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FILED PURSUANT TO RULE NO. 424(b)(4)
REGISTRATION NO. 333-44057
PROSPECTUS
MOTORS AND GEARS, INC.
OFFER TO EXCHANGE UP TO $270,000,000 OF ITS 10 3/4% SERIES D SENIOR NOTES DUE
2006, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR ANY AND ALL
OF ITS OUTSTANDING 10 3/4% SERIES C SENIOR NOTES DUE 2006 AND ITS 10 3/4% SERIES
B SENIOR NOTES DUE 2006
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Motors and Gears, Inc., a Delaware corporation (the "Company"), 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 $270 million aggregate principal amount of 10 3/4% Series D Senior Notes
due 2006 (the "New Notes"), of the Company for $100 million aggregate
principal amount of its outstanding 10 3/4% Series C Senior Notes due 2006
(the "Old Series C Notes") and $170 million aggregate principal amount of its
outstanding 10 3/4% Series B Senior Notes due 2006 (the "Old Series B Notes"
and collectively with the Old Series C Notes, 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 Series B Notes that are to be exchanged
therefor, except for the total outstanding principal amount thereof. See
"Description of Senior Notes." The Company will receive no proceeds in
connection with the Exchange Offer. See "Use of Proceeds."
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 Amended Credit
Agreement (as defined). On a pro forma basis, as of September 30, 1997, after
giving effect to the Old Offering and the application of the net proceeds
therefrom, the aggregate principal amount of secured Indebtedness of the
Company and Indebtedness of the Company's subsidiaries to which the Senior
Notes are effectively junior is approximately $9.1 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
Senior Notes may include up to $115.0 million incurred under the Amended
Credit Agreement and other Indebtedness permitted by the Indenture (as
defined), and $25.0 million of additional Indebtedness. See "Description of
Senior Notes" and "Description of Certain Indebtedness."
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON FEBRUARY 18, 1998, UNLESS EXTENDED.
(Cover continued on following pages)
----------------
SEE "RISK FACTORS" COMMENCING ON PAGE 14 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY HOLDERS OF OLD NOTES WHO
TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ACT 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 January 16, 1998
<PAGE>
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 the Old Series C 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 Series C Notes under the Securities Act. See "The
Exchange Offer --Consequences of Not Exchanging Old Notes."
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
February 18, 1998, 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 will pay the
expenses of the Exchange Offer.
The Old Series C Notes were issued and sold on December 17, 1997 (the "Old
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 Series C 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, which governs both
the Old Series C Notes and the New Notes. The form and terms (including
interest rate, maturity and ranking) of the New Notes are the same as the form
and terms of the Old Series B Notes, except for the total outstanding
principal amount thereof, and are the same as the form and terms of the Old
Series C Notes, except for the total outstanding principal amount thereof and
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 Series C Notes, (ii) will not be entitled to registration rights
and (iii) will not provide for any Liquidated Damages. See "The Exchange
Offer--Registration Rights; Liquidated Damages."
The Company is making the Exchange Offer pursuant to the registration
statement of which the 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.
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By tendering, each Holder which is not a broker-dealer will represent to the
Company that, among other things, the person receiving the New Notes, whether
or not such person is the Holder, (i) will acquire the New Notes in the
ordinary course of such persons' business, (ii) has no arrangement or
understanding with any person to participate in a distribution of the New
Notes and (iii) is not engaged in and does not intend to engage in a
distribution of the New Notes. If any Holder or any such other person has an
arrangement or understanding with any person to participate in a distribution
of such New Notes, is engaged in or intends to engage in a distribution of
such New Notes, is an "affiliate," as defined under rule 405 of the Securities
Act, of the Company, or acquired the Old Notes as a result of market making or
other trading activities, then such Holder or any such other person (i) can
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 meeting the
requirements of the Securities Act 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 are 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 120 days after the Expiration Date, it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution."
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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 herein. Unless
otherwise indicated, all references herein to the Company's business and pro
forma information give effect to the acquisition of all of the Company's
subsidiaries, including the acquisitions of Barber-Colman Motors (as defined)
(the "Barber-Colman Acquisition"), Imperial, Scott and Gear (each as defined)
(the "Imperial Acquisitions"), FIR (as defined) (the "FIR Acquisition"),
Electrical Design (as defined) (the "Electrical Design Acquisition") and Motion
Control (as defined) (the "Motion Control Acquisition") (collectively, either
the "Acquisitions" or the "Acquired Companies"), as if all such transactions
occurred at the beginning of the relevant period. See "--Recent Acquisitions"
and "The Company--Operating Subsidiaries." 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 international manufacturer of specialty purpose
electric motors, gearmotors, gearboxes, gears and electronic motion controls
for a wide variety of consumer, commercial and industrial markets. The Company
has a diverse base of customers and its products are used in a broad range of
applications including vending machines, refrigerator ice dispensers,
commercial dishwashers, commercial floor care equipment, commercial sewing
machines, industrial ventilation equipment, automated material handling systems
and elevators. The Company's subsidiaries have sold their brand name products
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 $210.4 million and $3.1 million, respectively and for the nine
months ended September 30, 1997, the Company had pro forma net sales and net
income of $166.4 million and $4.4 million, respectively.
The Company competes primarily in the electric motors and electronic motion
control systems industries. U.S. shipments of electric motors are estimated by
industry sources to have been approximately $8.0 billion in 1996 and to have
been growing at a compound annual growth rate of approximately 4.0% 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 1996 according to industry
sources. The Company believes that continuing competitive pressures will lead
to further consolidation in the electric motor industry and will create
opportunities for the Company to extend its product lines and business through
strategic acquisitions.
Within these industries, the Company operates in specialized niche markets
which typically consist of high value-added motor and control system
applications requiring custom engineered, non-standardized motors and controls.
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
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purchasing and updating used equipment. As a result, annual capital
expenditures for the last five years have averaged less than $3.0 million.
The Company operates in four product groups: (1) subfractional motors, which
represented 39.0% and 41.7% of pro forma net sales for the year ended December
31, 1996 and the nine months ended September 30, 1997, respectively, (2)
fractional/integral motors, which represented 34.6% and 31.2% of pro forma net
sales for the year ended December 31, 1996 and the nine months ended September
30, 1997, respectively, (3) gears and gearboxes, which represented 2.9% and
3.4% of pro forma net sales for the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively, and (4) motion control systems,
which represented 23.5% and 23.7% of pro forma net sales for the year ended
December 31, 1996 and the nine months ended September 30, 1997, respectively.
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, commercial dishwashers, commercial sewing
machines, industrial ventilation equipment and elevators. Average product
selling prices typically range from $50 to $150 per unit for commercial floor
care products to $2,000 to $2,500 per unit for elevator motors. The Company
believes it is the leading DC elevator motor manufacturer in the United States,
the leading commercial dishwasher pump manufacturer in Europe and the primary
supplier to virtually all the major commercial floor care product manufacturers
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 original equipment manufacturers ("OEMs") of
motors, 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.
Electronic Motion Control Systems. The Company's motion control systems are
used primarily in automated conveyor systems within the automotive industry and
the elevator modernization market. The systems typically control several
components such as electric motors, hydraulic or pneumatic valves, actuators
and switches that are required for the conveyor or elevator systems to function
properly. The prices for these motion control systems can run from several
thousand dollars to several hundred thousand dollars. The Company believes its
engineering capability, manufacturing quality and after-sales service are
highly regarded by all of its customers.
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. 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.
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Diverse Markets and Customers. The Company serves numerous end user markets
and a diverse base of over 2,500 customers. In 1996, the Company's largest
single customer represented approximately 3% of net sales and the Company's top
five customers represented approximately 14% of net sales. The Company's
customers include leading OEMs such as General Electric Co., Inc. ("General
Electric"), Whirlpool Corporation ("Whirlpool"), Clarke Industries ("Clarke"),
Siebe, plc. ("Siebe") and Vendo Company, Inc. ("Vendo"). 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. 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 and control system design and the continuous redesign
processes to ensure that the most reliable product is manufactured. The Company
aggressively redesigns its products to improve performance and reduce
production costs, which 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 seven senior managers average over
28 years of experience in the motors, gears and motion control systems 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. Recent examples of such product introductions include a
new transaxle drive system for floor care customers and a value-added sub-
assembly for major appliance customers. 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 electric motor, gear and motion control
markets remain 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
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lines, expanding technological capabilities or entering new geographic markets.
This strategy is illustrated by the Company's recent acquisition of FIR which
allowed it to add complementary products, acquire brushless motor technology
and enter new European markets. In addition, the Company plans to continue to
target the motion control industry for additional acquisition opportunities.
Acquisitions in the motion control industry, such as the Company's recent
acquisitions of Electrical Design and Motion Control in the controls and
sensors segment, 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. 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") in November 1996 from 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.
RECENT DEVELOPMENTS
On June 12, 1997, the Company, through its newly-formed wholly-owned
subsidiary, FIR Group Holdings, Inc. and its wholly-owned subsidiaries, Motors
and Gears Amsterdam, B.V. and FIR Group Holdings Italia, SrL, purchased all of
the common stock of the FIR Group Companies ("FIR"), consisting of CIME S.p.A.,
SELIN, S.p.A. and FIR S.p.A. FIR is a manufacturer of electric motors and pumps
for niche applications such as pumps for commercial dishwashers, motors for
industrial sewing machines and motors for industrial fans and ventilators. The
purchase price was $48.4 million.
On October 27, 1997, the Company purchased all of the outstanding stock of E.
D. and C. Company, Inc. through its newly formed wholly owned subsidiary,
Electrical Design and Control Company ("Electrical Design"). Electrical Design
is a full-service electrical engineering company which designs, engineers and
manufactures electrical control systems and panels for material handling
systems and other like applications. Electrical Design provides comprehensive
design, build and support services to produce electronic control panels which
regulate the speed and movement of conveyor systems used in a variety of
automotive plants and other industrial applications. The purchase price was
$19.0 million, including a $4.0 million ED Junior Seller Note (as defined). See
"Description of Certain Indebtedness--Junior Seller Notes."
On December 18, 1997, the Company purchased all of the outstanding stock of
Motion Control Engineering, Inc. ("Motion Control") through its newly formed
wholly owned subsidiary, Motion Holdings, Inc. Motion Control manufactures
electronic motion and logic control products for elevator markets, primarily
the elevator modernization market. The purchase price was $51.6 million.
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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 is a direct, wholly-owned subsidiary of Motors
and Gears Holdings, Inc., a Delaware corporation ("Parent"). 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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THE EXCHANGE OFFER
Securities Offered........ $270 million aggregate principal amount of 10 3/4%
Series D Senior Notes due 2006. The terms of the
New Notes and the Old Series C Notes are identical
in all material respects, except for the total
outstanding principal amount thereof, certain
transfer restrictions and registration rights
relating to the Old Series C Notes and certain
Liquidated Damages provisions relating to the Old
Series C Notes described below under "--Summary
Description of the New Notes."
Issuance of Old
Notes;Registration
Rights...................
The Old Series C Notes were issued on December 17,
1997 to Jefferies & Company, Inc. and BT Alex.
Brown Incorporated (the "Initial Purchasers"),
which placed the Old Series C 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
Series C Notes a 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 February 15, 1998 with respect to the
Exchange Offer and (ii) to use its best efforts to
cause the Registration Statement to be declared
effective by the Commission on or prior to April
16, 1998. In certain circumstances, the Company
will be required to provided a shelf registration
statement (the "Shelf Registration Statement") to
cover resales of the Old Series C 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 ("Liquidated Damages") to holders of the
Old Series C Notes under certain circumstances. See
"The Exchange Offer--Registration Rights;
Liquidated Damages," Holders of Old Series C 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 aggregate 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. The objective of the
Exchange Offer is to create a single series debt
securities having a total outstanding principal
amount which is larger than that of either the Old
Series B Notes or the Old Series C Notes as
separate series, thus resulting in greater
liquidity for the New Notes. However, see "Risk
Factors--New Notes; Dilution of Interest." As of
the date hereof, $170,000,000 aggregate principal
amount of Old Series B Notes and $100,000,000
aggregate principal amount of Old Series C Notes
are outstanding. 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) and Initial Purchaser who acquired the
Old Notes directly from the Company solely in order
to
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<PAGE>
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. By tendering,
each Holder, which is not a broker-dealer, will
represent to the Company that, among other things,
the person receiving the New Notes, whether or not
such person is the Holder, (i) will acquire the New
Notes in the ordinary course of such person's
business, (ii) has no arrangement or understanding
with any person to participate in a distribution of
the New Notes and (iii) is not engaged in and does
not intend to engage in a distribution of the New
Notes. If any Holder or any such other person has
an arrangement or understanding with any person to
participate in a distribution of such New Notes, is
engaged in or intends to engage in a distribution
of such New Notes, is an "affiliate," as defined
under Rule 405 of the Securities Act, of the
Company, or acquired the Old Notes as a result of
market making or other trading activities, then
such Holder or any such other person (i) cannot
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 meeting the requirements of the
Securities Act in connection with any resale of
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 the requests for
information
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<PAGE>
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 at 5:00 p.m., New
York City time, on February 18, 1998 or such later
date and time to which it is extended. 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
theExchange Offer........
The Exchange Offer is subject to certain customary
conditions, all of which may be waived by the
Company, including the absence of (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. In
the event the Company asserts or waives a condition
to the Exchange Offer which constitutes a material
change to the terms of the Exchange Offer, the
Company will disclose such change in a manner
reasonably calculated to inform prospective
investors of such change, and will extend the
period of the Exchange Offer by five business days.
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 holder
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."
7
<PAGE>
Federal Income
TaxConsequences..........
The exchange of Old Notes for New Notes 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" for a
discussion of the material federal income tax
consequences expected to result from the Exchange
Offer.
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............ State Street Bank and Trust Company is serving as
Exchange Agent in connection with the Exchange
Offer.
CONSEQUENCES OF NOT EXCHANGING THE OLD NOTES
Holders of Old Series C Notes who do not exchange their Old Series C Notes
for New Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Series C Notes as set forth in the legend
thereon as a consequence of the issuance of the Old Series C 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 Series C 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
Series C Notes under the Securities Act. In addition, Holders of Old Notes who
do not exchange their Old Notes for New Notes will not be able to take
advantage of the increased liquidity afforded by the New Notes which would have
a total aggregate principal amount of $270,000,000 as opposed to $170,000,000
for the Old Series B Notes and $100,000,000 for the Old Series C Notes. See
"Risk Factors--Consequences of Exchange and Failure to Exchange" and "The
Exchange Offer--Consequences of Not Exchanging Old Notes."
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Series C Notes are identical in all
material respects, except for the total outstanding principal amount thereof,
certain transfer restrictions and registration rights relating to the Old
Series C Notes and except that, if the Registration Statement is not filed on
or before February 15, 1998 or is not declared effective on or before April 16,
1998 or the Exchange Offer is not consummated on or before 30 business days
after the effective date of this Registration Statement, 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 Series C Notes in an amount equal to $.05 per week for each
$1,000 principal amount of Old Series C Notes, as applicable, held by such
Holder ("Liquidated Damages"). 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 Series C Notes, as applicable.
The New Notes will accrue 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 16, 1997. 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 from the most
recent date to which interest has been paid or, if no interest has been paid,
from November 16, 1997. 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 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 the consummation of the Exchange Offer.
8
<PAGE>
THE NEW NOTES
Issuer.................... Motors and Gears, Inc.
Securities Offered........ $270.0 million aggregate principal amount of 10
3/4% Series D Senior Notes due 2006.
Maturity.................. November 15, 2006.
Interest Rate and Payment The Old Notes bear interest and the New Notes will
Dates.................... bear interest at a rate of 10 3/4% per annum,
payable semi-annually in cash in arrears on each
November 15 and May 15, commencing May 15, 1998.
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, will rank pari passu in
right of payment with all other Senior Indebtedness
of the Company and senior to all Subordinated
Indebtedness of the Company. The Senior Notes will
effectively rank junior to any secured Indebtedness
incurred under the Amended Credit Agreement. On a
pro forma basis, as of September 30, 1997, after
giving effect to the Old Offering and the
application of the net proceeds therefrom, the
aggregate principal of secured Indebtedness of the
Company and Indebtedness of the Company's
subsidiaries to which the
9
<PAGE>
Senior Notes will effectively rank junior is
approximately $9.1 million. The Indenture will
permit 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 Senior Notes may
include up to $115.0 million incurred under the
Amended Credit Agreement and other Indebtedness
permitted by the Indenture, and $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 Amended Credit
Agreement. In the event a Change of Control occurs,
the Company will likely be required to refinance
the Indebtedness outstanding under the Amended
Credit Agreement and the Senior Notes. If there is
a Change of Control, any Indebtedness under the
Amended 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, 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."
For a discussion of the terms of the Senior Notes, see "Description of Senior
Notes."
RISK FACTORS
Holders of Old Notes should consider carefully all of the information set
forth in the Prospectus and, in particular, should consider the 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 Amended 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, the Company's
acquisition strategy and the dilution of voting interest caused by the issuance
of New Notes.
10
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents summary (i) historical and pro forma balance
sheet data of the Company at September 30, 1997, (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, for the year ended December 31, 1996
and for the nine months ended September 30, 1996 and 1997 and (iii) pro forma
operating and other data of the Company for the year ended December 31, 1996
and the nine months ended September 30, 1997. The pro forma data is unaudited.
The pro forma data gives effect to the Old Offering, the application of the
net proceeds therefrom and the Acquisitions. 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 Offering, and the application of
the net proceeds therefrom, and the Acquisitions 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,
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 and
FIR from June 12, 1997, the date of its acquisition by the Company. The
historical data does not reflect the results of Electrical Design or Motion
Control. The historical data of the Company at December 31, 1995 and 1996, 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 Company at and for the
nine months ended September 30, 1996 and 1997 were derived from the unaudited
condensed 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,"
"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, Imperial,
FIR, Electrical Design and Motion Control, and the related notes thereto,
included elsewhere herein.
11
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-----------------------
HISTORICAL PRO FORMA(1)
---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................... $ 37,303 $ 70,845
Total assets............................................ 228,295 329,293
Long-term obligations, including current portion(2)..... 209,095 283,595
Stockholder's equity (net capital deficiency)........... (13,461) 6,539
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(3)
---------------------------------------------------------------------------------- --------------------------
PREDECESSOR
AND COMPANY
PREDECESSOR(4) COMPANY COMBINED(5) COMPANY(6) COMPANY
-------------------------- ------------ ----------- ------------------------------ --------------------------
NINE
JANUARY 1, SEPTEMBER 23 MONTHS ENDED NINE MONTHS
YEAR ENDED THROUGH THROUGH YEAR ENDED YEAR ENDED SEPTEMBER 30, YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 22, DECEMBER 31, DECEMBER DECEMBER 31, ----------------- DECEMBER 31, SEPTEMBER 30,
1994 1995 1995 31, 1995 1996 1996 1997(7) 1996 1997
------------ ------------- ------------ ----------- ------------ ------- -------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
Net sales....... $49,340 $39,295 $24,684 $63,979 $117,571 $90,154 $106,379 $210,376 $166,413
Gross profit,
excluding
depreciation... 18,022 15,182 8,255 23,437 41,820 32,147 38,030 74,070 60,663
Operating
income......... 12,309 11,616 4,753 16,369 23,229 18,365 21,978 35,982 29,976
Interest
expense, net... 0 0 2,412 2,412 10,987 7,413 15,596 30,891 22,865
Net income...... 11,921 11,604 1,360 12,964 4,834 6,870 3,577 3,093 4,357
SUPPLEMENTAL PRO
FORMA AND OTHER
DATA:
Pro forma income
taxes(8)....... $ 4,837 $ 4,755 $ -- $ 4,755 $ -- $ -- $ -- $ -- $ --
Pro forma net
income(8)...... 7,255 7,133 1,360 8,493 4,834 6,870 3,577 3,093 4,357
Ratio of
earnings to
fixed
charges(9)..... 41.7x -- -- 6.3x 2.1x 2.4x 1.4x 1.2x 1.3x
</TABLE>
- -------
(1) Gives effect to (i) the transactions contemplated by the Old Offering and
the application of the net proceeds therefrom and (ii) the Electrical
Design Acquisition and the Motion Control Acquisition, as if all such
transactions occurred on September 30, 1997. See "Use of Proceeds,"
Unaudited Pro Forma Condensed Financial Statements of the Company and
"Certain Transactions--The Company Formation and Proceeds From the Series
A/B Note Offering."
(2) Pro forma balance includes the $4,500 premium on the Old Series C Notes
reflecting the issuance price of 104.5%. See "Capitalization."
(3) Includes the results of operations of the Company and the Acquired
Companies as if all of the Acquired Companies were acquired at the
beginning of the relevant period, and the elimination or adjustment of
certain expenses and fees as described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Certain
Transactions--Services Agreements," and the Unaudited Pro Forma Condensed
Financial Statements of the Company and the related notes thereto appearing
elsewhere herein.
(4) Reflects the results of operations of the Predecessor for the periods prior
to its acquisition by the Company on September 22, 1995.
(5) 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.
(6) 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.
12
<PAGE>
(7) The Company's results of operations for the nine months ended September 30,
1997 include the results of FIR since June 12, 1997, the date of its
acquisition by the Company, through July 31, 1997. The results of FIR are
included for periods ending two months prior to the Company's year end and
interim periods to ensure timely preparation of the Consolidated Financial
Statements.
(8) Pro forma net income reflects income taxes at the tax rate of 40%. For the
Predecessor, 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. For the Company, reflects income taxes
attributable to the Company for the historical periods presented subsequent
to September 23, 1995 at the tax rate (40%) attributed to it as a C
corporation pursuant to the Tax Sharing Agreement (as defined). See
"Certain Transactions--Tax Sharing Agreement."
