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PROSPECTUS
MOTORS AND GEARS, INC.
OFFER TO EXCHANGE ITS 10 3/4% SERIES B SENIOR NOTES DUE 2006, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT FOR ANY AND ALL OF ITS OUTSTANDING 10 3/4%
SERIES A SENIOR NOTES DUE 2006.
Motors and Gears, Inc., a Delaware corporation (the "Company") and a direct,
wholly-owned subsidiary of Motors and Gears Holdings, Inc., a Delaware
corporation ("Parent"), hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal (the "Letter of Transmittal") (which together constitute the
"Exchange Offer"), to exchange up to $170 million aggregate principal amount
of 10 3/4% Series B Senior Notes due 2006 (the "New Notes"), of the Company
for a like principal amount of the Company's issued and outstanding 10 3/4%
Series A Notes due 2006 (the "Old Notes" and collectively with the New Notes,
the "Senior Notes"), with the holders (each holder of Old Notes, a "Holder")
thereof. The terms of the New Notes are substantially identical to the terms
of the Old Notes that are to be exchanged therefor. See "Description of the
Senior Notes." The Company will receive no proceeds in connection with the
Exchange Offer.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON MAY 5, 1997, UNLESS EXTENDED.
The New Notes will be senior unsecured obligations of the Company and will
rank pari passu in right of payment with all other Senior Indebtedness (as
defined) of the Company and senior to all Subordinated Indebtedness (as
defined) of the Company, and will effectively rank junior to all secured
Indebtedness (as defined) of the Company and to all Indebtedness of the
Company's subsidiaries, including borrowings under the New Credit Agreement
(as defined). As of December 31, 1996, after giving effect to (i) the Old Note
Offering (as defined), (ii) the application of the net proceeds therefrom and
(iii) the Company's acquisition of Barber Colman Motors, (as defined), the
aggregate principal of secured Indebtedness of the Company and Indebtedness of
the Company's subsidiaries to which the New Notes are effectively junior is
approximately $5.0 million. The Indenture permits the Company and its
subsidiaries to incur additional Indebtedness, including secured Indebtedness,
subject to certain limitations. Such permitted additional secured Indebtedness
which would effectively be senior to the New Notes may include up to $75.0
million incurred under the New Credit Agreement and other Indebtedness
permitted by the Indenture, including $25.0 million of additional
Indebtedness. See "Description of Senior Notes" and "Description of Certain
Indebtedness."
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on
May 5, 1997, unless the Exchange Offer is extended (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 Old Notes being tendered for exchange.
However, the Exchange Offer is subject to certain customary conditions which
may be waived by the Company. The Company has agreed to pay the expenses of
the Exchange Offer. There will be no cash proceeds to the Company from the
Exchange Offer. See "Use of Proceeds."
(Cover continued on following page)
----------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF
OLD NOTES WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER, SEE "RISK FACTORS"
ON PAGE 13 OF THIS PROSPECTUS.
THESE 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 April 3, 1997
<PAGE>
The Old Notes were issued and sold on November 7, 1996 (the "Old Note
Offering"), in a transaction not registered under the Securities Act of 1933,
as amended (the "Securities Act"), in reliance upon the exemption provided in
Section 4(2) of the Securities Act. Accordingly, the Old Notes may not be
reoffered, resold or otherwise pledged, hypothecated or transferred in the
United States unless so registered or unless an applicable exemption from the
registration requirements of the Securities Act is available. The New Notes
are being offered for exchange in order to satisfy certain obligations of the
Company under a Registration Rights Agreement (as defined) between the Company
and the Initial Purchasers (as defined). The New Notes will be obligations of
the Company evidencing the same indebtedness as the Old Notes and will be
entitled to the benefits of the same Indenture (as defined), which governs
both the Old Notes and the New Notes. The form and terms (including principal
amount, interest rate, maturity and ranking) of the New Notes are the same as
the form and terms of the Old Notes, except that the New Notes (i) will be
registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Old Notes, (ii) will not be
entitled to registration rights and (iii) will not provide for any Liquidation
Damages (as defined). See "The Exchange Offer-- Registration Rights;
Liquidated Damages."
Prior to the Exchange Offer, there has been no established trading market
for the Old Notes or the New Notes. The Company does not intend to apply for
listing or quotation of the New Notes on any securities exchange or stock
market. Therefore, there can be no assurance as to the liquidity of any
trading market for the New Notes or that an active public market for the New
Notes will develop. Any Old Notes not tendered and accepted in the Exchange
Offer will remain outstanding. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered, or
tendered but unaccepted, Old Notes could be adversely affected. Following the
consummation of the Exchange Offer, the holders of Old Notes will continue to
be subject to the existing restrictions on transfer thereof and the Company
will have no further obligations to such holders to provide for the
registration of the Old Notes under the Securities Act. See "The Exchange
Offer--Consequences of Not Exchanging Old Notes."
The Company is making the Exchange Offer pursuant to the registration
statement of which this Prospectus is a part in reliance upon the position of
the staff of the Securities and Exchange Commission (the "Commission") set
forth in certain no-action letters addressed to other parties in other
transactions. However, the Company has not sought its own no-action letter and
there can be no assurance that the staff of the Commission would make a
similar determination with respect to the Exchange Offer. Based on these
interpretations by the staff of the Commission, the Company believes that the
New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by holders thereof (other than (i) any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act, (ii) an Initial Purchaser who acquired the Old Notes
directly from the Company solely in order to resell pursuant to Rule 144A of
the Securities Act or any other available exemption under the Securities Act,
or (iii) a broker-dealer who acquired the Old Notes as a result of market
making or other trading activities) without further compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder is not participating and has no arrangement
or understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such 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. 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 Old Notes where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities.
The Company has agreed that, for a period of 180 days after the Expiration
Date (as defined), it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to and should
be read in conjunction with the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Unless otherwise indicated, all references in this Prospectus to
the Company's business and pro forma information give effect to the acquisition
of all of the Company's subsidiaries, including the acquisition of Barber
Colman Motors (the "Barber Colman Acquisition"), and the acquisitions of
Imperial, Scott and Gear (the "Imperial Acquisitions"), as if all such
transactions occurred on January 1, 1996. Unless the context indicates or
otherwise requires, references in this Prospectus to the "Company" are to
Motors and Gears, Inc. (formerly MK Group, Inc.) and its subsidiaries.
THE COMPANY
The Company is a leading domestic manufacturer of specialty purpose electric
motors, gearmotors, gearboxes and gears for a wide variety of consumer,
commercial and industrial markets. The Company has a diverse base of customers
and its products are utilized in a broad range of applications including
vending machines, refrigerator ice dispensers, commercial floor care equipment,
elevators and photocopy machines. The Company's subsidiaries have sold their
brand name products to their customers for an average of over 70 years. The
Company believes that it has created strong customer loyalty for its products
primarily through its emphasis on high quality, custom engineered products,
competitive prices and customer service. For the year ended December 31, 1996,
the Company had pro forma net sales and net income of $122.4 million and $3.3
million, respectively.
Shipments of electric motors and generators are estimated by industry sources
to have been approximately $7.0 billion in 1995 and to have been growing at a
compound annual growth rate of approximately 2% to 3% over the last five years,
as compared to the Company's pro forma sales growth of approximately 6% over
the same period. Although the industry has experienced substantial
consolidation in recent years, the industry remains highly fragmented with over
200 manufacturers serving the U.S. market in 1995 according to industry
sources. The Company believes that continuing competitive pressures will lead
to further consolidation in the electric motor industry and create
opportunities for the Company to extend its product lines and business through
strategic acquisitions.
Within this industry, the Company operates in specialized niche markets which
typically consist of high value-added motor applications requiring custom
engineered, non-standardized motors and generate relatively small annual dollar
volumes. The Company has an active new product development effort and
constantly seeks to find new applications for its products and new niche
markets to enter. As a result of these efforts, the Company has historically
been able to achieve sales growth in excess of industry trends. The Company's
products typically require small manufacturing runs and frequent line
changeovers. These markets are generally unattractive to large integrated
manufacturers which target larger markets and long-run, standardized product
lines.
The Company constantly seeks to reduce its costs through redesigning its
manufacturing processes to minimize labor and material costs without
sacrificing quality. In addition, the Company works closely with its customers
to engineer its products in ways that enable the Company to manage costs and
increase value to the customer. The Company outsources its most capital
intensive processes and strives to minimize its capital investment through
purchasing and updating used equipment.
The Company operates in three product groups: (i) subfractional motors, which
represented 67.0% of pro forma net sales for the year ended December 31, 1996,
(ii) fractional/integral motors, which represented 28.0% of pro forma net sales
for the year ended December 31, 1996, and (iii) gears and gearboxes, which
represented 5.0% of pro forma net sales for the year ended December 31, 1996.
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Subfractional Motors. The Company's subfractional horsepower products are
comprised of motors and gearmotors that power applications up to 30 watts (
1/25 horsepower). These small, "fist-size" AC and DC motors are used in light
duty applications such as snack and beverage vending machines, refrigerator ice
dispensers and photocopy machines. Average product selling prices typically
range from $3 to $20 per unit. The Company focuses on niche applications in
this product group and believes it has a leading market position in most of its
niches.
Fractional/Integral Motors. The Company's fractional/integral horsepower
products are comprised of AC and DC motors and gearmotors having power ranges
from 1/8 up to 300 horsepower. Key end markets for these motors include
commercial floor care equipment, elevators, automatic hose reels, and
industrial lift machinery. Average product selling prices typically range from
$50 to $150 per unit for commercial floor care and hose reel products to $2,000
to $2,500 per unit for elevator motors. The Company believes it is the primary
supplier to virtually all the major commercial floor care product manufacturers
and the leading DC elevator motor manufacturer in the United States.
Gears and Gearboxes. The Company's precision gear and gearbox products are
produced in sizes of up to 16 inches in diameter and in various customized
configurations such as pump, bevel and helical gears. These products have a
reputation for their durability, accuracy, and low noise generation. Key end
markets for these products include motor original equipment manufacturers
("OEMs") for assembly into a gearmotor as well as OEMs of commercial floor care
equipment, aerospace and food processing product equipment. The Company focuses
on niche applications in this product group and believes it is the primary
supplier of gears and gearboxes to virtually all the major commercial floor
care product manufacturers in the United States.
COMPETITIVE STRENGTHS. The Company believes that it benefits from the
following competitive strengths:
Leading Position in Niche Markets. The Company has targeted niche markets in
which it has achieved leading market positions and which are generally
unattractive to large manufacturers due to their small size and specialized
nature. The Company believes that it has attained market shares in excess of
50% in markets which comprise over 65% of its net sales. These leading market
positions have provided a high level of predictability to the Company's net
sales. The Company believes that it has succeeded in these markets due to its
product design capabilities, reputation, competitive prices, quality and
service.
Diverse Markets and Customers. The Company serves numerous end user markets
and a diverse base of over 1,300 customers. In 1996, the Company's largest
single customer represented less than 6% of net sales and the Company's top ten
customers represented approximately 36% of net sales. The Company's customers
include leading OEMs such as General Electric Co. Inc. ("General Electric"),
Whirlpool Corporation, Clarke Industries Inc., Siebe, plc and Vendo Company
Inc. The diversity of products, markets and customers minimizes the Company's
exposure to economic cycles or geographic markets and provides a broad base
from which to grow sales through continued development of new products.
Active Product Development. The Company focuses on developing value-added
products with its customers by utilizing its extensive product development
expertise and manufacturing process capabilities to meet specific application
requirements. The Company's sales and technical staff work with existing
customers to identify specific needs and develop innovative solutions. As a
result, this custom application capability has also been a key driver of new
customer development.
Quality Product and High Level of Service. The Company sells into end product
applications which have long life cycles and require durability. In response,
the Company has established itself as a reliable manufacturer of high-quality
products. The Company maintains close contact with its customers during both
the original motor design and the continuous redesign processes to ensure that
the most reliable product is manufactured. The Company aggressively redesigns
its motors to improve performance and reduce production costs. This entrenches
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the Company with its customers and minimizes competition. In addition, the
Company is dedicated to on-time delivery as evidenced by its 100% on-time
delivery record with General Electric, its largest customer, in 1996.
Experienced Management Team. The Company's five senior managers together have
over 140 years of experience in the motors and gears industry and over time
have substantially improved operating efficiencies. The experience of senior
management has been critical to developing strong relationships with the
Company's customers and has resulted in significant new product development
opportunities. The Company's President, Ron Sansom, gained extensive experience
in this industry during his 15 years with General Electric.
BUSINESS STRATEGY. The Company's business strategy includes the following key
elements:
Expand Product Lines and Increase Distribution. The Company focuses on
developing value-added products with its customers by utilizing its extensive
product development expertise. The Company's sales, technical service and
development staff work with customers to identify specific needs and develop
innovative solutions. New product developments can often be profitably applied
to other high-margin niche markets. In addition, the Company intends to expand
its distribution sales effort to capture additional sales opportunities.
Reduce Costs. The Company's manufacturing cost reduction effort is
accomplished through redesigning the Company's products in cooperation with its
customers and through incremental production process improvements. The Company
also seeks to reduce costs through acquisitions by centralizing administration,
finance, legal, service and long-range strategic planning functions. This has
been demonstrated by annual cost savings from completed headcount reductions
and administrative savings relating to the Barber Colman Acquisition.
Pursue Strategic Acquisitions. The U.S. electric motor and gear market
remains highly fragmented, with many specialized manufacturers serving numerous
market niches. The Company will continue to search for strategic acquisitions
that support its current product groups by adding complementary product lines,
expanding technological capabilities or entering new geographic markets. In
addition, the Company believes there are other areas in the motion control
industry which offer acquisition opportunities. The Company defines the motion
control industry as having the following major business segments: motors, gears
and gear drives, controls and sensors, drives and drive systems, and couplings.
Acquisitions in other areas of the motion control industry would allow the
Company to access new markets and develop higher value-added products by
combining an existing motor product with additional motion control features.
The Company was organized in September 1995 by Jordan Industries, Inc.
("JII") to acquire and operate companies in the motion control industry. Since
its inception, the Company acquired Merkle-Korff Industries, Inc. ("Merkle-
Korff") in September 1995 and acquired the net assets of each of Colman, Inc.
and Colman Motor Products, Inc. (collectively, "Barber Colman Motors") in March
1996 through Merkle-Korff. Concurrent with the consummation of the Old Note
Offering, the Company, through a newly formed subsidiary, acquired the business
and net assets of Imperial Electric Company ("Imperial"), and Imperial's
subsidiaries, Scott Motor Company ("Scott") and Gear Research, Inc. ("Gear").
Since 1988, Imperial, Scott and Gear have been subsidiaries of JII. The Company
is structured as a holding company which owns all of the stock of Motors and
Gears Industries, Inc. ("M&G Industries"). M&G Industries owns all the stock of
the Company's operating subsidiaries.
----------------
The Company was incorporated in the State of Illinois on September 8, 1995.
On November 1, 1996, the Company effected a reincorporation merger whereby MK
Group, Inc., an Illinois corporation, was merged with and into Motors and
Gears, Inc., a Delaware corporation, with Motors and Gears, Inc. being the
surviving entity. The Company's principal executive offices are located at
ArborLake Centre, Suite 550, 1751 Lake Cook Road, Deerfield, Illinois 60015,
and its telephone number is (847) 945-5591.
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<PAGE>
THE EXCHANGE OFFER
Securities Offered.......... $170,000,000 principal amount of 10 3/4% Series B
Senior Notes due 2006. The terms of the New Notes
and the Old Notes are identical in all material
respects, except for certain transfer
restrictions and registration rights relating to
the Old Notes and except for certain Liquidated
Damages provisions relating to the Old Notes
described below under "--Summary Description of
the New Notes."
Issuance of Old Notes;
Registration Rights........ The Old Notes were issued on November 7, 1996 to
Donaldson, Lufkin & Jenrette Securities
Corporation, BT Securities Corporation and
Jefferies & Company, Inc. (collectively, the
"Initial Purchasers"), which placed the Old Notes
with "qualified institutional buyers" (as such
term is defined in Rule 144A promulgated under
the Securities Act). In connection therewith, the
Company executed and delivered for the benefit of
the holders of Old Notes a certain registration
rights agreement (the "Registration Rights
Agreement"), pursuant to which the Company agreed
(i) to file a registration statement (the
"Registration Statement") on or prior to 60 days
after November 7, 1996 with respect to the
Exchange Offer and (ii) to use their best efforts
to cause the Registration Statement to be
declared effective by the Commission on or prior
to 120 days after November 7, 1996. In certain
circumstances, the Company will be required to
provide a shelf registration statement (the
"Shelf Registration Statement") to cover resales
of the Old Notes by the holders thereof. If the
Company does not comply with its obligations
under the Registration Rights Agreement, it will
be required to pay Liquidated Damages to holders
of the Old Notes under certain circumstances. See
"The Exchange Offer--Registration Rights;
Liquidated Damages." Holders of Old Notes do not
have any appraisal rights in connection with the
Exchange Offer.
The Exchange Offer.......... The New Notes are being offered in exchange for a
like principal amount of Old Notes. The issuance
of the New Notes is intended to satisfy the
obligations of the Company contained in the
Registration Rights Agreement. Based upon the
position of the staff of the Commission set forth
in no-action letters issued to third parties in
other transactions substantially similar to the
Exchange Offer, the Company believes that the New
Notes issued pursuant to the Exchange Offer may
be offered for resale, resold and otherwise
transferred by holders thereof (other than (i)
any such holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act, (ii) an Initial Purchaser who
acquired the Old Notes directly from the Company
solely in order to resell pursuant to Rule 144A
of the Securities Act or any other available
exemption under the Securities Act, or (iii) a
broker-dealer who acquired the Old Notes as a
result of market making or other trading
activities) without further compliance with the
registration and
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<PAGE>
prospectus delivery requirements of the
Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's
business and such holder is not participating and
has no arrangement with any person to participate
in a distribution (within the meaning of the
Securities Act) of such 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 for such New Notes.
Although there has been no indication of any
change in the staff's position, there can be no
assurance that the staff of the Commission would
make a similar determination with respect to the
resale of the New Notes. See "Risk Factors."
Procedures for Tendering.... Tendering holders of Old Notes must complete and
sign the Letter of Transmittal in accordance with
the instructions contained therein and forward
the same by mail, facsimile or hand delivery,
together with any other required documents, to
the Exchange Agent, either with the Old Notes to
be tendered or in compliance with the specified
procedures for guaranteed delivery of Old Notes.
Holders of the Old Notes desiring to tender such
Old Notes in exchange for New Notes should allow
sufficient time to ensure timely delivery.
Certain brokers, dealers, commercial banks, trust
companies and other nominees may also effect
tenders by book-entry transfer. Holders of Old
Notes registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
are urged to contact such person promptly if they
wish to tender Old Notes pursuant to the Exchange
Offer. Letters of Transmittal and certificates
representing Old Notes should not be sent to the
Company. Such documents should only be sent to
the Exchange Agent. Questions regarding how to
tender and requests for information should be
directed to the Exchange Agent. See "The Exchange
Offer--Procedures for Tendering Old Notes."
Tenders, Expiration Date;
Withdrawal................. The Exchange Offer will expire the earlier of (i)
5:00 p.m., New York City time, on May 5, 1997 or
(ii) the date when all Old Notes have been
tendered, or such later date and time to which it
is extended, provided it may not be extended
beyond June 4, 1997. The tender of Old Notes
pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date. Any Old
Note not accepted for exchange for any reason
will be returned without expense to the tendering
holder thereof as promptly as practicable after
the expiration or termination of the Exchange
Offer. See "The Exchange Offer--Terms of the
Exchange Offer; Period for Tendering Old Notes"
and"--Withdrawal Rights."
Certain Conditions to the
Exchange Offer............. The Exchange Offer is subject to certain
customary conditions, all of which may be waived
by the Company, including the absence of
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<PAGE>
(i) threatened or pending proceedings seeking to
restrain the Exchange Offer or resulting in a
material delay to the Exchange Offer; (ii) a
general suspension of trading on any national
securities exchange or in the over-the-counter
market; (iii) a banking moratorium; (iv) a
commencement of war, armed hostilities or other
similar international calamity directly or
indirectly involving the United States; and (v)
change or threatened change in the business,
properties, assets, liabilities, financial
condition, operations, results of operations or
prospects of the Company and its subsidiaries
taken as a whole that, in the sole judgment of
the Company, is or may be adverse to the Company.
The Company shall not be required to accept for
exchange, or to issue New Notes in exchange for,
any Old Notes, if at any time before the
acceptance of such Old Notes for exchange or the
exchange of New Notes for such Old Notes, any of
the foregoing events occurs which, in the sole
judgment of the Company, make it inadvisable to
proceed with the Exchange Offer and/or with such
acceptance for exchange or with such exchange. If
the Company fails to consummate the Exchange
Offer because the Exchange Offer is not permitted
by applicable law or Commission policy, it will
file with the Commission a Shelf Registration
Statement to cover resales of the Transfer
Restricted Securities (as defined) by the holders
thereof who satisfy certain conditions. If the
Company fails to consummate the Exchange Offer or
file a Shelf Registration Statement in accordance
with the Registration Rights Agreement, the
Company will pay Liquidated Damages to each
holder of Transfer Restricted Securities until
the cure of all defaults. The Exchange Offer is
not conditioned upon any minimum aggregate
principal amount of Old Notes being tendered for
exchange. See "The Exchange Offer--Registration
Rights; Liquidated Damages" and "--Certain
Conditions to the Exchange Offer."
Federal Income Tax
Consequences............... For Federal income tax purposes, the exchange
pursuant to the Exchange Offer will not result in
any income, gain or loss to the Holders or the
Company. See "Certain Federal Income Tax
Considerations."
Use of Proceeds............. There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer.
Appraisal Rights............
Holders of Old Notes will not have dissenters'
rights or appraisal rights in connection with the
Exchange Offer.
Exchange Agent.............. Fleet National Bank is serving as Exchange Agent
in connection with the Exchange Offer.
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CONSEQUENCES OF NOT EXCHANGING THE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate
that it will register the Old Notes under the Securities Act. See "Risk
Factors--Consequences of Exchange and Failure to Exchange" and "The Exchange
Offer--Consequences of Exchanging Old Notes."
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions and registration rights
relating to the Old Notes and except that, if the Exchange Offer is not
consummated by March 7, 1997, subject to certain exceptions, with respect to
the first 90-day period immediately following thereafter, the Company will be
obligated to pay Liquidated Damages to each Holder of Old Notes in an amount
equal to $.05 per week for each $1,000 principal amount of Old Notes, as
applicable, held by such Holder. The amount of the Liquidated Damages will
increase by an additional $.05 per week with respect to each subsequent 90-day
period until the Exchange Offer is consummated, or any other Registration
Default (as defined) is cured, up to a maximum of $.40 per week for each $1,000
principal amount of Old Securities, as applicable.
The New Notes will bear interest from the most recent date to which interest
has been paid on the Old Notes or, if no interest has been paid on the Old
Notes, from November 7, 1996. Accordingly, registered Holders of New Notes on
the relevant record date for the first interest payment date following the
consummation of the Exchange Offer will receive interest accruing from the most
recent date to which interest has been paid or, if no interest has been paid,
from November 7, 1996. Old Notes accepted for exchange will cease to accrue
interest from and after the date of consummation of the Exchange Offer. Holders
of Old Notes whose Old Notes are accepted for exchange will not receive any
payment in respect of interest on such Old Notes otherwise payable on any
interest payment date which occurs on or after consummation of the Exchange
Offer.
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THE NEW NOTES
Issuer...................... Motors and Gears, Inc.
Securities Offered.......... $170 million aggregate principal amount of 10
3/4% Series B Senior Notes due 2006.
Maturity.................... November 15, 2006.
Interest.................... The Old Notes bear interest and the New Notes
will bear interest at a rate of 10 3/4% per
annum, payable semi-annually in cash in arrears
on each May 15 and November 15, commencing on the
first such date to occur after the Expiration
Date.
Optional Redemption......... On or after November 15, 2001, the Senior Notes
will be redeemable at the option of the Company,
in whole or in part, at any time at the
redemption prices set forth herein, plus accrued
and unpaid interest and Liquidated Damages, if
any, to the date of redemption. Notwithstanding
the foregoing, at any time prior to November 15,
1999, the Company may redeem up to 35% of the
original aggregate principal amount of the Senior
Notes with the net proceeds of one or more Equity
Offerings (as defined) at a redemption price
equal to 109.750% of the principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of
redemption. See "Description of Senior Notes--
Redemption of Senior Notes."
Mandatory Redemption........ Except after the passage of certain events, the
Company is not required to make any mandatory
redemption, purchase or sinking fund payments
with respect to the Senior Notes. See
"Description of Senior Notes--Mandatory Offers to
Purchase Senior Notes."
Change of Control........... Upon the occurrence of a Change of Control (as
defined), each holder of Senior Notes will have
the right to require the Company to purchase such
holder's Senior Notes pursuant to an Offer (as
defined) at a purchase price in cash equal to
101% of the aggregate principal amount thereof,
plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase. Certain
transactions with affiliates of the Company may
not be deemed to be a Change of Control.
Transactions constituting a Change of Control are
not limited to hostile takeover transactions not
approved by the current management of the
Company. Except as described under "Description
of Senior Notes--Mandatory Offers to Purchase
Senior Notes," the Indenture does not contain
provisions that permit the holders of Senior
Notes to require the Company to purchase or
redeem the Senior Notes in the event of a
takeover, recapitalization or similar
restructuring, including an issuer
recapitalization or similar transaction with
management.
Ranking..................... The Senior Notes will be senior unsecured
obligations of the Company, ranking pari passu in
right of payment with all other
8
<PAGE>
Senior Indebtedness of the Company and senior to
all Subordinated Indebtedness of the Company. The
Senior Notes will effectively rank junior to any
secured Senior Indebtedness incurred under the
New Credit Agreement. As of December 31, 1996,
after giving effect to (i) the Old Note Offering,
(ii) the application of the net proceeds
therefrom and (iii) the Barber Colman
Acquisition, the aggregate principal of secured
Indebtedness of the Company and Indebtedness of
the Company's subsidiaries to which the New Notes
will effectively rank junior is approximately
$5.0 million. The Indenture permits the Company
and its subsidiaries to incur additional
Indebtedness, including secured Indebtedness,
subject to certain limitations. Such permitted
additional secured Indebtedness which would
effectively be senior to the New Notes may
include up to $75.0 million incurred under the
New Credit Agreement and other Indebtedness
permitted by the Indenture, including $25.0
million of additional Indebtedness. See
"Description of Senior Notes--Certain Covenants"
and "Description of Certain Indebtedness."
The Company believes that prepayment of the
Senior Notes pursuant to a Change of Control
would constitute a default under the New Credit
Agreement. In the event a Change of Control
occurs, the Company will likely be required to
refinance the Indebtedness outstanding under the
New Credit Agreement and the Senior Notes. If
there is a Change of Control, any Indebtedness
under the New Credit Agreement could be
accelerated, which Indebtedness is secured and
effectively ranks senior to the Senior Notes.
Moreover, 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 the Senior Notes given the
Company's high leverage. See "Risk Factors--
Leverage and Coverage."
Certain Covenants...........
The Indenture contains certain covenants that,
among other things, limit the ability of the
Company and its Restricted Subsidiaries (as
defined) to pay dividends or make certain other
restricted payments, to incur certain additional
Indebtedness unless it meets a Cash Flow Coverage
Ratio (as defined), to encumber or sell assets,
to enter into transactions with affiliates, to
enter into certain guarantees of indebtedness, to
make certain investments, to merge or consolidate
with any other entity and to transfer or lease
all or substantially all of their assets. In
addition, under certain circumstances, the
Company will be required to offer to purchase
Senior Notes at a price equal to 100% of the
principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the
date of purchase with the proceeds of certain
Asset Sales (as defined). See "Description of
Senior Notes--Certain Covenants" and "--Mandatory
Offers to Purchase Senior Notes--Asset Sales."
9
<PAGE>
RISK FACTORS
Holders of Old Notes should consider carefully all of the information set
forth in this Prospectus and, in particular, should evaluate the specific
factors set forth under "Risk Factors." Risk factors which Holders of Old Notes
should evaluate include the consequences of exchanging and not exchanging Old
Notes for New Notes, the Company's leverage and coverage, the ranking of the
Senior Notes among other indebtedness of the Company, the Company's dependence
on intercompany transfers to meet its debt service and other obligations, the
Company's limited operating history and the limited relevance of its historical
financial information, the restrictive covenants contained in the Indenture and
the New Credit Agreement, the absence of a market for the New Notes, the
ability of the Company to purchase the Senior Notes upon a Change of Control,
the influence of the Company's principal stockholders and fraudulent transfer
considerations.
10
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents summary (i) historical balance sheet data of the
Company at December 31, 1996; (ii) historical operating and other data of the
Company and its predecessor, Merkle-Korff (also referred to herein as the
"Predecessor"), for the year ended December 31, 1994, for the period from
January 1, 1995 to September 22, 1995, for the period from September 23, 1995
to December 31, 1995, and for the year ended December 31, 1996 and (iii) pro
forma operating and other data for the year ended December 31, 1996. The pro
forma data is unaudited. The pro forma data gives effect to the Old Note
Offering, the application of the net proceeds therefrom, the Refinancing Plan
and the Barber Colman Acquisition. The pro forma data does not purport to
represent what the consolidated results of operations of the Company would
actually have been had the Old Note Offering, the application of the net
proceeds therefrom, the Refinancing Plan and the Barber Colman Acquisition
actually occurred at the beginning of the relevant period, and does not purport
to project the consolidated results of operations of the Company for the
current year or any future period. The historical data of the Predecessor and
the Company reflects the results of the Company's wholly-owned subsidiary,
Merkle-Korff, for all periods presented, together with its wholly-owned
subsidiary, Barber Colman Motors, from March 8, 1996, the date of the Barber
Colman Acquisition, and Imperial, Scott and Gear from September 23, 1995, the
date at which the Company and Imperial, Scott and Gear came under the common
control of JII. The historical data of the Company at December 31, 1996 and for
the period from September 23, 1995 to December 31, 1995 and for the year ended
December 31, 1996, were derived from the audited consolidated financial
statements of the Company. The historical data of the Predecessor for the year
ended December 31, 1994 and the period from January 1, 1995 to September 22,
1995 were derived from the audited combined financial statements of the
Predecessor. The summary financial data set forth below should be read in
conjunction with "Use of Proceeds," "Unaudited Pro Forma Condensed Financial
Statements," "Selected Historical Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of the Company, the Predecessor, Barber Colman Motors and
Imperial, and the related notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------------
HISTORICAL
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................... $ 27,586
Total assets......................................... 173,668
Long-term obligations, including current portion..... 175,067
Net capital deficiency............................... (15,787)
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR
AND COMPANY
PREDECESSOR(1) COMPANY COMBINED(2) COMPANY(3) PRO FORMA(4)
----------------------- ------------ ----------- ---------- ------------
JANUARY 1, SEPTEMBER 23
YEAR ENDED THROUGH THROUGH YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, SEPTEM- DECEM- DECEM- DECEM- DECEM-
------------ BER 22, BER 31, BER 31, BER 31, BER 31,
1994 1995 1995 1995 1996 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $49,340 $39,295 $24,684 $63,979 $117,571 $122,377
Gross profit, excluding
depreciation........... 18,022 15,182 8,255 23,437 41,820 43,067
Operating income........ 12,309 11,616 4,753 16,369 23,229 25,209
Interest expense........ 0 0 2,412 2,412 11,134 19,725
Net income(5)........... 11,921 11,604 1,360 12,964 4,834 3,291
SUPPLEMENTAL PRO
FORMA DATA:
Pro forma income
taxes(5)............... 4,837 4,755 -- 4,755 -- --
Pro forma net
income(5).............. 7,255 7,133 1,360 8,493 4,834 3,291
Ratio of earnings to
fixed charges(6)....... 41.7x -- -- 2.2x 2.1x 1.3x
</TABLE>
(footnotes on following page)
11
<PAGE>
- --------
(1) Reflects the results of operations of the Predecessor for the periods prior
to its acquisition by the Company on September 22, 1995.
(2) Reflects the combined results of operations of the Predecessor from January
1, 1995 to September 22, 1995, and the results of operations of the Company
from September 23, 1995 to December 31, 1995. The results of operations of
Imperial, Scott and Gear are included in the Company's consolidated
operating results from September 23, 1995, the date at which the Company
and Imperial, Scott and Gear came under the common control of JII.
(3) The Company's results of operations for the year ended December 31, 1996
include the results of operations of Barber Colman Motors since its
acquisition by the Company on March 8, 1996 and the results of operations
of Imperial, Scott and Gear for the entire period.
(4) Gives effect to (i) the Old Note Offering, the application of the net
proceeds therefrom and the Refinancing Plan; (ii) the Barber Colman
Acquisition; and (iii) the elimination of $369 of operating expenses for
completed headcount reductions and administrative savings in connection
with the Barber Colman Acquisition by the Company, as if all such
transactions had occurred on January 1, 1996. See "Use of Proceeds," and
"Unaudited Pro Forma Condensed Financial Statements."
(5) For the Predecessor, historical net income reflects only certain state
income taxes attributable to Merkle-Korff's income for the historical
periods presented prior to its acquisition by the Company on September 22,
1995, during which it elected to be a subchapter S corporation and
therefore was not subject to federal and certain state income taxes. Pro
forma net income reflects income taxes at the tax rate of 40%.
(6) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes, plus fixed charges.
Fixed charges consist of interest expense on all indebtedness and
capitalized interest (which the Company and Predecessor have not incurred
in the respective periods), amortization of deferred financing costs, and
rental expense on operating leases, representing that portion of rental
expense deemed by the Company to be attributable to interest.
12
<PAGE>
RISK FACTORS
Holders of the Old Notes should carefully consider the following risk
factors, as well as other information set forth in this Prospectus, before
tendering their Old Notes in the Exchange Offer. The risk factors set forth
below (other than "Consequences of Exchange and Failure to Exchange") are
generally applicable to the Old Notes as well as the New Notes.
CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE
Issuance of the New Notes in exchange for the Old Notes 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. Therefore, holders of the Old Notes desiring
to tender such Old Notes in exchange for New Notes should allow sufficient
time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to tenders of Old Notes
for exchange. Holders of Old Notes who do not exchange their Old Notes for New
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Notes as set forth in the legend thereon.
In general, the Old Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. The
Company does not currently anticipate that it will register the Old Notes
under the Securities Act. In addition, upon the consummation of the Exchange
Offer holders of Old Notes which remain outstanding will not be entitled to
any rights to have such Old Notes registered under the Securities Act or to
any rights under the Registration Rights Agreement. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, a holder's ability to
sell untendered, or tendered but unaccepted, Old Notes could be adversely
affected. See "The Exchange Offer--Consequences of Not Exchanging Old Notes."
Based on interpretations by the staff of the Commission, the Company
believes that the New Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by a
holder thereof (other than (i) an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act, (ii) an Initial Purchaser who
acquired the Old Notes directly from the Company solely in order to resell
pursuant to Rule 144A of the Securities Act or any other available exemption
under the Securities Act, or (iii) a broker-dealer who acquired the Old Notes
as a result of market making or other trading activities) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business and that such holder is not participating and
has no arrangement or understanding with any person to participate, in a
distribution (within the meaning of the Securities Act) of such New Notes. The
Company has not, however, sought its own no-action letter from the staff of
the Commission. Although there has been no indication of any change in the
staff's position, there can be no assurance that the staff of the Commission
would make a similar determination with respect to the resale of the New
Notes. Any holder that cannot rely upon such prior staff interpretations must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction, unless such
sale is made pursuant to an exemption from such requirements. See "The
Exchange Offer--Purpose of the Exchange Offer."
LEVERAGE AND COVERAGE
The Company has substantial indebtedness and debt service obligations. At
December 31, 1996, the Company's total indebtedness, including current
portion, is approximately $175.0 million and its net capital deficiency is
$15.8 million, in each case after giving effect to the transactions
contemplated by the Old Note Offering, the application of the net proceeds
therefrom, and the Refinancing Plan. In addition, subject to the restrictions
under the New Credit Agreement and the Indenture, the Company and its
subsidiaries may incur additional indebtedness (including additional secured
indebtedness and senior indebtedness) from time to time. See "Use of
Proceeds," "Capitalization" and "Description of Senior Notes--Certain
Covenants."
13
<PAGE>
The level of the Company's indebtedness could have important consequences to
holders of the Senior Notes, including: (i) a substantial portion of the
Company's cash flow from operations must be dedicated to debt service and will
not be available for other purposes; (ii) the Company'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) the Company's level of indebtedness could limit its flexibility in
reacting to changes in its operating environment and economic conditions
generally.
The Company's ability to pay principal and interest on the Senior 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
New Credit Agreement or a successor facility. The Company anticipates that its
operating cash flow, together with borrowings under the New Credit Agreement,
will be sufficient to meet its operating expenses and to service its debt
requirements as they become due. However, the Company may be required to
refinance a portion of the principal of the Senior Notes prior to their
maturity and, if the Company 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 can be no assurance that any of these
remedies can be effected on satisfactory terms, if at all.
RANKING OF SENIOR NOTES
The Senior Notes will be senior unsecured obligations of the Company and
will rank pari passu in right of payment with all other Senior Indebtedness of
the Company. The Senior Notes will effectively rank junior to any secured
Indebtedness of the Company and to all Indebtedness of the Company's
subsidiaries, including indebtedness incurred under the New Credit Agreement.
The Contingent Earnout (as defined) provided by the Company, M&G Industries,
Imperial, Scott and Gear to an affiliate of JII, its indirect parent, in
connection with the Imperial Acquisitions is a potential future obligation and
liability of such subsidiaries of the Company, the payment of which, if
earned, will not be limited or otherwise restricted by the Indenture or the
New Credit Agreement. See "The Company--The Imperial Acquisitions." As of
December 31, 1996, after giving effect to the (i) Old Note Offering, (ii) the
application of the net proceeds therefrom and (iii) the Barber Colman
Acquisition, the aggregate principal amount of secured Indebtedness of the
Company and Indebtedness of the Company's subsidiaries to which the Senior
Notes will effectively rank junior is approximately $5.0 million. The
Indenture permits the Company and its subsidiaries to incur up to $25.0
million of additional indebtedness, including secured indebtedness and
indebtedness of its subsidiaries, subject to certain limitations. See
"Description of Senior Notes--Certain Covenants" and "Description of Certain
Indebtedness."
HOLDING COMPANY STRUCTURE; DEPENDENCE ON SUBSIDIARIES; LIMITATIONS ON ACCESS
TO CASH FLOW OF THE SUBSIDIARIES
The Company is structured as a holding company which owns all of the stock
of M&G Industries. M&G Industries owns all of the stock of the Company's
operating subsidiaries. See "The Company--Operating Subsidiaries."
