $ 6,625
1997 . . . . . 8,000 -- -- 8,000
1998 . . . . . 9,625 -- -- 9,625
1999 . . . . . 567 $ 6,875 $9,000 16,442
2000 . . . . . -- 5,507 -- 5,507
2001 . . . . . $2,253 2,253
------- ------- ------ ------ -------
$24,817 $12,382 $9,000 $2,253 $48,452
------- ------- ------ ------ -------
------- ------- ------ ------ -------
</TABLE>
In addition to the above payments, certain additional reductions may be
required under the Alvey credit agreement based on annual excess cash flows, as
defined in the Credit Agreement.
As discussed in Note 15, amounts outstanding under the Term A Facility,
Term C Facility, Working Capital Facility and the Unsecured Subordinated Debt
Agreement were repaid on January 24, 1996.
F-14
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
In connection with the acquisition of White on December 14, 1993 and in
order to increase borrowings under its long-term credit facility, the Company
amended and restated the credit agreement among Alvey, Citibank N.A.
("Citibank"), NationsBank of Texas, N.A. ("NationsBank"), Equitable Capital
Private Income and Equity Partnership II, L.P. ("Equitable") and others (the
"Credit Agreement"). By the terms of the Credit Agreement, Alvey increased its
borrowings under the Term A Facility ("Term A") from $12.8 million to $34.5
million and paid off borrowings under a Term B Facility. Additionally, the
Working Capital Facility ("Working Capital") was increased to provide for up to
$29.9 million in revolving advances and letters of credit. Alvey had
approximately $20.9 million available for borrowing under such facility at
December 31, 1995. Under the Credit Agreement, the Term A and Working Capital
financings are provided and held equally by Citibank and NationsBank. The Term
C facility loan is provided by Equitable. Effective December 31, 1994, the
Credit Agreement was amended to revise certain of the covenants, amend the
interest accrual feature, revise the interest rate hedging feature and to allow
additional borrowings of $3 million. Of such additional debt, approximately $2
million was funded on January 3, 1995 through an unsecured subordinated debt
agreement with certain shareholders of Pinnacle at a rate of 11.95% for which
all interest and principal is due on December 31, 2001; the remaining $1 million
is available for additional borrowing.
Based on the achievement of certain ratios, interest accrues on the Term A
and Working Capital Facilities at Citibank's base rate plus a percentage ranging
from 1.25% to 1.75% or the Euro-dollar rate plus a percentage from 2.75% to
3.25% with the rate type being elected by Alvey periodically throughout the term
of the Credit Agreement. At December 31, 1995, the applicable rates were the
Citibank base rate plus 1.5% and the Euro-dollar rate plus 3.25%. The Credit
Agreement defines base rate as a function of Citibank's publicly announced base
rate, the Federal Funds Rate and average domestic three-month certificate of
deposit rates. Interest on base rate advances is payable monthly and interest
on Euro-dollar advances is payable every three months or at the end of the
elected interest period, whichever is earlier. Interest, payable monthly,
accrues on the Term C Facility at 13% per annum. Commitment fees accrue on the
average daily unused portion of the Working Capital Facility at 0.5% per annum
and are payable quarterly.
Debt issuance costs totaling $2.6 million were incurred in amending the
Credit Agreement at December 31, 1993 and are being amortized with certain
other costs over the weighted-average life of all remaining facilities.
Unamortized costs incurred in 1992 with the original issuance of the Term Loan
Facilities and the Working Capital Facility totaled $1.3 million. These costs,
net of applicable income tax benefits of $497,000, were written off during 1993
and accounted for as an extraordinary loss.
Under the Credit Agreement, Alvey has provided standby letters of credit at
December 31, 1995 in the amount of $2.0 million as security for payment of the
Company's workers' compensation claims. In addition to a .25% issuance fee,
outstanding letters of credit bear a 1.5% per annum fee which is payable
quarterly.
Prior to the December 31, 1994 amendment to the Credit Agreement, Alvey was
required to hedge not less than 50% of the notional amount of principal
outstanding on the Term A and Working Capital Facilities to provide protection
against fluctuations in interest rates above a rate per annum of 9% should
certain market conditions exist. In January 1993, Alvey purchased an interest
rate cap which limits the annual interest rate to 8.5% on borrowings of $11.0
million, $10.5 million, and $10 million during 1994, 1995 and 1996,
respectively. The December 31, 1994 amendment to the Credit Agreement requires
that for a period of not less than three years, Alvey will maintain hedges
totaling not less than $25 million on the notional amount of principal
outstanding on the Term A and Working Capital Facilities to provide protection
against fluctuations in interest
F-15
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
rates above a rate per annum of 11.75%. During January 1995, Alvey entered into
interest rate cap agreements which terminate in January 1998 and limit the
annual interest rate to 11.75% on a notional principal amount of $25 million.
Such agreements, with an original cost of $350,000, were capitalized and were
being amortized over the life of the agreements. In conjunction with the Debt
Offering (see Note 15), the unamortized portion of this amount was charged to
expense during the quarter ended March 31, 1996.
Virtually all of the tangible assets of the Company are pledged as
collateral under the Credit Agreement. Restrictive covenants of certain of the
debt instruments include the maintenance of certain key ratios as well as
limitations on capital expenditures, funding of divested operations (Note 5),
common stock issuances (including by Parent) and the payment of cash dividends.
Alvey was in compliance with such covenants at December 31, 1995.
8. REDEEMABLE PREFERRED STOCK
Pinnacle's Series A Senior Cumulative Exchangeable Preferred Stock ("Series
A Preferred") and Cumulative Exchangeable Preferred Stock ("Cumulative
Preferred") are redeemable by Pinnacle at a liquidation value of $100 per share.
At the option of the holder, the preferred stock may be exchanged for $100 of
senior subordinated notes to be issued by Alvey, which bear annual interest of
13% and are due on October 31, 2000. As the redeemable preferred stock is
exchangeable for debt issued by Alvey, such stock has been pushed down to the
financial statements of Alvey. On any dividend payment date or at any time after
October 31, 2000, Pinnacle may redeem, at its option, in whole or in part,
preferred stock at 100% of its liquidation value plus any accrued and unpaid
dividends. The preferred stock is only exchangeable or redeemable at such time
as it would not cause a default under any of the debt instruments of Alvey.
Pinnacle is required to pay dividends quarterly on both issues of preferred
stock and under terms of the related stockholder agreements, and may pay such
dividends in cash (at 13%) or stock (at 15.5%) at its option through December
31, 1996; cash dividends are funded by cash of the Company. However, the Credit
Agreement prohibits the payment of cash dividends throughout its term and, as
such, dividends declared in 1995, 1994 and 1993 were paid in the form of stock.
Pinnacle declared stock dividends of $3.9, $3.3 and $2.8 million in 1995, 1994
and 1993, respectively (38,522, 33,045, and 27,703 shares, respectively, at a
liquidating value of $100), all of which served to decrease the net investment
of Parent.