(9) 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.
13
<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 New Notes in exchange for 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 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 Series C Notes who do not exchange their Old Series C Notes for
New Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Series C Notes as set forth in the legend
thereon. In general, the Old Series C 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 Series C Notes under the Securities Act. In addition, upon
the consummation of the Exchange Offer holders of Old Series C Notes which
remain outstanding will not be entitled to any rights to have such Old Series
C 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." In addition,
Holders of Old Notes who do not exchange their Old Notes for New Notes will
not be able to take advantage of the increased liquidity afforded by the New
Notes which would have a total aggregate principal amount of $270,000,000 as
opposed to $170,000,000 for the Old Series B Notes and $100,000,000 for the
Old Series C Notes.
Based on interpretations by 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 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
(ii) 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. By tendering, each Holder which is not
a broker-dealer will represent to the Company that, among other things, the
person receiving the New Notes, whether or not such person is a Holder, (i)
will acquire the New Notes in the ordinary course of such person's business,
(ii) has no arrangement or understanding with any person to participate in a
distribution of the New Notes and (iii) is not engaged in and does not intend
to engage in a distribution of the New Notes. If any Holder or any such other
person has an arrangement or understanding with any person to participate in a
distribution of such New Notes, is engaged in or intends to engage in a
distribution of such New Notes, is an "affiliate," as defined under Rule 405
of the Securities Act, of the Company, or acquired the Old Notes as a result
of market making or other trading activities, then such Holder or any such
other person (i) can not rely on the applicable interpretations of the staff
of the Commission and (ii) must comply with the registration and prospectus
delivery requirements of
14
<PAGE>
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
September 30, 1997, on a pro forma basis, the Company's total indebtedness,
including current portion, was approximately $279.1 million, which excludes
the $4.5 million of premium on the Old Series C Notes, and its stockholders'
equity was $6.5 million, in each case after giving effect to the Old Offering,
the application of the net proceeds therefrom, and the Acquisitions. In
addition, subject to the restrictions under the Amended 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."
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
Amended Credit Agreement or a successor facility. The Company anticipates that
its operating cash flow, together with borrowings under the Amended 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 Amended 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 Amended Credit Agreement. See "Certain Transactions." On a pro forma
basis, as of September 30, 1997, 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 was approximately $9.1
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
15
<PAGE>
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
Amended Credit Agreement will limit the Company's subsidiaries from making
dividends to the Company except in limited circumstances. While the Amended
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 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 Amended Credit Agreement and
could cause a default under agreements governing other indebtedness of the
Company and its subsidiaries. Senior 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 Amended 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 or the results of FIR prior to June
12, 1997. None of the historical financial information presented in the
Prospectus reflects the results of Electrical Design or Motion Control. As a
result, the historical financial information 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 and Analysis 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.
JII expects to include the Company in its consolidated group for Federal
income tax purposes. However, if JII ceased to own stock representing at least
80% of the voting power and 80% of the value of all outstanding
16
<PAGE>
stock of the Company, the Company would be deconsolidated from the JII group.
It is anticipated that deconsolidation will occur, at the latest, in 2002, when
the preferred stock of the Company that is owned by JII is redeemed according
to its terms or discontinues its participation in the earnings of the Company,
although deconsolidation could occur prior to such time. Deconsolidation of the
Company from the JII group will trigger the recognition of substantial amount
of deferred intercompany gain that certain of the subsidiaries of JII will
realize as a result of the purchase of Imperial, Scott and Gear from JII.
Although JII would have the primary responsibility to pay the Federal income
tax liability arising from the recognition of those gains, the Company could
become liable for the Federal income tax on those gains if JII failed to pay
such tax.
The Company has entered into a number of affiliate transactions with JII,
including the Contingent Earnout Agreement, the New Subsidiary Advisory
Agreement (as defined), the JI Properties Services Agreement (as defined), the
New Subsidiary Consulting Agreement (as defined), the Transition 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 Amended Credit Agreement will contain other and more
restrictive covenants and prohibits the Company and its subsidiaries from
prepaying other indebtedness, including the Senior Notes. See "Description of
Senior Notes--Certain Covenants" and "Description of Certain Indebtedness--
Credit Agreement." The Amended Credit Agreement will also require 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 Amended Credit Agreement and/or the Indenture. Upon the
occurrence of an event of default under the Amended Credit Agreement, the
lenders thereunder could elect to declare all amounts outstanding under the
Amended 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
Amended Credit Agreement. The Indenture and the Amended 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--Credit Agreement."
CHANGE OF CONTROL AND DEFAULT UNDER AMENDED 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. Prepayment of the Senior Notes
pursuant to a Change of Control would constitute a default under the Amended
Credit Agreement. In the event that a Change of Control occurs, the Company
would be required to refinance the indebtedness outstanding under the Amended
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."
ACQUISITION STRATEGY
One of the Company's business strategies is to acquire additional electric
motors and generators companies that will complement the Company's existing
operations or provide the Company with an entry into regions or
17
<PAGE>
markets it does not presently serve. Inherent in such a strategy are certain
risks, such as increasing leverage and debt service requirements, potential
exposure to liabilities of acquired companies, and operating business in many
geographically diverse markets. There can be no assurance that the Company will
be able to identify suitable acquisition candidates or successfully acquire or
profitably manage additional companies. The Company competes and will continue
to compete with many other buyers, some of which have greater financial and
other resources than those of the Company, for the acquisition of electric
motors and generators companies.
NEW NOTES; DILUTION OF INTEREST
Pursuant to the Registration Rights Agreement, the Company has agreed to file
with the Commission the Exchange Offer Registration Statement with respect to
the Exchange Offer on or before February 15, 1998 and to use good faith efforts
to cause the Exchange Offer Registration Statement to become effective under
the Securities Act on or before April 16, 1998. It is likely that all Old Notes
will be tendered for exchange in the Exchange Offer; however, there is no
assurance that a significant amount of Old Series B Notes will be so tendered.
If all Old Series B Notes and Old Series C Notes are exchanged for New Notes,
$270,000,000 aggregate principal amount of New Notes will be outstanding
following consummation of the Exchange Offer, and the New Notes will be deemed
to be a single series of notes outstanding under the Indenture. In such case,
any actions requiring the consent of each holder or the holders of a majority
in outstanding principal amount of Senior Notes under the Indenture will
therefore require the consent of each holder of New Notes or the holders of a
majority in aggregate principal amount of such outstanding New Notes, as
applicable, and the individual voting interest of each holder will accordingly
be diluted.
ABSENCE OF PUBLIC MARKET FOR THE SENIOR NOTES; RESTRICTIONS ON TRANSFERS
The New Notes are being offered to Holders of the Old Notes. New Notes will
constitute a new issue of securities and do not have an established trading
market. The Old Notes are eligible for trading in the PORTAL Market, the
National Association of Securities Dealers' screen based, automated market for
trading of securities eligible for resale under Rule 144A. 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.
18
<PAGE>
THE COMPANY
GENERAL
The Company is a leading international manufacturer of specialty purpose
electric motors, gearmotors, gearboxes, gears and electronic motion controls
for a wide variety of consumer, commercial and industrial markets. The Company
has a diverse base of customers and its products are used in a broad range of
applications including vending machines, refrigerator ice dispensers,
commercial dishwashers, commercial floor care equipment, commercial sewing
machines, industrial ventilation equipment, automated material handling systems
and elevators. The Company's subsidiaries have sold their brand name products
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 $210.4 million and $3.1 million, respectively and for the nine
months ended September 30, 1997, the Company had pro forma net sales and net
income of $166.4 million and $4.4 million, respectively.
The Company operates in four product groups: (1) subfractional motors, which
represented 39.0% and 41.7% of pro forma net sales for the year ended December
31, 1996 and the nine months ended September 30, 1997, respectively, (2)
fractional/integral motors, which represented 34.6% and 31.2% of pro forma net
sales for the year ended December 31, 1996 and the nine months ended September
30, 1997, respectively, (3) gears and gearboxes, which represented 2.9% and
3.4% of pro forma net sales for the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively, and (4) motion control systems,
which represented 23.5% and 23.7% of pro forma net sales for the year ended
December 31, 1996 and the nine months ended September 30, 1997, respectively.
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, commercial dishwashers, commercial sewing
machines, industrial ventilation equipment and elevators. Average product
selling prices typically range from $50 to $150 per unit for commercial floor
care products to $2,000 to $2,500 per unit for elevator motors. The Company
believes it is the leading DC elevator motor manufacturer in the United States
and the leading commercial dishwasher pump manufacturer in Europe and the
primary supplier to virtually all the major commercial floor care product
manufacturers 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 OEMs of motors, 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.
Electronic Motion Control Systems. The Company's motion control systems are
used primarily in automated conveyor systems within the automotive industry and
the elevator modernization market. The systems typically control several
components such as electric motors, hydraulic or pneumatic valves, actuators
and switches that are required for the conveyor or elevator systems to function
properly. The prices for these motion control systems can run from several
thousand dollars to several hundred thousand dollars. The Company believes its
engineering capability, manufacturing quality and after-sales service are
highly regarded by all of its customers.
19
<PAGE>
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.
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.
FIR, founded in 1925 and acquired by the Company in June 1997, is an Italian
manufacturer of electric motors which are utilized in a variety of applications
including commercial sewing machines, commercial dishwashers and industrial
ventilation equipment.
Electrical Design, founded in 1958 and acquired by the Company in October
1997, manufactures electronic motion control products which control automated
conveyor systems and are used primarily in automotive manufacturing facilities.
Motion Control, founded in 1983 and acquired by the Company in December 1997,
manufactures electronic motion control products for elevator markets, primarily
the elevator modernization market.
For a discussion of the acquisitions of the Company's subsidiaries, see
"Certain Transactions--The Company Formation and Proceeds from the Series A/B
Note Offering."
20
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer.
The net proceeds received by the Company from the Old Offering and the
purchase of Company common stock by the Parent (after the deduction of
discounts and commissions, fees and other expenses associated with the Old
Offering, the Consent Solicitation and the Amended Credit Agreement) were
approximately $120.4 million. The net proceeds from the Old Offering and the
purchase of Company common stock by the Parent were used by the Company to (i)
repay existing indebtedness, (ii) acquire Motion Control, and (iii) provide
additional working capital.
M&G Industries, the Company's wholly-owned subsidiary, will enter into the
Amended Credit Agreement in order to provide for borrowings of up to $115.0
million. See "Description of Certain Indebtedness--Credit Agreement." The
following table summarizes the sources and uses of funds received in the Old
Offering.
<TABLE>
<CAPTION>
SOURCES OF FUNDS USES OF FUNDS
- ------------------------------------ -----------------------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Senior Notes (1)............. $105.4 Repay existing indebtedness (2).. $ 49.0
Additional Common Stock...... 20.0 Acquire Motion Control........... 51.6
Working Capital.................. 19.8
Fees and expenses................ 5.0
------ ------
Total Sources............ $125.4 Total Uses....................... $125.4
====== ======
</TABLE>
- --------
(1) Reflects the issuance of the Old Series C Notes at a price of 104.5%, plus
accrued interest from November 16, 1997 of $0.9 million.
(2) Represents repayment of outstanding balances as of December 17, 1997 under
the Existing Credit Agreement which bore interest at an average rate of
8.5% and was incurred to finance the FIR Acquisition in June 1997 and the
Electrical Design Acquisition in October 1997.
21
<PAGE>
CAPITALIZATION
The following table sets forth the (i) historical consolidated cash and cash
equivalents and capitalization of the Company at September 30, 1997 and (ii)
the pro forma consolidated cash and cash equivalents and capitalization of the
Company at September 30, 1997 as adjusted to reflect the transactions
contemplated by the Old Offering and the application of the net proceeds
therefrom, the Electrical Design Acquisition, the Motion Control Acquisition
and the proceeds from the purchase of common stock of the Company by the
Parent. The table should be read in conjunction with the "Selected Historical
Financial Data" and Consolidated Financial Statements of the Company and
related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------
ACTUAL PRO FORMA
-------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 5,104 $ 26,628
======== ========
Long-term obligations, including current portion:
Existing Credit Agreement (1)............................. $ 34,000 $ --
Senior Notes (2).......................................... 170,000 274,500
Other debt (3)............................................ 5,095 9,095
-------- --------
Total long-term obligations............................. 209,095 283,595
Stockholder's equity (net capital deficiency) (4)........... (13,461) 6,539
-------- --------
Total capitalization.................................... $195,634 $290,134
======== ========
</TABLE>
- --------
(1) For additional information see "Description of Certain Indebtedness--
Credit Agreement."
(2) Pro forma balance includes the $4,500 premium on the Old Series C Notes
reflecting the issuance price of 104.5%. For purposes of the above table,
"Senior Notes" includes the Old Series B and the Old Series C Notes.
(3) Includes the $5,000 MK Junior Seller Note (as defined) issued to the
seller of Merkle-Korff and the $4,000 ED Junior Seller Note (as defined)
issued to the seller of Electrical Design. See "Description of Certain
Indebtedness--Junior Seller Notes."
(4) Gives effect to the $20,000 of proceeds from the purchase of common stock
of the Company by the Parent.
22
<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, for the year ended December 31, 1996
and the nine months ended September 30, 1996 and 1997. 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, and the results of FIR from June 12, 1997, the date of its
acquisition by the Company. The results of Electrical Design and Motion Control
are not included in any historical period. 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 as
of and for the nine months ended September 30, 1996 and 1997 are derived from
the unaudited financial statements of the Company included elsewhere herein.
The financial statements of the Company for the periods ended September 30,
1996 and 1997 are unaudited, but in the opinion of management include all
adjustments consisting only of normal recurring adjustments, necessary for a
fair presentation of the Company's financial position and results of
operations. The results of operations for the nine months ended September 30,
1997 are not necessarily indicative of the results of operations for the year
ending December 31, 1997. 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, Imperial, Barber-Colman Motors and FIR and the
related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
PREDECESSOR
AND COMPANY
PREDECESSOR(1) COMPANY(2) COMBINED(3) COMPANY(4)
------------------------------------- ------------- ------------ ------------------------------
JANUARY 1 , SEPTEMBER 23,
THROUGH THROUGH YEAR ENDED YEAR ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 22, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
----------------------- ------------- ------------- ------------ ------------ -----------------
1992 1993 1994 1995 1995 1995 1996 1996 1997
------- ------- ------- ------------- ------------- ------------ ------------ -------- --------
(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 $ 90,154 $106,379
Gross profit, excluding
depreciation........... 13,828 16,315 18,022 15,182 8,255 23,437 41,820 32,147 38,030
Operating income........ 7,241 8,547 12,309 11,616 4,753 16,369 23,229 18,365 21,978
Interest expense........ -- -- -- -- 2,412 2,412 11,134 7,413 15,596
Income taxes(5)......... 116 143 171 284 948 1,232 5,290 4,082 2,805
Net income.............. 6,929 8,122 11,921 11,604 1,360 12,964 4,834 6,870 3,577
SUPPLEMENTAL PRO FORMA AND
OTHER DATA:
Pro forma income
taxes(6)............... $ 2,818 $ 3,306 $ 4,837 $ 4,755 $ -- $ 4,755 $ -- $ -- $ --
Pro forma net income.... 4,227 4,959 7,255 7,133 1,360 8,493 4,834 6,870 3,577
Ratio of earnings to
fixed charges(7)....... 26.2x 29.4x 41.7x -- -- 6.3x 2.1x 2.4x 1.4x
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital......... $ 9,646 $ 9,944 $11,546 $ 7,697 $ 14,747 $ 14,747 $ 27,586 $ 17,642 $ 37,303
Total assets............ 16,630 16,421 18,952 14,409 145,387 145,387 173,668 164,474 228,295
Long-term obligations,
including current
portion................ -- -- -- -- 83,547 83,547 175,067 96,369 209,095
Stockholder's equity
(net capital
deficiency)............ 12,057 12,515 14,332 9,218 45,925 45,925 (15,787) 52,445 (13,461)
</TABLE>
23
<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.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following financial information presents, (i) for the year ended December
31, 1994, the results of operations of the Predecessor, (ii) 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 (iii) 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, 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, and the results
of operations of FIR are included in the consolidated results of operations
from June 12, 1997 through July 31, 1997. 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 Series A/B Note Offering from November 7, 1996. See the Financial
Statements and the notes thereto included elsewhere herein and "Risk Factors--
Limited Operating History and Limited Relevance of Historical Financial
Information."
<TABLE>
<CAPTION>
PREDECESSOR
AND COMPANY
PREDECESSOR COMBINED COMPANY
----------- ----------- --------------------------------
NINE MONTHS
ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
-------------------------------- -----------------
1994 1995 1996 1996 1997
----------- ----------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $49,340 $63,979 $117,571 $90,154 $106,379
Gross profit (excluding
depreciation).......... 18,022 23,437 41,820 32,147 38,030
EBITDA(1)............... 12,633 17,725 30,307 23,453 28,328
Operating income........ 12,309 16,369 23,229 18,365 21,978
Interest expense........ -- 2,412 11,134 7,413 15,596
Gross margin (excluding
depreciation)(2)....... 36.5% 36.6% 35.6% 35.7% 35.8%
EBITDA margin(2)........ 25.6 27.7 25.8 26.0 26.6
Operating margin(2)..... 24.9 25.6 19.8 20.4 20.7
</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.
Nine Months Ended September 30, 1997 Compared to Nine Months ended September
30, 1996
Net Sales. Net sales for the nine months ended September 30, 1997 increased
$16.2 million or 18.0% as compared with the same period in 1996. Net sales of
sub-fractional motors for the nine months ended September 30, 1997 increased
20.0% over the same period in 1996. The growth in sub-fractional motors sales
was primarily attributable to the inclusion of Barber-Colman Motors in the 1996
period only from March 8, 1996, as well as continued strength in the vending
and appliance markets. Gears and gearbox sales for the nine months ended
September 30, 1997 increased 21.0% as compared with the same period in 1996,
primarily as a result of strong sales of planetary gears in the floor care
market. Sales of fractional/integral motors for the nine months ended September
30, 1997 increased 13.0% as compared with the same period in 1996. This
significant increase is attributable to the FIR Acquisition on June 12, 1997.
Existing fractional/integral motor sales for the nine months ended September
30, 1997 decreased 13.0%, reflecting unusually strong sales in the first half
of 1996, principally due to a substantial reduction in the backlog of orders
accumulated in the fourth quarter of 1995.
Gross Profit. Gross profit for the nine months ended September 30, 1997
increased $5.9 million or 18.4% as compared with the same period in 1996. The
increase was due to the increased sales noted above. The gross margin remained
strong, increasing from 35.7% for the nine months ended September 30, 1996 to
35.8% for the nine months ended September 30, 1997.
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EBITDA. EBITDA for the nine months ended September 30, 1997 increased $4.8
million or 20.4% as compared with the same period in the prior year. The
increase was due to the $5.9 million increased gross profit noted above.
Increases in selling, general and administrative expenses, depreciation and
amortization were due principally to the Barber-Colman Acquisition and the FIR
Acquisition. These increases were partially offset by reduced management fees
and other expenses at Imperial. The EBITDA margin remained strong, increasing
from 26.0% for the nine months ended September 30, 1996 to 26.5% for the nine
months ended September 30, 1997.
Operating Income. Operating income increased $3.6 million or 20% for the
nine months ended September 30, 1997 as compared with the same period in 1996.
This increase in operating income is primarily due to the increased sales
discussed above. Increases in selling, general and administrative expenses,
depreciation and amortization were due principally to the Barber-Colman
Acquisition and the FIR Acquisition. These increases were partially offset by
reduced management fees and other expenses at Imperial. Operating margins
remained strong, increasing from 20.4% for the nine months ended September 30,
1996 to 20.7% for the nine months ended September 30, 1997.
Interest Expense. Interest expense increased $8.2 million or 110% for the
nine months ended September 30, 1997 as compared with the same period in 1996
due to a full nine months of interest on the Old Series B Notes and borrowings
related to the Barber-Colman Acquisition. Interest expense also increased as a
result of the FIR Acquisition in June of 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales. Net sales increased $53.6 million or 83.8%. The Barber-Colman
Acquisition 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
Motors 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.
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.
Interest Expense. Interest expense increased $8.6 million or 360% in 1996
compared to 1995 due to the inclusion of a full year of interest on the
Merkle-Korff debt, interest on borrowings related to the Barber-Colman
Acquisition on March 8, 1996 and the Old Series B Notes.
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.
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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.
Interest Expense. Interest expense increased by $2.4 million in 1995 from $0
in 1994 due to the inclusion of interest expense associated with Imperial,
Scott & Gear from September 23, 1995 and new third party debt entered into by
the Company in connection with the acquisition of Merkle-Korff on September
22, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $37.3 million of working capital at September 30, 1997,
compared with $27.6 million at December 31, 1996. The increase in working
capital was primarily due to the FIR Acquisition, increased accounts
receivable, and lower intercompany payables offset partially by an increase in
accounts payable and accrued expenses and other current liabilities, and a
decrease in inventory.
The Company's net cash generated from operating activities for the nine
months ended September 30, 1997 increased $3.5 million to $13.1 million
compared with the same period in 1996. The increase was due to higher current
liabilities of $2.1 million, an increase in payables to affiliated company of
$7.3 million, an increase in depreciation and amortization of $1.1 million and
a greater benefit for deferred taxes of $0.3 million. These increases were
partially offset by lower net income of $3.3 million, an increase in current
assets of $3.7 million and an increase in non-current assets of $0.3 million.
