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FILED PURSUANT TO RULE 424(b)(3)
FILE NO. 333-43619
PROSPECTUS
OFFER TO EXCHANGE
8 3/4% SENIOR SUBORDINATED NOTES DUE 2007 (THE "EXCHANGE NOTES")
FOR ALL OUTSTANDING 8 3/4% SENIOR SUBORDINATED NOTES DUE 2007 (THE "PRIVATE
NOTES")
OF
UNITED DEFENSE INDUSTRIES, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON MARCH 17,
1998 UNLESS EXTENDED.
--------------------------
United Defense Industries, Inc. (the "Company") is offering (the "Exchange
Offer"), upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange $1,000 principal amount of its 8 3/4% Senior
Subordinated Notes Due 2007 (the "Exchange Notes"), which exchange has 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 (the
"Registration Statement"), for each $1,000 principal amount of its outstanding
8 3/4% Senior Subordinated Notes Due 2007 (the "Private Notes"), of which
$200,000,000 in aggregate principal amount was issued on October 6, 1997 and is
outstanding as of the date hereof. The form and terms of the Exchange Notes are
the same as the form and terms of the Private Notes except that (i) the exchange
will have been registered under the Securities Act, and, therefore, the Exchange
Notes will not bear legends restricting the transfer thereof and (ii) holders of
the Exchange Notes will not be entitled to certain rights of holders of the
Private Notes under the Registration Rights Agreement (as defined), which rights
will terminate upon the consummation of the Exchange Offer. The Exchange Notes
will evidence the same indebtedness as the Private Notes (which they replace)
and will be entitled to the benefits of the Indenture (as defined). The Private
Notes and the Exchange Notes are sometimes referred to herein collectively as
the "Notes." See "The Exchange Offer" and "Description of the Notes."
The Exchange Notes will bear interest at the same rate and on the same terms
as the Private Notes. Consequently, the Exchange Notes will bear interest at the
rate of 8 3/4% per annum and the interest thereon will be payable semi-annually
on May 15 and November 15 of each year, commencing May 15, 1998. The Exchange
Notes will bear interest from and including the date of issuance of the Private
Notes (October 6, 1997). Holders whose Private Notes are accepted for exchange
will be deemed to have waived the right to receive any interest accrued on the
Private Notes.
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after November 15, 2002, at the redemption prices set
forth herein plus accrued and unpaid interest thereon to the applicable
redemption date. In addition, at any time prior to November 15, 2000, the
Company may redeem up to 35% of the original aggregate principal amount of the
Notes at a redemption price equal to 108.75% of the principal amount thereof
plus accrued and unpaid interest thereon to the redemption date, with the net
cash proceeds of one or more Public Equity Offerings (as defined); provided that
at least 65% of the original aggregate principal amount of the Notes remains
outstanding immediately after each such redemption. The Notes will also be
redeemable by the Company in the event of a Change of Control (as defined) at
any time prior to November 15, 2002, at a redemption price equal to 100% of the
principal amount thereof plus the Applicable Premium (as defined), plus accrued
and unpaid interest thereon to the redemption date.
In the event of a Change of Control, if the Company does not redeem all of
the Notes, each holder of the Notes will have the right, at the holder's option,
to require the Company to purchase the Notes at a price equal to 101% of the
principal amount thereof plus accrued and unpaid interest thereon to the
purchase date. See "Description of the Notes." No assurance can be given that
the Company will have the financial resources to satisfy the amounts due upon a
Change of Control.
The Notes will be general unsecured obligations of the Company subordinate
in right of payment to all existing and future Senior Debt (as defined) of the
Company, including all obligations under the Senior Credit Facility. The Notes
will be guaranteed on a senior subordinated basis by the Company's parent, Iron
Horse Investors, L.L.C. ("Iron Horse"), UDLP, UDLP Holdings Corp. and each of
the Company's other subsidiaries that are also guarantors under the Senior
Credit Facility (collectively, the "Guarantors"). The guarantees will be full,
unconditional and on a joint and several basis, subject to applicable law. As of
November 30, 1997, the Company had approximately $428.5 million of Senior Debt
outstanding (excluding outstanding letters of credit of approximately $157.0
million and unused commitments of approximately $111.0 million under the Senior
Credit Facility, $50.0 million of which is available only to fund the repayment
of the Seller Note) and $50.0 million outstanding under the Seller Note (which
is PARI PASSU in right of payment with the Notes and will mature on the third
anniversary of the Acquisition). See "Description of the Notes--Subordination"
and "Capitalization." After consummation of the Transactions (as defined),
indebtedness represented approximately 80% of the Company's total
capitalization.
SEE "RISK FACTORS" BEGINNING ON PAGE 19 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
THE COMPANY WILL ACCEPT FOR EXCHANGE ANY AND ALL VALIDLY TENDERED PRIVATE
NOTES NOT WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON MARCH 17, 1998,
UNLESS THE EXCHANGE OFFER IS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION (THE
"EXPIRATION DATE"). TENDERS OF PRIVATE NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR
TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. THE EXCHANGE OFFER IS
NOT CONDITIONED UPON ANY MINIMUM PRINCIPAL AMOUNT OF PRIVATE NOTES BEING
TENDERED FOR EXCHANGE. PRIVATE NOTES MAY BE TENDERED ONLY IN INTEGRAL MULTIPLES
OF $1,000. IN THE EVENT THE COMPANY TERMINATES THE EXCHANGE OFFER AND DOES NOT
ACCEPT FOR EXCHANGE ANY PRIVATE
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NOTES, THE COMPANY WILL PROMPTLY RETURN ALL PREVIOUSLY TENDERED PRIVATE NOTES TO
THE HOLDERS THEREOF.
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The date of this Prospectus is February 16, 1998
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Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii) a
person that is an affiliate of the Company within the meaning of Rule 405 under
the Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act; PROVIDED that the holder is acquiring
the Exchange Notes in the ordinary course of its business and is not
participating, and had no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders of Private Notes
wishing to accept the Exchange Offer must represent to the Company, as required
by the Registration Rights Agreement, that such conditions have been met. The
Company believes that, to its knowledge, none of the registered holders of the
Private Notes is an affiliate (as such term is defined in Rule 405 under the
Securities Act) of the Company.
Prior to the Exchange Offer, there has been no public market for the Private
Notes. The Company does not intend to list the Exchange Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. There can be no assurance that an active market for the Exchange Notes
will develop. To the extent that a market for the Exchange Notes does develop,
the market value of the Exchange Notes will depend on market conditions (such as
yields on alternative investments), general economic conditions, the Company's
financial condition and certain other factors. Such conditions might cause the
Exchange Notes, to the extent that they are traded, to trade at a significant
discount from face value. See "Risk Factors--Absence of Public Market for the
Notes."
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer may be deemed to be an
"underwriter" within the meaning of the Securities Act. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Private Notes where such
Private Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has indicated its intention
to make this Prospectus (as it may be amended or supplemented) available to any
broker-dealer for use in connection with any such resale for the period required
by the Securities Act. See "Plan of Distribution."
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection with
this Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE 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.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF
TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
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UNTIL MAY 18, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
OFFERING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN THE
EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS IN CONNECTION THEREWITH.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
THE EXCHANGE NOTES WILL BE AVAILABLE INITIALLY ONLY IN BOOK-ENTRY FORM. THE
COMPANY EXPECTS THAT THE EXCHANGE NOTES ISSUED PURSUANT TO THE EXCHANGE OFFER
WILL BE ISSUED IN THE FORM OF ONE OR MORE FULLY REGISTERED GLOBAL NOTES THAT
WILL BE DEPOSITED WITH, OR ON BEHALF OF, THE DEPOSITORY TRUST COMPANY ("DTC" OR
THE "DEPOSITARY") AND REGISTERED IN ITS NAME OF CEDE & CO., AS ITS NOMINEE.
BENEFICIAL INTERESTS IN THE GLOBAL NOTE REPRESENTING THE EXCHANGE NOTES WILL BE
SHOWN ON, AND TRANSFERS THEREOF WILL BE EFFECTED ONLY THROUGH, RECORDS
MAINTAINED BY THE DEPOSITARY AND ITS PARTICIPANTS. AFTER THE INITIAL ISSUANCE OF
SUCH GLOBAL NOTE, EXCHANGE NOTES IN CERTIFICATED FORM WILL BE ISSUED IN EXCHANGE
FOR THE GLOBAL NOTE IN ACCORDANCE WITH THE TERMS AND CONDITIONS SET FORTH IN THE
INDENTURE. SEE "DESCRIPTION OF NOTES--BOOK ENTRY, DELIVERY AND FORM."
NOTICE REGARDING FORWARD-LOOKING INFORMATION
This Prospectus includes "forward-looking statements." All statements other
than statements of historical facts included in this Prospectus, including,
without limitation, the statements under "Prospectus Summary," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and located elsewhere herein regarding industry prospects and the
Company's business plans, opportunities and financial position are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are disclosed in the Prospectus,
including, without limitation, in conjunction with the forward-looking
statements in this Prospectus under "Risk Factors."
All subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN
THIS PROSPECTUS. FOR PURPOSES OF THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE
REQUIRES, THE "COMPANY" REFERS TO UNITED DEFENSE INDUSTRIES, INC. AND ITS
CONSOLIDATED SUBSIDIARIES, INCLUDING UNITED DEFENSE, L.P. ("UDLP"), AFTER GIVING
EFFECT TO THE TRANSACTIONS (AS DEFINED), AND HISTORICAL REFERENCES TO THE
COMPANY INCLUDE THE BUSINESSES CONDUCTED BY UDLP PRIOR TO GIVING EFFECT TO THE
TRANSACTIONS AND THE BUSINESSES CONDUCTED BY THE PREDECESSORS OF UDLP THAT WERE
CONTRIBUTED TO UDLP UPON ITS FORMATION ON JANUARY 1, 1994. ALL REFERENCES TO
"PRO FORMA" FINANCIAL INFORMATION GIVE EFFECT TO THE TRANSACTIONS, AS FURTHER
DESCRIBED UNDER "UNAUDITED PRO FORMA FINANCIAL DATA."
THE COMPANY
The Company is a leading supplier of tracked, armored combat vehicles and
weapons delivery systems to the U.S. Department of Defense and a number of
allied military forces worldwide. The Company's products include critical
elements of the U.S. military's tactical force structure. The Bradley Fighting
Vehicle, recognized as one of the best-performing weapons systems in U.S.
history, is the only domestically produced vehicle able to fulfill the dual role
of troop transport and armored fighting vehicle. The Company has maintained its
prime contractor position on the Bradley program since production began in 1981,
and has added a number of technology-based upgrades and derivative vehicles that
continue to extend the program's life-cycle. Building on over twenty years of
experience on the M109 self-propelled howitzer and upgrades, the Company is also
the prime contractor for the development of the Crusader Field Artillery System.
The U.S. Army has identified the Crusader as its planned multi-billion dollar
next-generation field artillery system and the largest U.S. military vehicle
development program of this decade. For the twelve months ended September 30,
1997, the Company had pro forma revenues of approximately $1.2 billion, pro
forma operating income of $53.2 million and a pro forma net loss of $7.0
million. With respect to the net loss and operating income, purchase accounting
for the Transactions is not yet complete and these amounts are subject to
adjustment upon completion of that process. See "Unaudited Pro Forma Financial
Data." For the same twelve month period the Company had pro forma EBITDA (as
defined) of $127.1 million.
The Company enjoys strong, long-standing customer relationships as a result
of its advanced design, engineering and manufacturing capabilities, competitive
cost structure, diversified product portfolio, demonstrated upgrade
capabilities, and reputation for program quality and service. Management
believes that these characteristics provide a key competitive advantage in
obtaining upgrade production contracts and in pursuing other domestic and
international business opportunities with new and existing customers. In
addition to the Bradley Fighting Vehicle and the M109 howitzer, the Company
serves as the prime contractor for a number of mission critical military
programs, several of which have spanned decades. The Company has been the prime
contractor for several of these programs, including the M113 armored personnel
carrier since 1960, the M88 tank recovery vehicle since 1960, and the U.S.
Navy's Mk45 naval gun system since 1968. The Company is currently performing
under more than 30 active contracts with original funded values in excess of $25
million each. The Company had a firm funded backlog of more than $1.6 billion as
of November 30, 1997, a substantial majority of which is derived from
sole-source, prime contracts.
Management believes that the emphasis of the U.S. Department of Defense on
enhancing military preparedness within a declining procurement budget
environment has resulted and will continue to result in increased emphasis on
upgrading and extending the life of existing equipment and systems, including
those currently supplied by the Company. Management believes this trend favors
large, established
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contractors such as the Company that are qualified to perform sole-source
contracts for product design, development, manufacture, field service and
support and subsequent upgrades.
The Company organizes its operations into three business areas: Armored
Combat Vehicles, Armament Systems and International.
ARMORED COMBAT VEHICLES. This business area is comprised of the Ground
Systems, Paladin Production and Steel Products Divisions of the Company.
GROUND SYSTEMS. The Company is the leading U.S. developer and manufacturer
of medium/light tracked, armored combat vehicles, including the Bradley family
of vehicles and derivatives (such as the Multiple Launch Rocket System carrier,
the Fire Support Vehicle, the Command and Control Vehicle and the Stinger
Fighting Vehicle), M109 self-propelled howitzers, M992 Field Artillery
Ammunition Supply Vehicles, M88 Recovery Vehicles, Grizzly Breaching Vehicles,
M9 Armored Combat Earthmovers, the M113 family of troop transport vehicles and
derivatives, M8 Armored Gun System and LVTP7 Amphibious Assault Vehicles.
PALADIN PRODUCTION. Through an innovative private sector/public sector
partnership, the Company has partnered with the U.S. government to upgrade the
M109 howitzer to the A6 configuration, known as the Paladin, creating a
comprehensive and integrated package with modern battlefield capabilities.
STEEL PRODUCTS. The Company is the largest U.S. designer and producer of
track shoes for armored combat vehicles and components for suspension systems.
The Company manufactures these products for nearly all of the tracked, armored
combat vehicles produced in the U.S., including vehicles manufactured by its
competitors. The Company also performs upgrades of the M113 family of vehicles
through a cooperative relationship with the U.S. Army.
ARMAMENT SYSTEMS. The Company provides integrated weapons delivery systems,
subsystems and services to the U.S. armed forces and military customers
worldwide.
CRUSADER. The Company is the prime contractor and systems integrator for
the Crusader under a $1.1 billion Demonstration and Validation contract, which
is presently scheduled to be completed in 2001, and expects to become the prime
contractor for the $1.0 billion Engineering and Manufacturing Development phase
presently scheduled to begin in 2000. Management believes the expertise acquired
through the design, development and engineering phases would give the Company a
significant advantage in securing the $1.3 billion Low Rate Initial Production
phase scheduled to begin in 2004 and any Full Rate Production contract
ultimately awarded, if necessary funding is appropriated and the U.S. Army
continues to proceed with the Crusader.
NAVAL PROGRAMS. Since 1940, the Company has designed, developed and
manufactured advanced guns and missile-launching systems for the U.S. Navy. The
Company is the sole-source, prime contractor of the Mk45 five-inch naval gun,
the U.S. Navy's primary gun for surface vessels, and produces the Mk41 Vertical
Launching System, the Navy's primary surface vessel missile launcher, under a
work-split agreement with Lockheed Martin Corporation. The Company is also
actively involved in the development and testing of several new naval guns and
missile launch systems, and provides complete overhaul, repair and maintenance
of naval ordnance at the recently privatized Naval Ordnance Station at
Louisville, Kentucky.
INTERNATIONAL. The Company has expanded its international presence over the
past several years, and its International Division operates joint ventures in
Saudi Arabia and Turkey and co-production programs in Japan, Korea and Pakistan.
The joint ventures have been awarded contracts to provide logistics support and
training, vehicle modernization upgrades and new tracked, armored combat vehicle
production. The Company provides training, technology and production kits to its
co-production partners and assists them in building domestic production
capability.
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In addition to the International Division's operations, the Company had
export sales directly and through the U.S. government's Foreign Military Sales
program, comprising $194.2 million of 1996 revenues. Management believes the
international market offers attractive opportunities to leverage established
programs, which the Company is actively pursuing in a number of countries
including Canada, Egypt, Israel, Kuwait, Malaysia, Spain, Taiwan and Thailand,
although opportunities in Asia may be reduced or deferred by recent economic and
political turmoil in that region.
BUSINESS STRENGTHS
The Company attributes its performance to several factors, including the
following:
COMPREHENSIVE CAPABILITIES IN ARMORED COMBAT VEHICLES. For more than half a
century, the Company has remained at the forefront in the design, development
and upgrade of medium/light tracked, armored combat vehicles, beginning with the
primary amphibious vehicle used in World War II, followed in 1960 by the M113,
the main troop transport vehicle used by the U.S. and other militaries with over
80,000 vehicles delivered worldwide. In 1981, the Company began initial
production as the sole-source, prime contractor for the Bradley Fighting
Vehicle. Management believes that these and other successes resulted from the
Company's proven, comprehensive design and engineering experience in simulation,
systems integration, armor, mobility and survivability, its demonstrated ability
to infuse "information dominance technologies" into combat systems for enhanced
information gathering, analysis and application in the battlefield environment,
its demonstrated manufacturing and upgrade capability, and its reputation for
service in the field.
ABILITY TO LEVERAGE SYSTEMS INTEGRATION EXPERTISE INTO LONG-TERM
PROGRAMS. The Company's experience and technological expertise afford it a
continued position as team leader and prime systems integrator for the programs
in which it participates, and positions the Company for the development and
integration of other complex, critical weapons systems. For example, management
believes the Company's position as the systems integrator on the Crusader played
a significant role in the Company's recent success in being named gun weapons
systems integrator for the Naval Surface Fire Support program, with
responsibility for the development and integration of a new naval gun system.
Management also believes that these capabilities create advantages in marketing
to international customers seeking products compatible with systems used by the
U.S. military.
LARGE, INSTALLED BASE OFFERS SIGNIFICANT LIFE-CYCLE OPPORTUNITIES. The U.S.
military is under budgetary constraints that provide incentives to upgrade and
overhaul existing systems and vehicles to maximize system life. The Company's
resident knowledge of its extensive domestic and international installed base of
vehicles affords significant opportunities, through modernization upgrades,
derivative vehicles that expand program capabilities, and logistical support
services and spares, to effectively extend product life for many years after
development. For example, the Bradley Fighting Vehicle has undergone three
generations of upgrades and has fostered a number of derivatives, and the
Company has upgraded its M109 howitzers to the A6 Paladin configuration and its
M88 recovery vehicles to the Hercules configuration. Management believes these
upgrades and derivatives, which comprise a substantial amount of the Company's
funded backlog, are more predictable sources of revenue and cash flow than new
products.
STRONG INTERNATIONAL PRESENCE AND GROWTH POTENTIAL. In contrast to the
declining U.S. procurement budget, military budgets of certain foreign
governments have expanded due to general economic growth or regional
geo-political pressures. Management believes the Company's proven design,
development, engineering and manufacturing capabilities for the U.S. military
have been the foundation for its International Division and export business. For
example, management believes the domestic M113 program and prior co-production
programs for Armored Infantry Fighting Vehicles in Europe were the basis for the
award of contracts for similar vehicles to the Company's Turkish joint venture.
Management also believes that the Company's existing product breadth and
established manufacturing platforms provide it with certain cost advantages over
smaller foreign competitors when pursuing typical lower volume foreign
contracts.
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INNOVATIVE PUBLIC/PRIVATE TEAMING RELATIONSHIPS. The Company has
established relationships with key constituencies, including the U.S. Army, U.S.
Navy and the Office of the Secretary of Defense, and is one of the leaders in
working with the U.S. Department of Defense to rationalize the U.S. defense
industrial base. The Company operates a significant portion of the recently
privatized Louisville Naval Ordnance Station, and is partnering with the
Letterkenny Army Depot to upgrade the M109 howitzer to the A6 Paladin
configuration. The Company also has partnering arrangements with another U.S.
government depot to upgrade the M113, the M88 and breaching vehicles. The
Company believes these arrangements demonstrate the success that can be achieved
through public/private partnerships.
STRONG MANAGEMENT TEAM AND EXPERIENCED INVESTOR. The Company has a highly
experienced and committed management team that has successfully adapted the
Company's cost structures and manufacturing operations to the declining U.S.
Department of Defense procurement budget and the significant transformation to a
lower volume, higher technology manufacturing capability. Senior management has
an average of more than 19 years with the Company and substantially all of the
senior management team was directly involved with the initial formation and
integration of UDLP in January 1994. Management will be given the opportunity to
participate in the Company's potential success through an equity-based incentive
program and direct investment. In addition, the management of the Company is
complemented by the support of The Carlyle Group, an active investor in the
defense and aerospace industries.
BUSINESS STRATEGY
Management intends to enhance its leading market position through the
successful execution of the following objectives:
CONTINUING TO PROVIDE PRODUCTS AND SERVICES ACROSS PROGRAM LIFE-CYCLES. The
Company intends to continue to leverage its extensive range of products and
services across entire program life-cycles through new technology developments,
follow-on products, derivative vehicles, upgrades, logistics support and
training. For example, the Company was recently awarded a Low Rate Initial
Production contract for the third generation of upgrades to the Bradley Fighting
Vehicle, the A3 configuration, which will incorporate a new core electronic
architecture, including, among others, combat identification systems,
situational awareness and battlefield digitization. In addition, the Company
plans to continue building on the successful Bradley Fighting Vehicle program by
further expanding its family of vehicles to include new armored vehicles, such
as a maintenance vehicle, a treatment and transport vehicle, an engineering
squad vehicle and a battle command vehicle.
CAPITALIZING ON THE CRUSADER OPPORTUNITY. The Crusader program represents
an important opportunity with the potential to become one of the U.S. Army's
largest procurement programs over the next decade. The Company plans to devote
all necessary resources to establish the Crusader's capabilities and develop
successful prototypes in the Demonstration and Validation phase and to win, if
awarded, the Engineering and Manufacturing Development and Low Rate Initial
Production contracts. The Company's objective is to fully demonstrate the
Company's engineering and cost-effective production qualifications so that the
Company will be the sole-source, prime contractor for the Crusader if necessary
funding is appropriated and the U.S. Army proceeds to Full Rate Production.
PURSUING KEY INTERNATIONAL OPPORTUNITIES. The Company plans to capitalize
on its established program base and expertise, and on its extensive
international joint venture and co-production experience, in order to expand
export sales and establish new joint ventures and co-production programs.
Management believes this strategy will require minimal additional capital, and
has the potential to diversify the Company's business base and enhance overall
margins.
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PARTICIPATING IN THE PUBLIC/PRIVATE DEFENSE INDUSTRIAL BASE
CONSOLIDATION. The Company intends to continue working closely with its U.S.
government customers to rationalize the public/private defense industrial base.
Potential opportunities include further privatizations such as the outsourcing
of logistics and training support and additional depot partnering relationships
with the U.S. Department of Defense.
MODERNIZING THE U.S. ARMY NATIONAL GUARD. A large portion of the U.S.
Army's tracked, armored combat vehicle fleet is in the National Guard. The
modernization of equipment and systems used by the National Guard generally lags
behind that of the active armed services. The Company is pursuing a directed
procurement program to assist the National Guard in obtaining funding for
upgrades of its Bradley Fighting Vehicles, M113 family of vehicles and M9
Armored Combat Earthmovers.
IDENTIFYING STRATEGIC ACQUISITION OPPORTUNITIES. Management expects that
the continuing consolidation in the U.S. defense industry will result in
strategic opportunities for the Company. The Company intends to be proactive in
this environment and, on an opportunistic basis, pursue acquisitions both
domestically and abroad that management believes will complement its key
business strengths or further expand its capabilities.
THE INVESTOR
The Carlyle Group (together with its affiliates, "Carlyle") is a Washington,
D.C.-based private merchant bank founded in 1987 and currently manages several
investment funds, including a $1.3 billion private equity fund. Carlyle has made
over 30 investments in select industries, including defense, aerospace,
information technology and related services. Some of these investments include
Howmet Corporation, a leading supplier of cast turbine engine components for the
jet aircraft and industrial gas power generation markets; BDM International,
Inc. (NASDAQ: BDMI), a multinational information technology company and provider
of professional services to the U.S. Department of Defense and other government
agencies (which Carlyle has agreed to sell to TRW, Inc.); Federal Data
Corporation, a supplier of information technology services and products to the
U.S. government; Magnavox Electronic Systems Company, a leading electronics
systems supplier to the U.S. government and prime contractors (later sold to
Hughes Electronics Corporation); GDE Systems Inc., a leading supplier of mission
planning and information systems as well as test equipment to the U.S.
government and prime contractors (later sold to Tracor, Inc.); Power Paragon
Inc., a leading supplier of power distribution systems to the U.S. government
and prime contractors (later sold to SPD Inc.); and Vought Aircraft Company, a
leading supplier of major aircraft structures and subassemblies for commercial
and military aircraft (later sold to Northrop Grumman Corporation).
THE TRANSACTIONS
United Defense Industries, Inc. was formed by Carlyle in August 1997 to
acquire UDLP from FMC Corporation ("FMC"), Harsco Corporation ("Harsco") and
Harsco UDLP Corporation (collectively with FMC and Harsco, the "Sellers"). On
October 6, 1997 pursuant to a Purchase Agreement among the Sellers and the
Company dated as of August 25, 1997 (the "Acquisition Agreement"), the Company
acquired 100% of the Sellers' respective partnership interests in UDLP (the
"Acquisition"). As part of the Acquisition, UDLP acquired certain assets of
FMC's Corporate Technology Center ("CTC") in San Jose, California and hired
certain FMC legal, audit and governmental affairs personnel. The aggregate
purchase price paid in the Acquisition was approximately $850.0 million (the
"Purchase Price"), plus related fees and expenses estimated to be approximately
$30.0 million. The Purchase Price and such fees and expenses were funded with
(i) $200.0 million of Senior Subordinated Notes due 2007 (the "Private Notes");
(ii) borrowings of $457.0 million under a senior credit facility (the "Senior
Credit Facility"), which facility includes $495.0 million of term loan
facilities (the "Term Loan Facilities") and a $230.0 million revolving credit
facility (the "Revolving Credit Facility"); (iii) approximately $173.0 million
of cash common equity (the "Equity Contribution"), representing an investment in
the Company by an investor group formed by Carlyle, including Carlyle and
management; and (iv) a $50.0 million senior subordinated note payable to
8
<PAGE>
the Sellers (the "Seller Note"). The Purchase Price is subject to adjustment
based on the balance sheet of UDLP as of October 6, 1997 (the "Closing Date").
If any such adjustment results in a decrease in the Purchase Price, borrowings
under the Senior Credit Facility will be correspondingly reduced. If the
Purchase Price is increased, the borrowings under the Revolving Credit Facility
will be correspondingly increased. This purchase price adjustment is currently
being negotiated by the Sellers and the Company. See "The Acquisition." If
certain consents and acknowledgments are obtained, the Company will pay to the
Sellers $50.0 million in cash in lieu of issuing the Seller Note, and the
borrowings under the Term Loan Facilities would be increased by $50.0 million to
effect such payment. See "Description of Certain Indebtedness." The Acquisition,
the borrowings under the Senior Credit Facility, the issuance of the Private
Notes, the Seller Note, the Equity Contribution and the payment of the related
fees and expenses are referred to herein as the "Transactions." For a
description of the Acquisition Agreement and related agreements, see "The
Acquisition."
The following table illustrates the sources and uses of funds in connection
with the Transactions:
($ IN MILLIONS)
<TABLE>
<CAPTION>
SOURCES OF FUNDS AMOUNT USES OF FUNDS AMOUNT
- -------------------------------------- ----------- -------------------------------------- -----------
<S> <C> <C> <C>
Revolving Credit Facility(1).......... $ 12.0 Acquisition Purchase Price............ $ 850.0
Term Loan Facilities(2)............... 445.0 Estimated Fees and Expenses........... 30.0
The Private Notes..................... 200.0
Seller Note(2)........................ 50.0
Equity Contribution................... 173.0
----------- -----------
Total Sources..................... $ 880.0 Total Uses............................ $ 880.0
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) On the Closing Date, the Revolving Credit Facility had a remaining borrowing
availability of approximately $64.0 million after giving effect to the
issuance of approximately $154.0 million of letters of credit to replace
outstanding letters of credit on or promptly after the Closing Date.
(2) The Company believes that the Seller Note, which is due three years after
the Closing Date, will be prepaid within one year from the Closing Date with
$50.0 million of additional borrowings under the Term Loan Facilities.
9
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer................ The Company is hereby offering to exchange $1,000
principal amount of Exchange Notes for each $1,000
principal amount of Private Notes that are properly
tendered and accepted. The Company will issue Exchange
Notes on or promptly after the Expiration Date. As of
the date hereof, there is $200,000,000 aggregate
principal amount of Private Notes outstanding. See "The
Exchange Offer."
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer in exchange
for Private Notes may be offered for resale, resold and
otherwise transferred by a holder thereof (other than
(i) a broker-dealer who purchases such Exchange Notes
directly from the Company to resell pursuant to Rule
144A or any other available exemption under the
Securities Act or (ii) a person that is an affiliate of
the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the
registration and prospectus delivery provisions of the
Securities Act; PROVIDED that the holder is acquiring
Exchange Notes in the ordinary course of its business
and is not participating, and had no arrangement or
understanding with any person to participate, in the
distribution of the Exchange Notes. Each broker-dealer
that receives Exchange Notes for its own account in
exchange for Private Notes, where such Private Notes
were acquired by such broker-dealer as a result of
market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act meeting
the requirements of the Securities Act in connection
with any resale of such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the
Exchange Offer may be deemed to be an "underwriter"
within the meaning of the Securities Act. 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. See "The Exchange
Offer--Resale of the Exchange Notes."
Registration Rights Agreement..... The Private Notes were sold by the Company on October 6,
1997 (the "Closing Date") to Lehman Brothers Inc., BT
Alex. Brown Incorporated and Chase Securities Inc. (the
"Initial Purchasers") pursuant to a Purchase Agreement,
dated October 1, 1997, by and among the Company and the
Initial Purchasers (the "Purchase Agreement"). The
Initial Purchasers subsequently sold the Private Notes
to third parties. See "The Exchange Offer--Purpose of
the Exchange Offer." The Initial Purchasers have
informed the Company that the entire initial allotment
sold to them on October 6, 1997 was subsequently sold
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
to third parties but that the Initial Purchasers, from
time to time, hold Notes as part of their market making
activities. Pursuant to the Purchase Agreement, the
Company and the Initial Purchasers entered into a
Registration Rights Agreement, dated as of October 6,
1997 (the "Registration Rights Agreement"), which grants
the holders of the Private Notes certain exchange and
registration rights. The Exchange Offer is intended to
satisfy such rights, which will terminate upon the
consummation of the Exchange Offer. The holders of the
Exchange Notes will not be entitled to any exchange or
registration rights with respect to the Exchange Notes.
See "The Exchange Offer--Termination of Certain Rights."
Expiration Date................... The Exchange Offer will expire at 5:00 p.m., New York
City time, on March 17, 1998, unless the Exchange Offer
is extended by the Company in its sole discretion, in
which case the term "Expiration Date" shall mean the
latest date and time to which the Exchange Offer is
extended. See "The Exchange Offer-- Expiration Date;
Extensions; Amendments."
Accrued Interest on the Exchange
Notes and the Private Notes..... The Exchange Notes will bear interest from and including
the date of issuance of the Private Notes (October 6,
1997). Holders whose Private Notes are accepted for
exchange will be deemed to have waived the right to
receive any interest accrued on the Private Notes. See
"The Exchange Offer--Interest on the Exchange Notes."
Conditions to the Exchange
Offer........................... The Exchange Offer is subject to the condition that, in
the reasonable judgment of the Company, it does not
violate applicable law, rules or regulations or an
applicable interpretation of the staff of the
Commission. The Exchange Offer is not conditioned upon
any minimum aggregate principal amount of Private Notes
being tendered for exchange. See "The Exchange
Offer--Conditions."
Procedures for Tendering Private
Notes........................... Each holder of Private Notes wishing to accept the
Exchange Offer must complete, sign and date the Letter
of Transmittal, or a facsimile thereof, in accordance
with the instructions contained herein and therein, and
mail or otherwise deliver such Letter of Transmittal, or
such facsimile, together with such Private Notes and any
other required documentation to Norwest Bank Minnesota,
National Association, as exchange agent (the "Exchange
Agent"), at the address set forth herein. By executing
the Letter of Transmittal, the holder will represent to
and agree with the Company that, among other things, (i)
the Exchange Notes to be acquired by such holder of
Private Notes in connection with the Exchange Offer are
being acquired by such holder in the ordinary course of
its business, (ii) such holder has no arrangement or
understanding with any person to participate in a
distribution of the Exchange Notes, (iii) that if such
holder is a broker-dealer registered under the Exchange
Act or is
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
participating in the Exchange Offer for the purposes of
distributing the Exchange Notes, such holder will comply
with the registration and prospectus delivery
requirements of the Securities Act in connection with a
secondary resale transaction of the Exchange Notes
acquired by such person and cannot rely on the position
of the staff of the Commission set forth in no-action
letters (see "The Exchange Offer--Resale of the Exchange
Notes"), (iv) such holder understands that a secondary
resale transaction described in clause (iii) above and
any resales of Exchange Notes obtained by such holder in
exchange for Private Notes acquired by such holder
directly from the Company should be covered by an
effective registration statement containing the selling
securityholder information required by Item 507 or Item
508, as applicable, of Regulation S-K of the Commission
and (v) such holder is not an "affiliate", as defined in
Rule 405 under the Securities Act, of the Company. Any
broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the
Exchange Offer may be deemed to be an "underwriter"
within the meaning of the Securities Act. If the holder
is a broker-dealer that will receive Exchange Notes for
its own account in exchange for Private Notes that were
acquired as a result of market-making activities or
other trading activities, such holder will be required
to acknowledge in the Letter of Transmittal that such
holder will deliver a prospectus meeting the
requirements of the Securities Act in connection with
any resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus, such
holder will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
See "The Exchange Offer--Procedures for Tendering. "
Special Procedures for Beneficial
Owners.......................... Any beneficial owner whose Private Notes are registered
in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender such
Private 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 on such owner's
own behalf, such owner must, prior to completing and
executing the Letter of Transmittal and delivering such
owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes
in such owner's name or obtain a properly completed bond
power from the registered holder. The transfer of
registered ownership may take considerable time and may
not be able to be completed prior to the Expiration
Date. See "The Exchange Offer-- Procedures for
Tendering."
Guaranteed Delivery Procedures.... Holders of Private Notes who wish to tender their
Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any other
documentation required by the Letter of Transmittal
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
to the Exchange Agent prior to the Expiration Date must
tender their Private Notes according to the guaranteed
delivery procedures set forth under "The Exchange
Offer--Guaranteed Delivery Procedures."
Acceptance of the Private Notes
and Delivery of the Exchange
Notes........................... Subject to the satisfaction or waiver of the conditions
to the Exchange Offer, the Company will accept for
exchange any and all Private Notes that are properly
tendered in the Exchange Offer prior to the Expiration
Date. The Exchange Notes issued pursuant to the Exchange
Offer will be delivered within five business days
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Withdrawal Rights................. Tenders of Private Notes may be withdrawn at any time
prior to the Expiration Date. See "The Exchange
Offer--Withdrawal of Tenders."
Certain Federal Income Tax
Considerations.................. The exchange of Private Notes for Exchange Notes will be
treated as a "non-event" for federal income tax
purposes. As a result, no material federal income tax
consequences will result to holders exchanging Private
Notes for Exchange Notes. See "Certain Federal Income
Tax Considerations."
Exchange Agent.................... Norwest Bank Minnesota, National Association is serving
as the Exchange Agent in connection with the Exchange
Offer.
</TABLE>
THE EXCHANGE NOTES
The Exchange Offer applies to the entire aggregate principal amount of the
Private Notes. The form and terms of the Exchange Notes are the same as the form
and terms of the Private Notes except that (i) the exchange will have been
registered under the Securities Act and, therefore, the Exchange Notes will not
bear legends restricting the transfer thereof and (ii) holders of the Exchange
Notes will not be entitled to certain rights of holders of the Private Notes
under the Registration Rights Agreement, which rights will terminate upon
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be issued under,
and be entitled to the benefits of, the Indenture. For further information and
for definitions of certain capitalized terms used below, see "Description of the
Notes."
<TABLE>
<S> <C>
Interest Payment Dates:........... Interest on the Exchange Notes will accrue from the date
of original issuance (the "Issue Date") and will be
payable semi- annually on May 15 and November 15,
commencing May 15, 1998.
Maturity Date:.................... November 15, 2007.
Optional Redemption:.............. The Exchange Notes will be redeemable at the option of
the Company, in whole or in part, at any time on or
after November 15, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest, thereon
to the applicable redemption date. In addition, at any
time prior to November 15, 2000, the Company may redeem
up to 35% of the original aggregate principal amount of
the Notes at a redemption price equal to 108.75% of the
principal amount thereof plus accrued and unpaid
interest to the redemption date, with the net cash
proceeds of one or more Public Equity Offerings,
provided that at least 65% of the original aggregate
principal amount of the
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Notes remains outstanding immediately after each such
redemption. See "Description of the Notes--Optional
Redemption."
Change of Control:................ Upon a Change of Control (as defined), (i) the Company
will have the option, at any time on or prior to
November 15, 2002, to redeem the Exchange Notes in whole
but not in part, at a redemption price equal to 100% of
the principal amount thereof plus the Applicable Premium
(as defined), plus accrued and unpaid interest, thereon
to the redemption date, and (ii) if the Company does not
so redeem the Exchange Notes, each holder will have the
right, at the holder's option, to require the Company to
purchase the Exchange Notes at a price equal to 101% of
the principal amount thereof plus accrued and unpaid
interest, thereon to the purchase date. See "Description
of the Notes--Repurchase at the Option of
Holders--Change of Control."
Ranking:.......................... The Exchange Notes will be general unsecured obligations
of the Company subordinate in right of payment to all
existing and future Senior Debt of the Company, and
senior in right of payment to or PARI PASSU with all
other indebtedness of the Company. As of November 30,
1997, the Company had approximately $428.5 million of
Senior Debt outstanding (excluding outstanding letters
of credit of approximately $157.0 million and unused
commitments of approximately $111.0 million under the
Senior Credit Facility, $50.0 million of which is
available only to fund the repayment of the Seller Note)
and $50.0 million outstanding under the Seller Note
(which is PARI PASSU in right of payment with the
Exchange Notes and will mature on the third anniversary
of the Closing Date, although the Company expects the
Seller Note to be prepaid prior to the first anniversary
of the Closing Date). See "Description of the
Notes--Subordination" and "Capitalization."
Guarantees:....................... The Company's payment obligations under the Exchange
Notes will be jointly and severally guaranteed on a
senior subordinated basis by the Guarantors (the
"Guarantees"). The Guarantee's will be full,
unconditional and on a joint and several basis, subject
to applicable law. The Guarantors will be the Company's
parent Iron Horse Investors, L.L.C., the Company's
wholly-owned subsidiary UDLP Holdings Corp., which is
the general partner of UDLP and UDLP and each of the
Company's other subsidiaries that are also guarantors
under the Senior Credit Facility. See "Description of
the Notes--Guarantees."
Certain Covenants:................ The indenture pursuant to which the Exchange Notes will
be issued (the "Indenture") contains certain covenants
that, among other things, limit the ability of the
Company and certain of its Subsidiaries to (i) incur
additional indebtedness and issue preferred stock; (ii)
pay dividends or make certain other restricted payments;
(iii) enter into transactions with affiliates; (iv) make
certain asset dispositions; (v) merge or consolidate or
transfer substantially all of its assets; (vi) encumber
assets under certain circumstances; (vii) restrict
dividends and other payments from subsidiaries; (viii)
engage in sale and leaseback transactions; (ix) issue
Capital Stock (as defined) of Controlled Subsidiaries
(as defined); or (x) engage in certain business
activities. See "Description of the Notes--Certain
Covenants."
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
In addition, under certain circumstances, the Company
will be required to offer to purchase the Notes at a
price equal to 100% of the principal amount thereof plus
accrued and unpaid interest, thereon to the date of
purchase, with the proceeds of certain Asset Sales (as
defined). See "Description of the Notes--Asset Sales."
</TABLE>
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS."
15
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following table presents summary unaudited consolidated pro forma
financial data of the Company and should be read in conjunction with the
"Unaudited Pro Forma Financial Data" and the notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical consolidated financial statements of UDLP, together with the
related notes thereto, included elsewhere in this Prospectus. The following
summary unaudited pro forma consolidated financial data for the year ended
December 31, 1996, the nine months ended September 30, 1996 and 1997 and the
twelve months ended September 30, 1997, give effect to the Transactions as if
such transactions had occurred on January 1, 1996 with respect to the pro forma
income statement and other data, and as of September 30, 1997 with respect to
the pro forma balance sheet data. See "The Acquisition." The Company accounts
for inventory using the LIFO method and incurred non-cash LIFO charges of $6.3
million, $7.1 million, $8.0 million and $7.2 million for the year ended December
31, 1996, the nine months ended September 30, 1996 and 1997 and the twelve
months ended September 30, 1997, respectively. The pro forma consolidated
financial data set forth below is not necessarily indicative of the results that
actually would have been achieved had such transactions been consummated as of
the dates indicated or that may be achieved in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, TWELVE MONTHS
DECEMBER 31, ---------------------- ENDED SEPTEMBER
1996 1996 1997 30, 1997
------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C>
($ IN MILLIONS, EXCEPT RATIO DATA)
INCOME STATEMENT DATA:
Revenue................................................ $ 1,019.7 $ 738.6 $ 906.5 $ 1,187.6
Total expenses......................................... 985.0 711.5 875.0 1,148.5
Earnings from foreign affiliates....................... 31.9 31.3 13.5 14.1
------------ ---------- ---------- ---------------
Income from operations............................... 66.6 58.4 45.0 53.2
Interest expense....................................... 66.1 49.6 49.6 66.1
Other (income) expense................................. (2.0) (2.2) (1.4) (1.2)
------------ ---------- ---------- ---------------
Income (loss) before income taxes.................... 2.5 11.0 (3.2) (11.7)
Provision (benefit) for income taxes................... 1.0 4.4 (1.3) (4.7)
------------ ---------- ---------- ---------------
Net income (loss).................................... $ 1.5 $ 6.6 $ (1.9) $ (7.0)
------------ ---------- ---------- ---------------
------------ ---------- ---------- ---------------
OTHER DATA:
EBITDA(1).............................................. $ 140.3 $ 113.2 $ 100.0 $ 127.1
Depreciation and amortization.......................... 73.7 54.8 55.0 73.9
Capital expenditures................................... 22.4 16.5 20.1 26.0
Ratio of earnings to fixed charges(3).................. -- 1.1:1 -- --
Ratio of EBITDA to cash interest expense(2)............ 2.0x
Ratio of total debt to EBITDA.......................... 5.6x
BALANCE SHEET DATA:
Working capital........................................ $ (0.5)
Total assets........................................... 1,306.1
Total debt............................................. 707.0
Stockholder's equity................................... 173.0
</TABLE>
- ------------------------
(1) EBITDA represents income from operations plus depreciation and amortization.