Accordingly, the Company's operations are conducted exclusively through its
subsidiaries, and the Company's only significant assets are the capital stock
of its subsidiaries. As a holding company, the Company is dependent on
dividends or other intercompany transfers of funds from its subsidiaries to
meet the Company's debt service and other obligations, including its
obligations under the Senior Notes. Under the terms of the Indenture, the
Company's subsidiaries may incur certain indebtedness pursuant to agreements
that may restrict the ability of such subsidiaries to make such dividends or
other intercompany transfers necessary to service the Company's obligations,
including its obligations under the Senior Notes. The terms of the New Credit
Agreement limit the Company's subsidiaries from making dividends to the
Company except in limited circumstances. While the New Credit Agreement
permits dividends to the Company for the purpose of paying interest on the
Senior Notes, dividends for other purposes, such as repurchases of Senior
Notes upon a Change of Control or an Asset Sale, are not permitted. Any
failure by the Company to satisfy its obligations with respect
14
<PAGE>
to the Senior Notes at maturity (with respect to payments of principal) or
prior thereto (with respect to payments of interest or required repurchases)
would constitute a default under the Indenture and the New Credit Agreement
and could cause a default under agreements governing other indebtedness of the
Company and its subsidiaries. The Old Notes are and the New Notes will be
obligations exclusively of the Company and will not be guaranteed by any of
the Company's subsidiaries. In addition, because the Company conducts its
business through its subsidiaries, all existing and future liabilities and
obligations of the Company's subsidiaries (including the New Credit Agreement
and the Contingent Earnout Agreement) will be effectively senior to the Senior
Notes. Consequently, the Company's cash flow and ability to service its debt,
including the Senior Notes, are dependent upon the earnings of its
subsidiaries and the distribution of those earnings to the Company, or upon
loans, advances or other payments made by its subsidiaries to the Company.
LIMITED OPERATING HISTORY AND LIMITED RELEVANCE OF HISTORICAL FINANCIAL
INFORMATION
The Company was incorporated in September 1995 to acquire Merkle-Korff and
other targeted companies focused on the motion control industry. The Company
defines the motion control industry as having the following major business
segments: motors, gears and gear drives, controls and sensors, drives and
drive systems, and couplings. The Company has conducted limited operations to
date. The historical financial information included herein for periods prior
to September 22, 1995 is based upon the historical information of Merkle-
Korff. For the periods after September 22, 1995, the historical financial
information is based upon historical information of the Company, including the
results of Barber Colman Motors since its acquisition by the Company on March
8, 1996, and includes purchase accounting adjustments as a result of the
Company's acquisitions. The historical financial information does not reflect
the results of operations, financial position or cash flows of the Company
with Imperial, Scott and Gear prior to September 22, 1995. As a result, the
historical financial information prior to September 22, 1995 is of limited
relevance in understanding what the results of operations, financial position
or cash flows of the Company would have been for the historical periods
presented had the Company in fact owned all of its current subsidiaries or had
the Company in fact been organized for such periods. See "Selected Financial
Information" and "Management's Discussion of Financial Condition and Results
of Operations."
CONTROL BY PRINCIPAL STOCKHOLDER AND CERTAIN TRANSACTIONS
JII and other Jordan Stockholders (as defined) own all of the preferred
stock and substantially all of the common stock of the Parent. See "Principal
Stockholders." Accordingly, JII has sufficient voting power to elect the
entire Board of Directors, exercise control over the business, policies and
affairs of Parent and its wholly-owned subsidiary, the Company, and, in
general, determine the outcome of any corporate transaction or other matters
submitted to the stockholders for approval, such as any amendment to the
Company's Certificate of Incorporation, the authorization of additional shares
of capital stock, and any merger, consolidation, sale of all or substantially
all of the assets of the Company and could prevent or cause a change of
control of the Company. JII is expected to maintain a majority ownership
interest in the Company. Messrs. Jordan, Quinn, Zalaznick and Boucher, all
directors of Parent and the Company, are directors, executive officers and
stockholders of JII.
The Company has entered into a number of affiliate transactions with JII and
The Jordan Company, an affiliate of JII, including the Contingent Earnout
Agreement, the JII Services Agreement (as defined), the TJC Advisory Agreement
(as defined), the Tax Sharing Agreement and certain other agreements and
transactions. See "Certain Transactions."
RESTRICTIVE COVENANTS
The Indenture restricts, among other things, the Company's and its
Restricted Subsidiaries' ability to pay dividends or make certain other
Restricted Payments, to incur additional indebtedness, to encumber or sell
assets, to enter into transactions with affiliates, to enter into certain
guarantees of indebtedness, to make Restricted Investments, to merge or
consolidate with any other entity and to transfer or lease all or
substantially all of their assets. In addition, the New Credit Agreement
contains other and more restrictive covenants and prohibits the Company and
its subsidiaries from prepaying other indebtedness, including the Senior
Notes. See "Description
15
<PAGE>
of Senior Notes--Certain Covenants" and "Description of Certain Indebtedness--
New Credit Agreement." The New Credit Agreement also requires the Company to
maintain specified financial ratios and satisfy certain financial condition
tests. The Company's ability to meet those financial ratios and tests can be
affected by events beyond its control, and there can be no assurance that the
Company will meet those tests. A breach of any of these covenants could result
in a default under the New Credit Agreement and/or the Indenture. Upon the
occurrence of an event of default under the New Credit Agreement, the lenders
thereunder could elect to declare all amounts outstanding under the New Credit
Agreement, together with accrued interest, to be immediately due and payable.
If the Company were unable to repay those amounts, such lenders could proceed
against the collateral granted to them to secure that indebtedness. If the
Senior Indebtedness were to be accelerated, there can be no assurance that the
assets of the Company would be sufficient to repay in full all Senior
Indebtedness, including the Senior Notes. Substantially all of the assets of
the Company's subsidiaries were pledged as security under the New Credit
Agreement. The Indenture and the New Credit Agreement do not limit or
otherwise restrict the Company's obligations under the Contingent Earnout
Agreement. See "--Ranking of Senior Notes" and "Description of Certain
Indebtedness--New Credit Agreement."
CHANGE OF CONTROL AND DEFAULT UNDER NEW CREDIT AGREEMENT
In the event of a Change of Control, each holder of Senior Notes will be
entitled to require the Company to purchase any or all of the Senior Notes
held by such holder at the prices stated herein. The Company expects that
prepayment of the Senior Notes pursuant to a Change of Control would
constitute a default under the New Credit Agreement. In the event that a
Change of Control occurs, the Company would likely be required to refinance
the indebtedness outstanding under the New Credit Agreement and the Senior
Notes. There can be no assurance that the Company would be able to refinance
such indebtedness or, if such refinancing were to occur, that such refinancing
would be on terms favorable to the Company. See "Description of Senior Notes--
Mandatory Offers to Purchase Senior Notes--Change of Control" and "--Certain
Definitions."
ABSENCE OF PUBLIC MARKET FOR THE SENIOR NOTES; RESTRICTIONS ON TRANSFERS
The New Notes are being offered to Holders of the Old Notes. The Old Notes
were issued on November 7, 1996 to a small number of institutional investors
and are eligible for trading in the Private Offering, Resale and Trading
through Automated Linkages (PORTAL) Market, the National Association of
Securities Dealers' screenbased, automated market for trading of securities
eligible for resale under Rule 144A. The New Notes are new securities for
which there currently is no market. Although the Initial Purchasers have
advised the Company that they currently intend to make a market in the New
Notes, they are not obligated to do so and may discontinue such market making
at any time without notice. The Company does not intend to list the Senior
Notes on any national securities exchange or to seek the admission thereof to
trading in the National Association of Securities Dealers Automated Quotation
System. Accordingly, no assurance can be given that an active market will
develop for any of the Senior Notes or as to the liquidity of the trading
market for any of the Senior Notes. If a trading market does not develop or is
not maintained, holders of the Senior Notes may experience difficulty in
reselling such Senior Notes or may be unable to sell them at all. If a market
for the Senior Notes develops, any such market may be discontinued at any
time. If a trading market develops for the Senior Notes, future trading prices
of such Senior 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 factors, including the financial
condition of the Company, the Senior Notes may trade at a discount from their
principal amount.
FRAUDULENT TRANSFER CONSIDERATIONS
Under fraudulent transfer law, if a court were to find in a lawsuit by an
unpaid creditor or representative of creditors of the Company, that the
Company received less than fair consideration or reasonable equivalent value
for incurring the indebtedness represented by the Senior Notes, and, at the
time of such incurrence, the Company (i) was insolvent or was rendered
insolvent by reason of such incurrence, (ii) was engaged or about to engage in
a business or transaction for which its remaining property constituted
unreasonably small capital or (iii) intended to incur, or believed it would
incur, debts beyond its ability to pay as such debts mature, such court could,
among
16
<PAGE>
other things, (a) void all or a portion of the Company's obligations to the
holders of Senior Notes and/or (b) subordinate the Company's obligations to
the holders of the Senior Notes to other existing and future indebtedness of
the Company, the effect of which would be to entitle such other creditors to
be paid in full before any payment could be made on the Senior Notes. The
measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer varies depending upon the law of the
jurisdiction which is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all of its liabilities were greater than
the value of all of its property at a fair valuation, or if the present fair
salable value of the debtor's assets were less than the amount required to
repay its probable liability on its debts as they become absolute and mature.
There can be no assurance as to what standard a court would apply in order to
determine solvency. To the extent that proceeds from the sale of the Old Notes
are used to repay indebtedness under the Credit Agreement, a court may find
that the Company did not receive fair consideration or reasonably equivalent
value for the incurrence of the indebtedness represented thereby.
On the basis of its historical financial information, its recent operating
history and other factors, the Company believes that at the time of the
issuance of the Senior Notes the Company was and will be solvent, did and will
have sufficient capital for the business in which it is engaged and did not
and will not have incurred debts beyond its ability to pay such debts as they
mature. There can be no assurance, however, that a court would necessarily
agree with these conclusions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
17
<PAGE>
THE COMPANY
GENERAL
The Company is a leading domestic manufacturer of specialty purpose electric
motors, gearmotors, gearboxes and gears for a wide variety of consumer,
commercial and industrial markets. The Company has a diverse base of customers
and its products are utilized in a broad range of applications including
vending machines, refrigerator ice dispensers, commercial floor care
equipment, elevators and photocopy machines. The Company's subsidiaries have
sold their brand name products to their customers for an average of over 70
years. The Company believes that it has created strong customer loyalty for
its products primarily through its emphasis on high quality, custom engineered
products, competitive prices and customer service. For the year ended December
31, 1996, the Company had pro forma net sales and net income of $122.4 million
and $3.3 million, respectively.
The Company operates in three product groups: (i) subfractional motors,
which represented 67.0% of pro forma net sales for the year ended December 31,
1996, (ii) fractional/integral motors, which represented 28.0% of pro forma
net sales for the year ended December 31, 1996, and (iii) gears and gearboxes,
which represented 5.0% of pro forma net sales for the year ended December 31,
1996.
Subfractional Motors. The Company's subfractional horsepower products are
comprised of motors and gearmotors that power applications up to 30 watts (
1/25 horsepower). These small, "fist-size" AC and DC motors are used in light
duty applications such as snack and beverage vending machines, refrigerator
ice dispensers and photocopy machines. Average product selling prices
typically range from $3 to $20 per unit. The Company focuses on niche
applications in this product group and believes it has a leading market
position in most of its niches.
Fractional/Integral Motors. The Company's fractional/integral horsepower
products are comprised of AC and DC motors and gearmotors having power ranges
from 1/8 up to 300 horsepower. Key end markets for these motors include
commercial floor care equipment, elevators, automatic hose reels, and
industrial lift machinery. Average product selling prices typically range from
$50 to $150 per unit for commercial floor care and hose reel products to
$2,000 to $2,500 per unit for elevator motors. The Company believes it is the
primary supplier to virtually all the major commercial floor care product
manufacturers and the leading DC elevator motor manufacturer in the United
States.
Gears and Gearmotors. The Company's precision gear and gearbox products are
produced in sizes of up to 16 inches in diameter and in various customized
configurations such as pump, bevel and helical gears. These products have a
reputation for their durability, accuracy, and low noise generation. Key end
markets for these products include motor OEMs for assembly into a gearmotor as
well as OEMs of commercial floor care equipment, aerospace and food processing
product equipment. The Company focuses on niche applications in this product
group and believes it has a leading market position in most of its niches.
OPERATING SUBSIDIARIES
The Company was organized in September 1995 by JII to acquire and operate
companies in the motion control industry. The Company conducts all of its
operations through an intermediate holding company, M&G Industries, and M&G
Industries' wholly-owned subsidiaries and each of their respective
subsidiaries.
Merkle-Korff, founded in 1911 and acquired by the Company in September 1995,
custom manufactures subfractional horsepower motors and gearmotors used in
such products as vending machines, refrigerators, photocopy machines, pumps
and compressors.
Barber Colman Motors, founded in 1894 and acquired by the Company through
Merkle-Korff in March 1996, manufactures subfractional horsepower motors and
gearmotors used as components in such products as vending machines, photocopy
machines, automatic teller machines, currency changers, X-ray machines,
heating, ventilating and air conditioning ("HVAC") actuators and medical
equipment.
18
<PAGE>
Imperial, founded in 1889 and acquired by certain Jordan Stockholders in
November 1983 and by JII in March 1988, manufactures electric motors and
gearmotors for commercial and industrial uses, including elevators, floor care
equipment and automatic hose reels.
Scott, founded in 1982 and acquired by JII through Imperial in August 1988,
designs and manufactures a variety of electric motors for commercial and
industrial applications, including floor care equipment and hydraulic pumps
used in various lift applications.
Gear, founded in 1952 and acquired by JII through Imperial in November 1988,
manufactures high-precision gears and gear boxes for OEMs in the floor care
equipment, hydraulic pump, food processing equipment, and aerospace
industries.
For a discussion of the acquisitions of the Company's subsidiaries, see
"Certain Transactions--The Company Formation and Proceeds from the Offering."
THE IMPERIAL ACQUISITIONS
Concurrent with the consummation of the Old Note Offering, the Company,
through a newly-formed subsidiary, acquired the business and net assets of
Imperial, Scott and Gear. Immediately after the consummation of the Imperial
Acquisitions, such newly-formed subsidiary transferred all of the net assets
and liabilities of Scott and Gear to two wholly-owned subsidiaries.These
subsidiaries have continued conducting business under the names Imperial,
Scott and Gear. The purchase price for the Imperial Acquisitions included
$75.0 million of cash payments, which included the repayment of approximately
$6.0 million of liabilities of Imperial and its subsidiaries owed to JII, and
a contingent payment (the "Contingent Earnout"). The Contingent Earnout is
payable pursuant to an agreement (the "Contingent Earnout Agreement") whereby
each of the Company, M&G Industries, Imperial, Scott and Gear, will be jointly
and severally obligated to pay to an affiliate of JII 50% of the cumulative
EBITDA (as defined therein) above $50 million of Imperial, Scott and Gear
earned during the five fiscal years ended December 31, 1996 through December
31, 2000. For the year ended December 31, 1996, EBITDA (as defined therein) of
Imperial, Scott and Gear was $10.6 million. Payments, if any, under the
Contingent Earnout Agreement will be determined and made on April 30, 2001.
See "Certain Transactions--The Company Formation and Proceeds From the
Offering."
REFINANCING PLAN
Concurrent with the consummation of the Old Note Offering, (i) Merkle-Korff
repaid in full all of its indebtedness under the Credit Agreement, and (ii)
M&G Industries entered into the New Credit Agreement, which provides M&G
Industries and its subsidiaries with a revolving credit facility of up to
$75.0 million for a five year term which, together with the net proceeds from
the Old Note Offering, replaced and refinanced the Credit Agreement. See
"Description of Certain Indebtedness--Credit Agreement" and "--New Credit
Agreement." The repayment of the Company's indebtedness under the Credit
Agreement and the execution of the New Credit Agreement are referred to herein
as the "Refinancing Plan."
19
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds in connection with the Exchange
Offer. The net proceeds received by the Company from the Old Note Offering
(after the deduction of discounts and commissions, fees and other expenses
associated with Old Note Offering and the New Credit Agreement) were
approximately $160.0 million. The net proceeds from the Old Note Offering were
used by the Company to: (i) fund the cash portion of the purchase price
payable by the Company in connection with the Imperial Acquisitions, (ii)
repay certain Imperial liabilities owed to JII, and (iii) repay in full all
outstanding indebtedness under the Credit Agreement pursuant to the
Refinancing Plan.
M&G Industries, the Company's wholly-owned subsidiary, entered into the New
Credit Agreement concurrently with the consummation of the Old Note Offering.
See "Description of Certain Indebtedness--New Credit Agreement." The following
table summarizes, as of December 31, 1996, the sources and uses of funds as a
result of the Old Note Offering and the Refinancing Plan described above.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C>
SOURCES OF FUNDS:
Senior Notes...................................... $ 170.0
-------
Total sources................................... $ 170.0
USES OF FUNDS:
Cash purchase price for Imperial Acquisitions
(1).............................................. $ 75.0
Repayment of Credit Agreement, including accrued
interest (2)..................................... 85.0
Fees and expenses (3)............................. 10.0
-------
Total uses...................................... $ 170.0
</TABLE>
- --------
(1) Includes the repayment of approximately $6.0 million of Imperial
liabilities owed to JII.
(2) The average interest rate on borrowings under the Credit Agreement for
current borrowings was 8.5%. See "Description of Certain Indebtedness--
Credit Agreement" and "Certain Transactions--The Company Formation and
Proceeds from the Offering."
(3) Includes estimated discounts and commissions and expenses incurred in
connection with the Old Note Offering, the Exchange Offer, fees and
expenses incurred in connection with the Refinancing Plan and fees paid to
The Jordan Company. See "Certain Transactions--The Jordan Company."
20
<PAGE>
CAPITALIZATION
The following table sets forth the historical consolidated capitalization of
the Company at December 31, 1996. The table should be read in conjunction with
the Consolidated Financial Statements of the Company and related notes thereto
included elsewhere in this Prospectus. See "Selected Historical Financial
Data" and the Consolidated Financial Statements of the Company and the related
notes thereto, all included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cash and cash equivalents...................................... $ 10,011
=========
Current portion of long-term obligations....................... $ 18
=========
Long-term obligations:
Credit Agreement(1).......................................... $ 0
Senior Notes................................................. 170,000
Other debt(2)................................................ 5,049
---------
Total long-term obligations................................ $ 175,049
Stockholder's equity:
Common Stock, $.01 par value, 100,000 shares authorized:
100,000 shares issued and outstanding....................... 1
Additional paid-in capital................................... 30,005
Accumulated Deficit.......................................... (45,793)
---------
Net capital deficiency..................................... (15,787)
---------
Total capitalization....................................... $ 159,262
=========
</TABLE>
- --------
(1) For additional information see "Description of Certain Indebtedness--
Credit Agreement."
(2) Includes the $5,000 Junior Seller Note (as defined) issued to the seller
of Merkle-Korff. See "Description of Certain Indebtedness--Junior Seller
Note."
21
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENT
The following unaudited pro forma condensed financial statement (the
"Unaudited Pro Forma Condensed Financial Statement") is based on the
historical financial statement of the Company included elsewhere in this
Prospectus. The Unaudited Pro Forma Condensed Statement of Operations is
adjusted to give effect to (i) the Old Note Offering, the application of the
net proceeds therefrom and the Refinancing Plan, (ii) the Barber Colman
Acquisition and the related headcount reductions and administrative savings in
connection therewith, and (iii) the adjustment for income taxes which would
have been recorded as if all such transactions occurred on January 1, 1996.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General."
The pro forma adjustments are based upon available information and certain
assumptions which management believes are reasonable. The Unaudited Pro Forma
Condensed Statement of Operations does not purport to represent what the
Company's results of operations would actually have been had the transactions
described above occurred on January 1, 1996. In addition, the Unaudited Pro
Forma Condensed Financial Statement does not purport to project the Company's
results of operations for any future date or period.
The Unaudited Pro Forma Condensed Financial Statement should be read in
conjunction with the Consolidated Financial Statements of the Company and the
related notes thereto included elsewhere in this Prospectus.
22
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------
COMPANY BARBER COLMAN PRO FORMA
HISTORICAL(1) ACQUISITION(2) ADJUSTMENTS TOTAL
------------- -------------- ----------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................. $117,571 $4,806 $ 0 $122,377
Cost of sales, excluding
depreciation............. 75,751 3,559 0 79,310
-------- ------ ------- --------
Gross profit, excluding
depreciation............. 41,820 1,247 0 43,067
Selling, general and
administrative expenses,
excluding depreciation... 8,796 871 (369)(3) 9,298
Depreciation and amortiza-
tion of intangible as-
sets..................... 7,078 203 55 (4) 7,336
Management fees........... 2,717 0 (1,493)(5) 1,224
-------- ------ ------- --------
Operating income.......... 23,229 173 1,807 25,209
Interest expense.......... 10,402 66 9,257 (6) 19,725
Interest expense--JII..... 732 0 (732)(7) 0
Other (income) expense.... (215) 2 213 0
-------- ------ ------- --------
Income (loss) before in-
come taxes and extraordi-
nary item................ 12,310 105 (6,931) 5,484
Income taxes (credits)(8). 5,290 42 (3,139) 2,193
-------- ------ ------- --------
Income before extraordi-
nary item ............... 7,020 63 (3,792) 3,291
Extraordinary item, net of
tax(8)................... 2,186 -- (2,186) 0
-------- ------ ------- --------
Net income................ $ 4,834 $ 63 $(1,606) $ 3,291
======== ====== ======= ========
OTHER DATA:
EBITDA(9)................. $ 30,307 $ 376 -- $ 32,545
EBITDA margin(10)......... 25.8% 7.8% -- 26.6%
Capital expenditures...... $ 1,304 $ 118 -- $ 1,422
Ratio of earnings to fixed
charges(11).............. 2.1x -- -- 1.3x
</TABLE>
- -------
(1) The Company's historical results of operations include the results of
Barber Colman Motors since its acquisition by the Company on March 8,
1996 and the results of Imperial, Scott and Gear for the entire period.
The results of operations of Imperial, Scott and Gear are included in the
Company's consolidated operating results from September 23, 1995, the
date at which the Company and Imperial, Scott and Gear came under the
common control of JII.
(2) Reflects the historical results of operations of Barber Colman Motors
from January 1, 1996 to March 8, 1996, the date of its acquisition by the
Company.
(3) Gives effect to the elimination of $369 in selling, general and
administrative expenses for completed headcount reductions and
administrative savings in connection with the Barber Colman Acquisition
by the Company.
(4) Includes incremental goodwill amortization and depreciation as a result
of the acquisition of Barber Colman Motors as if the company was acquired
on January 1, 1996.
(5) Gives effect to an adjustment to reduce management fee expense to 1% of
the Company's net sales. See "Certain Transactions--JII Services".
(6) Gives effect to (i) an adjustment in interest expense had the Old Note
Offering occurred on January 1, 1996, and (ii) an increase in the
amortization of deferred financing costs resulting from the Old Note
Offering.
(7) Gives effect to the elimination of intercompany interest for Imperial had
the Imperial Acquisitions occurred on January 1, 1996 and had the
proceeds from the Old Note Offering been used to reduce Imperial's
indebtedness to JII.
(8) Reflects the write off of deferred financing fees incurred in connection
with the Company's previous long term debt agreement. In connection with
the Old Note Offering, this debt was repaid and all corresponding
financing fees were expensed.
(9) EBITDA for any relevant period presented above represents net income plus
interest, income taxes, depreciation, amortization of goodwill and other
intangibles and other income and expenses (primarily interest income)
reflected in the determination of net income. See "Selected Historical
Financial Data." While EBITDA should not be construed as a substitute for
operating income or a better indicator of liquidity than cash flow from
operating activities, which are determined in accordance with generally
accepted accounting principles, it is included herein to provide
additional information with respect to the ability of the Company to meet
its future debt service, capital expenditure and working capital
requirements. EBITDA is included herein because management believes that
certain investors find it to be a useful tool for measuring the ability
of the Company to service its debt. EBITDA is not necessarily a measure
of the Company's ability to fund its cash needs. See the Consolidated
Statements of Cash Flows of the Company and the related notes to the
Consolidated Financial Statements thereto included in this Prospectus.
(10) EBITDA margin for any relevant period reflects EBITDA over net sales.
(11) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes, plus fixed charges.
Fixed charges consist of interest expense on all indebtedness and
capitalized interest (which the Company and Predecessor have not incurred
in the respective periods), amortization of deferred financing costs, and
rental expense on operating leases, representing that portion of rental
expense deemed by the Company to be attributable to interest.
23
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents summary (i) historical operating and other data
of the Company's predecessor, Merkle-Korff, for the years ended December 31,
1992, 1993, 1994 and the period from January 1, 1995 to September 22, 1995,
and (ii) historical operating and other data of the Company for the period
September 23, 1995 to December 31, 1995 and for the year ended December 31,
1996. The historical data of the Predecessor and the Company reflect the
results of the Company's wholly-owned subsidiary, Merkle-Korff, for all
periods presented, together with its wholly-owned subsidiary, Barber Colman
Motors, from the date of its acquisition by the Company on March 8, 1996. The
historical data of the Company also reflects the results of Imperial, Scott
and Gear from September 23, 1995, the date at which the Company and Imperial,
Scott and Gear came under the common control of JII. The financial data of the
Predecessor as of and for the years ended December 31, 1992 through 1994 and
the period from January 1, 1995 to September 22, 1995 were derived from the
Combined Financial Statements of the Predecessor, and the financial data of
the Company as of December 31, 1995 and 1996 and for the period from September
23, 1995 to December 31, 1995 and the year ended December 31, 1996 were
derived from the Consolidated Financial Statements of the Company, all of
which have been audited by Ernst & Young LLP, independent auditors. The
financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company, the
Predecessor and Barber Colman Motors and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR
AND COMPANY
PREDECESSOR(1) COMPANY(2) COMBINED(3) COMPANY(4)
------------------------------------- ------------- ------------ ------------
JANUARY 1, SEPTEMBER 23,
YEAR ENDED DECEMBER 31, THROUGH THROUGH YEAR ENDED YEAR ENDED
----------------------- SEPTEMBER 22, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995 1995 1995 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $39,801 $43,766 $49,340 $39,295 $ 24,684 $ 63,979 $117,571
Gross profit, excluding
depreciation.......... 13,828 16,315 18,022 15,182 8,255 23,437 41,820
Operating income....... 7,241 8,547 12,309 11,616 4,753 16,369 23,229
Interest expense....... 0 0 0 0 2,412 2,412 11,134
Income taxes(5)........ 116 143 171 284 948 1,232 5,290
Net income............. 6,929 8,122 11,921 11,604 1,360 12,964 4,834
SUPPLEMENTAL PRO FORMA
AND OTHER DATA:
Pro forma income
taxes(6).............. 2,818 3,306 4,837 4,755 0 4,755 0
Pro forma net income... 4,227 4,959 7,255 7,133 1,360 8,493 4,834
Ratio of earnings to
fixed charges(7)...... 26.2x 29.4x 41.7x -- -- 2.2x 2.1x
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital........ $ 9,646 $ 9,944 $11,546 $ 7,697 $ 14,747 $ 14,747 $ 27,586
Total assets........... 16,630 16,421 18,952 14,409 145,387 145,387 173,668
Long-term obligations,
including current
portion............... 0 0 0 0 83,547 83,547 175,067
Stockholder's equity
(net capital
deficiency)........... 12,057 12,515 14,332 9,218 45,925 45,925 (15,787)
</TABLE>
(footnotes on following page)
24
<PAGE>
- --------
(1) Reflects the results of operations of the Predecessor for the periods
prior to its acquisition by the Company on September 22, 1995.
(2) Reflects the Company's results of operations from September 23, 1995
through December 31, 1995.
(3) Reflects the combined results of operations of the Predecessor from
January 1, 1995 to September 22, 1995 and the Company from September 23,
1995 to December 31, 1995. The results of operations of Imperial, Scott
and Gear are included in the Company's consolidated operating results from
September 23, 1995, the date at which the Company and Imperial, Scott and
Gear came under the common control of JII.
(4) The Company's results of operations for the year ended December 31, 1996
include the results of operations of Barber Colman Motors since its
acquisition by the Company on March 8, 1996 and the results of operations
of Imperial, Scott and Gear for the entire period.
(5) For the Predecessor, historical net income reflects only certain state
income taxes attributable to Merkle-Korff's income for the historical
periods presented prior to its acquisition by the Company on September 22,
1995, during which it elected to be a subchapter S corporation and
therefore was not subject to federal and certain state income taxes.
(6) Prior to its acquisition by the Company, the Predecessor was an S
corporation and therefore was not subject to federal and certain state
income taxes. The pro forma data presented includes an unaudited pro forma
adjustment for income taxes which would have been recorded if the
Predecessor had been a C corporation.
(7) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes, plus fixed charges.
Fixed charges consist of interest expense on all indebtedness and
capitalized interest (which the Company and Predecessor have not incurred
in the respective periods), amortization of deferred financing costs, and
rental expense on operating leases, representing that portion of rental
expense deemed by the Company to be attributable to interest.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following financial information presents, for the year ended December
31, 1994, the results of operations of the Predecessor, for the year ended
December 31, 1995, the combined results of operations of the Predecessor from
January 1, 1995 to September 22, 1995, and the Company, from September 23,
1995 to December 31, 1995, and for the year ended December 31, 1996, the
results of operations of the Company. The results of operations of Barber
Colman Motors are included in the consolidated results of operations of the
Company since its acquisition on March 8, 1996, and the results of operations
of Imperial, Scott and Gear are included in the consolidated results of
operations of the Company from September 23, 1995, the date at which the
Company and Imperial, Scott and Gear came under the common control of JII. The
financial data after September 22, 1995 is not directly comparable to prior
periods because the acquired assets and liabilities assumed were revalued and
adjusted to reflect their estimated fair market values at the date of the
acquisition. This discussion reflects the Imperial Acquisitions from September
23, 1995, the Old Note Offering and the Refinancing Plan from November 7,
1996. See the Financial Statements and the notes thereto included elsewhere in
this Prospectus and "Risk Factors--Limited Operating History and Limited
Relevance of Historical Financial Information."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
PREDECESSOR
AND COMPANY
PREDECESSOR COMBINED COMPANY
1994 1995 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales................................ $49,340 $63,979 $117,571
Gross profit (excluding depreciation).... 18,022 23,437 41,820
EBITDA(1)................................ 12,633 18,408 30,307
Operating income......................... 12,309 16,369 23,229
Gross margin (excluding
depreciation)(2)........................ 36.5% 36.6% 35.6%
EBITDA margin(2)......................... 25.6 28.8 25.8
Operating margin(2)...................... 24.9 25.6 19.8
</TABLE>
- ------------
(1) EBITDA is included herein because management believes that certain
investors find it to be a useful tool for measuring the ability of the
Company to service its debt.
(2) All margins are calculated as a percentage of net sales.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales increased $53.6 million or 83.8%. The acquisition of
Barber-Colman on March 8, 1996 added $17.6 million to current year sales.
Also, the inclusion of Imperial, Scott and Gear for the entire year of 1996 as
compared to only the period from September 22, 1995 to December 31, 1995 in
the prior year, accounted for $29.9 million of the current year increase in
net sales. Sales at Merkle-Korff increased $6.1 million over the prior year
due primarily to increased sales of vending machine motors, $1.5 million,
refrigerator door ice dispenser motors, $1.2 million and pumps and controls,
$0.8 million.
Gross Profit. Gross profit increased $18.4 million or 78.4%. This increase
was due to increased net sales. The gross margin decreased from 36.6% in 1995
to 35.6% in 1996. This decrease was due to the acquisition of Barber-Colman
which operates at a slightly lower gross margin than the rest of the Company.
EBITDA. EBITDA increased $11.9 million or 64.6% as compared to 1995. This
increase was due to the $18.4 million increase in gross profit noted above,
and was partially offset by an increase in management fee expense of $2.0
million in 1996. The EBITDA margin decreased to 25.8% from 28.8% in 1995 due
to the increased expenses discussed above.
26
<PAGE>
Operating Income. Operating income increased $6.9 million or 41.9% in 1996
as compared to 1995. This increase was due to the increased gross profit noted
above, partially offset by increased depreciation and amortization of $5.6
million, and increased management fees to JII of $2.0 million. The increased
expenses noted above caused the operating margin to decrease from 25.6% in
1995 to 19.8% in 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Sales. Net sales increased $14.6 million or 29.7% in 1995 as compared to
1994. The increase was partially attributable to the inclusion of Imperial,
Scott and Gear in the Company's results from September 23, 1995 to December
31, 1995. This accounted for $10.5 million of the increase. In addition, sales
at Merkle-Korff increased $4.1 million in 1995 due to higher appliance motor
net sales of $1.5 million, higher vending machine motor net sales of $1.6
million and higher net sales of recreational equipment motors of $0.8 million.
Gross Profit. Gross profit increased $5.4 million or 30.0% in 1995 as
compared to 1994. The increase was due to the increased sales noted above.
Gross margin remained constant.
EBITDA. EBITDA increased $5.8 million or 45.7%. The increase was due to the
increased gross profit noted above along with a $0.9 million decrease in
selling, general and administrative expenses primarily due to a reduction in
executive compensation.
Operating Income. Operating income increased $4.1 million or 33.0%. The
increase was due to the increase in gross profit noted above partially offset
by an increase in depreciation and amortization of $1.0 million related to the
acquisition of Merkle-Korff, and $0.3 million related to the addition of
Imperial, Scott and Gear. Also, management fee expense of $0.7 million was
incurred by the Company in 1995 as compared to $0 in 1994. The increase in
gross profit caused operating margin to increase from 24.9% in 1994 to 25.6%
in 1995.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES
The Company had $27.6 million of working capital at December 31, 1996 as
compared to $14.7 million at the end of 1995. The increase is partially due to
the Barber Colman Acquisition on March 8, 1996, which had $2.0 million of
receivables, $3.2 million of inventory, $0.4 million of prepaid expenses and
$1.6 million of accounts payable and accrued expenses at December 31, 1996. In
addition, cash balances increased $7.2 million, inventories increased $3.1
million, deferred income taxes increased $0.5 million, accounts payable
decreased $2.2 million, intercompany amounts owed to JII decreased $3.4
million and the $0.5 million outstanding revolving credit facility at December
31, 1995 was repaid during 1996, and no additional borrowings were made in
1996. These items were partially offset by higher accrued interest, expenses
and other of $4.6 million.
During the year ended December 31, 1996, net cash provided by operating
activities was $21.6 million. Net income was $4.8 million and depreciation and
amortization was $7.1 million. Deferred income taxes were $1.5 million and the
extraordinary loss related to the write-off of deferred financing fees was
$3.8 million. Net cash used in investing activities was $92.0 million. Barber
Colman Motors was acquired on March 8, 1996 for $21.7 million and Imperial,
Scott and Gear were acquired on November 7, 1996 for $69.0 million (excluding
the repayment of $6.0 million of Imperial liabilities owed to JII). Capital
expenditures were $1.3 million. Net cash provided by financing activities was
$77.7 million. The Company issued $170.0 million of Senior Notes and borrowed
$21.7 million for the Barber Colman Acquisition, but repaid $2.2 million under
the Credit Agreement. The Company also repaid indebtedness of $90.2 million
and incurred financing costs of $10.3 million with respect to the issuance of
the Senior Notes. Payments were made to JII for intercompany charges in the
amount of $11.3 million.
Capital spending levels for fiscal 1997 are anticipated to be consistent
with the 1996 pro forma levels included herein and are expected to be financed
internally out of operating cash flow. Management believes that the Company's
cash on hand and anticipated funds from operations will be sufficient to cover
its working capital, capital expenditures, debt service requirements and other
fixed charges obligations for at least the next 12 months.
27
<PAGE>
Raw material price increases have not had, and are not expected to have, a
material effect on the Company's gross profit margin or cash flows. The only
raw material component that has experienced any significant fluctuation over
the past five years is copper. Copper is a component of commutators and is
also used by the Company in the form of copper wire. However, copper wire and
commutators account only for 9% of the total cost of sales, and therefore,
copper price fluctuations would not be expected to have any significant effect
on the Company's results.
ACCOUNTING STANDARDS
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 addresses the accounting for the impairment of
long-lived assets, certain identifiable intangibles and goodwill when events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. SFAS 121 was adopted in 1995. The adoption of SFAS 121 did
not have a material impact on the Company's results of operations or financial
position.
SEASONALITY AND INFLATION
The Company's net sales typically show no significant seasonal variations.
The impact of inflation on the Company's operations has not been significant
to date. However, there can be no assurance that a high rate of inflation in
the future would not have an adverse effect on the Company's operating
results.
28
<PAGE>
BUSINESS
GENERAL
The Company is a leading domestic manufacturer of specialty purpose electric
motors, gearmotors, gearboxes and gears for a wide variety of consumer,
commercial and industrial markets. The Company has a diverse base of customers
and its products are utilized in a broad range of applications including
refrigerator ice dispensers, vending machines, commercial floor care
equipment, elevators and photocopy machines. The Company's subsidiaries have
sold their brand name products to their customers for an average of over 70
years. The Company believes that it has created strong customer loyalty for
its products primarily through its emphasis on high quality, custom engineered
products, competitive prices and customer service. For the year ended December
31, 1996, the Company had pro forma net sales and net income of $122.4
million and $3.3 million, respectively.
Shipments of electric motors and generators are estimated by industry
sources to have been approximately $7.0 billion in 1995 and to have been
growing at a compound annual growth rate of approximately 2% to 3% over the
last five years. Although the industry has experienced substantial
consolidation in recent years, the industry remains highly fragmented with
over 200 manufacturers serving the U.S. market in 1995, according to industry
sources. The Company believes that continuing competitive pressures will lead
to further consolidation in the electric motor industry and create
opportunities for the Company to extend its product lines and business through
strategic acquisitions.
Within this industry, the Company operates in specialized niche markets,
which typically consist of high value-added motor applications requiring
custom engineered, non-standardized motors and generate relatively small
annual dollar volumes. The Company has an active new product development
effort and constantly seeks to find new applications for its products and new
niche markets to enter. As a result of these efforts, the Company has
historically been able to achieve sales growth in excess of industry trends.
The Company's products typically require small manufacturing runs and frequent
line changeovers. These markets are generally unattractive to large integrated
manufacturers which target larger markets and long-run, standardized product
lines.
The Company constantly seeks to reduce its costs through redesigning its
manufacturing processes to minimize labor and material costs without
sacrificing quality. In addition, the Company works closely with its customers
to engineer its products in ways that enable the Company to manage costs and
increase value to the customer. In addition, the Company's operations have
historically generated significant free cash flow. The Company outsources its
most capital intensive processes and strives to minimize its capital
investment through purchasing and updating used equipment.
COMPETITIVE STRENGTHS
The Company believes that it benefits from the following competitive
strengths:
Leading Position in Niche Markets. The Company has targeted niche markets in
which it has achieved leading market positions and which are generally
unattractive to large manufacturers due to their small size and specialized
nature. The Company believes that it has attained market shares in excess of
50% in markets which comprise over 65% of its net sales. These leading market
positions have provided a high level of predictability to the Company's net
sales. The Company believes that it has succeeded in these markets due to its
product design capabilities, reputation, competitive prices, quality and
service.