The net cash used in investing activities increased $28.2 million to $50.8
million in 1997, as compared to the same period in 1996, reflecting the FIR
Acquisition of $50.5 million, offset partially by lower capital expenditures
of $0.2 million, cash acquired in the FIR Acquisition of $0.9 million and the
absence of the Barber-Colman Acquisition of $21.7 million, which occurred in
1996.
The net cash provided by financing activities for the nine months ended
September 30, 1997, increased by $19.3 million compared with the same period
in 1996, due to net borrowings under the Existing Credit Agreement of $34.0
million and lower repayments of long term debt of $6.9 million, offset
partially by proceeds in the first quarter of 1996 from new debt issued in
connection with the Barber-Colman Acquisition of $21.7 million.
The Company's principal sources of liquidity will be from cash flow
generated from operations and borrowings under the Amended Credit Agreement.
The Amended Credit Agreement is anticipated to be a five-year, $115.0 million
revolving credit facility that will not be subject to any borrowing base or
similar restrictions on borrowings. See "Description of Certain Indebtedness--
Credit Agreement." Since consummation of the Old Offering, the Company has not
borrowed and upon consummation of the Exchange Offer does not expect to borrow
under the Amended Credit Agreement, leaving borrowing availability thereunder
of $115.0 million. Based upon its present plans, management believes that
operating cash flow and availability under the Amended Credit Agreement will
be adequate to meet the anticipated cash needs of the Company and to execute
the Company's operating strategy over the next three years.
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.
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BUSINESS
The Company is a leading international manufacturer of specialty purpose
electric motors, gearmotors, gearboxes, gears and electronic motion controls
for a wide variety of consumer, commercial and industrial markets. The Company
has a diverse base of customers and its products are used in a broad range of
applications including vending machines, refrigerator ice dispensers,
commercial dishwashers, commercial floor care equipment, commercial sewing
machines, industrial ventilation equipment, automated material handling systems
and elevators. The Company's subsidiaries have sold their brand name products
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 $210.4 million and $3.1 million, respectively, and for the nine
months ended September 30, 1997, the Company had pro forma net sales and net
income of $166.4 million and $4.4 million, respectively.
The Company competes primarily in the electric motors and electronic motion
control systems industries. U.S. shipments of electric motors are estimated by
industry sources to have been approximately $8.0 billion in 1996 and to have
been growing at a compound annual growth rate of approximately 4.0% 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 1996 according to industry
sources. The Company believes that continuing competitive pressures will lead
to further consolidation in the electric motor industry and will create
opportunities for the Company to extend its product lines and business through
strategic acquisitions.
Within these industries, the Company operates in specialized niche markets
which typically consist of high value-added motor and control system
applications requiring custom engineered, non-standardized motors and controls.
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. As a result, annual capital
expenditures for the last five years have averaged less than $3.0 million.
The Company operates in four product groups: (1) subfractional motors, which
represented 39.0% and 41.7% of pro forma net sales for the year ended December
31, 1996 and the nine months ended September 30, 1997, respectively, (2)
fractional/integral motors, which represented 34.6% and 31.2% of pro forma net
sales for the year ended December 31, 1996 and the nine months ended September
30, 1997, respectively, (3) gears and gearboxes, which represented 2.9% and
3.4% of pro forma net sales for the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively, and (4) motion control systems,
which represented 23.5% and 23.7% of pro forma net sales for the year ended
December 31, 1996 and the nine months ended September 30, 1997, respectively.
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.
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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, commercial dishwashers, commercial sewing
machines, industrial ventilation equipment and elevators. Average product
selling prices typically range from $50 to $150 per unit for commercial floor
care products to $2,000 to $2,500 per unit for elevator motors. The Company
believes it is the leading DC elevator motor manufacturer in the United States,
the leading commercial dishwasher pump manufacturer in Europe and the primary
supplier to virtually all the major commercial floor care product manufacturers
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 OEMs of motors, 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.
Electronic Motion Control Systems. The Company's motion control systems are
used primarily in automated conveyor systems within the automotive industry and
the elevator modernization market. The systems typically control several
components such as electric motors, hydraulic or pneumatic valves, actuators
and switches that are required for the conveyor or elevator systems to function
properly. The prices for these motion control systems can run from several
thousand dollars to several hundred thousand dollars. The Company believes its
engineering capability, manufacturing quality and after-sales service are
highly regarded by all of its customers.
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. 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 2,500 customers. In 1996, the Company's largest
single customer represented approximately 3% of net sales and the Company's top
five customers represented approximately 14% of net sales. The Company's
customers include leading OEMs such as General Electric, Whirlpool, Clarke,
Siebe and Vendo. 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. 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 and control system design and the continuous redesign
processes to ensure that the most reliable product is manufactured. The Company
aggressively redesigns its products to improve performance and reduce
production costs, which 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.
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Experienced Management Team. The Company's seven senior managers average over
28 years of experience in the motors, gears and motion control systems 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. Recent examples of such product introductions include a
new transaxle drive system for floor care customers and a value-added sub-
assembly for major appliance customers. 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 electric motor, gear and motion control
markets remain 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. This strategy is illustrated by the Company's recent acquisition of
FIR which allowed it to add complementary products, acquire brushless motor
technology and enter new European markets. In addition, the Company plans to
continue to target the motion control industry for additional acquisition
opportunities. Acquisitions in the motion control industry, such as the
Company's recent acquisitions of Electrical Design and Motion Control in the
controls and sensors segment, 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 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,
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planetary gearboxes, and right-angle gearboxes. For certain applications, an
electric motor and a gear box are combined to create a gearmotor.
An electronic motion control system is an assembly of electronic and
electromechanical components that are configured in such a manner that the
system has the capability to control various commercial or industrial
processes such as conveyor systems, packaging systems, elevators and automated
assembly operations. The components utilized in a motion control system are
typically electric motor drives (electronic controls that vary the speed and
torque characteristics of electric motors), programmable logic controls
("PLCs"), transformers, capacitors, switches and various types of software.
The majority of the Company's motion control products control automated
conveyor systems used in automotive manufacturing and elevators.
The Company has established itself as a reliable niche manufacturer of high-
quality, economical, custom electric motors, gearmotors, gears and electronic
motion control systems used in a wide variety of applications including
vending machines, refrigerator ice dispensers, commercial dishwashers,
commercial floor care equipment, automated material handling systems 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, custom shaft
machining and custom software solutions. The Company also provides value-added
assembly work, incorporating some of the above options into its final motor
and control products. All of the custom-tailored motors, gearmotors and
control systems are designed for long life, quiet operation, and superior
performance.
The following chart sets forth the Company's product categories indicating
the pro forma net sales for the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively:
PRODUCT CATEGORIES
SUBFRACTIONAL FRACTIONAL/INTEGRAL GEAR AND ELECTRONIC MOTION
HORSEPOWER HORSEPOWER GEARBOX PRODUCTS CONTROL SYSTEMS
PRODUCTS PRODUCTS
$72.7 AND $51.9 $6.2 AND $5.7 $49.5 AND $39.4
$82.0 AND $69.4 MILLION IN MILLION IN MILLION IN
MILLION IN NET SALES NET SALES(1) NET SALES
NET SALES
39.0% AND 41.7% 34.6% AND 31.2% 2.9% AND 3.4% OF 23.5% AND 23.7%
OF TOTAL OF TOTAL TOTAL OF TOTAL
NET SALES NET SALES NET SALES NET SALES
PRODUCTS: PRODUCTS: PRODUCTS: PRODUCTS:
. AC Motors . AC Motors . Gears . Motion Control
. DC Motors . DC Motors . Gearboxes Systems
. AC & DC Motors . DC Permanent
Magnet Motors
. AC & DC
Gearmotors
APPLICATIONS: APPLICATIONS: APPLICATIONS: APPLICATIONS:
. Refrigerator . Commercial . Commercial . Automated
Ice Dispensers Floor Care Floor Care Conveyor
. Vending Equipment Equipment Systems
Machines -- . Elevator Lift . Hydraulic . Robotics
Product Motors Pumps . Process
Delivery . Automatic Hose . Food Controls
Systems Reel Winding Processing . Packaging
. Photocopy Mechanisms Equipment Systems
Machines . Commercial . Elevator
. Commercial and Dishwashers Control
Industrial . Commercial Systems
Controls -- Sewing
HVAC Controls Machines
--RV Vent . Industrial
Actuators Ventilation
Equipment
(1) Excludes $3.3 and $3.2 million of intercompany sales, respectively.
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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 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 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, commercial dishwashers, commercial sewing machines, industrial
ventilation equipment, elevators and automatic hose reels.
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 as a
result of its long history of serving this market and because 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.
In Europe, the Company has cultivated a strong position in the commercial
dishwasher market by supplying pump products (a motor and pump combination) to
manufacturers of commercial dishwashers. These commercial dishwashers are used
in applications such as restaurants and hospitals. The Company is also a key
producer of commercial sewing machine motors within the European market. These
motors are highly specialized clutch and brake motors and are supplied with an
electronic control that regulates the motor's speed and braking
characteristics. The other major European market for the Company is industrial
ventilation. The Company produces motors and, in some cases, the entire fan
assembly for its industrial ventilation customer base. These fans are used to
heat and cool commercial and industrial sites.
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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 manufactured primarily 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.
Electronic Motion Control Systems
The Company manufactures motion control systems which are used primarily in
automated elevator control and conveyor systems and the elevator modernization
market. The systems typically control several components such as electric
motors, hydraulic or pneumatic valves, actuators and switches that are required
for the conveyor or elevator systems to function properly. The prices for these
motion control systems can run from several thousand dollars to several hundred
thousand dollars. The Company believes its engineering capability,
manufacturing quality and after-sales service are highly regarded by all of its
customers.
MARKETS
The Company produces motors, gears, gearmotors and motion control systems 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 Company's markets can be segmented into
three areas: (i) consumer, which represented approximately 27% of 1996 net
sales and includes end-use products such as refrigerator ice dispensers,
vending machines and treadmills, (ii) industrial, which represented
approximately 36% of 1996 net sales and includes end-use products such as
elevators, control systems and ventilation equipment and (iii) commercial,
which represented approximately 37% of 1996 net sales and includes end-use
products such as floor care equipment, hose reels and commercial dishwashers.
OPERATIONS
The Company is a fully integrated manufacturer performing practically every
aspect of motor, gear and motion control 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 out sources
all die production to further reduce capital expenditures and future
maintenance requirements. The Company sources most of the components used in
its electronic motion control systems with the exception of certain DC motor
drives, which the Company manufactures. 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.
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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, sheet metal cabinets and packaging
supplies. All materials are readily available in the marketplace. The Company
is not dependent upon any single 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 and Vendo. 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 five
Sales Managers and four manufacturers' representatives, two of which are
located in the U.S., one in France and one in Germany. 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 motion control systems business is served through eleven
internal sales and marketing professionals and eight representatives. The
Company plans to add sales talent to this segment in order to expand its
presence into additional motion control markets.
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>
NINE MONTHS ENDED BACKLOG
SEPTEMBER 30, (DOLLARS IN THOUSANDS)
----------------- ----------------------
<S> <C>
1996............ $33,238
1997............ $48,730
</TABLE>
The Company will ship substantially all of the 1997 nine month backlog
during the following twelve months.
34
<PAGE>
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 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 have been removed up to
the edge of the foundation of an overlying structure and down to bedrock. The
Wisconsin Department of Natural Resources has advised the Company that no
further action is necessary at this time. 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. Soils and groundwater, contaminated by historic waste handling
practices at the FIR property in Casalmaggiore, Italy are the subject of an
investigation and remediation under the review of government authorities. In
connection with the FIR Acquisition, the Company obtained indemnification from
the former owners for this investigation and remediation.
COMPETITION
The electric motor, gear and motion control systems' 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 and a slightly smaller number
serving the European 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 Company's motion control systems business competes primarily within the
automated conveyor system controls market and sells to conveyor manufacturers
that serve the automotive manufacturing industry and the elevator modernization
market. These niche markets consists of four to five major competitors. Based
upon internal customer surveys, the Company believes its motion control systems
business is a leader within its served markets.
The principal competitive factors in the motor, gear and motion control
systems' markets include price, quality and service. Major motor and control
system 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.
35
<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 22 facilities across the United States
and Italy.
<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
SUBFRACTIONAL Des Plaines, IL Manufacturing 45,000 Leased September 2000
HORSEPOWER Crystal Lake, IL Manufacturing 46,000 Leased April 1998
PRODUCTS Darlington, WI Manufacturing 68,000 Leased September 2005
Richland Center, WI Manufacturing 45,000 Leased September 2000
Belvedere, IL Design/ 12,000 Leased March 1998
Administration
- -----------------------------------------------------------------------------------
Akron, OH Manufacturing 43,000 Owned
Stow, OH Administration 7,000 Leased September 2000
Middleport, OH Manufacturing 85,000 Owned
Cuyahoga Falls, OH Manufacturing 63,000 Leased October 2003
Alamagordo, NM Manufacturing 15,000 Leased October 2002
FRACTIONAL/ Casalmaggiore, Italy Administration/ 100,000 Owned
INTEGRAL Manufacturing
HORSEPOWER Varano, Italy Manufacturing 30,000 Owned
PRODUCTS Bedonia, Italy Manufacturing 8,000 Owned
Genona, Italy Research & 33,000 Leased July 2002
Development/
Manufacturing
Reggio Emilia, Italy Manufacturing 35,000 Leased August 2002
Reggio Emilia, Italy Manufacturing 30,000 Leased November 2000
- -----------------------------------------------------------------------------------
Troy, MI Manufacturing/ 12,000 Leased January 1998
MOTION CONTROL Administration
SYSTEMS Troy, MI Administration 4,000 Leased January 1998
Rancho Cordova, CA Administration 40,000 Leased May 2001
- -----------------------------------------------------------------------------------
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.
36
<PAGE>
EMPLOYEES AND LABOR RELATIONS
As of September 30, 1997, the Company employed 1,343 employees, of which 750
were non-union, and 593 were represented by the following seven unions:
<TABLE>
<CAPTION>
NUMBER OF CONTRACT
UNION EMPLOYEES EXPIRATION
----- --------- --------------
<S> <C> <C>
International Workers
Union.................. 175 September 1998
United Steelworkers..... 90 March 2000
International Union of
Electrical Workers..... 29 September 1998
International
Brotherhood of
Electrical Workers..... 51 November 2000
United Auto Workers..... 47 November 2001
International
Association of
Machinists............. 20 October 2000
Metallurgic and Mechanic
Union of Italy......... 181 June 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
January 1, 1998:
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
<S> <C> <C>
Thomas H. Quinn......... 50 Chairman
Ron A. Sansom........... 38 Chief Executive Officer and a Director
Norman Bates............ 35 Chief Financial Officer
Randall Bays............ 42 President, Imperial (Fractional/Integral Products)
G. Barry Lawrence....... 46 President, Gear (Gears and Gear Boxes)
John W. Brown........... 59 President, Chief Executive Officer Merkle-Korff
(Subfractional Products)
Carlo Bergamaschi....... 66 President, FIR
Mike McGuire............ 55 President, Electrical Design
Javad Rahimian.......... 47 President, Motion Control
Jonathan F. Boucher..... 40 Vice President and a Director
John W. Jordan, II...... 49 Director
David W. Zalaznick...... 43 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 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 Chief Executive 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. BATES has served as Chief Financial Officer of the Company since April,
1997. Prior to that, Mr. Bates held several financial management positions with
General Electric from 1984 to 1997, including Finance Manager of General
Electric's Appliance Components business.
MR. BAYS has served as the President of Imperial since April, 1997. Prior to
that, Mr. Bays held several senior management positions in General Electric's
motor and control business from 1991 to 1997. Prior to that, Mr. Bays held
senior management positions in Bomar, Inc.'s electronics business.
MR. LAWRENCE has served as President of Gear since 1991. Prior to that, Mr.
Lawrence held several senior management positions with Gear since 1978.
MR. BROWN has served as President of 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.
MR. BERGAMASCHI has served as the President of FIR since 1960. Prior to that,
Mr. Bergamaschi held several management positions within FIR.
38
<PAGE>
MR. MCGUIRE has served as the General Manager of Electrical Design since 1990
and was promoted to President after the Electrical Design Acquisition. Prior to
that, Mr. McGuire was President of a controls company from 1985 to 1989. Mr.
McGuire has 31 years of experience in the motion controls business.
MR. RAHIMIAN has served as President of Motion Control since its inception in
1983. Prior to that, Mr. Rahimian was employed by Elevator Industries as an
engineering specialist.
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.
39
<PAGE>
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
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, the prior President of Imperial. See "Certain Transactions--JII
Payments."
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
--------------------------- ---- ------ ----- ---------------
<S> <C> <C> <C> <C>
Thomas H. Quinn(2)
Chairman of the Board and Chief Executive
Officer..................................... 1996 $ 0 $ 0 $--
Ron A. Sansom(2)
President and Chief Operating Officer....... 1996 0 0 --
</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.
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, and will be, owned by
the Parent. The table below sets forth as of the date hereof 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..................................... 300.0000 1.5%
John W. Jordan II(2)(3)(4)(5)..................... 7,136.8809 36.2
David W. Zalaznick(2)(4)(6)....................... 3,531.2473 17.9
Jonathan F. Boucher(2)............................ 1,116.5587 5.7
Thomas H. Quinn(2)................................ 1,799.7294 9.1
All directors and executive officers as a group
(12 persons)..................................... 13,884.4163 70.5
OTHER PRINCIPAL STOCKHOLDERS:
Jordan Industries, Inc(7)......................... 0.0000 0.0%
JI Partners(8).................................... 1,500.0000 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 the date hereof,
there were 19,700 shares of common stock of Parent issued and outstanding.
(2) Does not include shares of common stock of Parent owned by JI Partners as
to which the named individuals disclaim beneficial ownership.
(3) Includes 0.1650 shares held personally and 7,136.7159 shares held by the
John W. Jordan II Revocable Trust. Does not include 51.025 shares held by
Daly Jordan O'Brien, the sister of Mr. Jordan, 51.025 shares held by
Elizabeth O'Brien Jordan, the mother of Mr. Jordan or 51.025 shares held by
George C. Jordan, Jr., the brother of Mr. Jordan.
(4) Does not include 16.4973 shares held by the Jordan/Zalaznick Capital
Company or 577.4053 shares held by MCIT PLC, a publicly traded U.K.
investment trust advised by an affiliate of The Jordan Company (which is
controlled by Messrs. Jordan and Zalaznick).
(5) Does not include 535.8871 shares held by The Jordan Family Trust, of which
John W. Jordan II, George C. Jordan, Jr. and G. Robert Fisher are the
Trustees.
(6) Does not include 13.5558 shares held by Bruce H. Zalaznick, the brother of
Mr. Zalaznick.
(7) JII owns all of the issued and outstanding junior preferred stock of
Parent. The junior preferred stock entitles JII to 80% of the voting power
as of the date hereof. The principal address of JII is ArborLake Centre,
Suite 550, 1751 Lake Cook Road, Deerfield, IL 60015.
(8) JI Partners is an investment partnership whose partners include certain
officers and employees of JII and its affiliates. 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;
Liquidated Damages."
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. By tendering, each Holder
which is not a broker-dealer will represent to the Company that, among other
things, the person receiving the New Notes, whether or not such person is the
Holder, (i) will acquire the New Notes in the ordinary course of such person's
business, (ii) has no arrangement or understanding with any person to
participate in a distribution of the New Notes and (ii) is not engaged in and
does not intend to engage in a distribution of the New Notes. If any Holder or
any such other person has an arrangement or understanding with any person to
participate in a distribution of such New Notes, is engaged in or intends to
engage in a distribution of such New Notes, is an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company, or acquired the Old
Notes as a result of market making or other trading activities, then such
Holder or any such other person (i) can 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 a secondary resale transaction, unless such sale is made
pursuant to an exemption from such requirements.
Holders of Old Series C Notes not tendered will not have any further
registration rights and the Old Series C 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 Series C Notes, the Company
entered into the Registration Rights Agreement with the Initial Purchasers of
the Old Series C Notes.
Holders of the 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 Series C Notes are
42
<PAGE>
entitled to certain registration rights. Under the Registration Rights
Agreement, the Company has agreed, for the benefit of the Holders of the Old
Series C Notes, that it will, at its cost, (i) on or before February 15, 1998
file the Registration Statement with the Commission and (ii) on or before April
16, 1998, 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 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 or the Transfer Restricted Securities by the Holders thereof who
satisfy certain conditions relating to the provision of information in
connection with the Self 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 Old Series C Note, until (i) the
date of which such Transfer Restricted Security has been exchanged 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 sales 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 Notes 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 days after such filing obligation arises and use its best efforts to
cause the Shelf Registration Statement 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 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
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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 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 5:00 p.m.,
New York City Time, on February 18, 1998; 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. 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, $270,000,000 aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about January 16, 1998, 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 Series C Notes are identical in all
material respects, except for the total outstanding principal amount thereof,
certain transfer restrictions and registration rights relating to the Old
Series C Notes and rights to receive Liquidated Damages. See "--Registration
Rights; Liquidated Damages." The Old Series C 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
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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 State
Street Bank and Trust Company (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 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 Instruction" or "Special
Delivery Instruction" 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 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 lability 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
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representative 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 or understanding with any person 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 requirement 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 meeting the requirements of the Securities Act 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 and 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 in an aggregate 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 from November 16,
1997. 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 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 of Old Notes by causing the Book-Entry
Transfer Facility to transfer such Old Notes into the
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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.
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
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 the 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.
