<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 1998
REGISTRATION NO. 333-43089 AND 333-43089-01
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
THE GSI GROUP, INC. DAVID MANUFACTURING CO.
(EXACT NAME OF REGISTRANT AS (EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER) SPECIFIED IN ITS CHARTER)
IOWA
(STATE OR OTHER JURISDICTION
DELAWARE OF INCORPORATION OR ORGANIZATION)
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
3523
3523 (PRIMARY STANDARD
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION NO.)
INDUSTRIAL CLASSIFICATION NO.)
42-0920500
37-0856587 (I.R.S. EMPLOYER
(I.R.S. EMPLOYER IDENTIFICATION NO.)
IDENTIFICATION NO.)
1600 12TH STREET N.E.
1004 EAST ILLINOIS STREET MASON CITY, IOWA 50401
ASSUMPTION, ILLINOIS 62510 (515) 423-6182
(217) 226-4421 (ADDRESS, INCLUDING ZIP CODE, AND
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PRINCIPAL EXECUTIVE OFFICES)
--------------
JOHN W. FUNK
CHIEF FINANCIAL OFFICER
THE GSI GROUP, INC.
1004 EAST ILLINOIS STREET
ASSUMPTION, ILLINOIS 62510
(217) 226-4421
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPIES TO:
PAUL W. THEISS
MAYER, BROWN & PLATT
190 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603-3441
(312) 782-0600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
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<PAGE>
PROSPECTUS
THE GSI GROUP, INC.
OFFER TO EXCHANGE
ALL 10 1/4% SENIOR SUBORDINATED NOTES DUE 2007 WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 FOR ALL OUTSTANDING 10 1/4% SENIOR
SUBORDINATED NOTES DUE 2007 ($100,000,000 PRINCIPAL AMOUNT OUTSTANDING)
The Exchange Offer (as defined) and withdrawal rights will expire at 5:00
p.m., New York City time, on May 1, 1998 (as such date may be extended, the
"Expiration Date").
The GSI Group, Inc., a Delaware corporation (the "Company"), hereby offers,
upon the terms and subject to the conditions set forth in this Prospectus, as
it may be amended and supplemented from time to time (this "Prospectus"), and
the accompanying Letter of Transmittal (the "Letter of Transmittal," and
together with the Prospectus, the "Exchange Offer"), to exchange an aggregate
of up to $100,000,000 principal amount of its 10 1/4% Senior Subordinated
Notes due 2007 (the "New Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this Prospectus is a part, for an identical
principal amount of its outstanding 10 1/4% Senior Subordinated Notes due 2007
(the "Old Notes") (the Old Notes and the New Notes are collectively referred
to herein as the "Notes") of the Company from the holders thereof in integral
multiples of $1,000. See "The Exchange Offer."
The Company will accept for exchange any and all Old Notes that are validly
tendered prior to 5:00 p.m., New York City time, on the Expiration Date.
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date, otherwise such tenders are irrevocable. The
Exchange Offer is not conditioned upon any minimum principal amount of the Old
Notes being tendered for exchange. However, the Exchange Offer is subject to
certain customary conditions and to the terms and provisions of the
Registration Rights Agreement, dated as of November 5, 1997 (the "Registration
Rights Agreement"), among the Company, David Manufacturing Co. ("DMC") and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley & Co., Incorporated (the "Initial Purchasers"). See "The
Exchange Offer" and "Registration Rights."
(continued on next page)
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SEE "RISK FACTORS" ON PAGES 13 THROUGH 19 FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY HOLDERS IN EVALUATING THE EXCHANGE OFFER.
----------------
THE NOTES 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.
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The date of this Prospectus is March 31, 1998.
<PAGE>
An aggregate of $100 million principal amount of Old Notes were sold by the
Company (the "Offering") to the Initial Purchasers on November 5, 1997 (the
"Issue Date") without registration under the Securities Act, in reliance upon
exemptions therefrom, pursuant to a Purchase Agreement, dated October 30, 1997
(the "Purchase Agreement"), among the Company and the Initial Purchasers. The
Initial Purchasers subsequently resold the Old Notes in reliance on Rule 144A
under the Securities Act ("Rule 144A") and Regulation S under the Securities
Act ("Regulation S"). The Company and the Initial Purchasers also entered into
the Registration Rights Agreement, pursuant to which the Company granted
certain registration rights for the benefit of the holders of the Old Notes.
The Old Notes were, and the New Notes will be, issued under the Indenture,
dated as of November 1, 1997 (the "Indenture"), between the Company and
LaSalle National Bank, as trustee (in such capacity, the "Trustee"). As of the
date of this Prospectus, there are $100,000,000 aggregate principal amount of
Old Notes outstanding. The form and terms of the New Notes will be identical
in all material respects to the form and terms of the Old Notes, except that
(i) the New Notes have been registered under the Securities Act and,
therefore, will not bear legends restricting the transfer thereof, (ii)
holders of New Notes will not be entitled to any increase in the interest rate
("Additional Interest") thereon pursuant to certain circumstances under the
Registration Rights Agreement and (iii) holders of New Notes will no longer be
entitled to certain other rights under the Registration Rights Agreement.
Interest on the New Notes is payable semiannually in arrears on each May 1
and November 1, commencing May 1, 1998. Holders whose Old Notes are accepted
for exchange will have the right to receive interest accrued thereon from the
date of their original issuance or the last interest payment date, as
applicable, to, but not including, the date of issuance of the New Notes, such
interest to be payable with the first interest payment on the New Notes.
Interest on the Old Notes accepted for exchange will cease to accrue on the
day prior to the issuance of the New Notes. The New Notes will mature on
November 1, 2007. See "Description of the New Notes--Maturity, Interest and
Principal."
The New Notes will be redeemable at the option of the Company, in whole or
in part, at any time on or after November 1, 2002, at the redemption prices
set forth herein, plus accrued and unpaid interest thereon, if any, to the
date of redemption. In addition, on or prior to November 1, 2000, the Company
may redeem up to 35% of the originally issued aggregate principal amount of
the Notes, at a redemption price of 110.25% of the principal amount thereof,
plus accrued and unpaid interest thereon, if any, to the redemption date, with
the net proceeds of an Equity Offering (as defined herein); provided, that not
less than $65.0 million in aggregate principal amount of New Notes is
outstanding immediately after giving effect to such redemption. Following the
occurrence of a Change of Control (as defined herein), the Company will be
required to make an offer to repurchase the New Notes at a price equal to 101%
of the principal amount thereof, plus accrued and unpaid interest thereon, if
any, to the date of purchase. See "Description of the New Notes--Optional
Redemption" and "--Change of Control." There can be no assurance that the
Company will have cash sufficient to purchase tendered New Notes following a
Change of Control. See "Risk Factors--Leverage; Ability to Service
Indebtedness."
The New Notes will represent unsecured senior subordinated obligations of
the Company and will be subordinated in right of payment to all existing and
future Senior Indebtedness (as defined herein) of the Company. The New Notes
also will be fully and unconditionally guaranteed (the "DMC Guarantee") on an
unsecured senior subordinated basis by DMC, which is a wholly-owned subsidiary
of the Company. As of December 31, 1997, the Company had approximately $28.5
million of Senior Indebtedness outstanding. In addition, at December 31, 1997,
the Company's subsidiaries had approximately $1.4 million of indebtedness to
which holders of the Notes would have been structurally subordinated.
The New Notes are being offered hereby in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement. The
Company is making the Exchange Offer in reliance on the position of the staff
of the Securities and Exchange Commission (the "Commission") as set forth in
certain interpretive
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<PAGE>
letters addressed to third parties in other transactions. However, the Company
has not sought its own interpretive letter and there can be no assurance that
the staff of the Commission would make a similar determination with respect to
the Exchange Offer as it has in such interpretive letters to third parties.
Based on these interpretations by the staff of the Commission, the Company
believes that New Notes issued pursuant to the Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by a
holder (other than (i) a broker-dealer who purchased Old Notes directly from
the Company for resale pursuant to Rule 144A or any other available exemption
under the Securities Act, (ii) an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act or (iii) a broker-dealer who
acquired the Old Notes as a result of market-making or other trading
activities), without further compliance with the registration and prospectus
delivery provisions of the Securities Act, provided, that such holder is
acquiring the New Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
the New Notes. Holders wishing to accept the Exchange Offer must represent to
the Company, as required by the Registration Rights Agreement, that such
conditions have been met. Any holder of Old Notes who is not able to rely on
the interpretations of the staff of the Commission set forth in the above-
mentioned interpretive letters must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale of such Old Notes, unless such sale is made pursuant to an exemption from
such requirements. See "The Exchange Offer-- Resales of New Notes."
Each broker-dealer who receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it acquired the Old Notes for its own
account as a result of market-making activities or other trading activities
and must agree that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. Based on the position taken by the staff of
the Commission in the interpretive letters referred to above, the Company
believes that broker-dealers who acquired Old Notes for their own accounts as
a result of market-making or other trading activities ("Participating Broker-
Dealers") may fulfill their prospectus delivery requirements with respect to
the New Notes received upon exchange of such Old Notes (other than Old Notes
that represent an unsold allotment from the original sale of the Old Notes)
with a prospectus meeting the requirements of the Securities Act, which may be
the prospectus prepared for an exchange offer so long as it contains a
description of the plan of distribution with respect to the resale of such New
Notes. Accordingly, this Prospectus may be used by a Participating Broker-
Dealer in connection with resales of New Notes received in exchange for Old
Notes where such Old Notes were acquired by such Participating Broker-Dealer
for its own account as a result of market-making or other trading activities.
Subject to certain provisions set forth in the Registration Rights Agreement,
the Company has agreed that this Prospectus may be used by a Participating
Broker-Dealer in connection with resales of such New Notes. See "Plan of
Distribution." However, a Participating Broker-Dealer who intends to use this
Prospectus in connection with the resale of New Notes received in exchange for
Old Notes pursuant to the Exchange Offer must notify the Company, or cause the
Company to be notified, on or prior to the Expiration Date, that it is a
Participating Broker-Dealer. Such notice may be given in the space provided
for that purpose in the Letter of Transmittal or may be delivered to the
Exchange Agent at one of the addresses set forth herein under "The Exchange
Offer--Exchange Agent; Assistance." Any Participating Broker-Dealer who is an
"affiliate" of the Company may not rely on such interpretive letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. See "The Exchange
Offer--Resales of New Notes."
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company of
the occurrence of any event or the discovery of any fact which makes any
statement contained in this Prospectus untrue in any material respect or which
causes this Prospectus to omit to state a material fact necessary in order to
make the statements contained herein, in light of the circumstances under
which they were made, not misleading or of the occurrence of certain other
events specified in the Registration Rights Agreement, such Participating
Broker-Dealer will suspend the sale of New Notes pursuant to this Prospectus
until the
ii
<PAGE>
Company has amended or supplemented this Prospectus to correct such
misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such Participating Broker-Dealer or the Company has
given notice that the sale of the New Notes may be resumed, as the case may
be.
The New Notes issued pursuant to this Exchange Offer will be issued in the
form of a Global New Note (as defined herein), which will be deposited with,
or on behalf of, The Depository Trust Company ("DTC") and registered in its
name or in the name of Cede & Co., its nominee. Beneficial interests in the
Global New Note representing the New Notes will be shown on, and transfers
thereof will be effected through, records maintained by DTC and its
participants. Notwithstanding the foregoing, Old Notes held in certificated
form, if any, will be exchanged solely for Certificated New Notes (as defined
herein). After the initial issuance of the Global New Note, Certificated New
Notes will be issued in exchange for interests in the Global New Note only on
the terms set forth in the Indenture. See "Description of the New Notes" and
"Book-Entry, Delivery and Form."
The Company will not receive any proceeds from this offering, but, pursuant
to the Registration Rights Agreement, the Company will bear certain
registration expenses. No underwriter is being utilized in connection with the
Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER
THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
iii
<PAGE>
AVAILABLE INFORMATION
The Company and DMC have jointly filed a registration statement on Form S-4
(together with any amendments thereto, the "Registration Statement") with the
Commission under the Securities Act with respect to the New Notes and the
related DMC Guarantee. This Prospectus, which constitutes a part of the
Registration Statement, omits certain information contained in the
Registration Statement and reference is made to the Registration Statement and
the exhibits and schedules thereto for further information with respect to the
Company and the New Notes offered hereby. This Prospectus contains summaries
of the material terms and provisions of certain documents and in each instance
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. Each such summary is qualified in its entirety by such
reference.
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon the
effectiveness of the Registration Statement, the Company will be subject to
the reporting requirements of the Exchange Act and the interpretations issued
thereunder by the staff of the Commission. The Registration Statement, such
reports and other information can be inspected and copied at the offices of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as the following regional offices of the
Commission: Seven World Trade Center, Suite 1300, New York, New York 10048;
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Such material also may be accessed electronically by means
of the Commission's home page on the Internet (http://www.sec.gov).
So long as any of the Old Notes are outstanding, the Company will file with
the Commission, to the extent then permitted by the Commission, the annual
reports, quarterly reports and other documents that the Company would have
been required to file with the Commission pursuant to Sections 13(a) and 15(d)
of the Exchange Act if the Company was subject to such Sections, and the
Company will promptly provide to the Trustee copies of such reports and
documents; provided, however, that if the Company is for any reason unable to
make such filings it will make available, upon request, to any holder of Old
Notes or prospective purchaser of New Notes, the information specified in Rule
144(A)(d)(4) of the Securities Act.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus under "Prospectus Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," in addition to certain statements contained
elsewhere in this Prospectus, are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA")
and are thus prospective. Such "forward-looking statements" are subject to
risks, uncertainties and other factors that could cause actual results to
differ materially from future results expressed or implied by such forward-
looking statements. The most significant of such risks, uncertainties and
other factors are discussed under the heading "Risk Factors," on pages 13
through 19 of this Prospectus and holders of Notes are urged to carefully
consider such factors. The safe harbor provisions for forward looking
statements provided in the PSLRA do not apply to statements made in this
Prospectus.
iv
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, including the financial
statements and the notes thereto, appearing elsewhere in this Prospectus.
Unless otherwise indicated, all references in this Prospectus to the "Company"
refer to The GSI Group, Inc., a Delaware corporation, and its subsidiaries.
THE COMPANY
INTRODUCTION
The Company is a leading manufacturer and supplier of agricultural equipment
and services worldwide. The Company believes that it is the largest global
provider of both (i) grain storage bins and related drying and handling systems
and (ii) swine feed storage, feed delivery, confinement and ventilation
systems. The Company also is one of the largest global providers of poultry
feed storage, feed delivery, watering, ventilation, nesting, egg-handling and
hatching systems. The Company markets its agricultural products in
approximately 75 countries through a network of over 1,600 independent dealers
to grain, swine and poultry producers primarily under its GSI(R), AP(TM) and
Cumberland(R) brand names. The Company's current market position in the
industry reflects both the strong, long-term relationships the Company has
developed with its customers as well as the quality and reliability of its
products.
Craig Sloan, the Chief Executive Officer of the Company, founded its current
business in 1972. In 1995, the Company recruited additional management and in
1996, all of the capital stock of the Company was acquired by Mr. Sloan and
certain other executives of the Company. The Company's new management-led
ownership has implemented a growth strategy designed to position the Company as
the premier worldwide manufacturer and supplier of high-quality, cost efficient
grain, swine and poultry systems. In addition to capitalizing on domestic and
international growth opportunities, the Company's new management has focused on
profitability, production efficiencies and cost reductions commenced during
1995. As a result, the Company has experienced rapid growth in recent years.
Net sales and operating income increased from $141.2 million and $4.0 million,
respectively, in 1995 to $178.5 million and $14.1 million, respectively, in
1996, and to $220.8 million and $21.0 million, respectively, in 1997. Income
from continuing operations (excluding the write-off of an affiliate receivable)
plus interest expense (including amortization of debt issuance costs),
depreciation and amortization ("EBITDA") increased from $7.9 million in 1995 to
$17.8 million in 1996, and to $25.4 million in 1997. On a pro forma basis after
giving effect to the Offering, the application of the net proceeds therefrom
and the DMC Acquisition, EBITDA would have been $29.8 million in 1997.
The primary users of the Company's grain storage, drying and handling
products are farm operators or commercial businesses, such as the Archer-
Daniels-Midland Company and Cargill, Inc., that operate feed mills, grain
elevators, port storage facilities and commercial grain processing facilities.
The Company believes that its grain storage, drying and handling equipment is
superior to that of its principal competitors on the basis of strength,
durability, reliability, design efficiency and breadth of product offering. The
Company's feeding and ventilation systems are used primarily by growers that
raise swine and poultry, typically on a contract basis for large integrators
such as Murphy Family Farms, Perdue Farms Incorporated and Tyson Foods, Inc.
Because swine and poultry growers are partially compensated by integrators
based on the efficiency with which they convert feed to meat (the "feed-to-meat
ratio"), they seek to purchase systems which minimize the feed-to-meat ratio.
As a result of its proprietary designs, the Company believes that its swine and
poultry systems are the most effective in the industry in serving this customer
objective.
The industry in which the Company operates is characterized both domestically
and internationally by a few large companies, such as the Company, with broad
product offerings and numerous small manufacturers of niche product lines.
Domestically, the Company intends to build on its established presence in the
grain, swine
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<PAGE>
and poultry markets. Internationally, the Company intends to capitalize on
growth opportunities arising from still-developing agricultural industries and
favorable trends in the demand for grain, poultry and swine products. The
Company believes that less functionally sophisticated and efficient grain
storage systems used by facilities located outside the U.S. and Western Europe,
which experience relatively high levels of grain spoilage and loss, are
increasingly likely to be replaced by more modern systems. The Company also
believes that the significant economic and population growth occurring in the
Company's international markets will continue to result in consumers devoting
larger portions of their income to improved and higher-protein diets,
stimulating stronger demand for poultry and, to a lesser extent, pork. The
Company believes that it is well-positioned to capture expected increases in
worldwide demand for its products resulting from these industry trends because
of its leading brand names, broad and diversified product lines, strong
distribution network and high-quality products. See "Business--Industry
Overview."
COMPANY STRENGTHS
MARKET LEADER. The Company believes that it is the largest global provider of
both (i) grain storage bins and related drying and handling systems and (ii)
swine feed storage, feed delivery, confinement and ventilation systems. The
Company also is one of the largest global providers of poultry feed storage,
feed delivery, watering, ventilation, nesting, egg-handling and hatching
systems. The Company intends to continue to build its market share by
capitalizing on its strong reputation and the growth trends in worldwide demand
for grain, swine and poultry production.
PROVIDER OF FULLY-INTEGRATED SYSTEMS. The Company offers a broad range of
products that permits customers to purchase all of their grain, swine and
poultry production needs from one supplier. The Company believes that providing
fully-integrated systems significantly lowers total production costs and
enhances producer productivity by offering compatible products designed to
promote synergies and achieve maximum operating results. Dealers who purchase
fully-integrated systems also benefit from lower administrative and shipping
costs and the ease of dealing with a single supplier. The Company intends to
maintain its position as a provider of fully-integrated systems by continuing
to offer the most complete line of products available within its markets and by
developing and introducing new products. See "Business--Products."
BRAND NAME RECOGNITION AND REPUTATION FOR QUALITY PRODUCTS AND SERVICE.
Through its manufacturing expertise and experience, the Company has established
recognition in its markets for the GSI(R), AP(TM) and Cumberland(R) brand
names. The Company seeks to protect the reputation for high quality,
reliability and specialized services that are associated with such brand names
through extensive quality control and customer feedback programs. The Company
believes that its reputation and recognized brand names, along with its
extensive distribution network, will assist it in its efforts to further
penetrate both the domestic and international markets in which the Company
operates.
EFFECTIVE AND ESTABLISHED DISTRIBUTION NETWORK. The Company believes that its
development of a highly effective and established distribution network affords
it significant competitive advantages. The Company's distribution network
consists of over 1,600 independent dealers that market the Company's products
in approximately 75 countries throughout the world. The breadth and scope of
the Company's distribution network makes its products readily available in each
of the Company's markets and lowers transportation costs for its customers.
Dealers are carefully selected and trained to ensure high levels of customer
service. In addition, the Company has experienced a very low turnover rate of
its dealers since the Company's inception, which promotes consistency and
stability to customers. See "Business--Product Distribution."
LONG-TERM ALLIANCES WITH CUSTOMERS. The Company has a history of developing
long-term alliances with customers who are market leaders in both the
industries and the geographic markets they serve. The Company works closely
with customers through all stages of product development in order to tailor
products and systems to meet each customer's unique needs, making substitutions
with competitor products more difficult. The
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Company's commitment to product quality, dedication to customer service and
responsiveness to changing customer needs have enabled the Company to develop
and strengthen long-term alliances with its customers. The strength of the
Company's customer relationships are demonstrated by the fact that over 45% of
the Company's 1997 domestic net sales derived from grain equipment were made to
customers who have purchased from the Company for at least 10 years. In
addition, the Company has entered into long-term supply agreements with two of
its largest customers, which arrangements the Company believes are unique in
the industry.
FLEXIBLE MANUFACTURING FACILITIES. The Company's facilities are designed to
be easily reconfigured to adapt to demand changes for any or all of the
Company's products. The Company's primary manufacturing facility, located in
Assumption, Illinois, consists of approximately 675,000 square feet and
operates on a 24-hour basis during peak production periods. The Company's
facilities employ state-of-the-art machines that have enhanced production
efficiency. The Company believes that its current facilities will accommodate
planned production increases as the Company experiences sales growth and
expands into new markets. See "Business--Facilities."
COMPANY OPERATED AND OWNED BY EXPERIENCED MANAGEMENT TEAM. The Company is led
by an experienced management team, the members of which have each worked in the
agricultural products industry for an average of 16 years. Craig Sloan, a
founder and the Chief Executive Officer of the Company, and each of the other
members of the Company's senior management team have invested in the Company
and together own all of its voting common stock. The Company believes that the
agricultural expertise of its management team, coupled with the corporate
culture promoted by a management-owned company, permit it to establish strong
customer relationships and respond quickly to market opportunities. See
"Management--Executive Officers and Directors" and "Ownership of Capital
Stock."
BUSINESS STRATEGY
The Company's objective is to capitalize on its strengths through the
implementation of its business strategy, which includes the following principal
elements:
CAPITALIZE ON GROWTH OPPORTUNITIES IN INTERNATIONAL MARKETS. International
sales increased from approximately $36.9 million in 1995 to approximately $55.5
million in 1996, and to approximately $58.2 million in 1997. The Company
intends to continue to leverage its worldwide brand name recognition, leading
market positions and international distribution network to capture the
significant demand for its products that exists in the international
marketplace. While the Company anticipates that sales will continue to be
generated worldwide, the Company is targeting the Far East, Latin America and
Eastern Europe, where it believes the greatest potential for significant growth
exists. The Company believes that increasing the diversity of both its customer
base and geographic coverage by expanding its international operations will
mitigate the effect of future reductions in demand within any of its individual
product lines, or within a particular geographic selling region.
ENHANCE GROWTH THROUGH STRATEGIC ACQUISITIONS. The Company will continue to
selectively seek acquisitions with complementary product lines that offer the
opportunity to improve market penetration and profitability through integration
with the Company's existing businesses. The Company believes that the markets
in which it operates include single-product producers who may not be able to
effectively compete against larger, integrated producers, such as the Company,
but which might benefit from economies of scale resulting from a business
combination with the Company. The Company recently acquired all of the capital
stock of DMC, a leading manufacturer and supplier of grain drying and handling
equipment, to complement the Company's grain equipment product line.
CONTINUE DEVELOPMENT OF PROPRIETARY PRODUCT INNOVATIONS. The Company's
research and development efforts focus on the development of new and
technologically advanced products to respond to customer demands, changes in
the marketplace and new technology. The Company employs a strategy of working
closely with its customers and capitalizing on existing technology to improve
existing products and develop new value-added
3
<PAGE>
products. The Company believes that it has an impressive record of new product
development as is evidenced by its improved Easy Access doors and Series 2000
dryers for grain bins, its Performer Fan(TM) line of products for the swine
industry, and its patented HI-LO(R) chicken feeders and Delta Series(TM) turkey
feeders. The Company intends to continue to actively develop product
improvements and innovations to more effectively serve its customers. See
"Business--Products."
CONTINUE PROFITABILITY ENHANCEMENTS. The Company plans to continue to
actively manage its business to improve cash flows by containing costs,
selectively expanding production and improving productivity. The Company's past
success in enhancing profitability is evidenced by an EBITDA margin for 1997 of
11.5% compared to 10.0% for 1996 and 5.6% for 1995.
DMC ACQUISITION
In furtherance of its business strategy, on November 5, 1997, the Company
acquired all of the capital stock of DMC (the "DMC Acquisition") for
approximately $17.9 million in cash.
DMC is a leading manufacturer and supplier of grain drying and handling
equipment. DMC manufactures equipment at its headquarters in Mason City, Iowa
and maintains six company-owned distribution facilities in Iowa, Nebraska,
Illinois, Arkansas, Indiana and South Dakota. DMC uses this distribution
network to market products to approximately 1,500 domestic and international
dealers. DMC recorded net sales and operating income of $29.0 million and $4.3
million, respectively, for the fiscal year ended October 31, 1997.
Approximately 52% of DMC's net sales during such period were derived from
products manufactured by DMC, with the remaining portion derived from products,
including augers, fans, heaters, floor supports and bucket elevators and
conveyors, that were purchased from manufacturers other than the Company.
International sales comprised approximately 13.5% of DMC's net sales for the
fiscal year ended October 31, 1997.
The Company believes that the DMC Acquisition has expanded the breadth of the
Company's grain equipment product line and will increase net sales and
operating income. Because the Company manufactures many of the products sold
but not manufactured by DMC, the Company supplies such products to DMC. The
Company will continue to leverage DMC's distribution network to increase sales
of the Company's swine equipment. In addition, the Company believes it can
increase sales of DMC products through dealers in the Company's distribution
network who currently handle products of competitors of DMC.
4
<PAGE>
THE EXCHANGE OFFER
Securities Offered.............. Up to $100,000,000 principal amount of the
Company's 10 1/4% Senior Subordinated Notes
due 2007, which have been registered under
the Securities Act. The terms of the New
Notes and the Old Notes are identical in all
material respects, except for certain
transfer restrictions, additional interest
provisions and certain other registration
rights relating to the Old Notes described
below under "--Description of New Notes."
The Exchange Offer.............. The Company is offering, upon the terms and
subject to the conditions set forth herein
and in the accompanying Letter of
Transmittal, to exchange $1,000 in principal
amount of the New Notes for each $1,000 in
principal amount of the outstanding Old
Notes. The issuance of the New Notes is
intended to satisfy obligations of the
Company contained in the Registration Rights
Agreement. As of the date of this Prospectus,
$100 million in aggregate principal amount of
the Old Notes is outstanding, the maximum
amount authorized by the Indenture for all
Notes. The Company will issue the New Notes
to holders that validly tender Old Notes on
or promptly after the Expiration Date. See
"The Exchange Offer--Terms of the Exchange
Offer."
Expiration Date.................
5:00 p.m., New York City time, on May 1,
1998, as the same may be extended. See "The
Exchange Offer--Expiration Date; Extensions;
Amendments."
Conditions of the Exchange
Offer; Extensions; Amendments..
The Exchange Offer is not conditioned upon
any minimum principal amount of Old Notes
being tendered for exchange. However, the
Exchange Offer is subject to certain
customary conditions and to the terms and
provisions of the Registration Rights
Agreement. The Company expressly reserves the
right, in its sole and absolute discretion,
(i) to delay accepting any Old Notes, (ii) to
extend the Exchange Offer, (iii) if any of
the conditions set forth under "The Exchange
Offer--Conditions of the Exchange Offer"
shall not have been satisfied, to terminate
the Exchange Offer, by giving oral or written
notice of such delay, extension or
termination to the Exchange Agent and (iv) to
waive any condition or otherwise amend the
terms of the Exchange Offer in any manner. If
the Exchange Offer is amended in a manner
determined by the Company to constitute a
material change, the Company will promptly
disclose such amendments by means of a
prospectus supplement that will be
distributed to the registered holders of the
Old Notes. See "The Exchange Offer--
Expiration Date; Extensions; Amendments" and
"The Exchange Offer--Conditions of the
Exchange Offer."
Accrued Interest on the Old Holders whose Old Notes are accepted for
Notes.......................... exchange will have the right to receive
interest accrued thereon from the date of
their original issuance or the last interest
payment date, as
5
<PAGE>
applicable, to, but not including, the date
of issuance of the New Notes, such interest
to be payable with the first interest payment
on the New Notes. Interest on the Old Notes
accepted for exchange will cease to accrue on
the day prior to the issuance of the New
Notes.
Procedures for Tendering Old
Notes;
Special Procedures for Except as otherwise provided below, each
Beneficial Owners.............. holder desiring to accept the Exchange Offer
must transmit a properly completed and duly
executed Letter of Transmittal, including all
other documents required by the Letter of
Transmittal, to the Exchange Agent (as
defined herein) at the address set forth in
"The Exchange Offer--The Exchange Agent;
Assistance" prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition,
either (i) certificates for such Old Notes
must be received by the Exchange Agent along
with the Letter of Transmittal, (ii) a timely
confirmation of book-entry transfer of such
Old 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 prior to the Expiration
Date or (iii) the holder must comply with the
guaranteed delivery procedures described
below. Any beneficial owner of the Old Notes
(a "Beneficial Owner") whose Old Notes are
registered in the name of a nominee, such as
a broker, dealer, commercial bank or trust
company, and who wishes to tender Old Notes
in the Exchange Offer should instruct such
registered holder to promptly tender on such
Beneficial Owner's behalf. If such Beneficial
Owner wishes to tender on such Beneficial
Owner's own behalf, such beneficial owner
must, prior to completing and executing the
Letter of Transmittal and delivering the Old
Notes, make appropriate arrangements to
either register ownership of the Old Notes in
such Beneficial Owner's name or obtain a
properly completed bond power from the
registered holder. By executing the Letter of
Transmittal, each holder will represent to
the Company that, among other things, (i) the
holder is not an "affiliate" of the Company
as defined in Rule 405 of the Securities Act,
(ii) the holder is not a broker-dealer that
acquired Old Notes directly from the Company
in order to resell them pursuant to Rule 144A
of the Securities Act or any other available
exemption under the Securities Act, (iii) the
holder will acquire the New Notes in the
ordinary course of business and (iv) the
holder is not participating, and does not
intend to participate, and has no arrangement
or understanding with any person to
participate, in the distribution of the New
Notes. Any Old Notes not accepted for
exchange for any reason will be returned,
without expense to the tendering holder
thereof, as promptly as practicable after the
Expiration Date. See "The Exchange Offer--
Procedures for Tendering Old Notes."
6
<PAGE>
Guaranteed Delivery Procedures.. Holders of Old Notes who wish to tender their
Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot
deliver their Old Notes, the Letter of
Transmittal or any other documents required
by the Letter of Transmittal to the Exchange
Agent on or prior to the Expiration Date or
(iii) who cannot complete the procedures for
delivery by book-entry transfer on a timely
basis, may tender their Old Notes according
to the guaranteed delivery procedures set
forth in the Letter of Transmittal. See "The
Exchange Offer--Guaranteed Delivery
Procedures."
Acceptance of Old Notes and
Delivery of New Notes..........
Upon satisfaction or waiver of all conditions
of the Exchange Offer, the Company will
accept any and all Old Notes that are
properly tendered in the Exchange Offer prior
to 5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be
delivered promptly after acceptance of the
Old Notes. See "The Exchange Offer--
Acceptance of Old Notes for Exchange;
Delivery of New Notes."
Withdrawal Rights............... Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time,
on the Expiration Date. See "The Exchange
Offer--Withdrawal Rights."
The Exchange Agent.............. LaSalle National Bank is the exchange agent
(in such capacity, the "Exchange Agent"). The
address and telephone number of the Exchange
Agent are set forth in "The Exchange Offer--
The Exchange Agent; Assistance."
Fees and Expenses............... All expenses incident to the Company's
consummation of the Exchange Offer and
compliance with the Registration Rights
Agreement will be borne by the Company. The
Company will also pay certain transfer taxes,
if applicable, related to the Exchange Offer.
See "The Exchange Offer--Fees and Expenses."
Resales of New Notes............ The Company is making the Exchange Offer in
reliance on the position of the staff of the
Commission as set forth in certain
interpretive letters addressed to third
parties in other transactions. However, the
Company has not sought its own interpretive
letter and there can be no assurance that the
staff of the Commission would make a similar
determination with respect to the Exchange
Offer as it has in such interpretive letters
to third parties. Based on these
interpretations by the staff of the
Commission, the Company believes that New
Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by a
holder (other than (i) a broker-dealer who
purchased Old Notes directly from the Company
for resale pursuant to Rule 144A or any other
available exemption under the Securities Act,
(ii) an "affiliate" of the Company within
7
<PAGE>
the meaning of Rule 405 under the Securities
Act or (iii) a broker-dealer who acquired the
Old Notes as a result of market-making or
other trading activities) without further
compliance with the registration and
prospectus delivery provisions of the
Securities Act; provided, that such holder is
acquiring the New Notes in the ordinary
course of business and is not participating,
and has no arrangement or understanding with
any person to participate, in a distribution
(within the meaning of the Securities Act) of
the New Notes. Holders wishing to accept the
Exchange Offer must represent to the Company,
as required by the Registration Rights
Agreement, that such conditions have been
met. Any holder of Old Notes who is not able
to rely on the interpretations of the staff
of the Commission set forth in the above-
mentioned interpretive letters must comply
with the registration and prospectus delivery
requirements of the Securities Act in
connection with any sale of such Old Notes,
unless such sale is made pursuant to an
exemption from such requirements. See "The
Exchange Offer--Resales of New Notes."
Federal Income Tax The issuance of the New Notes to holders
Consequences................... pursuant to the terms set forth in this
Prospectus will not constitute an exchange
for federal income tax purposes.
Consequently, no gain or loss will be
recognized by holders upon receipt of the New
Notes. See "Certain Federal Income Tax
Considerations."
Use of Proceeds................. There will be no proceeds to the Company from
the Exchange Offer. See "Use of Proceeds."
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to restrictions on
transfer of such Old Notes contained in the legend thereon. In general, the Old
Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. See "Risk Factors--Restrictions on Resale" and "The Exchange Offer--
Consequences of Failure to Exchange."
8
<PAGE>
DESCRIPTION OF THE NEW NOTES
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of New Notes will not be
entitled to any Additional Interest pursuant to certain circumstances under the
terms of the Registration Rights Agreement and (iii) holders of New Notes will
not be entitled to certain other rights under the Registration Rights
Agreement. The New Notes will evidence the same debt as the Old Notes and will
be entitled to the benefits of the Indenture. See "The Exchange Offer--
Termination of Certain Rights," "The Exchange Offer--Procedures for Tendering
Old Notes" and "Description of the New Notes."
Notes Offered................... Up to $100,000,000 principal amount of the
Company's 10 1/4% Senior Subordinated Notes
due 2007, which have been registered under
the Securities Act.
Maturity Date................... November 1, 2007.
Interest........................ 10 1/4% calculated on the basis of a 360-day
year consisting of twelve 30-day months.
Interest Payment Dates.......... Interest on the New Notes will be payable
semi-annually in arrears on May 1 and Novem-
ber 1 of each year, commencing May 1, 1998.
Optional Redemption............. The New Notes will be redeemable at the
Company's option, in whole or in part, at any
time on or after November 1, 2002, at the re-
demption prices set forth herein, together
with accrued and unpaid interest, if any, to
the date of redemption. In addition, on or
prior to November 1, 2000, the Company may
redeem up to 35% of the Notes, at a price of
110.25% of the principal amount thereof, to-
gether with accrued and unpaid interest, if
any, to the redemption date, with the net
proceeds of an Equity Offering, provided,
that at least $65.0 million in principal
amount of Notes is outstanding immediately
after giving effect to such redemption. See
"Description of the New Notes--Optional Re-
demption."
Change of Control............... Following the occurrence of a Change of Con-
trol, the Company will be required to make an
offer to repurchase the New Notes at a price
equal to 101% of the principal amount there-
of, plus accrued and unpaid interest, if any,
to the date of purchase. See "Description of
the New Notes--Change of Control."
Ranking......................... The New Notes will represent unsecured senior
subordinated obligations of the Company and
will be subordinated in right of payment to
all existing and future Senior Indebtedness
of the Company. As of December 31, 1997, the
Company had approximately $28.5 million of
Senior Indebtedness outstanding. In addition,
at December 31, 1997, the Company's subsidi-
aries had approximately $1.4 million of in-
debtedness to which holders of the New Notes
would have been structurally subordinated.
9
<PAGE>
New Note Guarantee.............. The New Notes will be fully and
unconditionally guaranteed on an
unsecured senior subordinated basis by
DMC. See "Description of the New Notes--
Note Guarantees."
Certain Covenants............... The Indenture pursuant to which the New
Notes will be issued will contain certain
covenants including, among others,
covenants with respect to the following
matters: (i) limitation on indebtedness;
(ii) limitation on restricted payments;
(iii) limitation on certain transactions
with affiliates; (iv) disposition of
proceeds of asset sales; (v) limitations
on liens; (vi) limitation on other senior
subordinated indebtedness; (vii)
limitation of guarantees by restricted
subsidiaries; and (viii) limitation on
dividends and other payment restrictions
affecting restricted subsidiaries. See
"Description of the New Notes--Certain
Covenants."
Registration Rights............. In the event that applicable law or
Commission policy does not permit the
Company to effect the Exchange Offer, or
if certain holders of the Old Notes are
not permitted to participate in, or do
not receive the benefit of the Exchange
Offer, the Registration Rights Agreement
provides that the Company will use its
best efforts to cause to become effective
a shelf registration statement (the
"Shelf Registration Statement") with
respect to the resale of the Old Notes
and to keep such Shelf Registration
Statement effective until two years after
the Issue Date or such shorter period
ending when all the Old Notes have been
sold thereunder or cease to be
outstanding. The interest rate on the Old
Notes is subject to increase under
certain circumstances if the Company is
not in compliance with its obligations
under the Registration Rights Agreement.
See "Registration Rights."
RISK FACTORS
See "Risk Factors" on pages 13 through 19 for a discussion of certain factors
that should be considered by participants in the Exchange Offer.
10
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The summary financial data should be read in conjunction with the Selected
Consolidated Financial Data, Pro Forma Financial Data, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and notes thereto contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
PRO FORMA
1995(1) 1996 1997 1997(2)
-------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
INCOME STATEMENT:
Net sales............................ $141,191 $178,537 $220,758 $248,919
Cost of sales........................ 115,004 135,696 164,607 185,892
-------- -------- -------- --------
Gross profit......................... 26,187 42,841 56,151 63,027
Selling, general and administrative
expenses............................ 22,176 28,787 35,189 38,415
-------- -------- -------- --------
Operating income..................... 4,011 14,054 20,962 24,612
Interest expense..................... (2,894) (3,590) (6,174) (10,767)
Write-off of affiliate receivable(3). (3,423) -- -- --
Other income (expense), net.......... 548 674 943 943
-------- -------- -------- --------
Income (loss) from continuing
operations.......................... (1,758) 11,138 15,731 14,788
Income (loss) from discontinued
operations.......................... 280 (482) -- --
Extraordinary gain (loss) on
extinguishment of debt.............. -- -- 2,119 2,119
Provision for income taxes(4)........ -- (157) (288) (1,673)
-------- -------- -------- --------
Net income (loss).................... $ (1,478) $ 10,499 $ 17,562 $ 15,234
======== ======== ======== ========
OTHER DATA:
Cash flows provided by (used in)
operating activities................ $ 2,448 $ 1,771 $ (3,578) (5)
Cash flows provided by (used in)
investing activities................ $ (5,377) $ 8,276 $(28,089) (5)
Cash flows provided by (used in)
financing activities................ $ 3,844 $ (9,435) $ 48,749 (5)
Depreciation and amortization........ $ 3,351 $ 3,153 $ 3,499 $ 4,215
Capital expenditures................. $ 5,816 $ 3,834 $ 9,655 $ 10,442
EBITDA(6)............................ $ 7,910 $ 17,881 $ 25,404 $ 29,770
EBITDA to interest................... 2.73 4.98 4.11 2.76
Earnings to fixed charges............ (7) 3.73x 3.14x 2.24x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA:
Total assets..... $66,421 $67,572 $150,109
Working capital.. 8,085 15,252 49,050
Total debt....... 33,930 47,906 116,531
Total
stockholders'
equity
(deficit)....... 12,887 (5,381)(8) (4,784)
</TABLE>
- --------
(1) The Company signed an agreement to sell the working capital and fixed
assets of its Heritage Vinyl Division in December 1995 and completed the
sale in January 1996.
(2) Pro Forma to give effect to the Offering, the application of the net
proceeds therefrom and the DMC Acquisition as if such transactions had
occurred on January 1, 1997. See "Business--DMC Acquisition," "Use of
Proceeds" and "Capitalization."
(3) The write-off of the affiliate receivable resulted from a significant
customer, who is an affiliate of the Company, ceasing distribution
operations and selling its only division in December 1995. The write-off of
the affiliate receivable represents the portion of the remaining receivable
due that was not collectible. See Note 11 to Consolidated Financial
Statements.
(4) The Company currently operates as a Subchapter "S" corporation and,
accordingly, is not subject to federal income taxation for the periods for
which financial information has been presented herein.
11
<PAGE>
(5) Pro forma data for these items are not available.
(6) EBITDA represents income from continuing operations (excluding the write-
off of an affiliate receivable) plus interest expense (including
amortization of debt issuance costs), depreciation and amortization. EBITDA
is presented here to provide additional information about the Company's
ability to meet its future debt service, capital expenditure and working
capital requirements. EBITDA is not a measure of financial performance
under generally accepted accounting principles ("GAAP") and should not be
considered as an alternative either to net income as an indicator of the
Company's operating performance, or to cash flows as a measure of the
Company's liquidity. Items excluded from EBITDA, such as the write-off of
an affiliate receivable, depreciation and amortization, are significant
components of the Company's financial statements and should be considered
in assessing the financial performance of the Company. EBITDA as defined in
this Prospectus may differ from similary-titled measures presented by other
companies.
(7) The ratio of earnings to fixed charges is expressed as the ratio of fixed
charges plus pretax earnings to fixed charges. Fixed charges include
interest on borrowings, amortization of deferred financing costs and the
interest portion of rent expense. Earnings were insufficient to cover fixed
charges for the year ended December 31, 1995 by $1.8 million.
(8) Total stockholders' deficit at December 31, 1996 resulted from a management
buyout of the Company's capital stock in June 1996. The Company purchased
its capital stock from selling shareholders using cash and notes. In order
to fund a portion of the cash payments made by the Company, the Company
obtained a $4.0 million term loan. See "Certain Relationships and Related
Transactions--Management Buyout" and Note 6 to Consolidated Financial
Statements.
12
<PAGE>
RISK FACTORS
Prospective investors should carefully consider, among other matters, the
following in connection with a decision to tender their Old Notes in the
Exchange Offer. The risk factors set forth below are generally applicable to
the Old Notes as well as the New Notes.
LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
The Company is highly leveraged. As of December 31, 1997, the Company had
approximately $116.5 million (net of an unamortized discount of $1.6 million
on the Notes) of indebtedness outstanding. Subject to certain restrictions,
exceptions and financial tests set forth in the Indenture and the New Credit
Agreement (as defined herein), the Company also may incur additional
indebtedness in the future. In addition, in 1995 the Company's earnings were
insufficient to cover its fixed charges by $1.8 million. The degree to which
the Company is leveraged could have important consequences to the holders of
the Notes, including, but not limited to, the following: (i) a substantial
portion of the Company's cash flow from operations will be required to be
dedicated to debt service and will not be available to the Company for its
operations; (ii) the Company's ability to obtain additional financing in the
future for acquisitions, capital expenditures, working capital or general
corporate purposes could be limited; (iii) the Company will have increased
vulnerability to adverse general economic and industry conditions; and (iv)
the Company may be vulnerable to higher interest rates because borrowings
under certain of its credit arrangements are at variable rates of interest.