Diverse Markets and Customers. The Company serves numerous end user markets
and a diverse base of over 1300 customers. In 1996, the Company's largest
single customer represented approximately 6% of net sales and the Company's
top ten customers represented approximately 36% of net sales. The Company's
customers include leading OEMs such as General Electric, Whirlpool
Corporation, Clarke Industries Inc., Siebe, plc and Vendo Company Inc. The
diversity of products, markets and customers minimizes the Company's exposure
to economic cycles or geographic markets and provides a broad base from which
to grow sales through continued development of new products.
29
<PAGE>
Active Product Development. The Company focuses on developing value-added
products with its customers by utilizing its extensive product development
expertise and manufacturing process capabilities to meet specific application
requirements. The Company's sales and technical staff work with existing
customers to identify specific needs and develop innovative solutions. As a
result, this custom application capability has also been a key driver of new
customer development.
Quality Product and High Level of Service. The Company sells into end
product applications which have long life cycles and require durability. In
response, the Company has established itself as a reliable manufacturer of
high-quality products. The Company maintains close contact with its customers
during both the original motor design and the continuous redesign processes to
ensure that the most reliable product is manufactured. The Company
aggressively redesigns its motors to improve performance and reduce production
costs. This entrenches the Company with its customers and minimizes
competition. In addition, the Company is dedicated to on-time delivery as
evidenced by its 100% on-time delivery record with General Electric, its
largest customer, in 1996.
Experienced Management Team. The Company's five senior managers together
have over 140 years of experience in the motors and gears industry and over
time have substantially improved operating efficiencies. The experience of
senior management has been critical to developing strong relationships with
the Company's customers and has resulted in significant new product
development opportunities. The Company's President, Ron Sansom, gained
extensive experience in this industry during his 15 years with General
Electric.
BUSINESS STRATEGY
The Company's business strategy includes the following key elements:
Expand Product Lines and Increase Distribution. The Company focuses on
developing value-added products with its customers by utilizing its extensive
product development expertise. The Company's sales, technical service and
development staff work with customers to identify specific needs and develop
innovative solutions. New product developments can often be profitably applied
to other high-margin niche markets. In addition, the Company intends to expand
its distribution sales effort to capture additional sales opportunities.
Reduce Costs. The Company's manufacturing cost reduction effort is
accomplished through redesigning the Company's products in cooperation with
its customers and through incremental production process improvements. The
Company also seeks to reduce costs through acquisitions by centralizing
administration, finance, legal service and long-range strategic planning
functions. This has been demonstrated by annual cost savings from completed
headcount reductions and administrative savings relating to the Barber Colman
Acquisition.
Pursue Strategic Acquisitions. The U.S. electric motor and gear market
remains highly fragmented, with many specialized manufacturers serving
numerous market niches. The Company will continue to search for strategic
acquisitions that support its current product groups by adding complementary
product lines, expanding technological capabilities or entering new geographic
markets. In addition, the Company believes there are other areas in the motion
control industry which offer acquisition opportunities. The Company defines
the motion control industry as having the following major business segments:
motors, gears and gear drives, controls and sensors, drives and drive systems,
and couplings. Acquisitions in other areas of the motion control industry
would allow the Company to access new markets and develop higher value-added
products by combining an existing motor product with additional motion control
features.
PRODUCTS
An electric motor is a device that converts electric power into rotating
mechanical energy. The amount of energy delivered is determined by the level
of input power supplied to the electric motor and the size of the motor
itself. An electric motor can be powered by alternating current ("AC") or
direct current ("DC"). AC power is generally supplied by power companies
directly to homes, offices and industrial sites whereas DC power
30
<PAGE>
is supplied either through the use of batteries or by converting AC power to
DC power. Both AC motors and DC motors can be used to power most applications;
the determination is made through the consideration of power source
availability, speed variability requirements, torque considerations, and noise
constraints.
The power output of electric motors is measured in horsepower. Motors are
produced in power outputs that range from less than one horsepower up to
thousands of horsepower. The Company's subfractional horsepower products are
comprised of AC and DC motors that power applications up to 30 watts ( 1/25
horsepower). The Company's fractional/integral horsepower products are
comprised of AC and DC motors and gearmotors having power ranges from 1/8
horsepower up to 300 horsepower.
Gears and gearboxes are mechanical components used to transmit mechanical
energy from one source to another source. They are normally used to change the
speed and torque characteristics of a power source such as an electric motor.
Gears and gearboxes come in various configurations such as helical gears,
bevel gears, planetary gearboxes, and right-angle gearboxes. For certain
applications, an electric motor and a gear box are combined to create a
gearmotor.
The Company has established itself as a reliable niche manufacturer of high-
quality, economical, custom electric motors, gearmotors and gears used in a
wide variety of applications including vending machines, refrigerator ice
dispensers, commercial floor care equipment and elevators. The Company's
products are custom designed to meet specific application requirements. Less
than 5% of the Company's products are sold as stock products.
The Company offers a wide variety of options to provide greater flexibility
in its custom designs. These options include thermal protectors, special
mounting brackets, custom leads and terminals, single or double shaft
extensions, brakes, cooling fans, special heavy gearing, and custom shaft
machining. The Company also provides value-added assembly work, incorporating
some of the above options into its final motor products. All of the custom-
tailored motors and gearmotors are designed for long life, quiet operation,
and superior performance.
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<PAGE>
The Company operates in three product categories: (i) subfractional motors,
which represent 67.0% of pro forma net sales for the year ended December 31,
1996, (ii) fractional/integral motors, which represent 28.0% of pro forma net
sales for the year ended December 31, 1996, and (iii) gears and gearboxes,
which represent 5.0% of pro forma sales for the year ended December 31, 1996.
The following chart sets forth these three product categories indicating the
pro forma net sales for the year ended December 31, 1996:
PRODUCT CATEGORIES
<TABLE>
<CAPTION>
SUBFRACTIONAL FRACTIONAL/INTEGRAL GEAR AND
HORSEPOWER PRODUCTS HORSEPOWER PRODUCTS GEARBOX PRODUCTS
<S> <C> <C>
NET SALES: $82.0 MILLION NET SALES: $34.2 MILLION NET SALES: $6.2 MILLION
% OF TOTAL NET SALES: 67.0% % OF TOTAL NET SALES: 28.0% % OF TOTAL NET SALES: 5.0%
PRODUCTS: PRODUCTS: PRODUCTS:
.AC Motors .AC Motors .Gears
.DC Motors .DC Motors .Gearboxes
.AC & DC Gearmotors .DC Permanent Magnet
Motors
.AC and DC Gearmotors
APPLICATIONS: APPLICATIONS: APPLICATIONS:
.Refrigerator Ice Dispensers .Commercial Floor Care .Commercial Floor Care
.Vending Machines Equipment Equipment
--Bill Validators .Elevator Lift Motors .Hydraulic Pumps
--Product Delivery Systems .Automatic Hose Reel .Food Processing
.Photocopy Machines Winding Mechanisms Equipment
--Paper Delivery Systems
.Commercial and
Industrial Controls
--HVAC Controls
--RV Vent Actuators
</TABLE>
SUBFRACTIONAL HORSEPOWER PRODUCTS
Subfractional horsepower products are "fist-size" motors used in light duty
applications up to 30 watts. Most of the Company's products are custom
designed and manufactured in-house. The Company produces AC and DC
subfractional horsepower motors and gearmotors which have output speeds from 1
to 6,000 RPM and torque ratings up to 200 pounds per inch.
The Company sells its subfractional horsepower products into a variety of
specialized applications including motors used in certain refrigeration units,
vending machine mechanisms, business machines, and HVAC and medical
applications.
The Company defines its refrigeration market as ice dispensing subfractional
motors for "through the door" ice dispensing refrigerators and supplies
General Electric, as well as other refrigerator manufacturers. Similarly, the
Company's vending machine customers purchase subfractional horsepower AC or DC
motors in products which are incorporated in snack, beverage, game and bill
changer (currency validation) machines. The Company serves virtually every
major player in the vending market. The Company's business equipment market
focuses
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<PAGE>
upon the paper handling function of photocopier machinery. The Company's share
of the business equipment market has been established by utilizing the
Company's expertise in motor design and targeting high volume office equipment
customers. Finally, the Company services a diverse array of HVAC, medical and
industrial companies that manufacture equipment for a wide range of
applications.
FRACTIONAL/INTEGRAL HORSEPOWER PRODUCTS
Fractional/integral horsepower products are defined as motors and gearmotors
having power ranges from 1/8 horsepower up to 300 horsepower. The most common
application for the Company's AC and DC fractional motors are commercial floor
care equipment, elevators, automatic hose reels, lifts and hydraulic pumps.
The Company has carved a strong niche in the commercial floor care market
through its strength in providing permanent magnet DC motors and gearboxes to
commercial floor care equipment manufacturers. The Company believes that the
DC gearmotor product has replaced and will continue to replace the AC product
in commercial floor care equipment because of its superior operating
characteristics, particularly its variable speed capability, which makes it
easier for the floor care equipment manufacturers to optimize the performance
of its machine.
The Company also has a strong position in the DC elevator motor market.
During the past several years, the Company has expanded its elevator motor
sales as a result of the trend by elevator manufacturers to outsource their
motor manufacturing. The Company's permanent magnet motors and gearmotors for
automatic hose reels are highly specialized and are used on oil trucks, fire
engines, lawn care trucks, and similar vehicles which require an automatic
reel motor. The Company also manufactures low voltage permanent magnet motors
and gearmotors for commercial and industrial lift applications, hydraulic
pumps and lift truck power steering. Low voltage motors are used in portable
applications requiring high torque, long life and high efficiencies.
GEAR AND GEARBOX PRODUCTS
The Company manufactures precision gears and gearboxes for various OEMs in
sizes of up to 16 inches in diameter and in various configurations such as
bevel gears and helical gears, for various drive and speed reduction
applications and systems. The Company's gear products are characterized by
their durability, accuracy, and low noise generation. The Company's planetary
gearbox line is primarily manufactured for the commercial floor care equipment
industry which requires durability. The Company supplies gearboxes to
Imperial, for assembly into a gearmotor before being shipped to the end user,
and to end users directly. The Company also produces gears for the food
processing industry and hydraulic pumps used on garbage trucks, snowplows and
tailgate lifters.
33
<PAGE>
MARKETS
The Company produces motors, gears and gearmotors for a wide variety of
consumer, commercial and industrial products. The diversity of markets,
products and customers minimizes the Company's exposure to economic cycles and
geographic markets. The diagram below illustrates the percentage of pro forma
net sales for 1996 of the Company attributable to each of these markets:
[PIE CHART APPEARS HERE]
1996 NET SALES BY MARKET
TOTAL = $122.4
(DOLLARS IN MILLIONS)
CONSUMER ..............................$56.2
- Refrigerator Ice Dispensers
- Vending Machines
- Treadmills
INDUSTRIAL ............................$16.5
- Elevators
- Lifts
- Machine Tools
COMMERCIAL ............................$49.7
- Floor Care
- Photocopy Machines
- Hose Reels
OPERATIONS
The Company is a fully integrated manufacturer performing practically every
aspect of motor and gear manufacturing with the exception of certain capital-
intensive functions such as casting and lamination punching for subfractional
horsepower motors which it subcontracts. Capital expenditure requirements are
kept low by purchasing used equipment and updating the equipment for the
Company's specific requirements. The Company also outsources all die
production to further reduce capital expenditures and future maintenance
requirements. All other processes such as stamping, machining, endshield
machining, winding, injection molding, assembly, painting, and testing are
completed in-house.
The Company is capable of producing specialized products at very low volumes
as well as high volume products such as refrigerator ice dispenser motors. The
products are generally built to order; hence, a small warehouse/shipping area
at each plant is adequate to serve its customer base.
The Company is constantly redesigning its products and improving its
processes to reduce material and labor costs and improve quality. In many
instances, the Company initiates a product application with a custom product
which is designed from standard parts. As the application grows in volume, the
Company further customizes the product by redesigning the standard components
to reduce costs. The Company's manufacturing processes are improved using a
similar approach.
RAW MATERIALS
The primary raw materials used by the Company to produce its products are
steel, copper, and miscellaneous purchased parts such as endshield castings,
powdered metal gears, commutators and packaging supplies. All materials are
readily available in the marketplace. The Company is not dependent upon any
single
34
<PAGE>
supplier in its operations for any materials essential to its business or not
otherwise commercially available to the Company. The Company has been able to
obtain an adequate supply of raw materials, and no shortage of raw materials
is currently anticipated. Surcharges and/or raw material price escalation
clauses are often used to insulate the Company from fluctuations in prices.
SALES AND MARKETING
The Company's sales and marketing success is characterized by long-term
customer relationships which are the result of continuity of management,
outstanding delivery records, high-quality products, and competitive pricing.
The Company utilizes a combination of direct sales personnel and
manufacturers' representatives to market the Company's product lines.
Generally, the inside sales organization is compensated through a fixed salary
while the manufacturers' representative organizations receive commission.
The Company's subfractional horsepower product line is served through a
Vice-President of Sales who oversees a Field Sales Manager, a National
Accounts Manager and a Distribution Sales Manager. The Field Sales Manager
leads the efforts of seven Area Sales Managers who direct 18 manufacturers'
representatives. The manufacturers' representatives serve as the "front line"
sales force for the Company. The National Accounts Manager serves large
national OEMs such as General Electric, Whirlpool Corporation and Vendo
Company Inc. More than 95% of the Company's sales are to OEM customers;
however, the Company has begun a distribution program with four distributors
in its subfractional horsepower product line to increase coverage and generate
more revenue growth. The Distribution Sales Manager is responsible for this
program.
The Company's fractional/integral horsepower product line is served by three
Sales Managers and two manufacturers' representatives. This product line
requires fewer sales resources because the Company serves fewer markets than
in the subfractional horsepower product line. This product line serves OEMs
exclusively.
The Company's gear and gearbox products are served through an inside sales
manager and one manufacturers' representative. These products are also sold
exclusively to OEMs.
The Company's advertising efforts consist of specific product literature
which is printed and provided to customers as applications are developed. In
addition, the Company attends various trade shows to market its products and
to stay abreast of industry trends. It also advertises in trade magazines on a
periodic basis.
BACKLOG
The Company's approximate backlog of unfilled orders at the dates specified
was as follows:
<TABLE>
<CAPTION>
YEAR ENDED BACKLOG
DECEMBER 31, (DOLLARS IN THOUSANDS)
<S> <C>
1993.................. $32,258
1994.................. 36,043
1995.................. 43,220
1996.................. 44,562
</TABLE>
The Company will ship substantially all of the 1996 year end backlog during
1997.
ENVIRONMENTAL REGULATION
The Company is subject to a variety of Federal, state and local governmental
regulations related to the storage, use, discharge and disposal of toxic,
volatile or otherwise hazardous materials used in its manufacturing processes.
Moreover, the Company anticipates that such laws and regulations will become
increasingly stringent in the future. The Company does not currently
anticipate any material adverse effect on its business, financial condition or
results of operations as a result of compliance with U.S. Federal, state,
provincial, local or foreign environmental laws or regulations or remediation
costs. However, some risk of environmental liability and other
35
<PAGE>
costs is inherent in the nature of the Company's business. For example,
pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, the Company could be responsible for the necessary
costs responding to any releases of hazardous substances at facilities that it
has owned or operated, or facilities to which it sent hazardous substances for
disposal. In addition, any failure by the Company to obtain and maintain
permits that may be required for manufacturing operations could subject the
Company to suspension of its operations. Such liability or suspension of
manufacturing operations could have a material adverse effect on the Company's
results of operations and financial condition.
Barber Colman Motors leases property that has been the subject of remedial
investigation and corrective action following the removal of a small,
underground waste oil tank in 1994. Contaminated soils were removed up to the
edge of the foundation of an overlying structure and the Wisconsin Department
of Natural Resources has advised the Company that no further action is
necessary at this time with respect to any contaminated soil remaining beneath
the structure, if the property owner records a notice of the contamination in
the deed. In connection with the Barber Colman Acquisition, the Company
obtained indemnification from the former owner of Barber Colman Motors for
environmental liability resulting from its prior operations.
COMPETITION
The U.S. electric motor and gear markets are highly fragmented with a
multitude of manufacturing companies servicing numerous markets. Motor
manufacturers range from small local producers serving a specific application
or end user, to high volume manufacturers offering general-purpose "off the
shelf" motors to a wide variety of end users. The Company believes there are
over 200 fractional and subfractional horsepower motor manufacturers serving
the U.S. market. While there are numerous manufacturers of gears and gearboxes
that service a wide variety of industries and applications, the Company
competes in certain niche markets.
The principal competitive factors in the motor and gear markets include
price, quality and service. Major motor manufacturers include General
Electric, Baldor Electric Company, Emerson Electric Company and Reliance
Electric Company; however, the Company generally competes with smaller,
specialized manufacturers. While many of the major motor manufacturers have
substantially greater assets and financial resources, the Company believes
that its leading position in certain niche markets, its high-quality products
and its value-added custom applications are adequate to meet competition.
INTELLECTUAL PROPERTY
The Company's patents and trademarks taken individually and as a whole, are
not critical to the ongoing success of its business. The proprietary nature of
the Company's products is attributable to the custom application designs for
particular customers' needs rather than attributable to proprietary patented
or licensed technology.
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<PAGE>
PROPERTIES
The Company's headquarters are located in an approximately 12,750 square
foot office space in Deerfield, Illinois that is provided by JII.
Manufacturing, design and distribution are located in 11 facilities across the
United States.
<TABLE>
<CAPTION>
SQUARE OWNED/ LEASE
LOCATION USE FEET LEASED EXPIRATION
<S> <C> <C> <C> <C> <C>
Des Plaines, IL Design/ 38,000 Leased September 2000
Administration
Des Plaines, IL Manufacturing/ 45,000 Leased September 2000
SUBFRACTIONAL Distribution
HORSEPOWER Crystal Lake, IL Manufacturing 46,000 Leased April 1998
PRODUCTS Darlington, WI Manufacturing 68,000 Leased July 2000
Richland Center, WI Manufacturing 45,000 Leased September 2000
Belvedere, IL Design/ 12,000 Leased March 1997
Administration
Akron, OH Administration/ 43,000 Owned
FRACTIONAL/ Manufacturing
INTEGRAL Middleport, OH Manufacturing 85,000 Owned
HORSEPOWER Cuyahoga Falls, OH Manufacturing 63,000 Leased October 2003
PRODUCTS Alamagordo, NM Manufacturing 15,000 Leased October 1997
GEARS AND Grand Rapids, MI Manufacturing/ 39,000 Owned
GEARBOXES Administration
</TABLE>
The Company believes all its facilities are in good operating condition and
adequate for their present purposes. Its production facilities are capable of
being utilized at a higher capacity to support increased demand, if necessary.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 1996, the Company employed 912 employees, of which 572
were non-union, and 340 were represented by the following six unions:
<TABLE>
<CAPTION>
NUMBER OF CONTRACT
UNION EMPLOYEES EXPIRATION
<S> <C> <C>
International Workers
Union.................. 182 September 1998
United Steelworkers..... 41 March 2000
International Union of
Electrical Workers..... 44 October 1998
International
Brotherhood of
Electrical Workers..... 19 November 1997
United Auto Workers..... 44 October 2001
International
Association of
Machinists............. 10 October 2000
</TABLE>
The Company has experienced no work stoppages over the past 10 years. It
considers its relations with its employees to be excellent.
LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding the resolution of
which, the management of the Company believes, would have a material adverse
effect on the Company's results of operations or financial condition, nor to
any other pending legal proceedings other than ordinary, routine litigation
incidental to its business.
37
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following sets forth the names and ages of the Company's directors,
executive officers and other key employees and the positions they hold as of
the date of this Prospectus:
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
<S> <C> <C>
Thomas H. Quinn.......... 49 Chairman, Chief Executive Officer, and a Director
Ron A. Sansom............ 37 President, Chief Operating Officer and a Director
Thomas C. Spielberger.... 34 Chief Financial Officer
Frank A. Collins......... 65 President, Imperial (Fractional/Integral Products)
G. Barry Lawrence........ 45 President, Gear (Gears and Gear Boxes)
John D. Simms, Sr........ 70 Chairman and Chief Executive Officer, Merkle-Korff
and Barber Colman Motors (Subfractional Products)
John W. Brown............ 58 President, Merkle-Korff and Barber Colman Motors
(Subfractional Products)
Jonathan F. Boucher...... 39 Vice President and a Director
John W. Jordan, II....... 48 Director
David W. Zalaznick....... 42 Director
</TABLE>
Set forth below is a brief description of the business experience of each
director and executive officer of the Company.
MR. QUINN has served as Chairman, Chief Executive Officer, and a director of
the Company since its inception. Since 1988, Mr. Quinn has been President,
Chief Operating Officer and a director of JII. Mr. Quinn is also the Chairman
of the Board and Chief Executive Officer of American Safety Razor Company and
Welcome Home, Inc. as well as a director of AmeriKing, Inc. and of a number of
privately held companies. On January 22, 1997, Welcome Home, Inc. filed a
Chapter 11 petition in the United States Bankruptcy Court for the Southern
District of New York.
MR. SANSOM has served as President, Chief Operating Officer and a director
of the Company since June 1996. Prior to joining the Company, Mr. Sansom held
several senior management positions with General Electric from 1981 to 1996,
including General Manager of General Electric's Appliance Components business.
MR. SPIELBERGER has served as the Company's Chief Financial Officer since
June 1996. Since 1989, Mr. Spielberger has been employed by JII and has served
as the Vice President, Controller of JII since 1993.
MR. COLLINS has served as President, Imperial since 1980. Prior to that, Mr.
Collins held several senior management positions with Imperial, including Vice
President and General Manager.
MR. LAWRENCE has served as President, Gear since 1991. Prior to that, Mr.
Lawrence held several senior management positions with Gear since 1978.
MR. SIMMS has served as Chairman and Chief Executive Officer, Merkle-Korff
since 1993 and of Barber Colman Motors since March 1996. Prior to that, Mr.
Simms held several senior management positions with Merkle-Korff since the
1950's, including as President until 1993.
MR. BROWN has served as President, Merkle-Korff since 1993 and of Barber
Colman Motors since March 1996. Prior to that, Mr. Brown held several senior
management positions with Merkle-Korff since the 1950's, including Executive
Vice President until 1993.
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<PAGE>
MR. BOUCHER has served as a Vice President and a director of the Company
since its inception. Since 1983, Mr. Boucher has been a partner of The Jordan
Company, a private merchant banking firm. Mr. Boucher is also a director of
JII and American Safety Razor Company as well as other privately held
companies.
MR. JORDAN has served as a director of the Company since its inception. Mr.
Jordan is a managing partner of The Jordan Company, a private merchant banking
firm which he founded in 1982. Mr. Jordan is also a director of JII,
AmeriKing, Inc., American Safety Razor Company, Carmike Cinemas, Inc., Welcome
Home, Inc. and Apparel Ventures, Inc. as well as other privately held
companies.
MR. ZALAZNICK has served as a director of the Company since June 1996. Since
1982, Mr. Zalaznick has been a managing partner of The Jordan Company. Mr.
Zalaznick is also a director of JII, AmeriKing, Inc., Carmike Cinemas, Inc.,
American Safety Razor Company, Marisa Christina, Inc., and Apparel Ventures,
Inc. as well as other privately held companies.
BOARD OF DIRECTORS
Liability Limitation. The Certificate of Incorporation provides that a
director of the Company shall not be personally liable to it or its
stockholders for monetary damages to the fullest extent permitted by Delaware
Corporation Law. In accordance with Delaware Corporation Law, the Certificate
of Incorporation does not eliminate or limit the liability of a director for
acts or omissions that involve intentional misconduct by a director or a
knowing violation of law by a director for voting or assenting to an unlawful
distribution, or for any transaction from which the director will personally
receive a benefit in money, property, or services to which the director is not
legally entitled. Delaware Corporation Law does not affect the availability of
equitable remedies such as an injunction or rescission based upon a director's
breach of his duty of care. Any amendment to these provisions of the Delaware
Corporation Law will automatically be incorporated by reference into the
Certificate of Incorporation and the Bylaws, without any vote on the part of
its stockholders, unless otherwise required.
Indemnification Agreements. The Company and each of its directors and
certain executive officers have entered into indemnification agreements. The
indemnification agreements provide that the Company will indemnify the
directors against certain liabilities (including settlements) and expenses
actually and reasonably incurred by them in connection with any threatened or
pending legal action, proceeding or investigation (other than actions brought
by or in the right of the Company) to which any of them is, or is threatened
to be, made a party by reason of their status as a director, officer or agent
of the Company, or serving at the request of the Company in any other capacity
for or on behalf of the Company; provided that (i) such director acted in good
faith and in a manner not opposed to the best interest of the Company, (ii)
with respect to any criminal proceedings had no reasonable cause to believe
his or her conduct was unlawful, (iii) such director is not finally adjudged
to be liable for negligence or misconduct in the performance of his or her
duty to the Company, unless the court views in light of the circumstances the
director is nevertheless entitled to indemnification, and (iv) the
indemnification does not relate to any liability arising under Section 16(b)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
the rules or regulations promulgated thereunder. With respect to any action
brought by or in the right of the Company, directors are also indemnified to
the extent not prohibited by applicable laws or as determined by a court of
competent jurisdiction, against expenses actually and reasonably incurred by
them in connection with such action if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests
of the Company.
Director Compensation. Directors of the Company receive $10,000 per year for
serving as a director of the Company. In addition, the Company reimburses
directors for their travel and other expenses incurred in connection with
attending meetings of the Board of Directors.
COMPENSATION COMMITTEE INTERLOCK AND INSIDER PARTICIPATION
The Board of Directors does not maintain a Compensation Committee. During
fiscal 1996, however, Messrs. Boucher, Jordan and Quinn participated in
deliberations of the Board of Directors concerning executive officer
39
<PAGE>
compensation. During 1996, certain of the foregoing executive officers of the
Company served and currently serve as directors, executive officers and
members of a compensation committee of another entity, one of whose executive
officers served and currently serves as a director of the Company. See
"Certain Transactions."
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth a summary of certain information regarding
compensation paid or accrued by the Company for services rendered to the
Company for the fiscal year ended December 31, 1996 to those persons who were,
at December 31, 1996: (i) the Company's chief executive officer and (ii) the
Company's four most highly compensated executive officers other than the chief
executive officer whose total salary and bonus exceeded $100,000 during such
period. The following table does not include payments made by JII to Mr. Frank
A. Collins. See "Certain Transactions."
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(/1/)
--------------------------- ---- ------ ----- -----------------
<S> <C> <C> <C> <C>
Thomas H. Quinn(/2/)....................... 1996 $ 0 $ 0 $--
Chairman of the Board and Chief Executive
Officer
Ron A. Sansom(/2/)......................... 1996 0 0 --
President and Chief Operating Officer
</TABLE>
- --------
(/1/) For the periods indicated, no executive officer named in the table
received any Other Annual Compensation in an amount in excess of the lesser
of either $50,000 or 10% of the total of Annual Salary and Bonus reported for
him in the two preceding columns.
(/2/) Does not reflect compensation paid to Messrs. Quinn and Sansom by JII.
See "Certain Transactions--JII Services Agreement."
The Company does not maintain a stock option or stock purchase plan and has
not awarded any of its employees individual stock option grants.
40
<PAGE>
PRINCIPAL STOCKHOLDERS
All of the outstanding common stock of the Company is owned by Parent. The
table below sets forth as of January 31, 1997 certain information regarding
beneficial ownership of the common stock of Parent held by (i) each of its
directors and executive officers who own shares of common stock of Parent,
(ii) all directors and executive officers of Parent as a group and (iii) each
person known by Parent to own beneficially more than 5% of its common stock.
The Company believes that each individual or entity named has sole investment
and voting power with respect to shares of common stock of Parent indicated as
beneficially owned by them, except as otherwise noted. See "The Company--
General."
<TABLE>
<CAPTION>
AMOUNT OF BENEFICIAL OWNERSHIP(1)
--------------------------------------
NUMBER OF PERCENTAGE
SHARES OWNED
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Ron A. Sansom........................... 150.00000 1.5%
John W. Jordan II(2).................... 118.78125 1.2
David W. Zalaznick(2)................... 118.78125 1.2
Jonathan F. Boucher(2).................. 101.81250 1.0
Thomas H. Quinn(2)...................... 75.00000 0.7
All directors and executive officers as
a group (10 persons)................... 564.37500 5.7
OTHER PRINCIPAL STOCKHOLDERS:
Jordan Industries, Inc(3)............... 8,125.00000 82.5%
JI Partners(4).......................... 750.00000 7.6
</TABLE>
- --------
(1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. Under Rule
13d-3(d), shares not outstanding which are subject to options, warrants,
rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage owned
by such person, but not deemed outstanding for the purpose of calculating
the percentage owned by each other person listed. As of January 31, 1997,
there were 9,850 shares of common stock of Parent issued and outstanding.
(2) Does not include shares of common stock of Parent owned by JII and JI
Partners as to which the named individuals disclaim beneficial ownership.
(3) The principal address of Jordan Industries, Inc. is ArborLake Centre,
Suite 550, 1751 Lake Cook Road, Deerfield, IL 60015.
(4) JI Partners is an investment partnership whose partners include certain
officers and employees of Jordan Industries, Inc. and its affiliates. Does
not include shares of common stock of Parent owned by JII as to which JI
Partners disclaims beneficial ownership. The principal address of JI
Partners is ArborLake Centre, Suite 550, 1751 Lake Cook Road, Deerfield,
IL 60015.
41
<PAGE>
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer is being made by the Company to satisfy its obligations
pursuant to the Registration Rights Agreement, which requires the Company to
use its best efforts to effect the Exchange Offer. See "--Registration
Rights."
The Company is making the Exchange Offer in reliance upon the position of
the staff of the Commission set forth in certain no-action letters addressed
to other parties in other transactions. However, the Company has not sought
its own no-action letter and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange
Offer as in such other circumstances. Based on these interpretations by the
staff of the Commission, the New Notes issued pursuant to the Exchange Offer
may be offered for resale, resold and otherwise transferred by holders thereof
(other than (i) any such holder that is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act, (ii) an Initial Purchaser
who acquired the Old Notes directly from the Company solely in order to resell
pursuant to Rule 144A of the Securities Act or any other available exemption
under the Securities Act, or (iii) a broker-dealer who acquired the Old Notes
as a result of market making or other trading activities) without compliance
with the registration and prospectus delivery requirements of the Securities
Act, provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder is not participating and has no arrangement
or understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes. Any Holder who tenders Old
Notes in the Exchange Offer for the purpose of participating in a distribution
of the New Notes could not rely on such interpretations by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction, unless such sale is made pursuant to an exemption from such
requirements.
Holders of Old Notes not tendered will not have any further registration
rights and the Old Notes not exchanged will continue to be subject to certain
restrictions on transfer. Accordingly, the liquidity of the markets for the
Old Notes could be adversely affected.
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE
OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH
RECOMMENDATION. HOLDERS OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO
TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD
NOTES TO TENDER AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL
AND CONSULTING THEIR ADVISERS, IF ANY, BASED ON THEIR OWN FINANCIAL POSITION
AND REQUIREMENTS.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
In connection with the issuance of the Old Notes, the Company entered into
the Registration Rights Agreement with the Initial Purchasers of the Old
Notes.
Holders of New Notes (other than as set forth below) are not entitled to any
registration rights with respect to the New Notes. Pursuant to the
Registration Rights Agreement, Holders of Old Notes are entitled to certain
registration rights. Under the Registration Rights Agreement, the Company has
agreed, for the benefit of the Holders of the Old Notes, that it will, at its
cost, (i) within 60 days after the date of the original issue of the Old
Notes, file the Registration Statement with the Commission and (ii) within 120
days after the date of original issuance of the Old Notes, use its best
efforts to cause such Registration Statement to be declared effective under
the Securities Act. The Registration Statement of which this Prospectus is a
part constitutes the Registration Statement. If (i) the Company is not
permitted to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy or (ii) any Holder of
Transfer Restricted Securities (as
42
<PAGE>
defined) notifies the Company within the specified time period that (A) due to
a change in law or policy it is not entitled to participate in the Exchange
Offer, (B) due to a change in law or policy it may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Registration Statement is not
appropriate or available for such resales by such holder or (C) it is a
broker-dealer and acquired the Senior Notes directly from the Company or an
affiliate of the Company, the Company will file with the Commission a Shelf
Registration Statement to cover resales of the Transfer Restricted Securities
by the Holders thereof who satisfy certain conditions relating to the
provision of information in connection with the Shelf Registration Statement.
The Company will use its best efforts to cause the applicable registration
statement to be declared effective as promptly as possible by the Commission.
For purposes of the foregoing, "Transfer Restricted Securities" means each
Senior Note, until (i) the date of which such Transfer Restricted Security has
been exchanged by a person other than a broker-dealer for a New Note in the
Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange
Offer of a Transfer Restricted Security for a New Note, the date on which such
New Note is sold to a purchaser who receives from such broker-dealer on or
prior to the date of such sale a copy of the Prospectus contained in the
Registration Statement, (iii) the date on which such security has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iv) the date on which such security
is distributed pursuant to Rule 144 under the Act.
The Registration Rights Agreement also provides that, (i) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its best efforts to issue
on or prior to 30 business days after the date on which the Registration
Statement was declared effective by the Commission, New Securities in exchange
for all Transfer Restricted Securities tendered prior thereto in the Exchange
Offer and (ii) if obligated to file the Shelf Registration Statement, the
Company will file the Shelf Registration Statement with the Commission on or
prior to 60 days after such filing obligation arises (and in any event within
90 days after November 7, 1996) and use its best efforts to cause the Shelf
Registration to be declared effective by the Commission on or prior to 120
days after such obligation arises. The Company shall use its best efforts to
keep such Shelf Registration Statement continuously effective, supplemented
and amended until the third anniversary of the Closing Date or such shorter
period that will terminate when all the Senior Notes covered by the Shelf
Registration Statement have been sold pursuant to the Shelf Registration
Statement. If (a) the Company fails to file any of the registration statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) any of such registration statements are not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Registration Statement, or (d) the Shelf
Registration Statement or the Registration Statement is declared effective but
thereafter, subject to certain exceptions, ceases to be effective or usable in
connection with resales of Transfer Restricted Securities during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above a "Registration Default"), then the Company will
pay Liquidated Damages to each Holder of Transfer Restricted Securities, with
respect to the first 90-day period immediately following the occurrence of
such Registration Default in an amount equal to $.05 per week for each $1,000
principal amount of Senior Notes held by such Holder. The amount of the
Liquidated Damages will increase by an additional $.05 per week with respect
to each subsequent 90-day period until all Registration Defaults have been
cured, up to a maximum amount of Liquidated Damages of $.40 per week for each
$1,000 principal amount of Senior Notes, as applicable. Following the cure of
all Registration Defaults, the accrual of Liquidated Damages will cease.
Holders of Transfer Restricted Securities will be required to deliver
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time
periods set forth in the Registration Rights Agreement in order to have their
Transfer Restricted Securities included in the Shelf Registration Statement
and benefit from the provisions regarding Liquidated Damages set forth above.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration
43
<PAGE>
Rights Agreement, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus constitutes a part.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means the earlier
of (i) 5:00 p.m., New York City time, on May 5, 1997 or (ii) the date when all
Old Notes have been tendered; provided, however, that if the Company, in its
sole discretion, has extended the period of time for which the Exchange Offer
is open, the term "Expiration Date" means the latest time and date to which
the Exchange Offer is extended; provided further that in no event will the
Exchange Offer be extended beyond June 4, 1997. The Company may extend the
Exchange Offer at any time and from time to time by giving oral or written
notice to the Exchange Agent and by timely public announcement. Without
limiting the manner in which the Company may choose to make any public
announcement and subject to applicable law, the Company shall have no
obligation to publish, advertise or otherwise communicate any such public
announcement other than by issuing a release to an appropriate news agency.
During any extension of the Exchange Offer, all Old Notes previously tendered
pursuant to the Exchange Offer will remain subject to the Exchange Offer. The
Company intends to conduct the Exchange Offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations
thereunder.
As of the date of this Prospectus, $170,000,000 aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about April 7, 1997, to all Holders of
Old Notes known to the Company. The Company's obligation to accept Old Notes
for exchange pursuant to the Exchange Offer is subject to certain conditions
as set forth under "--Certain Conditions to the Exchange Offer" below.
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions and registration rights
relating to the Old Notes and rights to receive Liquidated Damages. See "--
Registration Rights; Liquidated Damages." The Old Notes were, and the New
Notes will be, issued under the Indenture and all such Senior Notes are
entitled to the benefits of the Indenture.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof. Any Old Notes
not accepted for exchange for any reason will be returned without expense to
the tendering Holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted
for exchange, upon the occurrence of any of the conditions of the Exchange
Offer specified below under "--Certain Conditions to the Exchange Offer". The
Company will give oral or written notice of any amendment, nonacceptance or
termination to the Holders of the Old Notes as promptly as practicable. Any
amendment to the Exchange Offer will not limit the right of Holders to
withdraw tendered Old Notes prior to the Expiration Date. See "--Withdrawal
Rights."
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a Holder thereof 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 a
properly completed and duly executed Letter of Transmittal, including all
other documents required by such Letter of Transmittal, to Fleet National Bank
(the "Exchange Agent") at one of the addresses set forth below under "Exchange
Agent" on or prior to the Expiration Date. In addition, either (i)
certificates
44
<PAGE>
for such Old Notes must be received by the Exchange Agent along, with the
Letter of Transmittal, or (ii) a timely confirmation of a book-entry transfer
(a "Book-Entry Confirmation") of such Old Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the Holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF
THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED
MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
Signatures 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 thereto are tendered (i) by a registered Holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust
company having an office or correspondent in the United States (collectively,
"Eligible Institutions"). If Old Notes are registered in the name of a person
other than the signer of the Letter of Transmittal, the Old Notes surrendered
for exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, 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.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance 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 tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance 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
any particular Old Notes either before or 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 as to any particular Old Notes either before or after
the Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, all defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall
any of them incur any liability for failure to give such notification. The
Exchange Agent intends to use reasonable efforts to give notification of such
defects and irregularities.
If the Letter of Transmittal is signed by a person or persons other than the
registered Holder or Holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the registered Holder or Holders that appear on the
Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of a corporation or others acting in a fiduciary or representatives
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the Holder and such person has no
arrangement with any person
45
<PAGE>
to participate in the distribution of the New Notes. If any Holder or any such
other person is an "affiliate," as defined under Rule 405 of the Securities
Act, of the Company, is engaged in or intends to engage in or has an
arrangement or understanding with any person to participate in a distribution
of such New Notes to be acquired pursuant to the Exchange Offer, or acquired
the Old Notes as a result of market making or other trading activities, such
Holder or any such other person (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. 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.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of
the Old Notes. See "--Certain Conditions to the Exchange Offer." For purposes
of the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent, with written confirmation of any
oral notice to be given promptly thereafter.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. Accordingly, registered Holders of New Notes on the relevant record
date for the first interest payment date following the consummation of the
Exchange Offer will receive interest accruing from the most recent date to
which interest has been paid on the Old Notes, or, if no interest has been
paid on the Old Notes, from November 7, 1996. Old Notes accepted for exchange
will cease to accrue interest from and after the date of consummation of the
Exchange Offer. Holders of Old Notes whose Old Notes are accepted for exchange
will not receive any payment in respect of accrued interest on such Old Notes
otherwise payable on any interest payment date the record date for which
occurs on or after consummation of the Exchange Offer.