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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
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; Liquidation 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 the event the Company asserts
or waives a condition to the Exchange Offer which constitutes a material change
to the terms of the Exchange Offer, the Company will disclose such change in a
manner reasonably calculated to inform prospective investors of such change,
and will extend the period of the Exchange Offer by five business days.
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
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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.
EXCHANGE AGENT
State Street Bank and Trust Company 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: State Street Bank and Trust Company, Exchange Agent:
By Registered or Certified Mail: By Overnight Courier or Hand:
State Street Bank State Street Bank
and Trust Company and Trust Company
P.O. Box 778 Two International Place or
Boston, MA 02102-0078 Boston, MA 02110
Attn: Kellie Mullen Attn: Kellie Mullen
By Facsimile for Eligible Institutions:
(617) 664-5395
For confirmation call:
(617) 664-5587
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 $250,000.
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.
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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 in the
Exchange Offer will not be able to take advantage of the increased liquidity
afforded by the New Notes which would have a total aggregate principal amount
of $270,000,000 as opposed to $170,000,000 for the Old Series B Notes and
$100,000,000 for the Old Series C Notes. In addition, Holders of Old Series C
Notes who do not exchange their Old Series C Notes for New Notes pursuant to
the Exchange Offer will continue to be subject to the restrictions on transfer
of such Old Series C Notes as set forth in the legend thereon as a consequence
of the issuance of the Old Series C 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 Series C 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 Series C 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 meeting the requirements of the Securities Act 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
jurisdiction 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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DESCRIPTION OF SENIOR NOTES
GENERAL
The Old Series C Notes were and the New Notes will be issued pursuant to an
indenture (the "Indenture") between the Company and State Street Bank and
Trust Company, as trustee (the "Trustee"), in a private transaction that is
not subject to the registration requirements of the Securities Act. 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 Old Series C 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 Old Series C Notes as Non-Restricted Subsidiaries.
Non-Restricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Indenture.
The Senior Notes will be limited to $270,000,000 in aggregate principal
amount, provided that $170,000,000 of Senior Notes reserved for issuance under
the Indenture will be available only in connection with the exchange of Old
Series B Notes for New Notes pursuant to the Exchange Offer. Each Senior Note
will mature on November 15, 2006. The Old Notes did bear 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, 1998, 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 November 16, 1997. Interest will be computed on the basis of a 360-day
year of twelve 30-day months. Senior 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,
premium, if any, 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 Notes and Certificated 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 "--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 effectively rank
junior to all indebtedness of the Company and to any indebtedness of the
Company's subsidiaries, including borrowings under the Amended Credit
Agreement. On a pro forma basis as of September 30, 1997, after giving effect
to the Old Offering and the application of the net proceeds therefrom, the
aggregate principal amount of secured Indebtedness of the Company and
indebtedness of the Company's subsidiaries to which the Senior Notes
effectively rank junior is approximately $9.1 million. The Indenture permits
the Company and its Subsidiaries to
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<PAGE>
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 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 $115.0 million incurred under the Amended 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 Amended
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 "--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 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.
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<PAGE>
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 a default under
the Amended 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 covenants to (i) repay in full and terminate all commitments under
Indebtedness under the Amended 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 Amended 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 Amended 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 Amended Credit Agreement and
the Senior Notes. If there is a Change of Control, any Indebtedness under the
Amended Credit Agreement could be accelerated. There is no limitation in the
Indenture which prohibits the Company from using the proceeds from the Old
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
Amended 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
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<PAGE>
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 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 that remain
upon completion of the Excess Proceeds offer required under the Series A/B
Indenture, 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 Amended 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 Amended Credit Agreement in order to repurchase Senior Notes with any Net
Proceeds. See "Risk Factors--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)
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<PAGE>
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.
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 Notes are 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
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<PAGE>
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 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 $20,000,000 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 $20,000,000 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 Subsidiary required by its terms to be purchased, redeemed,
retired or acquired with the net proceeds from asset sales (as defined
in the instrument
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<PAGE>
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) to the extent constituting Restricted Payments, payments under
the Tax Sharing Agreement, New Subsidiary Consulting Agreement,
Transition Agreement and the JI Properties Services Agreement;
(viii) to the extent constituting Restricted Payments, payments under
the New Subsidiary Advisory Agreement, provided that such payments will
not be made and shall be accrued so long as any Default or Event of
Default shall have occurred and be continuing or shall occur as a
consequence thereof, and the Company's obligations to pay such fees
under the New Subsidiary Advisory Agreement shall be subordinated
expressly to the Company's Obligations in respect of the Senior Notes
and indemnities, expenses and other amounts under the New Subsidiary
Advisory 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 in respect of the Junior Seller Notes;
(xiii) payments in connection with the Old Offering;
(xiv) payments in respect of the Contingent Earnout Agreement;
(xv) 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;
(xvi) 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
(xvii) 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 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.
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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)
$115.0 million aggregate principal amount under the Amended 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 $120.0 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 Amended
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 $120.0 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:
(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
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"Limitation on Incurrence of Indebtedness" covenant and clauses (i), (v),
(vi), (vii), (ix), (x), (xi), (xv) and (xvi) 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) and (xvi) 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
(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
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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 New Subsidiary Advisory Agreement, the New
Subsidiary Consulting Agreement, the Transition Agreement, the JI
Properties Services Agreement and the Tax Sharing 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 Old Offering.
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 (i) either (A) the Subsidiary to be so designated has total
assets of $1,000,000 or less or (B) immediately before and
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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 a 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.
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.
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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.
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 Amended Credit Agreement, shall become immediately due and payable upon
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the first to occur of an acceleration under the Amended Credit Agreement or
five business days after receipt by the Company and the Representative under
the Amended 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 Amended 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
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
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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
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.
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CONCERNING THE TRUSTEE
The Trustee for the Senior Notes will be State Street Bank and Trust Company.
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 or more Global New
Notes (collectively, 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 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.
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
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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 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.
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"Amended Credit Agreement" means the credit agreement, dated November 7,
1996, as amended as of the date hereof, 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 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.
"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 Amended 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 Old Offering, 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,
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plus (j) to the extent not covered in clause (e) above, fees paid or payable in
respect of the New TJC Management Consulting 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.
"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
JII, 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,
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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 Offering and the
application of the net proceeds therefrom or any other refinancing of
Indebtedness will be excluded.
"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 of
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 of 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 JII and certain of
its Restricted Subsidiaries, as in effect on November 7, 1996.
"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
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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.
"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.
"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
marshaling 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.
"JI Properties Services Agreement" means the properties services agreement,
dated as of July 25, 1997, between the Company and each of its Subsidiaries and
JI Properties, Inc., a subsidiary of JII, as in effect on December 17, 1997.
"Jordan Stockholders" means JII, 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
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for the benefit of any of the foregoing, including, without limitation, MCIT
PLC and Leucadia National Corporation and their respective Subsidiaries.
"Junior Seller Notes" mean 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 and the subordinated promissory
note, dated October 27, 1997, issued by Electrical Design, in the principal
amount of $4.0 million, and maturing on December 31, 2002, each as in effect on
December 17, 1997.
"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).
"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 Subsidiary Advisory Agreement" means the advisory agreement, dated as of
July 25, 1997, between the Company and each of its Subsidiaries and JII, as in
effect on December 17, 1997.
"New Subsidiary Consulting Agreement" means the management consulting
agreement, dated as of July 25, 1997, between the Company and each of its
Subsidiaries and JII, as in effect on December 17, 1997.
"New TJC Management Consulting Agreement" means the management consulting
agreement, dated as of July 25, 1997, between JII and TJC Management Corp., as
in effect on December 17, 1997.
"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
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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 Senior 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 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 (xi) 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;
(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;
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(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 Notes; and
(xvi) 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;
(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;
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(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; and
(17) 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 Amended 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) or (x) 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 Amended 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
Amended 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 not
limited to, Indebtedness issued by Restricted Subsidiaries under the Credit
Agreement or the Amended 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 Amended 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
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the Amended 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 Amended 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 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.
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"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 Amended Credit Agreement, and
(iii) any additional Indebtedness issued to pay premiums and fees in connection
with clauses (i) and (ii).
"Representative" means the agent or other representative in respect of the
Amended 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
November 7, 1996, and (ii) any other Subsidiary of the Company formed, acquired
or existing after November 7, 1996 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.
"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 Old Series C
Notes and the Old Series B 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
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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).
"Transition Agreement" means the transition agreement, dated as of July 25,
1997, between the Parent and JII, as in effect on December 17, 1997.
"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.
"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:
JUNIOR SELLER NOTES
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 "MK Junior
Seller Note") due December 31, 2003. The MK Junior Seller Note is a general
unsecured obligation of Merkle-Korff, which was subordinated to borrowings
under the Existing Credit Agreement and will be subordinated to borrowings
under the Amended Credit Agreement. Interest under the MK Junior Seller Note
is payable annually in arrears and Merkle-Korff is required to pay
installments of principal on the MK 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 Amended Credit Agreement, Merkle-Korff may prepay the principal amount of
the MK Junior Seller Note in whole or in part at any time without payment of
any premium or penalty.
In connection with the acquisition of Electrical Design, Electrical Design
issued to the Electrical Design Seller a $4.0 million, 9.0% seller note (the
"ED Junior Seller Note" and collectively with the MK Junior Seller Note, the
"Junior Seller Notes") due December 31, 2002. Interest is payable upon
Electrical Design achieving certain financial performance goals. The ED Junior
Seller Note is subordinated to all Senior Debt (as defined in the ED Junior
Seller Note).
CREDIT AGREEMENT
Concurrently with the consummation of the Series A/B 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 Company's
prior credit facility and provided for borrowings of up to $75.0 million for a
five year term (the "Existing Credit Agreement"). The Existing 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 Existing 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 Existing
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.
Following the Exchange Offer, the Company intends to enter into an amended
and restated credit agreement (the "Amended Credit Agreement") which will
provide for borrowings of up to $115.0 million.
The Existing Credit Agreement contains and the Amended Credit Agreement will
contain 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 Existing Credit Agreement contains
and the Amended Credit Agreement also will contain customary events of
default. As of the consummation of the Old Offering, M&G Industries will not
have any outstanding borrowings under the Existing Credit Agreement.
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CERTAIN TRANSACTIONS
The Company Formation and Proceeds From the Series A/B Note Offering. The
Company was formed in September 1995 in order to acquire and operate companies
in the motion control industry (the "Company Formation"). 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 MK Junior Seller Note and related fees and expenses. The Company
borrowed approximately $72.5 million under the Company's then existing credit
facility 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 then existing credit
facility to finance the cash purchase price for the Barber-Colman Acquisition
and to pay related fees and expenses.
Prior to the consummation of the Series A/B 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. On November 7, 1996, the Company originally issued and sold
$170,000,000 of notes in a transaction not registered under the Securities Act
(the "Series A/B Note Offering") which were then exchanged for the Old Series B
Notes pursuant to a prospectus dated April 3, 1997. The cash portion of the
purchase price for the Imperial Acquisitions was funded from the net proceeds
of the Series A/B 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 Amended Credit Agreement.
Services Agreements. Until July 24, 1997, the Parent and its subsidiaries
(including the Company) had been charged an annual management and advisory fee
by JII equal to 1.0% of its net sales payable quarterly. Management and
advisory fees charged to the Company were $0.7 million, $2.7 million and $0.8
million, respectively, for the period from September 23, 1995 to December 31,
1995, for the year ended December 31, 1996 and for the period from January 1,
1997 to July 24, 1997. Imperial, Scott and Gear were charged similar fees by
JII. Such fees were $2.0 million, $2.2 million and $1.5 million, respectively,
for the years ended December 31, 1993, 1994 and for the period from January
1995 to September 22, 1995. The Company was also obligated to pay to The Jordan
Company (i) an investment banking and sponsorship fee of up to 2.0% 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 1.0% 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. In connection with the Imperial Acquisitions and the
Series A/B Note Offering and the Existing Credit Agreement, the Company paid
The Jordan Company $2.25 million pursuant to such agreements. These
arrangements were terminated as of July 25, 1997 and replaced with five new
types of agreements and arrangements which are described below.
First, the Parent and each of its subsidiaries (including the Company)
entered into the New Subsidiary Advisory Agreement with JII, pursuant to which
the Parent and its subsidiaries pay to JII (i) investment banking and
sponsorship fees of up to 2.0% of the purchase price of acquisitions, joint
ventures, minority investments or sales involving the Parent and its
subsidiaries or their respective businesses or properties; (ii) financial
advisory fees of up to 1.0% of any debt, equity or other financings or
refinancing involving the Company or such
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subsidiary, in each case, arranged with the assistance of The Jordan Company or
its affiliates; and (iii) reimbursement for The Jordan Company's or JII's out-
of-pocket costs in connection with providing such services. The New Subsidiary
Advisory Agreement contains customary indemnities in favor of JII, The Jordan
Company and TJC Management Corp. (an affiliate of JII). Pursuant to the New TJC
Management Consulting Agreement between JII and TJC Management Corp., JII pays
to TJC Management Corp. (i) annual consulting fees, payable quarterly, equal to
$3.0 million; (ii) one-half of the investment banking, sponsorship and
financing fees paid to JII pursuant to the New Subsidiary Advisory Agreement;
and (ii) reimbursement of TJC Management Corp.'s and The Jordan Company's out-
of-pocket costs incurred in connection with providing such services. Each of
the New Subsidiary Advisory Agreement and the New TJC Management Consulting
Agreement expires in December 2007, 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. Pursuant to the New Subsidiary
Advisory Agreement, the Company paid fees of $0 to JII for the period from July
25, 1997 through September 30, 1997. In connection with the consummation of the
Old Offering, the acquisition of Motion Control and the Amended Credit
Agreement, the Company expects to pay fees of approximately $2.5 million to JII
pursuant to the New Subsidiary Advisory Agreement. Messrs. Jordan, Boucher and
Zalaznick, directors of the Company, are partners of The Jordan Company.
Second, the Parent and each of its subsidiaries (including the Company)
entered into the New Subsidiary Consulting Agreement, pursuant to which they
pay to JII annual consulting fees of 1.0% of the Parent's net sales for such
services, payable quarterly, and reimburse JII for its out-of-pocket costs
related to its services. The New Subsidiary Consulting Agreement expires in
December 2007, 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. Pursuant to the New Subsidiary Consulting Agreement,
JII (but not JII's affiliates) are obligated to present all acquisition,
business and investment opportunities that relate to manufacturing, assembly,
distribution or marketing of products and services in the motors, gears and
motion control industries to the Company, and JII will not be permitted to
pursue such opportunities or present them to third parties unless the Company
determines not to pursue such opportunities or consents thereto. Pursuant to
the New Subsidiary Consulting Agreement, the Company paid approximately $0.3
million for the period from July 25, 1997 to September 30, 1997.
Third, the Parent and each of its subsidiaries (including the Company)
entered into the JI Properties Services Agreement with JI Properties, Inc. ("JI
Proprieties"), a subsidiary of JII, pursuant to which JI Properties provides
certain real estate and other assets, transportation and related services to
the Company. Pursuant to the JI Properties Services Agreement, the Parent is
charged for its allocable portion of such services based upon its usage of such
services and its relative revenues, as compared to JII and its other
subsidiaries. Pursuant to the JI Properties Services Agreement, the Company
paid approximately $0.1 million for the period from July 25, 1997 to September
30, 1997. The JI Properties Services Agreement expires in December 2007, 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.
Fourth, JII determined to refine the allocation of its overhead, general and
administrative charges and expenses among JII and its subsidiaries, including
the Company, in order to more closely match these overhead charges with the
revenues and usage of corporate overhead by JII and its subsidiaries. On pro
forma basis, after giving effect to the corporate expenses reallocation by JII,
and prior to any charges or payments under the New Subsidiary Consulting
Agreement, Transition Agreement, JI Properties Services Agreement, New
Subsidiary Advisory Agreement, Tax Sharing Agreement and directors' fees, the
Company's allocable portion of corporate expenses would have been approximately
$0.2 million for the period from July 25, 1997 to September 30, 1997.
Fifth, the Parent and JII entered into the Transition Agreement, pursuant to
which JII will provide office space and certain administrative and accounting
services to the Parent to facilitate the transition of the Parent as a stand-
alone company. The Parent will reimburse JII for services provided pursuant to
the Transition Agreement on an allocated cost basis. The Transition Agreement
will expire on December 31, 1997, but is automatically renewed for success one
year periods (unless either party provides prior written notice of non-renewal)
and may
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be terminated by the Parent on 90 days' written notice. Pursuant to the
Transition Agreement, the Parent paid $0 to JII for the period from July 25,
1997 through September 30, 1997.
Tax Sharing Agreement. The Company and each of its subsidiaries are party to
a 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.
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 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.
81
<PAGE>
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.
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 April 16, 1998, 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 form any such broker-
dealers 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.
82
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion is a summary of the material United States federal
income tax considerations relevant to the acquisition, ownership and
disposition of the Senior Notes acquired on original issue for cash, but does
not purport to be a complete analysis of all potential tax effects. The
discussion is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Regulations, Internal Revenue Service ("Service") rulings and
pronouncements and judicial decisions all in effect as of the date hereof, all
of which are subject to change at any time, and any such change may be applied
retroactively in a manner that could adversely affect a holder of the Senior
Notes. The discussion does not address all of the federal income tax
consequences that may be relevant to a holder in light of such holder's
particular circumstances or to holders subject to special rules, such as
certain financial institutions, insurance companies, dealers in securities,
foreign corporations, nonresident alien individuals and persons holding the
Senior Notes as part of a "straddle," "hedge" or "conversion transaction."
Moreover, the effect of any applicable state, local or foreign tax laws is not
discussed. The discussion deals only with Senior Notes held as "capital assets"
within the meaning of Section 1221 of the Code.
The Company has not sought and will not seek any rulings from the Service
with respect to any position of the Company discussed below. There can be no
assurance that the Service will not take a different position from the Company
concerning aspects of the tax consequences of the acquisition, ownership or
disposition of the Senior Notes or that any such position would not be
sustained.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS.
CONSEQUENCES OF EXCHANGE OFFER 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
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.
INTEREST INCOME AND GAIN ON DISPOSITION
Interest payable on the Senior Notes will be includible in the income of a
holder in accordance with such holder's regular method of accounting. The
treatment of interest described in the preceding sentence with respect to the
Senior Notes is based in part upon the Company's determination that, as of the
date of issuance of the Senior Notes, the possibility that Liquidated Damages
would be paid to holders of the Senior Notes pursuant to a Registration Default
was remote. The Service may take a different position, which could affect the
timing and character of interest income reported by holders of the Senior
Notes.
If a Senior Note is redeemed, sold or otherwise disposed of, a holder
generally will recognize gain or loss equal to the difference between the
amount realized on the sale or other disposition of such Senior Note (to the
extent such amount does not represent accrued but unpaid interest) and such
holder's tax basis in the Senior Note. Such gain or loss generally will be
capital gain or loss, provided that the holder has held the Senior Note as a
capital asset. In general, the maximum tax rate for non-corporate taxpayers on
long-term capital gains is 20% for most capital assets (including the Senior
Notes) held for more than 18 months. Capital gain on such assets for non-
corporate holders having a holding period of more than one year but not more
than 18 months will be subject to a maximum tax rate of 28%.
83
<PAGE>
AMORTIZABLE BOND PREMIUM
The Old Series C Notes were issued for an amount in excess of their principal
amounts. A holder that purchased an Old Series C Note for an amount in excess
of its principal amount may elect to treat such excess as "amortizable bond
premium," in which case the amount required to be included in the holder's
income each year with respect to interest on the Old Series C Note will be
reduced by the amount of amortizable bond premium allocable (based on the Old
Series C Note's yield to maturity) to such year. Any election to amortize bond
premium shall apply to all bonds (other than bonds the interest on which is
excludable from gross income) held by the holder at the beginning of the first
taxable year to which the election applies or thereafter acquired by the
holder, and is irrevocable without the consent of the Service.
BACKUP WITHHOLDING
A holder may be subject, under certain circumstances, to backup withholding
at a 31% rate with respect to "reportable payments" on the Senior Notes. This
withholding generally applies only if the holder (i) fails to furnish his or
her social security or other taxpayer identification number ("TIN"), (ii)
furnishes an incorrect TIN, (iii) is notified by the Service that he or she has
failed to report properly payments of interest and dividends and the Service
has notified the Company that the holder is subject to backup withholding, or
(iv) fails, under certain circumstances, to provide a certified statement,
signed under penalty of perjury, that the TIN provided is his or her correct
number and that he or she is not subject to backup withholding. Any amount
withheld from payment to a holder under the backup withholding rules is
allowable as a credit against such holder's federal income tax liability,
provided that the required information is furnished to the Service. Certain
holders (including, among others, corporations and foreign individuals who
comply with certain certification requirements) are not subject to backup
withholding. Holders should consult their tax advisors as to their
qualifications for exemption from backup withholding and the procedure for
obtaining such an exemption.
INFORMATION REPORTING
The Company is required to furnish certain information to the Service and
will furnish annually to record holders of the Senior Notes information with
respect to interest paid on the Senior Notes during the calendar year.
LEGAL MATTERS
The validity of the Senior Notes will be passed upon for the Company by
Mayer, Brown & Platt, Chicago, Illinois. Mayer, Brown & Platt also represents
JII and its affiliates from time to time in connection with its various
acquisitions and divestitures.