The Company's ability to make scheduled payments of principal of, to pay
interest on or to refinance its indebtedness (including the Notes) depends on
its future performance and financial results, which, to a certain extent, are
subject to general economic, financial, competitive, legislative, regulatory
and other factors beyond the Company's control. There can be no assurance that
the Company's business will generate sufficient cash flow from operations or
that future working capital borrowings will be available in an amount
sufficient to enable the Company to service its indebtedness, including the
Notes, or make necessary capital expenditures. See "Description of the New
Credit Agreement" and "Description of the New Notes."
SUBORDINATION
The payment of principal, premium, if any, and interest on the Notes will be
subordinated in right of payment to the prior payment in full of all existing
and future Senior Indebtedness of the Company, including indebtedness incurred
under the New Credit Agreement. As of December 31, 1997, the Company had
approximately $28.5 million of Senior Indebtedness outstanding ($5.0 million
of which was in the form of letters of credit) and the ability (subject to
certain conditions) to incur an additional $40.0 million of Senior
Indebtedness under the New Credit Agreement. The Notes also will be
effectively subordinated to all existing and future indebtedness of the
Company's subsidiaries. As of December 31, 1997, the Company's subsidiaries
had approximately $1.4 million of indebtedness to which holders of the Notes
would have been structurally subordinated. Subject to certain restrictions,
exceptions and financial tests set forth in the Indenture and the New Credit
Agreement, the Company also may incur additional indebtedness in the future
that ranks prior to claims of holders of the Notes. See "Description of the
New Notes--Certain Covenants--Limitation on Indebtedness."
The subordination provisions of the Indenture will provide that, upon any
payment or distribution of the Company's assets to creditors upon any
dissolution, winding-up, insolvency, bankruptcy, receivership, liquidation,
reorganization or other proceedings relating to the Company, whether voluntary
or involuntary, holders of the Senior Indebtedness will be entitled to receive
payment in full of all amounts due thereon before the holders of Notes will be
entitled to receive any payment with respect to the Notes. In the event of any
default in the payment in respect of certain Senior Indebtedness, no payment
with respect to the Notes may be made by the Company unless and until such
default has been cured or waived. See "Description of the New Notes--
Subordination."
13
<PAGE>
The DMC Guarantee will be subordinated to all future guarantees by DMC of
Senior Indebtedness of the Company and any other Guarantor Senior Indebtedness
(as defined herein). As of December 31, 1997, DMC had no outstanding Guarantor
Senior Indebtedness, however DMC had $1.4 million of Indebtedness and other
obligations to which holders of the Notes would have been structurally
subordinated, because of the reasons described above.
RESTRICTIONS IMPOSED BY INDEBTEDNESS
The New Credit Agreement and the Indenture contain covenants that, among
other things and subject to certain exceptions, restrict the ability of the
Company to incur additional indebtedness, pay dividends, prepay subordinated
indebtedness, dispose of certain assets, create liens and make certain
investments or acquisitions and otherwise restrict corporate activities. In
addition, under the New Credit Agreement, the Company is required to satisfy
specified financial covenants, including maintenance of a minimum EBITDA, a
fixed charge coverage ratio and ratio of total debt to EBITDA. The ability of
the Company to comply with such provisions may be affected by events beyond
the Company's control. The breach of any of these covenants could result in a
default under the New Credit Agreement. In the event of any such default,
depending on the actions taken by the lenders under the New Credit Agreement,
such lenders could elect to declare all amounts borrowed under the New Credit
Agreement, together with accrued interest, to be due and payable. A default
under the New Credit Agreement or the instruments governing the Company's
other indebtedness could constitute a cross-default under the Indenture and
any instruments governing the Company's other indebtedness, and a default
under the Indenture could constitute a cross-default under the New Credit
Agreement and any instruments governing the Company's other indebtedness. See
"Description of the New Credit Agreement" and "Description of the New Notes."
AGRICULTURAL INDUSTRY; SEASONALITY
The agricultural industry is cyclical and subject to fluctuation. The
Company's sales of grain storage bins and drying and handling equipment have
historically been affected by feed and grain prices, acreage planted, crop
yields, demand, government policies, government subsidies, levels of export
and other factors beyond the Company's control. Weather conditions also can
adversely impact the agricultural industry and delay planned construction
activity, resulting in fluctuating demand for the Company's grain equipment
and delayed or lost revenues. Increases in feed and grain prices have in the
past resulted in a decline in sales of feeding, watering and ventilation
systems, although these same conditions have tended to improve sales of grain
storage bins. The Company's sales of production equipment for swine and
poultry producers have been affected by the level of construction activity by
such producers, which is affected by feed prices and domestic and
international demand for pork and poultry. Future declines in grain prices may
result in decreased grain production and could have a material adverse effect
on sales of the Company's grain storage, drying and handling products.
Declines in domestic or international demand for swine or poultry could have a
material adverse effect on the Company's sales of swine or poultry production
equipment. In addition, general downturns in the farm sector could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Industry Overview."
Events beyond the control of the Company, such as an outbreak of disease in
swine or poultry, may result in decreased production of swine and poultry in
local markets or generally. For example, a recent outbreak of hog cholera has
resulted in the destruction or scheduled destruction of approximately half of
the swine population in The Netherlands and in Taiwan in an effort to contain
the spread of the disease. Moreover, Belgium and Spain have ordered the
selective destruction of swine for the same purpose. The public perception of
health risks (such as salmonella food poisoning) associated with poultry and
swine products may result in reduced consumption of these products. Crop
diseases could affect grain production in local markets or generally. Any of
these events could have a material adverse effect on the Company's business,
financial condition and results of operations.
Sales of agricultural equipment are seasonal, with farmers traditionally
purchasing grain storage bins in the summer and fall in conjunction with the
harvesting season, and swine and poultry producers purchasing equipment during
prime construction periods in the spring, summer and fall. The Company's net
sales and net
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income have historically been lower during the first and fourth fiscal
quarters as compared to the second and third quarters. In 1997, the Company
generated approximately 27% and 36% of its net sales and 35% and 52% of its
operating income in the second and third fiscal quarters, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION
The market for the Company's products is competitive. Domestically and
internationally, the Company competes with a variety of manufacturers and
suppliers that offer a limited number of the products offered by the Company.
The Company believes that only one of its competitors, CTB International
Corp., offers products across most of the Company's product lines. Recent
trends towards consolidation in the agricultural industry have intensified
competition. Competition is based on the price, value, reputation, quality and
design of the products offered and the customer service provided by
manufacturers and dealers of the products. Although the Company believes that
it is competitive in all of these categories, there can be no assurance that
the Company will remain competitive in general or in any particular area of
its business. To the extent that the Company's competitors provide more
innovative and/or higher quality products, better designed products, better
pricing or offer better customer service through their distributors and
dealers, the Company's ability to compete could be adversely affected, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Independent dealers who market, sell and
install the Company's products may also market, sell and install competing
product lines. There can be no assurance that dealers will continue to handle,
or actively market, the Company's products. See "Business--Competition."
CONTROL BY PRINCIPAL STOCKHOLDERS; POTENTIAL CONFLICTS OF INTEREST
The Company's senior management team owns all of the outstanding voting
stock of the Company. See "Ownership of Capital Stock." In addition, these
individuals are parties to a voting agreement that requires a majority vote by
the holders of the Company's voting stock to approve certain matters affecting
the Company. See "Certain Relationships and Related Transactions--Management
Buyout--Stockholder Agreements." As a result, these individuals have the
ability to control all fundamental matters affecting the Company, including
the merger of the Company, the sale of all or substantially all of the
Company's assets and the future issuance of any securities of the Company.
Certain decisions concerning the operations or financial structure of the
Company may present conflicts of interest between the Company's stockholders
and the holders of the Notes. For example, if the Company encounters financial
difficulties or is unable to pay its debts as they become due, the interests
of the Company's stockholders might conflict with those of the holders of the
Notes. The Company's stockholders also may have an interest in pursuing
acquisitions, divestitures, financings or other transactions that could
enhance their equity investment, even though such transactions might involve
risk to the holders of the Notes. Because the Company's senior management team
is able to control the management policy of the Company, any such conflict of
interest may be resolved in favor of the Company's stockholders to the
detriment of the holders of the Notes.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon a number of key executive officers,
particularly Craig Sloan, Chief Executive Officer, Jorge Andrade, President
and Chief Operating Officer, and John W. Funk, Chief Financial Officer,
Secretary, Treasurer and General Counsel, as well as the Presidents of certain
of the Company's divisions. See "Management--Executive Officers and
Directors." The Company has entered into employment agreements with Messrs.
Sloan, Andrade and Funk each of whom are covered by key-man life insurance
policies, the proceeds of which may be used to repurchase their shares of the
Company's capital stock under certain circumstances. See "Management--
Employment Agreements" and "Certain Relationships and Related Transactions--
Management Buyout--Stockholder Agreements." There can be no assurance that the
Company
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will be able to retain its key executive officers or that it will be able to
attract or retain other skilled management personnel in the future. The loss
of the services of any of the Company's key personnel, or the inability to
attract and retain additional qualified personnel, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RAW MATERIALS PRICE VOLATILITY
The principal raw materials used by the Company in the manufacture of its
products, including steel, can be subject to significant price fluctuations.
The Company has no long-term supply contracts for such raw materials. While
the selling prices of the Company's products tend to increase or decrease over
time with the cost of raw materials, such changes may not occur simultaneously
or to the same degree. There can be no assurance that the Company will be able
to pass any increases in raw material costs through to its customers in the
form of price increases. Significant increases in the price of raw materials,
if not offset by product price increases, could have a material adverse effect
on the Company's profitability. See "Business--Raw Materials."
RISKS ASSOCIATED WITH ACQUISITIONS
As part of its business strategy, the Company plans to make strategic
acquisitions. In pursuing this acquisition strategy, the Company faces risks
commonly encountered with growth through acquisitions. These risks include
incurring significantly higher than anticipated capital expenditures and
operating expenses, failing to assimilate the operations and personnel of
acquired businesses, losing customers, entering markets in which the Company
has no or limited experience, disrupting the Company's ongoing business and
dissipating the Company's management resources. Realization of the anticipated
benefits of a strategic acquisition may take several years or may not occur at
all. There can be no assurance that the Company will be successful in
overcoming these risks or any other problems encountered with acquisitions. To
the extent that the Company does not successfully avoid or overcome these
risks or problems related to acquisitions, the Company's business, financial
condition and results of operations could be adversely affected. Future
acquisitions also may have a significant impact on the Company's financial
position and results of operations, and could cause substantial fluctuations
in the Company's quarterly and yearly results of operations. Although the
Company will continue to evaluate potential acquisitions, there can be no
assurances that the Company will be successful in effecting any acquisitions
in the future. See "Business--Business Strategy" and "Business--DMC
Acquisition."
INTERNATIONAL OPERATIONS; EXPOSURE TO FOREIGN CURRENCY RISK
As part of its business strategy, the Company plans to pursue international
opportunities for growth. International operations generally are subject to
various risks that are not present in domestic operations, including
restrictions on dividends, restrictions on repatriation of funds, unexpected
changes in tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, political instability, fluctuations in currency
exchange rates, reduced protection for intellectual property rights in some
countries, seasonal reductions in business activity and potentially adverse
tax consequences, any of which could adversely impact the Company's
international operations. For example, the recent financial crises of many
countries in Southeast Asia has caused some agricultural producers to cancel
orders or has led to the inability of such producers to secure necessary lines
of credit to buy agricultural commodities. While this trend has not led to
material cancellations of orders by the Company's customers, the Company
believes that it has contributed to a slight decline in the number of new
orders that the Company has received from customers located in such region.
See "Business--Product Distributions--International Distribution and
Customers." As the Company expands its operations internationally, its
exposure to such foreign risks will be amplified. There can be no assurance
that one or more of the above-mentioned risks will not have a material adverse
effect on the Company's future international operations and, consequently, on
the Company's business, financial condition and results of operations. See
"Business--Business Strategy" and "Business--Product Distribution."
The Company currently manufactures or purchases substantially all of its
products in the U.S. and derived approximately 26% of its net sales in 1997
from foreign countries. The production costs, profit margins and competitive
position of the Company are affected by the strength of the U.S. dollar
relative to the strength of the currencies in countries where its products are
sold. The Company's results of operations and financial condition
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may be adversely affected by fluctuations in foreign currencies because, for
example, such fluctuations may negatively impact the purchasing power of the
Company's foreign customers and make the Company's products less competitive
compared to locally-produced products. In addition, the Company's results of
operations and financial condition may also be negatively impacted by
translations of the financial statements of the Company's foreign subsidiaries
from local currencies into U.S. dollars.
The Company enters into foreign currency forward exchange contracts on a
limited basis. Such contracts are entered into with respect to significant
outstanding accounts receivable denominated in foreign currencies for which
timing of the receipt of payment can be reasonably estimated. Such hedging
activities are intended to reduce the risk that eventual net dollar inflows
resulting from the sale of products to foreign customers will be adversely
affected by changes in foreign currency exchange rates. Although the Company
seeks to enter into foreign exchange contracts which generally offset gains
and losses on the assets and liabilities being hedged, no assurances can be
given that such hedging activities will not result in losses which will have
an adverse effect on the Company's financial condition or results of
operations.
GOVERNMENT REGULATION AND POLICY
Domestic and foreign political developments and government regulations and
policies, including, without limitation, import/export quotas, government
subsidies and reserve programs, directly affect the agricultural industry in
the United States and abroad and thereby indirectly affect the Company's
business. Foreign trade embargoes and import quotas have in the past reduced
U.S. exports of grain, swine and poultry, adversely affecting the Company's
sales. The application or modification of existing laws, regulations or
policies or the adoption of new laws, regulations or policies could have an
adverse effect on the Company's business.
REGULATORY AND ENVIRONMENTAL MATTERS
Like other manufacturers, the Company is subject to a broad range of
federal, state, local and foreign laws and requirements, including those
governing discharges to the air and water, the handling and disposal of solid
and hazardous substances and wastes, the remediation of contamination
associated with releases of hazardous substances at the Company's facilities
and offsite disposal locations, workplace safety and equal employment
opportunities. Expenditures made by the Company to comply with such laws and
requirements historically have not been material.
Governmental authorities have the power to enforce compliance with such laws
and regulations and violators may be subject to penalties, injunctions or
both. Third parties may also have the right to enforce compliance with such
laws and regulations. Like most other industrial concerns, the Company's
manufacturing operations entail some risk of future noncompliance with
environmental regulations and there can be no assurance that material costs or
liabilities will not be incurred by the Company as a result thereof. It is
also possible that other developments, such as additional or increasingly
strict requirements of laws and regulations of these types and enforcement
policies thereunder, could significantly increase the Company's costs of
operations. See "Business--Regulatory and Environmental Matters."
PRODUCT LIABILITY RISK
Products sold by the Company may expose it to potential liabilities for
personal injury or property damage claims relating to the use of such
products. Although product liability claims historically have not had a
material adverse effect upon the Company, there can be no assurance that the
Company will not be subject to or incur liability for such claims in the
future. While the Company maintains third-party product liability insurance
that it believes to be adequate, there can be no assurance that the Company
will not experience claims in excess of its insurance coverage, or claims that
ultimately are not covered by insurance. There can also be no assurance that
such insurance will continue to be available on economically reasonable terms.
A significant claim that is uninsured or partially insured could result in
loss or deferral of revenues, diversion of resources or damage to the
Company's reputation, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Product Liability and Legal Proceedings."
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FRAUDULENT CONVEYANCE
The Company believes that the indebtedness represented by the Notes, and DMC
believes the indebtedness represented by the Guarantee, are being incurred for
proper purposes and in good faith, and that, based on present forecasts, asset
valuations and other financial information, the Company and DMC are solvent,
will have sufficient capital for carrying on their businesses and will be able
to pay their debts as they mature. Notwithstanding these beliefs, however,
under federal or state fraudulent transfer laws, if a court of competent
jurisdiction in a suit by an unpaid creditor or a representative of creditors
(such as a trustee in bankruptcy or a debtor-in-possession) were to find that
the Company or DMC did not receive fair consideration (or reasonably
equivalent value) for incurring the Notes or the Guarantee, as the case may
be, and at the time of the incurrence of such indebtedness, the Company or DMC
were insolvent, were rendered insolvent by reason of such incurrence, were
engaged in a business or transaction for which their remaining assets
constituted unreasonably small capital, intended to incur, or believed that
they would incur, debts beyond their ability to pay such debts as they
matured, or that the Company or DMC intended to hinder, delay or defraud their
creditors, then such court could, among other things, (i) void all or a
portion of the Company's obligations to the holders of the Notes or DMC's
obligations under the Guarantee, the effect of which would be that the holders
of the Notes may not be repaid in full, (ii) recover all or a portion of the
payments made to holders of the Notes and/or (iii) subordinate the Company's
or DMC's obligations to the holders of the Notes to other existing and future
indebtedness of the Company or DMC, as the case may be, to a greater extent
than would otherwise be the case, the effect of which would be to entitle such
other creditors to be paid in full before any payment could be made on the
Notes. The measure of insolvency for purposes of the foregoing will vary
depending upon the law of the relevant jurisdiction. Generally, however, a
company would be considered insolvent for purposes of the foregoing if the sum
of the company's debts is greater than all of the company's property at a fair
valuation, or if the present fair saleable value of the company's assets is
less than the amount that will be required to pay its probable liability on
its existing debts as they become absolute and mature. There can be no
assurances as to what standards a court would apply to determine whether the
Company or DMC were solvent at the relevant time, or whether, whatever
standard was applied, the Notes or the Guarantee would not be voided on
another of the grounds set forth above.
ABSENCE OF PRIOR PUBLIC MARKET FOR NEW NOTES
The New Notes will constitute a new class of securities with no established
trading market. Although the New Notes will generally be permitted to be
resold or otherwise transferred by nonaffiliates of the Company without
compliance with the registration requirements under the Securities Act, the
Company does not intend to apply for a listing of the New Notes on any
securities exchange or to arrange for the New Notes to be quoted on the NASDAQ
National Market or other quotation system. Merrill Lynch has advised the
Company that it currently intends to make a market in the New Notes; however,
Merrill Lynch is not obligated to do so, and any market-making with respect to
the New Notes may be discontinued at any time without notice. As a result,
there can be no assurance that an active trading market for the New Notes will
develop. If a market were to develop, the New Notes could trade at prices that
may be lower than the initial market values thereof depending on many factors,
including prevailing interest rates and the markets for similar securities.
RESTRICTIONS ON RESALE
The Old Notes were offered and sold by the Company in a private offering
exempt from registration pursuant to the Securities Act and have been resold
pursuant to Rule 144A, Regulation S and certain other available exemptions
under the Securities Act. As a result, the Old Notes may not be reoffered or
resold by purchasers, except pursuant to an effective registration statement
under the Securities Act, or pursuant to an applicable exemption from such
registration.
Based on interpretations by the staff of the Commission, the Company
believes that each holder (other than (i) a broker-dealer who purchased Old
Notes directly from the Company for resale pursuant to Rule 144A of the
Securities Act or any other available exemption under the Securities Act, (ii)
an "affiliate" of the Company
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<PAGE>
within the meaning of Rule 405 under the Securities Act or (iii) a broker-
dealer who acquired the Old Notes as a result of market-making or other
trading activities) who duly exchanges Old Notes for New Notes in the Exchange
Offer will receive notes that are freely transferable under the Securities
Act, provided, that such New Notes are acquired in the ordinary course of such
holder's business and that such holder is not participating, and has no
arrangement or understanding with any other person to participate, in a
distribution (within the meaning of the Securities Act) of the New Notes. The
Company has not, however, sought its own no-action letter from the staff of
the Commission regarding resales of the New Notes and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the resale of the New Notes. Any holder of Old Notes who is
not able to rely upon such staff interpretations must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale of such Old Notes, unless such sale is made pursuant
to an exemption from such requirements. See "Prospectus Summary--The Exchange
Offer."
CERTAIN MARKET CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
To the extent that Old Notes are tendered and accepted for exchange pursuant
to the Exchange Offer, the trading market for Old Notes that remain
outstanding may be significantly more limited, which might adversely affect
the liquidity of the Old Notes not tendered for exchange. The extent of the
market therefor and the availability of price quotations would depend upon a
number of factors, including the number of holders of Old Notes remaining at
such time and the interest in maintaining a market in such Old Notes on the
part of securities firms. An issue of securities with a smaller outstanding
market value available for trading (the "float") may command a lower price
than would a comparable issue of securities with a greater float. As a result,
the market price for Old Notes that are not exchanged in the Exchange Offer
may be affected adversely to the extent that the amount of Old Notes exchanged
pursuant to the Exchange Offer reduces the float. The reduced float also may
make the trading price of the Old Notes that are not exchanged more volatile.
In addition, holders of Old Notes who do not exchange their Old Notes for New
Notes pursuant to the Exchange Offer will continue to be subject to
restrictions on transfer of such Old Notes contained in the legend thereon. In
general, the Old Notes may be offered or sold unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The
Company does not currently anticipate that it will register the Old Notes
under the Securities Act. See "Risk Factors--Restrictions on Resale" and "The
Exchange Offer--Consequences of Failure to Exchange."
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THE EXCHANGE OFFER
The following discussion set forth or summarizes what the Company believes
are the material terms of the Exchange Offer. This Summary is qualified in its
entirety by reference to the full text of the documents underlying the
Exchange Offer, copies of which are filed as exhibits to the Registration
Statement of which this Prospectus is a part, and are incorporated by
reference herein.
PURPOSE AND EFFECT
The Old Notes were sold by the Company to the Initial Purchasers on November
5, 1997 pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A and Regulation S.
The Company, DMC and the Initial Purchasers also entered into the Registration
Rights Agreement, pursuant to which the Company agreed to use its best efforts
(i) to file an exchange offer registration statement ("Exchange Offer
Registration Statement") with the Commission under the Securities Act
concerning the Exchange Offer within 90 days after the Issue Date, (ii) to
cause the Exchange Offer Registration Statement to be declared effective by
the Commission within 150 days after the Issue Date, (iii) to keep the
Exchange Offer Registration Statement effective until the closing of the
Exchange Offer and (iv) to cause the Exchange Offer to be consummated 180 days
after the Issue Date. Pursuant to such Registration Rights Agreement, the
Company will endeavor to, within the applicable time periods, register under
the Securities Act all of the New Notes pursuant to a registration statement
under which the Company will offer each holder of Old Notes the opportunity to
exchange any and all of the outstanding Old Notes held by such holder for New
Notes in an aggregate principal amount equal to the aggregate principal amount
of Old Notes tendered for exchange by such holder. Subject to limited
exceptions, the Exchange Offer being made hereby, if commenced and consummated
within such applicable time periods, will satisfy those requirements under the
Registration Rights Agreement. In such event, Old Notes not exchanged for New
Notes in the Exchange Offer would remain outstanding and would continue to
accrue interest, but would generally not retain any rights under the
Registration Rights Agreement. Holders of Old Notes seeking liquidity in their
investment would have to rely on an exemption to the registration requirements
under the securities laws, including the Securities Act. This Exchange Offer
is intended to satisfy the Company's exchange offer obligations under the
Registration Rights Agreement.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange $1,000
in principal amount of the New Notes for each $1,000 in principal amount of
the outstanding Old Notes. The Company will accept for exchange any and all
Old Notes that are validly tendered on or prior to 5:00 p.m., New York City
time, on the Expiration Date. Tenders of the Old Notes may be withdrawn in
accordance with the procedures described under "--Withdrawal Rights" at any
time prior to 5:00 p.m., New York City time, on the Expiration Date. The
Exchange Offer is not conditioned upon any minimum principal amount of Old
Notes being tendered for exchange. However, the Exchange Offer is subject to
certain customary conditions that may be waived by the Company, and to the
terms and provisions of the Registration Rights Agreement. See "--Conditions
of the Exchange Offer."
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, holders may tender less than the aggregate principal amount
represented by the Old Notes held by them, provided that they appropriately
indicate this fact on the Letter Of Transmittal accompanying the tendered Old
Notes (or so indicate pursuant to the procedures for book-entry transfer).
As of the date of this Prospectus, $100 million in aggregate principal
amount of the Old Notes is outstanding, the maximum amount authorized by the
Indenture for all Notes. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about April 1, 1998, to all holders of
Old Notes known to the Company.
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Because the Exchange Offer is for any and all Old Notes, the number of Old
Notes tendered and exchanged in the Exchange Offer will reduce the principal
amount of Old Notes outstanding. Following the consummation of the Exchange
Offer, holders who did not tender their Old Notes generally will not have any
further registration rights under the Registration Rights Agreement, and such
Old Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Old Notes could be adversely
affected. The Old Notes are currently eligible for sale pursuant to Rule 144A
through the Private Offering, Resales and Trading through Automated Linkages
("PORTAL") system. Because the Company anticipates that most holders of Old
Notes will elect to exchange such Old Notes for New Notes due to the absence
of restrictions on the resale of New Notes under the Securities Act, the
Company anticipates that the liquidity of the market for any Old Notes
remaining after the consummation of the Exchange Offer may be substantially
limited. See "Risk Factors--Certain Market Consequences of Failure to Exchange
Old Notes."
The form and terms of the New Notes are generally the same as the form and
terms of the Old Notes, except that (i) the New Notes have been registered
under the Securities Act and will not bear legends restricting the transfer
thereof, (ii) the holders of New Notes will not be entitled to any Additional
Interest under the terms of the Registration Rights Agreement and (iii)
holders of New Notes will not be entitled to certain other rights under the
Registration Rights Agreement. The New Notes will evidence the same debt as
the Old Notes and will be entitled to the benefits of the Indenture.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes and for the purposes of receiving the New Notes from the Company
and delivering New Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer.
Holders of Old Notes who tender 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 Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "--Fees and Expenses."
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE
OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH
RECOMMENDATION. HOLDERS OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO
TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE PRINCIPAL
AMOUNT OF OLD NOTES TO TENDER, AFTER READING CAREFULLY THIS PROSPECTUS AND THE
LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR ADVISORS, IF ANY, BASED ON
THEIR OWN FINANCIAL POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Exchange Offer shall remain open for a period of not less than 30 days
after notice is mailed to holders. The Expiration Date shall be May 1, 1998 at
5:00 p.m., New York City time, unless the Company, in its sole discretion,
extends the Exchange Offer, in which case the Expiration Date shall be the
latest date and time to which the Exchange Offer is extended.
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In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, by means of a press release or any other acceptable
means, each prior to 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date.
The Company expressly reserves the right, in its sole and absolute
discretion, (i) to delay accepting any Old Notes, (ii) to extend the Exchange
Offer, (iii) if any of the conditions set forth below under "Conditions of the
Exchange Offer" shall not have been satisfied, to terminate the Exchange
Offer, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent and (iv) to waive any condition or otherwise
amend the terms of the Exchange Offer in any manner. If such waiver or
amendment constitutes a material change to the Exchange Offer, the Company
will promptly disclose such waiver or amendment by means of a prospectus
supplement that will be distributed to the registered holders of the Old
Notes, and the Company will extend the Exchange Offer to the extent required
by Rule l4e-1 under the Exchange Act.
Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent and
by making a public announcement thereof, and such announcement in the case of
an extension will be made no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date. Without
limiting the manner in which the Company may choose to make any public
announcement and subject to applicable law, the Company shall have no
obligation to publish, advertise or otherwise communicate any such public
announcement other than by issuing a release to the Dow Jones News Service.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Old Notes for any New Notes (whether or not any
Old Notes have theretofore been accepted for exchange) if (A) any of the
conditions set forth in (i) to (iii) below has not been satisfied or (B) the
condition set forth in (iv) below has occurred or exists:
(i) the Old Notes shall have been duly tendered in accordance with the
terms of the Exchange Offer;
(ii) the Exchange Offer shall not violate any applicable law or any
applicable policy of the Commission;
(iii) all governmental approvals shall have been obtained, which
approvals the Company deems necessary for the consummation of the Exchange
Offer; and
(iv) an action or proceeding shall have been instituted or threatened in
any court or by any governmental agency which might materially impair the
ability of the Company to proceed with the Exchange Offer, or a material
adverse development shall have occurred in any existing action or
proceeding with respect to the Company.
If the Company determines in its sole and absolute discretion that any of
the foregoing events or conditions has not been satisfied or has occurred or
exists, the Company may, subject to applicable law, (i) waive any such
condition, (ii) amend the terms of the Exchange Offer in any respect, (iii)
extend the Exchange Offer and retain all Old Notes tendered prior to the
expiration of the Exchange Offer subject, however, to the rights of holders to
withdraw such Old Notes or (iv) terminate the Exchange Offer (whether or not
any Old Notes have theretofore been accepted for exchange). If such waiver or
amendment constitutes a material change to the Exchange Offer, the Company
will promptly disclose such waiver or amendment by means of a prospectus
supplement that will be distributed to the registered holders of the Old
Notes, and the Company will extend the Exchange Offer to the extent required
by Rule l4e-1 under the Exchange Act.
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company in whole or in part at any time and from time to time in
its sole discretion. The failure by the Company at any time to exercise any of
the foregoing rights shall not be deemed a waiver of such rights and each such
right shall be
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deemed an ongoing right which may be asserted at any time and from time to
time. Any determination by the Company concerning the events described above
will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order shall be threatened or in effect with respect
to the Registration Statement of which this Prospectus constitutes a part or
the qualification of the Indenture under the Trust Indenture Act of 1939.
TERMINATION OF CERTAIN RIGHTS
Holders of New Notes will not be and, upon consummation of the Exchange
Offer, holders of Old Notes who were permitted to participate in the Exchange
Offer will no longer be, entitled to (i) the right to receive Additional
Interest under the Registration Rights Agreement or (ii) certain other rights
under the Registration Rights Agreement intended for the holders of
unregistered securities; provided, that holders of Old Notes who are not
permitted to participate in the Exchange Offer or who do not receive fully
tradeable New Notes pursuant to the Exchange Offer, shall have the right to
require the Company to file a Shelf Registration Statement solely for the
benefit of such holders of Old Notes and will be entitled to receive
Additional Interest following the occurrence of a Registration Default in
connection with the filing of such Shelf Registration Statement. See
"Registration Rights." Notwithstanding anything to the contrary in the
foregoing, Old Notes not tendered in the Exchange Offer will remain
outstanding and continue to accrue interest in accordance with their terms.
ACCRUED INTEREST ON THE OLD NOTES
Holders whose Old Notes are accepted for exchange will have the right to
receive interest accrued thereon from the date of their original issuance or
the last interest payment date, as applicable, to, but not including, the date
of issuance of the New Notes, such interest to be payable with the first
interest payment on the New Notes. Interest on the Old Notes accepted for
exchange, which interest accrued at the rate of 10 1/4% per annum, will cease
to accrue on the day prior to the issuance of the New Notes.
PROCEDURES FOR TENDERING OLD NOTES
The tender of a holder's Old Notes as set forth below and the acceptance
thereof by the Company will constitute a binding agreement between the
tendering holder and the Company upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal.
Except as set forth below, a holder who wishes to tender Old Notes for
exchange pursuant to the Exchange Offer must transmit a properly completed and
duly executed Letter of Transmittal, including all other documents required by
such Letter of Transmittal, to the Exchange Agent at the address set forth
under "--The Exchange Agent; Assistance" prior to 5:00 p.m., New York City
time on the Expiration Date. In addition, either (i) certificates of such Old
Notes must be received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of book-entry transfer of such Old
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 prior to the Expiration Date, or (iii) the
holder must comply with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
ELIGIBLE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED.
INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT THE ELIGIBLE HOLDER USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTER OF TRANSMITTAL OR OLD NOTES
SHOULD BE SENT TO THE COMPANY OR DTC. HOLDERS MAY REQUEST THEIR RESPECTIVE
BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT SUCH
TENDER FOR SUCH HOLDER.
23
<PAGE>
Any Beneficial Owner whose Old Notes are registered in the name of a
nominee, such as a broker, dealer, commercial bank or trust company, and who
wishes to tender Old Notes in the Exchange Offer should contact such
registered holder promptly and instruct such registered holder to tender on
such Beneficial Owner's behalf. If such Beneficial Owner wishes to tender
directly, such Beneficial Owner must, prior to completing and executing the
Letter of Transmittal and tendering Old Notes, either make appropriate
arrangements to register ownership of the Old Notes in such Beneficial Owner's
name or obtain a properly completed bond power from the registered holder.
Beneficial Owners should be aware that the transfer of registered ownership
may take considerable time.
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at DTC for the purposes of the Exchange Offer within two
business days after the date of this Prospectus. Any financial institution
that is a participant in DTC's Book-Entry Transfer Facility system may make
book-entry delivery of the Old Notes by causing DTC to transfer such Old Notes
into the Exchange Agent's account in accordance with DTC's procedures for such
transfer. However, although delivery of the Old Notes may be effected through
book-entry transfer into the Exchange Agent's account at DTC, the Letter of
Transmittal (or facsimile thereof), properly completed and duly executed, with
any required signature guarantees and any other required documents, must in
any case, be delivered to and received by the Exchange Agent at its address
set forth under "--The Exchange Agent; Assistance" on or prior to the
Expiration Date, or the guaranteed delivery procedure set forth below must be
complied with, within the time period provided under such procedures. Delivery
of documents to DTC does not constitute delivery to the Exchange Agent.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined herein)
unless the Old Notes surrendered for exchange pursuant hereto are tendered (i)
by a registered holder of the Old Notes who has not completed either the box
entitled "Special Exchange Instructions" or the box entitled "Special Delivery
Instructions" in the Letter of Transmittal or (ii) for the account of an
Eligible Institution. In the event that a signature on a Letter of Transmittal
or a notice of withdrawal, as the case may be, is required to be guaranteed,
such signature must be guaranteed by an Eligible Institution. If the Letter of
Transmittal is signed by a person other than the registered holder of the Old
Notes, the Old Notes surrendered for exchange must be endorsed or accompanied
by appropriate bond powers and a proxy which authorizes such person to tender
the Old Notes on behalf of the registered holder, in each case, signed by the
registered holder, with the signature thereon guaranteed by an Eligible
Institution. The term "registered holder" as used herein with respect to the
Old Notes means any person in whose name the Old Notes are registered on the
books of the Registrar. The term "Eligible Institution" as used herein means a
firm which is a member of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States or any other
"eligible guarantor institution" as such term is defined in Rule 17Ad-15 under
the Exchange Act.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and
all Old Notes not properly tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects
or irregularities in connection with tenders of Old Notes for exchange must be
cured within such period of time as the Company shall determine. Neither the
Company, the Exchange Agent nor any other person shall be under any duty to
give notification of defects or irregularities with respect to tenders of Old
Notes, nor shall any of them incur any liability for failure to give
notification of defects or irregularities with respect to tenders of Old
Notes. Tenders of the Old Notes will not be deemed to have been made until
such irregularities have been cured or waived.
24
<PAGE>
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and, unless waived by the
Company, proper evidence satisfactory to the Company, in its sole discretion,
of such person's authority so to act must be submitted with the Letter of
Transmittal.
By tendering, each registered holder will represent to the Company, among
other things, that: (i) the holder is not an "affiliate" of the Company as
defined in Rule 405 of the Securities Act, (ii) the holder is not a broker-
dealer that acquired Old Notes directly from the Company in order to resell
them pursuant to Rule 144A of the Securities Act or any other available
exemption under the Securities Act, (iii) the holder will acquire the New
Notes in the ordinary course of business and (iv) the holder is not
participating, and does not intend to participate, and has no arrangement or
understanding with any person to participate, in the distribution of the New
Notes. Any holder of Old Notes that is unable to make these representations to
the Company will not be able to rely on the interpretations of the staff of
the Commission described in "--Resales of New Notes" and therefore will be
required to comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale of such Old Notes, unless
such sale is made pursuant to an exemption from such requirements.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other documents required by the Letter of Transmittal to
the Exchange Agent on or prior to the Expiration Date or (iii) who cannot
complete the procedure for book-entry transfer on a timely basis, may tender
their Old Notes according to the guaranteed delivery procedures set forth in
the Letter of Transmittal. Pursuant to such procedures: (i) such tender must
be made by or through an Eligible Institution, (ii) prior to the Expiration
Date, the Exchange Agent must have received from the holder and the Eligible
Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the holder, the certificate or registration number or
numbers of the tendered Old Notes, and the principal amount of tendered Old
Notes, stating that the tender is being made thereby and guaranteeing that, at
least within four (4) New York Stock Exchange trading days after the
Expiration Date, the tendered Old Notes, a duly executed Letter of Transmittal
(or a facsimile thereof) and any other required documents will be deposited by
the Eligible Institution with the Exchange Agent and (iii) such properly
completed and executed documents required by the Letter of Transmittal (or a
facsimile thereof) and the tendered Old Notes in proper form for transfer (or
confirmation of a book-entry transfer of such Old Notes into the Exchange
Agent's account at DTC) must be received by the Exchange Agent within at least
four (4) New York Stock Exchange trading days after the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offer, the
Company will accept any and all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will be delivered as
promptly as practicable after acceptance of the Old Notes. For purposes of the
Exchange Offer, the Company shall be deemed to have accepted validly tendered
Old Notes, when, as, and if the Company has given oral or written notice
thereof to the Exchange Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and all other required
documents (or of confirmation of a book-entry transfer of such Old Notes into
the Exchange Agent's account at DTC); provided, that the Company reserves the
absolute right to waive any defects or irregularities in the tender or
conditions of the Exchange Offer. If any tendered Old Notes are not accepted
for any reason, such unaccepted Old Notes will be returned without expense to
the tendering holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
25
<PAGE>
WITHDRAWAL RIGHTS
Tenders of the Old Notes may be withdrawn by delivery of a written or
facsimile transmission notice to the Exchange Agent, at its address set forth
herein, at any time prior to 5:00 p.m., New York City time, on the Expiration
Date after which tenders of Old Notes are irrevocable. Any such notice of
withdrawal must (i) specify the name of the person having deposited the Old
Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be
withdrawn (including the certificate or registration number or numbers and
principal amount of such Old Notes, as applicable or, in the case of notes
transferred by book-entry transfer, the name and number of the account at DTC
to be credited), (iii) be signed by the Depositor in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by a
bond power in the name of the person withdrawing the tender, in satisfactory
form as determined by the Company in its sole discretion, duly executed by the
registered holder, with the signature thereon guaranteed by an Eligible
Institution together with the other documents required upon transfer by the
Indenture, (iv) specify the name in which such Old Notes are to be re-
registered, if different from the Depositor, pursuant to such documents of
transfer and (v) include a statement that such holder is withdrawing its
election to have such Old Notes exchanged. 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. The Old Notes so withdrawn
will be deemed not to have been validly tendered for exchange for purposes of
the Exchange Offer and no New Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes which have
been tendered for exchange but which are withdrawn will be returned to the
holder thereof without cost to such holder as promptly as practicable after
withdrawal. Properly withdrawn Old Notes may be retendered by following one of
the procedures described under "--Procedures for Tendering Old Notes" at any
time on or prior to the Expiration Date.
THE EXCHANGE AGENT; ASSISTANCE
LaSalle National Bank has been appointed the Exchange Agent for the Exchange
Offer. All tendered Old Notes, executed Letters of Transmittal and other
related documents should be directed to the Exchange Agent. Questions and
requests for assistance and requests for additional copies of the Prospectus,
the Letter of Transmittal and other related documents should be addressed to
the Exchange Agent as follows:
By Hand, Registered or Certified Mail or Overnight Courier:
LaSalle National Bank
135 South LaSalle Street
Room 1825
Chicago, IL 60603
Attention: Sarah Webb
By Facsimile:
312-904-2236
Attention: Sarah Webb
Confirm by Telephone 312-
904-2444
DELIVERY OF DOCUMENTS TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF DOCUMENTS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT
CONSTITUTE A VALID DELIVERY OF SUCH DOCUMENTS.
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. However, additional solicitations may be
made by facsimile, telephone or in person by officers and regular employees of
the Company and its affiliates.
26
<PAGE>
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith
and pay other registration expenses, including fees and expenses of the
Trustee, filing fees, blue sky fees and printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered or
if a transfer tax is imposed for any reason other than the exchange of Old
Notes pursuant to the Exchange Offer, then the amount of any such transfer
taxes (whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by the Company for accounting
purposes in connection with the Exchange Offer. The expenses of the Exchange
Offer will be amortized over the term of the New Notes.
RESALES OF NEW NOTES
Upon consummation of the Exchange Offer, holders of Old Notes who were not
prohibited from participating in the Exchange Offer and did not tender their
Old Notes will generally not have any registration rights under the
Registration Rights Agreement with respect to such nontendered Old Notes and
such Old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon. In general, the Old Notes may not be offered
or sold unless registered under the Securities Act and applicable state
securities laws, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The
Company does not currently anticipate that it will register the Old Notes
under the Securities Act.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought
its own interpretive letter and there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer as it has in such interpretive letters to third parties. Based on these
interpretations by the staff of the Commission, the Company believes that New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by a holder (other than
(i) a broker-dealer who purchased Old Notes directly from the Company for
resale pursuant to Rule 144A or any other available exemption under the
Securities Act, (ii) an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act or (iii) a broker-dealer who acquired the Old
Notes as a result of market-making or other trading activities), without
further compliance with the registration and prospectus delivery provisions of
the Securities Act, provided, that such holder is acquiring the New Notes in
the ordinary course of business and is not participating, and has no
arrangement or understanding with any person to participate, in the
distribution of the New Notes. Any holder wishing to accept the Exchange Offer
must represent to the Company, as required by the Registration Rights
Agreement, that (i) it is not an "affiliate" of the Company as defined in Rule
405 of the Securities Act, (ii) it is not a broker-dealer that acquired Old
Notes directly from the Company in order to resell them pursuant to Rule 144A
of the Securities Act or any other available exemption under the Securities
Act, (iii) it will acquire the New Notes in the ordinary course of business
and (iv) it is not participating, and does not intend to participate, and has
no arrangement or understanding with any person to participate, in the
distribution of the New Notes. Any holder of Old Notes that is unable to make
these representations to the Company will not be able to rely on the
interpretations of the staff
27
<PAGE>
of the Commission described above and therefore will be required to comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any sale of such Old Notes unless such sale is made
pursuant to an exemption from such requirements.
