<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 8, 1997
REGISTRATION STATEMENT NO. 333-38223
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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ARGO-TECH CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
3724
(PRIMARY STANDARD
INDUSTRIAL CLASSIFICATION CODE NUMBER)
31-1521125
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
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23555 Euclid Avenue
Cleveland, Ohio 44117
(216) 692-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------
PAUL R. KEEN
Vice President, General Counsel & Secretary
Argo-Tech Corporation
23555 Euclid Avenue
Cleveland, Ohio 44117
(216) 692-5800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
DAVID P. PORTER, Esq.
Jones, Day, Reavis & Pogue
901 Lakeside Avenue
Cleveland, Ohio 44114
(216) 586-3939
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED UNIT(2) PRICE(2) FEE
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8 5/8% Senior Subordinated Notes due 2007(1).......... $140,000,000 100% $140,000,000 $42,424.24
==================================================================================================================
</TABLE>
(1) These notes are guaranteed by the Guarantors (each of which is a
co-registrant) identified on Table 1 to this Registration Statement cover
page.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
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THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
TABLE 1 TO REGISTRATION STATEMENT COVER PAGE: GUARANTORS AND CO-REGISTRANTS
Each of the following subsidiaries of Argo-Tech Corporation, and each other
subisidiary that becomes a Guarantor of the Notes registered hereby, is hereby
deemed to be a Registrant:
<TABLE>
<CAPTION>
STATE OF PRIMARY STANDARD IRS EMPLOYER
GUARANTOR INCORPORATION INDUSTRIAL CLASSIFICATION CODE IDENTIFICATION NUMBER
- ----------------------------------------------- ------------- ------------------------------ ---------------------
<S> <C> <C> <C>
Argo-Tech Corporation Delaware 3724 91-1797229
(Aftermarket)(1)
Argo-Tech Corporation Delaware 6512 06-1100916
(HBP)(1)
Argo-Tech Corporation Delaware 3724 31-1521120
(OEM)(1)
JC Carter Company, Inc.(1) California 3724 33-0198905
</TABLE>
- ---------------
(1) The address for each Guarantor is the same as that of Argo-Tech Corporation.
See Cover Page of the Registration Statement.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PROSPECTUS DATED DECEMBER 8, 1997
PROSPECTUS
[ARGO-TECH LOGO] ARGO-TECH CORPORATION
OFFER TO EXCHANGE ITS 8 5/8% SENIOR SUBORDINATED NOTES DUE 2007, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT, FOR ANY AND ALL OF ITS OUTSTANDING 8 5/8%
SENIOR SUBORDINATED NOTES DUE 2007 ISSUED ON SEPTEMBER 26, 1997
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [THE 21st
BUSINESS DAY FOLLOWING THE EXCHANGE OFFER], 1997 UNLESS EXTENDED.
Argo-Tech Corporation, a Delaware corporation (the "Company"), hereby
offers to exchange (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), up to $140,000,000 in aggregate
principal amount of the Company's new 8 5/8% Senior Subordinated Notes due 2007
(the "Exchange Notes"), for $140,000,000 in aggregate principal amount of the
Company's outstanding 8 5/8% Senior Subordinated Notes due 2007 (the "Original
Notes") issued on September 26, 1997. The Original Notes and the Exchange Notes
are sometimes referred to herein collectively as the "Notes."
The terms of the Exchange Notes are substantially identical in all respects
(including principal amount, interest rate and maturity date) to the terms of
the Original Notes for which they may be exchanged pursuant to this Exchange
Offer, except that (i) the Exchange Notes will be freely transferable by holders
thereof (other than as provided herein) and issued free of any covenant
restricting transfer absent registration and (ii) holders of the Exchange Notes
will not be entitled to certain rights of holders of the Original Notes under
the Exchange and Registration Rights Agreement (as defined), which rights will
terminate upon the consummation of the Exchange Offer. The Exchange Notes will
evidence the same debt as the Original Notes (which they replace) and will be
entitled to the benefits of an Indenture dated as of September 26, 1997
governing the Original Notes and the Exchange Notes (the "Indenture"). For a
complete description of the terms of the Exchange Notes, see "Description of
Notes." There will be no cash proceeds to the Company from the Exchange Offer.
The Original Notes were sold on September 26, 1997, by the Company in
connection with the following transactions (collectively, the "Transactions"):
(i) the financing of the acquisition of the J.C. Carter Company, Inc.
("Carter"); (ii) the repayment of Existing Notes (as defined) and (iii) the
offering of the Original Notes (the "Offering").
Interest on the Notes will be payable in cash semi-annually on each April 1
and October 1, commencing April 1, 1998. The Notes are redeemable at the option
of the Company, in whole or in part, at any time on or after August 15, 2002, at
the redemption prices set forth herein, plus accrued and unpaid interest to the
date of redemption. In addition, the Company, at its option, may redeem in the
aggregate up to 33 1/3% of the original principal amount of the Notes at any
time and from time to time prior to October 1, 2000 at 108.625% of the aggregate
principal amount so redeemed plus accrued interest to the redemption date, with
the Net Cash Proceeds (as defined) of one or more Public Equity Offerings (as
defined) by the Company or Parent (as defined), provided that at least 66 2/3%
of the original aggregate principal amount of the Notes originally issued remain
outstanding immediately after the occurrence of any such redemption. See
"Description of Notes -- Optional Redemption."
SEE "RISK FACTORS" COMMENCING ON PAGE 22 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is December , 1997.
<PAGE> 4
(continued from prior page)
The Notes will not be subject to any sinking fund requirement. Upon a
Change of Control (as defined), each holder of the Notes will be entitled to
require the Company to repurchase such holder's Notes at 101% of the principal
amount thereof plus accrued and unpaid interest to the purchase date. See
"Description of Notes -- Change of Control." If a Change of Control occurs,
there can be no assurance that the Company will have, or will have access to,
sufficient funds to enable it to repurchase the Notes. In addition, the Company
is obligated in certain instances to make an offer to repurchase the Notes at a
purchase price in cash equal to 100% of the principal amount thereof plus
accrued interest to the date of repurchase with the net cash proceeds of certain
asset sales. See "Description of Notes -- Certain Covenants -- Limitation on
Sales of Assets and Subsidiary Stock."
The Notes are unsecured obligations of the Company subordinated in right of
payment to all existing and future Senior Indebtedness (as defined) of the
Company and senior in right of payment to all subordinated indebtedness of the
Company and pari passu to any other future senior subordinated indebtedness. The
Notes have been fully, unconditionally, jointly and severally guaranteed (the
"Subsidiary Guarantees") on an unsecured, senior subordinated basis by Argo-Tech
Corporation (HBP), Argo-Tech Corporation (OEM), Argo-Tech Corporation
(Aftermarket), Carter and all future domestic Restricted Subsidiaries (as
defined) that incur Indebtedness (as defined) and all future Restricted
Subsidiaries (collectively, the "Subsidiary Guarantors") that guarantee the
Amended Credit Facility (as defined), subject to certain fraudulent conveyance
limitations as described herein. See "Description of Notes -- Subsidiary
Guarantees." The Indenture permits the Company to incur additional indebtedness,
including Senior Indebtedness, subject to certain restrictions. As of August 2,
1997, after giving effect to the Transactions, the Offering, and the application
of the net proceeds therefrom, (i) the outstanding Senior Indebtedness of the
Company would have been $110.0 million (exclusive of unused commitments), all of
which would have been Secured Indebtedness (as defined), (ii) the Company would
have had no Senior Subordinated Indebtedness outstanding other than the Notes
and no Indebtedness that is subordinate or junior in right of repayment to the
Notes, (iii) the outstanding Senior Indebtedness of the Subsidiary Guarantors,
consisting entirely of Guarantees of the Amended Credit Facility, would have
been $110.0 million, all of which would have been Secured Indebtedness, and (iv)
the Subsidiary Guarantors would have had no outstanding Senior Subordinated
Indebtedness other than the Subsidiary Guarantees and no Indebtedness that is
subordinate or junior in right of payment to the Subsidiary Guarantees. See
"Description of Notes -- Certain Covenants."
The Original Notes were sold on September 26, 1997, in a transaction not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
in reliance upon an exemption provided in the Securities Act. Accordingly, the
Original Notes may not be offered, resold or otherwise pledged, hypothecated or
transferred in the United States unless registered under the Securities Act or
unless an exemption from the registration requirements of the Securities Act is
available. The Exchange Notes are being offered to satisfy the obligations of
the Company under the Exchange and Registration Rights Agreement relating to the
Original Notes. See "The Exchange Offer -- Purposes and Effects of the Exchange
Offer." Each holder receiving Exchange Notes, other than a broker-dealer, will
represent that the holder is not engaging in or intending to engage in a
distribution of such Exchange Notes. Exchange Notes issued pursuant to the
Exchange Offer in exchange for the Original Notes may be offered for resale,
resold or otherwise transferred by the holder thereof (other than any holder
that is an affiliate of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holders' business and such holders
have no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Each broker-dealer that receives Exchange
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by 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. Despite this
acknowledgement, such broker-dealer may nonetheless be determined to be an
"underwriter" by the Securities and Exchange Commission (the "Commission"). See
"The Exchange Offer -- Purposes and Effects of the Exchange Offer" and "Plan of
Distribution." Broker-dealers may use this Prospectus, as amended or
supplemented, in connection with resales of the Exchange Notes received in
exchange for the Original Notes where such Original Notes were acquired by such
broker-dealer as a result of market making activities or other such
<PAGE> 5
(continued from prior page)
trading. The Company has agreed that, for a period of 180 days after the
Expiration Date (as defined), it will make this Prospectus available to any
broker-dealer for use in connection with any such resale.
The Exchange Offer is not conditioned on any minimum aggregate principal
amount of Original Notes being tendered for exchange. The Company will accept
for exchange any and all validly tendered Original Notes not withdrawn prior to
5:00 P.M., New York City time, on [the 21st business day following the Exchange
Offer], 1997 unless extended (for a maximum of an additional 20 business days)
by the Company, in its sole discretion (the "Expiration Date"). Tenders of
Original Notes may be withdrawn at any time prior to the Expiration Date. The
Exchange Offer is subject to certain customary conditions. See "The Exchange
Offer -- Certain Conditions to the Exchange Offer." Original Notes may be
tendered only in integral multiples of $1,000. The Company will pay all expenses
incident to the Exchange Offer.
The Notes constitute securities for which there is no established trading
market. Any Original Notes not tendered and accepted in the Exchange Offer will
remain outstanding. The Company does not currently intend to list the Exchange
Notes on any securities exchange. To the extent that any Original Notes are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Original Notes would be adversely affected. No assurances can be
given as to the liquidity of the trading market for either the Original Notes or
the Exchange Notes.
<PAGE> 6
AVAILABLE INFORMATION
As a result of the Exchange Offer, the Company will become subject to the
periodic reporting and other informational requirements of the Exchange Act.
Pursuant to the Indenture, the Company has agreed that, whether or not the
Company is subject to filing requirements under Section 13 or 15(d) of the
Exchange Act, and so long as any Notes remain outstanding, it will file with the
Commission (but only if the Commission at such time is accepting such voluntary
filings) and will send the Trustee copies of the financial information,
documents and reports that would have been required to be filed with the
Commission pursuant to the Exchange Act.
The Company's executive offices and principal production facilities are
located at 23555 Euclid Avenue, Cleveland, Ohio 44117-1795 and its telephone
number is (216) 692-6000 (the "Cleveland Facility").
i
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the consolidated
financial statements and notes thereto appearing elsewhere in this Prospectus.
As used herein, unless the context otherwise indicates, references to "Carter"
refer to the J.C. Carter Company, Inc., after the completion of the Acquisition
and references to the "Company" refer to Argo-Tech Corporation ("Argo-Tech") and
its wholly owned subsidiaries (the "Subsidiaries"), including, for periods after
the consummation of the Acquisition, Carter. As used in this Prospectus, "large
commercial aircraft" refers to jet aircraft manufactured outside of the former
Soviet bloc, seating 100 or more passengers, "large commercial aircraft engines"
refers to commercial jet engines manufactured outside of the former Soviet bloc,
having 10,000 pounds of thrust or more, and "airframes" refers to jet airframes
manufactured outside of the former Soviet bloc.
THE COMPANY
OVERVIEW
The Company is a leading designer, manufacturer and servicer of high
performance fuel flow devices for the aerospace industry. The Company provides a
broad range of products and services to substantially all commercial and
domestic military engine and airframe manufacturers, to airlines worldwide and
to the U.S. and certain foreign militaries. The Company is the world's leading
supplier of main engine fuel pumps to the commercial aircraft industry and is a
leading supplier of airframe products and aerial refueling systems. Main engine
fuel pumps are precision mechanical pumps, mounted to the engine, that maintain
the flow of fuel to the engine at a precise rate and pressure. Airframe products
include fuel pumps and airframe accessories, which are used to transfer fuel to
the engine systems and to shift and control fuel between tanks in order to
maintain aircraft balance. Aerial refueling systems permit military aerial
tankers to refuel fighter, bomber and other military aircraft while in flight.
The Company is also a leading manufacturer of components for ground fueling
systems and estimates that one or more of its fueling hydrants, couplers and
nozzles are installed in approximately 65% of airports worldwide. Ground fueling
systems transfer fuel from fueling trucks and underground tanks to the underwing
fuel receptacle of the aircraft. Sales to original equipment manufacturers
("OEMs") provide the Company with a platform for its substantial aftermarket
business, which accounts for the major component of its net revenues. The
Company's aftermarket business provides repair and overhaul services and
distributes spare parts to commercial and military customers worldwide.
As of December 31, 1996, the Company's main engine fuel pumps were used in
approximately 8,200, or two-thirds, of the large commercial aircraft in service
throughout the world. In addition, during 1996, the Company received orders for
approximately 75% of all new main engine fuel pumps ordered by large commercial
aircraft engine manufacturers worldwide. The Company is the sole source supplier
of main engine fuel pumps for all CFM56 series engines, which were selected for
installation on approximately 61% of all large commercial aircraft ordered in
1996. This engine powers the Airbus Industries ("Airbus") A-319, A-320, A-321
and A-340 and The Boeing Company ("Boeing") 737 aircraft. The Company is also
the sole source supplier of main engine fuel pumps for all engines used on the
Boeing 777 aircraft.
Complementing its position as a leading supplier of main engine fuel pumps,
the Company estimates that one or more of its airframe fuel pumps or accessories
are installed on over 80% of all large commercial and U.S. designed military
aircraft currently in use. Aerial refueling components manufactured by the
Company are installed on every U.S. designed military aircraft equipped with
aerial refueling capabilities. In addition, ground fueling components
manufactured by the Company have been selected for use in all nine of the major
commercial airports constructed in the past ten years, including the recently
completed Denver International Airport and the Hong Kong International Airport,
which is currently under construction. The Company also produces and
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services industrial liquefied natural gas ("LNG") pumps and operates a materials
laboratory and a business park in Cleveland, Ohio, where the Company maintains
its headquarters and primary production facilities.
Since prior to 1992, until the acquisition of Carter, the Company was
primarily a manufacturer of main engine fuel pumps. In September, 1997, the
Company expanded its product lines through the acquisition of the outstanding
capital stock of Carter, a California corporation, for $107 million in cash.
Carter's product lines include airframe pumps and accessories, military aerial
refueling systems and other fuel system components such as valves and ground
fueling components, as well as the production and service of LNG pumps.
Pro forma for the Acquisition, for the twelve month period ended August 2,
1997, the Company generated net revenues, income from operations and Adjusted
EBITDA (as defined) of $156.2 million, $33.0 million and $49.9 million,
respectively. For the same period, on a pro forma basis, aerospace products and
aftermarket sales accounted for approximately 85% and 49% of the Company's net
revenues, respectively.
COMPETITIVE STRENGTHS
The Company believes it has a strong competitive position as a result of
the following factors:
- Strong Industry Position and Large Existing Installed Base. The Company
has the largest installed base of large commercial main engine fuel pumps
(approximately 30,000) in the aerospace industry. The Company also has an
installed base of over 215,000 military engine and airframe pumps and
accessories; 145,000 other engine pumps and airframe accessories,
including fuel gear motors and small main engine fuel pumps for
helicopters, turboprop and business aircraft; and 5,800 aerial refueling
components. This extensive installed base provides the Company with
significant opportunities for aftermarket sales of spare parts and repair
and overhaul services. Manufacturers of aerospace parts and components
are required to obtain airworthiness certification by the Federal
Aviation Administration ("FAA") in the case of products used on
commercial aircraft, by the United States Department of Defense (the
"U.S. Department of Defense") in the case of products used on U.S.
military aircraft, or by similar agencies in most foreign countries. Such
regulatory restrictions, which limit the access of other manufacturers to
the aftermarket, contribute to significantly higher margins on commercial
spare parts and overhaul services.
- Technological Leadership/New Product Development. Management believes
that the Company is a technological leader in its industry. The Company
maintains its technological leadership by operating state-of-the-art
facilities and employing over 110 engineers. The Company also staffs an
on-site design engineer at two of its major OEM customers. These on-site
engineers, in combination with its engineering and design staffs, assist
the Company in the development of innovative products which address the
needs and requirements of its customers and enhance its ability to gain
early entrant advantages. As a result of this technological leadership,
the Company's main engine fuel pumps have been selected for 22 of the 33
large commercial aircraft engine programs put into production over the
last 20 years. For example, the Company is the only manufacturer to win a
new production contract for main engine fuel pumps from Rolls-Royce, PLC.
("Rolls-Royce") since 1988 and from General Electric Company ("GE") since
1989. In addition, with the aid of its aftermarket customers, the Company
recently replaced the incumbent main engine fuel pump supplier on both
the GE CF34-8C (Bombardier Canadair Aerospace ("Canadair") RJ700) and the
Rolls-Royce RB211-535 (Boeing 757) engine programs, despite the industry
norm against such replacements.
Management also believes that its experience with engine systems for
use on airframes ranging from the Cessna Aircraft Company ("Cessna")
Citation to the Boeing 777, is a
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<PAGE> 9
competitive advantage that enhances the Company's ability to effectively
meet the technical requirements of all new engine system designs.
- Strong Relationship with Customers. The Company has developed strong
relationships with its OEM customers (including GE, Pratt and Whitney
("Pratt & Whitney") and Rolls-Royce), airline customers (including
American Airlines, Lufthansa, Japan Air Lines and United Airlines) and
freight carrier customers (including Federal Express and United Parcel
Service). Specifically, the Company has been a major supplier of main
engine fuel pumps to Pratt & Whitney for over 40 years, and has
maintained a relationship with United Airlines since 1962. Management
believes that the Company's reputation for quality and service in the
aftermarket has further solidified its strong relationships with its
airline and freight carrier customers. In addition to purchasing parts
and services in the aftermarket, these customers are also influential in
the engine OEM's supplier selection process, enhancing the Company's
ability to secure positions on new engine platforms.
Management believes that Argo-Tech's relationships with its OEM
customers will enhance Carter's ability to sell products to existing
Argo-Tech customers. For example, management expects to introduce
Carter's cross-feed and shut-off valves to Argo-Tech's existing OEM
engine customers such as GE, Pratt & Whitney and Rolls-Royce. The Company
believes similar opportunities exist to increase sales of Argo-Tech
products to Carter's customers. For example, management expects to
introduce Argo-Tech airframe pumps to Carter's business and regional jet
OEM customers such as Canadair, Cessna, Gulfstream Aerospace Corp.
("Gulfstream") and Lear Corp. ("Lear").
- Strong Core Competencies. The Company has developed strong core
competencies that management believes will enable it to improve its
position as a leading aerospace component supplier and provide
opportunities for growth outside its current product lines. These core
competencies include: (i) operational skills for low volume manufacturing
of high precision fluid flow devices, (ii) the capability to rapidly
design unique solutions to difficult fluid flow problems, (iii) skill and
experience in meeting the demanding specifications of aerospace
customers, the FAA, the U.S. Department of Defense and other regulatory
bodies, and (iv) skill and experience in the design of integrated fuel
systems and subsystems. These core competencies have enabled the Company
to become the sole source supplier for a substantial number of aerospace
programs. Management also believes that these core competencies will
allow the Company to develop additional fuel system and other high
precision products for use throughout the aerospace industry.
- Experienced Management Team. Argo-Tech's Chairman and CEO, Michael
Lipscomb, and five other members of senior management, have been with
Argo-Tech or its predecessor since 1980. Under Mr. Lipscomb's leadership,
Argo-Tech has reduced inventory levels, improved quality and on-time
performance and reduced manufacturing lead times, all of which have
contributed to significant increases in gross margins, which have grown
from 28.5% for fiscal 1992 to 42.6% for the nine months ended August 2,
1997.
BUSINESS STRATEGY
The Company's strategy is to maintain its leadership position and to grow
through the expansion of its product lines and the pursuit of strategic
acquisitions. This strategy includes the following key components:
- Expansion of Product Lines. The Company plans to apply its core
competencies in the aerospace business and to take advantage of its
strong reputation and relationships with its customers to expand into
specific industrial markets. The Company has utilized its expertise in
main engine fuel pump technology to develop industrial engine power
generation applications, and plans to capitalize on Carter's expertise in
other industrial applications. The Company's strong relationships with
GE, Pratt & Whitney and Rolls-Royce have already led
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<PAGE> 10
to development and production contracts for industrial products such as
lube and scavenge pumps and fluid flow dividers. In addition, the high
quality and reliability of the Company's main engine fuel pumps have
prompted several customers to use the Company's components on certain of
their industrial turbine engines. For example, Company-designed and
manufactured components are or will be installed on Westinghouse Electric
Corp. ("Westinghouse"), Pratt & Whitney, GE and Rolls-Royce land based
power generation applications. The Company anticipates further developing
this business by introducing Carter's products to these customers.
- Aerospace Growth through Acquisitions. The Company plans to pursue
strategic acquisitions in the aerospace and industrial fluid flow device
industries in order to capitalize on the trend for development of
airframe and engine fluid flow systems that will result in increased
reliance on integrated systems providers. For example, the Acquisition
expands the Company's product lines to include aerial refueling
components, aerospace valves and other fuel transfer control components
and enhances its base from which to design, manufacture and deliver a
broader range of fuel transfer systems and components. While the Company
is currently evaluating, and will continue to evaluate other acquisition
opportunities, there are no pending agreements or understandings
regarding acquisitions.
- Enhancement of Operating Efficiencies. Management constantly reviews the
Company's operations for opportunities to further reduce costs and
increase manufacturing efficiencies through improved utilization of
production facilities, continual rationalization of the vendor base and
more efficient human resource allocation. Continued enhancements of
operating efficiencies include the transfer of production between
facilities to absorb fixed overhead, the installation of integrated
computer systems at its Costa Mesa facility (the "Costa Mesa Facility"),
strengthening of the certified operator and vendor programs and the
reassignment of some engineering resources to the development of new
products and technologies.
- Ground Fueling Growth. The Company intends to devote significant
resources to the enhancement of sales, marketing and development of
ground fueling products. The Company has recently developed digital
pressure control valves that incorporate a microprocessor to enhance fuel
flow control and accurately measure the pressure in an aircraft's fuel
tank during fueling, allowing for reduced fueling time. Although these
products have been available for less than a year, the Company has
already supplied over 35 systems to various locations around the world,
including the Middle East and Latin America. In addition, the Company has
identified three new potential product applications for its ground
fueling technology: railroad fluid transfers, fueling of off-road
construction and mining equipment and liquefied natural gas ("LNG")
nozzles and receptacles used on alternative fuel vehicles. Management
believes that these potential product applications could significantly
increase the Company's ground fueling sales.
ARGO-TECH HISTORY AND OWNERSHIP
Argo-Tech, a Delaware corporation, was formed in 1986 to acquire the Power
Accessories Division of TRW Inc. (the "TRW Transaction"). The Company and its
predecessors have more than 50 years' experience in the aerospace industry. In
1990, the Company underwent a corporate restructuring and disposed of
substantially all of its operations except for its aircraft accessories business
and became a wholly owned subsidiary of AT Holdings Corporation ("AT Holdings"
or "Parent"). AT Holdings was formed in 1990 to purchase the Company and does
not have any other assets or operations not related to the Company. The new
owners of AT Holdings Corporation after the restructuring included, among
others, (i) Vestar Capital Partners ("Vestar"), a private investment firm, (ii)
Masashi Yamada, a private investor, and (iii) a group of 29 executives led by
the Company's current President and CEO, Michael Lipscomb. In 1994, with the
participation of all of the Company's salaried employees, the ESOP (as defined)
was formed and acquired 30% of the common stock ("Parent Stock") of AT Holdings,
including the Parent Stock previously owned by
8
<PAGE> 11
Vestar. Currently, management and the ESOP own 36% of the outstanding Parent
Stock. Mr. Yamada holds approximately 49% of the outstanding Parent Stock
through AT Holdings, LLC ("AT LLC"), a domestic limited liability company under
his control, and an additional 6% through YC International, Inc. ("YCI"), a U.S.
subsidiary of Yamada Corporation, which is a Japanese trading company controlled
by Mr. Yamada.
THE TRANSACTIONS
With the consummation of the Offering, the Company (i) consummated the
Acquisition for a cash purchase price of $107.0 million (subject to certain
post-closing adjustments), (ii) amended and restated the New Credit Facility (as
defined) to allow for, among other things, the Acquisition and the issuance of
the Original Notes (the "Amended Credit Facility"), (iii) borrowed the delayed
draw acquisition loans under the Amended Credit Facility in an aggregate
principal amount equal to $15.0 million (the "Delayed Draw Acquisition Loans")
and (iv) repaid $46.7 million of subordinated indebtedness (including accrued
interest) owed to affiliates (the "Existing Notes").
The Offering, the Acquisition, the execution of the Amended Credit
Facility, the borrowings under Delayed Draw Acquisition Loans and the repayment
of the Existing Notes are collectively referred to herein as the "Transactions."
See "Description of the Amended Credit Facility."
The table below illustrates the Company's corporate structure as of the
closing of the Acquisition:
AT Holdings
|
Argo-Tech Corporation
|
---------------------------------------------------------------------
| | | | | |
AT Argo-Tech Argo-Tech Argo-Tech J.C. Carter AT
Export Corporation Corporation Corporation Company, Inc.* Insurance
(HBP)* (OEM)* (Aftermarket)*
*Subsidiary Guarantor
All corporations shown are wholly owned by their respective parent. AT
Export and AT Insurance are not guarantors of the Notes; both have
inconsequential assets, liabilities and equity, and their only operations are
the result of intercompany activity which is immediately dividended back to the
Company.
The Notes are not collateralized by the capital stock of each of the
Subsidiary Guarantors nor of the Parent.
9
<PAGE> 12
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER.... The Original Notes were sold, in a
transaction exempt from the registration
requirements of the Securities Act, by the
Company on September 26, 1997 to Chase
Securities Inc. (the "Initial Purchaser").
In connection therewith, the Company
executed and delivered, for the benefit of
the holders of the Original Notes, an
Exchange and Registration Rights Agreement
dated September 26, 1997 (the "Exchange and
Registration Rights Agreement") which is
incorporated by reference as an exhibit to
the Registration Statement of which this
Prospectus is a part, providing for, among
other things, the Exchange Offer so that
the Exchange Notes will be freely
transferable by the holders thereof without
registration or any prospectus delivery
requirements under the Securities Act,
except that a "dealer" or any of its
"affiliates," as such terms are defined
under the Securities Act, who exchanges
Original Notes held for its own account
will be required to deliver copies of this
Prospectus in connection with any resale of
the Exchange Notes issued in exchange for
such Original Notes. See "The Exchange
Offer -- Purposes and Effects of the
Exchange Offer" and "Plan of Distribution."
THE EXCHANGE OFFER............... The Company is offering to exchange $1,000
principal amount of Exchange Notes for each
$1,000 principal amount of Original Notes
that are properly tendered and accepted.
The Company will issue Exchange Notes on or
promptly after the Expiration Date. There
is $140,000,000 aggregate principal amount
of Original Notes outstanding. The Original
Notes and the Exchange Notes are
collectively referred to herein as the
"Notes." The terms of the Exchange Notes
are substantially identical in all respects
(including principal amount, interest rate
and maturity date) to the terms of the
Original Notes for which they may be
exchanged pursuant to the Exchange Offer,
except that (i) the Exchange Notes are
freely transferable by holders thereof
(other than as provided herein) and are not
subject to any covenant restricting
transfer absent registration under the
Securities Act and (ii) holders of the
Exchange Notes will not be entitled to
certain rights of holders of the Original
Notes under the Exchange and Registration
Rights Agreement, which rights will
terminate upon the consummation of the
Exchange Offer. See "The Exchange Offer."
The Exchange Offer is not conditioned upon
any minimum aggregate principal amount of
Original Notes being tendered for exchange.
Based on an interpretation by the staff of
the Commission set forth in no-action
letters issued to third parties, the
Company believes that the Exchange Notes
issued
10
<PAGE> 13
pursuant to the Exchange Offer in exchange
for Original Notes may be offered for
resale, resold and otherwise transferred by
a holder thereof (other than (i) a
broker-dealer who purchases such Exchange
Notes directly from the Company to resell
pursuant to Rule 144A under the Securities
Act or any other available exemption under
the Securities Act or (ii) a person that is
an affiliate (as defined in Rule 405 under
the Securities Act) of the Company),
without compliance with the registration
and prospectus delivery provisions of the
Securities Act, provided that the holder is
acquiring the Exchange Notes in the
ordinary course of its business and is not
participating, and has no arrangement or
understanding with any person to
participate, in the distribution of the
Exchange Notes. The Company has not sought,
and does not currently intend to seek a no-
action letter. There can be no assurance
that the staff of the Securities and
Exchange Commission would make a similar
determination with respect to the Exchange
Offer. Each broker-dealer that receives the
Exchange Notes for its own account in
exchange for the Original Notes, where such
Notes were acquired by such broker-dealer
as a result of market-making activities or
other trading activities, must acknowledge
that it will deliver a prospectus in
connection with any resale of such Exchange
Notes.
REGISTRATION RIGHTS AGREEMENT.... The Original Notes were sold by the Company
on September 26, 1997 to the Initial
Purchaser pursuant to a Securities Purchase
Agreement dated as of September 23, 1997 by
and between the Company, the Subsidiary
Guarantors and the Initial Purchaser (the
"Purchase Agreement"). Pursuant to the
Purchase Agreement, the Company, the
Subsidiary Guarantors and the Initial
Purchaser entered into the Exchange and
Registration Rights Agreement which grants
the holders of the Original Notes certain
exchange and registration rights. See "The
Exchange Offer -- Termination of Certain
Rights." This Exchange Offer is intended to
satisfy such rights, which terminate upon
the consummation of the Exchange Offer. The
holders of the Exchange Notes are not
entitled to any exchange of registration
rights with respect to the Exchange Notes.
EXPIRATION DATE.................. The Exchange Offer will expire at 5:00
p.m., New York City time, on [the 21st
business day following the Exchange Offer],
1997, unless the Exchange Offer is extended
(for a maximum of an additional 20 business
days) by the Company in its reasonable
discretion, in which case the term
"Expiration Date" shall mean the latest
date and time to which the Exchange Offer
is extended.
11
<PAGE> 14
ACCRUED INTEREST ON THE EXCHANGE
NOTES AND ORIGINAL NOTES....... Interest on the Exchange Notes will accrue
from (A) the last interest payment date on
which interest was paid on the Original
Notes surrendered in exchange therefor, or
(B) if no interest has been paid on the
Notes, from September 26, 1997. Holders
whose Original Notes are accepted for
exchange will be deemed to have waived the
right to receive any interest accrued on
the Original Notes.
CONDITIONS TO THE
EXCHANGE OFFER................. The Exchange Offer is subject to certain
customary conditions, which may be waived
by the Company. See "The Exchange
Offer -- Certain Conditions to the Exchange
Offer." The Exchange Offer is not
conditioned upon any minimum aggregate
principal amount of Original Notes being
tendered for exchange. The Company reserves
the right to terminate or amend the
Exchange Offer at any time prior to the
Expiration Date upon the occurrence of any
such conditions.
PROCEDURES FOR TENDERING
ORIGINAL NOTES................. Each holder of Original Notes wishing to
accept the Exchange Offer must complete,
sign and date the Letter of Transmittal, or
a facsimile thereof, in accordance with the
instructions contained herein and therein,
and mail or otherwise deliver such Letter
of Transmittal, or such facsimile, together
with the Original Notes and any other
required documentation to the exchange
agent (the "Exchange Agent") at the address
set forth herein. Original Notes may be
physically delivered, but physical delivery
is not required if a confirmation of a
book-entry of such Original Notes to the
Exchange Agent's account at The Depository
Trust Company ("DTC" or the "Depository")
is delivered in a timely fashion. By
executing the Letter of Transmittal, each
holder will represent to the Company that,
among other things, the Exchange Notes
acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of
business of the person receiving such
Exchange Notes, whether or not such person
is the holder, that neither the holder nor
any such other person is engaged in, or
intends to engage in, or has an arrangement
or understanding with any person to
participate in, the distribution of such
Exchange Notes and that neither the holder
nor any such other person is an
"affiliate," as defined under Rule 405 of
the Securities Act, of the Company. Each
broker or dealer that receives Exchange
Notes for its own account in exchange for
Original Notes, where such Original Notes
were acquired by such broker or dealer as a
result of market-making activities or other
trading activities, must acknowledge that
it will deliver a prospectus in connection
with any resale of such Exchange Notes. See
"The
12
<PAGE> 15
Exchange Offer -- Procedures for Tendering"
and "Plan of Distribution."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS.............. Any beneficial owner whose Original Notes
are registered in the name of a broker,
dealer, commercial bank, trust company or
other nominee and who wishes to tender
should contact such registered holder
promptly and instruct such registered
holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to
tender on such owner's own behalf, such
owner must, prior to completing and
executing the Letter of Transmittal and
delivering his Original Notes, either make
appropriate arrangements to register
ownership of the Original Notes in such
owner's name or obtain a properly completed
bond power from the registered holder. The
transfer of registered ownership may take
considerable time. See "The Exchange Offer
-- Procedures for Tendering."
GUARANTEED DELIVERY PROCEDURES... Holders of Original Notes who wish to
tender their Original Notes and whose
Original Notes are not immediately
available or who cannot deliver their
Original Notes, the Letter of Transmittal
or any other documents required by the
Letter of Transmittal to the Exchange Agent
prior to the Expiration Date, must tender
their Original Notes according to the
guaranteed delivery procedures set forth in
the "Exchange Offer -- Guaranteed Delivery
Procedures."
ACCEPTANCE OF THE ORIGINAL NOTES
AND DELIVERY OF THE EXCHANGE
NOTES.......................... Subject to the satisfaction or waiver of
the conditions to the Exchange Offer, the
Company will accept for exchange any and
all Original Notes which are properly
tendered in the Exchange Offer prior to the
Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be
delivered on the earliest practicable date
following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange
Offer."
WITHDRAWAL RIGHTS................ Tenders of Original Notes may be withdrawn
at any time prior to the Expiration Date.
See "The Exchange Offer -- Withdrawal of
Tenders."
EXCHANGE AGENT................... Harris Trust and Savings Bank is serving as
the Exchange Agent in connection with the
Exchange Offer. See "The Exchange
Offer -- Exchange Agent."
EFFECT ON HOLDERS OF
THE ORIGINAL NOTES............. As a result of the making of, and upon
acceptance for exchange of all validly
tendered Original Notes pursuant to the
terms of this Exchange Offer, the Company
will have fulfilled one of the covenants
contained in the Exchange and Registration
Rights Agreement and, accordingly, no
liquidated damages will become payable in
respect of the Original Notes pursuant to
the applica-
13
<PAGE> 16
ble terms of the Exchange and Registration
Rights Agreement. Holders of the Original
Notes who do not tender their Original
Notes will be entitled to all the rights
and limitations applicable thereto under
the Indenture between the Company and
Harris Trust and Savings Bank, as trustee
(the "Trustee"), relating to the Original
Notes and the Exchange Notes, except for
any rights under the Indenture or the
Exchange and Registration Rights Agreement,
which by their terms terminate or cease to
have further effectiveness as a result of
the making of, and the acceptance for
exchange of all validly tendered Original
Notes pursuant to, the Exchange Offer. All
untendered Original Notes will continue to
be subject to the restrictions on transfer
provided for in the Original Notes and in
the Indenture. To the extent that Original
Notes are tendered and accepted in the
Exchange Offer, the trading market for
untendered Original Notes could be
adversely affected.
USE OF PROCEEDS.................. There will be no cash proceeds to the
Company from the exchange pursuant to the
Exchange Offer.
THE NOTES
THE EXCHANGE NOTES............... The Exchange Offer applies to $140,000,000
aggregate principal amount of the Original
Notes. The form and terms of the Exchange
Notes are the same as the form and terms of
the Original Notes except that (i) the
exchange will have been registered under
the Securities Act and, therefore, the
Exchange Notes will not bear legends
restricting their transfer pursuant to the
Securities Act, and (ii) holders of the
Exchange Notes will not be entitled to
certain rights of holders of the Original
Notes under the Exchange and Registration
Rights Agreement, which rights will
terminate upon consummation of the Exchange
Offer. The Exchange Notes will evidence the
same debt as the Original Notes (which they
replace) and will be issued under, and be
entitled to the benefits of, the Indenture.
See "Description of Notes" for further
information and for definitions of certain
capitalized terms used below.
ISSUER........................... Argo-Tech Corporation
INTEREST RATE.................... The Notes will bear interest at a rate of
8 5/8% per annum.
MATURITY DATE.................... October 1, 2007.
INTEREST PAYMENT DATES........... April 1 and October 1 of each year,
commencing on April 1, 1998.
SINKING FUND..................... None.
OPTIONAL REDEMPTION.............. Except as described below, the Company may
not redeem the Notes prior to October 1,
2002. On or after
14
<PAGE> 17
such date, the Company may redeem the
Notes, in whole or in part, at the
redemption prices set forth herein,
together with accrued and unpaid interest,
if any, to the date of redemption. In
addition, at any time on or prior to
October 1, 2000, the Company may, subject
to certain requirements, redeem up to
33 1/3% of the original aggregate principal
amount of the Notes with the Net Cash
Proceeds (as defined) of one or more Public
Equity Offerings by the Company or Parent,
at a price equal to 108.625% of the
principal amount to be redeemed, together
with accrued and unpaid interest, if any,
to the date of redemption, provided that at
least 66 2/3% of the original aggregate
principal amount of the Notes remains
outstanding immediately after each such
redemption. See "Description of
Notes -- Optional Redemption."
CHANGE OF CONTROL................ Upon the occurrence of a Change of Control
(as defined), each holder will have the
right to require the Company to make an
offer to repurchase such holder's Notes at
a price equal to 101% of the principal
amount thereof, together with accrued and
unpaid interest, if any, to the date of
repurchase. See "Description of
Notes -- Change of Control."
SUBSIDIARY GUARANTEES............ The Notes are fully, unconditionally,
jointly and severally guaranteed (the
"Subsidiary Guarantees") on an unsecured,
senior subordinated basis by Argo-Tech
Corporation (HBP), Argo-Tech Corporation
(OEM), Argo-Tech Corporation (Aftermarket),
Carter and all future domestic Restricted
Subsidiaries (as defined) that incur
Indebtedness (as defined) and all future
Subsidiary Guarantors, subject to certain
fraudulent conveyance limitations as
described herein. The Subsidiary Guarantors
have also guaranteed the Amended Credit
Facility. In addition, the Amended Credit
Facility is guaranteed by Parent and is
secured by pledges of all of the capital
stock of the Company and the Subsidiary
Guarantors and security interests in
substantially all other tangible and
intangible assets of the Company and the
Subsidiary Guarantors. See "Description of
Notes -- Subsidiary Guarantees."
RANKING.......................... The Notes are unsecured and subordinated in
right of payment to all existing and future
Senior Indebtedness (as defined) of the
Company. The Company may incur additional
Senior Indebtedness if it meets certain
financial ratio tests set forth in the
Indenture. Except for such financial ratio
tests, there are no restrictions on the
Company's ability to incur additional debt
or total debt that ranks senior to or pari
passu with the Notes. The Notes will rank
pari passu with any future Senior
Subordinated Indebtedness (as defined) of
the Company and rank senior to all
subordinated indebtedness
15
<PAGE> 18
of the Company. The Subsidiary Guarantees
are unsecured, senior subordinated
obligations of the Subsidiary Guarantors,
subordinated in right of payment to all
existing and future Senior Indebtedness of
the Subsidiary Guarantors. As of August 2,
1997, after giving effect to the
Transactions, the Offering, and the
application of the net proceeds therefrom,
(i) the outstanding Senior Indebtedness of
the Company would have been $110.0 million
(exclusive of unused commitments), all of
which would have been Secured Indebtedness,
(ii) the Company would have had no Senior
Subordinated Indebtedness outstanding other
than the Notes and no Indebtedness that is
subordinate or junior in right of repayment
to the Notes, (iii) the outstanding Senior
Indebtedness of the Subsidiary Guarantors,
consisting entirely of Guarantees of the
Amended Credit Facility, would have been
$110.0 million, all of which would have
been Secured Indebtedness, and (iv) the
Subsidiary Guarantors would have had no
outstanding Senior Subordinated
Indebtedness other than the Subsidiary
Guarantees and no Indebtedness that is
subordinate or junior in right of payment
to the Subsidiary Guarantees.
RESTRICTIVE COVENANTS............ The Indenture limits (i) the incurrence of
additional Indebtedness by the Company and
its Restricted Subsidiaries; (ii) the
payment of dividends on, and redemption of,
capital stock of the Company and its
Restricted Subsidiaries and the redemption
of certain Subordinated Obligations (as
defined) of the Company and its Restricted
Subsidiaries; (iii) certain other
restricted payments, including without
limitation, investments; (iv) sales of
assets and Restricted Subsidiary stock; (v)
certain transactions with affiliates; (vi)
the sale or issuance of capital stock of
its Restricted Subsidiaries; (vii) the
creation of liens; (viii) the lines of
business in which the Company and its
Restricted Subsidiaries may operate; (ix)
consolidations, mergers and transfers of
all or substantially all of the Company's
assets; and (x) sale and leaseback
transactions. The Indenture will also
prohibit certain restrictions on
distributions from Restricted Subsidiaries.
However, all of these limitations and
prohibitions are subject to a number of
important qualifications and exemptions.
See "Description of Notes -- Certain
Covenants" and "-- Merger and
Consolidation."
ASSET SALE PROCEEDS.............. The Company will be obligated in certain
instances to make offers to repurchase the
Notes at a purchase price in cash equal to
100% of the principal amount thereof plus
accrued interest to the date of repurchase
with the net cash proceeds of certain asset
sales. See "Description of Notes -- Certain
Covenants -- Limitation on Sales of Assets
and Subsidiary Stock."
16
<PAGE> 19
RISK FACTORS
Prospective investors should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific
factors set forth under "Risk Factors" for risks involved with an investment in
the Notes.
17
<PAGE> 20
SUMMARY UNAUDITED PRO FORMA FINANCIAL AND OTHER DATA OF THE COMPANY
The following table sets forth summary unaudited pro forma financial and
other data of the Company for the nine months ended August 2, 1997, the twelve
months ended August 2, 1997 and the fiscal year ended October 26, 1996, as if
the Transactions occurred at the beginning of the period indicated. The summary
unaudited pro forma balance sheet data give effect to the Transactions as if
they occurred on August 2, 1997. The information presented below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
included elsewhere herein. The unaudited pro forma financial data set forth
below are not necessarily indicative of the results that would have been
achieved had such transactions been consummated as of the dates indicated or
that may be achieved in the future. See "Unaudited Pro Forma Condensed
Consolidated Financial Information" for a more detailed presentation of the pro
forma financial information.
<TABLE>
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS ENDED FISCAL YEAR ENDED
AUGUST 2, 1997 AUGUST 2, 1997 OCTOBER 26, 1996
----------------- ------------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................................ $ 119,939 $ 156,163 $ 138,003
Gross profit............................................ 53,483 68,997 58,288
Operating expenses...................................... 26,749 35,953 33,050
--------- --------- ---------
Income from operations.................................. 26,734 33,044 25,238
Interest expense........................................ 16,066 21,422 21,422
Other, net.............................................. (52) 49 123
Income tax provision.................................... 5,853 6,341 3,419
--------- --------- ---------
Income before extraordinary loss........................ $ 4,867 $ 5,232 $ 274
========= ========= =========
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................................ $ 301,192
Working capital......................................... 42,742
Long-term debt (including current maturities)........... 250,275
Redeemable common stock................................. 3,900
Shareholders' deficiency................................ (9,515)
OTHER DATA:
Gross margin............................................ 44.6% 44.2% 42.2%
Adjusted EBITDA(a)...................................... $ 39,015 $ 49,909 $ 41,455
Adjusted EBITDA margin(b)............................... 32.5% 32.0% 30.0%
Depreciation, goodwill and deferred financing fee
amortization.......................................... $ 10,593 $ 14,881 $ 14,709
Capital expenditures(c)................................. 2,137 3,989 3,759
Cash interest expense(d)................................ 15,450 20,601 20,601
Ratio of Adjusted EBITDA to cash interest expense....... 2.5x 2.4x 2.0x
Ratio of earnings to fixed charges(e)................... 1.7x 1.5x 1.2x
</TABLE>
- ---------------
(a) Adjusted EBITDA represents income from operations plus non-cash charges as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS ENDED FISCAL YEAR ENDED
AUGUST 2, 1997 AUGUST 2, 1997 OCTOBER 26, 1996
----------------- ------------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income from operations.................................... $ 26,734 $ 33,044 $ 25,238
Depreciation and goodwill amortization.................... 9,977 14,060 13,888
Compensation expense -- ESOP.............................. 2,304 2,805 2,329
--------- --------- ---------
Adjusted EBITDA........................................... $ 39,015 $ 49,909 $ 41,455
========= ========= =========
</TABLE>
The Company's Adjusted EBITDA is not intended to represent cash flow from
operations as defined by generally accepted accounting principles ("GAAP") and
should not be considered as an alternative to net income as an indicator of
operating performance or to cash flow as a measure of liquidity. The Company has
included information concerning Adjusted EBITDA as it understands that it is
used by certain investors as one measure of a borrower's historical ability to
service its debt. Adjusted EBITDA, as presented, may not be comparable to
similarly titled measures reported by other companies, since not all companies
necessarily calculate Adjusted EBITDA in an identical manner, and therefore is
not necessarily an accurate means of comparison between companies.
(b) Adjusted EBITDA margin is computed as Adjusted EBITDA as a percentage of net
revenues.
(c) Capital expenditures for the fiscal year ended October 26, 1996 are net of
assets that were acquired and then immediately sold amounting to $3,855,000.
(d) Cash interest expense represents interest expense less amortization of
deferred financing fees of $616,000, $821,000 and $821,000 in the nine
months ended August 2, 1997, the twelve months ended August 2, 1997 and the
fiscal year ended October 26, 1996, respectively.
(e) For purposes of determining the ratio of earnings available to cover fixed
charges, earnings consist of income before taxes and the extraordinary loss
plus fixed charges. Fixed charges consist of interest on indebtedness
including amortization of deferred financing fees.
18
<PAGE> 21
SUMMARY HISTORICAL FINANCIAL AND OTHER DATA OF ARGO-TECH CORPORATION
The following table sets forth summary historical financial and other data
of Argo-Tech for (i) the 40 weeks ended August 2, 1997 and the 39 weeks ended
July 27, 1996, which have been derived from Argo-Tech's unaudited condensed
consolidated financial statements for those periods, which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the unaudited
interim periods and (ii) the fiscal years 1994 through 1996, which have been
derived from Argo-Tech's audited consolidated financial statements for those
years. Results for the 40 weeks ended August 2, 1997 are not necessarily
indicative of results that may be expected for the entire year. Argo-Tech's
fiscal year ends on the last Saturday in October and is identified according to
the calendar year in which it ends. For example, the fiscal year ended October
26, 1996 is referred to as "fiscal 1996." All of the fiscal years presented
consisted of 52-week periods. The information presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Selected Historical Financial and Other Data of
Argo-Tech Corporation" and the consolidated financial statements and notes
included elsewhere herein.
<TABLE>
<CAPTION>
40 WEEKS 39 WEEKS FISCAL YEAR ENDED
ENDED ENDED -----------------------------------------
AUGUST 2, JULY 27, OCTOBER 26, OCTOBER 28, OCTOBER 29,
1997 1996 1996 1995 1994
--------- -------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $ 84,892 $ 71,493 $ 96,437 $ 86,671 $ 79,709
Gross profit.............................. 36,195 28,633 38,555 32,449 25,433
Operating expenses........................ 14,135 13,850 19,307 17,390 14,789
--------- --------- --------- -------- ---------
Income from operations.................... 22,060 14,783 19,248 15,059 10,644
Interest expense.......................... 9,222 7,643 10,138 11,924 10,117
Other, net................................ (313) (118) (142) (588) 75
Income tax provision...................... 5,299 3,172 3,608 1,553 279
Extraordinary loss (a).................... 1,529 -- -- -- --
--------- --------- --------- -------- ---------
Net income................................ $ 6,323 $ 4,086 $ 5,644 $ 2,170 $ 173
========= ========= ========= ======== =========
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.............................. $ 161,504 $158,990 $ 167,106 $ 167,057 $ 183,826
Working capital........................... 26,874 23,916 25,531 23,098 34,506
Long-term debt (including current
maturities)............................. 141,107 108,907 107,607 118,607 137,607
Redeemable preferred stock................ -- 25,908 25,908 25,908 25,908
Redeemable common stock................... 3,900 2,200 2,700 1,100 --
Shareholders' deficiency (b).............. (9,515) (15,510) (14,878) (17,639) (16,848)
OTHER DATA:
Gross margin.............................. 42.6% 40.1% 40.0% 37.4% 31.9%
Adjusted EBITDA (c)....................... $ 29,575 $ 21,753 $ 29,039 $ 23,901 $ 20,210
Adjusted EBITDA margin(d)................. 34.8% 30.4% 30.1% 27.6% 25.4%
Net cash flows provided by operating
activities.............................. $ 8,771 $ 6,964 $ 15,942 $ 17,846 $ 17,531
Net cash flows used in investing
activities.............................. (1,775) (1,762) (3,355) (2,918) (1,475)
Net cash flows used in financing
activities.............................. (13,181) (9,700) (11,000) (19,730) (5,855)
Depreciation, goodwill and deferred
financing fee amortization.............. 6,009 6,036 8,653 8,577 10,177
Capital expenditures...................... 1,775 1,762 3,355 2,918 1,475
Cash interest expense (e)................. 8,424 6,749 8,947 10,519 8,666
Ratio of Adjusted EBITDA to cash interest
expense................................. 3.5x 3.2x 3.2x 2.3x 2.3x
Ratio of earnings to fixed charges(f)..... 2.4x 1.9x 1.9x 1.3x 1.0x
</TABLE>
- ---------------
(a) The extraordinary loss, net of federal income tax benefits, relates to the
write-off of unamortized debt issuance costs of a credit facility (the "Old
Credit Facility") that was refinanced with the proceeds of the Tranche A
Term Loans (as defined) under the New Credit Facility on July 18, 1997.
19
<PAGE> 22
(b) In connection with Argo-Tech's ESOP, the current value of the outstanding
shares of Parent Stock is determined annually by an independent appraiser.
The current value per share as so determined times the total shares
outstanding amounted to $79,650,000, $64,842,000 and $53,683,000, as of
October 26, 1996, October 28, 1995 and October 29, 1994, respectively.
(c) Adjusted EBITDA represents income from operations plus non-cash charges as
follows:
<TABLE>
<CAPTION>
40 WEEKS 39 WEEKS FISCAL YEAR ENDED
ENDED ENDED -----------------------------------------
AUGUST 2, JULY 27, OCTOBER 26, OCTOBER 28, OCTOBER 29,
1997 1996 1996 1995 1994
--------- -------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income from operations...................... $ 22,060 $ 14,783 $ 19,248 $ 15,059 $ 10,644
Depreciation and goodwill amortization...... 5,211 5,142 7,462 7,172 8,726
Compensation expense -- ESOP................ 2,304 1,828 2,329 1,670 840
--------- --------- --------- -------- ---------
Adjusted EBITDA............................. $ 29,575 $ 21,753 $ 29,039 $ 23,901 $ 20,210
========= ========= ========= ======== =========
</TABLE>
Argo-Tech's Adjusted EBITDA is not intended to represent cash flow from
operations as defined by generally accepted accounting principles and should not
be considered as an alternative to net income as an indicator of operating
performance or to cash flow as a measure of liquidity. Argo-Tech has included
information concerning Adjusted EBITDA as it understands that it is used by
certain investors as one measure of a borrower's historical ability to service
its debt. Adjusted EBITDA, as presented, may not be comparable to similarly
titled measures reported by other companies, since not all companies necessarily
calculate Adjusted EBITDA in an identical manner, and therefore is not
necessarily an accurate means of comparison between companies.
(d) Adjusted EBITDA margin is computed as Adjusted EBITDA as a percentage of net
revenues.
(e) Cash interest expense represents interest expense less amortization of
deferred financing fees of $798,000 and $894,000 and $1,191,000, $1,405,000
and $1,451,000 in the 40 weeks ended August 2, 1997 and the 39 weeks ended
July 27, 1996 and in the fiscal years ended October 26, 1996, October 28,
1995 and October 29, 1994, respectively.
(f) For purposes of determining the ratio of earnings available to cover fixed
charges, earnings consist of income before taxes and the extraordinary loss
plus fixed charges. Fixed charges consist of interest on indebtedness
including amortization of deferred financing fees and fixed loan guarantee
fees.
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<PAGE> 23
SUMMARY HISTORICAL FINANCIAL AND OTHER DATA OF J.C. CARTER COMPANY, INC.
The following table sets forth summary historical financial and other data
of Carter for (i) the six months ended June 30, 1997 and 1996, which have been
derived from Carter's unaudited condensed financial statements for those
periods, which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for the unaudited interim periods and (ii) the three
years ended December 31, 1996, which have been derived from Carter's audited
financial statements for those years. Results for the six months ending June 30,
1997 are not necessarily indicative of results that may be expected for the
entire year. Carter's fiscal year coincides with the calendar year. The
information presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Selected Historical Financial and Other Data of J.C. Carter Company, Inc." and
the financial statements and notes included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.......................................... $24,008 $22,131 $44,450 $39,986 $38,727
Gross profit.......................................... 11,864 10,079 21,892 19,602 19,744
Office of the President(a)............................ 6,088 4,840 9,339 10,994 7,963
Other operating expenses.............................. 5,704.. 4,354 9,926 8,822 8,460
------- ------- ------- ------- -------
Income (loss) from operations......................... 72 885 2,627 (214) 3,321
Interest expense...................................... 537 489 970 934 859
Other expense, net.................................... 214 54 226 101 396
Income tax provision (benefit)(b)..................... (2,271) 43 105 188 60
------- ------- ------- ------- -------
Net income (loss)..................................... $ 1,592 $ 299 $ 1,326 $(1,437) $ 2,006
======= ======= ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.......................................... $27,705 $23,708 $24,516 $24,117 $20,698
Working capital....................................... 1,625 2,457 2,471 2,674 4,457
Long-term debt (including current maturities)......... 13,550 11,991 11,388 12,552 10,547
Shareholders' equity.................................. 6,999 4,380 5,407 4,081 5,518
OTHER DATA:
Gross margin.......................................... 49.4% 45.5% 49.3% 49.0% 51.0%
Adjusted EBITDA(c).................................... $ 6,519 $ 6,026 $12,553 $11,640 $11,739
Adjusted EBITDA margin(d)............................. 27.2% 27.2% 28.2% 29.1% 30.3%
Net cash flows provided by (used in) operating
activities.......................................... $(1,472) $ 525 $ 1,524 $(1,057) $ 1,005
Net cash flows used in investing activities........... (476) (315) (780) (682) (831)
Net cash flows provided by (used in) financing
activities.......................................... 2,151 (561) (1,164) 2,005 (20)
Depreciation and amortization......................... 359 301 587 860 455
Capital expenditures(e)............................... 69 315 1,136 712 867
</TABLE>
- ---------------
(a) Office of the President expenses were incurred by Carter for the benefit of
the President and a director of Carter. These expenses include salaries,
benefits, personal expenses and costs associated with operating and
maintaining personal assets such as a private airplane, an airplane hangar,
personal residences and numerous automobiles. These expenses and assets will
be terminated or disposed of concurrent with the Acquisition in accordance
with the Carter Stock Purchase Agreement. Any services which were provided
by such individuals will be assumed by existing officers of the Company with
no incremental costs. Accordingly, the Company believes it is appropriate to
exclude all Office of the President expenses in determining the pro forma
operating results of the Company.