During 1993, certain employees of the Company purchased 3,725 shares of
preferred stock of Pinnacle with an aggregate liquidation value of $373,000; the
purchases were effected with cash of $271,000 and prepaid
F-16
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. REDEEMABLE PREFERRED STOCK (CONTINUED)
compensation of $102,000 to be charged to expense over one year. The following
table sets forth the changes in redeemable preferred stock (dollars in
thousands):
<TABLE>
<CAPTION>
SERIES A CUMULATIVE PREPAID TOTAL
PREFERRED STOCK PREFERRED COMPENSATION REDEEMABLE
----------------------- ----------------------- FOR PREFERRED PREFERRED
SHARES AMOUNT SHARES AMOUNT STOCK STOCK
-------- -------- -------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1992. . . . 129,404 $12,940 39,620 $3,962 $ -- $16,902
Stock issued . . . . . . . . . 5,000 500 (102) 398
Compensation expense . . . . . 4 4
Treasury stock purchases . . . (416) (41) (41)
Stock dividend declared. . . . 21,195 2,120 6,508 651 -- 2,771
-------- ------- ------- ------ -------
Balance December 31, 1993. . . . 155,183 15,519 46,128 4,613 (98) 20,034
Compensation expense . . . . . 98 98
Treasury stock purchases . . . (7) (1) (1)
Stock dividend declared. . . . 25,469 2,547 7,576 757 -- 3,304
-------- ------- ------- ------ -------
Balance December 31, 1994. . . . 180,645 18,065 53,704 5,370 0 23,435
Treasury stock sales . . . . . 350 35 35
Stock dividend declared. . . . 29,702 2,970 8,820 882 -- 3,852
-------- ------- ------- ------ -------
Balance December 31, 1995. . . . 210,697 $21,070 62,524 $6,252 $ 0 $27,322
-------- ------- ------- ------ -------
-------- ------- ------- ------ -------
</TABLE>
As discussed in Note 15, the Series A Preferred and Cumulative Preferred
Stock were redeemed on January 24, 1996.
9. INCOME TAXES
Income tax expense relative to income from continuing operations (before
extraordinary loss) is comprised of:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal . . . . . . . . . . . . . . . . $1,001 $ 86 $ 422
State . . . . . . . . . . . . . . . . . 448 14 112
------ ------ ------
1,449 100 534
Deferred, principally Federal . . . . . 2,660 1,416 1,026
------ ------ ------
$4,109 $1,516 $1,560
------ ------ ------
------ ------ ------
</TABLE>
F-17
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
A reconciliation of the income tax expense per the statutory federal
income tax rate to the reported income tax expense on income before
extraordinary loss is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense at statutory rate . . . . . . $2,896 $1,086 $1,227
Expense (benefit) resulting from:
State taxes (net of Federal tax benefit) . . . 366 258 173
Goodwill amortization. . . . . . . . . . . . . 282 361 221
Foreign tax credit utilization . . . . . . . . (453) (200)
Meals and entertainment. . . . . . . . . . . . 216 176 50
Other. . . . . . . . . . . . . . . . . . . . . 349 88 89
------ ------ ------
$4,109 $1,516 $1,560
------ ------ ------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(IN THOUSANDS)
<S> <C> <C>
Accrued insurance claims. . . . . . . . . . . . . $2,093 $1,248
Inventory reserves. . . . . . . . . . . . . . . . 2,045 804
Accrued warranty costs. . . . . . . . . . . . . . 1,021 1,109
Employee cost accruals. . . . . . . . . . . . . . 2,513 2,565
Plant closing accruals. . . . . . . . . . . . . . 470 2,756
Other . . . . . . . . . . . . . . . . . . . . . . 676 1,087
----- -----
Total deferred tax assets . . . . . . . . . . . 8,818 9,569
----- -----
Revenue timing differences. . . . . . . . . . . . 2,993 1,153
Property related items. . . . . . . . . . . . . . 5,250 4,624
Other . . . . . . . . . . . . . . . . . . . . . . 72 629
----- -----
Total deferred tax liabilities. . . . . . . . . 8,315 6,406
----- -----
Net deferred tax asset. . . . . . . . . . . . . $ 503 $3,163
----- -----
</TABLE>
10. EMPLOYEE BENEFIT AND STOCK OWNERSHIP PLANS
The Company maintains 401(k) savings plans for virtually all employees
who meet certain eligibility requirements, except those certain union employees
who participate in multi-employer pension plans. Under the plans, the employees
may defer receipt of a portion of their eligible compensation with the Company
matching a defined percentage of the employees' deferral. The Company's
matching contributions were $614,000, $429,000 and $296,000 for the years ended
December 31, 1995, 1994 and 1993, respectively. The Company may also elect to
make discretionary profit sharing contributions for virtually all employees,
except those union employees who participate in multi-employer pension plans,
for which a provision of $2.2 million, $1.4 million and $1.4 million is included
in the consolidated financial statements in 1995, 1994 and 1993, respectively.
Contributions under the multi-employer pension plans are based on
amounts per employee as defined in the union labor agreement. Pension expense
for the union employees' pension plans was $629,000, $675,000 and $208,000 for
the years ended December 31, 1995, 1994 and 1993, respectively. The Company may
be obligated,
F-18
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT AND STOCK OWNERSHIP PLANS (CONTINUED)
under the Multi-Employer Pension Plan Amendment Act of 1980, for a part of these
plans' unfunded vested benefits if there is a withdrawal or partial withdrawal
from a plan, as defined within the Act. There is no intention on the part of
management to withdraw their participation from a plan.
Alvey also provides a deferred compensation plan for its Chief
Executive Officer. Under the plan, upon his termination of employment for any
reason, except voluntary resignation to accept a comparable position, Alvey will
pay a formula-based annual benefit for the remainder of his life or for at least
10 years. At December 31, 1995, an amount of $1.5 million is accrued for such
benefits and related expense of $299,000, $93,000, and $196,000 was recorded for
the three years then ended.
Management employees have received options to purchase Pinnacle common
stock which were granted at exercise prices which approximated fair market value
of the shares at the dates of grant. Certain of these shares vest based on
performance while others vest over a period of employment. The option term
expires ten years subsequent to the grant date. These options are summarized as
follows:
<TABLE>
<CAPTION>
SHARES SUBJECT TO
AVERAGE PRICE OPTIONS
<S> <C> <C>
Exercisable at January 1, 1993. . . . . . $ 1.20 14,000
------
Exercisable at December 31, 1993. . . . . 1.20 14,000
Options granted in 1994 . . . . . . . . . 31.28 21,700
Options expired in 1994 . . . . . . . . . 1.20 (2,009)
------
Exercisable at December 31, 1994. . . . . 20.57 33,691
Options granted in 1995 . . . . . . . . . 20.00 3,000
------
Exercisable at December 31, 1995. . . . . $20.53 36,691
------
</TABLE>
During January 1996, an additional 58,375 options to purchase Pinnacle
common stock were issued to management employees at prices that approximate fair
market value.
During 1995, certain employees of the Company purchased shares of
Pinnacle common stock at estimated fair value totaling $409,000; these purchases
were effected with cash of $30,000 and employee notes receivable of $379,000.