EBITDA is not a measure of performance or financial condition under
generally accepted accounting principles, but is presented to provide
additional information related to debt service capability. EBITDA should not
be considered in isolation or as a substitute for other measures of
financial performance or liquidity under generally accepted accounting
principles. While EBITDA is frequently used as a measure of operations and
the ability to meet debt service requirements, it is not necessarily
comparable to other similarly titled captions of other companies due to the
potential inconsistencies in the method of calculation.
(2) For purposes of this computation, cash interest expense consists of pro
forma interest expense before amortization of deferred financing costs of
$2.0 million.
(3) Pro forma earnings were insufficient to cover fixed charges in the amount of
$1.3 million, $2.8 million and $11.9 million for the year ended December 31,
1996, the nine months ended September 30, 1997 and the twelve month period
ended September 30, 1997.
16
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents summary consolidated historical financial data
and should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical consolidated
financial statements of UDLP, together with the related notes thereto, included
elsewhere in this Prospectus. The historical consolidated financial data for the
nine months ended September 30, 1996 and 1997 have been derived from UDLP's
unaudited interim consolidated financial statements which, in the opinion of
management, reflect all material adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such data.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<CAPTION>
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue..................................................... $ 1,076.3 $ 967.6 $ 1,029.3 $ 745.9 $ 913.9
Cost of sales(1)............................................ 809.8 746.7 820.8 595.8 755.0
Selling, general and administrative(2)...................... 131.8 122.7 128.4 90.0 91.4
Research and development.................................... 16.3 12.4 12.9 9.1 12.1
--------- --------- --------- --------- ---------
Total expenses............................................ 957.9 881.8 962.1 694.9 858.5
Earnings from foreign affiliates(3)......................... 12.4 21.4 31.9 31.3 13.5
--------- --------- --------- --------- ---------
Income from operations.................................... 130.8 107.2 99.1 82.3 68.9
Other (income) expense...................................... (2.6) (1.9) (1.9) (2.2) (1.5)
--------- --------- --------- --------- ---------
Income before income taxes................................ 133.4 109.1 101.0 84.5 70.4
Provision for income taxes(4)............................... 3.9 1.4 2.8 -- 1.5
--------- --------- --------- --------- ---------
Net income................................................ $ 129.5 $ 107.7 $ 98.2 $ 84.5 $ 68.9
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER DATA:
EBITDA(5)................................................... $ 159.8 $ 133.9 $ 138.1 $ 111.1 $ 97.9
Net cash provided by operating activities................... 166.0 94.7 81.1 56.7 119.2
Net cash (used in) provided by investing activities......... (17.1) (50.8) (7.0) (4.6) 6.3
Net cash (used in) financing activities..................... (118.5) (74.9) (75.0) (53.0) (114.4)
Depreciation and amortization............................... 29.0 26.7 39.0 28.8 29.0
Capital expenditures........................................ 18.3 24.1 22.4 16.5 20.1
Ratio of earnings to fixed charges(6)....................... 38.1:1 26.4:1 23.6:1 25.6:1 19.2:1
BALANCE SHEET DATA:
Working capital............................................. $ 4.2 $ 11.3 $ 46.6 $ 48.4 $ 3.1
Total assets................................................ 479.9 569.6 645.0 601.7 612.1
Partners' capital........................................... 123.7 156.4 179.6 187.9 131.0
</TABLE>
- --------------------------
(1) Cost of sales includes consumption of inventory under the LIFO method and
includes charges relating to changes in cost as applied to inventory on-hand
("non-cash LIFO charges") of $5.6 million, $5.9 million and $6.3 million for
the years ended December 31, 1994, 1995 and 1996, respectively, and $7.1
million and $8.0 million for the nine months ended September 30, 1996 and
1997, respectively. Cost of sales for the year ended December 31, 1996 and
nine months ended September 30, 1996 includes a $14.3 million favorable
settlement from the U.S. government on a government procurement contract.
Cost of sales for the nine months ended September 30, 1997 includes
approximately $13.5 million of non-cash charges recorded for the quarter
ended September 1997 for changes in estimated contract profitability related
to contractual issues with customers and other matters resulting from the
periodic reassessment of the estimated profitability of contracts in
progress.
(2) Selling, general and administrative expense for the year ended December 31,
1994 includes a $7.4 million charge related to conforming Harsco's
historical accounting policy to UDLP's accounting for inventory.
(3) Earnings from foreign affiliates for the year ended December 31, 1996 and
nine months ended September 30, 1996 includes a $3.8 million increase as a
result of a change of accounting method for the investment in the Company's
Saudi Arabia joint venture, FMC Arabia Limited, from the cost method to the
equity method.
(4) UDLP was taxed as a partnership for the periods presented.
(5) EBITDA represents income from operations plus depreciation and amortization.
EBITDA is not a measure of performance or financial condition under
generally accepted accounting principles, but is presented to provide
additional information related to debt service capability. EBITDA should not
be considered in isolation or as a substitute for other measures of
financial performance or liquidity under generally accepted accounting
principles.
17
<PAGE>
While EBITDA is frequently used as a measure of operations and the ability
to meet debt service requirements, it is not necessarily comparable to other
similarly titled captions of other companies due to potential
inconsistencies in the method of calculation. See Note (6) to "Selected
Historical Financial Data" for information concerning the Company's net cash
provided by operating activities, net cash used in investing activities and
net cash used in financing activities for the periods indicated.
(6) For purposes of calculating the ratios of earnings to fixed charges,
"earnings" represents income before income taxes less the excess, if any, of
the equity in earnings of joint ventures over dividends received plus fixed
charges. "Fixed charges" consists of interest expense, including
amortization of deferred financing costs, plus that portion of operating
lease rental expense (33%) which management believes is representative of
the interest component of lease expense.
18
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS BEFORE
DECIDING TO MAKE AN INVESTMENT IN THE NOTES OFFERED HEREBY.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE
The Company incurred significant indebtedness as a result of the
Transactions and following consummation of the Transactions, approximately 80%
of the Company's total capitalization was represented by indebtedness. See "The
Acquisition." At November 30, 1997, the Company's consolidated total
indebtedness was approximately $678.5 million (excluding outstanding letters of
credit of approximately $157.0 million). The Indenture and the Senior Credit
Facility permit the Company to incur additional Indebtedness, subject to certain
limitations. For the year ended December 31, 1996 and the nine months ended
September 30, 1997, the Company's earnings would have been insufficient to cover
fixed charges by $1.3 million and $2.8 million, respectively. For the twelve
months ended September 30, 1997, the Company had pro forma revenues of
approximately $1.2 billion, pro forma operating income of $53.2 million and a
pro forma net loss of $7.0 million. With respect to the net loss and operating
income, purchase accounting for the Transactions is not yet complete and these
amounts are subject to adjustment upon completion of that process. See
"Unaudited Pro Forma Financial Data." The Company's ability to make scheduled
payments of the principal of, or interest on, or to refinance its indebtedness
(including the Notes) depends on its future performance, which to a certain
extent is subject to economic, financial, competitive, political and other
factors beyond its control. Based upon the current level of operations,
management believes that available cash flow, together with available borrowings
under the Senior Credit Facility and other sources of liquidity, should be
adequate to meet the Company's anticipated requirements for working capital,
capital expenditures, interest payments on the Notes and scheduled principal
payments under the Senior Credit Facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity, Capital
Resources and Financial Condition." There can be no assurance, however, that the
Company's cash flow will be sufficient to satisfy such requirements. If the
Company is unable to generate sufficient cash flow from operations in the future
to service its debt and make necessary capital expenditures, the Company may be
required to refinance all or a portion of its existing debt, including the
Notes, to sell assets or to obtain additional financing. There can be no
assurance that any such additional financing could be achieved. The Notes are
unsecured obligations of the Company. The Senior Credit Facility, however, is
secured by a lien on all assets (present, future, tangible and intangible) of
the Company and its domestic subsidiaries and by a pledge of all of the stock of
its domestic subsidiaries and two-thirds of the stock of its foreign
subsidiaries and joint ventures.
The Company's high level of debt will have several important effects on its
future operations, including the following: (i) the Company will have
significant cash requirements to service debt, reducing funds available for
operations, capital expenditures, research and development, acquisitions and
future business opportunities, and increasing the Company's vulnerability to
adverse general economic and industry conditions, all of which could be
exacerbated by the uncertainty inherent in government contracts and foreign
operations and the future of military expenditures (as described below) and (ii)
the financial covenants and other restrictions contained in the Senior Credit
Facility and other agreements relating to the Company's Senior Debt and in the
Indenture require the Company to meet certain financial tests and restrict its
ability to borrow additional funds, to dispose of assets or to pay cash
dividends.
SUBORDINATION AND RANKING OF THE NOTES AND THE GUARANTEES
The Notes and the Guarantees are general unsecured obligations of the
Company and the Guarantors, respectively, and are subordinate in right of
payment to all Senior Debt, including all indebtedness of the Company and the
Guarantors under the Senior Credit Facility. The Guarantees will be full,
unconditional and on a joint and several basis, subject to applicable law. As of
November 30, 1997, approximately $428.5 million of Senior Debt (excluding
outstanding letters of credit of approximately
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$157.0 million) was outstanding and the Company had no senior subordinated
indebtedness outstanding other than the Notes and the Seller Note. On November
30, 1997, the Company had approximately (i) $61.0 million available for
borrowing under the Revolving Credit Facility and (ii) $50.0 million available
for borrowing under the Term Loan Facilities solely to fund the repayment of the
Seller Note. The Indenture permits the Company and the Guarantors to incur
additional Senior Debt, provided certain conditions are met, and the Company and
the Guarantors expect from time to time to incur additional Senior Debt. In
addition, the Indenture permits Senior Debt to be secured. By reason of the
subordination provisions of the Indenture, in the event of the insolvency,
liquidation, reorganization, dissolution or other winding-up of the Company or
the Guarantors or upon a default in payment with respect to, or the acceleration
of, or if a judicial proceeding is pending with respect to any default under,
any Senior Debt, the lenders under the Senior Credit Facility and other
creditors who are holders of Senior Debt must generally be paid in full before a
holder of the Notes and the Guarantees may be paid. In addition, the Seller Note
matures and must be paid prior to the maturity of the Notes. Accordingly, there
may be insufficient assets remaining after such payments to pay amounts due on
the Notes and the Guarantees. See "Description of the Notes--Subordination."
RISKS OF FURTHER REDUCTIONS OR CHANGES IN MILITARY EXPENDITURES
Sales under contracts with the U.S. government's Department of Defense (the
"DoD"), including U.S. government Foreign Military Sales ("FMS") or under
subcontracts that identified the DoD as the ultimate purchaser, represented
approximately 90% of the Company's sales in 1996. The U.S. defense budget has
declined significantly since the mid-1980s, resulting in a slowing of new
program starts, program delays and program cancellations. The reduction in the
U.S. defense budget has caused most defense-related government contractors to
experience declining revenues, increased pressure on operating margins and, in
some cases, net losses. The Company has been adversely affected by these
reductions, and underwent a significant restructuring and consolidation of its
tracked combat vehicle manufacturing operations which began in 1994 and was
substantially completed in 1996.
The loss or significant curtailment of the Company's material U.S. or
international military contracts (including without limitation those identified
in "Business--Products and Systems"), or the failure to renew or replace
material contracts upon expiration or completion as a result of budget cuts or
for other reasons, would materially and adversely affect the Company's financial
condition, results of operations and debt service capability. While a major
portion of the Company's revenues have historically been derived from the
production of new vehicles and the development of systems, in recent years and
for the foreseeable future, a growing majority of its revenues have been and are
likely to be earned through the upgrading of existing vehicles and systems, with
correspondingly less revenues anticipated in the areas of new vehicle production
and development in the near term. There is also a risk that the U.S. Army could
elect to have any portion of its upgrade or overhaul work currently performed by
the Company, instead performed by the U.S. Army's own industrial facilities,
known as depots. A significant decline in military expenditures of the U.S.
government or certain foreign countries, particularly expenditures allocated to
the upgrading of any such country's military vehicles and armament systems,
could materially adversely affect the Company's financial condition, results of
operations and debt service capability.
The current Demonstration and Validation contract for the Crusader, an
advanced field artillery system for the U.S. Army, is for the design and
development of the Crusader including delivery of two prototype self-propelled
howitzers and resupply vehicles. While this contract is scheduled to continue
into 2001, no assurance can be given that the Company will complete performance
under the contract. Budget constraints could result in Congress not
appropriating the funding contemplated by this contract. Additionally, the
technical challenges associated with the Crusader may result in performance
requirements that are cost prohibitive and ultimately result in the U.S. Army
pursuing other alternatives for modernization. Finally, geo-political
circumstances or a shift in the U.S. Army's or the U.S. government's current
mission or strategy with respect to the U.S. Army could result in the U.S. Army
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reassessing its conflict and combat mission priorities and developing a new
strategy that either does not require a new howitzer vehicle or instead requires
a further upgrade of existing vehicles. If the U.S. Army decides to produce the
Crusader, full scale production would not be expected to commence until at least
2005, and there can be no assurance that the Company will be named the prime
contractor or otherwise participate in what could be a major competition for
future production. Failure to secure future contract awards for Crusader
development and production or loss or curtailment of any Crusader contract or
the funding therefore could have a material adverse effect on the Company's
financial condition, results of operations and debt service capability.
UNCERTAINTY INHERENT IN GOVERNMENT CONTRACTS
Companies engaged primarily in supplying defense-related equipment and
services to U.S. government agencies are subject to certain business risks
peculiar to the defense industry. These risks include the ability of the U.S.
government to unilaterally suspend its contractors from receiving new contracts
in the event of certain violations of law or regulations. All of the Company's
U.S. government contracts are, by their terms, subject to termination by the
U.S. government either for its convenience or for the default of the contractor.
In addition, certain costs and expenses are not allowable charges under U.S.
government contracts. The Company, as a U.S. government contractor, is subject
to financial audits and other reviews by the U.S. government of performance of,
and the accounting and general practices relating to, U.S. government contracts.
Costs and prices under such contracts may be subject to adjustment based upon
the results of such audits and reviews. Like most large government contractors,
the Company is audited and reviewed on a continual basis. Although adjustments
arising from such audits and reviews have not had a material adverse effect on
the Company's financial condition, results of operations or debt service
capability in the past, there can be no assurance that the effects of future
audits and reviews will not have such material adverse effects. See
"Business--Government Contracts; Regulatory Matters."
Congress usually appropriates funds for a given program on an annual basis
even though contract performance may take more than one year. Consequently, at
the outset of a major program, the contract is usually partially funded, and
additional monies are normally committed to the contract by the procuring agency
only as appropriations are made by Congress for future government fiscal years.
Failure of Congress to appropriate expected funding for the Company's programs
could have a material adverse effect on the Company's financial condition,
results of operations and debt service capability.
Additionally, approximately two-thirds of the Company's 1996 revenues were
derived from fixed-price contracts. Inherent in such contracts is the risk that
if a bid is submitted and a contract is subsequently awarded, actual performance
costs may exceed the projected costs on which the fixed contract prices were
based. To the extent that actual costs exceed such projected costs, the
Company's profitability could be materially adversely affected. See
"Business--Major Customers" and "--Government Contracts; Regulatory Matters."
TECHNOLOGY IMPLEMENTATION RISKS
The Company, like all defense businesses, is subject to risks associated
with uncertain cost factors related to scarcity of technologically necessary
components and human resources (such as software engineers and information
resource professionals), the frequent need to bid on programs in advance of
design completion (which may result in unforeseen technological difficulties
and/or cost overruns), the substantial time and effort required for design and
development, design complexity and the constant necessity for design
improvement. For example, the Company is currently the prime contractor to
develop the Crusader. To build the Crusader, the Company must integrate a number
of sophisticated technologies while meeting challenging performance requirements
and aggressive timetables. The integration of this array of diverse technologies
involves complex tasks, many of which have not been previously attempted. The
nature and complexity of the Crusader system is such that final confirmation of
the ability of the system to function in the intended manner cannot be assured.
As a result, there is a risk that the Crusader
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may not proceed into the next contracting phase or eventual production, which
could have a material adverse effect on the Company's financial condition,
results of operations and debt service capability.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND JOINT VENTURES
The Company participates in unconsolidated joint ventures in Turkey and
Saudi Arabia and in selected co-production programs in several other countries.
The Company's export sales, including FMS, totaled $194.2 million in 1996,
representing approximately 19% of the Company's revenues. In addition, the
Company's earnings from foreign affiliates were $14.1 million for the twelve
months ended September 30, 1997, representing approximately 11.1% of pro forma
EBITDA (as defined). These proportions of revenue and EBITDA were higher in
certain prior periods. The Company's strategy includes expansion of its
international operations and export sales. In connection with its international
operations and export sales, the Company is subject to risks associated with
operating in and selling to foreign countries, including (i) devaluations and
fluctuations in currency exchange rates; (ii) changes in or interpretations of
foreign regulations that may adversely affect the Company's ability to sell
certain products or repatriate profits to the United States; (iii) imposition of
limitations on conversions of foreign currencies into dollars; (iv) remittance
of dividends and other payments by foreign subsidiaries or joint ventures; (v)
imposition or increase of withholding and other taxes on remittances and other
payments by foreign subsidiaries; (vi) hyperinflation or political instability
in certain foreign countries; (vii) imposition or increase of investment and
other restrictions or requirements by foreign governments; (viii) the potential
imposition of trade or foreign exchange restrictions or increased tariffs; and
(ix) U.S. arms export control regulations and policies which govern the
Company's ability to supply foreign affiliates and customers. To the extent the
Company expands its international operations, these and other risks associated
with international operations are likely to increase. Although such risks have
not had a material adverse effect on the Company financial condition, results of
operations or debt service capability in the past, no assurance can be given
that such risks will not have any such material adverse effect on the Company in
the future.
The Company has contracts with government customers in Eastern Asia
(including the governments of Japan, Taiwan and Thailand) and with Samsung, a
large South Korean conglomerate. The Company also has accounts receivable from
Samsung and is scheduled to receive periodic payments from its government
customers in Eastern Asia. The Company's shipments to customers in this region
are in certain cases supported by letters of credit, the largest of which has
been issued by a major Korean bank. In addition, the Company's Turkish joint
venture, FNSS-Turkey, has been seeking a contract with the government of
Malaysia that would satisfy, in part, FNSS-Turkey's "offset" obligations,
described below. There can be no assurance that the Company's counterparties in
Asia will meet their obligations under existing contracts or that any such
non-performance or the recent economic and political turmoil in this region will
not have a material adverse effect on the Company's financial condition, results
of operations or debt service capability.
The Company is facing certain additional risks associated with its Turkish
joint venture, FMC-Nurol Savunma Sanayii A.S. ("FNSS-Turkey"), which was formed
for the purpose of providing vehicles and services to the Undersecretariat for
Defense Industries of Turkey ("SSM"). First, FNSS-Turkey is required by its
agreement with SSM to achieve a significant level of export sales from Turkey,
(which are required in order to fulfill "offset" requirements) by 2000 or pay a
penalty of 9% of the unsatisfied amounts of these offset obligations to SSM.
Such payment could be as high as $32.0 million if further offset sales are not
completed. There is no assurance that FNSS-Turkey will be able to successfully
fulfill its offset obligations. Second, the vehicle production agreement between
FNSS-Turkey and the Turkish government gives the government the right to
terminate the agreement "if the interest of [FNSS-Turkey] shall devolve upon any
person or corporation." The Company does not expect the Turkish government to
assert the view that this provision entitles it to terminate the joint venture
agreement, although no assurance can be given that the Turkish government will
not do so. See "The Acquisition." Third, SSM has been unable to supply certain
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components to FNSS-Turkey according to an agreed schedule, which has resulted in
production delays. While FNSS-Turkey has recently executed an extension to the
contract production schedule, FNSS-Turkey's financial results may be unfavorably
impacted and royalty and dividend payments to the Company could be reduced as a
result of any future delays or extensions, and the value of such royalties and
dividends could be materially adversely affected by the impact of any further
deterioration in the value of the Turkish lira against the U.S. dollar unless
pricing concessions are made in connection with any such extension. Termination
of the vehicle production agreement, or adverse resolution of any of the matters
discussed above, could have a material adverse effect on the Company's financial
condition, results of operations and debt service capability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Joint
Ventures--FNSS-Turkey."
The Company also faces certain additional risks associated with its Saudi
Arabian joint venture, FMC Arabia Limited ("FMC-Arabia"), including budgetary
pressures on Saudi defense spending. Because of overall budgeting constraints
affecting the Saudi Arabian government, the funding for both the M113 and CLS
programs has been substantially reduced, with the result that FMC-Arabia is
expected to operate both programs at only a nominal level for the remainder of
1998. The Company is continuing to work with the Saudi Arabian government in an
effort to arrange increased and more stable funding for the programs, but there
can be no assurance as to when or whether such funding will be provided. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Joint Ventures--FMC-Arabia."
NOVATION OF U.S. GOVERNMENT CONTRACTS
The U.S. government has preliminarily indicated that, on account of the
Acquisition, the Company should enter into a novation agreement with the U.S.
government and UDLP in order to continue to be recognized as the contractor
under its U.S. government contracts. A novation agreement is typically entered
between the U.S. government, a contractor who transfers its assets (including
its contracts) to a successor-in-interest, and that successor-in-interest.
Applicable U.S. government regulations do not expressly require parties to enter
into a novation agreement upon a transfer of control of a contractor, as opposed
to the assignment of contracts. The U.S. government has from time to time taken
the position that such agreements must be entered between the seller of the U.S.
government contracts business and the buyer of the business, even when no change
in business form (but only a change in ownership of the business) has occurred,
and the Company believes that contractors often determine that their interests
are best served by acquiescence to the U.S. government's interpretation. The
novation process typically takes a matter of weeks or months, and can require up
to or more than a year, to complete and would not be completed in any event
prior to the consummation of the Exchange Offer. The Company knows of no reason
why it could not successfully complete negotiation and execution of any novation
agreement that might be required, but the Company can offer no assurance that
such an agreement would ultimately be obtained. Failure to obtain any required
novation could have a material adverse effect on the Company's financial
condition, results of operations and debt service capability.
COMPETITION
Declining defense budgets and increasing pressures for cost reductions have
precipitated a major consolidation in the defense industry. This consolidation
has resulted in program cancellations, scope reductions and delays in contract
funding or awards. The combination of increased competition and reduced funding
have contributed, in some cases, to significant predatory pricing tactics
throughout the industry in competitive bidding situations. Because some of the
Company's current and potential competitors have significantly greater resources
than the Company, the Company's ability to compete effectively in the
consolidating defense industry could be adversely impacted. See "Business--
Competition."
Approximately 90% of the Company's sales are derived from contracts with the
U.S. government (including FMS sales) and its prime contractors. Generally more
than 80% of these sales are represented
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by sole-source directed procurement contracts, with the balance derived from
competitive bidding. The Company from time to time encounters significant
competition for its contracts, particularly internationally from other
companies, some of which have financial, technical, marketing, manufacturing,
distribution and other resources substantially greater than those of the
Company. The Company's ability to compete for these contracts depends to a large
extent on the effectiveness and innovativeness of its research and development
programs, its ability to offer better program performance than its competitors
at a lower cost to the U.S. government customer, and its readiness in
facilities, equipment and personnel to undertake the programs for which it
competes.
In addition to competing for specific programs with other companies, the
Company and its programs are subject to competition for availability of U.S.
government funding in a declining procurement environment. This competition
could result in curtailment or elimination of Company programs, even if those
programs are meeting their functional objectives and even if other programs
receiving continued or increased funding are completely unrelated to such
Company programs.
The Company obtains military contracts through the process of competitive
offers and through sole-source negotiations. While most of the Company's
historical revenues have been derived from sole-source negotiations, contracts
from which the Company has derived and expects to derive a significant portion
of its sales (including contracts relating to certain program opportunities
discussed or referenced herein) were or will be obtained through competitive
bidding. There can be no assurance that the Company will continue to be
successful in having its bids accepted or, if accepted, that awarded contracts
will generate sufficient sales to result in profitability for the Company. Also,
even as to those programs which the U.S. government has historically awarded to
the Company on a sole-source basis, the U.S. government may in the future
determine to shift such programs to a competitive bidding process. There can be
no assurance that the Company will continue to be successful in remaining the
sole-source contractor on various programs.
The U.S. Navy is testing a "mega-prime" procurement approach in an attempt
to reduce costs and development time. This procurement method would require a
single "mega-prime" contractor to deliver an entire and completed system to the
U.S. Navy. This procurement approach may eventually apply to substantial
portions of the U.S. Navy's budget in the future, and affect some or all of the
Company's major U.S. Navy programs. Such an arrangement would require the
Company to team with a "mega-prime" contractor and compete for participation on
teams, which would in turn compete against other such teams for large future
programs. The U.S. Army is pursuing major development programs in areas such as
future scout vehicles and future combat systems which may require teaming with
other major contractors to compete successfully. There can be no assurance that
the Company will successfully team with other contractors, that any team in
which the Company participates would be awarded any such "mega-prime" or major
U.S. Army contracts, or that such arrangements would not have a material adverse
effect on the Company's financial condition, results of operations and debt
service capability.
There can be no assurance that the Company will continue to compete
successfully for specific program opportunities or for appropriation funding in
a declining procurement environment, or that competition will not have a
material adverse effect on the Company's financial condition, results of
operations and debt service capability.
BUSINESS RISKS RELATED TO THE MK41 VERTICAL LAUNCHING SYSTEM
The Company participates in the Mk41 Vertical Launching System ("VLS")
through arrangements with Lockhead Martin Corporation ("L-M"). VLS procurements
by the U.S. Navy, which include launchers and related components for
installation on the Navy's own vessels and also for installation on certain
foreign naval vessels arranged via U.S. Government FMS sales, have since 1991
been governed by a Navy-approved worksplit agreement with L-M pursuant to which
the Company supplies launcher components as a subcontractor to L-M, but under
prices and terms which are to a substantial degree negotiated directly between
the Company and the Navy. The Company's current VLS production contract
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will expire in 2001 and will be substantially complete by the end of 1998. The
Company recently concluded negotiations with the Navy and L-M regarding the
Navy's next VLS procurement, which will provide production and ancillary VLS
work for the Company from 1998 through 2002. However, there can be no assurance
that the Navy would procure futher VLS work after 2002 or that if the U.S. Navy
did so, it would continue to adhere to the worksplit arrangement, or that in the
event that the Navy were instead to shift to a competitive procurement strategy,
the Company would then prevail against L-M or any other bidder.
Regarding potential direct foreign sales of VLS, the Company has since 1987
participated in cooperative foreign sales efforts with L-M pursuant to a series
of agreements between them. L-M currently disputes whether such an agreement is
in effect between the two companies, and if so, the extent and precise mechanics
of any such cooperative obligations. The Company believes and asserts to L-M
that such an agreement remains in effect, and believes that L-M continues to a
significant degree to conduct its pertinent behavior in accordance with the
agreement. There can be no assurance, however, that the parties' dispute might
not deteriorate in the future, nor that the Company would prevail, either
legally with respect to L-M or competitively regarding potential foreign sales,
in such event.
VARIABILITY IN QUARTERLY AND ANNUAL PERFORMANCE
The Company's operating performance and cash flow are dependent, to a
material extent, upon the timing and amounts of U.S. government contracts and
the work performed thereunder. Because the amounts payable under the Company's
government contracts are substantial, the award or expiration of one or more
contracts, or the timing for manufacturing and delivery of products under such
contracts and schedules, can materially affect the Company's operating results
and cash flow for the periods affected by such contracts. The Company's
operating results and cash flow can also be materially affected by the timing
and amounts of dividends received from the Company's foreign joint ventures,
which has generally resulted in higher earnings during the first quarter of the
year when such dividends are received. For example, dividends from FNSS-Turkey
were $23.8 million in 1996, but declined to $5.3 million in 1997. Therefore,
results for any particular period may vary significantly, and should not be
considered indicative of longer term results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview--Variability
in Quarterly and Annual Performance."
BACKLOG
The Company's backlog represents orders under contracts which are primarily
with the U.S. government. The U.S. government enjoys broad rights to
unilaterally modify or terminate such contracts. Accordingly, most of the
Company's backlog is subject to modification and termination at the U.S.
government's discretion. In addition, funding for orders from the U.S.
government is subject to approval on an annual basis by Congress pursuant to the
appropriations process. The Company's funded backlog as of November 30, 1997 was
approximately $1.58 billion compared to approximately $1.55 billion as of
November 30, 1996. There can be no assurance that the Company's backlog will
become revenues in any particular period or at all. Further, there can be no
assurance that any contract included in backlog that does become revenue will be
profitable.
CONCENTRATION OF OWNERSHIP
Entities controlled by Carlyle hold, in the aggregate, substantially all of
the voting power of Iron Horse, the Company's parent. TCG Holdings, L.L.C., a
limited liability company formed by Carlyle, is the 100% beneficial owner of
Iron Horse. Consequently, Carlyle can control the election of the directors of
the Company and the outcome of all matters submitted to a vote of the Company's
stockholders.
LACK OF INDEPENDENT OPERATING HISTORY
Prior to the Acquisition, UDLP was managed by FMC. FMC provided an array of
services to the Company including payroll and management of employee service
related costs, such as human resource
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information network, medical, dental, life insurance, pension, 401(k) plan
administration and workers compensation. The cost of these services were billed
back to the Company based on actual usage. Additionally, FMC provided general
and administrative services including tax, treasury, legal, audit and insurance.
The cost for these services were allocated back to the Company. After the
Acquisition, the Company operates independently of FMC and needs to provide
these services internally or obtain them from other sources. Upon consummation
of the Acquisition, the Company entered into a Transition Services Agreement
pursuant to which FMC is providing certain of these services at costs consistent
with past practices to the Company. See "The Acquisition." There can be no
assurance that the actual cost incurred in operating the Company will not exceed
historical charges or that upon termination of the Transition Services Agreement
the Company will be able to obtain similar services on comparable terms. There
can be no assurance that the Company will be able to operate effectively as an
independent company or achieve the performance attained when it was owned by FMC
and Harsco.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws and
regulations relating to, among other things, emissions to air, discharges to
water, the handling and disposal of hazardous and solid wastes and the cleanup
of hazardous substances ("Environmental Laws"). The Company continually assesses
its compliance status and other obligations with respect to Environmental Laws
and believes that its operations currently are in substantial compliance with
Environmental Laws. Based on historical experience and its expectation that a
significant portion of its ongoing environmental costs are recoverable from
other parties or allowable as contract costs pursuant to the terms of many of
the Company's contracts with the U.S. government, the Company does not believe
that its obligations under Environmental Laws will have a material adverse
effect on the Company's financial condition, results of operation or debt
service capability. There can be no assurance, however, that the Company will
not incur material unrecoverable or unallowable costs in the future, including
as a result of changes in Environmental Laws or changes in the Company's
obligations under Environmental Laws, nor can any assurance be given that
environmental costs expected to be reimbursed by other parties or allowed as
charges in U.S. government contracts will be reimbursed or allowed as expected.
See "Management's Discussion and Analysis of Financial Condition and Result of
Operations--Environmental Matters" and "Business--Environmental Matters."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture restricts, among other things, the Company's and the
Guarantors' ability to incur additional indebtedness, create liens, pay
dividends or make other restricted payments, consummate certain asset sales,
enter into certain transactions with affiliates, incur indebtedness that is
subordinate in right of payment to any Senior Debt and senior in right of
payment to the Notes or the Guarantees, as the case may be, impose restrictions
on the ability of a subsidiary to pay dividends or make certain payments to the
Company, merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of the assets of
the Company. In addition, the Senior Credit Facility contains other and more
restrictive covenants and prohibits the Company from prepaying its other
indebtedness (including the Notes). See "Description of the Notes--Certain
Covenants" and "Description of Certain Indebtedness--Senior Credit Facility."
The Senior Credit Facility also requires the Company to maintain specified
financial ratios and satisfy certain financial condition tests. The Company's
ability to meet those financial ratios and tests can be affected by events
beyond its control, and there can be no assurance that the Company will meet
those tests. A breach of any of the foregoing covenants could result in a
default under the Senior Credit Facility and/or the Indenture. Upon the
occurrence of an event of default under the Senior Credit Facility, the lenders
thereunder could elect to declare all amounts outstanding under the Senior
Credit Facility, together with accrued and unpaid interest, to be immediately
due and payable, which would, in turn, result in an event of default under the
Indenture.
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LIMITATION ON CHANGE OF CONTROL OFFER
Upon the occurrence of a Change of Control, if the Company does not exercise
its right to purchase the Notes, each holder of Notes will have the right to
require the Company to purchase all or a portion of such holder's Notes at a
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest thereon to the purchase date. If a Change of Control were to occur,
there can be no assurance that the Company would have sufficient financial
resources, or would be able to arrange financing, to pay the repurchase price
for all Notes tendered by holders thereof. Further, the provisions of the
Indenture may not afford holders of Notes protection in the event of a highly
leveraged transaction, reorganization, restructuring, merger or similar
transaction involving the Company that may adversely affect holders of Notes, if
such transaction does not result in a Change of Control. In addition, the terms
of the Senior Credit Facility prohibit the Company from optionally purchasing
any Notes and also identify certain events that would constitute a Change of
Control that would result in a termination of the Senior Credit Facility. Any
future credit agreements or agreements relating to other Indebtedness to which
the Company or the Guarantors become a party may contain similar restrictions
and provisions. In the event a Change of Control occurs at a time when there are
outstanding obligations under the Senior Credit Facility, the Company could seek
the consent of its lenders to the purchase of Notes or could attempt to
refinance such outstanding obligations. If the Company does not obtain such
consent or repay such obligations, the Company would remain effectively
prohibited from offering to purchase Notes. In such case, the Company's failure
to offer to purchase Notes could become an Event of Default under the Indenture,
which would, in turn, constitute a further default under the Senior Credit
Facility and may constitute a default under the terms of other Indebtedness that
the Company or the Guarantors may enter into from to time. See "Description of
Certain Indebtedness--Senior Credit Facility" and "Description of the Notes--
Repurchase at the Option of Holders--Change of Control."
FRAUDULENT CONVEYANCE RISKS
The incurrence by the Company of the indebtedness evidenced by the Notes and
by the Guarantors of the obligations represented by the Guarantees is subject to
review under relevant U.S. federal and state fraudulent conveyance statutes
("Fraudulent Conveyance Statutes") in a bankruptcy case or a lawsuit by or on
behalf of creditors of the Company or the Guarantors. The statutes provide that
if a court determines that at the time the Notes were issued and the proceeds
applied, (i) the Company issued the Notes and applied the proceeds with the
intent of hindering, delaying or defrauding creditors or (ii) the Company or the
Guarantors received less than a reasonably equivalent value or fair
consideration for issuing the Notes or the Guarantees, respectively, and, after
so applying the proceeds, the Company or a Guarantor (A) was insolvent or
rendered insolvent by reason of such transactions, (B) was engaged in a business
or transaction for which its assets constituted unreasonably small capital or
(C) intended to incur, or believed that it would incur, debts beyond its ability
to pay as they matured (as the foregoing terms are defined in or interpreted
under Fraudulent Conveyance Statutes), such court could subordinate all or a
part of the Notes or the Guarantees to existing and future indebtedness of the
Company or the Guarantors, recover any payments made on the Notes or the
Guarantees or take other action detrimental to the holders of the Notes,
including, under certain circumstances, invalidating the Notes or the
Guarantees.
Based upon financial information and analysis, each of the Company and the
Guarantors believes that the indebtedness and obligations evidenced by the
Private Notes and the Guarantees were incurred and proceeds of the Notes were
used for proper purposes and in good faith. Each of the Company and the
Guarantors believes that at the time of, and after giving effect to, the
incurrence of the indebtedness and obligations evidenced by the Private Notes
and the Guarantees, it was solvent and had sufficient capital to carry on its
business and to pay its debts as they mature. No assurance can be given,
however, that a court would concur with such beliefs and positions. The measure
of insolvency for these purposes will vary depending upon the law of the
jurisdiction being applied. Generally, a company will be considered insolvent
for these purposes if the company is unable to pay its debts as they become due
in the usual course of its business or 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
salable value of the company's assets is less than the amount that will be
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required to pay its probable liability on its existing debts as they become
absolute and mature. In rendering their opinion on the validity of the Private
Notes and the Guarantees, counsel for the Company and the Guarantors and counsel
for the Initial Purchasers expressed no opinion as to the effect of Fraudulent
Conveyance Statutes or laws affecting the enforcement of creditors' rights
generally.
The holders of the Notes will have the benefit of the Guarantees. However,
the Guarantees will be limited to the maximum amount which the Guarantors are
permitted to guarantee under applicable law. As a result, a Guarantor's
liability under its Guarantee could be reduced to zero, depending upon the
amount of other obligations of the Guarantors. Notwithstanding such provision,
such Guarantee may be subject to review by a court under relevant Fraudulent
Conveyance Statutes and, if a court makes certain findings, it could take
certain actions detrimental to the holders of the Notes. The Guarantees may also
be released under certain circumstances. See "Description of the
Notes--Guarantees."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
There is no existing market for the Notes and, although the Notes are
expected to be eligible for trading in the PORTAL market, there can be no
assurance as to the liquidity of any markets that may develop for the Notes, the
ability of holders of the Notes to sell their Notes, or the prices at which
holders would be able to sell their Notes. Future trading prices of the Notes
will depend on many factors, including, among other things, the Company's
ability to effect the Exchange Offer, prevailing interest rates, the Company's
operating results and the market for similar securities. The Initial Purchasers
have advised the Company that they currently intend to make a market in the
Notes offered hereby; however, the Initial Purchasers are not obligated to do so
and any market making may be discontinued at any time without notice. The
Company does not intend to apply for listing of the Notes on any securities
exchange or the Nasdaq National Market.
FAILURE TO EXCHANGE PRIVATE NOTES
Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly completed
and duly executed Letter of Transmittal and all other required documentation.
Therefore, holders of Private Notes desiring to tender such Private Notes in
exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. Neither the Exchange Agent nor the Company is under any duty to give
notification of defects or irregularities with respect to tenders of Private
Notes for exchange. Private Notes that are not tendered or are tendered but not
accepted will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof. In addition, any
holder of Private Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Private Notes, where such
Private Notes were acquired by such broker-dealer as a result of market-making
activities or any other trading activities, must acknowledge that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. Any broker-dealer that
resells Exchange Notes that were received by it for its own account pursuant to
the Exchange Offer may be deemed to be an "underwriter" within the meaning of
the Securities Act. 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. To the extent
that Private Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Private Notes could be
adversely affected due to the limited amount, or "float," of the Private Notes
that are expected to remain outstanding following the Exchange Offer. Generally,
a lower "float" of a security could result in less demand to purchase such
security and could, therefore, result in lower prices for such security. For the
same reason, to the extent that a large amount of Private Notes are not tendered
or are tendered and not accepted in the Exchange Offer, the trading market for
the Exchange Notes could be adversely affected. See "Plan of Distribution" and
"The Exchange Offer."
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on the Closing Date to the
Initial Purchasers pursuant to the Purchase Agreement. The Initial Purchasers
subsequently sold the Private Notes, and the Company and the Initial Purchasers
entered into the Registration Rights Agreement on October 6, 1997. Pursuant to
the Registration Rights Agreement, the Company agreed that, unless the Exchange
Offer is not permitted by applicable law or Commission policy, it would file
with the Commission a registration statement under the Securities Act (a
"Registration Statement") with respect to the Exchange Notes within 120 days
after the Closing Date and use its best efforts to cause such Registration
Statement to become effective under the Securities Act within 180 days after the
Closing Date. A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement. The Registration Statement is intended to
satisfy certain of the Company's obligations under the Registration Rights
Agreement and the Purchase Agreement.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer who
purchases such Exchange Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii) any
such holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) who exchanges Private Notes for Exchange Notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement with any person to participate, in a
distribution of the Exchange Notes, will be allowed to resell Exchange Notes to
the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in the distribution of the Exchange Notes or is a broker-dealer,
such holder cannot rely on the position of the staff of the Commission
enumerated in certain no-action letters issued to third parties and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction, unless an exemption from registration
is otherwise available. Each broker-dealer that receives Exchange Notes for its
own account in exchange for Private Notes, where such Private Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer may be deemed to be an
"underwriter" within the meaning of the Securities Act. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection of
resales of Exchange Notes received in exchange for Private Notes where such
Private Notes were acquired by such broker-dealer as a result of market-making
or other trading activities. Pursuant to the Registration Rights Agreement the
Company has agreed to make this Prospectus, as it may be amended or supplemented
from time to time, available to broker-dealer for use in connection with any
resale for the period required by the Securities Act. See "Plan of
Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and the Letter of Transmittal, the Company will accept any and all Private Notes
validly tendered and not withdrawn prior to the Expiration Date. The Company
will issue $1,000 principal amount of Exchange Notes in exchange for each $1,000
principal amount of outstanding Private Notes surrendered pursuant to the
Exchange Offer. Private Notes may be tendered only in integral multiples of
$1,000.