(b) Effective January 1, 1997, Carter voluntarily terminated its Subchapter S
tax status and became taxable at the applicable state and federal statutory
rates. A tax benefit of $2,207,000 was recorded in the six months ended June
30, 1997 for the impact on deferred assets for the change in tax status.
(c) Carter's Adjusted EBITDA is defined as income (loss) from operations before
depreciation and amortization expense and Office of the President expenses.
Adjusted EBITDA is not intended to represent cash flow from operations as
defined by generally accepted accounting principles and should not be
considered as an alternative to net income as an indicator of operating
performance or to cash flow as a measure of liquidity. Carter has included
information concerning Adjusted EBITDA as it understands that it is used by
certain investors as one measure of a borrower's historical ability to
service its debt. Adjusted EBITDA, as presented, may not be comparable to
similarly titled measures reported by other companies, since not all
companies necessarily calculate Adjusted EBITDA in an identical manner, and
therefore is not necessarily an accurate means of comparison between
companies.
(d) Adjusted EBITDA margin is computed as Adjusted EBITDA as a percentage of net
revenues.
(e) Capital expenditures for the six months ended June 30, 1996 and the year
ended December 31, 1996 are net of assets that were acquired and then
immediately sold amounting to $3,855,000.
21
<PAGE> 24
RISK FACTORS
Prior to making an investment decision, prospective investors should
carefully consider, together with the other information included in this
Prospectus, the following risk factors:
SUBSTANTIAL LEVERAGE; POTENTIAL INABILITY TO SERVICE DEBT
The Company is highly leveraged. As of August 2, 1997, on a pro forma basis
after giving effect to the Transactions as if they had occurred on such date,
the Company and its consolidated subsidiaries would have had an aggregate of
$250.3 million of outstanding indebtedness (excluding unused commitments),
redeemable common stock of $3.9 million and shareholders' deficiency of $9.5
million. The Indenture permits the Company and the Subsidiary Guarantors to
incur additional indebtedness, including indebtedness that is senior in rank to
the Notes. The Company will have additional borrowing capacity on a revolving
credit basis under the Amended Credit Facility. See "Capitalization" and
"Description of the Amended Credit Facility."
The Company's high degree of leverage could have important consequences to
the holders of the Notes, including the following: (i) the Company's ability to
obtain additional financing for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired in
the future; (ii) a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing the funds available to the Company for other
purposes; (iii) certain of the Company's borrowings are and will continue to be
at variable rates of interest, which exposes the Company to the risk of
increased rates; (iv) all the indebtedness outstanding under the Amended Credit
Facility is secured by substantially all of the assets of the Company and the
Subsidiary Guarantors, and will mature prior to the Notes; and (v) the Company's
flexibility to adjust to changing market conditions and ability to withstand
competitive pressures could be limited and the Company may be more vulnerable to
a downturn in general economic conditions or its business. See "Description of
the Amended Credit Facility" and "Description of Notes."
The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness will depend on its financial and
operating performance, which, in turn, is subject to prevailing economic
conditions and to certain financial, business and other factors beyond its
control. If the Company's cash flow and capital resources are insufficient to
fund its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, obtain additional equity capital or
restructure its debt. There can be no assurance that the Company's cash flow and
capital resources will be sufficient for payment of its indebtedness in the
future. In the absence of such operating results and resources, the Company
could face substantial liquidity problems and might be required to dispose of
material assets or operations to meet its debt service and other obligations,
and there can be no assurance as to the timing of such sales or the adequacy of
the proceeds which the Company could realize therefrom. See "Description of the
Amended Credit Facility" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
RESTRICTIVE DEBT COVENANTS
The Amended Credit Facility contains a number of covenants that, among
other things, limit the Company's ability to incur additional indebtedness, pay
dividends, prepay subordinated indebtedness such as the Notes, dispose of
certain assets, create liens, make capital expenditures, make certain
investments or acquisitions and otherwise restrict corporate activities. The
Amended Credit Facility also requires the Company to comply with certain
financial ratios and tests, under which the Company will be required to achieve
certain financial and operating results. The ability of the Company to comply
with such provisions may be affected by events beyond its control. A breach of
any of these covenants would result in a default under the Amended Credit
Facility. In the event of any such default, depending on the actions taken by
the lenders under the Amended Credit Facility, the Company would be prohibited
from making any payments on the Notes. In addition, such
22
<PAGE> 25
lenders could elect to declare all amounts borrowed under the Amended Credit
Facility, together with accrued interest, due and payable. If the Company were
unable to pay those amounts, the lenders thereunder could proceed against the
collateral granted to them to secure such indebtedness. See "-- Subordination;
Unsecured Status of the Notes and the Subsidiary Guarantees." If the
indebtedness under the Amended Credit Facility were to be accelerated, there can
be no assurance that the assets of the Company would be sufficient to repay in
full such indebtedness and the other indebtedness of the Company, including the
Notes. Any refinancing of the Amended Credit Facility is likely to contain
similar covenants. See "Description of the Amended Credit Facilities."
SUBORDINATION; UNSECURED STATUS OF THE NOTES AND THE SUBSIDIARY GUARANTEES
The payment of principal of and interest on, and any premium or other
amounts owing in respect of, the Notes will be subordinated to the prior payment
in full of all existing and future Senior Indebtedness of the Company, including
all amounts owing under the Amended Credit Facility. As of August 2, 1997, on a
pro forma basis after giving effect to the Transactions, the aggregate amount of
Senior Indebtedness of the Company would have been approximately $110.0 million
(excluding unused commitments), all of which would have been secured.
Consequently, in the event of a bankruptcy, liquidation, dissolution,
reorganization or similar proceeding with respect to the Company, assets of the
Company will be available to pay obligations on the Notes only after Senior
Indebtedness has been paid in full, and there can be no assurance that there
will be sufficient assets to pay amounts due on all or any of the Notes.
The Notes are unsecured and are subordinated in right of payment to all
existing and future Senior Indebtedness of the Company. The Notes will rank pari
passu with any future Senior Subordinated Indebtedness of the Company and rank
senior to all subordinated indebtedness of the Company. The Subsidiary
Guarantees are unsecured, senior subordinated obligations of the Subsidiary
Guarantors, subordinated in right of payment to all existing and future Senior
Indebtedness of the Subsidiary Guarantors. As of August 2, 1997, after giving
effect to the Transactions, the Offering, and the application of the net
proceeds therefrom, (i) the outstanding Senior Indebtedness of the Company would
have been $110.0 million (exclusive of unused commitments), all of which would
have been Secured Indebtedness, (ii) the Company would have had no Senior
Subordinated Indebtedness outstanding other than the Notes and no Indebtedness
that is subordinate or junior in right of repayment to the Notes, (iii) the
outstanding Senior Indebtedness of the Subsidiary Guarantors, consisting
entirely of guarantees of the Amended Credit Facility, would have been $110.0
million, all of which would have been Secured Indebtedness, and (iv) the
Subsidiary Guarantors would have had no outstanding Senior Subordinated
Indebtedness other than the Subsidiary Guarantees and no Indebtedness that is
subordinate or junior to right of payment to the Subsidiary Guarantees. See
"Description of Notes -- Ranking" and "-- Subsidiary Guarantees."
The Indenture permits the Company and the Subsidiary Guarantors to incur
certain secured indebtedness, including indebtedness under the Amended Credit
Facility, which will be secured by a lien on substantially all of the assets of
the Company and the Subsidiary Guarantors. The Notes and the Subsidiary
Guarantees are unsecured and therefore do not have the benefit of such
collateral. Accordingly, if an event of default occurs under the Amended Credit
Facility, the lenders thereunder may foreclose upon such collateral to the
exclusion of the holders of the Notes, notwithstanding the existence of an event
of default with respect to the Notes. In such event, such assets would first be
used to repay in full amounts outstanding under the Amended Credit Facility,
resulting in all or a portion of the Company's assets being unavailable to
satisfy the claims of the holders of Notes and other unsecured indebtedness.
FRAUDULENT TRANSFER CONSIDERATIONS
The incurrence of indebtedness (such as the Notes) in connection with the
Acquisition and the repayment of debt owed to Parent and Parent's affiliates is
subject to review under relevant federal and state fraudulent conveyance and
similar statutes in a bankruptcy or reorganization case or a
23
<PAGE> 26
lawsuit by or on behalf of creditors of the Company. Under these statutes, if a
court were to find that obligations (such as the Notes) were incurred with the
intent of hindering, delaying or defrauding present or future creditors, that
the Company received less than a reasonably equivalent value or fair
consideration for those obligations and, at the time of the incurrence of the
obligations, the obligor either (i) was insolvent or rendered insolvent by
reason thereof, (ii) was engaged or was about to engage in a business or
transaction for which its remaining unencumbered assets constituted unreasonably
small capital or (iii) intended to or believed that it would incur debts beyond
its ability to pay such debts as they matured or became due, such court could
void or subordinate the obligations in question.
The measure of insolvency for purposes of a fraudulent conveyance claim
will vary depending upon the law of the jurisdiction being applied. Generally,
however, a company will be considered insolvent at a particular time if the sum
of its debts at that time is greater than the then fair salable value of its
assets or if the fair salable value of its assets at that time is less than the
amount that would be required to pay its probable liability on its existing
debts as they become absolute and mature. Although management believes that,
after giving effect to the Transactions, the Company will be (i) neither
insolvent nor rendered insolvent by the incurrence of indebtedness in connection
with the Acquisition and the Amended Credit Facility, (ii) in possession of
sufficient capital to run its business effectively and (iii) incurring debts
within its ability to pay as the same mature or become due, there can be no
assurance, however, that a court would necessarily agree with these conclusions.
In addition, the Subsidiary Guarantees may be subject to review under
relevant federal and state fraudulent conveyance and similar statutes in a
bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of
any of the Subsidiary Guarantors. In such a case, the analysis set forth above
would generally apply, except that the Subsidiary Guarantees could also be
subject to the claim that, since the Subsidiary Guarantees were incurred for the
benefit of the Company (and only indirectly for the benefit of the Subsidiary
Guarantors), the obligations of the Subsidiary Guarantors thereunder were
incurred for less than reasonably equivalent value or fair consideration. A
court could void any of the Subsidiary Guarantors' obligations under the
Subsidiary Guarantees, subordinate the Subsidiary Guarantees to other
indebtedness of a Subsidiary Guarantor or take other action detrimental to the
holders of the Notes.
HOLDING COMPANY STRUCTURE
The Company is a holding company that conducts all of its business through
its subsidiaries and has no operations of its own. The Company derives all of
its operating income from its subsidiaries, and is dependent on the cash flow of
its subsidiaries in order to meet its debt service obligations. The Company has
no significant assets other than those related to its subsidiaries.
POSSIBLE UNENFORCEABILITY OF THE SUBSIDIARY GUARANTEES
The Company is a holding company that derives all of its operating income
from its subsidiaries. The holders of the Notes will have no direct claim
against such subsidiaries other than a claim created by one or more of the
Subsidiary Guarantees, which may themselves be subject to legal challenge in a
bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of a
Subsidiary Guarantor. See "-- Fraudulent Transfer Considerations." If such a
challenge were upheld, the Subsidiary Guarantees would be invalid and
unenforceable. To the extent that any of the Subsidiary Guarantees are not
enforceable, the rights of holders of the Notes to participate in any
distribution of assets of any Subsidiary Guarantor upon liquidation, bankruptcy,
reorganization or otherwise will, as is the case with other unsecured creditors
of the Company, be subject to prior claims of creditors of that Subsidiary
Guarantor. The Company must rely upon distributions from its subsidiaries to
generate the funds necessary to meet its obligations, including the payment of
principal of and interest on the Notes. The Indenture contains covenants that
restrict the ability of the Company's subsidiaries to enter into any agreement
limiting distributions and transfers,
24
<PAGE> 27
including dividends. However, the ability of the Company's subsidiaries to make
distributions may be restricted by, among other things, applicable state
corporate laws and other laws and regulations or by terms of agreements to which
they are or may become a party. In addition, there can be no assurance that such
distributions will be adequate to fund the interest and principal payments on
the Amended Credit Facility and the Notes when due. See "Description of Notes."
CHANGE OF CONTROL; POTENTIAL INABILITY TO EFFECTUATE A REPURCHASE OF THE NOTES
Upon a Change of Control, holders of the Notes will have the right to
require the Company to repurchase all or any part of such holders' Notes at a
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase. The events that constitute a Change
of Control under the Notes will also constitute a default under the Amended
Credit Facility, which will prohibit the purchase of the Notes by the Company in
the event of certain Change of Control events unless and until such time as the
Company's indebtedness under the Amended Credit Facility is repaid in full.
There can be no assurance that the Company would have sufficient financial
resources available to satisfy all of its obligations under the Amended Credit
Facility and the Notes in the event of a Change of Control. The Company's
failure to repurchase the Notes would result in a default under the Indenture
and under the Amended Credit Facility, each of which could have adverse
consequences for the Company and the holders of the Notes. See "Description of
the Amended Credit Facility" and "Description of Notes -- Change of Control."
DEPENDENCE ON AEROSPACE INDUSTRY
Substantially all of the Company's gross profit and operating income is
derived from its sales of products to the aerospace industry. The Company
designs, engineers and manufactures aircraft components for OEMs and supplies
spare parts and performs repair and overhaul services on existing installed
components for its commercial and military customers (the "aftermarket"). The
commercial OEM segment of the aerospace industry has historically been subject
to fluctuations due to general economic conditions. A reduction in airline
travel will generally result in reduced orders for new commercial aircraft,
reduced utilization of commercial aircraft and a corresponding decrease in the
Company's sales of new components, related income and cash flow. The commercial
airline industry was adversely affected by a severe downturn during the three
year period ended December 31, 1993. This downturn resulted in record losses for
the commercial airline industry and a decrease in production of commercial
engine and airframe assemblies, which caused a corresponding decline in the
Company's commercial OEM business. In addition, aftermarket sales were
negatively affected as airlines delayed purchases of spare parts, preferring to
use existing spare parts inventory. Management believes that airlines currently
maintain little or no spare parts inventory which should cause future
aftermarket sales to remain relatively stable even in an OEM downturn. Although
management believes that the cyclicality of the commercial airline industry is
mitigated by the Company's aftermarket and military sales, there can be no
assurance that economic and other factors that affect the commercial aerospace
industry will not similarly affect the military aerospace industry. In addition,
because of the relatively small number of customers for certain of the Company's
products, such customers are able to influence the Company's prices and other
terms of sale. The loss of one or more significant customers could have a
material adverse effect on the Company. See "Business and Properties -- Industry
Overview."
GOVERNMENT REGULATION AND OVERSIGHT
The aerospace industry is highly regulated in the United States and in
other countries. The Company must be certified by the FAA, the U.S. Department
of Defense and similar agencies in foreign countries and by individual OEMs in
order to sell and service parts and components used in specific aircraft models.
If material authorizations or approvals were revoked or suspended, the
operations of the Company would be adversely affected. In the future, new and
more stringent government regulations may be adopted or industry oversight may
be heightened, which may have a material adverse effect on the Company.
25
<PAGE> 28
REDUCTION IN DEFENSE SPENDING; GOVERNMENT CONTRACTS
Pro forma for the Acquisition, in fiscal 1996 approximately 19% of the
Company's sales were related to products used in U.S. designed military
aircraft. In general, the U.S. defense budget has been declining in recent
years, resulting in reduced demand for new aircraft and spare parts. Although
defense budget reductions in the U.S. may be offset in part by foreign military
sales, such sales are affected by U.S. Government regulations, regulations by
the purchasing foreign government and political uncertainties in the U.S. and
abroad. There can be no assurance that the U.S. defense budget will not continue
to decline or that sales of defense related items to foreign governments will
continue at present levels. In addition, the terms of defense contracts with the
U.S. Government generally permit the Government to terminate such contract, with
or without cause, at any time.
RISKS ASSOCIATED WITH THE ACQUISITION AND FUTURE ACQUISITIONS
The Acquisition was the first major acquisition made by the Company.
Acquisitions of this magnitude are inherently subject to significant risk.
Although management believes Carter's business is and has been successful and
should complement the Company's product lines, there can be no assurance that
the Company will be able to successfully integrate Carter's operations. Although
many of Carter's operations are similar to Argo-Tech's, the integration of
Carter will require substantial attention from, and will place significant
demands upon, the Company's administrative systems and its senior management,
and will require the cooperation of Carter's management and employees. As a
result, the Company's ability to successfully integrate Carter may be adversely
affected if a member of the management team were to leave the Company. The
demands on the management of both Carter and Argo-Tech caused by the Acquisition
may divert attention from and adversely impact their ability to manage their
respective companies' existing business.
The Company's objective is to grow through, among other things, strategic
acquisitions. The Company's acquisition strategy entails risks inherent in
assessing the value, strengths, weaknesses, contingent and other liabilities and
potential profitability of acquisition candidates and in integrating the
operations of acquired businesses. There can be no assurance that acquisition
opportunities will be available, that the Company will have access to the
capital required to finance potential acquisitions or that any business acquired
will be integrated successfully or prove profitable. See "Business and
Properties -- Business Strategy -- Aerospace Growth through Acquisitions."
RISKS ASSOCIATED WITH THE COMPANY'S WORKFORCE AND SUPPLIERS
The Company's sophisticated production processes and the aerospace industry
standards imposed on its products make the Company's operations highly dependent
on an educated and trained workforce. The Company could be adversely affected by
long-term or short-term shortages of appropriately skilled production and
professional workers. All of the hourly employees at the Cleveland Facility have
been represented by the United Auto Workers Union ("UAW") since 1987. The
current collective bargaining agreement, signed in 1996 after an extended period
of negotiations commencing in 1994, expires on March 31, 2000. Although
management believes that its relations with its employees are good, there can be
no assurance that the Company will be able to negotiate a satisfactory renewal
of the collective bargaining agreement or that the Company's employee relations
will remain stable. Because the Company maintains a relatively small inventory
of finished goods and operates on relatively long lead times for production, any
interruption of the work force could have a material adverse effect on the
Company.
In addition, the Company's profitability is affected by the price and
continuity of supply of its raw materials and component parts. The Company, and
all other aerospace fuel pump manufacturers, rely on one supplier for CPM-10V, a
powdered metal used in the manufacture of certain pump components. If that
supply ceased to exist, the Company, along with all other fuel pump
manufacturers, would be adversely affected. The Company could be adversely
affected by factors affecting its
26
<PAGE> 29
suppliers, or by increased costs associated with such materials or components if
the Company is unable to increase the prices of its own products. The Company
maintains a relatively small inventory of raw materials and component parts and
could be adversely affected by a curtailment of supply from its vendors.
Although management believes that alternative suppliers, or alternatives for
such materials or components, could be identified, the lengthy FAA and OEM
certification process associated with aerospace products could prevent efficient
replacement of a material or supplier and could have a material adverse effect
on the Company. See "Business and Properties -- Suppliers and Raw Materials."
COMPETITION
The global aerospace industry is highly competitive. The industry has
experienced significant consolidation, and the Company's competitors include
several companies that have significantly greater financial resources available
to them than does the Company. The Company competes primarily with Sundstrand
Corporation ("Sundstrand"), Chandler-Evans Fuel Systems, a division of Coltec
Industries, Inc. ("CECO") and Lucas Aerospace, a division of Lucas Varity
("Lucas"), in the production of main engine fuel pumps. The Company competes
with a diverse group of companies in the production of other fuel transfer
products and systems including Parker Hannifin Corp. ("Parker-Hannifin"),
Intertechnique S.A. ("Intertechnique") and GEC Marconi Aerospace Inc. ("GEC
Aerospace"). See "Business and Properties -- Industry Overview."
PRODUCT LIABILITY; CLAIMS EXPOSURE
While the Company has never been a defendant in a products liability case
involving its aerospace or ground fueling products, the Company's overall
operations expose it to potential liabilities for personal injury or death as a
result of the failure of an aircraft component that has been designed,
manufactured or serviced by the Company, or the irregularity of metal products
processed or distributed by the Company. Carter is a defendant in one products
liability case involving an industrial marine product for which Carter is
entitled to indemnification from a previous owner, who has defended the lawsuit
since its filing in 1984. While management believes that its liability insurance
is adequate to protect it from future products liability claims, there can be no
assurance that, if claims were to arise, such insurance coverage will be
adequate. Additionally, there can be no assurance that insurance coverage can be
maintained in the future at an acceptable cost. Any such liability not covered
by insurance or for which third party indemnification is not available could
have a material adverse effect on the Company.
POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES
The Company's business operations and facilities are subject to a number of
federal, state and local laws and regulations, which govern, among other things,
the discharge of hazardous materials into the air and water as well as the
handling, storage and disposal of such materials. Pursuant to certain
environmental laws, a current or previous owner or operator of real property may
be liable for the costs of removal or remediation of hazardous materials at such
property. Environmental laws typically impose liability whether or not the owner
or operator knew of, or was responsible for, the presence of such hazardous
materials. Persons who arrange, or are deemed to have arranged, for the disposal
or treatment of hazardous materials also may be liable for the costs of removal
or remediation of such substances at the disposal or treatment site, regardless
of whether the affected site is owned or operated by such person.
The Cleveland Facility is currently the subject of environmental
remediation activities, the cost of which is the responsibility of TRW Inc.
("TRW") pursuant to the purchase agreement by which Argo-Tech acquired TRW's
Power Accessories Division (which became Argo-Tech) in 1986 (the "TRW Purchase
Agreement"). In addition, the TRW Purchase Agreement requires TRW to indemnify
Argo-Tech for certain third party environmental claims for a period of 20 years.
See "Business and Properties -- Environmental Matters."
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The stock purchase agreement (the "Carter Stock Purchase Agreement")
entered into between Argo-Tech and the selling stockholders of Carter (the
"Sellers") provides that Sellers will indemnify (the "Carter Indemnity" and
together with the TRW Purchase Agreement, the "Environmental Agreements") the
Company for all liabilities related to, among other things, known groundwater
contamination at the Costa Mesa Facility, pursuant to a Clean Up and Abatement
Order issued by the California Regional Water Control Board. If additional
environmental requirements are imposed by government agencies, or if TRW or
Sellers fail to satisfy their obligations under the Environmental Agreements,
increased remediation and compliance expenditures may be required, which could
have a material adverse effect on the Company.
LACK OF PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON RESALE
The Notes are new securities for which there currently is no market.
Although the Initial Purchaser has informed the Company that it currently
intends to make a market in the Original Notes and the Exchange Notes, it is not
obligated to do so and any such market making may be discontinued at any time
without notice. In addition, such market making activity may be limited during
the pendency of the Exchange Offer or the effectiveness of a shelf registration
statement in lieu thereof. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Notes and, if issued, the
Exchange Notes. The Notes are expected to be eligible for trading in the PORTAL
market. The Company does not intend to apply for listing of the Original Notes
or the Exchange Notes on any securities exchange or for quotation through an
automated dealer quotation system.
The liquidity of, and trading market for, the Original Notes or the
Exchange Notes also may be adversely affected by general declines in the market
for similar securities. Such declines may adversely affect such liquidity and
trading markets independently of the financial performance of, and prospects
for, the Company.
CONTROLLING STOCKHOLDERS
The Company is a wholly owned subsidiary of Parent. The Company's
management and an employee stock ownership plan (the "ESOP") currently own
approximately 36% of the Parent Stock. Mr. Masashi Yamada holds approximately
49% of the outstanding Parent Stock through AT LLC, a domestic limited liability
company under his control, and an additional 6% of Parent Stock through YCI,
which is a subsidiary of Yamada Corporation, a Japanese trading company
controlled by Mr. Yamada. The AT Holdings Corporation 1994 Stockholders
Agreement as amended (the "1994 Stockholders Agreement") currently provides that
AT LLC has the right to elect a majority of the directors of Parent and a
majority of the directors of the Company. As a result, Mr. Yamada will be able
to direct the election of the members of the Board of Directors of the Company
and, therefore, direct the management and policies of the Company. The 1994
Stockholders Agreement provides that specified actions require approval by 80%
or more of the Board of Directors of Parent. Due to the current structure of
Parent's Board of Directors, wherein Mr. Yamada appoints 60%, and management
appoints 40% of Parent's Board of Directors, management retains a veto over any
action requiring 80% approval. See "Principal Stockholders" and "Certain
Transactions."
CONSEQUENCES OF FAILURE TO EXCHANGE ORIGINAL NOTES
Holders of Original Notes who do not exchange their Original Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Original Notes as set forth in the legend
thereon as a consequence of the offer or sale of the Original Notes pursuant to
an exemption from or in a transaction not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Original 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 or applicable state securities laws. The
Company does not currently expect that it will register the Original Notes under
the Securities Act. Based on interpretations by the staff of the Commission
issued in no-action letters to third parties,
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management believes that the Exchange Notes issued pursuant to the Exchange
Offer in exchange for Original Notes may be offered for resale, resold or
otherwise transferred by the Holder thereof (other than any such Holder which is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act), provided that such Exchange Notes are acquired in the ordinary
course of such Holder's business and such Holder has no arrangement with any
person to participate in the distribution of such Exchange Notes. Such no-action
letters are not binding interpretations of the law. The Company has not sought,
and does not currently intend to seek a no-action letter. There can be no
assurances that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. Any Holder of Original Notes who tenders in
the Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes would not be acting consistently with such interpretation by the
staff of the Commission and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Thus, any Exchange Notes acquired by such Holder will not be freely
transferable except in compliance with the Securities Act. Each Restricted
Holder that receives Exchange Notes for its own account in exchange for the
Original Notes, where such Original Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
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THE EXCHANGE OFFER
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
The Original Notes were sold by the Company on September 26, 1997 to the
Initial Purchaser pursuant to the Purchase Agreement dated as of September 23,
1997. As a condition to the sale of the Original Notes, the Company, the
Subsidiary Guarantors and the Initial Purchaser entered into the Exchange and
Registration Rights Agreement on September 26, 1997. Pursuant to the Exchange
and Registration Rights Agreement, the Company agreed that, unless the Exchange
Offer is not permitted by applicable law or Commission policy, it would (i) file
with the Commission a Registration Statement under the Securities Act with
respect to the Exchange Notes within 30 days after the Issue Date, (ii) use its
reasonable best efforts to cause such Registration Statement to become effective
under the Securities Act within 105 days after the Issue Date and the Exchange
Offer to be consummated no later than 135 days after the Issue Date and (iii)
keep the Registration Statement effective for not less than 30 days (or longer
if required by law) after the date that notice of the Exchange Offer is mailed
to the Holders. As soon as practicable after the close of the Exchange Offer,
the Company will (i) accept for exchange all Original Notes tendered and not
validly withdrawn pursuant to the Exchange Offer, (ii) deliver to the Trustee
for cancellation all Original Notes so accepted for exchange, and (iii) cause
the Exchange Agent to promptly authenticate and deliver to each Holder of
Original Notes, Exchange Notes equal in principal amount to the Original Notes
of such Holder so accepted for exchange. Under existing Commission
interpretations, the Exchange Notes would in general be freely transferable
after the Exchange Offer without further registration under the Securities Act;
provided, that in the case of broker-dealers, a prospectus meeting the
requirements of the Securities Act be delivered as required. The Company has
agreed to make available a prospectus meeting the requirements of the Securities
Act to any broker-dealer for use in connection with any resale of any such
Exchange Notes acquired as described below for such period of 180 days after the
Expiration Date. A broker-dealer that delivers such a prospectus to purchasers
in connection with such resales will be subject to certain of the civil
liability provisions under the Securities Act, and will be bound by the Exchange
and Registration Rights Agreement (including certain indemnification rights and
obligations). A copy of the Exchange and Registration Rights Agreement has been
incorporated by reference as an exhibit to the Registration Statement of which
this Prospectus is a part. The Registration Statement of which this Prospectus
is a part is intended to satisfy certain of the Company's obligations under the
Exchange and Registration Rights Agreement and the Purchase Agreement. The Notes
are not collateralized by the capital stock of each of the Subsidiary Guarantors
nor of the Parent.
The Company is generally not required to file any registration statement to
register any outstanding Original Notes. Holders of Original Notes who do not
tender their Original Notes or whose Original Notes are tendered but not
accepted will have to rely on exemptions to registration requirements under the
securities laws, including the Securities Act, if they wish to sell their
Original Notes.
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer who
purchases such Exchange Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii) any
such holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) who exchanges Original Notes for Exchange Notes in
the ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement with any person to participate, in the
distribution of the Exchange Notes, will be allowed to resell the Exchange Notes
to the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. The Company has not
sought, and does not currently intend to seek a no-action letter. There can be
no assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. However, if any holder acquires the Exchange
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<PAGE> 33
Notes in the Exchange Offer for the purpose of distributing or participating in
the distribution of the Exchange Notes or is a broker-dealer, such holder cannot
rely on the position of the staff of the Commission enumerated in certain
no-action letters issued to third parties and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction, unless an exemption from registration is otherwise
available. Each broker-dealer that receives Exchange Notes for its own account
in exchange for Original Notes, where such Original Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. 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 the resale of Exchange Notes
received in exchange for Original Notes where such Original Notes were acquired
by such broker-dealer as a result of market-making or other trading activities.
Pursuant to the Exchange and Registration Rights Agreement, the Company has
agreed to make this Prospectus, as it may be amended or supplemented from time
to time, available to broker-dealers for used in connection with any resale for
a period of 180 days after the Expiration Date. See "Plan of Distribution."
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
If (i) because any change in law or applicable interpretations of the staff
of the Commission does not permit the Company to effect the Exchange Offer as
contemplated thereby or (ii) for any other reason the Exchange Offer is not
consummated within 135 days after the Issue Date or (iii) the Initial Purchaser
so requests with respect to Original Notes purchased on the Issue Date not
eligible to be exchanged for Exchange Notes in the Exchange Offer and held by
the Initial Purchaser following the consummation of the Exchange Offer or (iv)
any holder either (A) is not eligible to participate in the Exchange Offer or
(B) participates in the Exchange Offer and does not receive freely transferrable
Exchange Notes in exchange for tendered Original Notes, the Company will file
with the Commission a shelf registration statement (the "Shelf Registration
Statement") to cover resales of Transfer Restricted Securities (as defined) by
such holders who satisfy certain conditions relating to, among other things, the
provision of information in connection with the Shelf Registration Statement.
The Company will, in the event of the Shelf Registration Statement, provide to
each holder of the Notes copies of the prospectus which is a part of the Shelf
Registration Statement, notify each such holder when the Shelf Registration
Statement for the Notes has become effective and take certain other actions as
are required to permit unrestricted resales of the Notes. A holder of the Notes
that sells such Notes pursuant to the Shelf Registration Statement generally
would be required to be named as a selling securityholder in the related
prospectus and to deliver a prospectus to purchasers, will be subject to certain
of the civil liability provisions under the Act in connection with such sales,
and will be bound by the provisions of the Exchange and Registration Rights
Agreement which are applicable to such a holder (including certain
indemnification rights and obligations).
Although the Company intends to file one of the registration statements
described above, there can be no assurance that such registration statement will
be filed or, if filed, that it will become effective. If the Company fails to
comply with the above provisions or if such registration statement fails to
become effective, then, liquidated damages shall become payable in respect of
the Notes as follows:
If (i) the Exchange Offer Registration Statement or Shelf Registration
Statement is not filed within 30 days after the Issue Date;
(ii) an Exchange Offer Registration Statement or Shelf Registration
Statement is not declared effective within 105 days after the Issue Date;
(or, in the case of a Shelf Registration Statement required to be filed in
response to a change in law or applicable interpretations of the
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Commission's staff, if later, within 30 days after publication of the
change in law or interpretation), or
(iii) the Registered Exchange Offer is not consummated on or prior to
135 days after the Issue Date, or
(iv) the Shelf Registration Statement is filed and declared effective
within 105 days after the Issue Date (or in the case of a Shelf
Registration Statement required to be filed in response to a change in law
or the applicable interpretations of Commission's staff, if later, within
30 days after publication of the change in law or interpretation) but will
thereafter cease to be effective (at any time that the Company is obligated
to maintain the effectiveness thereof) without being succeeded within 30
days by an additional Registration Statement filed and declared effective
(each such event referred to in clauses (i) through (iv), a "Registration
Default"), the Company and the Subsidiary Guarantors will be jointly and
severally obligated to pay liquidated damages to each holder of Transfer
Restricted Securities, during the period of one or more such Registration
Defaults, in an amount equal to $0.192 per week per $1,000 principal amount of
the Securities constituting Transfer Restricted Securities held by such Holder
until (i) the applicable Registration Statement is filed, (ii) the Exchange
Offer Registration Statement is declared effective and the Registered Exchange
Offer is consummated, (iii) the Shelf Registration Statement is declared
effective or (iv) the Shelf Registration Statement again becomes effective, as
the case may be. Following the cure of all Registration Defaults, the accrual of
liquidated damages will cease. As used herein, the term "Transfer Restricted
Securities" means each Original Note or Exchange Note until (i) the date on
which such Original Note or Exchange Note has been exchanged for a freely
transferable Exchange Note in the Registered Exchange Offer, (ii) the date on
which such Original Note or Exchange Note has been effectively registered under
the Securities Act and disposed of in accordance with the Shelf Registration
Statement or (iii) the date on which such Security or Exchange Note is
distributed to the public pursuant to Rule 144 under the Securities Act or is
salable pursuant to Rule 144(k) under the Securities Act. Notwithstanding
anything to the contrary in Section 3(a) of the Exchange and Registration Rights
Agreement, the Company and the Subsidiary Guarantors will not be required to pay
liquidated damages to the holder of Transfer Restricted Securities if such
holder failed to comply with its obligations to make the representations or
failed to provide the information required to be provided by it, if any,
pursuant to the Exchange and Registration Rights Agreement.
Such liquidated damages are intended to constitute the sole damages that
will be suffered by holders of Transfer Restricted Securities by reason of the
failure of (i) the Shelf Registration Statement or the Exchange Offer
Registration Statement to be filed, (ii) the Shelf Registration Statement to
remain effective or (iii) the Exchange Offer Registration Statement to be
declared effective and the Registered Exchange Offer to be consummated, in each
case to the extent required by the Exchange and Registration Rights Agreement.
The summary herein of the material provisions of the Exchange and
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
Exchange and Registration Rights Agreement, which has been incorporated by
reference as an exhibit to the Registration Statement of which this Prospectus
is a part, a copy of which will be available upon request to the Company.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept any and
all Original Notes validly tendered and not withdrawn prior to the Expiration
Date. The Company will issue $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of outstanding Original Notes
surrendered pursuant to the Exchange Offer. Holders may tender some or all of
their Original Notes pursuant to the Exchange Offer; provided, however, that
Original Notes may be tendered only in
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<PAGE> 35
integral multiples of $1,000. The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Original Notes being tendered for
exchange.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the Exchange Notes will be registered
under the Securities Act and, therefore, will not bear legends restricting their
transfer and (ii) holders of the Exchange Notes will not be entitled to the
certain rights of holders of Original Notes under the Exchange and Registration
Rights Agreement, which rights will terminate upon the consummation of the
Exchange Offer. The Exchange Notes will evidence the same debt as the Original
Notes (which they replace) and will be issued under, and be entitled to the
benefits of, the Indenture, which also authorized the issuance of the Original
Notes, such that all outstanding Notes will be treated as a single class of debt
securities under the Indenture.
Interest on the Exchange Notes will accrue from the last interest payment
date on which interest was paid on the Original Notes surrendered in exchange
therefor or, if no interest has been paid, from the Issue Date. Accordingly,
registered holders of Exchange Notes on the relevant record date for the first
interest payment date following the consummation of the Exchange Offer will
receive interest accruing from the last interest payment date on which interest
was paid or, if no interest has been paid on the Notes, from the Issue Date.
Original Notes accepted for exchange will cease to accrue interest from and
after the date of the consummation of the Exchange Offer. Holders whose Original
Notes are accepted for exchange will not receive any payment in respect of
interest on such Original Notes otherwise payable on any interest payment date,
the record date for which occurs on or after consummation of the Exchange Offer.
As of the date of this Prospectus, $140,000,000 aggregate principal amount
of the Original Notes are outstanding and registered in the name of Cede & Co.,
as nominee for the Depository Trust Company ("DTC"). Only a registered holder of
the Original Notes (or such holder's legal representative or attorney-in-fact)
as reflected on the records of the Trustee under the Indenture may participate
in the Exchange Offer. There will be no fixed record date for determining
registered holders of the Original Notes entitled to participate in the Exchange
Offer.
Holders of the Original Notes do not have any appraisal or dissenters'
rights under the Indenture in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the provisions of the
Exchange and Registration Rights Agreement and the applicable requirements of
the Securities Act, the Exchange Act and the rules and regulations of the
Commission thereunder.
The Company shall be deemed to have accepted validly tendered Original
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders of Original Notes for the purposes of receiving the Exchange Notes from
the Company.
If any tendered Original Notes are not accepted for exchange because of an
invalid tender, or due to the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Original Notes will be
returned without expense to the tendering holders thereof (or in the case of
Original Notes tendered by book-entry transfer, such Original Notes will be
credited to the account of such holder maintained at the Depository), as
promptly as practicable after the expiration or termination of the Exchange
Offer.
Holders who tender Original Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See " -- Fees and Expenses."
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EXPIRATION DATE; EXTENSIONS; TERMINATION
The term "Expiration Date" shall mean 5:00 p.m., New York City time on [the
21st business day following the Exchange Offer], 1997 unless the Company, in its
sole discretion, extends the Exchange Offer (for a maximum of an additional 20
business days), in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer the Company will notify the Exchange
Agent of any extension by oral (promptly confirmed in writing) or written notice
and will make a public announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date of the Exchange Offer. Without limiting the manner in which the Company may
choose to make a public announcement of any delay, extension, amendment or
termination of the Exchange Offer, the Company shall have no obligation to
publish, advertise or otherwise communicate any such public announcement, other
than by making a timely release to an appropriate news agency.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Original Notes, (ii) to extend the Exchange Offer, (iii) if any
conditions set forth below under "-- Certain Conditions to the Exchange Offer"
shall not have been satisfied, to terminate the Exchange Offer by giving oral or
written notice of such delay, extension or termination to the Exchange Agent or
(iv) to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the registered holders. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders of
Original Notes, and the Company will extend the Exchange Offer for a period of
five to ten business days, depending upon the significance of the amendment and
the manner of disclosure to such registered holders, if the Exchange Offer would
otherwise expire during such five to ten business day period. The rights
reserved by the Company in this paragraph are in addition to the Company's
rights set forth below under the caption "-- Certain Conditions to the Exchange
Offer."
If the Company extends the period of time during which the Exchange Offer
is open, or if it is delayed in accepting for exchange of, or in issuing and
exchanging the Exchange Notes for, any Original Notes, or is unable to accept
for exchange of, or issue Exchange Notes for, any Original Notes pursuant to the
Exchange Offer for any reason, then, without prejudice to the Company's rights
under the Exchange Offer, the Exchange Agent may, on behalf of the Company,
retain all Original Notes tendered, and such Original Notes may not be withdrawn
except as otherwise provided below in "-- Withdrawal of Tenders." The adoption
by the Company of the right to delay acceptance for exchange of, or the issuance
and the exchange of the Exchange Notes, for any Original Notes is subject to
applicable law, including Rule 14e-1(c) under the Exchange Act, which requires
that the Company pay the consideration offered or return the Original Notes
deposited by or on behalf of the holders thereof promptly after the termination
or withdrawal of the Exchange Offer.
PROCEDURES FOR TENDERING
Only a registered holder of Original Notes may tender such Original Notes
in the Exchange Offer. To tender in the Exchange Offer, a holder must complete,
sign and date the Letter of Transmittal, or facsimile thereof, have the
signature thereon guaranteed if required by the Letter of Transmittal and mail
or otherwise deliver such Letter of Transmittal or such facsimile to the
Exchange Agent at the address set forth below under "-- Exchange Agent" for
receipt prior to the Expiration Date. In addition, either (i) certificates for
such Notes must be received by the Exchange Agent along with the Letter of
Transmittal, or (ii) a timely confirmation of a book-entry transfer of such
Notes, if such procedure is available, into the Exchange Agent's account at DTC
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent
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prior to the Expiration Date, or (iii) the holder must comply with the
guaranteed delivery procedures described below.
Any financial institution that is a participant in the Depository's
Book-Entry Transfer Facility system may make book-entry delivery of the Original
Notes by causing the Depository to transfer such Original Notes into the
Exchange Agent's account in accordance with the Depository's procedure for such
transfer. Although delivery of Original Notes may be effected through book-entry
transfer into the Exchange Agent's account at the Depository, 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
or confirmed by the Exchange Agent at its addresses set forth under "-- Exchange
Agent" below prior to 5:00 p.m., New York City time, on the Expiration Date.
DELIVERY OF DOCUMENTS TO THE DEPOSITORY IN ACCORDANCE WITH ITS PROCEDURES DOES
NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute a binding agreement between such holder and the Company in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IF DELIVERY IS BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE
EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR NOTES
SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS,
DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE
TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner of the Original Notes whose Original Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owners's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Original Notes, either make appropriate
arrangements to register ownership of the Notes in such owner's name (to the
extent permitted by the Indenture) or obtain a properly completed assignment
from the registered holder. The transfer of registered ownership may take
considerable time.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Original Notes (which term includes any participants in
DTC whose name appears on a security position listing as the owner of the
Original Notes) or if delivery of the Exchange Notes is to be made to a person
other than the registered holder, such Original Notes must be endorsed or
accompanied by a properly completed bond power, in either case signed by such
registered holder as such registered holder's name appears on such Original
Notes with the signature on the Original Notes or the bond power guaranteed by
an Eligible Institution (as defined below).
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "-- Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution unless the Original Notes tendered pursuant thereto
are tendered (i) by a registered holder who has not completed the box entitled
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be made by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United
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States, or another "Eligible Guarantor Institution" within the meaning of Rule
17Ad-15 under the Exchange Act (any of the foregoing, an "Eligible
Institution").
If the Letter of Transmittal or any Original Notes or assignments are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Original Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Original Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Original Notes not properly tendered or any Original Notes, the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Original Notes must be cured within such time as the Company shall determine.
Although the Company intends to request the Exchange Agent to notify holders of
defects or irregularities with respect to tenders of Original Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Original Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived.
While the Company has no present plan to acquire any Original Notes which
are not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Original Notes which are not tendered pursuant to the
Exchange Offer, the Company reserves the right in its sole discretion to
purchase or make offers for any Original Notes that remain outstanding
subsequent to the Expiration Date or, if any of the conditions set forth below
under "-- Certain Conditions to the Exchange Offer" shall have not been
satisfied, to terminate the Exchange Offer and, to the extent permitted by
applicable law, purchase Original Notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or offers
could differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (i) the Exchange Notes to be acquired by the holder of the Original
Notes in connection with the Exchange Offer are being acquired by the holder in
the ordinary course of business of the holder, (ii) the holder has no
arrangement or understanding with any person to participate in the distribution
of Exchange Notes, (iii) the holder acknowledges and agrees that any person who
is a broker-dealer registered under the Exchange Act or is participating in the
Exchange Offer for the purpose of distributing the Exchange Notes must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction of the Exchange Notes acquired
by such person and cannot rely on the position of the staff of the Commission
set forth in certain no-action letters, (iv) the holder understands that a
secondary resale transaction described in clause (iii) above and any resales of
Exchange Notes obtained by such holder in exchange for Original Notes acquired
by such holder directly from the Company should be covered by an effective
registration statement containing the selling securityholder information
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Commission, and (v) the holder is not an "affiliate," as defined in Rule 405 of
the Securities Act, of the Company. If the holder is a broker-dealer that will
receive Exchange Notes for its own account in exchange for Original Notes that
were acquired as a result of market-making activities or other trading
activities, the holder is required to
36
<PAGE> 39
acknowledge in the Letter of Transmittal that it will deliver a prospectus in
connection with any resale of such Exchange Notes; however, by so acknowledging
and by delivering a prospectus, the holder will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
RETURN OF NOTES
If any tendered Original Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Original Notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Original Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Original Notes tendered by book-entry transfer into the Exchange Agent's
account at the Depository pursuant to the book-entry transfer procedures
described below, such Original Notes will be credited to an account maintained
with the Depository) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Original Notes at the Depository 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 Depository's system may make book-entry
delivery of Original Notes by causing the Depository to transfer such Original
Notes into the Exchange Agent's account at the Depository in accordance with the
Depository's procedures for transfer. However, although delivery of Original
Notes may be effected through book-entry transfer at the Depository, 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 the address set forth below under "-- Exchange Agent"
on or prior to the Expiration Date or pursuant to the guaranteed delivery
procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and (i) whose Original
Notes are not immediately available or (ii) who cannot deliver their Original
Notes (or complete the procedures for book-entry transfer), the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Original Notes (if
available) and the principal amount of Original Notes tendered, stating
that the tender is being made thereby guaranteeing that, within five New
York Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or a facsimile thereof) together with the certificate(s)
representing the Original Notes in proper form for transfer (or a
confirmation of a book-entry transfer into the Exchange Agent's account at
the Depository of Original Notes delivered electronically), and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly executed Letter of Transmittal (or facsimile
thereof), as well as the certificate(s) representing all tendered Original
Notes in proper form for transfer (or a confirmation of a book-entry
transfer into the Exchange Agent's account at the Depository of Original
Notes delivered electronically), and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within five New
York Stock Exchange trading days after the Expiration Date.
37
<PAGE> 40
Upon request to the exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Original Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Original Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Original Notes to be withdrawn (the "Depositor"), (ii) identify the Original
Notes to be withdrawn (including the certificate number or numbers (if
applicable) and principal amount of such Original Notes), and (iii) be signed by
the holder in the same manner as the original signature on the Letter of
Transmittal by which such Original Notes were tendered (including any required
signature guarantees). All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company in
its sole discretion, whose determination shall be final and binding on all
parties. Any Original Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no Exchange Notes will be issued
with respect thereto unless the Original Notes so withdrawn are validly
retendered. Properly withdrawn Notes may be retendered by following one of the
procedures described above under "-- Procedures for Tendering" at any time prior
to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Original Notes not theretofore accepted for exchange, and may terminate or amend
the Exchange Offer as provided herein before the acceptance of such Original
Notes, if any of the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer which, in
the reasonable judgment of the Company, might impair the ability of the Company
to proceed with the Exchange Offer or have a material adverse effect on the
contemplated benefits of the Exchange Offer to the Company or there shall have
occurred any material adverse development in any existing action or proceeding
with respect to the Company or any of its subsidiaries; or
(b) there shall have been any material change, or development involving a
prospective change, in the business or financial affairs of the Company or any
of its subsidiaries which, in the reasonable judgment of the Company, could
reasonably be expected to materially impair the ability of the Company to
proceed with the Exchange Offer or materially impair the contemplated benefits
of the Exchange Offer to the Company; or
(c) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation which, in the judgment of the Company, could reasonably be
expected to materially impair the ability of the Company to proceed with the
Exchange Offer or materially impair the contemplated benefits of the Exchange
Offer to the Company; or
(d) any governmental approval which the Company shall, in its reasonable
discretion, deem necessary for the consummation of the Exchange Offer as
contemplated hereby shall not have been obtained.
If the Company determines in its reasonable discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Original
Notes and return all tendered Original Notes to the tendering holders, (ii)
extend the Exchange Offer and retain all Original Notes tendered
38
<PAGE> 41
prior to the expiration of the Exchange Offer, subject, however, to the rights
of holders to withdraw such Original Notes (see "-- Withdrawal of Tenders") or
(iii) waive such unsatisfied conditions with respect to the Exchange Offer and
accept all properly tendered Original Notes which have not been withdrawn. If
such waiver constitutes a material change to the Exchange Offer, the Company
will promptly disclose such waiver by means of a prospectus supplement that will
be distributed to the registered holders of the Original Notes, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the waiver and the manner of disclosure to
the registered holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
Holders may have certain rights and remedies against the Company under the
Exchange and Registration Rights Agreement should the Company fail to consummate
the Exchange Offer, notwithstanding a failure of the conditions stated above.
Such conditions are not intended to modify those rights or remedies in any
respect.
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 such
condition or may be waived by the Company in whole or in part at any time and
from time to time in the Company's reasonable discretion. The failure by the
Company at any time to exercise 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.
TERMINATION OF CERTAIN RIGHTS
All rights under the Exchange and Registration Rights Agreement (including
registration rights) of holders of the Original Notes eligible to participate in
this Exchange Offer will terminate upon consummation of the Exchange Offer
except with respect to the Company's continuing obligations (i) to indemnify the
holders (including any broker-dealers) and certain parties related to the
holders against certain liabilities (including liabilities under the Securities
Act), (ii) to provide, upon the request of any holder of a transfer-restricted
Original Note, the information required by Rule 144A(d)(4) under the Securities
Act in order to permit resales of such Original Notes pursuant to Rule 144A,
(iii) to use its reasonable best efforts to keep the Registration Statement
effective to the extent necessary to ensure that it is available for resales of
transfer restricted Notes by broker-dealers for a period of 180 days from the
date on which the Registration Statement is declared effective and (iv) to
provide copies of the latest version of the Prospectus to broker-dealers upon
their request for a period of 180 days from the date on which the Registration
Statement is declared effective. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
EXCHANGE AGENT
Harris Trust and Savings Bank has been appointed as Exchange Agent for the
Exchange Offer. All questions and requests for assistance as well as all
correspondence in connection with the Exchange Offer and the Letter of
Transmittal should be addressed to the Exchange Agent, as follows:
By Registered or Certified Mail, Overnight Carrier or by Hand:
Harris Trust and Savings Bank
Corporate Trust Department
311 West Monroe
12th Floor
Chicago, Illinois 60606
39
<PAGE> 42
By Facsimile:
Harris Trust and Savings Bank
Corporate Trust Department
(312) 461-3525
Confirm by Telephone
(312) 461-2527
Requests for additional copies of this Prospectus, the Letter of
Transmittal or the Notice of Guaranteed Delivery should be directed to the
Exchange Agent.
40
<PAGE> 43
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager or other soliciting agent
in connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptance of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$200,000. Such expenses include fees and expenses of the Exchange Agent and
Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Original Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes, or Original Notes for principal amounts not
tendered or acceptable for exchange, are to be delivered to, or are to be issued
in the name of, any person other than the registered holders of the Original
Notes tendered, or if tendered Original Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a transfer
tax is imposed for any reason other than the exchange of Original Notes pursuant
to the Exchange Offer, then the amount of any such transfer taxes (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder of Original
Notes.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Original Notes as reflected in the Company's accounting records on the date of
the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer will be amortized over the term
of the Exchange Notes.
CONSEQUENCE OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Original
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
Original Notes which are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Original
Notes may be resold only (i) to a person whom the seller reasonably believes is
a qualified institutional buyer (as defined in Rule 144A under the Securities
Act) in a transaction meeting the requirements of Rule 144A, (ii) in a
transaction meeting the requirements of Rule 144 under the Securities Act, (iii)
outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, (iv) in accordance with
another exemption from the registration requirements of the Securities Act (and
based upon an opinion of counsel if the Company so requests), (v) to the Company
or (vi) pursuant to an effective registration statement and, in each case, in
accordance with any applicable securities laws of any state of the United States
or any other applicable jurisdiction.
41
<PAGE> 44
THE TRANSACTIONS
The Acquisition
On August 1, 1997, Argo-Tech and Carter entered into a stock purchase
agreement (the "Carter Stock Purchase Agreement") whereby Argo-Tech agreed to
acquire all of the outstanding capital stock of Carter from certain trusts
organized by Robert L. Veloz, the President and Chief Executive Officer of
Carter (the "Veloz Trusts"), and certain trusts organized by Harry S.
Derbyshire, a director of Carter, (the "Derbyshire Trust", and together with the
Veloz Trusts, the "Trusts") for $107.0 million in cash, subject to post-closing
adjustments (the "Acquisition"). The Acquisition was consummated on September
26, 1997.
Carter, a California corporation, was founded in 1945 by James Coolidge
Carter, who developed a line of cryogenic pumps to support the U.S. space
industry. In 1958, Mr. Carter developed an innovative submerged electric motor
LNG gas pump which became recognized as the world standard. The technology and
principles used in these pumps has led to the expansion of Carter's product
lines into military aerial refueling systems and other fuel system components
including valves, couplings, regulators and ground fueling components.
The Amended Credit Facility
On July 18, 1997, the Company entered into the New Credit Facility, which
provides for Tranche A Term Loans in an aggregate principal amount not to exceed
$100.0 million (the "Tranche A Term Loans"), Delayed Draw Acquisition Loans in
an aggregate principal amount not to exceed $15.0 million (the "Delayed Draw
Acquisition Loans" and, together with the Tranche A Term Loans, the "Term
Loans") and Revolving Credit Loans in an aggregate principal amount not to
exceed $20.0 million (the "Revolving Loans")(the "New Credit Facility"). On
September 26, 1997, the Company amended and restated the New Credit Facility to
authorize the Acquisition and the issuance of the Original Notes and to adjust
certain financial covenants. In addition, the Company borrowed the Delayed Draw
Acquisition Loans in an aggregate principal amount equal to $15.0 million. See
"Description of the Amended Credit Facility."
The Note Repayment
In March 1997, Parent purchased all of its redeemable preferred stock from
the two preferred stockholders, AT LLC and Vestar/Argo-Tech Investment Limited
Partnership (the "Vestar Investment Partnership"). AT LLC's preferred stock was
purchased, including accrued dividends, in exchange for subordinated notes in
the aggregate principal amount of $41.1 million (the "Parent Notes") and cash of
$2.1 million. Vestar Investment Partnership's preferred stock was purchased,
including accrued dividends, in exchange for cash of $2.0 million. The Company
also had notes payable in the aggregate principal amount of $5.0 million (the
"AT Notes," and together with the Parent Notes, the "Existing Notes"). The AT
Notes were issued to the Yamada Trust, a trust organized under an irrevocable
trust agreement, and were subordinate to the Company's senior debt. The Existing
Notes were repaid with the proceeds of the Offering. See "Summary -- The
Transactions" and "Certain Transactions."
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange
Original Notes in like principal amount, the terms of which are substantially
identical to the Exchange Notes. All Original Notes surrendered in exchange for
Exchange Notes will be retired and cancelled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any increase in
the indebtedness of the Company.