During 1994, certain employees of the Company purchased and were issued shares
of Pinnacle common stock at estimated fair value totaling $316,000; these
purchases were effected with cash of $43,000, employee notes receivable of
$185,000 and funding by Alvey and its subsidiaries of $88,000; amounts funded by
Alvey will be expensed over the vesting period of the related shares. During
1993, certain employees of the Company purchased shares of Pinnacle common stock
at estimated fair value of $2.1 million; the purchases were effected with cash
of $1.3 million, employee notes receivable of $545,000 and prepaid compensation
of $264,000 to be charged to expense of Alvey over the vesting period of the
related shares. Employee notes receivable outstanding to Pinnacle at December
31, 1995 and 1994 totaled $955,000 and $724,000, respectively, and are reflected
as a reduction of the net investment of Parent.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), which addresses
accounting for stock option, purchase and award plans. SFAS 123 specifies that
companies utilize either the "Fair value based method" or the "Intrinsic value
based method" for valuing stock options granted. The Company currently utilizes
and expects to continue to use the "Intrinsic value based method" for valuing
stock options granted when it adopts SFAS 123 in 1996. The
F-19
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT AND STOCK OWNERSHIP PLANS (CONTINUED)
Company anticipates that, when adopted, SFAS 123 will have no material effect on
the consolidated financial position or results of operations.
The Company also has agreed to provide life insurance policies, in
amounts ranging from $1 million to $3 million, for the remainder of the lives of
five of its executive managers or until such managers voluntarily resign to
accept a comparable position. Costs relative thereto are not material to the
Company's consolidated financial statements.
11. SIGNIFICANT CUSTOMERS
In 1995, 1994 and 1993, no single customer comprised more than 10% of
sales.
12. COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation consisting almost
entirely of product and general liability claims arising in the normal course of
its business. After deduction of a per occurrence self-insured retention, the
Company is insured for losses up to $17 million per year for products and
general liability claims. The Company has provided reserves for the estimated
cost of the self-insured retention; accordingly, these actions, when ultimately
concluded, are not expected to have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
Alvey has two agreements with related parties under which Alvey
receives investment banking and other consulting services. These agreements
terminate in the years 2000 and 2002, respectively. The agreements require
annual payments by Alvey totaling $500,000 plus out-of-pocket expenses which are
included in other expense (income), net in the accompanying financial
statements. In addition, Alvey is required to pay an aggregate 2% investment
banking fee on the total amount of consideration paid or received through a
merger, consolidation or sale of more than 10% of Alvey's assets or outstanding
securities, or the acquisition of assets or stock of another company. Payments
under the agreement are subordinate to Alvey's payments under the Credit
Agreement. At December 31, 1995, $510,000 is accrued for such fees relative to
the acquisitions of White and Buschman. In January 1996, concurrent with the
Debt Offering (see Note 15), these agreements were terminated at a cost of $1.5
million. Effective January 24, 1996, Pinnacle established consulting agreements
with two related parties whereby the Company is obligated to payments of
$350,000 per year plus expenses and, under one contract, annual increases of up
to 3%. Additionally, the Company is obligated to compensate one related party
for certain merger, acquisition and financing transactions.
In conjunction with the acquisition of Busse, a covenant not to
compete was signed by the former owners of Busse. The covenant requires Alvey
to make twelve semi-annual payments of $150,000 to the former owners commencing
October 1992 and continuing through April 1998. A portion of the Busse shares
acquired by Alvey are pledged to secure payments under the covenant-not-to-
compete.
White leases its manufacturing facility located in Kenilworth, New
Jersey from a partnership controlled by Donald J. Weiss, a director of the
Company. Pursuant to the terms of the operating lease, the Company paid $0.9
million and $1.1 million in 1995 and 1994, respectively.
The Company has entered into employment agreements with several
members of executive management. The agreements require the Company to pay the
executive's salary for a period lasting from one to two years should the
executive's employment be terminated. In addition, the agreements provide for
annual bonuses of up to 117% to 189% of the executive's annual salary based upon
the achievement of pre-established performance targets.
F-20
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accrued expenses include the following:
<TABLE>
<CAPTION>
December 31,
------------------
1995 1994
---- ----
(IN THOUSANDS)
<S> <C> <C>
Project expenses. . . . . . . . . . . . . . . . . $ 4,013 $ 3,064
Bonuses, incentives and profit sharing. . . . . . 7,507 5,053
Wages and salaries. . . . . . . . . . . . . . . . 2,407 2,241
Vacation and other employee costs . . . . . . . . 7,064 5,719
Plant disposal costs. . . . . . . . . . . . . . . 1,119 4,246
Other expenses. . . . . . . . . . . . . . . . . . 5,654 4,587
------- -------
$27,764 $24,910
------- -------
------- -------
</TABLE>
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data (in thousands) for fiscal 1995 and
1994 appears below:
<TABLE>
<CAPTION>
1995 Net Sales Gross Profit Net Income
---- ----------- -------------- -----------
<S> <C> <C> <C>
First quarter . . . . . . . $ 67,008 $ 15,523 $ 326
Second quarter. . . . . . . 72,026 17,479 1,137
Third quarter . . . . . . . 68,271 17,610 1,370
Fourth quarter. . . . . . . 80,713 20,109 1,573
-------- -------- --------
$288,018 $ 70,721 $ 4,406
-------- -------- --------
-------- -------- --------
1994
First quarter . . . . . . . $ 57,627 $ 11,142 $ (942)
Second quarter. . . . . . . 65,149 15,043 837
Third quarter . . . . . . . 58,898 15,215 553
Fourth quarter. . . . . . . 66,503 17,770 1,230
-------- -------- --------
$248,177 $ 59,170 $ 1,678
-------- -------- --------
-------- -------- --------
</TABLE>
15. SUBSEQUENT EVENTS
ACQUISITION
On January 29, 1996, Pinnacle, Alvey and MFA purchased all of the
outstanding capital stock of Weseley Software Development Corp. ("Weseley") for
a purchase price of $15 million in cash. The acquisition, which will be
recorded pursuant to the purchase method of accounting, was financed with a
portion of the proceeds of the Debt Offering as described below. In addition,
subject to the continued employment of the former principal shareholder of
Weseley and certain other conditions, certain employees of Weseley have an
opportunity to earn stay bonuses in the aggregate of $625,000 per year for each
of eight years which will be charged to income in the year earned and employee
incentive compensation up to an aggregate maximum of $13 million which will be
charged to income when such amounts are estimatable and payment thereof is
deemed probable.
In the quarter ended December 31, 1995, Weseley received and recorded
as deferred revenue $2.5 million in fees in connection with a distribution
contract with a large manufacturing company. On December 31, 1995 (prior to the
proposed purchase of Weseley by Pinnacle, Alvey and MFA), Weseley paid and
charged to income an aggregate of $3.0 million in bonuses to certain of its
employees.