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The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the exchange will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) holders of the Exchange Notes will not
be entitled to any of the rights of holders of Private Notes under the
Registration Rights Agreement, which rights will terminate upon the consummation
of the Exchange Offer. The Exchange Notes will evidence the same indebtedness as
the Private Notes (which they replace) and will be issued under, and be entitled
to the benefits of, the Indenture, which also authorized the issuance of the
Private Notes, such that both series of Notes will be treated as a single class
of debt securities under the Indenture.
As of the date of this Prospectus, $200,000,000 in aggregate principal
amount of the Private Notes are outstanding and registered in the name of Cede &
Co., as nominee for DTC. Only a registered holder of the Private Notes (or such
holder's legal representative or attorney-in-fact) as reflected on the records
of the Trustee under the Indenture may participate in the Exchange Offer. There
will be no fixed record date for determining registered holders of the Private
Notes entitled to participate in the Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange Offer. The Company intends
to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the Securities
Act, the Securities Exchange Act of 1934 as amended (the "Exchange Act"), and
the rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private 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 Private Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on March
17, 1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, (ii) mail to the
registered holders an announcement thereof and (iii) issue a press release or
other public announcement which shall include disclosure of the approximate
number of Private Notes deposited to date, each prior to 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 a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "--Conditions" 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. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered holders. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders, and
the Company will extend the Exchange Offer for a period of five
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to ten business days, depending upon the significance of the amendment and the
manner of disclosure to the registered holders, if the Exchange Offer would
otherwise expire during such five to ten business day period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate equal to 8 3/4% per annum.
Interest on the Exchange Notes will be payable semi-annually on May 15 and
November 15 of each year, commencing May 15, 1998. Holders of Exchange Notes
will receive interest from the date of initial issuance of the Private Notes.
Holders of Private Notes that are accepted for exchange will be deemed to have
waived the right to receive any interest accrued on the Private Notes.
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile to
the Exchange Agent at the address set forth below under "--Exchange Agent" for
receipt prior to the Expiration Date. In addition, either (i) certificates for
such Private Notes must be received by the Exchange Agent along with the Letter
of Transmittal, (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Private Notes, if such procedure is
available, into the Exchange Agent's account at the Depositary 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 tender by a holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name or
obtain a properly completed bond power from the registered holder. The transfer
of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed by
an Eligible Institution (as defined below) unless the Private Notes tendered
pursuant thereto are tendered (i) by a registered holder who has not completed
the box entitled "Special Issuance Instructions" or the box entitled "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution. In the event that signatures on a
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Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be made by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of
the recognized signature guarantee programs identified in the Letter of
Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Private Notes listed therein, such Private Notes must be endorsed
or accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Private Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Private Notes. All
questions as to the validity, form, eligibility (including time of receipt),
compliance with conditions, acceptance and withdrawal of tendered Private Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Private Notes not properly tendered or any Private Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Private Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Private Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Private Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Private Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any Private Notes that are not tendered pursuant to the Exchange
Offer, the Company reserves the right in its sole discretion to purchase or make
offers for any Private Notes that remain outstanding subsequent to the
Expiration Date or, as set forth below under "--Conditions," to terminate the
Exchange Offer and to the extent permitted by applicable law, purchase Private
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each holder of Private Notes will represent to the Company
that, among other things, (i) Exchange Notes to be acquired by such holder of
Private Notes in connection with the Exchange Offer are being acquired by such
holder in the ordinary course of business of such holder, (ii) such holder has
no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iii) such holder acknowledges and agrees
that any person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purposes of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on the
position of the staff of the Commission set forth in certain no-action letters,
(iv) such holder understands that a secondary resale transaction described in
clause (iii) above and any resales of Exchange Notes obtained by such holder in
exchange for Private Notes acquired by such holder directly from the Company
should be covered by an effective registration statement containing the selling
securityholder information required by Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission and
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(v) such holder is not an "affiliate," as defined in Rule 405 under the
Securities Act, of the Company. If the holder is a broker-dealer that will
receive Exchange Notes for such holder's own account in exchange for Private
Notes that were acquired as a result of market-making activities or other
trading activities, such holder will be required to acknowledge in the Letter of
Transmittal that such holder will deliver a prospectus meeting the requirements
of the Securities Act in connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a prospectus, such holder will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer may be deemed to be an
"underwriter" within the meaning of the Securities Act.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are withdrawn
or are submitted for a greater principal amount than the holders desire to
exchange, such unaccepted, withdrawn or non-exchanged Private Notes will be
returned without expense to the tendering holder thereof (or, in the case of
Private Notes tendered by book-entry transfer into the Exchange Agent's account
at the Depositary pursuant to the book-entry transfer procedures described
below, such Private Notes will be credited to an account maintained with the
Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depositary for purposes of the Exchange Offer within
two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make book-
entry delivery of Private Notes by causing the Depositary to transfer such
Private Notes into the Exchange Agent's account at the Depositary in accordance
with the Depositary's procedures for transfer. However, although delivery of
Private Notes may be effected through book-entry transfer at the Depositary, the
Letter of Transmittal or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address set forth below under
"--Exchange Agent" on or prior to the Expiration Date or pursuant to the
guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company
setting forth the name and address of the holder, the certificate
number(s) of such Private Notes and the principal amount of Private Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within five New York Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or a facsimile thereof),
together with the certificate(s) representing the Private Notes in proper
form for transfer or a Book-Entry Confirmation, as the case may be, and
any other documents required by the Letter of Transmittal, will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof), as
well as the certificate(s) representing all tendered Private Notes in
proper form for transfer and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within five New York
Stock Exchange trading days after the Expiration Date.
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Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Private Notes) and (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Private Notes were tendered (including any required signature guarantees). All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company in its sole discretion, whose
determination shall be final and binding on all parties. Any Private Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Private Notes so withdrawn are validly retendered. Properly withdrawn
Private Notes may be retendered by following one of the procedures described
above under "The Exchange Offer--Procedures for Tendering" at any time prior to
the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Private Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Private Notes, if the Exchange Offer violates applicable
law, rules or regulations or an applicable interpretation of the staff of the
Commission.
If the Company reasonably determines that such condition (that the Exchange
Offer not violate applicable law, rules, regulations or interpretation of the
Staff) is not satisfied, the Company may (i) refuse to accept any Private Notes
and return all tendered Private Notes to the tendering holders or (ii) extend
the Exchange Offer and retain all Private Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of holders to withdraw
such Private Notes (see "--Withdrawal of Tenders").
LIQUIDATED DAMAGES
The Company, the Guarantors and the Initial Purchaser entered into a
registration rights agreement (the "Registration Rights Agreement") dated as of
October 6, 1997, pursuant to which each of the Company and the Guarantors agreed
that they will, at their cost, for the benefit of the Holders, (i) to the extent
not prohibited by any applicable law or applicable interpretation of the staff
of the Commission (A) prepare and, on or prior to 120 days (the "Filing Date")
after the date of original issuance of the Private Notes (the "Issue Date"),
file with the Commission a Registration Statement under the Securities Act with
respect to an offer by the Company to the holders of the Private Notes (the
"Exchange Offer") to issue and deliver to such holders, in exchange for the
Private Notes, a like principal amount of notes (the "Exchange Notes")
guaranteed on a senior subordinated basis by each of the Subsidiary Guarantors,
and identical to the Private Notes in all material respects, except that the
such notes will not have provisions regarding restrictions on transfer, (B) use
their best efforts to cause the Registration Statement relating to the Exchange
Offer to be declared effective by the Commission under the Securities Act on or
prior to 180 days after the Issue Date, and (C) commence the Exchange Offer and
use their best efforts to issue, on or prior to the date (the "Consummation
Date") that is 30 days immediately following the date that the Exchange
Registration Statement shall have been declared effective, the Exchange Notes.
The offer and sale of the Exchange Notes pursuant to the Exchange Offer shall be
registered pursuant to the Securities Act on an appropriate form (the "Exchange
Registration Statement") and duly registered or qualified
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under all applicable state securities or Blue Sky laws and will comply with all
applicable tender offer rules and regulations under the Exchange Act and state
securities or Blue Sky laws. The Exchange Offer shall not be subject to any
condition, other than that the Exchange Offer does not violate any applicable
law or interpretation of the staff of the Commission.
If (i) the Company and the Guarantors are not permitted to file the Exchange
Offer Registration Statement or to consummate the Exchange Offer because the
Exchange Offer is not permitted by any applicable law or applicable
interpretation of the Staff of the Commission or (ii) any holder of a Private
Note notifies the Company on or prior to the 20th day following the Issue Date
that (A) such holder is prohibited by law or Commission policy from
participating in the Exchange Offer, (B) Exchange Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and the Prospectus
contained in the Exchange Registration Statement is not appropriate or available
for such resales by such holder or (C) such holder is a broker-dealer and owns
Private Notes acquired directly from the Company or any of its Affiliates (each
such event referred to in clauses (i) and (ii), a "Shelf Filing Event"), the
Company and the Guarantors shall at their own expense use their best efforts to
cause to be filed on or prior to 30 days after the date on which the Company
determines that it is not required to file the Exchange Offer Registration
Statement pursuant to clause (i) above or 30 days after the date on which the
Company receives the notice specified in clause (ii) above, a shelf registration
statement pursuant to Rule 415 under the Act (which may be an amendment to the
Exchange Offer Registration Statement (in either event, the "Shelf Registration
Statement")), relating to all Private Notes the holders of which have provided
to the Company in writing, within 15 days after receipt of a request therefor,
the information specified in item 507 of Regulation S-K of the Act and such
other information as the Company shall reasonably request and shall use their
best efforts to have the Shelf Registration Statement declared effective by the
Commission on or prior to 90 days after the filing thereof. In such
circumstances, the Company and the Guarantors shall use their best efforts to
keep the Shelf Registration Statement continuously effective under the
Securities Act, until (A) two years following the Issue Date or (B) if sooner,
the date immediately following the date that all Transfer Restricted Notes (as
defined) covered by the Shelf Registration Statement have been sold pursuant
thereto or otherwise cease to be Transfer Restricted Notes (the "Effectiveness
Period").
For purposes of the foregoing, a "Transfer Restricted Note" means each
Private Note, until the earliest to occur of (a) the date on which such Private
Note is exchanged in the Exchange Offer and entitled to be resold to the public
by the holder thereof without complying with the prospectus delivery
requirements of the Act, (b) the date on which such Private Note has been
disposed of in accordance with a Shelf Registration Statement, (c) the date on
which such Private Note is disposed of by a broker-dealer pursuant to the "Plan
of Distribution" section hereof (including delivery of the Prospectus
contemplated therein) or (d) the date on which such Private Note is distributed
to the public pursuant to Rule 144 under the Act.
If the Company and the Guarantors fail to comply with the above provisions
or if the Exchange Offer Registration Statement or the Shelf Registration
statement fails to become effective, then, liquidated damages (the "Liquidated
Damages") shall become payable in respect of the Private Notes as follows:
If (i) any Registration Statement required by the Registration Rights
Agreement is not filed with the Commission on or prior to the date specified
for such filing in the Registration Rights Agreement, (ii) any such
Registration Statement has not been declared effective by the Commission on
or prior to the date specified for such effectiveness in the Registration
Rights Agreement (the "EFFECTIVENESS TARGET DATE"), (iii) the Exchange Offer
has not been consummated within 30 Business Days after the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement or
(iv) any Registration Statement required by the Registration Rights
Agreement is filed and declared effective but shall thereafter cease to be
effective or fail to be usable in connection with resales of Transfer
Restricted Notes during the periods specified herein and is not succeeded
within 30 days by another effective Registration Statement by a
post-effective amendment to such Registration Statement that cures such
failure and that is itself declared effective immediately; PROVIDED THAT
such Registration
35
<PAGE>
Statement shall not cease to be effective or useable in connection with
resales of Transfer Restricted Securities for more than 30 days in any
calendar year (each such event referred to in clauses (i) through (iv), a
"REGISTRATION DEFAULT"), then the Company and the Guarantors hereby jointly
and severally agree to pay liquidated damages to each holder of Transfer
Restricted Notes with respect to the first 90-day period immediately
following the occurrence of such Registration Default, in an amount equal to
$.05 per week per $1,000 principal amount of Transfer Restricted Notes held
by such holder for each week or portion thereof that the Registration
Default continues. The amount of the liquidated damages shall increase by an
additional $.05 per week per $1,000 in principal amount of Transfer
Restricted Notes with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of liquidated
damages of $.25 per week per $1,000 principal amount of Transfer Restricted
Notes; PROVIDED THAT the Company and the Guarantors shall in no event be
required to pay liquidated damages for more than one Registration Default at
any given time. Notwithstanding anything to the contrary set forth herein,
(1) upon filing of the Exchange Offer Registration Statement (and/or, if
applicable, the Shelf Registration Statement), in the case of (i) above, (2)
upon the effectiveness of the Exchange Offer Registration Statement (and/or,
if applicable, the Shelf Registration Statement), in the case of (ii) above,
(3) upon consummation of the Exchange Offer, in the case of (iii) above, or
(4) upon the filing of a post-effective amendment to the Registration
Statement or an additional Registration Statement that causes the Exchange
Offer Registration Statement (and/or, if applicable, the Shelf Registration
Statement) to again be declared effective or made usable in the case of (iv)
above, the liquidated damages payable with respect to the Transfer
Restricted Notes as a result of such clause (i), (ii), (iii) or (iv), as
applicable, shall cease.
All accrued liquidated damages shall be paid by wire transfer of
immediately available funds or by federal funds check and to holders of
certificated securities by wire transfer to the accounts specified by them
or by mailing checks to their registered addresses if no such accounts have
been specified. All obligations of the Company set forth in the preceding
paragraph that are outstanding with respect to any Transfer Restricted Note
at the time such security ceases to be a Transfer Restricted Note shall
survive until such time as all such obligations with respect to such
security shall have been satisfied in full.
No holder of Transfer Restricted Notes shall be entitled to Liquidated
Damages payable in connection with any Shelf Registration Statement unless and
until such holder shall have provided certain information reasonably requested
by the Company for use in connection with such Shelf Registration Statement.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, a copy
of which will be available upon request to the Company.
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Private Notes eligible to participate in the Exchange
Offer will terminate upon consummation of the Exchange Offer except with respect
to the Company's continuing obligations (i) to indemnify such holders (including
any broker-dealers) and certain parties related to such holders against certain
liabilities (including liabilities under the Securities Act), (ii) to provide,
upon the request of any holder of a transfer-restricted Private Note, the
information required by Rule 144A(d)(4) under the Securities Act in order to
permit resales of such Private Notes pursuant to Rule 144A and (iii) to provide
copies of the latest version of the Prospectus to broker-dealers upon their
request for the period required by the Securities Act.
36
<PAGE>
EXCHANGE AGENT
Norwest Bank Minnesota, National Association has been appointed as Exchange
Agent of the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL: IN PERSON:
Norwest Bank Minnesota, Northstar East Bldg.
National Association 608 2nd Ave. S.
Corporate Trust Operations 12th Floor
P.O. Box 1517 Corporate Trust Ser.
Minneapolis, MN 55480-1517 Minneapolis, MN
BY HAND OR OVERNIGHT COURIER: BY FACSIMILE FOR ELIGIBLE INSTITUTIONS
ONLY:
Norwest Bank Minnesota, (612) 667-4927
National Association CONFIRM RECEIPT OF NOTICE OF
Corporate Trust Operations GUARANTEED DELIVERY BY TELEPHONE:
Norwest Center (612) 667-9764
Sixth and Marquette
Minneapolis, MN 55479-0113
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA A
FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$300,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Private Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take, and the Company takes no position with respect
to the advisability of the Exchange Offer.
37
<PAGE>
The Private Notes that are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Private
Notes may be resold only (i) to a person whom the seller reasonably believes is
a QIB in a transaction meeting the requirements of Rule 144A, (ii) in a
transaction meeting the requirements of Rule 144 under the Securities Act, (iii)
outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, (iv) in accordance with
another exemption from the registration requirements of the Securities Act (and
based upon an opinion of counsel if the Company so requests), (v) to the Company
or (vi) pursuant to an effective registration statement and, in each case, in
accordance with any applicable securities laws of any state of the United States
or any other applicable jurisdiction.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
USE OF PROCEEDS
The proceeds from the sale of the Private Notes were used in part to finance
the Acquisition and related fees and expenses. See "The Acquisition."
The Company will not receive any proceeds from the Exchange Offer. In
consideration for issuing the Exchange Notes as contemplated in this Prospectus,
the Company will receive in exchange Private Notes in like principal amount, the
terms of which are identical to the Exchange Notes except that (i) the exchange
will have been registered under the Securities Act, and, therefore, the Exchange
Notes will not bear legends restricting the transfer thereof and (ii) holders of
the Exchange Notes will not be entitled to certain rights of holders of the
Private Notes under the Registration Rights Agreement, which rights will
terminate upon the consummation of the Exchange Offer. The Private Notes
surrendered in exchange for Exchange Notes will be retained by the Company and
the Exchange Offer will not result in any increase in the indebtedness of the
Company.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
at September 30, 1997, as adjusted to give pro forma effect to the Transactions.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-----------------------
<S> <C>
($ IN MILLIONS)
Revolving Credit Facility(1)............................................................. $ 12.0
Term Loan Facilities(2).................................................................. 445.0
8 3/4% Senior Subordinated Notes due 2007................................................ 200.0
Seller Note(2)........................................................................... 50.0
------
Total Debt........................................................................... 707.0
Stockholder's Equity..................................................................... 173.0
------
Total Capitalization................................................................. $ 880.0
------
------
</TABLE>
- ------------------------
(1) At November 30, 1997, the Revolving Credit Facility had a remaining
borrowing availability of approximately $61.0 million, after giving effect
to the issuance of approximately $157.0 million of letters of credit.
(2) The Company believes that the Seller Note, which is due three years after
the Closing Date, will be prepaid within one year after the Closing Date
with $50.0 million of additional borrowings under the Term Loan Facilities.
38
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited consolidated pro forma financial data of the Company
for the year ended December 31, 1996, for the nine months ended September 30,
1996 and 1997, and as of and for the twelve months ended September 30, 1997,
give effect to the Transactions, (and certain related assumptions described in
the notes hereto) and the application of the proceeds therefrom as if such
transactions occurred on January 1, 1996, with respect to the pro forma income
statement and other data, and as of September 30, 1997 with respect to the pro
forma balance sheet data. See "The Acquisition."
The consolidated pro forma adjustments are based upon currently available
information and upon certain assumptions that management believes are
reasonable. The Acquisition will be accounted for by the Company under the
purchase method of accounting. The adjustments included in the unaudited pro
forma financial data represent the Company's preliminary determination of those
adjustments based on available information, although no appraisal or other
valuation has yet been completed and such adjustments do not include many of the
effects of purchase accounting. For example, an allocation of the purchase price
to increase the carrying value of inventories, intangible assets other than
goodwill, and property, plant and equipment would result in a reduction in the
amount assigned to goodwill and likely would result in an earlier recognition of
cost charged to operating results as compared to goodwill amortization.
Management is in the process of determining the fair value of the assets and
liabilities of the Company. Management expects the final valuation of assets and
liabilities to be completed by the time it is required to provide December 31,
1997 financial statements. Management believes there will be differences between
the preliminary allocation and the final allocation, and these differences could
have a material effect on operating results but management does not expect any
such differences to materially affect cash flow. There can be no assurance that
the actual adjustments will not differ significantly from the pro forma
adjustments reflected in the pro forma financial data.
The unaudited consolidated pro forma financial data are not necessarily
indicative of either future results of operations or results that might have
been achieved if the Transactions had been consummated as of the indicated
dates. The unaudited pro forma financial data should be read in conjunction with
the historical financial statements of UDLP, together with the related notes
thereto, included elsewhere in this Prospectus.
The Company accounts for inventory using the LIFO method and incurred
non-cash LIFO charges of $6.3 million, $7.1 million, $8.0 million and $7.2
million for the year ended December 31, 1996, the nine months ended September
30, 1996 and 1997, and the twelve months ended September 30, 1997, respectively.
39
<PAGE>
UNAUDITED PRO FORMA INCOME STATEMENT AND OTHER DATA
TWELVE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
STATEMENT ADJUSTMENTS STATEMENT
----------- ----------- -----------
<S> <C> <C> <C>
($ IN MILLIONS)
INCOME STATEMENT DATA:
Revenue................................................................ $ 1,197.3 $ 1.3(a) $ 1,187.6
(11.0)(b)
Cost of sales.......................................................... 980.0 1.1(a) 981.1
Selling, general and administrative.................................... 129.8 0.4(a) 115.2
(15.0)(b)
Research and development............................................... 15.9 1.6(a) 17.5
Amortization of goodwill............................................... -- 34.7(c) 34.7
----------- ----------- -----------
Total expenses....................................................... 1,125.7 22.8 1,148.5
Earnings from foreign affiliates....................................... 14.1 -- 14.1
----------- ----------- -----------
Income from operations............................................... 85.7 (32.5) 53.2
Interest expense....................................................... -- 66.1(d) 66.1
Other (income) expense................................................. (1.2) -- (1.2)
----------- ----------- -----------
Income before income taxes........................................... 86.9 98.6 (11.7)
Provision for income taxes............................................. 4.3 (9.0)(e) (4.7)
----------- ----------- -----------
Net income........................................................... $ 82.6 $ (89.6) $ (7.0)
----------- ----------- -----------
----------- ----------- -----------
OTHER DATA:
EBITDA (f)............................................................. $ 127.1
Depreciation and amortization (g)...................................... 73.9
Capital expenditures................................................... 26.0
Ratio of earnings to fixed charges (h)................................. --
</TABLE>
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
STATEMENT ADJUSTMENTS STATEMENT
----------- ----------- -----------
<S> <C> <C> <C>
($ IN MILLIONS)
INCOME STATEMENT DATA:
Revenue................................................................ $ 1,029.3 $ 1.4(a) $ 1,019.7
(11.0)(b)
Cost of sales.......................................................... 820.8 1.3(a) 822.1
Selling, general and administrative.................................... 128.4 0.4(a) 113.8
(15.0)(b)
Research and development............................................... 12.9 1.5(a) 14.4
Amortization of goodwill............................................... -- 34.7(c) 34.7
----------- ----------- -----------
Total expenses....................................................... 962.1 22.9 985.0
Earnings from foreign affiliates....................................... 31.9 -- 31.9
----------- ----------- -----------
Income from operations............................................... 99.1 (32.5) 66.6
Interest expense....................................................... -- 66.1(d) 66.1
Other (income) expense................................................. (1.9) (0.1)(a) (2.0)
----------- ----------- -----------
Income (loss) before income taxes.................................... 101.0 (98.5) 2.5
Provision (benefit) for income taxes................................... 2.8 (1.8)(e) 1.0
----------- ----------- -----------
Net income (loss).................................................... $ 98.2 $ (96.7) $ 1.5
----------- ----------- -----------
----------- ----------- -----------
OTHER DATA:
EBITDA (f)............................................................. $ 140.3
Depreciation and amortization (g)...................................... 73.7
Capital expenditures................................................... 22.4
Ratio of earnings to fixed charges (h)................................. --
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA INCOME STATEMENT AND OTHER DATA.
40
<PAGE>
UNAUDITED PRO FORMA INCOME STATEMENT AND OTHER DATA
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
STATEMENT ADJUSTMENTS STATEMENT
----------- ----------- -----------
<S> <C> <C> <C>
($ IN MILLIONS)
INCOME STATEMENT DATA:
Revenue ............................................................... $ 913.9 $ 0.9(a) $ 906.5
(8.3)(b)
Cost of sales.......................................................... 755.0 0.8(a) 755.8
Selling, general and administrative.................................... 91.4 80.1
(11.3)(b)
Research and development............................................... 12.1 1.0(a) 13.1
Amortization of goodwill............................................... -- 26.0(c) 26.0
----------- ----------- -----------
Total expenses....................................................... 858.5 16.5 875.0
Earnings from foreign affiliates....................................... 13.5 -- 13.5
----------- ----------- -----------
Income from operations............................................... 68.9 (23.9) 45.0
Interest expense....................................................... -- 49.6(d) 49.6
Other (income) expense................................................. (1.5) 0.1(a) (1.4)
----------- ----------- -----------
Income before income taxes........................................... 70.4 (73.6) (3.2)
Provision for income taxes............................................. 1.5 (2.8)(e) (1.3)
----------- ----------- -----------
Net income........................................................... $ 68.9 $ (70.8) $ (1.9)
----------- ----------- -----------
----------- ----------- -----------
OTHER DATA:
EBITDA (f)............................................................. $ 100.0
Depreciation and amortization (g)...................................... 55.0
Capital expenditures................................................... 20.1
Ratio of earnings to fixed charges (h)................................. --
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
STATEMENT ADJUSTMENTS STATEMENT
----------- ----------- -----------
<S> <C> <C> <C>
($ IN MILLIONS)
INCOME STATEMENT DATA:
Revenue................................................................ $ 745.9 $ 1.0(a) $ 738.6
(8.3)(b)
Cost of sales.......................................................... 595.8 1.0(a) 596.8
Selling, general and administrative.................................... 90.0 78.7
(11.3)(b)
Research and development............................................... 9.1 0.9(a) 10.0
Amortization of goodwill............................................... -- 26.0(c) 26.0
----------- ----------- -----------
Total expenses....................................................... 694.9 16.6 711.5
Earnings from foreign affiliates....................................... 31.3 -- 31.3
----------- ----------- -----------
Income from operations............................................... 82.3 (23.9) 58.4
Interest expense....................................................... 49.6(d) 49.6
Other (income) expense................................................. (2.2) (2.2)
----------- ----------- -----------
Income before income taxes........................................... 84.5 (73.5) 11.0
Provision for income taxes............................................. 0.0 4.4(e) 4.4
----------- ----------- -----------
Net income........................................................... $ 84.5 $ (77.9) $ 6.6
----------- ----------- -----------
----------- ----------- -----------
OTHER DATA:
EBITDA (f)............................................................. $ 113.2
Depreciation and amortization (g)...................................... 54.8
Capital expenditures................................................... 16.5
Ratio of earnings to fixed charges (h)................................. 1.1:1
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA INCOME STATEMENT AND OTHER DATA.
41
<PAGE>
NOTES TO UNAUDITED PRO FORMA INCOME STATEMENT AND OTHER DATA
(a) To reflect the operations of CTC acquired by UDLP pursuant to the
Acquisition Agreement.
(b) To reflect (i) elimination of charges to the Company by FMC for general and
administrative services including tax, treasury, legal, audit, and
insurance, net of the incremental cost to be incurred for such services
after the Acquisition, and (ii) inclusion of the anticipated management fee
to be charged to the Company by Carlyle after the Acquisition. Amounts
associated with the Transition Services Agreement are not a component of
this pro-forma adjustment because such amounts are reflected in the
historical statements and are expected to continue after the Acquisition.
The requirement that the net cost savings be shared with the customer on
cost-reimbursable and negotiated fixed price contracts, in both of which
contract types, sales value is determined based on cost plus profit, is
reflected by a reduction in revenues.
(c) To reflect amortization of goodwill associated with the Acquisition over an
estimated life of 15 years. Actual goodwill amortization is expected to
differ after completion of an asset valuation and application of purchase
accounting adjustments. See Note (a) of "Notes to Unaudited Pro Forma
Balance Sheet."
(d) To reflect interest expense and other expenses related to the Senior Credit
Facility, the Notes and the Seller Note. Interest expense associated with
the Senior Credit Facility was calculated based on an average interest rate
of 8.33% per year. Interest expense associated with the Notes and the Seller
Note was calculated based on an interest rate of 8.75% per year. A change of
1/8% in the interest rate on the Senior Credit Facility would result in a
change in interest expense of $.6 million and $.45 million, for the twelve
month and nine month periods, respectively. A portion of the change in
interest expense could be offset by an interest rate swap agreement on $160
million of the senior debt, which effectively changes that amount of
variable rate debt to fixed rate debt.
Interest expense includes the following:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1996
AND SEPTEMBER 30, AND SEPTEMBER 30,
1997 1997
--------------------- ---------------------
($ IN MILLIONS)
<S> <C> <C>
Senior Credit Facility............................. $ 38.1 $ 28.6
The Notes.......................................... 17.5 13.1
Seller Note........................................ 4.4 3.3
Fees related to the Senior Credit Facility......... 4.1 3.1
----- -----
64.1 48.1
Amortization of deferred financing costs........... 2.0 1.5
----- -----
$ 66.1 $ 49.6
----- -----
----- -----
</TABLE>
(e) To reflect the estimated provision for income taxes assuming an effective
income tax rate of 40% after the Acquisition. This amount includes the tax
effect of all pro forma adjustments and the tax effect of accounting for the
Company as if it were a C Corporation.
(f) EBITDA represents income from operations plus depreciation and amortization.
EBITDA is not a measure of performance or financial condition under
generally accepted accounting principles, but is presented to provide
additional information related to debt service capability. EBITDA should not
be considered in isolation or as a substitute for other measures of
financial performance or liquidity under generally accepted accounting
principles. While EBITDA is frequently used as a measure of operations and
the ability to meet debt service requirements, it is not necessarily
comparable to other similarly titled captions of other companies due to
potential inconsistencies in the method of calculation.
42
<PAGE>
(g) Amortization includes amounts related to an Advance Agreement entered into
with the U.S. Department of Defense in 1994. See "Management's Discussion
and Analysis of Financial Condition and Results of
Operations--Overview--Advance Agreement." Actual depreciation and
amortization are expected to differ from the pro forma amounts presented
after completion of an asset valuation and application of purchase
accounting adjustments. See Note (a) of "Notes to Unaudited Pro Forma
Balance Sheet."
(h) Pro forma earnings were insufficient to cover fixed charges in the amount of
$1.3 million, $2.8 million, and $11.9 million for the year ended December
31, 1996, the nine months ended September 30, 1997 and the twelve months
ended September 30, 1997.
43
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
STATEMENT ADJUSTMENTS(A) STATEMENT
---------- -------------- ----------
<S> <C> <C> <C>
($ IN MILLIONS)
ASSETS
Current Assets:
Cash and marketable securities.................... $ 11.1 $ (0.4)(c) $ 10.7
Short-term investments............................ -- -- --
Trade receivables................................. 77.9 1.7(b) 79.8
0.2(c)
Inventories....................................... 330.2 (4.1)(b) 366.3
0.5(c)
39.7(d)
Other current assets.............................. 4.8 0.1(c) 4.9
---------- -------------- ----------
Total Current Assets............................ 424.0 37.7 461.7
Investments in affiliated companies............... 10.8 -- 10.8
Net property, plant and equipment................. 101.2 1.1(c) 102.3
Patents and deferred charges...................... 25.8 0.2(c) 42.4
16.4(e)
Goodwill.......................................... -- 520.7(d) 520.7
Prepaid pension cost.............................. 50.3 117.9(d) 168.2
---------- -------------- ----------
Total Assets.................................... $ 612.1 $ 694.0 $ 1,306.1
---------- -------------- ----------
---------- -------------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable, trade and other................. $ 56.4 $ 0.2(c) $ 56.6
Advanced payments................................. 274.1 274.1
Accrued and other liabilities..................... 84.5 (0.4)(b) 85.2
1.1(c)
Due to FMC Corporation............................ 5.8 -- 5.8
Current maturities of long-term debt.............. -- 40.5(f) 40.5
---------- -------------- ----------
Total Current Liabilities....................... 420.8 41.4 462.2
Long-term debt, less current maturities........... -- 666.5(f) 666.5
Accrued pension cost.............................. 31.1 (31.1)(d) --
Accrued postretirement benefit cost............... 29.2 (24.8)(d) 4.4
---------- -------------- ----------
Total Liabilities............................... 481.1 652.0 1,133.1
Stockholder's Equity:
Capital stock..................................... -- 173.0(g) 173.0
Partners' capital................................. 131.0 (131.0)(h) --
---------- -------------- ----------
Total Stockholder's Equity...................... 131.0 42.0 173.0
---------- -------------- ----------
Total Liabilities and Stockholder's Equity...... $ 612.1 $ 694.0 $ 1,306.1
---------- -------------- ----------
---------- -------------- ----------
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA BALANCE SHEET.
44
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
(a) A purchase accounting valuation of the Company's assets and liabilities has
not been completed. Upon completion of such valuation, the Company will
allocate the purchase price to the Company's assets and liabilities, both
tangible and intangible, with the excess of the cost over the fair value of
the net assets acquired allocated to goodwill. Management expects that,
based on such allocation, additional purchase accounting adjustments will be
made to the Company's assets and liabilities and, among other adjustments,
property, plant, and equipment will increase and goodwill will decrease from
the amounts presented herein.
(b) To reflect adjustments pursuant to the Acquisition Agreement.
(c) To reflect CTC assets acquired and liabilities assumed by the Company
pursuant to the Acquisition Agreement.
(d) To reflect purchase accounting adjustments as follows:
<TABLE>
<CAPTION>
($ IN
MILLIONS)
<S> <C>
Inventories.................................................................... $ 39.7
Goodwill....................................................................... 520.7
Prepaid pension cost........................................................... 117.9
Accrued pension cost........................................................... (31.1)
Accrued postretirement cost.................................................... (24.8)
</TABLE>
The adjustment to inventories is to increase inventories for the difference
between inventories valued at LIFO and FIFO. The adjustment to prepaid
pension cost, accrued pension cost, and accrued postretirement benefit cost
adjusts historical balances to the difference between the assets of the
plans and the related projected benefit obligations. The adjustment to
goodwill is to record the remaining excess of acquisition cost over the net
assets acquired. See Note (a) above.
(e) To reflect deferred financing costs associated with the Senior Credit
Facility and the Notes.
(f) To reflect the financing of the Acquisition as follows:
<TABLE>
<CAPTION>
($ IN
MILLIONS)
<S> <C>
Senior Credit Facility......................................................... $ 457.0
The Notes...................................................................... 200.0
Seller Note.................................................................... 50.0
-------------
707.0
Less current maturities........................................................ 40.5
-------------
$ 666.5
-------------
-------------
</TABLE>
(g) To reflect the Equity Contribution.
(h) To reflect the elimination of partners' capital.
45
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of UDLP as of and for the years ended December 31, 1994 (the year of
inception), 1995 and 1996, which have been derived from financial statements
audited by Ernst & Young LLP, independent auditors. The selected historical
financial data as of and for the years ended December 31, 1992 and 1993 have
been derived from unaudited financial statements of FMC's Defense Systems Group
and Harsco's BMY Combat Systems Division. The selected historical consolidated
financial data as of and for the nine months ended September 30, 1996 and 1997
have been derived from unaudited interim consolidated financial statements
which, in the opinion of management, reflect all material adjustments,
consisting only of normal recurring adjustments, except as described below,
necessary for a fair presentation of such data. The following information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical consolidated financial
statements of UDLP, together with the related notes thereto, included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
--------------------------------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR OPERATIONS(1)
------------------------------------------
<CAPTION>
FMC HARSCO FMC HARSCO
1992 1992 1993 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- --------- --------- ---------
($ IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue................................. $ 1,111.8 $ 384.9 $ 639.9 $ 348.0 $ 1,076.3 $ 967.6 $ 1,029.3 $ 745.9
Cost of sales(2)........................ 861.5 313.1 468.4 258.6 809.8 746.7 820.8 595.8
Selling, general and
administrative(3)..................... 72.7 31.9 49.8 23.2 131.8 122.7 128.4 90.0
Research and development................ 21.0 1.8 11.4 2.1 16.3 12.4 12.9 9.1
--------- --------- --------- --------- --------- --------- --------- ---------
Total expenses........................ 955.2 346.8 529.6 283.9 957.9 881.8 962.1 694.9
Earnings from foreign affiliates(4)..... 16.2 -- 10.3 -- 12.4 21.4 31.9 31.3
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations................ 172.8 38.1 120.6 64.1 130.8 107.2 99.1 82.3
Other (income) expense.................. (7.1) 7.0 (2.3) (0.5) (2.6) (1.9) (1.9) (2.2)
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes............ 179.9 31.1 122.9 64.6 133.4 109.1 101.0 84.5
Provision for income taxes(5)........... 64.6 12.4 30.4 23.4 3.9 1.4 2.8 --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income............................ $ 115.3 $ 18.7 $ 92.5 $ 41.2 $ 129.5 $ 107.7 $ 98.2 $ 84.5
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
OTHER DATA(6):
EBITDA(6)............................... $ 159.8 $ 133.9 $ 138.1 $ 111.1
Depreciation and amortization........... $ 26.5 $ 9.2 $ 23.9 $ 9.1 29.0 26.7 39.0 28.8
Capital expenditures.................... 18.0 4.8 17.8 5.1 18.3 24.1 22.4 16.5
Ratio of earnings to fixed charges(7)... 38.1:1 26.4:1 23.6:1 25.6:1
Net cash provided by operating
activities............................ 166.0 94.7 81.1 56.7
Net cash (used in) provided by investing
activities............................ (17.1) (50.8) (7.0) (4.6)
Net cash used in financing activities... (118.5) (74.9) (75.0) (53.0)
BALANCE SHEET DATA:
Working capital......................... $ (56.6) $ 37.6 $ 2.2 $ 13.2 $ 4.2 $ 11.3 $ 46.6 $ 48.4
Total assets............................ 311.2 197.8 439.7 177.4 479.9 569.6 645.0 601.7
Partners' capital(8).................... 39.5 53.0 66.8 90.3 123.7 156.4 179.6 187.9
<CAPTION>
<S> <C>
1997
---------
<S> <C>
INCOME STATEMENT DATA:
Revenue................................. $ 913.9
Cost of sales(2)........................ 755.0
Selling, general and
administrative(3)..................... 91.4
Research and development................ 12.1
---------
Total expenses........................ 858.5
Earnings from foreign affiliates(4)..... 13.5
---------
Income from operations................ 68.9
Other (income) expense.................. (1.5)
---------
Income before income taxes............ 70.4
Provision for income taxes(5)........... 1.5
---------
Net income............................ $ 68.9
---------
---------
OTHER DATA(6):
EBITDA(6)............................... $ 97.9
Depreciation and amortization........... 29.0
Capital expenditures.................... 20.1
Ratio of earnings to fixed charges(7)... 19.2:1
Net cash provided by operating
activities............................ 119.2
Net cash (used in) provided by investing
activities............................ 6.3
Net cash used in financing activities... (114.4)
BALANCE SHEET DATA:
Working capital......................... $ 3.1
Total assets............................ 612.1
Partners' capital(8).................... 131.0
</TABLE>
- --------------------------
(SEE FOOTNOTES ON FOLLOWING PAGE)
46
<PAGE>
- --------------------------
(FOOTNOTES FROM PREVIOUS PAGE)
(1) Prior to the formation of UDLP effective January 1, 1994, respective
portions of the business were operated by FMC and Harsco. There was no
change in the basis of assets contributed or liabilities assumed at the
formation of UDLP. However, the financial information for 1992 and 1993 is
based on the accounting principles followed by each of FMC and Harsco prior
to the formation of UDLP, which differ in certain respects from the
accounting principles of UDLP.
(2) Cost of sales includes non-cash LIFO charges of $5.6 million, $5.9 million
and $6.3 million for the years ended December 31, 1994, 1995 and 1996,
respectively, and $7.1 million and $8.0 million for the nine months ended
September 30, 1996 and 1997, respectively. Cost of sales for the year ended
December 31, 1996 and nine months ended September 30, 1996 includes a $14.3
million favorable settlement from the U.S. government on a government
procurement contract. Cost of sales for the nine months ended September 30,
1997 includes approximately $13.5 million of non-cash charges recorded for
the quarter ended September 1997 for changes in estimated contract
profitability related to contractual issues with customers and other matters
resulting from the periodic reassessment of the estimated profitability of
contracts in progress.
(3) Selling, general and administrative expense for the year ended December 31,
1994 includes a $7.4 million charge related to conforming Harsco's
historical accounting policy to UDLP's accounting for inventory.
(4) Earnings from foreign affiliates for the year ended December 31, 1992
includes a $5.9 million increase as a result of a change in accounting
method for the investment in FNSS-Turkey from the equity method to the cost
method. Earnings from foreign affiliates for the year ended December 31,
1996 and nine months ended September 30, 1996 includes a $3.8 million
increase as a result of a change of accounting method for the investment in
FMC-Arabia from the cost method to the equity method.
(5) Income taxes are presented prior to the formation of UDLP as if the
operations were taxed as C corporations. After the formation of UDLP, income
passed to FMC and Harsco and is taxable at the partner level, except for
taxes payable on the income of UDLP's Foreign Sales Corporation subsidiary.
(6) EBITDA represents income from operations plus depreciation and amortization.
EBITDA is not a measure of performance or financial condition under
generally accepted accounting principles, but is presented to provide
additional information related to debt service capability. EBITDA should not
be considered in isolation or as a substitute for other measures of
financial performance or liquidity under generally accepted accounting
principles. While EBITDA is frequently used as a measure of operations and
the ability to meet debt service requirements, it is not necessarily
comparable to other similarly titled captions of other companies due to
potential inconsistencies in the method of calculation. EBITDA information
is not presented for periods prior to the formation of UDLP because
management believes such information is not meaningful.
(7) For purposes of calculating the ratios of earnings to fixed charges,
"earnings" represents income before income taxes less the excess, if any, of
the equity in earnings of joint ventures over dividends received plus fixed
charges. "Fixed charges" consists of interest expense, including
amortization of deferred financing costs, plus that portion of operating
lease rental expense (33%) which management believes is representative of
the interest component of lease expense. Ratios of earnings to fixed charges
are not presented for periods prior to the formation of UDLP because they
are not meaningful due to differences in capital structure.
(8) Prior to the formation of UDLP, the amounts represent the divisional equity
of the predecessor operations of FMC and Harsco, respectively.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and related notes, and the other financial information,
included elsewhere in this Prospectus. Unless otherwise indicated, the following
discussion does not give effect to the Transactions or include pro forma
financial information.