42
<PAGE> 45
The following table summarizes the sources and uses of funds at the closing
of the Transactions:
<TABLE>
<CAPTION>
AMOUNT
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
SOURCES:
Amended Credit Facility:
Revolving Credit Facility(1).................... $ --
Delayed Draw Acquisition Loans.................. 15.0
Senior Subordinated Notes due 2007................ 140.0
Cash on hand...................................... 4.7
------
Total Sources................................ $159.7
======
USES:
Acquisition Cash Purchase Price................... $107.0
Repayment of the Existing Notes................... 46.7
Fees and expenses................................. 6.0
------
Total Uses................................... $159.7
======
</TABLE>
- ---------------
(1) The Revolving Credit Facility under the Amended Credit Facility provides for
borrowings of up to $20.0 million (the "Revolving Credit Facility"), all of
which would have been available on a pro forma basis as of August 2, 1997.
43
<PAGE> 46
CAPITALIZATION
The following table sets forth as of August 2, 1997, (i) the historical
cash and capitalization of Argo-Tech and (ii) the pro forma cash and
capitalization of the Company giving effect to the Transactions, including the
application of the proceeds of the Offering as described under "Use of
Proceeds." The information was derived from, and is qualified by reference to,
the unaudited condensed consolidated financial statements of the Company,
including the notes thereto, included elsewhere in this Prospectus. This
information should be read in conjunction with such financial statements,
including the notes thereto, "Unaudited Pro Forma Condensed Consolidated
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF AUGUST 2, 1997
-------------------------
HISTORICAL PRO FORMA
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents......................... $ 7,371 $ 2,882
========= =========
Long-term debt (including current portion)
Amended Credit Facility:
Revolving Credit Facility(1)................. $ -- $ --
Tranche A Term Loan Facility................. 95,000 95,000
Delayed Draw Acquisition Loans............... -- 15,000
Senior Subordinated Notes due 2007 offered
hereby....................................... -- 140,000
Capital lease obligations....................... -- 275
Subordinated Notes.............................. 41,100 --
Notes Payable................................... 5,007 --
--------- ---------
Total long-term debt............................ 141,107 250,275
Total redeemable common stock..................... 3,900 3,900
Total shareholders' deficiency(2)................. (9,515) (9,515)
--------- ---------
Total capitalization.............................. $ 135,492 $ 244,660
========= =========
</TABLE>
- ---------------
(1) The Revolving Credit Facility provides for borrowing of up to $20.0 million,
all of which would have been available on a pro forma basis as of August 2,
1997.
(2) In connection with Argo-Tech's ESOP, the current value of the outstanding
shares of Parent Stock is determined annually by an independent appraiser.
The current value per share as so determined times the total shares
outstanding amounted to $53.7 million, $64.8 million and $79.7 million as of
October 29, 1994, October 28, 1995 and October 26, 1996, respectively. An
appraisal was not performed prior to fiscal year 1994.
44
<PAGE> 47
SELECTED HISTORICAL FINANCIAL AND OTHER DATA OF ARGO-TECH CORPORATION
The following table sets forth selected historical financial and other data
of Argo-Tech for (i) the 40 weeks ended August 2, 1997 and the 39 weeks ended
July 27, 1996, which have been derived from Argo-Tech's unaudited condensed
consolidated financial statements for those periods, which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the unaudited
interim periods and (ii) the fiscal years 1992 through 1996, which have been
derived from Argo-Tech's audited consolidated financial statements for those
years. Results for the 40 weeks ended August 2, 1997 are not necessarily
indicative of results that may be expected for the entire year. Argo-Tech's
fiscal year ends on the last Saturday in October and is identified according to
the calendar year in which it ends. For example, the fiscal year ended October
26, 1996 is referred to as "fiscal 1996." All of the fiscal years presented
consisted of 52-week periods. The information presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
included elsewhere herein.
<TABLE>
<CAPTION>
39 FISCAL YEAR ENDED
40 WEEKS ENDED -------------------------------------------------------------------
WEEKS ENDED JULY 27, OCTOBER 26, OCTOBER 28, OCTOBER 29, OCTOBER 30, OCTOBER 31,
AUGUST 2, 1997 1996 1996 1995 1994 1993 1992
-------------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............... $ 84,892 $ 71,493 $ 96,437 $ 86,671 $ 79,709 $ 88,484 $ 118,521
Gross profit............... 36,195 28,633 38,555 32,449 25,433 25,148 33,824
Operating expenses......... 14,135 13,850 19,307 17,390 14,789 14,497 16,077
--------- --------- --------- --------- --------- --------- --------
Income from operations..... 22,060 14,783 19,248 15,059 10,644 10,651 17,747
Interest expense........... 9,222 7,643 10,138 11,924 10,117 10,371 11,677
Other, net................. (313) (118) (142) (588) 75 127 (111)
Income tax provision....... 5,299 3,172 3,608 1,553 279 61 2,583
Extraordinary loss(a)...... 1,529 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------
Net income................. $ 6,323 $ 4,086 $ 5,644 $ 2,170 $ 173 $ 92 $ 3,598
========= ========= ========= ========= ========= ========= ========
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............... $161,504 $ 158,990 $ 167,106 $ 167,057 $ 183,826 $ 188,963 $ 204,183
Working capital............ 26,874 23,916 25,531 23,098 34,506 31,289 31,366
Long-term debt (including
current maturities)...... 141,107 108,907 107,607 118,607 137,607 128,000 144,500
Redeemable preferred
stock.................... -- 25,908 25,908 25,908 25,908 24,400 24,400
Redeemable common stock.... 3,900 2,200 2,700 1,100 -- -- --
Shareholder's equity/
(deficiency)(b)(c)....... (9,515) (15,510) (14,878) (17,639) (16,848) 1,245 3,911
OTHER DATA:
Gross margin............... 42.6% 40.1% 40.0% 37.4% 31.9% 28.4% 28.5%
Adjusted EBITDA(d)......... $ 29,575 $ 21,753 $ 29,039 $ 23,901 $ 20,210 $ 21,188 $ 29,534
Adjusted EBITDA
margin(e)................ 34.8% 30.4% 30.1% 27.6% 25.4% 23.9% 24.9%
Net cash flows provided by
operating activities..... $ 8,771 $ 6,964 $ 15,942 $ 17,846 $ 17,531 $ 20,907 $ 21,881
Net cash flows used in
investing activities..... (1,775) (1,762) (3,355) (2,918) (1,475) (2,190) (2,900)
Net cash flows used in
financing activities..... (13,181) (9,700) (11,000) (19,730) (5,855) (16,917) (14,692)
Depreciation, goodwill and
deferred financing fee
amortization............. 6,009 6,036 8,653 8,577 10,177 12,460 13,066
Capital expenditures....... 1,775 1,762 3,355 2,918 1,475 2,076 4,765
Cash interest expense(f)... 8,424 6,749 8,947 10,519 8,666 8,448 10,398
Ratio of Adjusted EBITDA to
cash interest expense.... 3.5x 3.2x 3.2x 2.3x 2.3x 2.5x 2.8x
Ratio of earnings to fixed
charges(g)............... 2.4x 1.9x 1.9x 1.3x 1.0x 1.0x 1.5x
</TABLE>
- ---------------
(a) The extraordinary loss, net of federal income tax benefits, relates to the
write-off of unamortized debt issuance costs of the Old Credit Facility that
was refinanced with the proceeds of the Tranche A Term Loans (as defined)
under the New Credit Facility on July 18, 1997.
(b) In connection with Argo-Tech's ESOP, the current value of the outstanding
shares of Parent Stock is determined annually by an independent appraiser.
The current value per share as so determined times the total shares
outstanding
45
<PAGE> 48
amounted to $79,650,000, $64,842,000 and $53,683,000 as of October 26, 1996,
October 28, 1995 and October 29, 1994, respectively. An appraisal was not
performed prior to fiscal year 1994.
(c) During the fiscal year ended October 29, 1994, Argo-Tech established its
ESOP. Shareholders' equity/(deficiency) reflects unearned ESOP shares of
$(11,340,000), $(13,020,000), $(12,600,000), $(14,280,000) and $(15,960,000)
as of August 2, 1997, July 27, 1996, October 26, 1996, October 28, 1995 and
October 29, 1994, respectively.
(d) Adjusted EBITDA represents income from operations plus non-cash charges as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
40 39 -------------------------------------------------------------------
WEEKS ENDED WEEKS ENDED OCTOBER 26, OCTOBER 28, OCTOBER 29, OCTOBER 30, OCTOBER 31,
AUGUST 2, 1997 JULY 27, 1996 1996 1995 1994 1993 1992
-------------- -------------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income from operations.... $ 22,060 $ 14,783 $ 19,248 $ 15,059 $ 10,644 $ 10,651 $ 17,747
Depreciation and goodwill
amortization............ 5,211 5,142 7,462 7,172 8,726 10,537 11,787
Compensation expense --
ESOP.................... 2,304 1,828 2,329 1,670 840 -- --
--------- --------- --------- --------- --------- -------- --------
Adjusted EBITDA........... $ 29,575 $ 21,753 $ 29,039 $ 23,901 $ 20,210 $ 21,188 $ 29,534
========= ========= ========= ========= ========= ======== ========
</TABLE>
Argo-Tech's Adjusted EBITDA is not intended to represent cash flow from
operations as defined by generally accepted accounting principles and should not
be considered as an alternative to net income as an indicator of operating
performance or to cash flow as a measure of liquidity. Argo-Tech has included
information concerning Adjusted EBITDA as it understands that it is used by
certain investors as one measure of a borrower's historical ability to service
its debt. Adjusted EBITDA, as presented, may not be comparable to similarly
titled measures reported by other companies, since not all companies necessarily
calculate Adjusted EBITDA in an identical manner, and therefore is not
necessarily an accurate means of comparison between companies.
(e) Adjusted EBITDA margin is computed as Adjusted EBITDA as a percentage of net
revenues.
(f) Cash interest expense represents interest expense less amortization of
deferred financing fees of $798,000 and $894,000 and $1,191,000, $1,405,000,
$1,451,000, $1,923,000 and $1,279,000 in the 40 weeks ended August 2, 1997
and the 39 weeks ended July 27, 1996 and in the fiscal years ended October
26, 1996, October 28, 1995, October 29, 1994, October 30, 1993 and October
31, 1992, respectively.
(g) For purposes of determining the ratio of earnings available to cover fixed
charges, earnings consist of income before taxes and the extraordinary loss
plus fixed charges. Fixed charges consist of interest on indebtedness
including amortization of deferred financing fees and fixed loan guarantee
fees.
46
<PAGE> 49
SELECTED HISTORICAL FINANCIAL AND OTHER DATA OF J.C. CARTER COMPANY, INC.
The following table sets forth selected historical financial and other data
of Carter for (i) the six months ended June 30, 1997 and 1996, which have been
derived from Carter's unaudited condensed financial statements for those
periods, which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for the unaudited interim periods and (ii) the three
years ended December 31, 1996, which have been derived from Carter's audited
financial statements for those years. Results for the six months ending June 30,
1997 are not necessarily indicative of results that may be expected for the
entire year. Carter's fiscal year coincides with the calendar year. The
information presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.......................................... $24,008 $22,131 $44,450 $39,986 $38,727
Gross profit.......................................... 11,864 10,079 21,892 19,602 19,744
Office of the President(a)............................ 6,088 4,840 9,339 10,994 7,963
Other operating expenses.............................. 5,704 4,354 9,926 8,822 8,460
------- ------- ------- ------- -------
Income (loss) from operations......................... 72 885 2,627 (214) 3,321
Interest expense...................................... 537 489 970 934 859
Other expense, net.................................... 214 54 226 101 396
Income tax provision (benefit)(b)..................... (2,271) 43 105 188 60
------- ------- ------- ------- -------
Net income (loss)..................................... $ 1,592 $ 299 $ 1,326 $(1,437) $ 2,006
======= ======= ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.......................................... $27,705 $23,708 $24,516 $24,117 $20,698
Working capital....................................... 1,625 2,457 2,471 2,674 4,457
Long-term debt (including current maturities)......... 13,550 11,991 11,388 12,552 10,547
Shareholders' equity.................................. 6,999 4,380 5,407 4,081 5,518
OTHER DATA:
Gross margin.......................................... 49.4% 45.5% 49.3% 49.0% 51.0%
Adjusted EBITDA(c).................................... $ 6,519 $ 6,026 $12,553 $11,640 $11,739
Adjusted EBITDA margin(d)............................. 27.2% 27.2% 28.2% 29.1% 30.3%
Net cash flows provided by (used in) operating
activities.......................................... $(1,472) $ 525 $ 1,524 $(1,057) $ 1,005
Net cash flows used in investing activities........... (476) (315) (780) (682) (831)
Net cash flows provided by (used in) financing
activities.......................................... 2,151 (561) (1,164) 2,005 (20)
Depreciation and amortization......................... 359 301 587 860 455
Capital expenditures(e)............................... 69 315 1,136 712 867
</TABLE>
- ---------------
(a) Office of the President expenses were incurred by Carter for the benefit of
the President and a director of Carter. These expenses include salaries,
benefits, personal expenses and costs associated with operating and
maintaining personal assets such as a private airplane, an airplane hangar,
personal residences and numerous automobiles. These expenses and assets will
be terminated or disposed of concurrent with the Acquisition in accordance
with the Carter Stock Purchase Agreement. Any services which were provided
by such individuals will be assumed by existing officers of the Company with
no incremental costs. Accordingly, the Company believes it is appropriate to
exclude all Office of the President expenses in determining the pro forma
operating results of the Company.
(b) Effective January 1, 1997, Carter voluntarily terminated its Subchapter S
tax status and became taxable at the applicable state and federal statutory
rates. A tax benefit of $2,207,000 was recorded in the six months ended June
30, 1997 for the impact on deferred assets for the change in tax status.
(c) Carter's Adjusted EBITDA is defined as income (loss) from operations before
depreciation and amortization expense and Office of the President expenses.
Adjusted EBITDA is not intended to represent cash flow from operations as
defined by generally accepted accounting principles and should not be
considered as an alternative to net income as an indicator of operating
performance or to cash flow as a measure of liquidity. Carter has included
information concerning Adjusted EBITDA as it understands that it is used by
certain investors as one measure of a borrower's historical ability to
service its debt. Adjusted EBITDA, as presented, may not be comparable to
similarly titled measures reported by other companies, since not all
companies necessarily calculate Adjusted EBITDA in an identical manner, and
therefore is not necessarily an accurate means of comparison between
companies.
(d) Adjusted EBITDA margin is computed as Adjusted EBITDA as a percentage of net
revenues.
(e) Capital expenditures for the six months ended June 30, 1996 and the year
ended December 31, 1996 are net of assets that were acquired and then
immediately sold amounting to $3,855,000.
47
<PAGE> 50
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated balance sheet as of August
2, 1997 includes the historical accounts of the Company and gives effect to the
Transactions as if they occurred as of August 2, 1997. The unaudited pro forma
condensed consolidated statements of operations of the Company for the nine
months ended August 2, 1997, the twelve months ended August 2, 1997 and the
fiscal year ended October 26, 1996 include the historical operations of the
Company and give effect to the Transactions as if they occurred at the beginning
of the period indicated.
The unaudited pro forma condensed consolidated financial data, which has
been prepared by the Company's management, has been derived from the historical
statements of operations and balance sheets of Argo-Tech and Carter. The
Acquisition has been accounted for under the purchase method of accounting using
the assumptions and adjustments disclosed in the notes to the unaudited pro
forma condensed consolidated financial data. A preliminary allocation of the
purchase price has been made based on available information. A balance sheet
will be prepared for Carter as of the date of closing, on which the post-closing
purchase price adjustment will be based. Management does not expect that
differences between the preliminary and final purchase price allocation will
have a material impact on the Company's financial position or results of
operations.
The information is not designed to represent and does not represent what
the Company's results of operations actually would have been had the
aforementioned transactions been completed as of the beginning of the periods
indicated, or to project the Company's results of operations for any future
period. The pro forma adjustments are based on available information and certain
assumptions that the Company currently believes are reasonable under the
circumstances. The unaudited pro forma condensed consolidated financial
information should be read in conjunction with the more detailed information
contained in the historical consolidated financial statements and notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Use of Proceeds," "Capitalization," and the historical financial
information included elsewhere in this Prospectus.
48
<PAGE> 51
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AUGUST 2, 1997 (JUNE 30, 1997 FOR J.C. CARTER COMPANY, INC.)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ARGO-TECH CARTER ADJUSTMENTS AS ADJUSTED
--------- -------- ------------ -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............. $ 7,371 $ 203 $ (4,692)(a) $ 2,882
Receivables, net...................... 19,021 4,856 -- 23,877
Note and accrued interest receivable
from an officer/shareholder........ -- 2,280 (2,280)(b) --
Inventories........................... 17,380 11,408 10,000 (c) 38,788
Deferred income taxes, prepaid
expenses and other................. 4,019 3,408 (4,000)(d) 3,427
--------- -------- -------- ---------
Total Current Assets............... 47,791 22,155 (972) 68,974
--------- -------- -------- ---------
Property and equipment, net of
accumulated depreciation.............. 26,343 5,188 4,206(e) 35,737
Goodwill, net of accumulated
amortization.......................... 81,825 362 42,669(f) 124,856
Identifiable intangible assets.......... -- -- 60,580(g) 60,580
Other assets............................ 5,545 -- 5,500(h) 11,045
--------- -------- -------- ---------
Total Assets....................... $ 161,504 $ 27,705 $111,983 $ 301,192
========= ======== ======== =========
LIABILITIES AND SHAREHOLDERS'
EQUITY/(DEFICIENCY)
Current Liabilities:
Current portion of long-term debt..... $ 5,000 $ 13,374 $(12,525)(i) $ 5,849
Accounts payable...................... 3,148 3,110 -- 6,258
Accrued liabilities................... 12,769 2,040 (684)(j) 14,125
Accrued officer/shareholder bonuses... -- 2,006 (2,006)(k) --
--------- -------- -------- ---------
Total Current Liabilities.......... 20,917 20,530 (15,215) 26,232
--------- -------- -------- ---------
Long-term debt, net of current
maturities............................ 136,107 176 108,143(i) 244,426
Other noncurrent liabilities............ 10,095 -- 26,054(l) 36,149
--------- -------- -------- ---------
Total Liabilities.................. 167,119 20,706 118,982 306,807
--------- -------- -------- ---------
Redeemable common stock................. 3,900 -- -- 3,900
Shareholders' Equity/(Deficiency):
Common stock.......................... -- 1,125 (1,125)(m) --
Paid-in capital....................... 11,288 -- -- 11,288
Accumulated earnings (deficit)........ (9,463) 5,874 (5,874)(m) (9,463)
Unearned ESOP shares.................. (11,340) -- -- (11,340)
--------- -------- -------- ---------
Total Shareholders'
Equity/(Deficiency).............. (9,515) 6,999 (6,999) (9,515)
--------- -------- -------- ---------
Total Liabilities and Shareholders'
Equity/(Deficiency).............. $ 161,504 $ 27,705 $111,983 $ 301,192
========= ======== ======== =========
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Balance
Sheet
49
<PAGE> 52
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
For purposes of the Unaudited Pro Forma Condensed Consolidated Balance
Sheet, the financial position of Argo-Tech is as of August 2, 1997 and Carter is
as of June 30, 1997.
<TABLE>
<S> <C> <C> <C>
(a) Represents the net adjustment to cash as a result of the following:
Proceeds from the sale of the Notes........................................ $ 140,000
Proceeds from Delayed Draw Acquisition Loans............................... 15,000
Purchase of common stock of Carter......................................... (107,000)
Repayment of the Existing Notes, including accrued interest of $585........ (46,692)
Payment of fees and expenses related to the Acquisition and the sale of the
Notes.................................................................... (6,000)
---------
$ (4,692)
=========
(b) Represents the elimination of note and accrued interest receivable from an officer/shareholder of
Carter of $2,280, which was settled at the closing of the Acquisition.
(c) Represents the excess of inventory fair market value over historical value. As such inventory is
sold, this adjustment to fair value will be charged to cost of revenues. The Company expects the
inventory to be sold over a one-year period.
(d) Represents the deferred tax impact at the Company's 40% statutory tax rate of the inventory
adjustment described in Note (c).
(e) Represents the net increase in property and equipment as a result of the
following:
Excess of estimated fair market over historical value........................ ....... $ 4,554
Elimination of Carter's capitalized tooling historical value to conform to
Argo-Tech's accounting policies............................................ (348)
---------
$ 4,206
=========
(f) Represents the excess of the Acquisition price over the fair market value of
the assets and liabilities acquired. The following reflects the calculation
of goodwill:
Total purchase price, including $500 of Acquisition costs.................. $ 107,500
Less:
Inventory adjustment -- Note (c)......................................... 10,000
Property and equipment adjustment -- Note (e)............................ 4,206
Identifiable intangibles adjustment -- Note (g).......................... 60,580
Repayment of Carter indebtedness -- Note (i)............................. 13,275
Accrued interest on Carter indebtedness -- Note (j)...................... 99
Accrued officer/shareholder bonuses -- Note (k).......................... 2,006
Carter historical net book value -- Note (m)............................. 6,999 (97,165)
------
Add:
Elimination of officer/shareholder receivable -- Note (b)................ 2,280
Deferred tax effect -- Notes (d) and (l)................................. 30,054 32,334
------ ---------
Total Carter goodwill...................................................... $ 42,669
=========
(g) Represents the estimated increase in identifiable intangible assets due to the application of
purchase price accounting for assets to be acquired in the Acquisition:
</TABLE>
<TABLE>
<CAPTION>
FAIR MARKET ESTIMATED
VALUE ECONOMIC LIFE
----------- -------------
<S> <C> <C>
Workforce............................................................ $ 4,900 8 years
Contracts............................................................ 17,100 10 years
Spare Parts Annuity.................................................. 38,200 10-28 years
Patents.............................................................. 380 14-17 years
-------
$60,580
=======
(h) Represents the net increase in other assets, related to deferred financing costs, as a result of the
sale of the Notes.
</TABLE>
50
<PAGE> 53
<TABLE>
<S> <C> <C> <C>
(i) Represents adjustments to long-term debt as follows:
Current portion:
Delayed Draw Acquisition Loans........................................... $ 750
Repayment of Carter indebtedness......................................... (13,275)
---------
$ (12,525)
========
Long-term:
Sale of the Notes........................................................ $ 140,000
Delayed Draw Acquisition Loans........................................... 14,250
Repayment of the Existing Notes.......................................... (46,107)
---------
$ 108,143
========
(j) Represents adjustments to accrued liabilities as follows:
Elimination of accrued interest on the Existing Notes...................... $ (585)
Repayment of accrued interest on Carter indebtedness....................... (99)
---------
$ (684)
========
(k) Represents the elimination of accrued officer/shareholder bonuses of $2,006,
which was settled at the closing of the Acquisition.
(l) Represents deferred tax liability relating to the purchase price adjustments in Notes (e) and (g)
above at the Company's 40% statutory tax rate for the excess of estimated fair market over historical
value of property and equipment and identifiable intangible assets.
(m) Represents the elimination of Carter's shareholders' equity accounts.
</TABLE>
51
<PAGE> 54
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED AUGUST 2, 1997
(NINE MONTHS ENDED JUNE 30, 1997 FOR J.C. CARTER COMPANY, INC.)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ARGO-TECH CARTER (a) ADJUSTMENTS AS ADJUSTED
--------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues................................... $ 84,892 $ 35,047 $ -- $119,939
Cost of revenues............................... 48,697 17,291 468 (b) 66,456
-------- -------- ------- --------
Gross profit................................. 36,195 17,756 (468) 53,483
Selling, general, and administrative........... 7,210 6,799 -- 14,009
Research and development....................... 5,065 2,000 -- 7,065
Office of the President........................ -- 8,079 (8,079)(c) --
Amortization of intangible assets.............. 1,860 -- 3,815 (d) 5,675
-------- -------- ------- --------
Operating expenses........................... 14,135 16,878 (4,264) 26,749
-------- -------- ------- --------
Income from operations......................... 22,060 878 3,796 26,734
Interest expense............................... 9,222 770 6,074 (e) 16,066
Other, net..................................... (313) 261 -- (52)
-------- -------- ------- --------
Income (loss) before income taxes.............. 13,151 (153) (2,278) 10,720
Income tax provision (benefit)................. 5,299 (2,217) 2,771 (g)(h) 5,853
-------- -------- ------- --------
Income (loss) before extraordinary loss........ $ 7,852 $ 2,064 $(5,049) $ 4,867
======== ======== ======= ========
OTHER DATA:
Gross margin............................................................................ 44.6%
Adjusted EBITDA(i)...................................................................... $ 39,015
Adjusted EBITDA margin.................................................................. 32.5%
Depreciation, goodwill and deferred financing fee amortization.......................... $ 10,593
Capital expenditures.................................................................... 2,137
Cash interest expense(j)................................................................ 15,450
Ratio of Adjusted EBITDA to cash interest expense....................................... 2.5x
Ratio of earnings to fixed charges (l).................................................. 1.7x
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations
52
<PAGE> 55
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED AUGUST 2, 1997
(TWELVE MONTHS ENDED JUNE 30, 1997 FOR J.C. CARTER COMPANY, INC.)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
ARGO-TECH CARTER (a) Adjustments as Adjusted
--------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Net revenues................................... $109,836 $ 46,327 $ -- $ 156,163
Cost of revenues............................... 63,719 22,650 797 (b) 87,166
-------- -------- -------- ---------
Gross profit................................. 46,117 23,677 (797) 68,997
Selling, general, and administrative........... 9,938 8,749 -- 18,687
Research and development....................... 6,702 2,525 -- 9,227
Office of the President........................ -- 10,587 (10,587)(c) --
Amortization of intangible assets.............. 2,952 -- 5,087 (d) 8,039
-------- -------- -------- ---------
Operating expenses........................... 19,592 21,861 (5,500) 35,953
-------- -------- -------- ---------
Income from operations......................... 26,525 1,816 4,703 33,044
Interest expense............................... 11,717 1,018 8,687 (e) 21,422
Other, net..................................... (337) 386 -- 49
-------- -------- -------- ---------
Income (loss) before income taxes.............. 15,145 412 (3,984) 11,573
Income tax provision (benefit)................. 5,735 (2,208) 2,814 (g)(h) 6,341
-------- -------- -------- ---------
Income (loss) before extraordinary loss........ $ 9,410 $ 2,620 $ (6,798) $ 5,232
======== ======== ======== =========
OTHER DATA:
Gross margin.......................................................................... 44.2%
Adjusted EBITDA(i).................................................................... $ 49,909
Adjusted EBITDA margin................................................................ 32.0%
Depreciation, goodwill and deferred financing fee amortization........................ $ 14,881
Capital expenditures.................................................................. 3,989
Cash interest expense(j).............................................................. 20,601
Ratio of Adjusted EBITDA to cash interest expense..................................... 2.4x
Ratio of net debt to Adjusted EBITDA(k)............................................... 5.0x
Ratio of earnings to fixed charges (l)................................................ 1.5x
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations
53
<PAGE> 56
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED OCTOBER 26, 1996
(TWELVE MONTHS ENDED SEPTEMBER 30, 1996 FOR J.C. CARTER COMPANY, INC.)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ARGO-TECH CARTER (a) ADJUSTMENTS AS ADJUSTED
--------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Net revenues.............................. $ 96,437 $ 41,566 $ -- $ 138,003
Cost of revenues.......................... 57,882 21,163 670(b) 79,715
-------- -------- --------- ---------
Gross profit............................ 38,555 20,403 (670) 58,288
Selling, general, and administrative...... 10,036 6,872 -- 16,908
Research and development.................. 6,429 1,784 -- 8,213
Office of the President................... --...... 10,148 (10,148)(c) --
Amortization of intangible assets......... 2,842 -- 5,087(d) 7,929
-------- -------- --------- ---------
Operating expenses...................... 19,307 18,804 (5,061) 33,050
-------- -------- --------- ---------
Income from operations.................... 19,248 1,599 4,391 25,238
Interest expense.......................... 10,138 995 10,289(e) 21,422
Other, net................................ (142) 141 124(f) 123
-------- -------- --------- ---------
Income (loss) before income taxes......... 9,252 463 (6,022) 3,693
Income tax provision (benefit)............ 3,608 208 (397)(g)(h) 3,419
-------- -------- --------- ---------
Income (loss) before extraordinary loss... $ 5,644 $ 255 $ (5,625) $ 274
======== ======== ========= =========
OTHER DATA:
Gross margin........................................................................... 42.2%
Adjusted EBITDA(i)..................................................................... $ 41,455
Adjusted EBITDA margin................................................................. 30.0%
Depreciation, goodwill and deferred financing fee amortization......................... $ 14,709
Capital expenditures................................................................... 3,759
Cash interest expense(j)............................................................... 20,601
Ratio of Adjusted EBITDA to cash interest expense...................................... 2.0x
Ratio of net debt to Adjusted EBITDA(k)................................................ 6.0x
Ratio of earnings to fixed charges (l)................................................. 1.2x
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations
54
<PAGE> 57
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(a) Represents the results of operations of Carter for the period from October
1, 1996 through June 30, 1997, July 1, 1996 through June 30, 1997 and
October 1, 1995 through September 30, 1996.
<TABLE>
<CAPTION>
NINE TWELVE
MONTHS MONTHS FISCAL YEAR
ENDED ENDED ENDED
AUGUST 2, AUGUST 2, OCTOBER 26,
1997 1997 1996
---------- ---------- ------------
<S> <C> <C> <C> <C>
(b) Represents the addition to cost of goods sold for:
Expensing of Carter's tooling cost to conform to
Argo-Tech's accounting policies.......................... $ (21) $ 145 $ 18
Depreciation of property and equipment that was written up
to fair market value for the Acquisition and is being
depreciated over estimated useful lives ranging from 7 to
30 years................................................. 489 652 652
--------- ------- ---------
$ 468 $ 797 $ 670
========= ======= =========
(c) Office of the President expenses were incurred by Carter
for the benefit of the President and a director of
Carter. These expenses include salaries, benefits,
personal expenses and costs associated with operating and
maintaining personal assets such as a private airplane,
an airplane hangar, personal residences and numerous
automobiles. These expenses and assets will be terminated
or disposed of concurrent with the Acquisition in
accordance with the Carter Stock Purchase Agreement. Any
services which were provided by such individuals will be
assumed by existing officers of the Company with no
incremental costs. Accordingly, the Company believes it
is appropriate to exclude all Office of the President
expenses in determining the pro forma operating results
of the Company........................................... $ (8,079) $(10,587) $(10,148)
(d) Represents the incremental amortization due to:
Goodwill created as a result of the Acquisition which is
being amortized over 40 years............................ $ 800 $ 1,067 $ 1,067
Amortization of identifiable intangible assets resulting
from the Acquisition:
Workforce (8 years)........................................ 459 612 612
Contracts (10 years)....................................... 1,282 1,710 1,710
Spare Parts Annuity (10-28 years).......................... 1,255 1,673 1,673
Patents (14-17 years)...................................... 19 25 25
--------- ------- ---------
$ 3,815 $ 5,087 $ 5,087
========= ======= =========
</TABLE>
55
<PAGE> 58
<TABLE>
<CAPTION>
NINE TWELVE
MONTHS MONTHS FISCAL YEAR
ENDED ENDED ENDED
AUGUST 2, AUGUST 2, OCTOBER 26,
1997 1997 1996
--------- ------- ---------
<S> <C> <C> <C> <C>
(e) Represents the net effect on interest for pro forma
adjustments:
Interest expense related to the Notes incurred to finance
the Acquisition (rate of 8.625%).......................... $ 9,056 $ 12,075 $ 12,075
Amortization of deferred financing fees associated with the
purchase of the Notes..................................... 413 550 550
Increase resulting from the Delayed Draw Acquisition Loans
incurred to finance the Acquisition (assumed rate of
7.75%).................................................... 872 1,163 1,163
Interest expense related to Amended Credit Facility (assumed
rate of 7.75%)............................................ 5,522 7,363 7,363
Amortization of deferred financing fees associated with the
New Credit Facility....................................... 203 271 271
Eliminate historical interest expense on the Old Credit
Facility.................................................. (5,816) (7,708) (7,825)
Eliminate loan fee amortization and guarantee fees related
to the Old Credit Facility................................ (1,313) (1,813) (1,891)
Elimination of the interest expense incurred on the
refinanced Existing Notes................................. (2,093) (2,196) (422)
Elimination of historical interest expense related to Carter
indebtedness.............................................. (770) (1,018) (995)
--------- ------- ---------
$ 6,074 $ 8,687 $ 10,289
========= ======= =========
A 1/8% change in the variable interest rate on the Delayed
Draw Acquisition Loans and the Amended Credit Facility
would change the pre-tax interest expense by $138.
(f) Eliminate gain on sale of airplane.......................... -- -- $ 124
(g) Represents the elimination of the tax effect of changing
Carter's Subchapter S Corporation status to a C
Corporation, at the Company's 40% statutory tax rate...... $ 2,156 $ 2,373 $ (23)
(h) Represents the income tax effects, at the Company's 40%
statutory tax rate, of the pro forma adjustments described
in Notes (b), (c), (e) and (f).
(i) Adjusted EBITDA represents income from operations plus
non-cash charges as follows:
Income from operations...................................... $26,734 $ 33,044 $ 25,238
Depreciation and goodwill amortization...................... 9,977 14,060 13,888
Compensation expense -- ESOP................................ 2,304 2,805 2,329
--------- ------- ---------
Adjusted EBITDA............................................. $39,015 $ 49,909 $ 41,455
========= ======= =========
Argo-Tech's Adjusted EBITDA is not intended to represent cash flow from operations as defined by
generally accepted accounting principles and should not be considered as an alternative to net income
as an indicator of operating performance or to cash flow as a measure of liquidity. Argo-Tech has
included information concerning Adjusted EBITDA as it understands that it is used by certain investors
as one measure of a borrower's historical ability to service its debt. Adjusted EBITDA, as presented,
may not be comparable to similarly titled measures reported by other companies, since not all
companies necessarily calculate Adjusted EBITDA in an identical manner, and therefore is not
necessarily an accurate means of comparison between companies.
(j) Cash interest expense represents interest expense less amortization of deferred financing fees.
(k) Net debt represents long-term debt, including current portion, less cash and cash equivalents on a pro
forma as adjusted basis.
(l) For purposes of determining the ratio of earnings available to cover fixed charges, earnings consist of
income before taxes and the extraordinary loss plus fixed charges. Fixed charges consist of interest
on indebtedness including amortization of deferred financing fees.
</TABLE>
56
<PAGE> 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In fiscal 1996 on a pro forma basis, the aerospace business generated
approximately 83% of the Company's net revenues. The balance of the Company's
net revenues were generated from sales of ground fueling equipment, certain
industrial products and revenues from the operation of Heritage Business Park
(the "Business Park"). Approximately 77% of the aerospace revenues were derived
from sales to commercial OEMs and commercial aftermarket customers, while
military revenues represented approximately 23% of the Company's aerospace
revenues.
In fiscal 1996 on a pro forma basis, sales to commercial OEMs represented
approximately 34% of the Company's commercial aerospace revenues. As is
customary in the commercial aerospace industry, the Company incurs substantial
costs, for which it is generally not reimbursed, to design, test and qualify
original equipment for OEMs. Once qualified, OEM products generally are sold at
or below cost of production in anticipation of receiving orders for commercial
spare parts and overhaul services at significantly higher margins. Over the
approximately 25 year life cycle of an aircraft program, commercial spare parts
and overhaul services for products manufactured by the Company often generate
six or more times the aggregate net revenues of the OEM program.
In contrast to the practice in the commercial aerospace industry, the
Company is generally reimbursed for the design, test and qualification costs of
equipment used on military aircraft. Military original equipment shipments
generally are sold at cost plus a reasonable profit. Due to lower aircraft
utilization, military aftermarket sales are less significant than commercial
aftermarket sales. Aftermarket margins for military products are at a level
higher than original equipment shipments.
ARGO-TECH CORPORATION
GENERAL
The following should be read in conjunction with "Selected Financial and
Other Data of Argo-Tech Corporation" and the Financial Statements of the Company
and Notes thereto included elsewhere in this Prospectus. Argo-Tech's fiscal year
ends on the last Saturday of October and is identified according to the calendar
year in which it ends. For example, the fiscal year ended October 26, 1996 is
referred to as "fiscal 1996." All of the fiscal years discussed consisted of 52
weeks.
Argo-Tech's historical financial results are affected by a variety of
factors which impact the aerospace industry, in general, or Argo-Tech, in
particular. Significant factors are (i) the cyclicality of the commercial
aerospace industry, (ii) the funding of new aerospace product development
programs, (iii) the formation of Argo-Tech's ESOP in 1994 and (iv) Argo-Tech's
ownership of the Business Park.
During the period 1993 to 1995, the aerospace industry experienced a
significant downturn in its business cycle. During this period, Argo-Tech
initiated a workforce reduction (the "Workforce Reduction") of approximately
30%, including early retirement programs. In addition, Argo-Tech undertook
process improvement programs, which are ongoing, such as Argo-Tech's certified
operator and certified supplier programs (together with the Workforce Reduction,
known as "Cost Reductions"). As the aerospace industry has moved into its
recovery phase, the increase in volume coupled with the Cost Reductions has
allowed Argo-Tech to increase its absorption of fixed manufacturing costs
("Operating Leverage").
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DEVELOPMENT EXPENSE TRENDS
In connection with new aerospace product development programs, Argo-Tech
incurs significant research and development expenditures to design, test and
qualify main engine fuel pumps and accessories for engine and airframe OEMs.
Prior to 1990, these engine and airframe OEMs reimbursed Argo-Tech for a
majority of these research and development expenditures. Since 1990, commercial
OEMs have significantly reduced, and in many cases eliminated, the reimbursement
of these development programs, which has resulted in increased levels of
research and development expenditures funded by Argo-Tech. Research and
development expenditures are expensed as incurred.
ESOP
Argo-Tech established its ESOP in 1994 by purchasing 420,000 shares of
Parent Stock with the proceeds of a $16.8 million ten-year loan funded through
Argo-Tech's Old Credit Facility. The ESOP, which includes each of the
approximately 310 salaried employees, represents an approximate 30% ownership
interest in the Parent. GAAP treatment requires that non-cash ESOP compensation
expense and a corresponding increase in shareholders' equity be recorded
annually as shares held by the ESOP are allocated to participants and the loan
made to the ESOP is repaid. GAAP also requires that this non-cash ESOP
compensation expense be added back to net income in the determination of cash
flow from operations. The aggregate amount of such non-cash ESOP compensation
expense was $2.8 million, $2.3 million, $1.7 million and $0.8 million for the
twelve months ended August 2, 1997 and the fiscal years ended 1996, 1995 and
1994, respectively. The Company believes that its ESOP has been successful in
motivating and compensating its salaried employees on a cost-efficient basis.
BUSINESS PARK
Argo-Tech owns and operates the Business Park, a 150 acre, 1.8 million
square foot business park in Cleveland, Ohio. Argo-Tech acquired the Business
Park as part of the TRW Transaction in 1986. In 1990, Argo-Tech underwent a
corporate restructuring and disposed of substantially all of its operations
except for its aircraft accessories business and the Business Park. In
connection with this corporate restructuring, Argo-Tech entered into certain
lease and service agreements with the disposed of operations located in the
Business Park. The service agreements covered certain support functions,
including computerized information services, equipment maintenance, and certain
office administrative services. The service agreements ensured that the disposed
of businesses would have the necessary support functions to operate during a
four to seven year transition period until they became self sufficient. The
planned elimination of services to these tenants has resulted in a continual
reduction of service-related revenues during the transition period. In addition
to providing space and services to operations formerly owned by it, the Company
also leases space in the Business Park to other manufacturers, and is working to
increase its rental and other income from the Business Park.
EXPORT SALES
Argo-Tech's export sales are all denominated in U.S. dollars. Export sales
for fiscal years 1996, 1995 and 1994 were $44.1 million, $37.5 million and $37.2
million, respectively. Sales to Europe were $13.2 million, $10.1 million and
$10.3 million and export sales to all other regions, individually less than 10%,
were $30.9 million, $27.4 million and $26.9 million for fiscal years 1996, 1995
and 1994, respectively.
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RESULTS OF OPERATIONS
The following table presents, for the periods indicated, selected items in
Argo-Tech's consolidated statements of income as a percentage of net revenues.
<TABLE>
<CAPTION>
40 WEEKS
ENDED 39 WEEKS 52 WEEKS ENDED
AUGUST ENDED -------------------------------------------
2, JULY 27, OCTOBER 26, OCTOBER 28, OCTOBER 29,
1997 1996 1996 1995 1994
-------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit....................... 42.6% 40.1% 40.0% 37.4% 31.9%
Operating expenses................. 16.6% 19.4% 20.0% 20.0% 18.5%
Income from operations............. 26.0% 20.7% 20.0% 17.4% 13.4%
Interest expense................... 10.9% 10.7% 10.5% 13.8% 12.7%
Other, net......................... (0.4)% (0.1)% (0.1)% (0.7)% 0.1%
Income before income taxes......... 15.5% 10.1% 9.6% 4.3% 0.6%
Income tax provision............... 6.3% 4.4% 3.7% 1.8% 0.4%
Income before extraordinary
items............................ 9.2% 5.7% 5.9% 2.5% 0.2%
Extraordinary loss................. 1.8% -- -- -- --
Net income......................... 7.4% 5.7% 5.9% 2.5% 0.2%
</TABLE>
40 WEEKS ENDED AUGUST 2, 1997 COMPARED WITH 39 WEEKS ENDED JULY 27, 1996
Net revenues for the first 40 weeks of fiscal 1997 increased $13.4 million,
or 18.7%, to $84.9 million from $71.5 million for the first 39 weeks of fiscal
1996 due to an increase of $15.1 million for aerospace products offset by a $1.7
million decrease in revenues related to the Business Park. Commercial
aftermarket revenues, which represented 61.5% of net revenues, increased 32.8%,
or $12.9 million, to $52.2 million and commercial OEM revenues increased 11.8%,
or $2.3 million, to $21.8 million due to a continued increase in both airline
traffic and airline capital spending. Total military revenues remained steady at
$6.6 million. The decline in Business Park revenues from the prior fiscal year
was due to a planned reduction in the maintenance and other services offered to
tenants and a reduction in the rental rate and square footage requirements of a
major tenant's lease.
Gross profit for the first 40 weeks of fiscal 1997 increased $7.6 million,
or 26.6%, to $36.2 million from $28.6 million for the first 39 weeks of fiscal
1996. Gross margin improved to 42.6% for fiscal 1997 from 40.1% in fiscal 1996
as a result of a higher percentage of aftermarket revenues and improved
Operating Leverage based on the overall increase in net revenues.
Operating expenses for the first 40 weeks of fiscal 1997 were $14.1
million, a slight increase from $13.9 million for the first 39 weeks of fiscal
1996. Operating expenses decreased as a percentage of net revenues to 16.6% in
the first 40 weeks of fiscal 1997 from 19.4% in the first 39 weeks of fiscal
1996. This decrease was primarily the result of improved Operating Leverage.
Income from operations for the first 40 weeks of fiscal 1997 increased $7.3
million, or 49.3%, to $22.1 million from $14.8 million for the first 39 weeks of
fiscal 1996 and increased as a percentage of net revenues to 26.0% in the first
40 weeks of fiscal 1997 from 20.7% in the first 39 weeks of fiscal 1996. This
increase was due to higher net revenues and improved Operating Leverage.
Interest expense for the first 40 weeks of fiscal 1997 increased $1.6
million, or 21.1%, to $9.2 million from $7.6 million for the first 39 weeks of
fiscal 1996 due to the increase in the average amount of indebtedness
outstanding related to the redemption of preferred stock and payment of accrued
dividends in March 1997. See Note 2 to Consolidated Financial Statements
(unaudited) for Argo-Tech.
The income tax provision for the first 40 weeks of fiscal 1997 of $5.3
million represents an effective tax rate of 40.3% compared to 43.7% for the
first 39 weeks of fiscal 1996. The decrease in
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<PAGE> 62
the effective tax rate is primarily due to the impact of lower tax rates on the
Company's foreign sales corporation earnings.
The extraordinary loss for the first 40 weeks of fiscal 1997 of $1.5
million represents the write-off of unamortized debt issuance costs, net of
federal income tax benefits, related to the Old Credit Facility, which was
refinanced with the New Credit Facility on July 18, 1997.
Net income for the first 40 weeks of fiscal 1997 increased $2.2 million, or
53.7%, to $6.3 million, from $4.1 million for the first 39 weeks of fiscal 1996
primarily due to the factors discussed above.
FISCAL 1996 COMPARED TO FISCAL 1995
Net revenues for fiscal 1996 increased $9.7 million, or 11.2%, to $96.4
million from $86.7 million in fiscal 1995 due to an increased demand for
aerospace products. Commercial aftermarket revenues, which in fiscal 1996
represented 55.3% of net revenues, increased 6.8%, or $3.4 million, to $53.3
million from $49.9 million in fiscal 1995. Commercial OEM revenues, which
represented 27.4% of net revenues in fiscal 1996 increased 21.7%, or $4.7
million, to $26.4 million from $21.7 million in fiscal 1995, in each case
primarily driven by increased capital investment by Argo-Tech's commercial
airline customers. Total military revenues, which represented 8.8% of net
revenues in fiscal 1996, increased by 34.9% or $2.2 million, to $8.5 million
from $6.3 million in fiscal 1995, as a result of increased revenues relating to
the F119 actuator fuel pump and increased spare parts deliveries for C-5 and
F-15 aircraft. Business Park revenues in fiscal 1996 were $0.6 million lower
than in fiscal 1995 due to a planned reduction in the level of maintenance and
other services offered to tenants and a reduction of rental square footage
requirements by a major tenant. Approximately 45.7% of Argo-Tech's fiscal 1996
net revenues were attributable to export sales to foreign customers compared to
43.3% in fiscal 1995. Substantially all such sales were made in dollars.
Gross profit in fiscal 1996 increased $6.2 million, or 19.1%, to $38.6
million from $32.4 million in fiscal 1995. Gross margin improved to 40.0% in
fiscal 1996 from 37.4% in fiscal 1995 as a result of higher net revenues,
improved Operating Leverage and the continued benefits of Cost Reductions.
Operating expenses in fiscal 1996, while stable as a percentage of
revenues, increased $1.9 million, or 10.9%, to $19.3 million from $17.4 million
in fiscal 1995 as Argo-Tech added incremental customer support of $0.3 million
and increased the level of research and development expenditures by $0.3
million.
Income from operations in fiscal 1996 increased by $4.2 million, or 28.0%
to $19.2 million from $15.0 million and increased as a percentage of net
revenues from 20.0% in fiscal 1996 from 17.4% in fiscal 1995. Improved Operating
Leverage and the continued benefits of Cost Reductions initiated in prior years
were the primary reasons for the increase.
Interest expense in fiscal 1996 declined $1.8 million, or 15.1%, to $10.1
million from $11.9 million in fiscal 1995 primarily due to the lower average
level of outstanding indebtedness.
The income tax provision in fiscal 1996 of $3.6 million represents an
effective tax rate of 39.0% compared to 41.7% for fiscal 1995. The lower
effective income tax rate in fiscal 1996 is due to the impact of lower tax rates
on the Company's foreign sales corporation earnings and the effect of the
non-deductible amortization of goodwill in proportion to lower pre-tax income in
fiscal 1995.
Net income in fiscal 1996 increased $3.4 million, or 154.5%, to $5.6
million from $2.2 million in fiscal 1995 primarily due to the factors discussed
above.
FISCAL 1995 COMPARED TO FISCAL 1994
Net revenues in fiscal 1995 increased $7.0 million, or 8.8%, to $86.7
million from $79.7 million in fiscal 1994 due to increased aerospace revenues.
Commercial aftermarket revenues, which in fiscal 1995 represented 57.7% of net
revenues, increased 17.4%, or $7.4 million, to $49.9 million from $42.5 million
in fiscal 1994. Commercial OEM revenues, which in fiscal 1995 represented 25.0%
of
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net revenues, increased 8.0%, or $1.6 million, to $21.7 million, in each case
driven by increased product shipments. Total military revenues in fiscal 1995
which represented 7.3% of net revenues, decreased by 3.1%, or $0.2 million, to
$6.3 million from $6.5 million in fiscal 1994, as a result of schedule changes
for the Pratt & Whitney F119 engine program for the F-22 aircraft. Business Park
revenues in fiscal 1995 were lower than fiscal 1994 due to a planned reduction
in the level of maintenance and other services offered to tenants and a lower
rental rate of a major tenant's lease. Approximately 43.3% of Argo-Tech's fiscal
1995 net revenues were attributable to export sales to foreign customers
compared to 46.7% in fiscal 1994. Substantially all such sales were made in
dollars.
Gross profit in fiscal 1995 increased $7.0 million, or 27.6%, to $32.4
million from $25.4 million in fiscal 1994. Gross margin improved to 37.4% in
fiscal 1995 from 31.9% in fiscal 1994 as a result of an increase in commercial
aftermarket revenues as a percentage of total net revenues, improved Operating
Leverage and the continued benefits of Cost Reductions instituted in prior
periods.
Operating expenses in fiscal 1995 increased $2.6 million, or 17.6%, to
$17.4 million in fiscal 1995 from $14.8 million in fiscal 1994. Research and
development expenses increased $3.2 million in fiscal 1995 to $5.7 million from
$2.5 million in fiscal 1994 due to a higher level of program activity and the
continuing trend by commercial OEMs of reducing or eliminating funding for
development projects. Partially offsetting this increase was the non-recurrence
of $1.4 million in legal and other expenses related to the formation of the ESOP
in fiscal 1994.
Income from operations in fiscal 1995 increased $4.4 million, or 41.5%, to
$15.0 million from $10.6 million and increased as a percentage of net revenues
to 17.4% in fiscal 1995 from 13.4% in fiscal 1994. This increase was due to
higher net revenues, improved Operating Leverage, the continued benefits of Cost
Reductions and the non-recurrence of ESOP formation expenses in fiscal 1994.
Interest expense in fiscal 1995 increased $1.8 million, or 17.8%, to $11.9
million from $10.1 million in fiscal 1994, primarily due to a general rise in
interest rates and a slightly higher average amount of outstanding indebtedness.
The income tax provision in fiscal 1995 of $1.6 million represents an
effective tax rate of 41.7% compared to 61.7% for fiscal 1994. This provision
included state and local taxes and the taxes related to the non-deductible
amortization of goodwill, reduced by a tax credit on foreign sales corporation
earnings which are subject to lower tax rates.
Net income in fiscal 1995 increased $2.0 million to $2.2 million from $0.2
million in fiscal 1994, primarily due to the factors discussed above.
J.C. CARTER COMPANY, INC.
GENERAL
The following should be read in conjunction with "Selected Historical
Financial and Other Data of J.C. Carter Company, Inc." and the Financial
Statements of Carter and the Notes thereto included elsewhere in this
Prospectus. Prior to the consummation of the Acquisition, Carter's fiscal year
ended on December 31. Following the Acquisition, Carter's fiscal year will
conform to the fiscal year of the Company.
In addition to the cyclicality of the commercial aerospace industry and the
funding of new aerospace product development programs discussed above under
"-- Argo-Tech Corporation," Carter's historical financial results have also been
affected by certain selling shareholder expenses captioned under "Office of the
President" expenses. Office of the President expenses were incurred by Robert
Veloz, the President and Chief Executive Officer of Carter, and Harry S.
Derbyshire, a director of Carter. These expenses include salaries, benefits,
personal expenses and costs associated with operating and maintaining personal
assets such as a private airplane, an airplane
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<PAGE> 64
hangar, personal residences and numerous automobiles. These expenses and assets
will be terminated or disposed of concurrent with the Acquisition in accordance
with the Carter Stock Purchase Agreement. Any services which were provided by
such individuals will be assumed by existing officers of the Company with no
incremental costs. Accordingly, the Company believes it is appropriate to
exclude all Office of the President expenses in determining the pro forma
operating results of the Company.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, selected items in
Carter's consolidated statements of income as a percentage of net revenues.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
---------------- ---------------------------
1997 1996 1996 1995 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.................................. 49.4% 45.5% 49.3% 49.0% 51.0%
Office of the President....................... 25.3% 21.9% 21.0% 27.5% 20.6%
Other operating expenses...................... 23.8% 19.6% 22.3% 22.0% 21.8%
Income (loss) from operations................. 0.3% 4.0% 6.0% (0.5)% 8.6%
Interest expense.............................. 2.2% 2.2% 2.2% 2.3% 2.2%
Other expense, net............................ 0.9% 0.2% 0.5% 0.3% 1.0%
Income (loss) before income taxes............. (2.8)% 1.6% 3.3% (3.1)% 5.4%
Income tax provision (benefit)................ (9.4)% 0.2% 0.3% 0.5% 0.2%
Net income (loss)............................. 6.6% 1.4% 3.0% (3.6)% 5.2%
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
Net revenues for the six months ended June 30, 1997 increased $1.9 million,
or 8.6%, to $24.0 million from $22.1 million for the six months ended June 30,
1996 due to increased sales volume from aerospace products of $1.3 million and
ground fueling products of $0.8 million offset by a $0.2 million decline in
industrial marine products.
Gross profit for the six months ended June 30, 1997 increased $1.8 million,
or 17.8%, to $11.9 million for the six months ended June 30, 1997 from $10.1
million for the six months ended June 30, 1996 as a result of increased
aftermarket sales as a percentage of net revenues. As a result of this change in
product mix, gross margin in 1997 improved to 49.4% from 45.5% in 1996.
Other operating expenses for the six months ended June 30, 1997 increased
$1.3 million, or 29.5%, to $5.7 million from $4.4 million for the six months
ended June 30, 1996 primarily due to increases in engineering R&D expenses of
$0.5 million, as well as $0.3 million selling and administrative expenses of
Carter IMS, an acquisition completed in February 1997. Office of the President
expenses increased $1.3 million for the six months ended June 30, 1997, or 27.1%
to $6.1 million from $4.8 million in the six months ended June 30, 1996.
Interest expense remained flat at 2.2% of net revenues for each of the six
months ended June 30, 1997 and 1996.
Carter received an income tax benefit of $2.2 million as Carter voluntarily
terminated its Subchapter S tax status effective January 1, 1997.
Net income for the six months ended June 30, 1997 increased $1.3 million to
$1.6 million from $0.3 million for the six months ended June 30, 1996 to the
factors discussed above .
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1996 COMPARED TO 1995
Net revenues in 1996 increased $4.5 million, or 11.3%, to $44.5 million
from $40.0 million in 1995 due to increased volume in aerospace and ground
fueling sales of $4.0 million and $1.4 million, respectively, offset by a $0.9
million decline in industrial marine sales.
Gross profit in 1996 increased $2.3 million, or 11.7%, to $21.9 million
from $19.6 million in 1995 due to increased sales volume. Gross profit as a
percentage of sales improved to 49.3% in 1996 from 49.0% in 1995.
Other operating expenses in 1996 increased to $9.9 million from $8.8
million in 1995 due to increased marketing expenses. Office of the President
expenses decreased $1.7 million in 1996, or 15.5% to $9.3 million from $11.0
million in 1995.
Interest expense in 1996 remained relatively flat at 2.2% of net revenues
compared to 2.3% of net revenues in 1995.
Carter was organized under Subchapter S of the Internal Revenue Code which
includes the Company's income in the shareholder's own income for federal income
tax purposes. The income tax provision recognized is for federal tax on built-in
gains recognized on the disposition of any prior appreciated C-Corporation
assets within 10 years from the first day of the S-Corporation's first tax year
and state income taxes offset by a manufacturing investment tax credit.