Each broker-dealer who receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it acquired the Old Notes for its own
account as a result of market-making activities or other trading activities
and, because it may be deemed a statutory underwriter, must agree that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Based on the position taken by the staff of the Commission in
the interpretive letters referred to above, the Company believes that
Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to the New Notes received upon exchange of such Old
Notes (other than Old Notes that represent an unsold allotment from the
original sale of the Old Notes) with a prospectus meeting the requirements of
the Securities Act, which may be the prospectus prepared for an exchange offer
so long as it contains a description of the plan of distribution with respect
to the resale of such New Notes. Accordingly, this Prospectus may be used by a
Participating Broker-Dealer during the period referred to below in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such Participating Broker-Dealer for its own account as
a result of market-making or other trading activities. Subject to certain
provisions and time limitations set forth in the Registration Rights
Agreement, the Company has agreed that this Prospectus may be used by a
Participating Broker-Dealer in connection with resales of such New Notes. See
"Plan of Distribution." However, a Participating Broker-Dealer who intends to
use this Prospectus in connection with the resale of New Notes received in
exchange for Old Notes pursuant to the Exchange Offer must notify the Company,
or cause the Company to be notified, on or prior to the Expiration Date, that
it is a Participating Broker-Dealer. Such notice may be given in the space
provided for that purpose in the Letter of Transmittal or may be delivered to
the Exchange Agent at one of the addresses set forth herein under "--The
Exchange Agent; Assistance." A Participating Broker-Dealer who delivers this
Prospectus to purchasers in connection with resales of New Notes will be
subject to certain of the civil liabilities under the Securities Act and will
be bound by the provisions of the Registration Rights Agreement (including
certain indemnification rights and obligations). Any Participating Broker-
Dealer who is an "affiliate" of the Company may not rely on such interpretive
letters and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to The Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company of
the occurrence of any event or the discovery of any fact which makes any
statement contained in this Prospectus untrue in any material respect or which
causes this Prospectus to omit to state a material fact necessary in order to
make the statements contained herein, in light of the circumstances under
which they were made, not misleading or of the occurrence of certain other
events specified in the Registration Rights Agreement, such Participating
Broker-Dealer will suspend the sale of New Notes pursuant to this Prospectus
until the Company has amended or supplemented this Prospectus to correct such
misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such Participating Broker-Dealer or the Company has
given notice that the sale of the New Notes may be resumed, as the case may
be.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who are permitted to participate in the Exchange Offer
and who do not tender their Old Notes generally will not have any further
registration rights under the Registration Rights Agreement or otherwise.
Accordingly, any holder that does not exchange such holder's Old Notes for New
Notes will continue to hold the untendered Old Notes and will be entitled to
all the rights and limitations applicable thereto under the Indenture, except
to the extent that such rights or limitations, by their terms, terminate or
cease to have further effectiveness as a result of the Exchange Offer.
28
<PAGE>
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will continue to be subject to the restrictions on transfer contained in
the legend thereon. In general, the Old Note may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register the Old Notes under the Securities Act. Accordingly, such Old Notes
may be resold only (i) to the Company (upon redemption thereof or otherwise),
(ii) pursuant to an effective registration statement under the Securities Act,
(iii) so long as the Old Notes are eligible for resale pursuant to Rule 144A,
to a Qualified Institutional Buyer (as defined in the Securities Act) in a
transaction meeting the requirements of Rule 144A, (iv) outside the United
States to a foreign person pursuant to the exemption from the registration
requirements of the Securities Act provided by Regulation S, (v) to an
institutional "accredited investor" (as defined in the Securities Act) in a
transaction exempt from the registration requirements of the Securities Act,
in each case in accordance with any applicable securities laws of any state of
the United States or other applicable jurisdiction, or (vi) pursuant to any
other available exemption from the registration requirements of the Securities
Act.
MISCELLANEOUS
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
The Company may in the future seek to acquire untendered Old Notes, to the
extent permitted by applicable law, in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The Company has
no present plans to acquire any Old Notes that are not tendered in the
Exchange Offer or to file a registration statement to permit resales of any
untendered Old Notes.
HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS IN
CONNECTION WITH THE EXCHANGE OFFER.
29
<PAGE>
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange of the Old Notes
for New Notes pursuant to the Exchange Offer.
The net proceeds to the Company from the Offering were approximately $94.8
million, after deducting the Initial Purchasers' discount and other expenses
related to the Offering. The Company used the net proceeds of the Offering as
follows: (i) approximately $53.2 million to repay certain notes and other
indebtedness described below; (ii) approximately $17.9 million to consummate
the DMC Acquisition, (iii) $7.0 million to pay a dividend to holders of the
Company's capital stock, (iv) approximately $1.5 million to purchase an
84,000-square-foot facility and a 19,400-square-foot facility for the assembly
of the Company's products in Mt. Olive and Warsaw, North Carolina,
respectively, and (v) approximately $15.2 million for general corporate
purposes. Prior to the application of the net proceeds from the Offering as
described above, such funds were invested in short-term, investment grade
securities.
The notes and other indebtedness that were repaid with a portion of the net
proceeds to the Company from the Offering consisted of the following: (i)
$31.7 million outstanding as of November 5, 1997 under the credit agreement,
dated as of April 26, 1995, as amended (the "Bank Credit Facility"), between
the Company and LaSalle National Bank (the "Bank"), including $28.7 million
under the revolver, which bore interest at a variable rate based on the prime
rate or LIBOR (8.2% at November 5, 1997), and was scheduled to mature on May
31, 1999, and $3.0 million under a term note, which bore interest at a
variable rate based on the prime rate (9.25% at November 5, 1997) and was
scheduled to mature on June 1, 2001; (ii) $16.8 million principal amount of
Stockholder Notes (as defined herein) outstanding as of October 10, 1997,
which were repurchased at a discount for approximately $14.3 million on
January 2, 1998, and which bore interest at 8% and were scheduled to mature on
either May 1, 2002 or May 1, 2006 (see "Certain Relationships and Related
Transactions--Management Buyout--Redemption Agreements"); (iii) $3.5 million
outstanding as of November 5, 1997 under a note payable to The CIT
Group/Equipment Financing, Inc., which bore interest at 9% and was scheduled
to mature on April 30, 2000; (iv) $2.8 million outstanding under a note
payable to Metropolitan Life Insurance Company, which bore interest at 8.65%
and was scheduled to mature on July 1, 2006; (v) $0.8 million outstanding as
of November 5, 1997 under a note payable to American National Bank, which bore
interest at 82% of the bank's prime rate and was scheduled to mature on
November 1, 2007; and (vi) $0.1 million outstanding under a capital lease on
equipment, which bore interest at 8% and was scheduled to mature on March 1,
1998. Such notes and other indebtedness constituted approximately 95% of the
Company's indebtedness prior to the Offering. See Note 6 to Consolidated
Financial Statements.
30
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1997. The information set forth below should be
read in conjunction with the Consolidated Financial Statements and notes
thereto contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.................................. $ 18,572
=========
Long-term debt and capital leases (including current
portions):
Bank Credit Facility..................................... $ --
Notes offered hereby (net of unamortized discounts of
$1,626,000)............................................. 98,374
Other notes payable...................................... 18,157
---------
Total debt............................................. 116,531
---------
Stockholders' equity:
Voting common stock, par value $.01 per share, 6,900,000
shares authorized, 1,800,000 outstanding................ 18
Non-voting common stock, par value $.01 per share,
1,100,000 shares authorized, 200,000 shares outstanding. 2
Additional paid-in capital............................... 2,473
Cumulative translation adjustment........................ (869)
Retained earnings........................................ 19,125
Treasury stock, at cost, 4,833,652 shares voting common
stock; 859,316 shares non-voting common stock........... (25,533)
---------
Total stockholders' equity (deficit)................... (4,784)
---------
Total capitalization................................... $ 111,747
=========
</TABLE>
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
Set forth below is certain selected historical consolidated financial and
operating data for the Company as of and for the years ended December 31,
1993, 1994, 1995, 1996 and 1997. The selected historical consolidated
financial data for the years indicated were derived from the consolidated
financial statements of the Company, which were audited by Arthur Andersen
LLP. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and notes thereto
contained elsewhere in this Offering Memorandum.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1993(1) 1994(1) 1995(1) 1996 1997
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT:
Net sales.................. $94,427 $130,852 $141,191 $178,537 $220,758
Cost of sales.............. 76,053 106,037 115,004 135,696 164,607
------- -------- -------- -------- --------
Gross profit............... 18,374 24,815 26,187 42,841 56,151
Selling, general and
administrative expenses... 14,122 19,497 22,176 28,787 35,189
------- -------- -------- -------- --------
Operating income........... 4,252 5,318 4,011 14,054 20,962
Interest expense........... (1,175) (1,934) (2,894) (3,590) (6,174)
Write-off of affiliate
receivable(2)............. -- -- (3,423) -- --
Other income (expense),
net....................... (166) 461 548 674 943
------- -------- -------- -------- --------
Income (loss) from
continuing operations..... 2,911 3,845 (1,758) 11,138 15,731
Income (loss) from
discontinued operations... (880) (554) 280 (482) --
Extraordinary gain (loss)
on extinguishment of debt. -- (279) -- -- 2,119
Provision for income taxes. -- -- -- (157) (288)
------- -------- -------- -------- --------
Net income (loss).......... $ 2,031 $ 3,012 $ (1,478) $ 10,499 $ 17,562
======= ======== ======== ======== ========
OTHER DATA:
Cash flows provided by
(used in) operating
activities................ $ 1,082 $ 1,490 $ 2,448 $ 1,711 $ (3,578)
Cash flows provided by
(used in) investing
activities................ $(8,732) $(10,790) $ (5,377) $ 8,276 $(28,089)
Cash flows provided by
(used in) financing
activities................ $ 7,130 $ 9,219 $ 3,844 $ (9,435) $ 48,749
Depreciation and
amortization.............. $ 2,076 $ 2,679 $ 3,351 $ 3,153 $ 3,499
Capital expenditures....... $ 5,520 $ 10,907 $ 5,816 $ 3,834 $ 9,655
EBITDA(3).................. $ 6,162 $ 8,458 $ 7,910 $ 17,881 $ 25,404
EBITDA to interest......... 5.24 4.37 2.73 4.98 4.11
Earnings to fixed charges.. 3.06x 2.66x (4) 3.73x 3.14x
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............... $44,381 $ 60,205 $ 66,421 $ 67,572 $150,109
Working capital............ 4,424 3,984 8,085 15,252 49,050
Total debt................. 18,953 30,546 33,930 47,906 116,531
Total stockholders' equity
(deficit)................. 13,105 14,365 12,887 (5,381)(5) (4,784)
</TABLE>
- --------
(1) The Company signed an agreement to sell the working capital and fixed
assets of its Heritage Vinyl Division in December 1995 and completed the
sale in January 1996. The Company's 1994 and prior year financial
statements were restated to reflect this discontinued operation. See Note
3 to Consolidated Financial Statements.
(2) The write-off of the affiliate receivable resulted from a significant
customer, who is an affiliate of the Company, ceasing distribution
operations and selling its only division in December 1995. The write-off
of the affiliate receivable represents the portion of the remaining
receivable due that was not collectible. See Note 11 to Consolidated
Financial Statements.
(3) EBITDA represents income from continuing operations (excluding the write-
off of an affiliate receivable) plus interest expense (including
amortization of debt issuance costs), depreciation and amortization.
EBITDA is presented here to provide additional information about the
Company's ability to meet its future debt service, capital expenditure and
working capital requirements. EBITDA is not a measure of financial
performance under GAAP and should not be considered as an alternative
either to net income as an
indicator of the Company's operating performance, or to cash flows as a
measure of the Company's liquidity. Items excluded from EBITDA, such as the
write-off of an affiliate receivable, depreciation and amortization, are
significant components of the Company's financial statements and should be
considered in assessing the financial performance of the Company. EBITDA as
defined in this Prospectus may differ from similarly-titled measures
presented by other companies.
32
<PAGE>
(4) The ratio of earnings to fixed charges is expressed as the ratio of fixed
charges plus pretax earnings to fixed charges. Fixed charges include
interest on borrowings, amortization of deferred financing costs and the
interest portion of rent expense. Earnings were insufficient to cover
fixed charges for the year ended December 31, 1995 by $1.8 million.
(5) Total stockholders' deficit at December 31, 1996 resulted from a
management buyout of the Company's capital stock in June 1996. The Company
purchased its capital stock from selling shareholders using cash and
notes. In order to fund a portion of the cash payments made by the
Company, the Company obtained a $4.0 million term loan. See "Certain
Relationships and Related Transactions--Management Buyout" and Note 6 to
Consolidated Financial Statements.
33
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined statement of income of the
Company gives effect to the Offering, the application of the net proceeds
therefrom and the DMC Acquisition, as if such transactions had occurred on
January 1, 1997. The DMC Acquisition was consummated on November 5, 1997. See
"Business--DMC Acquisition."
For purposes of the accompanying pro forma combined statement of income,
acquisition-related adjustments, all made pursuant to the purchase method of
accounting, and other adjustments, have been reflected on an estimated basis
using the most recent information available. No assurances can be given that
the final determinations of the fair value of assets acquired and liabilities
assumed by the Company in the DMC Acquisition will not differ from the
adjustments presented herein. Such determinations will be made within one year
of the DMC Acquisition and are not expected to be materially different from
the estimates used herein.
The unaudited pro forma combined statement of income should be read in
conjunction with the separate historical financial statements and related
notes thereto of the Company and DMC included elsewhere in this Prospectus.
The pro forma combined statement of income does not purport to be indicative
of the results that actually would have been obtained had all the transactions
been completed as of the assumed date and are not intended to be a projection
of future results or trends.
34
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
GSI GROUP
YEAR ENDED
DECEMBER 31, DMC PRO FORMA PRO FORMA
1997 1997(1) ADJUSTMENTS(2) COMBINED
------------ ------- ------------- ----------
<S> <C> <C> <C> <C>
Net sales..................... $ 220,758 $28,161 $ -- $ 248,919
Cost of sales................. 164,607 20,703 582 185,892
---------- ------- ------- ----------
Gross profit................ 56,151 7,458 (582) 63,027
Selling, general and
administrative expenses...... 35,189 3,093 133 38,415
---------- ------- ------- ----------
Operating income............ 20,962 4,365 (715) 24,612
Interest expense.............. (6,174) (155) (4,438) (10,767)
Other income, net............. 943 -- -- 943
---------- ------- ------- ----------
Income from continuing
operations................. 15,731 4,210 (5,153) 14,788
Extraordinary gain on early
retirement of debt........... 2,119 -- -- 2,119
Provision (benefit) for income
taxes........................ 288 1,618 (233) 1,673
---------- ------- ------- ----------
Net income.................. $ 17,562 $ 2,592 $(4,920) $ 15,234
========== ======= ======= ==========
Net income per common share... $ 8.78 $ 7.62
========== ==========
Weighted average common
shares....................... 2,000,000 2,000,000
========== ==========
</TABLE>
- --------
(1) Amounts include DMC's actual results for the first ten months of 1997
prior to the DMC Acquisition. Results for the two months after the DMC
Acquisition are included in the Company's results of operations.
(2) Pro forma adjustments consist of the following:
<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER 31,
1996
------------
<S> <C>
Cost of goods sold--
Depreciation of property, plant and equipment increased to
fair market value........................................ $ 582
=======
Amortization--
Amortization of goodwill related to the DMC Acquisition
(40 year life)........................................... $ 133
=======
Interest expense--
Elimination of interest expense related to debt which was
retired with the Offering................................ $(4,625)
Interest expense on the Notes (10.25% annually)........... 8,627
Amortization of deferred financing costs incurred by the
Company to finance the Offering and the DMC Acquisition
(10 years)............................................... 298
Amortization of debt discounts (10 years)................. 138
-------
$ 4,438
=======
Benefit for income taxes--
Income tax effect of the pro forma adjustments related to
DMC at DMC's effective tax rate (40%).................... $ (233)
=======
</TABLE>
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the notes thereto appearing elsewhere in this
Prospectus.
GENERAL
The Company is a leading manufacturer and supplier of agricultural equipment
and services worldwide. The Company's grain, swine and poultry products are
used by producers and purchasers of grain, and by producers of swine and
poultry. Fluctuations in grain and feed prices directly impact sales of the
Company's grain equipment. Because the primary cost of producing swine and
poultry is the cost of the feed grain consumed by animals, fluctuations in the
supply and cost of grain to users of the Company's products also can impact
sales of the Company's swine and poultry equipment. The Company believes,
however, that its diversified product offerings mitigate some of the effects
of fluctuations in the price of grain since the demand for grain storage,
drying and handling equipment tends to increase during periods of higher grain
prices, which somewhat offsets the reduction in demand during such periods for
the Company's products by producers of swine and poultry. See "Business--
Industry Overview."
Sales of agricultural equipment are seasonal, with farmers traditionally
purchasing grain storage bins and grain drying and handling equipment in the
summer and fall in conjunction with the harvesting season, and swine and
poultry producers purchasing equipment during prime construction periods in
the spring, summer and fall. The Company's net sales and net income have
historically been lower during the first and fourth fiscal quarters as
compared to the second and third quarters. See "Risk Factors--Agricultural
Industry; Seasonality."
Although the Company's sales are primarily denominated in U.S. dollars and
are not affected by currency fluctuations, the production costs, profit
margins and competitive position of the Company are affected by the strength
of the U.S. dollar relative to the strength of the currencies in countries
where its products are sold. With respect to sales that are not denominated in
U.S. dollars, the Company enters into foreign currency forward exchange
contracts on a limited basis. See "Risk Factors--International Operations;
Exposure to Foreign Currency Risk."
The Company's international sales have historically comprised a significant
portion of net sales. In 1997, the Company's international sales accounted for
26.4% of net sales. During 1997, the Company opened manufacturing and sales
facilities in Malaysia, South Africa, Brazil and Mexico to promote
international expansion. While the Company anticipates that sales will
continue to be generated worldwide, the Company is targeting the Far East,
Latin America and Eastern Europe, where it believes the greatest potential for
significant growth exists.
The primary raw materials used by the Company to manufacture its products
are steel and polymers. Fluctuations in the prices of steel and, to a lesser
extent, polymer materials can impact the Company's cost of sales. From 1994
through 1996, the price of steel and polymers remained relatively constant.
The Company has experienced modest price decreases in steel and polymers
during 1997. See "Risk Factors--Raw Materials Price Volatility."
The Company's current business was founded in 1972 as a subsidiary of the
Sloan Implement Company, Inc. ("Sloan Implement"), a distributor of John Deere
farm equipment owned by the Sloan family. This subsidiary was later merged
into Sloan Implement and became its manufacturing division and Sloan Implement
changed its name to Grain Systems, Inc. ("Grain Systems"). In 1994, the farm
equipment distributor division of Grain Systems was spun off as a newly-formed
corporation with the manufacturing division surviving as Grain Systems. The
Company's 1994 and prior year financial statements were restated to exclude
the results of operations and financial position of the farm equipment
distributor division. In 1995, Grain Systems changed its name to The GSI
Group, Inc. and in 1996, all of the capital stock of the Company was acquired
by Craig Sloan
36
<PAGE>
and certain other executives of the Company. See "Certain Relationships and
Related Transactions--Management Buyout." The Company currently operates as a
Subchapter "S" corporation and, accordingly, is not subject to federal income
taxation for the periods for which financial information has been presented
herein. Because the Company's stockholders are subject to tax liabilities
based on their pro rata shares of the Company's income, it is the Company's
policy to make periodic distributions to its stockholders in amounts equal to
such tax liabilities. See "Certain Relationships and Related Transactions--
Other Related Party Transactions."
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales increased 23.6% or $42.2 million to $220.8 million in 1997
compared to $178.5 million in 1996. Of this 23.6% increase, 5.5% was a result
of increased sales of grain storage products resulting primarily from
historically high domestic grain prices in 1996 and 13.0% was a result of
increased domestic sales of swine and poultry equipment attributable to
continuing strong construction demand for larger swine facilities.
International sales of $58.2 million in 1997 were essentially flat compared to
sales of $55.5 million in 1996. Sales in Europe and Canada increased by $6.5
million and $3.7 million, respectively, due to stronger market penetration.
These increases were offset by decreased Mideastern and Asian sales of $4.5
million and $5.0 million, respectively, primarily due to the completion of
turn-key grain storage projects in 1996.
Gross profit increased to $56.2 million in 1997 or 25.4% of net sales
compared to $42.8 million or 24.0% of net sales in 1996. This increase
reflected the impact of increased sales, as well as the benefit of price
increases in the grain drying and farm storage equipment product lines. These
positive impacts were offset by a change in sales mix towards lower margin
products within the swine product line.
Selling, general and administrative expenses increased 22.2% or $6.4 million
to $35.2 million in 1997 from $28.8 million in 1996. This increase was
primarily due to a $4.3 million increase in selling, general and
administrative compensation attributable to increased staffing and an increase
in bad debt reserve of $1.2 million. As a percentage of net sales, selling,
general and administrative expenses decreased to 15.9% in 1997 compared to
16.1% in 1996.
Operating income increased 49.2% or $6.9 million to $21.0 million in 1997
compared to $14.1 million in 1996. Operating income margins increased to 9.5%
of net sales in 1997 from 7.9% in 1996. These increases were attributable to
the 23.6% increase in sales and were offset by increased selling, general and
administrative expenses.
Interest expense increased $2.6 million for 1997, reflecting borrowings used
to fund the Company's redemption of certain shares of its voting common stock
in June 1996 as well as interest expense on the Old Notes. See "Certain
Relationships and Related Transactions--Management Buyout."
Net income increased 67.3% or $7.1 million to $17.6 million for 1997
compared to $10.5 million in 1996. This increase was due to increased net
sales and gross profit margin partially offset by increased interest expense.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales increased 26.4% or $37.3 million to $178.5 million in 1996
compared to $141.2 million in 1995. Of this 26.4% increase, 4.7% was a result
of increased sales of grain storage products resulting primarily from
historically high domestic grain prices, 8.5% was a result of increased sales
of swine equipment resulting primarily from strong construction demand for
larger swine facilities, and 13.2% was a result of increased international
sales of swine, poultry and grain storage equipment resulting primarily from
regional market penetration in Canada of $7.6 million and successful bids on
turn-key grain storage projects in the Mideast of $7.5 million.
37
<PAGE>
Gross profits increased to $42.8 million in 1996 or 24.0% of net sales
compared to $26.2 million in 1995 or 18.5% of net sales. The increase in gross
profit reflected the impact of increased sales, together with operating
efficiencies and the return of certain raw material prices to levels more
consistent with recent historical levels. The operating efficiencies were
attributable to the implementation of a gain share program for the Company's
production associates, which the Company believes led to the development of
more efficient labor processes. The positive impacts of the above items were
partially offset by a change in sales mix towards newly-introduced, lower
margin products within the swine product line.
Selling, general and administrative expenses increased 29.8% or $6.6 million
to $28.8 million in 1996 from $22.2 million in 1995. As a percentage of net
sales, selling, general and administrative expenses increased to 16.1% in 1996
from 15.7% in 1995. These increases were primarily a result of the
introduction of a two-year employee bonus incentive program driven by total
company profitability and increased staffing in the international
sales/engineering functions, partially offset by the elimination of certain
non-essential positions in corporate functions and an increase in distribution
expense.
Operating income increased 250.4% or $10.0 million to $14.1 million for 1996
compared to $4.0 million for 1995. Operating income margins increased in 1996
to 7.9% of net sales in 1996 from 2.8% in 1995. These increases were
attributable to the 26.4% increase in net sales and improved gross margins and
were offset by increased selling, general and administrative expenses.
Interest expense increased $0.7 million for 1996, reflecting additional
borrowings used to fund the Company's redemption of certain shares of its
voting common stock in June 1996. See "Certain Relationships and Related
Transactions--Management Buyout." Interest income was essentially flat in 1996
compared to 1995.
Net income increased $12.0 million to $10.5 million in 1996 compared to a
loss of $1.5 million in 1995. This increase was due to increased operating
income and the negative impact in 1995 of the $3.4 million write-off of an
affiliate receivable. There was no write-off of an affiliate receivable in
1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales increased 7.9% or $10.3 million to $141.2 million in 1995 compared
to $130.9 million in 1994. This increase was driven by strong international
market penetration for grain storage, swine and poultry products.
Gross profits increased to $26.2 million in 1995 from $24.8 million in 1994,
representing 18.5% of net sales in 1995 and 19.0% of net sales in 1994. This
decrease in gross profit percentage on slightly higher sales volume reflected
the impact of the aggressive bidding on contracts in the international market.
Selling, general and administrative expenses increased 13.7% or $2.7 million
to $22.2 million in 1995 from $19.5 million in 1994. As a percentage of net
sales, selling, general and administrative expenses increased to 15.7% in 1995
from 14.9% in 1994. These increases were primarily the result of the hiring of
professional staff for focused product grouping support.
Operating income decreased 24.6% or $1.3 million to $4.0 million for 1995
compared to $5.3 million for 1994. Operating income margins decreased to 2.8%
of net sales in 1995 from 4.1% in 1994. These decreases were attributable to
lower margin product mix and increased selling, general and administrative
expenses.
Interest expense increased by $1.0 million for 1995 reflecting expanded
working capital needs. Other expense increased $3.4 million in 1995 due to the
non-recurring write-off of an affiliate receivable. The affiliate receivable
was owing to the Company from a customer of the Company that ceased
operations, making the $3.4 million affiliate receivable uncollectible. See
"Certain Relationships and Related Transactions--Transactions with Carolina
Agri-Systems, Inc. and Farm PRO, Inc."
38
<PAGE>
The Company experienced a loss of $1.5 million in 1995 compared to net
income of $3.0 million in 1994. This loss was due to decreased operating
income and the $3.4 million write-off of an affiliate receivable.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded capital expenditures, working capital
requirements, debt service, stockholder dividends and stock repurchases from
cash flow from its operations, augmented by temporary borrowings made under
various credit agreements.
The Company's working capital requirements for its operations are seasonal,
with investments in working capital typically building in the second and third
quarters and then declining in the first and fourth quarters. As of December
31, 1997, the Company had $49.1 million of working capital, an increase of
$33.8 million from working capital as of December 31, 1996. The increase in
working capital was primarily due to increased inventory of $27.1 million due
to the DMC Acquisition and increased finished goods levels to improve customer
response time.
Operating activities generated/(used) $2.4 million, $1.7 million and $(3.6)
million in cash flow in each of 1995, 1996 and 1997, respectively. The
decrease in cash flow from operating activities from 1995 to 1996 of $0.7
million was primarily the result of an increase of accounts receivable and
inventories of $4.5 million and a decrease of accounts payable, accrued
expenses and customer deposits of $4.5 million, offset by net income of $10.5
million in 1996 compared to a net loss of $1.5 million in 1995. The decrease
in cash flow from operating activities from 1996 to 1997 of $5.3 million was
primarily the result of an increase in inventories and vendor deposits of
$22.6 million, offset by increases in accounts payable and net income of $5.3
million and $7.1 million, respectively, compared to 1996. In addition, changes
in accounts receivable decreased $5.2 million compared to 1996.
The Company's capital expenditures totaled $5.8 million, $3.8 million and
$9.7 million in 1995, 1996 and 1997, respectively. Capital expenditures have
primarily been for machinery and equipment and the purchase and expansion of
facilities. The decrease in the Company's capital expenditures from 1995 to
1996 was primarily due to the Company's decision to lease rather than purchase
new machinery and equipment and additional facilities. The increase in 1997
reflects the Company's continued expansion and the conversion of leased to
purchased assets. The Company anticipates that capital expenditures will
average approximately $6.0 million to $7.0 million per year over the next five
years. Other investing activities that resulted in significant cash flow
included $8.0 million in proceeds from the sale of net assets of a
discontinued business, $2.1 million in payments received on notes receivable,
and $1.4 million in proceeds from sales of fixed assets, all of which occurred
in 1996. In 1997, other investing activity that resulted in significant cash
flow was the acquisition of DMC for $17.9 million, net of $0.2 million cash
acquired.
Cash provided by financing activities in 1995 was $3.8 million. The cash
resulted primarily from $3.5 million in net borrowings under the Bank Credit
Facility in 1995. Cash used in financing activities in 1996 consisted
primarily of $25.5 million for the acquisition of treasury stock partially
offset by $17.5 million in proceeds from the repayment of former stockholder
loans and $2.3 million in proceeds from the issuance of common stock. Cash
provided by financing activities in 1997 consisted primarily of $94.8 million
from the Offering partially offset by $29.3 million in repayment of long-term
debt and borrowing under the line of credit and $16.3 million of dividends.
The Company sold the assets of its Heritage Vinyl Products Division in
January 1996 and applied the net proceeds of approximately $8.0 million to
reduce outstanding indebtedness under various credit facilities. This
operation was accounted for as a discontinued operation in 1995.
The Company acquired all of the capital stock of DMC for an aggregate
purchase price of $17.9 million on November 5, 1997. The Company funded the
DMC Acquisition with a portion of the net proceeds from the Offering. See "Use
of Proceeds" and "Business--DMC Acquisition."
39
<PAGE>
The Company plans to continue to pursue a selective acquisition strategy
which may result in the need for additional debt or equity financing in the
future.
Upon consummation of the Offering, approximately 95% of the Company's
indebtedness was repaid with the net proceeds of the Offering. Also, upon
consummation of the Offering, the New Credit Agreement provided a revolving
credit and letter of credit facility of $40 million terminating in November
2000 with no scheduled amortization. Revolving loans under the New Credit
Agreement are available for working capital and general corporate purposes.
The New Credit Agreement contains a number of covenants that, among other
things, restrict the ability of the Company to dispose of assets, incur
additional indebtedness, pay dividends or make distributions, create liens on
assets, enter into sale and leaseback transactions, make investments, loans or
advances, make certain acquisitions, engage in mergers or consolidations,
issue capital stock and form subsidiaries and otherwise restrict certain
corporate activities. In addition, the Company is required to comply with
specified financial ratios and tests. See "Description of the New Credit
Agreement."
The Company believes that existing cash, cash flow from operations and
available borrowings under the New Credit Agreement will be sufficient to
support its working capital, capital expenditures and debt service
requirements for the foreseeable future.
INFLATION
The Company believes that inflation has not had a material effect on its
results of operations or financial condition during recent periods.
40
<PAGE>
BUSINESS
INTRODUCTION
The Company is a leading manufacturer and supplier of agricultural equipment
and services worldwide. The Company believes that it is the largest global
provider of both (i) grain storage bins and related drying and handling
systems and (ii) swine feed storage, feed delivery, confinement and
ventilation systems. The Company also is one of the largest global providers
of poultry feed storage, feed delivery, watering, ventilation, nesting, egg-
handling and hatching systems. The Company markets its agricultural products
in approximately 75 countries through a network of over 1,600 independent
dealers to grain, swine and poultry producers primarily under its GSI(R),
AP(TM) and Cumberland(R) brand names. The Company's current market position in
the industry reflects both the strong, long-term relationships the Company has
developed with its customers as well as the quality and reliability of its
products.
Craig Sloan, the Chief Executive Officer of the Company, founded its current
business in 1972. In 1995, the Company recruited additional management and in
1996, all of the capital stock of the Company was acquired by Mr. Sloan and
certain other executives of the Company. The Company's new management-led
ownership has implemented a growth strategy designed to position the Company
as the premier worldwide manufacturer and supplier of high-quality, cost
efficient grain, swine and poultry systems. In addition to capitalizing on
domestic and international growth opportunities, the Company's new management
has focused on profitability, production efficiencies and cost reductions
commenced during 1995. As a result, the Company has experienced rapid growth
in recent years. Net sales and operating income increased from $141.2 million
and $4.0 million, respectively, in 1995 to $178.5 million and $14.1 million,
respectively, in 1996, and were $220.8 million and $21.0 million,
respectively, in 1997. EBITDA increased from $7.9 million in 1995 to $17.8
million in 1996, and to $25.4 million in 1997. On a pro forma basis after
giving effect to the Offering, the application of the net proceeds therefrom
and the DMC Acquisition, EBITDA would have been $29.8 million for 1997.
The primary users of the Company's grain storage, drying and handling
products are farm operators or commercial businesses, such as the Archer-
Daniels-Midland Company and Cargill, Inc., that operate feed mills, grain
elevators, port storage facilities and commercial grain processing facilities.
The Company believes that its grain storage, drying and handling equipment is
superior to that of its principal competitors on the basis of strength,
durability, reliability, design efficiency and breadth of product offering.
The Company's feeding and ventilation systems are used primarily by growers
that raise swine and poultry, typically on a contract basis for large
integrators such as Murphy Family Farms, Perdue Farms Incorporated and Tyson
Foods, Inc. Because swine and poultry growers are partially compensated by
integrators based on the efficiency with which they convert feed to meat (the
"feed-to-meat ratio"), they seek to purchase systems which minimize the feed-
to-meat ratio. As a result of its proprietary designs, the Company believes
that its swine and poultry systems are the most effective in the industry in
serving this customer objective.
The industry in which the Company operates is characterized both
domestically and internationally by a few large companies, such as the
Company, with broad product offerings and numerous small manufacturers of
niche product lines. Domestically, the Company intends to build on its
established presence in the grain, swine and poultry markets. Internationally,
the Company intends to capitalize on growth opportunities arising from still-
developing agricultural industries and favorable trends in the demand for
grain, poultry and swine products. The Company believes that less functionally
sophisticated and efficient grain storage systems used by facilities located
outside the U.S. and Western Europe, which experience relatively high levels
of grain spoilage and loss, are increasingly likely to be replaced by more
modern systems. The Company also believes that the significant economic and
population growth occurring in the Company's international markets will
continue to result in consumers devoting larger portions of their income to
improved and higher-protein diets, stimulating stronger demand for poultry,
and to a lesser extent, pork. The Company believes that it is well-positioned
to capture expected increases in worldwide demand for its products resulting
from these industry trends because of its leading brand names, broad and
diversified product lines, strong distribution network and high-quality
products. See "--Industry Overview."
41
<PAGE>
The Company was incorporated in Delaware on April 30, 1964. The Company's
principal executive office is located at 1004 East Illinois Street,
Assumption, Illinois 62510 and its telephone number is (217) 226-4421.
COMPANY STRENGTHS
MARKET LEADER. The Company believes that it is the largest global provider
of both (i) grain storage bins and related drying and handling systems and
(ii) swine feed storage, feed delivery, confinement and ventilation systems.
The Company also is one of the largest global providers of poultry feed
storage, feed delivery, watering, ventilation, nesting, egg-handling and
hatching systems. The Company intends to continue to build its market share by
capitalizing on its strong reputation and the growth trends in worldwide
demand for grain, swine and poultry production.
PROVIDER OF FULLY-INTEGRATED SYSTEMS. The Company offers a broad range of
products that permits customers to purchase all of their grain, swine and
poultry production needs from one supplier. The Company believes that
providing fully-integrated systems significantly lowers total production costs
and enhances producer productivity by offering compatible products designed to
promote synergies and achieve maximum operating results. Dealers who purchase
fully-integrated systems also benefit from lower administrative and shipping
costs and the ease of dealing with a single supplier. The Company intends to
maintain its position as a provider of fully-integrated systems by continuing
to offer the most complete line of products available within its markets and
by developing and introducing new products. See "--Products."
BRAND NAME RECOGNITION AND REPUTATION FOR QUALITY PRODUCTS AND SERVICE.
Through its manufacturing expertise and experience, the Company has
established recognition in its markets for the GSI(R), AP(TM) and
Cumberland(R) brand names. The Company seeks to protect the reputation for
high quality, reliability and specialized services that are associated with
such brand names through extensive quality control and customer feedback
programs. The Company believes that its reputation and recognized brand names,
along with its extensive distribution network, will assist it in its efforts
to further penetrate both the domestic and international markets in which the
Company operates.
EFFECTIVE AND ESTABLISHED DISTRIBUTION NETWORK. The Company believes that
its development of a highly effective and established distribution network
affords it significant competitive advantages. The Company's distribution
network consists of over 1,600 independent dealers that market the Company's
products in approximately 75 countries throughout the world. The breadth and
scope of the Company's distribution network makes its products readily
available in each of the Company's markets and lowers transportation costs for
its customers. Dealers are carefully selected and trained to ensure high
levels of customer service. In addition, the Company has experienced a very
low turn-over rate of its dealers since the Company's inception, which
promotes consistency and stability to customers. See "--Product Distribution."
LONG-TERM ALLIANCES WITH CUSTOMERS. The Company has a history of developing
long-term alliances with customers who are market leaders in both the
industries and the geographic markets they serve. The Company works closely
with customers through all stages of product development in order to tailor
products and systems to meet each customer's unique needs, making
substitutions with competitor products more difficult. The Company's
commitment to product quality, dedication to customer service and
responsiveness to changing customer needs have enabled the Company to develop
and strengthen long-term alliances with its customers. The strength of the
Company's customer relationships are demonstrated by the fact that over 45% of
the Company's 1997 domestic net sales derived from grain equipment were made
to customers who have purchased from the Company for at least 10 years. In
addition, the Company has entered into long-term supply agreements with two of
its largest customers, which arrangements the Company believes are unique in
the industry.
FLEXIBLE MANUFACTURING FACILITIES. The Company's facilities are designed to
be easily reconfigured to adapt to demand changes for any or all of the
Company's products. The Company's primary manufacturing facility, located in
Assumption, Illinois, consists of approximately 675,000 square feet and
operates on a 24-hour basis
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during peak production periods. The Company's facilities employ state-of-the-
art machines that have enhanced production efficiency. The Company believes
that its current facilities will accommodate planned production increases as
the Company experiences sales growth and expands into new markets. See "--
Facilities."
COMPANY OPERATED AND OWNED BY EXPERIENCED MANAGEMENT TEAM. The Company is
led by an experienced management team, the members of which have each worked
in the agricultural products industry for an average of 16 years. Craig Sloan,
a founder and the Chief Executive Officer of the Company, and each of the
other members of the Company's senior management team have invested in the
Company and together own all of its voting common stock. The Company believes
that the agricultural expertise of its management team, coupled with the
corporate culture promoted by a management-owned company, permit it to
establish strong customer relationships and respond quickly to market
opportunities. See "Management--Executive Officers and Directors" and
"Ownership of Capital Stock."
BUSINESS STRATEGY
The Company's objective is to capitalize on its strengths through the
implementation of its business strategy, which includes the following
principal elements:
CAPITALIZE ON GROWTH OPPORTUNITIES IN INTERNATIONAL MARKETS. International
sales increased from approximately $36.9 million in 1995 to approximately
$55.5 million in 1996, and to approximately $58.2 million in 1997. The Company
intends to continue to leverage its worldwide brand name recognition, leading
market positions and international distribution network to capture the
significant demand for its products that exists in the international
marketplace. While the Company anticipates that sales will continue to be
generated worldwide, the Company is targeting the Far East, Latin America and
Eastern Europe, where it believes the greatest potential for significant
growth exists. The Company believes that increasing the diversity of both its
customer base and geographic coverage by expanding its international
operations will mitigate the effect of future reductions in demand within any
of its individual product lines, or within a particular geographic selling
region.
ENHANCE GROWTH THROUGH STRATEGIC ACQUISITIONS. The Company will continue to
selectively seek acquisitions with complementary product lines that offer the
opportunity to improve market penetration and profitability through
integration with the Company's existing businesses. The Company believes that
the markets in which it operates include single-product producers who may not
be able to effectively compete against larger integrated producers, such as
the Company, but which might benefit from economies of scale resulting from a
business combination with the Company. The Company recently acquired all of
the capital stock of DMC, a leading manufacturer and supplier of grain drying
and handling equipment, to complement the Company's grain equipment product
line.
CONTINUE DEVELOPMENT OF PROPRIETARY PRODUCT INNOVATIONS. The Company's
research and development efforts focus on the development of new and
technologically advanced products to respond to customer demands, changes in
the marketplace and new technology. The Company employs a strategy of working
closely with its customers and capitalizing on existing technology to improve
existing products and develop new value-added products. The Company believes
that it has an impressive record of new product development as is evidenced by
its improved Easy Access doors and Series 2000 dryers for grain bins, its
Performer Fan(TM) line of products for the swine industry and its patented HI-
LO(R) chicken feeders and Delta Series(TM) turkey feeders. The Company intends
to continue to actively develop product improvements and innovations to more
effectively serve its customers. See "--Products."
CONTINUE PROFITABILITY ENHANCEMENTS. The Company plans to continue to
actively manage its business to improve cash flows by containing costs,
selectively expanding production and improving productivity. The Company's
past success in enhancing profitability is evidenced by an EBITDA margin for
1997 of 11.5% compared to 10.0% for 1996 and 5.6% for 1995.
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DMC ACQUISITION
In furtherance of its business strategy, the Company, on November 5, 1997,
acquired all of the capital stock of DMC for approximately $17.9 million in
cash. The Company funded the DMC Acquisition with a portion of the net
proceeds from the Offering. See "Use of Proceeds."
DMC is a leading manufacturer and supplier of grain drying and handling
equipment. DMC manufactures equipment at its headquarters in Mason City, Iowa
and maintains six company-owned distribution facilities in Iowa, Nebraska,
Illinois, Arkansas, Indiana and South Dakota. DMC uses this distribution
network to market products to approximately 1,500 domestic and international
dealers. DMC recorded net sales and operating income of $29.0 million and $4.3
million, respectively, for the fiscal year ended October 31, 1997.
Approximately 52% of DMC's net sales during such period were derived from
products manufactured by DMC, with the remaining portion derived from
products, including augers, fans, heaters, floor supports and bucket elevators
and conveyors, that were purchased from manufacturers other than the Company.
International sales comprised approximately 13.5% of DMC's net sales for the
fiscal year ended October 31, 1997.
The Company believes that the DMC Acquisition has expanded the breadth of
the Company's grain equipment product line and will increase net sales and
operating income. Because the Company manufactures many of the products sold
but not manufactured by DMC, the Company supplies such products to DMC. The
Company will continue to leverage DMC's distribution network to increase sales
of the Company's swine equipment. In addition, the Company believes it can
increase sales of DMC products through dealers in the Company's distribution
network who currently handle products of competitors of DMC.
INDUSTRY OVERVIEW
Demand for the Company's products is driven by the overall worldwide level
of grain, swine and poultry production as well as the increasing focus both
domestically and internationally on improving productivity in these
industries. These markets are driven by a number of factors, including
consumption trends affected by economic and population growth and government
policies.
Demand for grain and the required infrastructure for grain storage, drying
and handling is driven by several factors, including the need for additional
grain for increased worldwide production of swine, poultry and beef. The
Company believes that less functionally sophisticated and efficient grain
storage facilities located outside the U.S. and Western Europe, which
experience higher levels of grain spoilage and loss, are increasingly likely
to be replaced by more modern equipment. The Company also believes that these
dynamics will continue to support rising domestic and international demand for
the Company's grain storage, drying and handling systems.
Demand for the Company's swine and poultry feeding equipment and feed
storage and delivery systems is positively impacted by the significant
economic and population growth occurring in certain international markets,
including Asia (where average annual gross domestic product growth rates over
the past ten years have been more than triple that of the U.S.), Latin America
and to a lesser extent, Eastern Europe. As a result of increasing disposable
income in these international markets, consumers are devoting larger portions
of their income to improved and higher protein-based diets. This has
stimulated stronger demand for meat, specifically poultry and, to a lesser
extent, pork, as these meats provide more cost-effective sources of animal
protein than beef.
The Company's sales of grain equipment have historically been affected by
feed and grain prices, acreage planted, crop yields, demand, government
policies, government subsidies and other factors beyond the Company's control.
Weather conditions also can adversely impact the agricultural industry and
delay planned construction activity, resulting in fluctuating demand for the
Company's grain equipment and delayed or lost revenues. Increases in feed and
grain prices have in the past resulted in a decline in sales of feeding,
watering and ventilation systems, although these same conditions have tended
to improve sales of grain storage bins. The Company's sales of swine and
poultry equipment historically have been affected by the level of construction
activity by swine and poultry producers, which is affected by feed prices and
domestic and international demand for pork and poultry. See "Risk Factors--
Agricultural Industry; Seasonality."
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GRAIN INDUSTRY
After several years of relatively slow growth, world grain production is
projected to increase more rapidly through 2005 to meet demand for grain
products. Widespread economic and population growth, which increases demand
for animal protein, is driving increased demand for world grain production.