OVERVIEW
BUSINESS ENVIRONMENT
Approximately 90% of the Company's 1996 sales were to the U.S. government,
primarily to agencies of the DoD (including FMS sales), or through subcontracts
with other government contractors. The U.S. defense budget has been declining in
real terms since the mid-1980s, resulting in some delays in new program starts,
program stretch-outs and program cancellations. These budget declines have
adversely affected the Company's sales and earnings. However, the rate of budget
declines has recently slowed and management believes that, while the DoD budget
may continue to decline, any such declines in the near term should be at a lower
rate than the rate of decline over the last decade. The majority of the
Company's programs are funded under the Weapon & Tracked Combat Vehicles
("W&TCV") procurement budget, which includes personal and crew-served weapons
and heavy TCVs, in addition to the medium/light class of TCVs that the Company
produces. The W&TCV procurement reached its peak in the early 1980s, with over
$6.0 billion in procurement funding for the U.S. government's fiscal year ended
September 30 ("Fiscal"), 1983. The W&TCV procurement budget thereafter declined
substantially as the Cold War receded and then ended, reaching $0.9 billion for
Fiscal 1993 and Fiscal 1994. Such expenditures have been in the $1.1 billion to
$1.5 billion range for Fiscal 1995 through Fiscal 1997.
CONTRACTING PROCESS
Government procurement initiatives for significant new armaments programs
(including major upgrades) are generally completed in four primary sequential
phases, each of which generally constitutes a separate authorization decision
and a separate, progressively larger, business opportunity. The first award is a
Demonstration and Validation ("DemVal") contract, for construction of prototypes
and demonstration of performance capabilities and advantages. The second phase
is an Engineering and Manufacturing Development ("EMD") contract, to demonstrate
the ability to manufacture the systems cost-effectively on a large scale. The
third phase, Low Rate Initial Production ("LRIP"), introduces the system into
production for and delivery to U.S. government customers for final evaluation
prior to the fourth phase, which is Full Rate Production ("FRP"). There is
frequently competitive bidding at one or more phases, although the prime
contractor at the DemVal and/or EMD phases often has a competitive advantage in
successfully bidding on the LRIP and FRP phases. Each phase also represents a
separate opportunity for the U.S. military to prioritize programs and reassess
budgetary authority, and the annual appropriation for each phase also requires
separate Congressional approval.
PRODUCT LIFE-CYCLES
The Company's major products typically undergo a product life-cycle from
early development to mature production, including aftermarket support and
upgrades. During this life-cycle, it is not uncommon for next generation or
competing systems to begin to capture U.S. defense budget dollars. This has
typically resulted in line-item budget dollar shifts between programs. For
example, while the Company's production of the M109 self-propelled howitzer has
declined as the program has evolved toward the end of its life-cycle, the
Company's production of the A6 Paladin and development work for the Crusader has
increased. Export sales and foreign joint venture and co-production businesses
tend to mitigate the effect of these trends and extend product life cycles, as
mature U.S. vehicles and systems frequently continue to
48
<PAGE>
be attractive to international customers, allowing exporters to leverage their
experience and capital base. See "Business--Products and Systems" and
"--Backlog."
RESTRUCTURING
In October 1994, the Company entered into an advance agreement ("Advance
Agreement") with the DoD. Under the terms of the Advance Agreement, the Company
is permitted to defer certain costs that were incurred from January 1, 1994
through June 30, 1996 associated with consolidation and restructuring of its
Ground Systems Division businesses. Costs deferred are being allocated ratably
to contracts with the U.S. Department of Defense for thirty-six months beginning
January 1, 1996. As of December 31, 1996, consolidation and restructuring costs
incurred amounted to $38.3 million and are included in patents and deferred
charges in the Company's balance sheet. Amortization relating to the Advance
Agreement for the period ended December 31, 1996 was $12.7 million and is
expected to continue at $12.7 million annually for 1997 and 1998. Because the
costs incurred are allowable as costs under the Company's U.S. government
contracts, they are generally reflected in the Company's pricing. The Company
regularly considers other consolidation and cost reduction opportunities in
response to declines in program spending or program changes and completions. For
example, the Company has been consolidating certain operations from one of its
California facilities to its York, Pennsylvania facility, with the transfer
scheduled to be complete in the first quarter of 1998. Management considers it
unlikely that any of these opportunities will approach the magnitude of the
consolidation described above, or that any such opportunities will result in a
related advance agreement with the DoD.
VARIABILITY IN QUARTERLY AND ANNUAL PERFORMANCE
The Company's operating performance frequently varies significantly from
period to period, depending upon the timing, contract type and export sales,
and, in particular, the award or expiration of one or more contracts, and the
timing of manufacturing and delivery of products under such contracts. As a
result, period-to-period comparisons may show substantial increases and
decreases disproportionate to underlying business activity, and results for any
given period should not be considered indicative of longer term results.
Performance can also be materially affected by the timing and amount of
dividends from the Company's Turkish and Saudi joint ventures, which has
generally resulted in higher earnings during the first quarter of the year when
such dividends are received.
TAXES
The Company will be taxed as a corporation for federal income tax purposes
on the consolidated income of the Company and its wholly-owned subsidiary, UDLP
Holdings Corp. As a limited partnership, UDLP's income or loss passes through to
its partners (the Company and UDLP Holdings Corp.), and is taxable at the
partner level. Accordingly, the income and loss of UDLP will be included in the
Company's consolidated income. For federal income tax purposes, the income of
UDLP's subsidiaries will generally be taxable at the subsidiary level.
EXPORT SALES
Export sales, including FMS, to foreign governments transacted through the
U.S. government, were $194.2 million, $216.4 million and $433.2 million during
1996, 1995 and 1994, respectively. The substantial decline in 1995 from 1994 was
due primarily to the completion of a Bradley Fighting Vehicle contract for Saudi
Arabia in early 1995. Substantially all of the Company's export sales are made
in U.S. dollars. In certain cases, the Company arranges to provide letters of
credit to support advance payments that are received against future deliveries
and in certain cases to provide performance guarantees.
Increasingly, foreign governments have been demanding offset obligations
when they award contracts. An offset involves purchasing goods or services from
or otherwise providing value to the customer's
49
<PAGE>
country. If the obligations are not met, the Company must pay a penalty to the
foreign government for not meeting the obligations. As of June 30, 1997 the
Company's offset exposure for foreign purchases was approximately $8.0 million,
excluding offset obligations for the Company's foreign joint ventures. The
Company has yet to incur a penalty on any of its offset obligations.
IMPACT OF YEAR 2000
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in normal
business activity.
Based on a recent assessment, the Company determined that it will be
required to modify or replace significant portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. The Company presently believes that with modifications to
existing software and conversions to new software, the year 2000 issue will not
pose significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
year 2000 issue could have a material impact on the operations of the Company.
The Company also is currently surveying its supplier base to verify that the
suppliers have addressed the year 2000 issue.
The Company will utilize both internal and external resources to replace or
reprogram and test the software for the year 2000 issue. The Company anticipates
completing its year 2000 projects by the 2nd Quarter 1999, which is prior to any
impact on operating systems. The total cost of year 2000 projects is estimated
at $28 million and is being funded through operating cash flows. The Company
expects to capitalize the majority of cost attributable to the purchase and
implementation of new hardware and software. The remaining cost will be expensed
as incurred. Through December 31, 1997, the Company has incurred approximately
$5 million related to the assessment of the year 2000 issue and implementation
of plans to replace or modify its operating systems.
The costs of the project and the date on which the Company believes it will
complete the year 2000 projects are based on management's best estimates, which
were derived utilizing numerous assumptions of future events, including the
continued availability of certain resources. There can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the success of implementing new systems, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 ("NINE MONTHS 1997") COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1996 ("NINE MONTHS 1996")
REVENUE. Revenue increased $168 million, or 22.5%, to $913.9 million for
the Nine Months 1997 from $745.9 million for the Nine Months 1996. The primary
reasons for the increase were the ramp-up of the Crusader program, revenue from
the Company's involvement in the August 1996 privatization of the Louisville
Naval Ordnance Station, an increase in sales resulting from the M109 A6 Paladin
upgrade contract, the shipment of amphibious assault vehicles under a contract
with Brazil, and initial shipments of M113 armored personnel carriers under a
contract with Thailand. These increases were partially offset by lower sales of
armored gun and composite armored vehicle development systems, which were
essentially complete in 1996.
50
<PAGE>
GROSS PROFIT. Gross profit increased $8.8 million, or 5.9%, to $158.9
million for the Nine Months 1997 from $150.1 million for the Nine Months 1996.
Gross margin declined to 17.4% of sales for the Nine Months 1997 from 20.1% for
the Nine Months 1996. Gross profit for the Nine Months 1997 was favorably
impacted by increased sales of new production units compared to the Nine Months
1996, and higher award fees on the Crusader program. This improvement was more
than offset by approximately $13.5 million of non-cash charges recorded for the
quarter ended September 1997 for changes in estimated contract profitability
related to contractual issues with customers and other matters resulting from
the periodic reassessment of the estimated profitability of contracts in
progress. Additionally, gross profit for the Nine Months 1996 was favorably
impacted by a $14.3 million price adjustment with the U.S. government on a gun
and mount procurement contract. Gross profits were negatively impacted by a
non-cash LIFO charge of $8.0 million for the Nine Months 1997 and $7.1 million
for the Nine Months 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.4 million, or 1.6%, to $91.4 million for
the Nine Months 1997 from $90.0 million for the Nine Months 1996. The increase
is attributed to higher agent commissions related to foreign contracts,
increased bid and proposal activity for the pursuit of new contracts, the costs
associated with installing new automated business systems, and the costs related
to the operation of the Louisville Naval Ordnance Station in 1997. Substantially
offsetting these increases were the realization of the benefits of the
consolidation of the Ground Systems Division business and the reclassification
of certain costs in the Armament Systems Division business from general and
administrative to cost of sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $3.0 million, or 33.0%, to $12.1 million for the Nine Months 1997 from
$9.1 million for the Nine Months 1996. The majority of the increased expense was
for development work on new launching systems for the U.S. Navy, as well as
modest spending increases on most other programs.
EARNINGS RELATED TO INVESTMENTS IN FOREIGN AFFILIATES. Earnings from
foreign affiliates decreased $17.8 million, or 56.9%, to $13.5 million for the
Nine Months 1997 from $31.3 million for the Nine Months 1996. This decrease was
due to an $18.5 million decrease in dividends received from FNSS-Turkey,
primarily as a result of fire-related destruction of part of its production
facility in February 1996. This decrease was partially offset by an increase of
$0.7 million in earnings for the Nine Months 1997 primarily from the positive
impact of a new contract at FMC-Arabia. This increase from FMC-Arabia would have
been $4.6 million excluding the impact on the Nine Months 1996 of changing the
accounting method for this investment from the cost method to the equity method
beginning January 1996.
NET INCOME. As a result of the foregoing, including the $17.8 million
decline in earnings from foreign affiliates discussed earlier, net income
decreased $15.6 million, or 18.5%, to $68.9 million for the Nine Months 1997
from $84.5 million for the Nine Months 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE. Revenue increased $61.8 million, or 6.4%, to $1,029.3 million for
1996 from $967.6 million for 1995. The primary reasons for the increase were
increased revenue from the Crusader program, the continued ramp-up of sales on
the M109 A6 Paladin upgrade program, sales on a new contract to privatize the
operations of the Louisville Naval Ordnance Station and increased sales on the
Mk41 VLS after resumption of production on the program. These increases were
partially offset by lower sales due to a reduction of deliveries of new
production units for tracked combat vehicle product lines, notably foreign sales
of M109 howitzers.
GROSS PROFIT. Gross profit decreased $12.4 million, or 5.6%, to $208.5
million for 1996 from $220.9 million for 1995. Gross margin declined to 20.3% of
sales for 1996 from 22.8% of sales for 1995. The decrease in gross margin was
due to a shift from a greater percentage of sales of higher margin new
production units in 1995 to a greater percentage of lower margin engineering
development and vehicle
51
<PAGE>
upgrade program sales in 1996. Also, royalties declined $9.0 million in 1996 due
to a significant curtailment in deliveries by the joint venture in FNSS-Turkey
as a result of fire-related destruction of part of its production facility in
February 1996. These reductions were partially offset by the favorable impact of
the 1996 settlement of a $14.3 million claim with the U.S. government on a gun
and mount procurement contract. Gross profits were negatively impacted by
non-cash LIFO charges of $6.3 million in 1996 and $5.9 million in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5.8 million, or 4.7%, to $128.5 million for
1996 from $122.7 million for 1995. The increase was due primarily to increases
in employee benefit related costs, increased staffing costs related to the
ramp-up of the Crusader program and increased costs related to operation of the
Louisville Naval Ordnance Station, partially offset by reductions of expenses
resulting from realization of the benefits of the consolidation of the Ground
Systems Division business.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $0.4 million, or 3.5%, to $12.9 million for 1996 from $12.4 million
for 1995.
EARNINGS RELATED TO INVESTMENTS IN FOREIGN AFFILIATES. Earnings from
foreign affiliates increased $10.5 million, or 49.2%, to $31.9 million for 1996
from $21.4 million for 1995. Dividends received from FNSS-Turkey increased $3.9
million as a result of the shipment of more profitable units, while earnings
related to FMC-Arabia increased by $6.6 million, of which $3.8 million was due
to the effect of changing from the cost method to the equity method for this
investment beginning January 1996 and $2.8 million was due to increased sales at
FMC-Arabia.
NET INCOME. As a result of the foregoing, net income decreased $9.5
million, or 8.8%, to $98.2 million for 1996 from $107.7 million for 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUE. Revenue decreased $108.7 million, or 10.1%, to $967.6 million for
1995 from $1,076.3 million for 1994. The primary reason for the decrease was
lower sales of new tracked combat vehicles, principally due to the completion of
a multi-year Bradley Fighting Vehicle production contract in early 1995. These
decreases in sales were partially offset by increased sales of Bradley Fighting
Vehicle upgrades and M109 upgrades, and increased engineering development
revenues related to the Crusader and the Bradley A3 programs.
GROSS PROFIT. Gross profit decreased $45.6 million, or 17.1%, to $220.9
million for 1995 from $266.4 million for 1994. Gross margin decreased to 22.8%
of sales for 1995 from 24.8% of sales for 1994. The reduction in the gross
margin was due primarily to a shift from a greater percentage of sales of higher
margin new production units in 1994 to engineering development and vehicle
upgrade program sales in 1995. The gross margin in 1995 also was adversely
impacted by a loss provision on an amphibious assault vehicle contract with
Brazil, which management expected at the time of signing. The Company completed
delivery on this contract in 1997. Gross profits were negatively impacted by
non-cash LIFO charges of $5.9 million for 1995 and $5.6 million for 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $9.1 million, or 6.9%, to $122.7 million for
1995 from $131.8 million for 1994. The decrease was due in part to personnel
reductions resulting from the consolidation of the Ground Systems Division
business. Selling, general and administrative expenses in 1994 also were
unfavorably impacted by $7.4 million of costs previously capitalized in
inventories under Harsco's historical accounting policy but charged against
income after formation of the partnership to conform with UDLP's accounting
policy of charging such costs to expense as incurred.
52
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased $3.9 million, or 23.8%, to $12.4 million for 1995 from $16.3 million
for 1994. This decrease was primarily due to reductions in research and
development spending, consistent with overall spending reductions by the
Company.
EARNINGS RELATED TO INVESTMENTS IN FOREIGN AFFILIATES. Earnings from
foreign affiliates increased $8.9 million, or 71.5%, to $21.4 million for 1995
from $12.5 million for 1994. Dividends received from FNSS-Turkey increased $7.4
million due to increased vehicle deliveries and a more favorable product mix and
FMC-Arabia recorded its initial dividend income of $1.5 million in 1995.
NET INCOME. As a result of the foregoing, net income decreased $21.9
million, or 16.9%, to $107.7 million in 1995 from $129.5 million in 1994.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
The Company's liquidity requirements depend on a number of factors relative
to the timing of production and deliveries under its U.S. government and direct
foreign sales ("DFS") contracts. The Company generally receives progress
payments on U.S. government contracts, including Foreign Military Sales, and it
generally negotiates for the payment of advances from customers on DFS
contracts. Advances on DFS contracts vary depending on the specific programs
involved while progress payments on U.S. government contracts are at a
percentage of contract expenditures. These payments reduce the need for
Company-financed working capital, and changes in working capital between periods
are frequently due to program status changes and the level of such payments for
the specific programs by period. Cash and net assets from the Company's
subsidiaries and joint ventures are not restricted by contract, regulatory
authority or the organizational documents of the Company, or its subsidiaries or
joint ventures, except that the Company's joint ventures require unanimous vote
of the joint venture parties prior to distributions. Although it has not yet
done so, the Company's Turkish joint venture may limit its cash distributions to
the Company if it does not meet its offset obligations and is required to pay
the resulting penalty. See "--Joint Ventures--FNSS-Turkey."
CASH PROVIDED BY OPERATING ACTIVITIES. Cash provided by operating
activities was $119.2 million for the Nine Months 1997 compared to $56.7 million
for the Nine Months 1996. The Nine Months 1996 was adversely impacted by a $83.6
million increase in inventories, primarily the result of an inventory build-up
to support a DFS program in Thailand and FMS programs in Austria and Brazil, and
the VLS launcher program. The Nine Months 1996 also was adversely impacted by a
$38.2 million decrease in accounts payable due to the timing of spending and the
payment cycle for major subcontractors for the Crusader program.
Cash provided by operating activities was $81.1 million, $94.7 million and
$166.0 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The decrease in cash from operations in 1996 as compared to 1995
was primarily the result of changes in inventories, accounts payable and
advanced payments. The inventory build-up for 1996 of $113.5 million was
primarily the result of the same programs that affected the Nine Months 1996
while the increase in 1995 was the result of a $49.3 million inventory build-up
to support a program to build a component for a submarine and the VLS launcher
program. The negative impact on cash from operations of increased inventories
was partially offset by increased advanced payments of $64.7 million in 1996,
predominantly related to the various programs with increased inventories. Also
impacting cash from operations for 1995 was the favorable effect of higher
levels of accounts payable of $23.3 million in 1995 due to a difference in the
timing of spending. Accounts payable returned to more normal levels in 1996
thereby adversely affecting 1996 operating cash flow by approximately $26.7
million. Operating cash flow for 1995 also was adversely impacted by
approximately $23.5 million of costs related to the consolidation and
restructuring of the Ground Systems Division businesses. This program incurred
its highest expenditures in 1996.
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The decrease in cash from operations in 1995 as compared to 1994 resulted
primarily from lower net income, the changes in inventories, restructuring
costs, accounts payable, and advanced payments in 1995 as discussed above, and
an increase in accrued and other liabilities in 1994. The increase in accrued
and other liabilities in 1994 resulted from the establishment of
employee-related accruals such as workers compensation since the initial
formation of UDLP in January 1994 and the increase in a reserve to reimburse the
government on a large production contract.
CASH USED IN INVESTING ACTIVITIES. Cash used in investing activities for
each period primarily reflects the Company's capital spending and short-term
investments with FMC. Capital spending was $20.1 million for the Nine Months
1997 compared to $16.5 million for the Nine Months 1996. Capital spending was
$22.4 million, $24.1 million and $18.3 million during the years ended December
31, 1996, 1995 and 1994, respectively. Capital spending is primarily related to
spending for information technology and telecommunications equipment, simulation
labs and expenditures relating to the Ground Systems Division consolidation.
Capital expenditures for 1997 are expected to reach approximately $28 million,
including significant outlays for a new integrated business information system
during the second half of the year. The Company anticipates that its capital
spending will be approximately $27.0 million in 1998 addressing, among other
things, "year 2000" matters.
FINANCING ACTIVITIES AND CAPITAL RESOURCES. Prior to the Acquisition, UDLP
was financed primarily with cash flow from operations. Most of the operating
cash flow not reinvested in the business was distributed to FMC and Harsco.
Concurrently with the Acquisition, the Company entered into the Senior Credit
Facility, consisting of $495.0 million of term loans, of which $445.0 million
was outstanding initially, and a $230.0 million revolving credit facility, of
which $12.0 million in borrowings and approximately $154.0 million in letters of
credit were outstanding initially, and under which approximately $64.0 million
were available for additional revolving credit borrowings. As of November 30,
1997, the outstanding term loans had been reduced by $28.5 million. The Company
also issued the Notes and the $50.0 million Seller Note, which is expected to be
repaid with $50.0 million of additional term loans under the Senior Credit
Facility. If any adjustment results in a decrease in the Purchase Price for the
Acquisition, borrowings under the Term Loan Facilities will be correspondingly
reduced. If the Purchase Price is increased, the borrowings under the Revolving
Credit Facility will be correspondingly increased. See "The Acquisition" and
"Capitalization" for information relating to the financing for the Acquisition,
and "Description of Certain Indebtedness".
The Company has no operations independent from its subsidiaries. All of the
subsidiary Guarantors are directly or indirectly wholly-owned and all such
Guarantors have guaranteed the Notes on a full, unconditional and joint and
several basis. Any non-guarantor subsidiaries have assets, equity, income and
cash flows on an individual and combined basis less than 3% of related pro forma
amounts of the Company.
Based upon its current level of operations, management believes that the
Company's cash flow from operations, together with available borrowings under
the Senior Credit Facility, will be adequate to meet its anticipated
requirements for working capital, capital expenditures, research and development
expenditures, and interest payments and scheduled principal payments on its
indebtedness (including the Senior Credit Facility and the Notes). There can be
no assurance, however, that the Company's business will continue to generate
cash flow from operations at or above current levels. If the Company is unable
to generate sufficient cash flow from operations in the future to service its
debt, it may be required to sell assets, reduce capital expenditures, refinance
all or a portion of its existing debt (including the Notes) or obtain additional
financing. The Company's ability to make scheduled principal payments to pay
interest 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, competition, legislative, regulatory,
and other factors beyond its control. There can be no assurance that sufficient
funds will be available to enable the Company to service its indebtedness,
including the Notes, or make necessary capital expenditures.
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NEW BASIS OF ACCOUNTING AND ACCOUNTING STANDARD NOT YET ADOPTED
The basis of the Company's assets and liabilities will be adjusted upon the
application of purchase accounting pursuant to the Acquisition on October 6,
1997. Accordingly, the Company's future consolidated financial position and
results of operations will not be comparable to historical financial
information. The Company anticipates changing the method of determining
inventory cost after the Acquisition from the last in, first out basis to the
actual production cost basis. The effect of these adjustments and the change in
the method of determining inventory costs on future operating results has not
been determined. See note (g) of Notes to Unaudited Pro Forma Income Statement
and Other Data.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosure about Segments of an Enterprise and Related Information." This
Statement requires financial and descriptive information about reportable
operating segments in interim and annual financial reports. It also established
the standards for related disclosures about products and services, geographic
areas of operation and major customers. The Statement is effective for financial
statements for periods beginning after December 15, 1997. The Company does not
expect the impact of adopting this new accounting standard to be significant.
INFLATION
The effect of inflation on the Company's sales and earnings has historically
been minimal. Although a majority of the Company's sales are made under
long-term contracts, the selling prices of such contracts, established for
deliveries in the future, generally reflect estimated costs to be incurred in
these future periods. In addition, some contracts provide for price adjustments
through escalation clauses. Management believes the Company's risks associated
with fixed-price contracts have primarily been associated with estimating
program requirements, rather than the impact of price changes on those
requirements.
JOINT VENTURES
FNSS-TURKEY
The Company's investment in FNSS-Turkey is carried at cost since there is
uncertainty regarding the Company's ability to control the repatriation of
earnings. Royalties are reported as revenues, while dividends are reported as
earnings from foreign affiliates. Dividends and royalties are paid in U.S.
dollars.
Turkey has experienced high inflation and its currency, the Turkish lira,
has consistently fallen in value over several years against the U.S. dollar.
FNSS-Turkey receives payments from SSM in Turkish lira, and pricing under the
contract is calculated annually based on scheduled product deliveries pursuant
to a formula designed to adjust such pricing for, among other things,
fluctuations in the value of the Turkish lira against the U.S. dollar. Upon
receipt of such payments, FNSS-Turkey promptly converts Turkish lira into hard
currency. As a result, management believes that the terms of FNSS-Turkey's
contract with the Turkish government have generally protected FNSS-Turkey
against the impact of the devaluation of the Turkish lira. However, FNSS-Turkey
is adversely affected by depreciation of the Turkish lira if there is a delay in
payment after calculation of pricing under the contract. For example, when a
delivery schedule is delayed, FNSS-Turkey is adversely affected unless a pricing
adjustment is negotiated to give effect to any devaluation in the Turkish lira
between the time the products were priced under the contract and the delayed
delivery date. Such an adjustment was made after protracted negotiations when
delivery schedules were first extended in 1996.
In February 1996, a fire occurred at the FNSS-Turkey vehicle production
facility which destroyed a warehouse and the majority of production parts on
site. The plant resumed production in late 1996; however, the work stoppage
caused by the fire had a significant negative impact on royalties received from
FNSS-Turkey in 1996 and has negatively impacted dividends received to date in
1997. The Turkish
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<PAGE>
government, which is responsible for delivering turrets for one of the vehicle
models produced by FNSS-Turkey, has experienced difficulties in meeting the
production schedule and, as a result, has paid FNSS-Turkey for a number of
vehicles that are parked and awaiting delivery of turrets. The Turkish
government has refused to continue this practice, and has agreed to a revised
delivery schedule along with corresponding pricing adjustments, which management
believes will not have a material impact on royalty and dividend receipts.
FNSS-Turkey is required by its agreement with SSM to achieve a significant
level of export sales by 2000 to meet the 'offset' requirements of the contract
or pay a penalty of 9% of the unpaid offset obligations to SSM. Such payment
could be as high as $32.0 million if no additional offset sales are completed. A
potential award which would approximately halve the remaining liability is being
pursued, but is unlikely to be realized, if at all, earlier than 1999 due to the
current economic turmoil in Asia. There can be no assurance that FNSS-Turkey
will be able to complete this potential sale or fulfill its offset obligations.
Management believes that the time frame for meeting the offset deadline may be
extended to some extent to accommodate changes in the production schedule.
FMC-ARABIA
FMC-Arabia has two major FMS contracts through the DoD to provide services
to the Royal Saudi Land Forces Infantry Corps, one for Contractor Logistical
Support ("CLS") and the other for M113 modernization. Because of overall
budgeting constraints affecting the Saudi Arabian government, the funding for
both the M113 and CLS programs has been substantially reduced, with the result
that FMC-Arabia is expected to operate both programs at only a nominal level for
the remainder of 1998. The Company is continuing to work with the Saudi Arabian
government in an effort to arrange increased and more stable funding for the
programs, but there can be no assurance as to when or whether such funding will
be provided.
FMC-Arabia is treated as a partnership for United States tax purposes. UDLP
is the beneficiary of a "tax holiday," granted by the Kingdom of Saudi Arabia,
with respect to its proportionate share of FMC-Arabia's income and loss. The
"tax holiday" granted by the Kingdom of Saudi Arabia expires in April 1999, and
the Company is attempting to extend the tax holiday beyond April 1999. Due to
the uncertainty of extending the tax holiday, UDLP may incur taxes on its
proportionate share of FMC-Arabia's income at the Saudi Arabian statutory tax
rate of up to 45% beginning in April 1999, although the Company should be
eligible for a foreign tax credit with respect to such taxes.
ENVIRONMENTAL MATTERS
The Company's operations are subject to Environmental Laws. The Company
spends certain amounts annually to maintain compliance with Environmental Laws
and to remediate contamination, as required by certain Environmental Laws.
Operating and maintenance costs associated with environmental compliance and
prevention of contamination at the Company's facilities are a normal, recurring
part of operations, are not significant relative to total operating costs or
cash flows, and are generally allowable as contract costs under the Company's
contracts with the U.S. government ("Allowable Costs"). Such costs have not been
material in the past and, based on information presently available to the
Company and on Environmental Laws and U.S. government policies relating to
Allowable Costs in effect at this time (all of which are subject to change), are
not expected to have a material adverse effect on the Company's financial
condition, results of operations or debt service capability.
As with compliance costs, a significant portion of the Company's
expenditures for remediation at its facilities consists of Allowable Costs.
Management believes that it has sufficient reserves to cover remediation costs
that are not allowable costs under its U.S. government contracts ("Non-Allowable
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<PAGE>
Costs") and does not expect that such costs will materially adversely affect the
Company's financial condition or debt service capability.
Based on historical experience, the Company expects that a significant
percentage of the total remediation and compliance costs associated with its
facilities will continue to be Allowable Costs. In addition, pursuant to the
terms of the Acquisition Agreement, the Sellers are required to reimburse the
Company for 75% of certain remediation costs relating to operations prior to the
Closing Date, that are Non-Allowable Costs. There can be no assurance, however,
that the Sellers will reimburse the Company promptly or at all for future
compliance and remediation costs or that the U.S. government will allow as
Allowable Costs in the Company's contracts all or a significant portion of such
future environmental costs. The Company's financial condition, results of
operations and debt service capability could be materially and adversely
impacted where the Company does not receive full and prompt reimbursements from
the Sellers under the Acquisition Agreement, or contract costs in respect of
environmental matters are not allowed by the U.S. government as expected. For
additional information regarding environmental matters, see
"Business--Environmental Matters."
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BUSINESS
OVERVIEW
The Company is a leading supplier of tracked, armored combat vehicles and
weapons delivery systems to the U.S. Department of Defense and a number of
allied military forces worldwide. The Company's products include critical
elements of the U.S. military's tactical force structure. The Bradley Fighting
Vehicle, recognized as one of the best-performing weapons systems in U.S.
history, is the only domestically produced vehicle able to fulfill the dual role
of troop transport and armored fighting vehicle. The Company has maintained its
prime contractor position on the Bradley program since production began in 1981,
and has added a number of technology-based upgrades and derivative vehicles that
continue to extend the program's life-cycle. Building on over twenty years of
experience on the M109 self-propelled howitzer and upgrades, the Company is also
the prime contractor for the development of the Crusader Field Artillery System.
The U.S. Army has identified the Crusader as its planned multi-billion dollar
next-generation field artillery system and the largest U.S. military vehicle
development program of this decade. For the twelve months ended September 30,
1997, the Company had pro forma revenues of approximately $1.2 billion, pro
forma operating income of $53.2 million and a pro forma net loss of $7.0
million. With respect to the net loss and operating income, purchase accounting
for the transaction is not yet complete and these amounts are subject to
adjustment upon completion of that process. See "Unaudited Pro Forma Financial
Data." For the same twelve month period, the Company had pro forma EBITDA (as
defined) of $127.1 million.
The Company enjoys strong, long-standing customer relationships as a result
of its advanced design, engineering and manufacturing capabilities, competitive
cost structure, diversified product portfolio, demonstrated upgrade
capabilities, and reputation for program quality and service. Management
believes that these characteristics provide a key competitive advantage in
obtaining upgrade production contracts and in pursuing other domestic and
international business opportunities with new and existing customers. In
addition to the Bradley Fighting Vehicle and the M109 howitzer, the Company
serves as the prime contractor for a number of mission critical military
programs, several of which have spanned decades. The Company has been the prime
contractor for several of these programs, including the M113 armored personnel
carrier since 1960, the M88 tank recovery vehicle since 1960, and the U.S.
Navy's Mk45 naval gun system since 1968. The Company is currently performing
under more than 30 active contracts with original funded values in excess of $25
million each. The Company had a firm funded backlog of more than $1.6 billion as
of November 30, 1997, a substantial majority of which is derived from
sole-source, prime contracts.
Management believes that the emphasis of the U.S. Department of Defense on
enhancing military preparedness within a declining procurement budget
environment has resulted and will continue to result in increased emphasis on
upgrading and extending the life of existing equipment and systems, including
those currently supplied by the Company. Management believes this trend favors
large, established contractors such as the Company that are qualified to perform
sole-source contracts for product design, development, manufacture, field
service and support and subsequent upgrades.
BUSINESS STRENGTHS
The Company attributes its performance to several factors, including the
following:
COMPREHENSIVE CAPABILITIES IN ARMORED COMBAT VEHICLES. For more than half a
century, the Company has remained at the forefront in the design, development
and upgrade of medium/light tracked, armored combat vehicles, beginning with the
primary amphibious vehicle used in World War II, followed in 1960 by the M113,
the main troop transport vehicle used by the U.S. and other militaries with over
80,000 vehicles delivered worldwide. In 1981, the Company began initial
production as the sole-source, prime contractor for the Bradley Fighting
Vehicle. Management believes that these and other successes resulted from the
Company's proven, comprehensive design and engineering experience in simulation,
systems integration, armor, mobility and survivability, its demonstrated ability
to infuse "information dominance technologies" into combat systems for enhanced
information gathering, analysis and application in the battlefield
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environment, its demonstrated manufacturing and upgrade capability, and its
reputation for service in the field.
ABILITY TO LEVERAGE SYSTEMS INTEGRATION EXPERTISE INTO LONG-TERM
PROGRAMS. The Company's experience and technological expertise afford it a
continued position as team leader and prime systems integrator for the programs
in which it participates, and positions the Company for the development and
integration of other complex, critical weapons systems. For example, management
believes the Company's position as the systems integrator on the Crusader played
a significant role in the Company's recent success in being named gun weapons
systems integrator for the Naval Surface Fire Support program, with
responsibility for the development and integration of a new naval gun system.
Management also believes that these capabilities create advantages in marketing
to international customers seeking products compatible with systems used by the
U.S. military.
LARGE, INSTALLED BASE OFFERS SIGNIFICANT LIFE-CYCLE OPPORTUNITIES. The U.S.
military is under budgetary constraints that provide incentives to upgrade and
overhaul existing systems and vehicles to maximize system life. The Company's
resident knowledge of its extensive domestic and international installed base of
vehicles affords significant opportunities, through modernization upgrades,
derivative vehicles that expand program capabilities, and logistical support
services and spares, to effectively extend product life for many years after
development. For example, the Bradley Fighting Vehicle has undergone three
generations of upgrades and has fostered a number of derivatives, and the
Company has upgraded its M109 howitzers to the A6 Paladin configuration and its
M88 recovery vehicles to the Hercules configuration. Management believes these
upgrades and derivatives, which generally comprise a majority of the Company's
funded backlog (including substantially all of the backlog of the Ground Systems
Division and the Palladin Production Division, See "--Backlog"), are more
predictable sources of revenue and cash flow than new products.
STRONG INTERNATIONAL PRESENCE AND GROWTH POTENTIAL. In contrast to the
declining U.S. procurement budget, military budgets of certain foreign
governments have expanded due to general economic growth or regional
geo-political pressures. Management believes the Company's proven design,
development, engineering and manufacturing capabilities for the U.S. military
have been the foundation for its International Division and export business. For
example, management believes the domestic M113 program and prior co-production
programs for Armored Infantry Fighting Vehicles in Europe were the basis for the
award of contracts for similar vehicles to the Company's Turkish joint venture.
Management also believes that the Company's existing product breadth and
established manufacturing platforms provide it with certain cost advantages over
smaller foreign competitors when pursuing typical lower volume foreign
contracts.
INNOVATIVE PUBLIC/PRIVATE TEAMING RELATIONSHIPS. The Company has
established relationships with key constituencies, including the U.S. Army, U.S.
Navy and the Office of the Secretary of Defense, and is one of the leaders in
working with the U.S. Department of Defense to rationalize the U.S. defense
industrial base. The Company operates a significant portion of the recently
privatized Louisville Naval Ordnance Station, and is partnering with the
Letterkenny Army Depot to upgrade the M109 howitzer to the A6 Paladin
configuration. The Company also has partnering arrangements with another U.S.
government depot to upgrade the M113, the M88 and breaching vehicles. The
Company believes these arrangements demonstrate the success that can be achieved
through public/private partnerships.
STRONG MANAGEMENT TEAM AND EXPERIENCED INVESTOR. The Company has a highly
experienced and committed management team that has successfully adapted the
Company's cost structures and manufacturing operations to the declining U.S.
Department of Defense procurement budget and the significant transformation to a
lower volume, higher technology manufacturing capability. Senior management has
an average of more than 19 years with the Company and substantially all of the
senior management team was directly involved with the initial formation and
integration of UDLP in January 1994. Management will be given the opportunity to
participate in the Company's potential success through an equity-based incentive
program and direct investment. In addition, the management of the
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Company is complemented by the support of The Carlyle Group, an active investor
in the defense and aerospace industries.
BUSINESS STRATEGY
Management intends to enhance its leading market position through the
successful execution of the following objectives:
CONTINUING TO PROVIDE PRODUCTS AND SERVICES ACROSS PROGRAM LIFE-CYCLES. The
Company intends to continue to leverage its extensive range of products and
services across entire program life-cycles through new technology developments,
follow-on products, derivative vehicles, upgrades, logistics support and
training. For example, the Company was recently awarded a Low Rate Initial
Production contract for the third generation of upgrades to the Bradley Fighting
Vehicle, the Bradley A3 configuration which will incorporate a new core
electronic architecture, including, among others, combat identification systems,
situational awareness and battlefield digitization. In addition, the Company
plans to continue building on the successful Bradley Fighting Vehicle program by
further expanding its family of vehicles to include new armored vehicles, such
as a maintenance vehicle, a treatment and transport vehicle, an engineering
squad vehicle and a battle command vehicle.
CAPITALIZING ON THE CRUSADER OPPORTUNITY. The Crusader program represents
an important opportunity with the potential to become one of the U.S. Army's
largest procurement programs over the next decade. The Company plans to devote
all necessary resources to establish the Crusader's capabilities and develop
successful prototypes in the Demonstration and Validation phase and to win, if
awarded, the Engineering and Manufacturing Development and Low Rate Initial
Production contracts. The Company's objective is to fully demonstrate the
Company's engineering and cost-effective production qualifications so that the
Company will be the sole-source, prime contractor for the Crusader if necessary
funding is appropriated and the U.S. Army proceeds to Full Rate Production. For
a discussion of the Crusader Program, see "--Armament Systems Division."
PURSUING KEY INTERNATIONAL OPPORTUNITIES. The Company plans to capitalize
on its established program base and expertise, and on its extensive
international joint venture and co-production experience, in order to expand
export sales and establish new joint ventures and co-production programs.
Management believes this strategy will require minimal additional capital, and
has the potential to diversify the Company's business base and enhance overall
margins.
PARTICIPATING IN THE PUBLIC/PRIVATE DEFENSE INDUSTRIAL BASE
CONSOLIDATION. The Company intends to continue working closely with its U.S.
government customers to rationalize the public/private defense industrial base.
Potential opportunities include further privatizations such as the outsourcing
of logistics and training support and additional depot partnering relationships
with the U.S. Department of Defense.
MODERNIZING THE U.S. ARMY NATIONAL GUARD. A large portion of the U.S.
Army's tracked, armored combat vehicle fleet is in the National Guard. The
modernization of equipment and systems used by the National Guard generally lags
behind that of the active armed services. The Company is pursuing a directed
procurement program to assist the National Guard in obtaining funding for
upgrades of its Bradley Fighting Vehicles, M113 family of vehicles and M9
Armored Combat Earthmovers.
IDENTIFYING STRATEGIC ACQUISITION OPPORTUNITIES. Management expects that
the continuing consolidation in the U.S. defense industry will result in
strategic opportunities for the Company. The Company intends to be proactive in
this environment and, on an opportunistic basis, pursue acquisitions both
domestically and abroad that management believes will complement its key
business strengths or further expand its capabilities.
The Company is a Delaware corporation and UDLP is a Delaware limited
partnership. The principal address of each is 1525 Wilson Boulevard, Suite 700,
Arlington, Virginia 22209-2411 and the telephone number of each is (703)
312-6100.
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PRODUCTS AND SYSTEMS
The Company has five principal divisions, which are currently organized into
three major business areas: Armored Combat Vehicles, Armament Systems and
International. The table below summarizes the Company's principal products and
systems. A "sole-source" contractor is the sole provider of specified products
and systems to the customer, whether manufactured by the Company or integrated
from other sources. A "prime contractor" has a direct contract with the
customer, rather than another contractor.
<TABLE>
<CAPTION>
SCOPE
------------------------------
SOLE- PRIME
SOURCE CONTRACTOR DESCRIPTION
------ --------------- ---------
<S> <C> <C> <C> <C>
ARMORED COMBAT VEHICLES:
GROUND SYSTEMS
- Bradley Fighting Vehicle # # -
- BFV derivatives # # -
- M109 Self-Propelled Howitzers -
#
- M992 Field Artillery # # -
Ammunition Supply Vehicle
- M88 Recovery Vehicles # # -
- M113 Armored Personnel Carrier -
#
- M9 Armored Combat Earthmover # # -
- Linear Obstacle Breacher* # # -
- M8 Armored Gun System -
#
- LVTP7 Amphibious Assault -
Vehicle #
- Composite Armored Vehicle* -
#
PALADIN PRODUCTION
- M109 A6 Paladin Howitzer # # -
STEEL PRODUCTS
- M113 Vehicle Upgrades -
#
- Vehicle Components -
#
ARMAMENT SYSTEMS:
- Crusader* # # -
- Mk45 Naval Gun System # # -
- Mk41 Vertical Launching System # -
- Vertical Gun for Advanced -
Ships*
- Concentric Canister Launcher* -
- Cocoon Launcher* -
- Advanced Gun Technologies* -
INTERNATIONAL:
- FMC-Arabia Joint Venture # # -
- FNSS-Turkey Joint Venture # # -
- Co-Production Programs -
* INDICATES NEW PRODUCTS AND SYSTEMS CURRENTLY BEING DEVELOPED BY THE COMPANY.