Net income in 1996 increased $2.7 million to $1.3 million from a loss of
$1.4 million in 1995 primarily due to the factors discussed above.
1995 COMPARED TO 1994
Net revenues in 1995 increased $1.3 million, or 3.4%, to $40.0 million from
$38.7 million in 1994 due to $4.9 million in increased business volume from
aerospace sales, partially offset by decreases in industrial marine sales of
$0.3 million and ground fueling sales of $3.3 million. Increased ground fueling
competition caused the Company to reduce prices.
Gross profit in 1995 decreased $0.1 million to $19.6 million from $19.7
million in 1994. Gross profit as a percentage of sales in 1995 declined to 49.0%
from 51.0% in 1994 due to competitive pricing pressure in the ground fueling
product lines.
Other operating expenses in 1995 increased to $8.8 million from $8.5
million in 1994. Office of the President expenses increased $3.0 million in
1995, or 37.5% to $11.0 million from $8.0 million in 1994.
Interest expense in 1995 remained relatively flat at 2.3% of net revenues
compared to 2.2% of net revenues for 1994.
The income tax provision recognized is for federal tax on built-in gains
recognized on the disposition of any prior appreciated C-Corporation assets
within 10 years from the first day of the S-Corporation's first tax year offset
by a manufacturing investment tax credit.
Net income in 1995 decreased to a loss of $1.4 million from $2.0 million in
1994 primarily due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company that derives all of its operating income
from its subsidiaries. As a result, Argo-Tech's primary source of liquidity for
conducting business activities and servicing its indebtedness has been cash
flows from operating activities, while Carter's liquidity has historically been
provided by both operating activities and revolving line of credit borrowings.
After the Acquisition, the primary source of liquidity is expected to be cash
flows from operating activities.
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In July 1997, Argo-Tech refinanced its Old Credit Facility with the New
Credit Facility, consisting of a seven-year $100.0 million term loan of which
$95.0 million remains outstanding, a seven-year $20.0 million revolving credit
facility and the seven-year $15.0 million Delayed Draw Acquisition Loans. In
connection with the July refinancing, the Company recorded an extraordinary
charge of $2.5 million, consisting primarily of the write-off of unamortized
financing costs.
Concurrently with the consummation of the Acquisition, the Company amended
the New Credit Facility to allow for, among other things, the Acquisition and
the issuance of the Notes. Under the Amended Credit Facility the Company has
outstanding $110.0 million principal amount of Term Loans and also has available
the seven-year $20.0 million Revolving Credit Facility. The Amended Credit
Facility contains a number of covenants that, among other things, limit the
Company's ability to incur additional indebtedness, pay dividends, prepay
subordinated indebtedness, dispose of certain assets, create liens, make capital
expenditures, make certain investments or acquisitions and otherwise restrict
corporate activities. The Amended Credit Facility also requires the Company to
comply with certain financial ratios and tests, under which the Company will be
required to achieve certain financial and operating results. Interest will be
calculated, at the Company's choice, using an alternate base rate (ABR) or
LIBOR, plus a supplemental percentage determined by the ratio of debt to EBITDA.
The interest rate is not to exceed ABR plus 1.00% or LIBOR plus 2.00%.
In March 1997, the Company repurchased all of the preferred stock reflected
on the Company's financial statements, totalling $25.9 million, along with
accrued dividends of $19.3 million, in exchange for $41.1 million of
subordinated notes and cash of $4.1 million. Interest on the notes is payable
quarterly at 11.25% and the notes are due on December 31, 2007. The Company also
has $5.0 million of notes payable, which are due December 31, 2007, pay interest
quarterly at the prime rate and are subordinate to the Company's senior debt.
These Existing Notes, together with accrued interest thereon of approximately
$0.6 million, will be paid with the proceeds of the Offering.
The Company has entered into three interest rate swap agreements with a
financial institution which fixes the interest rate on the notional amounts of
$20.0 million at 5.80% and $20.0 million at 5.715% through October 1997, and
$30.0 million at 6.66% through October 2000. The amount of the swap agreements
for fiscal years 1994, 1995, 1996 and the nine month period ended August 2, 1997
were $40.0 million, $40.0 million, $70.0 million and $30.0 million,
respectively. The gains/losses were recognized as interest expense and amounted
to a $0.7 million loss in fiscal year 1994, a $0.1 million gain in fiscal year
1995, a $0.4 million loss in fiscal year 1996, and a $0.3 million loss for the
nine month period ended August 2, 1997. In July 1997, the Company refinanced its
Old Credit Facility and unwound $40.0 million of the swap agreements which were
to terminate in October 1997. The remaining $30.0 million swap was transferred
to another financial institution which fixed the rate at 6.785% through October
2000. The Company has no other derivative financial instruments.
Cash Flows from Operating Activities. At Argo-Tech, cash provided by
operating activities for the first 40 weeks of fiscal 1997 increased $1.8
million to $8.8 million primarily as a result of improved operating results
offset by an increase in receivables and inventory. Cash provided by operations
for Argo-Tech for the fiscal years 1994, 1995, and 1996 was $17.5 million, $17.8
million, and $15.9 million, respectively. Cash flows at Argo-Tech for fiscal
1994 were favorably impacted primarily from a reduction of inventory and an
increase in accrued liabilities. Cash flow from operations at Argo-Tech for
fiscal 1995 increased as a result of improved operating results and a continued
reduction of working capital requirements. In fiscal 1996, cash flow from
operations at Argo-Tech decreased due to an increase in working capital
requirements, primarily the non-cash recognition of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," offset by an
increase in operating results. For Carter, cash used in operating activities for
the first six months of 1997 was $1.5 million compared to cash provided by
operating activities of $0.5 million for the first six months of 1996. Carter's
net income of $1.6 million was offset by an increase in deferred income taxes of
$2.2 million and an increase in inventory of $1.1 million. Cash provided by
(used in) operations for the years ended December 31, 1994, 1995, and 1996 were
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$1.0 million, ($1.1) million and $1.5 million, respectively. Cash flows for
Carter in 1994 were impacted by favorable operating results and a reduction of
accounts receivable offset by an increase in inventory and a decrease in
accounts payable and accrued liabilities. Cash flow used in operations for
Carter in 1995 was a result of unfavorable operating results and increases in
accounts receivable, inventory and activity on uncompleted contracts offset by
an increase in accounts payable and accrued liabilities. In 1996, Carter's cash
flow increased primarily due to an increase in operating results.
Cash Flows from Investing Activities. Argo-Tech's expenditures for
property, plant and equipment were $1.8 million for each of the first 40 of
fiscal 1997 and the first 39 weeks of fiscal 1996. This reflects a normal level
of investing in capital requirements necessary to maintain the efficiency and
manufacturing capabilities of the Company. For the fiscal year ending October
25, 1997, Argo-Tech's capital expenditures are expected to total approximately
$3.5 million. Argo-Tech's expenditures for property, plant and equipment were
$1.5 million, $2.9 million, and $3.4 million for fiscal years 1994, 1995 and
1996, respectively. The increase in spending from fiscal 1994 to fiscal 1995
represents a return to the normal level of investing in capital requirements
following the end of the industry downturn. Carter's expenditures for property,
plant and equipment were $0.5 million, including the acquisition of IMS, and
$0.3 million for the six months ended June 30, 1997 and 1996, respectively.
Carter's expenditures for property, plant and equipment were $0.8 million, $0.7
million, and $1.1 million for the years ended December 31, 1994, 1995, and 1996,
respectively.
Cash Flows from Financing Activities. For Argo-Tech, cash used in
financing for the first 40 weeks of fiscal 1997 was $13.2 million compared to
$9.7 million for the first 39 weeks of fiscal 1996. Activity in 1997 at
Argo-Tech consisted of borrowing $41.1 million to redeem the preferred stock and
pay accrued interest totaling $45.2 million, repaying $7.6 million, net of
additional borrowings, and $1.5 million in deferred financing fees on the New
Credit Facility. Cash used in financing at Argo-Tech for the fiscal years 1994,
1995, and 1996 was $5.9 million, $19.7 million, and $11.0 million, respectively.
In fiscal 1994, Argo-Tech increased its long-term debt by $10.0 million, net of
repayments, which was used to purchase a portion of the 420,000 shares of Class
A common stock for the ESOP. In fiscal 1995 and fiscal 1996 cash was used at
Argo-Tech to make scheduled repayments as well as voluntary pre-payments of its
long-term debt. At Carter, cash provided by financing activities was $2.2
million for the six months ended June 30, 1997 and represented a net borrowing
on Carter's credit line of $2.8 million offset by a payment of $0.6 million on
other debt. Carter's cash provided by (used in) financing for the years 1995 and
1996 was $2.0 million and ($1.2) million, respectively. In 1994, a repayment of
a note receivable from an officer of Carter and proceeds from bank borrowings
was offset by payments on Carter's long-term debt and credit line. In 1995, a
new term loan agreement and additional borrowings on the credit line were used
to repay an existing term loan and provide cash for operations and investing
activities. In 1996, cash was used primarily to repay obligations on the term
loan.
Capital Expenditures. Pro forma for the Acquisition, the Company's capital
expenditures for fiscal 1997 aggregated $3.5 million, which included over 200
projects. Most of these projects related to maintaining existing facilities and
equipment. For fiscal 1998, capital expenditures are estimated to total $4.4
million to support approximately 200 projects. The majority of these projects
will be for continued maintenance of facilities and equipment in support of the
current operating activities of the Company. Capital expenditures are financed
with cash generated from operations. The Company currently has no material
commitments for capital expenditures.
The Company believes that cash flow from operations will provide adequate
funds for its working capital needs, planned capital expenditures and debt
service obligations. The Company's ability to fund its operations, make planned
capital expenditures, and to make scheduled payments on its indebtedness depends
on its future operating performance and cash flow, which, in turn are subject to
prevailing conditions and to financial, business and other factors, some of
which are beyond its control.
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ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Company will adopt this
standard during fiscal 1998. Such adoption is not expected to have a material
effect on the Company.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
statement requires that a public business enterprise report financial and
descriptive information about its reportable operating segments such as a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. The Company will adopt this standard during fiscal 1998.
Such adoption is not expected to have a material effect on the Company.
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BUSINESS AND PROPERTIES
GENERAL
The Company is a leading designer, manufacturer and servicer of high
performance fuel flow devices for the aerospace industry. The Company provides a
broad range of products and services to substantially all commercial and
domestic military engine and airframe manufacturers, to airlines worldwide and
to the U.S. and certain foreign militaries. The Company is the world's leading
supplier of main engine fuel pumps to the commercial aircraft industry and is a
leading supplier of airframe products and aerial refueling systems. Main engine
fuel pumps are precision mechanical pumps, mounted to the engine, that maintain
the flow of fuel to the engine at a precise rate and pressure. Airframe products
include fuel pumps and airframe accessories, which are used to transfer fuel to
the engine systems and to shift and control fuel between tanks in order to
maintain aircraft balance. Aerial refueling systems permit military aerial
tankers to refuel fighter, bomber and other military aircraft while in flight.
The Company is also a leading manufacturer of components for ground fueling
systems and estimates that one or more of its fueling hydrants, couplers and
nozzles are installed in over 65% of major commercial airports worldwide. Ground
fueling systems transfer fuel from fueling trucks and underground tanks to the
underwing fuel receptacle of the aircraft. Sales to OEMs provide the Company
with a platform for its substantial aftermarket business, which accounts for the
major component of its net revenues. The Company's aftermarket business provides
repair and overhaul services and distributes spare parts to its commercial and
military customers worldwide.
As of December 31, 1996, the Company's main engine fuel pumps were used in
approximately 8,200, or two-thirds, of the large commercial aircraft in service
throughout the world. In addition, during 1996, the Company received orders for
approximately 75% of all new main engine fuel pumps ordered by large commercial
aircraft engine manufacturers worldwide. The Company is the sole source supplier
of main engine fuel pumps for all CFM56 series engines, which were selected for
installation on approximately 61% of all large commercial aircraft ordered in
1996. This engine powers the Airbus A-319, A-320, A-321 and A-340 and Boeing 737
aircraft. The Company is also the sole source supplier of main engine fuel pumps
for all engines used on the Boeing 777 aircraft.
Complementing its position as a leading supplier of main engine fuel pumps,
the Company estimates that one or more of its airframe fuel pumps or accessories
are installed on over 80% of all large commercial and U.S. designed military
aircraft currently in use. Aerial refueling components manufactured by the
Company are installed on every U.S. designed military aircraft equipped with
aerial refueling capabilities. In addition, ground fueling components
manufactured by the Company have been selected for use in all nine of the major
commercial airports constructed in the past ten years, including the recently
completed Denver International Airport and the Hong Kong International Airport,
which is currently under construction. The Company also produces and services
LNG pumps and operates a materials laboratory and a business park in Cleveland,
Ohio, where the Company maintains its headquarters and primary production
facilities.
Since prior to 1992, until the acquisition of Carter, the Company was
primarily a manufacturer of main engine fuel pumps. In September 1997, the
Company expanded its product lines through the acquisition of the outstanding
capital stock of Carter, a California corporation, for $107 million in cash.
Carter's product lines include airframe pumps and accessories, military aerial
refueling systems and other fuel system components such as valves and ground
fueling components, as well as the production and service of LNG pumps.
Pro forma for the Acquisition, for the twelve month period ended August 2,
1997, the Company generated net revenues, income from operations and Adjusted
EBITDA of $156.2 million, $33.0 million and $49.9 million, respectively. For the
same period, on a pro forma basis, aerospace products and aftermarket sales
accounted for approximately 85% and 49% of the Company's net revenues,
respectively.
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INDUSTRY OVERVIEW
Aerospace
The airline industry has progressed through a low point in its business
cycle and is currently in a strong recovery phase as all key indicators of
demand -- the global economy, airline traffic and profitability, aircraft
utilization and firm aircraft orders -- remain favorable. According to Boeing's
1997 Current Market Outlook (the "Boeing Report"), world air traffic grew at a
rate of 6.7% in 1996 and is expected to increase by an average of 5.5% per year
over the next ten years, driven by increased travel outside the U.S.,
particularly in developing areas such as China and the Asia Pacific region. The
Airline Monitor reports that commercial airlines are currently experiencing
historically high passenger capacity ratios of approximately 70%, which suggest
that the industry is bordering on a capacity shortage. This potential shortage
is evidenced by increased demand for new aircraft as well as for spare parts and
repair and overhaul services. Moreover, prolonged airline retirements of
existing aircraft as well as conversions from retired commercial passenger to
freight carrier service can extend the normal life cycle of an aircraft from 25
years to 35 years, which in turn increases and extends demand for aftermarket
services. Management believes that these favorable industry conditions will
continue for the near term.
Unlike commercial aerospace demand which has been susceptible to normal
business cycles, demand for military aerospace products is primarily driven by
the requirements of the defense industry and Government budgetary constraints.
In addition, demand is tied to specific military aircraft programs which
typically call for steady, low-rate production volumes. Due to lower aircraft
utilization, military aftermarket sales are less significant than commercial
aftermarket sales.
Manufacturers of airframe and engine parts and components are required to
obtain regulatory airworthiness certification by the FAA in the case of products
used on commercial aircraft, by the U.S. Department of Defense in the case of
military aircraft, or by similar agencies in most foreign countries. This costly
and time consuming certification process involves testing both the airframe and
the engine to ensure compliance with safety and performance requirements.
Because replacement parts for airframe and engine products must also be
certified, these parts are almost exclusively provided by the original
manufacturer of the product. Moreover, guidelines and regulations established by
various Government agencies, OEMs and commercial airlines require that certain
components be tested and inspected at a certified repair facility after logging
specified levels of flight hours. Other components are tested as necessary to
monitor performance levels and are repaired and overhauled when a performance
degradation is detected. Since most modern aircraft have a useful life of 25
years or more, and require regular maintenance, the repair and overhaul of
airframe and engine components and sales of replacement parts generally provide
a continuous source of revenue for the original manufacturer. Over the life
cycle of an aircraft program, commercial spare parts and overhaul services often
generate six or more times the aggregate sales of OEM programs at significantly
higher margins.
In accordance with commercial aviation industry practice, competition among
airframe and engine component suppliers occurs at the time the airframe or
engine OEM makes its initial installation decision. In today's competitive
environment, commercial OEMs rarely pay for the development costs of new
components. To win selection of their products, airframe and engine component
suppliers customarily make significant investments in new product designs. In
some instances, component manufacturers have underwritten portions of the
development costs of new airframe or engine systems in order to secure a
position on the new system for several of their components.
Faced with a permanent decline in defense spending, the aerospace and
defense industry has undergone significant consolidation over the past five
years with major companies such as Martin Marietta Corp., Grumman Corp., Vought
Aircraft Co. and the defense businesses of GE, Loral Corp., Rockwell
International Corp. ("Rockwell"), Texas Instruments Inc. and Westinghouse being
acquired to form three dominant U.S. aerospace and defense firms: Boeing,
Lockheed Martin Corp.
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<PAGE> 71
("Lockheed Martin") and Raytheon Company ("Raytheon"). Boeing, the world's
largest commercial aerospace company, purchased the defense business of Rockwell
in 1996 and then merged its operations with McDonnell Douglas Corporation
("McDonnell Douglas") on August 1, 1997. The addition of McDonnell Douglas, a
leading military contractor and the largest producer of military aircraft, is
expected to significantly improve Boeing's competitive posture in the defense
sector. The combined company is expected to have annual revenues of
approximately $48 billion of which 60% will be commercial and 40% military,
compared to Boeing's 80-85% commercial revenues prior to the merger. In response
to objections raised by the European Commission, Boeing has agreed to maintain
Douglas Aircraft Company as a separate legal entity for ten years and to commit
itself not to profit from its relationships with suppliers in order to obtain
preferential treatment through its expanded purchasing power. In addition,
Lockheed Martin and Raytheon have announced transactions, still awaiting certain
regulatory approvals which will result in further consolidation in the aerospace
and defense industry. Lockheed Martin, with its pending acquisition of Northrop
Grumman Corp. ("Northrop") is expected to have a significant presence in
aerospace and defense electronics with combined annual revenues of approximately
$37 billion while Raytheon, with its pending merger with Hughes Defense, is
expected to have annual revenues of approximately $20 billion.
Ground Fueling
The demand for ground fueling products is directly related to the
construction and expansion of airports, the volume of air travel and the
maintenance and usage practices with which ground fueling products are used. As
detailed above, the Boeing Report projects that world air travel will continue
to grow. The Company believes, based on industry sources, that major investments
in airport expansion will be required to provide and support adequate
infrastructure. Airport expansion has already begun to take place in
international markets. This increase in expansion results in greater demand for
ground fueling components. For example, ground fueling components manufactured
by the Company have been selected for use in all nine of the major commercial
airports constructed in the past ten years, including the recently completed
Denver International Airport and the Hong Kong International Airport, which is
currently under construction.
COMPETITIVE STRENGTHS
The Company believes it has a strong competitive position as a result of
the following factors:
- Strong Industry Position and Large Existing Installed Base. The Company
has the largest installed base of large commercial main engine fuel pumps
(approximately 30,000) in the aerospace industry. The Company also has an
installed base of over 215,000 military engine and airframe pumps and
accessories; 145,000 other engine pumps and airframe accessories,
including fuel gear motors and small main engine fuel pumps for
helicopters, turboprop and business aircraft; and 5,800 aerial refueling
components. This extensive installed base provides the Company with
significant opportunities for aftermarket sales of spare parts and repair
and overhaul services. Manufacturers of aerospace parts and components
are required to obtain airworthiness certification by the FAA in the case
of products used on commercial aircraft, by the United States Department
of Defense (the "U.S. Department of Defense") in the case of products
used on U.S. military aircraft, or by similar agencies in most foreign
countries. Such regulatory restrictions, which limit the access of other
manufacturers to the aftermarket, contribute to significantly higher
margins on commercial spare parts and overhaul services.
- Technological Leadership/New Product Development. Management believes
that the Company is a technological leader in its industry. The Company
maintains its technological leadership by operating state-of-the-art
facilities and employing over 110 engineers. The Company also staffs an
on-site design engineer at two of its major OEM customers. These on-site
customer engineers, in combination with its engineering and design
staffs, assist the
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<PAGE> 72
Company in the development of innovative products which address the needs
and requirements of its customers and enhances its ability to gain early
entrant advantages. As a result of this technological leadership the
Company's main engine fuel pumps have been selected for 22 of the 33
large commercial aircraft engine programs put into production over the
last 20 years. For example, the Company is the only manufacturer to win a
new production contract for main engine fuel pumps from Rolls-Royce, PLC.
("Rolls-Royce") since 1988 and from General Electric Company ("GE") since
1989. In addition, with the aid of its aftermarket customers the Company
recently replaced the incumbent main engine fuel pump supplier on both
the GE CF34-8C (Canadair RJ700) and the Rolls-Royce RB211-535 (Boeing
757) engine programs, despite the industry norm against such
replacements.
Management also believes that its experience with engine systems for
use on airframes ranging from the Cessna Aircraft Company ("Cessna")
Citation to the Boeing 777, is a competitive advantage that enhances the
Company's ability to effectively meet the technical requirements of all
new engine system designs.
In connection with new aerospace product development programs,
Argo-Tech incurs significant research and development expenditures to
design, test and qualify main engine fuel pumps and accessories for
engine and airframe OEMs. Prior to 1990, these engine and airframe OEMs
reimbursed Argo-Tech for a majority of these research and development
expenditures. Since 1990, commercial OEMs have significantly reduced, and
in many cases eliminated, the reimbursement of these development
programs, which has resulted in increased levels of research and
development expenditures funded by Argo-Tech. Research and development
expenditures by the Company are expensed as incurred, and for the fiscal
years 1994, 1995 and 1996, such expenses totaled $2.5 million, $5.7
million, and $6.4 million, respectively. In addition, customer sponsored
research and development expenditures for the fiscal years 1994, 1995 and
1996 totaled $0.8 million, $0.9 million and $1.6 million respectively.
- Strong Relationship with Customers. The Company has developed strong
relationships with its OEM customers (including GE, Pratt & Whitney and
Rolls-Royce), airline customers (including American Airlines, Lufthansa,
Japan Air Lines and United Airlines) and freight carrier customers
(including Federal Express and United Parcel Service). Specifically, the
Company has been a major supplier of main engine fuel pumps to Pratt &
Whitney for over 40 years, and has maintained a relationship with United
Airlines since 1962. Management believes that the Company's reputation
for quality and service in the aftermarket has further solidified its
strong relationships with its airline and freight carrier customers. In
addition to purchasing parts and services in the aftermarket, these
customers are also influential in the engine OEM supplier selection
process enhancing the Company's ability to secure positions on new engine
platforms.
Management believes that Argo-Tech's relationships with its OEM
customers will enhance Carter's ability to sell products to existing
Argo-Tech customers. For example, management expects to introduce
Carter's cross-feed and shut-off valves to Argo-Tech's existing OEM
engine customers such as GE, Pratt & Whitney and Rolls-Royce. The Company
believes similar opportunities exist to increase sales of Argo-Tech
products to Carter's customers. For example, management expects to
introduce Argo-Tech airframe pumps to Carter's business and regional jet
OEM customers such as Canadair, Cessna, Gulfstream and Lear.
- Strong Core Competencies. The Company has developed strong core
competencies that management believes will enable it to improve its
position as a leading aerospace component supplier and provide
opportunities for growth outside its current product lines. These core
competencies include: (i) operational skills for low volume manufacturing
of high precision fluid flow devices, (ii) the capability to rapidly
design unique solutions to difficult fluid flow
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problems, (iii) skill and experience in meeting the demanding
specifications of aerospace customers, the FAA, the U.S. Department of
Defense and other regulatory bodies, and (iv) skill and experience in the
design of integrated fuel systems and subsystems. These core competencies
have enabled the Company to become the sole source supplier for a
substantial number of aerospace programs. Management also believes that
these core competencies will allow the Company to develop additional fuel
system and other high precision products for use throughout the aerospace
industry.
- Experienced Management Team. Argo-Tech's Chairman and CEO, Michael
Lipscomb, and five other members of senior management, have been with
Argo-Tech or its predecessor since 1980. Under Mr. Lipscomb's leadership,
Argo-Tech has reduced inventory levels, improved quality and on-time
performance and reduced manufacturing lead times, all of which have
contributed to significant increases in gross margins, which have grown
from 28.5% for fiscal 1992 to 42.6% for the nine months ended August 2,
1997.
BUSINESS STRATEGY
The Company's strategy is to maintain its leadership position and to grow
through the expansion of its product lines and the pursuit of strategic
acquisitions. This strategy includes the following key components:
- Expansion of Product Lines. The Company plans to apply its core
competencies in the aerospace business and to take advantage of its
strong reputation and relationships with its customers to expand into
specific industrial markets. The Company has utilized its expertise in
main engine fuel pump technology to develop industrial engine power
generation applications, and plans to capitalize on Carter's expertise in
other industrial applications. The Company's strong relationships with
GE, Pratt & Whitney and Rolls-Royce have already led to development and
production contracts for industrial products such as lube and scavenge
pumps and fluid flow dividers. In addition, the high quality and
reliability of the Company's main engine fuel pumps have prompted several
customers to use the Company's components on certain of their industrial
turbine engines. For example, Company-designed and manufactured
components are or will be installed on Westinghouse, Pratt & Whitney, GE
and Rolls-Royce land based power generation applications. The Company
anticipates further developing this business by introducing Carter's
products to these customers.
- Aerospace Growth through Acquisitions. The Company plans to pursue
strategic acquisitions in the aerospace and industrial fluid flow device
industries in order to capitalize on the trend for development of
airframe and engine fluid flow systems that will result in increased
reliance on integrated systems providers. For example, the Acquisition
expands the Company's product lines to include aerial refueling
components, aerospace valves and other fuel transfer control components
and enhances its base from which to design, manufacture and deliver a
broader range of fuel transfer systems and components. While the Company
is currently evaluating, and will continue to evaluate other acquisition
opportunities, there are no pending agreements or understandings
regarding acquisitions.
- Enhancement of Operating Efficiencies. Management constantly reviews the
Company's operations for opportunities to further reduce costs and
increase manufacturing efficiencies through improved utilization of
production facilities, continual rationalization of the vendor base and
more efficient human resource allocation. Continued enhancements of
operating efficiencies include the transfer of certain production to
absorb fixed overhead, the installation of integrated computer systems at
its Costa Mesa Facility, strengthening of the certified operator and
vendor programs and the reassignment of some engineering resources to the
development of new products and technologies.
- Ground Fueling Growth. The Company intends to devote significant
resources to the enhancement of sales, marketing and development of
ground fueling products. The Company
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has recently developed digital pressure control valves that incorporate a
microprocessor to enhance fuel flow control and accurately measure the
pressure in an aircraft's fuel tank during fueling, allowing for reduced
fueling time. Although these products have been available for less than a
year, the Company has already supplied over 35 systems to various
locations around the world, including the Middle East and Latin America.
In addition, the Company has identified three new potential product
applications for its ground fueling technology: railroad fluid transfers,
fueling of off-road construction and mining equipment and LNG nozzles and
receptacles used on alternative fuel vehicles. Management believes that
these potential product applications could significantly increase the
Company's ground fueling sales.
PRODUCTS
Aerospace OEM
Main Engine Fuel Pumps. Main engine fuel pumps are precision mechanical
pumps, mounted to the engine, that maintain the flow of fuel to the engine at a
precise rate and pressure. All Argo-Tech main engine fuel pumps are designed at
the Cleveland Facility. These pumps consist of an aluminum body which is cast by
one of two selected certified subcontractors. The Company then machines the
casting, adds a variety of gears and other components, and performs rigorous
testing at the Cleveland Facility. Large main engine fuel pumps vary in size
according to the thrust power of the engine for which they are designed, and are
typically sold to OEMs at a cost ranging from $8,000 to $17,000 per unit.
In 1996, the Company received orders for approximately 75% of all new large
main engine fuel pumps ordered by large commercial aircraft engine manufacturers
worldwide. The Company is the sole source supplier of main engine fuel pumps for
all CFM56 series engines, one of the most popular series of large commercial
aircraft engines used today. The CFM56 series engines, which power the Airbus
A-319, A-320, A-321 and A-340 and the Boeing 737 aircraft, were installed on
approximately 61% of all commercial aircraft ordered in 1996. The Company is
also the sole source supplier of main engine fuel pumps for all engines used on
the Boeing 777 aircraft.
In 1992 the Company expanded its market to include large regional and
business jet applications by securing the BR710 engine program, which is used on
the high-end Canadair Global Express and the Gulfstream V aircraft. In 1996, the
Company added to its growing base of regional and business jet applications by
winning the GE CF34-8C engine program, which is used on the Canadair RJ700
aircraft.
As shown in the following chart, the Company's main engine fuel pumps are
used across the full spectrum of commercial engine designs. The Company believes
its experience with engine systems all sizes and performance characteristics is
a competitive advantage in the bidding process to become a supplier of
components for newly designed engine systems.
This chart sets forth the following information:
- All airframes currently in commercial service, denoting those which are
not currently in production;
- The size of such airframes, categorized by engine thrust expressed in
pounds; and
- The engines in service on such airframes for which the Company and its
three primary competitors supply main engine fuel pumps. Engines that
remain in service, but are no longer in current production, are denoted
as such.
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
ENGINE INSTALLED PUMP AND ENGINE TYPE(4)
THRUST ----------------------------------------------------------------------------
(X 1,000 LBS) AIRFRAME ARGO-TECH PUMP SUNDSTRAND PUMP LUCAS PUMP CECO PUMP
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
Cessna Citation Williams FJ44 Pratt & Whitney Allison
Canada Engine
PW500 AE 3007
------------------------------------------------------------------------------------------------------
Raytheon Premier 1 Williams FJ44
------------------------------------------------------------------------------------------------------
Beechcraft Beech Jet Pratt & Whitney
Canada JT15D
------------------------------------------------------------------------------------------------------
British Aerospace Allied Signal
BAe125 TFE-731
------------------------------------------------------------------------------------------------------
Less British Aerospace AVRO Allied Signal
Than 10 ALF 507
------------------------------------------------------------------------------------------------------
Dassault Falcon GE/Allied
Signal CFE 738
------------------------------------------------------------------------------------------------------
Canadair GE
Challenger CF34-3
------------------------------------------------------------------------------------------------------
Canadair RJ200 GE
CF34-3
------------------------------------------------------------------------------------------------------
Embraer EMB-145 Allison
Engine
AE3007
------------------------------------------------------------------------------------------------------------------
Canadair Global BMW/Rolls-Royce
Express BR 710
------------------------------------------------------------------------------------------------------
Canadair RJ700 GE CF34-8C
------------------------------------------------------------------------------------------------------
Boeing 727(1) 100/200 Pratt & Whitney
JT8D
------------------------------------------------------------------------------------------------------
Boeing 737(1)100/200 Pratt & Whitney
JT8D
------------------------------------------------------------------------------------------------------
McDonnell Douglas DC Pratt & Whitney
9(1) JT8D
------------------------------------------------------------------------------------------------------
10-22 McDonnell Douglas MD Pratt & Whitney
80 JT8D
------------------------------------------------------------------------------------------------------
Gulfstream IV Rolls-Royce
RR Tay
------------------------------------------------------------------------------------------------------
Gulfstream V BMW/Rolls-Royce
BR 710
------------------------------------------------------------------------------------------------------
McDonnell Douglas MD BMW/Rolls-Royce
95 BR 715
------------------------------------------------------------------------------------------------------
Fokker 70, 100(1) Rolls-Royce
RR Tay
------------------------------------------------------------------------------------------------------------------
Boeing 737 300/800 GE/SNECMA
CFM56-3,7
------------------------------------------------------------------------------------------------------
Airbus A319 GE/SNECMA International
CFM56-5 Aero V2500
------------------------------------------------------------------------------------------------------
22-35 Airbus A320 GE/SNECMA International
CFM56-5 Aero V2500
------------------------------------------------------------------------------------------------------
Airbus A321 GE/SNECMA International
CFM56-5 Aero V2500
------------------------------------------------------------------------------------------------------
McDonnell Douglas MD International
90 Aero V2500
------------------------------------------------------------------------------------------------------------------
Airbus A340 GE/SNECMA
CFM56-5
35-45 ------------------------------------------------------------------------------------------------------
Boeing 757 Rolls-Royce Pratt & Whitney Rolls-Royce
RB211-535(3) PW2000 RB211-535(3)
------------------------------------------------------------------------------------------------------------------
Boeing 747 Pratt & Whitney GE Rolls-Royce GE
JT9(2), PW4000 CF6 RB211-524 CF6-50(2)
------------------------------------------------------------------------------------------------------
Boeing 767 Pratt & Whitney GE GE
JT9(2), PW4000 CF6 CF6-50(2)
------------------------------------------------------------------------------------------------------
Airbus A300 Pratt & Whitney GE GE
JT9(2), PW4000 CF6 CF6-50(2)
------------------------------------------------------------------------------------------------------
Airbus A310 Pratt & Whitney GE GE
PW4000 CF6 CF6-50(2)
------------------------------------------------------------------------------------------------------
45-75 Airbus A330 Rolls-Royce GE
RB211 - Trent, Pratt & CF6
Whitney PW4000
------------------------------------------------------------------------------------------------------
McDonnell Douglas MD Pratt & Whitney GE
11(1) PW4000 CF6
------------------------------------------------------------------------------------------------------
McDonnell Douglas DC Pratt & Whitney GE
10(1) PW4000, JT9(2) CF6
------------------------------------------------------------------------------------------------------
Lockheed L1011(1) Rolls-Royce
RB211-524
------------------------------------------------------------------------------------------------------------------
Boeing 777 Rolls-Royce
Greater RB211 - Trent,
Than 75 GE GE90, Pratt & Whitney
PW4084, PW4088,
PW4090, PW4098
------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Airframe still in service, but not in current production.
(2) Engine still in service, but not in current production.
(3) The Company replaced the incumbent supplier and will begin supplying main
engine fuel pumps in January 1998.
(4) Source: Company Information.
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Airframe Products. Fuel pumps and other airframe fuel transfer control
systems in the airframe are necessary to transfer fuel to the engine systems and
to maintain aircraft balance by shifting fuel between tanks. The Company
manufactures boost and transfer fuel pumps and fuel transfer control components,
including fuel flow proportioners, fuel system gate assemblies, and a variety of
airframe valves, adapters, nozzles and caps. These components are used to manage
storage, fueling, transfer and engine feed functions during ground and flight
operations. The Acquisition significantly increases the Company's presence in
the airframe fuel transfer control systems market. Pro forma for the
Acquisition, the Company supplies airframe fuel transfer control components for
more than 100 models of commercial and military aircraft creating an installed
base of over 290,000 components.
Aerial Refueling Systems. The Company is a major supplier of components
for aerial refueling systems, which are produced only for military applications.
Aerial refueling components manufactured by the Company, including pumps and
couplers, are installed in the refueling systems of 100% of U.S. designed
military aircraft equipped with such capability. Pressure surges, resulting from
unplanned, rapid changes in fuel flow rates, can cause premature failure of fuel
system components. Management believes that the Company's expertise in the
development of fuel flow control devices that eliminate pressure surges has
resulted in the award of several contracts to retrofit aircraft with surge
control devices. In 1995, the Company was awarded the first of two sole-source
contracts to retrofit the U.S. Air Force's KC-135 fleet with dry run aerial
refueling pumps. Valued at approximately $10 million, the initial contract was
for 1,060 pumps. The Company anticipates that the second contract, expected to
be awarded in late 1997, will be for approximately 1,500 pumps to allow the
retrofit of all 600 U.S. Air Force KC-135 aircraft. Management believes that the
Company is well-positioned to obtain this contract.
New Products. The Company has successfully developed new market
opportunities which include lube oil and scavenge pumps and fuel flow dividers.
Lube oil and scavenging pumps supply lubrication to aerospace and industrial gas
turbine engine components. Fuel flow dividers divide fuel flow into precisely
metered portions for more efficient combustion and lower emissions. As a result
of an investment of more than $1 million, the Company has secured a contract
with Rolls-Royce to supply components on an industrial power generation platform
which is scheduled to begin production by the end of 1997. Due to aggressive
marketing and an established record of performance with its engine customers,
the Company has also gained entry into the land-based gas turbine business,
securing development and production contracts with GE, Pratt & Whitney, Rolls-
Royce and Westinghouse.
In 1993, McDonnell Douglas awarded the Company the development contract for
the 480 gallon external fuel tank used on the Navy's F-18 E/F aircraft. Due to
the proprietary design of the internal components of the fuel tank, the Company
believes it is well positioned to be awarded the initial production contract,
which management believes will exceed 1,000 fuel tanks.
Ground Fueling Products
The Company manufactures various ground fueling hydrants, couplers and
nozzles for commercial and military airports around the world. The Company
estimates that components of its ground fueling equipment systems, which connect
the fuel pumps to the fuel receptacles in the aircraft, are installed in
approximately 65% of major commercial airports worldwide. Ground fueling systems
are used to transfer fuel from underground fuel tanks and ground fueling trucks
to the underwing fuel receptacle of the aircraft. In addition to nozzles,
couplers and hydrants, the Company also sells pressure control valves and
systems. The Company has successfully implemented the use of dry-break
technology to its current line of ground fueling products. Dry-break technology,
which is used in some military applications, stops the flow of fuel
automatically if the fueling connection between the fuel pump and the fuel
receptacle breaks free. The Company also developed the AVR2000 Fuel Delivery
Meter, a hardware and software system for customized fuel utilization
management, data collection and billing.
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<PAGE> 77
New Products. The Company has recently developed digital pressure control
valves which incorporate a microprocessor to enhance fuel flow control and allow
for accurate measurement of pressure into fuel tanks. In addition, the Company
has identified three new potential product applications for its ground fueling
technology: railroad fluid transfers, fueling of off-road construction and
mining equipment and LNG nozzles and receptacles for use on alternative fuel
vehicles. Management believes that these new potential product lines could add
significant ground fueling sales.
Industrial and Other
The Company has been widely recognized as a leading designer and supplier
of high performance submerged motor pumps for liquefied gas. Since 1961, the
Company has delivered over 3,400 of the approximately 6,200 liquefied submerged
motor gas pumps installed worldwide. The Company sold its OEM business for
industrial LNG pumps installed outside North America in 1987. As a result, new
pump delivery is extremely limited; however, the Company continues to provide
spare parts, testing, and upgrade and repair services. The Company also
maintains certain real estate and materials laboratory operations associated
with the Cleveland Facility.
AFTERMARKET SALES
Aftermarket sales comprise the largest component of the Company's business
and consist of spare parts sales and overhaul, retrofit, repair and technical
support services to commercial and military customers worldwide. Currently, over
35% of the Argo-Tech spare parts sales are attributable to overhaul and repair
services performed by the Argo-Tech, with the remaining sales resulting from
spare part purchases by third-party shops and airlines. The Company's Cleveland,
Costa Mesa and Inglewood facilities overhaul and repair approximately 30% of the
products manufactured by the Company. The Costa Mesa Facility also performs
overhaul services for non-Company manufactured products. On a pro forma basis,
the Company's aftermarket business accounted for approximately 49% of the
Company's net revenues during the twelve months ended August 2, 1997.
The strong demand for the Company's aftermarket parts and services is
directly related to the Company's extensive installed base. Since most modern
aircraft have a useful life of 25 years or more, and require regular
maintenance, spare parts and repair and overhaul services can often generate six
or more times the aggregate sales of the OEM program at significantly higher
margins. Replacement parts for airframe and engine components must be certified
by the FAA and similar agencies in foreign countries, as well as by the specific
airline customer. Accordingly, these parts are almost exclusively provided by
the original manufacturer of the component in order to avoid the time and
expense of recertification.
CUSTOMERS
Aerospace
OEM customers for the Company's aerospace products include the world's
major aircraft engine manufacturers: Allison Engine, BMW/Rolls-Royce (BRR), GE,
Pratt & Whitney (including Pratt & Whitney Canada), Rolls-Royce, SNECMA/GE
(CFMI) and Williams International Corp. Customers for the Company's airframe
pumps and valves include Airbus, Boeing, Cessna, Gulfstream, Lear, Lockheed
Martin, McDonnell Douglas, Raytheon, Rockwell and various U.S. Government
agencies. Orders for military components come to the Company through customers
such as Lockheed Martin, McDonnell Douglas and Pratt & Whitney. The Company's
aftermarket customers include all major aircraft and engine repair facilities
and all major airlines worldwide. Currently the total number of airline and
third party customers for spare parts and overhaul services exceeds 200.
The Company is a leading supplier of components used on U.S. designed
military aircraft. The Company's products are used on a variety of fighter,
training, transport and cargo aircraft, bombers and helicopters. Military
aircraft using the Company's products include the KC-135, F-15, F-16,
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F-18, F-22, B-1B, B-2, B-52, C-17, C-130 and CV-Helo. Substantially all of the
Company's military products are sold to the U.S. Department of Defense, certain
foreign militaries and airframe OEMs including Lockheed Martin, McDonnell
Douglas and Northrop. For the twelve months ended August 2, 1997, on a pro forma
basis, sales to the U.S. military accounted for approximately 19% of the
Company's net revenues.
Upsilon International Corporation ("UIC"), in its capacity as foreign
distributor of Argo-Tech products, accounted for approximately 16% of the
Company's net revenues for the twelve months ended August 2, 1997, on a pro
forma basis. No other customer accounted for more than 10% of the Company's
sales during the twelve months ended August 2, 1997 on a pro forma basis. See
"Certain Transactions."
Ground Fueling
Most ground fueling products are sold to customers through independent
distributors. Customers in the domestic markets include a variety of airlines,
airports and various fixed base operators. In international markets, the
Company's ground fueling products are purchased by several oil companies,
including several state-run oil companies and airport authorities. In 1996,
approximately 40% of the Company's ground fueling sales were to customers
outside the U.S.
Industrial and Other
The industrial customer base includes shipping vessels operated by domestic
and foreign carriers, liquefied gas ship loading terminal owners, liquefied gas
receiving terminals, petrochemical plants and large architectural and
engineering companies worldwide.
SALES AND MARKETING
The Company markets and sells its aerospace and ground fueling products and
services through a combination of direct marketing, sales personnel and
independent manufacturing representatives and U.S. and international
distributors. The Company supplies spare parts directly to domestic airlines and
third-party overhaul shops. Foreign customers of Argo-Tech receive their spare
parts from UIC which has a warehouse located in Torrance, California. Foreign
customers of Carter receive their spare parts directly from Carter. See "Certain
Transactions."
Engine and airframe OEMs select suppliers of aerospace components primarily
on the basis of custom design capabilities, product quality and performance,
prompt delivery, price and aftermarket service. The Company believes that it
meets these requirements in a timely, responsive manner which has resulted in an
extensive installed base of components and substantial aftermarket sales. The
Company also staffs an on-site design engineer with two of its customers to
represent its products and to work closely with the customer to develop new
components.
SUPPLIERS AND RAW MATERIALS
The Company utilizes a certified supplier program that demands a commitment
to 100% quality and on-time deliveries. In addition, for the last several years
a comprehensive supplier rating system has been in place at Argo-Tech to measure
supplier performance. While Carter's certified supplier program is in an earlier
stage of implementation, Argo-Tech believes that its experience will assist
Carter in the development of its program. Currently, the Company's total
supplier base includes approximately 200 firms. Pro forma for 1996,
approximately 40 certified suppliers accounted for a majority of the Company's
total purchases. The Company continues to move toward consolidating its supplier
base and increasing the number of certified suppliers.
The largest single expenditure by Carter relates to outsourcing of
component machining, which is primarily provided by three long term suppliers.
While prices have generally remained constant for two years, the Company has
derived significant savings by taking advantage of advances in machining
technologies and coordinating engineering with its suppliers.
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Aluminum castings are the highest volume raw material supplied to the
Company and are provided by five certified suppliers under long-term
arrangements. The Company also buys quantities of steel bar stock to produce
gears and shafts from multiple producers. However, CPM-10V, a powdered metal
which is essential for the manufacture of certain of the Company's main engine
fuel pumps, is a proprietary product available only from Crucible Specialty
Metals. The Company does not have a contractual arrangement with Crucible
Specialty Metals, but purchases CPM-10V pursuant to standard purchase orders.
The Company has approximately a six month supply of CPM-10V that has been
produced and is waiting to be released per the Company's manufacturing schedule.
Another material has been identified that would replace CPM-10V, but that
material has not been certified for use by the Company's customers. The Company
believes certification of this material could be obtained before the six month
supply has been depleted. See "Risk Factors -- Risks Associated with the
Company's Workforce and Suppliers."
MANUFACTURING
The Company manufactures a major portion of its products at its Cleveland
Facility, which was acquired from TRW in 1986. This facility houses the
Company's senior management and the majority of its aerospace engineering and
design staff, sales team, and production and main distribution facilities. The
Cleveland Facility is organized around four manufacturing "cells" that operate
its bearing, gear, housing and shaft productions. By creating cells, the
necessary people, machinery, materials and methods are organized into four
distinct business teams. Within each manufacturing cell are members from each of
the Manufacturing, Quality, Production Control, Statistical Process Control, and
Manufacturing Engineering disciplines. In addition, the Company's design
engineering staff is organized into cells which correspond to and complement the
manufacturing cells. The manufacturing and engineering cells work together to
meet the Company's integrated operating plan and to ensure timely, production of
the Company's products.
By using the cell structure and continuous improvement initiatives, the
Cleveland Facility has greatly improved its production performance and quality
since 1986, achieving nearly 100 percent compliance with product development and
customer schedule requirements. For example, typical production lead time for a
new pump was reduced from nearly 60 weeks after first order in 1991, to less
than 20 weeks in 1996, and overdue pump shipments decreased from nearly 500 in
1991 to fewer than 10 in 1996. Management believes that these performance
standards are substantially better than those of its competition. Based on
industry statistics, management also believes that in 1996, its main engine fuel
pumps cost an average of approximately 20% less to operate per flight hour than
the pumps of its nearest competitor. Management believes that the Company's
manufacturing systems and state-of-the-art equipment are critical competitive
factors which permit it to meet the tight tolerances and cost sensitive price
structure of aerospace customers.
In contrast to Argo-Tech's substantial reliance on internal manufacturing,
Carter outsources most of its machining and pre-assembly production to external
providers. However, Carter does maintain internal equipment capacity which
enables it to produce small quantity, quick turn components and to reduce
setup/breakdown times on smaller jobs. Carter has consistently achieved lower
costs by outsourcing capital intensive tasks such as casting and machining,
while completing final assembly and testing on the premises. With lead times of
8 to 50 weeks depending on the complexity of the component, a typical production
cycle at Carter takes an additional four weeks once the machined and
pre-assembled parts are received.
In addition to its manufacturing facilities, the Company maintains
sophisticated testing facilities at its Cleveland, Inglewood and Costa Mesa
locations. These facilities allow for simulation of typical conditions and
stresses that will be endured by products during use. Products are also
thoroughly tested for design compliance, performance and durability. To
facilitate quality control and product development, the Company maintains a
sophisticated chemistry and metallurgy laboratory at the Cleveland Facility,
which includes a scanning electron microscope.
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Both Argo-Tech and Carter have obtained and preserved their ISO
certifications, which is becoming a prerequisite for selling to customers
located in Europe. The ISO-9001 Certifications held by the Company are
recognized by most of the Company's customers, as well as by the FAA and U.S.
Government supply organizations, as the most widely accepted replacement for the
Military Standards formerly used in the aerospace industry.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local
environmental laws and to regulation by government agencies, including the
Environmental Protection Agency. Among other matters, these regulatory
authorities impose requirements that regulate the emission, discharge,
generation, management, transportation and disposal of hazardous materials and
pollutants, govern response actions to hazardous substances which may be or have
been released to the environment, and require the Company to obtain and maintain
permits in connection with its operations. This extensive regulatory framework
imposes significant compliance burdens and risks on the Company. Although
management believes that the Company's operations and its facilities are in
compliance in all material respects with applicable environmental laws, there
can be no assurance that future changes in such laws, regulations or
interpretations thereof or the nature of the Company's operations will not
require the Company to make significant additional expenditures to ensure
compliance in the future. The Company does not presently contemplate material
capital expenditures for environmental remediation for the 1997 or 1998 fiscal
years.
The Cleveland Facility is currently the subject of environmental
remediation activities, the cost of which is the responsibility of TRW pursuant
to the TRW Purchase Agreement. Remediation has been underway since 1989 and is
expected to continue for the foreseeable future. Argo-Tech has not borne any
material portion of the cost of the remediation and does not expect to do so in
the future. TRW has borne all necessary remediation costs and is expected to do
so in the future. The Company estimates that TRW has spent in excess of $10
million for environmental remediation at the Cleveland Facility.
The TRW Purchase Agreement also requires TRW, for a period of 20 years, to
indemnify Argo-Tech for (i) costs associated with third party environmental
claims relating to environmental conditions arising from activities conducted by
TRW in TRW's operation of its Power Accessories Division, which have not been
conducted by Argo-Tech after its purchase of the assets of the Power Accessories
Division in 1986, and (ii) a portion of the costs associated with third party
environmental claims arising from activities conducted by TRW and Argo-Tech, the
portion of the costs to be paid by each party being determined based on the
length of time each party conducted the activity giving rise to the claim. There
have been no third party environmental claims relating to Argo-Tech or the
Cleveland Facility.
In March 1986, a two thousand gallon spent underground storage tank ("UST")
was removed from the Costa Mesa Facility. Petroleum hydrocarbon soil
contamination was discovered during the UST removal, prompting the Orange County
Health Care Agency to require a site assessment. Subsequent site investigations
revealed that groundwater underlying the site is impacted by trichloroethene
("TCE") and perchloroethylene ("PCE"). In 1990, the Regional Water Quality
Control Board ("RWQCB") issued a Cleanup and Abatement Order (the "Cleanup
Order") to Carter related to the investigation and remediation of groundwater
contamination. To date, the full lateral extent of the groundwater contamination
has not been ascertained. By virtue of its acquisition of Carter, the Company
has assumed responsibility for satisfying the Cleanup Order. As part of the
Acquisition, the Sellers have agreed to indemnify the Company for, among other
things, all costs and expenses related to satisfaction of the RWQCB's Cleanup
Order. However, there can be no assurance that the Sellers will satisfy their
indemnification obligations with respect to the Cleanup Order. See "Risk
Factors -- Potential Exposure to Environmental Liabilities."
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PATENTS AND TRADEMARKS
The Company has a number of patents and pending patent applications related
to its products. While in the aggregate its patents are of material importance
to its business, management believes no single patent or group of patents is of
material importance to its business as a whole.
GOVERNMENT REGULATIONS
The commercial aerospace industry is highly regulated by both the FAA in
the United States and by the Joint Aviation Authorities in Europe, while the
military aerospace industry is governed by military quality (ISO-9000)
specifications. The Company is required to be certified by one or more of these
entities, and, in some cases, by individual OEMs in order to engineer and
service parts and components used in specific aircraft models. If material
authorizations or approvals were revoked or suspended, the operations of the
Company would be adversely affected. In the future, new and more stringent
government regulations may be adopted, or industry oversight may be heightened,
which may have an adverse impact on the Company.
The Company must also satisfy the requirements of its customers, including
OEMs and airlines, that are subject to FAA regulations, and provide these
customers with products and services that comply with the government regulations
applicable to commercial flight operations. In addition, the FAA requires that
various maintenance routines be performed on aircraft components, and the
Company currently satisfies or exceeds these maintenance standards in its repair
and overhaul services. Several of the Company's operating divisions include
FAA-approved repair stations.
The Company's aviation and metals operations are also subject to a variety
of worker and community safety laws. The Occupational Safety and Health Act of
1970 ("OSHA") mandates general requirements for safe workplaces for all
employees. In addition, OSHA provides special procedures and measures for the
handling of certain hazardous and toxic substances. The Company believes that
its operations are in material compliance with OSHA's health and safety
requirements.
COMPETITION
Competition among aerospace component manufacturers is based on price,
product quality, reliability and on-time delivery. The Company's primary main
engine fuel pump competitors are Sundstrand, CECO and Lucas. Sundstrand is the
Company's closest competitor in the main engine fuel pump market. See "Risk
Factors -- Competition." Competitors in the Company's other aerospace product
lines range in size from divisions of large corporations to small privately held
entities, with only one or two components in their entire product line. The
Company's primary airframe pump competitors are GEC Aerospace, Hydroaire, a
division of Crane Corporation and Intertechnique; the Company's primary airframe
valve competitors are Parker Hannifin, ITT Aerospace Controls and Whittaker
Controls, Inc. ("Whittaker"); and the Company's primary aerial refueling
component competitor is Parker Hannifin.
Competition among ground fueling product manufacturers is based on price.
The Company's primary ground fueling competitor is Whittaker.
BACKLOG
For Carter, backlog at June 30, 1997 and June 30, 1996 amounted to
approximately $29 million and $37 million, respectively. Backlog consists of
firm orders for Carter's products which have not been shipped. Approximately 57%
of the Carter's backlog at June 30, 1997 is expected to be shipped before
December 31, 1997. However, due to the government funding process, backlog can
vary on a period to period basis due to the stage of completion of the contracts
represented by such backlog. Argo-Tech has no backlog of firm orders for its
products.
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PROPERTIES AND FACILITIES
The Company owns and operates a 150-acre Business Park, which includes 1.8
million square feet of engineering, manufacturing and office space. The Company
occupies approximately 475,000 square feet for its main engine fuel pump
business and leases over one million square feet of the facility to third
parties. Management believes that the Cleveland Facility's machinery, plants and
offices are in satisfactory operating condition, and has sufficient capacity to
meet foreseeable future needs without incurring significant additional capital
expenditures.
The Company also owns the 9.2 acre Costa Mesa Facility, which encompasses
165,000 covered square feet and manufactures certain of the Company's airframe
products and accessories and, ground fueling and aerial refueling equipment.
Management believes that the Costa Mesa Facility has sufficient capacity to
permit further growth in the Company's product lines without significant
additional capital expenditure.
The Company's Inglewood, California leased facility occupies approximately
10,000 square feet and includes available space for expansion. Its primary
purpose is to repair and overhaul main engine fuel pumps owned by airline
customers. Inglewood's assets include test stands for testing fuel pumps after
overhaul and a small machine shop for simple rework of pump components.
EMPLOYEES
As of July 31, 1997, the Company had 763 full-time employees; of which, 459
are salaried and 304 are hourly. Over 36% of the salaried employees have college
degrees, with over 10% holding advanced degrees. The 217 hourly employees
located at the Cleveland Facility are represented by the UAW under a collective
bargaining agreement expiring on March 31, 2000 and have an average of over 18
years of experience in the industry.
LEGAL PROCEEDINGS
While the Company is not presently involved in any material legal
proceedings, during the ordinary course of business, the Company, from time to
time, is threatened with, or may become a party to, legal actions and other
proceedings. The Company believes that its potential exposure to such legal
actions is adequately covered by its aviation product and general liability
insurance.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. The following table sets
forth certain information concerning the directors and executive officers of the
Company. Directors serve until their successors are elected at each annual
meeting. Officers hold office until their successors are elected and qualified.