F-21
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS (CONTINUED)
The following table sets forth pro forma income statement data for Alvey as if
the Weseley acquisition had taken place on January 1, 1995. Such data reflects
the application of the purchase method of accounting. Amounts have been
preliminarily assigned to assets acquired and liabilities assumed based on
estimated fair values as of the date of acquisition pursuant to valuations and
other studies which are essentially completed. Based on the results of an
independent appraisal, it is expected that approximately $11.7 million of the
Weseley purchase price will be allocated to purchased research and development
and charged to expense in the quarter ended March 31, 1996. The pro forma data
below does not reflect such charge to expense for the purchased research and
development. This income statement data is unaudited and does not purport to
represent the results of operations had the acquisition actually occurred on
January 1, 1995.
Pro forma Information
(in thousands)
<TABLE>
<CAPTION>
12 months ended
December 31, 1995
(unaudited)
-----------
<S> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . $291,415
Cost of goods sold. . . . . . . . . . . . . . . . . . . 218,232
-------
Gross profit . . . . . . . . . . . . . . . . . . . 73,183
Selling, general and administrative expenses. . . . . . 56,821
Research and development expenses . . . . . . . . . . . 2,666
Amortization expense. . . . . . . . . . . . . . . . . . 2,208
Other income, net . . . . . . . . . . . . . . . . . (108)
-------
Operating income . . . . . . . . . . . . . . . . . 11,596
Interest expense . . . . . . . . . . . . . . . . . . . 8,583
-------
Income before income taxes . . . . . . . . . . . . 3,013
Income taxes . . . . . . . . . . . . . . . . . . . . . 2,060
-------
Net income . . . . . . . . . . . . . . . . . . . . $ 953
-------
</TABLE>
The pro forma income statement data presented above includes the payment by
Weseley and charge to expense on December 31, 1995 (prior to the purchase of
Weseley by Pinnacle, Alvey and MFA) of an aggregate of $3.0 million in one-time
nonrecurring bonuses to certain employees of Weseley. Had such amount been
excluded from the pro forma income statement data presented above, Alvey's pro
forma net income for fiscal year 1995 would have been $2,753,000.
DEBT OFFERING AND RECAPITALIZATION OF PINNACLE
On January 24, 1996, Alvey issued and sold $100 million of 11 3/8%
Senior Subordinated Notes due 2003 (the "Debt Offering"). The proceeds of the
Debt Offering were used to repay all of Alvey's outstanding senior indebtedness
and certain other indebtedness, fund the acquisition of Weseley, pay transaction
fees, fund a dividend to Pinnacle of $21.5 million and provide working capital
for the ongoing operation of Alvey. In accordance with the terms of the Debt
Offering, Alvey intends to file a registration statement with the Securities and
Exchange Commission with respect to an offer to exchange the 11 3/8% Senior
Subordinated Notes for a new issue of debt securities of Alvey registered under
the Securities Act of 1993 with terms substantially identical to those of the
11-3/8% Senior Subordinated Notes. In addition, concurrent with the
consummation of the Debt Offering, Pinnacle sold $30 million in preferred stock
and warrants (the "Preferred Stock Offering"). The proceeds of the Preferred
Stock Offering, together with the dividend from Alvey to Pinnacle, were used to
buy back certain shares of
F-22
<PAGE>
ALVEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pinnacle's outstanding common stock and to redeem certain shares of its
outstanding preferred stock which had been pushed down to Alvey's consolidated
financial statements.
REVOLVING CREDIT FACILITY
Concurrent with the consummation of the Debt Offering, Alvey entered
into a new credit agreement for a $30 million revolving credit facility (the
"Revolving Credit Facility"), which is guaranteed by Pinnacle and by
each direct and indirect subsidiary of Alvey. Indebtedness of Alvey under the
Revolving Credit Facility is secured by substantially all of the personal
property of Alvey and its subsidiaries, all capital stock of Alvey and 100% of
the capital stock of its domestic subsidiaries (other than the portion of the
shares of capital stock of Busse Bros., Inc. which are pledged to secure certain
noncompete payments). Indebtedness under this Revolving Credit Facility will
bear interest at a rate based (at Alvey's option) upon (i) the Base Rate (as
defined in the Revolving Credit Facility) plus 1.50% or (ii) the Euro-dollar
Rate (as defined in the Revolving Credit Facility) for one, two, three, six or,
if available, nine or twelve months, plus 2.5%; provided, however, the interest
rate margins are subject to 0.25% reductions in the event Alvey meets certain
performance targets. The Revolving Credit Facility is due January 24, 2001.
REINCORPORATION
Effective January 16, 1996, the Company reincorporated in the State of
Delaware under the name Alvey Systems, Inc. The Company historically conducted
business as a Missouri corporation under the name Alvey, Inc.
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Weseley Software Development Corp.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Weseley Software Development Corp.
at December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As explained in Note 7, in January 1996, Weseley Software Development Corp. sold
all of its outstanding stock to McHugh, Freeman & Associates, Inc., a wholly
owned subsidiary of Alvey Systems, Inc.
PRICE WATERHOUSE LLP
St. Louis, Missouri
February 21, 1996
F-24
<PAGE>
WESELEY SOFTWARE DEVELOPMENT CORP.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 216,398 $ 34,184
Accounts receivable, less allowance for doubtful
accounts of $20,000 and $0, respectively . . . . 341,386 204,958
Unbilled revenue. . . . . . . . . . . . . . . . . 39,487 35,450
Other assets. . . . . . . . . . . . . . . . . . . 10,000 1,061
---------- ----------
Total current assets . . . . . . . . . . . . . 607,271 275,653
Deferred income taxes . . . . . . . . . . . . . . 1,374,073
Property and equipment, net . . . . . . . . . . . 223,021 78,566
---------- ----------
$2,204,365 $ 354,219
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . $ 104,020 $ 62,947
Accrued pension and profit sharing . . . . . . 166,000 85,531
Deferred revenues. . . . . . . . . . . . . . . 3,041,625 159,000
Deferred income taxes. . . . . . . . . . . . . 220,113 7,647
Taxes payable. . . . . . . . . . . . . . . . . 56,109 --
----------- ----------
Total current liabilities. . . . . . . . . . 3,587,867 315,125
Long-term liabilities . . . . . . . . . . . . . . 25,888
Commitments and contingencies (Note 8)
Stockholders' (deficit) equity:
Common stock, $1 par value; authorized
1,000 shares; 468 and 415 shares issued;
464 and 415 shares outstanding,
respectively . . . . . . . . . . . . . . . . . 468 415
Additional paid-in capital. . . . . . . . . . . 168,484 39,787
Accumulated deficit . . . . . . . . . . . . . . (1,569,592) (1,108)
Treasury stock, at cost; 4 and 0 common
shares, respectively . . . . . . . . . . . . . (8,750) --
----------- ----------
Total stockholders' (deficit) equity . . . . (1,409,390) 39,094
----------- ----------
$2,204,365 $ 354,219
----------- ----------
----------- ----------
</TABLE>
See accompanying Notes to Financial Statements.