The U.S. Federal Agricultural Improvement and Reform (FAIR) Act of 1996 and
continued crop yield enhancements are expected to permit increased worldwide
grain production to meet this demand. According to the United States
Department of Agriculture (USDA), increasing demand for grain, combined with a
shortage of crops due to poor weather in key growing regions in the last
several years, resulted in a tightening of inventory positions and the lowest
level of U.S. and worldwide grain reserves in recent history. Consequently,
grain prices have risen both in real and nominal terms over the last several
years, while also creating significant pricing volatility and variability
beyond the normal seasonal variations. Higher grain prices have greatly
increased the income and cash reserves of North American grain farmers
providing them with the means to invest in additional farm assets. Commodity
price variations provide incentives for grain producers and users to utilize
on-farm or commercial grain storage capacity to take advantage of favorable
points in the pricing cycle.
PORK INDUSTRY
Although U.S. pork production has experienced slow growth over the past 10
years, a recent trend towards industry consolidation from a large number of
small operators to a smaller number of larger, integrated operators is
creating increased demand for automated production systems, including feeding
and ventilation systems. Since 1980, the number of U.S. swine farms has fallen
from over 650,000 to under 200,000. Total U.S. pork production, however, has
increased from 14.0 billion pounds in 1986 to 17.1 billion pounds in 1996, due
in part to greater capital investment in automated systems by larger
operators. The Company believes that this consolidation is likely to further
lower production costs and therefore pork prices, which may have a favorable
impact on per capita pork consumption. Internationally, world pork production
is projected to grow at a rate of 2.8% per year from 1997 to 2000. The primary
growth areas for pork demand are expected to include Asia and Mexico with
growth also anticipated in the countries of the former Soviet Union and
central and eastern Europe. The Company believes that much of the production
is expected to shift from small unconfined manual facilities to more modern
automated, confined facilities, and to large U.S. swine integrators that
establish overseas facilities, resulting in lower production costs and
improved meat quality.
POULTRY INDUSTRY
The U.S. poultry industry has enjoyed steady growth over the past several
decades, with U.S. per capita consumption of poultry increasing from 42.8
pounds in 1975 to 90.1 pounds in 1996, a compound annual growth rate of 3.6%.
U.S. poultry production has grown annually at rates of between 5% and 7% over
the past decade and this trend is expected to continue into the foreseeable
future. World poultry production and consumption have grown at even greater
rates than the U.S. in the last two decades. Industry sources attribute these
increases to a number of factors, including consumers' rising disposable
incomes, population growth, declining relative prices of poultry to other
meats and product innovations such as the proliferation of pre-packaged and
value-added poultry products. Additionally, nutritional and health concerns
among consumers have led to poultry market share increases relative to red
meat due to poultry's relatively low fat, low cholesterol and high protein
content. International growth is projected to exceed the rate experienced in
the U.S. due to the rapid rate of international economic development and the
relatively low market share that poultry holds of the total meat market in a
number of developing countries. As a result of this growth to date and the
inability of a number of developing countries to increase their production
facilities at a like rate, U.S. broiler exports have grown at a compound
annual rate of 25% since 1985, with global poultry trade projected to grow at
approximately 4% annually through 2005. Consequently, the U.S. is now the
world's largest exporter of poultry and is expected to hold this position for
the foreseeable future. Despite steady growth in both domestic and
international poultry production and consumption, competitive pressures have
caused poultry equipment prices to decline and the market for poultry
equipment products has not expanded as rapidly. See "Risk Factors--
Competition."
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PRODUCTS
The Company manufactures and markets (i) grain storage bins and related
drying and handling equipment systems, (ii) swine feed storage, feed delivery,
confinement and ventilation systems and (iii) poultry feed storage, feed
delivery, watering, ventilation, nesting, egg-handling and hatching systems.
The Company offers a broad range of products that permits customers to
purchase their grain, swine and poultry production equipment needs from one
supplier. The Company believes that its ability to offer integrated systems
provides it with a competitive advantage by enabling producers to purchase
complete, integrated production systems from a single distributor who can
offer high-quality installation and service.
GRAIN PRODUCT LINE
The Company's grain equipment consists of the following products:
Grain Storage Bins. The Company manufactures and markets a complete line of
over 1,000 models of both flat and hopper bottomed grain storage bins with
capacities of up to 650,000 bushels. The Company markets its bins to both farm
and commercial end users under its GSI(R) brand name. The Company's grain
storage bins are manufactured using high-yield, high tensile, galvanized steel
and are assembled with high strength, galvanized bolts and anchor brackets.
The Company's grain storage bins offer efficient design enhancements,
including patented walk-in doors and a roof design that provides specialized
vents for increased efficiency, extruded lips for protection against leakage,
large and accessible eave and peak openings for ease of access, and reinforced
supportive bends to increase rigidity. The Company believes that its grain
storage bins are the most reliable and durable in the industry.
Grain Drying Equipment. To meet the need to dry grain for storage, the
Company manufactures and markets a complete line of over 100 models of grain
drying devices with capacities of up to 10,000 bushels per hour. The Company
markets its grain drying equipment to both farm and commercial end users under
its GSI(R) and Airstream(R) brand names. The Company's drying equipment, which
includes fans, heaters, top dryers, portable dryers, stack dryers and tower
dryers, are manufactured using galvanized steel and high-grade electrical
components and utilize patented control systems, which offer computerized
control of all dryer functions from one panel.
Grain Handling Equipment. During 1997, the Company began manufacturing and
marketing a complete line of grain handling equipment to complement its grain
storage and drying product offerings. The Company markets its grain handling
equipment, which includes bucket elevators, conveyors and augers, to both farm
and commercial end users under its GSI(R) brand name. The Company's grain
handling equipment offers ease of integration into Company or competitor
systems and enables the Company to offer a fully-integrated product line to
grain producers.
SWINE PRODUCT LINE
The Company's swine equipment consists of the following products:
Feeding Systems. The Company manufactures and markets its swine feeding
products under its AP(TM) brand name. The Company designs and implements
custom swine feeding systems to fit both the general industry needs of the
different types of swine producers and the specialized needs of individual
swine producers. The Company's swine feeding systems generally consist of a
feed storage bin located outside of the swine building and a feed delivery
system, which conveys the feed to and through the building to drop feed
dispensers suspended within the building. The drop feed dispensers provide
individualized feeding through automatic timers. The Company's swine feed
storage bins are manufactured with precision die-cut, high tensile corrugated
steel and assembled with an exclusive water tight sealing system and specially
die-formed eaves, and include the Auto-Lok(TM) access system, which allows for
efficient systems monitoring. The Company's swine feed delivery systems
consist of the Flex-Flo(TM) System and the Chain Disk System. The Flex-Flo(TM)
System uses high-quality
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tensile steel augers and precision control devices to reach all drop feeders
within a system. The Chain Disk System handles high capacities of feed at long
distances with multiple turns. The Company believes that its swine drop
feeders are superior to its competitors' products due to their ease of
installation and maintenance, ability to handle high volumes of feed, accurate
eye-level scales and strong, durable all-plastic construction that eliminates
corrosion.
Ventilation Systems. The Company manufactures and markets ventilation
systems for swine buildings under its AP(TM) and Airstream(R) brand names.
These systems consist of fans, heating and evaporative cooling systems,
winches, inlets and other accessories (including computer based automated
control devices) that regulate temperature and air flow. Proper ventilation
systems are crucial for minimizing the feed-to-meat conversion ratio by
reducing stress caused by extreme temperature fluctuation, allowing for higher
density production and providing optimum swine health through disease
prevention. The Company's swine ventilation systems produce high levels of air
output at low levels of power consumption, adapt to a wide array of specialty
fans and other accessories, operate with little maintenance or cleaning and
provide precision monitoring of environmental control.
Confinement Systems. The Company manufactures and markets confinement
systems for swine buildings under its AP(TM) brand name. These systems consist
of products for building pens, gates, inner dividing walls and flooring
systems, special heating systems for piglets and uniquely designed gestation
stalls. The Company's swine confinement systems are manufactured using high
tensile steel, and utilize advanced robotic welding, shot blasting and
electrostatic spraying techniques to assure a long-lasting finish that is
durable, corrosion resistant and easy to clean. The Company believes its swine
confinement products contain several design ingenuities. Two examples are the
Company's Hog-Hearth System, which provides heat to newborn piglets at lower
energy costs than are otherwise required in more conventional heating methods,
and the Company's plastic swine nursery flooring equipment, which provides
extra comfort for growing piglets and cleaning advantages for swine producers.
POULTRY PRODUCT LINE
The Company's poultry equipment consists of the following products:
Feeding Systems. The Company manufactures and markets its poultry feeding
systems under its Cumberland(R) brand name. The Company manufactures feeding
systems that are custom tailored to both the general industry needs of
different types of poultry producers and to the specialized needs of
individual poultry producers. The Company's poultry feeding systems consist of
a feed storage bin located outside the poultry house, a feed delivery system
that delivers the feed from the feed storage bin into the house and an
internal feed distribution system that delivers feed to the birds. The
Company's poultry feed storage bins contain a number of patented features
designed to maximize capacity, manage the quality of stored feed, prevent rain
and condensation from entering feed storage bins and provide first-in, first-
out material flow, thereby keeping feed fresh to prevent spoilage, and blended
to provide uniform quality rations. The Company's poultry feed delivery
systems use non-corrosive plastic and galvanized steel parts specially
engineered for durability and reliable operations and specialized tubing and
auguring or chain components that allow feed to be conveyed up, down and
around corners. The Company believes that its patented HI-LO(R) pan feeder is
superior to competitor products due to its unique ability to adjust from floor
feeding for young chicks to regulated feed levels for other birds.
Watering Systems. The Company manufactures and markets nipple watering
systems for poultry producers under its Cumberland(R) brand name. The ability
of a bird to obtain water easily and rapidly is an essential factor in
facilitating weight gain. The Company's poultry watering system consists of
pipes that distribute water throughout the house to drinking units supported
by winches, cables and other components. The water is delivered through a
regulator designed to provide differential water pressure according to demand.
The Company's poultry watering systems are distinguished by their toggle
action nipples, which transmit water from
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nipple to beak without causing undue stress on the bird or excess water to be
splashed onto the floor. The watering nipples produced by the Company also are
designed to allow large water droplets to form on the cavity of the nipple,
thereby attracting young birds to drink, which ultimately promotes weight
gain.
Ventilation Systems. The Company manufactures and markets ventilation
systems for poultry producers under its Cumberland(R) brand name. Equipment
utilized in such systems include fiberglass and galvanized fans, the Komfort
Kooler evaporative cooling systems, manual and automated curtain coolers,
heating systems and automated controls for complete ventilation, cooling and
heating management. The Company believes its poultry ventilation products are
reliable and easy to assemble in the field, permit energy-efficient airflow
management and are well-suited for international sales because they ship
compactly and inexpensively and assemble with little hardware and few tools.
Nesting and Egg-Handling Systems. The Company manufactures and markets
nesting and egg-handling systems for poultry producers under its Cumberland(R)
brand name. These systems consist of mechanical nests and egg collection
tables. The Company's nesting and egg-handling systems are manufactured using
high-yield, high tensile galvanized steel and are designed to promote comfort
for nesting birds and efficiency for production personnel. The Company
believes that its nesting and egg-handling systems are among the most reliable
and cost-effective in the poultry industry.
Hatching Systems. The Company manufactures and markets commercial incubation
systems for the poultry industry, with capacities of up to 115,200 eggs, under
its Cumberland(R) brand name. The Company provides incubation systems for
producers that grow each of the following types of poultry: breeders (chickens
grown to lay eggs); broilers (chickens grown for human consumption); and
turkeys. The Company believes that its incubation products are distinguished
by their efficient use of space, reliable control panels, effective airflow
mechanisms, versatility and durability, ease of access and sophistication of
tracking devices. The Company's Visionlink(TM) product allows incubators to be
managed from a personal computer, while its Tracer(TM) product facilitates
effective bar code tracing from the point of breeding to the point of
delivery.
In 1997, 1996 and 1995, no single class of the Company's products accounted
for 10% or more of the Company's net sales.
PRODUCT DISTRIBUTION
The Company distributes its products primarily through a network of over
1,600 U.S. and international independent dealers who offer targeted geographic
coverage in key grain, swine and poultry producing markets throughout the
world. The Company's dealers sell products to grain, swine and poultry
producers, agricultural companies and various other farm and commercial end-
users. The Company believes that its distribution network is one of the
strongest in the industry, providing its customers with high levels of
service. Since its inception, the Company has experienced a very low turn-over
rate of its dealers. The Company believes this has resulted in a reputation of
consistency in its products and stability with its customers. The Company
further believes that the high-level of commitment its dealers have to the
Company is evidenced by the fact that many of the Company's dealers choose not
to sell products of the Company's competitors.
The Company also maintains a sales force consisting of approximately 75
professionals. In addition to providing oversight services of the Company's
distribution network, the sales force interacts with integrators and end
users, recruits additional dealers for the Company's products, and educates
the dealers on the uses and functions of the Company's products. The Company
further supports and markets its products with a 27 person technical service
and support team, which provides training and advice to dealers and end users
regarding installation, operation and service of products and, when necessary,
on-site service.
In 1997 and 1996, no individual dealer or other customer represented more
than 10% of the Company's net sales. In 1995, the Company made aggregate net
sales of approximately $14.9 million to Carolina Agri-Systems, Inc. ("CASI")
and its wholly owned subsidiary, FarmPRO, Inc. ("FarmPRO"). These sales
constituted
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approximately 10.6% of the Company's net sales in 1995. See "Certain
Relationships and Related Transactions--Transactions with Carolina Agri-
Systems, Inc. and Farm PRO, Inc."
DOMESTIC DISTRIBUTION AND CUSTOMERS
The Company sells its products in the U.S. through a network of over 1,350
independent dealers who market, sell and, in many cases, install the Company's
products and provide post-sale technical support and service. Most of the
Company's domestic sales are made to dealers who market the Company's products
to grain, swine and poultry end-users. The Company also makes direct sales of
its products to end-users, such as large commercial grain producers or swine
or poultry "turn-key" contractors. The Company's domestic dealers generally
cover certain geographic areas but are not restricted from competing in other
geographic markets.
INTERNATIONAL DISTRIBUTION AND CUSTOMERS
The Company has more than 250 independent international dealers that market
the Company's products in approximately 75 countries outside of the U.S. The
Company prefers to sell its products to local dealers, while maintaining the
right to make direct sales to key international customers. When direct sales
are made, the Company provides engineering and construction management
support. The Company's international dealers generally represent specific
geographic areas and are responsible for the development of their respective
markets and dealer networks. While the Company anticipates that sales will
continue to be generated worldwide, the Company is targeting the Far East,
Latin America and Eastern Europe, where it believes the greatest potential for
significant growth exists.
The percentage of net sales generated by the Company by market region in
1995, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
United States........................................ 73.9% 68.9% 73.6%
Asia................................................. 11.5 10.5 6.2
Canada............................................... 4.0 7.4 7.7
Latin America........................................ 5.3 5.7 4.9
Mideast.............................................. 1.9 5.7 2.6
Europe............................................... 1.4 1.4 4.1
All other............................................ 2.0 0.4 0.9
----- ----- -----
Total............................................ 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
COMPETITION
The market for the Company's products is competitive. Domestically and
internationally, the Company competes with a variety of manufacturers and
suppliers that offer only a limited number of the products offered by the
Company. The Company believes that only one of its competitors, CTB
International Corp., offers products across most of the Company's product
lines. See "Risk Factors--Competition."
Competition is based on the price, value, reputation, quality and design of
the products offered and the customer service provided by distributors,
dealers and manufacturers of the products. The Company believes that its
leading brand names, diversified product lines, strong distribution network
and high quality products enable it to compete effectively. The Company
further believes that its ability to offer integrated systems to grain, swine
and poultry producers, which significantly lowers total production costs and
enhances producer productivity, provides it with a competitive advantage.
Integrated equipment systems offer significant benefits to dealers, including
lower administrative and shipping costs and the ease of dealing with a single
supplier for all of their customer needs. In addition, the Company's dealers
provide producers with high quality service, installation and repair.
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NEW PRODUCT DEVELOPMENT
The Company has a product development and design engineering staff of
approximately 45 people, most of whom are located in Assumption, Illinois.
Expenditures by the Company for product research and development were
approximately $1.6 million, $1.2 million and $1.4 million for the years ended
December 31, 1997, 1996 and 1995, respectively. The Company charges research
and development costs to operations as incurred. The Company anticipates
product research and development spending to continue at historic levels for
the foreseeable future.
RAW MATERIALS
The primary raw materials used by the Company to manufacture its products
are steel and polymer materials, including PVC pipe, polypropylene and
polyethylene. The Company also purchases various component parts that are
integrated into the Company's products. The Company is not dependent on any
one of its suppliers and in the past has not experienced difficulty in
obtaining materials or components. In addition, materials and components
purchased by the Company are readily available from alternative suppliers. The
Company has no long-term supply contracts for materials or components. See
"Risk Factors--Raw Materials Price Volatility."
REGULATORY AND ENVIRONMENTAL MATTERS
Like other manufacturers, the Company is subject to a broad range of
federal, state, local and foreign laws and requirements, including those
governing discharges to the air and water, the handling and disposal of solid
and hazardous substances and wastes, the remediation of contamination
associated with releases of hazardous substances at the Company's facilities
and offsite disposal locations, workplace safety and equal employment
opportunities. Expenditures made by the Company to comply with such laws and
requirements historically have not been material. See "Risk Factors--
Regulatory and Environmental Matters."
FACILITIES
The following table sets forth information regarding the principal
properties of the Company:
<TABLE>
<CAPTION>
LOCATION OPERATIONS SQUARE FEET LEASED/OWNED(2)
-------- ---------- ----------- ---------------
<S> <C> <C> <C>
Assumption,
Illinois Headquarters/Manufacturing/Sales Office 675,000 Owned
Paris, Illi-
nois
Main Plant Manufacturing 97,320 Owned
Colson Plant Assembly 80,000 Owned
Airport
Plant Manufacturing 38,000 Leased
Newton, Illi-
nois Manufacturing 126,000 Owned
Mt. Olive,
North Caro-
lina(1) Assembly 84,000 Owned
Vandalia, Il-
linois Assembly 67,500 Owned
Nova Odessa,
Brazil Manufacturing/Sales Office/Warehouse 50,000 Leased
Mt. Carmel,
Illinois Assembly 48,000 Leased
Geneva, Indi-
ana Sales Office/Warehouse 41,760 Leased
Penang, Ma-
laysia Manufacturing/Sales Office/Warehouse 36,000 Leased
Fourways,
South Africa Sales Office/Warehouse 20,000 Leased
Sioux City,
Iowa Sales Office/Warehouse 20,000 Leased
Warsaw, North
Carolina(1) Sales Office/Warehouse 19,400 Owned
Lenni, Penn-
sylvania Assembly 10,000 Leased
Sambeek, The
Netherlands Sales Office/Warehouse 8,000 Leased
Nogales, Mex-
ico Sales Office/Warehouse 1,000 Leased
Mason City,
Iowa Manufacturing/Sales Office 160,770 Owned
Watertown,
South Dakota Sales Office/Warehouse 17,500 Owned
Garrett, In-
diana Sales Office/Warehouse 15,000 Owned
Oakland, Il-
linois Sales Office/Warehouse 20,400 Owned
West Memphis,
Arkansas Sales Office/Warehouse 9,600 Owned
Hampton, Ne-
braska Sales Office/Warehouse 13,500 Owned
</TABLE>
50
<PAGE>
- --------
(1) Immediately following the consummation of the Offering, the Company used a
portion of the net proceeds from the Offering to purchase these facilities
from Carolina Agri-Systems, Inc. for approximately $1.5 million. See "Use
of Proceeds" and "Certain Relationships and Related Transactions--
Transactions with Carolina Agri-Systems, Inc. and FarmPRO, Inc."
(2) Upon consummation of the Exchange Offer, the Company's owned facilities
will remain subject to mortgages. The Company's leased facilities are
subject to various leases that expire between April 1, 1998 and July 1,
2000.
The Company believes that its facilities are suitable for their present and
intended purposes and have adequate capacity for the Company's current levels
of operation.
BACKLOG
Backlog is not a significant factor in the Company's business because most
of the Company's products are delivered within a few weeks of their order. The
Company's backlog at December 31, 1997 was $29.4 million compared to $17.1
million at December 31, 1996. The Company believes that all such backlog will
be filled by the end of 1998.
PATENTS AND TRADEMARKS
The Company protects its technological and proprietary developments. The
Company currently has 21 active U.S. patents and 18 U.S. trademarks. The
Company has been granted a license from Petersime NV, a Belgium Corporation,
for technical information and know-how in developing and manufacturing
incubators for poultry. See "Business--Products--Poultry Product Line--
Hatching Systems." While the Company believes its patents, trademarks and
licensed information have significant value, the Company does not believe that
its competitive position or that its operations are dependent on any
individual patent or trademark or group of related patents or trademarks.
PRODUCT LIABILITY AND LEGAL PROCEEDINGS
From time to time, the Company is involved in various litigation matters
involving ordinary and routine claims incidental to the Company's business.
Products sold by the Company may expose it to potential liabilities for
personal injury or property damage claims relating to the use of such
products. The Company maintains third-party product liability insurance which
it believes to be adequate. To date the aggregate costs to the Company for
claims, including product liability actions, have not been material. See "Risk
Factors--Product Liability Risk."
There are no legal proceedings pending against the Company which, in the
opinion of management, would have a material adverse effect on the Company's
business, financial position or results of operations.
EMPLOYEES
As of December 31, 1997, the Company had approximately 1,448 employees, of
which 1,238 were permanent and 210 were seasonal. None of the Company's
employees are represented by a union. Management believes that its
relationships with the Company's employees are good.
In July 1996, certain employees of the Company were granted individual
amounts of "gainshares" based on several factors, including experience and
responsibilities. This program provides for participating employees to receive
a percentage of the Company's pre-tax profits that are in excess of a
specified target level of the Company's net sales. Each participating
employee's portion is calculated based on the number of shares held. Total
expenses to the Company under this plan were $3.2 million and $2.3 million in
1997 and 1996, respectively.
51
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's bylaws provide that the number of directors shall be four.
Each director is elected to serve until the next annual meeting and until his
or her successor has been elected and qualified or until his or her earlier
resignation or removal. Executive officers are elected by the Board of
Directors and serve until their successors have been elected and qualified or
until their earlier resignation or removal.
The following table sets forth certain information concerning the executive
officers and directors of the Company as of December 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Craig Sloan............. 47 Chief Executive Officer and Director
Jorge Andrade........... 46 President, Chief Operating Officer and Director
John W. Funk............ 38 Executive Vice President, Chief Financial Officer,
General Counsel, Secretary and Director
Howard G. Buffett....... 43 Chairman of the Board of Directors
Eugene A. Wiseman....... 48 President of GSI Division
David L. Vettel......... 39 President of GSI International Division
Allen A. Deutsch........ 47 President of AP Division
Christopher V. van 42 President of GSI/Cumberland International and
Rossem................. Cumberland Hatchery Systems Divisions
Charles L. Jordan....... 41 President of Cumberland Division
Russell C. Mello........ 36 Vice President, Finance, Assistant Secretary and
Assistant Treasurer
Mark S. Waters.......... 48 Vice President, International Operations
</TABLE>
CRAIG SLOAN joined the Company in November 1971. Mr. Sloan has been Chief
Executive Officer since December 1993. From December 1974 to December 1993, he
served as President of Grain Systems, Inc., a former subsidiary of the
Company. Mr. Sloan has been a Director of the Company since December 1972.
JORGE ANDRADE joined the Company in April 1993. Mr. Andrade has been Chief
Operating Officer since January 1995. Mr. Andrade also has been President
since April 1996. From April 1993 to December 1994, he served as President of
the Cumberland Division. From March 1987 to March 1993, he served as Executive
Vice President of Chick Master Incubator Company, an international
manufacturer of high-capacity incubators for poultry. Mr. Andrade has been a
Director of the Company since April 1996.
JOHN W. FUNK joined the Company in December 1995 and has been General
Counsel since that time. Mr. Funk also has been Executive Vice President,
Chief Financial Officer and Secretary since April 1996. From May 1994 to
December 1995, he served as Chief Operating Officer of Behnke & Company, Inc.,
a commercial insurance agency. From October 1988 to January 1994, he served as
In-House Counsel to A.E. Staley Manufacturing Company, a grain processing
company. From September 1985 to October 1988, he was an associate at the New
York law firm of Brown & Wood. Mr. Funk has been a Director of the Company
since April 1996.
HOWARD G. BUFFETT joined the Company in September 1995. Mr. Buffett has been
Chairman of the Board since June 1996. From September 1995 to June 1996, he
served as President of International Operations. From February 1992 to July
1995, he served as Corporate Vice President and Assistant to the Chairman of
the Archer-Daniels-Midland Company, a processor of agricultural products. Mr.
Buffett has been a Director of the Company since September 1995. Mr. Buffett
also is a Director of Berkshire Hathaway, Inc., Coca-Cola Enterprises, Inc.,
Lindsay Manufacturing Company and Vision Solutions, Inc.
52
<PAGE>
EUGENE A. WISEMAN joined the Company in October 1978. Mr. Wiseman has been
President of the GSI Division since December 1996. From December 1994 to
December 1996, he served as Vice President of the GSI Division. From March
1990 to December 1994, he served as Division Manager of the GSI Division.
Prior thereto, Mr. Wiseman held various sales and management positions.
DAVID L. VETTEL joined the Company in November 1993. Mr. Vettel has been
President of the GSI International Division since December 1995. From November
1993 to December 1995, he served as Vice President of the GSI International
Division. From November 1991 to November 1993, he served as International
Sales Manager of Chief Industries, Inc., a manufacturer of steel buildings and
grain storage bins.
ALLEN A. DEUTSCH joined the Company in January 1993. Mr. Deutsch has been
President of the AP Division since June 1996. From April 1995 to June 1996, he
served as Vice President of the AP Division. From January 1993 to April 1995,
he served as National Sales Manager of the AP Division. From August 1983 to
January 1993, he served as Sales Manager of AAA Associates, Incorporated, a
manufacturer and marketer of livestock ventilation systems, which business was
acquired by the Company in January 1993.
CHRISTOPHER V. VAN ROSSEM joined the Company in October 1993 and has been
President of the GSI/Cumberland International Division since that time. Mr.
van Rossem also has been President of the Cumberland Hatchery Systems Division
since August 1997. From June 1989 to October 1993, he served as Sales Manager
of Chick Master Incubator Co., an international manufacturer of high-capacity
incubators for poultry, where he managed the company's United States and
Canadian sales departments.
CHARLES L. JORDAN joined the Company in May 1975. Mr. Jordan has been
President of the Cumberland Division since March 1996. From May 1989 to March
1996, Mr. Jordan held various sales and operation management positions with
the Cumberland Division. Prior thereto, Mr. Jordan held various regional
management positions.
RUSSELL C. MELLO joined the Company in March 1995. Mr. Mello has been Vice
President, Finance and Assistant Secretary and Assistant Treasurer since
September 1996. From March 1995 to September 1996, he served as the Controller
of the GSI Division. From December 1993 to March 1995, he served as Manager of
Business Planning of Emerson Hermetic Motor Division, a division of Emerson
Electric Company, a manufacturer of commercial and industrial motors. From
March 1990 to December 1993, he served as Controller of Copeland Electric,
Inc., a subsidiary of Emerson Electric Company.
MARK S. WATERS joined the Company in September 1997 as Vice President,
International Operations. From January 1995 to September 1997, he served as
Controller, Latin America of Federal-Mogul Corporation, a manufacturer and
distributor of automotive parts. From January 1992 to December 1995, he served
as International Accounting Manager of Federal-Mogul Corporation. Mr. Waters
is a certified public accountant.
Messrs. Sloan, Andrade, Funk and Buffett serve as members of the Company's
Board of Directors pursuant to a voting agreement. See "Certain Relationships
and Related Transactions--Management Buyout--Stockholder Agreements."
53
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth in summary form all compensation for all
services rendered in all capacities to the Company for the year ended December
31, 1997 of the Company's Chief Executive Officer and the other four most
highly compensated executive officers of the Company (the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
----------------- ALL OTHER
NAME & PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
------------------------- ---- -------- -------- ---------------
<S> <C> <C> <C> <C>
Craig Sloan............................. 1997 $170,000 $100,000 $1,060
Chief Executive Officer and Director
Jorge Andrade........................... 1997 $160,000 $145,000 $3,099
President, Chief Operating Officer and
Director
John W. Funk............................ 1997 $150,000 $116,250 $2,704
Chief Financial Officer, General
Counsel, Secretary and Director
Howard G. Buffett....................... 1997 $235,000 $ 25,000 --
Chairman of the Board
Christopher van Rossem.................. 1997 $124,616 $ 55,144 $ 935
President of GSI/Cumberland
International Division
</TABLE>
- --------
(1) Consists of matching contributions by the Company to Company sponsored
401(k) plans.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Sloan,
Andrade, Funk and Buffett (each, an "Executive"). The terms of each
Executive's employment agreement are substantially the same. Each agreement
provides for a specified minimum annual base salary, subject to increases
determined by the Company's Board of Directors, and participation in any
profit sharing, retirement, insurance or other benefit plans maintained by the
Company.
The employment agreement of each Executive will terminate as of the earliest
of: (i) June 6, 2001; (ii) the last day of the month in which the Executive's
death occurs; or (iii) ninety days after the date the Company gives the
Executive notice of termination if such termination is for "cause" or due to
the Executive being "permanently disabled" (as such terms are defined in the
employment agreement). The Company may not terminate an Executive, with or
without cause, unless such termination has been authorized by a resolution
adopted by the Board at a meeting duly called and held, and where the
Executive is given prior written notice of the basis for his termination and
an opportunity to be heard by the Board at such meeting. In addition, the
Executive may not be terminated for cause unless: (i) the Company has followed
the foregoing procedures and (ii) the Executive is given an opportunity to
cure any of the actions or omissions which form the basis for his termination
within 30 days of the adoption of the Board resolution described above. If
employment is terminated due to permanent disability, the Executive will
continue to receive an annual salary (less any benefits paid during the period
of his disability under the Company's disability insurance programs) and other
benefits until such time that the Executive sells his stock to the Company
pursuant to the terms of certain stockholder agreements among the holders of
the Company's voting stock. See "Certain Relationships and Related
Transactions--Management Buyout--Stockholder Agreements." If employment is
terminated without cause after December 6, 1999, the Executive will receive at
a minimum, immediately upon such termination, a severance payment equal to the
greater of: (i) eighteen months salary at the Executive's then current rate;
or (ii) in the case of Mr. Sloan, $594,682; in the case of Messrs. Andrade and
Buffett, $450,000; and in the case of Mr. Funk, $375,000. There is no
provision for severance payments if employment is terminated without cause
prior to December 6, 1999.
Each employment agreement also provides that during the Executive's
employment with the Company, and for two years thereafter, the Executive will
not be employed by or otherwise engage in any business that is in
54
<PAGE>
competition with the Company, except that the Executive may: (i) invest in
such a business where the stock of such business is traded on a national
securities exchange and the Executive owns less than 1% of the equity of such
business; (ii) serve on the board of directors of any corporation on which the
Executive is serving as of the date of his termination; and (iii) invest in
any business in which the Executive has an investment as of the date of his
termination. If the Executive is terminated by the Company without cause, the
foregoing covenant not to compete is null and void.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during 1996. All members
of the Company's Board of Directors participated in deliberations regarding
executive officer compensation during 1996. See "Certain Relationships and
Related Transactions." During 1996, no member of the Company's Board of
Directors served as a director or a member of the compensation committee of
any other company of which any executive officer served as a member of the
Company's Board of Directors.
DIRECTOR COMPENSATION
Each director of the Company will receive an annual fee of $10,000 plus a
fee or $5,000 for each Board of Directors meeting attended, with such
attendance fees being capped at $40,000, in the aggregate, per year.
OWNERSHIP OF CAPITAL STOCK
The following table sets forth certain information as of December 31, 1997
with respect to the shares of the Company's voting common stock and non-voting
common stock beneficially owned by (i) each person or group that is known by
the Company to beneficially own more than 5% of the outstanding common stock,
(ii) each director of the Company, (iii) the Named Executives and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
NON-VOTING
VOTING COMMON STOCK COMMON STOCK (2)
-------------------- ------------------
NUMBER PERCENTAGE
NUMBER OF PERCENTAGE OF OF NON-
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OF VOTING SHARES VOTING
------------------------------------ --------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Craig Sloan (1)........................ 1,175,000 65.28% 26,497 13.25%
Jorge Andrade (1)...................... 300,000 16.67% -- --
John W. Funk (1)....................... 225,000 12.50% -- --
Howard G. Buffett (1).................. 100,000 5.55% -- --
Christopher van Rossem (1)............. -- -- 15,773 7.89%
Directors and executive officers as a
group (11 persons in group)........... 1,800,000 100.00% 129,022 64.51%
</TABLE>
- --------
(1) The address of each stockholder is c/o The GSI Group, Inc., 1004 East
Illinois Street, Assumption, Illinois 62510, (217) 226-4421.
(2) The Company has 200,000 shares of non-voting common stock outstanding.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT BUYOUT
Prior to June 1996, the Company was owned by Larry Sloan, an uncle of Craig
Sloan, and by Craig Sloan, Tom Sloan and Jim Sloan, all of whom are brothers.
In June 1996, Craig Sloan and three other executives of the Company acquired
all of the Company's voting stock (the "Management Buyout"). The Management
Buyout generally consisted of a redemption by the Company of certain shares of
its voting stock and a subsequent purchase of shares by certain executives of
the Company. In connection with the Management Buyout, the new owners of the
Company's stock also entered into certain stock restriction and buy-sell
agreements. The various components of the Management Buyout are described in
more detail in the sections that follow.
55
<PAGE>
REDEMPTION AGREEMENTS
In May 1996, the Company entered into Stock Redemption Agreements with Larry
Sloan, Tom Sloan and Jim Sloan (the "Selling Stockholders") pursuant to which
the Company agreed to redeem all the Selling Stockholders' capital stock (the
"Redemption"). The aggregate purchase price paid by the Company for stock
purchased in the Redemption was $25,490,444, which consisted of payments of
$15,600,000, $5,264,357 and $4,626,087 to Larry Sloan, Tom Sloan and Jim
Sloan, respectively. The purchase price consisted of (i) notes (the
"Stockholder Notes") totaling $17,490,444 issued by the Company to Larry
Sloan, Tom Sloan and Jim Sloan in amounts of $10,600,000, $2,264,357 and
$4,626,087, respectively, and (ii) cash totaling $8,000,000, which consisted
of payments to Larry Sloan and Tom Sloan of $5,000,000 and $3,000,000,
respectively. The Stockholder Notes, which bear interest at 8% and mature on
either May 1, 2002 or May 1, 2006, were repaid at a discount with a portion of
the net proceeds to the Company from the Offering. See "Use of Proceeds."
Immediately following the Redemption, Craig Sloan became the sole stockholder
of the Company, owning 1,125,000 shares of voting common stock and 200,000
shares of newly issued non-voting common stock.
STOCK PURCHASE AGREEMENTS
In June 1996, the Company entered into Stock Purchase Agreements with Craig
Sloan, the Company's Chief Executive Officer, Jorge Andrade, the Company's
Chief Operating Officer, John W. Funk, the Company's Chief Financial Officer,
General Counsel and Secretary, and Howard G. Buffett, the Company's Chairman
of the Board, pursuant to which such individuals purchased from the Company an
aggregate of 675,000 shares of the Company's voting stock for a total cash
purchase price of $2,250,000. Pursuant to such Stock Purchase Agreements,
Jorge Andrade purchased 300,000 shares for $1,000,000, John W. Funk purchased
225,000 shares for $750,000, Howard G. Buffett purchased 100,000 shares for
$333,333, and Craig Sloan purchased 50,000 shares for $166,667. Upon
completion of such purchases, Craig Sloan, Jorge Andrade, John W. Funk and
Howard G. Buffett (collectively the "New Stockholders") owned 100% of the
Company's voting stock.
STOCK PLEDGE, SUBORDINATION AND GUARANTEE AGREEMENTS
To fund a portion of the $8,000,000 in cash payments made in connection with
the Redemption by the Company to Larry Sloan and Tom Sloan, the Company
obtained a $4,000,000 term loan (the "Loan") from the Bank. In order to (i)
induce the Bank to make the Loan, (ii) encourage the Selling Stockholders to
sell their stock in the Redemption and (iii) obtain necessary consents for the
Redemption from various other creditors of the Company, the Selling
Stockholders, the Company, the Bank, the New Stockholders and various other
creditors of the Company entered into various Stock Pledge Agreements,
Subordination Agreements and Guarantees under which (i) the New Stockholders
pledged all their stock (the "Collateral") to the Bank to secure the Company's
obligations under the Loan, (ii) the New Stockholders pledged an applicable
percentage of the Collateral to each of the Selling Stockholders to secure the
Company's obligations under each of the Stockholder Notes, (iii) the Selling
Stockholders agreed to subordinate their rights to their proportionate shares
in the Collateral to the Bank's rights in the Collateral and (iv) the Selling
Stockholders agreed to subordinate their rights to payments under the
Stockholder Notes to both the rights of the Bank to payments under the Loan
and to the rights of various other creditors to payments from the Company
under certain other credit facilities. Upon consummation of the Offering and
application of the net proceeds therefrom, the pledges of Collateral by the
New Stockholders to the Bank and the Selling Stockholders terminated. See "Use
of Proceeds."
In connection with the Redemption, each of Craig Sloan, Jorge Andrade and
John Funk also (i) made personal guarantees of certain obligations of the
Company to various creditors and (ii) entered into Indemnification and
Guarantee Agreements with each of the Selling Stockholders whereby such
individuals agreed to indemnify each of the Selling Stockholders for losses
arising from guarantees made by the Selling Stockholders of certain
obligations of the Company and its affiliates to certain creditors of the
Company and its affiliates that did not release the Selling Stockholders from
their obligations under such guarantees.
56
<PAGE>
STOCKHOLDER AGREEMENTS
In connection with the Management Buyout, the Company and the New
Stockholders entered into a Stock Restriction and Buy-Sell Agreement and the
New Stockholders entered into a Stock Restriction and Cross Purchase Agreement
(the "Stockholder Agreements"). The Stockholder Agreements define the rights
of the New Stockholders with respect to their ownership of the Company's
shares. These agreements generally (i) provide that the holders of a majority
of the stock may sell all of their shares at any time if the other New
Stockholders are entitled to participate in such sale on the same terms and
conditions, and that the holders of a majority of the stock may require the
other New Stockholders to sell all their stock at the same time on the same
terms and conditions, (ii) establish that the New Stockholders are restricted
in their ability to sell, pledge or transfer such shares, (iii) grant rights
of first refusal, first to the Company and then to all non-transferring
stockholders, with respect to the transfer of any shares, (iv) require that an
affirmative vote by a majority of the Company's voting stock is required to
approve certain corporate matters and (v) establish procedures for the
purchase of shares by the Company (subject to compliance with the terms of the
Indenture) or any remaining New Stockholders upon the death, permanent
disability or termination of employment of any New Stockholder. Each of the
New Stockholders is covered by life insurance policies, the proceeds of which
generally will be used to fund the purchase of shares from the estate of a
deceased New Stockholder. The Stockholder Agreements also (i) provide that the
holders of a majority of the Company's shares may cause the Company to
register their shares in an underwritten public offering and (ii) grant piggy-
back registration rights to the New Shareholders in the event of an
underwritten public offering.
In addition, the Company, the New Stockholders and each of the holders of
the Company's non-voting common stock have entered into an agreement that (i)
provides that the holders of non-voting common stock are entitled to sell
their shares on the same terms and conditions in the event the New
Stockholders transfer a majority of the voting stock, (ii) provides that the
holders of the non-voting common stock must under certain circumstances agree
to sell their shares on the terms and conditions approved by the Company's
Board of Directors, (iii) establishes that the holders of the non-voting
common stock are restricted in their ability to sell, pledge or transfer such
shares, (iv) grants rights of first refusal, first to Mr. Sloan and then to
the other New Stockholders, with respect to the transfer of any non-voting
common stock to other non-voting stockholders and (v) establishes procedures
for the purchase of shares by Mr. Sloan, the other New Stockholders and the
Company (subject to compliance with the terms of the Indenture) upon the
death, permanent disability or termination of employment of any holder of non-
voting common stock. The agreement also grants piggy-back registration rights
to the holders of non-voting common stock in the event of an underwritten
public offering.
TRANSACTIONS WITH CAROLINA AGRI-SYSTEMS, INC. AND FARMPRO, INC.
In March 1993, certain members of the Sloan family acquired CASI, a company
that sold various products to swine contractors and growers. Larry Sloan owns
50% of the capital stock of CASI, while Craig Sloan, Jim Sloan and Tom Sloan
each own approximately 16.7% of the capital stock of CASI. In 1995, CASI
ceased distribution operations and the Company wrote-off a $3.4 million
receivable from CASI. Prior to the consummation of the Offering, the Company
leased two facilities that were owned by CASI. The first lease (the "Mt. Olive
Lease") was for a facility located in Mt. Olive, North Carolina (the "Mt.
Olive Facility"), which the Company uses for the assembly of hatchery
equipment. The Company made payments to CASI under the Mt. Olive Lease of
$138,600 during 1997, and of $184,800 during 1996. The other lease of property
owned by CASI (the "Warsaw Lease") was for property located in Warsaw, North
Carolina (the "Warsaw Facility"), which the Company uses as a sales office and
warehouse facility for the sale of swine equipment. The Company made payments
to CASI under the Warsaw Lease of $14,400 during 1997, and of $19,200 during
1996. On November 5, 1997 and November 10, 1997, respectively, the Company
purchased the Mt. Olive Facility and the Warsaw Facility from CASI for
$1,348,203 and $183,928, respectively. In 1996 and 1995 the Company also made
sales in the ordinary course of business of swine and poultry equipment to
CASI in the amounts of $0.1 million and $6.0 million, respectively.
57
<PAGE>
FarmPRO, a company that sells swine equipment, is a significant customer of
the Company. FarmPRO, formerly a wholly owned subsidiary of CASI, was sold by
CASI to certain management members of FarmPRO at the end of 1995. Craig Sloan
has not been affiliated with FarmPRO since such sale. Concurrently with such
sale, the Company and FarmPRO entered into a long-term supply agreement
pursuant to which FarmPRO agreed to purchase 90% of its equipment requirements
from the Company. On November 28, 1997, the Company became a guarantor of
FarmPRO's $6.0 million bank credit facility, which guarantee is a senior
secured obligation of the Company. Sales by the Company to FarmPRO were
approximately $16.5 million, $12.8 million, and $8.9 million for 1997, 1996
and 1995, respectively.
OTHER RELATED PARTY TRANSACTIONS
The Company makes sales in the ordinary course of business to Sloan
Implement Company, Inc., a supplier of agricultural equipment that is owned by
certain family members of Craig Sloan. Such transactions generally consist of
sales of grain equipment and amounted to $173,192, $129,009 and $315,938 for
1997, 1996 and 1995, respectively. The Company believes that these
transactions were, and future transactions with Sloan Implement Company, Inc.
will be, on terms no less favorable to the Company than could have been
obtained from an independent third party in arm's length transactions. In June
1996, Sloan Implement Company, Inc. repaid a note to the Company in the amount
of $1.8 million that was incurred in connection with certain corporate
restructuring activities between the two previously affiliated entities.
The Company has made payments to Sloan Transport, Inc., a company formerly
owned by Craig Sloan and certain other Sloan family members, for the use of a
private plane. Such payments were in the amounts of $76,854, $152,880 and
$220,040 for the years 1996, 1995 and 1994, respectively. In 1996, Sloan
Transport Inc. sold all of its assets and was dissolved.