<TABLE>
<CAPTION>
YEARS IN
NAME AGE INDUSTRY POSITION
- ---------------------------------- --- -------- --------------------------------------------
<S> <C> <C> <C>
Michael S. Lipscomb............... 51 25 Chairman, President & CEO, Director
David L. Chrencik................. 46 20 Vice President, Operations
Yoichi Fujiki..................... 47 6 Vice President and Treasurer, Director
Paul R. Keen...................... 48 20 Vice President, General Counsel & Secretary
Badrik Melikian................... 44 10 Chief Operating Officer, Carter
Frances S. St. Clair.............. 42 6 Vice President and CFO
Remi de Chastenet................. 25 Director
Thomas F. Dougherty............... 54 Director
Prakash A. Melwani................ 39 Director
Robert Y. Nagata.................. 52 Director
Karl F. Storrie................... 60 Director
</TABLE>
Michael S. Lipscomb has been Chairman, President & Chief Executive Officer
since 1994. Mr. Lipscomb joined TRW's corporate staff in February 1981 and was
made Director of Operations for the Power Accessories Division in 1985. Mr.
Lipscomb was named Vice President of Operations when Argo-Tech was formed in
1986, becoming President in 1990 and Chairman in 1994. Mr. Lipscomb has also
served as a director of the Company and Parent since 1990.
David L. Chrencik has been Vice President, Operations since December 1990.
Since joining Argo-Tech (TRW) in 1977, Mr. Chrencik has held various
manufacturing engineering and operations management positions.
Yoichi Fujiki has been Vice President and Treasurer since joining Argo-Tech
in 1991. Prior to joining Argo-Tech, he was Senior Vice President and Chief
Credit Officer of American Pacific State Bank in Los Angeles. Mr. Fujiki has
also served as a director of the Company since 1991.
Paul R. Keen has been Vice President, General Counsel and Secretary since
1990. Mr. Keen was named Vice President and General Counsel in 1987, and became
Secretary in December 1990. Prior to 1987, he spent the majority of his career
with TRW as Senior Counsel, Securities and Finance and as primary legal counsel
to two operating groups.
Badrik Melikian has been Chief Operating Officer of Carter since January
1994. Mr. Melikian joined Carter in 1987 and held management positions in
Carter's Ground Fueling Group before becoming the General Manager of the
Industrial Marine division when it was formed in 1990.
Frances S. St. Clair has been Vice President and Chief Financial Officer
since 1992. Ms. St. Clair joined the Company in 1991 as Controller and was
promoted to Vice President and Controller in November 1991. Prior to joining
Argo-Tech, Ms. St. Clair served as the Vice President and Controller of the
Sheffield Measurement Unit of the Cross and Trecker Corporation, a machine tool
manufacturer. Ms. St. Clair received her C.P.A. certification in 1984.
Remi de Chastenet became a director of the Company and Parent in 1997. Mr.
de Chastenet previously worked at Vestar Capital Partners as a Financial
Analyst.
Thomas F. Dougherty has served as a director of the Company and Parent
since 1995. Mr. Dougherty is President of the Columbiana Boiler Company, a
chemical and materials fabricator, Chairman of Anderson Columbiana Trading
Corporation, a wholesaler of storage and transportation
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tanks for gas and liquids, and President of Dougherty Development Corp., a
venture capital investment company. Mr. Dougherty is also a principal in
Dougherty Capital Partners, a private equity investment fund.
Prakash A. Melwani has served as a director of the Company since 1990. Mr.
Melwani is a founding partner of Vestar, which organized the Vestar Investment
Partnership to acquire Argo-Tech in 1990. Mr. Melwani is also a director of
Alvey Systems, Inc.
Robert Y. Nagata has served as a director of Parent since 1990, and became
a director of the Company in 1997. Mr. Nagata is a partner in the Los Angeles
law firm of Musick, Peeler & Garrett.
Karl F. Storrie has served as a director of the Company since 1990. Mr.
Storrie is President, CEO and a director of Dura Automotive Systems, Inc.
EXECUTIVE COMPENSATION
The following table sets forth, for fiscal 1996, certain information about
the compensation paid to the Chief Executive Officer and each of the other four
most highly compensated executive officers of the Company (the "Named
Executives").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)(2)
- ------------------------------------------ ---- --------- -------- ------------------
<S> <C> <C> <C> <C>
Michael S. Lipscomb....................... 1996 $ 263,680 $120,075 $ 21,334
Chairman, President and CEO
David Chrencik............................ 1996 $ 126,022 $ 57,037 $ 4,457
Vice President, Operations
Yoichi Fujiki............................. 1996 $ 131,072 $ 49,654 $ 4,754
Vice President and Treasurer
Paul R. Keen.............................. 1996 $ 146,552 $ 66,737 $ 5,574
Vice President, General Counsel and
Secretary
Frances S. St. Clair...................... 1996 $ 126,022 $ 57,037 $ 3,436
Vice President and CFO
</TABLE>
- ---------------
(1) Other annual compensation did not exceed the lesser of $50,000 or 10% of
salary plus bonus of any of the Named Executives in 1996.
(2) The amounts listed consist of the value of life insurance provided by the
Company for the benefit of the Named Executives in excess of the value of
life insurance provided by the Company for the benefit of all other salaried
employees.
CERTAIN AGREEMENTS
Management Retention Agreements
Stay Pay and Severance Agreements. The Company has entered into Stay Pay
and Severance Agreements (the "Severance Agreements") with each of the Named
Executives. The Board of Directors of the Company believes that such Severance
Agreements benefit the Company by securing the continued services of key
management personnel and by enabling management to perform their duties and
responsibilities without the distracting uncertainty generally associated with a
change in control.
The Severance Agreements provide that, if a Change in Control (as defined
in the Severance Agreements) occurs and the executive remains employed by the
Company on a full-time basis through the effective date of the Change in
Control, the executive will receive a single lump sum payment equal to 25% of
the sum of the highest annual base salary and the highest bonus amount received
by the executive in the preceding five years (the "Stay Payment").
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The Severance Agreements also provide that if an executive's full-time
employment is terminated without Cause (as defined in the Severance Agreements),
either before or after a Change in Control has occurred, or upon a voluntarily
termination of employment by an executive upon the reduction of his or her base
salary by 5% or more, if such reduction is not a result of a Company policy to
reduce the salaries of a substantial number of officers or employees, or if the
executive ceases to be employed in a position involving substantially the same
level of responsibility or duties as performed by the executive on the date the
Severance Agreement was executed (a "Qualifying Voluntary Termination"), the
executive will receive a payment consisting of a single lump sum equal to the
sum of the highest annual base salary and the highest bonus amount received by
the executive in the preceding five years (the "Basic Severance Payment").
Additional payments will be made to the executive in the event that a
Change in Control has occurred and the executive's employment is terminated
without Cause within the six-month period following the effective date of such
Change in Control, or upon a Qualifying Voluntary Termination within such
period. The executive will receive payments equal to the amount the executive
would have received had employment continued, at the same intervals and at the
same rate of base salary the executive was receiving during the month preceding
termination, until the six-month anniversary of the effective date of the Change
in Control (the "Additional Severance Payments"). The Additional Severance
Payments, if paid, would be in addition to the Basic Severance Payment and the
Stay Payment.
Each executive is entitled to several other benefits contained in the
Severance Agreements, including (i) life, health, medical/hospital, dental, and
vision insurance benefits for a period of 12 months in the event that an
executive's full-time employment is terminated without Cause or upon a
Qualifying Voluntary Termination, either before or after a Change in Control has
occurred and (ii) gross-up payments to cover any excise tax imposed by Section
4999 of the Internal Revenue Code upon any payment made to the executive under
the Severance Agreements, subject to certain limitations defined in therein.
The Company has agreed to be solely responsible for any and all attorneys'
fees and related expenses incurred by the executive in the event that the
Company fails to comply with its obligations under the Severance Agreements.
Trust Agreement. In connection with a Stay Pay Agreement, dated February
13, 1989 entered into between the Company and Mr. Lipscomb (the "Original Stay
Pay Agreement"), the Company and Key Trust Corporation of Ohio, N.A. (as
successor to Society National Bank) (the "Trustee") entered into a Trust
Agreement, dated as of October 28, 1994, (the "Trust Agreement") establishing an
irrevocable grantor trust (the "Trust") for the benefit of Mr. Lipscomb (the
"Beneficiary") or any Successor (as defined in the Trust Agreement). The
Original Stay Pay Agreement provides for payment of $315,600 (the "Payment") on
January 1, 2007, or earlier, upon Mr. Lipscomb's voluntary or involuntary
termination of full-time employment with the Company, with or without Cause (as
defined in the Original Stay Pay Agreement).
The assets to be held by the Trust include the original deposit of
principal and any other contributions made at the option of the Company (the
"Trust Assets"). The Trust Assets are to be disposed of by the Trustee when the
Trustee receives either (i) a certificate and affidavit signed by the
Beneficiary or Successor, in the form attached to the Trust Agreement, stating
that the conditions under the Original Stay Pay Agreement have occurred and the
Beneficiary or Successor is entitled to the Payment or (ii) a written direction
certified by two officers of the Company other than the Beneficiary or
Successor. If the amount disbursed by the Trustee is insufficient to fully fund
the Payment specified under the Original Stay Pay Agreement, the Company will be
required to pay the balance. However, if the amount disbursed by the Trustee
exceeds the amount to which the Beneficiary or Successor is entitled under the
Severance Agreement, the Beneficiary or Successor is entitled to retain such
excess. The Trust Assets and any income earned on such Trust Assets
83
<PAGE> 86
remain at all times subject to the claims of general creditors of the Company
under state and federal law.
The Original Stay Payment Agreement also provides for the payment of
attorneys' expenses if enforcement of the contract becomes necessary, and
contains certain restrictions on Competitive Activity (as defined in the
Original Stay Pay Agreement). The benefits provided by the Original Stay Pay
Agreement and the Trust Agreement are in addition to the benefits provided under
the Severance Agreements and Mr. Lipscomb's Additional Contract (as defined).
Additional Employment Agreements and Arrangements. The Company has entered
into additional employment contracts with two of the Named Executives, Mr.
Lipscomb and Mr. Keen (collectively, the "Additional Contracts"). Each
Additional Contract provides for the payment of severance benefits upon
termination of employment without Cause (as defined in the Additional
Contracts). In the event of such a termination, Mr. Lipscomb will receive all
salary and bonuses for a period of twelve months from the date of termination,
in an amount equal to all salary and bonuses received during the twelve month
period immediately preceding termination. Mr. Keen will receive, in the event of
such a termination, a single lump sum payment equal to 24 months of his base
salary, in an amount calculated from the base salary in effect for the full
month immediately preceding the date of termination. Both Mr. Lipscomb and Mr.
Keen will receive life, health, medical/hospital, dental and vision insurance
benefits for a period of twelve months. Mr. Keen's Additional Contract also
provides for the payment of attorneys' expenses if enforcement of the contract
becomes necessary, and contains restrictions on Competitive Activity (as defined
in the Additional Contract). The benefits provided by the Additional Contracts
are provided in addition to the benefits provided under the Severance
Agreements, the Original Stay Pay Agreement and the Trust Agreement.
COMPENSATION PURSUANT TO EMPLOYEE BENEFIT PLANS OF THE COMPANY
Retirement Plan
Salaried Pension Plan. The Company maintains the Argo-Tech Corporation
Salaried Pension Plan (the "Salaried Pension Plan"). The Salaried Pension Plan
was established effective November 1, 1986. Prior to July 1, 1994, regular,
permanent, salaried employees of the Company were eligible to participate in the
Salaried Pension Plan. Participation in the Salaried Pension Plan was closed to
any person who was not a participant on June 30, 1994, and all benefit accruals
ceased as of the close of business on June 30, 1994. The benefits of
participants in the Salaried Pension Plan who were employees on June 30, 1994,
became vested (to the extent otherwise non-vested) as of the close of business
on June 30, 1994. Employee contributions were neither required nor permitted.
All Salaried Pension Plan assets are presently invested in an annuity contract
with Aetna Life Insurance Company as the funding agent.
The monthly normal retirement benefit under the Salaried Pension Plan is
1.25% of a participant's final average monthly compensation multiplied by the
participant's years of benefit service. Compensation earned after June 30, 1994,
and service performed after June 30, 1994, are not taken into account in
determining a participant's benefit under the Salaried Pension Plan. Final
average monthly compensation means the average monthly compensation (computed
before withholdings, deductions for taxes or other purposes, and salary
reduction amounts under the Argo-Tech Employee Savings Plan (the "Salaried
Savings Plan")) paid or payable to the participant for the five calendar years
which produce the highest such average, determined as if the participant's
employment terminated on June 30, 1994 (or, if earlier, the date the
participant's employment actually terminated or the participant ceased to be
within the class of employees eligible to participate in the Salaried Pension
Plan). If a participant ceased to be within the class of employees eligible to
participate or a participant's employment terminated (or is deemed to have
terminated) prior to July 1 of a calendar year, that calendar year is not taken
into account for purposes of determining final average monthly compensation. A
participant's vested benefit cannot be less than the participant's vested
benefit under the Salaried Pension Plan, if any, as of October 31, 1989.
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<PAGE> 87
Under the Internal Revenue Code of 1986, as amended (the "Code"), the
maximum annual retirement benefit payable under the Salaried Pension Plan and
the maximum amount of annual compensation that can be taken into account in
calculating benefits under the Salaried Pension Plan are limited.
At retirement, based on benefits accrued as of June 30, 1994, the monthly
retirement benefits payable to each of the individuals named in the Summary
Compensation Table are:
<TABLE>
<CAPTION>
NAME MONTHLY BENEFIT
------------------------------------------------------ ---------------
<S> <C>
Michael S. Lipscomb................................... $1,799.32
David L. Chrencik..................................... $ 949.57
Yoichi Fujiki......................................... $ 488.15
Paul R. Keen.......................................... $1,188.83
Frances S. St. Clair.................................. $ 411.56
</TABLE>
The benefits shown above are in the form of a single life annuity
commencing as of the first day of the month after the participant attains age
65. Benefits may commence at any time after age 55 if the participant had at
least five years of service when the participant's employment terminated.
Actuarial reductions would apply for early commencement and for payment in the
form of a joint and survivor annuity.
The normal form of payment under the Salaried Pension Plan is a single life
annuity; however, participants may elect payment of retirement benefits under
several joint and survivor forms of payment, subject to the requirement that a
married participant receive benefits in the form of a joint and survivor annuity
with the spouse as contingent annuitant unless the spouse consents to the
participant's election of another form of payment, another contingent annuitant,
or both, as applicable.
Salaried Savings Plan
The Company's Salaried Savings Plan became effective on May 1, 1987.
Regular, permanent, salaried employees of the Company who have completed at
least 3 months of service are eligible to participate in the Salaried Savings
Plan. All assets of the Salaried Savings Plan are held in trust by Key Trust
Company of Ohio, N.A., the current Trustee.
Participants may elect to have "tax-deferred" (401(k) compensation
reduction) contributions made to the Plan of up to 13% of their eligible
compensation. Participants may also elect to have after-tax contributions made
to the Plan of up to 10% of their eligible compensation. With respect to periods
prior to July 1, 1994, the Salaried Savings Plan provided for employer matching
contributions as follows: Basic matching contributions of 25% of each
participant's tax-deferred contributions in excess of 3% of compensation and
discretionary additional matching contributions of a percentage (within the
range of 0% and 125% established for each fiscal year (the "Plan Year")) of each
participant's tax-deferred contributions not in excess of 3% of compensation.
Employer matching contributions to the Salaried Savings Plan ceased on July 1,
1994. A participant's benefit under the Salaried Savings Plan is the balance of
the participant's accounts attributable to after-tax contributions and the
vested balance of the participant's accounts attributable to employer matching
contributions. Tax-deferred contributions and after-tax contributions are always
100% vested. Participants (including former employees) whose accounts
attributable to employer matching contributions had not been forfeited prior to
November 1, 1994, became, to the extent otherwise non-vested, 100% vested.
Benefits are payable in the form of a single lump sum payment.
Under the Code, the maximum annual contributions that can be made to the
Salaried Savings Plan and the maximum amount of annual compensation that can be
taken into account in calculating contributions to the Salaried Savings Plan are
limited. Contributions for a plan year on behalf of
85
<PAGE> 88
certain highly compensated individuals may also be limited to comply with
nondiscrimination requirements under the Code.
Benefits are generally payable after a participant is separated from
service. A participant who is an employee may, however, apply for an in-service
distribution of all or a portion of the participant's vested account balance
after attainment of age 59 1/2 or in the event of a hardship (as defined in the
Salaried Savings Plan). A participant may apply for an in-service distribution
of after-tax contributions at any age and for any reason. A participant who is a
"party in interest" may apply for a loan of up to 50% of the participant's
vested account balance under the Salaried Savings Plan.
Employee Stock Ownership Plan
The Company established its ESOP (as defined) effective May 17, 1994.
Salaried employees of the Company are eligible to participate in the ESOP. Key
Trust Company of Ohio, N.A., serves as Trustee (the "ESOP Trustee"), and holds
in trust all of the ESOP's assets.
On May 17, 1994, the ESOP Trustee purchased 420,000 shares of Parent Stock
with the proceeds of a $16,800,000 loan to the ESOP from Argo-Tech Corporation.
The term of the loan, unless it is prepaid or accelerated, ends on April 28,
2004. The interest rate for the ESOP loan is fixed for the ten year term at
7.16% per annum. The purchase price for the Parent Stock was $40 per share. The
Company agreed to make contributions to the ESOP necessary to repay the loan.
The shares of Parent Stock purchased by the ESOP with the proceeds of the
loan are held in an ESOP suspense account and released to eligible participants
on a pro rata basis as loan principal payments are made. Shares released from
the ESOP for the Plan Year are allocated to each eligible participant's ESOP
account based on the ratio of each such participant's eligible compensation to
the total eligible compensation of all eligible ESOP participants. Forfeitures
of the ESOP accounts of non-vested participants are reallocated among eligible
participants in the same manner as shares of Parent Stock released from the
suspense account.
For the Plan Years ended October 31, 1994, October 31, 1995, and October
31, 1996, the number of shares of Parent Stock released from the suspense
account were, 21,000, 42,000, and 42,000, respectively. Based on the loan
payment schedule, the number of shares of Parent Stock released from the
suspense account each future Plan Year during the loan period would be:
<TABLE>
<CAPTION>
NUMBER OF
PLAN YEAR ENDING SHARES RELEASED
---------------------------------------------------- ---------------
<S> <C>
October 31, 1997.................................... 42,000
October 31, 1998.................................... 42,000
October 31, 1999.................................... 42,000
October 31, 2000.................................... 42,000
October 31, 2001.................................... 42,000
October 31, 2002.................................... 42,000
October 31, 2003.................................... 42,000
October 31, 2004.................................... 21,000
</TABLE>
If the Company makes additional contributions to the ESOP, the ESOP would
use such contribution to "prepay" the loan, and shares would be released from
the suspense account more rapidly than shown above. If, however, for any reason
the Company does not make contributions to the ESOP to pay the principal on the
loan as described above, the shares would not be released from the suspense
account as rapidly as shown above.
The Company may, for any Plan Year, make additional discretionary
contributions for the benefit of ESOP participants. The Company's contributions
may be made in cash, shares of qualifying employer securities, or other
property.
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<PAGE> 89
Whether the ESOP will acquire additional shares of Parent Stock or other
qualifying employer securities in the future depends upon future business
conditions. Such purchases, if made, would be funded through additional
borrowings by the ESOP or additional contributions from the Company. The timing,
amount and manner of future contributions to the ESOP will be affected by
various factors, including prevailing regulatory policies, the requirements of
applicable laws and regulations, and market conditions.
ESOP participants may elect to receive the shares of qualifying employer
securities credited to their accounts after their termination of employment, and
in certain instances, after attaining age 55 with 10 or more years of
participation in the ESOP. ESOP participants vest in their ESOP accounts 20% per
year of service, and service prior to the effective date of the ESOP counts for
this purpose. An ESOP participant can require the Company to purchase qualifying
employer securities received from the ESOP at the value the stock then has, as
determined for ESOP purposes (a "put option"). Shares of qualifying employer
securities distributed from the ESOP are subject to a "right of first refusal"
in favor of the Company or the ESOP at the value the stock then has, as
determined for ESOP purposes. The put option and right of first refusal will no
longer apply if the qualifying employer securities become tradeable on an
established securities market.
Voting rights on and decisions whether to tender or exchange shares of
qualifying employer securities held in the ESOP are "passed through" to ESOP
participants. Each participant is entitled to direct the ESOP Trustee as to the
voting of (1) shares of qualifying employer securities credited to the
participant's account; and (2) a proportionate part of the unallocated shares of
qualifying employer securities held in the ESOP suspense account and shares of
qualifying employer securities allocated to participants' ESOP accounts as to
which no direction is received by the ESOP Trustee. In the event of a tender or
exchange offer for qualifying employer securities held in the ESOP, each
participant is entitled to direct the ESOP Trustee whether to tender or exchange
shares of qualifying employer securities held in the ESOP in a manner similar to
the voting directions described above.
Because the employers' contributions to the ESOP are not fixed, benefits
payable under the ESOP cannot be estimated.
For the Plan Year ended October 31, 1996, the number of shares of Parent
Stock allocated under the ESOP to the accounts of the individuals named in the
Summary Compensation Table were:
<TABLE>
<CAPTION>
SHARES ALLOCATED
--------------------------------------
YEAR ENDED CUMULATIVE TO
NAME OCTOBER 31, 1996 OCTOBER 31, 1996
----------------------------------- ---------------- ----------------
<S> <C> <C>
Michael S. Lipscomb................ 389.4886 1062.3804
David L. Chrencik.................. 389.4886 1022.8018
Yoichi Fujiki...................... 389.4886 1044.5887
Paul R. Keen....................... 389.4886 1062.3804
Frances S. St. Clair............... 389.4886 1013.4160
</TABLE>
Generally Accepted Accounting Principles require that any third party
borrowing by the ESOP be reflected as a liability on the Company's statement of
financial condition. Since the ESOP is borrowing from the Company, such
obligation is not treated as a liability, but will be excluded from
stockholders' equity. If the ESOP purchases newly issued shares of Parent Stock
from the Company, total stockholders' equity would neither increase nor
decrease, but per share stockholders' equity and per share net earnings would
decrease as the newly issued shares of Parent Stock are allocated to the ESOP
participants.
The Internal Revenue Service has issued a determination letter that the
ESOP is qualified under Section 401(a) of the Code and is an employee stock
ownership plan under Section 4975(e)(7) of the Code. Contributions to the ESOP
and allocations to the accounts of eligible participants
87
<PAGE> 90
thereunder are subject to applicable limitations imposed under the Code. The
ESOP is subject to the requirements of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), and the regulations thereunder.
ESOP Excess Benefit Plan
The Company maintains an unfunded plan to provide for cash payments to
employees participating in the ESOP in respect of reduction to allocations to
their ESOP accounts because of limitations under the Code applicable to
tax-qualified plans (the "ESOP Excess Benefit Plan"). Benefits under the ESOP
Excess Benefit Plan vest in the same manner as benefits under the ESOP and are
payable at the same time or times as benefits under the ESOP are distributable
from the ESOP, or in the case of benefits with respect to qualifying employer
securities subject to the put option under the ESOP at the time the ESOP Excess
Benefit Plan participant exercises (or is deemed to have exercised) a
hypothetical "put option" under the Excess Benefit Plan. All benefits under the
ESOP Excess Benefit Plan are payable solely from the Company's general assets.
The Company maintains a bookkeeping account for amounts credited to the
accounts of ESOP Excess Benefit participants. For the Plan Year ended October
31, 1996, the amounts credited to the ESOP Excess Benefit Plan accounts of the
individuals named in the Summary Compensation Table were:
<TABLE>
<CAPTION>
EQUIVALENT SHARES ALLOCATED
--------------------------------------
YEAR ENDED CUMULATIVE TO
NAME OCTOBER 31, 1996 OCTOBER 31, 1996
----------------------------------- ---------------- ----------------
<S> <C> <C>
Michael S. Lipscomb................ 582.675 1,267.954
David L. Chrencik.................. 73.425 73.425
Yoichi Fujiki...................... 67.500 100.626
Paul R. Keen....................... 150.125 250.154
Frances S. St. Clair............... 73.425 73.425
</TABLE>
Incentive Stock Option Plans
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
% OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR MARKET PRICE FOR OPTION TERMS($)
OPTIONS EMPLOYEES IN BASE PRICE ON DATE EXPIRATION --------------------------
NAME GRANTED FISCAL YEAR ($/SH) OF GRANT DATE 0% 5% 10%
- --------------------------------------- ------------ ----------- ------------ ---------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael S. Lipscomb.......... 1,990 20.1% $ 10.00 58.63 11/09/01 96,774 129,008 168,004
David L. Chrencik............ 790 8.0% $ 10.00 58.63 11/09/01 38,418 51,214 66,695
Yoichi Fujiki................ 790 8.0% $ 10.00 58.63 11/09/01 38,418 51,214 66,695
Paul R. Keen................. 790 8.0% $ 10.00 58.63 11/09/01 38,418 51,214 66,695
Frances S. St. Clair......... 790 8.0% $ 10.00 58.63 11/09/01 38,418 51,214 66,695
</TABLE>
1991 Performance Stock Option Plan. The 1991 Performance Stock Option Plan
provides for option agreements on the purchase of Class D non-voting Parent
Stock, at a price of $10.00 per share, unless and until such stock is offered
for sale to the public, in which case the price will be not less than fair
market value. The options, which were granted by the Compensation Committee of
Parent upon the recommendation of the Argo-Tech Compensation Committee, expire
on November 9, 2001. The options may be exercised only in quarters over four
successive years, but shall become exercisable in full in the event that the
shares become registered or traded on a national exchange or in the event of a
change in control.
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<PAGE> 91
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISABLE IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END($)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Lipscomb................ 0 0 7,432 2,238 361,418 108,834
David L. Chrencik.................. 0 0 2,097 893 101,977 43,427
Yoichi Fujiki...................... 0 0 497 893 24,169 43,427
Paul R. Keen....................... 0 0 2,097 893 101,977 43,427
Frances S. St. Clair............... 0 0 2,097 893 101,977 43,427
</TABLE>
1991 Management Incentive Stock Option Plan. The 1991 Management Incentive
Stock Option Plan provides for option agreements on the purchase of Class A
voting Parent Stock, at a price not less than $10.00 per share unless and until
the stock is offered for sale to the public, in which case the price will be not
less than fair market value. The options, which were granted by the Compensation
Committee of Parent upon the recommendation of the Argo-Tech Compensation
Committee, expire on November 9, 2001. The options may be exercised only in
quarters over four successive years, but shall become exercisable in full in the
event that the shares become registered or traded on a national exchange, or in
the event of a change in control.
Executive Life Insurance Plan
The Company's executive life insurance plan permits certain officers and
key employees to obtain life insurance benefits in addition to those generally
provided to salaried employees. The level of coverage provided to such officers
and key employees consists of basic term and whole life insurance coverage equal
to 3 times the individual's salary.
Bonus Plan
The Company has in effect a plan pursuant to which officers and other key
management employees may receive cash bonuses paid upon (1) the achievement of
specified cash flow goals in the preceding fiscal year and (2) individual
performance. The amounts of such bonus awards are approved by the Compensation
Committee of the Company.
Compensation of Directors
The Company pays each Director a quarterly fee of $2,500. Each director
also receives $3,000 plus reasonable out-of-pocket expenses for each board
meeting attended. Members of the Audit and the Compensation Committees of the
Company receive $3,000 for attendance at a committee meeting that is not held on
the same day as a meeting of the Board of Directors.
The members of the Company's Audit Committee are Thomas F. Dougherty, Remi
de Chastenet and Karl F. Storrie. The members of the Company's Compensation
Committee are Prakash A. Melwani, Karl F. Storrie and Robert Y. Nagata. The
members of the Compensation Committee of Parent are Michael S. Lipscomb and
Robert Y. Nagata.
CERTAIN TRANSACTIONS
UIC Distribution Agreement
UIC, a company owned by YCI (which is under the control of Mr. Yamada,
Parent's majority stockholder), was appointed by Argo-Tech as its exclusive
distributor of Argo-Tech products in 1990 with respect to the Japanese market
and in 1994 for the entire international market under a long-term agreement (the
"Distribution Agreement"). Management believes that the Distribution Agreement
was entered into on terms and conditions customary for the industry in all
respects with the exception of the basic contract term of 50 years and
termination provisions which are more favorable to UIC than industry norm. The
Distribution Agreement provides for a 15% discount from
89
<PAGE> 92
Argo-Tech catalog prices on all purchases of Argo-Tech products by UIC. For the
twelve months ended August 2, 1997, on a pro forma basis, sales by UIC accounted
for approximately 16% of the Company's net revenues.
Vestar Consulting Agreement
The Company has retained Vestar (of which Prakash A. Melwani, a director of
the Company, is a Managing Director) to provide it with financial and corporate
consulting services. In exchange for such services, the Company has agreed to
pay Vestar an annual consulting fee of approximately $110,000, payable
semi-annually in advance, plus Vestar's reasonable out-of-pocket costs and
expenses. Management believes that these terms of the consulting agreement are
no less favorable to the Company than would have been available pursuant to
arms' length negotiations with unaffiliated parties. The consulting agreement
will continue until December 31, 2000 and thereafter shall be renewed
automatically for additional one-year terms unless the Company or Vestar gives
written notice of termination.
Officer Loans
Several of the Named Executives have entered into presently outstanding
loan agreements with Parent. The largest amount of indebtedness outstanding
since the beginning of fiscal 1996 was: $243,418 (Mr. Lipscomb), $222,026 (Mr.
Keen) and $81,421 (Mr. Chrencik). Each loan is due October 28, 2000 and accrues
interest at 6.75% annually. These loans, secured by a pledge of Parent Stock,
were extended for the purchase of Parent Stock, or for the personal use of the
Named Executive. Each of the Named Executives having an outstanding loan has
entered into a Pledge Agreement and Promissory Note with Parent in connection
with such loans. Management believes that the terms of these loans are no less
favorable to the Company than would have been available pursuant to arms' length
negotiations with unaffiliated parties.
The Note Repayment
In March 1997, Parent purchased all of its redeemable preferred stock from
the two preferred stockholders, AT LLC and Vestar/Argo-Tech Investment Limited
Partnership (the "Vestar Investment Partnership"). AT LLC's preferred stock was
purchased, including accrued dividends, in exchange for subordinated notes in
the aggregate principal amount of $41.1 million (the "Parent Notes") and cash of
$2.1 million. Vestar Investment Partnership's preferred stock was purchased,
including accrued dividends, in exchange for cash of $2.0 million. The Company
also had notes payable in the aggregate principal amount of $5.0 million (the
"AT Notes," and together with the Parent Notes, the "Existing Notes"). The AT
Notes were issued to the Yamada Trust, a trust organized under an irrevocable
trust agreement, and were subordinate to the Company's senior debt. The Existing
Notes were repaid with the proceeds of the Offering. See "Summary -- The
Transactions" and "Certain Transactions."
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<PAGE> 93
PRINCIPAL STOCKHOLDERS
The Company is a wholly owned subsidiary of Parent, which owns 3,000
shares, or 100% of the Argo-Tech's Common Stock, par value of $.01 per share.
The shares of the Company held by the Parent are the only shares of the
Company's capital stock that are outstanding. The following table sets forth the
ownership of the Parent Stock as of August 2, 1997 by (i) each person known to
the Company to be the beneficial owner of more than 5% of any class of Parent
Stock, (ii) each director of the Company and (iii) all directors and executive
officers of the Company as a group. On August 2, 1997, the number of shares of
Parent Stock outstanding was 1,363,493 shares.
Shares of Parent's Class A and Class B Stock are voting shares and are
identical in all respects. Shares of Parent's Class C Stock are non-voting
shares which are convertible into shares of Parent's Class B Stock pursuant to
the terms of the 1994 Stockholders Agreement. Shares of Parent's Class D Stock
are non-voting, and all such shares are currently unissued and reserved for
issuance pursuant to the 1991 Performance Stock Option Plan. No Parent's Class D
Stock options have been exercised.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
SHARES OF SHARES OF SHARES OF PERCENT OF CLASS
NAME OF CLASS A CLASS B CLASS C ------------------
BENEFICIAL OWNER COMMON STOCK COMMON STOCK COMMON STOCK A B C
-------------------- ------------ ------------ ------------ ----- ---- ---
<S> <C> <C> <C> <C> <C> <C>
AT Holdings, LLC............................ 20,000 614,000(2) 27,560 3.1 89.1 100
1890 Highway 50 East
Suite 4
Carson City, NV 89701
Key Trust Company of Ohio, N.A.(1).......... 415,520 -- -- 64.2 -- --
127 Public Square
Cleveland, OH 44114
Sunhorizon International, Inc............... 129,402 -- -- 20.0 -- --
13221 Ranchwood Road
Tustin, CA 92680
YC International Inc........................ -- 75,000(2) -- -- 10.9 --
725 South Figueroa Street
Suite 3870
Los Angeles, CA 90117
Chrencik, David............................. 5,512 ** -- --
de Chastenet, Remi*......................... -- -- -- -- -- --
Dougherty, Thomas*.......................... 1,654 -- -- ** -- --
Fujiki, Yoichi*............................. 2,000 -- -- ** -- --
Keen, Paul.................................. 12,027 -- -- 1.9 -- --
Lipscomb, Michael*.......................... 20,670 -- -- 3.2 -- --
Melwani, Prakash*........................... -- -- -- -- -- --
Nagata, Robert*............................. -- -- -- -- -- --
St. Clair, Frances.......................... 5,812 -- -- ** -- --
Storrie, Karl*.............................. 1,654(3) -- -- ** -- --
Directors and Officers as a Group........... 57,635 -- -- 8.9 -- --
(15 persons)
</TABLE>
- ---------------
<TABLE>
<C> <S>
* Director of the Company
** Less than 1%
(1) Key Trust holds shares of Parent Stock in trust for the benefit of the ESOP.
(2) AT Holdings, LLC has the option to purchase all of YC International, Inc.'s shares of Class B
Common Stock. AT Holdings, LLC disclaims all beneficial ownership of such shares.
(3) Includes options to purchase 450 shares of Class A Common Stock that are immediately exercisable.
</TABLE>
91
<PAGE> 94
Stockholder Agreements
On May 17, 1994, the stockholders of Parent entered into the 1994
Stockholders Agreement, which was amended as of May 1, 1997 to reflect the
acquisition of Parent Stock by AT LLC from YCI, and was subsequently amended as
of July 18, 1997 to facilitate the reorganization of the Company's corporate
structure.
The 1994 Stockholders Agreement provides that the Board of Directors of
Parent will consist of five directors, three of whom are to be nominated by AT
LLC and two of whom are to be nominated by the then-serving chief executive
officer of the Company, of which, one of whom may be such chief executive
officer and at least one of whom is to be an independent director whose
selection is subject to AT LLC's approval. The 1994 Stockholders Agreement
further provides that the Board of Directors of the Company will consist of
seven directors, (i) four of whom are to be selected by AT LLC, (ii) two of whom
are to be selected by the chief executive officer of the Company, of which, one
of whom may be such chief executive officer and at least one of whom is to be an
independent director whose selection is subject to AT LLC's approval, and (iii)
one of whom is to be selected by Vestar Investment Partnership until December
31, 2000 and thereafter selected jointly by AT LLC and the chief executive
officer of the Company. The composition of the Board of Directors of the Company
is subject to change based on the occurrence of certain specified events
described in the 1994 Stockholders Agreement.
The 1994 Stockholders Agreement provides that until the consummation of an
Acceptable Company Offering or an Acceptable Demand Offering (each as defined in
the 1994 Stockholders Agreement), each of the stockholders agree to vote its
Parent Stock so that the Restated Certificate will provide that certain
specified actions require the approval of not less than 80% of the members of
the Board of Directors of Parent then serving. The specified actions include,
among other things, (i) certain transactions, on other than arms-length terms
among the Parent and YCI, AT LLC or an affiliate of YCI or AT LLC, or any
transaction between Parent and another Person (as defined in the 1994
Stockholders Agreement); (ii) transactions related to any merger, consolidation,
liquidation or dissolution of Parent or Argo-Tech, or the sale, lease, exchange,
transfer or other disposition or grant of a security interest or mortgage by
Argo-Tech relating to all or substantially all of its assets (except where the
net per share amount received by holders of Parent stock is the same and an
independent investment banking firm shall have determined that the price to be
realized from such transaction is fair to all stockholders); (iii) transactions
resulting in (a) a dilution of the percentage ownership interest of any
Non-Yamada Stockholder (as defined in the 1994 Stockholders Agreement), (b) the
issuance of capital stock of Argo-Tech to any person, (c) an amendment of the
Restated Certificate of Incorporation of Parent (the "Restated Certificate"),
(d) the issuance of, or amendment of the Restated Certificate to provide for the
issuance of, any preferred stock, (e) the issuance of any debt securities, (f) a
change of the capital structure of Parent which has a material adverse effect on
the Non-Yamada Stockholders that is different in kind from the effect on Yamada
and its affiliates, or (g) the declaration or payment of any dividend to any
Person; (iv) changes in the arrangements for the distribution of the Company's
products; (v) changes in the Certificate of Incorporation relating to election
or removal of directors; or (vi) any action taken by Parent as the sole
stockholder of the Company. The 1994 Stockholders Agreement further provides
that until the consummation of an Acceptable Company Offering or an Acceptable
Demand Offering, the Restated Certificate will provide that the power of Parent,
as sole stockholder of the Company, to elect and remove members of the Board of
Directors of the Company is vested exclusively in the stockholders of Parent.
The 1994 Stockholders Agreement imposes certain restrictions on the rights
of the stockholders of Parent to sell or otherwise dispose of their Parent
Stock. In certain circumstances, the stockholders have tag-along rights to
participate in certain transactions by AT LLC, YCI or Sunhorizon involving
Parent Stock. Additionally, the stockholders are subject to drag-along rights in
the event that Parent's or the Company's Board of Directors approves a
transaction in which the terms and conditions relating to such stockholder are
no less favorable than those relating to AT
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LLC. The 1994 Stockholders Agreement also grants a right of first refusal in the
event that a stockholder attempts to dispose of its Parent Stock other than as
permitted pursuant to the 1994 Stockholders Agreement.
Members of the Company's management (the "Management Stockholders") and
certain outside directors of the Company who are parties to the 1994 Stockholder
Agreement have the right, exercisable no more than once in any calendar year, to
put to Parent or the Company the shares of Parent Stock beneficially owned by
such stockholders. The exercise of such put rights, which must occur on or
before April 30, 2004, is to be effected during a four-week period, which is
selected annually by the chief executive officer of the Company, during the
Company's second fiscal quarter.
The 1994 Stockholders Agreement further provides that after December 24,
1996, each of AT LLC, the Management Stockholders and the ESOP Trustee (acting
by vote or consent of a majority of the aggregate number of shares held by them)
have the right to demand that Parent make an initial registered public offering
of its Parent Stock under the Securities Act, provided that (i) following such
offering, AT LLC, Sunhorizon and their respective transferees will own no less
than 36% in the aggregate of the outstanding Parent Stock, (ii) any underwriters
chosen to assist in such offering are reasonably acceptable to not less than 80%
of the members of Parent's Board of Directors and (iii) the minimum amount
received pursuant to such offering is no less than $35,000,000 in gross proceeds
in the aggregate. In addition, each of AT LLC and the non-AT LLC stockholders
have the right, subject to certain restrictions and limitations, to require
Parent to effect registration under the Securities Act of such stockholder's
Parent Stock. In addition, in certain circumstances and subject to certain
restrictions and limitations, if Parent registers shares of Parent Stock, such
stockholders are entitled to include their shares of Parent Stock in such
registration.
On May 17, 1994, the Company and Parent also entered into a supplemental
stockholders agreement (the "Supplemental Stockholders Agreement") with Key
Trust Company of Ohio, N.A. as ESOP Trustee. The Supplemental Stockholders
Agreement contains, among other things, provisions relating to tag along and
drag along rights and demand and piggyback registration rights for the benefit
of the ESOP. The Supplemental Stockholders Agreement was amended as of July 18,
1997 to facilitate the reorganization of the Company's corporate structure.
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DESCRIPTION OF THE AMENDED CREDIT FACILITY
On September 26, 1997, the New Credit Facility was amended and restated (as
amended and restated, the "Amended Credit Facility") substantially in accordance
with the following description. The description set forth below does not purport
to be complete and is qualified in its entirety by reference to certain
agreements setting forth the principal terms and conditions of the Amended
Credit Facility, which are available upon request from the Company. Capitalized
terms used but not otherwise defined in this "Description of the Amended Credit
Facility" shall have the meaning ascribed to them in the Amended Credit
Facility.
On July 18, 1997, the Company entered into the New Credit Facility. The New
Credit Facility provides for Tranche A Term Loans in an aggregate principal
amount not to exceed $100 million, Delayed Draw Acquisition Loans in an
aggregate principal amount not to exceed $15 million and Revolving Credit Loans
in an aggregate principal amount not to exceed $20 million. All loans under the
New Credit Facility mature on July 18, 2004.
The proceeds of the Tranche A Term Loans, initially aggregating $100
million, were used in July 1997 to repay in full the Company's Old Credit
Facility. On July 23, 1997, the Company optionally prepaid $5 million of the
Tranche A Term Loans. The proceeds of the Delayed Draw Acquisition Loans were
used, together with the proceeds of the Offering and cash on hand, to pay the
purchase price of the Acquisition and related fees and expenses. The proceeds of
the Revolving Loans may be used at any time (1) for working capital purposes,
(2) in an amount not to exceed a maximum of $10 million, and subject to excess
cash flow availability, to finance permitted acquisitions, to fund distributions
from the ESOP and to fund purchases of Parent Stock (a) pursuant to outstanding
Put Options and (b) from directors and employees of the Company and its
subsidiaries. In addition, up to $2 million of the revolving commitments may be
used for letters of credit issued for general corporate purposes.
The Term Loans are repayable in twenty-eight quarterly installments,
beginning with an aggregate amortization payment of $1,375,000 in October 1997
and continuing with gradually increasing amortization payments until the
maturity date, at which time an aggregate amortization payment of $8,250,000
will become due.
The Company may optionally prepay the Term Loans from time to time in whole
or in part, without premium or penalty. At the Company's option, Revolving Loans
may be prepaid, and revolving commitments may permanently be reduced, in whole
or in part, at any time.
The Company is required to make mandatory prepayments of the Term Loans in
an amount equal to (a) 50% of excess cash flow for each fiscal year (or, in the
case of the fiscal year ending October 25, 1997, 12.5%) if at the end of the
fiscal year the Senior Leverage Ratio (as defined in the Amended Credit
Facility) is more than 2.10 to 1.00 and (b) 100% of the net cash proceeds of
certain dispositions of assets, issuance of stock or occurrence of certain
indebtedness.
The Amended Credit Facility contains a number of covenants that, among
other things, restrict the ability of Parent, the Company and its subsidiaries
to incur additional indebtedness, issue preferred stock, create liens on assets,
incur guarantee obligations, enter into mergers, consolidations or amalgamations
or liquidate, wind up or dissolve, dispose of assets, pay dividends, make
capital expenditures, purchase Parent Stock, make advances, acquisitions, loans,
extensions of credit, capital contributions to, or purchases of any stock,
bonds, notes, debentures or other securities, prepay certain indebtedness or
amend other debt instruments, engage in certain transactions with subsidiaries
and affiliates, enter into sale and leaseback transactions, pay dividends or
make other distributions and otherwise restrict certain corporate activities. In
addition, the Company will be required to comply with specified financial ratios
and tests, including minimum interest coverage and maximum leverage ratios.
The Amended Credit Facility contains customary events of default,
including, but not limited to, nonpayment of principal or interest; violation of
covenants; incorrectness of representations and
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warranties in any material respect; cross default and cross acceleration;
bankruptcy; material judgments; ERISA; actual or asserted invalidity of security
documents; and Change in Control (as defined in the Credit Agreement).
The obligations of the Company under the Amended Credit Facility are
unconditionally and irrevocably guaranteed by Parent and by each of the
Company's existing and future domestic operating subsidiaries including Carter
and each future foreign subsidiary to the extent such guarantee would not result
in adverse consequences to the Borrower (the "Subsidiary Guarantors"). In
addition, the Company and the Subsidiary Guarantors have granted and/or pledged
a first priority security interest in all of their respective tangible and
intangible assets and capital stock held by them, except for the Business Park.
Although it has no immediate plans to do so, the Company is permitted by the
Amended Credit Facility to dispose of the Business Park.
All loans under the Amended Credit Facility will bear interest, at the
Company's election, at a spread over either (1) the Eurodollar Rate or (2) the
Alternate Base Rate ("ABR") which is equal to the highest of (a) the
Administrative Agent's Prime Rate, (b) the secondary market rate for three-month
certificates of deposit plus 1.0% and (c) the Federal funds rate plus 0.5%, in
each case as in effect from time to time. The Eurodollar Rate is the rate
offered for Eurodollar deposits for one, two, three or six months (as selected
by the Company) in the London interbank market. The spread with respect to the
Eurodollar Rate ranges from 2.00% to 1.00% and the spread with respect to the
ABR ranges from 1.00% to 0% and in each case is determined based on the ratio of
Total Debt to Consolidated EBITDA (the "Leverage Ratio") as of the most recent
fiscal quarter end. The spread with respect to the ABR ranges from 1.00% to 0%.
The Company also will pay a commitment fee on the unused portion of the
revolving commitments at a rate ranging from 0.50% to 0.20% determined based on
the Leverage Ratio as of the most recent fiscal quarter end.
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DESCRIPTION OF NOTES
GENERAL
The Original Notes were, and the Exchange Notes will be, issued under an
Indenture, dated as of September 26, 1997 (the "Indenture"), among the Company,
the Subsidiary Guarantors and Harris Trust and Savings Bank, as Trustee (the
"Trustee"), a copy of which is available upon request to the Company.
The following summary of all material provisions of the Indenture and the
Notes does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act of 1939, as amended ("TIA"). Capitalized terms used herein
and not otherwise defined have the meanings set forth in the section "Certain
Definitions".
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee, at Wall Street Plaza, 88 Pine
Street, 19th Floor, New York, New York 10005), except that, at the option of the
Company, payment of interest may be made by check mailed to the registered
holders of the Notes at their registered addresses.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF THE NOTES
The Notes are unsecured senior subordinated obligations of the Company,
limited to $140 million aggregate principal amount, and will mature on October
1, 2007. Each Note bears interest at the rate per annum shown on the front cover
of this Prospectus from September 26, 1997, or from the most recent date to
which interest has been paid or provided for, payable semiannually to Holders of
record at the close of business on the March 15 or September 15 immediately
preceding the interest payment date on April 1 and October 1 of each year,
commencing April 1, 1998.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time on or after October 1, 2002, and prior to maturity, upon not less
than 30 nor more than 60 days' prior notice mailed by first-class mail to each
Holder's registered address, at the following redemption prices (expressed as a
percentage of principal amount), plus accrued interest, if any, to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month period commencing on October 1 of the years set
forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
---------------------------------------------------------------- ---------
<S> <C>
2002............................................................ 104.313%
2003............................................................ 102.875%
2004............................................................ 101.438%
2005 and thereafter............................................. 100.000%
</TABLE>
In addition, at any time and from time to time prior to October 1, 2000,
the Company may redeem in the aggregate up to 33 1/3% of the original aggregate
principal amount of the Notes with the proceeds of one or more Public Equity
Offerings following which there is a Public Market, at a redemption price
(expressed as a percentage of principal amount thereof) of 108.625% plus
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accrued interest, if any, to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date); provided, however, that at least 66 2/3% of the
original aggregate principal amount of the Notes must remain outstanding after
each such redemption.
SELECTION
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
will be redeemed in part. If any Note is to be redeemed in part only, the notice
of redemption relating to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancelation of the original Note.
RANKING
The indebtedness evidenced by the Notes are unsecured Senior Subordinated
Indebtedness of the Company. The payment of principal of, premium (if any) and
interest on the Notes is subordinated in right of payment, as set forth in the
Indenture, to all existing and future Senior Indebtedness of the Company, will
rank pari passu in right of payment with all existing and future Senior
Subordinated Indebtedness of the Company and is senior in right of payment to
all existing and future Subordinated Obligations of the Company. The Notes are
also effectively subordinated to any Secured Indebtedness of the Company to the
extent of the value of the assets securing such Indebtedness. However, payment
from the money or the proceeds of U.S. Government Obligations held in any
defeasance trust described under "-- Defeasance" below is not subordinated to
any Senior Indebtedness or subject to the restrictions described herein.
The indebtedness evidenced by a Subsidiary Guarantee is unsecured Senior
Subordinated Indebtedness of the Subsidiary Guarantor issuing such Subsidiary
Guarantee. The Payment of a Subsidiary Guarantee is subordinate in right of
payment, as set forth in the Indenture, to all existing and future Senior
Indebtedness of such Subsidiary Guarantor, ranks pari passu in right of payment
with the existing and future Senior Subordinated Indebtedness of such Subsidiary
Guarantor and is senior in right of payment to all existing and future
Subordinated Obligations of such Subsidiary Guarantor. Each Subsidiary Guarantee
is also effectively subordinated to any Secured Indebtedness of the applicable
Subsidiary Guarantor to the extent of the value of the assets securing such
indebtedness.
As of August 2, 1997, after giving pro forma effect to the Transactions,
the Offering and the application of the proceeds therefrom as described herein
under "Use of Proceeds", (i) the outstanding Senior Indebtedness of the Company
would have been $110.0 million (exclusive of unused commitments), all of which
would have been Secured Indebtedness, (ii) the Company would have had no Senior
Subordinated Indebtedness outstanding other than the Notes and no indebtedness
that is subordinate or junior in right of repayment to the Notes, (iii) the
outstanding Senior Indebtedness of the Subsidiary Guarantors, consisting
entirely of Guarantees of Senior Indebtedness, would have been $110.0 million,
all of which would have been Secured Indebtedness, and (iv) the outstanding
Senior Subordinated Indebtedness of the Subsidiary Guarantors would consist
entirely of the Subsidiary Guarantees. Although the Indenture contains
limitations on the amount of additional Indebtedness that the Company and the
Subsidiary Guarantors may Incur, under certain circumstances the amount of such
Indebtedness could be substantial and, in any case, such Indebtedness may be
Senior Indebtedness of the Company or a Subsidiary Guarantor, as the case may
be. See "Certain Covenants -- Limitation on Indebtedness" below.
"Senior Indebtedness" of the Company means the principal of, premium (if
any) and interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization of
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the Company, regardless of whether or not a claim for post-filing interest is
allowed in such proceedings) on, and fees and other amounts owing in respect of,
Bank Indebtedness and all other Indebtedness of the Company including interest
thereon, whether outstanding on the Issue Date or thereafter Incurred, unless in
the instrument creating or evidencing the same or pursuant to which the same is
outstanding it is provided that such obligations are not superior in right of
payment to the Notes; provided, however, that Senior Indebtedness shall not
include (i) any obligation of the Company to any Subsidiary, (ii) any liability
for Federal, state, local or other taxes owed or owing by the Company, (iii) any
accounts payable or other liability to trade creditors arising in the ordinary
course of business (including Guarantees thereof or instruments evidencing such
liabilities), (iv) any Indebtedness or obligation of the Company that by its
terms is subordinate or junior in any respect to any other Indebtedness or
obligation of the Company, including any Senior Subordinated Indebtedness and
any Subordinated Obligations, (v) any obligations with respect to any Capital
Stock or (vi) any Indebtedness Incurred in violation of the Indenture. "Senior
Indebtedness" of any Subsidiary Guarantor has a correlative meaning.
Only Indebtedness of the Company or a Subsidiary Guarantor that is Senior
Indebtedness will rank senior to the Notes and the relevant Subsidiary Guarantee
in accordance with the provisions of the Indenture. The Notes and each
Subsidiary Guarantee will in all respects rank pari passu with all other Senior
Subordinated Indebtedness of the Company and the relevant Subsidiary Guarantor,
respectively. The Company and each Subsidiary Guarantor have agreed in the
Indenture that they will not Incur, directly or indirectly, any Indebtedness
that is subordinate or junior in ranking in any respect to Senior Indebtedness
unless such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness. Unsecured
Indebtedness of the Company or a Subsidiary Guarantor is not deemed to be
subordinate or junior to Secured Indebtedness merely because it is unsecured.
The Company may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under
"-- Defeasance" below and may not otherwise purchase, redeem or otherwise retire
any Notes (collectively, "pay the Notes") if (i) any Senior Indebtedness of the
Company is not paid when due or (ii) any other default on Senior Indebtedness of
the Company occurs and the maturity of such Senior Indebtedness is accelerated
in accordance with its terms unless, in either case, the default has been cured
or waived and any such acceleration has been rescinded or such Senior
Indebtedness has been paid in full. However, the Company may pay the Notes
without regard to the foregoing if the Company and the Trustee receive written
notice approving such payment from the Representative of the Designated Senior
Indebtedness with respect to which either of the events set forth in clause (i)
or (ii) of the immediately preceding sentence has occurred and is continuing.
During the continuance of any default (other than a default described in clause
(i) or (ii) of the second preceding sentence) with respect to any Designated
Senior Indebtedness pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods, the
Company may not pay the Notes for a period (a "Payment Blockage Period")
commencing upon the receipt by the Trustee (with a copy to the Company) of
written notice (a "Blockage Notice") of such default from the Representative of
the Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period and ending 179 days thereafter (or earlier if such Payment
Blockage Period is terminated (i) by written notice to the Trustee and the
Company from the Person or Persons who gave such Blockage Notice, (ii) by
repayment in full of such Designated Senior Indebtedness or (iii) because the
default giving rise to such Blockage Notice is no longer continuing).
Notwithstanding the provisions described in the immediately preceding sentence
(but subject to the provisions contained in the first sentence of this
paragraph), unless the holders of such Designated Senior Indebtedness or the
Representative of such holders have accelerated the maturity of such Designated
Senior Indebtedness, the Company may resume payments on the Notes after the end
of such Payment Blockage Period, including any missed payments. Not more than
one Blockage Notice may be given in any consecutive 360-day period, irrespective
of the number of defaults with respect to Designated
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Senior Indebtedness during such period. However, if any Blockage Notice within
such 360-day period is given by or on behalf of any holders of Designated Senior
Indebtedness other than the Bank Indebtedness, the Representative of the Bank
Indebtedness may give another Blockage Notice within such period. In no event,
however, may the total number of days during which any Payment Blockage Period
or Periods is in effect exceed 179 days in the aggregate during any 360
consecutive day period. For purposes of this Section, no default or event of
default that existed or was continuing on the date of the commencement of any
Payment Blockage Period with respect to the Designated Senior Indebtedness
initiating such Payment Blockage Period shall be, or be made, the basis of the
commencement of a subsequent Payment Blockage Period by the Representative of
such Designated Senior Indebtedness, whether or not within a period of 360
consecutive days, unless such default or event of default shall have been cured
or waived for a period of not less than 90 consecutive days.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property, the holders of Senior Indebted ness
will be entitled to receive payment in full of the Senior Indebtedness before
the Noteholders are entitled to receive any payment and until the Senior
Indebtedness is paid in full, any payment or distribution to which Note holders
would be entitled but for the subordination provisions of the Indenture will be
made to holders of the Senior Indebtedness as their respective interests may
appear. If a distribution is made to Noteholders that due to the subordination
provisions of the Indenture should not have been made to them, such Noteholders
are required to hold it in trust for the holders of Senior Indebtedness and pay
it over to them as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of the Designated
Senior Indebtedness (or their Representative) of the acceleration. If any
Designated Senior Indebtedness is outstanding, the Company may not pay the Notes
until five Business Days after such holders (or their Representative) receive
notice of such acceleration and, thereafter, may pay the Notes only if the
subordination provisions of the Indenture otherwise permit payment at that time.