<CAPTION>
<S> <C>
ARMORED C
GROUND
- Tracked, armored vehicle with 25mm cannon, TOW missiles,
stabilized turret and troop transport capabilities; current
development focus is on the A3 upgrade program
- Includes the Multiple Launch Rocket System carrier, Fire
Support Vehicle, Command and Control Vehicle, Stinger
Fighting Vehicle and others
- Highly mobile field artillery system capable of delivering a
rapid and high volume of firepower
- Provides transport of ammunition, supplies and personnel to
the battlefield in support of the M109
- Provides recovery of impaired tanks through its towing,
lifting and pulling capabilities
- Troop transport vehicle; recent activity limited to upgrades
by the Steel Products Division and export sales
- Fully-tracked, 18-ton, aluminum armored vehicles for use on
the battlefield to bulldoze, rough grade, excavate, haul and
scrape
- The Grizzly is designed to clear mines and other complex
obstacles
- Lightweight, highly maneuverable armored gun systems,
capable of high speeds and can be air dropped from a C130
aircraft
- Landing vehicle tracked personnel amphibious assault vehicle
- Fully operational, advanced technology demonstration vehicle
PALADIN
- Remanufacture and upgrade M109 with new turret and armament
system
STEEL P
- Vehicle conversion, upgrade and manufacturing
- Largest U.S. producer of cast and forged track shoes for
armored combat vehicles and components for suspension
systems
ARMAMENT
- Development of an integrated and fully-automated two-vehicle
rapid deployment system consisting of a 155mm,
self-propelled howitzer and an armored resupply vehicle
- Production, overhaul and support of the 5-inch (127mm),
54-caliber, fully-automated naval gun
- Mechanical components for naval missile launcher deploying
anti-air Standard, Tomahawk, anti-submarine and ship
self-defense Sea Sparrow missiles; produced in conjunction
with Lockheed Martin
- Next generation naval gun system consisting of an automated
magazine containing two 155mm barrels and an extensive
quantity of projectiles, and capable of shooting long ranges
at high rates of fire
- Missile launching system with integral gas management system
design and ship-fit flexibility
- Launcher designed to provide above-deck ship self-defense
missile capabilities
- Electromagnetic and electrothermal chemical technologies for
guns
INTERNATI
- 51% beneficial interest in venture that provides logistics
support and training to the Royal Saudi Land Forces, and has
been contracted to upgrade and modernize Saudi Arabia's
fleet of M113s
- 51% interest in venture that produces and sells armored
combat vehicles to the Turkish army under license from the
Company
- Co-production programs including the M113, MLRS carrier,
LVTP7 and contractor logistic support in Japan, Korea and
Pakistan under license from the Company
* INDICAT
</TABLE>
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The revenues generated by each of the Company's principal products and
systems in each of the past three years are set forth below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
($ IN MILLIONS)
ARMORED COMBAT VEHICLES:
GROUND SYSTEMS:
Bradley Fighting Vehicle and Derivatives..................................... $ 329.4 $ 270.8 $ 308.1
M88 Armored Recovery Vehicle................................................. 42.1 4.3 75.5
M109 Self-Propelled Howitzer................................................. 198.3 105.2 40.1
M9 Armored Combat Earthmover................................................. 23.4 87.2 37.1
M113 Armored Personnel Carrier............................................... 30.8 22.0 9.8
Other........................................................................ 146.6 97.2 85.3
--------- --------- ---------
770.6 586.7 555.9
PALADIN PRODUCTS............................................................... 4.7 57.7 102.1
STEEL PRODUCTS................................................................. 75.2 58.4 62.4
ARMAMENT SYSTEMS:
Crusader..................................................................... 17.7 101.9 137.2
Mk41 Vertical Launching System............................................... 49.5 23.4 46.4
Mk45 Naval Gun System........................................................ 78.8 59.7 32.0
Overhaul, Repair, Maintenance and Other...................................... 77.9 66.5 102.0
--------- --------- ---------
223.9 251.5 317.6
INTERNATIONAL.................................................................... 49.3 49.3 42.0
Intercompany Eliminations........................................................ (47.4) (36.0) (50.7)
--------- --------- ---------
TOTAL REVENUE.................................................................... $ 1,076.3 $ 967.6 $ 1,029.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
ARMORED COMBAT VEHICLES. The Ground Systems Division ("GSD") is a leading
prime contractor of land-based military systems for the U.S. government and
serves certain foreign military customers. GSD's capabilities include systems
integration expertise, advanced engineering and technology development
capabilities and flexible manufacturing and systems-conversion capacity for
medium/light and certain heavy tracked combat vehicles. The Company also offers
a full range of logistics support and training capabilities for vehicles it
produces. The Company believes that its broad product line, its ability to
service a vehicle throughout its life and its established prime contractor
status provide a foundation for sustained, long-term programs.
TRACKED COMBAT VEHICLES ("TCV"). TCVs are highly mobile vehicles that can
cross natural and man-made obstacles and urban terrain in all weather
conditions, while under fire from enemy combat forces. The U.S. Army and Marines
use tracked combat vehicles for four basic missions: (i) close combat, where the
combination of tanks, scout vehicles, fighting vehicles, armored personnel
carriers and command and control vehicles provide the capability to present an
integrated and flexible combat front to face enemy forces at close range; (ii)
fire support, by providing lethal indirect firepower through self-propelled
armament and multiple launch rocket systems; (iii) combat support, including the
provision of operational assistance, such as crossing barriers, clearing or
laying obstacles and recovering disabled systems; and (iv) amphibious assaults,
in which amphibious assault vehicles are able to initiate attack from the sea
and continue the attack on land.
TCVs are classified into two weight classes: medium/light and heavy. The
Company produces and services vehicles primarily in the medium/light class.
Medium/light vehicles weigh less than 40 tons and normally are fabricated from
aluminum. The medium/light class of vehicles made its first appearance
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during World War II, with an amphibious assault vehicle produced by the Company.
Since then, this vehicle class has expanded to include fighting vehicles,
self-propelled artillery and specialty vehicles.
THE BRADLEY FIGHTING VEHICLE ("BFV"). The Company has been the sole-source,
prime contractor of the BFV to the U.S. Army since its initial production in
1981. Management believes that the Company's resident knowledge of the BFV,
gained through years of experience in developing and manufacturing the vehicle,
gives it a significant competitive advantage in pursuing upgrade opportunities
for the BFV, developing derivatives and leveraging international sales
opportunities. The latest fielded version, the BFV A2, is a tracked armored
vehicle with a 25mm cannon, TOW missiles and a stabilized turret, and is the
only domestically produced vehicle able to fulfill the dual role of troop
transport and armored fighting vehicle. Weighing 35 tons, the BFV is outfitted
with armor and day/night sights, and can transport up to nine people safely
across rough terrain. The vehicle's combination of lethality, survivability and
tactical and strategic mobility has established it as a critical component of
the U.S. government's full-spectrum warfare strategy. A total of 6,742 BFVs have
been built, of which 400 were for the Saudi Arabian Army.
The BFV's mobility and fire power, as well its combination of both defensive
and offensive capabilities, were most recently demonstrated in Operation Desert
Storm ("ODS"). As a result of the live-combat experiences of ODS, the Company
has developed an upgrade kit, named the BFV A2 ODS. This kit features eye-safe
laser range finders, restowage, missile counter-measures and the addition of
mounting provisions for the Battlefield Combat Identification System, a
capability designed to electronically identify whether targets are friend or
foe, thus reducing the risk of friendly fire casualties. Since 1995, the
Company's BFV-related revenues have been derived primarily from such upgrades
and sales of the derivative products and support services described below.
The BFV A3, currently under development, incorporates all of the
improvements made to the BFV A2 ODS, as well as providing enhancements to
situation awareness capability, lethality, survivability and sustainability. The
U.S. Army is currently upgrading a portion of its fleet of BFVs to the A2 ODS
configuration, and has announced plans to further upgrade a portion of its fleet
to the BFV A3 configuration. The LRIP contract for the BFV A3 was signed in July
1997, with deliveries scheduled from late 1998 through 1999.
BFV DERIVATIVES AND SUPPORT. The BFV has served as a platform for a number
of derivative vehicles developed by the Company. One such derivative, the
Multiple Launch Rocket System ("MLRS") carrier, was developed to provide a
carrier for a long-range rocket artillery system and is outfitted with rockets,
a launcher and fire control system developed and produced by Lockheed Martin
Vought Systems. The Company was awarded a contract to initiate an MLRS
remanufacture program, with the first delivery completed in August 1997. Another
derivative, the Fire Support Vehicle, supports armor and mechanized forces by
pinpointing enemy targets using laser technology, which allows more accurate and
timely calls for fire from the artillery. The Company is building the Fire
Support Vehicle under an EMD contract awarded in 1995 and recently received an
LRIP contract for 22 additional vehicles. The Command and Control Vehicle
("C2V") is a self-contained vehicle that keeps pace with armored maneuver forces
while providing the crew with a protected environment. The Company was awarded
an LRIP contract for 5 C2Vs in 1996 with customer options for 41 systems to be
delivered between 1998 and 2001. The Stinger Fighting Vehicle integrates the BFV
with Stinger missiles and adds improvements to turret fire control, target
acquisition subsystems and survivability. The Company is under an LRIP contract
for delivery of 85 such vehicles through 1998. Several other BFV derivatives are
in the early stages of development. In addition, the Company plans to build on
the successful BFV program by expanding the BFV family of vehicles in the future
to include new armored vehicles such as a maintenance vehicle, a treatment and
transport vehicle, an engineering squad vehicle and a battle command vehicle.
In addition to the development and manufacture of BFV derivatives, the
Company provides BFV upgrade kits and field services. Kits allow for the upgrade
of BFVs to incorporate advancements in technology such as the ODS enhancements
discussed above. The Company also deploys experts to provide on-site training
and advice to customers, complete maintenance and repairs, and assess the
necessity of
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replacement parts. GSD is also under contract with the U.S. Army's Simulation,
Training and Instrumentation Command for the development and demonstration of a
prototype multi-purpose simulator/trainer for the BFV family of vehicles.
M109 SELF-PROPELLED HOWITZER ("M109"). The M109 has been the most
widely-used field artillery vehicle for the U.S. military and certain foreign
governments since it was first produced by the Company in 1974. The M109 is
widely recognized for its ability to deliver rapid and high volume artillery
support and maximize survivability through mobility. The latest generation of
the M109, the M109A6 Paladin (described below), is the most advanced M109
upgrade fielded today. The Company also designs and produces unique
configurations of the M109 for, and offers M109 servicing and training to,
various foreign governments including Austria, Egypt, Greece, Korea and Taiwan,
with a number of funded contracts in place.
M992 FIELD ARTILLERY AMMUNITION SUPPLY VEHICLE ("FAASV"). The single
mission of the FAASV, the battlefield partner of the M109, is to safely
transport ammunition, supplies and personnel to howitzer artillery vehicles on
the battlefield during both firing and non-firing conditions. By utilizing
synchronized and semi-automated resupply strategies and mechanisms to carry the
M109 ammunition, the FAASV enables the howitzer to remain in the field longer
and thereby increase its lethality. The FAASV accommodates all standard 155mm
rounds and its heavily armored chassis provides ballistic protection to its
munition supply crew. The Company is currently operating under a full rate
production ("FRP") contract for 96 vehicles scheduled to be delivered in 1998
and 1999.
M88 ARMORED RECOVERY VEHICLE ("M88"). The M88 currently has an installed
base of more than 3,240 vehicles, including more than 70 M88A2 ("Hercules")
models, throughout the world. The M88 performs towing, lifting and pulling tasks
in the recovery of impaired tanks or in basic tank maintenance. With the
deployment at the beginning of this decade of the heavier M1 tanks by the U.S.
Army, in 1991 the Company began the development effort for the Hercules upgrade.
The Hercules is the only recovery vehicle worldwide that can safely recover
70-ton tanks (for example, the M1A1/A2), and has established itself as a
critical element in the upkeep of a modern tank force. The U.S. Army has been
awarding annual contracts for M88 upgrades over the past several years, and in
June 1997, the U.S. Army awarded the Company a contract to upgrade 24 of its
M88s to the Hercules configuration.
M113 ARMORED PERSONNEL CARRIER ("M113"). The M113 has been the main troop
transport vehicle used by the U.S. military and allied governments throughout
the world, with more than 80,000 units delivered since initial production in
1960. The Company has produced various M113 models in cooperation with U.S.
allies, including production of various configurations of the Armored Infantry
Fighting Vehicle, historically produced in Europe and currently by FNSS-Turkey.
The U.S. Army, which received its last delivery of new M113s from the Company in
1992, continues to upgrade its M113s to the latest A3 configuration. The
installed base of M113s includes a number of derivative vehicles worldwide, and
the Company is currently engaged in M113 upgrade programs in several countries
around the world. This upgrade work currently occurs in the Company's Steel
Products Division (described below), and continues to be a significant source of
current and potential future revenues for the Company because of the large
number of M113s currently in existence. Management expects the U.S. Army to
modernize a portion of its M113 fleet to the A3 configuration over the next
several years, and believes the National Guard may also implement an M113
modernization program.
M9 ARMORED COMBAT EARTHMOVER ("M9 ACE"). The M9 ACE is an 18-ton,
fully-tracked, aluminum armored vehicle, used on the battlefield to bulldoze,
rough grade, excavate, haul and scrape. With a crew of one, the multi-purpose M9
ACE can attain road speeds of up to 35 miles per hour, and unlike a standard
bulldozer, requires no transport vehicle. The M9 ACE can serve as the prime
mover of vehicles weighing up to 39,000 pounds and can clear debris left in the
wake of battles or civil disasters. The Company recently entered into an FRP
contract for 51 vehicles, to be delivered through 1999, with a customer option
for 51 additional vehicles.
LINEAR OBSTACLE BREACHER ("GRIZZLY"). First delivered in 1995, the Grizzly
is a 70-ton vehicle designed to clear mines and other obstacles. Mounted on a
modified M1 chassis, the Grizzly features a mine-clearing blade
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outfitted with complex software that provides automatic depth control. It is
also equipped with a power-driven arm for digging, grappling and lifting, as
well as external cameras for vision and remote operation, with full electronic
integration. Management believes that Grizzly will be a critical component of
modern battle strategy because of the prevalent use of complex obstacles such as
land mines and other low-cost defense mechanisms by hostile nations. The Company
recently completed its $70.0 million DemVal phase for the U.S. government, and
was awarded the $129.0 million EMD phase through 2001.
OTHER GSD PROGRAMS. The M8 Armored Gun System ("AGS") is a highly
maneuverable, 25-ton light tank capable of being air dropped from a C130
aircraft. The AGS is outfitted with an automatically loaded, lightweight 105mm
cannon that fires all NATO standard and enhanced ammunition at the rate of 12
rounds per minute. Due to cuts in defense funding, the U.S. government has
canceled its AGS program; however, the Company is pursuing opportunities for
sale of the AGS internationally. The LVTP7 Amphibious Assault Vehicle ("LVTP7")
has been the U.S. Marine Corps' amphibious assault vehicle for over two decades
with more than 1,500 vehicles delivered. The Company is currently producing 57
kits for delivery to Samsung Aerospace for final assembly in Korea. The Company
believes that there may also be future upgrade opportunities for the United
States Marine Corps' fleet of LVTP7s.
PALADIN PRODUCTION DIVISION ("PPD"). PPD manufactures the M109A6 Paladin
vehicle in partnership with the Letterkenny Army Depot, where it has located its
production facility. The A6 Paladin is the latest and most advanced howitzer in
the U.S. Army inventory and is steadily replacing prior generations of M109s.
With its increased firepower and use of computerized navigation and gun
positioning, the A6 Paladin upgrade provides a comprehensive and integrated
package with modern battlefield capabilities.
In addition to a multi-year contract for 713 upgrades (448 of which have
been completed through August 1997), PPD has recently negotiated a contract with
the U.S. Army for the upgrade of another 37 vehicles through May 1999 bringing
the total up to 750, and the U.S. Army has exercised an option for 72 additional
vehicles which will extend the delivery period to May 2000. Management also
believes that the Company has opportunities for international Paladin sales.
PPD conducts the Paladin program through an innovative partnership with the
U.S. Army Depot at Letterkenny, Pennsylvania. The Company's facility provides
component parts for U.S. Army depot work, integrates sub-systems and components,
including new GSD-fabricated turrets, and provides systems technical support for
the U.S. Army artillery crews.
The Company's experience in the manufacture of M109s gives the Company the
background necessary to pursue opportunities in the upgrade of M109s to the A6
configuration, the manufacture of follow-on and upgrade kits, and the provision
of spare parts and training. The Company is now pursuing a Fleet Management
initiative, which is an integrated program providing engineering support, spare
parts supply, inventory management and distribution and training and field
maintenance support for the U.S. Army's fleet of M109 vehicles.
STEEL PRODUCTS DIVISION ("SPD"). SPD's primary businesses are the
production of track and suspension components for armored vehicles, and
performing major upgrades of M113 armored vehicles for the U.S. Army. SPD is the
largest producer of track and suspension components in the U.S., and has been
designated by the U.S. Army as the design agent for nearly all track in the U.S.
inventory. Approximately one third of SPD's track products are sold to
international customers.
The M113 upgrade business involves the upgrade of existing M113 vehicles
into the A3 configuration, and involves a variety of manufacturing and
engineering operations. The Company entered into a partnering arrangement in
1997 with the Anniston Army Depot, which will perform any necessary upgrades of
the M113 awarded by the U.S. Army and the National Guard, as described above.
SPD's conversion technology, including a complete technical data and tooling
package, can also be applied to M113 fleets elsewhere in the world.
ARMAMENT SYSTEMS DIVISION ("ASD"). ASD provides integrated weapon delivery
system products and services to the armed forces of the United States and
military customers worldwide. The division provides armament design,
development, production, and support as well as advanced technology research and
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development. Specifically, ASD designs, develops and manufactures advanced guns
and missile-launching systems for the U.S. Navy, and is the prime contractor and
systems integrator in the development of the U.S. Army's next generation
self-propelled howitzer, the Crusader. Additionally, ASD provides complete
overhaul, repair and maintenance of naval ordnance.
CRUSADER. The Crusader is an integrated and automated two-vehicle system
consisting of a 155-mm, self-propelled howitzer and a resupply vehicle. The
Company is the sole-source, prime contractor and systems integrator responsible
for the design and development of the Crusader, including delivery of two
prototype systems, under a $1.1 billion DemVal contract, which is presently
scheduled to be completed in 2001. The Company expects to become the
sole-source, prime contractor for the $1.0 billion EMD phase presently scheduled
to begin in 2000. The Company would then seek to become the sole-source prime
contractor for the $1.3 billion LRIP phase presently scheduled to begin in 2004.
Management believes the expertise acquired through the DemVal and EMD phases
would give the Company a significant advantage in securing a contract for the
LRIP and ultimately the FRP phase if necessary funding is appropriated and the
U.S. Army continues to proceed with the Crusader.
The Crusader is designed to achieve the U.S. Army's stated objectives for
the next-generation howitzer. These specifications include: (i) increased
mobility; (ii) increased lethality; (iii) improved survivability; and (iv)
better sustainability. The Crusader is being designed to be the first howitzer
capable of keeping pace with the maneuver strike force, including M1 tanks and
BFVs. The Crusader is also being designed to provide substantially greater
responsiveness and high rates of fire through long-range and accurate firings
enabled by the vehicle's advanced autoloading technology and actively-cooled
cannon, thereby giving it a multiple round simultaneous impact capability. This
firing capability is being designed to allow commanders to extend and dominate
the battle space and set a higher tempo for land operations. The Crusader is
being designed to enhance survivability and allow the vehicle to be run by a
three person crew compared to the four person crew required for the M109. The
Crusader is being developed with an embedded digitized command, control,
communications and intelligence for enhanced situational awareness, and for new
capabilities for battlefield movement and resupply.
As prime contractor, it is the Company's role to integrate all Crusader
modules, manage the entire program and develop key components, including the
advanced gun system. Gun system and autoloader technologies have historically
been a core capability of ASD, developed through its long history with Naval gun
systems.
NAVAL SYSTEMS. The U.S. Navy is implementing a variety of programs to
increase its ability to support land forces, with pronounced changes expected to
occur in the surface fleet. The U.S. Navy plans for additional missile launcher
firepower in its surface combatant ship building program for the 21st century
("SC 21"). The identity of contractors and scope of terms for any production of
launchers for the SC 21 program have not been determined, although significant
competition will exist for any SC 21 contract. In addition, the U.S. Navy plans
to bolster surface land attack capability with modifications to existing ships.
The U.S. Navy's focus on land attack warfare is spurring the development of new
and modified weapon systems, including (i) a modified naval gun system, the Mk45
Mod4; (ii) a new 155mm gun system; (iii) integrating land attack missiles into
VLS, requiring new cannisters and missile integration; and (iv) new or modified
launching systems. The Company expects that the design, engineering and
production of these systems will be the primary focus of naval ordnance
manufacturers for the foreseeable future.
MK45 NAVAL GUN SYSTEM ("MK45"). The Mk45 is the U.S. Navy's sole 5-inch gun
system, with more than 150 systems installed. The U.S. Navy installs one 5-inch
gun for every Arleigh Burke DDG 51 ("DDG 51") class destroyer built. The U.S.
Navy has indicated that, over the next five years, it expects to require
approximately 15 new Mk45s to be installed on newly constructed DDG 51
destroyers. The U.S. Navy recently awarded the Company a sole-source, prime
development contract to upgrade Mk45 guns from Mod2 to Mod4 configuration, which
extends the Mk45's range and improves surface fire support capability.
Furthermore, the U.S. government recommends that foreign allied navies have
compatible armaments, and has recently increased its support for the Company's
efforts to place Mk45s on foreign ships. Management believes the improvements
included in the Mod4 configuration will make the Mk45
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more competitive internationally. The Company is also the lead agent for the gun
weapons systems integration for the Naval Surface Fire Support program, with
responsibility for the development and integration of a new naval gun system
which includes managing the interfaces of other components with the gun weapons
system.
MK41 VERTICAL LAUNCHING SYSTEM ("VLS"). The VLS is the U.S. Navy's primary
missile launcher on surface combatants, firing the anti-air Standard Missile,
strike mission-related Tomahawk missile, anti-submarine VLASROC, and ship
self-defense Sea Sparrow missile. The VLS is manufactured under a work-split
agreement with Lockheed Martin, which is the prime contractor of the VLS
launcher. The Company is the designated mechanical subcontractor and, separately
from the work-split agreement, is the sole-source, prime provider of VLS
canisters, which hold a variety of missiles. The U.S. Navy places the VLS, like
the Mk45, on all DDG 51s, each of which contains twelve 8-cell VLS modules.
Management believes the foreign market is likely to require a significant number
of VLS systems in the future, representing a potential growth opportunity for
the Company.
OVERHAUL, REPAIR, MAINTENANCE AND OTHER. The Company, the U.S. Navy and the
local government recently privatized a significant portion of the Naval Ordnance
Station, Louisville ("United Defense Louisville"), where the Company previously
had no operations. United Defense Louisville provides service for the Mk45 and
smaller caliber gun mounts, guided missile launching systems, surface vessel
torpedo tubes, gun fire control systems, target and decoy launchers and other
U.S. Navy equipment. United Defense Louisville's operations remain primarily
keyed to the engineering, repair, upgrade, maintenance and logistic support of
U.S. Navy shipboard guns and related ordnance systems, although at a reduced
scale compared to the U.S. Navy's operation of United Defense Louisville prior
to privatization. United Defense Louisville services are supported by the
Company's broad-based naval ordnance design, production and overhaul experience.
INTERNATIONAL DIVISION. The International Division specializes in the
operation of joint ventures and management of selected co-production programs in
countries throughout the world. The International Division does not represent
all of the international export opportunities and international sales of the
Company, many of which are in other divisions; the International Division
includes only joint ventures and certain co-production programs requiring
specialized international management expertise. Current operations include joint
ventures in Turkey and Saudi Arabia, in each of which the Company owns a 51%
interest, and co-production programs in Japan, Korea and Pakistan. The
International Division also has co-production, upgrade and rebuild programs
under development for several other countries.
The Company's objective in setting up a joint venture or co-production
program is to provide the host country with an indigenous production capability
that will utilize the Company's developed programs, adapted to local
requirements. The International Division uses project financing, letters of
credit and offsets to structure programs that meet unique customer needs.
FMC-ARABIA. The joint venture was formed in 1994 to pursue defense
contracts within the Kingdom of Saudi Arabia. The Company's 51% interest in the
joint venture is a beneficial interest, but record ownership has remained with
FMC for administrative convenience. The initial contract was to provide
logistics support and training to the Royal Saudi Land Forces Infantry Corps for
BFVs previously purchased from the Company. This contract is scheduled to be
complete in the first quarter of 1998. FMC-Arabia has submitted a 3-year
contract proposal for follow-on with substantially the same scope as the
existing contract. In early 1997, FMC-Arabia was awarded a 3-year contract to
commence the modernization of 523 of Saudi Arabia's M113s (out of a fleet of
approximately 1700 vehicles) to an A3 configuration and to design and construct
a facility to perform the work. Because of overall budgeting constraints
affecting the Saudi Arabian government, the funding for both the M113 and CLS
programs has been substantially reduced, with the result that FMC-Arabia is
expected to operate both programs at only a nominal level for the remainder of
1998. The Company is continuing to work with the Saudi Arabian government in an
effort to arrange increased and more stable funding for the programs, but there
can be no assurance as to when or whether such funding will be provided. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Joint Ventures--FMC-Arabia."
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FNSS-TURKEY. The joint venture was formed in 1987 to pursue armored combat
vehicle sales to the Turkish Army. Four types of armored vehicles using a common
chassis are included in the contract: personnel carrier, fighting vehicle, tow
missile vehicle and mortar vehicle. The initial production contract began in
August 1989 and required FNSS-Turkey to deliver 1,698 vehicles, of which
approximately 1,444 have been delivered to date. At the request of the Turkish
government, the contract was modified in 1996 to extend the production and the
delivery timetable to August 1999; however, due to problems with Turkish
government furnished equipment, this completion date has been further extended.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Joint Ventures-- FNSS-Turkey."
OTHER PROGRAMS. The Company is currently involved with co-production
programs in Japan, Korea and Pakistan. Current co-production programs include
the M113, MLRS carrier, LVTP7, and contractor logistics support. Under these
arrangements, the Company provides training, technology and production kits to
these countries until a domestic production capability is established, after
which the Company continues to license its technology to the local manufacturer.
RESEARCH AND DEVELOPMENT AND ENGINEERING CAPABILITIES
The Company's ability to compete for defense contracts depends to a large
extent on the effectiveness and innovativeness of its research and development
programs. Among the DoD's procurement requirements is the research and
development of new technologies for application to new weapon systems and
upgrades.
The Company's engineering capability has been a critical component of its
success. The Company's experience in simulation, systems integration, armor,
mobility, survivability and armaments, as well as its software development,
engineering and electronics capabilities have allowed the Company to stay at the
forefront of the development, manufacture and upgrade of its products.
While most research and development is done at each of the Company's
divisions, the Company also conducts some of its more sophisticated research and
development at its Corporate Technology Center located in Santa Clara,
California. CTC, which employs 45 engineering and research professionals (many
of whom hold advanced degrees), provides state-of-the-art modeling simulation
and testing to support UDLP's design, integration and production efforts.
The Company has a number of systems in the early stages of development,
which could provide long-term potential opportunities subject to successful
development and testing, Congressional spending authorization and selection of
the Company's products over those developed by competitors. The Vertical Gun for
Advanced Ships ("VGAS") is the U.S. Navy's next-generation gun system and
includes two 155mm barrels with a large number of projectiles in an automated
magazine. The VGAS could replace or augment the Mk45 on future surface
combatants. The Concentric Canister Launcher is a candidate for the U.S. Navy's
next-generation launch system and could replace the current VLS. It has an
integral gas management system design in which each cell is an individual
launcher. The Composite Armored Vehicle integrates composite structures and
lightweight armors into a fully-operational, advanced technology demonstration
vehicle. The Company successfully completed this competitively awarded
demonstration vehicle contract in 1997. The Cocoon Launcher is an on-deck system
designed to launch the ship self-defense Evolved Sea Sparrow Missile. The
Company has also invested in, and has received development contracts for,
Electromagnetic and Electrothermal Chemical technologies related to advanced gun
technologies, electric drive technologies and various advanced survivability
technologies, including active defense.
GOVERNMENT CONTRACTS; REGULATORY MATTERS
Management expects that for the foreseeable future approximately 90% of the
Company's sales will continue to result from contracts with the U.S. government,
either directly, through prime contractors or pursuant to the U.S. government's
Foreign Military Sales program. The Company's U.S. government business is
performed under cost-plus contracts (cost-plus-fixed-fee,
cost-plus-incentive-fee, or cost-plus-award-fee) and under fixed-price contracts
(firm fixed-price, fixed-price incentive, or fixed-price-level-of-effort).
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Cost-plus-fixed-fee contracts provide for reimbursement of costs, to the
extent that such costs are allowable, and the payment of a fixed "fee", which is
essentially the profit negotiated between the contractor and the U.S.
government. Cost-plus-incentive-fee and cost-plus-award-fee contracts provide
for increases or decreases in the contract fee, within specified limits, based
upon actual results as compared to contractual targets for such factors as cost,
quality, schedule and performance. Cost-plus contracts accounted for more than
one-third of the Company's business in 1996.
Under firm fixed-price contracts, the Company agrees to perform certain work
for a fixed price and, accordingly, realizes all the benefit or detriment
resulting from decreases or increases in the costs of performing the contract.
Fixed-price incentive contracts are fixed-price contracts providing for
adjustment of profit and establishment of final contract prices by a formula
based on the relationship which final costs bear to target cost.
Fixed-price-level-of-effort contracts are generally structured with a fixed
price per labor hour subject to the customer's labor hour needs up to a contract
cap. Fixed-price contracts accounted for approximately two-thirds of the
Company's business in 1996. Almost all of the Company's fixed-price contracts in
1996 were firm fixed-price contracts.
Under U.S. government regulations, certain costs, including certain
financing costs, portions of research and development costs, lobbying expenses,
certain types of legal expenses and certain marketing expenses related to the
preparation of bids and proposals and FMS sales, are not allowable. The U.S.
government also regulates the methods under which costs are allocated to U.S.
government contracts.
U.S. government contracts are, by their terms, subject to termination by the
U.S. government either for its convenience or default by the contractor.
Cost-plus contracts provide that, upon termination, the contractor is entitled
to reimbursement of its allowable costs, and if the termination is for
convenience, a total fee proportionate to the percentage of the work completed
under the contract. Fixed-price contracts provide for payment upon termination
for items delivered to and accepted by the U.S. government, and, if the
termination is for convenience, for payment of fair compensation of work
performed plus the costs of settling and paying claims by terminated
subcontractors, other settlement expenses, and a reasonable profit on the costs
incurred. If a contract termination is for default, however, (i) the contractor
is paid an amount agreed upon for completed and partially completed products and
services accepted by the U.S. government; (ii) the U.S. government is not liable
for the contractor's costs with respect to unaccepted items, and is entitled to
repayment of advance payments and progress payments, if any, related to the
terminated portion of the contract; and (iii) the contractor may be liable for
excess costs incurred by the U.S. government in procuring undelivered items from
another source.
In addition to the right of the U.S. government to terminate, U.S.
government contracts are conditioned upon the continuing availability of
Congressional appropriations. Congress usually appropriates funds for a given
program on a September 30 fiscal year basis, even though contract performance
may take many years. Consequently, at the outset of a major program, the
contract is usually partially funded, and additional monies are normally
committed to the contract by the procuring agency only as appropriations are
made by Congress for future fiscal years.
Generally, the Company's DemVal, EMD and LRIP phase programs are performed
under cost-plus contracts, while the FRP phase is awarded on a firm fixed-price
basis.
There are two principal contracting methods used to export defense
equipment: Direct Foreign Sales and Foreign Military Sales. In a DFS, the
contractor sells directly to the foreign country and assumes all risks in the
transaction. In an FMS sale, the sale is funded for, contracted by and made to
the U.S. government which in turn sells the product to the foreign country.
Licenses are required from U.S. government agencies for DFS exports from the
U.S. of nearly all of the Company's products. Certain of the Company's products
may not be exported to certain countries.
In common with other companies which derive a substantial portion of their
sales from contracts with the U.S. government for defense-related products, the
Company is subject to business risks, including changes in governmental
appropriations, national defense policies or regulations, and availability of
funds. Any of these factors could materially adversely affect the Company's
business with the U.S. government in the future.
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<PAGE>
COMPETITION
With respect to certain products and programs, the Company competes with one
or more companies, most of which are multinational firms with substantial
resources and capital. The Company from time to time faces competition from a
number of competitors, both domestic and foreign, and in the tracked, armored
combat vehicle market, the Company encounters General Dynamics Corporation most
frequently. The Company's ability to compete for defense contracts depends to a
large extent on the effectiveness and innovativeness of its research and
development programs, its ability to offer better program performance than its
competitors at a lower cost to its government customers, and its readiness in
facilities, equipment and personnel to undertake the programs for which it
competes. In some instances, programs are sole-sourced by the U.S. government to
a single supplier, and in other cases involve a prime contractor and multiple
suppliers. In cases where the Company is the sole-source provider, there may be
other suppliers who have the capability to compete for the programs involved,
but they can only enter or reenter the market if the U.S. government should
choose to reopen the particular program to competition.
The Company's customers, particularly depots, often compete for after-market
business, such as Steel Products Division upgrade work and various overhaul and
servicing work performed by the Company.
Management believes that the Company will continue to be able to compete
successfully based upon the quality, technological advancement and cost
competitiveness of its products and services. However, all defense contractors
are competing for a limited amount of budgeted funding.
MAJOR CUSTOMERS
The Company's sales are predominantly derived from contracts with agencies
of the U.S. government. The various government customers exercise largely
independent purchasing decisions. Sales to the U.S. government generally are not
regarded as constituting sales to one customer. Instead, each contracting entity
(including multiple contracting entities within the U.S. Army and U.S. Navy) is
considered to be a separate customer. The Company's largest programs,
representing approximately 30%, 13% and 10% of 1996 revenues were the BFV
programs (including derivatives and represented by multiple contracts through
multiple entities within the U.S. Army, with no such contract representing more
than 13% of 1996 revenues), the Crusader program and the Paladin program,
respectively.
BACKLOG
As of November 30, 1997 and November 30, 1996, the Company's funded backlog
was approximately $1.6 billion. Funded backlog does not include the awarded but
unfunded portion of total contract values. This backlog provides management with
a useful tool to project sales and plan its business on an on-going basis;
however, no assurance can be given that the Company's backlog will become
revenues in any particular period or at all. A substantial majority of this
backlog is expected to be earned as revenues by the end of 1998.
<TABLE>
<CAPTION>
FUNDED BACKLOG AS OF NOVEMBER 30,
----------------------------------------
<S> <C> <C>
1997 1996
------------------- -------------------
<CAPTION>
($ IN MILLIONS)
<S> <C> <C>
Ground Systems Division............................ $ 817.4 $ 778.3
Armament Systems Division.......................... 488.4 438.5
Paladin Products Division.......................... 166.5 240.2
International Division............................. 93.0 124.1
Steel Products Division............................ 45.0 77.3
Headquarters, Elimination and Other................ (57.6) (79.7)
-------- --------
Total............................................ $ 1,552.7 $ 1,578.7
-------- --------
-------- --------
</TABLE>
INTELLECTUAL PROPERTY
Although the Company owns a number of patents and has filed applications for
additional patents, it does not believe that its operations depend upon its
patents. In addition, the Company's U.S. government contracts generally license
it to use patents owned by others. Similar provisions in the U.S. government
contracts awarded to other companies make it impossible for the Company to
prevent the use by other
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<PAGE>
companies of its patents in most domestic work. Additionally, the Company owns
certain data rights in its products under certain of its government contracts.
The protection of data developed by the Company from use by other government
contractors is from time to time a source of negotiation between the Company and
the U.S. government, and the extent of the Company's data rights in any
particular product generally depends upon the degree to which that product was
developed by Company, rather than U.S. government funds. The Company routinely
enters into confidentiality and non-disclosure agreements with its employees to
protect its trade secrets.
EMPLOYEES
At November 30, 1997, the Company had approximately 5,626 employees and
approximately 280 contract workers (excluding employees of the foreign joint
ventures). Approximately 1,680 of these employees at five locations are
represented by six unions, including the Glass, Moulders, Pottery, Plastics and
Allied Workers (Anniston); the International Association of Machinists
(Louisville and San Jose); the United Automobile, Aerospace and Agricultural
Implement Workers (Minneapolis); the International Guards (Minneapolis); the
International Brotherhood of Teamsters (San Jose); and the United Steelworkers
(York). These contracts are scheduled to expire between February 1998 and April
2000. The Company considers its relations with its employees to be generally
good, and has not experienced a work stoppage since 1986.
PROPERTIES
The table below sets forth certain information with respect to the Company's
manufacturing facilities and properties.
<TABLE>
<CAPTION>
LOCATION LEASED/OWNED BUSINESS CONDUCTED(1) SQUARE FOOTAGE
- ---------------------------------------------- ------------------ -------------------------- -----------------
<S> <C> <C> <C>
Arlington, VA................................. Leased HQ 16,218
Anniston, AL.................................. Leased SPD 100,000
Anniston, AL.................................. Owned SPD 356,000
Aiken, SC..................................... Leased GSD 21,000
Aiken, SC..................................... Owned GSD 189,000
Aberdeen, SD.................................. Owned ASD 105,000
Chambersburg, PA.............................. Govt. Owned PPD 90,000
Fayette County, PA............................ Leased GSD 176,600
Fridley, MN................................... Govt. Owned ASD 1,712,240
Fridley, MN................................... Owned ASD 326,023
Louisville, KY................................ Leased ASD 1,047,800
Orlando, FL................................... Leased GSD 4,860
San Benito, CA................................ Leased GSD 1,218acres
San Jose, CA
1125 Coleman................................ Leased* GSD 675,600
1205 Coleman................................ Leased* CTC 119,000
1450 Coleman................................ Leased* GSD 36,600
340 Brokaw.................................. Leased* GSD 4,400
328 Brokaw.................................. Leased* GSD 138,200
2830 De La Cruz............................. Leased GSD 86,785
2890 De La Cruz............................. Leased GSD 68,708
215 Devcon.................................. Leased GSD 48,700
150 Brokaw.................................. Leased GSD 48,666
York County, PA............................... Owned GSD 946,901
</TABLE>
- ------------------------
* Indicates properties at which FMC is the lessor.
(1) Indicates whether property is used for corporate headquarters ("HQ") or used
by the Armament Systems Division, Ground Systems Division, Paladin
Production Division, Steel Products Division or Corporate Technology Center.
The U.S. Navy is currently in the process of divesting its Fridley,
Minnesota facility that has historically been provided rent free to the Company
for production of systems and spares for the U.S. government. The divestiture
requires that the facility be available for use by the Company for government
71
<PAGE>
production through 2000. The Company has the right of first refusal in the sale
of the facility and the U.S. government has made an offer to sell its portion of
the Fridley facility to the Company and negotiations relating to this offer have
commenced. Depending on the outcome of these negotiations, the Company's
historical occupancy costs associated with its operations at this facility and
any lease obligations associated with operating after a sale of the facility may
be affected. The Company is considering alternatives to a purchase including the
sale of its portion of the facility with a leaseback of the portion it occupies.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company's manufacturing operations require raw materials, primarily
aluminum and steel, which are purchased in the open market and are normally
available from a number of suppliers. The Company also purchases a variety of
electronic and mechanical components for which the Company has multiple
commercial sources. The Company has not experienced any significant delays in
obtaining timely deliveries of essential raw materials.
ENVIRONMENTAL MATTERS
The Company's operations are subject to Environmental Laws. The Company
continually assesses its compliance status and other obligations with respect to
Environmental Laws and believes that its operations currently are in substantial
compliance with Environmental Laws. Based on historical experience, the Company
does not believe that its obligations under Environmental Laws will have a
material adverse effect on the Company's financial condition, results of
operation or debt service capability. There can be no assurance, however, that
the Company will not incur material costs in the future as a result of changes
in Environmental Laws or changes in the Company's obligations under
Environmental Laws.
Pursuant to the terms of the Acquisition Agreement, the Company has retained
responsibility for environmental compliance at its facilities and may also incur
significant remediation costs, portions of which are reimbursable by the U.S.
government and the Sellers, associated with historical releases of hazardous
substances and wastes at the facilities. Based on certain U.S. government
contracting statutes and regulations, the Company expects that a significant
portion of such environmental compliance and remediation costs will be Allowable
Costs. In addition, under the environmental indemnification provisions of the
Acquisition Agreement, the Sellers will retain responsibility for 75% of certain
remediation costs relating to periods prior to the Closing Date that are
Non-Allowable Costs. Based on historical experience, the Company expects that a
significant percentage of the total remediation and compliance costs associated
with its facilities will continue to be Allowable Costs. There can be no
assurance, however, that the Sellers will reimburse the Company promptly or at
all for future environmental costs or that the U.S. government will allow as
Allowable Costs in the Company's contracts all or a significant portion of such
future environmental costs. In such an event, the Company's financial condition,
results of operation and debt service capability could be materially and
adversely affected. For a more detailed discussion of the environmental
indemnification provisions of the Acquisition Agreement, see "The Acquisition."
Following is a summary of the principal environmental issues associated with
the Company's facilities:
SAN JOSE FACILITIES. The Sellers have conducted and expect to conduct in
the future soil and groundwater investigation and remediation at the San Jose
facilities to address historical releases of solvents and other substances. The
California Regional Water Quality Control Board has issued administrative orders
that govern the investigation and remediation. The Company and the California
Department of Toxic Substances Control ("DTSC") has issued an order pursuant to
the Resource Conservation and Recovery Act ("RCRA"), under which investigation
and remediation are under way at a second section of the property. The Company
submitted a RCRA Facility Investigation report to the DTSC in December 1996,
which was approved in August 1997, and the Company expects that FMC will need to
conduct significant additional investigative and remedial work at the property.
The Acquisition Agreement provides that the Sellers will be responsible for 100%
of all uninsured remediation costs incurred at the San Jose facilities but will
be entitled to reimbursement from the Company for 78% of such costs, subject to
certain limitations including a reimbursement ceiling of $16.7 million. The
Company, in turn, expects to
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<PAGE>
be able to recover such costs from the U.S. government pursuant to the terms of
a settlement agreement among FMC, the Company and DoD (the "Environmental
Advance Agreement") under the terms of which 78% of remediation costs and 100%
of compliance costs incurred by the Company at the San Jose facilities will be
allowable as contract costs in the Company's contracts.
FRIDLEY, YORK AND ANNISTON FACILITIES. At the Company's York and Anniston
facilities, the Company has investigated soil and groundwater contamination, and
in some cases, has undertaken remediation. On the portion of the Fridley
facility that is owned by the Company, the Company is conducting soil and
groundwater remediation to address solvent contamination. Additional
investigative and remedial activities have been conducted by the U.S. Navy on
certain Navy-owned portions of the Fridley facility. At the Company's York
facility, soil and groundwater investigation and remediation are underway,
including efforts related to contamination caused by a former on-site wastewater
treatment plant. The groundwater remediation at the Fridley and York facilities
focuses on preventing off-site migration of contaminants. The Anniston facility
is the site of century-old forge and foundry operations, and soil and
groundwater sampling has detected elevated levels of petroleum hydrocarbons at
the facility. The Company is evaluating whether additional investigative or
remedial activity will be required at this facility. The majority of costs
associated with current remediation efforts at these facilities are considered
to be Allowable Costs. In addition, under the Environmental Indemnity, the
Sellers will reimburse the Company for 75% of Non-Allowable Costs associated
with environmental remediation or noncompliance at these facilities where such
Non-Allowable Costs arise out of pre-closing operations, so long as the Sellers
are notified of the indemnified matters within three years of the Closing Date.