In all cases, issuance 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 (i) certificates for such Old Notes or a timely Book-
Entry Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, (ii) a properly completed and duly executed
Letter of Transmittal and (iii) all other required documents. If any tendered
Old Notes are not accepted for any reason set forth in the terms and
conditions of the Exchange Offer, or if Old Notes are submitted for a greater
amount than the Holder desires to exchange, such unaccepted or nonexchanged
Old Notes will be returned without expense to the tendering Holder thereof
(or, in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry procedures described below, such nonexchanged Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility)
designated by the tendering Holder as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the Book-
Entry Transfer Facility, the Letter of Transmittal or facsimile thereof, with
any required signature guarantees and any other required documents, must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "--Exchange Agent" on or prior to the
Expiration Date or the guaranteed delivery procedures described below must be
complied with.
46
<PAGE>
GUARANTEED DELIVERY PROCEDURES
If a registered Holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
Holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent has received from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form of the corresponding exhibit to the
Registration Statement of which this Prospectus constitutes a part (by telegram,
telex, facsimile transmission, mail or hand delivery), setting forth the name
and address of the Holder of Old Notes and the amount of Old Notes tendered,
stating that the tender is being made thereby and guaranteeing that within three
New York Stock Exchange ("NYSE") trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent, and (iii) the
certificates for all physically tendered Old Notes, in proper form for transfer,
or a Book-Entry Confirmation, as the case may be, and all other documents
required by the Letter of Transmittal, are received by the Exchange Agent within
three NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes
to be withdrawn (including the amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which
such Old Notes are registered, if different from that of the withdrawing
Holder. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing Holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such Holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties.
Any 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 not exchanged for any reason will be
returned to the Holder thereof without cost to such Holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account with
such Book-Entry Transfer Facility specified by the Holder) as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described under "--Procedures for Tendering Old Notes"
above at any time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer, if at any time
before the acceptance of such Old Notes for exchange or the exchange of the
New Notes for such Old Notes, any of the following events shall occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
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<PAGE>
regulatory or administrative agency or commission, (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof, or (ii) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of
the Old Notes pursuant to the Exchange Offer; or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of
the transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the sole judgment of the
Company might directly or indirectly result in any of the consequences
referred to in clauses (i) or (ii) above or, in the sole judgment of the
Company, might result in the holders of New Notes having obligations with
respect to resales and transfers of New Notes which are greater than those
described in the interpretation of the Commission referred to on the cover
page of this Prospectus, or would otherwise make it inadvisable to proceed
with the Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Company to complete the transactions contemplated by the
Exchange Offer, (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by any governmental agency or authority which adversely affects
the extension of credit or (iv) a commencement of a war, armed hostilities
or other similar international calamity directly or indirectly involving
the United States, or, in the case of any of the foregoing existing at the
time of the commencement of the Exchange Offer, a material acceleration or
worsening thereof; or
(c) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company and its subsidiaries taken as a whole that, in the
sole judgment of the Company, is or may be adverse to the Company, or the
Company shall have become aware of facts that, in the sole judgment of the
Company, have or may have an adverse effect on the value of the Old Notes
or the New Notes.
Holders of Old Notes will have registration rights and the right to Liquidated
Damages as described under "--Registration Rights; Liquidated Damages" if the
Company fails to consummate the Exchange Offer.
To the Company's knowledge as of the date of this Prospectus, none of the
above events has occurred.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order shall be threatened or in effect with respect
to the Registration Statement of which this Prospectus constitutes a part or
the qualification of the Indenture under the Trust Indenture Act of 1939.
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<PAGE>
EXCHANGE AGENT
Fleet National Bank has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal and Notices of Guaranteed
Delivery should be directed to the Exchange Agent at the addresses set forth
below. Questions and requests for assistance, requests for additional copies
of this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
Deliver to: Fleet National Bank, Exchange Agent:
By Mail: By Overnight Courier: By Hand:
Fleet National Bank Fleet National Bank Fleet National Bank
Mail Code: CTOPT06D Mail Code: CTOPT06D Corporate Trust
Corporate Trust Corporate Trust Operations Operations
Operations Department Department
Department 1 Talcott Plaza, 6th Floor Customer Service
P.O. Box 1440 Hartford, Connecticut 06120 Window
Hartford, 1 Talcott Plaza,
Connecticut 06143 5th Floor
By Facsimile:
Hartford,
Connecticut 06120
(860) 986-7908
DELIVERY OF A LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer.
The Company will, however, pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for reasonable out-of-pocket
expenses in connection therewith. The Company will also pay brokerage houses
and other custodians, nominees and fiduciaries the reasonable out-of-pocket
expenses incurred by them in forwarding copies of this Prospectus and related
documents to the beneficial owners of Old Notes, and in handling tenders for
their customers. The expenses to be incurred in connection with the Exchange
Offer, including the fees and expenses of the Exchange Agent and printing,
accounting, registration, and legal fees, will be paid by the Company and are
estimated to be approximately $60,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct
the Company to register New Notes in the name of, or request that Old Notes
not tendered or not accepted in the Exchange Offer be returned to, a person
other than the registered tendering holder will be responsible for the payment
of any applicable transfer tax thereon.
APPRAISAL RIGHTS
HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS IN
CONNECTION WITH THE EXCHANGE OFFER.
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
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<PAGE>
consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. Based upon no-action letters issued by the staff of the Commission to
third parties, the Company believes the New Notes issued pursuant to the
Exchange Offer in exchange for the Old Notes may be offered for resale, resold
or otherwise transferred by a Holder thereof (other than any (i) Holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act), (ii) an Initial Purchaser who acquired the Old Notes directly
from the Company solely in order to resell pursuant to Rule 144A of the
Securities Act or any other available exemption under the Securities Act, or
(iii) a broker-dealer who acquired the Old Notes as a result of market making
or other trading activities) without compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder is not participating and has no arrangement or understanding with any
person to participate in a distribution (within the meaning of the Securities
Act) of such New Notes. However, the Company has not sought its own no-action
letter and there can be no assurance that the staff of the Commission would
make a similar determination with respect to the Exchange Offer as in such
other circumstances. Each Holder, other than a broker-dealer, must acknowledge
that it is not engaged in, and does not intend to engage in, a distribution of
New Notes, and has no arrangement or understanding to participate in a
distribution of New Notes. If any Holder is an affiliate of the Company, is
engaged in or intends to engage in or has any arrangement or understanding
with respect to the distribution of the New Notes to be acquired pursuant to
the Exchange Offer, or acquired the Old Notes as a result of market making or
other trading activities, such Holder (i) could not rely on the relevant
determinations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. Each broker-dealer that
receives New Notes for its own account in exchange for Old Notes must
acknowledge that such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities and that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution." In addition, to comply with the securities laws of
certain jurisdictions, if applicable, the New Notes may not be offered or sold
unless they have been registered or qualified for sale in such jurisdiction or
an exemption from registration or qualification is available and is complied
with. The Company has agreed to register or qualify the sale of the New Notes
in such jurisdictions only in limited circumstances and subject to certain
conditions.
ACCOUNTING TREATMENT
The exchange of the New Notes for the Old Notes will have no impact on the
Company's accounting records on the date of the exchange. Accordingly, no gain
or loss for accounting purposes will be recognized. Expenses of the Exchange
Offer and expenses related to the Old Notes will be amortized, pro rata, over
the term of the New Notes.
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<PAGE>
DESCRIPTION OF SENIOR NOTES
GENERAL
The Old Notes were and the New Notes will be issued pursuant to an indenture
(the "Indenture"), dated as of November 7, 1996, between the Company and Fleet
National Bank, as trustee (the "Trustee"), in a private transaction that is
not subject to the registration requirements of the Securities Act. See
"Notice to Investors." The terms of the Senior 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"), as in effect on
the date of original issuance of the Senior Notes. The Senior Notes are
subject to all such terms, and holders of the Senior Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the material provisions of the Indenture 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.
As of the date of the Indenture, all of the Company's subsidiaries will be
Restricted Subsidiaries. However, under certain circumstances, the Company
will be able to designate each of its existing subsidiaries, subsidiaries
formed by the Company or subsidiaries acquired by the Company after the
original issuance of the Senior Notes as Non-Restricted Subsidiaries. Non-
Restricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Indenture.
The Old Notes were and the New Notes will be limited to $170,000,000 in
aggregate principal amount and will mature on November 15, 2006. The Old Notes
have and the New Notes will bear interest at the rate of 10 3/4% per annum.
Interest on the Senior Notes is payable semi-annually in cash in arrears on
May 15 and November 15 in each year, commencing May 15, 1997, to holders of
record of Senior Notes at the close of business on the May 1 or November 1
immediately preceding such interest payment date. Interest on the Senior Notes
will accrue from the most recent date to which interest has been paid or, if
no interest has been paid, from the date of original issuance. Interest will
be computed on the basis of a 360-day year of twelve 30-day months. The Old
Notes were and the New Notes will be issued in denominations of $1,000 and
integral multiples thereof.
Principal of, premium, if any, and interest on the Senior Notes will be
payable, and the Senior Notes may be presented for registration of transfer or
exchange, at the office of the Paying Agent and Registrar in New York, New
York. Holders of Senior Notes must surrender their Senior Notes to the Paying
Agent to collect principal payments, and the Company may pay principal,
interest and Liquidated Damages, if any, by check and may mail checks to a
holder's registered address; provided that all payments with respect to Global
Senior Notes and Certificated Senior Notes, 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. The Registrar may require payment of a sum sufficient to
cover any transfer tax or similar governmental charge payable in connection
with certain transfers or exchanges. See "Description of Senior Notes--
Transfer and Exchange." The Trustee will initially act as Paying Agent and
Registrar. The Company may change the Paying Agent or Registrar without prior
notice to holders of Senior Notes, and the Company or any of its subsidiaries
may act as Paying Agent or Registrar.
The Old Notes were and the New Notes will be senior unsecured obligations of
the Company, will rank senior in right of payment to all Subordinated
Indebtedness of the Company, and will rank pari passu in right of payment with
all Senior Indebtedness of the Company. The Senior Notes will effectively rank
junior to all indebtedness of the Company and to any indebtedness of the
Company's subsidiaries, including borrowings under the New Credit Agreement.
As of December 31, 1996, after giving effect to (i) the Old Note Offering,
(ii) the application of the net proceeds therefrom and (iii) the Barber Colman
Acquisition, the aggregate principal amount of secured Indebtedness of the
Company and indebtedness of the Company's subsidiaries to which the Senior
Notes will effectively rank junior is approximately $5.0 million. The
Indenture permits the Company and its Subsidiaries to incur additional
Indebtedness, including secured Indebtedness, subject to certain limitations.
In addition, under the terms of the Indenture, the Company's Subsidiaries may
incur certain Indebtedness pursuant to agreements that may restrict the
ability of such Subsidiaries to make dividends or other intercompany
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transfers to the Company necessary to service the Company's obligations,
including its obligations under the Senior Notes. Such permitted additional
Indebtedness which would effectively be senior to the Senior Notes may include
up to $75.0 million incurred under the New Credit Agreement and other
Indebtedness permitted by the Indenture, including $25.0 million of additional
Indebtedness. Any failure by the Company to satisfy its obligations with
respect to the Senior Notes at maturity (with respect to payments of
principal) or prior thereto (with respect to payments of interest or required
repurchases) would constitute a default under the Indenture and the New Credit
Agreement and could cause a default under agreements governing other
indebtedness of the Company and its Subsidiaries. See "Risk Factors--Holding
Company Structure; Dependence on Subsidiaries; Limitations on Access to Cash
Flow of the Subsidiaries," "--Certain Covenants" and "Description of Certain
Indebtedness."
REDEMPTION OF SENIOR NOTES
Optional Redemption. The Senior Notes may not be redeemed at the option of
the Company prior to November 15, 2001 other than out of the net proceeds of
one or more Equity Offerings, as and to the extent described below. During the
12-month period beginning on November 15 of the years indicated below, the
Senior Notes will be redeemable, at the option of the Company, in whole or in
part, on at least 30 but not more than 60 days' notice to each holder of
Senior Notes to be redeemed, at the redemption prices (expressed as
percentages of the principal amount) set forth below, plus any accrued and
unpaid interest and Liquidated Damages, if any, to the redemption date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2001.............................. 105.375%
2002.............................. 103.583%
2003.............................. 101.792%
2004 and thereafter............... 100.000%
</TABLE>
Notwithstanding the foregoing, prior to November 15, 1999, the Company may
(but shall not have the obligation to) redeem up to 35% of the original
aggregate principal amount of the Senior Notes at a redemption price of
109.750% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the redemption date, with the net proceeds of
one or more Equity Offerings; provided that at least 65% of the aggregate
principal amount of Senior Notes originally issued remain outstanding
immediately after the occurrence of any such redemption; and provided,
further, that any such redemption shall occur within 60 days of the date of
the closing of any such Equity Offering. The restrictions on optional
redemptions contained in the Indenture do not limit the Company's right to
separately make open market, privately negotiated or other purchases of Senior
Notes from time to time.
Mandatory Redemption. Except as set forth below under "Description of Senior
Notes--Mandatory Offers to Purchase Senior Notes," the Company is not required
to make any mandatory redemption, purchase or sinking fund payments with
respect to the Senior Notes.
MANDATORY OFFERS TO PURCHASE SENIOR NOTES
Change of Control. Upon the occurrence of a Change of Control (such date
being the "Change of Control Trigger Date"), each holder of Senior Notes shall
have the right to require the Company to purchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's Senior Notes pursuant
to an Offer (as defined herein) at a purchase price in cash equal to 101% of
the aggregate principal amount thereof, plus any accrued and unpaid interest
and Liquidated Damages, if any, to the date of purchase. The Company shall
furnish to the Trustee, at least two Business Days before notice of an Offer
(as defined) is mailed to all Holders of Senior Notes pursuant to the
procedures described below under "--Procedures for Offers," notice that the
Offer is being made. Transactions constituting a Change of Control are not
limited to hostile takeover transactions not approved by the current
management of the Company.
The Company expects that prepayment of the Senior Notes pursuant to a Change
of Control would, and the exercise by holders of Senior Notes of the right to
require the Company to purchase Senior Notes may, constitute
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a default under the New Credit Agreement or other indebtedness of the Company.
The Indenture provides that, prior to the mailing of the notice referred to
below, but in any event within 30 days following any Change of Control Trigger
Date, the Company is required to (i) repay in full and terminate all
commitments under Indebtedness under the New Credit Agreement and all other
Senior Indebtedness the terms of which require repayment upon a Change of
Control or offer to repay in full and terminate all commitments under all
Indebtedness under the New Credit Agreement and all other such Senior
Indebtedness and to repay the Indebtedness owed to each lender which has
accepted such offer or (ii) obtain the requisite consents under the New Credit
Agreement and all such other Senior Indebtedness to permit the repurchase of
the Senior Notes as provided below. The Company shall first comply with the
covenant in the immediately preceding sentence before it shall be required to
repurchase Senior Notes pursuant to the provisions described below. The
Company's failure to comply with this covenant shall constitute an Event of
Default described in clause (c) and not in clause (b) under "--Events of
Default" below. In the event a Change of Control occurs, the Company will
likely be required to refinance the Indebtedness outstanding under the New
Credit Agreement and the Senior Notes. If there is a Change of Control, any
Indebtedness under the New Credit Agreement could be accelerated. There is no
limitation in the Indenture which prohibits the Company from using the
proceeds from the Old Note Offering to finance mandatory purchases of Senior
Notes upon a Change of Control. Moreover, 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 the Senior Notes given the Company's high
leverage. The financing of the purchases of Senior Notes could additionally
result in a default under the New Credit Agreement or other indebtedness of
the Company. The occurrence of a Change of Control may also have an adverse
impact on the ability of the Company to obtain additional financing in the
future. The ability of holders of Senior Notes to require that the Company
purchase Senior Notes upon a Change of Control may deter persons from
effecting a takeover of the Company which would constitute a Change of Control
if it believes such takeover will cause the occurrence of a Change of Control
and it has insufficient funds available to make mandatory purchases of Senior
Notes. Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit (i) the holders of Senior
Notes to require that the Company purchase or redeem the Senior Notes in the
event of a takeover, recapitalization or similar restructuring or (ii) the
Board of Directors or the Trustee to waive the covenant relating to the
holders' right to redeem upon a "Change of Control." See "Risk Factors--
Leverage and Coverage" and "--Holding Company Structure; Dependence on
Subsidiaries; Limitations on Access to Cash Flow of the Subsidiaries."
Asset Sales. The Indenture provides that the Company may not, and may not
permit any Restricted Subsidiary to, directly or indirectly, consummate an
Asset Sale (including the sale of any of the Capital Stock of any Restricted
Subsidiary) providing for Net Proceeds in excess of $2,500,000 unless at least
75% of the Net Proceeds from such Asset Sale are applied (in any manner
otherwise permitted by the Indenture) to one or more of the following purposes
in such combination as the Company shall elect: (a) an investment in another
asset or business in the same line of business as, or a line of business
similar to that of, the line of business of the Company and its Restricted
Subsidiaries at the time of the Asset Sale; provided that such investment
occurs on or prior to the 365th day following the date of such Asset Sale (the
"Asset Sale Disposition Date"), (b) 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, (c) the purchase, redemption or other prepayment
or repayment of outstanding Senior Indebtedness of the Company or Indebtedness
of the Company's Restricted Subsidiaries on or prior to the 365th day
following the Asset Sale Disposition Date or (d) an Offer expiring on or prior
to the Purchase Date (as defined herein). The Indenture also provides that the
Company may not, and may not permit any Restricted Subsidiary to, directly or
indirectly, consummate an Asset Sale unless at least 75% of the consideration
thereof received by the Company or such Restricted Subsidiary is in the form
of cash, cash equivalents or marketable securities; provided that, solely for
purposes of calculating such 75% of the consideration, the amount of (x) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet or in the notes thereto, excluding contingent liabilities
and trade payables), of the Company or any Restricted Subsidiary (other than
liabilities that are by their terms subordinated to the Senior Notes) that are
assumed by the transferee of any such assets and (y) any notes or other
obligations received by the Company
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or any such Restricted Subsidiary from such transferee that are promptly, but
in no event more than 30 days after receipt, converted by the Company or such
Restricted Subsidiary into cash (to the extent of the cash received), shall be
deemed to be cash and cash equivalents for purposes of this provision. Any Net
Proceeds from any Asset Sale that are not applied or invested as provided in
the first sentence of this paragraph shall constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10,000,000 (such date
being an "Asset Sale Trigger Date"), the Company shall make an Offer to all
holders of Senior Notes to purchase the maximum principal amount of the Senior
Notes then outstanding that may be purchased out of Excess Proceeds, at an
offer price in cash in an amount equal to 100% of principal amount thereof
plus any accrued and unpaid interest and Liquidated Damages, if any, to the
Purchase Date in accordance with the procedures set forth in the Indenture.
Notwithstanding the foregoing, to the extent that any or all of the Net
Proceeds of an Asset Sale is prohibited or delayed by applicable local law
from being repatriated to the United States, the portion of such Net Proceeds
so affected will not be required to be applied as described in this or the
preceding paragraph, but may be retained for so long, but only for so long, as
the applicable local law prohibits repatriation to the United States.
To the extent that any Excess Proceeds remain after completion of an Offer,
the Company may use such remaining amount for general corporate purposes. If
the aggregate principal amount of Senior Notes surrendered by holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Senior
Notes to be purchased on a pro rata basis. Upon completion of an Asset Sale
Offer, the amount of Excess Proceeds shall be reset at zero.
While the New Credit Agreement permits dividends from the Company's
subsidiaries to the Company for the purpose of paying interest on the Senior
Notes, dividends for other purposes, such as repurchases of Senior Notes by
the Company upon an Asset Sale, are not permitted under the terms thereof.
Accordingly, the Company would need to seek the consent of its lenders under
the New Credit Agreement in order to repurchase Senior Notes with any Net
Proceeds. See "Holding Company Structure; Dependence on Subsidiaries;
Limitations on Access to Cash Flow of the Subsidiaries."
Procedures for Offers. Within 30 days following any Change of Control
Trigger Date or Asset Sale Trigger Date, subject to the provisions of the
Indenture, the Company shall mail a notice to each holder of Senior Notes at
such holder's registered address a notice stating: (a) that an offer ("Offer")
is being made pursuant to a Change of Control or an Asset Sale Trigger Date,
as the case may be, the length of time the Offer shall remain open and the
maximum principal amount of Senior Notes that will be accepted for payment
pursuant to such Offer, (b) the purchase price, the amount of accrued and
unpaid interest and Liquidated Damages, if any, as of the purchase date, and
the purchase date (which shall be no earlier than 30 days and no later than 40
days from the date such notice is mailed (the "Purchase Date")), and (c) such
other information required by the Indenture and applicable law and
regulations.
On the Purchase Date for any Offer, the Company will, to the extent required
by the Indenture and such Offer, (1) in the case of an Offer resulting from a
Change of Control, accept for payment all Senior Notes or portions thereof
tendered pursuant to such Offer and, in the case of an Offer resulting from an
Asset Sale Trigger Date, accept for payment the maximum principal amount of
Senior Notes or portions thereof tendered pursuant to such Offer that can be
purchased out of Excess Proceeds from such Asset Sale Trigger Date, (2)
deposit with the Paying Agent the aggregate purchase price of all Senior Notes
or portions thereof accepted for payment and any accrued and unpaid interest
and Liquidated Damages, if any, on such Senior Notes as of the Purchase Date,
and (3) deliver or cause to be delivered to the Trustee all Senior Notes
tendered pursuant to the Offer. The Paying Agent shall promptly mail to each
holder of Senior Notes or portions thereof accepted for payment an amount
equal to the purchase price for such Senior Notes plus any accrued and unpaid
interest and Liquidated Damages, if any, thereon, and the Trustee shall
promptly authenticate and mail (or cause to be transferred by book-entry) to
such holder of Senior Notes accepted for payment in part a new Note equal in
principal amount to any unpurchased portion of the Senior Notes and any Note
not accepted for payment in whole or in part shall be promptly returned to the
holder thereof. The Company will publicly announce the results of the Offer on
or as soon as practicable after the Purchase Date.
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<PAGE>
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1, in connection with an
offer required to be made by the Company to repurchase the Senior Notes as a
result of a Change of Control or an Asset Sale Trigger Date. To the extent
that the provisions of any securities laws or regulations conflict with
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the Indenture by virtue thereof.
Selection and Notice. In the event of a redemption or purchase of less than
all of the Senior Notes, the Senior Notes to be redeemed or purchased will be
chosen by the Trustee pro rata, by lot or by any other method that the Trustee
considers fair and appropriate and, if the Senior Notes are listed on any
securities exchange, by a method that complies with the requirements of such
exchange; provided that, if less than all of a holder's Senior Note is to be
redeemed or accepted for payment, only principal amounts of $1,000 or
multiples thereof may be selected for redemption or accepted for payment. On
and after any redemption or purchase date, interest and Liquidated Damages, if
any, shall cease to accrue on the Senior Notes or portions thereof called for
redemption or accepted for payment. Notice of any redemption or offer to
purchase will be mailed at least 30 days but not more than 60 days before the
redemption or purchase date to each holder of Senior Notes to be redeemed or
purchased at such holder's registered address.
CERTAIN COVENANTS
The Indenture contains, among other things, the following covenants:
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, (i) declare or pay any dividend or make any distribution on
account of the Company's or such Restricted Subsidiary's Capital Stock or
other Equity Interests (other than dividends or distributions payable in
Capital Stock or other Equity Interests (other than Disqualified Stock) of the
Company or a Restricted Subsidiary and dividends or distributions payable by a
Restricted Subsidiary to another Restricted Subsidiary or to the Company);
(ii) purchase, redeem or otherwise acquire or retire for value any Capital
Stock or other Equity Interests of the Company or any of its Restricted
Subsidiaries (other than any such Equity Interest purchased from the Company
or any Restricted Subsidiary for fair market value (as determined by the Board
of Directors in good faith)); (iii) voluntarily prepay any Subordinated
Indebtedness of the Company, whether any such Subordinated Indebtedness is
outstanding on, or issued after, the date of original issuance of the Senior
Notes except as specifically permitted by the covenants of the Indenture as
described herein; or (iv) make any Restricted Investment (all such dividends
distributions purchases, redemptions, acquisitions, retirements, prepayments
and Restricted Investments, being collectively referred to as "Restricted
Payments"), if, at the time of such Restricted Payment:
(a) a Default or Event of Default shall have occurred and be continuing
or shall occur as a consequence thereof; or
(b) immediately after such Restricted Payment and after giving effect
thereto on a Pro Forma Basis, the Company shall not be able to issue $1.00
of additional Indebtedness pursuant to the first sentence of the
"Limitation on Incurrence of Indebtedness" covenant; or
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made after the date of original issuance of the Senior
Notes, without, duplication, exceeds the sum of: (1) 50% of the aggregate
Consolidated Net Income (including, for this purpose, gains from Asset
Sales and, to the extent not included in Consolidated Net Income, any gain
from a sale or disposition of a Restricted Investment) of the Company (or,
in case such aggregate is a loss, 100% of such loss) for the period (taken
as one accounting period) from the beginning of the first fiscal quarter
commencing immediately after the date of original issuance of the Senior
Notes and ended as of the Company's most recently ended fiscal quarter at
the time of such Restricted Payment; plus (2) 100% of the aggregate net
cash proceeds and the fair market value of any property or securities (as
determined by the Board of Directors in good faith) received by the Company
from the issue or sale of Capital Stock or other Equity Interests of the
Company subsequent to the date of original issuance of the Senior Notes
(other than (x) Capital Stock or other Equity Interests
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issued or sold to a Restricted Subsidiary and (y) the issuance or sale of
Disqualified Stock); plus (3) $5,000,000; plus (4) the amount by which the
principal amount of and any accrued interest on either (A) Senior
Indebtedness of the Company or (B) any Indebtedness of any Restricted
Subsidiary is reduced on the Company's consolidated balance sheet upon the
conversion or exchange other than by a Restricted Subsidiary subsequent to
the date of original issuance of the Senior Notes of any Indebtedness of
the Company or any Restricted Subsidiary (not held by the Company or any
Restricted Subsidiary) for Capital Stock or other Equity Interests (other
than Disqualified Stock) of the Company or any Restricted Subsidiaries
(less the amount of any cash, or the fair market value of any other
property or securities (as determined by the Board of Directors in good
faith), distributed by the Company or any Restricted Subsidiary (to persons
other than the Company or any other Restricted Subsidiary) upon such
conversion or exchange); plus (5) if any Non-Restricted Subsidiary is
redesignated as a Restricted Subsidiary, the value of the deemed Restricted
Payment resulting therefrom and determined in accordance with the second
sentence of the "Designation of Restricted and Non-Restricted Subsidiaries"
covenant; provided, however, that for purposes of this clause (5), the
value of any redesignated Non-Restricted Subsidiary shall be reduced by the
amount that any such redesignation replenishes or increases the amount of
Restricted Investments permitted to be made pursuant to clause (ii) of the
next sentence.
Notwithstanding the foregoing, the Indenture does not prohibit as Restricted
Payments:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration, such payment would
comply with all covenants of such Indenture (including, but not limited to,
the "Limitation on Restricted Payments" covenant);
(ii) making Restricted Investments at any time, and from time to time, in
an aggregate outstanding amount of $10,000,000 after the date of original
issuance of the Senior Notes (it being understood that if any Restricted
Investment after the date of original issuance of the Senior Notes pursuant
to this clause (ii) is sold, transferred or otherwise conveyed to any
person other than the Company or a Restricted Subsidiary, the portion of
the net cash proceeds or fair market value of securities or properties paid
or transferred to the Company and its Restricted Subsidiaries in connection
with such sale, transfer or conveyance that relates or corresponds to the
repayment or return of the original cost of such a Restricted Investment
will replenish or increase the amount of Restricted Investments permitted
to be made pursuant to this clause (ii), so that up to $10,000,000 of
Restricted Investments may be outstanding under this clause (ii) at any
given time; provided that without otherwise limiting this clause (ii), any
Restricted Investment in a Subsidiary made pursuant to this clause (ii) is
made for fair market value (as determined by the Board of Directors in good
faith).
(iii) the repurchase, redemption, retirement or acquisition of the
Company's stock from the executives, management, employees or consultants
of the Company or its Subsidiaries pursuant to the terms of any
subscription, stockholder or other agreement or plan, up to an aggregate
amount not to exceed $5,000,000;
(iv) any loans, advances, distributions or payments from the Company to
its Restricted Subsidiaries, or any loans, advances, distributions or
payments by a Restricted Subsidiary to the Company or to another Restricted
Subsidiary, in each case pursuant to intercompany Indebtedness,
intercompany management agreements and other intercompany agreements and
obligations;
(v) investments in marketable securities and other negotiable instruments
through the William Penn Funds (including the William Penn Interest Income
Fund);
(vi) the purchase, redemption, retirement or other acquisition of (a) any
Senior Indebtedness of the Company or any Indebtedness of a Restricted
Subsidiaries required by its terms to be purchased, redeemed, retired or
acquired with the net proceeds from asset sales (as defined in the
instrument evidencing such Senior Indebtedness or Indebtedness) or upon a
change of control (as defined in the instrument evidencing such Senior
Indebtedness or Indebtedness) and (b) the Senior Notes pursuant to the
"Change of Control" or "Asset Sales" provisions of the Indenture;
(vii) the payment of (a) consulting, financial and investment banking
fees under the TJC Agreement, provided, that no Default or Event of Default
shall have occurred and be continuing or shall occur as a
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consequence thereof, and the Company's Obligations to pay such fees under
the TJC Agreement shall be subordinated expressly to the Company's
Obligations in respect of the Senior Notes, and (b) indemnities, expenses
and other amounts under the TJC Agreement;
(viii) the payment of management, advisory and service fees, indemnities,
expenses and other amounts under the JII Services Agreement;
(ix) the redemption, repurchase, retirement or the acquisition of any
Capital Stock or other Equity Interests of the Company or any Restricted
Subsidiary in exchange for, or out of the proceeds of, the substantially
concurrent sale (other than to a Subsidiary of the Company) of other
Capital Stock or other Equity Interests of the Company or any Restricted
Subsidiary (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 clauses (c)(1) and (c)(2) of the preceding paragraph;
(x) the defeasance, redemption or repurchase of pari passu or
Subordinated Indebtedness with the net cash proceeds from an issuance of
permitted Refinancing Indebtedness or the substantially concurrent sale
(other than to a Subsidiary of the Company) of Capital Stock or other
Equity Interests of the Company or of a Restricted Subsidiary (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 clauses (c)(1) and (c)(2) of
the preceding paragraph;
(xi) payments of fees, expenses and indemnities in respect of the
Company's and its Subsidiaries' directors and such payments to Parent (and
its parent companies) in respect of their directors, provided that the
aggregate amount of such fees payable to all such directors does not exceed
$250,000 in any fiscal year;
(xii) payments to Parent (and its parent companies) in respect of
accounting, legal or other professional or administrative expenses or
reimbursements or franchise or similar taxes and governmental charges
incurred by them relating to the business, operations or finances of the
Company and its Subsidiaries and in respect of fees and related expenses
associated with their registration statements filed with the Commission and
subsequent ongoing public reporting requirements;
(xiii) so long as Parent files consolidated income tax returns which
include the Company, payments to Parent (and its parent companies) pursuant
to the Tax Sharing Agreement;
(xiv) payments in respect of the Junior Seller Note, the MK Installment
Note and the MK Installment Note LC Facility;
(xv) payments in connection with the Imperial Acquisitions, the Offering
and the Refinancing Plan;
(xvi) payments in respect of the Contingent Earnout Agreement;
(xvii) Restricted Investments made or received in connection with the
sale, transfer or disposition of any business, properties or assets of the
Company or any Restricted Subsidiary, provided, that if such sale, transfer
or disposition constitutes an Asset Sale, the Company complies with the
"Asset Sale" provisions of the Indenture;
(xviii) any Restricted Investment constituting securities or instruments
of a person issued in exchange for trade or other claims against such
person in connection with a financial reorganization or restructuring of
such person; and
(xix) any Restricted Investment constituting an equity investment in a
Receivables Subsidiary.
Limitation on Incurrence of Indebtedness. The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, issue any
Indebtedness (other than the Indebtedness represented by the Senior Notes)
unless the Company's Cash Flow Coverage Ratio for its four full fiscal
quarters next preceding the date such additional Indebtedness is issued would
have been at least 2.0 to 1 if such date is on or prior to November 15, 1998,
and 2.25 to 1 thereafter, in each case, determined on a Pro Forma Basis
(including, for this purpose, any other Indebtedness incurred since the end of
the applicable four quarter period) as if such additional
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Indebtedness and any other Indebtedness issued since the end of such four
quarter period had been issued at the beginning of such four-quarter period.
The foregoing limitations do not apply to the issuance of:
(i) Indebtedness of the Company and/or its Restricted Subsidiaries as
measured on such date of issuance in an aggregate principal amount
outstanding on any such date of issuance not exceeding the greater of (a)
$75.0 million aggregate principal amount under the New Credit Agreement,
and (b) an aggregate principal amount up to the sum of: (A) 85% of the book
value of the Receivables of the Company and its Restricted Subsidiaries on
a consolidated basis, and (B) 65% of the book value of the inventories of
the Company and its Restricted Subsidiaries on a consolidated basis;
provided that the aggregate principal amount of Indebtedness outstanding
under this clause (i) together with the aggregate principal amount of
Indebtedness outstanding under clause (iv) below shall not exceed $80.0
million in aggregate principal amount at any one time outstanding;
(ii) Indebtedness of the Company and its Restricted Subsidiaries in
respect of any Receivables Financing;
(iii) Indebtedness of the Company and its Restricted Subsidiaries in
connection with capital leases, sale and leaseback transactions, purchase
money obligations, capital expenditures or similar financing transactions
relating to: (A) their properties, assets and rights as of the date of
original issuance of the Senior Notes up to $5,000,000 in aggregate
principal amount, or (B) their properties, assets and rights acquired after
the date of original issuance of the Senior Notes, provided that the
aggregate principal amount of such Indebtedness under this clause (iii)(B)
does not exceed 100% of the cost of such properties, assets and rights;
(iv) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount up to $25,000,000 (all or any
portion of which may be issued as additional Indebtedness under the New
Credit Agreement); provided that the aggregate principal amount of
Indebtedness outstanding under this clause (iv) together with the aggregate
principal amount of Indebtedness outstanding under clause (i) above shall
not exceed $80.0 million in aggregate principal amount at any one time
outstanding; and
(v) Other Permitted Indebtedness.
Notwithstanding the foregoing, no Restricted Subsidiary shall under any
circumstances issue a guarantee of any Indebtedness of the Company except for
guarantees issued by Restricted Subsidiaries pursuant to the "Limitation on
Guarantees of Company Indebtedness by Restricted Subsidiaries" covenant,
provided, however, that the foregoing will not limit or restrict guarantees
issued by Restricted Subsidiaries in respect of Indebtedness of other
Restricted Subsidiaries.
Limitation on Liens. The Indenture provides that the Company shall not, and
shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume or suffer to exist any Lien (other than
Permitted Liens) upon any property or asset now owned or hereafter acquired by
them, or any income or profits therefrom, or assign or convey any right to
receive income therefrom; provided, however, that in addition to creating
Permitted Liens on its properties or assets, the Company and any of its
Restricted Subsidiaries may create any Lien upon any of their properties or
assets (including, but not limited to, any Capital Stock of its Subsidiaries)
if the Senior Notes are equally and ratably secured.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create
or otherwise cause or suffer to exist or become effective, any encumbrance or
restriction on the ability of any Restricted Subsidiary to: (a) pay dividends
or make any other distributions on its Capital Stock or any other interest or
participation in, or measured by, its profits, owned by the Company or any
Restricted Subsidiary, or pay any Indebtedness owed to, the Company or any
Restricted Subsidiary, (b) make loans or advances to the Company, or (c)
transfer any of its properties or assets to the Company, except for such
encumbrances or restrictions existing under or by reason of:
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(i) applicable law,
(ii) Indebtedness permitted (A) under the first sentence of the first
paragraph of the "Limitation on Incurrence of Indebtedness" covenant, (B)
under clauses (i), (ii) and (iv) of the second paragraph of the "Limitation
on Incurrence of Indebtedness" covenant and clauses (i), (v), (vi), (vii),
(ix), (x), (xi), (xv), (xvi) and (xvii) of the definition of Other
Permitted Indebtedness, or (C) by agreements and transactions permitted
under the "Limitation on Restricted Payments" covenant,
(iii) customary provisions restricting subletting or assignment of any
lease or license of the Company or any Restricted Subsidiary,
(iv) customary provisions of any franchise, distribution or similar
agreement,
(v) any instrument governing Indebtedness or any other encumbrance or
restriction of a person acquired by the Company or any Restricted
Subsidiary at the time 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,
(vi) Indebtedness or other agreements existing on the date of original
issuance of the Senior Notes,
(vii) any Refinancing Indebtedness permitted under the "Limitation on
Incurrence of Indebtedness" covenant and clauses (i), (v), (vi), (vii),
(ix), (x) (xi), (xv), (xvi) and (xvii) of the definition of Other Permitted
Indebtedness; provided that the encumbrances and restrictions created in
connection with such Refinancing Indebtedness are no more restrictive in
any material respect with regard to the interests of the holders of Senior
Notes than the encumbrances and restrictions in the refinanced
Indebtedness,
(viii) any restrictions, with respect to a Restricted Subsidiary, imposed
pursuant to an agreement that has been entered into for the sale or
disposition of the stock, business, assets or properties of such Restricted
Subsidiary,
(ix) the terms of any Indebtedness of the Company incurred in connection
with the "Limitation on Incurrence of Indebtedness" covenant, provided that
the terms of such Indebtedness constitute no greater encumbrance or
restriction on the ability of any Restricted Subsidiary to pay dividends or
make distributions, make loans or advances or transfer properties or assets
than is otherwise permitted by this covenant, and
(x) the terms of purchase money obligations, but only to the extent such
purchase money obligations restrict or prohibit the transfer of the
property so acquired.
Nothing contained in this covenant shall prevent the Company from entering
into any agreement or instrument providing for the incurrence of Permitted
Liens or restricting the sale or other disposition of property or assets of
the Company or any of its Restricted Subsidiaries that are subject to
Permitted Liens.
Limitation on Transactions With Affiliates. The Indenture provides, except
under certain circumstances, that neither the Company nor any of its
Restricted Subsidiaries may make any loan, advance, guarantee or capital
contribution to, or for the benefit of, or sell, lease, transfer or dispose of
any properties or assets to, or for the benefit of, or purchase or lease any
property or assets from, or enter into any or amend any contract, agreement or
understanding with, or for the benefit of, an Affiliate (each such transaction
or series of related transactions that are part of a common plan are referred
to as an "Affiliate Transaction"), except in good faith and on terms that are
no less favorable to the Company or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable transaction on an arm's
length basis from an unrelated person.