F-25
<PAGE>
WESELEY SOFTWARE DEVELOPMENT CORP.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . $3,396,601 $1,810,239
Cost of sales. . . . . . . . . . . . . . . . . . . . . 935,390 602,981
--------- -------
Gross profit. . . . . . . . . . . . . . . . . . . . 2,461,211 1,207,258
Selling, general and administrative expenses . . . . . 4,538,423 865,651
Product development and research and development
expenses. . . . . . . . . . . . . . . . . . . . . . . 615,445 450,971
-------- -------
Operating loss. . . . . . . . . . . . . . . . . . . (2,692,657) (109,364)
Interest income. . . . . . . . . . . . . . . . . . . . 18,675 5,458
-------- -------
Loss before income tax benefit. . . . . . . . . . . (2,673,982) (103,906)
Income tax benefit . . . . . . . . . . . . . . . . . . 1,105,498 43,348
--------- -------
Net loss. . . . . . . . . . . . . . . . . . . . . . ($1,568,484) $ (60,558)
------------ ----------
------------ ----------
</TABLE>
See accompanying Notes to Financial Statements.
F-26
<PAGE>
WESELEY SOFTWARE DEVELOPMENT CORP.
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock
----------------------------
Retained
For the years ended Number Additional Earnings Total
December 31, 1994 and 1995 of Shares Paid-in (Accumulated Treasury Stockholders'
Outstanding Par Value Capital Deficit) Stock Equity (Deficit)
- -------------------------------------------- ---------------- ----------- ------------- ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 415 $ 415 $ 39,787 $ 59,450 $ -- $ 99,652
Net loss. . . . . . . . . . . . . . . . . (60,558) (60,558)
--- --- ------ ----- ----- ------
Balance, December 31, 1994 . . . . . . . . . 415 415 39,787 (1,108) -- 39,094
Treasury stock purchased . . . . . . . . . (4) (8,750) (8,750)
Stock options exercised. . . . . . . . . . 53 53 128,697 128,750
Net loss . . . . . . . . . . . . . . . . . (1,568,484) (1,568,484)
--- --- ------ --------- ----- ---------
Balance, December 31, 1995 . . . . . . . . . 464 $ 468 $168,484 $(1,569,592) $(8,750) $(1,409,390)
--- --- ------- --------- ----- ---------
--- --- ------- --------- ----- ---------
</TABLE>
See accompanying Notes to Financial Statements.
F-27
<PAGE>
WESELEY SOFTWARE DEVELOPMENT CORP.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
------ ------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . $(1,568,484) $ (60,558)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . 68,708 44,100
Deferred income taxes. . . . . . . . . . . . . . (1,161,607) (43,348)
Rent expense . . . . . . . . . . . . . . . . . . 25,888
Increase in current assets:
Accounts receivable, net. . . . . . . . . . . . (136,428) (9,654)
Unbilled revenue. . . . . . . . . . . . . . . . (4,037) (3,800)
Other assets. . . . . . . . . . . . . . . . . . (8,939) (460)
Increase in current liabilities:
Accounts payable. . . . . . . . . . . . . . . . 41,073 8,422
Taxes payable . . . . . . . . . . . . . . . . . 56,109
Accrued expenses. . . . . . . . . . . . . . . . 80,469 13,834
Deferred revenues . . . . . . . . . . . . . . . 2,882,625 109,672
--------- -------
Net cash provided for operating activities. . . 275,377 58,208
INVESTING ACTIVITIES:
Acquisition of property and equipment. . . . . . . (213,163) (47,612)
--------- --------
Net cash used for investing activities . . . . (213,163) (47,612)
--------- --------
FINANCING ACTIVITIES:
Stock options exercised. . . . . . . . . . . . . . 128,750
Purchase of treasury stock . . . . . . . . . . . . (8,750) --
--------- -------
Net cash provided by financing activities. . . 120,000 --
-------- -------
Increase in cash and cash equivalents. . . . . . . 182,214 10,596
Cash and cash equivalents, beginning of year . . . 34,184 23,588
-------- -------
Cash and cash equivalents, end of year . . . . . . $ 216,398 $ 34,184
------------- -------------
------------- -------------
</TABLE>
See accompanying Notes to Financial Statements.
F-28
<PAGE>
WESELEY SOFTWARE DEVELOPMENT CORP.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
DESCRIPTION OF BUSINESS
Weseley Software Development Corp. (the "Company" or "Weseley")
develops, markets and supports software management products and provides related
services which are utilized by a variety of companies to manage their shipping
processes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The policies utilized by the Company in the preparation of the
financial statements conform to generally accepted accounting principles, and
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual amounts could differ from these estimates.
REVENUE RECOGNITION
Revenue from the sale of software licenses is recognized upon
installation of the software providing that no significant vendor obligations
remain and collection of the related receivable is deemed probable. Cost and
expenses, primarily direct labor and materials, related to installation are
recorded as cost of sales as the related revenues are recognized.
UNBILLED REVENUE
Revenues for services rendered in the installation or maintenance of
software which have not been billed at the end of the year are recorded as
unbilled revenue.
DEFERRED REVENUES
Revenues related to sales of maintenance service contracts, which are
billed at the inception of the contract, are deferred and recognized ratably
over the term of the contract.
COST OF SALES
For purposes of estimating the cost of sales relating to installation
and maintenance services revenues, the Company includes all of its customer
service expenses plus an allocation of certain other expenses based upon
estimates made by management.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less
at date of purchase are considered to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company sells its products to a variety of manufacturing companies
throughout the United States and generally does not require collateral (see also
Note 6). The Company maintains reserves for potential credit losses and
historically such losses have been within management's expectations.
F-29
<PAGE>
WESELEY SOFTWARE DEVELOPMENT CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Upon sale or other
disposition, the cost and related accumulated depreciation are removed from the
respective accounts and any resulting gain or loss is included in income.
Property and equipment consists of:
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Computer equipment . . . . . . . . . . . . . $287,632 $ 84,925
Office furniture and fixtures. . . . . . . . 90,177 79,721
------- -------
377,809 164,646
Less accumulated depreciation. . . . . . . . (154,788) (86,080)
------- -------
$223,021 $ 78,566
-------- --------
</TABLE>
Depreciation is provided on equipment and furniture using the
straight-line method over the estimated useful life (5 years) of each asset.
Maintenance and repairs are expensed as incurred.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
During 1995 and 1994, none of these expenses qualified for capitalization under
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
INCOME TAXES
The Company utilizes SFAS No. 109, "Accounting for Income Taxes."
Income taxes are based upon income for financial reporting purposes and deferred
income taxes are provided for the temporary differences between the financial
reporting bases and the income tax bases of the Company's assets and
liabilities. The tax rates expected to be in effect when such differences are
reflected in the Company's income tax returns are used in calculating the
deferred tax asset or liability. The major temporary differences that give rise
to deferred taxes are primarily the result of the Company using the cash basis
of accounting for income tax reporting purposes. See Note 3 for additional
information.
EARNINGS PER SHARE INFORMATION
Given the historical organization and capital structure of the
Company, earnings per share information is not considered meaningful or relevant
and has not been presented in the accompanying financial statements or the notes
thereto.