LOUISVILLE FACILITY. The Louisville facility, which is among the facilities
that the Company leases from the U.S. government, has been the site of
manufacturing operations since the 1940s and is believed to have soil and
groundwater contamination from such historical operations. The Company is the
express beneficiary of an indemnification provision that provides that the U.S.
government is responsible for all remediation costs incurred with respect to the
Louisville facility other than those related to the Company's occupancy of the
facility, and the provision creates a rebuttable presumption that environmental
contamination discovered at the facility is not related to the Company's
occupancy.
CERCLA OBLIGATIONS. The Company is subject to liability under the
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA")
and similar state statutes for investigation and remediation of environmental
contamination of off-site locations at which it has arranged for the disposal of
hazardous substances. The Company has been notified that it is a potentially
responsible party in certain actions brought under CERCLA or similar state
statues and is attempting to resolve these matters. The Company has been named a
potentially responsible party (a "PRP") under CERCLA at four locations involving
its Fridley facility. The first location is in Fridley, Minnesota. This facility
is jointly owned by the UDLP and the U.S. Navy. Remediation is currently
underway to reduce groundwater contamination, which could extend for several
decades and to remediate an on-site landfill. The Company currently estimates
the cost of remediation at $300,000 per year for these projects, assuming no new
remediation efforts are required. The U.S. Navy is also in the process of
installing a treatment plant for the plant's storm sewer, which should be
completed by 1998 and the Company is providing on-site technical support for
this effort. The other sites at which the Company or a subsidiary has been named
a PRP are three landfills to which UDLP sent waste in the past. Each of these
sites has been issued a Letter of Compliance under the State of Minnesota
Landfill Cleanup Program and UDLP is currently being reimbursed a portion of its
expenditure from the clean-up of these landfills. Based on historical
experience, management does not expect that liability for CERCLA costs, either
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition, results of operation or debt service capability.
LEGAL PROCEEDINGS
ALLIANT TECHSYSTEMS CLAIM. Alliant Techsystems Inc. ("Alliant Tech"), a
subcontractor to UDLP in connection with UDLP's Paladin howitzer prime contract,
has asserted a claim against UDLP alleging wrongful termination of that
subcontract by UDLP. UDLP maintains that it terminated the Alliant Tech
subcontract work in accordance with its termination rights under the applicable
subcontract agreement and
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<PAGE>
pursuant to a corresponding U.S. Army termination for convenience of the portion
of UDLP's prime contract that covered the pertinent components supplied by
Alliant Tech. In a letter dated September 19, 1996, Alliant Tech asserted its
intention to pursue this claim against UDLP for approximately $17 million in
damages. In October 1997, UDLP and Alliant Tech settled Alliant Tech's claim for
certain costs under the termination for convenience provisions of the
subcontract. Alliant retained the right to pursue breach of contract claims
against UDLP but no litigation has commenced. Management believes that UDLP has
a valid defense to any such claim. However, no assurances can be given that UDLP
will be successful in its defense of this claim, in the event that the claim
were further pursued by Alliant.
LITIGATION RETAINED BY SELLERS. UDLP is subject to, or involved in, certain
litigation and governmental investigations (the "Retained Litigation Matters")
for which the Sellers have retained responsibility and agreed to indemnify UDLP
and the Company for any liabilities relating to these proceedings. See "The
Acquisition." The Retained Litigation Matters include, among other proceedings,
a "QUI TAM" action asserted against FMC, the general partner of UDLP prior to
the Acquisition and the former owner of a portion of UDLP's business, which
relates to the conduct of the Ground Systems Division of UDLP prior to the
formation of UDLP in 1994.
The QUI TAM action was filed under seal in 1986 in the U.S. District Court
for the Northern District of California by Henry Boisvert, a former employee of
FMC (the "relator"), and is captioned UNITED STATES EX REL. HENRY J. BOISVERT V.
FMC. The complaint alleges that the BFV failed to meet certain specifications
contained in the BFV program contract and alleges the existence of certain other
material and design defects. Trial of the case commenced on December 15, 1997
and is expected to continue into January 1998.
Management does not believe that the Retained Litigation Matters will have a
material adverse effect upon the financial condition or results of operations of
UDLP because Sellers have agreed to indemnify UDLP and the Company for all
losses and liabilities directly attributable to the Retained Litigation Matters.
However, no assurances can be made that the Sellers will perform their
indemnification obligations if these matters are adversely determined or that
such adverse determination would not otherwise be disruptive to the Company's
business.
OTHER MATTERS. UDLP, in its ordinary course of business, is party to
various other legal proceedings, some of which are covered by insurance.
Management believes these these are routine in nature and incidental to its
operations. Management believes that the outcome of such proceedings to which
UDLP currently is a party will not have material adverse effects upon its
operations, financial condition or liquidity.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The following table sets forth certain information with respect to the
members of the Board of Directors and the executive officers of the Company.
Executive officers of the Company are chosen by the Board of Directors and serve
at its discretion. The Board of Directors does not maintain any committees.
<TABLE>
<CAPTION>
YEARS WITH
NAME(1) POSITION AGE COMPANY(2)
- ------------------------------ ------------------------------------------------------------- --- -----------------
<S> <C> <C> <C>
William E. Conway, Jr......... Chairman 48 --
Allan M. Holt................. Director 45 --
Peter J. Clare................ Director 32 --
Frank C. Carlucci............. Director 67 --
J.H. Binford Peay, III........ Director 57 --
Thomas W. Rabaut.............. President, Chief Executive Officer, Director 49 20
David V. Kolovat.............. Vice President, General Counsel and Secretary 53 9
Francis Raborn................ Director, Vice President and Chief Financial Officer 54 20
Arthur L. Roberts............. Vice President, General Manager--International Division 57 30
Frederick M. Strader.......... Vice President, General Manager--Armament Systems Division 44 17
Dennis A. Wagner, III......... Vice President, Business Development and Marketing 47 16
Peter C. Woglom............... Vice President, General Manager--Ground Systems Division 52 24
</TABLE>
- ------------------------
(1) Prior to the Acquisition, Allan M. Holt was the sole director and President
of the Company. Other directors and officers listed above were elected
following the Acquisition.
(2) Includes the Company and its predecessors.
WILLIAM E. CONWAY, JR. was elected as a Director of the Company in 1997. He
has been a Managing Director of The Carlyle Group, a Washington, D.C.-based
private merchant bank, since 1987. Mr. Conway was Senior Vice President and
Chief Financial Officer of MCI Communications Corporation from 1984 until 1987,
and was a Vice President and Treasurer of MCI from 1981 to 1984. Mr. Conway
presently serves on the Board of Directors of GTS Duratek, Inc., Howmet
International Inc., Nextel Communications, Inc., Tracor Inc. and several
privately held companies.
ALLAN M. HOLT was elected as a Director of the Company in 1997. He is a
Managing Director of The Carlyle Group, a Washington, D.C.-based private
merchant bank which he joined in 1991. Mr. Holt was previously with Avenir
Group, a private investment and advisory group, and from 1984 to 1987 was
Director of Planning and Budgets at MCI Communications Corporation, which he
joined in 1982. Mr. Holt currently serves on the boards of several privately
held companies.
PETER J. CLARE was elected as a Director of the Company in 1997. He is
currently a Principal with The Carlyle Group, a Washington, D.C.-based private
merchant bank which he joined in 1992. Mr. Clare was previously with First City
Capital, a private investment group. From 1987 to 1989, he worked in the mergers
and acquisitions and merchant banking groups at Prudential-Bache. Mr. Clare
currently serves on the boards of several privately held companies.
FRANK C. CARLUCCI was elected as a Director of the Company in 1997. He is
Chairman of The Carlyle Group, a Washington, D. C. based merchant bank. Prior to
joining The Carlyle Group in 1989, Mr.
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Carlucci served as Secretary of Defense from 1987-1989. Previously he had served
as President Reagan's National Security Advisor in 1987. Mr. Carlucci serves on
the following corporate boards: Ashland Inc.; IRI International Corp.; Kaman
Corporation; Neurogen Corporation; Northern Telecom Limited; The Quaker Oats
Company; SunResorts, Ltd., N.V.; Texas Biotechnology Corporation; Pharmacia &
Upjohn, Inc.; Westinghouse Electric Corporation; and the Board of Trustees for
the RAND Corporation and the Advisory Committee of East New York Savings Bank.
J.H. BINFORD PEAY, III was elected as a Director of the Company in 1997.
General Peay is a career U.S. Army officer who attained the rank of four star
general and retired from the Army on October 1, 1997. He is the former
Commander-in-Chief of the U.S. Central Command (1994-1997) and also served as
Vice Chief of Staff, United States Army (1993-1994). Prior to serving as Vice
Chief of Staff, he was Deputy Chief of Staff for Operations and Plans,
Department of the Army and Senior Army Member, U.S. Military Committee, United
Nations in Washington, D. C. (1991-1993) and was Commanding General, 101st
Airborne Division (Air Assault) at Ft. Campbell, Kentucky (1989 to 1991).
THOMAS W. RABAUT has been President and Chief Executive Officer of UDLP
since its formation in 1994. Before joining UDLP, Mr. Rabaut worked at FMC since
1977 and held several executive positions including General Manager of FMC's
Steel Products Division from 1986 to 1988, Operations Director and then Vice
President and General Manager of FMC's Ground Systems Division from 1988 to
1993, and General Manager of FMC's Defense Systems Group, overseeing operations
in the U.S., Turkey, Pakistan, and Saudi Arabia for U.S. and allied armies,
navies, and marines from 1993 to 1994. In 1994, he was also elected Vice
President of FMC. Mr. Rabaut graduated from the U.S. Military Academy at West
Point and from the Harvard Business School.
DAVID V. KOLOVAT has been Vice President and General Counsel of UDLP since
its formation in 1994. He has also served as FMC's Associate General Counsel in
charge of defense business legal work from 1988 until consummation of the
Acquisition. Mr. Kolovat served as Vice President and General Counsel of
Premisys, Inc. from 1986 to 1988, during which Premisys was acquired by Pacific
Telesis Corp., and from 1984 to 1986 as Vice President and General Counsel of
Robot Defense Systems, Inc. Mr. Kolovat received his undergraduate degree from
the University of Iowa and his law degree from Stanford Law School.
FRANCIS RABORN was elected as a Director of the Company in 1997. He has been
Vice President and Chief Financial Officer of UDLP since its formation in 1994,
with responsibility for financial, contract, administrative and government
compliance matters. Mr. Raborn joined FMC in 1977 and held a variety of
financial and accounting positions including Controller of FMC's Defense Systems
Group from 1985 to 1993 and Controller of FMC's Special Products Group from 1979
to 1985. Mr. Raborn received a B.S. in Economics from the University of
Pennsylvania's Wharton School and an MBA from UCLA.
ARTHUR L. ROBERTS has been Vice President and General Manager--International
Division of UDLP since its formation in 1994. His responsibilities include
management of joint ventures in Turkey and Saudi Arabia, ongoing co-production
programs in Pakistan and Japan and development of new co-production programs in
Malaysia and Korea. Prior to joining UDLP, Mr. Roberts was General Manager of
FMC's Defense Systems International Division since 1993. Mr. Roberts held a
number of positions at FMC since 1967, including management of the Turkey joint
venture program from its initial proposal in 1988 through 1992. Mr. Roberts
holds a bachelor's degree in mechanical engineering from Yale University and an
MBA from Harvard Business School.
FREDERICK M. STRADER has been Vice President and General Manager--Armament
Systems Division of UDLP since May 1994. Prior to joining UDLP, Mr. Strader was
Division Manager of FMC's Agricultural Machinery Division from October 1992 to
May 1994, and Manager of FMC's Strategic Planning Group from September 1991 to
October 1992. Prior thereto, he held a number of operations, planning and
financial positions at the Steel Products Division of FMC. Mr. Strader received
his BA degree from Ripon College and his MBA degree from the Wharton School at
University of Pennsylvania.
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DENNIS A. WAGNER, III has been Vice President, Business Development and
Marketing of UDLP since its formation in 1994 with responsibility for the
development and coordination of worldwide strategies for the design,
manufacture, and sale of combat vehicles, amphibious assault vehicles, and
armament systems for the U.S. and Allied armed forces. Mr. Wagner joined FMC's
Defense Systems Group in 1981 and held a number of marketing and management
positions, including Division General Manager of FMC's Steel Products Division
from 1989 to 1994 and Program Director for the M113 family of vehicles from 1987
to 1989. Mr. Wagner received a BS in General Engineering from the U.S. Military
Academy and an MBA in Finance from the University of Detroit.
PETER C. WOGLOM has been Vice President and General Manager--Ground Systems
Division of UDLP since 1994. Prior thereto, he held a number of line and
executive positions at FMC after joining FMC in 1973, including Vice President
and General Manager of FMC's Ground Systems Division from 1993 to 1994, and Vice
President and Director, Business Strategies and Initiatives for FMC's Defense
Systems Group from 1990 to 1993. Mr. Woglom received BSCE and Master of
Engineering degrees from Cornell University and an MBA from the University of
Pittsburgh.
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EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
paid by the Company for services rendered for the year ended December 31, 1996
to the Chief Executive Officer and to each of the four other most highly
compensated executive officers of the Company (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
RESTRICTED
NAME AND PRINCIPAL OTHER ANNUAL STOCK ALL OTHER
POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3) AWARDS(4) COMPENSATION(5)
- -------------------------- --------- ---------- ------------ ---------------- ---------------- ----------------
Thomas W. Rabaut.......... 1996 $ 322,091 $ 171,525 $ -- $ -- $ --
President and CEO
Peter C. Woglom........... 1996 234,665 79,648 -- 284,500 --
Vice President,
General Manager-- Ground
Systems
Frederick M. Strader...... 1996 183,990 99,770 -- 213,375 --
Vice President,
General Manager--
Armament Systems
David V. Kolovat(6)....... 1996 202,196 63,078 -- -- --
Vice President, General
Counsel and Secretary
Arthur L. Roberts......... 1996 177,619 68,320 -- -- --
Vice President,
General Manager--
International
</TABLE>
- ------------------------
(1) Includes matching contributions under the Company's 401(k) plan for salaried
employees or the FMC 401(k) plan in which the individual participated prior
to the Acquisition.
(2) The FMC management incentive plans in which the employee participated prior
to the Acquisition. Such plans provided for both annual and three-year
incentive bonuses.
(3) Amounts less than $50,000 or 10% the Named Executive Officer's compensation
are excluded.
(4) Includes options to purchase and shares of restricted stock of FMC pursuant
to FMC plans in which the Named Executive Officer participated prior to the
Acquisition.
(5) The Named Executive Officers participated in FMC's stock option plan. In
1996 Mr. Kolovat exercised 6,400 shares and realized $195,800 of value and
Mr. Roberts exercised 4,300 shares and realized $265,876 of value. Messrs.
Rabaut, Woglom, Strader, Kolovat and Roberts had $609,525, $296,663,
$463,325, $71,250 and $369,550 of value, respectively, in exercisable
in-the-money options at the end of 1996. Such Named Executive Officers had
$291,194, $99,600, $145,910, $160,813 and $132,200, respectively, of
presently unexercisable FMC options at such date that will vest upon
consummation of the Acquisition.
(6) 1996 compensation was paid by FMC. Mr. Kolovat became an employee of the
Company upon consummation of the Acquisition.
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EMPLOYMENT AGREEMENTS
The Company expects to enter into employment agreements with certain key
executive officers, including terms for salary, bonus opportunity, insurance,
severance and non-competition.
RETIREMENT PLAN
Each Named Executive Officer is covered under the UDLP Defense Segment
Pension Plan (the "Pension Plan") described below. The following table shows the
estimated annual pension benefits under the Pension Plan, including amounts
attributable to the Supplemental Retirement and Savings Plan ("SERP") described
below for the specified compensation and years of service.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ESTIMATED ANNUAL RETIREMENT BENEFITS
FOR YEARS OF SERVICE INDICATED
FINAL AVERAGE ----------------------------------------------------------
EARNINGS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
--------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 150,000........................ $ 31,552 $ 42,070 $ 52,587 $ 63,104 $ 73,622
250,000........................ 54,052 72,070 90,087 108,104 126,122
350,000........................ 76,552 102,070 127,587 153,104 178,622
450,000........................ 99,052 132,070 165,087 198,104 231,122
550,000........................ 121,552 162,070 202,587 243,104 283,622
650,000........................ 144,052 192,070 240,087 288,104 336,122
900,000........................ 200,302 267,070 333,837 400,604 467,372
1,150,000....................... 256,552 342,070 427,587 513,104 598,622
1,300,000....................... 290,302 387,070 483,837 580,604 677,372
1,450,000....................... 324,052 432,070 540,087 648,104 756,122
</TABLE>
Compensation included in the final average earnings for the pension benefit
computation includes base annual salary and annual bonuses but excludes payments
for most other compensation. Unreduced retirement pension benefits are
calculated pursuant to the Pension Plan's benefit formula as an individual life
annuity payable at age 65. Benefits may also be payable as a joint and survivor
annuity or a level income option. Final average earnings in the above table
means the average of covered remuneration for the highest 60 consecutive
calendar months out of the 120 calendar months immediately preceding retirement.
Benefits applicable to a number of years of service or final average earnings
different from those in the above table are equal to the sum of (A) 1 percent of
allowable Social Security Covered Compensation ($29,304 for a participant
retiring at age 65 in 1997) times years of credited service and (B) 1.5 percent
of the difference between final average earnings and allowable Social Security
Covered Compensation times years of credited service. ERISA limits the annual
benefits that may be paid from a tax-qualified retirement plan. Accordingly, as
permitted by ERISA, the Company has adopted supplemental arrangements to
maintain total benefits upon retirement at the levels shown in the table.
Messrs. Rabaut, Woglom, Strader, Kolovat and Roberts currently have 20, 24, 17,
9 and 30 years of service under the Pension Plan, respectively.
The Company will also maintain a SERP designed to provide unfunded
supplemental retirement benefits to certain Executive Officers of the Company.
The SERP will be designed to provide the selected employees a benefit at
retirement equal to the benefit the participant would have received under the
401(k) plan and the pension plan if the Code and such plan did not require the
exclusion of certain compensation from the determination of benefits under those
plans. SERP benefits will be offset by amounts the participant receives from
certain other plans and Social Security. All Named Executive Officers will
likely participate in the SERP.
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<PAGE>
TRANSACTION INCENTIVE PAYMENTS
The Company instituted an additional incentive plan in 1997 for the Named
Executive Officers and certain other employees granting them significant
incentive bonuses upon a successful sale of the Company. The Sellers paid the
amounts under this plan. The incentives paid to the Named Executive Officers
were as follows:
TRANSACTIONS INCENTIVE PAYMENT
<TABLE>
<CAPTION>
PERFORMANCE
NAME INCENTIVE PREMIUM INCENTIVE
- ------------------------------------------------------------------------ -------------------- -----------------
<S> <C> <C>
Thomas W. Rabaut........................................................ $ 250,000 $ 250,000
President and CEO
Peter C. Woglom......................................................... 150,000 150,000
Vice President, General Manager--Ground Systems
Frederick M. Strader.................................................... 150,000 150,000
Vice President, General Manager--Armament Systems
David V. Kolovat........................................................ 100,000 --
Vice President, General Counsel and Secretary
Arthur L. Roberts....................................................... 100,000 --
Vice President, General Manager--International
</TABLE>
SEVERANCE ARRANGEMENTS
In June 1997, the Company entered into executive compensation agreements
with fourteen management employees, including each Named Executive Officer.
These agreements generally provide that in the event the executive's employment
is terminated by the Company other than for "cause" or by the executive with
"good reason" (each as defined therein) within 2 years following a "sale of the
company" (as defined therein) including the Acquisition, the executive will be
entitled to (i) a payment equal to a multiple (ranging from one to three) of the
executive's base pay and target bonus; (ii) Company-paid outplacement services;
and (iii) the right to continue to participate in the Company's health, life and
accidental death and dismemberment and long-term disability benefits plan for
one year (or three years in the case of Mr. Rabaut) at the rates in effect for
active employees.
The Company also maintains a severance plan that generally covers most
salaried and non-union hourly employees, and provides severance payments in the
event of the employee's involuntary termination of employment due to a reduction
in force. Severance payments are calculated as a percentage (up to 100% maximum)
of base pay.
STOCK OPTION PLAN
The Company is adopting an option plan for key employees (including the
Named Executive Officers) of the Company, pursuant to which options to purchase
an aggregate of approximately 8% of the Company's fully-diluted common stock at
the Closing Date will be granted, subject to vesting requirements based on
performance and/or length of service after the options are granted. The Company
intends to adopt a stock purchase plan, pursuant to which key employees
(including the Named Executive Officers) will be entitled to purchase stock of
UDI.
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CERTAIN TRANSACTIONS
Prior to the Acquisition, UDLP contracted with FMC for various
administrative and support services, including computer services, systems and
programming, data communications, employee relocation support, payroll
processing, research and development, insurance and general management support.
During the years ended December 31, 1994, 1995 and 1996 and the nine months
ended September 30, 1997, UDLP paid $42.4 million, $39.8 million, $35.2 million
and $22.3 million, respectively, to FMC for such support. This contract was
terminated at or prior to the Closing Date. The Company also leases office and
manufacturing facilities in San Jose, California from FMC. Under the lease
agreement during the years ended December 31, 1994, 1995 and 1996, UDLP paid
$4.2 million, $3.9 million and $3.7 million, respectively. In connection with
the Acquisition, UDLP amended the lease to provide for a $4.0 million annual
base rent.
UDLP sales of inventory to FMC during the years ended December 31, 1994,
1995 and 1996 and the nine months ended September 30, 1997 were $2.8 million,
$1.5 million, $1.1 million and $0.9 million, respectively. Management believes
that such transactions were consummated on terms substantially similar to those
that would arise in transactions with unrelated third parties. Sales to Harsco
were not material.
During 1995, UDLP entered into an agreement with FMC and Harsco whereby
UDLP's excess cash balances of up to $40 million were invested with FMC.
Interest on these funds was earned based on the average monthly cost of FMC's
U.S. dollar revolver-related short-term borrowings for such month. In addition,
UDLP made short-term loans, not to exceed ninety days, to FMC at rates equal to
FMC's average overnight borrowing rate for the period of the loan. Interest on
all loans to FMC totaled $1.8 million and $1.1 million in 1996 and 1995,
respectively. This agreement terminated on the Closing Date.
Concurrently with the closing of the Acquisition, the Company entered into a
management agreement (the "Management Agreement") with TCG Holdings, L.L.C. (or
another affiliate of Carlyle) for certain management and financial advisory
services to be provided to the Company and its subsidiaries. The Management
Agreement provides for the payment to Carlyle an annual management fee of $2.0
million. In addition, the Company may retain Carlyle or any third party for the
provision of certain corporate administrative services or transactional services
on terms and conditions to be agreed upon including fees for assisting the
Company with the future acquisitions, dispositions, financing transactions and
other similar transactions. Pursuant to the Management Agreement, Carlyle
received a fee of $4.5 million and will receive an additional $2.0 million in
1998 for advisory and other services provided in connection with the
Transactions.
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PRINCIPAL STOCKHOLDERS
All of the capital stock of the Company is held by Iron Horse.
The following table sets forth certain information regarding the beneficial
ownership of Iron Horse by each person known by the Company to be the owner of
5% or more of Iron Horse's equity interests ("Units"), by each person who is a
director or Named Executive Officer of the Company and by all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF ALL OUTSTANDING
BENEFICIAL OWNER(1) UNITS UNITS
- -------------------------------------------------------------------------------------- ----------- ---------------
<S> <C> <C>
TCG Holdings, L.L.C.(2)(3)............................................................ 1,000 100.0%
William E. Conway, Jr.(3)............................................................. -- *
Allan M. Holt(3)...................................................................... -- *
Peter J. Clare(3)..................................................................... -- *
Frank C. Carlucci(3).................................................................. -- *
J.H. Binford Peay, III(4)............................................................. -- *
Thomas Rabaut(4)...................................................................... -- *
Peter C. Woglom(4).................................................................... -- *
Frederick M. Strader(4)............................................................... -- *
David V. Kolovat(4)................................................................... -- *
Francis Raborn(4)..................................................................... -- *
Arthur L. Roberts(4).................................................................. -- *
All Directors and Executive Officers as a group (12 persons).......................... -- *
</TABLE>
- ------------------------
* Denotes less than 1% beneficial ownership.
(1) Beneficial ownership is determined in accordance with the rules of the SEC.
Except as otherwise indicated, each beneficial owner has the sole power to
vote, as applicable, and to dispose of all Units owned by such beneficial
owner.
(2) Carlyle Partners II, L.P., a Delaware limited partnership, Carlyle Partners
III, L.P., a Delaware limited partnership, Carlyle International Partners
II, L.P., a Cayman Islands limited partnership, Carlyle International
Partners III, L.P., a Cayman Islands limited partnership, and certain
additional partnerships formed by Carlyle (collectively, the "Investment
Partnerships") and certain investors with respect to which TC Group, L.L.C.
or an affiliate exercises investment discretion and management constitute
all of the members of Iron Horse. TC Group, L.L.C. is the sole general
partner of the Investment Partnerships and TCG Holdings, L.L.C., a Delaware
limited liability company, is the sole managing member of TC Group, L.L.C.
(3) The address of such person is c/o The Carlyle Group, 1001 Pennsylvania
Avenue, N.W., Washington, D.C. 20004.
(4) The address of such person is c/o United Defense Industries, Inc., 1525
Wilson Boulevard, Suite 700, Arlington, Virginia 22209-2411.
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THE ACQUISITION
ACQUISITION AGREEMENT
The Company entered into the Acquisition Agreement with the Sellers on
August 25, 1997 for the acquisition by the Company of all of FMC's and Harsco's
respective partnership interests in UDLP. The aggregate Purchase Price paid in
the Acquisition was $850.0 million. The Company paid the Purchase Price with
$800.0 million of cash and the Seller Note. The Purchase Price is subject to
adjustment following the closing based upon the difference (if any) between the
net worth of UDLP as of the Closing Date (as adjusted as provided in the
Acquisition Agreement) and the adjusted net worth of UDLP as of June 30, 1997.
If any adjustment results in a decrease in the Purchase Price for the
Acquisition, borrowings under the Term Loan Facilities will be correspondingly
reduced. If the Purchase Price is increased, the borrowings under the Revolving
Credit Facility will be correspondingly increased. Sellers and the Company are
currently negotiating this adjustment.
The Seller Note is subordinate in right of payment to all existing and
future Senior Indebtedness (as defined in the Seller Note) and PARI PASSU in
right of payment with all other senior subordinated indebtedness of the Company,
including the Notes. For a description of the terms of the Seller Note, see
"Description of Certain Indebtedness--Seller Note."
The Acquisition Agreement contains representations, warranties and covenants
of the Sellers concerning the business of UDLP and its subsidiaries. The Sellers
have agreed to indemnify UDLP and the Company and their respective affiliates
and each of their respective officers, directors and employees for certain
breaches of representations or covenants of the Sellers contained in the
Acquisition Agreement and for certain liabilities relating to the business of
UDLP being retained by the Sellers, including certain litigation to which UDLP
is a party or which relates to the business of UDLP prior to the Closing Date.
For a discussion of certain litigation being retained by the Sellers, see
"Business--Legal Proceedings." Subject to limited exceptions, no claims under
such indemnity may be asserted by UDLP or the Company for breach of any
representation or warranty unless the aggregate amount of all such claims
asserted by UDLP or the Company exceed $10.0 million, in which event the Sellers
shall only be obligated to indemnify the Company and UDLP for the amount of such
claims in excess of $10.0 million. The aggregate recovery of UDLP and the
Company for breaches of the representations and warranties of the Sellers
contained in the Acquisition Agreement is limited to 10% of the Purchase Price
(as adjusted).
The Acquisition Agreement also provides for the allocation as between the
Sellers and the Company of costs and liabilities relating to certain
environmental matters in connection with the business of UDLP prior to the
Closing Date ("Pre-Closing Environmental Matters"). The Acquisition Agreement
provides that FMC will be responsible for 100% of all remediation costs incurred
at UDLP's San Jose/Santa Clara facilities and will be entitled to reimbursement
by the Company or UDLP for 78% of such uninsured costs subject to certain
limitations. Management believes that most of UDLP's share of these costs will
be allowable as contract costs under its contracts with the U.S. government
pursuant to the Environmental Advance Agreement among FMC, UDLP and DoD. The
parties agreed in the Environmental Advance Agreement to the allocation of
remediation costs between defense and commercial activities at UDLP's San
Jose/Santa Clara Facilities and established that, subject to certain
limitations, 78% of such allowable costs will be subject to recovery from the
U.S. government through UDLP's cost plus contracts. The aggregate amount of
remediation costs related to the San Jose/Santa Clara facilities for which the
Company is required to reimburse FMC is capped by the Acquisition Agreement at
$16.7 million with certain limitations on yearly expenditures. With respect to
all other real property owned or leased by the Company or otherwise relating to
UDLP's business, the Company and UDLP will be responsible for all costs of
remediation relating to Pre-Closing Environmental Matters and will be entitled
to reimbursement from the Sellers of 75% of all such costs which (i) are not
allowable costs under applicable U.S. government contracting statutes and
regulations; (ii) relate to matters of which the Sellers are notified in writing
before the third anniversary of the Closing Date; and (iii) are identified on or
before the tenth
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<PAGE>
anniversary of the Closing Date. For additional information concerning these
environmental matters, see "Business--Environmental Matters."
OTHER ANCILLARY AGREEMENTS
Concurrently with the Company's acquisition of UDLP, UDLP acquired certain
assets of, and assumed certain liabilities related to, FMC's Corporate
Technology Center in San Jose, California. CTC is presently a separate business
unit of FMC which provides research and testing services to UDLP and certain
other FMC commercial business units. No additional consideration is required to
be paid for CTC, and FMC agreed to purchase $9.0 million of services from CTC,
in the aggregate, in the three years following the Closing Date. At the closing
of the Acquisition, UDLP, FMC and Harsco entered into several ancillary
agreements relating to the period following the closing. These ancillary
agreements include (i) a Transition Services Agreement; (ii) a Technology and
Environmental Services Agreement; (iii) the FMC and Harsco Intellectual Property
Agreements; and (iv) a lease for certain real property in San Jose. Under the
Transition Services Agreement, FMC provides certain services to UDLP, in a
manner and amount historically provided prior to the closing pursuant to a
management services agreement. The Transition Services Agreement will continue
for a term of six months from the Closing Date or such shorter or longer term as
the parties may agree. The services to be provided to the Company are expected
to include, among other things, accounts payable, accounting processing,
benefits administration, payroll processing, insurance, employee relocation,
expatriate employee administration and human resource information systems. The
Technology and Environmental Services Agreement sets forth the terms and
conditions pursuant to which FMC will purchase certain services from CTC after
the closing. The Intellectual Property Agreements grant UDLP a license to use in
UDLP's business certain intellectual property which was retained by FMC and
Harsco at the time UDLP was formed, as well as certain intellectual property
used by CTC on or prior to the Closing Date. The Intellectual Property
Agreements also grant FMC and Harsco a license to use the intellectual property
which was transferred to UDLP at the time of formation for uses outside of
UDLP's core business. FMC also leases to UDLP the land, buildings, fixtures and
improvements at the San Jose facility currently used by UDLP and CTC for an
aggregate annual base rent of approximately $4.0 million and the payment of
certain expenses relating to the operation and maintenance of such facilities.
The lease has an initial term of four years, and UDLP has an option to renew the
lease for a portion of the premises for one additional four-year term.
The production agreement between FNSS-Turkey and the Turkish government
gives the government the right to terminate the agreement "if the interest of
[FNSS-Turkey] shall devolve upon any person or corporation." The Company does
not expect the Turkish government to assert the view that this provision
entitles it to terminate the joint venture agreement, although no assurance can
be given that the Turkish government will not do so.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR CREDIT FACILITY
In connection with the Acquisition, the Company entered into a new senior
secured credit agreement that closed contemporaneously with the offering of the
Private Notes. The Senior Credit Facility is among the Company, Iron Horse,
various lending institutions including Lehman Commercial Paper Inc. and
Citibank, N.A. as Documentation Agents, and Bankers Trust Company as
Administrative Agent and as Syndication Agent. The Senior Credit Facility
consists of an "A Term Loan Facility" in an aggregate principal amount of $150.0
million, a "B Term Loan Facility" in an aggregate principal amount of $175.0
million, a "C Term Loan Facility" in an aggregate principal amount of $170.0
million and a Revolving Credit Facility in an aggregate principal amount of
$230.0 million, including subfacilities for letters of credit and swingline
loans.
Loans made pursuant to the A Term Loan Facility ("A Term Loans") mature six
years after the closing date of the Senior Credit Facility (the "Senior Credit
Facility Closing Date"), with equal quarterly amortization payments of $6.25
million.
Loans made pursuant to the B Term Facility ("B Term Loans") mature eight
years from the Senior Credit Facility Closing Date and during the first six
successive one year periods following the Senior Credit Facility Closing Date
require annual amortization equal to 1% of the initial aggregate principal
amount of B Term Loans (payable in four equal quarterly installments per year).
The remaining aggregate principal amount of B Term Loans incurred is subject to
equal quarterly amortization payments during the seventh and eighth years after
the Senior Credit Facility Closing Date.
Loans made pursuant to the C Term Facility ("C Term Loans") mature nine
years from the Senior Credit Facility Closing Date and during the first eight
successive one year periods following the Senior Credit Facility Closing Date
require annual amortization equal to 1% of the initial aggregate principal
amount of C Term Loans (payable in four equal quarterly installments per year).
The remaining aggregate principal amount of C Term Loans incurred is subject to
equal quarterly amortization payments in the ninth year.
Loans made pursuant to the Revolving Credit Facility ("Revolving Loans")
will be utilized for general corporate and working capital requirements and for
transaction fees in connection with the Acquisition. The Revolving Credit
Facility will be available for the issuance of standby and trade letters of
credit (collectively "Letters of Credit") to support obligations of the Company
and its subsidiaries in types to be specified in the credit documentation.
Maturities for Letters of Credit will not exceed twelve months, renewable
annually thereafter and, in any event, will not extend beyond the fifth business
day prior to the maturity of the A Term Loan Facility. At no time will (x) the
aggregate principal amount of Revolving Loans outstanding pursuant to the
Revolving Credit Facility exceed $150.0 million or (y) the aggregate principal
amount of Revolving Loans together with any outstanding Letters of Credit and
any unpaid drawings with respect thereto exceed the commitments then in effect
pursuant to the Revolving Credit Facility. The Revolving Credit Facility matures
on the date that the A Term Loan Facility matures.
All outstanding loans under the Senior Credit Facility are guaranteed by
Iron Horse and certain of the Company's subsidiaries and are secured by a lien
on all the assets (present and future, tangible and intangible) of the Company
and its domestic subsidiaries and by a pledge of all of the stock of the Company
and its domestic subsidiaries and two-thirds of the stock of certain of the
Company's foreign subsidiaries and joint ventures.
Mandatory prepayments and reductions of outstanding principal amounts under
the Senior Credit Facility are required upon the occurrence of certain events.
All outstanding loans under the Senior Credit Facility bear interest at the
Company's option at (i) the base rate in effect from time to time plus an
applicable margin ranging from 1 1/4% to 1 3/4% depending on
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<PAGE>
the type of loan or (ii) LIBOR (adjusted for maximum reserves) as determined by
the agent for the respective interest period, plus an applicable margin between
2 1/4% and 2 3/4%, depending on the type of loan.
The Senior Credit Facility contains customary covenants restricting the
incurrence of debt, encumbrances on and sales of assets, limitations on mergers
and certain acquisitions, limitations on changes of control, provisions for the
maintenance of certain financial ratios and various other financial covenants
and restrictions.
SELLER NOTE
In connection with the Acquisition, the Company issued the Seller Note to
the Sellers in an aggregate principal amount of $50.0 million. The Seller Note
bears interest at the same rate per annum as the Notes, payable quarterly in
arrears on the last business day of each calendar quarter. The Seller Note is
guaranteed by each entity that guaranteed the Notes and has substantially the
same covenants and default provisions as the Notes, provided, however, that the
maturity of the Seller Note may be accelerated only in the event of acceleration
of the maturity of the Senior Credit Facility and the Notes. The Seller Note is
subordinate in right of payment to all existing and future Senior Indebtedness
(as defined in the Seller Note) and PARI PASSU in right of payment with all
other senior subordinated or subordinated indebtedness of the Company, including
the Notes.
The Seller Note matures on the third anniversary of the issuance thereof and
will be subject to a mandatory prepayment (with such prepayment expected to be
made with the proceeds of term loans under the Senior Credit Facility) of
outstanding principal and interest upon the receipt by the Company of certain
consents or in certain other circumstances. The Company anticipates that
mandatory prepayment of the Seller Note will likely occur within one year of
issuance. If the Company suffers damages or losses in connection with the
failure to receive certain consents as a result of the change in control of
UDLP, the Company would have certain rights of set-off against payment on the
Seller Note for such damages or losses.
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DESCRIPTION OF THE NOTES
GENERAL
The Notes were issued pursuant to an Indenture (the "Indenture") by and
among the Company, the Guarantors and Norwest Bank Minnesota, N.A., as trustee
(the "Trustee"), in a private transaction that is not subject to the
registration requirements of the Securities Act. See "Notice to Investors." The
terms of the Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939 (the "Trust
Indenture Act"). The Notes are subject to all such terms, and Holders of Notes
are referred to the Indenture and the Trust Indenture Act for a statement
thereof. The following summary of the material provisions of the Indenture does
not purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below. Copies
of the proposed form of Indenture and Registration Rights Agreement are
available as set forth below under "Additional Information." The definitions of
certain terms used in the following summary are set forth below under "--Certain
Definitions." For purposes of this summary, the term "Company" refers only to
United Defense Industries, Inc. and not to any of its Subsidiaries.
The Notes are general unsecured obligations of the Company and are
subordinated in right of payment to all current and future Senior Debt. The
Notes rank PARI PASSU in right of payment with the Seller Note and with all
other senior subordinated Indebtedness of the Company issued in the future, if
any, and senior in the right of payment to all subordinated Indebtedness of the
Company issued in the future, if any. As of September 30, 1997, on a pro forma
basis after giving effect to the Transactions, the Company would have had
approximately $457.0 million of Senior Debt outstanding (excluding outstanding
letters of credit of approximately $154.0 million and unused commitments of
approximately $114.0 million under the Senior Credit Facility, $50.0 million of
which will be available only to fund the repayment of the Seller Note) and $50.0
million of PARI PASSU Indebtedness outstanding under the Seller Note (which will
mature on the third anniversary of the Acquisition, although the Company
believes the Seller Note will be prepaid prior to the first anniversary of the
Acquisition). The Indenture permits the incurrence of additional Senior Debt in
the future.
As of the Issue Date, all of the Company's Subsidiaries were Restricted
Subsidiaries, except for FNSS-Turkey, which is an Unrestricted Subsidiary. Under
certain circumstances, the Company will be able to designate other current or
future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will
not be subject to any of the restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $300.0 million,
$200.0 million of which were issued in connection with the issuance of the
Private Notes, and mature on November 15, 2007. Interest on the Notes accrues at
the rate of 8 3/4% per annum and is payable semi-annually in arrears on May 15
and November 15, commencing on May 15, 1998, to Holders of record on the
immediately preceding May 1 and November 1. Additional amounts may be issued in
one or more series from time to time subject to the limitations set forth under
the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock" and restrictions contained in the Senior Credit Facility and
any other agreement to which the Company is a party at the time of such
issuance. 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 date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal and premium, if any, on the Notes
will be payable at the office or agency of the Company maintained for such
purpose within the City and State of New York or, at the option of the Company,
payment of interest may be made by check mailed to the Holders of the Notes at
their respective addresses set forth in the register of Holders of Notes;
PROVIDED that all payments of principal, premium and interest with respect to
Notes the Holders of which have given wire transfer instructions to the Company
will be required to be made by wire transfer of immediately available funds to
the accounts specified by the Holders thereof. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of
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<PAGE>
the Trustee maintained for such purpose. The Notes will be issued in
denominations of $1,000 and integral multiples thereof.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes is
subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full, in cash or Cash Equivalents, of all Senior Debt, whether
outstanding on the date of the Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, in
an assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full, in cash or Cash Equivalents, of all Obligations due in respect
of such Senior Debt (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Debt (whether or not
an allowable claim)) before the Holders of Notes will be entitled to receive any
payment with respect to the Notes, and until all Obligations with respect to
Senior Debt are paid in full, in cash or Cash Equivalents, any distribution to
which the Holders of Notes would be entitled shall be made to the holders of
Senior Debt (except that Holders of Notes may receive and retain (i) Permitted
Junior Securities and (ii) payments made from the trust described under "--Legal
Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in Permitted Junior Securities or from the trust described under
"--Legal Defeasance and Covenant Defeasance") if (i) a default in the payment of
the principal of, premium, if any, or interest on Designated Senior Debt occurs
and is continuing beyond any applicable period of grace or (ii) any other
default occurs and is continuing with respect to Designated Senior Debt that
permits holders of the Designated Senior Debt as to which such default relates
to accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Company or the holders of any Designated
Senior Debt. Payments on the Notes may and shall be resumed (a) in the case of a
payment default, upon the date on which such default is cured or waived and (b)
in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Debt has been accelerated. No new period of payment blockage
may be commenced unless and until (i) 360 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal, premium, if any, and interest on the Notes that
have come due have been paid in full in cash. No nonpayment default that existed
or was continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice
unless such default shall have been waived for a period of not less than 90
days.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Debt. The Indenture limits,
subject to certain financial tests, the amount of additional Indebtedness,
including Senior Debt, that the Company and its Restricted Subsidiaries can
incur. See "--Certain Covenants-- Incurrence of Indebtedness and Issuance of
Preferred Stock."