From time to time the Company extends demand loans to its officers and
directors for the payment of taxes incurred as a result of the Company's
Subchapter "S" status. The annual interest rate on such loans is based on the
prime rate, and has fluctuated between 8.75% and 8.25% during the last three
years. No loans were outstanding for Craig Sloan, Jorge Andrade, John W. Funk
and Howard G. Buffett at December 31, 1997. The largest amount outstanding for
each individual during 1997 was $551,868, $256,350, $192,400 and $86,350,
respectively. The Company also extended similar loans to Larry Sloan, Tom
Sloan and Jim Sloan, which were repaid in connection with the Redemption. The
largest amounts outstanding under such loans during 1996 were $505,255,
$65,916 and $348,081, respectively, and during 1995 were $579,058, $43,485 and
$418,148, respectively. During 1995, Craig Sloan advanced loans to the Company
for general corporate purposes. These loans, which bore interest at the prime
rate, were repaid in full during 1996. The largest amount outstanding under
such notes during 1995 was $393,803.
58
<PAGE>
DESCRIPTION OF THE NEW CREDIT AGREEMENT
Concurrently with the consummation of the Offering, the Company entered into
an Amended and Restated Credit Agreement (the "New Credit Agreement") with the
Bank, which amended the Bank Credit Facility. The New Credit Agreement
provides for a revolving credit and letter of credit facility of $40,000,000
terminating in November 2000. The New Credit Agreement bears interest at a
floating rate per annum equal to (at the Company's option): (i) 0.55% to 1.45%
over LIBOR based on the Company's total debt to EBITDA ratio or (ii) the
Bank's prime rate as in effect from time to time. The New Credit Agreement is
available for working capital and general corporate purposes. The Company is
required under the New Credit Agreement to pay the Bank a facility fee on a
quarterly basis. The obligations of the Company under the New Credit Agreement
are secured by a security interest in substantially all of the assets and
properties of the Company. In March 1998, the Bank committed to refinance an
existing $6,250,000 line of credit with another lender. When the refinancing
is complete, availability under the New Credit Agreement will be reduced by
$5,000,000.
The New Credit Agreement contains a number of covenants that, among other
things, restrict the ability of the Company to dispose of assets, incur
additional indebtedness, pay dividends or make distributions, create liens on
assets, enter into sale and leaseback transactions, make investments, loans or
advances, make acquisitions, engage in mergers or consolidations, issue
capital stock and form subsidiaries and otherwise restrict certain corporate
activities. In addition, the Company is required to comply with specified
financial ratios and tests.
The New Credit Agreement contains various events of default, including
defaults relating to payments, breaches of representations, warranties and
covenants, certain events of bankruptcy and insolvency, defaults on certain
other indebtedness, certain liens and encumbrances on assets, certain events
terminating employee benefit plans and certain changes of control of the
Company.
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DESCRIPTION OF THE NEW NOTES
The Old Notes were issued and the New Notes will be issued under an
Indenture dated as of November 1, 1997 (the "Indenture") between the Company
and LaSalle National Bank, as trustee (the "Trustee"), in a private
transaction that is not subject to the registration requirements of the
Securities Act. For purposes of this summary, references to the "Company" mean
only The GSI Group, Inc. and not any of its subsidiaries. References to the
Notes include the New Notes and the Old Notes unless the context otherwise
requires.
Upon the effectiveness of the Registration Statement of which this
Prospectus forms a part, the Indenture will be subject to and governed by the
Trust Indenture Act. The following summaries of the material provisions of the
Indenture do not purport to be complete, and where reference is made to
particular provisions of the Indenture, such provisions, including the
definitions of certain terms, are qualified in their entirety by reference to
all of the provisions of the Indenture and those terms made a part of the
Indenture by reference to the Trust Indenture Act. A copy of the Indenture is
filed as an exhibit to the Registration Statement of which this Prospectus
forms a part, and is incorporated by reference herein. For definitions of
certain capitalized terms used in the following summary, see "--Certain
Definitions" or "Exchange Offer; Registration Rights."
GENERAL
The New Notes will be unsecured senior subordinated obligations of the
Company limited to $100,000,000 aggregate principal amount. The New Notes will
be issued solely in exchange for an equal principal amount of outstanding Old
Notes pursuant to the Exchange Offer. The form and terms of the New Notes will
be identical in all material respects to the form and terms of the Old Notes,
except that (i) the New Notes have been registered under the Securities Act
and, therefore, will not bear legends restricting the transfer thereof, (ii)
holders of New Notes will not be entitled to any Additional Interest thereon
pursuant to certain circumstances under the Registration Rights Agreement and
(iii) holders of New Notes will no longer be entitled to certain other rights
under the Registration Rights Agreement. The New Notes will be issued only in
fully registered form without coupons, in denominations of $1,000 and integral
multiples thereof. Principal of, premium, if any, and interest on the Notes
are payable, and the Notes are exchangeable and transferable, at the office or
agency of the Company in the City of New York maintained for such purposes
(which initially will be the corporate trust office of the Trustee). See
"Book-Entry, Delivery and Form." No service charge will be made for any
registration of transfer, exchange or redemption of the Notes, except in
certain circumstances for any tax or other governmental charge that may be
imposed in connection therewith.
DMC has fully and unconditionally guaranteed payment of the Notes on an
unsecured senior subordinated basis. See "--Note Guarantees."
MATURITY, INTEREST AND PRINCIPAL
The Notes will mature on November 1, 2007. Interest on the Notes will accrue
at the rate of 10 1/4% per annum and will be payable semi-annually in arrears
on each May 1 and November 1, commencing May 1, 1998, to the holders of record
of Notes at the close of business on the April 15 and October 15,
respectively, immediately preceding such interest payment date. Interest on
the Notes will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from the Issue Date. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
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OPTIONAL REDEMPTION
Optional Redemption. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after November 1, 2002, at the
redemption prices (expressed as percentages of principal amount) set forth
below, plus accrued and unpaid interest thereon, if any, to the date of
redemption, if redeemed during the 12-month period beginning on November 1 of
the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002........................................................... 105.188%
2003........................................................... 103.458%
2004........................................................... 101.729%
2005 and thereafter............................................ 100.000%
</TABLE>
Optional Redemption upon Equity Offering. On or prior to November 1, 2000,
the Company may, at its option, use the net proceeds of an Equity Offering to
redeem up to 35% of the originally issued aggregate principal amount of the
Notes, at a redemption price in cash equal to 110.25% of the principal amount
thereof, plus accrued and unpaid interest thereon, if any, to the date of
redemption; provided, however, that not less than $65.0 million in aggregate
principal amount of Notes is outstanding following such redemption. Notice of
any such redemption must be given not later than 60 days after the
consummation of the Equity Offering.
As used in the preceding paragraph, an "Equity Offering" means any public or
private sale of equity securities (other than Redeemable Capital Stock) of the
Company; provided, however, that the proceeds (net of any underwriting
discounts or commissions) to the Company from any such private sale of equity
securities shall be at least $20.0 million.
Selection and Notice. In the event that less than all of the Notes are to be
redeemed at any time, selection of Notes for redemption shall be made by the
Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes
are not listed on a national securities exchange, on a pro rata basis, by lot
or by such other method as the Trustee deems fair and appropriate; provided,
however, that no Notes of a principal amount of $1,000 or less shall be
redeemed in part; provided, further, however, that any such redemption made
with the net proceeds of an Equity Offering shall be made on a pro rata basis
or on as nearly a pro rata basis as practicable (subject to the procedures of
DTC). Notice of redemption will be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each holder of Notes to be
redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note will state the
portion of the principal amount thereof to be redeemed. A New Note in a
principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original Note. On and
after the redemption date, interest will cease to accrue on Notes or portions
thereof called for redemption so long as the Company has deposited with the
paying agent for the Notes funds in satisfaction of the applicable redemption
price pursuant to the Indenture.
CHANGE OF CONTROL
The Indenture provides that, following the occurrence of a Change of Control
(the date of such occurrence being the "Change of Control Date"), the Company
will be obligated, not more than 40 or less than 20 business days after the
Change of Control Date, to make an offer to purchase (a "Change of Control
Offer") all of the then outstanding Notes at a purchase price (the "Change of
Control Purchase Price") in cash equal to 101% of the principal amount
thereof, plus accrued and unpaid interest thereon, if any, to the purchase
date. The Company will be required to purchase all Notes properly tendered
into the Change of Control Offer and not withdrawn.
In order to effect such Change of Control Offer, the Company will, not later
than the 40th business day after the Change of Control Date, be obligated to
mail to each holder of Notes notice of the Change of Control Offer, which
notice will govern the terms of the Change of Control Offer and will state,
among other things, the procedures that holders must follow to accept the
Change of Control Offer. The Change of Control Offer will be required to be
kept open for a period of at least 20 business days.
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If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the Notes that might be tendered by holders of Notes seeking to accept the
Change of Control Offer. If the Company fails to repurchase all of the Notes
tendered for purchase, such failure will constitute an Event of Default under
the Indenture. See "--Events of Default" below.
The Company shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act, and any other applicable securities laws or
regulations and any applicable requirements of any securities exchange on
which the Notes are listed, in connection with the repurchase of Notes
pursuant to a Change of Control Offer, and any violation of the provisions of
the Indenture relating to such Change of Control Offer occurring as a result
of such compliance shall not be deemed a Default.
SUBORDINATION
The payment of the principal of, premium, if any, and interest on the Notes
will be subordinated in right of payment, as described below, to the prior
payment in full in cash or Cash Equivalents of all Senior Indebtedness.
The Indenture provides that in the event of any insolvency or bankruptcy
case or proceeding, or any receivership, liquidation, reorganization or other
similar case or proceeding in connection therewith, relating to the Company,
or any liquidation, dissolution or other winding-up of the Company, whether
voluntary or involuntary, or any assignment for the benefit of creditors or
other marshaling of assets or liabilities of the Company, all Senior
Indebtedness must be paid in full before any payment or distribution
(excluding any payment or distribution of certain permitted equity or
subordinated securities) is made on account of the principal of, premium, if
any, or interest on the Notes.
During the continuance of any default in the payment of any Designated
Senior Indebtedness pursuant to which the maturity thereof may immediately be
accelerated beyond any applicable grace period and after receipt by the
Trustee from representatives of holders of such Designated Senior Indebtedness
of written notice of such default, no payment or distribution of any assets of
the Company of any kind or character (excluding any payment or distribution of
certain permitted equity or subordinated securities) shall be made on account
of the principal of, premium, if any, or interest on, or the purchase,
redemption or other acquisition of, the Notes unless and until such default
has been cured or waived or has ceased to exist or such Designated Senior
Indebtedness shall have been discharged or paid in full.
During the continuance of any non-payment default with respect to any
Designated Senior Indebtedness pursuant to which the maturity thereof may
immediately be accelerated (a "Non-payment Default") and after the receipt by
the Trustee from the representatives of holders of such Designated Senior
Indebtedness of a written notice of such Non-payment Default, no payment or
distribution of any assets of the Company of any kind or character (excluding
any payment or distribution of certain permitted equity or subordinated
securities) may be made by the Company on account of the principal of,
premium, if any, or interest on, or the purchase, redemption or other
acquisition of, the Notes for the period specified below (the "Payment
Blockage Period").
The Payment Blockage Period will commence upon the receipt of notice of a
Non-payment Default by the Trustee from the representatives of holders of
Designated Senior Indebtedness and will end on the earlier to occur of the
following events: (i) 179 days shall have elapsed since the receipt of such
notice of a Non-payment Default (provided that such Designated Senior
Indebtedness shall not theretofore have been accelerated), (ii) such default
is cured or waived or ceases to exist or such Designated Senior Indebtedness
is discharged or (iii) such Payment Blockage Period shall have been terminated
by written notice to the Company or the Trustee from the representatives of
holders of Designated Senior Indebtedness initiating such Payment Blockage
Period. After the end of any Payment Blockage Period the Company shall
promptly resume making any and all required payments in respect of the Notes,
including any missed payments. Notwithstanding anything in the subordination
provisions of the Indenture or the Notes to the contrary, (x) in no event
shall a Payment Blockage Period extend beyond 179 days from the date of the
receipt by the Trustee of the notice initiating such Payment Blockage Period,
(y) there shall be a period of at least 186 consecutive days in each 365-day
period when no Payment
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Blockage Period is in effect and (z) not more than one Payment Blockage Period
with respect to the Notes may be commenced within any period of 365
consecutive days. A Non-payment Default with respect to Designated Senior
Indebtedness 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 cannot be made the basis for the
commencement of a second Payment Blockage Period, whether or not within a
period of 365 consecutive days, unless such default has been cured or waived
for a period of not less than 90 consecutive days and subsequently recurs.
If the Company fails to make any payment on the Notes when due or within any
applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of
Default under the Indenture and would enable the holders of the Notes to
accelerate the maturity thereof. See "--Events of Default."
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company who are holders of Senior Indebtedness may recover
more, ratably, than the holders of the Notes and funds which would be
otherwise payable to the holders of the Notes will be paid to the holders of
Senior Indebtedness to the extent necessary to pay the Senior Indebtedness in
full, and the Company may be unable to meet its obligations fully with respect
to the Notes.
As of December 31, 1997, the Company had outstanding $28.5 million of Senior
Indebtedness. In addition, subsidiaries of the Company had outstanding $1.4
million of Indebtedness and other obligations to which holders of Notes would
have been structurally subordinated, because the claims of creditors of such
subsidiaries effectively will have priority with respect to the assets and
earnings of such subsidiaries over the claims of the Company and its
creditors, including holders of the Notes. The Indenture limits, but does not
prohibit, the incurrence by the Company of additional Indebtedness which is
senior to the Notes, but prohibits the incurrence of any Indebtedness
contractually subordinated in right of payment to any other Indebtedness of
the Company and senior in right of payment to the Notes. See "Risk Factors--
Subordination."
NOTE GUARANTEES
DMC has fully and unconditionally guaranteed the Company's obligations under
the Notes. In addition, if any Domestic Subsidiary of the Company becomes a
Guarantor or obligor in respect of Indebtedness of the Company, the Company's
obligations under the Notes will be guaranteed by such Domestic Subsidiary.
See "--Certain Covenants--Limitation on Guarantees by Restricted
Subsidiaries." Subject to the subordination provisions described above, if the
Company defaults in payment of the principal of, premium, if any, or interest
on the Notes, DMC and each other Guarantor, if any, will be obligated to duly
and punctually pay the same.
The Indebtedness evidenced by each Note Guarantee (including the payment of
principal of, premium, if any, and interest on the Notes) is subordinated on
the same basis to Guarantor Senior Indebtedness (defined with respect to the
Indebtedness of any Guarantor) as the Notes are subordinated to Senior
Indebtedness. See "--Subordination." As of December 31, 1997, DMC had no
outstanding Guarantor Senior Indebtedness, however DMC had $1.4 million of
Indebtedness and other obligations to which holders of the Notes would have
been structurally subordinated because of the structural subordination
described above.
CERTAIN COVENANTS
The Indenture contains the following covenants, among others:
Limitation on Indebtedness. The Company shall not, and shall not cause or
permit any of the Restricted Subsidiaries to, directly or indirectly, create,
incur, assume, issue, guarantee or in any manner become liable for or with
respect to, contingently or otherwise (in each case, to "incur"), the payment
of any Indebtedness (including any Acquired Indebtedness); provided, however,
that (i) the Company and any Guarantor may incur
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Indebtedness (including Acquired Indebtedness) and (ii) a Restricted
Subsidiary may incur Acquired Indebtedness, in each case if immediately after
giving pro forma effect thereto, the Consolidated Fixed Charge Coverage Ratio
of the Company and its Restricted Subsidiaries is at least equal to 2.0:1.0.
Notwithstanding the foregoing, the Company and, to the extent specifically
set forth below, the Restricted Subsidiaries may incur each and all of the
following (collectively, "Permitted Indebtedness"):
(i) Indebtedness of the Company or any Guarantor under the New Credit
Agreement in an aggregate principal amount at any time outstanding not to
exceed the greater of (x) $50.0 million and (y) the sum of 85% of the
consolidated book value of the net accounts receivable and 65% of the
consolidated book value of the inventory of the Company and its Restricted
Subsidiaries, in each case determined in accordance with GAAP;
(ii) Indebtedness under the Indenture, the Notes and the Note Guarantees;
(iii) Indebtedness of the Company or any Restricted Subsidiary not
otherwise referred to in this paragraph that is outstanding on the Issue
Date, except Indebtedness repaid with the proceeds of the issuance of the
Notes as described under "Use of Proceeds" (which is permitted hereunder);
(iv) Indebtedness of the Company or any Restricted Subsidiary in respect
of bid, payment or performance bonds, bankers' acceptances, letters of
credit of the Company or any Restricted Subsidiary and surety bonds
provided by the Company or any Restricted Subsidiary in the ordinary course
of business;
(v) Indebtedness of any Restricted Subsidiary owed to and held by the
Company or any Restricted Subsidiary, and Indebtedness of the Company owed
to and held by any other Restricted Subsidiary which is unsecured and
subordinated in right of payment to the payment and performance of the
Company's obligations under the Indenture and the Notes;
(vi) any guarantees of Indebtedness by a Restricted Subsidiary incurred
in compliance with the covenant described under "--Limitations on
Guarantees by Restricted Subsidiaries";
(vii) Interest Rate Protection Obligations of the Company or any
Restricted Subsidiary covering Indebtedness of the Company or any
Restricted Subsidiary (which Indebtedness (a) bears interest at fluctuating
interest rates and (b) is otherwise permitted to be incurred under this
covenant) to the extent the notional principal amount of such Interest Rate
Protection Obligations does not exceed the principal amount of the
Indebtedness to which such Interest Rate Protection Obligations relate;
(viii) Indebtedness of the Company in respect of Purchase Money
Indebtedness in an amount not exceeding $2.0 million incurred in any one
fiscal year;
(ix) Indebtedness of the Company or any Restricted Subsidiary under
Currency Agreements relating to (a) Indebtedness of the Company or any
Restricted Subsidiary and/or (b) obligations to purchase or sell assets or
properties, in each case, incurred in the ordinary course of business of
the Company or any Restricted Subsidiary; provided, however, that such
Currency Agreements do not increase the Indebtedness or other obligations
of the Company and its Restricted Subsidiaries outstanding other than as a
result of fluctuations in foreign currency exchange rates or by reason of
fees, indemnities and compensation payable thereunder;
(x) (a) Indebtedness of the Company or any Guarantor to the extent the
proceeds thereof are used to Refinance Indebtedness of the Company or any
Guarantor or any Restricted Subsidiary and (b) Indebtedness of any
Restricted Subsidiary that is not a Guarantor to the extent the proceeds
thereof are used to Refinance Indebtedness of any Restricted Subsidiary
that is not a Guarantor, in each case other than the Indebtedness to be
Refinanced as described under "Use of Proceeds" herein and Indebtedness
incurred under clause (i) or (v) above; provided, however, that, in the
case of either clause (a) or (b), (1) the principal amount of Indebtedness
incurred pursuant to this clause (x) (or, if such Indebtedness provides for
an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration of the maturity thereof, the original issue
price of such Indebtedness) shall not exceed the sum of (A) the principal
amount of Indebtedness so Refinanced (or, if such Indebtedness provides for
an amount less than the principal
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amount thereof to be due and payable upon a declaration of acceleration of
the maturity thereof, the original issue price of such Indebtedness, plus
any accreted value attributable thereto since the original issuance of such
Indebtedness, plus any accreted value attributable thereto since the
issuance date of such Indebtedness), plus (B) the amount of any premium
required to be paid in connection with such Refinancing pursuant to the
terms of such Indebtedness or the amount of any premium reasonably
determined by the Company or a Restricted Subsidiary, as applicable, as
necessary to accomplish such Refinancing by means of a tender offer or
privately negotiated purchase, plus (C) the amount of expenses in
connection with such Refinancing; and (2) except in the case of Refinancing
or replacement of Senior Indebtedness or Guarantor Senior Indebtedness or
of any Indebtedness of any Restricted Subsidiary that is not a Guarantor,
Indebtedness incurred pursuant to this clause (x) hall not reduce the
Average Life to Stated Maturity of Indebtedness so Refinanced;
(xi) Indebtedness arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from guarantees of
letters of credit, surety bonds or payment or performance bonds securing
any obligations of the Company pursuant to such agreements, incurred or
assumed in connection with the disposition of any business, assets or
Subsidiary of the Company, other than guarantees or similar credit support
by the Company of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or Subsidiary for the purpose of financing
such acquisition; and
(xii) in addition to the items referred to in clauses (i) through (xi)
above, additional Indebtedness of the Company or any Restricted Subsidiary
not to exceed an aggregate principal amount at any time outstanding of
$25.0 million.
Limitation on Restricted Payments. The Company shall not, and shall not
cause or permit any of the Restricted Subsidiaries, directly or indirectly,
to:
(i) declare or pay any dividend or make any other distribution or payment
on or in respect of Capital Stock of the Company or any Restricted
Subsidiary or any payment made to the direct or indirect holders (in their
capacities as such) of Capital Stock of the Company or any Restricted
Subsidiary (other than dividends or distributions made to the Company or a
Restricted Subsidiary and dividends and distributions payable solely in
Capital Stock of the Company (other than Redeemable Capital Stock) or in
rights to purchase Capital Stock of the Company (other than Redeemable
Capital Stock)); or
(ii) purchase, redeem, defease or otherwise acquire or retire for value
any Capital Stock of the Company or any Restricted Subsidiary (other than
any such Capital Stock owned by the Company or a Restricted Subsidiary); or
(iii) make any principal payment on, or purchase, defease, repurchase,
redeem or otherwise acquire or retire for value, prior to any scheduled
maturity, scheduled repayment, scheduled sinking fund payment or other
Stated Maturity, any Subordinated Indebtedness (other than any Subordinated
Indebtedness owed to and held by a Restricted Subsidiary); or
(iv) make any Investment (other than a Permitted Investment) in any
Person (such payments or Investments described in clauses (i), (ii), (iii)
and (iv) are collectively referred to as "Restricted Payments"), unless, at
the time of and after giving effect to the proposed Restricted Payment (the
amount of any such Restricted Payment, if other than in cash, being the
Fair Market Value of the asset(s) proposed to be transferred by the Company
or such Restricted Subsidiary, as the case may be, pursuant to such
Restricted Payment):
(A) no Default shall have occurred and be continuing;
(B) the Company could incur $1.00 of additional Indebtedness by
virtue of the Consolidated Fixed Charge Coverage Ratio set forth in the
first paragraph of the "Limitation on Indebtedness" covenant described
above; and
(C) the aggregate amount of all Restricted Payments declared or made
(and not repaid or reimbursed) from and after the Issue Date would not
exceed the sum of (1) 50% of cumulative Consolidated Net Income of the
Company during the period (treated as one accounting period)
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beginning on the first day of the fiscal quarter that includes the
Issue Date and ending on the last day of the fiscal quarter of the
Company immediately preceding the date of such proposed Restricted
Payment for which consolidated financial information of the Company is
internally available (or, if such cumulative Consolidated Net Income of
the Company for such period shall be a deficit, minus 100% of such
deficit), plus (2) the aggregate net cash proceeds received by the
Company either (x) as capital contributions in the form of common
equity to the Company after the Issue Date or (y) from the issuance or
sale of Capital Stock (excluding Redeemable Capital Stock and Capital
Stock to the extent the proceeds from the sale thereof are used to
redeem Notes but including Capital Stock issued upon the conversion of
convertible Indebtedness, in exchange for outstanding Indebtedness or
from the exercise of options, warrants or rights to purchase Capital
Stock (other than Redeemable Capital Stock)) of the Company to any
Person (other than to a Restricted Subsidiary of the Company) after the
Issue Date (excluding the net cash proceeds from any issuance and sale
of Capital Stock financed using funds borrowed from the Company or any
Restricted Subsidiary until and to the extent such borrowing is
repaid), plus (3) in the case of the disposition or repayment of any
Investment constituting a Restricted Payment made after the Issue Date,
an amount equal to the lesser of the return of capital with respect to
such Investment and the initial amount of such Investment which was
treated as a Restricted Payment, in either case, less the cost of the
disposition of such Investment.
For purposes of the preceding clause (C)(2), upon the issuance of Capital
Stock either from the conversion of convertible Indebtedness or exchange for
outstanding Indebtedness or upon the exercise of options, warrants or rights,
the amount counted as net cash proceeds received will be the cash amount
received by the Company at the original issuance of the Indebtedness that is
so converted or exchanged or from the issuance of options, warrants or rights,
as the case may be, plus the incremental amount of cash received by the
Company, if any, upon the conversion, exchange or exercise thereof.
None of the foregoing provisions of this covenant will prohibit:
(i) the payment of any dividend within 60 days after the date of its
declaration, if at the date of declaration such payment would be permitted
by the provisions of the Indenture;
(ii) so long as no Default shall have occurred and be continuing or would
occur upon the consummation thereof, the redemption, repurchase or other
acquisition or retirement of any shares of any class of Capital Stock of
the Company in exchange for, or out of the net cash proceeds of, a
substantially concurrent issue and sale of other shares of Capital Stock
(other than Redeemable Capital Stock) of the Company to any Person (other
than to a Restricted Subsidiary); provided, however, that any such net
proceeds and the value of any Capital Stock issued in exchange for such
retired Capital Stock are excluded from clause (C)(2) of the preceding
paragraph;
(iii) so long as no Default shall have occurred and be continuing or
would occur upon the consummation thereof, any redemption, repurchase or
other acquisition or retirement of Subordinated Indebtedness made by
exchange for, or out of the net cash proceeds of, a substantially
concurrent issue and sale of (A) Capital Stock (other than Redeemable
Capital Stock) of the Company to any Person (other than to a Restricted
Subsidiary); provided, however, that any such net cash proceeds and the
value of any Capital Stock issued in exchange for Subordinated Indebtedness
are excluded from clause (C)(2) of the preceding paragraph; or (B)
Indebtedness of the Company or any Restricted Subsidiary so long as such
Indebtedness (1) is subordinated to Senior Indebtedness and the Notes or
Guarantor Senior Indebtedness and the Note Guarantees of such Guarantor, as
the case may be, at least to the same extent as the Subordinated
Indebtedness so purchased, exchanged, redeemed, repurchased, acquired or
retired, and (2) has no Stated Maturity earlier than the Stated Maturity
for the final scheduled principal payment of the Notes;
(iv) Investments constituting Restricted Payments made as a result of the
receipt of non-cash consideration from any Asset Sale made pursuant to and
in compliance with the covenant "--Disposition of Proceeds of Asset Sales";
(v) the application of the net proceeds of the Offering on the Issue
Date, as described under "Use of Proceeds";
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(vi) so long as no Default shall have occurred and be continuing or would
occur upon the consummation thereof, the purchase, redemption or other
acquisition, cancellation or retirement for value of Capital Stock, or
options, warrants, equity appreciation rights or other rights to purchase
or acquire Capital Stock, of the Company or any Restricted Subsidiary, or
similar securities, held by officers or employees or former officers or
employees of the Company or any Restricted Subsidiary (or their estates or
beneficiaries under their estates), upon death, disability, retirement or
termination of employment (collectively "Repurchase Payments"), in an
amount not to exceed $2.0 million in any single fiscal year, provided that
to the extent such $2.0 million amount is not utilized in any single fiscal
year (beginning in the fiscal year containing the Issue Date) such amount
may be utilized in any future fiscal year;
(vii) so long as no Default shall have occurred and be continuing or
would occur upon the consummation thereof, in addition to Repurchase
Payments permitted under clause (vi), Repurchase Payments in an amount not
to exceed 50% of the sum of (A) Consolidated Net Income plus (B)
Consolidated Non-cash Charges minus (C) capital expenditures made by the
Company minus (D) other Repurchase Payments previously made pursuant to
this clause (vii), in each case determined with respect to the Company and
its Restricted Subsidiaries on a consolidated basis in accordance with GAAP
for the four full fiscal quarters immediately preceding the date of any
such proposed Repurchase Payment for which consolidated financial
information of the Company is internally available; provided, however, that
prior to making any such Repurchase Payment under this clause (vii) the
Company shall have first made an offer to purchase (which offer will be
required to be kept open for a period of at least 20 business days after
commencement thereof) to all holders of outstanding Notes up to a maximum
principal amount (expressed as a multiple of $1,000) of Notes equal to such
proposed Repurchase Payment (which, if consummated, shall be effected pro
rata based upon the aggregate principal amount of such Notes tendered by
each holder), at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest thereon, if any, to the date of
such purchase; and to the extent the amount of such proposed Repurchase
Payment exceeds the aggregate amount of Notes tendered by the holders of
the Notes pursuant to such offer, the Company may make such Repurchase
Payment;
(viii) loans or advances to officers, directors and employees of the
Company or any Restricted Subsidiary in an aggregate amount not in excess
of $2.5 million at any one time outstanding;
(ix) so long as no Default shall have occurred and be continuing or would
occur upon the consummation thereof, dividends or distributions to
Permitted Holders who are also officers or directors of the Company, in an
aggregate amount not to exceed $2.0 million in respect of any single fiscal
year of the Company;
(x) payments by the Company in satisfaction of its obligations under the
Stockholder Agreements from the proceeds of life insurance policies
received by the Company or any Restricted Subsidiary; or
(xi) so long as the Company remains a Subchapter S corporation under the
Internal Revenue Code, the payment of dividends or the making of loans or
advances to the holders of the Company's Capital Stock in an amount equal
to the Tax Amount (the "Permitted Tax Payments").
In computing the amount of Restricted Payments previously made for purposes
of clause (C) of the preceding paragraph, amounts described under the
immediately preceding clauses (i), (vi) and (vii) shall be included.
Limitation on Transactions with Affiliates. The Company shall not, and shall
not cause or permit any of the Restricted Subsidiaries, directly or
indirectly, to, conduct any business or enter into or suffer to exist any
transaction or series of related transactions with, or for the benefit of, any
of their respective Affiliates (other than a Restricted Subsidiary so long as
no Affiliate of the Company or any beneficial holder of 5% or more of any
class or series of Capital Stock of the Company shall beneficially own any
Capital Stock in such Restricted Subsidiary) or any beneficial holder of 10%
or more of any class of Capital Stock of the Company or any officer or
director of the Company or any Restricted Subsidiary (each, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the Restricted Subsidiary, as the
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case may be, than those which could have been obtained in a comparable
transaction at such time from Persons who do not have such a relationship,
(ii) with respect to any Affiliate Transaction or series of Affiliate
Transactions involving aggregate payments or value equal to or greater than
$2.0 million, the Company shall have delivered an officers' certificate to the
Trustee certifying that such Affiliate Transaction or series of Affiliate
Transactions has been approved by a majority of the Board of Directors of the
Company, including a majority of the disinterested directors, if any, of the
Board of Directors of the Company, and (iii) with respect to any Affiliate
Transaction or series of Affiliate Transactions involving aggregate payments
or value equal to or greater than $5.0 million (or greater than $2.0 million
in the event there are no disinterested directors), the Company shall have
obtained a written opinion from an Independent Financial Advisor stating that
the terms of such Affiliate Transaction or series of Affiliate Transactions
are fair, from a financial point of view, to the Company or the Restricted
Subsidiary involved, as the case may be.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among the Company and the
Restricted Subsidiaries; (ii) directors' fees, indemnification and similar
arrangements, consulting fees, employee salaries, bonuses or employment
agreements, compensation or employee benefit arrangements and incentive
arrangements with any officer, director or employee of the Company or any
Restricted Subsidiary entered into in the ordinary course of business
(including customary benefits thereunder) and payments under any
indemnification arrangements permitted by applicable law; (iii) the issue and
sale by the Company to its stockholders of Capital Stock (other than
Redeemable Capital Stock); (iv) any dividends made in compliance with the
provisions described under "--Limitation on Restricted Payments" above; (v)
loans and advances to officers, directors and employees of the Company or any
Restricted Subsidiary for travel, entertainment, moving and other relocation
expenses, in each case made in the ordinary course of business, and other
loans or advances to officers, directors and employees of the Company or any
Restricted Subsidiary in an aggregate amount not in excess of $2.5 million in
any fiscal year; and (vi) the incurrence of intercompany Indebtedness
permitted pursuant to clause (v) of the second paragraph of "--Limitation on
Indebtedness" above.
Disposition of Proceeds of Asset Sales. The Company shall not, and shall not
cause or permit any Restricted Subsidiary, directly or indirectly, to, make
any Asset Sale, unless (i) the Company or such Restricted Subsidiary, as the
case may be, receives consideration at the time of such Asset Sale at least
equal to the Fair Market Value of the assets sold or otherwise disposed of and
(ii) at least 75% of such consideration consists of (A) cash or Cash
Equivalents, (B) properties and capital assets to be used in the same line of
business being conducted by the Company or any Restricted Subsidiary at such
time or (C) Capital Stock in any Person which thereby becomes a Restricted
Subsidiary whose assets consist primarily of properties and capital assets
used in the same line of business being conducted by the Company or any
Restricted Subsidiary at such time. The amount of any (i) Indebtedness (other
than any Subordinated Indebtedness) of the Company or any Restricted
Subsidiary actually assumed by the transferee in such Asset Sale and from
which the Company and the Restricted Subsidiaries are fully released and (ii)
notes or other similar obligations received by the Company or the Restricted
Subsidiaries from such transferee that are immediately converted, sold or
exchanged (or are converted, sold or exchanged within thirty days of the
related Asset Sale) by the Company or the Restricted Subsidiaries into cash,
in an amount equal to the net cash proceeds realized upon such conversion,
sale or exchange, shall be deemed to be cash for purposes of determining the
percentage of cash or Cash Equivalent consideration received by the Company or
the Restricted Subsidiaries.
The Company or such Restricted Subsidiary, as the case may be, may (i) apply
the Net Cash Proceeds of any Asset Sale within 365 days of receipt thereof to
permanently repay Senior Indebtedness or Indebtedness (for purposes of this
clause, a repayment of any amount owing under a revolving credit facility
shall be deemed a permanent repayment to the extent the amount represented by
such repayment is not drawn upon by the Company for a period of six months
after such repayment) of any Restricted Subsidiary that is not subordinated in
right of payment to any Indebtedness of such Restricted Subsidiary, provided,
however, that no such repayment shall affect the amount permitted under clause
(i) of the second paragraph of the covenant "--Limitation on Indebtedness," or
(ii) commit in writing within 365 days after the receipt thereof to acquire,
construct or improve
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properties and capital assets to be used in the same line of business as being
conducted by the Company or any Restricted Subsidiary at such time and so
apply such Net Cash Proceeds within 365 days after the receipt thereof.
To the extent all or part of the Net Cash Proceeds of any Asset Sale are not
applied (or, in the case of clause (ii) above, committed to be so applied in
writing) within 365 days of such Asset Sale as described in clause (i) or (ii)
of the immediately preceding paragraph (such Net Cash Proceeds, the
"Unutilized Net Cash Proceeds"), the Company shall, within 20 business days
after such 365th day, make an offer to purchase (the "Asset Sale Offer") to
all holders of outstanding Notes up to a maximum principal amount (expressed
as a multiple of $1,000) of Notes equal to such Unutilized Net Cash Proceeds,
at a purchase price in cash equal to 100% of the principal amount thereof,
plus accrued and unpaid interest thereon, if any, to the date of such
purchase; provided, however, that the Asset Sale Offer shall not be required
to be made until there are aggregate Unutilized Net Cash Proceeds equal to or
in excess of $7.5 million, at which time the entire amount of such Unutilized
Net Cash Proceeds, and not just the amount in excess of $7.5 million, shall be
applied as required pursuant to this paragraph. An Asset Sale Offer will be
required to be kept open for a period of at least 20 business days after
commencement thereof.
With respect to any Asset Sale Offer effected pursuant to this covenant, to
the extent the aggregate principal amount of Notes tendered pursuant to such
Asset Sale Offer exceeds the Unutilized Net Cash Proceeds to be applied to the
repurchase thereof, such Notes shall be purchased pro rata based on the
aggregate principal amount of such Notes tendered by each holder. To the
extent the Unutilized Net Cash Proceeds exceed the aggregate amount of Notes
tendered by the holders of the Notes pursuant to such Asset Sale Offer, the
Company may retain and utilize any portion of the Unutilized Net Cash Proceeds
not applied to repurchase the Notes for any purpose consistent with the other
terms of the Indenture.
The Company shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act, and any other applicable securities laws or
regulations and any applicable requirements of any securities exchange on
which the Notes are listed, and any violation of the provisions of the
Indenture relating to such Asset Sale Offer occurring as a result of such
compliance shall not be deemed a Default.
Limitation on Liens. The Company shall not, and shall not cause or permit
any Restricted Subsidiary to, create, incur, assume or suffer to exist any
Lien of any kind, upon any of its property or assets, whether now owned or
acquired after the Issue Date, or any proceeds therefrom, which secure either
(i) Subordinated Indebtedness unless the Notes, in the case of the Company,
and the Note Guarantees, if any, are secured by a Lien on such property,
assets or proceeds senior in priority to the Liens securing such Subordinated
Indebtedness or (ii) Pari Passu Indebtedness unless the Notes, in the case of
the Company, and the Note Guarantees, are equally and ratably secured with the
Liens securing such Pari Passu Indebtedness.
Limitation on Other Senior Subordinated Indebtedness. Neither the Company
nor any Guarantor shall create, incur, assume, guarantee or in any other
manner become liable with respect to any Indebtedness (other than the Notes
and the Note Guarantees) subordinate in right of payment to any Indebtedness
of the Company or of such Guarantor, as the case may be, unless such
Indebtedness is either (i) pari passu in right of payment with the Notes or
such Note Guarantee, as the case may be, or (ii) subordinate in right of
payment to the Notes or such Note Guarantee, as the case may be, in the same
manner and at least to the same extent as the Notes are subordinated to Senior
Indebtedness or as such Note Guarantee is subordinated to Guarantor Senior
Indebtedness, as the case may be.
Limitation on Guarantees by Restricted Subsidiaries. The Company shall not
cause or permit any of the Domestic Subsidiaries, directly or indirectly, to
guarantee the payment of any Indebtedness of the Company or any Restricted
Subsidiary unless such Domestic Subsidiary (A) is a Guarantor or (B)
simultaneously executes and delivers a supplemental indenture to the Indenture
pursuant to which it will become a Guarantor under the Indenture.
Notwithstanding the foregoing, any Note Guarantee by a Restricted Subsidiary
shall be automatically and unconditionally released and discharged upon any
sale, exchange or transfer, to any Person not an Affiliate of the Company, of
all of the Capital Stock of such Restricted Subsidiary, or all or
substantially all the assets of
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such Restricted Subsidiary, pursuant to a transaction which is in compliance
with the Indenture. The Company may, at any time, cause a Restricted
Subsidiary to become a Guarantor by executing and delivering a supplemental
indenture providing for the guarantee of payment of the Notes by such
Restricted Subsidiary on the basis provided in the Indenture.
Restrictions on Preferred Stock of Restricted Subsidiaries. The Company
shall not sell, and shall not cause or permit any of the Restricted
Subsidiaries to issue, any Preferred Stock of any Restricted Subsidiary (other
than to the Company or to a Wholly-Owned Restricted Subsidiary) or permit any
Person (other than the Company or a Wholly-Owned Restricted Subsidiary) to own
any Preferred Stock of any Restricted Subsidiary.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company shall not, and shall not cause or permit any
Restricted Subsidiary, directly or indirectly, to create or otherwise cause or
suffer to exist, or enter into any agreement with any Person that would cause
to become effective, any consensual encumbrance or restriction of any kind, on
the ability of any Restricted Subsidiary to (a) pay dividends, in cash or
otherwise, or make any other distribution on or in respect of its Capital
Stock or any other interest or participation in, or measured by, its profits,
to the Company or any other Restricted Subsidiary, (b) pay any Indebtedness
owed to the Company or any other Restricted Subsidiary, (c) make loans or
advances to, or guarantee any Indebtedness or other obligations of, the
Company or any other Restricted Subsidiary or (d) transfer any of its property
or assets to the Company or any other Restricted Subsidiary, except (i) any
encumbrance or restriction existing under the security documentation for the
New Credit Agreement as in effect on the Issue Date relating to assets subject
to a Lien created thereby, and with respect to a Restricted Subsidiary that is
not a Restricted Subsidiary on the Issue Date, existing at the time such
Person becomes a Restricted Subsidiary (but not created in contemplation
thereof); provided, however, that such encumbrances and restrictions are not
applicable to the Company or any Restricted Subsidiary, or the properties or
assets of the Company or any Restricted Subsidiary; (ii) customary non-
assignment provisions in leases entered into in the ordinary course of
business and consistent with past practices; (iii) Purchase Money Indebtedness
for property acquired in the ordinary course of business that only imposes
encumbrances and restrictions on the property so acquired; (iv) any agreement
for the sale or disposition of the Capital Stock or assets of any Restricted
Subsidiary; provided, however, that such encumbrances and restrictions
described in this clause (iv) are only applicable to such Restricted
Subsidiary or assets, as applicable, and any such sale or disposition is made
in compliance with "Disposition of Proceeds of Asset Sales" above to the
extent applicable thereto; and (v) any encumbrance or restriction existing
under any agreement that refinances or replaces the agreements containing the
encumbrance or restrictions in the foregoing clauses (i) through (iv);
provided, however, that the terms and conditions of any such restrictions
permitted under this clause (v) are not materially less favorable to the
holders of the Notes than those under or pursuant to the agreement evidencing
the Indebtedness refinanced.
Limitation on Designations of Unrestricted Subsidiaries. The Company may
designate after the Issue Date any Subsidiary (other than a Guarantor) as an
"Unrestricted Subsidiary" under the Indenture (a "Designation") only if:
(i) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(ii) the Company would be permitted to make an Investment at the time of
Designation (assuming the effectiveness of such Designation) in an amount
(the "Designation Amount") equal to the Fair Market Value of the Company's
interest in such Subsidiary on such date; and
(iii) the Company would be permitted under the Indenture to incur $1.00
of additional Indebtedness (other than Permitted Indebtedness) pursuant to
the covenant described under "--Limitation on Indebtedness" at the time of
such Designation (assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "--Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount.
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The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(i) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
Reporting Requirements. So long as any of the Notes are outstanding, the
Company will file with the Commission, to the extent then permitted by the
Commission, the annual reports, quarterly reports and other documents that the
Company would have been required to file with the Commission pursuant to
Sections 13(a) and 15(d) of the Exchange Act if the Company was subject to
such Sections, and the Company will promptly provide to the Trustee copies of
such reports and documents; provided, however, that if the Company is for any
reason unable to make such filings it will make available, upon request, to
any holder of Notes or prospective purchaser of Notes, the information
specified in Rule 144(A)(d)(4) of the Securities Act.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Indenture provides that the Company shall not, in any transaction or
series of related transactions, merge or consolidate with or into, or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially
all of its properties and assets as an entirety to, any Person or Persons, and
that the Company shall not permit any of the Restricted Subsidiaries to enter
into any such transaction or series of related transactions if such
transaction or series of related transactions, in the aggregate, would result
in a sale, assignment, conveyance, transfer, lease or other disposition of all
or substantially all of the properties and assets of the Company and the
Restricted Subsidiaries (determined on a consolidated basis for the Company
and the Restricted Subsidiary), to any Person or Persons, unless at the time
and after giving effect thereto (i) either (A)(1) if the transaction or
transactions is a merger or consolidation involving the Company, the Company
shall be the Surviving Person of such merger or consolidation or (2) if the
transaction or transactions is a merger or consolidation involving a
Restricted Subsidiary, such Restricted Subsidiary shall be the Surviving
Person of such merger or consolidation, or (B)(1) the Surviving Person shall
be a corporation organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and (2)(x) in the case
of a transaction involving the Company, the Surviving Person shall expressly
assume by a supplemental indenture executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company under the
Notes and the Indenture and the Registration Rights Agreement, and in each
case, the Indenture and the Registration Rights Agreement shall remain in full
force and effect, or (y) in the case of a transaction involving a Restricted
Subsidiary that is a Guarantor, the Surviving Person shall expressly assume by
a supplemental indenture executed and delivered to the Trustee, inform
satisfactory to the Trustee, all the obligations of such Restricted Subsidiary
under its Note Guarantee and the Indenture and the Registration Rights
Agreement, and in each case, such Indenture and the Registration Rights
Agreement shall remain in full force and effect; (ii) immediately after giving
effect to such transaction or series of related transactions on a pro forma
basis, no Default shall have occurred and be continuing; and (iii) the
Company, or the Surviving Person, as the case may be, immediately after giving
effect to such transaction or series of transactions on a pro forma basis
(including, without limitation, any Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction or series of
transactions), could incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the first paragraph of the "--Limitation on
Indebtedness" covenant described above.