F-30
<PAGE>
WESELEY SOFTWARE DEVELOPMENT CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES
Income tax benefit is comprised of the following:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1995 1994
------ ------
<S> <C> <C>
Current:
Federal . . . . . . . . . . . . . . . . . $ 40,871 $ --
State . . . . . . . . . . . . . . . . . . 15,238 --
----------- ------------
56,109 --
Deferred:
Federal . . . . . . . . . . . . . . . . . (846,145) (31,574)
State . . . . . . . . . . . . . . . . . . (315,462) (11,774)
-------- -------
(1,161,607) (43,348)
--------- -------
$(1,105,498) $ (43,348)
--------- -------
</TABLE>
A reconciliation of the income tax benefit at the statutory federal income
tax rate to reported income tax benefit per the accompanying financial
statements is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994
-------- ---------
<S> <C> <C>
Income tax benefit at statutory rate. . $ (909,154) $ (35,328)
Benefit resulting from:
State taxes (net of federal) . . . (196,344) (8,020)
---------- ---------
($1,105,498) $ (43,348)
---------- ---------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
------ ------
<S> <C> <C>
Deferred revenues. . . . . . . . . . . . . $1,374,073 $ 71,948
Accounts payable . . . . . . . . . . . . . 47,069 28,484
Allowance for doubtful accounts. . . . . . 9,050
Other accruals . . . . . . . . . . . . . . 11,714 706
--------- -------
Total deferred tax assets . . . . . . 1,441,906 101,138
--------- -------
Accounts receivable. . . . . . . . . . . . (163,527) (92,744)
Other. . . . . . . . . . . . . . . . . . . (124,419) (16,041)
--------- -------
Total deferred tax liabilities. . . . (287,946) (108,785)
--------- --------
Net deferred tax asset (liability). . $1,153,960 $ (7,647)
---------- ---------
</TABLE>
F-31
<PAGE>
WESELEY SOFTWARE DEVELOPMENT CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCK OPTION PLANS
The Company has a nonqualified stock option plan whereby the Company
may grant stock options to key employees for an option price of at least the
fair market value of the stock on the date of grant. The options vest three
years after the date of grant, during which time they are subject to repurchase
provisions at the option of the Company. In connection with the sale of the
Company, as further discussed in Note 7, all issued options vested on
November 21, 1995. Changes under this plan were as follows:
<TABLE>
<CAPTION>
Average exercise
Shares price per share
------ ----------------
<S> <C> <C>
Shares subject to plan . . . . . . . . . 100
----
Options outstanding, January 1, 1994 . . 41 $ 2,183
----
Options outstanding, January 1, 1995 . . 41 2,183
Options issued. . . . . . . . . . . 12 4,000
Options exercised . . . . . . . . . (53) (2,429)
----
Options outstanding, December 31, 1995 . -- --
----
</TABLE>
5. EMPLOYEE RETIREMENT AND PROFIT SHARING PLANS
The Company has two defined contribution benefit plans covering
substantially all regular full time employees of the Company who are at least 21
years of age and have at least 12 months of service. No employee contributions
to the plans are allowed except for roll-over contributions from another
retirement plan upon the inception of employment. The Company makes
contributions to the retirement plan once per year in an amount equal to 10% of
each participant's compensation for the plan year. The Company makes
contributions to the profit sharing plan once per year on a discretionary basis.
Employer contributions to the plans during the years ended
December 31, 1995 and 1994 were $85,531 and $34,585, respectively. Employees
vest in the plans' assets ratably over a five-year period.
6. SIGNIFICANT CUSTOMERS
Two customers comprised approximately 38% and 9% of net accounts
receivable and 26% and 13% of net sales as of and for the year ended
December 31, 1995, respectively. Three customers comprised approximately 48%,
1% and 0% of accounts receivable and 21%, 14% and 12% of net sales as of and for
the year ended December 31, 1994, respectively.
7. SIGNIFICANT EVENTS
SALE OF THE COMPANY
On January 29, 1996, the Company consummated the sale of all of its
outstanding stock to McHugh, Freeman & Associates, Inc., a wholly owned
subsidiary of Alvey Systems, Inc., for a purchase price of approximately
$15,000,000 in cash. In addition, subject to the continued employment of the
former principal owner of Weseley and other conditions, certain designated
employees of Weseley will have an opportunity to earn stay bonuses in the
aggregate amount of $625,000 per year for each of eight years and employment
incentive compensation up to an aggregate maximum of $13,000,000 which would be
payable over time. The accompanying financial statements reflect the
historical, pre-acquisition basis of accounting.
F-32
<PAGE>
WESELEY SOFTWARE DEVELOPMENT CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SIGNIFICANT EVENTS (CONTINUED)
DISTRIBUTION CONTRACT AND EMPLOYEE BONUSES
On November 2, 1995, the Company entered into a distribution contract
with GE Capital Transportation Services Corporation ("GECTS") whereby GECTS has
been granted exclusive distribution rights on certain software currently under
development and to be manufactured by the Company (TRACS Version 3.0) in
exchange for a non-refundable prepaid fee of $2,500,000. During the seven year
term of the contract, for any licenses of such software sold by GECTS, the
Company shall perform all services required in connection with the license,
including software customization, installation, training and maintenance. The
Company is entitled to and will receive additional payments based upon the
actual services performed. The contract also provides for additional payments,
based on a percentage of the suggested retail list price of the software
licenses (as defined in the contract), to the Company should sales of the
software licenses and related installation, training and maintenance fees exceed
$2,850,000. Fees of approximately $2,500,000 received under this contract are
reflected as deferred revenues in the accompanying balance sheet at December 31,
1995. Such fees will be recorded as revenue as related software licenses are
sold by GECTS or ratably over the life of the contract, whichever is greater.
On December 31, 1995, the Company paid and charged to income an
aggregate of $3,000,000 in bonuses to certain of its employees.
8. COMMITMENTS AND CONTINGENCIES
The Company has various obligations under long-term operating leases.
The aggregate minimum rental commitments for the years ended December 31 under
all noncancellable long-term operating leases are as follows: 1996 - $63,621;
1997 - $82,984; 1998 - $83,400; 1999 - $82,631; and 2000 - $58,328.
Total rental expenses under all noncancellable long-term operating
leases and various monthly equipment rentals was $130,200 and $99,538 for the
years ended December 31, 1995 and 1994, respectively.
The Company is party to certain lawsuits. Management and legal
counsel do not expect the outcome of any litigation to have a material adverse
effect on the Company's financial position, results of operations or liquidity.
F-33
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF
TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE
AGENT AS FOLLOWS:
BY HAND, REGISTERED OR CERTIFIED MAIL
OR OVERNIGHT CARRIER:
THE BANK OF NEW YORK
101 BARCLAY STREET, 7 EAST
REORGANIZATION SECTION
NEW YORK, NEW YORK, 10286
BY FACSIMILE: (212) 571-3080
CONFIRM BY TELEPHONE: (212) 815-2742
(ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE SHOULD BE SENT PROMPTLY
BY HAND, OVERNIGHT COURIER, OR REGISTERED OR CERTIFIED MAIL)
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION 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 COMPANY
OR BY THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY 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 CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
OFFER TO EXCHANGE ALL OUTSTANDING 11 3/8%
SENIOR SUBORDINATED NOTES DUE 2003
($100,000,000 PRINCIPAL AMOUNT) FOR 11 3/8%
SENIOR SUBORDINATED NOTES DUE 2003
[LOGO]
----------------------
P R O S P E C T U S
----------------------
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145(a) of the Delaware General Corporation Law (the
"GCL") provides that a Delaware corporation may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if he or she 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 action or proceeding, had no cause to believe his
or her conduct was unlawful.