The terms of the subordination provisions described above with respect to
the Company's obligations under the Notes apply equally to a Subsidiary
Guarantor and the obligations of such Subsidiary Guarantor under its Subsidiary
Guarantee.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company or a Subsidiary Guarantor who
are holders of Senior Indebtedness of the Company or such Subsidiary Guarantor,
as the case may be, may recover more, ratably, than the Noteholders, and
creditors of the Company who are not holders of Senior Indebtedness or of Senior
Subordinated Indebtedness (including the Notes) may recover less, ratably, than
holders of Senior Indebtedness of the Company.
SUBSIDIARY GUARANTEES
The Subsidiary Guarantors, as primary obligors and not merely as sureties,
have irrevocably and unconditionally Guaranteed, on an unsecured senior
subordinated basis, the performance and punctual payment when due, whether at
Stated Maturity, by acceleration or otherwise, of all obligations of the Company
under the Indenture and the Notes, whether for payment of principal of or
interest on the Notes, expenses, indemnification or otherwise (all such
obligations guaranteed by such Subsidiary Guarantors being herein called the
"Guaranteed Obligations"). The Subsidiary Guarantors have also agreed to pay, in
addition to the amount stated above, any and all expenses (including reasonable
counsel fees and expenses) incurred by the Trustee or the Holders in enforcing
any rights under the Subsidiary Guarantees. Each Subsidiary Guarantee is limited
in amount to an amount not to exceed the maximum amount that can be Guaranteed
by the applicable Subsidiary Guarantor without rendering the Subsidiary
Guarantee, as it relates to such Subsidiary
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Guarantor, voidable under applicable law relating to fraudulent conveyance or
fraudulent transfer or similar laws affecting the rights of creditors generally.
On or after the Issue Date, the Company will cause (a) each Restricted
Subsidiary that is a Domestic Subsidiary that incurs Indebtedness and (b) each
Restricted Subsidiary that is not a Domestic Subsidiary that enters into a
Guarantee of any of the obligations of the Company, Parent or any of the
Company's Subsidiaries pursuant to the Credit Agreement, to execute and deliver
to the Trustee a supplemental indenture pursuant to which such Restricted
Subsidiary will Guarantee payment of the Notes. See "Certain Covenants -- Future
Subsidiary Guarantors" below.
Each Subsidiary Guarantee is a continuing guarantee and shall (a) remain in
full force and effect until payment in full of all the Guaranteed Obligations,
except as provided below, (b) be binding upon each Subsidiary Guarantor and (c)
enure to the benefit of and be enforceable by the Trustee, the Holders and their
successors, transferees and assigns.
A Subsidiary Guarantee will be automatically released upon the sale
(including through merger or consolidation) of the Capital Stock, or all or
substantially all the assets, of the applicable Subsidiary Guarantor if (a) such
sale is made in compliance with the covenant described under "Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and (b) such
Subsidiary Guarantor is released from its guarantees of, and all pledges and
security granted in connection with, the Credit Agreement and any other
Indebtedness of the Parent, the Company or any Restricted Subsidiary. A
Subsidiary Guarantee also will be automatically released upon the applicable
Subsidiary Guarantor ceasing to be a Subsidiary of the Company as a result of
any foreclosure of any pledge or security interest securing Bank Indebtedness or
other exercise of remedies in respect thereof if such Subsidiary Guarantor is
released from its guarantees of, and all pledges and security interests granted
in connection with, the Amended Credit Facility.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder will have the right to require the Company to repurchase
all or any part of such Holder's Notes at a purchase price in cash equal to 101%
of the principal amount thereof, plus accrued and unpaid interest, if any, to
the date of repurchase (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date):
(i) prior to the earlier to occur of the first public offering of
Voting Stock of Parent or the Company, the Permitted Holders cease to be
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, of a majority in the aggregate of
the total voting power of the Voting Stock of the Company or Parent,
whether as a result of issuance of securities of the Company or Parent, as
the case may be, any merger, consolidation, liquidation or dissolution of
the Company or Parent, as the case may be, any direct or indirect transfer
of securities by any Permitted Holder or otherwise (for purposes of this
clause (i) and clause (ii) below, the Permitted Holders shall be deemed to
own beneficially any Voting Stock of an entity (the "specified entity")
held by any other entity (the "parent entity") so long as the Permitted
Holders beneficially own (as so defined), directly or indirectly, in the
aggregate a majority of the voting power of the Voting Stock of the parent
entity);
(ii) (A) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than one or more Permitted Holders, is or
becomes the beneficial owner (as defined in clause (i) above, except that
such person shall be deemed to have "beneficial ownership" of all shares
that any 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 35% of the total voting power of the Voting Stock
of the Company or Parent, as the case may be, and (B) the Permitted Holders
"beneficially own" (as defined in clause (i) above), directly or
indirectly, in the aggregate a lesser percentage of the total voting power
of the Voting Stock of the Company or Parent, as the case may be, than such
other person and do not have the right
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or ability by voting power, contract or otherwise to elect or designate for
election a majority of the Board of Directors of the Parent or the Company,
as the case may be (for the purposes of this clause (ii), such other person
shall be deemed to own beneficially any Voting Stock of a specified
corporation held by a parent corporation, if such other person
"beneficially owns" (as defined in this clause (ii)), directly or
indirectly, more than 35% of the voting power of the Voting Stock of such
parent corporation and the Permitted Holders "beneficially own" (as defined
in clause (i) above), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the board of
directors of such parent corporation); or
(iii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of Parent
or the Company, as the case may be (together with any new directors whose
election by such Board of Directors or whose nomination for election by the
shareholders of Parent or the Company, as the case may be, was approved by
a vote of 66 2/3% of the directors of Parent or the Company, as the case
may be, then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved), cease for any reason to constitute a majority of the Board of
Directors of the Parent or the Company, as the case may be, then in office.
In the event that at the time of such Change of Control the terms of the
Bank Indebtedness restrict or prohibit the repurchase of Notes pursuant to this
covenant, then prior to the mailing of the notice to Holders provided for in the
immediately following paragraph but in any event within 30 days following any
Change of Control, the Company shall (i) repay in full all Bank Indebtedness or
offer to repay in full all Bank Indebtedness and repay the Bank Indebtedness of
each lender who has accepted such offer or (ii) obtain the requisite consent
under the agreements governing the Bank Indebtedness to permit the repurchase of
the Notes as provided for in the immediately following paragraph.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase (subject to the right of Holders of record on the relevant record
date to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts and financial information regarding such Change
of Control; (3) the repurchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and (4) the
instructions determined by the Company, consistent with this covenant, that a
Holder must follow in order to have its Notes purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this paragraph by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchaser. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings.
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The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the Credit Agreement. Future Senior
Indebtedness of the Company may contain prohibitions of certain events that
would constitute a Change of Control or require such Senior Indebtedness to be
repurchased upon a Change of Control. Moreover, the exercise by the Holders of
their right to require the Company to repurchase the Notes could cause a default
under such Senior Indebtedness, even if the Change of Control itself does not,
due to the financial effect of such repurchase on the Company. Finally, the
Company's ability to pay cash to the Holders upon a repurchase may be limited by
the Company's then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company will not, and will not permit
any Restricted Subsidiary to, Incur any Indebtedness; provided, however, that
the Company may Incur Indebtedness if on the date thereof the Consolidated
Coverage Ratio would be greater than 2.00:1.00, if such Indebtedness is Incurred
on or prior to September 30, 1999, and 2.25:1.00 if such Indebtedness is
Incurred thereafter. Notwithstanding the foregoing, the Company will not permit
any Subsidiary to issue, to any party other than the Company, any Preferred
Stock.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness: (i) Bank
Indebtedness relating to the Term Loan Facilities in an aggregate principal
amount not to exceed $110 million less the aggregate amount of all prepayments
of principal applied permanently to reduce any such Indebtedness; (ii) Bank
Indebtedness relating to the Revolving Facility or Indebtedness Incurred
pursuant to other revolving credit, working capital or letter of credit
financings in an aggregate principal amount outstanding not in excess of the
greater of $20.0 million and the Borrowing Base in effect from time to time;
(iii) Indebtedness of the Company owing to and held by any Subsidiary or
Indebtedness of a Restricted Subsidiary owing to and held by the Company or any
Subsidiary; provided, however, that any subsequent issuance or transfer of any
Capital Stock or any other event that results in any such Subsidiary ceasing to
be a Subsidiary or any subsequent transfer of any such Indebtedness (except to
the Company or a Restricted Subsidiary) will be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the issuer thereof; (iv)
Indebtedness represented by the Notes, the Subsidiary Guarantees, any
Indebtedness (other than the Indebtedness described in clauses (i) through (iii)
above) outstanding on the Issue Date and any Refinancing Indebtedness Incurred
in respect of any Indebtedness described in this clause (iv) or paragraph (a);
(v) (A) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or
prior to the date on which such Restricted Subsidiary was acquired by the
Company (other than Indebtedness Incurred as consideration in, in contemplation
of, or to provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to which
such Restricted Subsidiary became a Subsidiary or was otherwise acquired by the
Company); provided, however, that at the time such Restricted Subsidiary is
acquired by the Company, the Company would have been able to Incur $1.00 of
additional Indebtedness pursuant to paragraph (a) after giving effect to the
Incurrence of such Indebtedness pursuant to this clause (v) and (B) Refinancing
Indebtedness Incurred by a Restricted Subsidiary in respect of Indebtedness
Incurred by such Restricted Subsidiary pursuant to this clause (v); (vi)
Indebtedness (A) in respect of performance bonds, bankers' acceptances, letters
of credit and surety or appeal bonds provided by the Company and the Restricted
Subsidiaries in the ordinary course of their business and which do not secure
other Indebtedness, and (B) under Currency Agreements and Interest Rate
Agreements, in each case entered into for bona fide hedging purposes of the
Company in the ordinary course of business; provided, however, that, in the case
of Currency Agreements and Interest Rate Agreements, such Currency Agreements
and Interest Rate Agreements do not increase the Indebtedness of the Company
outstanding at any time other than as a result of
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fluctuations in foreign currency exchange rates or interest rates or by reason
of fees, indemnities and compensation payable thereunder; (vii) Purchase Money
Indebtedness and Capitalized Lease Obligations in an aggregate principal amount
not to exceed $10.0 million at any time outstanding; (viii) Indebtedness of
Restricted Subsidiaries (other than Indebtedness permitted to be Incurred
pursuant to any other clause of this paragraph (b)) in an aggregate principal
amount on the date of Incurrence that, when added to all other Indebtedness
Incurred pursuant to this clause (viii) and then outstanding, will not exceed
$5.0 million; or (ix) Indebtedness (other than Indebtedness permitted to be
Incurred pursuant to paragraph (a) or any other clause of this paragraph (b)) in
an aggregate principal amount on the date of Incurrence that, when added to all
other Indebtedness Incurred pursuant to this clause (ix) and then outstanding,
will not exceed $10.0 million.
(c) Notwithstanding the foregoing, the Company may not Incur any
Indebtedness pursuant to paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to repay, prepay, redeem, defease, retire, refund or
refinance any Subordinated Obligations unless such Indebtedness will be
subordinated to the Notes to at least the same extent as such Subordinated
Obligations. The Company may not Incur any Indebtedness if such Indebtedness is
subordinate or junior in ranking in any respect to any Senior Indebtedness
unless such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness. In
addition, the Company may not Incur any Secured Indebtedness that is not Senior
Indebtedness unless contemporaneously therewith effective provision is made to
secure the Notes equally and ratably with (or on a senior basis to, in the case
of Indebtedness subordinated in right of payment to the Notes) such Secured
Indebtedness for so long as such Secured Indebtedness is secured by a Lien. A
Subsidiary Guarantor may not Incur any Indebtedness if such Indebtedness is by
its terms expressly subordinate or junior in ranking in any respect to any
Senior Indebtedness of such Subsidiary Guarantor unless such Indebtedness is
Senior Subordinated Indebtedness of such Subsidiary Guarantor or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness of such
Subsidiary Guarantor. In addition, a Subsidiary Guarantor may not Incur any
Secured Indebtedness that is not Senior Indebtedness of such Subsidiary
Guarantor unless contemporaneously therewith effective provision is made to
secure the Subsidiary Guarantee of such Subsidiary Guarantor equally and ratably
with (or on a senior basis to, in the case of Indebtedness subordinated in right
of payment to such Subsidiary Guarantee) such Secured Indebtedness for so long
as such Secured Indebtedness is secured by a Lien.
(d) Notwithstanding any other provision of this covenant, the maximum
amount of Indebtedness that the Company or any Restricted Subsidiary may Incur
pursuant to this covenant shall not be deemed to be exceeded solely as a result
of fluctuations in the exchange rates of currencies. For purposes of determining
the outstanding principal amount of any particular Indebtedness Incurred
pursuant to this covenant, (i) Indebtedness Incurred pursuant to the Credit
Agreement prior to or on the Issue Date shall be treated as Incurred pursuant to
clause (i) of paragraph (b) above, (ii) Indebtedness permitted by this covenant
need not be permitted solely by reference to one provision permitting such
Indebtedness but may be permitted in part by one such provision and in part by
one or more other provisions of this covenant permitting such Indebtedness and
(iii) in the event that Indebtedness or any portion thereof meets the criteria
of more than one of the types of Indebtedness described in this covenant, the
Company, in its sole discretion, shall classify such Indebtedness and only be
required to include the amount of such Indebtedness in one of such clauses.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary, directly or indirectly, to (i) declare or pay
any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) except dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and except dividends or distributions
payable to the Company or another Restricted Subsidiary (and, if such Restricted
Subsidiary is not wholly owned, to its other shareholders on a pro rata basis),
(ii) purchase, redeem, retire or otherwise acquire for
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value any Capital Stock of the Company or any Restricted Subsidiary held by
Persons other than the Company or another Restricted Subsidiary, (iii) purchase,
repurchase, redeem, defease or otherwise acquire or retire for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of acquisition) or (iv) make any Investment
(other than a Permitted Investment) in any Person (any such dividend,
distribution, purchase, redemption, repurchase, defeasance, other acquisition,
retirement or Investment being herein referred to as a "Restricted Payment") if
at the time the Company or such Restricted Subsidiary makes such Restricted
Payment: (1) a Default will have occurred and be continuing (or would result
therefrom); (2) the Company could not Incur at least $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under "-- Limitation
on Indebtedness"; or (3) the aggregate amount of such Restricted Payment and all
other Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination will be
conclusive and evidenced by a resolution of the Board of Directors) declared or
made subsequent to the Issue Date would exceed the sum of: (A) 50% of the
Consolidated Net Income accrued during the period (treated as one accounting
period) from the beginning of the fiscal quarter in which the Issue Date occurs
to the end of the most recent fiscal quarter ending at least 45 days prior to
the date of such Restricted Payment (or, in case such Consolidated Net Income
will be a deficit, minus 100% of such deficit); (B) the aggregate Net Cash
Proceeds received by the Company from the issue or sale of its Capital Stock
(other than Disqualified Stock) subsequent to the Issue Date (other than an
issuance or sale to a Subsidiary of the Company or an employee stock ownership
plan or other trust established by the Company or any of its Subsidiaries); (C)
the amount by which Indebtedness of the Company or its Restricted Subsidiaries
is reduced on the Company's balance sheet upon the conversion or exchange (other
than by a Subsidiary) subsequent to the Issue Date of any Indebtedness of the
Company or its Restricted Subsidiaries convertible or exchangeable for Capital
Stock (other than Disqualified Stock) of the Company (less the amount of any
cash or other property distributed by the Company or any Restricted Subsidiary
upon such conversion or exchange); and (D) the amount equal to the net reduction
in Investments in Unrestricted Subsidiaries resulting from (i) payments of
dividends, repayments of the principal of loans or advances or other transfers
of assets to the Company or any Restricted Subsidiary from Unrestricted
Subsidiaries or (ii) the redesignation of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the definition of
"Investment") not to exceed, in the case of any Unrestricted Subsidiary, the
amount of Investments previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary, which amount was included in the
calculation of the amount of Restricted Payments.
(b) The provisions of the foregoing paragraph (a) will not prohibit: (i)
any purchase or redemption of Capital Stock of the Company or Subordinated
Obligations made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified Stock
and other than Capital Stock issued or sold to a Subsidiary or an employee stock
ownership plan or other trust established by the Company or any of its
Subsidiaries); provided, however, that (A) such purchase or redemption will be
excluded in the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such sale will be excluded from clause (3)(B) of paragraph
(a) above; (ii) any purchase or redemption of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company that is permitted to be Incurred pursuant to
paragraph (b) of the covenant described under "-- Limitation on Indebtedness";
provided, however, that such purchase or redemption will be excluded in the
calculation of the amount of Restricted Payments; (iii) any purchase or
redemption of Subordinated Obligations from Net Available Cash to the extent
permitted by the covenant described under "-- Limitation on Sales of Assets and
Subsidiary Stock"; provided, however, that such purchase or redemption will be
excluded in the calculation of
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the amount of Restricted Payments; (iv) dividends paid within 60 days after the
date of declaration thereof if at such date of declaration such dividend would
have complied with this covenant; provided, however, that such dividend will be
included in the calculation of the amount of Restricted Payments; (v) payment of
dividends, other distributions or other amounts by the Company for the purposes
set forth in clauses (A) through (D) below; provided, however, that such
dividend, distribution or amount set forth in clauses (A) through (D) shall be
included in the calculation of the amount of Restricted Payments for the
purposes of paragraph (a) above: (A) to Parent in amounts equal to the amounts
required for Parent to pay franchise taxes and other fees required to maintain
its corporate existence, and to provide for other operating costs of up to
$100,000 per fiscal year; (B) to Parent in amounts equal to amounts required for
Parent to pay federal, state and local income taxes to the extent such income
taxes are attributable to the income of the Company and its Restricted
Subsidiaries (and, to the extent of amounts actually received from its
Unrestricted Subsidiaries, in amounts required to pay such taxes to the extent
attributable to the income of such Unrestricted Subsidiaries); (C) to Parent in
amounts equal to amounts expended by Parent to repurchase Capital Stock of
Parent owned by former employees of the Company or its Subsidiaries or their
assigns, estates and heirs; provided, however, that the aggregate amount paid,
loaned or advanced to Parent pursuant to this clause (C) shall not, in the
aggregate, exceed (1) for each fiscal year of the Company prior to the 2000
fiscal year, $1.0 million per fiscal year and (2) for all other fiscal years,
$2.0 million, in each case plus any amounts contributed by Parent to the Company
as a result of resales of such repurchased shares of Capital Stock; and (D) in
amounts equal to amounts expended by the Company to repurchase shares of its
Capital Stock from deceased or retired employees in accordance with the terms of
the ESOP as in effect on the Issue Date and from employees whose employment with
the Company or any of its Subsidiaries has terminated for any other reason but
only to the extent mandatorily required by the ESOP as in effect on the Issue
Date, the Code or ERISA; provided that in each case the Company has deferred
making any cash payments in respect of such repurchase obligations to the
maximum extent possible under the ESOP as in effect on the Closing Date.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness owed to the Company, (ii) make any loans or
advances to the Company or (iii) transfer any of its property or assets to the
Company, except: (1) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date; (2) any encumbrance or restriction
with respect to a Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary prior to the date on which
such Restricted Subsidiary was acquired by the Company (other than Indebtedness
Incurred as consideration in, in contemplation of, or to provide all or any
portion of the funds or credit support utilized to consummate, the transaction
or series of related transactions pursuant to which such Restricted Subsidiary
became a Restricted Subsidiary or was otherwise acquired by the Company) and
outstanding on such date; (3) any encumbrance or restriction pursuant to an
agreement constituting Refinancing Indebtedness of Indebtedness Incurred
pursuant to an agreement referred to in clause (1) or (2) of this covenant or
this clause (3) or contained in any amendment to an agreement referred to in
clause (1) or (2) of this covenant or this clause (3); provided, however, that
the encumbrances and restrictions contained in any such refinancing agreement or
amendment are no less favorable to the Noteholders than encumbrances and
restrictions contained in such agreements; (4) in the case of clause (iii), any
encumbrance or restriction (A) that restricts in a customary manner the
subletting, assignment or transfer of any property or asset that is subject to a
lease, license or similar contract, (B) by virtue of any transfer of, agreement
to transfer, option or right with respect to, or Lien on, any property or assets
of the Company or any Restricted Subsidiary not otherwise prohibited by the
Indenture or (C) contained in security agreements or mortgages securing
Indebtedness of a Restricted Subsidiary to the extent such encumbrance or
restrictions
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restrict the transfer of the property subject to such security agreements or
mortgages; and (5) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration (including by way of relief from, or by any other Person assuming
sole responsibility for, any liabilities, contingent or otherwise) at the time
of such Asset Disposition at least equal to the fair value of the shares and
assets subject to such Asset Disposition, (ii) at least 75% (or 50% in the case
of an Asset Disposition relating to the Specified Real Estate) of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash and (iii) an amount equal to 100% of the Net Available Cash
from such Asset Disposition is applied by the Company (or such Restricted
Subsidiary, as the case may be) (A) first, within one year from the later of
such Asset Disposition or the receipt of such Net Cash Proceeds, either (1) to
the extent the Company elects (or is required by the terms of any Senior
Indebtedness or Indebtedness (other than Preferred Stock) of a Wholly Owned
Subsidiary), to prepay, repay, redeem, defease or purchase Senior Indebtedness
or such Indebtedness (in each case other than Indebtedness owed to the Company
or an Affiliate of the Company) or (2), to the extent the Company or such
Restricted Subsidiary elects, to reinvest in Additional Assets (including by
means of an Investment in Additional Assets by a Restricted Subsidiary with Net
Available Cash received by the Company or another Restricted Subsidiary), or (3)
a combination of the foregoing; (B) second, to the extent of the balance of such
Net Available Cash after application in accordance with clause (A), to make an
Offer (as defined below) to purchase Notes pursuant to and subject to the
conditions set forth in section (b) of this covenant, provided that if the
Company elects (or is required by the terms of any Senior Subordinated
Indebtedness), such Offer may be made to ratably purchase the Notes and other
Senior Subordinated Indebtedness, and (c) third, to the extent of the balance of
such Net Available Cash after application in accordance with clauses (A) and
(B), to prepay, repay, redeem or purchase Indebtedness of the Company (other
than Indebtedness owed to an Affiliate of the Company and other than
Disqualified Stock of the Company) or Indebtedness of any Restricted Subsidiary
(other than Indebtedness owed to the Company or an Affiliate of the Company), in
each case described in this clause (C) within one year from the receipt of such
Net Available Cash or, if the Company has made an Offer pursuant to clause (B),
six months from the date such Offer is consummated; provided, however that in
connection with any prepayment, repayment, redemption or purchase of
Indebtedness pursuant to clause (A), (B) or (C) above, the Company or such
Restricted Subsidiary will retire such Indebtedness and will cause the related
loan commitment (if any) to be permanently reduced in an amount equal to the
principal amount so prepaid, repaid, redeemed or purchased. Notwithstanding the
foregoing provisions of this covenant, the Company and the Restricted
Subsidiaries will not be required to apply any Net Available Cash in accordance
with this covenant except to the extent that the aggregate Net Available Cash
from all Asset Dispositions that is not applied in accordance with this covenant
exceeds $10.0 million.
For the purposes of clause (ii) of this covenant, the following are deemed
to be cash: (x) the assumption of Indebtedness of the Company (other than
Disqualified Stock of the Company) or any Restricted Subsidiary and the release
of the Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition, (y) securities received
by the Company or any Restricted Subsidiary from the transferee that are
promptly converted by the Company or such Restricted Subsidiary into cash and
(z) in the case of an Asset Disposition relating to the Specified Real Estate,
REIT Securities.
(b) In the event of an Asset Disposition that requires the purchase of
Notes pursuant to clause (a)(iii)(B) of this covenant, the Company will be
required to purchase Notes tendered pursuant to an offer by the Company for the
Notes (the "Offer") at a purchase price of 100% of their principal
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amount plus accrued interest to the date of purchase in accordance with the
procedures (including prorationing in the event of oversubscription) set forth
in the Indenture. If the aggregate purchase price of Notes tendered pursuant to
the Offer is less than the Net Available Cash allotted to the purchase of the
Notes, the Company will apply the remaining Net Available Cash in accordance
with clause (a)(iii)(C) of this covenant. The Company will not be required to
make an Offer for Notes pursuant to this covenant if the Net Available Cash
available therefor (after application of the proceeds as provided in clause (A)
of this covenant section (a)(iii)) is less than $5.0 million for any particular
Asset Disposition (which lesser amount will be carried forward for purposes of
determining whether an Offer is required with respect to the Net Available Cash
from any subsequent Asset Disposition).
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.
Limitation on Transactions with Affiliates. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter into
or conduct any transaction (including, the purchase, sale, lease or exchange of
any property or the rendering of any service) with any Affiliate of the Company
(an "Affiliate Transaction") on terms (i) that are less favorable to the Company
or such Restricted Subsidiary, as the case may be, than those that could be
obtained at the time of such transaction in arm's-length dealings with a Person
who is not such an Affiliate and (ii) that, in the event such Affiliate
Transaction involves an aggregate amount in excess of $10.0 million, are not in
writing and have not been approved by a majority of the members of the Board of
Directors having no personal stake in such Affiliate Transaction and who are not
employed by or otherwise associated with such Affiliates. In addition, if such
Affiliate Transaction involves an amount in excess of $15.0 million, a fairness
opinion must be provided by a nationally recognized appraisal or investment
banking firm.
(b) The provisions of the foregoing paragraph (a) will not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described under
"-- Limitation on Restricted Payments," (ii) any issuance of securities, or
other payments, awards or grants in cash, securities or otherwise pursuant to,
or the funding of, employment arrangements, stock options and stock ownership
plans approved by the Board of Directors, (iii) loans or advances to employees
in the ordinary course of business in accordance with past practices of the
Company, but in any event not to exceed $2.0 million in the aggregate
outstanding at any one time, (iv) the payment of reasonable fees to directors of
the Company and its Subsidiaries who are not employees of the Company or its
Subsidiaries, (v) any transaction between the Company and a Wholly Owned
Subsidiary or between Wholly Owned Subsidiaries or (vi) transactions pursuant to
the Existing Agreements, as in effect on the Issue Date.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Company will not sell any shares of Capital Stock of a
Restricted Subsidiary, and will not permit any Restricted Subsidiary, directly
or indirectly, to issue or sell any shares of its Capital Stock except: (i) to
the Company or a Wholly Owned Subsidiary or (ii) if, immediately after giving
effect to such issuance or sale, such Restricted Subsidiary would no longer
constitute a Restricted Subsidiary. The proceeds of any sale of such Capital
Stock permitted hereby will be treated as Net Available Cash from an Asset
Disposition and must be applied in accordance with the terms of the covenant
described under "-- Limitation on Sales of Assets and Subsidiary Stock."
SEC Reports. Notwithstanding that the Company may not be required to be or
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company will file with the SEC and provide the Trustee and
Noteholders and prospective Noteholders (upon request)
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within 15 days after it files them with the SEC, copies of its annual report and
the information, documents and other reports that are specified in Sections 13
and 15(d) of the Exchange Act. In addition, following a Public Equity Offering,
the Company shall furnish to the Trustee and the Noteholders, promptly upon
their becoming available, copies of the annual report to shareholders and any
other information provided by the Company or Parent to its public shareholders
generally. The Company also will comply with the other provisions of Section
314(a) of the TIA.
Future Subsidiary Guarantors. The Company will cause (a) each Restricted
Subsidiary that is a Domestic Subsidiary that Incurs Indebtedness or that is a
guarantor of Indebtedness Incurred pursuant to clause (b)(i), (b)(ii) or (b)(ix)
of the covenant described under "-- Limitation on Indebtedness" and (b) each
Restricted Subsidiary that is not a Domestic Subsidiary that enters into a
Guarantee of any of the obligations of the Company, Parent or any of the
Company's Subsidiaries pursuant to the Credit Agreement to execute and deliver
to the Trustee a supplemental indenture pursuant to which such Subsidiary will
Guarantee payment of the Notes. Each Subsidiary Guarantee will be limited to an
amount not to exceed the maximum amount that can be Guaranteed by that
Subsidiary without rendering the Subsidiary Guarantee, as it relates to such
Subsidiary, voidable under applicable law relating to fraudulent conveyance or
fraudulent transfer or similar laws affecting the rights of creditors generally.
Limitation on Lines of Business. The Company will not, and will not permit
any Restricted Subsidiary to, engage in any material respect in any line of
business, other than a Related Business. The Company shall not be deemed to be
engaged in the line of business associated with assets held for sale.
Limitation on Sale/Leaseback Transactions. The Company will not, and will
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (a) the net cash proceeds
received by the Company or any Restricted Subsidiary in connection with such
Sale/Leaseback Transaction are at least equal to the fair value (as determined
in good faith by the Board of Directors) of such property, (b) the transfer of
such property is permitted by, and the Company applies the proceeds of such
transaction in compliance with, the covenant described under "-- Limitation on
Sale of Assets and Subsidiary Stock" and (c) the Company or such Subsidiary
would be entitled to (i) in the case of a Sale/Leaseback Transaction involving
the Specified Real Estate, Incur $1.00 of additional Indebtedness pursuant to
the covenant described under paragraph (a) of "-- Limitation on Indebtedness"
and (ii) in all other cases (A) Incur Indebtedness in an amount equal to the
Attributable Debt with respect to such Sale/Leaseback Transaction pursuant to
the covenant described under "-- Limitation on Indebtedness" and (B) create a
Lien on such property securing such Attributable Debt without equally and
ratably securing the Notes pursuant to the covenant described under "--
Limitation on Indebtedness".
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company") will
be a corporation organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company) will expressly assume, by an indenture supplemental hereto,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company under the Notes and the Indenture; (ii)
immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Restricted Subsidiary as a result of such transaction as having been Incurred by
the Successor Company or such Restricted Subsidiary at the time of such
transaction), no Default will have occurred and be continuing; (iii) immediately
after giving effect to such transaction, the Successor Company would be able to
Incur an additional $1.00 of Indebtedness under paragraph (a) of the covenant
described under "-- Limitation on Indebtedness"; (iv) immediately after giving
effect to such transaction, the
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Successor Company will have Consolidated Net Worth in an amount which is not
less than the Consolidated Net Worth of the Company immediately prior to such
transaction; and (v) the Company will have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but the
predecessor Company in the case of a conveyance, transfer or lease of all or
substantially all its assets will not be released from the obligation to pay the
principal of and interest on the Notes.
Notwithstanding the foregoing clauses (ii), (iii) and (iv), any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Company.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Note when due, whether or not prohibited by the
provisions described under "-- Ranking" above, continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated Maturity,
upon optional redemption, upon required repurchase, upon declaration or
otherwise, whether or not such payment is prohibited by the provisions described
under "-- Ranking" above, (iii) the failure by the Company to comply with its
obligations under the covenant described under "-- Merger and Consolidation"
above, (iv) the failure by the Company to comply for 30 days after notice with
any of its obligations under the covenants described under "-- Change of
Control" or "-- Certain Covenants" above (in each case, other than a failure to
purchase Notes), (v) the failure by the Company to comply for 60 days after
notice with its other agreements contained in the Notes or the Indenture, (vi)
the failure by the Company or any Significant Subsidiary to pay any Indebtedness
within any applicable grace period after final maturity or the acceleration of
any such Indebtedness by the holders thereof because of a default if the total
amount of such Indebtedness unpaid or accelerated exceeds $5.0 million or its
foreign currency equivalent (the "cross acceleration provision"), (vii) certain
events of bankruptcy, insolvency or reorganization of the Company or a
Significant Subsidiary (the "bankruptcy provisions"), (viii) the rendering of
any judgment or decree for the payment of money in excess of $5.0 million or its
foreign currency equivalent against the Company or a Significant Subsidiary if
(A) an enforcement proceeding thereon is commenced or (B) such judgment or
decree remains outstanding for a period of 60 days following such judgment and
is not discharged, waived or stayed (the "judgment default provision") or (ix)
any Subsidiary Guarantee ceases to be in full force and effect (except as
contemplated by the terms thereof) or any Subsidiary Guarantor denies or
disaffirms its obligations under the Indenture or any Subsidiary Guarantee and
such Default continues for 10 days.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
However, a default under clauses (iv) or (v) will not constitute an Event
of Default until the Trustee or the Holders of 25% in principal amount of the
outstanding Notes notify the Company of the default and the Company does not
cure such default within the time specified in clauses (iv) and (v) hereof after
receipt of such notice.
If an Event of Default (other than a Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company) occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of
the outstanding Notes by notice to the Company may declare the principal of and
accrued but unpaid interest on all the Notes to be due and payable. Upon such a
declaration, such principal and interest will be due and payable immediately. If
an Event of Default relating to certain events of bankruptcy, insolvency or
reorganization of the Company occurs, the
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principal of and interest on all the Notes will become immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holders. Under certain circumstances, the Holders of a majority in principal
amount of the outstanding Notes may rescind any such acceleration with respect
to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
Holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such Holders have offered the
Trustee reasonable security or indemnity against any loss, liability or expense,
(iv) the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity and (v) the
Holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other Holder or that would involve the Trustee in personal liability. Prior
to taking any action under the Indenture, the Trustee will be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within the earlier of 90 days after it occurs or 30 days after it is known to a
Trust Officer or written notice of it is received by the Trustee. Except in the
case of a Default in the payment of principal of, premium (if any) or interest
on any Note, the Trustee may withhold notice if and so long as a committee of
its Trust Officers in good faith determines that withholding notice is in the
interests of the Noteholders. In addition, the Company is required to deliver to
the Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred during
the previous year. The Company also is required to deliver to the Trustee,
within 30 days after the occurrence thereof, written notice of any event which
would constitute certain Defaults, their status and what action the Company is
taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding and any past default or compliance with any provisions may be waived
with the consent of the Holders of a majority in principal amount of the Notes
then outstanding. However, without the consent of each Holder of an outstanding
Note affected, no amendment may, among other things, (i) reduce the amount of
Notes whose Holders must consent to an amendment, (ii) reduce the rate of or
extend the time for payment of interest or any liquidated damages on any Note,
(iii) reduce the principal of or extend the Stated Maturity of any Note, (iv)
reduce the premium payable upon the redemption of any Note or change the time at
which any Note may be redeemed as described under "-- Optional Redemption"
above, (v) make any Note payable in money other than that stated in the Note,
(vi) make any change to the subordination provisions of the Indenture that
adversely affects the rights of any Holder, (vii) impair the right of any Holder
to receive payment of principal of and interest on such Holder's Notes on or
after the due dates therefor or to institute suit for the enforcement of any
payment on or with respect
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to such Holder's Notes, (viii) make any change in the amendment provisions that
require each Holder's consent or in the waiver provisions or (ix) modify the
Subsidiary Guarantees in any manner adverse to the Holders.
Without the consent of any Holder, the Company and Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the Company
under the Indenture, to provide for uncertificated Notes in addition to or in
place of certificated Notes (provided that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f)(2)(B) of the
Code), to add Guarantees with respect to the Notes, to secure the Notes, to add
to the covenants of the Company for the benefit of the Noteholders or to
surrender any right or power conferred upon the Company, to make any change that
does not adversely affect the rights of any Holder or to comply with any
requirement of the SEC in connection with the qualification of the Indenture
under the TIA. However, no amendment may be made to the subordination provisions
of the Indenture that adversely affects the rights of any holder of Senior
Indebtedness then outstanding unless the holders of such Senior Indebtedness (or
any group or representative thereof authorized to give a consent) consent to
such change.
The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Noteholders a notice briefly describing such amendment.
However, the failure to give such notice to all Noteholders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Noteholder may transfer or exchange Notes in accordance with the
Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Noteholder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a Noteholder to pay any taxes
required by law or permitted by the Indenture. The Company is not required to
transfer or exchange any Note selected for redemption or to transfer or exchange
any Note for a period of 15 days prior to a selection of Notes to be redeemed.
The Notes will be issued in registered form and the registered holder of a Note
will be treated as the owner of such Note for all purposes.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under the covenants
described under "-- Change of Control," "-- Certain Covenants," the operation of
the cross acceleration provision, the bankruptcy provisions with respect to
Subsidiaries and the judgment default provision described under "-- Defaults"
above and the limitations contained in clauses (iii) and (iv) under "-- Merger
and Consolidation" above ("covenant defeasance"). If the Company exercises its
legal defeasance option or its covenant defeasance option, each Subsidiary
Guarantor will be released from all of its obligations with respect to its
Subsidiary Guarantee.
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 Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) with respect only to
Subsidiaries, (viii) or
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(ix) under "Defaults" above or because of the failure of the Company to comply
with clause (iii) or (iv) under "Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the 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 the case if such
deposit and defeasance had 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).
CONCERNING THE TRUSTEE
Harris Trust and Savings Bank is to be the Trustee under the Indenture and
has been appointed by the Company as Registrar and Paying Agent with regard to
the Notes.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any tangible property or assets (other than
Indebtedness and Capital Stock) to be used by the Company or a Restricted
Subsidiary in a Related Business; (ii) the Capital Stock of a Person that
becomes a Restricted Subsidiary as a result of the acquisition of such Capital
Stock by the Company or another Restricted Subsidiary; or (iii) Capital Stock
constituting a minority interest in any Person that at such time is a Restricted
Subsidiary; provided, however, that any such Restricted Subsidiary described in
clauses (ii) or (iii) above is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "-- Certain Covenants -- Limitation
on Transactions with Affiliates" and "-- Certain Covenants -- Limitation on
Sales of Assets and Subsidiary Stock" only, "Affiliate" shall also mean any
beneficial owner of shares representing 10% or more of the total voting power of
the Voting Stock (on a fully diluted basis) of the Company or of rights or
warrants to purchase such Voting Stock (whether or not currently exercisable)
and any Person who would be an Affiliate of any such beneficial owner pursuant
to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition of
shares of Capital Stock of a Restricted Subsidiary (other than directors'
qualifying shares), property or other assets (each referred to for the purposes
of this definition as a "disposition") by the Company or any of its Restricted
Subsidiaries (including any disposition by means of a merger, consolidation or
similar transaction) other than (i) a disposition by a Restricted Subsidiary to
the Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Subsidiary, (ii) a disposition of inventory in the ordinary course of business,
(iii) dispositions with a fair value of less than $250,000 in the aggregate in
any fiscal year, (iv) an exchange of real estate for other similar property
structured on
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a tax-free like-kind basis and (v) for purposes of the provisions described
under "-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary
Stock" only, a disposition subject to the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments".
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the lessee
for rental payments (other than rental payments in the nature of supplemental
rent for the lessee's proportional share of taxes, maintenance, insurance and
similar customary payments) during the remaining term of the lease included in
such Sale/Leaseback Transaction (including any period for which such lease has
been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable under or in respect
of the Credit Agreement, the other Senior Credit Documents and any Refinancing
Indebtedness with respect thereto, as amended from time to time, including
principal, premium (if any), interest (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company whether or not a claim for post-filing interest is allowed in such
proceedings), fees, charges, expenses, reimbursement obligations, guarantees and
all other amounts payable thereunder or in respect thereof.
"Board of Directors" means the Board of Directors of the Parent or the
Company or any committee thereof duly authorized to act on behalf of such Board.
Unless the context otherwise requires, references to the Board of Directors are
to the Board of Directors of the Company.
"Borrowing Base" means, as of any date, an amount equal to the sum of (i)
50% of the aggregate book value of inventory (adjusted to include any LIFO
reserves) and (ii) 85% of the aggregate book value of all accounts receivable
(net of bad debt reserves) of the Company and its Restricted Subsidiaries on a
Consolidated basis, as determined in accordance with GAAP consistently applied.
To the extent that information is not available as to the amount of inventory or
accounts receivable as of a specific date, the Company shall use the most recent
available information for purposes of calculating the Borrowing Base.
"Business Day" means a day other than a Saturday, Sunday or other day on
which banking institutions in New York State are authorized or required by law
to close.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that (A) if the Company or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period that
remains
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outstanding on such date of determination or if the transaction giving rise to
the need to calculate the Consolidated Coverage Ratio is an Incurrence of
Indebtedness, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such Indebtedness as if
such Indebtedness had been Incurred on the first day of such period and the
discharge of any other Indebtedness repaid, repurchased, defeased or otherwise
discharged with the proceeds of such new Indebtedness as if such discharge had
occurred on the first day of such period, (B) if since the beginning of such
period the Company or any Restricted Subsidiary shall have made any Asset
Disposition, the EBITDA for such period shall be reduced by an amount equal to
the EBITDA (if positive) directly attributable to the assets that are the
subject of such Asset Disposition for such period or increased by an amount
equal to the EBITDA (if negative) directly attributable thereto for such period
and Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period (or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale), (C) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment in
any Restricted Subsidiary (or any Person that becomes a Restricted Subsidiary)
or an acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a business, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any Indebtedness)
as if such Investment or acquisition occurred on the first day of such period
and (D) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the Company or any
Restricted Subsidiary since the beginning of such period) shall have made any
Asset Disposition or any Investment or acquisition of assets that would have
required an adjustment pursuant to clause (B) or (C) above if made by the
Company or a Restricted Subsidiary during such period, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto as if such Asset Disposition, Investment or acquisition of assets
occurred on the first day of such period. For purposes of this definition,
whenever pro forma effect is to be given to an acquisition of assets, the amount
of income or earnings relating thereto and the amount of Consolidated Interest
Expense associated with any Indebtedness Incurred in connection therewith, the
pro forma calculations shall be determined in accordance with GAAP. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term as at the
date of determination in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent Incurred by the Company and its Subsidiaries in such period but not
included in such interest expense, (i) interest expense attributable to
Capitalized Lease Obligations, (ii) amortization of debt discount and debt
issuance cost, (iii) capitalized interest, (iv) noncash interest expense, (v)
commissions, discounts and other fees and charges with respect to letters of
credit and bankers' acceptance financing, (vi) interest accruing on any
Indebtedness of any other Person to the extent such Indebtedness is Guaranteed
by the Company or any Restricted Subsidiary; provided that payment of such
amounts by the Company or any Restricted Subsidiary is being made to, or is
sought by, the holders of such Indebtedness pursuant to such guarantee, (vii)
net costs associated with Hedging Obligations (including amortization of fees),
(viii) Preferred Stock dividends in respect of all Preferred Stock of
Subsidiaries of the Company and Disqualified Stock of the Company held by
Persons other than the
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Company or a Wholly Owned Subsidiary, and (ix) the cash contributions to any
employee stock ownership plan or similar trust to the extent such contributions
are used by such plan or trust to pay interest or fees to any Person (other than
the Company) in connection with Indebtedness Incurred by such plan or trust;
provided, however, that there shall be excluded therefrom any such interest
expense of any Unrestricted Subsidiary to the extent the related Indebtedness is
not Guaranteed or paid by the Company or any Restricted Subsidiary.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries; provided, however, that there
shall not be included in such Consolidated Net Income: (i) any net income (loss)
of any Person if such Person is not a Restricted Subsidiary, except that (A)
subject to the limitations contained in clause (iv) below, the Company's equity
in the net income of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually distributed
by such Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution to a Restricted Subsidiary, to the limitations contained in clause
(iii) below) and (B) the Company's equity in a net loss of any such Person
(other than an Unrestricted Subsidiary) for such period shall be included in
determining such Consolidated Net Income; (ii) any net income (loss) of any
person acquired by the Company or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition; (iii) any net
income (loss) of any Restricted Subsidiary if such Subsidiary is subject to
restrictions, directly or indirectly, on the payment of dividends or the making
of distributions by such Restricted Subsidiary, directly or indirectly, to the
Company, except that (A) subject to the limitations contained in clause (iv)
below, the Company's equity in the net income of any such Restricted Subsidiary
for such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash that could have been distributed by such Restricted
Subsidiary during such period to the Company or another Restricted Subsidiary as
a dividend (subject, in the case of a dividend that could have been made to
another Restricted Subsidiary, to the limitation contained in this clause) and
(B) the Company's equity in a net loss of any such Restricted Subsidiary for
such period shall be included in determining such Consolidated Net Income; (iv)
any gain (but not loss) realized upon the sale or other disposition of any asset
of the Company or its consolidated Subsidiaries (including pursuant to any
Sale/Leaseback Transaction) that is not sold or otherwise disposed of in the
ordinary course of business and any gain (but not loss) realized upon the sale
or other disposition of any Capital Stock of any Person; (v) any extraordinary
gain or loss; and (vi) the cumulative effect of a change in accounting
principles. Notwithstanding the foregoing, for the purpose of the covenant
described under "Certain Covenants -- Limitation on Restricted Payments" only,
there shall be excluded from Consolidated Net Income any dividends, repayments
of loans or advances or other transfers of assets from Unrestricted Subsidiaries
to the Company or a Restricted Subsidiary to the extent such dividends,
repayments or transfers increase the amount of Restricted Payments permitted
under such covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and the Restricted Subsidiaries, determined on a
Consolidated basis, as of the end of the most recent fiscal quarter of the
Company ending at least 45 days prior to the taking of any action for the
purpose of which the determination is being made, as (i) the par or stated value
of all outstanding Capital Stock of the Company plus (ii) paid-in capital or
capital surplus relating to such Capital Stock plus (iii) any retained earnings
or earned surplus less (A) any accumulated deficit and (B) any amounts
attributable to Disqualified Stock.
"Consolidation" means the consolidation of the amounts of each of the
Restricted Subsidiaries with those of the Company in accordance with GAAP
consistently applied; provided, however, that "Consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary, but the interest
of the Company or any Restricted Subsidiary in a Unrestricted Subsidiary will be
accounted for as an investment. The term "Consolidated" has a correlative
meaning.
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"Credit Agreement" means the credit agreement dated as of July 18, 1997, as
amended and in effect as of the Issue Date and as thereafter amended, restated,
waived or otherwise modified from time to time, among the Company, Parent, the
financial institutions from time to time party thereto and The Chase Manhattan
Bank, as administrative agent (except to the extent that any such amendment,
waiver or other modification thereto would be prohibited by the terms of the
Indenture, unless otherwise agreed to by the Holders of at least a majority in
aggregate principal amount of Notes at the time outstanding).
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii)
any other Senior Indebtedness that, at the date of determination, has an
aggregate principal amount outstanding of, or under which, at the date of
determination, the holders thereof, are committed to lend up to, at least $25.0
million and is specifically designated by the Company in the instrument
evidencing or governing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable or exercisable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first anniversary of the
Stated Maturity of the Notes.
"Domestic Subsidiary" means any Restricted Subsidiary of the Company other
than a Foreign Subsidiary.
"EBITDA" for any period means the Consolidated Net Income for such period
(adjusted to exclude any non-cash items attributable to purchase accounting for
any acquisition transactions consummated subsequent to the Issue Date), plus the
following to the extent deducted in calculating such Consolidated Net Income:
(i) income tax expense, (ii) Consolidated Interest Expense, (iii) depreciation
expense, (iv) amortization expense and (v) all extraordinary charges during such
period and all non-cash charges associated with ESOP compensation and Management
Put Options, in each case for such period. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation and
amortization of, a Subsidiary of the Company shall be added to Consolidated Net
Income to compute EBITDA only to the extent (and in the same proportion) that
the Net Income of such Subsidiary was included in calculating Consolidated Net
Income and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Subsidiary without prior
approval (that has not been obtained), pursuant to the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statuses, rules and
governmental regulations applicable to such Subsidiary or its stockholders.
"ESOP" means the employee stock ownership plan created pursuant to the
terms of the Argo-Tech Corporation Employee Stock Ownership Plan and Trust
Agreement, dated May 17, 1994, between the Company and Society National Bank in
its capacity as ESOP Trustee.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Agreements" means the Distributorship Agreement (1994) dated as
of December 24, 1990, among the Company, Yamada Corporation and Venture Capital
Partners, Inc. and the Japan Distributorship Agreement dated as of December 24,
1990, between Argo-Tech and Upsilon International Corporation as in effect on
the Issue Date.
"Foreign Subsidiary" means any Restricted Subsidiary of the Company that is
not organized under the laws of the United States of America or any State
thereof or the District of Columbia.
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"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession.
All ratios and computations based on GAAP contained in the Indenture shall be
computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keepwell, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
person at the time it becomes a Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money; (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments; (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto); (iv) all obligations
of such Person to pay the deferred and unpaid purchase price of property or
services (except Trade Payables), which purchase price is due more than six
months after the date of placing such property in service or taking delivery and
title thereto or the completion of such services; (v) all Capitalized Lease
Obligations and all Attributable Debt of such Person; (vi) the amount of all
obligations of such Person with respect to the redemption, repayment or other
repurchase of any Disqualified Stock or, with respect to any Subsidiary of the
Company, any Preferred Stock (but excluding, in each case, any accrued
dividends); (vii) all Indebtedness of other Persons secured by a Lien on any
asset of such Person, whether or not such Indebtedness is assumed by such
Person; provided, however, that the amount of Indebtedness of such Person shall
be the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness of such other Persons;
(viii) all Indebtedness of other Persons to the extent Guaranteed by such
Person; and (ix) to the extent not otherwise included in this definition,
Hedging Obligations of such Person. The amount of Indebtedness of any Person at
any date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence of
the contingency giving rise to the obligation, of any contingent obligations at
such date.
"Initial Purchaser" means Chase Securities Inc.
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"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person) or other
extension of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments," (i) "Investment" shall include
the portion (proportionate to the Company's equity interest in such Subsidiary)
of the fair market value of the net assets of any Subsidiary of the Company at
the time that such Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Put Options" means the put option created pursuant to Article
IX of the Stockholders' Agreement.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received (x) by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, or (y) in
the case of REIT Securities, upon the sale, redemption, transfer or other
disposition of such REIT Securities, in each case, only as and when received,
but excluding any other consideration received in the form of assumption by the
acquiring person of Indebtedness or other obligations relating to the properties
or assets that are the subject of such Asset Disposition or received in any
other noncash form) therefrom, in each case net of (i) all legal, title and
recording tax expenses, commissions and other fees and expenses incurred, and
all Federal, state, provincial, foreign and local taxes required to be paid or
accrued as a liability under GAAP, as a consequence of such Asset Disposition,
(ii) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien upon
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law be repaid out of the
proceeds from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) appropriate amounts to
be provided by the seller as a reserve, in accordance with GAAP, against any
liabilities associated with the assets disposed of in such Asset Disposition and
retained by the Company or any Restricted Subsidiary after such Asset
Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
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"Officer" means the Chairman of the Board, the Chief Executive Officer, the
Chief Financial Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Parent" means AT Holdings Corporation, any successor corporation and any
corporation succeeding to the ownership of the Company.
"Permitted Holders" means (a) Mr. Masashi Yamada and members of his
immediate family (b) corporations and other entities that are Controlled by one
or more of the persons referred to in clause (a), (c) trusts for the sole
benefit of one or more of the persons referred to in clause (a), (d) the ESOP,
(e) individuals who are members of management of Parent or the Company as of the
Issue Date and (f) any Person acting in the capacity of an underwriter in
connection with a public or private offering of the Company's or Parent's
Capital Stock.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon the making
of such Investment, become a Restricted Subsidiary; provided, however, that the
primary business of such Restricted Subsidiary is a Related Business; (ii)
another Person if as a result of such Investment such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all its
assets to, the Company or a Restricted Subsidiary; provided, however, that such
Person's primary business is a Related Business; (iii) Temporary Cash
Investments; (iv) receivables owing to the Company or any Restricted Subsidiary,
if created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however, that
such trade terms may include such concessionary trade terms as the Company or
any such Restricted Subsidiary deems reasonable under the circumstances; (v)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (vi) loans or
advances to employees made in the ordinary course of business consistent with
past practices of the Company or such Restricted Subsidiary and not exceeding
$1.0 million in the aggregate outstanding at any one time; (vii) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments; and (viii) stock, obligations or
securities received in a transaction permitted under "-- Limitation on Sales of
Assets and Subsidiary Stock."
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) that is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company or Parent pursuant to an effective registration
statement under the Securities Act.
"Public Market" means any time after (i) a Public Equity Offering has been
consummated and (ii) at least 15% of the total issued and outstanding common
stock of the Company or Parent (as applicable) has been distributed by means of
an effective registration statement under the Securities Act.
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"Purchase Agreement" means the agreement for the purchase of $140 million
principal amount of senior subordinated Securities among the Company, the
Subsidiary Guarantors and the Initial Purchaser dated September 23, 1997.
"Purchase Money Indebtedness" means Indebtedness (i) consisting of the
deferred purchase price of property, conditional sale obligations, obligations
under any title retention agreement and other purchase money obligations, in
each case where the maturity of such Indebtedness does not exceed the
anticipated useful life of the asset being financed, and (ii) incurred to
finance the acquisition by the Company of such asset, including additions and
improvements; provided, however, that any Lien arising in connection with any
such Indebtedness shall be limited to the specified asset being financed or, in
the case of real property or fixtures, including additions and improvements, the
real property on which such asset is attached; and provided further, that such
Indebtedness is Incurred within 180 days after such acquisition by the Company
of such asset.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) (collectively, "refinances," and "refinanced" shall have
a correlative meaning) any Indebtedness existing on the date of the Indenture or
Incurred in compliance with the Indenture (including Indebtedness of the Company
that refinances Indebtedness of any Restricted Subsidiary (to the extent
permitted in the Indenture) and Indebtedness of any Restricted Subsidiary that
refinances Indebtedness of another Restricted Subsidiary) including Indebtedness
that refinances Refinancing Indebtedness; provided, however, that (i) the
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being refinanced, (ii) the Refinancing Indebtedness
has an Average Life at the time such Refinancing Indebtedness is Incurred that
is equal to or greater than the Average Life of the Indebtedness being
refinanced, (iii) such Refinancing Indebtedness is Incurred in an aggregate
principal amount (or if issued with original issue discount, an aggregate issue
price) that is equal to or less than (x) the aggregate principal amount (or if
issued with original issue discount, the aggregate accreted value) then
outstanding of the Indebtedness being refinanced plus (y) the amount of premium
or other amounts paid and fees and expenses incurred in connection with such
refinancing and (iv) if the Indebtedness being refinanced is subordinated in
right of payment to the Notes, such Refinancing Indebtedness is subordinated in
right of payment to the Notes to the extent of the Indebtedness being
refinanced; provided further, however, that Refinancing Indebtedness shall not
include (x) Indebtedness of a Restricted Subsidiary that refinances Indebtedness
of the Company or (y) Indebtedness of the Company or a Restricted Subsidiary
that refinances Indebtedness of an Unrestricted Subsidiary.
"REIT" means a real estate investment trust under the Code.
"REIT Securities" means equity securities of a publicly traded (either on a
national securities exchange or on NASDAQ) REIT or equity securities convertible
into equity securities of a publicly traded (either on a national securities
exchange or on NASDAQ) REIT.
"Related Business" means any business related, ancillary or complementary
to the businesses of the Company and the Restricted Subsidiaries on the Issue
Date.
"Representative" means the trustee, agent or representative (if any) for an
issue of Senior Indebtedness.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Revolving Facility" means the revolving credit facility provided to the
Company under the Credit Agreement.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a
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Person and the Company or a Restricted Subsidiary leases it from such Person,
other than leases between the Company and a Wholly Owned Subsidiary or between
Wholly Owned Subsidiaries.
"SEC" means the Securities and Exchange Commission.
"Senior Credit Documents" means the collective reference to the Credit
Agreement, the notes issued pursuant thereto (if any) and the Guarantees
thereof, and the Security Agreements, the Mortgages and the Pledge Agreements
(each as defined in the Credit Agreement).