GUARANTEES
The Company's payment obligations under the Notes are fully, unconditionally
and jointly and severally guaranteed (the "Guarantees") by the Guarantors. The
Guarantee of each Guarantor is subordinated to the prior payment in full of all
Senior Debt of such Guarantor (none of which, other than guarantees under the
Senior Credit Facility, was outstanding on a pro forma basis as of September 30,
1997), and the amounts for which the Guarantors are liable under the guarantees
issued from time to time
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with respect to Senior Debt. The obligations of each Guarantor under its
Guarantee is limited to the maximum amount the Guarantors are permitted to
guarantee under applicable law. See, however, "Risk Factors--Fraudulent
Conveyance Matters."
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) the Person formed by or surviving any such consolidation or merger
(if other than such Guarantor) assumes all the obligations of such Guarantor
pursuant to a supplemental indenture in form and substance reasonably
satisfactory to the Trustee, under the Notes and the Indenture; (ii) immediately
after giving effect to such transaction, no Default or Event of Default exists;
and (iii) except in the case of the merger of a Guarantor with or into another
Guarantor or the Company, the Company would be permitted by virtue of the
Company's pro forma Fixed Charge Coverage Ratio, immediately after giving effect
to such transaction, to incur at least $1.00 of additional Indebtedness pursuant
to the Fixed Charge Coverage Ratio test set forth in the covenant described
above under the caption "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock."
Upon (i) the release by the lenders under the Senior Credit Facility,
related documents and future refinancings thereof of all guarantees of a
Guarantor and all Liens on the property and assets of such Guarantor relating to
such Indebtedness, or (ii) the sale or disposition of a Guarantor (or all or
substantially all of its assets) to an entity which is not a Subsidiary of the
Company, which is otherwise in compliance with the Indenture, such Guarantor
shall be deemed released from all its obligations under the Indenture and its
Guarantee; PROVIDED, HOWEVER, that any such termination shall occur only to the
extent that all obligations of such Guarantor under the Senior Credit Facility
and all of its guarantees of, and under all of its pledges of assets or other
security interests which secure, Indebtedness of the Company shall also
terminate upon such release, sale or transfer.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Guarantee; PROVIDED THAT the
Net Proceeds of such sale or other disposition are applied in accordance with
the applicable provisions of the Indenture. See "--Repurchase at the Option of
Holders--Asset Sales."
OPTIONAL REDEMPTION
The Notes are not be redeemable at the Company's option prior to November
15, 2002. Thereafter, the Notes are subject to redemption at any time at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest, thereon to the
applicable redemption date, if redeemed during the twelve-month period beginning
on November 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- -------------------------------------------------------------------------- ------------------
<S> <C>
2002...................................................................... 104.375%
2003...................................................................... 102.917%
2004...................................................................... 101.458%
2005 and thereafter....................................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to November 15, 2000, the
Company may on any one or more occasions redeem up to 35% of the aggregate
principal amount of the Notes at a redemption price of 108.75% of the principal
amount thereof, plus accrued and unpaid interest to the redemption date, with
the net cash proceeds of any Public Equity Offering; PROVIDED that at least 65%
of the aggregate principal amount of Notes originally issued on the Issue Date
remain outstanding immediately after each occurrence
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of such redemption; and PROVIDED, further, that each such redemption shall occur
within 90 days of the date of the closing of such Public Equity Offering.
At any time on or prior to November 15, 2002, the Notes may also be redeemed
in whole but not in part at the option of the Company upon the occurrence of a
Change of Control, upon not less than 30 nor more than 60 days prior notice (but
in no event more than 90 days after the occurrence of such Change of Control),
at a redemption price equal to 100% of the principal amount thereof plus the
Applicable Premium, plus accrued and unpaid interest, thereon to the redemption
date (the "Redemption Date") (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date). The Company may not redeem Notes pursuant to this paragraph if it has
made a Change of Control Offer with respect to such Change of Control.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee 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 so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; PROVIDED
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. Notes called
for redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Notes or portions of them called
for redemption
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest thereon, if any, to the purchase date (the "Change of Control
Payment"). Within 30 days following any Change of Control, the Company will mail
a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Notes on the date
specified in such notice, which date shall be no earlier than 30 days and no
later than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"), pursuant to the procedures required by the Indenture and
described in such notice. The Company will comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so
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tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; PROVIDED THAT each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture
provides that, prior to complying with the provisions of this covenant, but in
any event within 60 days following a Change of Control, the Company will either
repay all outstanding Senior Debt or obtain the requisite consents, if any,
under all agreements governing outstanding Senior Debt to permit the repurchase
of Notes required by this covenant. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The Indenture requires that if the Senior Credit Facility is in effect, or
any amounts are owing thereunder, at the time of the occurrence of a Change of
Control, prior to the mailing of the notice to holders described in the third
preceding paragraph, but in any event within 30 days following any Change of
Control, the Company covenants to (i) repay in full all Obligations under the
Senior Credit Facility or offer to repay in full Obligations under the Senior
Credit Facility and repay the Obligations under the Senior Credit Facility of
each lender who has accepted such offer or (ii) obtain the requisite consent
under the Senior Credit Facility to permit the repurchase of the Notes as
described above. The Company must first comply with the covenant described in
the preceding sentence before it shall be required to purchase Notes in the
event of a Change of Control; PROVIDED that the Company's failure to purchase
Notes in the event of a Change of Control after complying with the covenant
described in the preceding sentence constitutes an Event of Default described in
clause (iv) under the caption "--Events of Default and Remedies" below if not
cured within 30 days after the notice required by such clause. As a result of
the foregoing, a holder of the Notes may not be able to compel the Company to
purchase the Notes unless the Company is able at the time to refinance all of
the Obligations outstanding under the Senior Credit Facility or obtain requisite
consents under the Senior Credit Facility.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
ASSET SALES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless (i) the Company or such Restricted
Subsidiary receives consideration at the time of such Asset Sale at least equal
to the fair market value, or at least equal to 95% of the fair market value in
the case of a sale and leaseback transaction permitted by the covenant described
below under the caption "--Certain Covenants--Sale and Leaseback Transactions"
(in each case as specified in an Officers' Certificate with respect to any Asset
Sale of less than $3.0 million and as determined by the Board of Directors in
good faith with respect to any Asset Sales in excess of $3.0 million), of the
assets or Equity Interests issued or sold or otherwise disposed of and (ii) at
least 75% (100% in the case of lease payments) of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of cash or
Cash Equivalents; PROVIDED that the amount of (x) any liabilities (as shown on
the Company's or such Restricted Subsidiary's most recent balance sheet) of the
Company or any Restricted Subsidiary of the Company (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes or
any Guarantee thereof) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability and (y)
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any securities, notes or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that are converted by the Company or
such Restricted Subsidiary into cash (to the extent of the cash received) within
30 days after consummation of such Asset Sale, shall be deemed to be cash for
purposes of this provision.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or the Restricted Subsidiary, as applicable, may apply such Net
Proceeds, at its option, (a) to repay Indebtedness under any Credit Facility
(and to correspondingly permanently reduce the commitments with respect thereto
in the case of revolving borrowings) or (b) to the acquisition of a controlling
interest in another business, the making of a capital expenditure or the
acquisition of other assets that are not current assets, in each case, in
Permitted Businesses. Pending the final application of any such Net Proceeds,
the Company may temporarily reduce Indebtedness under any Credit Facility or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the first sentence of this paragraph shall be deemed to constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0
million, the Company shall be required to make an offer (after complying with
any asset sale offer requirement pursuant to the terms of any Senior Debt
permitted to be incurred in accordance with the Indenture, and PRO RATA in
proportion to the principal amount (or accreted value, if applicable)
outstanding in respect of any asset sale offer required by the terms of the
Seller Note and any other PARI PASSU Indebtedness incurred in accordance with
the Indenture) to all Holders of Notes (an "Asset Sale Offer") to purchase the
maximum principal amount of Notes that may be purchased out of the Excess
Proceeds, at an offer price in cash in an amount equal to 100% of the principal
amount thereof plus accrued and unpaid interest thereon, if any, to the date of
purchase, in accordance with the procedures set forth in the Indenture. To the
extent that the aggregate amount of Notes tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds (after giving effect to any asset sale
offer required under the terms of any Senior Debt or PARI PASSU Indebtedness as
aforesaid), the Company may use any remaining Excess Proceeds for general
corporate purposes including payment of Subordinated Obligations. If the
aggregate principal amount of Notes surrendered by Holders thereof exceeds the
amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on
A PRO RATA basis. Upon completion of such offer to purchase, the amount of
Excess Proceeds shall be reset at zero. This paragraph shall apply, but the
preceding paragraph shall not apply, to the sale or liquidation of an interest
in a Permitted Joint Venture or FNSS-Turkey pursuant to the exercise of call or
rights by any party thereto, or the sale or other disposition of property or
assets of a Permitted Joint Venture or FNSS-Turkey, in accordance with the terms
of the agreement or agreements (as amended) governing such Permitted Joint
Venture or FNSS-Turkey.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly: (i) declare or pay any dividend or make any other
payment or distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment in
connection with any merger or consolidation involving the Company) or to the
direct or indirect holders of the Company's or any of its Restricted
Subsidiaries' Equity Interests in their capacity as such (other than dividends
or distributions payable in Equity Interests (other than Disqualified Stock) of
the Company); (ii) purchase, redeem or otherwise acquire or retire for value
(including without limitation, in connection with any merger or consolidation
involving the Company) any Equity Interests of the Company or any direct or
indirect parent of the Company or other Affiliate (other than Equity Interests
of the Company or a Restricted Subsidiary in a Restricted Subsidiary or
Permitted Joint Venture) of the Company; (iii) make any payment on or with
respect to, or purchase, redeem, defease or otherwise acquire or retire for
value any Subordinated Obligations, except a payment of interest or principal at
Stated Maturity; or (iv) make any Restricted Investment (all such payments and
other actions set forth in clauses (i) through (iv) above
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being collectively referred to as "Restricted Payments"), unless, at the time of
and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company or any of its Restricted
Subsidiaries after the Issue Date (excluding Restricted Payments permitted
by clauses (ii), (iii), (iv), (vi), (vii), (viii) or (ix) of the next
succeeding paragraph), is less than the sum of (i) 50% of the Consolidated
Net Income of the Company for the period (taken as one accounting period)
from the beginning of the first fiscal quarter immediately following the
Issue Date to the end of the Company's most recently ended fiscal quarter
for which internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit), plus (ii) 100% of the aggregate Net
Cash Proceeds received by the Company as a contribution to its common equity
capital or from the issue or sale since the Issue Date of Equity Interests
of the Company (other than Disqualified Stock), or of Disqualified Stock or
debt securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or convertible
debt securities) sold to a Restricted Subsidiary of the Company and other
than Disqualified Stock or convertible debt securities that have been
converted into Disqualified Stock), plus (iii) to the extent not already
included in Consolidated Net Income of the Company for such period without
duplication, any Restricted Investment that was made by the Company or any
of its Restricted Subsidiaries after the Issue Date is sold for cash or
otherwise liquidated or repaid for cash, or any Unrestricted Subsidiary
which is designated as an Unrestricted Subsidiary subsequent to the Issue
Date is sold for cash or otherwise liquidated or repaid for cash, the lesser
of (A) the cash return of capital with respect to such Restricted Investment
or Unrestricted Subsidiary (less the cost of disposition, if any) and (B)
the initial amount of such Restricted Investment or amount deemed to
constitute an Investment in such Unrestricted Subsidiary.
The foregoing provisions shall not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of Subordinated Obligations or Equity Interests of the Company in
exchange for, or out of the net cash proceeds of the substantially concurrent
sale (other than to a Restricted Subsidiary of the Company) of, other Equity
Interests of the Company (other than any Disqualified Stock); PROVIDED that the
amount of any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be excluded from
clause (c) (ii) of the preceding paragraph; (iii) the defeasance, redemption,
repurchase or other acquisition of Subordinated Obligations with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the
payment of any dividend or distribution by a Restricted Subsidiary of the
Company or by a Permitted Joint Venture, (A) in the case of a Restricted
Subsidiary that is not a Permitted Joint Venture, to the holders of its common
Equity Interests so long as the Company or such Restricted Subsidiary receives
at least its pro rata share of such dividend or distribution in accordance with
its Equity Interests, and (B) in the case of a Permitted Joint Venture, to the
holders of its Equity Interests so long as such dividend or distribution is made
in accordance with the terms of the agreement or agreements or applicable legal
requirements governing such Permitted Joint Venture and the Company and/or the
applicable Restricted Subsidiary or Restricted Subsidiaries holding such
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Equity Interests receive its or their share of such dividend or distribution as
contemplated by such agreement or agreements or applicable legal requirements;
(v) any payment by the Company or any Restricted Subsidiary of the Company, or
any payment of a dividend or distribution by the Company to Iron Horse the
proceeds of which are used, (a) in connection with repurchases of Equity
Interests or Subordinated Obligations of the Company or Iron Horse following the
death, disability or termination of employment of members of management of the
Company or any Subsidiary of the Company or any Permitted Joint Venture, and (b)
of amounts (to the extent such payments would otherwise constitute Restricted
Payments) required to be paid by the Company or any of its Restricted
Subsidiaries or Iron Horse to participants in employee benefit plans upon
termination of employment by such participants, as provided in the documents
related thereto, in an aggregate amount (for both clauses (a) and (b)) not to
exceed $3.0 million in any fiscal year; PROVIDED that any unused amounts may be
carried over to any subsequent fiscal year subject to a maximum amount of $6.0
million in any fiscal year; PROVIDED, FURTHER, that such amount in any fiscal
year may be increased by an amount not to exceed (A) the cash proceeds from the
sale of Equity Interests of the Company (or from the sale of Equity Interests of
Iron Horse to the extent such proceeds are contributed to the Company by Iron
Horse) to members of management, directors or consultants of the Company and its
Subsidiaries that occurs after the Issue Date (to the extent the cash proceeds
from the sale of such Equity Interests have not otherwise been applied to the
payment of Restricted Payments by virtue of clause (c) of the preceding
paragraph) plus (B) the cash proceeds of key man life insurance policies
received by the Company and its Restricted Subsidiaries after the Issue Date
less (C) the amount of any Restricted Payments previously made pursuant to
clauses (A) and (B); and PROVIDED, FURTHER that the cancellation of Indebtedness
owing to the Company or Iron Horse from members of management of the Company or
any of its Restricted Subsidiaries in connection with a repurchase of Equity
Interests of the Company or Iron Horse will not be deemed to constitute a
Restricted Payment for purposes of this covenant or any other provision of the
Indenture; (vi) repurchases of Equity Interests of the Company or a Restricted
Subsidiary deemed to occur upon exercise of stock options if such Equity
Interests represent a portion of the exercise price of such options; (vii)
Restricted Investments in Subsidiaries or Permitted Joint Ventures that are made
with Excluded Contributions; (viii) other Restricted Payments in an aggregate
amount since the Issue Date not to exceed $10.0 million; (ix) the declaration
and payment of dividends to holders of any class or series of Designated
Preferred Stock issued after the Issue Date; PROVIDED, HOWEVER, that for the
most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date of issuance of such
Designated Preferred Stock, after giving effect to such issuance on a pro forma
basis, the Company and its Restricted Subsidiaries would have had a Fixed Charge
Coverage Ratio greater than 2.0 to 1.0; and (x) payments required pursuant to
any indenture or agreement governing Subordinated Obligations in respect of any
Change of Control or Asset Sale, provided that payment has theretofore been made
with respect to all Notes tendered in response to a Change of Control Offer or
Asset Sale Offer, as applicable, PROVIDED that, with respect to clauses (ii),
(iii), (v), (viii), (ix) and (x) above, no Default or Event of Default shall
have occurred and be continuing immediately after such transaction.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary of the Company, pursuant to the Restricted Payment. The fair market
value of any non-cash Restricted Payment shall be determined by the Board of
Directors of the Company whose resolution with respect thereto shall be
delivered to the Trustee, such determination to be based upon an opinion or
appraisal issued by an Independent Financial Advisor if such fair market value
exceeds $10.0 million. Not later than five Business Days after making any
Restricted Payment in excess of $2.0 million, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant described above under the caption "--Certain Covenants--Restricted
Payments" were computed, together with a copy of any fairness opinion or
appraisal required by the Indenture.
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INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt) and that the
Company shall not issue any Disqualified Stock and shall not permit any of its
Restricted Subsidiaries to issue any shares of preferred stock; PROVIDED,
HOWEVER, that the Company or any Restricted Subsidiary that is a Guarantor may
incur Indebtedness (including Acquired Debt) or the Company may issue shares of
Disqualified Stock if the Company's Fixed Charge Coverage Ratio for the
Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock is issued would
have been at least 2.0 to 1.0, determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock had been issued, as
the case may be, at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant shall not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of Indebtedness under one or more
Credit Facilities and related guarantees under any such Credit Facility;
PROVIDED that the sum of the aggregate principal amount of all such
Indebtedness outstanding under such Credit Facilities after giving effect to
such incurrence, does not exceed an amount equal to $505.0 million minus an
amount (the "Reduction Amount") equal to the difference between (a) $50.0
million and (b) the amount of Indebtedness incurred under the Senior Credit
Facility to repay the Seller Note (provided that if the computation of the
Reduction Amount results in a negative amount, the Reduction Amount shall be
deemed to be zero);
(ii) the incurrence by the Company or any Restricted Subsidiary of
revolving credit Indebtedness under one or more Credit Facilities, letters
of credit and related guarantees under any such Credit Facility; PROVIDED
that the aggregate principal amount of all revolving Indebtedness (with
letters of credit being deemed to have a principal amount equal to the
maximum potential liability of the Company and its Restricted Subsidiaries
thereunder) outstanding under such Credit Facilities after giving effect to
such incurrence, does not exceed the greater of (a) $220.0 million and (b)
the Borrowing Base, less the aggregate amount of Asset Sale proceeds applied
to permanently reduce the availability of revolving credit Indebtedness
under such Credit Facilities pursuant to the provisions described under the
caption "--Asset Sales;"
(iii) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness (which Indebtedness is not contemplated to be
repaid with the proceeds of the Offering) other than Indebtedness described
in clause (i), (ii) or (viii) of this paragraph;
(iv) the incurrence by the Company of Indebtedness represented by the
Private Notes and the Exchange Notes issued in exchange for the Private
Notes and the incurrence by the Guarantors of the Guarantees;
(v) the incurrence by the Company of Indebtedness represented by the
Seller Note and the incurrence by the Guarantors of guarantees thereof;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary, in an aggregate
principal amount, including all Permitted Refinancing Indebtedness incurred
to refund, refinance or replace Indebtedness incurred pursuant to this
clause (vi), not to exceed $15.0 million at any time outstanding;
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(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in respect of
Indebtedness described in the first paragraph of this covenant or clause
(iii), (iv) or (v) of this paragraph;
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Restricted Subsidiaries; PROVIDED, HOWEVER, that (x) any
subsequent event or issuance or transfer of Equity Interests that results in
any such Indebtedness being held by a Person other than the Company or a
Restricted Subsidiary of the Company and (y) any sale or other transfer of
any such Indebtedness to a Person that is not either the Company or a
Restricted Subsidiary of the Company that is a Guarantor shall be deemed, in
each case, to constitute an incurrence of such Indebtedness by the Company
or such Restricted Subsidiary, as the case may be, that was not permitted by
this clause (viii);
(ix) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred in the normal course of business or
as required by any Credit Facility for the purpose of fixing or hedging
currency, commodity or interest rate risk (including with respect to any
floating rate Indebtedness that is permitted by the terms of the Indenture
to be outstanding) in connection with the conduct of their respective
businesses and not for speculative purposes;
(x) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company or a
Permitted Joint Venture that was permitted to be incurred by another
provision of this covenant "--Incurrence of Indebtedness and Issuance of
Preferred Stock," PROVIDED that any such guarantee of Indebtedness is a
Permitted Investment or otherwise permitted by the covenant described above
under the caption "--Certain Covenants-- Restricted Payments";
(xi) Indebtedness incurred by the Company or any Restricted Subsidiary
under performance bonds, letter of credit obligations to provide security
for worker's compensation claims, payment obligations in connection with
self-insurance or similar requirements and bank overdrafts incurred in the
ordinary course of business; PROVIDED that any Obligations arising in
connection with such bank overdraft Indebtedness is extinguished within five
Business Days;
(xii) Indebtedness incurred by the Company or any Restricted Subsidiary
arising from agreements providing for indemnification, adjustment of
purchase price or similar obligations, from guarantees or letters of credit,
surety bonds or performance bonds securing any Obligations of the Company or
any Restricted Subsidiary pursuant to such agreements, in any case incurred
in connection with the disposition of any business, assets, Subsidiary or
Permitted Joint Venture (including, without limitation, an Asset Sale) other
than guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets, Subsidiary or Permitted Joint Venture
(including, without limitation, an Asset Sale) for the purpose of financing
such acquisition, in a principal amount not to exceed the gross proceeds
(with proceeds other than cash or Cash Equivalents being valued at the fair
market value thereof as determined by the Board of Directors in good faith)
actually received by the Company or any Restricted Subsidiary in connection
with such dispositions;
(xiii) the incurrence of Non-Recourse Indebtedness (A) by Permitted
Joint Ventures or (B) constituting Acquired Debt of a Restricted Subsidiary
not incurred in connection with such Restricted Subsidiary becoming a
Restricted Subsidiary; and
(xiv) the incurrence by the Company or any of its Restricted
Subsidiaries or any Permitted Joint Ventures of additional Indebtedness in
an aggregate principal amount (or accreted value, as applicable) at any time
outstanding, which may, but need not, be incurred under a Credit Facility,
not to exceed $50.0 million.
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For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (xiv) above or is entitled to be
incurred pursuant to the first paragraph of this covenant, the Company shall, in
its sole discretion, classify such item of Indebtedness in any manner that
complies with this covenant and such item of Indebtedness shall be treated as
having been incurred pursuant to only one of such clauses or pursuant to the
first paragraph hereof. Accrual of interest, the accretion of accreted value and
the payment of interest in the form of additional Indebtedness will not be
deemed to be an incurrence of Indebtedness for purposes of this covenant.
LIENS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, create, incur, assume or otherwise cause or suffer to exist or become
effective any Lien of any kind securing Indebtedness or trade payables (other
than Permitted Liens) upon any of their property or assets, now owned or
hereafter acquired, unless all payments due under the Indenture and the Notes
are secured on an equal and ratable basis with the obligations so secured until
such time as such obligations are no longer secured by a Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction on the ability of any Restricted
Subsidiary of the Company or the Company to (i)(x) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (y) pay any Indebtedness owed to the Company or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Company
or any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the Issue Date, or as amended thereafter on terms,
taken as a whole, no less favorable to the Holders of the Notes than the terms
of such Indebtedness as in effect on the Issue Date, (b) the Senior Credit
Facility as in effect as of the Issue Date, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, PROVIDED that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement or
refinancings are no more restrictive, taken as a whole, with respect to such
dividend and other payment restrictions than those contained in the Senior
Credit Facility as in effect on the Issue Date, (c) the Indenture and the Notes,
(d) applicable law (including without limitation the laws of any jurisdiction
governing any Permitted Joint Venture), (e) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of its
Restricted Subsidiaries as in effect at the time of such acquisition (except to
the extent such Indebtedness was incurred in connection with or in contemplation
of such acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, PROVIDED that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (f) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business, (g) purchase money obligations
for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property so
acquired, (h) Indebtedness of Guarantors, PROVIDED that such Indebtedness was
permitted to be incurred pursuant to the Indenture, (i) Permitted Refinancing
Indebtedness, PROVIDED that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced,
(j) secured Indebtedness otherwise permitted to be incurred pursuant to the
provisions of the covenant described under the caption "--Certain
Covenants--Liens" that limit the right of the debtor to dispose of the assets
securing such Indebtedness, (k) customary net worth provisions contained in
leases and other agreements entered into in the ordinary course of business, (l)
customary restrictions with respect to a Restricted Subsidiary pursuant
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to an agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Restricted Subsidiary,
(m) provisions with respect to dividends and the disposition or distribution of
assets or property, or transactions between or among the joint venture and the
parties to such joint venture (including loans), in joint venture agreements and
other similar agreements, (n) any other instrument governing Indebtedness
incurred on or after the Issue Date or any refinancing thereof that is incurred
in accordance with the Indenture, PROVIDED that the encumbrance or restriction
contained in any such Indebtedness or any such refinancing thereof is no more
restrictive and no more unfavorable to the holders of the Notes than that
contained in the Senior Credit Facility as in effect on the Issue Date, (o)
restrictions on cash or other deposits or net worth imposed by customers under
contracts entered into in the ordinary course of business, (p) Non-Recourse
Indebtedness of any Permitted Joint Venture or other Indebtedness of a Permitted
Joint Venture permitted to be incurred under the Indenture, and (q) the Seller
Note.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Company will not consolidate or merge with or into (whether or not the
Company is the surviving corporation), or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its properties or assets in
one or more related transactions, to another corporation, Person or entity
unless (i) the Company is the surviving corporation or the entity or the Person
formed by or surviving any such consolidation or merger (if other than the
Company) or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made is a corporation organized or existing under
the laws of the United States of America, any state thereof or the District of
Columbia; (ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or Person to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made assumes all the obligations of the Company under the Notes
and the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately before and after such transaction
no Default or Event of Default shall have occurred; and (iv) except in the case
of a merger of the Company with or into a Restricted Subsidiary of the Company,
the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made will, at the time of such transaction and after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of covenant described above under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock."
LIMITATION ON CAPITAL STOCK OF CONTROLLED SUBSIDIARIES
The Company will not, if such action would cause a Restricted Subsidiary not
to be a Controlled Subsidiary, (i) sell, pledge, hypothecate or otherwise convey
or dispose of any Capital Stock of a Controlled Subsidiary (other than Liens on
such Capital Stock securing Obligations under Senior Debt) or (ii) permit any of
its Controlled Subsidiaries to issue any Capital Stock, other, in any such case,
than to the Company or a Controlled Subsidiary. The foregoing restrictions shall
not apply to an Asset Sale made in compliance with the covenant described above
under the caption "--Asset Sales" or the issuance or sale of Capital Stock of or
by a Controlled Subsidiary that will result in the establishment of a Permitted
Joint Venture.
GUARANTEES OF CERTAIN INDEBTEDNESS
The Company will not permit any of its Restricted Subsidiaries, directly or
indirectly, to guarantee the payment of any Indebtedness under any Credit
Facility under which the Company is a borrower or under which a Restricted
Subsidiary is a borrower and guarantees Indebtedness of the Company under any
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Credit Facility, unless such Restricted Subsidiary, the Company and the Trustee
execute and deliver a supplemental indenture evidencing such Guarantee of the
Notes, such Guarantee to be a senior subordinated unsecured obligation of such
Restricted Subsidiary. Neither the Company nor any Guarantor shall be required
to make a notation on the Notes to reflect any such subsequent Guarantee.
Nothing in this covenant shall be construed to permit any Restricted Subsidiary
of the Company to incur Indebtedness otherwise prohibited by the covenant
described above under the caption "--Certain Covenants-- Incurrence of
Indebtedness and Issuance of Preferred Stock".
TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, make any payment to, or sell, lease, transfer or otherwise dispose of any
properties or assets to, or purchase any property or assets from, or enter into
or make or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate of any such
Person (each of the foregoing, an "Affiliate Transaction"), unless (i) such
Affiliate Transaction is on terms that are no less favorable to the Company or
the relevant Restricted Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Restricted Subsidiary with an
unrelated Person and (ii) the Company delivers to the Trustee (x) with respect
to any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $3.0 million, a resolution of its
Board of Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the disinterested members of its
Board of Directors and (y) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, an opinion as to the fairness to the Holders of such Affiliate
Transaction from a financial point of view issued by an Independent Financial
Advisor; PROVIDED that none of the following shall be deemed to be Affiliate
Transactions: (a) any employment agreement entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business of the Company or
such Restricted Subsidiary, as the case may be; (b) transactions between or
among (A) the Company and/or its Restricted Subsidiaries that are Guarantors,
Controlled Subsidiaries and/or Permitted Joint Ventures, and (B) any such entity
and any other Restricted Subsidiaries or between or among such other Restricted
Subsidiaries, which in the case of clause (B) are on terms that are no less
favorable to the Company and/or such Subsidiary than those that would have been
obtained in a comparable transaction by the Company and/or such Subsidiary with
an unrelated Person; (c) Restricted Payments that are permitted by the covenant
described above under the caption "--Certain Covenants--Restricted Payments";
(d) fees and compensation paid to members of the Board of Directors of the
Company and any of its Restricted Subsidiaries and Permitted Joint Ventures in
their capacity as such, to the extent such fees and compensation are reasonable
and customary; (e) advances to employees for moving, entertainment and travel
expenses, drawing accounts and similar expenditures in the ordinary course of
business and consistent with past practices; (f) provision of administrative or
management services by the Company, its Subsidiaries or Permitted Joint Ventures
or any of their officers to any of their respective Subsidiaries or Permitted
Joint Ventures in the ordinary course of business; (g) arm's length transactions
entered into in the ordinary course of business between or among the Company,
any Restricted Subsidiary or any Permitted Joint Venture and any Affiliate of
the Company; (h) transactions contemplated by any agreement as in effect as of
the Issue Date or any amendment thereto so long as any such amendment is not
disadvantageous to the Holders of the Notes in any material respect and so long
as the amounts paid by the Company and the Restricted Subsidiaries under any
such amended agreement do not exceed the amounts payable by the Company and the
Restricted Subsidiaries on the Issue Date; and (i) fees, compensation and
benefits paid to, and indemnity provided on behalf of, officers, directors or
employees of the Company or any of its Restricted Subsidiaries, as determined by
the Board of Directors of the Company or of any such Restricted Subsidiary, to
the extent such fees, compensation and benefits are reasonable and customary.
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SALE AND LEASEBACK TRANSACTIONS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, enter into any sale and leaseback transaction; PROVIDED THAT the Company may
enter into a sale and leaseback transaction if (i) the Company could have
incurred Indebtedness in an amount equal to the Attributable Debt relating to
such sale and leaseback transaction pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph or clause (vi) or (xiv) of the second
paragraph of the covenant described above under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" and (ii)
the gross cash proceeds of such sale and leaseback transaction are at least
equal to 95% of the fair market value (as determined in good faith by the Board
of Directors and set forth in an Officers' Certificate delivered to the Trustee)
of the property that is the subject of such sale and leaseback transaction and
(iii) the transfer of assets in such sale and leaseback transaction is permitted
by, and the Company applies the proceeds of such transaction in compliance with,
the covenant described above under the caption
"--Asset Sales."
NO SENIOR SUBORDINATED DEBT
The Indenture provides that, notwithstanding any other provision thereof,
(i) the Company will not incur, create, issue, assume, guarantee or otherwise
become liable directly or indirectly for any Indebtedness (including Acquired
Debt) that is expressly subordinate or junior in right of payment to any Senior
Debt and senior in any respect in right of payment to the Notes and (ii) no
Guarantor will incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness (including Acquired Debt) that is expressly
subordinate or junior in right of payment to any Senior Debt of a Guarantor and
senior in any respect in right of payment to the Guarantees, it being understood
that Indebtedness will not be considered senior to other Indebtedness solely by
reason of being secured.
BUSINESS ACTIVITIES
The Company will not, and the Company will not permit any of its Restricted
Subsidiaries to, directly or indirectly, engage in any line of business other
than a Permitted Business, except to such extent as would not be material to the
Company and its Restricted Subsidiaries taken as a whole.
PAYMENTS FOR CONSENT
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any Holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Notes unless such consideration is offered to be paid or
is paid to all Holders of the Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
REPORTS
The Indenture provides that whether or not the Company is required by the
rules and regulations of the SEC, so long as any Notes are outstanding and
irrespective of whether the Exchange Offer Registration Statement or the Shelf
Registration Statement has been declared effective by the SEC, the Company will
furnish to each of the Holders of Notes within the time periods specified in the
SEC's rules and regulations, beginning with annual financial information for the
year ended December 31, 1997, (i) all quarterly and annual financial information
that would be required to be contained in a filing with the SEC on Forms 10-Q
and 10-K if the Company were required to file such financial information,
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations " that describes the financial condition and results of
operations of the Company and any consolidated Restricted Subsidiaries and, with
respect to the annual information only, reports thereon by the Company's
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independent public accountants (which shall be firm(s) of established national
reputation) and (ii) all information that would be required to be filed with the
SEC on Form 8-K if the Company were required to file such reports. In addition,
whether or not required by the rules and regulations of the SEC, the Company
shall file a copy of all such information and reports with the SEC for public
availability within the time periods specified in the SEC's rules and
regulations (unless the SEC will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. For so long as any Notes remain outstanding, the Company and the
Guarantors shall furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest with
respect to, the Notes (whether or not prohibited by the subordination provisions
of the Indenture); (ii) default in payment when due of the principal of or
premium, if any, on the Notes (whether or not prohibited by the subordination
provisions of the Indenture); (iii) failure by the Company or any of its
Restricted Subsidiaries to comply with the provisions described under the
caption "--Certain Covenants--Merger, Consolidation, or Sale of Assets"; (iv)
failure by the Company or any of its Restricted Subsidiaries for 30 days after
notice to comply with the provisions described under the captions "--Asset
Sales," "--Repurchase at the Option of Holders--Change of Control," "--Certain
Covenants--Restricted Payments," or "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock"; (v) failure by the Company or any
of its Restricted Subsidiaries for 60 days after notice to comply with any of
its other agreements in the Indenture or the Notes; (vi) default under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by the
Company or any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted Subsidiaries) whether such
Indebtedness or guarantee now exists, or is created after the Issue Date, which
default (a) is caused by a failure to pay principal of such Indebtedness at
final maturity prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b) results in
the acceleration of such Indebtedness prior to its express maturity and, in each
case, the principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been a Payment
Default or the maturity of which has been so accelerated, aggregates without
duplication $10.0 million or more; (vii) failure by the Company or any of its
Significant Subsidiaries to pay final judgments aggregating in excess of $10.0
million (excluding amounts covered by insurance), which judgments are not paid,
discharged or stayed for a period of 60 days; (viii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Significant
Subsidiaries and (ix) except as permitted by the Indenture, any Guarantee shall
be held in any judicial proceeding to be unenforceable or invalid or shall cease
for any reason to be in full force and effect or any Guarantor, or any Person
acting on behalf of any Guarantor, shall deny or disaffirm its obligations under
its Guarantee (other than by reason of the termination of the Indenture or the
release of any such Guarantee in accordance with the Indenture).
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency with respect to the Company or any Significant Subsidiary, all
outstanding Notes will become due and payable without further action or notice.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
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In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the principal intention of avoiding payment of the premium that the Company
would have had to pay if the Company then had elected to redeem the Notes
pursuant to the optional redemption provisions of the Indenture, an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law upon the acceleration of the Notes. If an Event of Default
occurs prior to November 15, 2002 by reason of any willful action (or inaction)
taken (or not taken) by or on behalf of the Company with the intention of
avoiding the prohibition on redemption of the Notes prior to November 15, 2002,
then the premium specified in the Indenture shall also become immediately due
and payable to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator, partner, member or stockholder
of the Company or any Subsidiary of the Company or any Permitted Joint Venture
or any Guarantor, or of any member, partner or stockholder of any such entity,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
SEC that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, on such Notes
when such payments are due from the trust referred to below, (ii) the Company's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "--Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated maturity or on the
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applicable redemption date, as the case may be, and the Company must specify
whether the Notes are being defeased to maturity or to a particular redemption
date; (ii) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the Issue Date,
there has been a change in the applicable federal income tax law, in either case
to the effect that, and based thereon such opinion of counsel shall confirm
that, the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Legal Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Legal Defeasance had
not occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the Indenture) to which the Company
or any of its Restricted Subsidiaries is a party or by which the Company or any
of its Restricted Subsidiaries is bound; (vi) the Company must have delivered to
the Trustee an opinion of counsel to the effect that 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; (vii) the Company must deliver to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders of Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
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Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"--Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders") or (viii) make any change in
the foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Indenture (which relate to subordination) will
require the consent of the Holders of at least 75% in aggregate principal amount
of the Notes then outstanding if such amendment would adversely affect the
rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's or any Guarantor's obligations to Holders of Notes
in the case of a merger or consolidation, to make any change that would provide
any additional rights or benefits to the Holders of Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, or to
comply with requirements of the SEC in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; HOWEVER, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the SEC for permission to continue or
resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to United Defense
Industries, Inc., 1525 Wilson Boulevard, Suite 700, Arlington, VA 22209-2411,
Attention: Chief Financial Officer.
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BOOK-ENTRY, DELIVERY AND FORM
The Notes will be represented by one or more global notes in registered,
global form without interest coupons (the "Global Note"). The Global Note
initially will be deposited upon issuance with the Trustee as custodian for the
Depositary, in New York, New York, and registered in the name of the Depositary
or its nominee, in each case for credit to an account of a direct or indirect
participant as described below.
Except as set forth below, the Global Note may be transferred, in whole and
not in part, only to another nominee of the Depositary or to a successor of the
Depositary or its nominee. Beneficial interests in the Global Notes may not be
exchanged for Notes in certificated form except in the limited circumstances
described below. See "--Depositary Procedures--Exchange of Book-Entry Notes for
Certificated Notes."
Transfer of beneficial interests in the Global Notes will be subject to the
applicable rules and procedures of the Depositary and its direct or indirect
participants, which may change from time to time.
The Notes may be presented for registration of transfer and exchange at the
offices of the Registrar.
DEPOSITARY PROCEDURES
The Depositary has advised the Company that the Depositary is a
limited-purpose trust company created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the clearance
and settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of Participants. The Participants
include securities brokers and dealers (including the Initial Purchasers),
banks, trust companies, clearing corporations and certain other organizations.
Access to the Depositary's system is also available to other entities such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
(collectively, "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of the Depositary only through
the Participants or Indirect Participants. The ownership interest and transfer
of ownership interest of each actual purchaser of each security held by or on
behalf of the Depositary are recorded on the records of the Participants and
Indirect Participants.
The Depositary has also advised the Company that pursuant to procedures
established by it, (i) upon deposit of the Global Notes, the Depositary will
credit the accounts of Participants designated by the Initial Purchasers with
portions of the principal amount of Global Notes and (ii) ownership of such
interests in the Global Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to Participants) or by Participants and the Indirect Participants
(with respect to other owners of beneficial interests in the Global Notes).
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interest in a Global Note to such persons may be limited to
that extent. Because the Depositary can act only on behalf of Participants,
which in turn act on behalf of Indirect Participants and certain banks, the
ability of a person having a beneficial interest in a Global Note to pledge such
interest to persons or entities that do not participate in the Depositary
system, or otherwise take actions in respect of such interests, may be affected
by the lack of physical certificate evidencing such interests. For certain other
restrictions on the transferability of the Notes see, "--Depositary
Procedures--Exchange of Book-Entry Notes for Certificated Notes."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal, premium and interest on a Global Note
registered in the name of the Depositary or its nominee will be payable by the
Trustee to the depositary or its nominee in its capacity as the registered
Holder under the Indenture. Under the terms of the Indenture, the Company and
the
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Trustee will treat the persons in whose names the Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
the Company, the Trustee nor any agent of the Company or the Trustee has or will
have any responsibility or liability for (i) any aspect of the Depositary's
records or any Participant's or Indirect Participant's records relating to or
payments made on account of beneficial ownership interests in the Global Notes,
or for maintaining, supervising or reviewing any of the Depositary's records or
any Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Notes or (ii) any other matter relating to the
actions and practices of the Depositary or any of its Participants or Indirect
Participants.
The Depositary has advised the Company that its current practices, upon
receipt of any payment in respect of securities such as the Notes (including
principal and interest), is to credit the accounts of the relevant Participants
with the payment on the payment date, in amounts proportionate to their
respective holdings in principal amount of beneficial interests in the relevant
security such as the Global Notes as shown on the records of the Depositary.
Payments by Participants and the Indirect Participants to the beneficial owners
of Notes will be governed by standing instructions and customary practices and
will not be the responsibility of the Depositary, the Trustee or the Company.
Neither the Company nor the Trustee will be liable for any delay by the
Depositary or its Participants in identifying the beneficial owners of the
Notes, and the Company and the Trustee may conclusively rely on and will be
protected in relying on instructions from the Depositary or its nominee as the
registered owner of the Notes for all purposes.
Interests in the Global Note will trade in the Depositary's Same-Day Funds
Settlement System and secondary market trading activity in such interests will,
therefore, settle in immediately available funds, subject in all cases to the
rules and procedures of the Depositary and its Participants.
Transfers between Participants in the Depositary will be effective in
accordance with the Depositary's procedures, and will be settled in same-day
funds.
The Depositary has advised the Company that it will take any action
permitted to be taken by a Holder of Notes only at the direction of one or more
Participants to whose account the Depositary interests in the Global Notes are
credited and only in respect of such portion of the aggregate principal amount
of the Notes as to which such Participant or Participants has or have given
direction. However, if there is an Event of Default under the Notes, the
Depositary reserves the right to exchange Global Notes for legended Notes in
certificated form, and to distribute such Notes to its Participants.
The information in this section concerning the Depositary and its bookentry
systems has been obtained from sources that the Company believes to be reliable,
but the Company takes no responsibility for the accuracy thereof.
Although the Depositary has agreed to the foregoing procedures to facilitate
transfers of interests in the Global Note among Participants in the Depositary
it is under no obligation to perform or to continue 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 the Depositary or
its respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive Notes in registered
certificated form if (i) the Depositary (A) notifies the Company that it is
unwilling or unable to continue as depository for the Global Note and the
Company thereupon fails to appoint a successor depository or (B) has ceased to
be a clearing agency registered under the Exchange Act or (ii) the Company, at
its option, notifies the Trustee in writing that it elects to cause issuance of
the Notes in certificated form. In addition, beneficial interests in a Global
Note may be exchanged for certificated Notes upon request but only upon at least
20 days prior written notice given to the Trustee by or on behalf of the
Depositary in accordance with customary procedures. In all
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cases, certificated Notes delivered in exchange for any Global Note or
beneficial interest therein will be registered in names, and issued in any
approved denominations, requested by or on behalf of the Depositary (in
accordance with its customary procedures).