Section 145(b) of the GCL provides that a Delaware corporation
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the corporation to procure a judgment in its favor by reason of the fact that
such person acted in any of the capacities set forth above, against expenses
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if he or she acted under similar standards,
except that no indemnification may be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his or her duty to the
corporation unless and only to the extent that the court in which such action or
suit was brought shall determine that despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to be indemnified for such expenses which the court shall
deem proper.
Section 145 of the GCL further provides that to the extent a
director or officer of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsection (a) and (b) or in the
defense of any claim, issue or matter therein, such officer or director shall be
indemnified against expenses actually and reasonably incurred by him or her in
connection therewith; that indemnification provided for by Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the corporation may purchase and maintain insurance on behalf
of a director or officer of the corporation against any liability asserted
against such officer or director and incurred by him or her in any such capacity
or arising out of his or her status as such, whether or not the corporation
would have the power to indemnify him or her against such liabilities under
Section 145.
As permitted by Section 102(b)(7) of the GCL, the Company's and
Pinnacle's Certificates of Incorporation provides that a director shall not be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. However, such provision does not eliminate or
limit the liability of a director for acts or omissions not in good faith or for
breaching his or her duty of loyalty, engaging in intentional misconduct or
knowingly violating a law, paying a dividend or approving a stock repurchase
which was illegal, or obtaining an improper personal benefit. A provision of
this type has no effect on the availability of equitable remedies, such as
injunction or rescission, for breach of fiduciary duty.
The Company's and Pinnacle's Bylaws require that directors and
officers be indemnified to the maximum extent permitted by Delaware law.
II-1
<PAGE>
The Company and Pinnacle have entered into indemnity agreements
with each of its directors requiring that the Company and Pinnacle pay on behalf
of each director party thereto any amount that he or she is or becomes legally
obligated to pay because of any claim or claims made against him or her because
of any act or omission or neglect or breach of duty, including any actual or
alleged error or misstatement or misleading statement, which he or she commits
or suffers while acting in his or her capacity as a director of the Company and
Pinnacle and solely because of his or her being a director. Under the General
Corporation Law, absent such an indemnity agreement, indemnification of a
director is discretionary rather than mandatory (except in the case of a
proceeding in which a director is successful on the merits). Consistent with
the Bylaws of the Company and Pinnacle provision on the subject, the indemnity
agreements require the Company or Pinnacle to make prompt payment of defense
and investigation costs and expenses at the request of the director in advance
of indemnification, provided that the recipient undertakes to repay the amounts
if it is ultimately determined that he or she is not entitled to indemnification
for such expenses and provided further that such advance shall not be made if it
is determined that the director acted in bad faith or deliberately breached his
or her duty to the Company and Pinnacle or their stockholders and, as a result,
it is more likely than not that it will ultimately be determined that he or she
is not entitled to indemnification under the terms of the indemnity agreement.
The indemnity agreements make the advance of litigation expenses mandatory
absent a special determination to the contrary, whereas under the General
Corporation Law absent such an indemnity agreement, such advance would be
discretionary. Under the indemnity agreement, the director is permitted to
petition the court to seek recovery of amounts due under the indemnity agreement
and to recover the expenses of seeking such recovery if he or she is successful.
Without the indemnity agreement, the Company would not be required to pay or
reimburse the director for his or her expenses in seeking indemnification
recovery against the Company. By the terms of the indemnity agreement, its
benefits are not available if the director has other indemnification or
insurance coverage for the subject claim or, with respect to the matters giving
rise to the claim, (i) received a personal benefit, (ii) violated section 16(b)
of the Securities Exchange Act of 1934, as amended, or analogous provisions of
law or (iii) committed certain acts of dishonesty. Absent the indemnity
agreement, indemnification that might be made available to directors could be
changed by amendments to the Company's Certificate of Incorporation or Bylaws.
Pursuant to Section 8 of the Purchase Agreement, the Initial
Purchaser agreed to indemnify the Company and its directors and officers against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended, to the extent provided in the Purchase Agreement.
ITEM 21. EXHIBITS.
(a) Exhibits.
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
* Certificate of Incorporation of Alvey Systems, Inc.
*3.1
*3.2 Bylaws of Alvey Systems, Inc.
*4.1 Indenture
*4.2 Form of Note (included in Exhibit 4.1)
*5.1 Opinion of Gibson, Dunn & Crutcher as to the legality
of the Notes.
*10.1 Recapitalization Agreement, dated as of September 28,
1995, by and among Pinnacle Automation, Inc., Alvey
Systems, Inc. and the Selling Stockholders listed on
Schedule A thereto
*10.2 Equity Purchase and Sale Agreement, dated as of December 13, 1995, by
and among Pinnacle Automation, Inc., Alvey Systems, Inc., James M.
Schloeman and each of the other persons or entities listed on Schedule
A thereto
II-2
<PAGE>
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
*10.3 Equity Purchase and Sale Agreement, dated as of
January 24, 1996, by and among Pinnacle Automation,
Inc., Alvey Systems, Inc. and Atlantic Equity
Corporation
*10.4 Amended and Restated Stockholders Agreement, dated as
of January 11, 1996, by and among Pinnacle Automation,
Inc., each of the Management Stockholders (as defined
therein), the Raebarn Stockholders (as defined therein)
the Series C Holders (as defined therein) and the
Warrantholders (as defined therein)
*10.5 Consulting Agreement, dated as of December 31, 1995, by
and among Pinnacle Automation, Inc., Alvey Systems,
Inc. and Mammoth Capital Inc.
*10.6 Termination Agreement, dated as of December 31, 1995,
by and among Pinnacle Automation, Inc., Alvey Systems,
Inc., and Lafarick, Inc.
*10.7 Investment Agreement, dated as of December 12, 1995,
by and among Pinnacle Automation, Inc., Vestar Equity
Partners, L.P., Chemical Equity Associates and Hancock
Venture Partners IV--Direct Fund, L.P., as amended
*10.8 Registration Rights Agreement, dated as of January 24,
1996, by and among Pinnacle Automation, Inc., Vestar
Equity Partners, L.P., Chemical Equity Associates,
Hancock Venture Partners IV--Direct Fund, L.P., and
the other persons listed on the schedules thereto
*10.9 Consulting Agreement, dated as of January 24, 1996, by
and among Pinnacle Automation, Inc., Alvey Systems,
Inc. and Vestar Capital Partners
*10.10 Purchase Agreement, dated January 19, 1996, by and
among Alvey Systems, Inc., Pinnacle Automation, Inc.
and NationsBanc Capital Markets, Inc.
*10.11 Indenture, dated as of January 24, 1996, by and between
Alvey Systems, Inc. and The Bank of New York
*10.12 Registration Rights Agreement, dated as of January 24,
1996, by and among Alvey Systems, Inc., Pinnacle
Automation, Inc. and NationsBanc Capital Markets, Inc.