The Indenture further provides that the Company will not, and will not
permit any Restricted Subsidiary to, engage in any Affiliate Transaction
involving aggregate payments or other transfers by the Company and its
Restricted Subsidiaries in excess of $5,000,000 (including cash and non-cash
payments and benefits valued at their fair market value by the Board of
Directors of the Company in good faith) unless the Company delivers to the
Trustee:
(i) a resolution of the Board of Directors of the Company stating that
the Board of Directors (including a majority of the disinterested
directors, if any) has, in good faith, determined that such Affiliate
Transaction complies with the provisions of the Indenture, and
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(ii) (A) with respect to any Affiliate Transaction involving the
incurrence of Indebtedness, a written opinion of a nationally recognized
investment banking or accounting firm experienced in the review of similar
types of transactions, (B) with respect to any Affiliate Transaction
involving the transfer of real property, fixed assets or equipment, either
directly or by a transfer of 50% or more of the Capital Stock of a
Restricted Subsidiary which holds any such real property, fixed assets or
equipment, a written appraisal from a nationally recognized appraiser,
experienced in the review of similar types of transactions or (C) with
respect to any Affiliate Transaction not otherwise described in (A) and (B)
above, a written certification from a nationally recognized professional or
firm experienced in evaluating similar types of transactions, in each case,
stating that the terms of such transaction are fair to the Company or such
Restricted Subsidiary, as the case may be, from a financial point of view.
Notwithstanding the foregoing, this Affiliate Transactions covenant will not
apply to:
(i) transactions between the Company and any Restricted Subsidiary or
between Restricted Subsidiaries;
(ii) payments under the TJC Agreement or the JII Services Agreement;
(iii) payments under the Contingent Earnout Agreement;
(iv) any other payments or transactions permitted pursuant to the
"Limitation on Restricted Payments" covenant;
(v) reasonable compensation paid to officers, employees or consultants of
the Company or any Subsidiary as determined in good faith by the Company's
Board of Directors or executives;
(vi) transactions in connection with a Receivables Financing; or
(vii) payments and transactions in connection with the Imperial
Acquisitions, the Old Note Offering and the Refinancing Plan.
Limitation on Guarantees of Company Indebtedness by Restricted
Subsidiaries. The Company will not permit any Restricted Subsidiary, directly
or indirectly, to guarantee any Indebtedness of the Company other than the
Senior Notes (the "Other Company Indebtedness") unless (A) such Restricted
Subsidiary contemporaneously executes and delivers a supplemental indenture to
the Indenture providing for a guarantee of payment of the Senior Notes then
outstanding by such Restricted Subsidiary to the same extent as the guarantee
of payment (the "Other Company Indebtedness Guarantee") of the Other Company
Indebtedness (including waiver of subrogation, if any) and (B) if the Other
Company Indebtedness guaranteed by such Restricted Subsidiary is (1) Senior
Indebtedness, the guarantee for the Senior Notes shall be pari passu in right
of payment with the Other Company Indebtedness Guarantee and (2) Subordinated
Indebtedness, the guarantee for the Senior Notes shall be senior in right of
payment to the Other Company Indebtedness Guarantee; provided that the
foregoing will not limit or restrict guarantees issued by Restricted
Subsidiaries in respect of Indebtedness of other Restricted Subsidiaries.
Each guarantee of the Senior Notes created by a Restricted Subsidiary
pursuant to the provisions described in the foregoing paragraph shall be in
form and substance satisfactory to the Trustee and shall provide, among other
things, that it will be automatically and unconditionally released and
discharged upon (i) any sale, exchange or transfer permitted by the Indenture
of (a) all of the Company's Capital Stock in such Restricted Subsidiary or (b)
the sale of all or substantially all of the assets of the Restricted
Subsidiary and upon the application of the Net Proceeds from such sale in
accordance with the requirements of the "Asset Sales" provisions described
herein or (ii) the release or discharge of the Other Company Indebtedness
Guarantee that resulted in the creation of such guarantee of the Senior Notes,
except a discharge or release by or as a result of direct payment under such
Other Company Indebtedness Guarantee.
Designation of Restricted and Non-Restricted Subsidiaries. The Indenture
provides that, subject to the exceptions described below, from and after the
date of original issuance of the Senior Notes, the Company may designate any
existing or newly formed or acquired Subsidiary as a Non-Restricted
Subsidiary; provided that
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(i) either (A) the Subsidiary to be so designated has total assets of
$1,000,000 or less or (B) immediately before and after giving effect to such
designation on a Pro Forma Basis; (1) the Company could incur $1.00 of
additional Indebtedness pursuant to the first sentence of the "Limitation on
Incurrence of Indebtedness" covenant determined on a Pro Forma Basis; and (2)
no Default or Event of Default shall have occurred and be continuing, and (ii)
all transactions between the Subsidiary to be so designated and its Affiliates
remaining in effect are permitted pursuant to the "Limitation on Transactions
with Affiliates" covenant. Any Investment made by the Company or any
Restricted Subsidiary which is redesignated from a Restricted Subsidiary to a
Non-Restricted Subsidiary shall thereafter be considered as having been a
Restricted Payment (to the extent not previously included as a Restricted
Payment) made on the day such Subsidiary is designated a Non-Restricted
Subsidiary in the amount of the greater of (i) the fair market value (as
determined by the Board of Directors of the Company in good faith) of the
Equity Interests of such Subsidiary held by the Company and its Restricted
Subsidiaries on such date, and (ii) the amount of the Investments determined
in accordance with GAAP made by the Company and any of its Restricted
Subsidiaries in such Subsidiary.
A Non-Restricted Subsidiary may be redesignated as a Restricted Subsidiary.
The Company may not, and may not permit any Restricted Subsidiary to, take any
action or enter into any transaction or series of transactions that would
result in a Person becoming a Restricted Subsidiary (whether through an
acquisition, the redesignation of a Non-Restricted Subsidiary or otherwise,
but not including through the creation of a new Restricted Subsidiary) unless,
immediately before and after giving effect to such action, transaction or
series of transactions on a Pro Forma Basis, (a) the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first sentence of
"Limitation on Incurrence of Indebtedness" and (b) no Default or Event of
Default shall have occurred and be continuing.
The designation of a Subsidiary as a Restricted Subsidiary or the removal of
such designation is required to be made by a resolution adopted by a majority
of the Board of Directors of the Company stating that the Board of Directors
has made such designation in accordance with the Indenture, and the Company is
required to deliver to the Trustee such resolution together with an Officers'
Certificate certifying that the designation complies with the Indenture. Such
designation will be effective as of the date specified in the applicable
resolution, which may not be before the date the applicable Officers'
Certificate is delivered to the Trustee.
MERGER OR CONSOLIDATION
The Indenture provides that the Company shall not consolidate or merge with
or into, or sell, lease, convey or otherwise dispose of all or substantially
all of its assets to, any person (any such consolidation, merger or sale being
a "Disposition") unless: (a) the successor corporation of such Disposition or
the corporation to which such 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; (b) the successor corporation of
such Disposition or the corporation to which such Disposition shall have been
made expressly assumes the Obligations of the Company, pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee, under
the Indenture and the Senior Notes; (c) immediately after such Disposition, no
Default or Event of Default shall exist; and (d) the corporation formed by or
surviving any such Disposition, or the corporation to which such Disposition
shall have been made, shall (i) have Consolidated Net Worth (immediately after
the Disposition but prior to giving any pro forma effect to purchase
accounting adjustments or Restructuring Charges resulting from the
Disposition) equal to or greater than the Consolidated Net Worth of the
Company immediately preceding the Disposition, (ii) be permitted immediately
after the Disposition by the terms of the Indenture to issue at least $1.00 of
additional Indebtedness determined on a Pro Form Basis, and (iii) have a Cash
Flow Coverage Ratio, for the four fiscal quarters immediately preceding the
applicable Disposition, and determined on a Pro Forma Basis, equal to or
greater than the actual Cash Flow Coverage Ratio of the Company for such four
quarter period. The limitations in the Indenture on the Company's ability to
make a Disposition described in this paragraph do not restrict the Company's
ability to sell less than all or substantially all of its assets, such sales
being governed by the "Asset Sales" provisions of the Indenture as described
herein.
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Prior to the consummation of any proposed Disposition, the Company shall
deliver to the Trustee an officers' certificate to the foregoing effect and an
opinion of counsel stating that the proposed Disposition and such supplemental
indenture comply with the Indenture.
PROVISION OF FINANCIAL INFORMATION TO HOLDERS OF SENIOR NOTES
So long as the Senior Notes are outstanding, whether or not the Company is
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall submit for filing with the Commission the annual
reports, quarterly reports and other documents that the Company would have
been required to file with the Commission pursuant to Section 13 or 15(d) if
the Company were subject to such reporting requirements. The Company will also
provide to all holders of Senior Notes and file with the Trustee copies of
such annual reports, quarterly reports and other documents required to be
furnished to stockholders generally under the Exchange Act. In addition, the
Company has agreed that, for so long as any Senior Notes remain outstanding,
it will furnish to the holders and prospective investors, upon their request,
the information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that an Event of Default is: (a) a default for 30
days in payment of interest on, or Liquidated Damages, if any, with respect
to, the Senior Notes; (b) a default in payment when due of principal or
premium, if any, with respect to the Senior Notes; (c) the failure of the
Company to comply with any of its other agreements or covenants in, or
provisions of, such Indenture or the Senior Notes outstanding under such
Indenture and the Default continues for the period, if applicable, and after
the notice specified in the next paragraph; (d) a default by the Company or
any Restricted Subsidiary 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 Restricted Subsidiary
(or the payment of which is guaranteed by the Company or any Restricted
Subsidiary), whether such Indebtedness or guarantee now exists or shall be
created hereafter, if (1) either (A) such default results from the failure to
pay principal of or interest on any such Indebtedness at or after the final
maturity thereof (after giving effect to any extensions thereof) and such
default continues for 30 days beyond any applicable grace period, or (B) as a
result of such default the maturity of such Indebtedness has been accelerated
prior to its expressed maturity, and (2) the principal amount of such
Indebtedness, together with the principal amount of any other such
Indebtedness in default for failure to pay principal or interest thereon at
final maturity, or, because of the acceleration of the maturity thereof,
aggregates in excess of $10,000,000; (e) a failure by the Company or any
Restricted Subsidiary to pay final judgments (not covered by insurance)
aggregating in excess of $10,000,000 which judgments a court of competent
jurisdiction does not rescind, annul or stay within 45 days after their entry
and the Default or an Event of Default continues for the period and after the
notice specified in the next paragraph; and (f) certain events of bankruptcy
or insolvency involving the Company or any Significant Subsidiary. In the case
of any Event of Default pursuant to clause (a) or (b) above occurring by
reason of any willful action (or inactions) taken (or not taken) by or on
behalf of the Company with the intention of avoiding payment of the premium
that the Company would have to pay pursuant to a redemption of Senior Notes as
described under "--Redemption of Senior Notes--Optional Redemption," an
equivalent premium shall also become and be immediately, due and payable to
the extent permitted by law.
A Default or Event of Default under clause (c) (other than an Event of
Default arising under the "Merger or Consolidation" covenant which shall be an
Event of Default with the notice but without the passage of time specified in
this paragraph) or clause (e) is not an Event of Default under the Indenture
until the Trustee or the holders of at least 25% in principal amount of the
Senior Notes then outstanding notify the Company of the Default and the
Company does not cure the Default within 30 days after receipt of the notice.
A Default or Event of Default under clause (f) of the preceding paragraph will
result in the Senior Notes automatically becoming due and payable without
further action or notice.
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Upon the occurrence of an Event of Default, the Trustee or the holders of at
least 25% in principal amount of the then outstanding Senior Notes may declare
all Senior Notes to be due and payable by notice in writing to the Company and
the Trustee specifying the respective Event of Default and that it is a
"notice of acceleration" (the "Acceleration Notice") and the same (i) shall
become immediately due and payable or (ii) if there are any amounts
outstanding under the New Credit Agreement, shall become immediately due and
payable upon the first to occur of an acceleration under the New Credit
Agreement or five business days after receipt by the Company and the
Representative under the New Credit Agreement of such Acceleration Notice but
only if such Event of Default is then continuing. The holders of a majority in
principal amount of the Senior Notes then outstanding under the Indenture, by
notice to the Trustee, may rescind any declaration of acceleration of such
Senior Notes and its consequences (if the rescission would not conflict with
any judgment or decree) if all existing Events of Default (other than the
nonpayment of principal of or interest on such Senior Notes that shall have
become due by such declaration) shall have been cured or waived. Subject to
certain limitations, holders of a majority in principal amount of the Senior
Notes then outstanding under the Indenture may direct the Trustee in its
exercise of any trust or power. Holders of the Senior Notes may not enforce
the Indenture, except as provided therein. The Trustee may withhold from
holders of Senior Notes notice of any continuing Default or Event of Default
(except a Default or an Event of Default in payment of principal, premium, if
any, or interest) if the Trustee determines that withholding notice is in
their interest.
The holders of a majority in aggregate principal amount of the Senior Notes
then outstanding may on behalf of all holders of such Senior Notes waive any
existing Default or Event of Default under the Indenture and its consequences,
except a continuing Default in the payment of the principal of, or premium, if
any, or interest on, such Senior Notes, which may only be waived with the
consent of each holder of the Senior Notes affected.
Upon any payment or distribution of assets of the Company and its
subsidiaries in a total or partial liquidation, dissolution, reorganization or
similar proceeding, including a Default under clause (f) above involving
certain events of bankruptcy or insolvency of the Company or a Significant
Subsidiary, there may not be sufficient assets remaining to satisfy the claims
of any Holders of Senior Notes given the effective structural subordination of
the Senior Notes to the obligations of the Company under the New Credit
Agreement.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and upon an officer of the Company
becoming aware of any Default or Event of Default, a statement specifying such
Default or Event of Default.
NO PERSONAL LIABILITY OF OFFICERS, DIRECTORS, EMPLOYEES, STOCKHOLDERS AND
SUBSIDIARIES
No officer, employee, director, stockholder or Subsidiary of the Company
shall have any liability for any Obligations of the Company under the Senior
Notes or the Indenture, or for any claim based on, in respect of, or by reason
of, such Obligations or the creation of any such Obligation, except, in the
case of a Subsidiary, for an express guarantee or an express creation of any
Lien by such Subsidiary of the Company's Obligations under the Senior Notes
issued in accordance with the Indenture. Each holder of the Senior Notes by
accepting a Senior Note waives and releases all such liability, and such
waiver and release is part of the consideration for issuance of the Senior
Notes. The foregoing waiver may not be effective to waive liabilities under
the Federal securities laws and the Securities and Exchange Commission is of
the view that such a waiver is against public policy.
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Company at any time may terminate all its obligations under the Senior
Notes and the Indenture ("legal defeasance option"), except for certain
obligations (including those with respect to the defeasance trust (as defined
herein) and obligations to register the transfer or exchange of the Senior
Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a
registrar and paying agent in respect of the Senior Notes). The Company at any
time may terminate (1) its obligations under the "Change of Control" and
"Asset Sales" provisions described herein and the covenants described under
"Certain Covenants" and certain other covenants in the Indenture, (2) the
operation of clauses (c), (d), (e), and (f) contained in the first paragraph
of the "Events
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of Default and Remedies" provisions described herein and (3) the limitations
contained in clauses (c) and (d) under the "Merger or Consolidation"
provisions described herein (collectively, a "covenant defeasance option").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Senior Notes may not be accelerated
because of an Event of Default with respect thereto. If the Company exercises
its covenant defeasance option, payment of the Senior Notes shall not be
accelerated because of an Event of Default specified in clauses (c), (d), (e)
or (f) in the first paragraph under the "Events of Default and Remedies"
provisions described herein or because of the Company's failure to comply with
clauses (c) and (d) under the "Merger or Consolidation" provisions described
herein.
To exercise either defeasance option with respect to the Senior Notes
outstanding, the Company must irrevocably deposit in trust (the "defeasance
trust") with the Trustee money or U.S. Government Obligations (as defined in
the Indenture) for the payment of principal of, premium, if any, and unpaid
interest on, and Liquidated Damages, if any, with respect to the Senior Notes
then outstanding to redemption or maturity, as the case may be, and must
comply with certain other conditions, including the passage of 91 days and the
delivery to the Trustee an opinion of counsel to the effect that holders of
such Senior Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit and defeasance and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been in the case if such deposit and defeasance has not
occurred (and, in the case of legal defeasance only, such opinion of counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable federal income tax law).
TRANSFER AND EXCHANGE
Holders of Senior Notes may transfer or exchange their Senior Notes in
accordance with the Indenture, but the Registrar may require a holder, among
other things, to furnish appropriate endorsements and transfer documents, and
to pay any taxes and fees required by law or permitted by the Indenture, in
connection with any such transfer or exchange. Neither the Company nor the
Registrar is required to issue, register the transfer of, or exchange (i) any
Senior Note selected for redemption or tendered pursuant to an Offer, or (ii)
any Senior Note during the period between (a) the date the Trustee receives
notice of a redemption from the Company and the date the Senior Notes to be
redeemed are selected by the Trustee or (b) a record date and the next
succeeding interest payment date. The registered holder of a Senior Note will
be treated as its owner for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture may be amended or supplemented
with the consent of the holders of at least a majority in principal amount of
the Senior Notes then outstanding under such Indenture, and any existing
Default or Event of Default (other than a payment default) or compliance with
any provision may be waived with the consent of the holders of a majority in
principal amount of the Senior Notes then outstanding under the Indenture.
Without the consent of any holder of Senior Notes, the Company and the Trustee
may amend or supplement the Indenture or the Senior Notes to cure any
ambiguity, defect or inconsistency, to provide for uncertificated Senior Notes
in addition to or in place of certificated Senior Notes, to provide for the
assumption by a successor corporation of the Company's obligations to the
holders of Senior Notes in the case of a Disposition, to comply with the Trust
Indenture Act, or to make any change that does not materially adversely affect
the legal rights of any holder of Senior Notes.
Without the consent of each holder of Senior Notes affected, the Company may
not (i) reduce the principal amount of Senior Notes whose holders must consent
to an amendment to the Indenture or a waiver under the Indenture; (ii) reduce
the rate of or change the interest payment time of the Senior Notes, or alter
the redemption provisions with respect thereto (other than the provisions
relating to the covenants described above under the caption "--Mandatory
Offers to Purchase Senior Notes--Change of Control" and "--Asset Sales") or
the price
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at which the Company is required to offer to purchase the Senior Notes; (iii)
reduce the principal of or change the fixed maturity of the Senior Notes; (iv)
make the Senior Notes payable in money other than stated in the Senior Notes;
(v) make any change in the provisions concerning waiver of Defaults or Events
of Default by holders of the Senior Notes, or rights of holders of the Senior
Notes to receive payment of principal or interest; or (vi) waive any default
in the payment of principal of, premium, if any, or unpaid interest on, and
Liquidated Damages, if any, with respect to the Senior Notes.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee, if
it becomes a creditor of the Company, to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise. The Trustee is permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined in
the Trust Indenture Act) it must eliminate such conflict or resign.
The holders of a majority in principal amount of the Senior Notes then
outstanding 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 if an Event of
Default occurs (and has not been cured), the Trustee will be required, in the
exercise of its power, to use the degree of care and skill of a prudent person
in similar circumstances in the conduct of its own affairs. Subject to the
provisions of the Indenture, the Trustee will be under no obligation to
exercise any of its rights or powers under its Indenture at the request of any
of the holders of the Senior Notes, unless such holders shall have offered to
the Trustee security and indemnity satisfactory to it.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the New Notes to be exchanged as
set forth herein will initially be issued in the form of one Global New Note
(the "Global New Note"). The Global New Note will be deposited on the
Expiration Date with, or on behalf of, the Depositary and registered in the
name of Cede & Co., as nominee of the Depositary (such nominee being referred
to herein as the "Global New Note Holder").
New Notes that are issued as described below under "--Certificated New
Notes" will be issued in the form of registered definitive certificates (the
"Certificated New Notes"). Such Certificated New Notes may, unless the Global
New Note has previously been exchanged for Certificated New Notes, be
exchanged for an interest in the Global New Note representing the principal
amount of New Notes being transferred.
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 (including the Initial Purchasers), 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.
So long as the Global New Note Holder is the registered owner of any New
Notes, the Global New Note Holder will be considered the sole holder under the
Indenture of any New Notes evidenced by the Global New Note. Beneficial owners
of New Notes evidenced by the Global New 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 liability for any aspect of the records of the Depositary or
for maintaining, supervising or reviewing any records of the Depositary
relating to the New Notes.
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Payments in respect of the principal of, premium, if any, and interest on
New Notes registered in the name of the Global New Note Holder on the
applicable record date will be payable by the Trustee to or at the direction
of the Global New 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 New Notes, including the Global New 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 New 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 New 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 NEW NOTES
Subject to certain conditions, any person having a beneficial interest in
the Global New Note may, upon request to the Trustee, exchange such beneficial
interest for New Notes in the form of Certificated New Notes. Upon any such
issuance, the Trustee is required to register such Certificated New Notes in
the name of, and cause the same to be delivered to, such person or persons (or
the nominee of any thereof). In addition, if (i) 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 or (ii) the Company, at its option, notifies the Trustee in writing
that it elects to cause the issuance of New Notes in the form of Certificated
New Notes under the Indenture, then, upon surrender by the Global New Note
Holder of its Global New Note, New Notes in such form will be issued to each
person that the Global New Note Holder and the Depositary identify as being
the beneficial owner of the related New Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global New Note Holder or the Depositary in identifying the beneficial owners
of New Notes and the Company and the Trustee may conclusively rely on, and
will protected in relying on, instructions from the Global New Note Holder or
the Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the New Notes represented
by the Global New Note (including principal, premium, if any, and interest) be
made by wire transfer of immediately available funds to the accounts specified
by the Global New Note Holder. With respect to Certificated New Notes, the
Company will make all payments of principal, premium, if any, and interest 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 clearinghouse or
next-day funds. In contrast, New Notes represented by the Global New Note are
expected to be eligible to trade in the PORTAL market and to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such New Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in the Certificated New Notes will also be settled in
immediately available funds.
CERTAIN DEFINITIONS
Set forth below are certain of the defined terms used in the Indenture.
Reference is made to the Indenture for the definition of all other terms used
in the Indenture.
"Affiliate" means any of the following: (i) any person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the Company, (ii) any spouse, immediate family member or other
relative who has the same principal residence as any person described in
clause (i) above, (iii) any trust in which
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any such persons described in clause (i) or (ii) above has a beneficial
interest, and (iv) any corporation or other organization of which any such
persons described above collectively own 50% or more of the equity of such
entity.
"Asset Sale" means the sale, lease, conveyance or other disposition by the
Company or a Restricted Subsidiary of assets or property whether owned on the
date of original issuance of the Senior Notes or thereafter acquired, in a
single transaction or in a series of related transactions, that are outside of
the ordinary course of business of the Company or such Restricted Subsidiary;
provided that Asset Sales will not include such sales, leases, conveyances or
dispositions in connection with (i) the sale or disposition of any Restricted
Investment, (ii) any Equity Offering by (a) the Company or (b) any Restricted
Subsidiary if the proceeds therefrom are used to make mandatory prepayments of
Indebtedness under the New Credit Agreement or Indebtedness of the Restricted
Subsidiaries or redeem Senior Notes as described above in "Optional
Redemption," (iii) the sale or lease of equipment, inventory, accounts
receivable or other assets in the ordinary course of business, (iv)
Receivables Financings, (v) the surrender or waiver of contract rights or the
settlement, release or surrender of contract, tort or other claims of any
kind, (vi) the grant of any license of patents, trademarks, registration
therefor and other similar intellectual property, (vii) a transfer of assets
by the Company or a Restricted Subsidiary to any of the Company, a Restricted
Subsidiary or a Non-Restricted Subsidiary, (viii) the designation of a
Restricted Subsidiary as a Non-Restricted Subsidiary pursuant to the
"Designation of Restricted and Non-Restricted Subsidiaries" covenant, (ix) the
sale, lease, conveyance or other disposition of all or substantially all of
the assets of the Company as permitted under "Merger or Consolidation," (x)
the sale or disposition of obsolete equipment or other obsolete assets, or
(xi) Restricted Payments permitted by the "Limitations on Restricted Payments"
covenant.
"Board of Directors" means the Company's board of directors or any
authorized committee of such board of directors.
"Capital Stock" means any and all shares, interests, participations or other
equivalents (however designated) of corporate stock, including any preferred
stock.
"Cash Flow" means, for any given period and person, the sum of, without
duplication, Consolidated Net Income, plus (a) the portion of Net Income
attributable to the minority interests in its Subsidiaries, to the extent not
included in calculating Consolidated Net Income, plus (b) any provision for
taxes based on income or profits to the extent such income or profits were
included in computing Consolidated Net Income, plus (c) Consolidated Interest
Expense, to the extent deducted in computing Consolidated Net Income, plus (d)
the amortization of all intangible assets, to the extent such amortization was
deducted in computing Consolidated Net Income (including, but not limited to,
inventory write-ups, goodwill, debt and financing costs, and Incentive
Arrangements), plus (e) any non-capitalized transaction costs incurred in
connection with financings, acquisitions or divestitures (including, but not
limited to, financing and refinancing fees, including those in connection with
the Offering and the Refinancing Plan, in each case, to the extent deducted in
computing Consolidated Net Income), plus (f) all depreciation and all other
non-cash charges (including, without limitation, those charges relating to
purchase accounting adjustments and LIFO adjustments), to the extent deducted
in computing Consolidated Net Income, plus (g) any interest income, to the
extent such income was not included in computing Consolidated Net Income, plus
(h) all dividend payments on preferred stock (whether or not paid in cash) to
the extent deducted in computing Consolidated Net Income, plus (i) any
extraordinary or non-recurring charge or expense arising out of the
implementation of SFAS 106 or SFAS 109 to the extent deducted in computing
Consolidated Net Income, plus (j) to the extent not covered in clause (e)
above, fees paid or payable in respect of the TJC Agreement to the extent
deducted in computing Consolidated Net Income, plus (k) the net loss of any
person, other than those of a Restricted Subsidiary, to the extent deducted in
computing Consolidated Net Income, plus (l) net losses in respect of any
discontinued operations as determined in accordance with GAAP, to the extent
deducted in computing Consolidated Net Income; provided, however, that if any
such calculation includes any period during which an acquisition or sale of a
person or the incurrence or repayment of Indebtedness occurred, then such
calculation for such period shall be made on a Pro Forma Basis.
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"Cash Flow Coverage Ratio" means, for any given period and person, the ratio
of: (i) Cash Flow, divided by (ii) the sum of Consolidated Interest Expense
and the amount of all dividend payments on any series of preferred stock of
such person (except dividends paid or payable in additional shares of Capital
Stock (other than Disqualified Stock)), in each case, without duplication;
provided, however, that if any such calculation includes any period during
which an acquisition or sale of a person or the incurrence or repayment of
Indebtedness occurred, then such calculation for such period shall be made on
a Pro Forma Basis.
"Change of Control" means the occurrence of each of the following: (i) any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act), excluding the Jordan Stockholders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of
all securities that such person has the right to acquire, whether such right
is exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total Voting Stock of the Company; and
(ii) the Company consolidates with, or merges with or into, another person or
sells, assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any person, or any person consolidates
with, or merges with or into, the Company, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Company is converted
into or exchanged for cash, securities or other property, other than any such
transaction where (A) the outstanding Voting Stock of the Company is converted
into or exchanged for (1) Voting Stock (other than Redeemable Capital Stock)
of the surviving or transferee corporation or (2) cash, securities and other
property in an amount which could be paid by the Company as a Restricted
Payment under the Indenture and (B) immediately after such transaction no
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act), excluding the Jordan Stockholders, is the "beneficial owner"
(as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a
person shall be deemed to have "beneficial ownership" of all securities that
such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
more than 50% of the total Voting Stock of the surviving or transferee
corporation; and (iii) during any consecutive two-year period, individuals who
at the beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election by such Board of
Directors or whose nomination for election by the stockholders of the Company
was approved by a vote of a majority of the directors then still in office who
are entitled to vote to elect such new director and were either directors at
the beginning of such period or persons whose election as directors or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in office.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the Company's assets. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of Senior Notes to require the Company to repurchase such Senior Notes
as a result of a sale, lease, transfer, conveyance or other disposition of
less than all of the assets of the Company and its subsidiaries to another
person may be uncertain. Furthermore, an acquisition of the Company by the
Jordan Stockholders including pursuant to a spin-off to the Jordan
Stockholders by Jordan Industries, Inc., directly or indirectly of its
investment in the Company, would not constitute a Change of Control.
"Commission" means the Securities and Exchange Commission.
"Consolidated Interest Expense" means, for any given period and person, the
aggregate of the interest expense in respect of all Indebtedness of such
person and its Subsidiaries for such period, on a consolidated basis,
determined in accordance with GAAP (including amortization of original issue
discount on any such Indebtedness, all non-cash interest payments, the
interest portion of any deferred payment obligation and the interest component
of capital lease obligations, but excluding amortization of deferred financing
fees if such amortization would otherwise be included in interest expense);
provided, however, that for the purpose of the Cash Flow Coverage Ratio,
Consolidated Interest Expense shall be calculated on a Pro Forma Basis;
provided further that any premiums, fees and expenses (including the
amortization thereof) payable in connection with the Old Note Offering and the
Refinancing Plan and the application of the net proceeds therefrom or any
other refinancing of Indebtedness will be excluded.
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"Consolidated Net Income" means, for any given period and person, 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,
however, that: (i) 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, and (ii) Consolidated Net Income of any person will not
include, without duplication, any deduction for: (A) any increased
amortization or depreciation resulting from the write-up of assets pursuant to
Accounting Principles Board Opinion Nos. 16 and 17, as amended or supplemented
from time to time, (B) the amortization of all intangible assets (including
amortization attributable to inventory write-ups, goodwill, debt and financing
costs, and Incentive Arrangements), (C) any non-capitalized transaction costs
incurred in connection with financings, acquisitions or divestitures
(including, but not limited to, financing and refinancing fees), (D) any
extraordinary or nonrecurring charges relating to any premium or penalty paid,
write-off or deferred financing costs or other financial recapitalization
charges in connection with redeeming or retiring any Indebtedness prior to its
stated maturity, and (E) any Restructuring Charges; provided, however, that
for purposes of determining the Cash Flow Coverage Ratio, Consolidated Net
Income shall be calculated on a Pro Forma Basis.
"Consolidated Net Worth" with respect to any person means, as of any date,
the consolidated equity of the common stockholders of such person (excluding
the cumulated foreign currency translation adjustment), all determined on a
consolidated basis in accordance with GAAP, but without any reduction in
respect of the payment of dividends on any series of such person's preferred
stock if such dividends are paid in additional shares of Capital Stock (other
than Disqualified Stock); provided, however, that Consolidated Net Worth shall
also include, without duplication: (a) the amortization of all write-ups of
inventory, (b) the amortization of all intangible assets (including
amortization of goodwill, debt and financing costs, and Incentive
Arrangements), (c) any non-capitalized transaction costs incurred in
connection with financings, acquisitions or divestitures (including, but not
limited to, financing and refinancing fees), (d) any increased amortization or
depreciation resulting from the write-up of assets pursuant to Accounting
Principles Board Opinion Nos. 16 and 17, as amended and supplemented from time
to time, (e) any extraordinary or nonrecurring charges or expenses relating to
any premium or penalty paid, write-off or deferred financing costs or other
financial recapitalization charges incurred in connection with redeeming or
retiring any Indebtedness prior to its stated maturity, (f) any Restructuring
Charges, and (g) any extraordinary or non-recurring charge arising out of the
implementation of SFAS 106 or SFAS 109; provided, however, that Consolidated
Net Worth shall be calculated on a Pro Forma Basis.
"Contingent Earnout Agreement" means the Contingent Earnout Agreement, among
the Company and certain of its Restricted Subsidiaries and Jordan Industries,
Inc. and certain of its Restricted Subsidiaries, as in effect on the date of
issuance of the Old Notes.
"Credit Agreement" means the Credit Agreement, dated September 22, 1995,
among Merkle-Korff Industries, Inc., its Subsidiaries and Bankers Trust
Company, and all loan documents and instruments thereunder, as amended and
restated in connection with the Offering, and as further amended, modified,
extended, restated, replaced, or supplemented, from time to time.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that by its terms (or by the
terms of any security into which it is convertible--or for which it is
exchangeable), or upon the happening of any event, 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 maturity date of the Senior Notes.
"Equity Interests" means Capital Stock or partnership interests or warrants,
options or other rights to acquire Capital Stock or partnership interests (but
excluding (i) any debt security that is convertible into, or exchangeable for,
Capital Stock or partnership interests, and (ii) any other Indebtedness or
Obligation) provided, however, that Equity Interests will not include any
Incentive Arrangements or obligations or payments thereunder.
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"Equity Offering" means a public or private offering by the Company and/or
its Subsidiaries for cash of Capital Stock or other Equity Interests and all
warrants, options or other rights to acquire Capital Stock, other than (i) an
offering of Disqualified Stock or (ii) Incentive Arrangements or obligations
or payments thereunder.
"GAAP" means generally accepted accounting principles, consistently applied,
as of the date of original issuance of the Senior Notes. All financial and
accounting determinations and calculations under the Indenture will be made in
accordance with GAAP.
"Hedging Obligations" means, with respect to any person, the Obligations of
such persons under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, (ii) foreign exchange
contracts, currency swap agreements or similar agreements, and (iii) other
agreements or arrangements designed to protect such person against
fluctuations, or otherwise to establish financial hedges in respect of,
exchange rates, currency rates or interest rates.
"Imperial Acquisitions" means the acquisition by the Company and certain of
its Restricted Subsidiaries of the business and net assets of Imperial
Electric Company, Scott Motor Company and Gear Research Company.
"Incentive Arrangements" means any earn-out agreements, stock appreciation
rights, "phantom" stock plans, employment agreements, non-competition
agreements, subscription and stockholders agreements and other incentive and
bonus plans and similar arrangements made in connection with acquisitions of
persons or businesses by the Company or the Restricted Subsidiaries or the
retention of executives, officers or employees by the Company or the
Restricted Subsidiaries.
"Indebtedness" means, with respect to any person, any indebtedness, 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 representing the deferred and unpaid balance
of the purchase price of any property (including pursuant to capital leases),
except any such balance that constitutes an accrued expense or a trade
payable, and any Hedging Obligations, if and to the extent such indebtedness
(other than a Hedging Obligation) would appear as a liability upon a balance
sheet of such person prepared on a consolidated basis in accordance with GAAP,
and also includes, to the extent not otherwise included, the guarantee of
items that would be included within this definition; provided, however, that
"Indebtedness" will not include any Incentive Arrangements or obligations or
payments thereunder.
"Insolvency or Liquidation Proceeding" means (i) any insolvency or
bankruptcy or similar case or proceeding, or any reorganization, receivership,
liquidation' dissolution or winding up of the Company, whether voluntary or
involuntary, or (ii) any assignment for the benefit of creditors or any other
marshalling of assets and liabilities of the Company.
"Investment" means any capital contribution to, or other debt or equity
investment in, any Person.
"Issue" means create, issue, assume, guarantee, incur or otherwise become
directly or indirectly liable for any Indebtedness or Capital Stock, as
applicable; provided, however, that any Indebtedness or Capital Stock of a
person existing at the time such person becomes a Restricted Subsidiary
(whether by merger, consolidation, acquisition or otherwise) shall be deemed
to be issued by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary. For this definition, the terms "issuing," "issuer," "issuance" and
"issued" have meanings correlative to the foregoing.
"JII Services Agreement" means the Management and Administration Services
Agreement, dated November 7, 1996, between the Company and Jordan Industries,
Inc., as in effect on the date of issuance of the Old Notes.
"Jordan Stockholders" means Jordan Industries, Inc., The Jordan Company and
Jordan/Zalaznick Capital Corporation and their respective affiliates,
principals, partners and employees, family members of any of the foregoing and
trusts for the benefit of any of the foregoing, including, without limitation,
MCIT PLC and Leucadia National Corporation and their respective Subsidiaries.
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"Junior Seller Note" means the subordinated promissory note, dated September
22, 1995, issued by Merkle-Korff Industries, Inc., in the principal amount of
$5.0 million, and maturing on December 31, 2003, as in effect on the date of
the issuance of the Old Notes.
"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 and any filing of or
agreement to give any financing statement under the Uniform Commercial Code
(or equivalent statutes) of any jurisdiction).
"MK Installment Note" means the promissory note, dated September 22, 1995,
issued by Merkle-Korff Industries, Inc., in the principal amount of $90.0
million, and paid on December 26, 1996, as in effect on the date of the
issuance of the Old Notes.
"MK Installment Note LC Facility" means the Letter of Credit Agreement,
dated September 22, 1995, among the Company, Merkle-Korff Industries, Inc.,
and Bankers Trust Company, including the cash collateral agreement and letter
of credit thereunder, and all loan documents and instruments thereunder,
pursuant to which Bankers Trust Company had issued and had outstanding a
standby letter of credit in the face amount of $90.0 million, as in effect on
the date of the issuance of the Old Notes.
"Net Income" means, with respect to any person, the net income (loss) of
such person, determined in accordance with GAAP, excluding, however, any gain
or loss, together with any related provision for taxes, realized in connection
with any Asset Sale (including, without limitation, dispositions pursuant to
sale and leaseback transactions).
"Net Proceeds" means, with respect to any Asset Sale, the aggregate amount
of cash proceeds (including any cash received by way of deferred payment
pursuant to a note receivable issued in connection with such Asset Sale, other
than the portion of such deferred payment constituting interest, and including
any amounts received as disbursements or withdrawals from any escrow or
similar account established in connection with any such Asset Sale, but, in
either such case, only as and when so received) received by the Company or any
of its Restricted Subsidiaries in respect of such Asset Sale, net of: (i) the
cash expenses of such Asset Sale (including, without limitation, the payment
of principal of, and premium, if any, and interest on, Indebtedness required
to be paid as a result of such Asset Sale (other than the Senior Notes) and
legal, accounting, management and advisory and investment banking fees and
sales commissions), (ii) taxes paid or payable as a result thereof, (iii) any
portion of cash proceeds that the Company determines in good faith should be
reserved for post-closing adjustments, it being understood and agreed that on
the day that all such post-closing adjustments have been determined, the
amount (if any) by which the reserved amount in respect of such Asset Sale
exceeds the actual post-closing adjustments payable by the Company or any of
its Restricted Subsidiaries shall constitute Net Proceeds on such date, (iv)
any relocation expenses and pension, severance and shutdown costs incurred as
a result thereof, and (v) any deduction or appropriate amounts to be provided
by the Company or any of its Restricted Subsidiaries as a reserve in
accordance with GAAP against any liabilities associated with the asset
disposed of in such transaction and retained by the Company or such Restricted
Subsidiary after such sale or other disposition thereof, including, without
limitation, pension and other post-employment benefit liabilities and
liabilities related to environmental matters or against any indemnification
obligations associated with such transaction.