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 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 appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
84
<PAGE>
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 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 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 FIR Group as of July 31, 1995,
1996 and March 31, 1997, and for each of the two years in the period ended
July 31, 1996 and the eight month period ended March 31, 1997, appearing in
this Prospectus and Registration Statement have been audited by Coopers &
Lybrand L.L.P., independent auditors, as set forth in their report 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 E. D. and C. Company, Inc. as of
December 31, 1996, and for the year then ended, appearing in this Prospectus
and Registration Statement have been audited by Janz & Knight, independent
auditors, as set forth in their report 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 Motion Control Engineering, Inc. as
of December 31, 1996 and September 30, 1997 and for the year and nine months
in the period ended September 30, 1997, appearing in this Prospectus and
Registration Statement have been audited by Arthur Andersen LLP, independent
auditors, as set forth in their report 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 is 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.
85
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONDENSED UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Condensed Unaudited Pro Forma Financial Statements...................... P-1
Condensed Unaudited Pro Forma Statements of Operations and Other Data
for the year ended December 31, 1996................................... P-2
Condensed Unaudited Pro Forma Statements of Operations and Other Data
for the nine months ended September 30, 1997........................... P-3
Condensed Unaudited Pro Forma Balance Sheet as of September 30, 1997.... P-5
MOTORS AND GEARS, INC.
Report of Independent Auditors.......................................... F-1
Consolidated Balance Sheets as of December 31, 1995 and 1996............ F-2
Consolidated Statements of Income for the period from September 23, 1995
to
December 31, 1995, and the year ended December 31, 1996 ............... F-3
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-4
Consolidated Statements of Cash Flows for the period from September 23,
1995
to December 31, 1995, and the year ended December 31, 1996............. F-5
Notes to Consolidated Financial Statements.............................. F-6
Condensed Consolidated Balance Sheet as of September 30, 1997
(unaudited)............................................................ F-14
Condensed Consolidated Statements of Income for the nine months ended
September 30, 1996 and 1997 (unaudited)................................ F-15
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1997 (unaudited).......................... F-16
Notes to Condensed Consolidated Financial Statements (unaudited)........ F-17
MERKLE-KORFF INDUSTRIES, INC.,
MERCURY INDUSTRIES, INC. AND
ELMCO INDUSTRIES, INC.
Report of Independent Auditors.......................................... F-19
Combined Balance Sheet as of December 31, 1994.......................... F-20
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-21
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-22
Notes to Combined Financial Statements.................................. F-23
BARBER-COLMAN MOTORS DIVISION
Report of Independent Auditors.......................................... F-27
Balance Sheets as of March 31, 1995 and December 31, 1995............... F-28
Statements of Divisional Operations for the year ended March 31, 1995,
and the
nine months ended December 31, 1995.................................... F-29
Statements of Cash Flows for the year ended March 31, 1995, and the nine
months
ended December 31, 1995................................................ F-30
Notes to Financial Statements........................................... F-31
THE IMPERIAL ELECTRIC COMPANY AND SUBSIDIARIES
Report of Independent Auditors.......................................... F-36
Consolidated Balance Sheets as of December 31, 1994 and 1995............ F-37
Consolidated Statements of Income for each of the years ended December
31, 1993,
1994, and 1995......................................................... F-38
</TABLE>
I-1
<PAGE>
<TABLE>
<S> <C>
Consolidated Statements of Shareholder's Equity for each of the years
ended
December 31, 1993, 1994 and 1995....................................... F-39
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1993,
1994 and 1995.......................................................... F-40
Notes to Consolidated Financial Statements.............................. F-41
FIR GROUP
(FIR Elettromeccanica S.p.A., CIME S.p.A. and Selin Sistemi S.p.A.)
Report of Independent Auditors.......................................... F-47
Consolidated Balance Sheets as of July 31, 1995 and 1996................ F-48
Consolidated Income Statements for the years ended July 31, 1995 and
1996................................................................... F-49
Consolidated Statement of Changes in Shareholders' Equity for the years
ended
July 31, 1995 and 1996................................................. F-50
Consolidated Statements of Cash Flows for the years ended July 31, 1995
and 1996............................................................... F-51
Notes to Consolidated Financial Statements.............................. F-52
Report of Independent Auditors.......................................... F-58
Consolidated Balance Sheet as of March 31, 1997......................... F-59
Consolidated Income Statement for the eight months ended March 31, 1997. F-60
Consolidated Statement of Changes in Shareholders' Equity for the eight
months ended
March 31, 1997......................................................... F-61
Consolidated Statement of Cash Flows for the eight months ended March
31, 1997............................................................... F-62
Notes to Consolidated Financial Statements.............................. F-63
E. D. AND C. COMPANY, INC.
Report of Independent Auditors.......................................... F-68
Balance Sheet as of December 31, 1996................................... F-69
Statement of Income and Retained Earnings for the year ended December
31, 1996............................................................... F-70
Statement of Cash Flows for the year ended December 31, 1996............ F-71
Notes to Financial Statements........................................... F-72
Balance Sheet as of September 30, 1997 (unaudited)...................... F-75
Statement of Income and Retained Earnings for the nine months ended
September 30, 1997 (unaudited)......................................... F-76
Statement of Cash Flows for the nine months ended September 30, 1997
(unaudited)............................................................ F-77
Notes to Financial Statements (unaudited)............................... F-78
MOTION CONTROL ENGINEERING, INC.
Report of Independent Auditors.......................................... F-79
Balance Sheets as of December 31, 1996 and September 30, 1997........... F-80
Statements of Income for the year ended December 31, 1996 and the nine
months ended September 30, 1997........................................ F-81
Statements of Shareholders' Equity for the year ended December 31, 1996
and the nine months ended September 30, 1997........................... F-82
Statements of Cash Flows for the year ended December 31, 1996 and the
nine months ended September 30, 1997................................... F-83
Notes to Financial Statements for the year ended December 31, 1996 and
the nine months ended September 30, 1997............................... F-84
</TABLE>
I-2
<PAGE>
UNAUDITED PRO FORMA
CONDENSED FINANCIAL STATEMENTS AND OTHER DATA
The following unaudited pro forma income statement for the fiscal year ended
December 31, 1996, the nine months ended September 30, 1997 and the pro forma
condensed balance sheet as of September 30, 1997 reflect pro forma adjustments
for (a) the Barber-Colman Acquisition, the purchase accounting and other
acquisition adjustments relating thereto, and the Series A/B Note Offering (b)
the Electrical Design Acquisition, the FIR Acquisition and the Motion Control
Acquisition (the "1997 Acquisitions") and the purchase accounting and other
acquisition adjustments relating thereto and (c) the Old Offering and the
purchase of the Company's common stock by the Parent, in each case, as if they
occurred at the beginning of the relevant period or as of the relevant date.
Unaudited pro forma adjustments are based upon historical information,
preliminary estimates and certain assumptions management deems appropriate. The
unaudited pro forma financial data presented herein are not necessarily
indicative of the results the Company would have obtained had such events
occurred at the beginning of the period, as assumed, or of the future results
of the Company. The pro forma condensed financial statements should be read in
conjunction with the other financial statements and notes thereto appearing
elsewhere herein. See also "Selected Financial Information" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
P-1
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS AND OTHER DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------------------
BARBER 1997 ACQUISITIONS PROFORMA
COMPANY COLMAN THRU ----------------------------- ADJUSTMENTS
HISTORI- MARCH 8, ELECTRICAL MOTION & OLD PRO
CAL(1) 1996(2) FIR(3) DESIGN(3) CONTROL(3) OFFERING FORMA
-------- ----------- ------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $117,571 $4,806 $38,476 $14,566 $34,957 $ -- $210,376
Cost of sales excluding
depreciation........... 75,751 3,559 25,905 10,550 20,541 -- 136,306
-------- ------ ------- ------- ------- -------- --------
Gross profit excluding
depreciation........... 41,820 1,247 12,571 4,016 14,416 -- 74,070
Selling, general and
administrative expenses
excluding depreciation
....................... 8,796 871 3,688 1,236 12,154 (1,871)(4) 24,874
Depreciation and
amortization........... 7,078 203 949 56 308 2,515 (5) 11,109
Management fees......... 2,717 -- -- -- -- (612)(6) 2,105
-------- ------ ------- ------- ------- -------- --------
Operating income........ 23,229 173 7,934 2,724 1,954 (32) 35,982
Interest expense (net of
interest income)....... 10,987 66 2,301 42 275 17,220 (7) 30,891
Other (income) expense.. (68) 2 19 -- (81) 65 (63)
-------- ------ ------- ------- ------- -------- --------
Income (loss) before
income taxes and
minority interest...... 12,310 105 5,614 2,682 1,760 (17,317) 5,154
Provision (benefit) for
income taxes........... 5,291 -- 3,123 107 -- (6,460)(8) 2,061
-------- ------ ------- ------- ------- -------- --------
Income (loss) from
continuing operations.. $ 7,019 $ 105 $ 2,491 $ 2,575 $ 1,760 $(10,857) $ 3,093
======== ====== ======= ======= ======= ======== ========
OTHER DATA:
Capital expenditures.... $ 1,304 $ 118 $ 906 $ 64 $ 453 $ 2,845
Cash interest expense
(9).................... 9,555 29,835
Ratio of earnings to
fixed charges (10)..... 2.1x 1.2x
</TABLE>
P-2
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS AND OTHER DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------------
1997 ACQUISITIONS PRO FORMA
------------------------------ ADJUSTMENTS
ELECTRICAL MOTION & OLD
COMPANY FIR(3) DESIGN(3) CONTROL(3) OFFERING PRO FORMA
HISTORICAL(1) ------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $106,379 $20,591 $10,135 $29,308 $ -- $166,413
Cost of sales excluding
depreciation........... 68,349 14,176 6,630 16,595 -- 105,750
-------- ------- ------- ------- ------- --------
Gross profit excluding
depreciation........... 38,030 6,415 3,505 12,713 -- 60,663
Selling, general and
administrative expenses
excluding depreciation
....................... 8,638 2,179 794 6,824 1,639 (4) 20,074
Depreciation and
amortization........... 6,259 626 24 260 1,674 (5) 8,843
Other (income) and
expenses............... 91 16 -- -- -- 107
Management fees ........ 1,064 -- -- -- 599 (6) 1,663
-------- ------- ------- ------- ------- --------
Operating income........ 21,978 3,594 2,687 5,629 (3,912) 29,976
Interest expense (net of
interest income)....... 15,596 1,165 -- 208 5,896 (7) 22,865
Other (income) expense.. -- (70) (24) (55) -- (149)
-------- ------- ------- ------- ------- --------
Income (loss) before
income taxes and
minority interest...... 6,382 2,499 2,711 5,476 (9,808) 7,260
Provision (benefit) for
income taxes .......... 2,805 1,381 114 -- (1,397)(8) 2,903
-------- ------- ------- ------- ------- --------
Income (loss) from
continuing operations.. $ 3,577 $ 1,118 $ 2,597 $ 5,476 $(8,411) $ 4,357
======== ======= ======= ======= ======= ========
OTHER DATA:
Capital expenditures.... $ 739 $ 124 $ 24 $ 363 $ -- $ 1,250
Cash interest expense
(9).................... 15,164 22,391
Ratio of earnings to
fixed charges (10)..... 1.4x 1.3x
</TABLE>
- --------
(1) Historical results of operations for the year ended December 31, 1996 and
the nine months ended September 30, 1997 include the results of Barber-
Colman Motors from the date of its acquisition on March 8, 1996. The
historical results of operations for the nine months ended September 30,
1997 include the results of FIR from the date of its acquisition on June
12, 1997 through July 31, 1997. The results of FIR are included for
periods ending two months prior to the Company's year end and interim
periods to ensure timely preparation of the Consolidated Financial
Statements.
(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) Reflects the historical results of operations of the acquired subsidiaries
from January 1 of the relevant period to the earlier of (i) the date of
acquisition, or (ii) the end of the relevant period.
(4) Adjustments to selling, general, and administrative expenses include: (i)
the elimination of $369 relating to the completed headcount reductions and
administrative savings in connection with the Barber-Colman Acquisition by
the Company for the year ended December 31, 1996, (ii) the elimination of
$3,979 for the year ended December 31, 1996 for reductions in executive
compensation expense related to the 1997 Acquisitions (defined as the
acquisitions of FIR, Electrical Design, and Motion Control), and the
addition of $710 for increases in executive compensation expense related
to the 1997 Acquisitions for the nine months ended September 30, 1997, and
(iii) the addition of $2,477 and $929 for the year ended December 31, 1996
and the nine months ended September 30, 1997, respectively, for shared
general, administrative, and overhead expenses of Jordan Industries and
estimated costs of the Motors & Gears Corporate Group.
(5) Includes incremental goodwill amortization and depreciation as a result of
the 1997 Acquisitions and the acquisition of Barber-Colman Motors as if
the acquisitions occurred at the beginning of the relevant periods.
(6) Adjustments to management fees reflect the elimination and termination of
the historical advisory and management fees paid to Jordan Industries
under the JI Properties Services Agreement and the recording of management
fees pursuant to the New Subsidiary Advisory Agreement and JI Properties
Service Agreement (see "Certain Transactions--Services Agreements").
(7) Interest expense is adjusted to reflect the transactions of the Old
Offering and the Series A/B Note Offering as if the transactions occurred
at the beginning of the relevant periods.
P-3
<PAGE>
(8) Pro forma net income reflects income taxes at a rate of 40%.
(9) Pro forma cash interest expense excludes amortization of deferred financing
costs, amortization of premium on the Old Series C Notes and is net of
interest income.
(10) For the 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.
P-4
<PAGE>
CONDENSED UNAUDITED PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
------------------------------------------------------------
ACQUISITIONS
---------------------
COMPANY MOTION ELECTRICAL PRO FORMA
HISTORICAL CONTROL(1) DESIGN(1) ADJUSTMENTS PRO FORMA
---------- ---------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 5,104 $ 1 $2,127 $ 19,396(2)(3) $ 26,628
Accounts receivables--
net................... 29,988 9,675 2,526 -- 42,189
Inventories............ 25,442 5,143 1,105 -- 31,690
Prepaid expenses and
other current assets.. 4,301 65 2 -- 4,368
-------- ------- ------ -------- --------
Total current assets. 64,835 14,884 5,760 19,396 104,875
Property and equipment,
net.................... 14,081 1,383 142 -- 15,606
Intangibles, net........ 139,537 -- -- 54,433 (2) 193,970
Other assets............ 9,842 -- -- 5,000 (3) 14,842
-------- ------- ------ -------- --------
Total assets......... $228,295 $16,267 $5,902 $ 78,829 $329,293
======== ======= ====== ======== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY
(NET CAPITAL
DEFICIENCY)
Current liabilities..... $ 27,532 $ 6,015 $1,284 $ (801)(2)(3) $ 34,030
Current portion of long-
term debt.............. 20 -- 840 (840)(2) 20
Long-term obligations
Credit Agreement....... 34,000 -- -- (34,000)(3) --
Senior Notes........... 170,000 -- -- 104,500 (3) 274,500
Sellers' Notes......... 5,000 -- -- 4,000 (2) 9,000
Other debt............. 75 209 -- (209)(2) 75
-------- ------- ------ -------- --------
Total long-term
obligations......... 209,075 209 -- 74,291 283,575
Other non-current
liabilities and
deferred income taxes.. 5,129 -- -- -- 5,129
Stockholder's equity
(net capital
deficiency)............ (13,461) 10,043 3,778 6,179 (2)(4) 6,539
-------- ------- ------ -------- --------
Total liabilities and
stockholder's
equity.............. $228,295 $16,267 $5,902 $ 78,829 $329,293
======== ======= ====== ======== ========
</TABLE>
- --------
(1) Reflects the historical consolidated balance sheet of the respective
acquisitions as of September 30, 1997.
(2) Gives effect to the Electrical Design Acquisition and the Motion Control
Acquisition, as if these transactions had occurred on September 30, 1997.
(3) Gives effect to (i) the proceeds from the issuance of the Old Series C
Notes at a price of 104.5%, plus accrued interest from November 16, 1997
of $896, (ii) the purchase of the Company's common stock by the Parent,
the repayment of amounts owing under the Existing Credit Agreement, and
the addition of $5,000 of estimated fees and expenses associated with the
Old Offering, as if such transactions occurred on September 30, 1997.
(4) Gives effect to the proceeds from the purchase of the Company's common
stock by the Parent.
P-5
<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
Except for Note 11, as to which the date is December 18, 1997
F-1
<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-2
<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-3
<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 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-4
<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-5
<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-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<PAGE>
MOTORS AND GEARS, INC.
(A SUBSIDIARY OF MOTORS AND GEARS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS
On June 12, 1997, Motors & Gears Industries, Inc. ("MGI"), through its
newly-formed wholly-owned subsidiary, FIR Group Holdings, Inc. and its wholly-
owned subsidiaries, Motors and Gears Amsterdam, B.V. and FIR Group Holdings
Italia, SrL. purchased all of the common stock of the FIR Group Companies,
consisting of CIME S.p.A., SELIN S.p.A., and FIR S.p.A. The FIR Group
Companies are manufacturers of electric motors and pumps for niche
applications such as pumps for commercial dishwashers, motors for industrial
sewing machines, and motors for industrial fans and ventilators.
The purchase price of $50.5 million, including costs directly related to the
transaction, was preliminarily allocated to working capital of $17.5 million,
property, plant, and equipment of $4.9 million, other long term liabilities of
$3.9 million, and resulted in an excess of purchase price over net
identifiable assets of $32.0 million. The cash was provided from borrowings
under MGI's existing Credit Agreement.
On October 27, 1997, MGI acquired all of the outstanding stock of ED&C
Company ("ED&C"). MGI acquired ED&C through its newly formed wholly owned
subsidiary, Electrical Design and Control Company. ED&C is a full-service
electric engineering company which designs, engineers, and manufactures
electrical control systems and panels for material handling systems and other
like applications. ED&C provides comprehensive design, build, and support
services to produce electronic control panels which regulate the speed and
movement of conveyor systems used in a variety of automotive plants and other
industrial applications.
In connection with the acquisition of ED&C MGI paid $15.0 million to the
sellers in cash and the remainder was financed through a $4.0 million
unsecured note which bears an interest rate of 9% with one principal
amortization payment of $4.0 million in 2002. The cash was provided from
borrowings under MGI's existing Credit Agreement.
On December 18, 1997, MGI acquired all of the outstanding stock of Motion
Control Engineering, Inc. ("Motion Control"). MGI acquired Motion Control
through its newly formed wholly-owned subsidiary, Motion Holdings, Inc. Motion
Control is the leading independent supplier of electronic motion and logic
control products to the elevator industry. Motion Control designs, engineers
and assembles custom microprocessor-based control systems primarily used in
modernizing and upgrading existing cable traction and hydraulic elevators (90%
of sales) as well as new building construction (10% of sales).
In connection with the acquisition, MGI paid $51.6 million to the sellers in
cash. The cash was provided through proceeds from the 10 3/4% Series C Senior
Notes due 2006 issued on December 17, 1997.
On December 17, 1997, the Company issued $100.0 million aggregate principal
amount of 10 3/4% Series C Senior Notes. Interest on the Series C Senior Notes
is payable in arrears on May 15 and November 15 of each year commencing May
15, 1998. The Series C Senior Notes are unsecured obligations of the Company
and mature on November 15, 2006. In connection with the issuance of the Series
C Senior Notes, the Company also received $20,000 of proceeds from the
issuance of shares of common stock to its Parent.
F-13
<PAGE>
MOTORS AND GEARS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 5,104
Accounts receivable, net...................................... 29,988
Inventories................................................... 25,442
Prepaid expenses and other current assets..................... 3,142
Deferred income taxes......................................... 1,159
--------
Total current assets........................................ 64,835
Property, plant, and equipment, net............................. 14,081
Goodwill, net................................................... 138,556
Covenants not to compete, net................................... 981
Deferred financing costs, net................................... 9,643
Other assets.................................................... 199
--------
Total assets................................................ $228,295
========
LIABILITIES AND SHAREHOLDER'S EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable.............................................. $ 15,195
Accrued interest payable...................................... 6,965
Accrued expenses and other.................................... 2,602
Due to affiliated company..................................... 2,770
Current portion of capital lease obligations.................. 20
--------
Total current liabilities................................... 27,552
Long-term debt.................................................. 204,000
Subordinated note payable....................................... 5,000
Capital lease obligations, less current portion................. 75
Deferred income taxes........................................... 2,503
Other non-current liabilities................................... 2,626
Shareholder's equity (net capital deficiency):
Common stock.................................................. 1
Additional paid-in capital.................................... 30,005
Accumulated deficit........................................... (43,467)
--------
Shareholder's equity (net capital deficiency)............... (13,461)
--------
Total liabilities and net capital deficiency................ $228,295
========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-14
<PAGE>
MOTORS AND GEARS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1997
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................... $ 90,153 $ 106,379
Cost of sales, excluding depreciation....................... 58,007 68,349
Selling, general, and administrative expenses............... 6,404 8,226
Depreciation................................................ 2,168 3,003
Amortization of goodwill and other intangibles.............. 2,920 3,256
Management fees and other................................... 2,289 1,567
-------- ---------
Operating income........................................ $ 18,365 $ 21,978
Other (income) and expenses:
Interest expense.......................................... 7,413 15,950
Interest income........................................... -- (354)
-------- ---------
Total other expenses.................................... $ 7,413 $ 15,596
-------- ---------
Income before income taxes.................................. 10,952 6,382
Provision for income taxes.................................. 4,082 2,805
-------- ---------
Net income.................................................. $ 6,870 $ 3,577
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-15
<PAGE>
MOTORS AND GEARS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 6,870 $ 3,577
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 5,978 7,046
Provision for deferred income taxes..................... 516 803
Changes in operating assets and liabilities
Net of effects from acquisitions:
Decrease (Increase) in current assets................... 1,169 (2,527)
Increase in current liabilities......................... 1,295 3,401
Increase in non-current liabilities..................... -- 53
Increase in non-current assets.......................... -- (327)
(Decrease) Increase in payables to affiliated company... (6,235) 1,064
-------- --------
Net cash provided by operating activities.................. 9,593 13,090
Cash flows from investing activities:
Capital expenditures, net................................. (874) (739)
Acquisitions of subsidiaries.............................. (21,700) (50,950)
Cash acquired in purchase of subsidiaries................. -- 890
-------- --------
Net cash used in investing activities...................... (23,574) (50,799)
Cash flows from financing activities:
Proceeds from debt issuance............................... 20,000 --
Net borrowings from revolving credit facilities........... 1,700 34,000
Repayment of long-term debt............................... (6,945) (17)
Other..................................................... 81 70
-------- --------
Net cash provided by financing activities.................. 14,836 34,053
-------- --------
Effect of exchange rate changes on cash.................... -- (1,251)
Net increase (decrease) in cash and cash equivalents....... 1,855 (4,907)
Cash and cash equivalents at beginning of period........... 2,781 10,011
-------- --------
Cash and cash equivalents at end of period................. $ 4,636 $ 5,104
======== ========
Cash paid during the period for:
Interest.................................................. $ 7,183 $ 11,695
Income taxes.............................................. $ 839 $ 319
======== ========
Non-cash paid investing activities:
Capital leases............................................ $ 67 $ 46
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-16
<PAGE>
MOTORS AND GEARS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
A. ORGANIZATION
The unaudited condensed consolidated financial statements, which reflect all
adjustments that management believes necessary to present fairly the results
of interim operations, should be read in conjunction with the Notes to the
Consolidated Financial Statements (including the Summary of Significant
Accounting Policies) included in the Company's audited consolidated financial
statements for the year ended December 31, 1996, which are included elsewhere
herein. The Company conducts its operations exclusively through its
subsidiaries. Results of operations for the interim periods are not
necessarily indicative of annual results of operations.
B. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Raw materials and work in process............................ $22,533
Finished Goods............................................... 2,909
-------
$25,442
=======
</TABLE>
C. ACQUISITION OF SUBSIDIARIES
On March 8, 1996, Merkle-Korff acquired the net assets of Barber-Colman
Motors ("Colman Motors Products", formerly "Barber-Colman"), a division of
Barber-Colman Company, which was wholly-owned by Siebe, plc. This division
consisted of Colman OBM and Colman Motor Products, wholly owned subsidiaries
of Barber-Colman Company, and the motors division of Barber-Colman Company,
collectively, Colman Motor Products ("CMP"). It is a vertically integrated
manufacturer of sub fractional horsepower AC/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, which included costs incurred directly
related to the transaction, was allocated to working capital of $5,111,
property, plant and equipment of $6,541, non-compete agreements of $1,000, and
resulted in an excess purchase price over net identifiable assets of $9,048.
The acquisition was financed with $21,700 of new and existing credit
facilities.
On June 12, 1997, Motors & Gears Industries, Inc. ("The Company"), through
its newly-formed wholly-owned subsidiary, FIR Group Holdings, Inc. and its
wholly-owned subsidiaries, Motors and Gears Amsterdam, B.V. and FIR Group
Holdings Italia, SrL, purchased all of the common stock of the FIR Group
Companies, consisting of CIME S.p.A., SELIN S.p.A., and FIR S.p.A. The FIR
Group Companies are manufacturers of electric motors and pumps for niche
applications such as pumps for commercial dishwashers, motors for industrial
sewing machines, and motors for industrial fans and ventilators.
The purchase price of $50.5 million, including costs directly related to the
transaction, was preliminarily allocated to working capital of $17.5 million,
property, plant, and equipment of $4.9 million, other long term liabilities of
$3.9 million, and resulted in an excess of purchase price over net
identifiable assets of $32.0 million. The cash was provided from borrowings
under the Company's existing Credit Agreement.
On October 27, 1997, Motor & Gears Industries, Inc. ("Company") acquired all
of the outstanding stock of ED&C Company ("ED&C"). The Company acquired ED&C
through its newly formed wholly owned
F-17
<PAGE>
MOTORS AND GEARS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
subsidiary, Electrical Design and Control Company. ED&C is a full-service
electric engineering company which designs, engineers, and manufactures
electrical control systems and panels for material handling systems and other
like applications. ED&C provides comprehensive design, build, and support
services to produce electronic control panels which regulate the speed and
movement of conveyor systems used in a variety of automotive plants and other
industrial applications.
In connection with the acquisition of ED&C the Company paid $15.0 million to
the sellers in cash and the remainder was financed through a $4.0 million
unsecured note which bears an interest rate of 9% with one principal
amortization payment of $4.0 million in 2002. The cash was provided from
borrowings under the Company's existing credit agreement.
D. SIGNIFICANT ACCOUNTING POLICIES--CONSOLIDATION PRINCIPLES
The consolidated financial statements include the accounts of Motors &
Gears, Inc. and its subsidiaries. Material intercompany transactions and
balances are eliminated in consolidations. Operations of subsidiaries outside
the United States are included for periods ending two months prior to the
Company's year end and interim periods to ensure timely preparation of the
consolidated financial statements.
F-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
FIR Group
We have audited the accompanying consolidated balance sheets of FIR Group
(the "Company"), composed of FIR Elettromeccanica S.p.A., CIME S.p.A. and
Selin Sistemi S.p.A., as of July 31, 1995 and 1996 and the related
consolidated statements of income, changes in stockholder's equity and cash
flows for the years then ended. These consolidated 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 audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 financial position of the
Company as of July 31, 1995 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Chicago, Illinois
June 9, 1997
F-47
<PAGE>
FIR GROUP
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 631 $ 2,790
Accounts receivable, net of allowance for doubtful accounts
of $148 in 1995 and $153 in 1996............................. 14,474 14,086
Other receivables............................................. 816 1,081
Prepaid assets................................................ 129 243
Inventories................................................... 9,124 10,487
Deferred income taxes......................................... 5,449 2,948
------- -------
Total current assets........................................ 30,623 31,635
Property, plant and equipment, net.............................. 4,483 5,179
Goodwill, net of $322 and $671 accumulated amortization in
1995 and 1996, respectively.................................... 9,328 9,366
Other intangible assets, net of $28 and $94 accumulated
amortization in 1995 and 1996, respectively.................... 170 277
Other assets.................................................... 201 125
------- -------
Total assets................................................ $44,805 $46,582
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................. $ 2,901 $ 3,028
Bank debt..................................................... 2,951 1,992
Accounts payable.............................................. 5,342 6,576
Accrued interest.............................................. 426 1,603
Accrued liabilities........................................... 593 808
Taxes payable................................................. 214 499
------- -------
Total current liabilities................................... 12,427 14,506
Long-term debt, net............................................. 14,768 15,733
Deferred taxes.................................................. 939 1,106
Staff severance liability....................................... 2,234 2,680
------- -------
Total liabilities........................................... 30,368 34,025
Total shareholders' equity.................................. 14,437 12,557
------- -------
Total liabilities and shareholders' equity.................. $44,805 $46,582
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-48
<PAGE>
FIR GROUP
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED JULY 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Net sales..................................................... $31,811 $37,040
Cost of sales................................................. 22,180 25,333
------- -------
Gross profit................................................ 9,631 11,707
Selling, general and administrative expenses.................. 2,645 3,594
Amortization of intangible assets............................. 343 385
Net exchange (gain) loss...................................... (134) 98
------- -------
Income from operations...................................... 6,777 7,630
Other expense (income), net................................... 632 263
------- -------
Income before interest and taxes............................ 6,145 7,367
Interest expense, net......................................... 2,303 2,433
------- -------
Income before taxes......................................... 3,842 4,934
Income tax (provision) benefit................................ 3,944 (2,977)
------- -------
Profit before minority interest............................. 7,786 1,957
Minority interest............................................. -- (96)
------- -------
Net income.................................................. $ 7,786 $ 1,861
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-49
<PAGE>
FIR GROUP
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN- RETAINED TREASURY TRANSLATION
STOCK CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL
------ ---------- -------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1994.. $1,756 $ 291 $ -- $ -- $ -- $ 2,047
Net income, fiscal
1995.................. -- -- 7,786 -- -- 7,786
Capital contribution... -- 4,390 -- -- -- 4,390
Translation adjustment. -- -- -- -- 214 214
------ ------ ------ ------- ------ -------
Balance, July 31, 1995 1,756 4,681 7,786 -- 214 14,437
Net income, fiscal
1996.................. -- -- 1,861 -- -- 1,861
Share buyback.......... -- -- -- (4,656) -- (4,656)
Translation adjustment. -- -- -- -- 925 925
------ ------ ------ ------- ------ -------
Balance, July 31, 1996.. $1,756 $4,681 $9,647 $(4,656) $1,139 $12,567
====== ====== ====== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-50
<PAGE>
FIR GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Cash flow from operating activities:
Net income................................................. $ 7,785 $ 1,861
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 631 806
Increase (decrease) in deferred taxes..................... (81) 122
Changes in assets and liabilities, net of effects from
purchase of SELIN and FIR:
Decrease (increase) in accounts receivable and other..... (1,198) 975
(Increase) decrease in other receivables................. 41 (221)
(Increase) decrease in prepaid assets.................... 60 (104)
Decrease (increase) in other assets...................... (154) 81
Decrease (increase) in income tax receivable............. (5,553) 2,635
Increase in inventory.................................... (1,129) (934)
Increase in accounts payable............................. 575 967
Increase (decrease) in accrued liabilities............... (492) 165
Increase in accrued interest............................. 400 1,132
Increase (decrease) in income tax payable................ (1,010) 266
Increase (decrease) in staff severance liability and
other long-term liabilities............................. (57) 337
-------- -------
Net cash provided by operating activities................... (182) 8,088
-------- -------
Cash flows from investing activities:
Net fixed asset acquisitions............................... (543) (906)
Acquisition of intangibles................................. (86) (130)
Payment for purchase of FIR, net of cash acquired.......... (23,521) --
Payment for purchase of SELIN, net cash acquired........... (358) --
-------- -------
Net cash provided by investing activities................... (24,508) (1,036)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt................... 17,894 --
Payment of long-term debt.................................. -- 311
Change in short-term bank debt............................. 2,811 (1,047)
Purchase of treasury stock................................. -- (4,344)
Proceeds from capital contribution......................... 4,454 --
-------- -------
Net cash provided by financing activities................... 25,159 (5,080)
-------- -------
Effect of exchange rate on changes in cash.................. 46 187
-------- -------
Net change in cash.......................................... 515 2,159
Cash, beginning of year..................................... 116 631
-------- -------
Cash, end of year........................................... $ 631 $ 2,790
======== =======
Supplemental disclosure of cash flow information:
Interest paid.............................................. $ 1,144 $ 879
======== =======
Income taxes paid.......................................... $ -- $ 67
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-51
<PAGE>
FIR GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. NATURE OF BUSINESS AND ORGANIZATION
Description of Business and Operating Structure
The FIR Group (the "Company"), composed of FIR Elettromeccanica S.p.A.
("FIR"), CIME S.p.A. ("CIME") and Selin Sistemi S.p.A. ("Selin"), is engaged
in the design, production, and assembly of special electric motors employed in
several industrial applications such as gasoline pumps, industrial sewing
machines, and construction machines. Approximately 50% of its sales are within
Italy and 40% are within the rest of Europe. No customer comprises more than
10% of consolidated sales.
The consolidated financial statements include all accounts of the FIR Group
and related entities under common control including FIR, CIME, and Selin. All
significant intercompany balances and transactions have been eliminated.
In July, 1994, MEVA S.r.l. and SEPI S.r.l. were acquired through a buy-out
group of institutional investors. In September, 1994, FIR Elettromeccanica
S.p.A. was acquired by MEVA and in March, 1995, MEVA, FIR and SEPI were merged
into a single company under the FIR name.
Cime S.p.A. was created in 1995 by the FIR shareholders and the managing
director of FIR to lease certain production activities formerly performed by
FIR Elettromeccanica S.p.A. before the March 1995 merger.
In May, 1995, Nike S.r.l. ("Nike") was created by the FIR shareholders and
the managing director of FIR to lease certain production activities performed
by Selin S.p.A., a company in receivership. In May, Nike changed its name to
Selin Sistemi, S.p.A. In January, 1996, Selin acquired the Selin S.p.A. and
ended the leasing arrangement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Translation of Financial Statements Denominated in a Foreign Currency
The functional currency is the Italian lire. The balance sheets have been
translated into U.S. dollars using the year-end exchange rates, while the
income statements have been translated using the average exchange rates each
year. Translation gains and losses are reported as a part of consolidated
shareholder's equity.
Cash and Cash Equivalents
All highly liquid debt instruments purchased with an initial maturity of
three months or less are considered to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first out (LIFO) method.
Property, Plant and Equipment
Property, plant and equipment are recorded at purchase cost. Depreciation is
provided on the straight-line method over the estimated useful lives of the
assets as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 10-33 years
Plant and equipment......................................... 6-10 years
Commercial and industrial tools............................. 4-5 years
</TABLE>
F-52
<PAGE>
FIR GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Repairs and maintenance are charged to expense when incurred, and
expenditures for improvements are capitalized. Upon sale or retirement, the
related cost and accumulated depreciation or amortization are removed from the
respective accounts and any resulting gain or loss is included in operations.
Intangible Assets
Goodwill is being amortized using the straight-line method over thirty
years. Other intangibles consists of patents and other intangibles assets and
are amortized using the straight-line method over four to five years.
Revenue Recognition
Revenue from the sale of products are recognized on the transfer of
ownership, which generally coincides with the time of shipment.
Research and Development
Research and development costs related to both present and future products
are charged to expense when incurred.
Interest Rate Swaps
As discussed in Note 14, the Company uses interest rate swaps to hedge its
long-term debt. The Company recognizes the differentials to be received or
paid under the contracts as an adjustment to interest expense over the life of
the contracts.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes
Income taxes are accounted for as prescribed in Statement of Financial
Accounting Standards ("SFAS") No. 109--Accounting for Income Taxes. Under the
asset and liability method SFAS No. 109, the Company recognizes the amount of
income taxes payable. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities, and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years those
temporary differences are expected to be recovered or settled.
3. RELATED PARTY TRANSACTIONS
Commercial relationships are in place between FIR and TEA, which is
partially owned by the managing director of FIR. TEA buys motors from FIR,
which totaled $65 in 1995 and $158 in 1996 TEA also provides some
subcontracted production services to FIR, which totaled $33 in 1995 and $113
in 1996.
The controlling shareholder group performs certain managerial and corporate
finance functions for the Company. During 1995 and 1996, fees paid to these
controlling shareholders totaled $527 and $105, respectively. These fees were
included in other income/expenses.
As discussed in Note 10, the majority shareholder has guaranteed certain
debts of the Group.
F-53
<PAGE>
FIR GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INVENTORIES
Inventories consist of the following, valued of LIFO cost:
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1995 1996
------ -------
<S> <C> <C>
Raw Materials............................................... $6,103 $ 6,955
Work-in-Process............................................. 2,550 2,891
Finished Goods.............................................. 471 641
------ -------
$9,124 $10,487
====== =======
</TABLE>
Inventories are accounted for using the LIFO cost method. LIFO cost
approximates replacement cost.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1995 1996
------ ------
<S> <C> <C>
Land and building.......................................... $2,931 $3,124
Plant and machinery........................................ 1,086 1,451
Commercial and industrial tools............................ 761 1,348
------ ------
4,778 5,923
Less accumulated depreciation and amortization............. (295) (744)
------ ------
$4,483 $5,179
====== ======
</TABLE>
6. SHAREHOLDERS' EQUITY
In September, 1995, the shareholders made an additional capital contribution
of $4,390. This amount was recorded directly to Additional Paid-in-Capital.
In March 1996, the Company re-acquired common stock from certain
shareholders for $4,656. The transaction was recorded as a Treasury Stock
acquisition.
7. GAINS AND LOSSES ON FOREIGN SALES
Approximately 50% of the Company's sales are to customers outside of Italy
and 10% of these sales are to customers outside of Europe. These sales are
denominated in the customer's local currency. Gains and losses on the currency
translation of these sales are recorded in the income statement when the
Company receives remittance. Gains/losses on amounts in accounts receivable at
year end are immaterial. Net gains and losses on the settlement of foreign
currency sales were $134 gain and $98 loss for the years ending July 31, 1995
and 1996, respectively.
8. LEASE COMMITMENTS
The Company leases certain production facilities under operating leases
expiring through 2002. In most cases, management expects that in the normal
course of business these leases will be renewed or replaced by other leases.
F-54
<PAGE>
FIR GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rental expense under noncancelable operating leases was approximately $5 and
$21 for the years ended July 31, 1995 and 1996, respectively. Future minimum
commitments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JULY 31,
--------------------
<S> <C>
1997................................... $134
1998................................... 130
1999................................... 130
2000................................... 130
2001................................... 130
Thereafter.............................. 130
</TABLE>
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the Italian tax basis of assets and liabilities and their carrying
amounts for financial reporting purposes. The more significant components of
the net deferred income tax assets and liabilities resulted from differences
in the timing of expenses for financial statement purposes and deductibility
for income taxes principally related to the future benefit of an Italian tax
credit and for differences in depreciation and amortization methods.
The income tax (provision) benefit for the years ended July 31, 1995 and
1996 consists of the following:
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Current................................................... $ (566) $ (289)
Deferred.................................................. 4,510 (2,688)
------ -------
$3,944 $(2,977)
====== =======
</TABLE>
The 1995 benefit results principally from an Italian tax credit arising from
an intercompany merger transaction. The credit carryforward is reflected as a
deferred tax asset as its realizability is considered by management to be more
likely than not.
F-55
<PAGE>
FIR GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. DEBT ARRANGEMENTS
The Company has a number of short-term borrowing facilities available from
approximately 25 banks. The total amount available under overdraft facilities
is $4,147 at interest rates between 9.5% and 12.75% at July 31, 1996. These
facilities are not collateralized and do not contain significant financial
covenants. In addition, the Company has a number of export and domestic sales
facilities whereby the banks loan against accounts receivable. Total available
receivable lines of credit are $15,273 at July 31, 1996 and carry interest at
9.5% to 12.75%.
Long-term debt consists of the following at July 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
CARIPLO and other banks pool senior loan to FIR, due
September 15, 1999. Indexed interest rate at Roman Interbank
Offering Rate ("RIBOR") plus 1.5%. No penalty for
anticipated reimbursements.................................. $14,513 $12,112
Subordinated debt from Banca Popolare di Cremona to FIR, due
September 9, 1999. Indexed interest rate at RIBOR plus 1.5%. 1,578 1,646
Subordinated debt from Credit Lyonnais (Milan) to FIR, due
September 9, 1999. Indexed rate at RIBOR 1.5%. No penalty
for anticipated reimbursement .............................. 1,578 1,646
Senior debt from Credit Lyonnais to Selin, due February 26,
2001. Indexed interest rate at RIBOR plus 0.5%.............. -- 3,357
------- -------
Total...................................................... 17,669 18,761
Less current maturities...................................... (2,901) (3,028)
------- -------
Long-term debt, net........................................ $14,768 $15,733
======= =======
</TABLE>
RIBOR was 11.375% and 8.5625% at July 31, 1995 and 1996, respectively.
In accordance with the pool senior loan, the Company is unable to declare
dividends or make a reduction in share capital. In addition, the bank has the
right to request the repayment of the debt in the event of certain changes in
ownership. There are no significant financial covenants on the subordinated
debt. None of the debt facilities are collateralized.
The controlling shareholder has guaranteed the subordinated debt from Banca
Popolare di Cremona, the subordinated debt from credit Lyonnais, and the
senior debt from Credit Lyonnais.
Maturities of net long-term debt as of July 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.................... $3,028
1998.................... 3,028
1999.................... 3,028
2000.................... 6,320
2001.................... 3,357
</TABLE>
Based upon the borrowing rates currently available to the Company for debt,
management estimates that the recorded principle amount is deemed to be the
same as current fair value.
F-56
<PAGE>
FIR GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. STAFF SEVERANCE
The staff severance liability is similar to a pension fund. It is accrued by
the Company per Italian law for all employees at 13.5% of annual gross salary.
In addition to the annual accrual, the total fund is revalued each year
according to an official index (equivalent to the retail price index plus
1.5%). This fund is payable to employees when they leave the Company.
12. SUBSEQUENT EVENTS
In May, 1997, the Company entered into an agreement to acquire the common
stock of TEA, referred to in Note 3, for approximately $1,100 in cash and
assumed debt. The transaction will be accounted for under the purchase method
of accounting.
In May, 1997, the Company's shareholders entered into an agreement to sell
their shares to a subsidiary of Motors and Gears, Inc.
13. COMMITMENTS AND CONTINGENCIES
FIR issued a guarantee in favor of Banca di Roma, which in turn had issued a
bank guarantee in favor of third parties for a commercial obligation of Selin
Sistemi. Such obligation is related to a $1,970 supply contract for an Indian
government body. As of July 31, 1996, approximately $99 remained on the
guarantee.
The Company is evaluating potential environmental remediation liabilities.
As of April, 1997, the Company has identified a site which may require
remediation. The Company is presently unable to determine what, if any,
liability it may incur in this matter.