*10.13 Credit Agreement, dated as of January 24, 1996, among
Alvey Systems, Inc., the lenders named therein and
NationsBank N.A.
*10.14 Pledge and Security Agreement, dated as of January 24,
1996, by Alvey Systems, Inc., as pledgor, in favor of
NationsBank, N.A.
*10.15 Pledge and Security Agreement, dated as of January 24,
1996, by Pinnacle Automation, Inc., as pledgor, in
favor of NationsBank, N.A.
*10.16 Security Agreement, dated as of January 24, 1996, by
Alvey Systems, Inc., and its subsidiaries, in favor of
NationsBank, N.A.
*10.17 Non-Competition, Working Capital Guarantee and Security
Agreement, dated April 15, 1992, by and among the
Company, Busse Bros, Inc., Eugene H. Busse and First
Wisconsin Trust Company
*10.18 Non-Competition, Working Capital Guarantee and
Security Agreement, dated April 15, 1992, by and among
the Company, Busse Bros, Inc., Sheldon C. Busse and
First Wisconsin Trust Company
*10.19 Non-Competition, Working Capital Guarantee and
Security Agreement, dated April 15, 1992, by and among
the Company, Busse Bros, Inc., Lois B. Biel and First
Wisconsin Trust Company
*10.20 Stock Purchase Agreement by and among Pinnacle
Automation, Inc., Alvey Systems, Inc., McHugh, Freeman
& Associates, Inc., Weseley Software Development Corp.
and the other signatories thereto, dated December 20,
1995.
II-3
<PAGE>
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
*10.21 Asset Purchase Agreement dated as of May 9, 1995 by
and among Pinnacle Automation, Inc., Alvey Systems,
Inc., The Buschman Company, Diamond Machine Co. and
IMH of Lynchburg, Inc.
*10.22 Lease Agreement, dated December 31, 1986, by and among
Boright Realty and White Storage & Retrieval Systems,
Inc.
*10.23 Amended and Restated Employment Agreement, dated May
31, 1995, by and among Pinnacle Automation, Inc. and
William R. Michaels
*10.24 Amended and Restated Employment Agreement, dated June
27, 1995, by and among Pinnacle Automation, Inc.
and Michael J. Tilton
*10.25 Amended and Restated Employment Agreement, dated June
27, 1995, by and among Pinnacle Automation, Inc. and
Stephen J. O'Neill
*10.26 Employment Agreement, dated March 9, 1994, by and among
The Buschman Company and Christopher C. Cole
*10.27 Employment Agreement, dated December 14, 1993, by and
among White Storage & Retrieval Systems, Inc. and Donald
J. Weiss
12 Statement re: Computation of Ratios
*21 List of Subsidiaries
23.1 Independent Auditors' Consents
*23.2 Consents of Gibson, Dunn & Crutcher (to be included in
its opinion filed as Exhibit 5.1)
*24 Power of Attorney (included on pages II-4 through II-6)
*25 Form T-1, Statement of Eligibility under the Trust
Indenture Act of 1939 of The Bank of New York (3
copies bound separately)
- --------------------------
*Previously filed.
(b) Financial Schedules.
SCHEDULE NO. DESCRIPTION
II Rule 12-09 Valuation and Qualifying Accounts and Reserves
of Registrant.
Schedules other than those listed above have been omitted because
of the absence of conditions under which they are required or because the
information required is set forth in the financial statements of the notes
thereto.
ITEM 22. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE>
(b) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
County of St. Louis, State of Missouri, on May 6, 1996.
ALVEY SYSTEMS, INC.
By: /s/ William R. Michaels
----------------------------------
William R. Michaels
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to the Registration Statement has been signed below by the
following persons in their capacities and on the dates indicated.
SIGNATURE TITLE DATE
----------- ------- ------
/s/ William R. Michaels Chairman of the Board and May 6, 1996
- ----------------------------- Chief Executive Officer
William R. Michaels (Principal Executive Officer)
/s/ James A. Sharp Vice President, Chief Financial May 6, 1996
- ----------------------------- Officer, Treasurer and Assistant
James A. Sharp Secretary(Principal Financial
and Accounting Officer)
* Director May 6, 1996
- -----------------------------
Frederick R. Ulrich, Jr.
* Director May 6, 1996
- -----------------------------
Prakash A. Melwani
* Director May 6, 1996
- -----------------------------
Daniel S. O'Connell
II-6
<PAGE>
* Director May 6, 1996
- -----------------------------
Charles A. Dill
* By:/s/ James A. Sharp
---------------------------------
* James A. Sharp - Attorney-in-Fact
II-7
<PAGE>
SCHEDULE II
ALVEY SYSTEMS, INC.
Rule 12-09 Valuation and Qualifying Accounts and Reserves
(In thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Balance at Charged to Charged to Balance at
Valuation and Beginning Costs and Other End of
Reserve Accounts of Period Expenses Accounts Deductions Period
<S> <C> <C> <C> <C> <C>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1993
Accounts Receivable Reserve $870 $99 $760(1) ($454) $1,275
(1) Reflects increase to Accounts Receivable Reserves due to acquisition of White.
Inventory Reserve $1,442 $478 $723(1) ($971) $1,672
(1) Reflects increase to Inventory Reserves due to acquisition of White and purchase
accounting adjustment related to Busse.
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
Accounts Receivable Reserve $1,275 $88 ($486)(1) ($282) $595
(1) Reflects decrease to Accounts Receivable Reserves due to purchase accounting
adjustments related to the acquisition of White.
Inventory Reserve $1,672 $626 $0 ($824) $1,474
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
Accounts Receivable Reserve $595 $546 $0 ($317) $824
Inventory Reserve $1,474 $1,362 $0 ($784) $2,052
</TABLE>
II-8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1995 CONSOLIDATED FINANCIAL STATEMENTS OF ALVEY SYSTEMS, INC.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,405
<SECURITIES> 0
<RECEIVABLES> 57,919
<ALLOWANCES> (824)
<INVENTORY> 19,686
<CURRENT-ASSETS> 86,550
<PP&E> 38,490
<DEPRECIATION> (12,815)
<TOTAL-ASSETS> 150,285
<CURRENT-LIABILITIES> 86,951
<BONDS> 42,460
0
27,322
<COMMON> 0
<OTHER-SE> (15,719)
<TOTAL-LIABILITY-AND-EQUITY> 150,285
<SALES> 288,018
<TOTAL-REVENUES> 288,018
<CGS> 217,297
<TOTAL-COSTS> 217,297
<OTHER-EXPENSES> 55,310
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,896
<INCOME-PRETAX> 8,515
<INCOME-TAX> 4,109
<INCOME-CONTINUING> 4,406
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,406
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1> GIVEN THE HISTORICAL ORGANIZATION AND CAPITAL STRUCTURE OF ALVEY, EARNINGS
PER SHARE INFORMATION IS NOT CONSIDERED MEANINGFUL OR RELEVANT AND THEREFORE HAS
NOT BEEN PRESENTED.
</TABLE>