In connection with any consolidation, merger, transfer, lease or other
disposition contemplated hereby, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to
the Trustee, an officers' certificate and an opinion of counsel, each stating
that such consolidation, merger, transfer, lease or other disposition and the
supplemental indenture in respect thereof comply with the
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requirements under the Indenture. In addition, each Guarantor, in the case of
a transaction described in the first paragraph hereunder, unless it is the
other party to the transaction or unless its Note Guarantee will be released
and discharged in accordance with its terms as a result of the transaction,
will be required to confirm, by supplemental indenture, that its Note
Guarantee will continue to apply to the obligations of the Company or the
Surviving Person under the Indenture.
Upon any consolidation or merger of the Company or any Guarantor or any
transfer of all or substantially all of the assets of the Company in
accordance with the foregoing, in which the Company or a Guarantor is not the
Surviving Person, the Surviving Person shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under the
Indenture and the Notes and the Registration Rights Agreement or such
Guarantor under the Indenture, the Note Guarantee of such Guarantor and the
Registration Rights Agreement, as the case may be, with the same effect as if
such successor corporation had been named as the Company or Guarantor, as the
case may be, therein; and thereafter, except in the case of (a) a lease or (b)
any sale, assignment, conveyance, transfer, lease or other disposition to a
Restricted Subsidiary of the Company or such Guarantor, the Company shall be
discharged from all obligations and covenants under the Indenture and the
Notes and such Guarantor shall be discharged from all obligations and
covenants under the Indenture and the Note Guarantee of such Guarantor, as the
case may be.
The Indenture provides that for all purposes of the Indenture and the Notes
(including the provisions of this covenant and the covenants described in "--
Limitation on Indebtedness," "--Limitation on Restricted Payments" and
"Limitation on Liens"), Subsidiaries of any Surviving Person shall, upon such
transaction or series of related transactions, become Restricted Subsidiaries
unless and until designated as Unrestricted Subsidiaries pursuant to and in
accordance with "--Limitation on Designations of Unrestricted Subsidiaries"
and all Indebtedness, and all Liens on property or assets, of the Company and
the Restricted Subsidiaries in existence immediately prior to such transaction
or series of related transactions will be deemed to have been incurred upon
consummation of such transaction or series of related transactions.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(i) default in the payment of the principal of or premium, if any, when
due and payable, on any of the Notes (at its Stated Maturity, upon optional
redemption, required purchase, scheduled principal payment or otherwise);
or
(ii) default in the payment of an installment of interest on any of the
Notes, when due and payable, continued for 30 days or more; or
(iii) the Company or any Guarantor fails to comply with any of its
obligations described under
"--Consolidation, Merger, Sale of Assets, Etc.," "--Certain Covenants--
Change of Control" or
"--Certain Covenants--Disposition of Proceeds of Asset Sales"; or
(iv) the Company or any Guarantor fails to perform or observe any other
term, covenant or agreement contained in the Notes, the Note Guarantees or
the Indenture (other than a default specified in (i), (ii) or (iii) above)
for a period of 30 days after written notice of such failure requiring the
Company to remedy the same shall have been given (x) to the Company by the
Trustee or (y) to the Company and the Trustee by the holders of 25% in
aggregate principal amount of the Notes then outstanding; or
(v) default or defaults under one or more agreements, indentures or
instruments under which the Company or any Restricted Subsidiary then has
outstanding Indebtedness in excess of $7.5 million individually or in the
aggregate and either (a) such Indebtedness is already due and payable in
full or (b) such default or defaults results in the acceleration of the
maturity of such Indebtedness; or
(vi) any Note Guarantee ceases to be in full force and effect or is
declared null and void or any Guarantor denies that it has any further
liability under any Note Guarantee, or gives notice to such effect (other
than by reason of the termination of the Indenture or the release of any
such Note Guarantee in
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accordance with "--Certain Covenants--Limitation on Guarantees by
Restricted Subsidiaries") and such condition shall have continued for a
period of 30 days after notice to the Company by the Trustee; or
(vii) one or more judgments, orders or decrees of any court or regulatory
or administrative agency for the payment of money in excess of $7.5 million
either individually or in the aggregate shall have been rendered against
the Company or any Restricted Subsidiary or any of their respective
properties and shall not have been discharged and either (a) any creditor
shall have commenced an enforcement proceeding upon such judgment, order or
decree, and such judgment is not being appealed by the Company or (b) there
shall have been a period of 60 consecutive days during which a stay of
enforcement of such judgment, order or decree, by reason of a pending
appeal or otherwise, shall not be in effect; or
(viii) certain events of bankruptcy, insolvency or reorganization with
respect to the Company or any Material Subsidiary of the Company shall have
occurred.
If an Event of Default (other than as specified in clause (viii) with
respect to the Company) shall occur and be continuing, the Trustee, by notice
to the Company, or the holders of at least 25% in aggregate principal amount
of the Notes then outstanding, by notice to the Trustee and the Company, may
declare the principal of, premium, if any, and accrued interest on all of the
outstanding Notes due and payable immediately, upon which declaration all such
amounts payable in respect of the Notes will become and be immediately due and
payable; provided, however, that so long as the New Credit Agreement shall be
in force and effect, if an Event of Default shall have occurred and be
continuing (other than an Event of Default under clause (viii) with respect to
the Company), any such acceleration shall not be effective until the earlier
to occur of (x) five business days following delivery of a notice of such
acceleration to the agent under the New Credit Agreement and (y) the
acceleration of any Indebtedness under the New Credit Agreement. If an Event
of Default specified in clause (viii) above with respect to the Company occurs
and is continuing, then the principal of, premium, if any, and accrued
interest on all of the outstanding Notes will ipso facto become and be
immediately due and payable without any declaration or other act on the part
of the Trustee or any holder of Notes.
Notwithstanding the preceding paragraph, in the event of a declaration of
acceleration in respect of the Notes because an Event of Default specified in
clause (v) shall have occurred and be continuing, such declaration of
acceleration will be automatically annulled if the Indebtedness that is the
subject of such Event of Default has been discharged or paid (if permitted by
the terms thereof and the Indenture) or the requisite holders thereof have
rescinded their declaration of acceleration in respect of such Indebtedness,
and written notice of such discharge or rescission, as the case may be, shall
have been given to the Trustee by the Company, within 60 days after such
declaration of acceleration in respect of the Notes and no other Event of
Default has occurred which has not been cured or waived during such 60-day
period.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of the outstanding Notes, by written
notice to the Company and the Trustee, may rescind such declaration if (a) the
Company has paid or deposited with the Trustee a sum sufficient to pay (i) all
sums paid or advanced by the Trustee under the Indenture and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, (ii) all overdue interest on all Notes, (iii) the principal of
and premium, if any, on any Notes which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate borne by the
Notes and (iv) to the extent that payment of such interest is lawful, interest
upon overdue interest at the rate borne by the Notes; and (b) all Events of
Default, other than the non-payment of principal of, premium, if any, and
interest on the Notes that has become due solely by such declaration of
acceleration, have been cured or waived.
No holder of any of the Notes has any right to institute any proceeding with
respect to the Indenture or any remedy thereunder, unless the holders of at
least 25% in aggregate principal amount of the outstanding Notes have made
written request, and offered reasonable indemnity, to the Trustee to institute
such proceeding as Trustee under the Notes and the Indenture, the Trustee has
failed to institute such proceeding within 15 days after receipt of such
notice and the Trustee, within such 15-day period, has not received directions
inconsistent
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with such written request by holders of a majority in aggregate principal
amount of the outstanding Notes. Such limitations do not apply, however, to a
suit instituted by a holder of a Note for the enforcement of the payment of
the principal of, premium, if any, or interest on such Note on or after the
respective due dates expressed in such Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent Person
would exercise under the circumstances in the conduct of such Person's own
affairs. Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing, the
Trustee under the Indenture is not under any obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
holders unless such holders shall have offered to the Trustee reasonable
security or indemnity. Subject to certain provisions concerning the rights of
the Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee under the Indenture.
The Company is required to furnish to the Trustee annual statements as to
the performance by the Company and any Guarantor of their respective
obligations under the Indenture and as to any default in such performance. The
Company is also required to notify the Trustee within ten business days of any
event which is, or after notice or lapse of time or both would become, an
Event of Default.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the obligations of
the Company and any Guarantor with respect to the outstanding Notes
("defeasance"). Such defeasance means that the Company will be deemed to have
paid and discharged the entire Indebtedness represented by the outstanding
Notes, except for (i) the rights of holders of outstanding Notes to receive
payment in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due, (ii) the Company's obligations to issue
temporary Notes, register the transfer or exchange of any Notes, replace
mutilated, destroyed, lost or stolen Notes and maintain an office or agency
for payments in respect of the Notes, (iii) the rights, powers, trusts, duties
and immunities of the Trustee and (iv) the defeasance provisions of the
Indenture. In addition, the Company may, at its option and at any time, elect
to terminate the obligations of the Company and any Guarantor with respect to
certain covenants that are set forth in the Indenture, some of which are
described under "--Certain Covenants" above, and any omission to comply with
such obligations will not constitute a Default or an Event of Default with
respect to the Notes ("covenant defeasance").
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Notes, cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants, to pay the principal of, premium, if any,
and interest on the outstanding Notes at maturity; (ii) the Company shall have
delivered to the Trustee an opinion of counsel to the effect that the holders
of the outstanding Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such defeasance or covenant defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such defeasance or
covenant defeasance had not occurred (in the case of defeasance, such opinion
must refer to and be based upon a ruling of the Internal Revenue Service or a
change in applicable federal income tax laws); (iii) no Default shall have
occurred and be continuing on the date of such deposit; (iv) such defeasance
or covenant defeasance shall not cause the Trustee to have a conflicting
interest with respect to any securities of the Company or any Guarantor; (v)
such defeasance or covenant defeasance shall not result in a breach or
violation of, or constitute a default under, any material agreement or
instrument to which the Company or any Guarantor is a party or by which it is
bound; (vi) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that (A) the trust funds will not be subject to any
rights of holders of Senior
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Indebtedness, including, without limitation, those arising under the Indenture
and (B) after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally; and (vii) the Company
shall have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that all conditions precedent under the Indenture to
either defeasance or covenant defeasance, as the case may be, have been
complied with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company or any Guarantor has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire Indebtedness on the Notes
not theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together
with irrevocable instructions from the Company directing the Trustee to apply
such funds to the payment thereof at maturity or redemption, as the case may
be; (ii) the Company or any Guarantor has paid all other sums payable under
the Indenture by the Company and any Guarantor; and (iii) the Company and each
Guarantors have delivered to the Trustee an officers' certificate and an
opinion of counsel each stating that all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture have
been complied with.
AMENDMENTS AND WAIVERS
From time to time, the Company and any Guarantor, when authorized by
resolutions of their boards of directors, and the Trustee may, without the
consent of the holders of any outstanding Notes, amend, waive or supplement
the Indenture or the Notes for certain specified purposes, including, among
other things, curing ambiguities, defects or inconsistencies, qualifying, or
maintaining the qualification of, the Indenture under the Trust Indenture Act,
or making any change that does not materially adversely affect the legal
rights of any holder; provided, however, that the Company has delivered to the
Trustee an opinion of counsel stating that such change does not materially
adversely affect the legal rights of any holder. Other amendments and
modifications of the Indenture or the Notes may be made by the Company, any
Guarantor and the Trustee with the consent of the holders of not less than a
majority of the aggregate principal amount of the outstanding Notes; provided,
however, that no such modification or amendment may, without the consent of
the holder of each outstanding Note affected thereby, (i) change the maturity
of the principal of or any installment of interest on any such Note or alter
the optional redemption or repurchase provisions of any such Note or the
Indenture in a manner adverse to the holders of the Notes; (ii) reduce the
principal amount (or the premium) of any such Note; (iii) reduce the rate of
or extend the time for payment of interest on any such Note; (iv) change the
place or currency of payment of principal of (or premium) or interest on any
such Note; (v) modify any provisions of the Indenture relating to the waiver
of past defaults (other than to add sections of the Indenture or the Notes
subject thereto) or the right of the holders of Notes to institute suit for
the enforcement of any payment on or with respect to any such Note or any Note
Guarantee in respect thereof or the modification and amendment provisions of
the Indenture and the Notes (other than to add section of the Indenture or the
Notes which may not be amended, supplemented or waived without the consent of
each holder therein affected); (vi) reduce the percentage of the principal
amount of outstanding Notes necessary for amendment to or waiver of compliance
with any provision of the Indenture or the Notes or for waiver of any Default
in respect thereof; (vii) waive a default in the payment of principal of,
interest on, or redemption payment with respect to, the Notes (except a
rescission of acceleration of the Notes by the holders thereof as provided in
the Indenture and a waiver of the payment default that resulted from such
acceleration); (viii) modify the ranking or priority of any Note or the Note
Guarantee in respect thereof of any Guarantor or modify the definition of
Senior Indebtedness or Guarantor Senior Indebtedness or amend or modify
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the subordination provisions of the Indenture in any manner adverse to the
holders of the Notes; or (ix) release any Guarantor from any of its
obligations under its Note Guarantee or the Indenture otherwise than in
accordance with the Indenture.
The holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all holders of Notes, may waive compliance by the Company
and any Guarantor with certain restrictive provisions of the Indenture.
Subject to certain rights of the Trustee, as provided in the Indenture, the
holders of a majority in aggregate principal amount of the Notes, on behalf of
all holders of the Notes, may waive any past default under the Indenture
(including any such waiver obtained in connection with a tender offer or
exchange offer for the Notes), except a default in the payment of principal,
premium or interest or a default arising from failure to purchase any Notes
tendered pursuant to an optional redemption or repurchase, or a default in
respect of a provision that under the Indenture cannot be modified or amended
without the consent of the holder of each Note that is affected.
GOVERNING LAW
The Indenture, the Notes and the Note Guarantees are governed by the laws of
the State of New York, without regard to the principles of conflicts of law.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) assumed in
connection with an Asset Acquisition from such Person or (ii) existing at the
time such Person becomes a Restricted Subsidiary of any other Person (other
than any Indebtedness incurred in connection with, or in contemplation of,
such Asset Acquisition or such Person becoming such a Restricted Subsidiary).
"Affiliate" means, with respect to any specified Person (i) any other Person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person, (ii) any other Person that
owns, directly or indirectly, 10% or more of any class or series of such
Person's, or the parent of such Person's, capital stock or any officer,
director or affiliate of any such other Person or (iii) with respect to any
other natural Person, any Person having a relationship with such other person
by blood, marriage or adoption not more remote than first cousin. For the
purposes of this definition, "control" when used with respect to any specified
Person means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of Voting Stock, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Affiliate Transaction" has the meaning set forth under "--Limitation on
Transactions with Affiliates."
"Asset Acquisition" means (i) an Investment by the Company or any Restricted
Subsidiary in any other Person pursuant to which such Person will become a
Restricted Subsidiary or will be merged or consolidated with or into the
Company or any Restricted Subsidiary or (ii) the acquisition by the Company or
any Restricted Subsidiary of the assets of any Person which constitute
substantially all of the assets of such Person, or any division or line of
business of such Person, or which is otherwise outside of the ordinary course
of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease or other disposition (including, without limitation, any
merger, consolidation or sale-leaseback transaction) to any Person other than
the Company or a Restricted Subsidiary, in one or a series of related
transactions, of (i) any Capital Stock of any Restricted Subsidiary; (ii) all
or substantially all of the assets of any division or line of business of the
Company or any Restricted Subsidiary; or (iii) any other properties or assets
of the Company or any Restricted Subsidiary other than in the ordinary course
of business. For the purposes of this definition, the term "Asset Sale" will
not include (a) any sale, issuance, conveyance, transfer, lease or other
disposition of properties or assets governed by the provisions described under
"Consolidation, Merger, Sale of Assets, Etc."; (b) sales of property or
equipment that have become worn out, obsolete or damaged or otherwise
unsuitable for use in connection with
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the business of the Company or any Restricted Subsidiary, as the case may be;
or (c) any transaction consummated in compliance with "--Certain Covenants--
Limitation on Restricted Payments." For purposes of the covenant described
under "Disposition of Proceeds of Asset Sales," the term "Asset Sale" shall
not include any sale, conveyance, transfer, lease or other disposition of any
property or asset, whether in one transaction or a series of related
transactions, involving assets with a Fair Market Value not in excess of $1.0
million.
"Asset Sale Offer" has the meaning set forth under "--Disposition of
Proceeds of Asset Sales."
"Average Life to Stated Maturity" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from such date to the date or dates
of each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness multiplied by (b) the
amount of each such principal payment by (ii) the sum of all such principal
payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participation, rights in or other equivalents (however designated)
of such Person's capital stock, and any rights (other than debt securities
convertible into capital stock), warrants or options exchangeable for or
convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real,
personal or mixed) required to be classified and accounted for as a capital
lease obligation under GAAP, and, for the purpose of the Indenture, the amount
of such obligation at any date shall be the capitalized amount thereof at such
date, determined in accordance with GAAP consistently applied.
"Cash Equivalents" means, at any time, (i) any evidence of Indebtedness with
a maturity of not more than one year issued or directly and fully guaranteed
or insured by the United States of America or any agency or instrumentality
thereof (provided that the full faith and credit of the United States of
America is pledged in support thereof); (ii) certificates of deposit or
acceptances with a maturity of not more than one year of any financial
institution that is a member of the Federal Reserve System having combined
capital and surplus and undivided profits of not less than $500,000,000; (iii)
commercial paper with a maturity of not more than one year issued by a
corporation that is not an Affiliate of the Company organized under the laws
of any state of the United States or the District of Columbia and rated at
least A-1 by Standard & Poor's Rating Services, a division of the McGraw Hill
Companies, Inc. or at least P-1 by Moody's Investors Service, Inc.; and (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (i) and (ii) above entered into
with any financial institution meeting the qualifications specified in clause
(ii) above.
"Change of Control" means the occurrence of any of the following events: (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act), other than Permitted Holders or their successors and
assigns who are Affiliates of the Permitted Holders, members of their families
and their heirs and executors, is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person
will be deemed to have "beneficial ownership" of all securities that such
Person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time), directly or indirectly, of 50% of the
total voting power of the then outstanding Voting Stock of the Company; (ii)
the Company consolidates with, or merges with or into, another Person or
sells, assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person (other than any such transaction
where the holders of the Voting Stock of the Company immediately prior to such
transaction own, directly or indirectly, not less than a majority of the total
voting power of the then outstanding Voting Stock of the surviving or
transferee corporation immediately after such transaction); or (iii) during
any consecutive two-year period, individuals who at the beginning of such
period constituted the Board of Directors of the Company (together with any
new directors whose election by such Board of Directors or whose nomination
for election by the stockholders of the Company was approved by a vote of 66
2/3% of the directors then still in office who were
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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 Company then in office.
"Change of Control Offer" has the meaning set forth under "--Change of
Control."
"Consolidated Cash Flow Available for Fixed Charges" means, for any period,
(i) the sum of, without duplication, the amounts for such period, taken as a
single accounting period, of (a) Consolidated Net Income, (b) to the extent
reducing Consolidated Net Income, Consolidated Non-cash Charges, (c) to the
extent reducing Consolidated Net Income, Consolidated Interest Expense, and
(d) to the extent reducing Consolidated Net Income, Consolidated Income Tax
Expense less (ii) (A) all non-cash items increasing Consolidated Net Income
for such period and (B) all cash payments during such period relating to non-
cash charges that were added back in determining Consolidated Cash Flow
Available for Fixed Charges in any prior period.
"Consolidated Fixed Charge Coverage Ratio" means the ratio of the aggregate
amount of Consolidated Cash Flow Available for Fixed Charges of the Company
for the four full fiscal quarters immediately preceding the date of the
transaction (the "Transaction Date") giving rise to the need to calculate the
Consolidated Fixed Charge Coverage Ratio for which consolidated financial
information of the Company is internally available (such four full fiscal
quarter period being referred to herein as the "Four Quarter Period") to the
aggregate amount of Consolidated Fixed Charges of the Company for such Four
Quarter Period. For purposes of this definition, "Consolidated Cash Flow
Available for Fixed Charges" and "Consolidated Fixed Charges" will be
calculated, without duplication, after giving effect on a pro forma basis for
the period of such calculation to (i) the incurrence of any Indebtedness of
the Company or any of the Restricted Subsidiaries during the period commencing
on the first day of the Four Quarter Period to and including the Transaction
Date (the "Reference Period"), including, without limitation, the incurrence
of the Indebtedness giving rise to the need to make such calculation, as if
such incurrence occurred on the first day of the Reference Period, (ii) an
adjustment to eliminate or include, as applicable, the Consolidated Cash Flow
Available for Fixed Charges and Consolidated Fixed Charges of the Company
directly attributable to assets which are the subject of any Asset Sale or
Asset Acquisition (including, without limitation, any Asset Acquisition giving
rise to the need to make such calculation as a result of the Company or one of
the Restricted Subsidiaries (including any Person who becomes a Restricted
Subsidiary as a result of the Asset Acquisition) incurring, assuming or
otherwise being liable for Acquired Indebtedness) occurring during the
Reference Period, as if such Asset Sale or Asset Acquisition occurred on the
first day of the Reference Period and (iii) the retirement of Indebtedness
during the Reference Period which cannot thereafter be reborrowed occurring as
if retired on the first day of the Reference Period. Furthermore, in
calculating Consolidated Fixed Charges for purposes of determining the
denominator (but not the numerator) of this definition of "Consolidated Fixed
Charge Coverage Ratio," (1) interest on Indebtedness determined on a
fluctuating basis as of the Transaction Date and which will continue to be so
determined thereafter will be deemed to accrue at a fixed rate per annum equal
to the rate of interest on such Indebtedness in effect on the Transaction
Date; (2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a factor of a
prime or similar rate, a eurocurrency interbank offered rate, or other rates,
then the interest rate in effect on the Transaction Date shall be deemed to
have been in effect during the Reference Period; and (3) notwithstanding
clause (1) above, interest on Indebtedness determined on a fluctuating basis,
to the extent such interest is covered by agreements relating to Interest Rate
Protection Obligations, will be deemed to accrue at the rate per annum
resulting after giving effect to the operation of such agreements. If the
Company or any Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the above definition will give effect to the
incurrence of such guaranteed Indebtedness as if the Company or any Restricted
Subsidiary had directly incurred or otherwise assumed such guaranteed
Indebtedness.
"Consolidated Fixed Charges" means, for any period, the sum of, without
duplication, the amounts for such period of (i) Consolidated Interest Expense;
and (ii) the aggregate amount of cash dividends and other distributions paid
or accrued during such period in respect of Redeemable Capital Stock of the
Company.
"Consolidated Income Tax Expense" means, for any period, the provision for
federal, state, local and foreign income taxes payable by the Company and the
Restricted Subsidiaries for such period as determined on a consolidated basis
in accordance with GAAP, plus any Permitted Tax Payments made during such
period.
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"Consolidated Interest Expense" means, for any period, without duplication,
the sum of (a) the interest expense of the Company and the Restricted
Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (i) any amortization of
debt discount attributable to such period, (ii) the net cost under Interest
Rate Protection Obligations (including any amortization of discounts), (iii)
the interest portion of any deferred payment obligation, (iv) all commissions,
discounts and other fees and charges owed with respect to letters of credit
and bankers' acceptance financing and (v) all capitalized interest and all
accrued interest, and (b) all but the principal component of Capitalized Lease
Obligations paid, accrued and/or scheduled to be paid or accrued by the
Company and the Restricted Subsidiaries during such period and as determined
on a consolidated basis in accordance with GAAP, minus amortization of
deferred financing costs and expenses.
"Consolidated Net Income" means, for any period, the consolidated net income
(or loss) of the Company and the Restricted Subsidiaries for such period as
determined in accordance with GAAP, adjusted, to the extent included in
calculating such net income, by excluding, without duplication, (i) all
extraordinary gains or losses (net of fees and expenses relating to the
transaction giving rise thereto), (ii) the portion of net income (or loss) of
the Company and the Restricted Subsidiaries allocable to minority interests in
unconsolidated Persons, except to the extent that cash dividends or
distributions are actually received by the Company or one of the Restricted
Subsidiaries, (iii) net income (or loss) of any Person combined with the
Company or one of the Restricted Subsidiaries in a "pooling of interests"
basis attributable to any period prior to the date of combination, (iv) any
gain or loss, net of taxes, realized upon the termination of any employee
pension benefit plan, (v) gains or losses in respect of any Asset Sales by the
Company or one of the Restricted Subsidiaries (net of fees and expenses
relating to the transaction giving rise thereto), (vi) the net income of any
Restricted Subsidiary to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is not at
the time permitted, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulations applicable to that Restricted Subsidiary or its
stockholders and (vii) any Permitted Tax Payments made during such period.
"Consolidated Non-cash Charges" means, for any period, the aggregate
depreciation, amortization and other non-cash expenses of the Company and the
Restricted Subsidiaries reducing Consolidated Net Income for such period,
determined on a consolidated basis in accordance with GAAP.
"covenant defeasance" has the meaning set forth under "--Defeasance or
Covenant Defeasance of Indenture."
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company against fluctuations in currency values.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Defeasance" has the meaning set forth under "--Defeasance or Covenant
Defeasance of Indenture."
"Designated Senior Indebtedness" means (a) all Senior Indebtedness
outstanding under the New Credit Agreement and (b) any other Senior
Indebtedness which, at the time of determination, is specifically designated
in the instrument governing such Senior Indebtedness as "Designated Senior
Indebtedness" by the Company.
"Designation" has the meaning set forth under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries."
"DMC" means the David Manufacturing Company, an Iowa corporation, and a
wholly-owned subsidiary of the Company.
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"Domestic Subsidiary" means a Restricted Subsidiary organized under the laws
of the United States, any State or territory thereof or the District of
Columbia.
"Equity Offering" has the meaning set forth under "--Optional Redemption--
Optional Redemption upon Equity Offering."
"Event of Default" has the meaning set forth under "--Events of Default."
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Commission thereunder.
"Existing Leases" means the Master Equipment Lease Agreement dated as of
June 7, 1994 by and between Keycorp Leasing Ltd. and the Company and the
Master Equipment Lease Agreement dated December 19, 1996 by and between Fleet
Capital Corporation and the Company.
"Fair Market Value" means, with respect to any asset, the price which could
be negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing buyer, neither of which is under pressure or
compulsion to complete the transaction. Fair Market Value shall be determined
by the Board of Directors of the Company acting in good faith evidenced by a
board resolution thereof delivered to the Trustee.
"Four Quarter Period" has the meaning set forth in the definition of
"Consolidated Fixed Charge Coverage Ratio."
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are applicable as of the Issue Date and
are consistently applied.
"guarantee" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
"Guarantor" means each Domestic Subsidiary formed, created or acquired
before or after the Issue Date, required to become a Guarantor after the Issue
Date pursuant to "--Certain Covenants--Limitation on Guarantees by Restricted
Subsidiaries."
"Guarantor Senior Indebtedness" means, with respect to the Indebtedness of
any Guarantor, any such Indebtedness represented by a guarantee by such
Guarantor of any Senior Indebtedness.
"incur" has the meaning set forth in "--Certain Covenants--Limitation on
Indebtedness." "incurrence," "incurred" and "incurring" shall have the
meanings correlative to the foregoing.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payable and other
accrued current liabilities incurred in the ordinary course of business, but
including, without limitation, all obligations, contingent or otherwise, of
such Person in connection with any letters of credit, bankers acceptance or
other similar credit transaction and in connection with any agreement to
purchase, redeem, exchange, convert or otherwise acquire for value any Capital
Stock of such Person, or any warrants, rights or options to acquire such
Capital Stock, now or hereafter outstanding (provided, that any future payment
obligations of the Company issued by the Company in accordance with the
Stockholder Agreements shall not be "Indebtedness" hereunder, if such
obligations are expressly subordinated to the Notes; and provided, further,
that no cash payments may be
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made by the Company in respect of such future payment obligations to the
extent such payments do not violate the limitations set forth in "--Limitation
on Restricted Payments"), (ii) all obligations of such Person evidenced by
bonds, notes, debentures or other similar instruments, (iii) all indebtedness
created or arising under any conditional sale or other title retention
agreement with respect to property acquired by such Person (even if the rights
and remedies of the seller or lender under such agreement in the event of
default are limited to repossession or sale of such property), but excluding
trade accounts payable arising in the ordinary course of business, (iv) all
Capitalized Lease Obligations of such Person, (v) all Indebtedness referred to
in the preceding clauses of other Persons and all dividends of other Persons,
the payment of which is secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien upon property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or
become liable for the payment of such Indebtedness (the amount of such
obligation being deemed to be the lesser of the value of such property or
asset or the amount of the obligation so secured), (vi) all guarantees of
Indebtedness by such Person, provided, however, that any such guarantee shall
not be deemed Indebtedness unless the Company shall have received a demand for
payment thereunder and the Company shall have failed to make such payment
within ten business days of the date required for payment, (vii) all
Redeemable Capital Stock valued at the greater of its voluntary or involuntary
maximum fixed repurchase price plus accrued and unpaid dividends, (viii) all
obligations under or in respect of Currency Agreements and Interest Rate
Protection Obligations of such Person, and (ix) any amendment, supplement,
modification, deferral, renewal, extension or refunding of any liability of
the types referred to in clauses (i) through (viii) above. For purposes
hereof, the "maximum fixed repurchase price" of any Redeemable Capital Stock
which does not have a fixed repurchase price will be calculated in accordance
with the terms of such Redeemable Capital Stock as if such Redeemable Capital
Stock were purchased on any date on which Indebtedness will be required to be
determined pursuant to the Indenture, and if such price is based upon, or
measured by, the Fair Market Value of such Redeemable Capital Stock, such Fair
Market Value is to be determined in good faith by the Board of Directors of
the issuer of such Redeemable Capital Stock.
"Independent Financial Advisor" means an accounting, appraisal or investment
banking firm (i) which does not, and whose directors, officers and employees
or Affiliates do not have, a direct or indirect financial interest in the
Company and (ii) which, in the judgment of the Board of Directors of the
Company, is otherwise independent and qualified to perform the task for which
it is to be engaged.
"Interest Rate Protection Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest
on a stated notional amount in exchange for periodic payments made by such
Person calculated by applying a fixed or a floating rate of interest on the
same notional amount or any other arrangement involving payments by or to such
Person based upon fluctuations in interest rates.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan or other extension of credit (including by means of a guarantee)
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 otherwise), or any purchase or acquisition by such Person of any
Capital Stock, bonds, notes, debentures or other securities or evidences of
Indebtedness issued by any other Person. Investments shall exclude extensions
of trade credit on commercially reasonable terms in accordance with the
Company's normal trade practices. In addition to the foregoing, any foreign
exchange contract, currency swap, Interest Rate Protection Obligation or
similar agreement shall constitute an Investment.
"Issue Date" means the original issue date of the Old Notes under the
Indenture.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
privilege, security interest, hypothecation, cessation and transfer, lease of
real property, assignment for security, claim, deposit arrangement, or
preference or priority or other encumbrance upon or with respect to any
property of any kind, whether real, Personal or mixed, movable or immovable,
now owned or hereafter acquired. A Person will be deemed to own
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subject to a Lien any property it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement.
"Material Subsidiary" means any Restricted Subsidiary of the Company that is
a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X under the
Securities Act (as such regulation is in effect on the Issue Date).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect
of deferred payment obligations when received in the form of cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Company or any Restricted Subsidiary) net of (i)
brokerage commissions and other reasonable fees and expenses (including fees
and expenses of legal counsel and investment bankers) related to such Asset
Sale, (ii) provisions for all taxes payable as a result of such Asset Sale,
(iii) amounts required to be paid to any Person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in or having a Lien on the
assets subject to the Asset Sale and (iv) appropriate amounts to be provided
by the Company or any Restricted Subsidiary, as the case may be, as a reserve
required in accordance with GAAP consistently applied against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale.
"New Credit Agreement" means the Credit Agreement between the Company and
LaSalle National Bank, as in effect on the Issue Date, and as such agreement
may be amended, renewed, extended, substituted, refinanced, replaced,
supplemented or otherwise modified from time to time, and includes (a) related
notes, guarantees and other agreements executed in connection therewith and
(b) any agreement (i) extending the maturity of all or any portion of the
Indebtedness thereunder, (ii) adding additional borrowers or guarantors
thereunder and (iii) increasing the amount to be borrowed thereunder;
provided, however, that in the case of clauses (i), (ii) and (iii), any such
agreement is not prohibited by the Indenture.
"Note Guarantee" means a guarantee by a Guarantor of the Notes and the
Company's obligations under the Indenture.
"Pari Passu Indebtedness" means any Indebtedness of the Company or any
Guarantor ranking pari passu in right of payment with the Notes or the Note
Guarantee of such Guarantor, as applicable.
"Permitted Holders" means Craig Sloan, Jorge Andrade, John W. Funk and
Howard G. Buffett or their successors and assigns who are Affiliates of the
Permitted Holders, members of their families and their heirs or executors.
"Permitted Indebtedness" has the meaning set forth under "--Certain
Covenants--Limitation on Indebtedness."
"Permitted Investments" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease,
utility and workers' compensation, performance and other similar deposits; (c)
loans and advances to employees made in the ordinary course of business not to
exceed $250,000 in the aggregate at any one time outstanding; (d) Interest
Rate Protection Obligations and Currency Agreements; and (e) Investments not
to exceed $15.0 million in the aggregate outstanding at any time.
"Permitted Tax Payments" has the meaning set forth under "--Certain
Covenants--Limitations on Restricted Payments."
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
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"Preferred Stock" means, with respect to any Person, Capital Stock of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over
Capital Stock of any other class of such Person.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary incurred for the purpose of financing all or any part of
the purchase price or the cost of construction or improvement of any property,
plant or equipment, provided that the aggregate principal amount of such
Indebtedness does not exceed the lesser of the Fair Market Value of such
property or such purchase price or cost.
"Redeemable Capital Stock" means any class or series of Capital Stock to the
extent that, either by its terms, by the terms of any security into which it
is convertible or exchangeable, or by contract or otherwise, is or upon the
happening of an event or passage of time would be, required to be redeemed
prior to the final Stated Maturity of the Notes or is redeemable at the option
of the holder thereof at any time prior to such Stated Maturity, or is
convertible into or exchangeable for debt securities at any time prior to such
Stated Maturity, provided the Capital Stock subject to the Stockholder
Agreements shall not be deemed Redeemable Capital Stock.
"Reference Period" has the meaning set forth under the definition of
"Consolidated Fixed Charge Coverage Ratio."
"Refinance" means, with respect to any Indebtedness, any refinancing,
redemption, retirement, renewal, substitution, replacement, extension or
refunding of such Indebtedness.
"Restricted Payment" has the meaning set forth under "--Certain Covenants--
Limitation on Restricted Payments."
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a board
resolution delivered to the Trustee, as an Unrestricted Subsidiary pursuant to
and in compliance with the covenant described under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries." Any such designation
may be revoked by a board resolution of the Board of Directors of the Company
delivered to the Trustee, subject to the provisions of such covenant.
"Revocation" has the meaning set forth under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries."
"Securities Act" mean the Securities Act of 1933, as amended, and the rules
and regulations promulgated by the Commission thereunder.
"Senior Indebtedness" means the principal of, premium, if any, and interest
on any Indebtedness of the Company, whether outstanding on the Issue Date or
thereafter created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to any Indebtedness of the Company. Without
limiting the generality of the foregoing, "Senior Indebtedness" will include
(a) the principal of, premium, if any, and interest (including interest that
would accrue but for the filing of a petition initiating any proceeding under
any state or federal bankruptcy laws, whether or not such claim is allowable
in such proceeding) on all obligations of every nature of the Company from
time to time owed to the lenders under the New Credit Agreement, including,
without limitation, principal of and interest on, and all fees and expenses
payable under the New Credit Agreement and (b) amounts owing under the
Existing Leases. Notwithstanding the foregoing, "Senior Indebtedness" shall
not include, to the extent constituting Indebtedness, (i) Indebtedness
evidenced by the Notes, (ii) Indebtedness that is subordinate or junior in
right of payment to any Indebtedness of
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the Company, (iii) Indebtedness which, when incurred and without respect to
any election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company, (iv) Indebtedness which is represented by Redeemable
Capital Stock, (v) Indebtedness for goods, materials or services purchased in
the ordinary course of business or Indebtedness consisting of trade payables
or other current liabilities (other than any current liabilities owing under
the New Credit Agreement or the current portion of any long-term Indebtedness
which would constitute Senior Indebtedness but for the operation of this
clause (v)), (vi) Indebtedness of or amounts owed by the Company for
compensation to employee or for services rendered to the Company, (vii) any
liability for federal, state, local or other taxes owed or owing by the
Company, (viii) Indebtedness of the Company to a Subsidiary of the Company,
(ix) that portion of any Indebtedness which at the time of issuance is issued
in violation of the Indenture and (x) any obligation to purchase Capital Stock
under the Stock Purchase Agreements.
"Stated Maturity" means, with respect to any Note or any installment of
interest thereon, the dates specified in such Note as the fixed date on which
the principal of such Note or such installment of interest is due and payable,
and when used with respect to any other Indebtedness, means the date specified
in the instrument governing such Indebtedness as the fixed date on which the
principal of such Indebtedness or any installment of interest is due and
payable.
"Stockholder Agreements" means each of the Stock Restriction and Buy-Sell
Agreements, made as of June 6, 1996 by and between each of the Permitted
Holders and the Company with respect to the Company's voting Capital Stock, as
amended, and the Stock Restriction and Buy-Sell Agreement made as of January
1, 1997 among the Company, the Permitted Holders and other persons named
therein with respect to the Company's non-voting Capital Stock, as amended.
"Subordinated Indebtedness" means, with respect to the Company, Indebtedness
of the Company which is expressly subordinated in right of payment to the
Notes or, with respect to any Guarantor, Indebtedness of such Guarantor which
is expressly subordinated in right of payment to the Note Guarantee of such
Guarantor.
"Subsidiary" means, with respect to any Person, (a) any corporation of which
the outstanding shares of Voting Stock having at least a majority of the votes
entitled to be cast in the election of directors shall at the time be owned,
directly or indirectly, by such Person, or (b) any other Person of which at
least a majority of the shares of Voting Stock are at the time, directly or
indirectly, owned by such first named Person.
"Surviving Person" means, with respect to any Person involved in any
consolidation or merger, or any sale, assignment, conveyance, transfer, lease
or other disposition of all or substantially all of its properties and assets
as an entirety, the Person formed by or surviving such merger or consolidation
or the Person to which such sale, assignment, conveyance, transfer or lease is
made.
"Tax Amount" means, with respect to any period, without duplication, the
amount of taxable income of any Person attributable to the income of the
Company and its Restricted Subsidiaries for such period multiplied by the
highest marginal combined federal, state and local tax rates applicable to
individuals during such period.
"Transaction Date" has the meaning set forth under the definition of
"Consolidated Fixed Charge Coverage Ratio".
"Unrestricted Subsidiary" means a Subsidiary of the Company (other than a
Guarantor) designated as such pursuant to and in compliance with the covenant
described under "--Certain Covenants--Limitation on Designations of
Unrestricted Subsidiaries." Any such designation may be revoked by a Board
Resolution of the Company delivered to the Trustee, subject to the provisions
of such covenant.
"Unutilized Net Available Proceeds" has the meaning set forth under "--
Certain Covenants--Disposition of Proceeds of Asset Sales."
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"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the Board of Directors, managers or trustees
of any Person (irrespective of whether or not, at the time, stock of any other
class or classes shall have, or might have, voting power by reason of the
happening of any contingency).
"Wholly-Owned Restricted Subsidiary" means any Restricted Subsidiary of
which 100% of the outstanding Capital Stock is owned by the Company and/or
another Wholly-Owned Restricted Subsidiary. For purposes of this definition,
any directors' qualifying shares shall be disregarded in determining the
ownership of a Restricted Subsidiary.
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BOOK-ENTRY; DELIVERY AND FORM
The Old Notes offered and sold to qualified institutional buyers (as defined
under Rule 144A) ("QIBs") were each registered in book-entry form, are
represented by a global note in fully registered form without interest
coupons, which was deposited with the Trustee as custodian for DTC and
registered in the name of Cede & Co. or such other nominee as DTC may
designate.
The Old Notes offered and sold to persons outside the United States who
received such Old Notes pursuant to sales in accordance with Regulation S were
each initially represented by a global note certificate in fully registered
form without interest coupons (the "Offshore Global Old Note"). The Offshore
Global Old Note was deposited with the Trustee as custodian for DTC and
registered in the name of Cede & Co. Prior to the expiration of the "40-day
restricted period" within the meaning of Rule 903 of Regulation S, transfers
of interest in the Offshore Global Old Note were only effected through records
maintained by DTC, Cedel Bank, societe anonyme ("Cedel") or Euroclear System
("Euroclear").
The certificates representing the New Notes will be issued in fully
registered form without interest coupons. Except as described below, the New
Notes will be deposited with, or on behalf of, DTC, and registered in the name
of Cede & Co as DTC's nominee, in the form of a global New Note certificate
(the "Global New Note") or will remain in the custody of the Trustee pursuant
to the FAST Balance Certificate between DTC and the Trustee.
Holders of New Notes who elect to take physical delivery of their
certificates instead of holding their interest through the Global New Note
(collectively referred to herein as the "Non-Global Holders") will be issued
in registered form a certificated New Note ("Certificated New Note"). Upon the
transfer of any Certificated New Note initially issued to a Non-Global Holder,
such Certificated New Note will, unless the transferee requests otherwise or
the Global New Note has previously been exchanged in whole for Certificated
New Notes, be exchanged for an interest in the Global New Note.
THE GLOBAL NEW NOTE. The Company expects that, pursuant to procedures
established by DTC, (a) upon deposit of the Global New Note, DTC or its
custodian will credit on its internal system the principal amount at maturity
of New Notes of the individual beneficial interests represented by such Global
New Note to the respective accounts of persons who have accounts with DTC and
(b) ownership of beneficial interests in the Global New Note will be shown on,
and the transfer of ownership thereof will be effected only through, records
maintained by DTC or its nominee (with respect to interests of Participants
(as defined herein)) and the records of Participants (with respect to
interests of persons other than Participants). Ownership of beneficial
interests in the Global New Note will be limited to persons who have accounts
with DTC ("Participants") or persons who hold interests through Participants.