14. INTEREST RATE SWAP
In order to hedge the Company's $14,500 loan, the Company has entered into
four interest swap agreements with San Paolo Torini as follows:
<TABLE>
<CAPTION>
NOMINAL AMOUNT
EXPIRATION DATE $000'S RATE RECEIVED RATE PAID
--------------- -------------- ------------- ---------
<S> <C> <C> <C> <C>
Contract 1....... September 1996 $3,291 LIBOR at 6 months 11.28%
Contract 2....... September 1997 $3,291 LIBOR at 6 months 11.70%
Contract 3....... September 1998 $3,291 LIBOR at 6 months 11.85%
Contract 4....... September 1999 $3,291 LIBOR at 6 months 11.91%
</TABLE>
The 6 month LIBOR rate was 10.94% at July 31, 1995 and 8.67% at July 31,
1996. The LIBOR rate may continue to decline, thereby creating larger losses
on the interest rate swaps. The Company records the differentials to be
received or paid under the contracts as an adjustment to interest expense over
the life of the contracts. An additional $44 and $172 was expensed for the
loss on the swap contract in 1995 and 1996, respectively.
15. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
During 1995, noncash investing activities consisted of the following:
<TABLE>
<S> <C>
Acquisition of FIR
Assets acquired............................................... $50,027
Liabilities assumed........................................... 13,222
Acquisition of SELIN
Assets acquired............................................... 631
Liabilities assumed........................................... --
</TABLE>
F-57
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
FIR Group
We have audited the accompanying consolidated balance sheet of FIR Group
(the "Company"), composed of FIR Elettromeccanica S.p,.A., CIME S.p.A. and
Selin Sistemi S.p.A., as of March 31, 1997 and the related consolidated
statements of income, changes in stockholder's equity and cash flows for the
eight months then ended. These consolidated 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of March 31, 1997, and the results of its operations and its cash
flows for the eight months then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
July 25, 1997
F-58
<PAGE>
FIR GROUP
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 2,337
Accounts receivable, net of allowance for doubtful accounts of $341... 11,108
Other receivables..................................................... 2,341
Prepaid assets........................................................ 174
Inventories........................................................... 9,263
Deferred income taxes................................................. 1,759
-------
Total current assets................................................ 26,982
Property, plant and equipment net....................................... 4,575
Goodwill, net of $810 accumulated amortization.......................... 8,280
Other intangible assets, net of $138 accumulated amortization........... 133
Other assets............................................................ 49
-------
Total assets........................................................ $40,019
=======
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C>
Current liabilities:
Current portion of long-term debt.................................... $ 5,783
Bank debt............................................................ 1,193
Accounts payable..................................................... 6,852
Accrued interest..................................................... 1,172
Accrued liabilities.................................................. 619
Taxes payable........................................................ 244
-------
Total current liabilities.......................................... 15,863
Long-term debt, net.................................................... 8,467
Deferred taxes......................................................... 1,145
Staff severance liability.............................................. 2,551
-------
Total liabilities.................................................. 28,026
Total shareholders' equity......................................... 11,993
-------
Total liabilities and shareholders' equity......................... $40,019
=======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-59
<PAGE>
FIR GROUP
CONSOLIDATED INCOME STATEMENT
FOR THE EIGHT MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Net sales.............................................................. $21,241
Cost of sales.......................................................... 14,898
-------
Gross profit....................................................... 6,343
Selling, general and administrative expenses........................... 2,337
Amortization of intangible assets...................................... 274
Net exchange loss...................................................... 20
-------
Income from operations............................................. 3,712
Other expense, net..................................................... 489
-------
Income before interest and taxes................................... 3,223
Interest expense, net.................................................. 1,294
-------
Income before taxes................................................ 1,929
Income tax provision................................................... 1,247
-------
Net income......................................................... $ 682
=======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-60
<PAGE>
FIR GROUP
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE EIGHT MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
COMMON ADDITIONAL RETAINED TREASURY TRANSLATION
STOCK PAID-IN-CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL
------ --------------- -------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1996.. $1,756 $4,681 $ 9,647 $(4,656) $ 1,139 $12,567
Net income, eight
months ended March
31, 1997............. -- -- 682 -- -- 682
Translation
adjustment........... -- -- -- -- (1,256) (1,256)
------ ------ ------- ------- ------- -------
Balance, March 31, 1997. $1,756 $4,681 $10,329 $(4,656) $ (117) $11,993
====== ====== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-61
<PAGE>
FIR GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE EIGHT MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash flow from operating activities:
Net income.......................................................... $ 682
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 614
Increase (decrease) in deferred taxes............................. 153
Changes in assets and liabilities:
Decrease in accounts receivable................................. 1,774
Increase in other receivables................................... (1,349)
Decrease in prepaid assets...................................... 49
Increase in other assets........................................ (45)
Decrease in income tax receivable............................... 980
Increase in inventory........................................... 253
Increase in accounts payable.................................... 962
Decrease in accrued liabilities................................. (119)
Decrease in accrued interest.................................... (301)
Decrease in income tax payable.................................. (223)
Increase in staff severance liability and other long-term
liabilities.................................................... 134
-------
Net cash provided by operating activities..................... 3,564
-------
Cash flows from investing activities:
Net fixed assets acquisitions....................................... (152)
Acquisition of intangibles.......................................... (12)
-------
Net cash provided by investing activities..................... (164)
-------
Cash flows from financing activities:
Payment of long-term debt........................................... (6,216)
Change in short-term bank debt...................................... 2,611
-------
Net cash provided by financing activities..................... (3,605)
-------
Effect of exchange rate on changes in cash............................ (248)
-------
Net change in cash.................................................... (453)
Cash, beginning of year............................................... 2,790
-------
Cash, end of year..................................................... $ 2,337
=======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-62
<PAGE>
FIR GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. NATURE OF BUSINESS AND ORGANIZATION
Description of Business and Operating Structure
The FIR Group (the "Company"), composed of FIR Elettromeccanica S.p.A.
("FIR"), CIME S.p.A. ("CIME") and Selin Sistemi S.p.A. ("Selin"), is engaged
in the design, production, and assembly of special electric motors employed in
several industrial applications such as gasoline pumps, industrial sewing
machines, and construction machines. Approximately 50% of its sales are within
Italy and 40% are within the rest of Europe. No customer comprises more than
10% of consolidated sales.
The consolidated financial statements include all accounts of the FIR Group
and related entities under common control including FIR, CIME and Selin. All
significant intercompany balances and transactions have been eliminated.
In July, 1994, MEVA S.r.l. and SEPI S.r.l. were acquired through a buy-out
group of institutional investors. In September, 1994, FIR Elettromeccanica
S.p.A. was acquired by MEVA and in March, 1995, MEVA, FIR and SEPI were merged
into a single company under the FIR name.
Cime S.p.A. was created in 1995 by the FIR shareholders and the managing
director of FIR to lease certain production activities formerly performed by
FIR Elettromeccanica S.p.A. before the March 1995 merger.
In May 1995, Nike S.r.l. ("Nike") was created by the FIR shareholders and
the managing director of FIR to lease certain production activities performed
by Selin S.p.A., a company in receivership. In May, Nike changed its name to
Selin Sistemi, S.p.A. In January, 1996, Selin acquired Selin S.p.A. and ended
the leasing arrangement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Translation of Financial Statements Denominated in a Foreign Currency
The functional currency is the Italian lire. The balance sheet has been
translated into U.S. dollars using the year-end exchange rates, while the
income statement has been translated using the average exchange rates each
year. Translation gains and losses are reported as a part of consolidated
shareholders' equity.
Cash and Cash Equivalents
All highly liquid debt instruments purchased with an initial maturity of
three months or less are considered to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first out (LIFO) method.
Property, Plant and Equipment
Property, plant and equipment are recorded at purchase cost. Depreciation is
provided on the straight-line method over the estimated useful lives of the
assets as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................... 10-33 years
Plant and equipment........................................... 6-10 years
Commercial and industrial tools............................... 4-5 years
</TABLE>
F-63
<PAGE>
FIR GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Repairs and maintenance are charged to expense when incurred, and
expenditures for improvements are capitalized. Upon sale or retirement, the
related cost and accumulated depreciation or amortization are removed from the
respective accounts and any resulting gain or loss is included in operations.
Intangible Assets
Goodwill is being amortized using the straight-line method over thirty
years. Other intangibles consists of patents and other intangible assets and
are amortized using the straight-line method over four to five years.
Revenue Recognition
Revenue from the sale of products is recognized on the transfer of
ownership, which generally coincides with the time of shipment.
Research and Development
Research and Development costs related to both present and future products
are charged to expense when incurred.
Interest Rate Swaps
As discussed in Note 11, the Company used interest rate swaps to hedge its
long-term debt. The Company recognizes the differentials to be received or
paid under the contracts as an adjustment to interest expense over the life of
the contracts.
The Interest Rate Swap contracts have been canceled and the related
termination cost of $568 has been recorded as a component of Other Expense in
the March 31, 1997 financial statements.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes
Income taxes are accounted for as prescribed in Statement of Financial
Accounting Standards ("SFAS") No. 109--Accounting for Income Taxes. Under the
asset and liability method SFAS No. 109, the Company recognizes the amount of
income taxes payable. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities, and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years those
temporary differences are expected to be recovered or settled.
3. INVENTORIES
Inventories as of March 31, 1997 consist of the following, valued at LIFO
cost:
<TABLE>
<S> <C>
Raw Materials...................................................... $4,831
Work-in-Process.................................................... 3,442
Finished Goods..................................................... 990
------
$9,263
======
</TABLE>
Inventories are accounted for using the LIFO cost method. LIFO cost
approximates replacement cost.
F-64
<PAGE>
FIR GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of March 31, 1997:
<TABLE>
<S> <C>
Land and building................................................. $2,917
Plant and machinery............................................... 1,245
Commercial and industrial tools................................... 1,404
------
5,566
Less accumulated depreciation and amortization.................... (991)
------
$4,575
======
</TABLE>
5. GAINS AND LOSSES ON FOREIGN SALES
Sales to customers outside of Italy are denominated in the customer's local
currency. Gains and losses on the currency translation of these sales are
recorded in the income statement when the Company receives remittance.
Gains/losses on amounts in accounts receivable at year end are immaterial. The
net loss on the settlement of foreign currency sales was $20 for the eight
months ended March 31, 1997.
6. LEASE COMMITMENTS
The Company leases certain production facilities under operating leases
expiring through 2002. In most cases, management expects that in the normal
course of business these leases will be renewed or replaced by other leases.
Rental expense under noncancelable operating leases was approximately $93
for the eight months ended March 31, 1997. Future minimum commitments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JULY 31,
<S> <C>
1997....................................... $ 24
1998....................................... 117
1999....................................... 117
2000....................................... 117
2001....................................... 117
Thereafter................................. 117
</TABLE>
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the Italian tax basis of assets and liabilities and their carrying
amounts for financial reporting purposes. The more significant components of
the net deferred income tax assets and liabilities resulted from differences
in the timing of expenses for financial statement purposes and deductibility
for income taxes principally related to the future benefit of an Italian tax
credit and for differences in depreciation and amortization methods.
The income tax (provision) benefit for the eight months ended March 31, 1997
consists of the following:
<TABLE>
<S> <C>
Current.................................. $(1,329)
Deferred................................. 82
-------
$(1,247)
=======
</TABLE>
F-65
<PAGE>
FIR GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. DEBT ARRANGEMENTS
The Company has a number of short-term borrowing facilities available from
approximately 25 banks. The total amount available under overdraft facilities
is $5,096 at interest rates between 9.00% and 11.25% at March 31, 1997. These
facilities are not collateralized and do not contain significant financial
covenants. In addition, the Company has a number of export and domestic sales
facilities whereby the banks loan against accounts receivable. Total available
receivable lines of credit are $10,187 at March 31, 1997 and carry interest at
7.5% to 9.5%.
Long-term debt consists of the following at March 31, 1997:
<TABLE>
<S> <C>
September 15, 1999. Indexed interest rate at Roman Interbank Offering
Rate ("RIBOR") plus 1.5%. No penalty for anticipated reimbursements.. $ 8,228
Subordinated debt from Banca Popolare di Cremona to FIR, due September
9, 1999. Indexed interest rate at RIBOR plus 1.5%.................... 1,491
Subordinated debt from Credit Lyonnais (Milan) to FIR, due September
9, 1999. Indexed rate at RIBOR plus 1.5%. No penalty for anticipated
reimbursement........................................................ 1,491
Senior debt from Credit Lyonnais to Selin, due February 26, 2001.
Indexed interest rate at RIBOR plus 0.5%............................. 3,040
-------
Total............................................................. 14,250
Less current maturities............................................... (5,783)
-------
Long-term debt, net............................................... $ 8,467
=======
</TABLE>
RIBOR was 7.75% at March 31, 1997.
In accordance with the pool senior loan, the Company is unable to declare
dividends or make a reduction in share capital. In addition, the bank has the
right to request the repayment of the debt in the event of certain changes in
ownership. There are no significant financial covenants on the subordinated
debt. None of the debt facilities are collateralized.
The controlling shareholder has guaranteed the subordinated debt from Banca
Popolare di Cremona, the subordinated debt from Credit Lyonnais, and the
senior debt from Credit Lyonnais.
Maturities of net long-term debt as of March 31, 1997 are as follows:
<TABLE>
<S> <C>
1998....................................... $5,783
1999....................................... 2,743
2000....................................... 2,684
2001....................................... 3,040
</TABLE>
Based upon the borrowing rates currently available to the Company for debt,
management estimates that the recorded principal amount is deemed to be the
same as current fair value.
9. STAFF SEVERANCE
The staff severance liability is similar to a pension fund. It is accrued by
the Company per Italian law for all employees at 13.5% of annual gross salary.
In addition to the annual accrual, the total fund is revalued each year
according to an official index (equivalent to the retail price index plus
1.5%). This fund is payable to employees when they leave the Company.
F-66
<PAGE>
FIR GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
10. RELATED PARTY TRANSACTIONS
Commercial relationships are in place between FIR and TEA S.r.l. Tecnologia
Elettromeccanica ("TEA"), which is partially owned by the managing director of
FIR. TEA buys motors from FIR, which totaled $105 during the eight month
period ended March 31, 1997. TEA also provides subcontracted production
services to FIR, which totaled $75 during the eight month period ended March
31, 1997. The Company has a receivable from TEA of $894 at MArch 31, 1997.
11. INTEREST RATE SWAP
In order to hedge the Company's senior loan, the Company entered into
interest swap agreements with San Paolo Torini as follows:
<TABLE>
<CAPTION>
NOMINAL
EXPIRATION AMOUNT RATE
DATE $000'S RATE RECEIVED PAID
-------------- ------- ----------------- ------
<S> <C> <C> <C> <C>
Contract 1...................... September 1997 $3,291 LIBOR at 6 months 11.70%
Contract 2...................... September 1998 $3,291 LIBOR at 6 months 11.85%
Contract 3...................... September 1999 $3,291 LIBOR at 6 months 11.91%
</TABLE>
The Company records the differentials to be received or paid under the
contracts as an adjustment to interest expense over the life of the contracts.
These Interest Rate Swap contracts were cancelled and the related
termination cost of $568 has been recorded as a component of Other Expense in
the March 31, 1997 financial statements.
13. SUBSEQUENT EVENTS
In May 1997, the Company entered into an agreement to purchase TEA for
approximately $1,100 in cash and assumed debt. The transaction will be
accounted for under the purchase method of accounting.
In May 1997, the Company's shareholders entered into an agreement to sell
their shares to a subsidiary of Motors and Gears, Inc.
14. COMMITMENTS AND CONTINGENCIES
The Company is evaluating potential environmental remediation liabilities.
As of April, 1997, the Company has identified a site which may require
remediation. The Company is presently unable to determine what, if any,
liability it may incur in this matter.
F-67
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
E. D. and C. Company, Inc.
Members of the Board:
We have audited the accompanying balance sheet of E. D. and C. Company, Inc.
as of December 31, 1996, and the related statements of income, retained
earnings, and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion the financial statements referred to above present fairly, in
all material respects, the financial position of E. D. and C. Company, Inc. as
of December 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
Janz & Knight P.L.C.
Certified Public Accountants
Bloomfield Hills, Michigan
March 18, 1997, except for Note J
as to which the date is September 16, 1997
F-68
<PAGE>
E. D. AND C. COMPANY, INC.
(A MICHIGAN CORPORATION)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
ASSETS
Current assets:
Cash on hand and in banks....................................... $1,173,195
Accounts receivable:
Trade.......................................................... 2,300,923
Less allowance for non-collection.............................. (15,000)
----------
2,285,923
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note A)................................. 852,425
Inventory (Note A).............................................. 225,000
----------
Total current assets.......................................... 4,536,543
Property equipment--at cost:
Shop equipment.................................................. 35,544
Office furniture and fixtures................................... 244,469
Automotive equipment............................................ 106,843
Leasehold improvements.......................................... 55,329
----------
442,185
Less allowance for depreciation................................. (284,442)
----------
Total property and equipment.................................. 157,743
Deposits.......................................................... 1,800
----------
Total assets.................................................. $4,696,086
==========
LIABILITIES
Current liabilities:
Loans payable (Note D).......................................... $ 840,000
Accounts payable:
Trade.......................................................... 410,216
Employees withheld taxes....................................... 32,320
----------
442,536
Accrued expenses:
Salaries and bonuses........................................... 22,216
Pension plan................................................... 73,185
Interest....................................................... 5,600
----------
101,001
Michigan single business tax.................................... 31,000
----------
Total current liabilities..................................... 1,414,537
STOCKHOLDERS' EQUITY
Capital stock, common, no par value; authorized 6,000 shares;
issued and outstanding 2,640 shares.............................. 26,400
Retained earnings--statement annexed.............................. 3,255,149
----------
Total stockholders' equity.................................... 3,281,549
----------
Total liabilities and stockholders' equity.................... $4,696,086
==========
</TABLE>
The attached notes are an integral part of the financial statements.
F-69
<PAGE>
E. D. AND C. COMPANY, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Sales.............................................................. $14,566,016
Cost of sales:
Material.......................................................... 5,625,085
Direct Labor...................................................... 1,097,765
Manufacturing expenses:
Supervision salaries............................................. 262,545
Engineering salaries............................................. 1,376,160
Payroll taxes.................................................... 244,829
Outside services................................................. 1,187,005
Employee benefits................................................ 186,710
Freight.......................................................... 21,623
Engineering supplies............................................. 54,360
Shop supplies.................................................... 12,710
Office supplies.................................................. 10,501
Repairs and maintenance.......................................... 43,246
Rent............................................................. 85,650
Utilities........................................................ 20,303
Depreciation (Note A)............................................ 55,689
Insurance........................................................ 109,558
Travel........................................................... 212,351
-----------
Total cost of sales............................................ 10,606,090
-----------
Gross profit................................................... 3,959,926
Administrative and selling expenses................................ 1,236,357
-----------
Income from operations......................................... 2,723,569
Other income (expense):
Interest income................................................... 37,760
Interest expense.................................................. (79,626)
-----------
Income before provision for taxes.............................. 2,681,703
Provision for taxes:
Single business tax............................................... 107,279
-----------
Net income..................................................... 2,574,424
Retained earnings at beginning of year (as restated, Note J)....... 1,911,986
Dividends paid..................................................... (1,231,262)
-----------
Retained earnings at end of year................................... $ 3,255,148
===========
</TABLE>
The attached notes are an integral part of the financial statements.
F-70
<PAGE>
E. D. AND C. COMPANY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Cash flows from operating activities:
Net income........................................................ $2,574,424
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................... 55,689
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable...................... 444,003
(Increase) decrease in costs in excess of billings.............. (282,977)
(Increase) decrease in prepaid expenses......................... 15,112
Increase (decrease) in accounts payable......................... (47,350)
Increase (decrease) in billing in excess of costs............... (33,929)
Increase (decrease) in accrued expenses......................... (8,674)
Increase (decrease) in single business tax...................... 17,056
----------
Total adjustments.............................................. 158,930
----------
Net cash provided by operating activities.......................... 2,733,354
Cash flows from investing activities:
Purchase of property and equipment................................ (63,659)
Cash flows from financing activities:
Proceeds from line of credit borrowings, net of repayments........ (500,000)
Dividends paid.................................................... (1,231,262)
----------
Net cash used in financing activities.............................. (1,731,262)
----------
Increase in cash and cash equivalents.............................. 938,433
Cash and cash equivalents--beginning of year....................... 234,762
----------
Cash and cash equivalents--end of year............................. $1,173,195
==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest......................................................... $ 80,806
==========
Single business tax.............................................. $ 90,223
==========
</TABLE>
The attached notes are an integral part of the financial statements.
F-71
<PAGE>
E. D. AND C. COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1. The corporation engineers and manufacturers control panels for assembly
line processes.
The corporation's sales are both domestic and international. For 1996 the
corporation had three customers that meet the criteria of major customers as
defined by FASB 30. These are detailed as follows:
<TABLE>
<CAPTION>
CUSTOMER'S 1996
INDUSTRY SALES
---------- -----
<S> <C>
1. Manufacturing......... $3,573,501
2. Manufacturing......... 2,606,629
3. Manufacturing ........ 2,444,591
</TABLE>
2. Revenue and Cost Recognition: Revenues from construction contracts are
recognized on the percentage-of-completion method, measured by the percentage
of costs incurred to date to estimated total cost for each contract. This
method is used because management considers expended costs to be the best
available measure of progress on the contracts.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance such as indirect labor,
supplies, repairs and maintenance and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to cost and
income and are recognized in the period in which the revisions are determined.
An amount equal to contract costs attributable to claims is included in
revenues when realization is probable and the amount can be reliably
estimated.
The assets, "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed.