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of the Company that specifically provides that such Indebtedness is
to rank pari passu with the Notes and is not subordinated by its terms to any
Indebtedness or other obligation of the Company which is not Senior
Indebtedness.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Specified Real Estate" means the real estate owned by Argo-Tech
Corporation (HBP) as of the Issue Date.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Stockholders' Agreement" means the AT Holdings Corporation Stockholders'
Agreement dated as of May 17, 1994, as amended by Amendment No. 1 thereto dated
as of May 1, 1997 and Amendment No. 2 thereto dated as of July 18, 1997, by and
among Parent, the Company, YC International Inc., Yamada Corporation, Sunhorizon
International Inc. and the other Persons party thereto.
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) that is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person or (ii) one or more
Subsidiaries of such Person.
"Subsidiary Guarantee" means any Guarantee of the Notes that may from time
to time be executed and delivered by a Subsidiary Guarantor pursuant to the
terms of the Indenture. Each such Subsidiary Guarantee will have subordination
provisions equivalent to those contained in the Indenture and will be
substantially in the form prescribed in the Indenture.
"Subsidiary Guarantors" means Argo-Tech Corporation (HBP), Argo-Tech
Corporation (OEM), Argo-Tech Corporation (Aftermarket), J.C. Carter Company,
Inc. and each Subsidiary of the Company acquired or organized after the Issue
Date that becomes a Subsidiary Guarantor in accordance with the terms of the
Indenture.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of
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acquisition thereof issued by a bank or trust company that is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States of America having capital, surplus and
undivided profits aggregating in excess of $250,000,000 (or the foreign currency
equivalent thereof) and whose long-term debt is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act), (iii)
repurchase obligations with a term of not more than 30 days for underlying
securities of the types described in clause (i) above entered into with a bank
meeting the qualifications described in clause (ii) above, (iv) investments in
commercial paper, maturing not more than 90 days after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America or any foreign
country recognized by the United States of America with a rating at the time as
of which any investment therein is made of "P-1" (or higher) according to
Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard and
Poor's Ratings Service, a division of The McGraw-Hill Companies, Inc. ("S&P"),
and (v) investments in securities with maturities of six months or less from the
date of acquisition issued or fully guaranteed by any state, commonwealth or
territory of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by S&P or "A" by Moody's
Investors Service, Inc.
"Term Loan Facilities" means the Tranche A Term Loans and the Delayed Draw
Acquisition Loans provided to the Company under the Credit Agreement.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. sec.sec.
77aaa-77bbbb) as in effect on the date of the Indenture.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; provided, however,
that either (A) the Subsidiary to be so designated has total consolidated assets
of $1,000 or less or (B) if such Subsidiary has consolidated assets greater than
$1,000, then such designation would be permitted under the covenant entitled
"Limitation on Restricted Payments." The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that
immediately after giving effect to such designation (x) the Company could Incur
$1.00 of additional Indebtedness under paragraph (a) of the covenant described
under "Limitation on Indebtedness" and (y) no Default shall have occurred and be
continuing. Any such designation of a Subsidiary as a Restricted Subsidiary or
an Unrestricted Subsidiary by the Board of Directors shall be evidenced to the
Trustee by promptly filing with the Trustee a copy of the resolution of the
Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or
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instrumentality thereof) for the payment of which the full faith and credit of
the United States of America is pledged and which are not callable or redeemable
at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares) is owned by
the Company or another Wholly Owned Subsidiary.
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EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
The following description is a summary of all material provisions of the
Exchange and Registration Rights Agreement. This summary does not purport to be
complete and is qualified in its entirety by reference to all provisions of the
Exchange and Registration Rights Agreement, a copy of the form of which is
available from the Initial Purchaser upon request.
The Company, the Subsidiary Guarantors and the Initial Purchaser entered
into the Exchange and Registration Rights Agreement on September 26, 1997 (the
"Issue Date"). Pursuant to the Exchange and Registration Rights Agreement, the
Company and the Subsidiary Guarantors agreed to (i) file with the Commission on
or prior to 30 days after the Issue Date a registration statement on Form S-1 or
Form S-4, if the use of such form is then available (the "Exchange Offer
Registration Statement") relating to a registered exchange offer (the "Exchange
Offer") for the Notes under the Securities Act and (ii) use their best efforts
to cause the Exchange Offer Registration Statement to be declared effective
under the Securities Act within 105 days after the Issue Date. As soon as
practicable after the effectiveness of the Exchange Offer Registration
Statement, the Company will offer to the holders of Transfer Restricted
Securities (as defined) who are not prohibited by any law or policy of the
Commission from participating in the Exchange Offer the opportunity to exchange
their Transfer Restricted Securities for an issue of a second series of notes
(the "Exchange Notes"), identical in all material respects to the Notes (except
that the Exchange Notes will not contain terms with respect to transfer
restrictions), that would be registered under the Securities Act. The Company
will keep the Exchange Offer open for not less than 30 days (or longer, if
required by applicable law) after the date notice of the Exchange Offer is
mailed to the holders of the Notes. If (i) because any change in law or
applicable interpretations of the staff of the Commission does not permit the
Company to effect the Exchange Offer as contemplated thereby or (ii) for any
other reason the Exchange Offer is not consummated within 135 days after the
Issue Date or (iii) the Initial Purchaser so requests with respect to Notes
purchased on the Issue Date not eligible to be exchanged for Exchange Notes in
the Exchange Offer and held by the Initial Purchaser following the consummation
of the Exchange Offer or (iv) any holder either (A) is not eligible to
participate in the Exchange Offer or (B) participates in the Exchange Offer and
does not receive freely transferrable Exchange Notes in exchange for tendered
Notes, the Company will file with the Commission a shelf registration statement
(the "Shelf Registration Statement") to cover resales of Transfer Restricted
Securities by such holders who satisfy certain conditions relating to, among
other things, the provision of information in connection with the Shelf
Registration Statement. The Company will use its best efforts to have the
Exchange Offer Registration Statement and, if applicable, a Shelf Registration
Statement (each, a "Registration Statement") declared effective by the
Commission as promptly as practicable after the filing thereof. For purposes of
the foregoing, "Transfer Restricted Securities" means each Note until (i) the
date on which such Note has been exchanged for a freely transferable Exchange
Note in the Exchange Offer; (ii) the date on which such Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iii) the date on which such Note is
distributed to the public pursuant to Rule 144 under the Securities Act ("Rule
144") or is salable pursuant to Rule 144(k) under the Securities Act ("Rule
144(k)").
Unless the Exchange Offer would not be permitted by a policy of the
Commission, the Company will commence the Exchange Offer and will use its best
efforts to consummate the Exchange Offer as promptly as practicable, but in any
event prior to 135 days after the Issue Date. If applicable, the Company will
use its best efforts to keep the Shelf Registration Statement effective for a
period of two years after the date the Shelf Registration Statement is declared
effective by the Commission or such shorter period that will terminate when all
the Notes covered by the Shelf Registration Statement (i) have been sold
pursuant to the Shelf Registration Statement or (ii) are distributed to the
public pursuant to Rule 144 are saleable pursuant to Rule 144(k). If (i) the
applicable Registration Statement is not filed with the Commission on or prior
to 30 days after the Issue Date, (ii) the Exchange Offer Registration Statement
or the Shelf Registration Statement, as the case may
124
<PAGE> 127
be, is not declared effective within 105 days after the Issue Date (or in the
case of a Shelf Registration Statement required to be filed in response to a
change in law or the applicable interpretations of the Commission's staff, if
later, within 30 days after publication of the change in law or interpretation),
(iii) the Exchange Offer is not consummated on or prior to 135 days after the
Issue Date, or (iv) the Shelf Registration Statement is filed and declared
effective within 105 days after the Issue Date (or in the case of a Shelf
Registration Statement required to be filed in response to a change in law or
the applicable interpretations of the Commission's staff, if later, within 30
days after publication of the change in law or interpretation) but will
thereafter cease to be effective (at any time that the Company is obligated to
maintain the effectiveness thereof) without being succeeded within 30 days by an
additional Registration Statement filed and declared effective (each such event
referred to in clauses (i) through (iv), a "Registration Default"), the Company
will pay liquidated damages to each holder of Transfer Restricted Securities,
during the period of Registration Default, in an amount equal to $0.192 per week
per $1,000 principal amount of the Notes constituting Transfer Restricted
Securities held by such holder until the applicable Registration Statement is
filed or declared effective, the Exchange Offer is consummated or the Shelf
Registration Statement again becomes effective, as the case may be. All accrued
liquidated damages will be paid to holders in the same manner as interest
payments on the Notes on semi-annual payment dates that correspond to interest
payment dates for the Notes. Following the cure of all Registration Defaults,
the accrual of liquidated damages will cease.
The Exchange and Registration Rights Agreement also provides that the
Company and the Subsidiary Guarantors (i) will make available for a period of
180 days after the consummation of the Exchange Offer a prospectus meeting the
requirements of the Securities Act and any amendment or supplement thereto to
any broker-dealer for use in connection with any resale of any such Exchange
Notes and (ii) will pay all expenses incident to the Exchange Offer (including
the expense of one counsel to the holders of the Notes) and will indemnify
holders of the Notes (including any broker-dealer) against certain liabilities,
including liabilities under the Securities Act. A broker-dealer that delivers
such a prospectus to purchasers in connection with such resales is subject to
certain of the civil liability provisions under the Securities Act and is bound
by the provisions of the Exchange and Registration Rights Agreement (including
certain indemnification rights and obligations).
Each holder of Notes who wishes to exchange such Notes for Exchange Notes
in the Exchange Offer is required to make certain representations, including
representations that (i) any Exchange Notes to be received by it have been
acquired in the ordinary course of its business; (ii) it has no arrangement or
understanding with any person to participate in the distribution of the Notes or
the Exchange Notes and (iii) it is not an affiliate of the Company or a
Subsidiary Guarantor or an Exchanging Dealer (as defined) not complying with the
requirements of the next paragraph, or if it is an affiliate, that it has
complied with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable.
If the holder is not a broker-dealer, it is required to represent that it
is not engaged in, and does not intend to engage in, the distribution of the
Exchange Notes. If the holder is a broker-dealer that receives Exchange Notes
for its own account in exchange for Notes that were acquired as a result of
market-making activities or other trading activities (an "Exchanging Dealer"),
it is required to acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes.
Holders of the Notes are required to make certain representations to the
Company (as described above) in order to participate in the Exchange Offer and
are required to deliver information to be used in connection with the Shelf
Registration Statement in order to have their Notes included in the Shelf
Registration Statement and benefit from the provisions regarding liquidated
damages set forth in the preceding paragraphs. A holder who sells Notes pursuant
to the Shelf Registration Statement generally is required to be named as a
selling security holder in the related prospectus and to deliver a prospectus to
purchasers, is subject to certain of the civil liability provisions under the
Securities Act in connection with such sales and is bound by the provisions of
125
<PAGE> 128
the Exchange and Registration Rights Agreement that are applicable to such a
holder (including certain indemnification obligations).
For so long as the Notes are outstanding, the Company and the Subsidiary
Guarantors will continue to provide to holders of the Notes and to prospective
purchasers of the Notes the information required by Rule 144A(d)(4) under the
Securities Act ("Rule 144A"). The Company will provide a copy of the Exchange
and Registration Rights Agreement to prospective purchasers of Notes identified
to the Company by the Initial Purchaser upon request.
126
<PAGE> 129
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the Exchange Notes will initially be issued in
the form of one or more registered Notes in global form without coupons (each a
"Global Note"). Each Global Note will be deposited on the date of the closing of
the sale of the Notes (the "Closing Date") with, or on behalf of, The Depository
Trust Company ("DTC") and registered in the name of Cede & Co., as nominee of
DTC, or will remain in the custody of the Trustee pursuant to the FAST Balance
Certificate Agreement between DTC and the Trustee.
DTC has advised the Company that it is (i) a limited purpose trust company
organized under the laws of the State of New York, (ii) a member of the Federal
Reserve system, (iii) a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and (iv) a "Clearing Agency" registered pursuant to
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants (collectively, the "Participants") and facilitates the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes to the accounts of its Participants, thereby
eliminating the need for physical transfer and delivery of certificates. DTC's
Participants include securities brokers and dealers (including the Initial
Purchaser), banks and trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Holders who are not Participants may
beneficially own securities held by or on behalf of the Depository only through
Participants or Indirect Participants.
The Company expects that pursuant to procedures established by DTC (i) upon
deposit of the Global Notes, DTC will credit the accounts of Participants
designated by the Initial Purchaser with an interest in the Global Notes and
(ii) ownership of beneficial interests in the Global Notes will be shown on, and
the transfer of beneficial ownership therein will be effected only through,
records maintained by DTC (with respect to the interest of Participants), the
Participants and the Indirect Participants. The laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own and that security interests in negotiable instruments can only be
perfected by delivery of certificates representing the instruments.
Consequently, the ability to transfer Notes or to pledge the Notes as collateral
to persons in such states will be limited to such extent. For certain other
restrictions on the transferability of the Notes, see "Transfer Restrictions."
So long as DTC or its nominee is the registered owner of a Global Note, DTC
or such nominee, as the case may be, will be considered the sole owner or holder
of the Notes represented by the Global Note for all purposes under the Indenture
and the Notes. Except as provided below, owners of beneficial interests in a
Global Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of certificated securities, and will not be considered the owners or
Holders thereof under the Indenture for any purpose, including with respect to
the giving of any directions, instruction or approval to the Trustee thereunder.
As a result, the ability of a person having a beneficial interest in Notes
represented by a Global Note to pledge or transfer such interest to persons or
entities that do not participate in DTC's system or to otherwise take action
with respect to such interest, may be affected by the lack of a physical
certificate evidencing such interest.
Accordingly, each holder owning a beneficial interest in a Global Note must
rely on the procedures of DTC and, if such holder is not a Participant or an
Indirect Participant, on the procedures of the Participant through which such
holder owns its interest, to exercise any rights of a holder of Notes under the
Indenture or such Global Note. The Company understands that under existing
industry practice, in the event the Company requests any action of holders of
Notes or a holder that is an owner of a beneficial interest in a Global Note
desires to take any action that DTC, as the holder of such Global Note, is
entitled to take, DTC would authorize the Participants to take such action and
the Participant would authorize holders owning through such Participants to take
127
<PAGE> 130
such action or would otherwise act upon the instruction of such holders. Neither
the Company nor the Trustee will have any responsibility or liability for any
aspect of the records relating to or payments made on account of Notes by DTC,
or for maintaining, supervising or reviewing any records of DTC relating to such
Notes or for any other matter relating to the actions or procedures of DTC.
Payments with respect to the principal of, premium (if any) and interest
on, any Notes represented by a Global Note registered in the name of DTC or its
nominee on the applicable record date will be payable by the Trustee to or at
the direction of DTC or its nominee in its capacity as the registered holder of
the Global Note representing such notes under the Indenture. Under the terms of
the Indenture, the Company and the Trustee may treat the persons in whose names
the Notes, including the Global Notes, are registered as the owners thereof for
the purpose of receiving such payment and for any and all other purposes
whatsoever. Consequently, neither the Issuer nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of interests in the Global Notes (including principal, premium (if any)
and interest), or to immediately credit the accounts of the relevant
Participants with such payment, in amounts proportionate to their respective
holdings in principal amount of beneficial interest in the Global Note as shown
on the records of DTC. The Company expects that payments by the Participants and
the Indirect Participants to the beneficial owners of interests in the Global
Note will be governed by standing instructions and customary practice and will
be the responsibility of the Participants or the Indirect Participants and DTC.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depositary or DTC ceases to be registered as a
clearing agency under the Securities Exchange Act of 1934, as amended ("the
Exchange Act") and the Company is unable to locate a qualified successor within
90 days, (ii) the Company, at its option, notifies the Trustee in writing that
it elects to cause the issuance of Notes in definitive form under the Indenture
or (iii) upon the occurrence of certain other events, then, upon surrender by
DTC of its Global Notes, Certificated Securities will be issued to each person
that DTC identifies as the beneficial owner of the Notes represented by the
Global Notes. Upon any such issuance, the Trustee is required to register such
Certificated Securities in the name of such person or persons (or the nominee of
any thereof), and cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners of
the related Notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the Notes to be issued).
128
<PAGE> 131
PLAN OF DISTRIBUTION
Based on interpretations by the Staff set forth in no-action letters issued
to third parties, the Company believes that Exchange Notes issued pursuant to
the Exchange Offer in exchange for Original Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder which
is (i) an "Affiliate," (ii) a broker-dealer who acquired Original Notes directly
from the Company or (iii) broker-dealers who acquired Original Notes as a result
of market-making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business and such holders have no arrangement with any person to participate in
a distribution of such Exchange Notes and that broker-dealers receiving Exchange
Notes in the Exchange Offer will be subject to a prospectus delivery requirement
with respect to resales of such Exchange Notes.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Original Notes where such Original 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 this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale. In addition, until , 1998,
all dealers effecting transactions in the Exchange Notes may be required to
deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commission 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.
Despite this acknowledgement, such broker-dealer may nonetheless be determined
to be an "underwriter" by the Commission.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
Holders of the Notes) other than commissions or concessions of any broker-dealer
and will indemnify the Holders of the Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the Exchange Notes will be passed
upon for the Company by Jones, Day, Reavis & Pogue, Cleveland, Ohio.
129
<PAGE> 132
EXPERTS
The consolidated financial statements of Argo-Tech Corporation and
Subsidiaries (A Wholly-Owned Subsidiary of AT Holdings Corporation) as of
October 26, 1996 and October 28, 1995 and for each of the three years in the
period ended October 26, 1996 included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and is included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The financial statements of J.C. Carter Company, Inc. at December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996,
appearing in this Prospectus and Amendment No. 2 to the Registration Statement
on Form S-1 have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
130
<PAGE> 133
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheet at August 2, 1997.......................... F-2
Condensed Consolidated Statements of Operations for the 40 Weeks Ended August 2,
1997 and the 39 Weeks Ended July 27, 1996.................................... F-3
Condensed Consolidated Statements of Cash Flows for the 40 Weeks Ended August 2,
1997 and the 39 Weeks Ended July 27, 1996.................................... F-4
Notes to Condensed Consolidated Financial Statements............................ F-5
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report.................................................... F-8
Consolidated Balance Sheets at October 26, 1996 and October 28, 1995............ F-9
Consolidated Statements of Operations for the 52 Weeks Ended October 26, 1996,
October 28, 1995 and October 29, 1994........................................ F-10
Consolidated Statements of Shareholders' Equity/(Deficiency) for the 52 Weeks
Ended October 26, 1996, October 28, 1995 and October 29, 1994................ F-11
Consolidated Statements of Cash Flows for the 52 Weeks Ended October 26, 1996,
October 28, 1995 and October 29, 1994........................................ F-12
Notes to Consolidated Financial Statements...................................... F-13
J.C. CARTER COMPANY, INC.
UNAUDITED FINANCIAL STATEMENTS:
Condensed Balance Sheet at June 30, 1997........................................ F-24
Condensed Statements of Operations for the Six Months Ended June 30, 1997 and
1996......................................................................... F-25
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1997 and
1996......................................................................... F-26
Notes to Condensed Financial Statements......................................... F-27
AUDITED FINANCIAL STATEMENTS:
Report of Independent Auditors.................................................. F-29
Balance Sheets at December 31, 1996 and 1995.................................... F-30
Statements of Operations and Retained Earnings for the Years Ended December 31,
1996, 1995 and 1994.......................................................... F-31
Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994................................................................ F-32
Notes to Financial Statements................................................... F-33
</TABLE>
The Notes are not collateralized by the capital stock of each of the
Subsidiary Guarantors nor of the Parent.
Effective August 3, 1997, the Company established itself as a parent,
holding company with 3 wholly-owned operating guarantor subsidiaries, Argo-Tech
Corporation (HBP), Argo-Tech Corporation (OEM) and Argo-Tech Corporation
(Aftermarket). The Company has no outside assets, liabilities or operations
apart from its wholly-owned subsidiaries. The Senior Subordinated Notes are
fully, unconditionally, jointly and severally guaranteed by the guarantor
subsidiaries, and therefore, separate financial statements of the guarantor
subsidiaries will not be presented. Upon acquisition, Carter became a
wholly-owned operating guarantor subsidiary of the Company. Carter fully,
unconditionally, jointly and severally guarantees the Senior Subordinated Notes
with the other guarantor subsidiaries. The Company also has 2 wholly-owned
non-guarantor subsidiaries that have inconsequential assets, liabilities and
equity, and their only operations are the result of intercompany activity which
is immediately dividended back to the Company.
F-1
<PAGE> 134
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 2,
1997
-----------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 7,371
Receivables, net............................................................... 19,021
Inventories.................................................................... 17,380
Deferred income taxes and prepaid expenses..................................... 4,019
---------
Total current assets................................................... 47,791
---------
PROPERTY AND EQUIPMENT, net of accumulated depreciation.......................... 26,343
GOODWILL, net of accumulated amortization........................................ 81,825
OTHER ASSETS..................................................................... 5,545
---------
Total Assets........................................................... $ 161,504
=========
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt.............................................. $ 5,000
Accounts payable............................................................... 3,148
Accrued liabilities............................................................ 12,769
---------
Total current liabilities.............................................. 20,917
---------
LONG-TERM DEBT, net of current maturities........................................ 136,107
OTHER NONCURRENT LIABILITIES..................................................... 10,095
---------
Total liabilities...................................................... 167,119
---------
REDEEMABLE COMMON STOCK.......................................................... 3,900
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY/(DEFICIENCY):
Common stock, $.01 par value, authorized 3,000 shares; 3,000 shares issued and
outstanding................................................................. --
Paid-in capital................................................................ 11,288
Accumulated deficit............................................................ (9,463)
Unearned ESOP shares........................................................... (11,340)
---------
Total shareholders' equity/(deficiency)................................ (9,515)
---------
Total Liabilities and Shareholders' Equity/(Deficiency)................ $ 161,504
=========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-2
<PAGE> 135
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
40 WEEKS 39 WEEKS
ENDED ENDED
AUGUST 2, JULY 27,
1997 1996
----------- -----------
<S> <C> <C>
Net revenues.......................................................... $84,892 $71,493
Cost of revenues...................................................... 48,697 42,860
------- -------
Gross profit................................................ 36,195 28,633
------- -------
Selling, general and administrative................................... 7,210 7,308
Research and development.............................................. 5,065 4,792
Amortization of intangible assets..................................... 1,860 1,750
------- -------
Operating expenses.......................................... 14,135 13,850
------- -------
Income from operations................................................ 22,060 14,783
Interest expense...................................................... 9,222 7,643
Other, net............................................................ (313) (118)
------- -------
Income before income taxes............................................ 13,151 7,258
Income tax provision.................................................. 5,299 3,172
------- -------
Income before extraordinary loss...................................... 7,852 4,086
Extraordinary loss on early extinguishment of debt, net of income tax
benefit of $1,019................................................... 1,529 --
------- -------
Net income............................................................ $ 6,323 $ 4,086
======= =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-3
<PAGE> 136
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
40 WEEKS 39 WEEKS
ENDED ENDED
AUGUST 2, JULY 27,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 6,323 $ 4,086
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation..................................................... 3,351 3,392
Amortization of goodwill and deferred financing costs............ 2,658 2,644
Compensation expense recognized in connection with employee stock
ownership plan.................................................. 2,304 1,828
Deferred income taxes............................................ (239) 453
Extraordinary loss on early extinguishment of debt............... 1,529 --
Changes in operating assets and liabilities:
Receivables.................................................... (3,916) (1,053)
Inventories.................................................... (1,743) (717)
Prepaid expenses............................................... 10 612
Accounts payable............................................... (1,408) (1,569)
Accrued and other liabilities.................................. (579) (2,880)
Other, net....................................................... 481 168
--------- ---------
Net cash provided by operating activities........................... 8,771 6,964
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES -- Capital expenditures.......... (1,775) (1,762)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt......................................... (107,600) (9,700)
Additional borrowing of long-term debt.............................. 141,100 --
Payment of financing related fees................................... (1,475) --
Redemption of redeemable preferred stock............................ (25,908) --
Payment of redeemable preferred dividends........................... (19,298) --
--------- ---------
Net cash used in financing activities............................... (13,181) (9,700)
--------- ---------
CASH AND CASH EQUIVALENTS:
Net decrease for the period........................................... (6,185) (4,498)
Balance, Beginning of period.......................................... 13,556 11,969
--------- ---------
Balance, End of period................................................ $ 7,371 $ 7,471
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................................. $ 9,198 $ 7,269
Income taxes.......................................................... 3,058 1,902
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-4
<PAGE> 137
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Argo-Tech Corporation and Subsidiaries (the "Company") (A
Wholly-Owned Subsidiary of AT Holdings Corporation) pursuant to the rules of the
Securities and Exchange Commission ("SEC") and, in the opinion of the Company,
include all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of financial position, results of operations and cash flows.
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 SEC rules. The
Company believes that the disclosures made are adequate to make the information
presented not misleading. The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with the Company's annual
financial statements and footnotes, including footnote 2, which presents the
Company's summary of significant accounting policies. The unaudited condensed
consolidated statement of operations for the 40 weeks ended August 2, 1997 is
not necessarily indicative of the results to be expected for the full year.
Effective August 3, 1997, the Company established itself as a parent,
holding company with 3 wholly-owned operating guarantor subsidiaries, Argo-Tech
Corporation (HBP), Argo-Tech Corporation (OEM) and Argo-Tech Corporation
(Aftermarket). The Company has no outside assets, liabilities or operations
apart from its wholly-owned subsidiaries. The Senior Subordinated Notes
(footnote 4) are fully, unconditionally, jointly and severally guaranteed by the
guarantor subsidiaries, and therefore, separate financial statements of the
guarantor subsidiaries will not be presented. The Company also has 2
wholly-owned non-guarantor subsidiaries that have inconsequential assets,
liabilities and equity, and their only operations are the result of intercompany
activity which is immediately dividend back to the Company.
2. PREFERRED STOCK TRANSACTION
In March 1997, the Company redeemed all of its redeemable preferred stock,
along with accrued dividends, in exchange for subordinated notes in the
principal amount of $41.1 million and cash of $4.1 million. Interest on the
notes is payable quarterly at 11.25% and the notes are due on December 31, 2007.
Such subordinated notes were repaid with the proceeds of the Offering.
3. BANK CREDIT AGREEMENT
In July 1997, the Company refinanced its existing credit facility. The New
Credit Facility, totaling $135.0 million, consisted of a seven-year $100.0
million Term Loan of which $95.0 million is currently outstanding, a seven-year
$20.0 million Revolving Credit Facility and a seven-year $15.0 million Delayed
Draw Acquisition Loans. The Delayed Draw Acquisition Loans were fully utilized
for the Acquisition. The New Credit Facility contains a number of covenants
that, among other things, limit the Company's ability to incur additional
indebtedness, pay dividends, prepay subordinated indebtedness, dispose of
certain assets, create liens, make capital expenditures, make certain
investments or acquisitions and otherwise restrict corporate activities. The New
Credit Facility also requires the Company to comply with certain financial
ratios and tests, under which the Company will be required to achieve certain
financial and operating results. Interest will be calculated, at the Company's
choice, using an alternate base rate (ABR) or LIBOR, plus a supplemental
percentage determined by the ratio of debt to EBITDA. The interest rate is not
to exceed ABR plus 1.00% or LIBOR plus 2.00%. Concurrently with the consummation
of the Acquisition, the Company amended
F-5
<PAGE> 138
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
the New Credit Facility, and such Amended Credit Facility includes a seven-year
$110.0 million Term Loan and a seven-year $20.0 million Revolving Credit
Facility with zero drawn on the Revolving Credit Facility.
4. ACQUISITION AND SENIOR SUBORDINATED NOTE OFFERING
On August 1, 1997, Argo-Tech Corporation entered into an agreement with the
shareholders of J.C. Carter Company, Inc. ("Carter") to purchase 100% of the
outstanding common stock of Carter for $107.0 million in cash, subject to
post-closing adjustment. The sale was completed on September 26, 1997. The
Company offered $140.0 million of Senior Subordinated Notes due 2007 through a
"Rule 144A" private placement with registration rights under the Securities Act
of 1933. The proceeds of the offering were used for the acquisition of Carter
and the repayment of $46.1 million of subordinated notes and notes payable.
Upon acquisition, Carter became a wholly-owned operating guarantor
subsidiary of the Company. Carter fully, unconditionally, jointly and severally
guarantees the Senior Subordinated Notes with the other guarantor subsidiaries.
5. ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The Statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Company will adopt this
standard during fiscal 1998. Such adoption is not expected to have a material
effect on the Company.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
statement requires that a public business enterprises report financial and
descriptive information about its reportable operating segments such as a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. The Company will adopt this standard during fiscal 1998.
Such adoption is not expected to have a material effect on the Company.
6. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 2,
1997
---------
<S> <C>
Finished goods............................... $ 1,603
Work-in-process and purchased parts.......... 17,499
Raw materials and supplies................... 388
---------
Total...................................... 19,490
Reserve for excess and obsolete inventory.... (2,110)
---------
Inventories -- net........................... $ 17,380
=========
</TABLE>
F-6
<PAGE> 139
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
7. EXTRAORDINARY LOSS
In connection with the early extinguishment of debt under the Company's
previous bank credit agreement, the Company recognized an extraordinary loss of
$1.5 million, net of income tax benefit of $1.0 million, resulting from the
write-off of unamortized debt issuance costs.
8. CONTINGENCIES
ENVIRONMENTAL MATTERS -- The soil and groundwater at the Company's
Cleveland Facility contain elevated levels of certain contaminants which are
currently in the process of being removed and/or remediated. Because the Company
has certain indemnification rights from former owners of the facility for
liabilities arising from these or other environmental matters, in the opinion of
the Company's management, the ultimate outcome is not expected to materially
affect the Company's financial condition, results of operations or liquidity.
OTHER MATTERS -- The Company is subject to various legal actions and other
contingencies. In the opinion of the Company's management, after reviewing the
information which is currently available with respect to such matters and
consulting with the Company's legal counsel, any liability which may ultimately
be incurred with respect to these additional matters is not expected to
materially affect the Company's financial condition, results of operations or
liquidity.
* * * * * *
F-7
<PAGE> 140
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of Argo-Tech Corporation and Subsidiaries
(A Wholly-Owned Subsidiary of AT Holdings Corporation):
We have audited the accompanying consolidated balance sheets of Argo-Tech
Corporation and Subsidiaries (the "Company")(A Wholly-Owned Subsidiary of AT
Holdings Corporation) as of October 26, 1996 and October 28, 1995 and the
related consolidated statements of operations, shareholders'
equity/(deficiency), and cash flows for the three years in the period ended
October 26, 1996. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of October 26,
1996 and October 28, 1995, and the results of their operations and their cash
flows for each of the three years in the period ended October 26, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
November 26, 1997
Cleveland, Ohio
F-8
<PAGE> 141
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 28,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 13,556 $ 11,969
Receivables, net................................................. 15,105 15,539
Inventories...................................................... 15,637 15,469
Deferred income taxes and prepaid expenses....................... 3,821 5,123
--------- ---------
Total current assets.......................................... 48,119 48,100
--------- ---------
PROPERTY AND EQUIPMENT, net of accumulated depreciation............ 27,919 29,184
GOODWILL, net of accumulated amortization.......................... 83,686 83,042
OTHER ASSETS....................................................... 7,382 6,731
--------- ---------
Total Assets.................................................. $ 167,106 $ 167,057
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt................................ $ 4,500 $ 4,700
Accounts payable................................................. 4,556 4,265
Accrued liabilities.............................................. 13,532 16,037
--------- ---------
Total current liabilities..................................... 22,588 25,002
--------- ---------
LONG-TERM DEBT, net of current maturities.......................... 103,107 113,907
OTHER NONCURRENT LIABILITIES....................................... 27,681 18,779
--------- ---------
Total liabilities............................................. 153,376 157,688
--------- ---------
REDEEMABLE PREFERRED STOCK......................................... 25,908 25,908
REDEEMABLE COMMON STOCK............................................ 2,700 1,100
COMMITMENTS AND CONTINGENCIES (Notes 9 and 14)
SHAREHOLDERS' EQUITY/(DEFICIENCY):
Common stock, $.01 par value, authorized 3,000 shares; 3,000
shares issued and outstanding................................. -- --
Paid-in capital.................................................. 11,444 12,395
Accumulated deficit.............................................. (13,722) (15,754)
Unearned ESOP shares............................................. (12,600) (14,280)
--------- ---------
Total shareholders' equity/(deficiency)....................... (14,878) (17,639)
--------- ---------
Total Liabilities and Shareholders' Equity/(Deficiency)....... $ 167,106 $ 167,057
========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-9
<PAGE> 142
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS ENDED
-----------------------------------------
OCTOBER 26, OCTOBER 28, OCTOBER 29,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues.............................................. $96,437 $86,671 $79,709
Cost of revenues.......................................... 57,882 54,222 54,276
------- ------- -------
Gross profit............................................ 38,555 32,449 25,433
------- ------- -------
Selling, general and administrative....................... 10,036 9,392 8,527
Research and development.................................. 6,429 5,664 2,543
Amortization of intangible assets......................... 2,842 2,334 2,334
Fees and costs associated with the formation of an ESOP... -- -- 1,385
------- ------- -------
Operating expenses...................................... 19,307 17,390 14,789
------- ------- -------
Income from operations.................................... 19,248 15,059 10,644
Interest expense.......................................... 10,138 11,924 10,117
Other, net................................................ (142) (588) 75
------- ------- -------
Income before income taxes................................ 9,252 3,723 452
Income tax provision...................................... 3,608 1,553 279
------- ------- -------
Net income................................................ $ 5,644 $ 2,170 $ 173
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-10
<PAGE> 143
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNEARNED
COMMON PAID-IN ACCUMULATED ESOP
STOCK CAPITAL DEFICIT SHARES TOTAL
------ ------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1993...... $ -- $13,505 $ (12,260) $ -- $ 1,245
Net income..................... -- -- 173 -- 173
Acquisition of common stock
upon formation of ESOP....... -- -- -- (16,800) (16,800)
ESOP shares committed to be
released..................... -- -- -- 840 840
Dividends accrued on preferred
stock........................ -- -- (3,124) -- (3,124)
Other, net..................... -- -- 818 -- 818
----- ------- --------- -------- --------
Balance, October 29, 1994...... $ -- $13,505 $ (14,393) $(15,960) $(16,848)
Net income..................... -- -- 2,170 -- 2,170
ESOP shares committed to be
released..................... -- (10) -- 1,680 1,670
Dividends accrued on preferred
stock........................ -- -- (3,509) -- (3,509)
Accretion of redeemable common
stock........................ -- (1,100) -- -- (1,100)
Other, net..................... -- -- (22) -- (22)
----- ------- --------- -------- --------
Balance, October 28, 1995...... $ -- $12,395 $ (15,754) $(14,280) $(17,639)
Net income..................... -- -- 5,644 -- 5,644
ESOP shares committed to be
released..................... -- 649 -- 1,680 2,329
Dividends accrued on preferred
stock........................ -- -- (3,848) -- (3,848)
Accretion of redeemable common
stock........................ -- (1,600) -- -- (1,600)
Other, net..................... -- -- 236 -- 236
----- ------- --------- -------- --------
Balance, October 26, 1996...... $ -- $11,444 $ (13,722) $(12,600) $(14,878)
===== ======= ========= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-11
<PAGE> 144
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS ENDED
---------------------------------------------
OCTOBER 26, OCTOBER 28, OCTOBER 29,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 5,644 $ 2,170 $ 173
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 4,620 4,838 6,392
Amortization of goodwill and deferred financing
costs.......................................... 4,033 3,739 3,785
Compensation expense recognized in connection
with employee stock ownership plan............. 2,329 1,670 840
Deferred rental income........................... (288) (670) (1,336)
Deferred income taxes............................ 825 700 32
Changes in operating assets and liabilities:
Receivables.................................... 434 270 612
Inventories.................................... (168) 5,793 6,284
Prepaid expenses............................... 958 (290) (123)
Accounts payable............................... 291 1,777 (1,727)
Accrued and other liabilities.................. (2,972) (2,693) 1,780
Other, net....................................... 236 542 819
------- ------- -------
Net cash provided by operating activities........... 15,942 17,846 17,531
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES -
Capital expenditures................................ (3,355) (2,918) (1,475)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional borrowing of long-term debt.............. -- -- 22,007
Repayment of long-term debt......................... (11,000) (19,000) (12,400)
Payment of financing costs.......................... -- (730) (170)
Proceeds from sale of redeemable preferred stock.... -- -- 1,508
Acquisition of unearned ESOP shares................. -- -- (16,800)
------- ------- -------
Net cash used in financing activities............... (11,000) (19,730) (5,855)
------- ------- -------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) for the period................ 1,587 (4,802) 10,201
Balance, Beginning of period.......................... 11,969 16,771 6,570
------- ------- -------
Balance, End of period................................ $13,556 $11,969 $16,771
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-12
<PAGE> 145
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 26, 1996, OCTOBER 28, 1995 AND OCTOBER 29, 1994
1. BASIS OF PRESENTATION
Argo-Tech Corporation and Subsidiaries (the "Company") (A Wholly-Owned
Subsidiary of AT Holdings Corporation) principal operations include the design,
manufacture and distribution of aviation products, primarily aircraft fuel
pumps, throughout the world. In addition, the Company leases a portion of its
manufacturing facility to other parties. The Company's fiscal year ends on the
last Saturday in October. The Company is obligated to fulfill certain
obligations of AT Holdings. As a result, those obligations have been reflected
by the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of the Company. All material intercompany accounts and
transactions between these entities have been eliminated.
CASH EQUIVALENTS -- Cash equivalents represent short-term investments with
an original maturity of three months or less.
ACCOUNTS RECEIVABLE -- The Company does not generally require collateral or
other security to guarantee trade receivables.
INVENTORIES -- Inventories are stated at standard cost which approximates
the costs which would be determined using the first-in, first-out (FIFO) method.
The recorded value of inventories at both dates is not in excess of market
value.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost and are
depreciated using principally an accelerated method over their estimated useful
lives as follows:
<TABLE>
<S> <C>
Buildings and improvements........... 15 to 30 years
Equipment............................ 5 to 10 years
</TABLE>
GOODWILL -- Goodwill is amortized on a straight-line basis over forty
years. Accumulated amortization at October 26, 1996 and October 28, 1995 was
$14,947,000 and $12,105,000, respectively. The Company assesses the
recoverability of goodwill by determining whether the amortization over the
remaining life can be recovered through projected undiscounted future
operations.
DEFERRED FINANCING COSTS -- The costs of obtaining financing are amortized
over the terms of the financing. The amortized cost is included in interest
expense in the consolidated statements of income. Accumulated amortization at
October 26, 1996 and October 28, 1995 was $8,314,000 and $7,123,000,
respectively.
REVENUE AND COST RECOGNITION -- The Company recognizes revenues and costs
upon the shipment of goods or rendering of services to customers. The Company's
product development activities are conducted principally under cost-sharing
arrangements that are funded by the Company. The need for and timing of
expenditures under these arrangements is generally determined by the Company.
The estimated unreimbursable costs under the activities are expensed as
incurred.
INCOME TAXES -- Income taxes are accounted for under the asset and
liability approach, which can result in recording tax provisions or benefits in
periods different than the periods in which such taxes are paid or benefits
realized. Expected tax benefits from temporary differences that will result
F-13
<PAGE> 146
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED OCTOBER 26, 1996, OCTOBER 28, 1995 AND OCTOBER 29, 1994
in deductible amounts in future years and from carryforwards, if it is more
likely than not that such tax benefits will be realized, are recognized
currently.
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.
3. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
The major components of the following balance sheet captions were (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 28,
1996 1995
----------- -----------
<S> <C> <C>
Other assets:
Deferred financing costs........................................... $ 3,305 $ 4,496
Deferred income taxes.............................................. 3,733 1,891
Other.............................................................. 344 344
------- -------
Total........................................................... $ 7,382 $ 6,731
======= =======
Accrued liabilities:
Salaries and accrued compensation.................................. $ 4,867 $ 4,858
Accrued interest................................................... 2,070 3,051
Accrued income taxes............................................... 865 659
Accrued warranty................................................... 1,725 1,475
Deferred rental income............................................. 108 1,035
Other.............................................................. 3,897 4,959
------- -------
Total........................................................... $13,532 $16,037
======= =======
Other noncurrent liabilities:
Accumulated dividends on redeemable preferred stock................ $17,770 $13,922
Pension and other employee benefits................................ 9,245 3,624
Other.............................................................. 666 1,233
------- -------
Total........................................................... $27,681 $18,779
======= =======
</TABLE>
F-14
<PAGE> 147
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED OCTOBER 26, 1996, OCTOBER 28, 1995 AND OCTOBER 29, 1994
4. RECEIVABLES
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 28,
1996 1995
----------- -----------
<S> <C> <C>
Amounts billed -- net of allowance for uncollectible amounts of $164
and $118.......................................................... $ 13,002 $ 12,841
--------- ---------
Amounts unbilled (principally commercial customers):
Net reimbursable costs incurred on uncompleted contracts.......... 16,785 13,287
Billings to date.................................................. (14,682) (10,589)
--------- ---------
Total unbilled -- net.......................................... 2,103 2,698
--------- ---------
Receivables -- net.................................................. $ 15,105 $ 15,539
========= =========
</TABLE>
5. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 28,
1996 1995
----------- -----------
<S> <C> <C>
Finished goods...................................................... $ 1,658 $ 1,675
Work-in-process and purchased parts................................. 15,658 15,985
Raw materials and supplies.......................................... 499 607
------- -------
Total............................................................. 17,815 18,267
Reserve for excess and obsolete inventory........................... (2,178) (2,798)
------- -------
Inventories -- net.................................................. $15,637 $15,469
======= =======
</TABLE>
6. PROPERTY AND EQUIPMENT
OWNED PROPERTY -- Property and equipment owned by the Company consists of
the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 28,
1996 1995
----------- -----------
<S> <C> <C>
Land and land improvements.......................................... $ 4,488 $ 4,488
Buildings and building equipment.................................... 29,042 29,101
Machinery and equipment............................................. 26,442 24,338
Office and automotive equipment..................................... 4,748 4,009
Construction-in-progress............................................ 2,043 1,979
--------- ---------
Total............................................................. 66,763 63,915
Accumulated depreciation............................................ (38,844) (34,731)
--------- ---------
Total -- net........................................................ $ 27,919 $ 29,184
========= =========
</TABLE>
PROPERTY LEASED TO OTHERS -- The Company leases certain portions of its
Cleveland Facility. The leases have been accounted for as operating leases
whereby revenue is recognized as earned over the lease terms. Rents paid in
advance are deferred and recognized in income on a straight-line basis over the
remaining life of the lease. The cost of property leased to others is included
in property and equipment and is being depreciated over its estimated useful
life. It is not practical to
F-15
<PAGE> 148
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED OCTOBER 26, 1996, OCTOBER 28, 1995 AND OCTOBER 29, 1994
determine the cost of the property that is being leased to others or the related
amount of accumulated depreciation. In addition, the Company has separate
service contracts with its tenants under which the Company provides maintenance,
telecommunications and various other services. A large portion of the Company's
cost related to the receipts based on usage is variable in nature.
Total rental revenue under the property leases and service contracts was as
follows for the fiscal years ended 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Minimum contractual amounts under property leases............. $ 5,768 $ 6,005 $ 6,604
Recognition of deferred rental income......................... 288 670 1,336
Service contracts revenue based on usage...................... 1,484 2,055 2,636
------- ------- -------
Total....................................................... $ 7,540 $ 8,730 $10,576
======= ======= =======
</TABLE>
Future minimum rentals under the noncancelable property leases and service
contracts at October 26, 1996 are (in thousands): $3,719 in 1997, $3,017 in
1998, $1,767 in 1999, $1,764 in 2000, and $1,764 in 2001.
7. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN -- The Company has an Employee Stock
Ownership Plan (ESOP) to provide retirement benefits to qualifying, salaried
employees. In 1994, the ESOP purchased shares of AT Holdings through a $16.8
million loan from the Company. The ESOP grants to participants in the plan
certain ownership rights in, but not possession of, the common stock of the
Company held by the Trustee of the Plan. Shares of common stock are allocated
annually to participants in the ESOP pursuant to a prescribed formula. The value
of the shares committed to be released by the Trustee under the Plan's
provisions for allocation to participants was recognized as an expense of
$2,329,000, $1,670,000, and $840,000 for the fiscal years ended 1996, 1995, and
1994, respectively. The cost of the shares acquired for the ESOP that are not
committed to be released to participants is shown as a contra-equity account,
"Unearned ESOP shares".
Summary information regarding ESOP activity for the fiscal years ended 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Allocated shares................................................ 63,000 21,000
Shares released for allocation.................................. 42,000 42,000
Unearned ESOP shares............................................ 315,000 357,000
----------- -----------
Total ESOP shares............................................... 420,000 420,000
Repurchased shares received as distributions.................... (862) --
----------- -----------
Total available ESOP shares..................................... 419,138 420,000
=========== ===========
Fair market value of unearned ESOP shares....................... $18,468,450 $17,039,610
=========== ===========
</TABLE>
All of the shares acquired for the ESOP (both allocated and unearned
shares) are owned and held in trust by the ESOP.
The Company's stock is not listed or traded on an active stock market and
market prices are, therefore, not available. Annually, an independent financial
consulting firm determines the fair market value based upon the Company's
performance and financial condition.
F-16
<PAGE> 149
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED OCTOBER 26, 1996, OCTOBER 28, 1995 AND OCTOBER 29, 1994
The Company provides an "internal market" for shareholders through its
purchase of their common shares. Participants in the Company's ESOP have the
right to require the Company, within a specified period, to repurchase shares
received as distributions under the ESOP at their fair market value.
PENSION AND SAVINGS PLANS -- The Company has two noncontributory defined
benefit pension plans which together cover substantially all of its employees. A
plan covering salaried employees provides pension benefits that are based on the
employees' compensation and years of service. The future accrual of benefits was
terminated in connection with the formation of the ESOP. A plan covering hourly
employees provides benefits of stated amounts for each year of service. The
Company's funding policy is to contribute actuarially determined amounts
allowable under Internal Revenue Service regulations. The Company also sponsors
two employee savings plans which cover substantially all of the Company's
employees. Neither plan provides for a Company match of participating employees
contributions.
A summary of the components of net periodic pension cost for the pension
plans for the fiscal years ended 1996, 1995 and 1994 is as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during the period............ $ 218 $ 167 $ 735
Interest cost on projected benefit obligation................ 805 701 768
Actual return on plan assets................................. (1,488) (1,520) 68
Net amortization and deferral................................ 483 576 (1,007)
------- ------- -------
Net periodic pension cost.................................... $ 18 $ (76) $ 564
======= ======= =======
</TABLE>
The following table sets forth the funded status of the plans and amounts
recognized in the Company's balance sheets for its pension plan (in thousands):
<TABLE>
<CAPTION>
OCTOBER 26, 1996 OCTOBER 28, 1995
--------------------------- ---------------------------
(ACCUMULATED (ASSETS (ACCUMULATED (ASSETS
BENEFITS EXCEED BENEFITS EXCEED
EXCEED ACCUMULATED EXCEED ACCUMULATED
ASSETS) BENEFITS) ASSETS) BENEFITS)
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation............ $ (3,450) $ (7,328) $ (2,831) $ (6,774)
======== ========= ======== =========
Accumulated benefit obligation....... $ (3,526) $ (7,328) $ (2,896) $ (6,774)
======== ========= ======== =========
Projected benefit obligation......... $ (3,526) $ (7,328) $ (2,896) $ (6,774)
Plan assets at fair value.............. 2,923 8,535 2,379 7,581
-------- --------- -------- ---------
Projected benefit obligation (in excess
of) or less than plan assets......... (603) 1,207 (517) 807
Unrecognized prior service cost........ 451 -- 163 --
Unrecognized net gain from past
experience different from that
assumed.............................. (874) (2,661) (829) (2,494)
-------- --------- -------- ---------
Accrued pension cost recognized in the
consolidated balance sheets.......... $ (1,026) $ (1,454) $ (1,183) $ (1,687)
======== ========= ======== =========
</TABLE>
F-17
<PAGE> 150
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED OCTOBER 26, 1996, OCTOBER 28, 1995 AND OCTOBER 29, 1994
The assumptions used to determine net periodic pension cost as well as the
funded status are:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Discount rate................................ 8.0% 8.0%
Long-term rate of return on plan assets...... 9.0% 9.0%
</TABLE>
The plans' assets consist primarily of insurance company pooled separate
accounts.
OTHER POSTRETIREMENT BENEFITS -- The Company provides certain
postretirement health care benefits to hourly retirees and their dependents.
Effective November 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This statement requires that costs
of these postretirement benefits be accrued during an employee's active working
career. Prior to adoption of this statement, the cost of providing these
benefits was previously recognized on a pay-as-you-go basis and amounted to
$83,000 for fiscal 1995.
The Company implemented SFAS No. 106 on the immediate recognition basis by
recording a postretirement benefit obligation of $5,808,941, and, according to
Statement provisions related to business combinations occurring after December
21, 1990, a resulting increase in Goodwill and Deferred Income Taxes of
$3,485,365 and $2,323,576, respectively.
The net postretirement benefit cost for fiscal 1996 includes the following
components (in thousands):
<TABLE>
<S> <C>
Service cost......................................................... $158
Interest cost on accumulated postretirement benefit obligation....... 460
----
Net postretirement benefit cost...................................... $618
====
</TABLE>
Benefit costs were generally estimated assuming retiree health care costs
would initially increase at an 11% annual rate, decreasing gradually to a 5%
annual growth rate after 12 years and remain at a 5% annual growth rate
thereafter. A 1% increase in this annual trend rate would have increased the
accumulated postretirement benefit obligation at October 26, 1996 by $1,093,000
with a corresponding effect on the 1996 postretirement benefit expense of
$115,000. The discount rate used to estimate the accumulated postretirement
benefit obligation was 8.0%.
The accumulated postretirement benefit obligation at October 26, 1996
consisted of unfunded obligations related to the following (in thousands):
<TABLE>
<S> <C>
Retirees and dependents.............................................. $1,464
Fully eligible active plan participants.............................. 1,629
Other active participants............................................ 3,196
------
Postretirement benefit liability recognized on the balance sheet..... $6,289
======
</TABLE>
F-18
<PAGE> 151
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED OCTOBER 26, 1996, OCTOBER 28, 1995 AND OCTOBER 29, 1994
8. INCOME TAXES
The income tax provision consists of the following for the fiscal years
ended 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current tax provision:
Federal.................................................... $ 2,153 $ 764 $ (35)
State and local............................................ 630 89 282
------- ------- -------
Total................................................... 2,783 853 247
Deferred tax provision....................................... 825 700 32
------- ------- -------
Income tax provision......................................... $ 3,608 $ 1,553 $ 279
======= ======= =======
</TABLE>
The difference between the recorded income tax provision and the amounts
computed using the statutory U.S. Federal income tax rate are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income tax provision at statutory rate....................... $ 3,146 $ 1,266 $ 154
State tax provision -- net of federal benefits............... 416 78 --
Other -- net................................................. 46 209 125
------- ------- -------
Income tax provision......................................... $ 3,608 $ 1,553 $ 279
======= ======= =======
</TABLE>
During the fiscal years ended 1996, 1995, and 1994 the Company paid (net of
refunds received) approximately $2.0, $1.2 and $3.1 million in income taxes,
respectively.
The components of the Company's net deferred tax asset (liability) are as
follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 28,
1996 1995
----------- -----------
<S> <C> <C>
Current:
Deductible temporary differences.................................. $ 3,493 $ 3,854
Taxable temporary differences..................................... -- (17)
------- -------
Total............................................................... $ 3,493 $ 3,837
======= =======
Long-term:
Taxable temporary differences..................................... $ (347) $ (608)
Hourly retiree medical............................................ 2,453 --
Deductible temporary differences.................................. 1,627 2,499
------- -------
Total............................................................... $ 3,733 $ 1,891
======= =======
</TABLE>
The temporary differences described above principally represent differences
between the tax bases of assets (principally inventory, property and equipment)
or liabilities (principally related to employee benefits, loss reserves and
rental credits) and their reported amounts in the consolidated financial
statements that will result in taxable or deductible amounts in future years
when the reported amounts of the assets or liabilities are recovered or settled,
respectively.
F-19
<PAGE> 152
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED OCTOBER 26, 1996, OCTOBER 28, 1995 AND OCTOBER 29, 1994
9. DEBT
SUMMARY -- The Company's long-term debt consists of the following (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 28,
1996 1995
----------- -----------
<S> <C> <C>
Term loans.................... $ 52,600 $ 63,600
Subordinated loan............. 50,000 50,000
Notes payable................. 5,007 5,007
--------- ---------
Total borrowings............ 107,607 118,607
Current maturities............ (4,500) (4,700)
--------- ---------
Long-term portion............. $ 103,107 $ 113,907
========= =========
</TABLE>
CREDIT FACILITY AND TERM LOANS -- The Company has a credit facility with a
financial institution consisting of a revolving line of credit of $25.0 million
and term loans. Approximately $0.2 million of letters of credit were outstanding
under the line of credit to guarantee performance under certain contracts at
October 26, 1996. The unused balance of the revolving line of credit ($24.8
million at October 26, 1996) is subject to a .25% commitment fee. The revolving
line of credit expires on October 28, 1997 at which time any amount borrowed
thereunder must be repaid; however, after this date, the revolving line of
credit may be extended on an annual basis through October 28, 2000 subject to
approval by the financial institution.
The principal amount of the term loans is payable in generally increasing
amounts semi-annually through October 28, 2000. Pre-payments on the term loans
will modify the repayment schedule. During the years ended October 26, 1996 and
October 28, 1995, the Company prepaid $6.5 million and $12.0 million,
respectively. The repayment schedule under the term loans will be accelerated if
the Company generates "Excess Cash Flow" as defined in the Loan Agreement. There
is a payment required for excess cash flow generated during the year ended
October 26, 1996 in the amount of $200,000. There was no payment required for
the year ended October 28, 1995.
The credit facility bears interest at the Company's option of (1) the LIBO
Rate for Eurodollar Loans plus 1.5% or (2) the higher of the overnight federal
funds rate or the prime rate plus .50%. With respect to $20.0 million of the
term loans, the Company has entered into an interest rate swap agreement with
the financial institution which fixed the interest rate at 7.215% through
October 1997. The interest rate on the credit facility ranged from 6.98% to
7.215% at October 26, 1996.
The credit facility is collateralized by substantially all of the tangible
assets of the Company (including the capital stock of Argo-Tech and a mortgage
on the Company's real property) as well as the unearned shares of the Company's
common stock held by the ESOP. The agreement also contains a number of
restrictive covenants that, among other things, limit the ability of AT Holdings
Corporation and its subsidiaries to enter into leasing arrangements, incur
indebtedness, pay dividends, transfer assets among subsidiaries, engage in
transactions with stockholders and affiliates, create liens, engage in mergers
and consolidations, make capital expenditures, engage in sales of assets or the
stock of subsidiary companies and make certain investments.