QIBs may hold their interests in the Global New Note directly through DTC if
they are Participants in such system, or indirectly through organizations
which are Participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the New
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner and holder of the New Notes represented by such Global New Note for all
purposes under the Indenture. No beneficial owner of an interest in the Global
New Note will be able to transfer such interest except in accordance with
DTC's procedures, in addition to those provided for under the Indenture with
respect to the New Notes.
Payments of the principal of or premium and interest on the Global New Note
will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee or any paying agent under the
Indenture will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global New Note or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of or premium and interest on the Global New Note, will credit
Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global New
Note as shown on the records
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of DTC or its nominee. The Company also expects that payments by Participants
to owners of beneficial interests in the Global New Note held through such
Participants will be governed by standing instructions and customary practice
as is now the case with securities held for the accounts of customers
registered in the names of nominees for such customers. Such payments will be
the responsibility of such Participants.
Transfers between Participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in federal funds. If a holder requires physical delivery of a
Certificated New Note for any reason, including to sell New Notes to persons
in states that require physical delivery of the New Notes or to pledge such
securities, such holder must transfer its interest in the Global New Note in
accordance with normal procedures of DTC and with the procedures set forth in
the Indenture.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of New Notes (including the presentation of New Notes for
exchange as described below) only at the direction of one or more Participants
to whose account the DTC interests in the Global New Note are credited and
only in respect of such portion of the aggregate principal amount of New Notes
as to which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the Indenture, DTC will
exchange the Global New Note for Certificated New Notes, which it will
distribute to its Participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
Although DTC, Euroclear and Cedel are expected to follow the foregoing
procedures in order to facilitate transfers of interest in the Global New
Notes among Participants of DTC, they are under no obligation to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Company nor the Trustee will have any responsibility for the performance by
DTC, Euroclear and Cedel or the Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
CERTIFICATED NEW NOTES. Interests in the Global New Note will be
exchangeable or transferable, as the case may be, for Certificated Notes if
(i) DTC notifies the Company that it is unwilling or unable to continue as
depositary for such Global New Note, or DTC ceases to be a "Clearing Agency"
registered under the Exchange Act, and a successor depositary is not appointed
by the Company within 90 days, or (ii) an Event of Default has occurred and is
continuing with respect to such New Notes. Upon the occurrence of any of the
events described in the preceding sentence, the Company will cause the
appropriate Certificated New Notes to be delivered.
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement with the Initial Purchasers,
the Company agreed to file with the Commission the Exchange Offer Registration
Statement of which this Prospectus is a part on an appropriate form under the
Securities Act with respect to an offer to exchange the Old Notes for the New
Notes. Upon the effectiveness of the Exchange Offer Registration Statement,
the Company will offer to the holders of Old Notes who are able to make
certain representations the opportunity to exchange their Old Notes for New
Notes. If (i) the Company is not permitted to file the Exchange Offer
Registration Statement or to consummate the Exchange Offer because the
Exchange Offer is not permitted by applicable law or Commission policy, (ii)
the Exchange Offer is not for any other reason consummated within 180 days
after the Issue Date, (iii) any holder of Old Notes
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notifies the Company within a specified time period that (a) due to a change
in applicable law or Commission policy it is not entitled to participate in
the Exchange Offer, (b) due to a change in applicable law or Commission policy
it may not resell the New Notes acquired by it in the Exchange Offer to the
public without delivering a prospectus and the prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales by such holder or (c) it is a broker-dealer and owns Old Notes
acquired directly from the Company or (iv) the holders of a majority of the
Old Notes may not resell the New Notes to be acquired by them in the Exchange
Offer to the public without restriction under the Securities Act and without
restriction under applicable blue sky or state securities laws, the Company
will file with the Commission the Shelf Registration Statement to cover
resales of the Transfer Restricted Notes (as defined herein) by the holders
thereof. The Company will use its best efforts to cause the applicable
registration statement to be declared effective as promptly as possible by the
Commission. For purposes of the foregoing, "Transfer Restricted Notes" means
each Old Note until (i) the date on which such Old Note has been exchanged by
a person other than a broker-dealer for a New Note in the Exchange Offer, (ii)
following the exchange by a broker-dealer in the Exchange Offer of an Old Note
for a New Note, the date on which such New Note is sold to a purchaser who
receives from such broker-dealer on or prior to the date of such sale a copy
of the prospectus contained in the Exchange Offer Registration Statement,
(iii) the date on which such Old Note has been effectively registered under
the Securities Act and disposed of in accordance with the Shelf Registration
Statement, (iv) the date on which such Old Note is distributed to the public
pursuant to Rule 144(k) under the Securities Act (or any similar provision
then in force, but not Rule 144A under the Securities Act), (v) such Old Note
shall have been otherwise transferred by the holder thereof and a New Note not
bearing a legend restricting further transfer shall have been delivered by the
Company and subsequent disposition of such Old Note shall not require
registration or qualification under the Securities Act or any similar state
law then in force or (vi) such Old Note ceases to be outstanding.
Under existing Commission interpretations, the New 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
participating in the Exchange Offer, a prospectus meeting the requirements of
the Securities Act must be delivered upon resale by such broker-dealers in
connection with resales of the New Notes. The Company has agreed, for period
of 180 days after consummation of the Exchange Offer, to make available a
prospectus meeting the requirements of the Securities Act to any such broker-
dealer for use in connection with any resale of any New Notes acquired in the
Exchange Offer. A broker-dealer who 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
provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations).
Each holder of Old Notes who wishes to exchange such Old Notes for New Notes
in the Exchange Offer will be required to make certain representations,
including representations that: (i) the holder is not an "affiliate" of the
Company as defined in Rule 405 of the Securities Act, (ii) the holder is not a
broker-dealer that acquired Old Notes directly from the Company in order to
resell them pursuant to Rule 144A of the Securities Act or any other available
exemption under the Securities Act, (iii) the holder will acquire the New
Notes in the ordinary course of business and (iv) the holder is not
participating, and does not intend to participate, and has no arrangement or
understanding with any person to participate, in the distribution of the New
Notes.
If the holder is a broker-dealer that will receive New Notes for its own
account in exchange for Old Notes that were acquired as a result of market-
making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes.
The Company has agreed to pay all expenses incident to the Exchange Offer
and will indemnify the Initial Purchasers against certain liabilities,
including liabilities under the Securities Act.
The Registration Rights Agreement provides that (i) unless the Exchange
Offer would not be permitted by applicable law or Commission policy, the
Company will use its best efforts to file the Exchange Offer Registration
Statement with the Commission on or prior to 90 days after the Issue Date,
(ii) unless the Exchange
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Offer would not be permitted by applicable law or Commission policy, the
Company will use its best efforts to have the Exchange Offer Registration
Statement declared effective by the Commission on or prior to 150 days after
the Issue Date, (iii) unless the Exchange Offer would not be permitted by
applicable law or Commission policy, the Company will use its best efforts to
have the Exchange Offer Registration Statement remain effective until the
closing of the Exchange Offer, (iv) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, the Company will commence
the Exchange Offer and use its best efforts to issue, on or prior to 180 days
after the Issue Date, New Notes in exchange for all Old Notes tendered prior
thereto in the Exchange Offer and (v) if obligated to file the Shelf
Registration Statement, the Company will use its best efforts to file the
Shelf Registration Statement prior to the later of (a) 120 days after the
Issue Date or (b) 30 days after such filing obligation arises and use its best
efforts to cause the Shelf Registration Statement to be declared effective by
the Commission on or prior to 60 days after such obligation arises; provided,
that if the Company has not consummated the Exchange Offer within 180 days of
the Issue Date, then the Company will file the Shelf Registration Statement
with the Commission on or prior to the 181st day after the Issue Date. The
Company shall use its best efforts to keep such Shelf Registration Statement
continuously effective, supplemented and amended until the second anniversary
of the Issue Date or such shorter period that will terminate when all the
Transfer Restricted Notes covered by the Shelf Registration Statement have
been sold pursuant thereto. A holder of Old Notes who intends to sell such Old
Notes pursuant to the Shelf Registration Statement will be required to be
named as a selling securityholder in the related prospectus and to deliver
such prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales
and will be bound by the provisions of the Registration Rights Agreement
applicable to such holder (including certain indemnification and contribution
obligations).
If (i) the Company fails to file any of the registration statements required
by the Registration Rights Agreement on or before the date specified for such
filing, (ii) any of such registration statements are not declared effective by
the Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), subject to certain limited exceptions, (iii) the
Company fails to consummate the Exchange Offer within 30 days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement or (iv) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter, subject to
certain limited exceptions, ceases to be effective or usable in connection
with the Exchange Offer or resales of Transfer Restricted Notes, as the case
may be, during the periods specified in the Registration Rights Agreement
(each such event referred to in clauses (i) through (iv) above, a
"Registration Default"), then the interest rate on the Transfer Restricted
Notes will accrue at a rate per annum equal to an additional one quarter of
one percent (0.25%) of the principal amount of the Notes upon the occurrence
of each Registration Default, which rate will increase by one quarter of one
percent (0.25%) each 90-day period that such Additional Interest continues to
accrue under any such circumstance, with an aggregate maximum increase in the
interest rate equal to one percent (1%) per annum. Following the cure of all
Registration Defaults, the accrual of additional interest will cease and the
interest rate will revert to the original rate.
The summary herein of the material provisions of the Registration Rights
Agreement does not purport to be complete, and where reference is made to
particular provisions of the Registration Rights Agreement, such provisions,
including the definitions of certain terms, are qualified in their entirety by
reference to all of the provisions of the Registration Rights Agreement. A
copy of the Registration Rights Agreement is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part, and is
incorporated by reference herein.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations of the issuance of New Notes and the Exchange Offer. This
summary does not discuss all aspects of federal income taxation that may be
relevant to particular holders of Note, especially in light of a holder's
personal investment circumstances, or to certain types of holders subject to
special treatment under the federal income tax laws (for example, life
insurance companies, tax-exempt organizations and foreign corporations and
individuals who are not citizens or residents of the United States) and does
not discuss any aspects of state, local or foreign taxation. This discussion
is limited to those holders who will hold the Notes as "capital assets"
(generally, property held for investment) within the meaning of Section 1221
of the Internal Revenue Code of 1986, as amended (the "Code").
This summary is based upon laws, regulations, rulings and decisions now in
effect and upon proposed regulations, all of which are subject to change
(possibly with retroactive effect) by legislation, administrative action or
judicial decision.
EXCHANGE OFFER. The exchange of Old Notes for New Notes pursuant to the
Exchange Offer should not be treated as a taxable "exchange" because the New
Notes should not be considered to differ materially in kind or extent from the
Old Notes. Rather, the New Notes received by a holder of the Old Notes should
be treated as a continuation of the Old Notes in the hands of such holder. As
a result, there should be no gain or loss to holders exchanging the Old Notes
for the New Notes pursuant to the Exchange Offer.
INTEREST. A holder will be required to include in gross income the stated
interest on the Old Notes or the New Notes in accordance with the holder's
method of tax accounting.
TAX BASIS. Generally, a holder's tax basis in an Old Note will initially be
the holder's purchase price for the Old Note and will be decreased by the
amount of any principal payments received. If a holder exchanges an Old Note
for a New Note pursuant to the Exchange Offer, the tax basis of the New Note
immediately after such exchange should equal the holder's tax basis in the Old
Note immediately prior to the exchange.
SALE OR REDEMPTION. The sale, exchange, redemption or other disposition of
an Old Note or a New Note (other than pursuant to the Exchange Offer)
generally will be a taxable event. A holder generally will recognize gain or
loss equal to the difference between (i) the amount of cash plus the fair
market value of any property received upon such sale, exchange, redemption or
other taxable disposition of an Old Note or a New Note (other than in respect
of accrued interest thereon) and (ii) the holder's adjusted tax basis in such
Old Note or New Note. Such gain or loss generally will be capital gain or
loss, provided that the holder has held the Note as a capital asset. The
recently enacted Taxpayer Relief Act of 1997 made certain changes to the Code
with respect to taxation of capital gains of taxpayers other than
corporations. In general, the maximum tax rate for non-corporate taxpayers on
long-term capital gains has been lowered to 20% from the previous 28% rate for
most capital assets (including the Old or New Notes) held for more than 18
months. For taxpayers in the 15% regular tax bracket, the maximum tax rate on
long-term capital gains in now 10%. Capital gain on such assets for non-
corporate holders having a holding period of more than one year but not more
than 18 months will be subject to a maximum tax rate of 28%. The holding
period of each New Note would include the holding period of the Old Notes
exchanged therefor.
PURCHASERS OF NOTES AT OTHER THAN ORIGINAL ISSUANCE. The foregoing summary
does not discuss special rules which may affect the treatment of purchasers
that acquire Notes other than at original issuance, including those provisions
of the Code relating to the treatment of "market discount" and "acquisition
premium." Any such Purchaser should consult its tax advisor as to the
consequences to him of the acquisition, ownership and disposition of Old Notes
and the New Notes.
BACKUP WITHHOLDING. Unless a holder or other payee provides its correct
taxpayer identification number (employer identification number or social
security number) to the Company (as payor) and certifies that such number is
correct, under the federal income tax backup withholding rules, generally 31%
of (1) the interest paid
90
<PAGE>
on the Notes, and (2) proceeds of sale or other disposition of the Notes must
be withheld and remitted to the United States Department of the Treasury.
Therefore, each holder should complete and sign the Substitute Form W-9
included so as to provide the information and certification necessary to avoid
backup withholding. However, certain exchanging holders (including, among
others, certain foreign individuals) are not subject to these backup
withholding and reporting requirements. In order for a foreign individual to
qualify as an exempt foreign recipient, that exchanging holder must submit a
statement, signed under penalties of perjury, attesting to that individual's
exempt foreign status.
Withholding is not an additional federal income tax. Rather, the federal
income tax liability of a person subject to withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained from the Internal Revenue Service.
EACH HOLDER OF NOTES OR NEW NOTES SHOULD CONSULT SUCH HOLDER'S TAX ADVISOR
AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE EXCHANGE OFFER,
INCLUDING THE APPLICATION OF AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX
LAWS.
91
<PAGE>
PLAN OF DISTRIBUTION
Pursuant to the Exchange Offer, each Participating Broker-Dealer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. This Prospectus may be used by a Participating Broker-Dealer
in connection with resales of New Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. The Company has agreed that it will make this
Prospectus available to any Participating Broker-Dealer for use in connection
with any such resale and Participating Broker-Dealers shall be authorized to
deliver this Prospectus for a period not exceeding 180 days after the
Expiration Date.
The Company will not receive any proceeds from any sales of the New Notes by
Participating Broker-Dealers. New Notes received by Participating Broker-
Dealers for their own account pursuant to the Exchange Offer may be sold from
time to time, in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or 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 such Participating Broker-Dealer or the purchasers of any
such New Notes. Any broker-dealer that resells New Notes that were received by
it for its own account pursuant to the Exchange Offer and any broker or dealer
that participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
The Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any Participating Broker-Dealer
that reasonably requests such documents in the Letter of Transmittal. See "The
Exchange Offer."
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
Notes offered hereby will be passed upon for the Company by Mayer, Brown &
Platt, Chicago, Illinois.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and 1997 and for the years ended December 31, 1995, 1996 and 1997, included in
this Prospectus, have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their report appearing herein.
The balance sheets of DMC as of October 31, 1996 and 1997, and the related
statements of income, stockholders' equity and cash flows for the years ended
October 31, 1995, 1996 and 1997 included herein and elsewhere in this
Prospectus, have been audited by McGladrey & Pullen, LLP, independent public
accountants, as stated in their report appearing herein and are included
herein in reliance and upon the authority of said firm as experts in giving
said reports.
In 1996, for business reasons, the Company's Board of Directors approved the
dismissal of Arthur Andersen LLP, which had been the Company's principal
accounting firm for fiscal 1992 through fiscal 1995, and the appointment of
Geo. S. Olive & Co., LLC. Following the completion of the 1996 audit, the
Board approved the reappointment of Arthur Andersen LLP as the Company's
principal accounting firm. None of the reports on the Company's financial
statement prepared by either Arthur Andersen LLP or Geo. S. Olive & Co., LLC
contained an adverse opinion or a disclaimer of opinion, or were qualified or
modified as to uncertainty, audit scope or accounting principles. There were
no disagreements with either Arthur Andersen LLP or Geo. S. Olive & Co., LLC
on any matter of accounting principles or practices, financial statement
disclosures or auditing scope or procedure through the date of its dismissal.
92
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
THE GSI GROUP, INC. AND SUBSIDIARIES
Audited Consolidated Financial Statements:
Report of Independent Public Accountants.................................. F-2
Report of Independent Public Accountants on Supplemental Schedule......... F-3
Consolidated Balance Sheets as of December 31, 1996 and 1997.............. F-4
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997...................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997......................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997...................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
DAVID MANUFACTURING CO.
Independent Auditor's Report.............................................. F-19
Balance Sheets as of October 31, 1996 and 1997............................ F-20
Statements of Income for the years ended October 31, 1995, 1996 and 1997.. F-21
Statements of Stockholders' Equity for the years ended October 31, 1995,
1996 and 1997............................................................ F-22
Statements of Cash Flows for the years ended October 31, 1995, 1996 and
1997..................................................................... F-23
Notes to Financial Statements............................................. F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
The GSI Group, Inc.:
We have audited the accompanying consolidated balance sheets of The GSI
Group, Inc. and subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The GSI
Group, Inc. and subsidiaries as of December 31, 1996 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Chicago, Illinois
February 24, 1998 (except with respect to the
matter discussed in the first paragraph of Note 6,
as to which the date is March 5, 1998)
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE
To the Board of Directors and Stockholders of The GSI Group, Inc.
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of The GSI Group, Inc. and subsidiaries
included in this registration statement and have issued our report thereon
dated February 24, 1998 (except with respect to the matter discussed in the
first paragraph of Note 6, as to which the date is March 5, 1998). Our audits
were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index in Item 21(b) is
the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. The schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
February 24, 1998
F-3
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1996 1997
------ -------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................ $ 1,490 $ 18,572
Accounts receivable, net................................. 18,453 23,214
Inventories, net......................................... 19,805 46,882
Prepaids................................................. 202 8,165
Current portion of notes receivable...................... 154 --
Other.................................................... 3,534 3,155
-------- --------
Total current assets................................... 43,638 99,988
-------- --------
Notes Receivable, less current portion..................... 1,127 1,084
-------- --------
Long-Term Retainage........................................ -- 579
-------- --------
Property, Plant and Equipment, net......................... 22,106 36,143
-------- --------
Other Assets:
Goodwill, net............................................ 120 7,991
Other intangible assets, net............................. 336 564
Deferred financing costs, net............................ 245 3,514
Other.................................................... -- 246
-------- --------
Total other assets..................................... 701 12,315
-------- --------
Total assets........................................... $ 67,572 $150,109
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable......................................... $ 7,071 $ 11,948
Dividend payable......................................... 5,526 5,300
Payroll and payroll related expenses..................... 3,123 3,843
Deferred taxes........................................... -- 1,234
Accrued expenses......................................... 5,435 9,067
Customer deposits........................................ 3,892 4,883
Current maturities of long-term debt..................... 3,339 14,663
-------- --------
Total current liabilities.............................. 28,386 50,938
-------- --------
Long-Term Debt, less current maturities.................... 44,567 101,868
-------- --------
Deferred Income Taxes...................................... -- 2,087
-------- --------
Commitments and Contingencies
Stockholders' Equity (Deficit):
Common stock, $.01 par value, voting (authorized
6,900,000 shares;
issued 6,633,652 shares; outstanding 1,800,000 shares).. 18 18
Common stock, $.01 par value, nonvoting (authorized
1,100,000 shares;
issued 1,059,316 shares; outstanding 200,000 shares).... 2 2
Paid-in capital.......................................... 2,473 2,473
Cumulative translation adjustment........................ -- (869)
Retained earnings........................................ 17,659 19,125
Treasury stock, at cost.................................. (25,533) (25,533)
-------- --------
Total stockholders' equity (deficit)................... (5,381) (4,784)
-------- --------
Total liabilities and stockholders' equity............. $ 67,572 $150,109
======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-4
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net Sales..................................... $ 141,191 $ 178,537 $ 220,758
Cost of Sales................................. 115,004 135,696 164,607
--------- --------- ---------
Gross profit.............................. 26,187 42,841 56,151
Selling, General and Administrative Expenses.. 22,176 28,787 35,189
--------- --------- ---------
Operating income.......................... 4,011 14,054 20,962
--------- --------- ---------
Other Income (Expense):
Write-off of affiliate receivable........... (3,423) -- --
Interest expense............................ (2,894) (3,590) (6,174)
Interest income............................. 431 264 654
Other, net.................................. 117 410 289
--------- --------- ---------
Income (loss) before income taxes,
discontinued operation and extraordinary
item..................................... (1,758) 11,138 15,731
--------- --------- ---------
Income Taxes.................................. -- 157 288
--------- --------- ---------
Income (loss) before discontinued
operation and extraordinary item......... (1,758) 10,981 15,443
--------- --------- ---------
Discontinued Operation:
Loss from operations of discontinued
business................................... (2,562) -- --
Loss on sale of discontinued business....... 2,842 (482) --
--------- --------- ---------
Income (loss) before extraordinary item... (1,478) 10,499 15,443
--------- --------- ---------
Extraordinary Item:
Gain on early extinguishment of debt........ -- -- 2,119
--------- --------- ---------
Net income (loss)......................... $ (1,478) $ 10,499 $ 17,562
--------- --------- ---------
Basic and Diluted Earnings Per Share:
Continuing operations....................... $ (0.98) $ 5.78 $ 7.72
Discontinued operations..................... 0.16 (0.25) --
Extraordinary item.......................... -- -- 1.06
--------- --------- ---------
Net income................................ $ (0.82) $ 5.53 $ 8.78
--------- --------- ---------
Weighted Average Common Shares Outstanding.... 1,800,000 1,900,000 2,000,000
========= ========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
--------------------------------- ----------------------------------
VOTING NONVOTING VOTING NONVOTING
------------------ -------------- ADDITIONAL CUMULATIVE ------------------ --------------
SHARES SHARES PAID-IN TRANSLATION RETAINED
ISSUED AMOUNT ISSUED AMOUNT CAPITAL ADJUSTMENT EARNINGS SHARES AMOUNT SHARES AMOUNT
---------- ------ ------- ------ ---------- ----------- -------- --------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1994. 750 $-- -- $-- 200 $ -- $14,165 -- $ -- -- $--
Stock exchange and
recapitalization--
Stock issue
retired.......... (750) -- -- -- (200) -- -- -- -- -- --
New stock issue... 1,800,000 18 -- -- 182 -- -- -- -- -- --
Net loss........... -- -- -- -- -- -- (1,478) -- -- -- --
---------- ---- ------- ---- ------ ----- ------- --------- -------- ------- ----
Balance,
December 31, 1995. 1,800,000 $ 18 -- $-- $ 182 $ -- $12,687 -- $ -- -- $--
Treasury stock
purchased........ (1,460,158) (15) -- -- 15 -- -- 1,460,158 (25,490) -- --
Stock split--
Voting common
stock.......... 785,158 8 -- -- 26 -- -- 3,373,494 (34) -- --
Non-voting
common stock... -- -- 200,000 2 7 -- -- -- -- 859,316 (9)
Stock sold
pursuant to four
purchase
agreements....... 675,000 7 -- -- 2,243 -- -- -- -- -- --
Net income........ -- 10,499
Dividends......... -- -- -- -- -- -- (5,527) -- -- -- --
---------- ---- ------- ---- ------ ----- ------- --------- -------- ------- ----
Balance,
December 31, 1996. 1,800,000 $ 18 200,000 $ 2 $2,473 $ -- $17,659 4,833,652 $(25,524) 859,316 $ (9)
Net income......... -- -- -- -- -- -- 17,562 -- -- -- --
Dividends.......... -- -- -- -- -- -- (16,096) -- -- -- --
Cumulative
Translation
Adjustment........ -- -- -- -- -- (869) -- -- -- -- --
---------- ---- ------- ---- ------ ----- ------- --------- -------- ------- ----
Balance,
December 31, 1997. 1,800,000 $ 18 200,000 $ 2 $2,473 $(869) $19,125 4,833,652 $(25,524) 859,316 $ (9)
========== ==== ======= ==== ====== ===== ======= ========= ======== ======= ====
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balance,
December 31, 1994. $14,365
Stock exchange and
recapitalization--
Stock issue
retired.......... (200)
New stock issue... 200
Net loss........... (1,478)
-------------
Balance,
December 31, 1995. $12,887
Treasury stock
purchased........ (25,490)
Stock split--
Voting common
stock.......... --
Non-voting
common stock... --
Stock sold
pursuant to four
purchase
agreements....... 2,250
Net income........ 10,499
Dividends......... (5,527)
-------------
Balance,
December 31, 1996. $(5,381)
Net income......... 17,562
Dividends.......... (16,096)
Cumulative
Translation
Adjustment........ (869)
-------------
Balance,
December 31, 1997. $(4,784)
=============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss)................................ $(1,478) $ 10,499 $ 17,562
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization.................. 3,351 3,153 3,499
Amortization of deferred financing costs....... -- -- 137
Gain (loss) on sale of equipment............... 30 (349) (17)
Gain on early retirement of debt--noncash
portion....................................... -- -- (2,299)
Write-off of affiliate receivable.............. 3,423 -- --
Loss on sale of discontinued business.......... (2,843) 482 --
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable, net..................... (4,071) (7,056) (1,893)
Inventories, net............................. (453) (2,010) (19,429)
Other current assets and prepaids............ (279) (2,924) (8,091)
Accounts payable............................. 3,027 (2,178) 3,120
Accrued expenses and payroll and related
expenses.................................... 60 3,669 2,925
Other........................................ 1,681 (1,575) 908
------- -------- --------
Net cash flows provided by (used in)
operating activities...................... 2,448 1,711 (3,578)
------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures............................. (5,816) (3,834) (9,655)
Proceeds from sale of discontinued business...... -- 7,982 --
Payments received on notes receivable............ -- 2,130 261
Acquisition of Clark Products, Inc............... -- -- (866)
Acquisition of David Manufacturing Co., net of
cash acquired................................... -- -- (17,684)
Other............................................ 439 1,998 (145)
------- -------- --------
Net cash flows provided by (used in)
investing activities...................... (5,377) 8,276 (28,089)
------- -------- --------
Cash Flows from Financing Activities:
Proceeds from former shareholder loans........... 2,762 17,490 --
Payments on former shareholder loans............. (1,336) -- --
Proceeds from issuance of long-term debt......... 3500 4,000 99,231
Payments on long-term debt....................... (3,703) (2,511) (13,019)
Deferred financing costs......................... -- -- (4,458)
Net payments under line-of-credit agreement...... 3,489 (4,773) (16,299)
Proceeds from issuance of common stock........... -- 2,250 --
Purchase of treasury stock....................... -- (25,490) --
Dividends........................................ -- -- (16,322)
Other............................................ (868) (401) (384)
------- -------- --------
Net cash flows provided by (used in)
financing activities...................... 3,844 (9,435) 48,749
------- -------- --------
Increase in Cash and Cash Equivalents.............. $ 915 $ 552 $ 17,082
Cash & Cash Equivalents, beginning of year......... 23 938 1,490
------- -------- --------
Cash and Cash Equivalents, end of year............. $ 938 $ 1,490 $ 18,572
======= ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements
F-7
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The GSI Group, Inc. and its subsidiaries (the "Company") manufacture and
sell equipment for the agricultural industry. The Company's product lines
include: grain storage, ventilation and handling equipment; and swine and
poultry feeding, ventilation, watering and confinement systems. The Company's
headquarters and main manufacturing facility is in Assumption, Illinois, with
other manufacturing facilities in Illinois, Iowa, Pennsylvania and North
Carolina and a selling and distribution facility in Indiana. In addition, the
Company has manufacturing and assembly operations in Brazil, Malaysia and
Canada and selling and distribution operations in South Africa, The
Netherlands and Mexico.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All intercompany transactions and balances have been
eliminated.
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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all short-term investments with original maturities of
three months or less to be cash equivalents.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company places its cash and temporary investments with high
quality financial institutions. At times, such investments may be in excess of
the FDIC insurance limit. Temporary investments are valued at the lower of
cost or market and at the balance sheet dates approximate fair market value.
The Company primarily serves customers in the agricultural industry. The
Company reviews a customer's credit history before extending credit. In
addition, the Company routinely assesses the financial strength of its
customers, and, as a consequence, believes that its trade accounts receivable
risk is limited.
Inventories
Inventories are stated at the lower of cost or market. Cost includes the
cost of materials, labor and factory overhead. The cost of inventories was
determined on the last-in, first-out link-chain method. Had the inventories
been determined on the first-in, first-out method at December 31, 1996 and
1997, the reported value of such inventories would have been increased by
approximately $3.3 million and $2.5 million, respectively. Inventories and
cost of sales are based in part on accounting estimates relating to
differences resulting from periodic physical inventories.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. The cost of property, plant and equipment acquired as part of a
business acquisition represents the estimated fair market value of such assets
F-8
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
at the acquisition date. Depreciation is provided using the straight-line
method over the following estimated useful lives.
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building and Improvements.......... 7-39
Machinery and Equipment............ 3-20
Office Equipment and Furnitures.... 3-10
</TABLE>
Property, plant and equipment under capital leases are amortized over the
shorter of the estimated useful life of the asset or the term of the lease.
Research and Development
Costs associated with research and development are expensed as incurred.
Such costs incurred were $1.4 million, $1.2 million and $1.6 million for the
years ended December 31, 1995, 1996, and 1997, respectively.
Intangible Assets
The excess of purchase costs over amounts allocated to identifiable assets
and liabilities of businesses acquired ("goodwill") is amortized on the
straight-line basis over 40 years. Goodwill is net of accumulated amortization
of $90,202 and $190,727 at December 31, 1996 and 1997, respectively. Should
events or circumstances occur subsequent to the acquisition of a business
which bring into question the realizable value or impairment of the related
goodwill, the Company will evaluate the remaining useful life and balance of
goodwill and make appropriate adjustments. The Company's principal
considerations in determining impairment include the strategic benefit to the
Company of the particular business as measured by undiscounted current and
expected future operating cash flows of that particular business and expected
undiscounted cash flows. Should an impairment be identified, a loss would be
reported to the extent that the carrying value of the related goodwill exceeds
the fair value of that goodwill as determined by valuation techniques
available in the circumstances. Other intangible assets are net of accumulated
amortization of $1.1 million and $1.4 million at December 31, 1996 and 1997,
respectively, and are being amortized on a straight line basis over a period
of 3 to 17 years.
Revenue Recognition
Revenue on all products are recorded when products are shipped. Provisions
are made at that time, when applicable, for installation and warranty costs to
be incurred.
Translation of Foreign Currency
The Company translates the financial statements of its foreign subsidiaries
in accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Translation." The Company's foreign operations are
reported in the local currency and translated to U.S. dollars, except for
Brazil and Mexico which are in highly inflationary environments and therefore
utilize the U.S. dollar as the functional currency. In 1998, the Company will
not consider Brazil to be highly inflationary and, therefore, will begin to
utilize the local currency as the functional currency.
Forward Exchange Contract
The Company enters into foreign currency forward exchange contracts on a
limited basis. Contracts entered into are for significant outstanding accounts
receivable for which timing of the receipt of payment can be reasonably
estimated. The purpose of the Company's hedging activities is to protect the
Company from the risk that eventual dollar net inflows resulting from the sale
of products to foreign customers will be adversely affected
F-9
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
by changes in foreign currency exchange rates. The Company's foreign exchange
contracts do not subject the Company's results of operations to risk due to
exchange rate movements because gains and losses on the contracts generally
offset gains and losses on the assets and liabilities being hedged.
Deferred Financing Costs
Costs incurred in connection with obtaining financing are capitalized and
amortized over the maturity period of the debt. Accumulated amortization as of
December 31, 1996 and 1997 was $77,492 and $214,482, respectively.
Reclassification
Certain reclassifications have been made to prior-year amounts to conform to
the current-year presentation.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" (SFAS No.
131), which amends the requirements for a public enterprise to report
financial and descriptive information about its reportable operating segments.
Operating segments, as defined in the pronouncement, are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the Company in deciding how to allocate resources and
in assessing performance. The financial information is required to be reported
on the basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments. The disclosure required by
SFAS No. 131 is effective for all fiscal years beginning after December 15,
1997. The Company will adopt SFAS No. 131 in 1998. This pronouncement will
have an effect on the Company's disclosure in subsequent periods; however, the
Company is evaluating alternative formats for presenting this information.
3. DISCONTINUED OPERATIONS
In 1995, in order to concentrate on its core businesses, the Company made a
decision to sell its Heritage Vinyl Products Division ("Division"). The
agreement to sell the Division was signed in December 1995 and the sale of the
Division closed on January 11, 1996. The sale of the net assets of the
Division resulted in net proceeds to the Company of $8.0 million. The gain on
the sale was $2.8 million. A charge of $482,000 was recorded in 1996 to adjust
certain retained assets to net realizable value.
F-10
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. DETAIL OF CERTAIN ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER
31,
------------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts Receivable
Trade receivables...................................... $ 19,096 $ 25,050
Allowance for doubtful accounts........................ (643) (1,836)
-------- --------
Total................................................ $ 18,453 $ 23,214
======== ========
Inventories
Raw materials.......................................... $ 3,605 $ 8,883
Work-in-process........................................ 1,802 12,464
Finished goods......................................... 14,398 25,535
-------- --------
Total................................................ $ 19,805 $ 46,882
======== ========
Property, Plant and Equipment
Land................................................... $ 533 $ 895
Buildings.............................................. 12,565 18,799
Machinery.............................................. 21,491 34,897
Furniture and fixtures................................. 4,132 4,514
Construction-in-progress............................... 1,022 1,364
-------- --------
39,743 60,469
Accumulated depreciation............................... (17,637) (24,326)
-------- --------
Property, Plant and equipment, net..................... $ 22,106 $ 36,143
======== ========
</TABLE>
5. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid $3.2 million, $2.8 million and $5.2 million in interest
during the years ended December 31, 1995, 1996 and 1997, respectively. The
Company paid income taxes of $32,538, $4,567 and $237,745 during the years
ended December 31, 1995, 1996 and 1997, respectively.
6. LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1997 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
CIT note payable with interest at 9%, due $117 monthly
through April, 2000, secured by specific equipment and
by the joint and several personal guarantees of certain
stockholders............................................ $ 4,594 $ --
Metropolitan Life Insurance Company note payable at 9.45%
at December 31, 1996, due $24 monthly plus interest with
unpaid principal due July, 2006, secured by a mortgage
on real property located in Assumption, Illinois, and by
the joint but not several personal guarantees of certain
stockholders............................................ 2,828 --
Citizens National Bank IRB with variable interest at 6.5%
until March, 2000, at which time rate is subject to
periodic adjustments based on U.S. Treasury Note rates,
due $14 monthly plus interest with unpaid principal
balance due April, 2010, secured by certain real estate
and improvements in Paris, Illinois..................... 2,209 2,042
American National Bank IRB with variable interest based
on prime (6.77% at December 31, 1996), due $7 monthly
with unpaid principal balance due November, 2007,
secured by real estate and improvements on a specific
building in Assumption, Illinois and joint and several
personal guarantees of certain stockholders............. 903 --
</TABLE>
F-11
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
LaSalle Bank revolving line that has a maximum
borrowing level ($25,208 at December 31, 1996) based
upon accounts receivable and inventory and secured by
accounts receivable, inventories and certain
equipment; interest is at variable rates based on the
lower of floating prime rate plus one-half or LIBOR-
based rates (8.00% at December 31, 1996) outstanding
letters of credit reduce the overall level of
borrowing; at December 31, 1996, the Company has
$3,937 of standby letters of credit reducing the
overall availability of the line to $5,247 at December
31, 1996; this revolving line terminated on November
5, 1997............................................... $16,024 $ --
LaSalle Bank term note payable with variable interest
based on floating prime rate plus one or LIBOR-based
rate (9.25% at December 31, 1996), due $200 quarterly
through June, 2001, secured by accounts receivable,
inventories and certain equipment..................... 3,600 --
Capital lease on equipment with interest at 8%, due $13
monthly through March, 1998, secured by the related
equipment............................................. 232 --
Various noncompete, license and patent agreement
payable, noninterest-bearing and payable in varying
amounts through 2003.................................. 209 78
Notes to former stockholders payable in varying amounts
each May and November through November, 2006, with
interest at 8%........................................ 17,307 14,312
LaSalle Bank revolving line that has a maximum
borrowing level of $40,000 at December 31, 1997;
interest is a floating rate per annum equal to (at the
Company's option) 0.55% to 1.45% over LIBOR based on
certain ratios of the Company or the prime rate and
secured by substantially all assets of the Company;
outstanding letters of credit, David Manufacturing Co.
("DMC") revolving credit loans outstanding and debt of
FarmPRO, Inc. guaranteed by the Company reduce the
overall level of borrowing; at December 31, 1997, the
Company has $5,022 of standby letters of credit,
$1,125 of DMC revolving credit loans and $4,446 of
guaranteed FarmPRO debt reducing the overall
availability of the line to $29,407; this revolving
line terminates on October 31, 2000................... -- --
Clark Products, Inc. promissory note bearing interest
at 10%; due $14 monthly through June, 2001, secured by
certain equipment and intangibles..................... -- 600
10.25% senior subordinated notes payable, principal due
November, 2007, net of unamortized debt discounts of
$1,626; interest is payable semi-annually in May and
November.............................................. -- 98,374
Norwest Bank Iowa revolving line of credit whereby
outstanding borrowings may not exceed the lesser of
the borrowing base defined as a percentage of eligible
accounts receivable and inventory or $6,250 ($6,250 at
December 31, 1997); interest is payable monthly at the
bank's base rate (8.5% at December 31, 1997) and is
secured by all assets of DMC and the personal
guarantees of certain members of management up to $150
each, plus interest and all costs of collection; at
December 31, 1997 DMC has $250 of letters of credit
reducing the overall availability of the line to
$4,875; this revolving line matures on March 31,
1998.................................................. -- 1,125
------- --------
Total.............................................. 47,906 116,531
Less--
Current maturities................................... (3,339) (14,663)
------- --------
Total long-term debt............................... $44,567 $101,868
======= ========
</TABLE>
F-12
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities of long-term debt during the next five years are as follows (in
thousands):
<TABLE>
<S> <C>
1998............................ $ 14,663
1999............................ 351
2000............................ 1,476
2001............................ 265
2002............................ 180
Thereafter...................... 99,596
--------
Total......................... $116,531
========
</TABLE>
In March 1998, LaSalle Bank committed to refinance the Norwest Bank Iowa
revolving line of credit with a new revolving line providing for borrowings up
to $5.0 million, which will reduce availability under the Company's existing
$40.0 million line to $35.0 million. The new revolving line will bear interest
at a floating rate per annum equal to (at the Company's option) 0.55% to 1.45%
over LIBOR based on certain ratios of the Company or the prime rate. The new
revolving line will be secured by substantially all of the assets of the
Company and will terminate on October 31, 2000. Accordingly, borrowings of
approximately $1.1 million at December 31, 1997 are classified as long-term
debt.
In November 1997, the Company issued $100 million of Senior Subordinated
Notes ("Notes") which are due in 2007. The Notes represent unsecured senior
subordinated obligations of the Company. Upon occurrence of a change in
control (as defined), the Company is required to repurchase the Notes at a
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase. The net proceeds to the Company of
the Offering were $94.8 million, after deducting the Initial Purchasers'
discount and other expenses related to the Offering. The Company used the net
proceeds of the Offering to repay certain notes and other indebtedness of
$53.2 million, purchase 100% of the capital stock of David Manufacturing Co.
("DMC") for approximately $17.9 million, purchase leased facilities in Mt.
Olive and Warsaw, North Carolina for $1.5 million, pay a dividend to holders
of the Company's capital stock of $7.0 million and used $15.2 million for
general corporate purposes. In October 1997, the former stockholders and the
Company entered into an agreement to modify the terms of the former
stockholder debt. Accordingly, during the fourth quarter of 1997, the Company
recorded an extraordinary gain of approximately $2.1 million related to the
early extinguishment of debt. The extraordinary gain results primarily from a
discount on the notes. Of the $53.2 million of indebtedness repaid, $14.3
million due former stockholders was paid in January, 1998. Associated with the
early retirement of the above referenced debt was $143,595 of deferred
financing costs that have been written off.
The senior subordinated note and credit agreements provide for certain
restrictive financial and non-financial covenants. The more significant of the
non-financial covenants restrict the ability of the Company to dispose of
assets, incur additional indebtedness, pay dividends or make distributions and
other payments affecting subsidiaries. In addition, the Company is required to
maintain a certain funded debt to EBITDA ratio, fixed charge coverage ratio
and certain levels of EBITDA. The Company was in compliance with or had
obtained waivers for all covenants as of December 31, 1997.
The fair value of long-term debt approximates carrying value based on the
borrowing rate currently available to the Company for borrowing with similar
terms and maturities.
7. EMPLOYEE BENEFIT PLANS
On December 31, 1995, the Company terminated its profit sharing plan. The
plan's assets were distributed at the direction of the account holders. Under
this plan, the Company's contribution was discretionary. The Company made no
contributions to this plan during 1995.
F-13
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company provides a defined contribution plan covering virtually all
full-time employees. Under the plan, Company contributions are discretionary.
During 1997, the Company provided a 25% matching contribution up to 1% of the
employees' compensation. Employer contributions to this plan were $79,000 and
$228,000 during 1996 and 1997, respectively.
On July 1, 1996, certain employees were granted individual amount of
"gainshares" based on several factors, including experience and
responsibilities. This program provided for participating employees to receive
a specified percentage of the pre-tax profits (as defined by the stockholders)
that are in excess of a certain percentage of net sales. Each participating
employee's portion is calculated based on the number of shares held divided by
the total number of shares provided. Total expense for 1996 and 1997 was $2.3
million and $3.2 million, respectively.
DMC has a profit-sharing bonus plan for those employees who meet the
eligibility requirements. Substantially all of DMC's full-time employees are
covered by the plan. DMC made no contributions to the plan for the two months
ended December 31, 1997. DMC paid $147,376 and $252,077 during the plan years
ended October 31, 1996 and 1997, respectively.
8. INCOME TAX MATTERS
Effective February 1988, an election was filed with the Internal Revenue
Service to have taxable income of The GSI Group, Inc. ("GSI") taxed to the
individual owners pursuant to S Corporation provisions of the Internal Revenue
Code. Accordingly, no provision for federal income taxes related to GSI has
been recorded. Dividends sufficient to pay the resulting income taxes of the
owners are declared and paid as needed. A wholly owned subsidiary of GSI, DMC,
is taxed pursuant to the C Corporation provisions of the Internal Revenue
Code. Accordingly provisions for federal taxes related to DMC have been
recorded. Both GSI and DMC are subject to certain state taxes.
The income tax provision, which relates primarily to taxes currently
payable, differs from the amount of income tax determined by applying the U.S.
Federal income tax rate to pretax income for the years ended December 31,
1995, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
----- ------- -------
<S> <C> <C> <C>
U.S. Federal statutory rate........................ $(597) $ 3,787 $ 5,349
Increase (Decrease) in income taxes resulting from:
Non-taxable S Corporation (income) losses........ 594 (3,703) (5,833)
Foreign rate differences and losses with no tax
benefits........................................ 3 (84) 426
State and other income taxes..................... -- 157 346
----- ------- -------
$ -- $ 157 $ 288
===== ======= =======
</TABLE>
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". Such
approach results in the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the book
carrying amounts and the tax basis of assets and liabilities.