"New Credit Agreement" means the credit agreement, dated November 7, 1996,
among M&G Industries, Inc., certain of its subsidiaries and the lenders party
thereto in their capacities as lenders thereunder and Bankers Trust Company,
as agent, together with all loan documents and instruments thereunder
(including, without limitation, any guarantee agreements and security
documents), in each case as such agreements may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from
time to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including, without limitation,
increasing the amount of available borrowings thereunder, and all Obligations
with respect
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thereto, in each case, to the extent permitted by the "Limitation on
Incurrence of Indebtedness" covenant, or adding Subsidiaries of the Company as
additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement
and whether by the same or any other agent, lender or group of lenders.
"Non-Restricted Subsidiary" means any Subsidiary of the Company other than a
Restricted Subsidiary.
"Obligations" means, with respect to any Indebtedness, all principal,
interest, premiums, penalties, fees, indemnities, expenses (including legal
fees and expenses), reimbursement obligations and other liabilities payable to
the holder of such Indebtedness under the documentation governing such
Indebtedness, and any other claims of such holder arising in respect of such
Indebtedness.
"Other Permitted Indebtedness" means:
(i) Indebtedness of the Company and its Restricted Subsidiaries existing
as of the date of issuance of the Old Notes;
(ii) Indebtedness of the Company and its Restricted Subsidiaries in
respect of bankers acceptances and letters of credit (including, without
limitation, letters of credit in respect of workers' compensation claims)
issued in the ordinary course of business, or other Indebtedness in respect
of respect to reimbursement-type obligations regarding workers'
compensation claims;
(iii) Refinancing Indebtedness, provided that: (A) the principal amount
of such Refinancing Indebtedness shall not exceed the outstanding principal
amount of Indebtedness (including unused commitments) extended, refinanced,
renewed, replaced, substituted or refunded plus any amounts incurred to pay
premiums, fees and expenses in connection therewith, (B) the Refinancing
Indebtedness shall have 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, substituted or refunded;
provided, however, that this limitation in this clause (B) does not apply
to Refinancing Indebtedness of Senior Indebtedness, and (C) in the case of
Refinancing Indebtedness of Subordinated Indebtedness, such Refinancing
Indebtedness shall be subordinated to the Senior Notes at least to the same
extent as the Subordinated Indebtedness being extended, refinanced,
renewed, replaced, substituted or refunded;
(iv) intercompany Indebtedness of and among the Company and its
Restricted Subsidiaries (excluding guarantees by Restricted Subsidiaries of
Indebtedness of the Company not issued in compliance with "Limitation on
Guarantees of Company Indebtedness by Restricted Subsidiaries" covenant);
(v) Indebtedness of the Company and its Restricted Subsidiaries incurred
in connection with making permitted Restricted Payments under clauses
(iii), (iv) but only to the extent that such Indebtedness is provided by
the Company or a Restricted Subsidiary, or (x) of the second sentence of
the "Limitation on Restricted Payments" covenant;
(vi) Indebtedness of any Non-Restricted Subsidiary created after the date
of original issuance of the Senior Notes, provided that such Indebtedness
is nonrecourse to the Company and its Restricted Subsidiaries and the
Company and its Restricted Subsidiaries have no Obligations with respect to
such Indebtedness;
(vii) Indebtedness of the Company and its Restricted Subsidiaries under
Hedging Obligations;
(viii) Indebtedness of the Company and its Restricted Subsidiaries
arising from the honoring by a bank or other financial institution of a
check, draft or similar instrument inadvertently (except in the case of
daylight overdrafts, which will not be, and will not be deemed to be,
inadvertent) drawn against insufficient funds in the ordinary course of
business;
(ix) Indebtedness of any person at the time it is acquired as a
Restricted Subsidiary, provided that such Indebtedness was not issued by
such person in connection with or in anticipation of such acquisition;
(x) guarantees by Restricted Subsidiaries of Indebtedness of any
Restricted Subsidiary if such Indebtedness so guaranteed is permitted under
the Indenture;
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(xi) guarantees by a Restricted Subsidiary of Indebtedness of the Company
if the Indebtedness so guaranteed is permitted under the Indenture and the
Senior Notes are guaranteed by such Restricted Subsidiary to the extent
required by the "Limitation on Guaranties of Company Indebtedness by
Restricted Subsidiaries" covenant;
(xii) guarantees by the Company of Indebtedness of any Restricted
Subsidiary if the Indebtedness so guaranteed is permitted under the
Indenture;
(xiii) Indebtedness of the Company and its Restricted Subsidiaries in
connection with performance, surety, statutory, appeal or similar bonds in
the ordinary course of business;
(xiv) Indebtedness of the Company and its Restricted Subsidiaries in
connection with agreements providing for indemnification, purchase price
adjustments and similar obligations in connection with the sale or
disposition of any of their business, properties or assets;
(xv) Indebtedness of the Restricted Subsidiaries in respect of the Junior
Seller Note;
(xvi) Indebtedness of the Restricted Subsidiaries in respect of the MK
Installment Note and the MK Installment Note LC Facility; and
(xvii) Indebtedness of the Company and its Restricted Subsidiaries in
respect of the Contingent Earnout Agreement.
"Parent" means Motors and Gears Holdings, Inc., a Delaware corporation and
corporate parent of the Company.
"Permitted Liens" means: (a) with respect to the Company and its Restricted
Subsidiaries,
(1) Liens for taxes, assessments, governmental charges or claims which
are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have
been made therefor;
(2) statutory Liens of landlords and carriers', warehousemen's,
mechanics', suppliers', materialmen's, repairmen's or other like Liens
arising in the ordinary course of business and with respect to amounts not
yet delinquent or being contested in good faith by appropriate proceedings,
if a reserve or other appropriate provision, if-any as shall be required in
conformity with GAAP shall have been made therefor;
(3) Liens incurred on deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security;
(4) Liens incurred on deposits made to secure the performance of tenders,
bids, leases, statutory obligations, surety and appeal bonds, government
contracts, performance and return of money bonds and other obligations of a
like nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money);
(5) easements, rights-of-way, zoning or other restrictions, minor defects
or irregularities in title and other similar charges or encumbrances not
interfering in any material respect with the business of the Company or any
of its Restricted Subsidiaries incurred in the ordinary course of business;
(6) Liens (including extensions, renewals and replacements thereof) upon
property acquired (the "Acquired Property") after the date of original
issuance of the Senior Notes, provided that: (A) any such Lien is created
solely for the purpose of securing Indebtedness representing, or issued to
finance, refinance or refund, the cost (including the cost of construction)
of the Acquired Property, (B) the principal amount of the Indebtedness
secured by such Lien does not exceed 100% of the cost of the Acquired
Property, (C) such Lien does not extend to or cover any property other than
the Acquired Property and any improvements on such Acquired Property, and
(D) the issuance of the Indebtedness to purchase the Acquired Property is
permitted by the "Limitation on Incurrence of Indebtedness" covenant;
(7) Liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of customs duties in connection with the
importation of goods;
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(8) judgment and attachment Liens not giving rise to an Event of Default;
(9) leases or subleases granted to others not interfering in any material
respect with the business of the Company or any of its Restricted
Subsidiaries;
(10) Liens securing Indebtedness under Hedging Obligations;
(11) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements;
(12) Liens arising out of consignment or similar arrangements for the
sale of goods entered into by the Company or its Restricted Subsidiaries in
the ordinary course of business;
(13) any interest or title of a lessor in property subject to any capital
lease obligation or operating lease;
(14) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(15) Liens existing on the date of original issuance of the Senior Notes
and any extensions, refinancings, renewals, replacements, substitutions or
refundings thereof;
(16) any Lien granted to the Trustee and any substantially equivalent
Lien granted to any trustee or similar institution under any indenture for
Senior Indebtedness permitted by the terms of the Indenture;
(17) Liens securing Indebtedness under the MK Installment Note LC
Facility; and
(18) additional Liens at any one time outstanding in respect of
properties or assets where aggregate fair market value does not exceed
$10,000,000 (the fair market value to be determined on the date such Lien
is granted on such properties or assets);
(b) with respect to the Restricted Subsidiaries,
(1) Liens securing Restricted Subsidiaries' reimbursement Obligations
with respect to letters of credit that encumber documents and other
property relating to such letters of credit and the products and proceeds
thereof;
(2) Liens securing Indebtedness issued by Restricted Subsidiaries if such
Indebtedness is (A) under the Credit Agreement or New Credit Agreement, or
(B) permitted by the first sentence of the "Limitation on Incurrence of
Indebtedness" covenant, clauses (i), (ii), (iii) or (iv) of the second
sentence of the "Limitation on Incurrence of Indebtedness" covenant, or
clauses (i), (iii) (to the extent the Indebtedness subject to such
Refinancing Indebtedness was subject to Liens), (vi), (vii), (ix), (x) or
(xvi) of the definition of Other Permitted Indebtedness;
(3) Liens securing intercompany Indebtedness issued by any Restricted
Subsidiary to the Company or another Restricted Subsidiary; and
(4) Liens securing guarantees by Restricted Subsidiaries of Indebtedness
issued by the Company if such guarantees permitted by clause (xi) (but only
in respect of the property, rights and assets of the Restricted
Subsidiaries issuing such guarantees) of the definition of Other Permitted
Indebtedness;
(c) with respect to the Company,
(1) Liens securing Indebtedness issued by the Company if such
Indebtedness is (A) under the Credit Agreement or the New Credit Agreement,
or (B) if such Indebtedness is permitted by the "Limitation on Incurrence
of Indebtedness" covenant (including, but not limited to, Indebtedness
issued by the Company under the Credit Agreement or the New Credit
Agreement pursuant to clause (i) and/or clause (iv) of the second sentence
of the "Limitation on Incurrence of Indebtedness" covenant);
(2) Liens securing Indebtedness of the Company if such Indebtedness is
permitted by clauses (i), (iii) (to the extent the Indebtedness subject to
such Refinancing Indebtedness was subject to Liens) or (vii) of the
definition of Other Permitted Indebtedness;
(3) Liens securing guarantees by the Company of Indebtedness issued by
Restricted Subsidiaries if such Indebtedness is permitted by the
"Limitation on Incurrence of Indebtedness" covenant (including, but
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not limited to, Indebtedness issued by Restricted Subsidiaries under the
Credit Agreement or the New Credit Agreement pursuant to clause (i) and/or
clause (iv) of the second sentence of the "Limitation on Incurrence of
Indebtedness" covenant) and if such guarantees are permitted by clause
(xii) (but only in respect of Indebtedness issued by the Restricted
Subsidiaries under the Credit Agreement or the New Credit Agreement
pursuant to the "Limitation on Incurrence of Indebtedness" covenant) of the
definition of Other Permitted Indebtedness; and
(4) Liens securing the Company's reimbursement obligations with respect
to letters of credit that encumber documents and other property relating to
such letters of credit and the products and proceeds thereof
provided, however, that, notwithstanding any of the foregoing, the Permitted
Liens referred to in clause (c) of this definition shall not include any Lien
on Capital Stock of Restricted Subsidiaries held directly by the Company (as
distinguished from Liens on Capital Stock of Restricted Subsidiaries held by
other Restricted Subsidiaries) other than Liens securing (A) Indebtedness of
the Company issued under the Credit Agreement or the New Credit Agreement
pursuant to the "Limitation on Incurrence of Indebtedness" covenant and any
permitted Refinancing Indebtedness of such Indebtedness, and (B) guarantees by
the Company of Indebtedness issued by Restricted Subsidiaries under the Credit
Agreement or the New Credit Agreement pursuant to the "Limitation on
Incurrence of Indebtedness" covenant and any permitted Refinancing
Indebtedness of such Indebtedness.
"Pro Forma Basis" means, for purposes of determining Consolidated Net Income
in connection with the Cash Flow Coverage Ratio (including in connection with
the "Limitation on Restricted Payments" covenant, the "Designation of
Restricted and Non-Restricted Subsidiaries" covenant, the "Merger or
Consolidation" covenant, the incurrence of Indebtedness pursuant to the first
sentence of the "Limitation on Incurrence of Indebtedness" covenant and
Consolidated Net Worth for purposes of the "Merger or Consolidation" covenant,
giving pro forma effect to (x) any acquisition or sale of a person, business
or asset, related incurrence, repayment or refinancing of Indebtedness or
other related transactions, including any Restructuring Charges which would
otherwise be accounted for as an adjustment permitted by Regulation S-X under
the Securities Act or on a pro forma basis under GAAP, or (y) any incurrence,
repayment or refinancing of any Indebtedness and the application of the
proceeds therefrom, in each case, as if such acquisition or sale and related
transactions, restructurings, consolidations, cost savings, reductions,
incurrence, repayment or refinancing were realized on the first day of the
relevant period permitted by Regulation S-X under the Securities Act or on a
pro forma basis under GAAP. Furthermore, in calculating the Cash Flow Coverage
Ratio, (1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the determination date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal to
the rate of interest on such Indebtedness in effect on the determination date;
(2) if interest on any Indebtedness actually incurred on the determination
date may optionally be determined at an interest rate based upon a factor of a
prime or similar rate, a eurocurrency interbank offered rate, or other rates,
then the interest rate in effect on the determination date will be deemed to
have been in effect during the relevant period; and (3) notwithstanding clause
(1) above, interest on Indebtedness determined on a fluctuating basis, to the
extent such interest is covered by agreements relating to interest rate swaps
or similar interest rate protection Hedging Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"Receivables" means, with respect to any person, all of the following
property and interests in property of such person, whether now existing or
existing in the future or hereafter acquired or arising: (i) accounts,
(ii) accounts receivable (including, without limitation, all rights to payment
created by or arising from sales of goods, leases of goods or leased or the
rendition of services rendered no matter how evidenced, whether or not earned
by performance), (iii) all unpaid seller's or lessor's rights (including,
without limitation, recession, replevin, reclamation and stoppage in transit,
relating to any of the foregoing or arising therefrom), (iv) all rights to any
goods or merchandise represented by any of the foregoing (including, without
limitation, returned or repossessed goods), (v) all reserves and credit
balances with respect to any such accounts receivable or account debtors, (vi)
all letters of credit, security or guarantees of any of the foregoing, (vii)
all insurance policies or
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reports relating to any of the foregoing, (viii) all collection or deposit
accounts relating to any of the foregoing, (ix) all proceeds of any of the
foregoing, and (x) all books and records relating to any of the foregoing.
"Receivables Financing" means (i) the sale, factoring or other disposition
of Receivables that arise in the ordinary course of business, or (ii) the
sale, factoring or other disposition of Receivables that arise in the ordinary
course of business to a Receivables Subsidiary followed by a financing
transaction in connection with such sale or disposition of such Receivables.
"Receivables Subsidiary" means any Subsidiary of the Company or any other
corporation trust or entity that is exclusively engaged in Receivables
Financings and activities reasonably related thereto.
"Redeemable Preferred Stock" means preferred stock that by its terms or
otherwise is required to be redeemed or is redeemable at the option of the
holder thereof on, or prior to, the maturity date of the Senior Notes.
"Refinancing Indebtedness" means (i) Indebtedness of the Company and its
Restricted Subsidiaries issued or given in exchange for, or the proceeds of
which are used to, extend, refinance, renew, replace, substitute or refund any
Indebtedness permitted under this Indenture or any Indebtedness issued to so
extend, refinance, renew, replace, substitute or refund such Indebtedness,
(ii) any refinancings of Indebtedness issued under the New Credit Agreement,
and (iii) any additional Indebtedness issued to pay premiums and fees in
connection with clauses (i) and (ii).
"Refinancing Plan" means the Company's repayment of Indebtedness under the
Credit Agreement and certain other Indebtedness with the net proceeds from the
sale of the Old Notes and borrowing under the New Credit Agreement.
"Representative" means the agent or other representative in respect of the
New Credit Agreement, with the Representative originally being Bankers Trust
Company.
"Restricted Investment" means any Investment in any person, provided that
Restricted Investments will not include: (i) Investments in marketable
securities and other negotiable instruments permitted by the Indenture; (ii)
any Incentive Arrangements; (iii) Investments in the Company; or (iv)
Investments in any Restricted Subsidiary (provided that any Investment in a
Restricted Subsidiary was made for fair market value (as determined by the
Board of Directors in good faith)). The amount of any Restricted Investment
shall be the amount of cash and the fair market value at the time of transfer
of all other property (as determined by the Board of Directors in good faith)
initially invested or paid for such Restricted Investment, plus all additions
thereto, without any adjustments for increases or decreases in value of or
write-ups, write-downs or write-offs with respect to, such Restricted
Investment.
"Restricted Subsidiary" means: (i) any Subsidiary of the Company existing on
the date of issuance of the Old Notes, and (ii) any other Subsidiary of the
Company formed, acquired or existing after the date of issuance of the Old
Notes that is designated as a "Restricted Subsidiary" by the Company pursuant
to a resolution approved a majority of the Board of Directors, provided,
however, that the term Restricted Subsidiary shall not include any Subsidiary
of the Company that has been redesignated by the Company pursuant to a
resolution approved by a majority of the Board of Directors as a Non-
Restricted Subsidiary in accordance with the "Designation of Restricted and
Non-Restricted Subsidiaries" covenant unless such Subsidiary shall have
subsequently been redesignated a Restricted Subsidiary in accordance with
clause (ii) of this definition.
"Restructuring Charges" means any charges or expenses in respect of
restructuring or consolidating any business, operations or facilities, any
compensation or headcount reduction, or any other cost savings, of any persons
or businesses either alone or together with the Company or any Restricted
Subsidiary, as permitted by GAAP or Regulation S-X under the Securities Act.
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"Senior Indebtedness" means: (i) all Obligations (including any interest
accruing subsequent to the filing of a petition of bankruptcy at the rate
provided for in the documentation with respect thereto, whether or not such
interest is an allowed claim under applicable law) on any Indebtedness of the
Company, whether outstanding on the date of original issuance of the Senior
Notes or thereafter created, incurred or assumed, of the following types: (A)
all Indebtedness of the Company (including without limitation the Senior
Notes) for money borrowed, and (B) all Indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of which the
Company is responsible or liable; (ii) all capitalized lease obligations of
the Company; (iii) all Obligations of the Company: (A) for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (B) all constituting Hedging Obligations, or (C) issued as the
deferred purchase price of property and all conditional sale Obligations of
the Company and all Obligations of the Company under any title retention
agreement; (iv) all guarantees of the Company with respect to Obligations of
other persons of the type referred to in clauses (ii) and (iii) and with
respect to the payment of dividends of other persons; and (v) all Obligations
of the Company consisting of modifications, renewals, extensions, replacements
and refundings of any Obligations described in clauses (i), (ii), (iii) or
(iv) unless, in the instrument creating or evidencing the same or pursuant to
which the same is outstanding, it is expressly provided that such Obligations
are subordinated or junior in right of payment to the Senior Notes; provided,
however, that Senior Indebtedness shall not be deemed to include: (1) any
Obligation of the Company to any Subsidiary, (2) any liability for federal,
state, local or other taxes owed or owing by the Company, (3) any accounts
payable or other liability to trade creditors arising in the ordinary course
of business (including guarantees thereof or instruments evidencing such
liabilities), (4) any Indebtedness, guarantee or Obligation of the Company
that is contractually subordinated or junior in any respect to any other
Indebtedness, guarantee or Obligation of the Company, or (5) any Indebtedness
to the extent the same is incurred in violation of the Indenture. Senior
Indebtedness shall include all Obligations in respect of the Senior Notes and
the Indenture.
To the extent any payment on the Senior Notes, whether by or on behalf of
the Company, as proceeds of security or enforcement of any right of setoff or
otherwise, is declared to be fraudulent or preferential, set aside or required
to be paid to a trustee, receiver or other similar party under any bankruptcy,
insolvency, receivership or similar law, then if such payment is recovered by,
or paid over to, such trustee, receiver or other similar party, the Senior
Notes or part thereof originally intended to be satisfied by such payment
shall be deemed to be reinstated and outstanding as if such payment had not
occurred.
"SFAS 106" means Statement of Financial Accounting Standards No. 106.
"SFAS 109" means Statement of Financial Accounting Standards No. 109.
"Significant Subsidiary" means any Restricted Subsidiary of the Company that
would be a "significant subsidiary" as defined in clause (2) of the definition
of such term in Rule 1-02 of Regulation S-X under the Securities Act and the
Exchange Act.
"Subordinated Indebtedness" means all Obligations of the type referred to in
clauses (i) through (v) of the definition of Senior Indebtedness, if the
instrument creating or evidencing the same, or pursuant to which the same is
outstanding, designates such Obligations as subordinated or junior in right of
payment to Senior Indebtedness.
"Subsidiary" of any person means any entity of which the Equity Interests
entitled to cast at least a majority of the votes that may be cast by all
Equity Interests having ordinary voting power for the election of directors or
other governing body of such entity are owned by such person (regardless of
whether such Equity Interests are owned directly by such person or through one
or more Subsidiaries).
"TJC Agreement" means the Management Consulting Agreement, dated as of
November 7, 1996, between the Company and TJC Management Corporation, as in
effect on the date of original issuance of the Senior Notes.
"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect the board of directors.
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"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the then outstanding
principal amount of such Indebtedness into (ii) the sum of the product(s)
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other requirement payment of principal,
including payment at final maturity, in respect thereof, by (b) the number of
years (calculated to the nearest one-twelfth) which will elapse between such
date and the making of such payment.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of important terms of certain indebtedness of the
Company and its Subsidiaries:
CREDIT AGREEMENT
In connection with the acquisition of Merkle-Korff, Merkle-Korff entered
into a Credit Agreement with Bankers Trust Company ("BTCo."), as agent, and
other lenders thereunder (the "Credit Agreement"). The Credit Agreement
provided for (i) a $12.0 million revolving credit facility due 2001 with an
interest rate determined by reference to LIBOR plus 2.75% or base rate plus
1.50%, subject to reductions based on a leverage ratio, (ii) a $43.0 million
Term Loan A facility due 2001 with an interest rate determined by reference to
LIBOR plus 2.75% or base rate plus 1.50%, subject to reductions based on a
leverage ratio, and (iii) a $27.0 million Term Loan B facility due 2003 with
an interest rate determined by reference to LIBOR plus 3.25% or base rate plus
2.00%. The Company and Merkle-Korff's subsidiaries guaranteed Merkle-Korff's
obligations under the Credit Agreement, and provided as security under the
Credit Agreement a pledge of stock of Merkle-Korff and its subsidiaries and
liens in respect of certain of their assets.
To finance the Barber Colman Acquisition, the Company amended the Credit
Agreement by, among other things, increasing Term Loan A to $50.0 million,
increasing Term Loan B to $34.4 million, and adding a $5.0 million Term Loan C
due 2003 with an interest rate determined by reference to LIBOR plus 3.50% or
base rate plus 2.25%, and adding Barber Colman Motors as a guarantor under the
Credit Agreement and a pledge of the stock of Barber Colman Motors and liens
in respect of certain of its assets.
In connection with the Old Note Offering, Merkle-Korff repaid its
indebtedness under the Credit Agreement.
MK INSTALLMENT NOTE
In connection with the acquisition of Merkle-Korff, Merkle-Korff issued to
the Merkle-Korff seller a $90.0 million installment note which was paid on
December 26, 1996 (the "MK Installment Note"). The MK Installment Note was an
obligation of Merkle-Korff, and was supported by the $90.0 million letter of
credit issued under the MK Installment Note LC Facility. The indebtedness
evidenced by the MK Installment Note was not reflected on the Company's
balance sheet at December 31, 1995 since this indebtedness was supported by
the $90.0 million letter of credit issued under the MK Installment Note LC
Facility. Consequently, although the Company remained obligated under the MK
Installment Note, the Company viewed the MK Installment Note as defeased.
Interest on the MK Installment Note was determined and paid by reference to
the rate per annum paid on ninety (90) day U.S. Treasury Bills issued on
specified dates. Pursuant to the terms of the MK Installment Note, Merkle-
Korff was not permitted to prepay the MK Installment Note in whole or in part.
MK INSTALLMENT NOTE LC FACILITY
In connection with the acquisition of Merkle-Korff and the execution of the
MK Installment Note, Merkle-Korff and the Company entered into a separate
letter of credit facility with BTCo., pursuant to which Merkle-Korff deposited
$90.0 million into a cash collateral account which, in turn, secured a letter
of credit in the amount of $90.0 million which was delivered to the Merkle-
Korff seller in support of payment of the MK Installment Note (the "MK
Installment Note LC Facility"). This pledged cash collateral was not reflected
on the Company's balance sheet at December 31, 1995. In order to induce BTCo.
to enter into the MK Installment Note LC Facility, the Company guaranteed all
amounts owed by Merkle-Korff to BTCo. under the MK Installment Note LC
Facility. This facility matured on December 26, 1996.
JUNIOR SELLER NOTE
In connection with the acquisition of Merkle-Korff, Merkle-Korff issued to
the Merkle-Korff seller a $5.0 million, 9% Junior Seller Note (the "Junior
Seller Note") due December 31, 2003. The Junior Seller Note is a general
unsecured obligation of Merkle-Korff, which was subordinated to borrowings
under the Credit
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Agreement and is subordinated to borrowings under the New Credit Agreement.
Interest under the Junior Seller Note is payable annually in arrears and
Merkle-Korff is required to pay installments of principal on the Junior Seller
Note as follows: (i) $1.0 million on December 31, 2000, (ii) $1.25 million on
December 31, 2001, (iii) $1.25 million on December 31, 2002, and (iv) the
entire then outstanding principal amount on December 31, 2003. Subject to the
terms and conditions of the New Credit Agreement, Merkle-Korff may prepay the
principal amount of the Junior Seller Note in whole or in part at any time
without payment of any premium or penalty.
NEW CREDIT AGREEMENT
Concurrently with the consummation of the Old Note Offering, M&G Industries
entered into a new revolving credit agreement with BTCo., as agent, and other
lenders thereunder, which replaced and refinanced the Credit Agreement and
provides for borrowings of up to $75.0 million for a five year term (the "New
Credit Agreement"). The New Credit Agreement is a revolving credit facility
and borrowings thereunder are not subject to a borrowing base or similar
limitation. M&G Industries pays interest under the New Credit Agreement based
upon LIBOR plus 2.50% or base rate plus 1.5%, subject to reduction based on
the Company's leverage ratio. Unutilized commitments under the revolving
credit facility bear an availability fee of 1/2 of 1% per annum, subject to
reduction based on the Company's leverage ratio. M&G Industries' obligations
under the New Credit Agreement are guaranteed by M&G Industries' subsidiaries,
and secured by pledges of the stock of M&G Industries' subsidiaries and liens
in respect of certain assets of M&G Industries and its subsidiaries.
The New Credit Agreement contains customary covenants, including covenants
relating to levels of interest coverage and limits on the ability of M&G
Industries and certain of its subsidiaries to incur indebtedness, create
liens, make restricted payments, engage in affiliate transactions, engage in
mergers and consolidations and make asset sales. The New Credit Agreement also
contains customary events of default. As of the date of this Prospectus, M&G
Industries had not incurred indebtedness under the New Credit Agreement.
CERTAIN TRANSACTIONS
The Company Formation and Proceeds From the Old Note Offering. The Company
was formed in September 1995 in order to acquire and operate companies in the
motion control industry. In September 1995, the Company acquired Merkle-Korff
for $107.4 million, including the $90.0 million MK Installment Note, a $5.6
million promissory note paid in 1995, the $5.0 million Junior Seller Note and
related fees and expenses. The Company borrowed approximately $72.5 million
under the Credit Agreement to finance the cash portion of the purchase price
for Merkle-Korff and to pay related fees and expenses. In connection with the
acquisition of Merkle-Korff, the Company also entered into the MK Installment
Note LC Facility, pursuant to which Merkle-Korff deposited $90.0 million in a
cash collateral account which, in turn, secured a letter of credit in the face
amount of $90.0 million which was delivered to the Merkle-Korff seller in
support of payment of the MK Installment Note and other obligations. In March
1996, the Company, through Merkle-Korff, effected the Barber Colman
Acquisition for $21.7 million. The Company borrowed approximately $21.7
million under the Credit Agreement to finance the cash purchase price for the
Barber Colman Acquisition and to pay related fees and expenses.
Prior to the consummation of the Old Note Offering, Imperial, Scott and Gear
were subsidiaries of JII. Imperial, Scott and Gear were sold to the Company
for $75.0 million in cash, which included the repayment of approximately $6.0
million of liabilities of Imperial and its subsidiaries owed to JII, and the
Contingent Earnout, if any, to be earned pursuant to the Contingent Earnout
Agreement. The acquisition agreement entered into in connection with such sale
contained customary terms and provisions used in transactions of that type and
limited the aggregate amount of any claims for indemnification by the Company
for breaches by the sellers thereunder to $15.0 million. The cash portion of
the purchase price for the Imperial Acquisitions were funded from the net
proceeds of the Old Note Offering. The Contingent Earnout Agreement, an
obligation of each of the Company, M&G Industries, Imperial, Scott and Gear is
payable to an affiliate of JII and will not be limited or otherwise restricted
by the Indenture or the New Credit Agreement. See "The Company--The Imperial
Acquisitions," "Use of Proceeds" and "Principal Stockholders."
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JII Services. In connection with the Merkle-Korff acquisition, Parent
entered into an agreement with JII which agreement was amended in connection
with the Old Note Offering to add the Company and M&G Industries as parties
thereto and to modify the payment formula for the management and advisory fees
due thereunder from a fixed fee to a percentage of net sales (the "JII
Services Agreement"). Under the JII Services Agreement, the Company is charged
an annual management and advisory fee by JII equal to 1% of its net sales
payable quarterly. Management and advisory fees charged to the Company were
$0.7 million and $2.7 million, respectively, for the period from September 23,
1995 to December 31, 1995 and for the year ended December 31, 1996. Imperial,
Scott and Gear were charged similar fees by JII. Such fees were $2.0 million,
$2.2 million and $1.5 million, for the years ended December 31, 1993, 1994 and
the period from January 1995 to September 22, 1995. See Note 3 to the
Company's Consolidated Financial Statements and Note 6 to the Consolidated
Financial Statements of Imperial. Pursuant to the JII Services Agreement, JII
makes certain services available to the Company, including the resources of
its acquisition, business development and international expansion and
accounting staffs. The JII Services Agreement expires in 2006 but is
automatically renewable for successive one year terms, unless either party
provides written notice of termination 60 days prior to the scheduled renewal
date. See "Risk Factors--Control by Principal Stockholder and Certain
Transactions."
Tax Sharing Agreement. The Company and each of its subsidiaries are party to
a Tax Sharing Agreement (the "Tax Sharing Agreement") among JII and each of
its consolidated subsidiaries for Federal income tax purposes. Pursuant to the
Tax Sharing Agreement, each of the consolidated subsidiaries of JII pays to
JII, on an annual basis, an amount determined by reference to the separate
return tax liability of the subsidiary as defined in Treasury Regulation (S)
1.1552-1(a)(2)(ii). For the years ended December 31, 1994 and 1995, the income
tax payments by Imperial, Scott and Gear to JII under the Tax Sharing
Agreement were $2.0 million and $1.3 million. For the year ended December 31,
1996, the income tax payments by the Company to JII under the Tax Sharing
Agreement were $2.4 million. These income tax payments reflected a Federal and
state income tax rate of approximately 40% of each subsidiary's pre-tax
income.
The Jordan Company. In connection with the Merkle-Korff acquisition, Parent
entered into an agreement with The Jordan Company which agreement was amended
in connection with the Old Note Offering to add the Company and M&G Industries
as parties thereto (the "TJC Agreement"). Under the TJC Agreement, Parent and
the Company agreed to retain The Jordan Company to render consulting services
to it regarding the Company and its subsidiaries, their financial and business
affairs and their relationships with their lenders and stockholders, and the
operation and expansion of their business. The TJC Agreement expires in 2006,
but is automatically renewed for successive one-year terms, unless either
party provides written notice of termination 60 days prior to the scheduled
renewal date. The TJC Agreement provides for payment to The Jordan Company of
(i) an investment banking and sponsorship fee of up to 2% of the purchase
price of certain acquisitions or sales involving the Company or any of its
subsidiaries, (ii) a financial consulting fee of up to 1% of any debt, equity
or other financing arranged by the Company with the assistance of The Jordan
Company and (iii) reimbursement for out-of-pocket costs; provided, that such
fees may be paid, in whole or in part, to JII, upon the mutual agreement of
the board of directors of JII and The Jordan Company. In connection with the
acquisitions of Merkle-Korff and Barber Colman Motors and related financings,
The Jordan Company was paid investment banking fees of $2.1 million and $0.4
million, respectively. See Note 3 to the Company's Consolidated Financial
Statements. In connection with the Imperial Acquisitions and the consummation
of the Old Note Offering and the New Credit Agreement, the Company paid The
Jordan Company $2.25 million pursuant to the TJC Agreement. Messrs. Jordan,
Boucher and Zalaznick are partners of The Jordan Company. The Company believes
that the terms of the TJC Agreement are comparable to the terms that it would
obtain from a non-affiliated party for comparable services. See "Risk
Factors--Control by Principal Stockholder and Certain Transactions."
Merkle-Korff Leases. Merkle-Korff leases its plants, warehouse and offices
under a net lease (the "Merkle-Korff Leases") from companies controlled by
John Simms, Sr., Chairman and Chief Executive Officer of Merkle-Korff and
Barber Colman Motors. Rent expenses, including real estate taxes attributable
to the Merkle-Korff Leases, amounted to $0.7 million for the year ended
December 31, 1996. The Company has agreed to pay the following future minimum
rental payments under the Merkle-Korff Leases: (i) $0.8 million for the year
ended December 31, 1997; (ii) $0.8 million for the year ended December 31,
1998; (iii) $0.8 million for the year ended December 31, 1999; and (iv) $0.6
million for the year ended December 31, 2000. The Company has
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the right of first refusal to buy these facilities from Mr. Simms. See Note 3
to the Company's Consolidated Financial Statements. The Company believes that
the terms of the Merkle-Korff Leases are comparable to the terms that it would
obtain from a non-affiliated party.
Employment Agreements. Effective September 22, 1995, Merkle-Korff entered
into an employment agreement with John D. Simms, Sr. (the "Simms Employment
Agreement"). Pursuant to the terms of the Simms Employment Agreement, Mr.
Simms agreed to serve as Chairman and Chief Executive Officer of Merkle-Korff
for a three-year period ending on September 22, 1998. Mr. Simms also agreed
not to compete against Merkle-Korff throughout the term of his employment
agreement and for three years thereafter or until September 22, 2000,
whichever is later, and not to disclose any confidential information during
and after the term of his employment. In exchange for his services and
covenants, Merkle-Korff agreed to compensate Mr. Simms with (i) a base salary
of $100,000 per annum, (ii) the use of an automobile, including reimbursement
for automobile-related costs and (iii) participation in Merkle-Korff's benefit
programs. In the event Mr. Simms no longer provides services to Merkle-Korff
due to his dismissal without cause (as defined in the Simms Employment
Agreement), then Mr. Simms is entitled to receive his base compensation from
the date of his termination through the remaining term of his employment
agreement.
Effective September 22, 1995, Merkle-Korff entered into an employment
agreement with John W. Brown (the "Brown Employment Agreement"). Pursuant to
the terms of the Brown Employment Agreement, Mr. Brown agreed to serve as
President of Merkle-Korff for a three-year period ending on September 22,
1998. Mr. Brown also agreed not to compete against Merkle-Korff throughout the
term of his employment agreement and for three years thereafter or until
September 22, 2000, whichever is later, and not to disclose any confidential
information during and after the term of his employment. In exchange for his
services and covenants, Merkle-Korff agreed to compensate Mr. Brown with (i) a
base salary of $200,000 per annum, (ii) the use of an automobile, including
reimbursement for automobile-related costs, (iii) payment of monthly and other
incidental country club fees, (iv) payment of annual life insurance premiums
on his life and (v) participation in benefit programs for JII's executives. In
addition, Mr. Brown is eligible to receive an annual bonus of up to $200,000,
as calculated by a formula reflecting annual increases in Merkle-Korff's
profitability. In the event Mr. Brown no longer provides services to Merkle-
Korff due to his dismissal without cause (as defined in the Brown Employment
Agreement), then Mr. Brown is entitled to receive his base compensation from
the date of his termination through the remaining term of his employment
agreement and a pro rata portion of the annual bonus which he would have been
entitled to had he not been dismissed.
JII Payments. Effective October 1, 1996, JII voluntarily agreed to pay to
Mr. Frank A. Collins $3.9 million (the "JII Payment") in view of his
contributions to JII, including identifying and analyzing acquisition
candidates for JII and providing strategic advice to the Board of Directors of
JII. JII agreed to pay Mr. Collins the JII Payment as follows: (i) one-third
(or $1.3 million) was paid to Mr. Collins in October 1996 and (ii) the
remaining two-thirds (or $2.6 million) will be paid to Mr. Collins in six
equal, semi-annual installments payable on each October 1 and April 1,
commencing on April 1, 1997.
Directors and Officers Indemnification. The Company has entered into
indemnification agreements with each member of the Company's Board of
Directors and certain executive officers whereby the Company agreed, subject
to certain exceptions, to indemnify and hold harmless each director and
certain executive officers from liabilities incurred as a result of such
person's status as a director or executive officer of the Company. See
"Management--Board of Directors."
Future Transactions. The Company has adopted a policy to provide that all
transactions between the Company and its officers, directors and other
affiliates must (i) be approved by a majority of the members of the Board of
Directors and by a majority of the disinterested members of the Board of
Directors and (ii) be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account as a result
of market-making activities or other trading activities in connection with 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 for a period of 180 days after
the Expiration Date, it will make available a prospectus meeting the
requirements of the Securities Act to any broker-dealer for use in connection
with any such resale. In addition, until July 2, 1997, all dealers effecting
transactions in the New Notes may be required to deliver a prospectus.
The Company will receive no proceeds in connection with the Exchange Offer.
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 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 on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
FEDERAL INCOME TAX CONSEQUENCES
TO EXCHANGING AND NONEXCHANGING HOLDERS
The exchange of an Old Note for a New Note pursuant to the Exchange Offer
will not be taxable to the exchanging Holders for Federal income tax purposes.
As a result (i) an exchanging Holder will not recognize any gain or loss on
the exchange, (ii) the holding period for the New Note will include the
holding period for the Old Note and (iii) the basis of the New Note will be
the same as the basis of the Old Note.
The Exchange Offer will result in no Federal income tax consequences to a
nonexchanging Holder.
The preceding discussion is for general information only and does not
constitute tax advice. Each Holder should consult its own tax adviser as to
these and any other Federal income tax consequences of the Exchange Offer as
well as any tax consequences to it under state, local or other law. This
summary is based on the current provisions of the Internal Revenue Code of
1986, as amended, and applicable Treasury regulations, judicial authority and
administrative rulings and practice. Those consequences could be modified by
future changes in the relevant law (which changes could be applied
retroactively).
LEGAL MATTERS
The validity of the New Notes will be passed upon for the Company by Mayer,
Brown & Platt, New York, New York. Mayer, Brown & Platt also represents JII
and its affiliates from time to time in connection with its various
acquisitions and divestitures.