SUBORDINATED LOAN -- The repayment of the subordinated loan, which is due
October 28, 2000 and has been guaranteed by the parent company of YC
International, the majority shareholder of AT Holdings, is subordinate to
amounts payable under the Company's credit facility. The loan is payable to the
financial institution which provided the Company's credit facility and bears
interest at the
F-20
<PAGE> 153
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED OCTOBER 26, 1996, OCTOBER 28, 1995 AND OCTOBER 29, 1994
Company's option equal to (1) the LIBO Rate for Eurodollar Loans plus 1.0% or
(2) the higher of the overnight federal funds rate or the prime rate. With
respect to the $50.0 million subordinated loan, the Company has entered into two
interest rate swap agreements with the financial institution which fixes the
interest rate on $20.0 million at 6.80% through October 1997, and 7.66% through
October 2000 on the remaining $30.0 million. The interest rate on the
subordinated loans ranged from 6.80% to 7.66% at October 26, 1996. The
subordinated loan contains many of the same restrictive covenants that are
included in the loan agreement which governs the credit facility.
NOTES PAYABLE -- The repayment of the notes, which are due on October 28,
2000, is subordinate to the Company's other long-term debt. Interest on the
notes is payable at the prime rate.
ANNUAL MATURITIES AND INTEREST PAYMENTS -- The maturities of the Company's
long-term debt during each of the next five fiscal years are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ----------- --------
<S> <C>
1997....... $ 4,500
1998....... 5,300
1999....... 5,300
2000....... 92,507
2001....... --
--------
Total...... $107,607
========
</TABLE>
The total interest paid during the fiscal years ended 1996, 1995 and 1994
was $9.2 million, $9.8 million and $5.1 million, respectively.
10. REDEEMABLE STOCK
Redeemable preferred stock of AT Holdings consists of $1 par value Series A
Cumulative Redeemable Preferred Stock. The preferred stock must be redeemed by
December 24, 2000 at a liquidation preference of $25.9 million ($100 per share)
plus accrued dividends. All of the preferred stock is redeemable prior to
December 24, 2000 upon a change in the control of the Company or AT Holdings (as
defined) and up to $10.0 million is redeemable from the proceeds from certain
sales of the Company's real estate, including the Euclid, Ohio facility. Under
the terms of AT Holdings articles of incorporation and by-laws, no additional
shares of preferred stock are available for issuance.
Dividends are accrued at an annual rate of 9.33% (based on a $100 per share
value), compounded quarterly. Dividends accrued during the period December 24,
1990 through December 24, 1997 may be paid at any time prior to December 24,
2000. Dividends accrued during the period December 25, 1997 through December 24,
2000 are to be paid quarterly to the extent sufficient funds are available to
legally pay the dividends. At October 26, 1996 and October 28, 1995, dividends
of $17.8 million and $13.9 million, respectively, were accrued on the preferred
stock and included in other long-term liabilities on the accompanying
consolidated balance sheets.
Redeemable common stock represents a right (a "put") that management
shareholders have to require the Company to repurchase shares of common stock at
the greater of their fair market value or $40 per share, subject to certain
limitations through April 30, 2004. There were 69,363 of these shares
outstanding at October 26, 1996 and October 28, 1995.
F-21
<PAGE> 154
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED OCTOBER 26, 1996, OCTOBER 28, 1995 AND OCTOBER 29, 1994
11. RELATED PARTY TRANSACTIONS
Management fees and out-of-pocket expenses were charged to operations in
accordance with the provisions of a management agreement between the Company and
a related party. Fees payable to the parent company of YC International, the
majority shareholder of AT Holdings for the guarantee of the Company's
subordinated loan were charged to operations. The total related party fees
charged to operations during 1996, 1995 and 1994 approximated 0.8%, 1.0% and
1.6% of net revenues, respectively. In addition, during the fiscal years ended
1996, 1995 and 1994 sales of $21.1 million, $17.4 million and $5.6 million,
respectively, were made to a related party.
12. MAJOR CUSTOMERS AND EXPORT SALES
During the fiscal years ended 1996, 1995 and 1994, the Company had revenues
in excess of 10% from the following customers (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Customer A........... $21,167 $17,444 $12,287
Customer B........... 16,177 12,172 12,538
Customer C........... -- -- 8,281
</TABLE>
During the fiscal years ended 1996, 1995 and 1994, export sales to foreign
customers were comprised of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Europe........................ $13,158 $10,096 $10,319
All others individually
(less than 10%)............. 30,911 27,437 26,856
------- ------- -------
$44,069 $37,533 $37,175
======= ======= =======
</TABLE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has various financial instruments, including cash and
short-term investments, interest rate swaps, long-term debt, and preferred
stock. The Company has determined the estimated fair value of these financial
instruments by soliciting available market information and utilizing appropriate
valuation methodologies which require judgment. The Company believes that the
carrying values of these financial instruments approximate their fair value.
14. CONTINGENCIES
ENVIRONMENTAL MATTERS -- The soil and groundwater at the Company's
Cleveland Facility contain elevated levels of certain contaminants which are
currently in the process of being removed and/or remediated. Because the Company
has certain indemnification rights from former owners of the facility for
liabilities arising from these or other environmental matters, in the opinion of
the Company's management, the ultimate outcome is not expected to materially
affect the Company's financial condition, results of operations or liquidity.
OTHER MATTERS -- The Company is subject to various legal actions and other
contingencies. In the opinion of the Company's management, after reviewing the
information which is currently available with respect to such matters and
consulting with the Company's legal counsel, any liability which may ultimately
be incurred with respect to these additional matters is not expected to
materially affect the Company's financial condition, results of operations or
liquidity.
F-22
<PAGE> 155
ARGO-TECH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AT HOLDINGS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED OCTOBER 26, 1996, OCTOBER 28, 1995 AND OCTOBER 29, 1994
15. SUBSEQUENT EVENTS
PREFERRED STOCK TRANSACTION -- In March 1997, the Company redeemed all of
its redeemable preferred stock, along with accrued dividends, in exchange for
subordinated notes in the principal amount of $41.1 million and cash of $4.1
million. Interest on the notes is payable quarterly at 11.25% and the notes are
due on December 31, 2007.
BANK CREDIT AGREEMENT -- In July 1997, the Company refinanced its existing
credit facility. The New Credit Facility, totaling $135.0 million, consisted of
a seven-year $100.0 million Term Loan of which $95 million is currently
outstanding, a seven-year $20.0 million Revolving Credit Facility and a
seven-year $15.0 million Delayed Draw Acquisition Loans. The Delayed Draw
Acquisition Loans were fully utilized for the Acquisition. The New Credit
Facility contains a number of covenants that, among other things, limit the
Company's ability to incur additional indebtedness, pay dividends, prepay
subordinated indebtedness, dispose of certain assets, create liens, make capital
expenditures, make certain investments or acquisitions and otherwise restrict
corporate activities. The New Credit Facility also requires the Company to
comply with certain financial ratios and tests, under which the Company will be
required to achieve certain financial and operating results. Interest will be
calculated, at the Company's choice, using an alternative base rate (ABR) or
LIBOR, plus a supplemental percentage determined by the ratio of debt to EBITDA.
The interest rate is not to exceed ABR plus 1.00% or LIBOR plus 2.00%.
Concurrently with the consummation of the Acquisition, the Company amended the
New Credit Facility, and such Amended Credit Facility includes a seven-year
$110.0 million Term Loan and a seven-year $20.0 million Revolving Credit
Facility with zero drawn on the Revolving Credit Facility.
ACQUISITION AND SENIOR SUBORDINATED NOTE OFFERING -- On August 1, 1997,
Argo-Tech Corporation entered into an agreement with the shareholders of J.C.
Carter Company, Inc. ("Carter") to purchase 100% of the outstanding common stock
of Carter for $107.0 million in cash, subject to post-closing adjustment. The
sale was completed on September 26, 1997. The Company offered $140.0 million of
Senior Subordinated Notes due 2007 through a "Rule 144A" private placement with
registration rights under the Securities Act of 1933. The proceeds of the
offering were used for the acquisition of Carter and the repayment of $46.1
million of subordinated notes and notes payable.
Upon acquisition, Carter became a wholly-owned operating guarantor
subsidiary of the Company. Carter fully, unconditionally, jointly, and severally
guarantees the Senior Subordinated Notes with the other guarantor subsidiaries.
CHANGE IN CORPORATE STRUCTURE -- Effective August 3, 1997, the Company
established itself as a parent, holding company with 3 wholly-owned operating
guarantor subsidiaries, Argo-Tech Corporation (HBP), Argo-Tech Corporation (OEM)
and Argo-Tech Corporation (Aftermarket). The Company has no outside assets,
liabilities or operations apart from its wholly-owned subsidiaries. The Senior
Subordinated Notes are fully, unconditionally, jointly and severally guaranteed
by the guarantor subsidiaries, and therefore, separate financial statements of
the guarantor subsidiaries will not be presented. The Company also has 2
wholly-owned non-guarantor subsidiaries that have inconsequential assets,
liabilities and equity, and their only operations are the result of intercompany
activity which is immediately dividend back to the Company.
* * * * * *
F-23
<PAGE> 156
J.C. CARTER COMPANY, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
1997
-----------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................................... $ 203
Accounts receivable, net of allowance of $63................................... 4,856
Note and accrued interest receivable from an officer/shareholder............... 2,280
Costs and estimated earnings in excess of billings on uncompleted contracts.... 659
Inventory...................................................................... 11,408
Prepaid expenses and other..................................................... 426
Deferred income taxes.......................................................... 2,323
-------
Total current assets................................................... 22,155
PROPERTY, PLANT AND EQUIPMENT, net............................................... 5,188
GOODWILL, net.................................................................... 362
-------
TOTAL ASSETS..................................................................... $27,705
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................... $ 3,110
Accrued liabilities............................................................ 1,985
Accrued bonuses................................................................ 2,061
Current portion of capital lease obligation.................................... 99
Current portion of long-term debt.............................................. 13,275
-------
Total current liabilities.............................................. 20,530
CAPITAL LEASE OBLIGATION, less current portion................................... 176
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value: authorized shares -- 2,000,000; issued and
outstanding shares -- 1,125,000............................................. 1,125
Retained earnings.............................................................. 5,874
-------
Total shareholders' equity............................................. 6,999
-------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....................................... $27,705
=======
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
F-24
<PAGE> 157
J.C. CARTER COMPANY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net revenues.......................................................... $24,008 $22,131
Cost of revenues...................................................... 12,144 12,052
------- -------
Gross profit................................................ 11,864 10,079
------- -------
Selling, general and administrative................................... 4,395 3,564
Engineering and development........................................... 1,309 790
Office of the President............................................... 6,088 4,840
------- -------
Operating expenses.......................................... 11,792 9,194
------- -------
Income from operations................................................ 72 885
Interest expense...................................................... 537 489
Other expense, net.................................................... 214 54
------- -------
Income (loss) before income taxes..................................... (679) 342
Income tax provision (benefit)........................................ (2,271) 43
------- -------
Net income............................................................ $ 1,592 $ 299
======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
F-25
<PAGE> 158
J.C. CARTER COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
------------------
1997 1996
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................. $ 1,592 $ 299
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization....................................... 359 301
Provision for deferred income taxes................................. (2,207) --
Loss on sale of property, plant and equipment....................... 150 123
Changes in operating assets and liabilities:
Accounts receivable............................................... 360 (215)
Cost and estimated earnings in excess of billings on uncompleted
contracts........................................................ 133 (146)
Inventory......................................................... (1,124) 205
Prepaid expenses, other and refundable income taxes............... (13) 86
Note and accrued interest receivable from an
officer/shareholder............................................ (14) 245
Accounts payable and accrued liabilities.......................... (188) (234)
Accrued bonuses................................................... (520) (139)
------- -------
Net cash provided by (used in) operating activities.................... (1,472) 525
INVESTING ACTIVITIES:
Capital expenditures................................................... (69) (4,170)
Proceeds from sale of property, plant and equipment.................... -- 3,855
Acquisition of IMS..................................................... (407) --
------- -------
Net cash used in investing activities.................................. (476) (315)
FINANCING ACTIVITIES:
Proceeds from bank borrowings.......................................... -- 42
Principal payments on debt............................................. (650) (650)
Net borrowings on credit line.......................................... 2,847 55
Payments on capital lease obligations.................................. (46) (8)
------- -------
Net cash provided by (used in) financing activities.................... 2,151 (561)
------- -------
NET INCREASE (DECREASE) IN CASH.......................................... 203 (351)
CASH AT BEGINNING OF YEAR................................................ -- 420
------- -------
CASH AT END OF YEAR...................................................... $ 203 $ 69
======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
F-26
<PAGE> 159
J. C. CARTER COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by J.C.
Carter Company, Inc. (the "Company") pursuant to the rules of the Securities and
Exchange Commission ("SEC") and, in the opinion of the Company, include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of financial position, results of operations and cash flows.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such SEC rules. The Company believes
that the disclosures made are adequate to make the information presented not
misleading. The statement of operations for the six months ended June 30, 1997
is not necessarily indicative of the results to be expected for the full year.
INVENTORY
Inventory is stated at the lower of cost or market. Cost has been
determined under the first-in, first-out method. Inventory at June 30, 1997
consists of the following (in thousands):
<TABLE>
<S> <C>
Finished goods awaiting shipment............................. $ 496
Work in process.............................................. 1,756
Material and spare parts..................................... 9,156
-------
$11,408
========
</TABLE>
CASH FLOWS
Net cash flows from operating activities reflect cash payments for income
taxes and interest of $187,000 and $488,000, respectively for six months ended
June 30, 1997.
INCOME TAXES
Effective January 1, 1997, the Company voluntarily terminated the
Subchapter S tax status and will be taxed at the applicable state and federal
statutory rates. The Company will record a tax benefit of approximately
$2,207,000, in the six months ended June 30, 1997, for the impact on the
deferred assets for the change in tax status.
REVENUE RECOGNITION
The Company uses the unit-of-delivery or percentage-of-completion methods
for recognizing sales and cost of sales under long-term contracts. A majority of
revenues from product sales and long-term contracts are recorded as units are
shipped. Revenues, which includes costs incurred plus a portion of estimated
profit, applicable to certain fixed-price long-term contracts (principally
design and development contracts), are recognized on the
percentage-of-completion (cost-to-cost) method, whereby revenue is measured by
relating costs incurred to total estimated costs. Any anticipated losses on
contracts are charged to earnings when identified. Revenues related to claims or
contract changes that have not been completely priced, negotiated, documented or
funded are not recognized unless realization is considered probable.
CONTRACTS IN PROCESS
Costs and estimated earnings in excess of billings on uncompleted contracts
represents costs incurred plus estimated profit, less amounts billed to
customers. Incurred costs include production costs and related overhead.
F-27
<PAGE> 160
J. C. CARTER COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
CONTINGENCIES
During 1990, the Company received a cleanup and abatement order from the
California Regional Ground Water Quality Control Board (Santa Ana Region)
related to certain hazardous waste materials that are present under the
Company's facilities. The Company filed an appeal of the order with the State
Water Resources Control Board (the State Board). The Company continues to
negotiate with the Regional Board as to that responsibility, if any, the Company
will have for site investigation or cleanup. Management and their consultants
believe that much of the pollution is from sources outside the Company, and the
Company intends to vigorously defend against all liability arising from this
issue.
The potential costs related to the above matters, and the possible impact
thereof on future operations, are uncertain and it is not possible at the
present time to estimate the ultimate range of legal and financial liability
with regard to the above matters. No reserve is included in accrued liabilities
at June 30, 1997 for anticipated cleanup or other costs related to the hazardous
waste materials mentioned in the previous paragraph. Management believes that
the remaining liability will not materially affect the Company's financial
condition, results of operations or liquidity.
The Company is a defendant in various lawsuits. In the opinion of
management, potential losses, if any, would not materially affect the Company's
financial condition, results of operations or liquidity.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The Statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Company will adopt this
standard during fiscal 1998. Such adoption is not expected to have a material
effect on the Company.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
statement requires that a public business enterprises report financial and
descriptive information about its reportable operating segments such as a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. The Company will adopt this standard during fiscal 1998.
Such adoption is not expected to have a material effect on the Company.
SUBSEQUENT EVENTS
On August 1, 1997, the shareholders of J.C. Carter Company, Inc. entered
into an agreement to sell 100% of the outstanding common stock of the Company to
Argo-Tech Corporation for approximately $107.0 million in cash, subject to
post-closing adjustment. The sale was completed on September 26, 1997.
On August 25, 1997 the Company met with the California Regional Quality
Control Board, Santa Ana Region (the "Board") to present recent results from
newly installed wells. The Board's position is that both onsite remediation and
offsite groundwater investigation will be required. The Company intends to
propose additional solutions to the Board. The estimate to remediate onsite and
investigate offsite groundwater is approximately $500,000 to $1,500,000. The
shareholders of J.C. Carter Company, Inc. have agreed to indemnify Argo-Tech
Corporation for the costs of all known environmental liabilities if the purchase
agreement is finalized.
* * * * * *
F-28
<PAGE> 161
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
J.C. Carter Company, Inc.
We have audited the accompanying balance sheets of J.C. Carter Company,
Inc. as of December 31, 1996 and 1995, and the related statements of operations
and retained earnings, and cash flows for each of the three years in the period
ended December 31, 1996. 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 J.C. Carter Company, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Long Beach, California
March 21, 1997
F-29
<PAGE> 162
J.C. CARTER COMPANY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................................... $ -- $ 420
Accounts receivable, net of allowance of $63 in 1996 and $73 in 1995... 5,161 4,741
Note and accrued interest receivable from an officer/shareholder....... 2,266 2,256
Costs and estimated earnings in excess of billings on uncompleted
contracts........................................................... 792 859
Inventory.............................................................. 10,228 10,203
Prepaid expenses and other............................................. 520 496
------- -------
Total current assets................................................ 18,967 18,975
PROPERTY, PLANT AND EQUIPMENT, net....................................... 5,549 5,142
------- -------
TOTAL ASSETS............................................................. $24,516 $24,117
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................................... $ 3,071 $ 2,974
Accrued liabilities.................................................... 2,069 2,238
Accrued bonuses........................................................ 2,581 2,272
Current portion of capital lease obligation............................ 95 17
Current portion of long-term debt...................................... 8,680 8,800
------- -------
Total current liabilities........................................... 16,496 16,301
CAPITAL LEASE OBLIGATION, less current portion........................... 226 77
LONG-TERM DEBT, less current portion..................................... 2,387 3,658
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Common stock, no par value: authorized shares -- 2,000,000; issued and
outstanding shares -- 1,125,000..................................... 1,125 1,125
Retained earnings...................................................... 4,282 2,956
------- -------
Total shareholders' equity.......................................... 5,407 4,081
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................... $24,516 $24,117
======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
F-30
<PAGE> 163
J.C. CARTER COMPANY, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net revenues.................................................... $44,450 $39,986 $38,727
Cost of revenues................................................ 22,558 20,384 18,983
------- ------- -------
Gross profit.................................................. 21,892 19,602 19,744
Selling, general and administrative............................. 7,919 6,760 6,452
Engineering and development..................................... 2,007 2,062 2,008
Office of the President......................................... 9,339 10,994 7,963
------- ------- -------
Operating expenses............................................ 19,265 19,816 16,423
------- ------- -------
Income (loss) from operations................................... 2,627 (214) 3,321
Interest expense................................................ 970 934 859
Other expense, net.............................................. 226 101 396
------- ------- -------
Income (loss) before income taxes............................... 1,431 (1,249) 2,066
Income tax provision............................................ 105 188 60
------- ------- -------
Net income (loss)............................................... 1,326 (1,437) 2,006
Retained earnings at beginning of year.......................... 2,956 4,393 2,387
------- ------- -------
Retained earnings at end of year................................ $ 4,282 $ 2,956 $ 4,393
======= ======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
F-31
<PAGE> 164
J.C. CARTER COMPANY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................ $ 1,326 $(1,437) $ 2,006
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 587 860 455
Provision for deferred income taxes................. 5 7 33
Gain on sale of property, plant and equipment....... (214) (19) (11)
Changes in operating assets and liabilities:
Accounts receivable.............................. (420) (1,187) 1,039
Cost and estimated earnings in excess of billings
on uncompleted contracts....................... 67 (827) (8)
Inventory........................................ (25) (1,180) (782)
Prepaid expenses and other....................... (29) 102 23
Note and accrued interest receivable from an
officer/shareholder............................ (10) (227) 435
Accounts payable and accrued liabilities......... (72) 579 (2,185)
Accrued bonuses.................................. 309 2,272 --
------- ------- -------
Net cash provided by (used in) operating activities...... 1,524 (1,057) 1,005
INVESTING ACTIVITIES:
Capital expenditures..................................... (4,991) (712) (867)
Proceeds from sale of property, plant and equipment...... 4,211 30 12
Long-term accounts receivable from officer/shareholder... -- -- 24
------- ------- -------
Net cash used in investing activities.................... (780) (682) (831)
FINANCING ACTIVITIES:
Proceeds from bank borrowings............................ -- 5,500 1,614
Principal payments on debt............................... (1,261) (6,067) (1,500)
Net (payments) borrowings on credit line................. (130) 2,488 (1,088)
Net borrowings (payments) on capital lease obligations... 227 84 (12)
Net repayments on note receivable from
officer/shareholder................................... -- -- 966
------- ------- -------
Net cash (used in) provided by financing activities...... (1,164) 2,005 (20)
------- ------- -------
NET (DECREASE) INCREASE IN CASH............................ (420) 266 154
CASH AT BEGINNING OF YEAR.................................. 420 154 --
------- ------- -------
CASH AT END OF YEAR........................................ $ -- $ 420 $ 154
======= ======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
F-32
<PAGE> 165
J. C. CARTER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS AND CREDIT RISK -- J. C. Carter Company, Inc. (the "Company")
manufactures certain aircraft fluid control component parts, industrial marine
cryogenic pumps, and special ground fueling components which are sold to U.S.
and foreign government prime contractors and subcontractors, commercial airlines
and airplane manufacturers.
Sales under U.S. government prime contractors and subcontractors were
$23,495,000, or 53% of total sales, $19,654,000, or 49% of total sales, and
$19,205,000, or 50% of total sales, in 1996, 1995 and 1994, respectively.
INVENTORY -- Inventory is stated at the lower of cost or market. Cost has
been determined under the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is stated on
the basis of cost. Depreciation is computed using the straight-line method, at
rates designated to distribute the cost of assets over the useful lives,
estimated as follows:
<TABLE>
<S> <C>
Buildings and improvements........... 7 years
Furniture and fixtures............... 5 years
Machinery and equipment.............. 3-7 years
</TABLE>
REVENUE RECOGNITION -- The Company uses the unit-of-delivery or
percentage-of-completion methods for recognizing sales and cost of sales under
long-term contracts. A majority of revenues from product sales and long-term
contracts are recorded as units are shipped. Revenues, which includes costs
incurred plus a portion of estimated profit, applicable to certain fixed-price
long-term contracts (principally design and development contracts), are
recognized on the percentage-of-completion (cost to-cost) method, whereby
revenue is measured by relating costs incurred to total estimated costs. Any
anticipated losses on contracts are charged to earnings when identified.
Revenues related to claims or contract changes that have not been completely
priced, negotiated, documented or funded are not recognized unless realization
is considered probable.
Revenues, costs, and earnings on long-term contracts are based, in part, on
estimates and as a result, actual earnings may differ from estimates.
CONTRACTS IN PROCESS -- Costs and estimated earnings in excess of billings
on uncompleted contracts represents costs incurred plus estimated profit, less
amounts billed to customers. Incurred costs include production costs and related
overhead.
General and administrative expenses and research and development expenses
are considered period costs and, accordingly, are charged to operations on a
current basis.
Certain customers have title to, or security interest in, certain
inventories by reason of progress payments.
RESEARCH AND DEVELOPMENT -- Research and development expenses of $411,000,
$416,000 and $512,000 in 1996, 1995 and 1994, respectively, are included in
engineering and development costs and expenses in the accompanying statements of
operations.
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1995
and 1994 financial statements to conform to the 1996 presentation.
F-33
<PAGE> 166
J. C. CARTER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
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 reported amounts of assets and liabilities and disclosures 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.
2. INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
------- -------
<S> <C> <C>
Finished goods awaiting shipment.............................. $ 249 $ 283
Work in process............................................... 1,564 2,396
Material and spare parts...................................... 8,415 7,524
------- -------
$10,228 $10,203
======= =======
</TABLE>
Inventory is reflected net of certain valuation allowances. Included in the
inventory valuation allowance is a reserve of $503,000 and $623,000 at December
31, 1996 and 1995, respectively, for losses on certain contracts where the
estimated cost at completion of the contract exceeds the contract sales value.
Contracts in process are recorded net of progress payments received of
approximately $1,284,000 and $0 at December 31, 1996 and 1995, respectively.
3. NOTE AND ACCRUED INTEREST RECEIVABLE FROM AN OFFICER/SHAREHOLDER
The note and accrued interest receivable from an officer/shareholder,
consisting of approximately $1,593,000 and $1,343,000 in borrowings and accrued
interest amounting to $673,000 and $663,000 at December 1, 1996 and 1995,
respectively, accrues interest at the bank's prime rate. The entire balance,
including accrued interest amounting to $2,266,000 at December 31, 1996, was due
on March 31, 1995. The Company is verbally extending the term on a monthly
basis.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
------- -------
<S> <C> <C>
Land.......................................................... $ 2,909 $ 2,909
Buildings and improvements.................................... 1,664 1,645
Furniture and fixtures........................................ 1,475 1,883
Machinery and equipment....................................... 6,381 5,639
------- -------
12,429 12,076
Less accumulated depreciation and amortization................ 6,880 6,934
------- -------
$ 5,549 $ 5,142
======= =======
</TABLE>
F-34
<PAGE> 167
J. C. CARTER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
------- -------
<S> <C> <C>
Credit line with a bank for borrowings up to $9,500, expiring
May 31, 1997, with interest payable at either the bank's
reference rate plus .25% or the Eurodollar rate plus
2.25%....................................................... $ 7,370 $ 7,500
Term loan with a bank for borrowings up to $5,500, expiring
July 31, 1999, with principal and interest payable monthly
at the bank's reference rate plus .375%, cost of funds rate
plus 2.375% or the Eurodollar rate plus 2.375%.............. 3,658 4,958
Other long-term debt.......................................... 39 --
------- -------
11,067 12,458
Less current portion.......................................... 8,680 8,800
------- -------
$ 2,387 $ 3,658
======= =======
</TABLE>
The bank facility requires the Company to maintain certain net worth, debt
to equity, and other financial ratio levels and is secured by substantially all
of the assets of the Company.
The Company had $1,500,000 of available letters of credit, of which,
$1,247,000 and $1,500,000 were unused at December 31, 1996 and 1995,
respectively.
Interest paid was $1,047,000, $984,000 and $716,000 during 1996, 1995 and
1994, respectively. Maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1997...................................................................... $ 8,680
1998...................................................................... 1,316
1999...................................................................... 1,071
--------
Total..................................................................... $ 11,067
========
</TABLE>
6. LEASES
The Company leases various office equipment under both capital and
operating leases. Included in machinery and equipment is $344,000 and $95,000 at
December 31, 1996 and 1995, respectively, under capital leases. Accumulated
amortization of equipment under capital lease amounted to $19,000 and $0 at
December 31, 1996 and 1995, respectively, and is included in accumulated
depreciation and amortization.
F-35
<PAGE> 168
J. C. CARTER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Future minimum payments, by year and in the aggregate, under capital leases
and noncancelable operating leases with initial or remaining terms of one year
or more, consisted of the following at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------ ---------
<S> <C> <C>
1997............................................................ $121 $ 696
1998............................................................ 121 603
1999............................................................ 121 576
2000............................................................ 25 576
2001............................................................ -- 48
---- -------
Total minimum lease payments.................................... 388 $ 2,499
=======
Amounts representing interest................................... 67
----
Present value of net minimum lease payments (including $95
classified as current)........................................ $321
====
</TABLE>
Gross rental expense on operating leases was $759,000, $660,000 and
$555,000 in 1996, 1995 and 1994, respectively.
7. INCOME TAXES
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal.................................................. $120 $237 $ 27
State.................................................... (20) (56) --
---- ---- ----
100 181 27
Deferred -- State.......................................... 5 7 33
---- ---- ----
Total................................................. $105 $188 $ 60
==== ==== ====
</TABLE>
Significant components of the Company's deferred tax assets as of December
31, 1996 and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Bonus accrual..................................................... $ 39 $ 33
Manufacturing investment credit................................... 34 35
Excess and obsolete inventory reserve............................. 15 13
Other............................................................. 28 40
---- ----
Total.......................................................... $116 $121
==== ====
</TABLE>
F-36
<PAGE> 169
J. C. CARTER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
The following table reconciles the provision for income taxes to the
statutory income tax rate (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
State income tax provision (benefit)..................... $ 21 $ (18) $ 31
Federal built-in gains tax............................... 120 237 27
Manufacturing investment tax credit...................... (43) (35) --
Other.................................................... 7 4 2
----- ----- -----
$ 105 $ 188 $ 60
===== ===== =====
Effective tax rate....................................... 7.34% 15.05% 2.90%
===== ===== =====
</TABLE>
The manufacturing investment credit expires through fiscal 2006. Effective
October 1, 1992, the shareholders of the Company elected under Subchapter S of
the Internal Revenue Code to include the Company's income in their own income
for federal income tax purposes. Accordingly, effective October 1, 1992, the
Company is not generally subject to federal income tax and is subject to a 1.5%
state franchise tax. In addition to the franchise tax, the Company is subject to
a federal tax on built-in gains recognized on the disposition of any prior
appreciated C-Corporation assets within 10 years from the first day of the
S-Corporation's first tax year. Income taxes paid were $156,000, $220,000 and
$50,000 during 1996, 1995 and 1994, respectively.
Effective January 1, 1997, the Company voluntarily terminated the
Subchapter S tax status and will be taxed at the applicable state and federal
statutory rates. The Company will receive a tax benefit of approximately
$2,207,000 in fiscal 1997, for the impact on the deferred assets for the change
in tax status. If the Company were taxed at the applicable C-Corporation state
and federal statutory rates, net income and tax expense (benefit) for the years
ending December 31, 1996, 1995 and 1994, would have been approximately (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income (loss) before income taxes.................. $ 1,431 $(1,249) $ 2,066
Pro forma tax expense (benefit).................... 529 (535) 826
------- ------- -------
Pro forma net income (loss)........................ $ 902 $ (714) $ 1,240
======= ======= =======
</TABLE>
8. CONTINGENCIES
During 1990, the Company received a cleanup and abatement order from the
California Regional Ground Water Quality Control Board (Santa Ana Region)
related to certain hazardous waste materials that are present under the
Company's facilities. The Company filed an appeal of the order with the State
Water Resources Control Board (the State Board). The Company continues to
negotiate with the Regional Board as to that responsibility, if any, the Company
will have for site investigation or cleanup. Management and their consultants
believe that much of the pollution is from sources outside the Company, and the
Company intends to vigorously defend against all liability arising from this
issue.
The potential costs related to the above matters, and the possible impact
thereof on future operations, are uncertain and it is not possible at the
present time to estimate the ultimate range of legal and financial liability
with regard to the above matters. Included in accrued liabilities is $0 and
$250,000 at December 31, 1996 and 1995, for anticipated cleanup or other costs
related to the
F-37
<PAGE> 170
J. C. CARTER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
hazardous waste materials mentioned in the previous paragraph. Management
believes that the remaining liability will not materially affect the Company's
financial condition, results of operations or liquidity.
The Company is a defendant in various lawsuits. In the opinion of
management, potential losses, if any, would not materially affect the Company's
financial condition, results of operations or liquidity.
9. EMPLOYEES' 401(k) PLAN
The Company maintains a 401(k) Plan (the "Plan"), which is qualified under
the Internal Revenue Code. Substantially all employees over age 21 are eligible
to participate in the Plan after six months of employment. Employees may make
voluntary contributions to the Plan, which are matched by the Company, subject
to certain limitations. The Company's contributions, recognized as expense, were
approximately $414,000, $350,000 and $382,000 in 1996, 1995 and 1994,
respectively.
10. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
AUDITORS
On August 1, 1997, the shareholders of J.C. Carter Company, Inc. entered
into an agreement to sell 100% of the outstanding common stock of the Company to
Argo-Tech Corporation for approximately $107.0 million in cash, subject to
post-closing adjustment. The sale was completed on September 26, 1997.
On August 25, 1997 the Company met with the California Regional Quality
Control Board, Santa Ana Region (the "Board") to present recent results from
newly installed wells. The Board's position is that both onsite remediation and
offsite groundwater investigation will be required. The Company intends to
propose additional solutions to the Board. The estimate to remediate onsite and
investigate offsite groundwater is approximately $500,000 to $1,500,000. The
shareholders of J.C. Carter Company, Inc. have agreed to indemnify Argo-Tech
Corporation for the costs of all known environmental liabilities if the purchase
agreement is finalized.
F-38
<PAGE> 171
NO DEALER, SALES PERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary............................ 5
Risk Factors.................................. 22
The Exchange Offer............................ 30
The Transactions.............................. 42
Use of Proceeds............................... 42
Capitalization................................ 44
Selected Historical Financial and Other
Data........................................ 45
Unaudited Pro Forma Condensed Consolidated
Financial Information....................... 48
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 57
Business and Properties....................... 67
Management.................................... 81
Principal Stockholders........................ 91
Description of the Amended Credit Facility.... 94
Description of Notes.......................... 96
Exchange and Registration Rights Agreement.... 124
Book-Entry, Delivery and Form................. 127
Plan of Distribution.......................... 129
Legal Matters................................. 129
Experts....................................... 130
Index to Financial Statements................. F-1
</TABLE>
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF THE DEALERS TO DELIVER A PROSPECTUS
WHEN SELLING EXCHANGE NOTES RECEIVED IN EXCHANGE FOR ORIGINAL NOTES HELD FOR
THEIR OWN ACCOUNT. SEE "PLAN OF DISTRIBUTION."
$140,000,000
ARGO-TECH CORPORATION
[ARGO-TECH LOGO]
OFFER TO EXCHANGE ITS
8 5/8% SENIOR SUBORDINATED
NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT FOR ANY AND ALL
OUTSTANDING
8 5/8% SENIOR SUBORDINATED
NOTES DUE 2007
------------------------
PROSPECTUS
------------------------
DECEMBER , 1997
<PAGE> 172
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a list of the estimated expenses to be incurred by the
Company in connection with the issuance and distribution of the Notes being
registered hereby.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............................. $ 42,424
Printing costs................................................................... 50,000
Accounting fees and expenses..................................................... 30,000
Legal fees and expenses (not including Blue Sky)................................. 50,000
Blue Sky fees and expenses....................................................... 10,000
Miscellaneous expenses........................................................... 17,576
--------
Total.......................................................................... $200,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VIII of the Company's Restated Certificate of Incorporation
provides that the Company will, to the fullest extent permitted by the General
Corporation Law of the State of Delaware (including, without limitation, Section
145 thereof), as the same may be amended from time to time, indemnify any
promoter, director, or officer whom it will have power to indemnify from and
against any and all of the expenses, liabilities, or other loss of any nature,
and such indemnification will not be deemed exclusive of any other rights to
which those indemnified may be entitled under any By-law, agreement, vote of
stockholders or disinterested directors, or otherwise, both as to action in his
or her official capacity and as to action in another capacity while holding such
office, and will continue as to a person who has ceased to be promoter,
director, or officer and will inure to the benefit of the heirs, executors, and
administrators of such a person.
Subsection (a) of the Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative, or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation or enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted
under standards similar to those set forth in the paragraph above, except that
no indemnification may be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation,
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought determines that
despite the adjudication of liability, but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to be indemnified for
such expenses which the court deems proper.
II-1
<PAGE> 173
Section 145 further provides that, to the extent that a director or officer
of a corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of Section
145, or in defense of any claim, issue or matter therein, he will be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that any indemnification under subsections (a) and
(b) of Section 145 (unless ordered by a court) will be made by a corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of Section 145; that expenses incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount
unless it is ultimately determined that he is not entitled to be indemnified by
the corporation; that indemnification provided for by Section 145 will not be
deemed exclusive of any other rights to which the indemnified party may be
entitled; and that a corporation is empowered to purchase and maintain insurance
on behalf of a director or officer of the corporation against any liability
asserted against him and incurred by him in such capacity, or arising out of his
status as such, whether or not the corporation would have the power to indemnify
him against such liability under Section 145.
Section 8.01(a) of the Company's By-laws provides that the Company will
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative, or arbitrative or investigative (other than an
action by or in the right of the Company) by reason of the fact that he is or
was a director, officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, except in such cases as involve gross negligence or
willful misconduct.
Section 8.01(b) of the Company's By-laws provides that the Company will
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor by reason of the fact that he is or
was a director, officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company and except that no indemnification
will be made in respect of any claim, issue or matter as to which such person
has been adjudged to be liable for negligence or misconduct in the performance
of his duty to the Company unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought determines upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
deems proper.
In addition, Section 801(c) of the Company's By-laws provides that expenses
incurred in defending a civil or criminal action, suit or proceeding will be
paid by the Company in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount unless it is ultimately
determined that he is not entitled to be indemnified by the Company as
authorized in Article VIII of the Company's By-laws.
II-2
<PAGE> 174
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities of the Company which were not registered under the Securities
Act have been issued or sold by the Company within the past three years, except
as follows:
On March 31, 1997, Parent subscribed for and purchased one share of the
Company's Common Stock, par value $.01 per share, at a price of $1.00 per share,
in reliance on the exemption from registration afforded by Section 4(2) of the
Securities Act.
On September 26, 1997, the Company sold the Original Notes in an aggregate
principal amount of $140,000,000 to Chase Securities Inc. The issuance of the
Original Notes was exempt from registration under the Securities Act pursuant to
Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. The following Exhibits are filed herewith and made a part
hereof:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ---------------------------------------------------------------------------------
<S> <C>
3.1(i)* Restated Certificate of Incorporation of the Company.
3.2(ii)* By-Laws of the Company.
4.1* Indenture dated September 26, 1997, between the Company, the Subsidiary
Guarantors signatory thereto and Harris Trust and Savings Bank, as Trustee,
relating to the 8 5/8% Senior Subordinated Notes due 2007 (the form of which is
included in such Indenture).
4.2* Form of Global Exchange Note (included in Exhibit 4.1)
4.3* Exchange and Registration Rights Agreement dated September 26, 1997, between the
Company, the Subsidiary Guarantors and Chase Securities Inc.
5* Opinion of Jones, Day, Reavis & Pogue as to the validity of the Exchange Notes
being offered.
10.1* Form of Stay Pay and Severance Agreement dated June 6, 1996, by and among the
Company and certain Executive Officers of the Company (Michael S. Lipscomb,
Yoichi Fujiki, Frances S. St. Clair, Paul R. Keen and David Chrencik).
10.2* Employment Agreement dated February 13, 1989 between the Company and Paul R.
Keen.
10.3* Employment Agreement dated October 15, 1986 between the Company and Michael S.
Lipscomb.
10.4* Argo-Tech Corporation Trust Agreement dated October 28, 1994 between the Company
and Society National Bank, as Trustee, relating to the Employment Agreement dated
October 15, 1986 between the Company and Michael S. Lipscomb.
10.5* Argo-Tech Corporation Salaried Pension Plan, dated November 1, 1995.
10.6* Form of First Amendment to Argo-Tech Corporation Salaried Pension Plan.
10.7* Argo-Tech Corporation Employee Stock Ownership Plan and Trust Agreement, dated
May 17, 1994.
10.8* First Amendment to the Argo-Tech Corporation Employee Stock Ownership Plan and
Trust Agreement, dated October 26, 1994.
10.9* Second Amendment to the Argo-Tech Corporation Employee Stock Ownership Plan and
Trust Agreement, dated May 9, 1996.
10.10* Third Amendment to the Argo-Tech Corporation Employee Stock Ownership Plan and
Trust Agreement, dated July 18, 1997.
10.11* Argo-Tech Corporation Employee Stock Ownership Plan Excess Benefit Plan, dated
May 17, 1994.
10.12* AT Holdings Corporation 1994 Stockholders' Agreement, dated May 17, 1994.
10.13* First Amendment to AT Holdings Corporation 1994 Stockholders' Agreement, dated
May 1, 1997.
</TABLE>
II-3
<PAGE> 175
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ---------------------------------------------------------------------------------
<S> <C>
10.14* Second Amendment to AT Holdings Corporation 1994 Stockholders' Agreement, dated
July 18, 1997.
10.15* AT Holdings Corporation Supplemental Stockholders Agreement dated May 17, 1994.
10.16* First Amendment to AT Holdings Corporation Supplemental Stockholders Agreement,
dated July 18, 1997.
10.17* Amendment, Termination and Release under Vestar/AT Holdings Corporation
Stockholders' Agreement, dated May 17, 1994.
10.18* Consulting Agreement between the Company and Vestar Capital Partners, Inc. dated
May 17, 1994.
10.19* Form of Management Incentive Compensation Plan for key employees of the Company.
10.20* 1991 Management Incentive Stock Option Plan, as amended, dated May 16, 1994.
10.21* Form of Stock Option Agreement in connection with the Management Incentive Stock
Option Plan, as amended, between the Company and all members of the Company's
Executive Staff.
10.22* 1991 Performance Stock Option Plan, as amended, dated May 16, 1997.
10.23* Form of Stock Option Agreement in connection with the 1991 Performance Stock
Option Plan, as amended, between the Company and certain key employees.
10.24* Amended Credit Facility, dated September 26, 1997, between the Company and Chase
Manhattan Bank.
10.25* Distributorship Agreement, dated December 24, 1990, between the Company, Yamada
Corporation and Vestar Capital Partners, Inc.
10.26* Japan Distributorship Agreement, dated December 24, 1990, between the Company,
Aerotech World Trade Corporation, Yamada Corporation, Yamada International
Corporation and Vestar Capital Partners, Inc.
10.27* Stock Purchase Agreement, dated August 1, 1997 between the Company, J.C. Carter
Company, Inc., Robert L. Veloz, Individually and as Trustee, Marlene J. Veloz,
Individually and as Trustee, Edith T. Derbyshire, Individually and as Trustee,
Harry S. Derbyshire, Individually and as Trustee, Michael Veloz, Katherine
Canfield and Maureen Partch, as Trustee.
10.28* Prism Prototype Retirement Plan & Trust & 401(k) Profit Sharing Plan Adoption
Agreement, dated November 1, 1994.
10.29* Prism Prototype Retirement Plan and Trust.
10.30* Agreement of Purchase and Sale between Agnem Holdings, Inc. and TRW Inc. dated as
of August 5, 1986.
12* Statement regarding computation of ratios.
21* List of Subsidiaries.
23.1* Consent of Jones, Day, Reavis & Pogue (contained in Exhibit 5).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Ernst & Young LLP.
24* Powers of Attorney.
25* Statement of Eligibility of Trustee, Harris Trust and Savings Bank, on Form T-1.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
* Previously filed.
(b) Financial Statement Schedules
All financial statement schedules are omitted because they are either not
applicable or the required information is included in the financial statements
or notes thereto appearing elsewhere in this Registration Statement.
II-4
<PAGE> 176
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in said Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as a
part of this registration statement in reliance upon Rule 430A and
contained in form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE> 177
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 2 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Cleveland,
State of Ohio, on December 8, 1997.
ARGO-TECH CORPORATION
By: /s/ PAUL R. KEEN
----------------------------------
Paul R. Keen
Vice President, General Counsel
and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AMENDMENT NO. 2
TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ---------------------------------------- -------------------
<S> <C> <C>
* Chairman, President, Chief Executive December 8, 1997
- ------------------------------ Officer and Director
Michael S. Lipscomb (Principal Executive Officer)
* Vice President and Chief Financial December 8, 1997
- ------------------------------ Officer
Frances S. St. Clair (Principal Financial Officer)
* Manager, Financial Accounting December 8, 1997
- ------------------------------ (Principal Accounting Officer)
Paul A. Sklad
* Director December 8, 1997
- ------------------------------
Remi de Chastenet
* Director December 8, 1997
- ------------------------------
Thomas Dougherty
* Director December 8, 1997
- ------------------------------
Yoichi Fujiki
* Director December 8, 1997
- ------------------------------
Prakash A. Melwani
* Director December 8, 1997
- ------------------------------
Robert Y. Nagata
* Director December 8, 1997
- ------------------------------
Karl F. Storrie
</TABLE>
- ---------------
* The undersigned, pursuant to a Power of Attorney executed by each of the
Directors and officers identified above and filed with the Securities and
Exchange Commission, by signing his name hereto, does hereby sign and execute
this Amendment No. 2 to Registration Statement on behalf of each of the
persons noted above, in the capacities indicated.
<TABLE>
<S> <C> <C>
By: /s/ PAUL R. KEEN December 8, 1997
--------------------------------------------
Paul R. Keen, Attorney-in-Fact
</TABLE>
II-6
<PAGE> 178
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Argo-Tech
Corporation (After-market) has duly caused this Amendment No. 2 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cleveland, State of Ohio, on December 8, 1997.
ARGO-TECH CORPORATION (AFTER-MARKET)
By: /s/ PAUL R. KEEN
----------------------------------
Paul R. Keen
Vice President and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ---------------------------------------- -------------------
<S> <C> <C>
* Chairman, President, Chief Executive December 8, 1997
- ------------------------------ Officer and Director
Michael S. Lipscomb (Principal Executive Officer)
* Vice President and Chief Financial December 8, 1997
- ------------------------------ Officer
Frances S. St. Clair (Principal Financial Officer)
* Manager, Financial Accounting December 8, 1997
- ------------------------------ (Principal Accounting Officer)
Paul A. Sklad
* Director December 8, 1997
- ------------------------------
Victor Aguilar
/s/ PAUL R. KEEN Director December 8, 1997
- ------------------------------
Paul R. Keen
</TABLE>
- ---------------
* The undersigned, pursuant to a Power of Attorney executed by each of the
Directors and officers identified above and filed with the Securities and
Exchange Commission, by signing his name hereto, does hereby sign and execute
this Amendment No. 2 to Registration Statement on behalf of each of the
persons noted above, in the capacities indicated.
<TABLE>
<S> <C> <C>
By: /s/ PAUL R. KEEN December 8, 1997
--------------------------------------------
Paul R. Keen, Attorney-in-Fact
</TABLE>
II-7
<PAGE> 179
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Argo-Tech
Corporation (HBP) has duly caused this Amendment No. 2 to Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Cleveland, State of Ohio, on December 8, 1997.
ARGO-TECH CORPORATION (HBP)
By: /s/ PAUL R. KEEN
----------------------------------
Paul R. Keen
Vice President and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ---------------------------------------- -------------------
<S> <C> <C>
* President and Director December 8, 1997
- ------------------------------ (Principal Executive Officer)
Michael S. Lipscomb
* Vice President and Chief Financial December 8, 1997
- ------------------------------ Officer
Frances S. St. Clair (Principal Financial Officer)
* Manager, Financial Accounting December 8, 1997
- ------------------------------ (Principal Accounting Officer)
Paul A. Sklad
/s/ PAUL R. KEEN Director December 8, 1997
- ------------------------------
Paul R. Keen
</TABLE>
- ---------------
* The undersigned, pursuant to a Power of Attorney executed by each of the
Directors and officers identified above and filed with the Securities and
Exchange Commission, by signing his name hereto, does hereby sign and execute
this Amendment No. 2 to Registration Statement on behalf of each of the
persons noted above, in the capacities indicated.
<TABLE>
<S> <C> <C>
By: /s/ PAUL R. KEEN December 8, 1997
--------------------------------------------
Paul R. Keen, Attorney-in-Fact
</TABLE>
II-8
<PAGE> 180
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Argo-Tech
Corporation (OEM) has duly caused this Amendment No. 2 to Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Cleveland, State of Ohio, on December 8, 1997.
ARGO-TECH CORPORATION (OEM)
By: /s/ PAUL R. KEEN
----------------------------------
Paul R. Keen
Vice President and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ---------------------------------------- -------------------
<S> <C> <C>
* President and Director December 8, 1997
- ------------------------------ (Principal Executive Officer)
Michael S. Lipscomb
* Vice President, Chief Financial Officer December 8, 1997
- ------------------------------ and Director
Frances S. St. Clair (Principal Financial Officer)
* Manager, Financial Accounting December 8, 1997
- ------------------------------ (Principal Accounting Officer)
Paul A. Sklad
/s/ PAUL R. KEEN Director December 8, 1997
- ------------------------------
Paul R. Keen
</TABLE>
- ---------------
* The undersigned, pursuant to a Power of Attorney executed by each of the
Directors and officers identified above and filed with the Securities and
Exchange Commission, by signing his name hereto, does hereby sign and execute
this Amendment No. 2 to Registration Statement on behalf of each of the
persons noted above, in the capacities indicated.
<TABLE>
<S> <C> <C>
By: /s/ PAUL R. KEEN December 8, 1997
--------------------------------------------
Paul R. Keen, Attorney-in-Fact
</TABLE>
II-9
<PAGE> 181
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, J.C. Carter
Company, Inc. has duly caused this Amendment No. 2 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Cleveland, State of Ohio, on December 8, 1997.
J.C. CARTER COMPANY, INC.
By: /s/ PAUL R. KEEN
----------------------------------
Paul R. Keen
Vice President and Assistant
Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ---------------------------------------- -------------------
<S> <C> <C>
* President and Director December 8, 1997
- ------------------------------ (Principal Executive Officer)
Michael S. Lipscomb
* Vice President and Chief Financial December 8, 1997
- ------------------------------ Officer
Frances S. St. Clair (Principal Financial Officer)
* Manager, Financial Accounting December 8, 1997
- ------------------------------ (Principal Accounting Officer)
Paul A. Sklad
/s/ PAUL R. KEEN Director December 8, 1997
- ------------------------------
Paul R. Keen
</TABLE>
- ---------------
* The undersigned, pursuant to a Power of Attorney executed by each of the
Directors and officers identified above and filed with the Securities and
Exchange Commission, by signing his name hereto, does hereby sign and execute
this Amendment No. 2 to Registration Statement on behalf of each of the
persons noted above, in the capacities indicated.
<TABLE>
<S> <C> <C>
By: /s/ PAUL R. KEEN December 8, 1997
--------------------------------------------
Paul R. Keen, Attorney-in-Fact
</TABLE>
II-10
<PAGE> 182
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ---------------------------------------------------------------------------------
<S> <C>
3.1(i)* Restated Certificate of Incorporation of the Company.
3.2(ii)* By-Laws of the Company.
4.1* Indenture dated September 26, 1997, between the Company, the Subsidiary
Guarantors signatory thereto and Harris Trust and Savings Bank, as Trustee,
relating to the 8 5/8% Senior Subordinated Notes due 2007 (the form of which is
included in such Indenture).
4.2* Form of Global Exchange Note (included in Exhibit 4.1)
4.3* Exchange and Registration Rights Agreement dated September 26, 1997, between the
Company, the Subsidiary Guarantors and Chase Securities Inc.
5* Opinion of Jones, Day, Reavis & Pogue as to the validity of the Exchange Notes
being offered.
10.1* Form of Stay Pay and Severance Agreement dated June 6, 1996, by and among the
Company and certain Executive Officers of the Company (Michael S. Lipscomb,
Yoichi Fujiki, Frances S. St. Clair, Paul R. Keen and David Chrencik).
10.2* Employment Agreement dated February 13, 1989 between the Company and Paul R.
Keen.
10.3* Employment Agreement dated October 15, 1986 between the Company and Michael S.
Lipscomb.
10.4* Argo-Tech Corporation Trust Agreement dated October 28, 1994 between the Company
and Society National Bank, as Trustee, relating to the Employment Agreement dated
October 15, 1986 between the Company and Michael S. Lipscomb.
10.5* Argo-Tech Corporation Salaried Pension Plan, dated November 1, 1995.
10.6* First Amendment to Argo-Tech Corporation Salaried Pension Plan.
10.7* Argo-Tech Corporation Employee Stock Ownership Plan and Trust Agreement, dated
May 17, 1994.
10.8* First Amendment to the Argo-Tech Corporation Employee Stock Ownership Plan and
Trust Agreement, dated October 26, 1994.
10.9* Second Amendment to the Argo-Tech Corporation Employee Stock Ownership Plan and
Trust Agreement, dated May 9, 1996.
10.10* Third Amendment to the Argo-Tech Corporation Employee Stock Ownership Plan and
Trust Agreement, dated July 18, 1997.
10.11* Argo-Tech Corporation Employee Stock Ownership Plan Excess Benefit Plan, dated
May 17, 1994.
10.12* AT Holdings Corporation 1994 Stockholders' Agreement, dated May 17, 1994.
10.13* First Amendment to AT Holdings Corporation 1994 Stockholders' Agreement, dated
May 1, 1997.
10.14* Second Amendment to AT Holdings Corporation 1994 Stockholders' Agreement, dated
July 18, 1997.
10.15* AT Holdings Corporation Supplemental Stockholders Agreement, dated May 17, 1994.
10.16* First Amendment to AT Holdings Corporation Supplemental Stockholders Agreement,
dated July 18, 1997.
10.17* Amendment, Termination and Release under Vestar/AT Holdings Corporation
Stockholders' Agreement, dated May 17, 1994.
10.18* Consulting Agreement between the Company and Vestar Capital Partners dated May
17, 1994.
10.19* Form of Management Incentive Compensation Plan for key employees of the Company.
</TABLE>
<PAGE> 183
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ---------------------------------------------------------------------------------
<S> <C>
10.20* 1991 Management Incentive Stock Option Plan, as amended, dated May 16, 1994.
10.21* Form of Stock Option Agreement in connection with the Management Incentive Stock
Option Plan, as amended, between the Company and all members of the Company's
Executive Staff.
10.22* 1991 Performance Stock Option Plan, as amended, dated May 16, 1997.
10.23* Form of Stock Option Agreement in connection with the 1991 Performance Stock
Option Plan, as amended, between the Company and certain key employees.
10.24* Amended Credit Facility, dated September 26, 1997, between the Company and Chase
Manhattan Bank.
10.25* Distributorship Agreement, dated December 24, 1990, between the Company, Yamada
Corporation and Vestar Capital Partners, Inc.
10.26* Japan Distributorship Agreement, dated December 24, 1990, between the Company,
Aerotech World Trade Corporation, Yamada Corporation, Yamada International
Corporation and Vestar Capital Partners, Inc.
10.27* Stock Purchase Agreement, dated August 1, 1997, between the Company, J.C. Carter
Company, Inc., Robert L. Veloz, Individually and as Trustee, Marlene J. Veloz,
Individually and as Trustee, Edith T. Derbyshire, Individually and as Trustee,
Harry S. Derbyshire, Individually and as Trustee, Michael Veloz, Katherine
Canfield and Maureen Partch, as Trustee.
10.28* Prism Prototype Retirement Plan & Trust & 401(k) Profit Sharing Plan Adoption
Agreement, dated November 1, 1994.
10.29* Prism Prototype Retirement Plan and Trust.
10.30* Agreement of Purchase and Sale between Agnem Holdings, Inc. and TRW Inc. dated as
of August 5, 1986.
12* Statement regarding computation of ratios.
21* List of Subsidiaries.
23.1* Consent of Jones, Day, Reavis & Pogue (contained in Exhibit 5).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Ernst & Young LLP.
24* Powers of Attorney.
25* Statement of Eligibility of Trustee, Harris Trust and Savings Bank, on Form T-1.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-38223 of Argo-Tech Corporation on Form S-1 of our report dated November 26,
1997, appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
December 8, 1997
<PAGE> 1
Exhibit 23.3
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CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 21, 1997, in Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-38223) and related Prospectus of Argo-Tech
Corporation for the registration of $140,000,000 Senior Subordinated Notes.
/s/ ERNST & YOUNG LLP
Long Beach, California
December 8, 1997