F-14
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of deferred tax assets and liabilities at December 31, 1997
are as follows (in thousands):
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Deferred tax assets:
Tax loss carryforwards......................................... $ 84
Allowance for doubtful accounts................................ 20
Inventory uniform capitalization............................... 30
Estimated product liability.................................... 12
Accrued vacations.............................................. 54
Reserve for slow moving inventory.............................. 10
Estimated liability on product warranties...................... 25
-------
$ 235
=======
Deferred tax liabilities:
Property and equipment......................................... 2,087
Inventory...................................................... 1,469
-------
$ 3,556
=======
Net Deferred tax liability....................................... $ 3,321
=======
</TABLE>
These deferred tax assets and liabilities relate primarily to the book and
tax differences pertaining to DMC, which was acquired during 1997. As such,
the Company had no deferred taxes in prior years.
9. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal matters arising in the normal
course of business which, in the opinion of management, will not have a
material effect of the Company's financial position or results of operations.
The Company has month to month leases for several buildings and paid rentals
in 1995, 1996 and 1997 of $131,880, $592,000 and $811,245, respectively. The
Company also leases equipment and vehicles under operating lease arrangements.
Total lease expense related to the equipment and vehicle leases for the years
ended December 31, 1995, 1996 and 1997 was $3.1 million, $2.1 million and $2.7
million, respectively.
Operating lease commitments for the next five years are as follows (in
thousands):
<TABLE>
<S> <C>
1998.............................. $2,125
1999.............................. 1,965
2000.............................. 1,733
2001.............................. 1,610
2002.............................. 1,458
Thereafter........................ 1,090
======
</TABLE>
The Company has a contract with the Syrian Government to erect a grain
handling system. Other current and long-term assets include $2.3 million of
retainage withheld until completion of the project and the meeting of certain
performance criteria. This asset is secured by a letter of credit in the
amount of $2.3 million. Accrued expenses include $0.6 million for supervisory
costs and commissions expected to be paid in 1998. The project is anticipated
to be completed in late 1998.
The Company has entered into employment agreements with certain executives
that provide for minimum aggregate annual payments of $715,000. The agreements
terminate as of the earliest of: (i) June 6, 2001; (ii) the last day of the
month in which the executives death occurs; or (iii) ninety days after the
date the Company gives the executive notice of termination. If employment is
terminated due to permanent disability, the executives will continue to
receive annual salary and other benefits until such time that the executive
sells his stock. If employment is terminated without cause after December 6,
1999 the executive will at a minimum, immediately upon such termination,
receive a severance payment equal to the greater of: (i) eighteen months of
salary at the executives then current rate or (ii) in the case of certain
stockholders, a range from $375,000 to $594,682. There is no provision for
severance payments if the executive is terminated without cause prior to
December 6, 1999.
F-15
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. REGIONAL INFORMATION
The Company is engaged in the manufacture and sale of equipment for the
agricultural industry. The Company's product lines include: grain storage,
ventilation and handling equipment; and swine and poultry feeding,
ventilation, watering and confinement systems. The Company's products are sold
primarily to independent dealers and distributors and are marketed through the
Company's sales personnel and network of independent dealers. Users of the
Company's products include farmers, feed mills, grain elevators, grain
processing plants and poultry/swine integrators. The Company's three largest
customers, in total, accounted for approximately 14.9%, 14.2% and 11.5% of
sales for the years ended December 31, 1995, 1996 and 1997, respectively. No
single customer accounted for more than 10% of net sales in 1996 and 1997. In
1995, one customer together with its affiliate accounted for more than 10% of
net sales. Export sales outside the United States represented 26%, 31% and 26%
of the Company's net sales in 1995, 1996 and 1997, respectively. Net sales by
each major geographic region are as follows (in millions):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
United States........................................... $104.3 $123.0 $162.6
Asia.................................................... 16.2 18.7 13.7
Canada.................................................. 5.6 13.2 16.9
Latin America........................................... 7.5 10.2 10.9
Mideast................................................. 2.7 10.2 5.7
Europe.................................................. 2.0 2.5 9.0
All other............................................... 2.9 0.7 2.0
------ ------ ------
$141.2 $178.5 $220.8
====== ====== ======
</TABLE>
11. RELATED-PARTY TRANSACTIONS
The Company has various advances to and from stockholders of the Company
netting to a $0.4 million payable and zero as of December 31, 1996 and 1997,
respectively.
The Company makes sales in the ordinary course of business to Sloan
Implement Company, Inc., a supplier of agricultural equipment that is owned by
certain family members of a shareholder of the Company. Such transactions
generally consist of sales of grain equipment and amounted to $315,938,
$129,009 and $173,192 for 1995, 1996 and 1997, respectively.
The Company has made payments to Sloan Transport, Inc., a company formerly
owned by a stockholder of the Company and certain members of his family, for
the use of a private plane. Such payments were in the amounts of $152,880,
$76,854 and zero for the years ended 1995, 1996 and 1997, respectively. In
1996, Sloan Transport, Inc. sold all of its assets and was dissolved.
A significant customer and an affiliate of the Company, Carolina Agri-
Systems, Inc. ("CASI"), ceased distribution operations in North Carolina and
sold its only other operation, Farmer Boy Ag, Inc. ("FBA") in December 1995.
Sales to CASI were $6.0 million in 1995. As a result of this event, the
Company received from CASI the proceeds from the sale and inventory the
Company previously sold to CASI. The remaining receivable due from CASI of
$3.4 million was written off in the year ended December 31, 1995. In
connection with this transaction, the Company entered into an agreement to
lease two facilities that were owned by CASI. Lease payments to CASI during
1996 and 1997 were $204,000 and $153,000, respectively. During 1997, the
Company purchased these leased facilities for $1.5 million. The Company
believes this transaction was negotiated at arm's-length in the normal course
of business. CASI was dissolved in January 1998.
After the sale of FBA noted above, FBA's name was changed to FarmPRO, Inc.
("FarmPRO"). As part of the proceeds of the sale, CASI received a note of $1.4
million from the purchasers of FarmPRO, which was subsequently assigned to the
Company. The note receivable is a 10-year note with quarterly interest
payments calculated at a rate of 9% per annum on the outstanding principal
amount. The note provides for principal
F-16
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
payments equal to 5% of the outstanding principal amount commencing on the
first to occur of (i) March 31, 2000 and (ii) the last day of the first
calendar quarter in which the balance sheet deficit of FarmPRO is reduced to
zero. The balance of this note receivable and accounts receivable from FarmPRO
were $3.9 million and $4.6 million as of December 31, 1996 and 1997,
respectively. Also in 1995, the Company and FarmPRO entered into a long-term
supply agreement pursuant to which FarmPRO agreed to purchase 90% of its
equipment requirements from the Company. During 1997 the long-term supply
agreement was amended. As a result of this amendment the Company agreed to (i)
guarantee FarmPRO borrowings under a line of credit agreement limited to
amounts borrowed up to $6.0 million and before November 26, 1998 and (ii)
provide administrative services to FarmPRO for two years at no charge. In
connection with such guarantee, the Company received an option to purchase up
to 60% of the common stock of FarmPRO at a formula price which approximates
fair market value. The amount of the guaranteed borrowings at December 31,
1997 was $4.4 million. Sales to FarmPRO were $8.9 million, $12.8 million and
$16.5 million in 1995, 1996 and 1997, respectively.
The Company and its stockholders are subject to certain agreements relating
to the rights of the stockholders with respect to their ownership of the
Company's shares (the "Stockholder Agreements"). These agreements generally
(i) provide that the holders of a majority of the stock may sell all of their
shares at any time if the other stockholders are entitled to participate in
such sale on the same terms and conditions, and that the holders of a majority
of the stock may require the other stockholders to sell all their stock at the
same time on the same terms and conditions, (ii) establish that the
stockholders are restricted in their ability to sell, pledge or transfer such
shares, (iii) grant rights of first refusal, first to the Company and then to
all non-transferring stockholders, with respect to the transfer of any shares,
(iv) require that an affirmative vote by a majority of the Company's voting
stock is required to approve certain corporate matters and (v) establish
procedures for the purchase of shares by the Company (subject to compliance
with the terms of the Indenture) or any remaining voting stockholders upon the
death, permanent disability or termination of employment of any stockholder.
Each of the stockholders is covered by life insurance policies, the proceeds
of which generally will be used to fund the purchase of shares from the estate
of a deceased stockholder. The Stockholder Agreements also (i) provide that
the holders of a majority of the Company's shares may cause the Company to
register their shares in an underwritten public offering and (ii) grant piggy-
back registration rights to the stockholders in the event of an underwritten
public offering.
12. UNAUDITED QUARTERLY INFORMATION
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
1995--
Net sales.................................. $23,281 $41,146 $47,491 $29,273
Gross profit............................... 3,604 7,183 9,064 6,336
Net income (loss).......................... (1,110) 484 2,155 (3,007)
Basic and diluted net income (loss) per
share..................................... (.62) .27 1.20 (1.67)
======= ======= ======= =======
1996--
Net sales.................................. $26,051 $46,500 $64,929 $41,057
Gross profit............................... 6,473 11,257 15,260 9,851
Net income (loss).......................... (978) 3,745 6,039 1,693
Basic and diluted net income (loss) per
share..................................... (.54) 2.08 3.02 .85
======= ======= ======= =======
1997--
Net sales.................................. $33,603 $58,558 $79,804 $48,793
Gross profit............................... 7,006 15,344 20,023 13,778
Net income (loss).......................... (985) 5,674 8,812 4,061
Basic and diluted net income (loss) per
share..................................... (.49) 2.84 4.41 2.03
======= ======= ======= =======
</TABLE>
F-17
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
13. ACQUISITIONS
In February 1997, the Company completed the acquisition of certain assets
and liabilities of Clark Products, Inc. This acquisition complements the
Company's poultry equipment product line and was accounted for as a
purchase. Accordingly, the purchased assets and assumed liabilities have been
recorded at their estimated fair market values at the date of the acquisition,
resulting in goodwill of $1.6 million.
On November 5, 1997, the Company acquired all of the capital stock of DMC
for approximately $17.9 million in cash. DMC is a manufacturer and supplier of
grain drying and handling equipment. The acquisition was recorded in
accordance with the purchase method of accounting and accordingly, the
acquired assets and assumed liabilities have been recorded at their estimated
fair market values at the date of acquisition. The purchase price exceeded the
fair market value of net assets acquired resulting in goodwill of
approximately $6.4 million.
The following summarized unaudited pro forma financial information assumes
the acquisition had occurred on January 1:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net sales.............................................. $203,321 $248,919
Net income............................................. 4,600 15,234
Basic and diluted earnings per share................... 2.42 7.62
</TABLE>
These amounts include DMC's actual results for 1996 and for the first ten
months of 1997 prior to the acquisition. Results for the two months after the
acquisition are included in the Company's results of operations. The pro forma
results do not necessarily represent results which would have occurred had the
acquisition taken place on the basis assumed above, nor are they indicative of
the results of future operations.
14. SUBSEQUENT EVENT
In May 1998, the Company anticipates exchanging all 10 1/4% Senior
Subordinated Notes ("New Notes") due 2007 which have been registered under the
Securities Act of 1933 for all outstanding 10 1/4% Senior Subordinated Notes
("Old Notes") due 2007 ($100 million principal amount outstanding). The form
and terms of the New Notes will be identical in all material respects to the
form and terms of the Old Notes. The New Notes will be recorded at the same
carrying value as the Old Notes. Accordingly, no gain or loss will be
recognized by the Company for accounting purposes in connection with the
anticipated exchange offer.
F-18
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
David Manufacturing Co.
Mason City, Iowa
We have audited the accompanying balance sheets of David Manufacturing Co.
as of October 31, 1996 and 1997 and the related statements of income,
stockholders' equity, and cash flows for the years ended October 31, 1995,
1996, and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of David Manufacturing Co. as
of October 31, 1996 and 1997, and the results of its operations and its cash
flows for the years ended October 31, 1995, 1996, and 1997 in conformity with
generally accepted accounting principles.
McGladrey & Pullen, LLP
Mason City, Iowa
December 10, 1997
F-19
<PAGE>
DAVID MANUFACTURING CO.
BALANCE SHEETS
OCTOBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
ASSETS (NOTE 2) 1996 1997
- --------------- ---------- -----------
<S> <C> <C>
Current Assets
Cash.................................................. $ 218,151 $ 180,991
Trade receivables, less allowance for doubtful
accounts 1996 $30,000;
1997 $50,000......................................... 3,472,120 3,060,671
Inventories (Note 3).................................. 3,444,971 4,482,036
Deferred taxes (Note 6)............................... 153,645 150,824
Other................................................. 57,327 68,340
---------- -----------
Total current assets................................ 7,346,214 7,942,862
---------- -----------
Property and Equipment
Land and land improvements............................ 197,506 248,858
Buildings............................................. 2,660,012 2,886,115
Machinery and equipment............................... 3,103,488 3,708,809
---------- -----------
5,961,006 6,843,782
Less accumulated depreciation......................... 3,528,158 3,728,304
---------- -----------
2,432,848 3,115,478
---------- -----------
Patent Rights, at amortized cost........................ 130,264 117,760
---------- -----------
$9,909,326 $11,176,100
========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C>
Current Liabilities
Note payable (Note 2)................................. $ 600,000 $ 1,400,000
Current maturities of long-term debt (Note 2)......... 137,952 --
Accounts payable...................................... 574,358 1,195,837
Accrued profit-sharing bonus.......................... 147,376 252,077
Accrued salaries and wages............................ 147,512 176,743
Accrued vacations..................................... 130,920 131,217
Accrued commissions to affiliated DISC corporation
(Note 7)............................................. 196,442 --
Other accrued expenses................................ 237,460 212,703
Income taxes payable.................................. 420,465 806,867
---------- -----------
Total current liabilities........................... 2,592,485 4,175,444
---------- -----------
Long-Term Debt (Note 2)................................. 1,029,692 --
---------- -----------
Deferred Taxes (Note 6)................................. 126,157 132,805
---------- -----------
Commitments and Contingencies (Notes 4 and 9)...........
Stockholders' Equity
Common stock, $2,000 par value; authorized 500 shares;
issued 1996 123.25 shares; 1997 114 shares (Note 8).. 246,500 228,000
Retained earnings (Notes 2 and 8)..................... 5,914,492 6,639,851
---------- -----------
6,160,992 6,867,851
---------- -----------
$9,909,326 $11,176,100
========== ===========
</TABLE>
See Notes to Financial Statements.
F-20
<PAGE>
DAVID MANUFACTURING CO.
STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales.................................. $18,623,011 $24,346,130 $29,035,707
Cost of goods sold......................... 14,139,664 19,030,500 21,784,703
----------- ----------- -----------
Gross profit........................... 4,483,347 5,315,630 7,251,004
Other operating revenue.................... 306,201 437,727 496,413
----------- ----------- -----------
4,789,548 5,753,357 7,747,417
Selling and administrative expenses,
including commissions to affiliate 1995
$205,506; 1996 $196,442; 1997 none........ 2,735,198 3,156,012 3,488,052
----------- ----------- -----------
Operating income....................... 2,054,350 2,597,345 4,259,365
Financial expense, interest................ 405,794 398,257 167,769
----------- ----------- -----------
Income before income taxes............. 1,648,556 2,199,088 4,091,596
----------- ----------- -----------
Federal and state income taxes (Note 6):
Current.................................. 621,400 792,298 1,561,354
Deferred................................. 7,805 55,281 9,469
----------- ----------- -----------
629,205 847,579 1,570,823
----------- ----------- -----------
Net income............................. $ 1,019,351 $ 1,351,509 $ 2,520,773
=========== =========== ===========
Earnings per common share (Note 8)......... $ 8,270.60 $ 10,965.59 $ 20,495.76
=========== =========== ===========
Weighted average common shares............. 123.25 123.25 122.99
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-21
<PAGE>
DAVID MANUFACTURING CO.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
SHARES OF COMMON RETAINED
COMMON STOCK STOCK EARNINGS TOTAL
------------ -------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, October 31, 1994..... 123.25 $246,500 $ 3,740,832 $ 3,987,332
Net income................... -- -- 1,019,351 1,019,351
Dividends on common stock,
$1,600 per share (Note 8)... -- -- (197,200) (197,200)
------ -------- ----------- -----------
Balance, October 31, 1995..... 123.25 246,500 4,562,983 4,809,483
Net income................... -- -- 1,351,509 1,351,509
------ -------- ----------- -----------
Balance, October 31, 1996..... 123.25 246,500 5,914,492 6,160,992
Net income................... -- -- 2,520,773 2,520,773
Dividends on common stock,
$3,000 per share (Note 8)... -- -- (369,750) (369,750)
Redemption of 9.25 shares of
common stock at $156,126 per
share (Note 8).............. (9.25) (18,500) (1,425,664) (1,444,164)
------ -------- ----------- -----------
Balance, October 31, 1997..... 114.00 $228,000 $ 6,639,851 $ 6,867,851
====== ======== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-22
<PAGE>
DAVID MANUFACTURING CO.
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income.......................... $ 1,019,351 $ 1,351,509 $ 2,520,773
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation...................... 275,109 326,228 407,679
Amortization...................... 7,294 12,504 12,504
Provision for doubtful accounts... 6,411 64,816 34,614
(Gain) loss on sale of equipment.. (1,500) (540) 1,300
Deferred taxes.................... 7,805 55,281 9,469
Change in assets and liabilities:
(Increase) decrease in trade
receivables.................... 423,614 (1,867,167) 376,835
(Increase) decrease in
inventories.................... (1,295,653) 2,445,867 (1,037,065)
(Increase) in other current
assets......................... (19,903) (7,549) (11,013)
Increase (decrease) in accounts
payable and accrued expenses... (25,032) 402,744 343,836
Increase (decrease) in income
taxes payable.................. (380,793) 85,003 386,402
----------- ------------ ------------
Net cash provided by operating
activities................... 16,703 2,868,696 3,045,334
----------- ------------ ------------
Cash Flows from Investing Activities
Proceeds from sale of equipment..... 1,500 550 4,500
Purchase of property and equipment.. (699,803) (352,045) (905,436)
Purchase of patent rights........... (150,062) -- --
----------- ------------ ------------
Net cash (used in) investing
activities................... (848,365) (351,495) (900,936)
----------- ------------ ------------
Cash Flows from Financing Activities
Borrowings on revolving credit
agreement.......................... 3,475,000 13,950,000 15,615,000
Payments on revolving credit
agreement.......................... (2,087,000) (15,438,000) (14,815,000)
Principal payments on other
borrowings......................... (373,102) (948,796) (1,167,644)
Cash dividends paid................. (197,200) -- (369,750)
Redemption of common stock.......... -- -- (1,444,164)
----------- ------------ ------------
Net cash provided by (used in)
financing activities......... 817,698 (2,436,796) (2,181,558)
----------- ------------ ------------
Net increase (decrease) in
cash......................... (13,964) 80,405 (37,160)
Cash
Beginning........................... 151,710 137,746 218,151
----------- ------------ ------------
Ending.............................. $ 137,746 $ 218,151 $ 180,991
=========== ============ ============
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest.......................... $ 399,028 $ 420,728 $ 182,306
Income taxes...................... 1,002,193 707,295 1,174,952
Supplemental Schedule of Noncash
Investing and Financing Activities
Purchase of property and equipment
on account......................... $ 190,673
</TABLE>
See Notes to Financial Statements.
F-23
<PAGE>
DAVID MANUFACTURING CO.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: The Company manufactures and sells grain handling and
drying equipment to dealers.
Sales are made on credit terms established by the Company. The Company's
customers are concentrated in the agricultural industry and are located
throughout the Midwest.
Significant accounting policies:
Accounting estimates and assumptions: The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that effect 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 revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Cash and cash equivalents: For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents. The Company maintains cash in
bank deposit accounts, which at times may exceed federally insured limits. The
Company has not experienced any losses in such accounts.
Inventories: Inventories are valued at the lower of cost, as determined by
the last-in, first-out (LIFO) method, or market.
Property and equipment: Property and equipment is stated at cost.
Depreciation is computed primarily by the straight-line method over the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Land improvements................................................... 10-20
Buildings........................................................... 7-39
Machinery and equipment............................................. 3-20
</TABLE>
Patent rights: Patent rights are being amortized by the straight-line method
over a period of twelve years and are periodically reviewed for impairment
based upon an assessment of future operations to ensure that they are
appropriately valued. Accumulated amortization on patent rights totaled
$19,798 and $32,302 at October 31, 1996 and October 31, 1997, respectively.
Warranty claims: Estimated warranty costs are provided at the time of sale
of the warranted products.
Revenue recognition: Revenue is recognized when the products are shipped.
Income taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Earnings per common share: Earnings per common share are determined by
dividing net income by the weighted average number of shares outstanding.
New accounting pronouncements: SFAS No. 128, "Earnings Per Share," was
issued in February 1997 and will be adopted by the Company effective January
1, 1998. This new pronouncement establishes revised methods
F-24
<PAGE>
DAVID MANUFACTURING CO.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
for computing and reporting earnings per share. Adoption of this standard will
not materially impact previously reported earnings per share.
SFAS No. 130, "Reporting Comprehensive Income," was issued in July 1997 and
will be adopted by the Company effective January 1, 1998. This new
pronouncement establishes standards for reporting and display of comprehensive
income and its components. Adoption of this standard will not impact the
Company's financial position or results of operations.
NOTE 2. PLEDGED ASSETS, NOTE PAYABLE AND LONG-TERM DEBT
The Company has a revolving line of credit with a bank whereby outstanding
borrowings may not exceed the lesser of the borrowing base defined as a
percentage of eligible accounts receivable and inventory or $6,250,000.
Interest is payable monthly at the bank's base rate (9.0% and 8.5%,
respectively, October 31, 1996 and 1997). Outstanding borrowings ($600,000 and
$1,400,000 as of October 31, 1996 and 1997, respectively) are due March 31,
1997 and 1998, respectively. As of October 31, 1996 and 1997, the remaining
available borrowing base on this line of credit was $5,400,000 and $4,600,000,
respectively. The line of credit is collateralized by all assets of the
Company and the personal guarantees of Mr. Wesley Cagle, Mr. Stephen Wolfe,
and Mr. Keith Braun up to $150,000 each, plus interest and all costs of
collection. A letter of credit of $250,000 is available as part of the
revolving line of credit. The loan agreement contains various restrictions,
including expenditures for property and equipment, and the maintenance of
various financial ratios, including debt to tangible net worth. At October 31,
1996 and 1997, the Company was in compliance with these covenants or had
obtained a waiver for noncompliance.
The Company had a balance due of $1,167,644 as of October 31, 1996 on an
unsecured contract payable to David M. Murphy. The contract was due in monthly
installments of $17,114 including interest at 6.1%, with final payment due
October 1, 2003. The contract payable was subordinated to bank debt; however,
such subordination would permit payment of principal and interest, so long as
no event of default had occurred under the credit agreement. The Company paid
the contract payable in full on October 28, 1997.
NOTE 3. INVENTORIES
The composition of inventories at replacement cost is as follows:
<TABLE>
<CAPTION>
OCTOBER OCTOBER
31, 1996 31, 1997
---------- ----------
<S> <C> <C>
Production materials................................ $1,515,818 $1,654,482
Work in process..................................... 965,114 770,003
Finished goods...................................... 3,768,042 5,020,053
---------- ----------
6,248,974 7,444,538
Less LIFO reserve................................... 2,804,003 2,962,502
---------- ----------
$3,444,971 $4,482,036
========== ==========
</TABLE>
The liquidation of LIFO inventory quantities during the year ended October
31, 1996, which were carried at the lower of cost prevailing in certain
earlier years, resulted in an increase in the net income for the year ended
October 31, 1996 of approximately $123,000 or $997.97 per share of common
stock.
NOTE 4. PRODUCT LIABILITY INSURANCE
The Company has $2,000,000 of product liability insurance which requires a
$100,000 deductible per claim by the Company. Currently, there are no
significant product liability claims outstanding as of October 31, 1997.
F-25
<PAGE>
DAVID MANUFACTURING CO.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. PROFIT-SHARING BONUS PLAN
The Company has a profit-sharing bonus plan for those employees who meet the
eligibility requirements. Substantially all of the Company's full-time
employees are covered by the plan. The Company expensed $114,682, $147,376 and
$252,077 during the years ended October 31, 1995, 1996 and 1997, respectively.
NOTE 6. INCOME TAX MATTERS
The components of deferred tax assets and liabilities at October 31, 1996
and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts...................... $ 12,275 $ 20,465
Inventory uniform capitalization..................... 55,070 29,580
Estimated product liability.......................... 12,275 12,279
Accrued vacations.................................... 53,567 53,708
Reserve for slow moving inventory.................... -- 10,233
Estimated liability on product warranties............ 20,458 24,559
-------- --------
153,645 150,824
Deferred tax liabilities, property and equipment....... 126,157 132,805
-------- --------
$ 27,488 $ 18,019
======== ========
</TABLE>
The income tax provision differs from the amount of income tax determined by
applying the U.S. Federal income tax rate to pretax income for years ended
October 31, 1995, 1996 and 1997:
<TABLE>
<S> <C> <C> <C>
Computed expected tax expense...................... $560,509 $747,690 $1,391,143
Increase in income taxes resulting from:
State income taxes, net of federal benefits...... 63,992 88,178 174,496
Nondeductible expenses........................... 2,372 2,524 4,321
Other............................................ 2,332 9,187 863
-------- -------- ----------
$629,205 $847,579 $1,570,823
======== ======== ==========
</TABLE>
NOTE 7. AFFILIATED COMPANY
Effective January 1, 1995, the Company became affiliated with the David
Service Company, a foreign DISC corporation, as a result of having common
stockholders and management. The Company has an agreement with the David
Service Company whereby a discretionary commission up to 50% of net export
profits may be paid by the Company to the DISC corporation. For the years
ended October 31, 1995, 1996 and 1997, the commission expense totaled
$205,506, $196,442 and none, respectively.
NOTE 8. AMENDMENT TO ARTICLES OF INCORPORATION AND REVERSE STOCK SPLIT
Effective October 22, 1997, the Company amended its articles of
incorporation by changing the number of shares the Corporation is authorized
to issue from 100,000 shares to 500 shares and increasing the par value of its
shares from $100 to $2,000. Also, effective October 22, 1997, the Company
reduced the shares issued to effect a one-for-twenty reverse stock split. All
common stock information including earnings per share has been retroactively
adjusted for this split as if it occurred on November 1, 1994.
F-26
<PAGE>
DAVID MANUFACTURING CO.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. SUBSEQUENT SALE OF THE COMPANY
On November 5, 1997, the GSI Group, Inc. purchased the outstanding 114 shares
of common stock of the Company at a price of $156,126 per share.
F-27
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY GUARANTOR OR THE EXCHANGE
AGENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information...................................................... iv
Prospectus Summary......................................................... 1
Risk Factors............................................................... 13
The Exchange Offer......................................................... 20
Use of Proceeds............................................................ 30
Capitalization............................................................. 31
Selected Consolidated Financial Data....................................... 32
Pro Forma Financial Data................................................... 34
Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 36
Business................................................................... 41
Management................................................................. 52
Ownership of Capital Stock................................................. 55
Certain Relationships and Related Transactions............................. 55
Description of the New Credit Agreement.................................... 59
Description of the New Notes............................................... 60
Book-Entry; Delivery and Form.............................................. 86
Registration Rights........................................................ 87
Certain Federal Income Tax Considerations.................................. 90
Plan of Distribution....................................................... 92
Legal Matters.............................................................. 92
Experts.................................................................... 92
Index to Consolidated Financial Statements................................. F-1
</TABLE>
---------------
UNTIL JUNE 29, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$100,000,000
LOGO
10 1/4% SENIOR SUBORDINATED NOTES DUE 2007
---------------
PROSPECTUS
---------------
MARCH 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations.
Section 145 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 another enterprise if serving at the request of the
corporation. Depending on the character of the proceeding, a corporation may
indemnify against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action, suit or proceeding if the person indemnified acted in good faith
and in a manner be 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. In
the case of an action by or in the right of the corporation, 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 or the court in which
such action or suit was brought shall determine that, despite the adjudication
of liability, such person is fairly and reasonably entitled to indemnity for
such expenses which the court shall deem proper. Section 145 further provides
that to the extent a director or officer of a corporation has been successful
in the defense of any action, suit or proceeding referred to above or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him
in connection therewith. In addition, pursuant to Article SEVENTH of the
Company's Amended and Restated Certificate of Incorporation, a director will
not be liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director. Article EIGHTH of the Company's
Amended and Restated Certificate of Incorporation provides that with respect
to threatened, pending or completed actions, suits or proceedings to which any
individual is made a party by reason of such individual being or having been 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,
the Company has the power to indemnify such persons, provided that such person
in general, acted in good faith and in the best interests of the Company.
The Company maintains a directors' and officers' liability insurance policy
which insures directors and officers of the Company and officers of the
Company and its subsidiaries for losses as a result of claims based upon their
acts or omissions in the discharge of their duties as directors and officers
of the Company and its subsidiaries.
Sections 851 and 856 of the Iowa Business Corporation Act ("IBCA") provide
that a corporation has the power to indemnify its directors and officers
against liabilities and expenses incurred by reason of such person serving in
the capacity of director or officer, if such person has acted in good faith
and in a manner reasonably believed by the individual to be in or not opposed
to the best interests of the corporation, and in any criminal proceeding if
such person had no reasonable cause to believe the individual's conduct was
unlawful. The foregoing indemnity provisions notwithstanding, in the case of
actions brought by or in the right of the corporation, no indemnification
shall be made to such director or officer with respect to any matter as to
which such individual has been adjudged to be liable to the corporation
unless, and only to the extent that, a court determines that indemnification
is proper under the circumstances. DMC's Bylaws provide indemnification for
its officers and directors to the extent permitted by the IBCA. DMC's Bylaws
also provide that DMC shall indemnify any of its directors and officers who
are wholly successful, on the merits or otherwise, in the defense of any
proceeding to which such directors or officers were parties, because of the
fact that such directors or officers are or were directors or officers of DMC,
against reasonable expenses incurred by such directors and officers in
connection with such proceeding.
DMC maintains a directors' and officers' liability insurance policy to
insure against losses arising from claims made against its directors and
officers, subject to the limitations and conditions as set forth in the
policies.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The exhibits filed as part of this registration statement are as follows:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
1.1* Purchase Agreement, dated October 30, 1997, among The GSI
Group, Inc., Merrill Lynch, Pierce Fenner & Smith Incorporated
and Morgan Stanley & Co. Incorporated.
3.1* Amended and Restated Articles of Incorporation of The GSI
Group, Inc., as amended as of October 23, 1997.
3.2* By-Laws of The GSI Group, Inc.
3.3* Restated Articles of Incorporation of David Manufacturing Co.,
as amended as of February 17, 1987.
3.4* By-Laws of David Manufacturing Co.
4.1* Indenture, dated November 1, 1997, between The GSI Group, Inc
and LaSalle National Bank, as Trustee, including forms of the
Old Notes and the New Notes issued pursuant to such Indenture.
4.2* First Supplemental Indenture, dated December 19, 1997, between
The GSI Group, Inc. and LaSalle National Bank, as Trustee,
amending Indenture dated November 1, 1997, between The GSI
Group, Inc. and LaSalle National Bank, as Trustee, to quailify
such Indenture under the Trust Indenture Act of 1939.
4.3* Second Supplemental Indenture dated December 19, 1997, exe-
cuted by David Manufacturing Co., amending Indenture dated No-
vember 1, 1997, between The GSI Group, Inc. and LaSalle Na-
tional Bank, as Trustee, to add David Manufacturing Co. as a
Guarantor under such Indenture.
4.4* Registration Rights Agreement, dated November 1, 1997, among
The GSI Group, Inc., David Manufacturing Co., Merrill Lynch,
Pierce Fenner & Smith Incorporated and Morgan Stanley & Co.
Incorporated.
4.5* Agreement of The GSI Group, Inc. to furnish the Securities and
Exchange Commission with a copy of certain instruments relat-
ing to long-term debt of The GSI Group, Inc. upon request.
5.1**** Opinion of Mayer, Brown & Platt, dated March 27, 1998.
10.1* Credit Agreement, dated as of November 5, 1997, between The
GSI Group, Inc., as borrower, and LaSalle National Bank, as
lender.
10.2* Guaranty, dated November 26, 1997, executed by The GSI Group,
Inc. in favor of Mercantile Bank National Association.
10.3* Stock Purchase Agreement, dated November 5, 1997, between and
among The GSI Group, Inc., David Manufacturing Company, David
Service Company, the Stockholders of David Manufacturing Com-
pany and the Stockholders of David Service Company.
10.4* Lease, dated April 29, 1997, between The GSI Group, Inc. and
Richard and Priscilla Perry relating to property located in
Mt. Carmel, Illinois.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
10.5* Lease with Option to Purchase, dated July 12, 1996, between
The GSI Group, Inc. and Edgar County Bank & Trust Company, as
Trustee for Trust No. 455-232 relating to property located in
Paris, Illinois.
10.6** Letter, dated September 15, 1997, from Luis F. Pacheco of
Trench, Rossi e Watanabe, attorneys at law, to Ricardo S.
Santana of Cumberland do Brasil Ltda. summarizing the terms of
the Lease, dated September 1, 1997, between Cumberland do Bra-
sil Ltda. and Cruzeiro do Sul relating to property leased by
The GSI Group, Inc. in Nova Odessa, Brazil.
10.7* Agreement, dated April 9, 1997, between GSI/Cumberland Sdn.
Bhd. and Ban Leng Fibre Sdn. Bhd. relating to property located
in Penang, Malaysia.
10.8* Lease Agreement, dated November 1, 1996, between The GSI
Group, Inc., successor by acquisition to Clark Products, Inc.
and Riddle Valley Industrial Park related to property located
in Lenni, Pennsylvania.
10.9* Asset Purchase Agreement, dated December 20, 1995, by and
among The GSI Group, Inc., Jannock, Inc. and Heritage Vinyl
Products Inc.
10.10** Amended and Restated Employment Agreement, dated as of January
1, 1997, between The GSI Group, Inc. and John C. Sloan.
10.11** Amended and Restated Employment Agreement, dated as of January
1, 1997, between The GSI Group, Inc. and Jorge Andrade.
10.12** Amended and Restated Employment Agreement, dated as of January
1, 1997, between The GSI Group, Inc. and John Funk.
10.13** Amended and Restated Employment Agreement, dated as of January
1, 1997, between The GSI Group, Inc. and Howard Buffett.
10.14* Stock Restriction and Buy-Sell Agreement, dated June 6, 1996,
between The GSI Group, Inc. and John C. Sloan, Jorge Andrade,
John Funk and Howard Buffett.
10.15* First Amendment to Stock Restriction and Buy-Sell Agreement,
dated July 15, 1996, between The GSI Group, Inc. and John C.
Sloan, Jorge Andrade, John Funk and Howard Buffett.
10.16** Second Amendment to Stock Restriction and Buy-Sell Agreement,
dated October 2, 1997, between The GSI Group, Inc. and John C.
Sloan, Jorge Andrade, John Funk and Howard Buffett.
10.17* Stock Restriction and Buy-Sell Agreement, dated January 1,
1997, between The GSI Group, Inc., John C. Sloan, Jorge
Andrade, John Funk and Howard Buffett and the Non-Voting
Shareholders.
10.18** First Amendment to Stock Restriction and Buy-Sell Agreement,
dated as of November 5, 1997, between The GSI Group, Inc.,
John C. Sloan, Jorge Andrade, John Funk and Howard Buffett and
the Non-Voting Shareholders.
10.19** Stock Restriction and Cross-Purchase Agreement, dated June 6,
1996, among John C. Sloan, Jorge Andrade, John Funk and Howard
Buffett.
10.20** First Amendment to Stock Restriction and Cross-Purchase Agree-
ment, dated July 15, 1996, among John C. Sloan, Jorge Andrade,
John Funk and Howard Buffett.
10.21** Second Amendment to Stock Restriction and Cross-Purchase
Agreement, dated as of October 2, 1997, among John C. Sloan,
Jorge Andrade, John Funk and Howard Buffett.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
12.1* Computation of Ratio of Earnings to Fixed Charges.
16.1* Letter of Geo. S. Olive & Co., LLC to the Securities and Ex-
change Commission
21.1* List of Subsidiaries of The GSI Group, Inc.
23.1**** Consent of Arthur Andersen LLP.
23.2**** Consent of McGladrey & Pullen, LLP.
23.3**** Consent of Mayer, Brown & Platt (included in their opinion
filed as Exhibit 5.1).
24.1* Powers of Attorney (included as part of the signature page
hereof).
25.1* Form T-1 Statement of Eligibility under the Trust Indenture
Act of 1939 of LaSalle National Bank.
27.1*** Financial Data Schedule
99.1* Form of Letter of Transmittal for the 10 1/4 Senior Subordi-
nated Notes due 2007.
99.2* Guidelines for Certification of Taxpayer Identification Num-
bers on Substitute Form W-9.
99.3* Form of Notice of Guaranteed Delivery.
</TABLE>
- --------
*Included with the Registration Statement filed on December 23, 1997.
**Included with Amendment No. 1 to the Registration Statement filed on
February 25, 1998.
***Included with Amendment No. 2 to the Registration Statement filed on March
18, 1998.
****Included with this Amendment No. 3 to the Registration Statement.
(b) FINANCIAL STATEMENTS SCHEDULES
Schedule II--Valuation and Qualifying Accounts and Reserves
Schedules not listed above have been omitted because they are inapplicable
or the information required to be set forth therein is provided in the
Consolidated Financial Statements or the notes thereto.
ITEM 22. UNDERTAKINGS
Each of the undersigned registrants hereby undertakes:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
(a) Each of the undersigned registrants 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
II-4
<PAGE>
the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any
increase or decrease in 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 and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(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.
(b) Each of the undersigned registrants hereby undertakes:
(1) To respond to requests for information that is incorporated by
reference into the Prospectus pursuant to Item 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
GSI GROUP, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN ASSUMPTION,
ILLINOIS ON MARCH 27, 1998.
The GSI Group, Inc.
By: /s/ Craig Sloan
_____________________________________
Craig Sloan, Director and Chief
Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON MARCH 27, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Craig Sloan Director and Chief Executive Officer
___________________________________________ (Principal Executive Officer)
Craig Sloan
/s/ John W. Funk* Director, Chief Financial Officer,
___________________________________________ Secretary and General Counsel (Principal
John W. Funk Financial Officer)
/s/ Jorge Andrade* Director and Chief Operating Officer
___________________________________________
Jorge Andrade
Chairman of the Board of Directors
___________________________________________
Howard G. Buffett
/s/ Russ C. Mello Vice President, Finance, Assistant
___________________________________________ Secretary and Assistant Treasurer
Russ C. Mello (Principal Accounting Officer)
</TABLE>
/s/ Russ C. Mello
*By: ________________________________
Russ C. Mello
Attorney-in-fact
II-6
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
DAVID MANUFACTURING CO. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN MASON
CITY, IOWA ON MARCH 27, 1998.
DAVID MANUFACTURING CO.
/s/ Dale Colee
By: _________________________________
Dale Colee,
Director and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON MARCH 27, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Dale Colee Director and Chief Executive Officer
___________________________________________ (Principal Executive Officer)
Dale Colee
/s/ Stephen Wolfe* Director, Chief Financial Officer and
___________________________________________ Controller (Principal Financial Officer
Stephen Wolfe and Principal Accounting Officer)
/s/ Keith Braun* Director
___________________________________________
Keith Braun
/s/ Craig Sloan* Director
___________________________________________
Craig Sloan
/s/ Jorge Andrade* Director
___________________________________________
Jorge Andrade
/s/ John Funk* Director
___________________________________________
John Funk
</TABLE>
/s/ Russ C. Mello
*By: ________________________________
Russ C. Mello
Attorney-in-fact
II-7
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS WRITE-OFFS OTHER BALANCE AT
BEGINNING CHARGED DURING CHANGES END OF
OF PERIOD TO EXPENSE THE PERIOD ADD (DEDUCT) PERIOD
---------- ---------- ---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts: deducted from
accounts receivable on
the balance sheets--
1995.................. $300 $ 536 ($216) $ 620
1996.................. $620 $ 816 ($793) $ 643
1997.................. $643 $1,712 ($519) $1,836
</TABLE>
<PAGE>
Exhibit 5.1
MAYER, BROWN & PLATT
190 SOUTH LA SALLE STREET
CHICAGO, ILLINOIS 60603-3441
March 27, 1998
The GSI Group, Inc.
1004 East Illinois Street
Assumption, Illinois 62510
David Manufacturing Co.
1600 12th Street N.E.
Mason City, Iowa 50401
Ladies and Gentlemen:
We have acted as your counsel in connection with the registration of
certain 10 1/4% Senior Subordinated Notes due 2007 (the "Notes") of The GSI
Group, Inc. (the "Company"), and the guarantee thereof (the "Guarantee") by
David Manufacturing Co ("DMC"), pursuant to a registration statement on Form
S-4 (the "Registration Statement").
In rendering the opinions expressed herein, we have examined and relied
upon such documents, corporate records, certificates of public officials and
certificates as to factual matters executed by officers of the Company and DMC
as we have deemed necessary or appropriate. We have assumed the authenticity,
accuracy and completeness of all documents, records and certificates submitted
to us as originals, the conformity to the originals of all documents, records
and certificates submitted to us as copies and the authenticity, accuracy and
completeness of the originals of all documents, records and certificates
submitted to us as copies. We have also assumed the legal capacity and
genuineness of the signatures of persons signing all documents in connection
with which the opinions expressed herein are rendered.
Based upon the foregoing, we are of the opinion that:
(i) the Notes have been duly authorized for issuance by the Company and,
when the Notes are duly executed, authenticated, issued and delivered in
accordance with the indenture governing the Notes, the Notes will be
legally issued and will constitute a valid and legally binding obligations
of the Company, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally or by the effect of general principles of equity, including,
without limitation, concepts of materiality, reasonableness, good faith and
fair dealing (regardless of whether considered in a proceeding at law or
equity); and
<PAGE>
The GSI Group, Inc.
David Manufacturing Co.
March 27, 1998
Page 2
(ii) the Guarantee has been duly authorized for issuance by DMC and, when
the Notes are duly executed, authenticated, issued and delivered in
accordance with the indenture governing the Notes, the Guarantee will be
legally issued and will constitute a valid and legally binding obligation
of DMC, except as may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally or by the
effect of general principles of equity, including, without limitation,
concepts of materiality, reasonableness, good faith and fair dealing
(regardless of whether considered in a proceeding at law or equity).
We are admitted to practice law in the States of Illinois and New York and
we express no opinions as to matters under or involving any laws other than the
laws of the States of Illinois and New York, the federal laws of the United
States of America and the corporate laws of the State of Delaware.
We hereby consent to the filing of this opinion letter as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters."
Very truly yours,
MAYER, BROWN & PLATT
By /s/ J. Paul Forrester
----------------------------------------------
J. Paul Forrester, a Partner of the Firm
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made part of Registration
Statement File No. 333-43089.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 26, 1998
<PAGE>
Exhibit 23.2
[letterhead of]
McGLADREY & PULLEN, LLP
--------------------------------------------
Certified Public Accountants and Consultants
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
David Manufacturing Co.
Mason City, Iowa
To the Board of Directors
The GSI Group, Inc.
Assumption, Illinois
We hereby consent to the use in this Registration Statement of our report, dated
December 10, 1997, relating to the financial statements of David Manufacturing
Co. and to the reference to our Firm under the caption "Experts" in the
Prospectus.
/s/ McGLADREY & PULLEN, LLP
McGLADREY & PULLEN, LLP
Mason City, Iowa
March 26, 1998