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EXPERTS
The consolidated financial statements of Motors and Gears, Inc. as of
December 31, 1995 and 1996 and for the period from September 23, 1995 to
December 31, 1995 and the year ended December 31, 1996, appearing in this
Prospectus and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The combined financial statements of Merkle-Korff Industries, Inc., Mercury
Industries, Inc. and Elmco Industries, Inc. as of December 31, 1994, and for
the years ended December 31, 1993, 1994 and the period from January 1, 1995 to
September 22, 1995, appearing in this Prospectus and Registration Statement,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Barber Colman Motors Division as of March 31,
1995 and December 31, 1995, and for the year ended March 31, 1995 and the nine
month period ended December 31, 1995, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of The Imperial Electric Company and
Subsidiaries as of December 31, 1994 and 1995, and for each of the three years
in the period ended December 31, 1995, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission the Registration Statement
pursuant to the Securities Act, and the rules and regulations promulgated
thereunder, covering the New Notes being offered hereby. This Prospectus does
not contain all the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the New Notes, reference is hereby made to the Registration
Statement. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to in the Registration
Statement are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. Upon consummation of the Exchange Offer, the Company will
become subject to the periodic and other informational requirements of the
Exchange Act. Periodic reports and other information filed by the Company with
the Commission may be inspected at the public reference facilities maintained
by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, or at its regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New
York, New York 10048 at prescribed rates. Such materials may also be accessed
electronically by means of the Commission's home page on the Internet at http:
//www.sec.gov.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
MOTORS AND GEARS, INC.
Report of Independent Auditors.......................................... F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996............ F-4
Consolidated Statements of Income for the period from September 23, 1995
to
December 31, 1995, and the year ended December 31, 1996 ............... F-5
Consolidated Statements of Changes in Shareholder's Equity (Net Capital
Deficiency) for the period from September 23, 1995 to December 31,
1995, and the year
ended December 31, 1996................................................ F-6
Consolidated Statements of Cash Flows for the period from September 23,
1995
to December 31, 1995, and the year ended December 31, 1996............. F-7
Notes to Consolidated Financial Statements.............................. F-8
MERKLE-KORFF INDUSTRIES, INC.,
MERCURY INDUSTRIES, INC. AND
ELMCO INDUSTRIES, INC.
Report of Independent Auditors.......................................... F-15
Combined Balance Sheet as of December 31, 1994.......................... F-16
Combined Statements of Income and Retained Earnings for each of the
years
ended December 31, 1993 and 1994, and the period from January 1, 1995
to
September 22, 1995..................................................... F-17
Combined Statements of Cash Flows for each of the years ended December
31,
1993 and 1994, and the period from January 1, 1995 to September 22,
1995................................................................... F-18
Notes to Combined Financial Statements.................................. F-19
BARBER-COLMAN MOTORS DIVISION
Report of Independent Auditors.......................................... F-23
Balance Sheets as of March 31, 1995 and December 31, 1995............... F-24
Statements of Divisional Operations for the year ended March 31, 1995,
and the
nine months ended December 31, 1995.................................... F-25
Statements of Cash Flows for the year ended March 31, 1995, and the nine
months
ended December 31, 1995................................................ F-26
Notes to Financial Statements........................................... F-27
THE IMPERIAL ELECTRIC COMPANY AND SUBSIDIARIES
Report of Independent Auditors.......................................... F-32
Consolidated Balance Sheets as of December 31, 1994 and 1995............ F-33
Consolidated Statements of Income for each of the years ended December
31, 1993,
1994, and 1995......................................................... F-34
Consolidated Statements of Shareholder's Equity for each of the years
ended
December 31, 1993, 1994 and 1995....................................... F-35
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1993,
1994 and 1995.......................................................... F-36
Notes to Consolidated Financial Statements.............................. F-37
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
BARBER-COLMAN MOTORS DIVISION
Balance Sheet as of March 8, 1996 (unaudited)........................... F-43
Statement of Divisional Operations and Division Equity for the period
from January 1, 1996 to
March 8, 1996 (unaudited).............................................. F-44
Statement of Cash Flows for the period from January 1, 1996 to March 8,
1996 (unaudited)....................................................... F-45
Notes to Financial Statements (unaudited)............................... F-46
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Motors and Gears, Inc.
We have audited the consolidated balance sheets of Motors and Gears, Inc. as
of December 31, 1995 and 1996, and the related consolidated statements of
income, shareholder's equity, and cash flows for the period from September 23,
1995 to December 31, 1995 and for the year ended December 31, 1996. These
consolidated financial statements are the responsibility of the management of
Motors and Gears, Inc. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Motors and Gears, Inc. as of December 31, 1995 and 1996, and the
consolidated results of its operations and its cash flows for the period from
September 23, 1995 to December 31, 1995 and for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 21, 1997
F-3
<PAGE>
MOTORS AND GEARS, INC.
(A SUBSIDIARY OF MOTORS AND GEARS HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
-------- --------
(IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE
AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 2,781 $ 10,011
Accounts receivable, less allowance for doubtful ac-
counts of $29 and $59 at December 31, 1995 and 1996,
respectively.......................................... 13,213 13,056
Inventories............................................ 13,404 16,554
Prepaid expenses and other............................. 402 886
Deferred income taxes.................................. 686 1,159
-------- --------
Total current assets................................. 30,486 41,666
Property, plant and equipment--Net....................... 7,166 11,431
Goodwill--Net............................................ 103,562 109,103
Covenants not to compete--Net............................ 473 1,206
Deferred financing costs--Net............................ 3,639 10,181
Other non-current assets................................. 61 81
-------- --------
Total assets......................................... $145,387 $173,668
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable....................................... $ 7,617 $ 5,408
Accrued interest payable............................... 718 3,204
Accrued expenses and other............................. 1,629 3,744
Due to Jordan.......................................... 5,139 1,706
Current portion of capital lease obligations........... 136 18
Revolving credit facility.............................. 500 --
-------- --------
Total current liabilities............................ 15,739 14,080
Senior Notes payable..................................... 69,375 170,000
Subordinated note payable................................ 5,000 5,000
Note payable to Jordan................................... 7,827 --
Capital lease obligations, less current portion.......... 709 49
Deferred income taxes.................................... 759 282
Other non-current liabilities............................ 53 44
Shareholder's equity (net capital deficiency):
Common stock, $.01 par value, 100,000 shares
authorized, issued and outstanding.................... 1 1
Additional paid-in capital............................. 30,005 30,005
Retained earnings (accumulated deficit)................ 15,919 (45,793)
-------- --------
Total shareholder's equity (net capital deficiency).. 45,925 (15,787)
-------- --------
Total liabilities and shareholder's equity (net $145,387 $173,668
capital deficiency)................................. ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
MOTORS AND GEARS, INC.
(A SUBSIDIARY OF MOTORS AND GEARS HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 23, 1995 YEAR ENDED
TO DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Net sales............................... $24,684 $117,571
Cost of sales, excluding depreciation... 16,429 75,751
Selling, general, and administrative
expenses, excluding depreciation....... 1,564 8,796
Depreciation............................ 415 2,960
Amortization of goodwill and other in-
tangibles.............................. 840 4,118
Management fees to Jordan............... 683 2,717
------- --------
Operating income........................ 4,753 23,229
Other income (expense):
Interest expense:
Jordan.............................. (301) (732)
Other............................... (2,111) (10,402)
Miscellaneous, net.................... (33) 215
------- --------
Income before income taxes and extraor-
dinary item............................ 2,308 12,310
Provision for income taxes.............. 948 5,290
------- --------
Income before extraordinary item........ 1,360 7,020
Extraordinary loss, net of income tax
benefit of $1,620...................... -- 2,186
------- --------
Net income.............................. $ 1,360 $ 4,834
======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
MOTORS AND GEARS, INC.
(A SUBSIDIARY OF MOTORS AND GEARS HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (NET CAPITAL
DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK RETAINED SHAREHOLDER'S
---------------- ADDITIONAL EARNINGS EQUITY (NET
NUMBER OF PAID-IN (ACCUMULATED CAPITAL
SHARES AMOUNT CAPITAL DEFICIT) DEFICIENCY)
--------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at September 22,
1995................... 100 $-- $ -- $ -- $ --
Equity of Imperial at
date of combination.... -- -- 100 14,559 14,659
Issuance of common
stock.................. 99,900 1 29,905 -- 29,906
Net income.............. -- -- -- 1,360 1,360
------- ---- ------- -------- --------
Balance at December 31,
1995................... 100,000 1 30,005 15,919 45,925
Acquisition of Imperial. -- -- -- (66,546) (66,546)
Net income.............. -- -- -- 4,834 4,834
------- ---- ------- -------- --------
Balance at December 31,
1996................... 100,000 $ 1 $30,005 $(45,793) $(15,787)
======= ==== ======= ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
MOTORS AND GEARS, INC.
(A SUBSIDIARY OF MOTORS AND GEARS HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 23,
1995 TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 1,360 $ 4,834
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 1,255 7,078
Amortization of deferred financing costs......... 152 799
Provision for bad debts.......................... 14 --
Deferred income taxes............................ (3) 1,496
Extraordinary loss............................... -- 3,806
Changes in assets and liabilities (net of acqui-
sitions):
Accounts receivable............................ 66 3,190
Inventories.................................... 871 128
Prepaid expenses and other..................... 24 187
Accounts payable............................... 363 (3,500)
Accrued expenses and other..................... 1,671 3,564
Other non-current assets and liabilities....... (19) (12)
--------- --------
Net cash provided by operating activities.......... 5,754 21,570
Cash flows from investing activities:
Purchases of property, plant and equipment......... (269) (1,304)
Acquisition of subsidiaries........................ (107,406) (90,692)
Cash acquired in purchase of subsidiaries.......... 696 --
--------- --------
Net cash used in investing activities.............. (106,979) (91,996)
Cash flows from financing activities:
Proceeds from debt issuances--Senior Notes......... 70,000 190,000
Payment of financing costs......................... -- (10,354)
Payments on Senior Notes........................... (625) (89,375)
Proceeds from revolving credit facility............ 2,500 1,700
Payments on revolving credit facility.............. (2,000) (2,200)
Proceeds from debt issuance--Subordinated Note..... 5,000 --
Proceeds from common stock issuance................ 29,906 --
Payments on note payable to Jordan................. (1,635) (7,827)
Payments on capital lease obligations.............. (88) (855)
Increase (decrease) in due to Jordan............... 948 (3,433)
--------- --------
Net cash provided by financing activities.......... 104,006 77,656
--------- --------
Increase in cash and cash equivalents.............. 2,781 7,230
Cash and cash equivalents at beginning of period... -- 2,781
--------- --------
Cash and cash equivalents at end of period......... $ 2,781 $ 10,011
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest:
Jordan......................................... $ 589 $ 1,066
Other.......................................... 23 7,117
Income taxes..................................... 94 781
Non cash investing activities:
Capital leases................................... -- 77
</TABLE>
See accompanying notes.
F-7
<PAGE>
MOTORS AND GEARS, INC.
(A SUBSIDIARY OF MOTORS AND GEARS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. FORMATION OF THE COMPANY AND ACQUISITIONS
Motors and Gears, Inc. (Company), a wholly-owned subsidiary of Motors and
Gears Holdings, Inc. (Parent), a majority-owned subsidiary of Jordan
Industries, Inc. (Jordan), was formed on September 8, 1995, to combine a group
of companies engaged in the manufacture and sale of reversible, permanent
split-capacitor, shaded-pole, and DC subfractional horsepower motors and gear
motors primarily to customers located throughout the United States.
On September 22, 1995, the Company acquired all of the outstanding shares of
Merkle-Korff Industries, Inc. (Merkle-Korff), Mercury Industries, Inc.
(Mercury) and Elmco Industries, Inc. (Elmco), for $107,406. The purchase
price, including costs incurred directly related to the transaction, was
allocated to working capital of $8,201; property and equipment of $3,652;
covenants not to compete of $500; deferred financing fees of $3,791; and
resulted in an excess purchase price over net identifiable assets of $91,262.
Mercury and Elmco were subsequently merged into Merkle-Korff.
On March 8, 1996, the Company acquired the net assets of Barber-Colman
Motors Division (Division), a division of Barber-Colman Company, which was
wholly-owned by Siebe, plc. The Division consisted of Colman OEM and Colman
Motor Products, wholly-owned subsidiaries of Barber-Colman Company, and the
motors division of Barber-Colman Company. The Division is a vertically
integrated manufacturer of subfractional horsepower AC and DC motors and gear
motors, with applications in such products as vending machines, copiers,
printers, ATM machines, currency changers, X-ray machines, peristaltic pumps,
HVAC actuators, and other products.
The purchase price of $21,700, including costs incurred directly related to
the transaction, has been allocated to working capital of $4,899; property,
plant, and equipment of $5,843; covenants not to compete of $1,000, deferred
financing fees of $793, and resulted in an excess purchase price over net
identifiable assets of $9,165. The acquisition was financed with $21,700 of
new and existing credit facilities. The Division was subsequently merged into
Merkle-Korff. Pro forma results of operations as if the acquisition had
occurred on January 1, 1996 are not materially different than the amounts
reported.
Concurrent with the consummation of a debt offering on November 7, 1996 (see
Note 7), the Company acquired Imperial Electric Company (Imperial), a wholly-
owned subsidiary of Jordan, and Imperial's wholly-owned subsidiaries, Scott
Motors Company (Scott) and Gear Research, Inc. (Gear) (Imperial, Scott and
Gear are hereafter collectively referred to as Imperial), for $75,000 of cash
payments from the offering proceeds, which included the repayment of $6,008 in
Imperial liabilities owed to Jordan, and a contingent payment payable pursuant
to a contingent earnout arrangement. Under the terms of the contingent earnout
arrangement, 50% of Imperial, Scott and Gear's cumulative earnings before
interest, taxes, depreciation and amortization, as defined, exceeding $50,000
during the five fiscal years ended December 31, 1996 through December 31, 2000
will be paid to an affiliate of Jordan. Payments, if any, under the contingent
earnout arrangement will be determined and made on April 30, 2001.
Imperial designs, manufactures, and distributes speciality electric motors,
generators, and gears for industrial and commercial use. Scott manufactures
specialty electric motors. Gear manufactures gears and precision gear
assemblies. Imperial, Scott and Gear's customers are located mainly in the
United States.
The Company and Imperial came under the common control of Jordan on
September 22, 1995, the date the Company acquired a controlling interest in
Merkle-Korff, Mercury and Elmco, and the Company commenced operations. The
consolidated financial statements give retroactive effect to the acquisition
of Imperial, which has
F-8
<PAGE>
MOTORS AND GEARS, INC.
(A SUBSIDIARY OF MOTORS AND GEARS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
been accounted for in a manner similar to the pooling-of-interests method.
Accordingly, the results of operations of the Company include the historical
results of operations of Imperial since September 22, 1995. As a result of the
Imperial acquisition, the Company recorded a $66,546 charge to retained
earnings in 1996. This amount represents the $75,000 of cash payments to
Jordan, less $6,008 in Imperial liabilities owed to Jordan and $2,446 of
deferred income taxes recorded in connection with the acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Motors and Gears Industries, Inc., Merkle-
Korff, and Imperial. All significant intercompany transactions and accounts
have been eliminated.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with an initial
maturity of three months or less at the time of purchase.
Inventories
Inventories are stated at the lower of cost or market. Inventories are
primarily valued at either average or first-in, first-out (FIFO) cost.
Property, Plant, and Equipment
Property, plant, and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided using either straight-line or
accelerated methods over the estimated useful lives of the assets. Leasehold
improvements and assets under capital leases are amortized using the straight-
line method over the shorter of the lease term or their estimated productive
lives. Amortization of leasehold improvements and assets under capital leases
is included in depreciation expense.
The useful lives of plant and equipment for the purpose of computing book
depreciation are as follows:
<TABLE>
<S> <C>
Buildings 5 to 31 years
Machinery and equipment 3 to 7 years
Dies and tooling 3 years
Furniture and fixtures 5 to 10 years
Vehicles 5 years
Leasehold improvements Life of lease
</TABLE>
Intangible Assets
Goodwill is being amortized using the straight-line method over 30 years at
Merkle-Korff and over 40 years at Imperial. Goodwill at December 31, 1995 and
1996 is net of accumulated amortization of $5,028 and $8,880, respectively.
The covenants not to compete are being amortized using the straight-line
method over the respective terms of the agreements. The covenants not to
compete at December 31, 1995 and 1996 are net of accumulated amortization of
$27 and $294, respectively. Deferred financing costs are amortized using the
straight-line method over the shorter of the terms of the related loans or the
period such loans are expected to be outstanding. Deferred financing costs at
December 31, 1995 and 1996 are net of accumulated amortization of $152 and
$173, respectively. Amortization of deferred financing costs is included in
interest expense.
F-9
<PAGE>
MOTORS AND GEARS, INC.
(A SUBSIDIARY OF MOTORS AND GEARS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that are expected to be in
effect when the differences reverse. The operating results of the Company are
included in the consolidated federal income tax return of Jordan. In addition,
the Company is party to a tax-sharing agreement with Jordan. However, the
Company's income tax provision has been calculated as if the Company would
have filed a separate federal income tax return.
Fair Value of Financial Instruments
The Company's financial instruments include cash equivalents, the Senior
Notes, the Subordinated Note, the revolving credit facility, and the note
payable to Jordan. The fair values of the Company's financial instruments were
not materially different from their carrying values at December 31, 1996.
Concentration of Credit Risk
Cash and trade receivables may subject the Company to credit risk. The
Company holds cash at highly rated financial institutions which are federally
insured up to prescribed limits. Cash balances may exceed these limits at any
given time. The Company closely monitors the credit quality of its customers.
Credit losses have been insignificant on a historical basis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Adoption of SFAS 121
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS 121 requires, among other things, that the Company consider whether
indicators of impairment of long-lived assets held for use are present. If
such indicators are present, the Company determines whether the sum of the
estimated undiscounted future cash flows attributable to such assets is less
than their carrying amount and, if so, the Company recognizes an impairment
loss based on the excess of the carrying amount of the assets over their fair
value.
The Company adopted the provisions of SFAS 121 during the period from
September 23, 1995 to December 31, 1995. The effect of the adoption was not
material.
Reclassifications
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
3. RELATED PARTY TRANSACTIONS
The Company leases certain plants, warehouses, and offices under net leases
from affiliated entities. Rent expenses, including real estate taxes
attributable to these leases, amounted to $261 and $736 for the period from
September 23, 1995 to December 31, 1995, and for the year ended December 31,
1996, respectively.
F-10
<PAGE>
MOTORS AND GEARS, INC.
(A SUBSIDIARY OF MOTORS AND GEARS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum rental payments required under these leases are as follows:
<TABLE>
<S> <C>
1997............................................................... $750
1998............................................................... 766
1999............................................................... 781
2000............................................................... 606
</TABLE>
The Company receives consulting services from Jordan in exchange for fees
payable in accordance with terms stipulated in a management consulting
agreement between the two entities. Management fee expenses recorded by the
Company for such services amounted to $683 and $2,717 for the period from
September 23, 1995 to December 31, 1995, and for the year ended December 31,
1996, respectively.
The Company, through its Parent, and TJC Management Corporation (TJC), an
affiliated entity, have entered into a management consulting agreement whereby
TJC is paid an investment banking fee of up to 2%, based on the aggregate
consideration paid or received, for its assistance in acquisitions or sales
undertaken by the Company, and a financial consulting fee not to exceed 1% of
the aggregate debt or equity financing that is arranged by TJC, plus the
reimbursement of out-of-pocket expenses. The Company paid $2,055 to TJC during
the period from September 23, 1995 to December 31, 1995 related to the
acquisition of Merkle-Korff, Mercury, and Elmco. The Company paid $394 to TJC
in 1996 related to the acquisition of Barber--Colman Motors Division.
An individual who is a shareholder, Director, General Counsel and Secretary
of the Parent is also a partner in a law firm used by the Company. The firm
was paid $0 and $201 in fees and expenses during the period from September 23,
1995 to December 31, 1995 and the year ended December 31, 1996, respectively.
The rates charged to the Company were at arms-length.
Due to Jordan consists of:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1995 1996
------- -------
<S> <C> <C>
Interest on note payable.................................. $ 334 $ --
Management fee............................................ 672 243
Federal income taxes...................................... 3,280 968
Other..................................................... 853 495
------- -------
$ 5,139 $ 1,706
======= =======
4. INVENTORIES
Inventories consist of the following:
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Raw materials............................................. $ 9,766 $ 9,351
Work in process........................................... 1,565 4,668
Finished goods............................................ 2,073 2,535
------- -------
$13,404 $16,554
======= =======
</TABLE>
F-11
<PAGE>
MOTORS AND GEARS, INC.
(A SUBSIDIARY OF MOTORS AND GEARS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------ --------
<S> <C> <C>
Land and improvements.................................... $ 265 $ 265
Building and improvements................................ 2,889 3,206
Machinery and equipment.................................. 12,562 15,690
Dies and tooling......................................... 481 3,881
Furniture and fixtures................................... 553 846
Vehicles................................................. 78 108
------ --------
16,828 23,996
Less: Accumulated depreciation and amortization.......... (9,662) (12,565)
------ --------
$7,166 $ 11,431
====== ========
</TABLE>
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 23, 1995 YEAR ENDED
TO DECEMBER 31,
DECEMBER 31, 1995 1996
------------------ ------------
<S> <C> <C>
Current:
Federal.................................. $827 $1,594
State.................................... 124 572
---- ------
Total current.......................... 951 2,166
Deferred:
Federal.................................. (3) 1,228
State.................................... -- 276
---- ------
Total deferred......................... (3) 1,504
---- ------
Provision for income taxes................ $948 $3,670
==== ======
The provision for income taxes differs from the amount of income tax provision
computed by applying the federal income tax rate to income before income taxes.
A reconciliation of the differences is as follows:
<CAPTION>
PERIOD FROM
SEPTEMBER 23, 1995 YEAR ENDED
TO DECEMBER 31,
DECEMBER 31, 1995 1996
------------------ ------------
<S> <C> <C>
Computed statutory tax provision.......... $785 $2,891
Increase resulting from:
State and local taxes, net of federal
benefit.............................. 82 560
Nondeductible amortization............ 37 145
Other................................. 44 74
---- ------
Provision for income taxes................ $948 $3,670
==== ======
</TABLE>
F-12
<PAGE>
MOTORS AND GEARS, INC.
(A SUBSIDIARY OF MOTORS AND GEARS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax liabilities and assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------
1995 1996
---- ------
<S> <C> <C>
Deferred tax liabilities:
Goodwill................................................... $-- $1,866
Property, plant and equipment.............................. 759 --
---- ------
Total deferred tax liabilities............................... 759 1,866
Deferred tax assets:
Property, plant and equipment ............................. -- 1,509
Covenants not to compete................................... -- 75
Vacation accrual........................................... 63 136
Franchise tax.............................................. 128 128
Employee benefits.......................................... 53 230
Uniform capitalization..................................... 243 243
Allowance for doubtful accounts............................ -- 17
Inventory obsolescence reserve............................. -- 159
Other...................................................... 199 246
---- ------
Total deferred tax assets.................................... 686 2,743
---- ------
Net deferred tax (liabilities) assets........................ $(73) 877
==== ======
</TABLE>
7. INDEBTEDNESS
On November 7, 1996, the Company issued $170,000 aggregate principal amount
of 10 3/4% Senior Notes (Senior Notes). Interest on the Senior Notes is
payable in arrears on May 15 and November 15 of each year, commencing May 15,
1997. The Senior Notes are unsecured obligations of the Company and mature on
November 15, 2006. The Senior Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after November 15, 2001. In
addition, notwithstanding the foregoing, the Company may redeem up to 35% of
the original aggregate principal amount prior to November 15, 1999 under
certain circumstances.
The Indenture relating to the Senior Notes contains certain covenants which,
among other things, restricts the ability of the Company to incur additional
indebtedness, to declare or pay dividends, to repurchase stock or make other
restricted payments, create liens, engage in transactions with affiliates, or
complete certain mergers or consolidations.
Concurrent with the consummation of the above offering, the Company used a
portion of the net proceeds to repay all of its outstanding indebtedness under
the existing Credit Agreement, canceled the existing Credit Agreement, and
entered into a new Credit Agreement (New Credit Agreement) with a bank.
Accordingly, the unamortized balance of deferred financing costs related to
the previous credit agreement of $3,806 was written-off as an extraordinary
charge. The New Credit Agreement is in the form of a revolving credit facility
and provides for borrowings of up to $75,000 over a five year term. Borrowings
bear interest at a floating rate of LIBOR plus 2.5% or base rate plus 1.5%,
subject to reduction based on the Company's leverage ratio, as defined. Unused
commitments under the revolving credit facility are subject to an availability
fee of 1/2 of 1% per annum, as defined. Borrowings are secured by the stock
and substantially all of the assets of the Company. There were no borrowings
outstanding under the revolving credit facility at December 31, 1996.
The New Credit Agreement contains covenants which, among other things,
provide for a minimum level of interest coverage, as defined, and limit the
Company's ability to incur additional indebtedness, create liens, make
restricted payments, engage in affiliate transactions or mergers and
consolidations, and make asset sales.
F-13
<PAGE>
MOTORS AND GEARS, INC.
(A SUBSIDIARY OF MOTORS AND GEARS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The subordinated note payable is due to the former shareholder of Merkle-
Korff in installments beginning December 31, 2000 through December 31, 2003
and bears interest at 9% per annum. The note is unsecured.
8. LEASES
The Company leases certain land, buildings, and equipment under capital and
noncancellable operating lease agreements expiring in various years through
2003. Under the terms of one of these operating leases, monthly rental
payments may be adjusted every 36 months. Minimum future lease payments, by
year and in aggregate, under capital and noncancellable operating leases, are
as follows at December 31, 1996:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
1997..................................................... $1,796 $22
1998..................................................... 1,326 22
1999..................................................... 1,236 22
2000..................................................... 956 11
2001..................................................... 304 1
Thereafter............................................... 512 --
------ ---
Total minimum lease payments........................... $6,130 78
======
Amount representing interest............................. (11)
---
Present value of net minimum lease payments.............. $67
===
</TABLE>
Total rent expense was $333 and $1,680 for the period from September 23,
1995 to December 31, 1995 and for the year ended December 31, 1996,
respectively.
9. COMMON STOCK
Concurrent with its formation on September 8, 1995, the Company issued 100
shares of its stock for one hundred dollars. On September 22, 1995, the
Company sold an additional 99,900 shares of its common stock for $29,906. The
proceeds were used to finance a portion of the acquisition of all of the
outstanding shares of Merkle-Korff, Mercury, and Elmco, as described in Note
1.
10. BENEFIT PLANS
Merkle-Korff maintains a 401(k) profit sharing plan covering substantially
all of their employees who have satisfied minimum years of service and age
requirements. Merkle-Korff's contribution to the plan was approximately $55
and $181 for the period from September 23, 1995 to December 31, 1995 and for
the year ended December 31, 1996, respectively.
Employees of Imperial who are not covered by collective bargaining
agreements and have satisfied minimum years of service and age requirements
are eligible to participate in a 401(k) savings plan sponsored by Jordan.
Imperial, Scott and Gear also maintain other defined-contribution plans
covering substantially all of their respective employees. Employer
contributions to these plans were approximately $75 and $268 for the period
from September 23, 1995 to December 31, 1995 and for the year ended December
31, 1996, respectively.
F-14
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Boards of Directors
Merkle-Korff Industries, Inc.,
Mercury Industries, Inc. and Elmco Industries, Inc.
We have audited the accompanying combined balance sheet of Merkle-Korff
Industries, Inc., Mercury Industries, Inc., and Elmco Industries, Inc. as of
December 31, 1994, and the related combined statements of income and retained
earnings and cash flows for the years ended December 31, 1993 and 1994 and the
period from January 1, 1995 to September 22, 1995. These financial statements
are the responsibility of the Companies' management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement representation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects the combined financial position of Merkle-Korff
Industries, Inc., Mercury Industries, Inc. and Elmco Industries, Inc. as of
December 31, 1994, and the combined results of their operations and their cash
flows for the years ended December 31, 1993 and 1994 and the period from
January 1, 1995 to September 22, 1995, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Chicago, Illinois
February 23, 1996
F-15
<PAGE>
MERKLE-KORFF INDUSTRIES, INC.,
MERCURY INDUSTRIES, INC. AND
ELMCO INDUSTRIES, INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
ASSETS
Current assets:
Cash............................................................. $ 69,574
Short-term investments........................................... 5,539,994
Accounts receivable.............................................. 5,877,107
Inventories...................................................... 4,529,148
Prepaid expenses and other....................................... 139,034
Note receivable.................................................. 11,415
-----------
Total current assets........................................... 16,166,272
Property and equipment--Net........................................ 482,766
Other assets:
Note receivable.................................................. 57,083
Due from related parties......................................... 1,231,426
Other noncurrent assets.......................................... 1,014,845
-----------
Total assets................................................... $18,952,392
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Outstanding checks in excess of bank balance..................... $ 56,857
Accounts payable................................................. 3,086,278
Accrued expenses and other....................................... 1,476,899
-----------
Total current liabilities...................................... 4,620,034
Stockholders' equity:
Common stock..................................................... 2,248,325
Retained earnings................................................ 12,084,033
-----------
Total stockholders' equity..................................... 14,332,358
-----------
Total liabilities and stockholders' equity..................... $18,952,392
===========
</TABLE>
See accompanying notes.
F-16
<PAGE>
MERKLE-KORFF INDUSTRIES, INC., MERCURY INDUSTRIES, INC. AND ELMCO INDUSTRIES,
INC.
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED YEAR ENDED 1995 TO
DECEMBER 31, DECEMBER 31, SEPTEMBER 22,
1993 1994 1995
------------ ------------ -------------
<S> <C> <C> <C>
Net sales............................. $43,766,171 $ 49,340,321 $ 39,294,103
Cost of sales......................... 27,706,529 31,564,365 24,188,376
----------- ------------ ------------
Gross profit.......................... 16,059,642 17,775,956 15,105,727
Selling, general, and administrative
expenses............................. 7,512,421 5,466,521 3,489,567
----------- ------------ ------------
Operating income...................... 8,547,221 12,309,435 11,616,160
Other income (expense):
Interest income..................... 172,186 231,089 273,970
Other............................... (454,117) (448,639) (2,293)
----------- ------------ ------------
Income before income taxes............ 8,265,290 12,091,885 11,887,837
State income taxes.................... 143,255 170,529 283,778
----------- ------------ ------------
Net income............................ 8,122,035 11,921,356 11,604,059
Retained earnings--beginning of
period............................... 9,808,279 10,267,075 12,084,033
Dividends paid........................ (7,663,239) (10,104,398) (16,718,535)
----------- ------------ ------------
Retained earnings--end of period...... $10,267,075 $ 12,084,033 $ 6,969,557
=========== ============ ============
Pro forma income data (unaudited):
Pro forma income taxes, including
amounts recorded................... $ 3,306,116 $ 4,836,754 $ 4,755,135
Pro forma net income................ 4,959,174 7,255,131 7,132,702
</TABLE>
See accompanying notes.
F-17
<PAGE>
MERKLE-KORFF INDUSTRIES, INC.,
MERCURY INDUSTRIES, INC. AND
ELMCO INDUSTRIES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED YEAR ENDED 1995 TO
DECEMBER 31, DECEMBER 31, SEPTEMBER 22,
1993 1994 1995
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income:......................... $ 8,122,035 $ 11,921,356 $ 11,604,059
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization..... 334,584 323,657 101,411
Provision for bad debts........... 72,455 -- --
Changes in operating assets and
liabilities:
Accounts receivable............. (720,101) (954,472) (772,042)
Inventories..................... (62,634) (511,136) (717,088)
Prepaid expenses and other...... 46,353 (82,360) (269,254)
Deposits........................ (135,065) (187,123) --
Outstanding checks in excess of
bank balance................... (321,847) (309,780) (56,857)
Accounts payable................ (461,094) 1,017,562 1,481,436
Accrued expenses and other...... 115,173 6,671 (853,705)
----------- ------------ ------------
Net cash provided by operating
activities......................... 6,989,859 11,224,375 10,517,960
Cash flows from investing activities
(Purchases) sales of property and
equipment........................ (267,279) (190,223) 46,527
Decrease (increase) in short-term
investments...................... 1,009,923 (789,266) 5,539,994
Decrease (increase) in note
receivable....................... 43,388 (23,819) 11,415
(Increase) in accrued interest
receivable....................... -- -- (2,495)
----------- ------------ ------------
Net cash provided by (used in)
investing activities............... 786,032 (1,003,308) 5,595,441
Cash flows from financing activities
(Increase) decrease in due from
related parties.................. (122,673) (113,542) 1,231,426
Dividends paid.................... (7,663,239) (10,104,398) (16,718,535)
----------- ------------ ------------
Net cash (used in) financing
activities......................... (7,785,912) (10,217,940) (15,487,109)
----------- ------------ ------------
(Decrease) increase in cash......... (10,021) 3,127 626,292
Cash at beginning of period......... 76,468 66,447 69,574
----------- ------------ ------------
Cash at end of period............... $ 66,447 $ 69,574 $ 695,866
=========== ============ ============
Supplemental disclosures of cash
flow information
Cash paid during the period for:
Income taxes.................... $ 143,000 $ 171,000 $ 59,673
=========== ============ ============
</TABLE>
See accompanying notes.
F-18
<PAGE>
MERKLE-KORFF INDUSTRIES, INC.,
MERCURY INDUSTRIES, INC., AND
ELMCO INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 22, 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Merkle-Korff Industries, Inc. (Merkle-Korff), Mercury Industries, Inc.
(Mercury), and Elmco Industries, Inc. (Elmco), collectively referred to as the
"Companies," are owned by an individual and trusts, the beneficiaries of which
are related to the individual. Merkle-Korff manufactures and sells reversible,
permanent split-capacitor, shaded-pole, and DC sub-fractional horsepower
motors and gearmotors primarily to customers located throughout the United
States. Mercury and Elmco manufacture various electro-mechanical products and
components exclusively for Merkle-Korff.
Short-Term Investments
Short-term investments consist of U.S. Treasury bills and are carried at
cost, which approximates market.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by
the first in, first out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
determined using either straight-line or accelerated methods over the
estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the life of the leasehold improvement.
Research and Development Costs
Research and development costs related to both present and future products
are charged to expense when incurred.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Income Taxes
The Companies elected to be taxed as S corporations under applicable
provisions of the Internal Revenue Code and, therefore, are generally not
liable for federal and certain state income taxes, as the income of the
Companies is included in the taxable income of its stockholders.
Financial Instruments
Cash and trade receivables may subject the Companies to credit risk. The
Companies hold cash at highly rated financial institutions which are federally
insured up to prescribed limits. Cash balances may exceed the federally
insured limits at any given time.
For the years ended December 31, 1993 and 1994, and for the period from
January 1, 1995 to September 22, 1995, the three largest customers accounted
for 36%, 35% and 37% of sales, respectively. At December 31,
F-19
<PAGE>
MERKLE-KORFF INDUSTRIES, INC.,
MERCURY INDUSTRIES, INC. AND
ELMCO INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1994, the three largest customers accounted for 29% of trade accounts
receivable. The Companies closely monitor the credit quality of their
customers and credit losses have been insignificant on a historical basis.
2. RESTATED PARTY TRANSACTIONS
Merkle-Korff leases its plants, warehouse, and offices under net leases from
affiliated entities. Rent expenses, including real estate taxes attributable
to these leases, amounted to $361,967, $361,962 and $274,731 for the years
ended December 31, 1993 and 1994, and for the period from January 1, 1995 to
September 22, 1995, respectively. Future annual minimum rental payments
required under this lease amount to $303,480 for 1996.
Mercury leases its plant under a net lease from a corporation which is an
affiliated entity. Rent expenses, including real estate taxes attributable to
this lease, amounted to $196,638, $194,419 and $146,431 for the years ended
December 31, 1993 and 1994, and for the period from January 1, 1995 to
September 22, 1995, respectively. Future minimum rental payments required
under this lease amount to $174,600 for 1996.
Elmco leases its plant under a net lease from a corporation which is an
affiliated entity. Rent expenses, including real estate taxes attributable to
this lease, amounted to $314,702, $334,938 and $162,421 for the years ended
December 31, 1993 and 1994, and for the period from January 1, 1995 to
September 22, 1995, respectively. Future minimum rental payments required
under this lease amount to $254,040 for 1996.
The amount shown as due from related parties at December 31, 1994
principally includes amounts due from related trusts and individuals under
certain insurance agreements entered into for the benefit of certain officers
of the Companies. The Companies are entitled to be reimbursed by the trusts
for the lesser of all premiums paid relating to these policies or their cash
surrender values upon either payment of the face value of the policies or
termination of the policies for any reason. As of December 31, 1994, these
amounts were secured by the cash surrender value of the related life insurance
policies.
The Companies contributed $450,000 to a foundation controlled by a related
party during each of the years ended December 31, 1993 and 1994.
Transactions and accounts existing between the Companies have been
eliminated in the combined financial statements.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Raw materials................................................... $2,796,630
Work in process................................................. 764,058
Finished goods.................................................. 968,460
----------
$4,529,148
==========
</TABLE>
F-20
<PAGE>
MERKLE-KORFF INDUSTRIES, INC.,
MERCURY INDUSTRIES, INC. AND
ELMCO INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Machinery and equipment........................................ $ 4,088,405
Dies and tooling............................................... 1,687,477
Furniture and fixtures......................................... 834,661
Vehicles....................................................... 205,304
Leasehold improvements......................................... 740,135
-----------
7,555,982
Less: Accumulated depreciation and amortization................ (7,073,216)
-----------
$ 482,766
===========
5. NOTE RECEIVABLE
Note receivable consists of the following:
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
9.75% note receivable due in monthly installments of $1,466
including interest through November 1999...................... $ 68,498
Less: Current portion.......................................... (11,415)
-----------
$ 57,083
===========
6. COMMON STOCK
Common stock consists of the following:
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Merkle-Korff Industries, Inc.
Common stock; no par value; 1,000,000 shares authorized;
803,250 shares
issued and outstanding...................................... $ 2,222,235
Mercury Industries, Inc.
Common stock; no par value; 2,500 shares authorized; 1,000
shares issued and outstanding............................... 25,000
Elmco Industries, Inc.
Common stock; $10 par value; 100,000 shares authorized; 100
shares issued and outstanding............................... 1,000
-----------
$ 2,248,325
===========
</TABLE>
7. PROFIT-SHARING PLANS
The Companies maintain profit-sharing plans with a 401(k) provision. The
plans cover all eligible employees with specified years of service and
attainment of minimum age requirements. The Companies' voluntary contributions
to the plans were $99,047 and $98,765 for the years ended December 31, 1993
and 1994, respectively. The Companies did not make any voluntary contributions
to the plans during the period from January 1, 1995 to September 22, 1995.