3. Inventory consists of shop supplies and is valued at cost, under the
first-in first-out method.
4. Depreciation was computed as follows:
<TABLE>
<CAPTION>
USEFUL
LIFE
PROPERTY AND EQUIPMENT (YEARS) METHOD 1996
---------------------- ------- ------ ----
<S> <C> <C> <C>
Office furniture and fixtures................ 5 ACRS & MACRS $25,898
Machinery and equipment...................... 7 MACRS 15,370
Automotive equipment......................... 5 MACRS 12,949
Leasehold improvements....................... 31 Straight-Line 1,472
-------
Totals..................................... $55,689
=======
</TABLE>
5. For purposes of the statement of cash flows, the corporation considers
all highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
6. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
F-72
<PAGE>
E. D. AND C. COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE B--LEASE COMMITMENTS:
1. The corporation leases facilities located at 2545 Industrial Row, Troy,
Michigan on a month to month basis at a monthly rate of $5,000, exclusive of
taxes, insurance, maintenance and repairs which are also payable by the
corporation as lessee. Total rent paid on this lease for 1996 was $60,000.
2. The corporation leases additional office facilities for $1,800 per month
plus utilities. Total rent paid on this lease for 1996 was $21,600.
3. The corporation leases parking space for $225 per month.
NOTE C--RETAINED EARNINGS:
Retained earnings at December 31, 1996 consists of the following:
<TABLE>
<S> <C>
S Corporation earnings............ $2,726,092
C Corporation earnings............ 529,056
----------
$3,255,148
==========
</TABLE>
NOTE D--LOANS PAYABLE:
The corporation has demand loans payable to related parties in the amount of
$840,000 at December 31, 1996. The loans bear interest at a rate of 8%. Total
interest paid on these loans during 1996 amounted to $67,200.
NOTE E--LOAN PAYABLE--LINE OF CREDIT:
The company has available an unsecured line of credit with First of America
Bank in the total amount of $2,000,000, of which there was no amount
outstanding at December 31, 1996. The line of credit expires June 1, 1997 and
carries a variable interest rate based on First of America Bank's base lending
rate.
NOTE F--RELATED PARTY TRANSACTION:
1. The lessor of the property referenced in Note B is related to the
shareholders of the corporation. Rent paid to this party was $60,000 for the
year ended December 31, 1996.
2. The note holders referenced in Note D are related to the shareholders.
Total interest paid to these parties for the year ended December 31, 1996 was
$67,200.
NOTE G--RETIREMENT PLANS:
The company established a Simplified Employee Pension (SBP) Plan effective
July 1, 1992 for employees not covered by a collective bargaining agreement.
Corporate contributions are discretionary and are determined by the Board of
Directors. During the year ended December 31, 1996 the corporation contributed
$73,185, which represents 4% of eligible employee wages.
The corporation has established a 401K Plan for employees covered under the
International Brotherhood of Electrical Workers contract. The corporation will
match $.50 for each $1.00 up to 4% of gross wages the employee elects to
defer. The corporation contributed $7,840 under this plan for the year ended
December 31, 1996.
F-73
<PAGE>
E. D. AND C. COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE H--INCOME TAXES:
The corporation has elected under Section 1372(a) of the Internal Revenue
Code to be treated as an "electing small business corporation." The
corporation will pay no federal income taxes as any income will be taxed
directly to the stockholders.
NOTE I--CREDIT RISK:
Included in the balance sheet under the caption "cash" are liquid short-term
investments. At the end of the year the carrying amount of the corporation's
deposit was $1,173,044 (reconciled). The unreconciled balance was $1,209,887
of which $1,149,887 was not insured by the Federal Deposit Insurance
Corporation.
NOTE J--PRIOR PERIOD ADJUSTMENT:
During September, 1997 it was determined that inventory as of December 31,
1995 was understated by approximately $150,000. The retained earnings and
inventory as of January 1, 1996 have been restated to reflect this adjustment.
This adjustment has no effect on the net income of the corporation for the
year ended December 31, 1996.
In addition, the original Independent Auditor's Report dated March 18, 1997,
included a qualification for a depreciation method not computed under GAAP.
The difference between this depreciation method and GAAP has been determined
to be immaterial and therefore this qualification has been removed.
F-74
<PAGE>
E. D. AND C. COMPANY, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
ASSETS 1997
------ --------------
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
<S> <C>
Current assets:
Cash and cash equivalents..................................... $2,127
Accounts receivable, less allowance for doubtful accounts of
$65.......................................................... 2,526
Costs and estimated earnings in excess of billings on
uncompleted contracts........................................ 880
Inventory..................................................... 225
Other assets.................................................. 2
------
Total current assets........................................ 5,760
Property and equipment, net..................................... 142
------
Total assets................................................ $5,902
======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
Current liabilities:
Notes payable to related party................................ $ 840
Accounts payable.............................................. 810
Accrued compensation and related liabilities.................. 361
Accrued expenses and other current liabilities................ 113
------
Total current liabilities................................... 2,124
Stockholders' equity:
Common Stock, no par value: 6,000 shares authorized; 2,640
shares issued and outstanding................................ 26
Retained earnings............................................. 3,752
------
Total stockholders' equity.................................. 3,778
------
$5,902
======
</TABLE>
See accompanying notes.
F-75
<PAGE>
E. D. AND C. COMPANY, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
------------------
(IN THOUSANDS)
<S> <C>
Net sales.................................................... $10,135
Cost of sales excluding depreciation......................... 6,630
-------
Gross profit................................................. 3,505
Administrative and selling expenses.......................... 908
Depreciation................................................. 24
-------
Income from operations....................................... 2,573
Interest income, net....................................... 24
-------
Net income................................................... 2,597
Retained earnings at beginning of period..................... 3,255
Dividends paid............................................... (2,100)
-------
Retained earnings at end of period........................... $ 3,752
=======
</TABLE>
See accompanying notes.
F-76
<PAGE>
E. D. AND C. COMPANY, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1997
--------------
(IN THOUSANDS)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................... $ 2,597
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................. 24
Loss on sale of equipment.................................... 4
Changes in operating assets and liabilities:
Accounts receivable........................................ (240)
Costs and estimated earnings in excess of billings......... (27)
Accounts payable........................................... 400
Accrued expenses........................................... 310
-------
Net cash provided by operating activities...................... 3,067
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment......................................... (24)
Proceeds from sale of equipment................................ 12
-------
Net cash used in investing activities.......................... (12)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid................................................. (2,100)
-------
Net cash used in financing activities.......................... (2,100)
-------
Net increase in cash and cash equivalents...................... 954
Cash and cash equivalents at beginning of period............... 1,173
-------
Cash and cash equivalents at end of period..................... $ 2,127
=======
</TABLE>
See accompanying notes.
F-77
<PAGE>
E.D. AND C. COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
(IN THOUSANDS)
SEPTEMBER 30, 1997
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 December 31, 1996.
Results of operations for the nine months ended September 30, 1997 is not
necessarily indicative of the results that may be achieved for the entire year
ending December 31, 1997.
F-78
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Motion Control Engineering, Inc.:
We have audited the accompanying balance sheets of MOTION CONTROL
ENGINEERING, INC. (a California corporation) as of December 31, 1996 and
September 30, 1997, and the related statements of income, shareholders' equity
and cash flows for the year ended December 31, 1996 and the nine months ended
September 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Motion Control
Engineering, Inc. as of December 31, 1996 and September 30, 1997 and the
results of its operations and its cash flows for the periods then ended in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Sacramento, California
October 24, 1997
F-79
<PAGE>
MOTION CONTROL ENGINEERING, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 1,638 $ 855
Accounts receivable, net of allowance for doubtful
accounts of
$425,421 and $371,242 for 1996 and 1997,
respectively........................................ 7,693,836 9,674,721
Inventories.......................................... 3,633,240 5,142,910
Other current assets................................. 76,973 64,946
----------- -----------
Total current assets............................... 11,405,687 14,883,432
Property and equipment, net............................ 1,305,736 1,382,689
Deposits............................................... 1,000 1,000
----------- -----------
Total assets....................................... $12,712,423 $16,267,121
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit....................................... $ 4,051,566 $ 0
Accounts payable..................................... 1,056,200 2,704,385
Accrued expenses..................................... 875,800 1,294,662
Accrued retirement contribution...................... 400,000 285,571
Current portion of notes payable..................... 318,373 427,425
Current portion of notes payable to shareholders..... 0 1,302,906
----------- -----------
Total current liabilities.......................... 6,701,939 6,014,949
Notes payable.......................................... 250,480 209,469
Notes payable to shareholders.......................... 1,200,000 0
----------- -----------
Total liabilities.................................. 8,152,419 6,224,418
----------- -----------
Commitments and Contingencies (Notes 3, 5, 6 and 7)
Shareholders' Equity:
Common stock, no par value--10,000 shares authorized,
issued and outstanding.............................. 62,000 62,000
Retained earnings.................................... 4,498,004 9,980,703
----------- -----------
Total shareholders' equity......................... 4,560,004 10,042,703
----------- -----------
Total liabilities and shareholders' equity......... $12,712,423 $16,267,121
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-80
<PAGE>
MOTION CONTROL ENGINEERING, INC.
STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Net sales............................................. $34,956,469 $29,308,245
Cost of goods sold.................................... 20,541,184 16,595,753
----------- -----------
Gross margin...................................... 14,415,285 12,712,492
----------- -----------
Operating expenses:
General and administrative.......................... 4,580,843 4,089,479
Research and development............................ 2,673,841 2,348,959
Selling and distribution............................ 828,689 645,250
Shareholders' compensation.......................... 4,387,938 0
----------- -----------
Total operating expenses.......................... 12,471,311 7,083,688
----------- -----------
Operating income.................................. 1,943,974 5,628,804
----------- -----------
Other income (expense):
Interest expense.................................... (283,467) (201,782)
Other income........................................ 98,952 55,677
----------- -----------
Total other expense............................... (184,515) (146,105)
----------- -----------
Net income............................................ $ 1,759,459 $ 5,482,699
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-81
<PAGE>
MOTION CONTROL ENGINEERING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997
<TABLE>
<CAPTION>
COMMON RETAINED
SHARES STOCK EARNINGS TOTAL
------ ------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995............ 160 $62,000 $3,578,545 $ 3,640,545
Exchange of new for existing stock.... 9,840 0 0 0
Dividends to shareholders............. 0 0 (840,000) (840,000)
Net income............................ 0 0 1,759,459 1,759,459
------ ------- ---------- -----------
Balance at December 31, 1996............ 10,000 $62,000 $4,498,004 $ 4,560,004
Net income............................ 0 0 5,482,699 5,482,699
------ ------- ---------- -----------
Balance at September 30, 1997........... 10,000 $62,000 $9,980,703 $10,042,703
====== ======= ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-82
<PAGE>
MOTION CONTROL ENGINEERING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income.......................................... $ 1,759,459 $ 5,482,699
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 308,374 286,383
Gain on asset dispositions........................ (50) 0
Changes in operating assets and liabilities:
Accounts receivable.............................. (1,530,741) (1,980,885)
Inventories...................................... (167,040) (1,509,670)
Other current assets............................. (28,650) 12,027
Accounts payable................................. (384,064) 1,648,185
Accrued expenses................................. 286,256 418,862
Accrued retirement contribution.................. 10,000 (114,429)
----------- -----------
Net cash provided by operating activities............ 253,544 4,243,172
----------- -----------
Cash Flows From Investing Activities:
Proceeds from asset dispositions.................... 50 0
Acquisitions of property and equipment.............. (453,076) (363,336)
----------- -----------
Net cash used for investing activities............... (453,026) (363,336)
----------- -----------
Cash Flows From Financing Activities:
Net borrowings (repayments) under line-of-credit
agreements......................................... 1,036,742 (4,051,566)
Net borrowings (repayments) under notes payable..... 3,391 68,041
Net borrowings (repayments) under notes payable to
shareholders....................................... 0 102,906
Distributions to shareholders....................... (840,000) 0
----------- -----------
Net cash provided by (used for) financing activities. 200,133 (3,880,619)
----------- -----------
Net increase (decrease) in cash...................... 651 (783)
Cash and Cash Equivalents, beginning of period....... 987 1,638
----------- -----------
Cash and Cash Equivalents, end of period............. $ 1,638 $ 855
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest.............................. $ 283,467 $ 201,782
</TABLE>
The accompanying notes are an integral part of these statements.
F-83
<PAGE>
MOTION CONTROL ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
THE YEAR ENDED DECEMBER 31, 1996
1. ORGANIZATION AND DESCRIPTION OF BUSINESS:
Description of the Company
Motion Control Engineering, Inc. (the Company) was incorporated in
California on September 24, 1981. The Company manufacturers and sells
microcomputer elevator control systems both domestically and internationally.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reporting of amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue when the product is shipped.
Customer Concentration
Historically, approximately 25 percent of the Company's customer base is
concentrated in the New York City metro area. Due to a work stoppage by a
union group in late 1996 through early 1997, the Company had a slow down of
revenue from this geographic region. The Company continues to sell a similar
amount of its products to this area.
Income Tax Status
The Company has elected to be taxed as an S corporation for federal and
state income tax purposes. As a result, the Company's earnings are attributed
to the shareholders for tax purposes. California does require that all S
corporations pay a minimum franchise tax. This amount is not significant and
is included in general and administrative expense in the accompanying
statements of income.
Reclassifications
Certain reclassification have been made to 1996 balances to conform to the
1997 presentation.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts
receivable, deposits, accounts payable and variable rate debt instruments. The
carrying amounts of cash, accounts receivable, deposits, accounts payable and
variable rate debt instruments are considered to estimate their respective
fair values due to the short-term nature of the instruments, the current
interest rate environment and the variable rate nature of the debt
instruments. The fair value of the Company's fixed rate debt instruments are
estimated using discounted cash flows based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
F-84
<PAGE>
MOTION CONTROL ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
The Company considers all investments with original maturities of less than
three months to be cash equivalents.
Inventories
Inventories of finished goods, work-in-process and raw materials are valued
at the lower of cost or market with cost being determined using a moving
average method which approximates the first-in, first-out (FIFO) method.
Inventories at December 31, 1996 and September 30, 1997 consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Raw materials and purchased parts.................... $2,449,112 $3,056,906
Work-in-process...................................... 1,184,128 1,168,435
Inventory at subcontractor........................... 0 917,569
---------- ----------
$3,633,240 $5,142,910
========== ==========
</TABLE>
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method. The estimated useful lives are three to ten years.
Maintenance and repair costs are expensed as incurred, while betterments are
capitalized and depreciated over their estimated useful lives.
Property and equipment is comprised of the following at December 31, 1996
and September 30, 1997:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Equipment and furniture.......................... $ 2,271,887 $ 2,399,123
Shop equipment................................... 233,714 304,427
Leasehold improvements........................... 128,318 201,427
Other............................................ 204,649 296,927
----------- -----------
2,838,568 3,201,904
Less--accumulated depreciation................... (1,532,832) (1,819,215)
----------- -----------
$ 1,305,736 $ 1,382,689
=========== ===========
</TABLE>
Depreciation expense for the periods ended December 31, 1996 and September
30, 1997 was $308,374 and $286,383, respectively.
Shareholders' Compensation
Shareholders (3 individuals) have chosen to forego any compensation for
their services for the nine-month period ended September 30, 1997.
Accordingly, no expense has been recorded for the period ended September 30,
1997 in the accompanying statements of income. Shareholder compensation for
the year ended December 31, 1996 was $4,387,938.
F-85
<PAGE>
MOTION CONTROL ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. DEBT:
The Company's borrowings at December 31, 1996 and September 30, 1997
consisted of the following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Line of credit with a financial institution, maximum
borrowing $6,000,000, interest due monthly at the
bank's reference rate (8.5% at September 30, 1997),
secured by current assets, due July 1, 1998........ $ 4,051,566 $ 0
Note payable to financial institution bearing
interest at Libor plus 1.5% (8.38% at September 30,
1997), secured by current assets, principle
payments including interest made in equal monthly
installments through July 1, 2000.................. 0 275,000
Note payable to financial institution bearing
interest at the bank's reference rate plus .75%
(9.25% at September 30, 1997), secured by current
assets, principle payments including interest made
in equal monthly installments through June 1, 1998. 170,853 80,402
Note payable to financial institution bearing
interest at a fixed rate of 9.2%, secured by
current assets, principle payments including
interest made in equal monthly installments through
July 1, 1998....................................... 148,000 74,000
Note payable to financial institution bearing
interest at a fixed rate of 9.0%, secured by
current assets, principle payments including
interest made in equal monthly installments through
July 1, 1999....................................... 250,000 175,000
Note payable to GMAC, bearing interest at a fixed
rate of 3.9%, principle payments including interest
made monthly through January 10, 2002.............. 0 32,492
Notes payable to shareholders, unsecured, bearing
interest at the bank's reference rate (8.5% at
September 30, 1997), due January 1, 1998........... 1,200,000 1,302,906
----------- -----------
$ 5,820,419 $ 1,939,800
----------- -----------
Less: Current portion............................... (4,369,939) (1,730,331)
----------- -----------
$ 1,450,480 $ 209,469
=========== ===========
</TABLE>
The above line of credit contains a provision whereby the Company can choose
an interest rate of LIBOR plus 1.5% (8.38% at September 30, 1997.) Should the
Company choose this option, it must be for a minimum of $1,000,000 of the
outstanding balance. The agreement also contains provisions whereby the
Company can choose a fixed rate on portions of the outstanding balance in
increments of $250,000. The line of credit contains various covenants which
require, among other things the maintenance of certain ratios and net worth
levels.
In addition, the above line of credit contains a provision whereby the
financial institution may finance sales of equipment to the Company'
customers. The Company guarantees customers' loans, which cannot exceed
$1,000,000 at any time and reduces the Company's availability under the line
by the amounts outstanding. The balance outstanding and guaranteed by the
Company at December 31, 1996 and September 30, 1997 was $133,780 and $134,934,
respectively.
The Company also has a nonrevolving line of credit with a financial
institution, with a maximum borrowing of $300,000, bearing interest at .25%
above the bank's reference rate (8.5% at September 30, 1997). The line is
secured by current assets and personally guaranteed by the shareholders. It is
available until July 1, 1998. There was no amount outstanding on this line at
December 31, 1996 or September 30, 1997.
The fair value of the Company's fixed rate debt instruments is $279,839.
F-86
<PAGE>
MOTION CONTROL ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Aggregate principal payments required under all borrowing agreements for
periods subsequent to September 30, 1997 are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING
DECEMBER 31 AMOUNT
------------- ----------
<S> <C>
1997............................. $ 106,542
1998............................. 1,609,585
1999............................. 157,361
2000............................. 57,654
2001............................. 7,978
2002............................. 680
----------
$1,939,800
==========
</TABLE>
4. EMPLOYEE BENEFIT PLANS:
The Company has a profit sharing plan. In 1995, a 401(k) provision was added
to the profit sharing plan, whereby the Company will match up to $275 per
employee per year under a 25 percent matching provision. Total employer
matching contributions for the periods ended December 31, 1996 and September
30, 1997 totaled $37,196 and $39,662, respectively. Profit sharing
contributions to the plan are made at management's discretion. Employees who
have completed one year of service, are 21 years of age and are not covered by
a collective bargaining agreement are eligible to participate in the plan.
Employees vest in the plan over a six-year period. The Company's contribution
to the plan for the periods ended December 31, 1996 and September 30, 1997
totaled $400,000 and $285,571, respectively.
5. RELATED PARTY TRANSACTIONS:
The Company leases substantially all of its production and office space
under noncancellable operating leases, which expire in 2002, from a limited
partnership whose partners include shareholders of the Company. Rents under
the lease were $601,390 and $473,854 for the periods ended December 31, 1996
and September 30, 1997, respectively. The future minimum lease payments for
periods subsequent to September 30, 1997 are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING
DECEMBER 31 AMOUNT
------------- ----------
<S> <C>
1997............................. $ 139,704
1998............................. 558,816
1999............................. 558,816
2000............................. 558,816
2001............................. 469,216
2002............................. 284,712
----------
$2,570,080
==========
</TABLE>
6. CONTINGENCIES:
The Company is the subject of litigation arising in the normal course of
business. In the opinion of management, the Company's ultimate liability, if
any, related to pending litigation would not materially affect its financial
position or results of operations.
7. SUBSEQUENT EVENT (UNAUDITED):
Subsequent to September 30, 1997, the Company signed a non-binding letter of
intent to sell all outstanding shares of its common stock to Motors & Gears,
Inc.
F-87
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRE-
SENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY 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 SE-
CURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAW-
FUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 1
Risk Factors.............................................................. 14
The Company............................................................... 19
Use of Proceeds........................................................... 21
Capitalization............................................................ 22
Selected Historical Financial Data........................................ 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 25
Business.................................................................. 28
Management................................................................ 38
Principal Stockholders.................................................... 41
The Exchange Offer........................................................ 42
Description of Senior Notes............................................... 51
Description of Certain Indebtedness....................................... 78
Certain Transactions...................................................... 79
Plan of Distribution...................................................... 82
Federal Income Tax Consequences .......................................... 83
Legal Matters............................................................. 84
Experts................................................................... 84
Available Information..................................................... 85
Index to Financial Statements............................................. I-1
</TABLE>
UNTIL APRIL 16, 1998, DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER
OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PRO-
SPECTUS. THIS OBLIGATION IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD AL-
LOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$270,000,000
MOTORS AND GEARS, INC.
10 3/4% SERIES D SENIOR NOTES
DUE 2006
----------------------
PROSPECTUS
----------------------
January 16, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------