F-21
<PAGE>
MERKLE-KORFF INDUSTRIES, INC.,
MERCURY INDUSTRIES, INC. AND
ELMCO INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. SUBSEQUENT EVENT
On September 22, 1995, Motors and Gears, Inc., formerly MK Group, Inc., a
wholly-owned subsidiary of M&G Holdings, Inc., a majority-owned subsidiary of
Jordan Industries, Inc., acquired all of the outstanding common stock of the
Companies for approximately $107,406,000.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Barber-Colman Company
We have audited the accompanying balance sheets of Barber-Colman Company--
Barber-Colman Motors Division (the Division) as of March 31, 1995 and December
31, 1995, and the related statements of divisional operations and cash flows
for the year ended March 31, 1995 and the nine month period ended December 31,
1995. These financial statements are the responsibility of the Division's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
Barber-Colman Company--Barber-Colman Motors Division is a part of Barber-
Colman Company, a wholly owned subsidiary of Siebe, plc., and has no separate
legal status or existence. Transactions with Barber-Colman Company and other
affiliates are described in Note 1.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Barber-Colman Company--
Barber-Colman Motors Division at March 31, 1995 and December 31, 1995, and the
results of its operations and its cash flows for the year ended March 31, 1995
and the nine months ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, the Division changed its
method of accounting for advertising costs on April 1, 1995 to conform with
Statement of Position 93-7, "Reporting on Advertising Costs."
Ernst & Young LLP
Chicago, Illinois
January 19, 1996
F-23
<PAGE>
BARBER-COLMAN MOTORS DIVISION
(A DIVISION OF BARBER-COLMAN COMPANY, A
WHOLLY OWNED SUBSIDIARY OF SIEBE, PLC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1995
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 6,000 $ 6,000
Accounts receivable from third parties, less allow-
ance of $33,000.................................... 3,129,000 1,586,000
Accounts receivable from related entities........... 507,000 428,000
Inventories......................................... 2,908,000 2,726,000
Prepaid expenses and other current assets........... 837,000 599,000
Deferred income taxes............................... 78,000 128,000
----------- -----------
Total current assets.............................. 7,465,000 5,473,000
Property, equipment, and leasehold improvements--Net.. 7,265,000 6,989,000
Goodwill, less accumulated amortization of $626,000 at
March 31, 1995; $687,000 at December 31, 1995........ 2,652,000 2,591,000
----------- -----------
Total assets...................................... $17,382,000 $15,053,000
=========== ===========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable to third parties................... $ 2,501,000 $ 591,000
Accounts payable to related entities................ 362,000 119,000
Accrued expenses and other current liabilities...... 650,000 551,000
----------- -----------
Total current liabilities......................... 3,513,000 1,261,000
Deferred income taxes................................. 2,042,000 1,971,000
Commitments (Note 8)
Division equity....................................... 11,827,000 11,821,000
----------- -----------
Total liabilities and division equity............. $17,382,000 $15,053,000
=========== ===========
</TABLE>
See accompanying notes.
F-24
<PAGE>
BARBER-COLMAN MOTORS DIVISION
(A DIVISION OF BARBER-COLMAN COMPANY, A WHOLLY OWNED SUBSIDIARY OF SIEBE, PLC.)
STATEMENTS OF DIVISIONAL OPERATIONS
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
MARCH 31, DECEMBER 31,
1995 1995
----------- ------------
<S> <C> <C>
Net sales:
Third parties....................................... $21,362,000 $14,890,000
Related entities.................................... 2,090,000 1,452,000
----------- -----------
23,452,000 16,342,000
Cost of sales:
Third parties....................................... 15,296,000 11,105,000
Related entities.................................... 1,497,000 1,083,000
----------- -----------
16,793,000 12,188,000
----------- -----------
Gross profit........................................ 6,659,000 4,154,000
Selling, general, and administrative expenses:
Allocated by parent................................. 981,000 886,000
Other............................................... 3,953,000 2,935,000
----------- -----------
4,934,000 3,821,000
----------- -----------
Operating income...................................... 1,725,000 333,000
Other expense......................................... 11,000 18,000
Allocated interest expense............................ 425,000 321,000
----------- -----------
Income (loss) before income taxes and cumulative
effect of change in accounting for advertising
costs................................................ 1,289,000 (6,000)
Provision for income taxes............................ 671,000 130,000
----------- -----------
Income (loss) before cumulative effect of change in
accounting for advertising costs..................... 618,000 (136,000)
Cumulative effect of change in accounting for
advertising costs (Note 1)........................... -- 122,000
----------- -----------
Divisional income (loss) ............................. $ 618,000 $ (258,000)
=========== ===========
</TABLE>
See accompanying notes.
F-25
<PAGE>
BARBER-COLMAN MOTORS DIVISION
(A DIVISION OF BARBER-COLMAN COMPANY, A WHOLLY OWNED SUBSIDIARY OF SIEBE, PLC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
MARCH 31, DECEMBER 31,
1995 1995
---------- ------------
<S> <C> <C>
Cash flows from operating activities
Divisional income (loss) ............................ $ 618,000 $ (258,000)
Adjustments to reconcile divisional income (loss) to
net cash provided by operating activities:
Depreciation and amortization...................... 831,000 641,000
Deferred income taxes.............................. (590,000) (39,000)
Cumulative effect of change in accounting for
advertising costs................................. -- 122,000
Changes in operating assets and liabilities:
Accounts receivable.............................. (507,000) 1,622,000
Inventories...................................... (567,000) 182,000
Prepaid expenses and other current assets........ 35,000 34,000
Accounts payable................................. 340,000 (2,153,000)
Accrued expenses and other current liabilities... (60,000) (99,000)
---------- -----------
Net cash provided by operating activities............ 100,000 52,000
Cash flows from investing activities
Purchases of property, equipment, and leasehold im-
provements........................................ (699,000) (458,000)
Proceeds from disposals of property, equipment, and 1,433,000 154,000
leasehold improvements............................ ---------- -----------
Net cash provided by (used for) investing activi-
ties................................................ 734,000 (304,000)
Cash flows from financing activities
(Distributions to) contributions by Parent......... (834,000) 252,000
---------- -----------
Net cash (used for) provided by financing activi- (834,000) 252,000
ties................................................ ---------- -----------
Net change in cash................................... -- --
Cash at beginning of period.......................... 6,000 6,000
---------- -----------
Cash at end of period................................ $ 6,000 $ 6,000
========== ===========
</TABLE>
See accompanying notes.
F-26
<PAGE>
BARBER-COLMAN MOTORS DIVISION
(A DIVISION OF BARBER-COLMAN COMPANY, A WHOLLY OWNED SUBSIDIARY OF SIEBE,
PLC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Barber-Colman Motors Division (the Division) is a division of Barber-Colman
Company, which is a wholly owned subsidiary of Siebe, plc. (collectively, the
Parent). The Division consists of Colman OEM and Colman Motor Products, wholly
owned subsidiaries of Barber-Colman Company, and the motors division of
Barber-Colman Company. The Division is a vertically integrated manufacturer of
subfractional horsepower AC and DC motors and gear motors and sells its
products to customers located in North America.
Basis of Presentation
These financial statements present the assets, liabilities, and results of
operations of the Division. Costs related to functions performed by the Parent
and certain other costs which are attributable to the Division are allocated
to the Division by the Parent. Costs related to these functions performed by
the Parent include legal, property and casualty insurance, human resources,
financial reporting, general accounting, and other administrative services. In
addition, interest expense is allocated by the Parent. Refer to Note 9 for a
summary of allocated costs.
The Division is part of a consolidated group and as such has significant
transactions with related entities. The terms of these transactions were
determined between related parties and may, therefore, differ from terms which
would have occurred between wholly unrelated parties and may also differ from
the costs which would have been incurred had the Division operated as a
completely autonomous entity.
The assets, liabilities, income, and expenses shown on the Division's
financial statements are only part of those of a larger entity and are not
subject to the constraints of law and custom applicable to legal entities.
Consequently, they may be available to satisfy claims unrelated to and not
reflected in the financial statements of the nonlegal entity.
Cash Management
The Division transfers its cash to the Parent and the Parent advances funds
to the Division to finance its operations, the expansion of its business, and
its working capital requirements. The net activity in the regard is reflected
as a part of Division equity.
Inventories
Inventories are valued at the lower of cost or market. The Division costs
certain inventories using the last in, first out (LIFO) method and other
inventories using the first in, first out (FIFO) method.
Property, Equipment, and Leasehold Improvements
Property and equipment are stated at cost, less accumulated depreciation.
Provisions for depreciation of property and equipment are determined using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are stated at cost, less accumulated amortization. Amortization
is determined using the straight-line method over the life of the leasehold
improvement.
Goodwill
Goodwill is being amortized over 40 years using the straight-line method.
All of the goodwill was allocated by the Parent to the Division after the
acquisition of Barber-Colman Company in 1987.
F-27
<PAGE>
BARBER-COLMAN MOTOR DIVISION
(A DIVISION OF BARBER-COLMAN COMPANY, A
WHOLLY OWNED SUBSIDIARY OF SIEBE, PLC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Financial Instruments
Trade receivables may subject the Division to credit risk. Credit risk
associated with trade receivables is limited by the large number of customers
in the Division's customer base. The Division monitors the credit quality of
its customers and maintains allowances for potential credit losses which,
historically, have been within the range of the Division's expectations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Advertising Costs
On April 1, 1995, the Division adopted Statement of Position 93-7,
"Reporting on Advertising Costs" (SOP 93-7). The adoption of SOP 93-7 changes
the Division's method of accounting for advertising costs. Previously, the
Division deferred advertising costs and amortized them over the related period
of advertising. Advertising costs are now expensed as incurred. The cumulative
effect of this change in accounting was to increase the divisional loss for
the nine months ended December 31, 1995 by $122,000, net of an $82,000 income
tax benefit.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1995
---------- ------------
<S> <C> <C>
Raw materials....................................... $ 152,000 $ 62,000
Work in process..................................... 3,341,000 3,220,000
Finished goods...................................... 135,000 199,000
Inventory obsolescence reserve...................... (451,000) (451,000)
---------- ----------
3,177,000 3,030,000
LIFO reserve........................................ (269,000) (304,000)
---------- ----------
$2,908,000 $2,726,000
========== ==========
</TABLE>
Inventories with a current cost of approximately $1,842,000 and $1,944,000,
respectively, have been costed using the LIFO method.
F-28
<PAGE>
BARBER-COLMAN MOTORS DIVISION
(A DIVISION OF BARBER-COLMAN COMPANY, A
WHOLLY OWNED SUBSIDIARY OF SIEBE, PLC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment, and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1995
----------- ------------
<S> <C> <C>
Machinery and equipment.............................. $10,132,000 $10,468,000
Furniture and fixtures............................... 503,000 514,000
Construction in process.............................. 534,000 386,000
Leasehold improvements............................... 421,000 432,000
Allocated software costs............................. 1,093,000 1,079,000
Other fixed assets................................... 46,000 57,000
----------- -----------
12,729,000 12,936,000
Less: Accumulated depreciation and amortization...... (5,512,000) (5,995,000)
----------- -----------
7,217,000 6,941,000
Allocated building costs, net........................ 48,000 48,000
----------- -----------
$ 7,265,000 $ 6,989,000
=========== ===========
</TABLE>
Allocated building costs, net represents the portion of the cost of Barber-
Colman Company's headquarters facility allocated to the Division. This
facility was disposed of during the year ended March 31, 1995 and the related
allocation was reversed.
4. DIVISION EQUITY
Division equity consists of the following:
<TABLE>
<S> <C>
Balance at April 1, 1994........................................ $12,043,000
Divisional income............................................... 618,000
Distributions to Parent, net.................................... (834,000)
-----------
Balance at March 31, 1995....................................... 11,827,000
Divisional loss................................................. (258,000)
Contributions by Parent, net.................................... 252,000
-----------
Balance at December 31, 1995.................................... $11,821,000
===========
</TABLE>
Distributions to/Contributions by Parent represent the change in net assets
of the Division, net of divisional income or loss during each respective
period.
5. INCOME TAXES
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
MARCH 31, DECEMBER 31,
1995 1995
---------- ------------
<S> <C> <C>
Current:
Federal.............................................. $ 977,000 $131,000
State................................................ 284,000 38,000
---------- --------
1,261,000 169,000
Deferred............................................... (590,000) (39,000)
---------- --------
$ 671,000 $130,000
========== ========
</TABLE>
F-29
<PAGE>
BARBER-COLMAN MOTORS DIVISION
(A DIVISION OF BARBER-COLMAN COMPANY, A
WHOLLY OWNED SUBSIDIARY OF SIEBE, PLC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The primary reasons for the difference between the statutory federal income
tax rate and the effective tax rate are state income taxes and amortization of
goodwill and other expenses not deductible for tax purposes.
The Division's operating results are included in the Parent's income tax
returns. The provision for current income taxes is based on the Division's
taxable income calculated on a separate return basis.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes.
Significant components of the Division's deferred tax assets and liabilities
consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1995
----------- ------------
<S> <C> <C>
Deferred income tax assets:
Allowance for doubtful accounts.................... $ 13,000 $ 13,000
Inventory obsolescence reserve..................... 180,000 180,000
Accrued vacation................................... 32,000 11,000
Accrued warranty................................... 10,000 10,000
Other.............................................. 14,000 84,000
----------- -----------
249,000 298,000
Deferred income tax liabilities:
Book value in excess of tax basis
of property, equipment, and
leasehold improvements............................ (2,042,000) (1,971,000)
Prepaid expenses................................... (171,000) (170,000)
----------- -----------
(2,213,000) (2,141,000)
----------- -----------
$(1,964,000) $(1,843,000)
=========== ===========
</TABLE>
6. RETIREMENT BENEFITS
Substantially all of the Division's employees are covered by a qualified
retirement savings and/or profit sharing plan of the Parent. The Division is
charged for its share of the Parent's contributions to the plans. The Division
was charged approximately $214,000 and $161,000 for these contributions during
year ended March 31, 1995 and nine months ended December 31, 1995,
respectively.
7. MAJOR CUSTOMERS
During the year ended March 31, 1995 and the nine months ended December 31,
1995, the same three customers accounted for approximately 31% and 34% of
sales, respectively. At March 31, 1995 and December 31, 1995, these same three
customers accounted for approximately 37% and 31% of trade accounts
receivable, respectively.
One of these customers is a related entity which accounted for approximately
9% of sales during both the year ended March 31, 1995 and the nine months
ended December 31, 1995. At March 31, 1995 and December 31, 1995, this related
entity accounted for approximately 14% and 21% of trade accounts receivable,
respectively.
F-30
<PAGE>
BARBER-COLMAN MOTORS DIVISION
(A DIVISION OF BARBER-COLMAN COMPANY, A
WHOLLY OWNED SUBSIDIARY OF SIEBE, PLC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS
The Division leases manufacturing, office, and storage facilities and
certain equipment under noncancelable operating leases expiring in various
years through 2000. The leases require the Division to pay real estate taxes
and maintenance costs.
Commitments for future minimum payments under noncancelable leases are as
follows as of December 31, 1995:
<TABLE>
<S> <C>
1996........................................................... $1,244,000
1997........................................................... 1,031,000
1998........................................................... 960,000
1999........................................................... 762,000
2000 and thereafter............................................ 386,000
</TABLE>
Rental expense for the year ended March 31, 1995 and the nine months ended
December 31, 1995 was approximately $984,000 and $842,000, respectively.
Included in these amounts is related party rental expense of approximately
$158,000 and $132,000 for the year ended March 31, 1995 and the nine months
ended December 31, 1995, respectively.
9. ALLOCATED COSTS
Costs related to functions performed by the Parent and certain other costs
which are attributable to the Division are allocated to the Division by the
Parent as follows:
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
MARCH 31, DECEMBER 31,
1995 1995 BASIS FOR ALLOCATION
--------- ------------ --------------------
<S> <C> <C> <C>
Cost of sales*:
Building rent......... $ 38,000 $ 31,000 Square feet occupied
Data processing....... 157,000 124,000 Hourly use
Insurance............. 168,000 112,000 Actual experience
-------- --------
$363,000 $267,000
======== ========
Selling, general and ad-
ministrative expenses:
Building rent......... $120,000 $101,000 Square feet occupied
Data processing....... 31,000 23,000 Hourly use
Insurance............. 63,000 68,000 Actual experience
Royalties............. 216,000 147,000 Actual third-party sales
Management fees....... 78,000 98,000 Budgeted sales
Other................. 473,000 449,000 Budgeted sales, headcount, and
actual use of corporate services
-------- --------
$981,000 $886,000
======== ========
Interest................ $425,000 $321,000 Average net assets
======== ========
</TABLE>
- --------
* These costs are included in cost of sales of both third parties and related
entities.
F-31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder
The Imperial Electric Company and Subsidiaries
We have audited the accompanying consolidated balance sheets of The Imperial
Electric Company and subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of income, shareholder's equity and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of The Imperial Electric Company and subsidiaries at December 31, 1994 and
1995, and the consolidated 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.
Ernst & Young LLP
Akron, Ohio
October 1, 1996
F-32
<PAGE>
THE IMPERIAL ELECTRIC COMPANY AND SUBSIDIARIES
(A SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
(IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 56 $ 36
Accounts receivable, net of allowance for doubtful
accounts of $15 in 1994 and 1995........................ 5,434 7,378
Inventories.............................................. 7,000 8,481
Prepaid expenses......................................... 287 272
--------- ---------
Total current assets................................... 12,777 16,167
Property, plant and equipment--Net......................... 3,010 3,615
Goodwill less accumulated amortization of $3,748 in 1994
and $4,172 in 1995........................................ 13,434 13,005
Other non-current assets................................... 29 27
--------- ---------
Total assets........................................... $ 29,250 $ 32,814
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable......................................... $ 2,313 $ 2,911
Accrued expenses and other current liabilities........... 469 594
Current portion of capital lease obligations............. 163 136
Current portion of note payable to Parent................ 2,200 3,357
Due to parent............................................ 3,551 4,802
--------- ---------
Total current liabilities.............................. 8,696 11,800
Long-term capital lease obligations........................ 348 709
Deferred income taxes...................................... 83 73
Note payable to Parent..................................... 7,827 4,470
Other non-current liabilities.............................. 157 53
Shareholder's equity:
Common stock, Class A, $100 per share stated value, 50
shares authorized, issued and outstanding............... 5 5
Common stock, Class B, $100 per share stated value, 950
shares authorized, issued and outstanding............... 95 95
Retained earnings........................................ 12,039 15,609
--------- ---------
Total shareholder's equity............................. 12,139 15,709
--------- ---------
Total liabilities and shareholder's equity............. $29,250 $32,814
========= =========
</TABLE>
See accompanying notes.
F-33
<PAGE>
THE IMPERIAL ELECTRIC COMPANY AND SUBSIDIARIES
(A SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1993 1994 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales........................................... $32,242 $36,243 $40,090
Cost of sales, excluding depreciation............... 21,217 23,461 27,055
Selling, general and administrative expenses, ex-
cluding depreciation............................... 2,425 2,267 2,239
Depreciation........................................ 912 595 707
Amortization of goodwill and other intangibles...... 687 474 431
Management fees to Parent........................... 1,967 2,065 2,168
------- ------- -------
Operating income.................................... 5,034 7,381 7,490
Other (income) and expenses:
Interest expense:
Parent............................................ 2,285 1,813 1,352
Other............................................. 6 45 85
Miscellaneous--Net................................. (49) (45) (9)
------- ------- -------
2,242 1,813 1,428
------- ------- -------
Income before income taxes.......................... 2,792 5,568 6,062
Provision for income taxes.......................... 1,185 2,254 2,492
------- ------- -------
Net income.......................................... $ 1,607 $ 3,314 $ 3,570
======= ======= =======
</TABLE>
See accompanying notes.
F-34
<PAGE>
THE IMPERIAL ELECTRIC COMPANY AND SUBSIDIARIES (A SUBSIDIARY OF JORDAN
INDUSTRIES, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON COMMON
STOCK STOCK RETAINED
CLASS A CLASS B EARNINGS TOTAL
------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at January 1, 1993.................... $ 5 $95 $ 7,118 $ 7,218
Net income................................... -- -- 1,607 1,607
--- --- ------- -------
Balance at December 31, 1993.................. 5 95 8,725 8,825
Net income................................... -- -- 3,314 3,314
--- --- ------- -------
Balance at December 31, 1994.................. 5 95 12,039 12,319
Net income................................... -- -- 3,570 3,570
--- --- ------- -------
Balance at December 31, 1995.................. $ 5 $95 $15,609 $15,709
=== === ======= =======
</TABLE>
See accompanying notes.
F-35
<PAGE>
THE IMPERIAL ELECTRIC COMPANY AND SUBSIDIARIES
(A SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1993 1994 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income......................................... $ 1,607 $ 3,314 $ 3,570
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 1,599 1,069 1,138
Deferred income taxes............................ (211) 31 (10)
Changes in assets and liabilities:
Accounts receivable............................. 297 (505) (1,944)
Inventories..................................... 42 (1,070) (1,481)
Prepaid expenses................................ (240) 18 15
Accounts payable, accrued expenses and other
account liabilities............................ (233) 1,214 722
Non-current liabilities......................... 44 63 (104)
------- ------- -------
Net cash provided by operating activities.......... 2,905 4,134 1,906
Cash flows from investing activities
Net additions to property, plant and equipment... (291) (194) (731)
------- ------- -------
Net cash used in investing activities.............. (291) (194) (731)
Cash flows from financing activities
Increase in due to Parent........................ 889 265 1,251
Payments on note payable to Parent............... (3,503) (4,031) (2,200)
Payment of capital lease obligations............. -- (118) (246)
------- ------- -------
Net cash used in financing activities.............. (2,614) (3,884) (1,195)
------- ------- -------
Increase (decrease) in cash........................ -- 56 (20)
Cash and cash equivalents at beginning of year..... -- -- 56
------- ------- -------
Cash and cash equivalents at end of year........... $ -- $ 56 $ 36
======= ======= =======
Supplemental cash flow disclosure:
Interest:
Parent........................................... $ 2,582 $ 1,933 $ 1,432
Other............................................ 6 45 85
Income taxes paid................................. 65 89 142
Property acquired under capital leases............ -- 556 581
</TABLE>
See accompanying notes.
F-36
<PAGE>
THE IMPERIAL ELECTRIC COMPANY AND SUBSIDIARIES
(A SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Imperial Electric Company ("Imperial") designs, manufactures and
distributes specialty electric motors, generators and gears for industry and
commercial use. Sales are principally in the United States. Imperial is owned
100% by Jordan Industries, Inc. ("Parent" or "Jordan Industries").
Principles of Consolidation
The consolidated financial statements include the accounts of Imperial and
its wholly-owned subsidiaries, Scott Motors Company ("Scott"), a manufacturer
of specialty electric motors; and Gear Research Inc. ("Gear"), a manufacturer
of gears and precision gear assemblies. Imperial and its subsidiaries are
referred to collectively as "the Company". All significant intercompany
transactions and accounts have been eliminated.
Cash and cash equivalents
Cash equivalents consist of highly liquid investments with an initial
maturity of three months or less at the time of purchase.
Inventories
Inventories are stated at the lower of cost or market. Inventories are
primarily valued at either average or first-in, first-out (FIFO) cost.
Property, Plant and Equipment
Property, plant and equipment is carried at cost less accumulated
depreciation. Depreciation is provided on the straight-line and accelerated
methods over the estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 5 to 30 years
Machinery and equipment..................................... 3 to 7 years
Furniture and fixtures...................................... 5 to 10 years
</TABLE>
Leasehold improvements and assets under capital leases are amortized using
the straight-line method over the lower of the lease term or their estimated
productive lives. Amortization of leasehold improvements and capital leased
assets is included in depreciation expense.
Goodwill
Goodwill is the excess of cost over net assets acquired from the acquisition
of Imperial by the Parent, and the acquisitions of Scott and Gear by Imperial.
Goodwill is being amortized on the straight-line method over forty years. The
carrying amount of goodwill is reviewed if facts and circumstances suggest
that it may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, the Company's carrying value
of the goodwill will be reduced by the estimated shortfall of cash flows.
Adoption of FAS 121
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS 121 requires, among other things, that the Company consider whether
F-37
<PAGE>
THE IMPERIAL ELECTRIC COMPANY AND SUBSIDIARIES
(A SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
indicators of impairment of long-lived assets held for use are present, that
if such indicators are present the Company determines whether the sum of the
estimated undiscounted future cash flows attributable to such assets is less
than their carrying amount, and if so, that the Company recognizes an
impairment at loss based on the excess of the carrying amount of the assets
over their fair value.
The Company adopted the provisions of SFAS 121 in the fourth quarter of
1995. Accordingly, the Company evaluated the ongoing value of its property,
plant and equipment and other long-lived assets at that time. From this
evaluation, the Company determined that there were no indications of
impairment significant enough to warrant recognition of an impairment loss,
and as such, no impairment loss has been recognized for the year ended
December 31, 1995.
Income Taxes
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Under the provisions of this statement, deferred tax assets and liabilities
are determined based on the difference between the financial statement and tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. A valuation allowance is
provided when it is more likely than not that some portion of the deferred tax
assets arising from temporary differences and net operating losses will not be
realized. The adoption of SFAS No. 109 did not have a material effect on the
financial condition or results of operations of the Company.
Concentration of Credit Risk
Credit is extended based on an evaluation of the customer's financial
condition and generally collateral is not required. Credit terms are
consistent with the industry, and credit losses are provided for in the
financial statements and consistently have been within management's
expectations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments include trade accounts receivable,
accounts payable, accrued expenses, and notes payable to Jordan Industries.
The fair values of all financial instruments were not materially different
from their carrying values.
2. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Raw materials.................................................. $5,613 $6,598
Work-in-process................................................ 736 867
Finished goods ................................................ 651 1,016
------ ------
$7,000 $8,481
====== ======
</TABLE>
F-38
<PAGE>
THE IMPERIAL ELECTRIC COMPANY AND SUBSIDIARIES
(A SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements...................................... $ 265 $ 265
Buildings.................................................. 2,492 2,648
Machinery and equipment.................................... 8,827 9,826
Furniture and fixtures..................................... 287 298
------- -------
11,871 13,037
Less accumulated depreciation and amortization............. (8,861) (9,422)
------- -------
Net property, plant and equipment.......................... $ 3,010 $ 3,615
======= =======
</TABLE>
4. LEASE
The Company leases certain land, buildings and equipment under capital and
noncancelable operating lease agreements expiring in various years through
2003. Under the terms of one of these operating leases, monthly rental payments
may be adjusted every 36 months. Minimum future lease payments, by year and in
aggregate, under capital and noncancelable operating leases are as follows at
December 31, 1995:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1996...................................................... $ 342 $ 272
1997...................................................... 281 272
1998...................................................... 216 198
1999...................................................... 136 198
2000...................................................... 31 198
Thereafter................................................ -- 398
------ ------
Total minimum lease payments.............................. 1,006 $1,536
======
Amount representing interest.............................. (161)
------
Present value of net minimum lease payments............... $ 845
======
</TABLE>
Total rent expense related to operating leases for 1993, 1994 and 1995
amounted to $275, $276 and $288, respectively.
F-39
<PAGE>
THE IMPERIAL ELECTRIC COMPANY AND SUBSIDIARIES
(A SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES
The Company's taxable income is included in the consolidated federal income
tax return of Jordan Industries, Inc. The amount of income taxes allocated to
the Company is based on the amount of taxes determined as if the Company filed
a separate federal income tax return.
Significant components of the provision for income taxes attributable to
operations are as follows for the years ended December 31:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1993 1994 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.......................................... $ 1,208 $ 1,931 $ 2,194
State............................................ 188 292 308
------- ------- -------
Total current.................................. 1,396 2,223 2,502
Deferred:
Federal.......................................... (211) 31 (10)
State............................................ -- -- --
------- ------- -------
Total deferred................................. (211) 31 (10)
------- ------- -------
$ 1,185 $ 2,254 $ 2,492
======= ======= =======
</TABLE>
The provision for income taxes differs from the amount of income tax
provision computed by applying the federal income tax rate to income before
income taxes. A reconciliation of the differences is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1993 1994 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Computed statutory tax provision.................... $ 949 $ 1,893 $ 2,061
Increase (decrease) resulting from:
State and local taxes, net of federal benefit..... 110 193 203
Nondeductible amortization........................ 145 145 146
Other--Net........................................ (19) 23 82
------- ------- -------
Provision for income taxes.......................... $ 1,185 $ 2,254 $ 2,492
======= ======= =======
</TABLE>
Deferred tax liabilities and assets are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1994 1995
----- -----
(IN
THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Depreciation.................................................. $ 783 $ 759
----- -----
Total deferred tax liabilities.............................. 783 759
Deferred tax assets:
Vacation accrual.............................................. 55 63
Franchise tax................................................. 146 128
Employee benefits............................................. 94 53
Uniform capitalization........................................ 201 243
Other......................................................... 204 199
----- -----
Total deferred tax assets................................... 700 686
----- -----
Net deferred tax liabilities.................................... $ 83 $ 73
===== =====
</TABLE>
F-40
<PAGE>
THE IMPERIAL ELECTRIC COMPANY AND SUBSIDIARIES
(A SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. RELATED PARTY TRANSACTION
During the years ended December 31, 1993, 1994 and 1995, the Company engaged
in various related party transactions with its parent, Jordan Industries, Inc.
Following are the details of material transactions between the Company and
Jordan Industries.
The Company's note payable to Parent is primarily financed through a
revolving credit arrangement with Jordan Industries, Inc. Borrowings under the
arrangement are due on demand and bear interest at 14.5%. The borrowings were
used primarily to purchase Imperial, Scott, and Gear. The Parent has
represented that it does not intend to call this note in any part during the
year ended December 31, 1996. The portion of the note payable which the
Company has repaid or intends to repay within the next year has been
classified as current in the financial statements.
Jordan Industries, Inc. provides consulting services to the Company in
exchange for annual fees which are payable in accordance with terms stipulated
in the management consulting agreement between the Company and Jordan
Industries. Management fee expenses recorded by the Company for such services
amounted to $1,967, $2,065 and $2,168 for the years ended December 31, 1993,
1994 and 1995, respectively.
Due to Parent at December 31 consists of:
<TABLE>
<CAPTION>
1994 1995
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Interest under revolving credit agreement..................... $ 414 $ 334
Management fee................................................ 516 542
Taxes payable................................................. 2,008 3,073
Other......................................................... 613 853
------ ------
$3,551 $4,802
====== ======
</TABLE>
7. BENEFIT PLANS
The Company has several employee benefit plans covering substantially all
employees. The Company makes contributions to the plans equal to the amounts
determined by accepted actuarial methods for the defined benefit plan and on a
cents-per-hour basis for certain defined contribution plans.
Benefits under the defined benefit plan are based on years of service and
employee compensation.
The following table sets forth the status of the defined benefit plan of the
Company at December 31:
<TABLE>
<CAPTION>
1994 1995
----- -----
(IN
THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested...................................................... $ 151 $ 72
Non-vested.................................................. 9 8
----- -----
Projected benefit obligation.................................. 160 80
Plan assets at fair value primarily invested in money market
accounts, equity securities, loans and mortgages............. 128 32
----- -----
Under-funded projected benefit obligation..................... (32) (48)
Unrecognized net gain......................................... (40) (6)
----- -----
Accrued pension cost recorded as a current liability.......... $ (72) $ (54)
===== =====
</TABLE>
F-41
<PAGE>
THE IMPERIAL ELECTRIC COMPANY AND SUBSIDIARIES
(A SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net pension cost of the defined benefit plan includes the following
components for the years ended December 31:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Interest cost..................................... $ 16 $ 17 $ 8
Return on assets.................................. (21) 17 (4)
Net amortization of deferral...................... 8 (31) (3)
-------- -------- -------
Net periodic pension cost....................... $ 3 $ 3 $ 1
======== ======== =======
</TABLE>
The following actuarial assumptions were used in determining the projected
benefit at December 31:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate............................. 7.00% 7.75% 6.00%
Expected long-term rate on plan assets..................... 8.00% 8.00% 7.75%
</TABLE>
Certain employees not covered by collective bargaining agreements
participate in 401(k) plans sponsored by the Company or Jordan Industries,
Inc. The plans provide for employer contributions either based on a formula or
at the discretion of the Board of Directors. Employer contributions to their
401(k) and other defined contribution plans amounted to approximately $416,
$401 and $299 in 1993, 1994 and 1995, respectively.
8. RESTRICTED SUBSIDIARIES
The Company is a wholly-owned subsidiary of Jordan Industries and is one of
the "Restricted Subsidiaries" of Jordan Industries under the JII Indentures
relating to the Senior Notes and Senior Subordinated Discount Debentures of
Jordan Industries (the "JII Indentures"). As a result, certain covenants in
the JII Indentures are applicable to the Company and will limit its ability to
make dividends, distributions and investments in entities that are not
"Restricted Subsidiaries", incur indebtedness, grant liens, enter into
affiliate transactions, and enter into agreements which limit the Company's
ability to make dividends and distributions and make asset sales. The JII
Indentures are also collateralized by all of the assets of the Company.
F-42
<PAGE>
BARBER-COLMAN MOTORS DIVISION
(A DIVISION OF BARBER-COLMAN COMPANY, A
WHOLLY-OWNED SUBSIDIARY OF SIEBE, PLC.)
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 8,
1996
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Current assets:
Cash............................................................. $ 6
Accounts receivable from third parties, less allowance of $33.... 2,399
Accounts receivable from related entities........................ 634
Inventories...................................................... 2,935
Prepaids expenses and other current assets....................... 636
Deferred income taxes............................................ 175
-------
Total current assets........................................... 6,785
Property, equipment and leasehold improvements, net.............. 6,918
Goodwill, less accumulated amortization of $701.................. 2,577
-------
Total assets................................................... $16,280
=======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable to third parties................................ $ 1,361
Accounts payable to related entities............................. 121
Accrued expenses and other current liabilities................... 305
-------
Total current liabilities...................................... 1,787
Deferred income taxes............................................ 1,959
Division equity.................................................. 12,534
-------
Total liabilities and division equity.......................... $16,280
=======
</TABLE>
See accompanying notes.
F-43
<PAGE>
BARBER-COLMAN MOTORS DIVISION
(A DIVISION OF BARBER-COLMAN COMPANY, A WHOLLY-OWNED SUBSIDIARY OF SIEBE, PLC.)
STATEMENT OF DIVISIONAL OPERATIONS AND DIVISION EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1996 TO MARCH
8, 1996
--------------
(IN THOUSANDS)
<S> <C>
Net sales:
Third parties................................................ $ 4,378
Related entities............................................. 428
-------
4,806
-------
Cost of sales, excluding depreciation:
Third parties................................................ 3,242
Related entities............................................. 317
-------
3,559
-------
Selling, general and administrative expenses, excluding
depreciation:
Allocated by Parent.......................................... 164
Other........................................................ 707
-------
871
-------
Depreciation................................................... 103
Amortization of goodwill and other intangibles................. 100
-------
Operating income............................................... 173
Other expense.................................................. 2
Allocated interest expense..................................... 66
-------
Income before income taxes..................................... 105
Provision for income taxes..................................... 42
-------
Divisional income.............................................. 63
Division equity at beginning of period......................... 11,821
Contributions by Parent, net................................... 650
-------
Division equity at end of period............................... $12,534
=======
</TABLE>
See accompanying notes.
F-44
<PAGE>
BARBER-COLMAN MOTORS DIVISION
(A DIVISION OF BARBER-COLMAN COMPANY, A WHOLLY-OWNED SUBSIDIARY OF SIEBE, PLC.)
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1996 TO MARCH
8, 1996
--------------
(IN THOUSANDS)
<S> <C>
Cash flows from operating activities
Divisional income................................................ $ 63
Adjustments to reconcile divisional income to
net cash used in operating activities:
Depreciation and amortization.................................. 203
Deferred income taxes.......................................... (59)
Changes in operating assets and liabilities:
Accounts receivable.......................................... (1,019)
Inventories.................................................. (209)
Prepaid expenses and other current assets.................... (37)
Accounts payable............................................. 772
Accrued expenses and other current liabilities............... (246)
------
Net cash used in operating activities............................ (532)
Cash flows from investing activities
Purchases of property, equipment,
and leasehold improvements.................................... (118)
------
Net cash used in investing activities............................ (118)
Cash flows from financing activities
Contributions by Parent........................................ 650
------
Net cash provided by financing activities........................ 650
------
Net change in cash............................................... --
Cash at beginning of period...................................... 6
------
Cash at end of period............................................ $ 6
======
</TABLE>
See accompanying notes.
F-45
<PAGE>
BARBER-COLMAN MOTORS DIVISION
(A DIVISION OF BARBER-COLMAN COMPANY, A
WHOLLY-OWNED SUBSIDIARY OF SIEBE, PLC.)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
(IN THOUSANDS)
MARCH 8, 1996
1.BASIS OF PRESENTATION
The unaudited financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes these disclosures are adequate to make the information
presented not misleading. In the opinion of management, all adjustments
necessary for a fair presentation for the period presented have been reflected
and are of a normal recurring nature. These financial statements should be
read in conjunction with the financial statements and the notes thereto for
the year ended March 31, 1995 and the nine month period ended December 31,
1995.
Results of operations for the period from January 1, 1996 to March 8, 1996
is not necessarily indicative of the results that may be achieved for the
entire year ending December 31, 1996.
The Division is part of a consolidated group and as such has significant
transactions with related entities. The terms of these transactions were
determined between related parties and may, therefore, differ from terms which
would have occurred between wholly unrelated parties and may also differ from
the costs which would have been incurred had the Division operated as a
completely autonomous entity.
2.INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 8,
1996
--------------
(IN THOUSANDS)
<S> <C>
Raw materials................................................. $ 66
Work in process............................................... 3,432
Finished goods................................................ 212
Inventory obsolescence reserve................................ (451)
------
3,259
LIFO reserve.................................................. (324)
------
$2,935
======
</TABLE>
Inventories with a current cost of approximately $2,072 have been costed
using the LIFO method.
F-46
<PAGE>
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NO DEALER, SALESMAN OR ANY OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
NOT CONTAINED IN THIS OFFERING MEMORANDUM, AND, IF GIVEN OR MADE, SUCH INFOR-
MATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR BY THE INITIAL PURCHASERS. THIS OFFERING MEMORANDUM DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN 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 OFFERING MEMORAN-
DUM NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLI-
CATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSE-
QUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary................................................................... 1
Risk Factors.............................................................. 13
The Company............................................................... 18
Use of Proceeds........................................................... 20
Capitalization............................................................ 21
Unaudited Pro Forma Condensed Financial Statements........................ 22
Unaudited Pro Forma Condensed Balance Sheet............................... 26
Selected Historical Financial Data........................................ 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Business.................................................................. 29
Management................................................................ 38
Principal Stockholders.................................................... 41
The Exchange Offer........................................................ 42
Description of Senior Notes............................................... 51
Description of Certain Indebtedness....................................... 79
Certain Transactions...................................................... 80
Plan of Distribution...................................................... 83
Federal Income Tax Consequences........................................... 83
Legal Matters............................................................. 83
Experts................................................................... 84
Available Information..................................................... 84
Index to Financial Statements............................................. F-1
</TABLE>
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$170,000,000
MOTORS AND GEARS, INC.
10 3/4% SERIES B SENIOR NOTES DUE 2006
----------------
PROSPECTUS
----------------
APRIL 3, 1997
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