CERTIFICATED NOTES
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of certificated Notes. Upon any such issuance,
the Trustee is required to register such certificated Notes in the name of, and
cause the same to be delivered to, such person or persons (on the nominee of any
thereof). In addition, if (i) the Company notifies the Trustee in writing that
the Depositary is no longer willing or able to act as a depository and the
Company is unable to locate a qualified successor within 90 days or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of Notes in the form of certificated Notes under the Indenture,
then, upon surrender by the Global Note Holder of its Global Note, Notes in such
form will be issued to each person that the Global Note Holder and the
Depository identify as being the beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Note (including principal, premium, if any, and interest) be made by
wire transfer of immediately available funds to the accounts specified by the
Global Note Holder. With respect to certificated Notes, the Company will make
all payments of principal, premium, if any, and interest by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address. The Company expects that secondary trading in the
certificated Notes will also be settled in immediately available funds.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured by
a Lien encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control "
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED THAT
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"APPLICABLE PREMIUM" means, with respect to a Note at any Redemption Date,
the greater of (i) 1.0% of the principal amount of such Note and (ii) the excess
of (A) the present value at such time of (1)
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the redemption price of such Note at November 15, 2002 (such redemption price
being described under the caption "--Optional Redemption") plus (2) all required
interest payments due on such Note through November 15, 2002, computed using a
discount rate equal to the Treasury Rate plus 87.5 basis points, over (B) the
principal amount of such Note.
"ASSET SALE" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than in the ordinary course of business (PROVIDED that the
sale, lease, conveyance or other disposition of all or substantially all of the
assets of the Company and its Restricted Subsidiaries taken as a whole will be
governed by the covenants described above under the captions "--Repurchase at
the Option of Holders--Change of Control" and "--Certain Covenants--Merger,
Consolidation, or Sale of Assets" and not by the provisions of the covenant
described above under the caption "--Repurchase at the Option of Holders--Asset
Sales"), and (ii) the issue or sale by the Company or any of its Restricted
Subsidiaries of Equity Interests of any the Company's Restricted Subsidiaries,
in the case of either clause (i) or (ii), whether in a single transaction or a
series of related transactions (a) that have a fair market value in excess of
$2.0 million or (b) for Net Proceeds in excess of $2.0 million. Notwithstanding
the foregoing: (i) a transfer of assets by the Company to a Restricted
Subsidiary of the Company that is a Guarantor or to a Controlled Subsidiary or
by a Restricted Subsidiary of the Company to the Company or to another
Restricted Subsidiary of the Company that is a Guarantor or to a Controlled
Subsidiary, (ii) an issuance or sale of Equity Interests by a Restricted
Subsidiary of the Company to the Company or to another Restricted Subsidiary of
the Company that is a Guarantor, and (iii) (A) a Permitted Investment
(including, without limitation, a Permitted Investment in a Permitted Joint
Venture) or (B) a Restricted Payment that is permitted by the covenant described
above under the caption "--Certain Covenants--Restricted Payments" will not be
deemed to be Asset Sales.
"ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"BOARD OF DIRECTORS" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"BORROWING BASE" means, as of any date, an amount equal to the sum of (a)
90% of the net book value of the accounts receivable of the Company and its
Restricted Subsidiaries as of such date resulting from sales in the United
States of America, including sales pursuant to the U.S. Foreign Military Sales
program (provided that no accounts receivable shall be included in such
calculation if such receivable or any portion thereof is unpaid for more than 90
days after the date such receivable arises or is created), and (b) 60% of the
net book value of the inventory, including work-in-process and raw goods (less
progress payments or advanced payments from customers with respect to such
inventory), owned by the Company and its Restricted Subsidiaries as of such
date, all calculated on a consolidated basis and in accordance with GAAP. To the
extent that information is not available as to the amount of accounts receivable
or inventory as of a specific date, the Company may utilize the most recent
available quarterly or annual financial report for purposes of calculating the
Borrowing Base.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participation, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership (whether general or limited) or membership interests and
(iv) any other interest or
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participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) the local currency
of any jurisdiction in which any Permitted Joint Venture conducts business,
(iii) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof having
maturities of not more than one year from the date of acquisition, (iv)
certificates of deposit and eurodollar time deposits with maturities of not more
than one year from the date of acquisition, bankers' acceptances with maturities
of not more than one year from the date of acquisition and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $250.0 million and a Thompson Bank Watch Rating of "B" or
better, (v) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (iii) and (iv) above
entered into with any financial institution meeting the qualifications specified
in clause (iv) above, (vi) commercial paper having the highest rating obtainable
from Moody's Investors Service, Inc. or one of the two highest ratings from
Standard & Poor's Rating Group with maturities of not more than six months from
the date of acquisition, and (vii) money market funds at least 95% of the assets
of which are comprised of assets specified in clauses (i) through (vi).
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group") together with any Affiliates thereof (whether or
not otherwise in compliance with the provisions of the Indenture) unless
immediately following such sale, lease, exchange or other transfer in compliance
with the Indenture such assets are owned, directly or indirectly, by the Company
or a Restricted Subsidiary of the Company that is a Guarantor; (ii) the approval
by the holders of Capital Stock of the Company of any plan or proposal for the
liquidation or dissolution of the Company (whether or not otherwise in
compliance with the provisions of the Indenture); (iii) the acquisition in one
or more transactions, of beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act) by (x) any Person or Group (other than a Group the
majority in economic interests and voting or similar rights is owned by
Permitted Holders) that either (A) beneficially owns (within the meaning of Rule
13d-3 under the Exchange Act), directly or indirectly, (I) at least 30% (or, in
the case of a transaction or transactions approved before the consummation of
same by a majority of the directors of the Company, 35%) of the Company's then
outstanding voting securities entitled to vote on a regular basis for the board
of directors of the Company and (II) a greater beneficial interest than the
Permitted Holders, or (B) otherwise has the ability to elect, directly or
indirectly, a majority of the members of the Company's board of directors,
including without limitation by the acquisition of revocable proxies for the
election of directors; or (iv) the first day on which a majority of the members
of the Company's board of directors are not Continuing Directors. Clause (i) of
the definition of "Change of Control" includes a sale, lease, exchange or other
transfer of "all or substantially all" of the assets of the Company to a Group.
There is little case law interpreting the phrase "all or substantially all" in
the context of an indenture. Because there is no precise established definition
of this phrase, the ability of a holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, exchange or other transfer
of all or substantially all of the Company's assets to a Person or a Group may
be uncertain.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such Consolidated
Net Income, plus (iii) Fixed Charges of such Person and its Restricted
Subsidiaries for such period, to the extent that any such Fixed Charges were
deducted in computing such Consolidated Net Income, plus (iv) depreciation and
amortization (including amortization of goodwill, other intangibles and other
asset write-ups resulting from the application of purchase accounting but
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excluding amortization of prepaid cash expenses that were paid in a prior period
commencing after the Issue Date) of such Person and its Restricted Subsidiaries
for such period to the extent that such depreciation and amortization were
deducted in computing such Consolidated Net Income, plus (v) LIFO charges of
such Person and its Restricted Subsidiaries for such period, plus (vi) other
non-cash items reducing Consolidated Net Income (excluding any such charge which
requires an accrual of or a cash reserve for cash charges for any future
period), plus (vii) cash received with respect to any non-cash item previously
deducted from Consolidated Net Income pursuant to clause (viii) below and minus
(viii) non-cash items increasing such Consolidated Net Income for such period
(including without limitation under any LIFO credit and excluding any reversal
of any non-cash item to the extent such reversed non-cash item previously
reduced an addition to Consolidated Cash Flow pursuant to the parenthetical to
clause (vi) above). Notwithstanding the foregoing, the provision for taxes on
the income or profits of, and the depreciation and amortization and other
non-cash charges of, a Restricted Subsidiary of the referent Person shall be
added to Consolidated Net Income to compute Consolidated Cash Flow only to the
extent (and in same proportion) that the Net Income of such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Restricted Subsidiary, and
without direct or indirect restriction pursuant to the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Restricted Subsidiary or its
stockholders.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
(for such period, on a consolidated basis, determined in accordance with GAAP);
PROVIDED THAT (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
that is a Guarantor, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, and (iv) the cumulative effect of a change in accounting principles
shall be excluded. For purposes of the calculation in clause (c) of the covenant
described under the caption "--Certain Covenants--Restricted Payments" only, the
calculation of Consolidated Net Income shall exclude the effects of any
amortization of goodwill, research and development, inventory and other asset
write-ups, in each case as reflected on the Company's opening consolidated
balance sheet after giving effect to the Acquisition as a result of the
application of purchase accounting, with the amount of such exclusion (the
"Excluded Amount") being reduced by an amount equal to the product of (A) the
Excluded Amount and (B) the average effective consolidated federal, state and
local income tax rate of the Company applied by the Company in its consolidated
financial statements in accordance with GAAP over the period of determination
expressed as a decimal.
"CONSOLIDATED TANGIBLE ASSETS" means, with respect to any Person as of any
date, the amount which, in accordance with GAAP, would be set forth under the
caption "Total Assets" (or any like caption) on a consolidated balance sheet of
such Person and its Restricted Subsidiaries, less all intangible assets,
including, without limitation, goodwill, organization costs, patents,
trademarks, copyrights, franchises and research and development costs.
"CONTINUING DIRECTOR" means, as of any date of determination, any member of
the Company's board of directors who (i) was a member of the Company's board of
directors on the date of the Indenture or (ii) was nominated for election or
elected to such board of directors with the approval of a majority of the
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Continuing Directors who were members of such board of directors at the time of
such nomination or election.
"CONTROLLED SUBSIDIARY" of the Company means a Restricted Subsidiary of the
Company (i) (x) 90% or more of the total Equity Interests or other ownership
interests of which (other than Capital Stock constituting directors' qualifying
shares or interests held by directors or shares or interest required to be held
by foreign nationals, in each case to the extent mandated by applicable law) is
at the time owned by the Company (directly or through one or more Controlled
Subsidiaries of the Company), and (y) the remaining Equity Interests or other
ownership interest of which (other than Capital Stock constituting directors'
qualifying shares or interests held by directors or shares or interests required
to be held by foreign nationals, in each case to the extent mandated by
applicable law) is at the time owned by members of management of the Company or
any of its Restricted Subsidiaries, directors of the Company or any of its
Restricted Subsidiaries or consultants or suppliers to or customers of the
Company or any of its Restricted Subsidiaries and (ii) of which the Company
possesses, directly or indirectly, the power to direct or cause the direction of
the management or policies, whether through the ownership of voting securities,
by agreement or otherwise.
"CREDIT FACILITIES" means, with respect to the Company or any Restricted
Subsidiary, one or more debt facilities (including, without limitation, the
Senior Credit Facility) or commercial paper facility with banks or other
institutional lenders providing for revolving credit loans, other borrowings
(including term loans), receivables financing (including through the sale of
receivables to such lenders or to special purpose entities formed to borrow from
such lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice (or both) would be an Event of Default.
"DESIGNATED PREFERRED STOCK" means Preferred Stock of the Company that is
issued for cash (other than to a Restricted Subsidiary) and is so designated as
Designated Preferred Stock, pursuant to an Officers' Certificate executed by the
principal executive officer and the principal financial officer of the Company,
on the issuance date thereof.
"DESIGNATED SENIOR DEBT" means (i) any Indebtedness outstanding under the
Senior Credit Facility and (ii) any other Senior Debt permitted hereunder the
principal amount of which is $25.0 million or more and that has been designated
by the Company as "Designated Senior Debt."
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature, except to the extent that such Capital Stock is solely
redeemable with, or solely exchangeable for, any Capital Stock of such Person
that is not Disqualified Stock.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXCLUDED CONTRIBUTIONS" means net cash proceeds received by the Company
after the Issue Date from (a) capital contributions and (b) the private sale of
common stock of the Company to Carlyle or its Affiliates, in each case
designated as Excluded Contributions pursuant to an Officers' Certificate
executed by the principal executive officer and the principal financial officer
of the Company on the date such capital contributions are made or the date such
Equity Interests are sold, as the case may be, the cash proceeds of which are
excluded from the calculation set forth in clause (c) of the first paragraph of
the covenant described above under the caption "--Certain Covenants--Restricted
Payments".
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"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its Restricted
Subsidiaries (other than Indebtedness under the Senior Credit Facility and the
Notes) in existence on the Issue Date, until such amounts are repaid.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Restricted Subsidiaries incurs, assumes, guarantees or
redeems any Indebtedness (other than revolving credit borrowings under any
Credit Facility) or issues preferred stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated but on or
prior to the date on which the event for which the calculation of the Fixed
Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, guarantee or redemption of Indebtedness, or such issuance or
redemption of preferred stock, as if the same had occurred at the beginning of
the applicable four-quarter reference period. In addition, for purposes of
making the computation referred to above, (i) acquisitions that have been made
by the Company or any of its Restricted Subsidiaries, including through mergers
or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income, (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Restricted Subsidiaries
following the Calculation Date.
"FIXED CHARGES" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense (net of interest
income) of such Person and its Restricted Subsidiaries for such period, whether
paid or accrued (including, without limitation, original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations) but excluding amortization of debt
issuance costs, (ii) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period, (iii) any interest expense
on Indebtedness of another Person (excluding the Company or any Restricted
Subsidiary) that is guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (whether or not such guarantee or Lien is called upon)
and (iv) the product of (a) all dividend payments, whether or not in cash, on
any series of Preferred Stock of such Person or any of its Restricted
Subsidiaries, other than dividend payments on Equity Interests payable solely in
Equity Interests of the Company (other than Disqualified Stock) and other than
dividends paid or accrued for the benefit of the Company or a Restricted
Subsidiary; PROVIDED that with respect to any series of Preferred Stock that is
Disqualified Capital Stock or Designated Preferred Stock that has not paid cash
dividends during such period but accrues dividends according to its terms during
any period prior to the maturity date of the Notes, cash dividends will be
deemed to have been paid with respect to such series of Disqualified or
Designated Preferred Stock during such period, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current combined federal, state and local statutory tax rate of such Person,
expressed as a decimal, in each case, on a consolidated basis and in accordance
with GAAP.
"FNSS-TURKEY" means FMC-Nurol Savunma Sanayii A.S., the Company's 51%-owned
Turkish joint venture.
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"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, the statements and pronouncements of
the Financial Accounting Standards Board and such other statements by such other
entities as have been approved by a significant segment of the accounting
profession, which are applicable at the Issue Date.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTEE" means the guarantee of the Notes by each of the Guarantors
pursuant to Article 11 of the Indenture and in the form of guarantee endorsed on
the form of Note attached as Exhibit A to the Indenture and any additional
guarantee of the Notes to be executed by any Restricted Subsidiary of the
Company pursuant to the covenant described above under the caption "--Certain
Covenants--Guarantees of Certain Indebtedness."
"GUARANTORS" means (i) each of (a) United Defense, L.P., (after consummation
of the Acquisition), (b) UDLP Holdings Corp. and (c) Iron Horse Investors,
L.L.C., (ii) each of the Company's Subsidiaries which becomes a guarantor of the
Notes pursuant to the covenant described above under "--Certain
Covenants--Guarantees of Certain Indebtedness" and (iii) each of the Company's
Subsidiaries executing a supplemental indenture in which such Subsidiary agrees
to be bound by the terms of the Indenture; PROVIDED that any Person constituting
a Guarantor as described above shall cease to constitute a Guarantor when its
respective Guarantee is released in accordance with the terms thereof.
"HEDGING OBLIGATIONS" means, with respect to any Person, the net payment
Obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements in the ordinary course of business designed to
protect such Person against fluctuations in commodity prices, interest rates or
currency exchange rates.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense, customer advance, progress
payment or trade payable, if and to the extent any of the foregoing indebtedness
(other than letters of credit and Hedging Obligations) would appear as a
liability upon a balance sheet of such Person prepared in accordance with GAAP,
as well as all Indebtedness of others secured by a Lien on any asset of such
Person (whether or not such Indebtedness is assumed by such Person) and, to the
extent not otherwise included, the guarantee by such Person of any Indebtedness
of any other Person. The amount of any Indebtedness outstanding as of any date
shall be (i) the accreted value thereof, in the case of any Indebtedness that
does not require current payments of interest, and (ii) the principal amount
thereof, together with any interest thereon that is more than 30 days past due,
in the case of any other Indebtedness.
"INDEPENDENT FINANCIAL ADVISOR" means a reputable accounting, appraisal or
investment banking firm that is, in the reasonable judgment of the Board of
Directors, qualified to perform the task for which such firm has been engaged
hereunder and disinterested and independent with respect to the Company and its
Affiliates.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other Obligations),
advances of assets or capital contributions, purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP. If the Company or any of its
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Restricted Subsidiaries sells or otherwise disposes of any Equity Interests of
any direct or indirect Restricted Subsidiary or Permitted Joint Venture of the
Company such that, after giving effect to any such sale or disposition, such
Person is no longer a direct or indirect Restricted Subsidiary or Permitted
Joint Venture of the Company, the Company or such Restricted Subsidiary, as the
case may be, shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Restricted Subsidiary or Permitted Joint Venture not sold or disposed of in
an amount determined as provided in the final paragraph of the covenant
described above under the caption "--Certain Covenants--Restricted Payments."
"INVESTMENTS" shall exclude extensions of trade credit by the Company and the
Restricted Subsidiaries on commercially reasonable terms in the ordinary course
of business.
"ISSUE DATE" means the date on which the Private Notes were first issued and
delivered.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
any asset and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary gain (but not loss),
together with any related provision for taxes on such extraordinary or
nonrecurring gain (but not loss).
"NET PROCEEDS" means the aggregate cash proceeds or Cash Equivalents
received by the Company or any of its Restricted Subsidiaries in respect of any
Asset Sale (including, without limitation, any cash received upon the sale or
other disposition of any non-cash consideration received in any Asset Sale), net
of all costs relating to such Asset Sale (including, without limitation, legal,
accounting, investment banking and brokers fees, and sales and underwriting
commissions) and any relocation expenses incurred as a result thereof, taxes
paid or payable as a result thereof (after taking into account any available tax
credits or deductions and any tax sharing arrangements) and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP. Net proceeds shall not include Asset Sale proceeds payable
to a holder of Capital Stock of any Permitted Joint Venture other than the
Company or any of its Restricted Subsidiaries in accordance with the terms of
the joint venture agreement or similar agreements governing such Permitted Joint
Venture.
"NON-RECOURSE INDEBTEDNESS" means Indebtedness (i) as to which neither the
Company nor any of its Restricted Subsidiaries (other than Permitted Joint
Ventures), (a) provides any guarantee or credit support of any kind (including
any undertaking, guarantee, indemnity, agreement or instrument that would
constitute Indebtedness) or (b) is directly or indirectly liable (as a guarantor
or otherwise), and (ii) the incurrence of which will not result in any recourse
against any of the assets of the Company or its Restricted Subsidiaries (other
than Permitted Joint Ventures).
"OBLIGATIONS" means any principal, premium, if any, interest (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company or its Restricted Subsidiaries whether or
not a claim for post-filing interest is allowed in such proceeding), penalties,
fees, charges, expenses, indemnifications, reimbursement obligations, damages
(including Liquidated Damages), guarantees and other liabilities or amounts
payable under the documentation governing any Indebtedness or in respect
thereof.
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"PERMITTED BUSINESS" means the lines of business conducted by the Company
and its Subsidiaries on the date of the Acquisition and businesses reasonably
related thereto and reasonable extensions thereof, serving governmental,
commercial or other customers.
"PERMITTED HOLDERS" or "CARLYLE" means TC Group, L.L.C., a Delaware limited
liability company, and its Affiliates, and any successors thereof that are
Permitted Holders.
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a
Controlled Subsidiary or in a Restricted Subsidiary of the Company that is a
Guarantor; (b) any Investment in Cash Equivalents; (c) any Investment by the
Company or any Restricted Subsidiary of the Company in a Person engaged in a
Permitted Business, if as a result of such Investment (i) such Person becomes a
Controlled Subsidiary or a Restricted Subsidiary that is a Guarantor or (ii)
such Person is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the Company
or a Controlled Subsidiary or a Restricted Subsidiary that is a Guarantor; (d)
any Investment made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant
described above under the caption "--Repurchase at the Option of Holders--Asset
Sales"; (e) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company; (f) Investments
arising in connection with Hedging Obligations that are incurred in the ordinary
course of business consistent with past practices, for the purpose of fixing or
hedging currency, commodity or interest rate risk (including with respect to any
floating rate Indebtedness that is permitted by the terms of the Indenture to be
outstanding) in connection with the conduct of the business of the Company and
its Subsidiaries; (g) loans or advances to employees in an aggregate principal
amount not to exceed $500,000 at any time outstanding; (h) any Investment
acquired by the Company or any of its Restricted Subsidiaries (x) in exchange
for any other Investment or accounts receivable held by the Company or any such
Restricted Subsidiary in connection with or as a result of a bankruptcy,
workout, reorganization or recapitalization of the issuer of such other
Investment or accounts receivable or (y) as a result of a foreclosure by the
Company or any of its Restricted Subsidiaries with respect to any Investment or
other transfer of title with respect to any Investment in default; (i) loans and
advances to officers, directors and employees for business-related travel
expenses, moving expenses and other similar expenses, in each case incurred in
the ordinary course of business; (j) Investments the payment for which consists
of Equity Interests of the Company (exclusive of Disqualified Stock); PROVIDED,
HOWEVER, that such Equity Interests will not increase the amount available for
Restricted Payments under clause (c) of the first paragraph of the covenant
described above under the caption "--Certain Covenants--Restricted Payments";
(k) any Investments by the Company or any Restricted Subsidiary of the Company
in Permitted Joint Ventures made after the Issue Date having an aggregate fair
market value, when taken together with all other Investments made pursuant to
this clause (k) that are at the time outstanding, not exceeding in the aggregate
10% of the Consolidated Tangible Assets of the Company as of the last day of the
most recent full fiscal quarter ending immediately prior to the date of such
Investment (with the fair market value of each Investment being measured at the
time made and without giving effect to subsequent changes in value); (l) any
Investment existing on the Issue Date; and (m) other Investments by the Company
or any of its Restricted Subsidiaries in any Person having an aggregate fair
market value, when taken together with all other Investments made pursuant to
this clause (m) that are at the time outstanding, not to exceed $25.0 million at
the time of such Investment (with the fair market value being measured at the
time made and without giving effect to subsequent changes in value).
"PERMITTED JOINT VENTURE" means any joint venture, partnership or other
Person designated by the Board of Directors, and until designation by the Board
of Directors to the contrary, (i) at least 50% of whose Capital Stock with
voting power under ordinary circumstances to elect directors (or Persons having
similar or corresponding powers and responsibilities) is at the time owned
(beneficially or directly) by the Company and/or by one or more Restricted
Subsidiaries of the Company and if the Company and/or such Restricted Subsidiary
or Subsidiaries owns more than 50% of the Capital Stock of the Permitted Joint
Venture, such Permitted Joint Venture is a Restricted Subsidiary of the Company,
(ii) all of whose
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Indebtedness is Non-Recourse Indebtedness or otherwise permitted to be incurred
by such entity pursuant to clause (ii) and/or (xiv) of the second paragraph of
the covenant described above under the caption "--Certain Covenants--Incurrence
of Indebtedness and Issuance of Preferred Stock" and (iii) which is engaged in a
Permitted Business. Any such designation or designation to the contrary shall be
evidenced to the Trustee by promptly filing with the Trustee a copy of the
resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"PERMITTED JUNIOR SECURITIES" means Equity Interests in the Company or debt
securities that are subordinated to all Senior Debt (and any debt securities
issued in exchange for Senior Debt) to substantially the same extent as, or to a
greater extent than, the Notes are subordinated to Senior Debt pursuant to the
Indenture.
"PERMITTED LIENS" means (i) Liens on assets of the Company or any of its
Restricted Subsidiaries to secure Senior Debt permitted by the Indenture to be
incurred; (ii) Liens on the assets of the Company or any of the Guarantors to
secure Hedging Obligations with respect to Indebtedness under any Credit
Facility permitted by the Indenture to be incurred; (iii) Liens on property of a
Person existing at the time such Person is merged into or consolidated with the
Company or any Restricted Subsidiary of the Company; PROVIDED that such Liens
were in existence prior to the contemplation of such merger or consolidation and
do not extend to any assets other than those of the Person merged into or
consolidated with the Company; (iv) Liens on property existing at the time of
acquisition thereof by the Company or any Restricted Subsidiary of the Company,
PROVIDED that such Liens were in existence prior to the contemplation of such
acquisition and only extend to the property so acquired; (v) Liens existing on
the Issue Date; (vi) Liens to secure any Permitted Refinancing Indebtedness
incurred to refinance any Indebtedness secured by any Lien referred to in the
foregoing clauses (i) through (v), as the case may be, at the time the original
Lien became a Permitted Lien; (vii) Liens in favor of the Company or any
Restricted Subsidiary that is a Guarantor; (viii) Liens incurred in the ordinary
course of business of the Company or any Restricted Subsidiary of the Company
with respect to obligations that do not exceed $10.0 million in the aggregate at
any one time outstanding and that (a) are not incurred in connection with the
borrowing of money or the obtaining of advances or credit (other than trade
credit in the ordinary course of business) and (b) do not in the aggregate
materially detract from the value of the property or materially impair the use
thereof in the operation of business by the Company or such Restricted
Subsidiary; (ix) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds, deposits to secure the performance of
bids, trade contracts, government contracts, leases or licenses or other
obligations of a like nature incurred in the ordinary course of business
(including, without limitation, landlord Liens on leased properties); (x) Liens
for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently prosecuted, PROVIDED that any reserve or
other appropriate provision as shall be required to conform with GAAP shall have
been made therefor; (xi) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (vi) of the second paragraph of the covenant
described above under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock" covering only the assets acquired
with such Indebtedness; (xii) carriers', warehousemen's, mechanics', landlords'
materialmen's, repairmen's or other like Liens arising in the ordinary course of
business in respect of obligations not overdue for a period in excess of 60 days
or which are being contested in good faith by appropriate proceedings promptly
instituted and diligently prosecuted; PROVIDED that any reserve or other
appropriate provision as shall be required to conform with GAAP shall have been
made therefor; (xiii) easements, rights-of-way, zoning and similar restrictions
and other similar encumbrances or title defects incurred, or leases or subleases
granted to others, in the ordinary course of business, which do not in any case
materially detract from the value of the property subject thereto or do not
interfere with or adversely affect in any material respect the ordinary conduct
of the business of the Company and its Restricted Subsidiaries taken as a whole;
(xiv) Liens in favor of customs and revenue authorities to secure payment of
customs duties in connection with the importation of goods in the ordinary
course of business and other similar Liens arising in the ordinary
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course of business; and (xv) leases or subleases granted to third Persons not
interfering with the ordinary course of business of the Company or any of its
Restricted Subsidiaries, (xvi) Liens (other than any Lien imposed by ERISA or
any rule or regulation promulgated thereunder) incurred or deposits made in the
ordinary course of business in connection with workers' compensation,
unemployment insurance, and other types of social security; (xvii) deposits, in
an aggregate not to exceed $250,000, made in the ordinary course of business to
secure liability to insurance carriers; (xviii) Liens for purchase money
obligations (including refinancings thereof) permitted under the covenant
described above under the caption "-- Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock", PROVIDED that (A) the
Indebtedness secured by any such Lien is permitted under the covenant described
above under the caption "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock" and (B) any such Lien encumbers only the asset so
purchased; (xix) any interest or title of a lessor or sublessor under any
operating lease; (xx) Liens under licensing agreements for use of intellectual
property entered into in the ordinary course of business; (xxi) Liens on the
assets of a Permitted Joint Venture securing Non-Recourse Indebtedness; (xxii)
Liens securing industrial revenue bonds; (xxiii) Liens in favor of the Trustee
under the Indenture and any substantially equivalent Lien granted to any trustee
or similar institution under any indenture for Senior Debt permitted by the
terms of the Indenture; (xxiv) Liens securing reimbursement obligations with
respect to letters of credit which encumber documents and other property
relating to such letters of credit and the products and proceeds thereof; (xxv)
Liens arising out of consignment or similar arrangements for the sale of goods
entered into by the Company or any Subsidiary in the ordinary course of business
in accordance with past practices; (xxvi) any interest or title of a lessor in
the property subject to any lease, whether characterized as capitalized or
operating other than any such interest or title resulting from or arising out of
a default by the Company or any Subsidiary of its obligations under such lease;
(xxvii) Liens arising from filing UCC financing statements for precautionary
purposes in connection with true leases of personal property that are otherwise
permitted under the applicable indenture and under which the Company or any
Subsidiary is lessee; (xxviii) Liens on assets or capital stock of Unrestricted
Subsidiaries; and (xxix) any attachment or judgment Lien not constituting an
Event of Default under clause (vii) of the first paragraph of the section
described above under the caption "Events of Default and Remedies."
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); PROVIDED that: (i) the principal amount
(or accreted value, if applicable) of such Permitted Refinancing Indebtedness
does not exceed the principal amount of (or accreted value, if applicable), plus
accrued and unpaid interest on, any Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of reasonable fees and
expenses incurred in connection therewith); (ii) such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred either by the
Company or a Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
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<PAGE>
"PREFERRED STOCK" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such person over the holder so the
other Capital Stock issued by such Person.
"PUBLIC EQUITY OFFERING" means any underwritten primary public offering of
the Voting Stock of the Company pursuant to an effective registration statement
(other than a registration statement on Form S-4, Form S-8, or any successor or
similar form) under the Securities Act.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referenced
Person that is not an Unrestricted Subsidiary; PROVIDED that, on the Issue Date,
all Subsidiaries of the Company (other than FNSS-Turkey) shall be Restricted
Subsidiaries of the Company.
"SEC" means the Securities and Exchange Commission.
"SELLER NOTE" means the Senior Subordinated Note, if any, outstanding on the
Issue Date that was issued by the Company to certain former partners of United
Defense, L.P., as in effect on the Issue Date.
"SENIOR CREDIT FACILITY" means that certain Credit Agreement, to be dated as
of October 6, 1997, by and among United Defense Industries, Inc., Iron Horse
Investors, L.L.C., various lending institutions including Lehman Brothers
Commercial Paper Inc. and Citibank, N.A. (as Documentation Agents), and Bankers
Trust Company (as Administration Agent and as Syndication Agent) providing for
up to $495.0 million of term loan borrowings and $230.0 million of revolving
credit borrowings and letters of credit in each case, including any related
notes, guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, restated,
refunded, replaced or refinanced from time to time and any agreement (and
related documents) governing Indebtedness incurred to refund or refinance credit
extensions and commitments then outstanding or permitted to be outstanding under
such Senior Credit Facility or a successor Credit Facility, whether by the same
or any other lender or group of lenders. The Company shall promptly notify the
Trustee of any other lender or group of lenders. The Company shall promptly
notify the Trustee of any such refunding or refinancing of the existing Senior
Credit Facility.
"SENIOR DEBT" means (i) indebtedness of the Company for money borrowed and
all obligations, whether direct or indirect, under guarantees, letters of
credit, foreign currency or interest rate swaps, foreign exchange contracts,
caps, collars, options, hedges or other agreements or arrangements designed to
protect against fluctuations in currency values or interest rates, other
extensions of credit, expenses, fees, reimbursements, indemnities and all other
amounts (including interest at the contract rate accruing on or after the filing
of any petition in bankruptcy or reorganization relating to the Company whether
or not a claim for post-filing interest is allowed in such proceeding) owed by
the Company under, or with respect to, the Senior Credit Facility or any other
Credit Facility, (ii) the principal of and premium, if any, and accrued and
unpaid interest, whether existing on the date hereof or hereafter incurred, in
respect of (A) indebtedness of the Company for money borrowed, (B) express
written guarantees by the Company of indebtedness for money borrowed by any
other Person, (C) indebtedness evidenced by notes, debentures, bonds, or other
instruments of indebtedness for the payment of which the Company is responsible
or liable, by guarantees or otherwise, (D) obligations of the Company for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction, (E) obligations of the Company under any agreement
to lease, or any lease of, any real or personal property which, in accordance
with GAAP, is classified on the Company's consolidated balance sheet as a
liability, and (F) obligations of the Company under interest rate swaps, caps,
collars, options and similar arrangements and foreign currency hedges and (iii)
modifications, renewals, extensions, replacements, refinancings and refundings
of any such indebtedness, obligations or guarantees, unless, in the instrument
creating or evidencing the same or pursuant to which the same is outstanding, it
is expressly provided that such indebtedness, obligations or guarantees, or such
modifications, renewals, extensions, replacements, refinancings or refundings
thereof,
118
<PAGE>
are not superior in right of payment to the Notes; PROVIDED that Senior Debt
will not be deemed to include (a) any obligation of the Company to any
Subsidiary (other than obligations pledged pursuant to the Senior Credit
Facility, as security for the obligations of the Company thereunder), (b) any
liability for federal, state, local or other taxes owed or owing by the Company,
(c) advance payments and progress payments to customers and any accounts payable
or other liability to trade creditors arising in the ordinary course of
business, (d) any Indebtedness, guarantee or obligation of the Company which is
expressly subordinate or junior by its terms in right of payment to any other
Indebtedness, guarantee or obligation of the Company, (e) Indebtedness with
respect to the Seller Note, (f) that portion of any Indebtedness incurred in
violation of the covenant described above under the caption "--Certain
Covenants-- Incurrence of Indebtedness and Issuance of Capital Stock" or (g)
Indebtedness of the Company which is classified as non-recourse in accordance
with GAAP or any unsecured claim arising in respect thereof by reason of the
application of section 1111(b)(1) of the Bankruptcy Code.
"SIGNIFICANT SUBSIDIARY" means each Restricted Subsidiary of the Company
that is a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X
under the Securities Act and the Exchange Act (as such regulation is in effect
on the date hereof).
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"SUBORDINATED OBLIGATIONS" means any Indebtedness of the Company which is
expressly subordinated or junior in right of payment to the Notes.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person, (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or an entity described in clause (i) and
related to such Person or (b) the only general partners of which are such Person
or of one or more entities described in clause (i) and related to such Person
(or any combination thereof) and (iii) any limited liability company, the sole
managing member or the majority of the managing members of which are Persons
described in clause (i) or (ii).
"TREASURY RATE" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the
Redemption Date (or, if such Statistical Release is no longer published, any
publicly available source or similar market date)) most nearly equal to the
period from the Redemption Date to November 15, 2002; provided, however, that if
the period from the Redemption Date to November 15, 2002 is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the period from the Redemption Date to November 15, 2002
is less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company (including
any newly acquired or newly formed Subsidiary of the Company) that is designated
by the Board of Directors as an Unrestricted Subsidiary and (ii) any Subsidiary
of an Unrestricted Subsidiary; but only to the extent that the Subsidiary
described in clause (i) and each of its Subsidiaries at the time of designation
and thereafter (a) have no Indebtedness other than Non-Recourse Indebtedness;
(b) are not party to any agreement, contract,
119
<PAGE>
arrangement or understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted Subsidiary
than those that might be obtained, in light of all the circumstances, at the
time from Persons who are not Affiliates of the Company; (c) are Persons with
respect to which neither the Company nor any of its Restricted Subsidiaries has
any direct or indirect obligation (x) to subscribe for additional Equity
Interests or (y) to maintain or preserve such Persons' financial condition or to
cause such Persons to achieve any specified levels of operating results; (d)
have not guaranteed or otherwise directly or indirectly provided credit support
for any Indebtedness of the Company or any of its Restricted Subsidiaries and
(e) do not own any Capital Stock of or own or hold any Lien on any property of,
the Company or any Restricted Subsidiary of the Company. The Board of Directors
may designate any Unrestricted Subsidiary to be a Restricted Subsidiary only if
(x) immediately after giving effect to such designation, the Company is able to
incur at least $1.00 of additional Indebtedness under the first paragraph of the
covenant described above under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock", (y) immediately before and
immediately after giving effect to such designation, no Default or Event of
Default shall have occurred and be continuing and (z) the Company certifies that
such designation complies with the covenant described above under the caption
"-- Certain Covenants--Restricted Payments." Any such designation by the Board
of Directors shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions. If, at any time, any Unrestricted Subsidiary would fail to
meet the foregoing requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture
and any Indebtedness of such Subsidiary shall be deemed to be incurred as of
such date.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"WHOLLY OWNED SUBSIDIARY" means (i) a Restricted Subsidiary of the Company,
100% of the outstanding Capital Stock and other Equity Interests of which (other
than Capital Stock constituting directors' qualifying shares or interests held
by directors or shares or interests required to be held by foreign nationals, in
each case to the extent mandated by applicable law) is directly or indirectly
owned by the Company or by one or more Wholly Owned Subsidiaries of the Company.
120
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Latham & Watkins, counsel to the Company, the following
discussion describes the material federal income tax consequences expected to
result to holders whose Private Notes are exchanged for Exchange Notes in the
Exchange Offer. Such opinion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service ("the Service") will not take a contrary view,
and no ruling from the Service has been or will be sought with respect to the
Exchange Offer. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the statements and
conclusions set forth herein. Any such changes or interpretations may or may not
be retroactive and could affect the tax consequences to holders. Certain holders
(including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations, and persons who are not
citizens or residents of the United States) may be subject to special rules not
discussed below. EACH HOLDER OF PRIVATE NOTES SHOULD CONSULT ITS OWN TAX ADVISOR
AS TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING PRIVATE NOTES FOR EXCHANGE
NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
LAWS.
The exchange of Private Notes for Exchange Notes will be treated as a
"non-event" for federal income tax purposes. As a result, no material federal
income tax consequences will result to holders exchanging Private Notes for
Exchange Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer may be deemed to be an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with the resales of Exchange Notes received in exchange for
Private Notes where such Private Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for the period required by the Securities Act, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer that
requests such document in the Letter of Transmittal for use in connection with
any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other persons. Exchange Notes received by broker- dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealers and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders of Private Notes (including any broker-dealers), and
certain parties related to such holders, against certain liabilities, including
liabilities under the Securities Act.
121
<PAGE>
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Company by Latham & Watkins, Chicago, Illinois.
EXPERTS
The consolidated financial statements of United Defense, L.P., the balance
sheet of United Defense Industries, Inc. (a wholly-owned subsidiary of Iron
Horse Investors, L.L.C.), and the consolidated balance sheet of Iron Horse
Investors L.L.C. appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included herein in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Rights Agreement on
Form S-4 under the Securities Act with respect to the Exchange Notes offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information, exhibits and undertakings contained in the
Registration Statement. For further information with respect to the Company and
the Exchange Notes offered hereby, reference is made to the Registration
Statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof. As a result of the Exchange Offer, the
Company will become subject to the informational requirements of the Exchange
Act. The Registration Statement (and the exhibits and schedules thereto), as
well as the periodic reports and other information filed by the Company with the
Commission, may be inspected and copied at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, New York, New York 10048 and Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of such
materials may be obtained from the Public Reference Section of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
its public reference facilities in New York, New York and Chicago, Illinois at
the prescribed rates. The Commission also maintains a web site (located at
http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference.
Pursuant to the Indenture, the Company has agreed to furnish to the Trustee
and to registered holders of the Exchange Notes, without cost to the Trustee or
such registered holders, copies of all reports and other information that would
be required to be filed by the Company with the Commission under the Exchange
Act, whether or not the Company is then required to file reports with the
Commission. As a result of this Exchange Offer, the Company will become subject
to the periodic reporting and other informational requirements of the Exchange
Act. In the event that the Company ceases to be subject to the information
requirements of the Exchange Act, the Company has agreed that, so long as any
Exchange Notes remain outstanding, it will file with the Commission (but only if
the Commission at such time is accepting such voluntary filings) and distribute
to holders of the Notes copies of the financial information that would have been
contained in such annual reports and quarterly reports, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," that would have been required to be filed with the Commission
pursuant to the Exchange Act. The Company will also furnish such other reports
as it may determine or as may be required by law.
122
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
IRON HORSE INVESTORS, L.L.C.
Report of Independent Auditors................................................... F-2
Consolidated Balance Sheet as of September 30, 1997.............................. F-3
Note to Consolidated Financial Statements........................................ F-4
UNITED DEFENSE INDUSTRIES, INC.
Report of Independent Auditors................................................... F-5
Balance Sheet as of September 30, 1997........................................... F-6
Note to Financial Statements..................................................... F-7
UNITED DEFENSE, L.P.
Report of Independent Auditors................................................... F-8
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30,
1997 (unaudited)............................................................... F-9
Consolidated Statements of Income for the Years Ended December 31, 1994, 1995 and
1996 and Nine Months Ended September 30, 1996 and 1997 (unaudited)............. F-10
Consolidated Statements of Partners' Capital for the Years Ended December 31,
1994, 1995 and 1996 and Nine Months Ended September 30, 1997................... F-11
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995
and 1996 and Nine Months Ended September 30, 1996 and 1997..................... F-12
Notes to Consolidated Financial Statements....................................... F-13
</TABLE>
The Company has no operations independent from its subsidiaries. All of the
Guarantors are directly or indirectly wholly-owned and all such Guarantors have
guaranteed the Notes on a full, unconditional and joint and several basis. Any
non-guarantor subsidiaries have assets, equity, income and cash flows on an
individual and combined basis less than 3% of related pro forma amounts of the
Company.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Members
Iron Horse Investors, L.L.C.
We have audited the accompanying consolidated balance sheet of Iron Horse
Investors, L.L.C. as of September 30, 1997. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
balance sheet presentation. We believe that our audit of the consolidated
balance sheet provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of Iron Horse
Investors, L.L.C. at September 30, 1997 in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Washington, DC
February 4, 1998
F-2
<PAGE>
IRON HORSE INVESTORS, L.L.C.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<S> <C>
ASSETS
Cash................................................................................ $ 1,000
---------
Total assets.................................................................. $ 1,000
---------
---------
LIABILITIES AND MEMBER'S CAPITAL
Member's capital $ 1,000
Total liabilities and member's capital........................................ $ 1,000
---------
---------
</TABLE>
See accompanying note.
F-3
<PAGE>
IRON HORSE INVESTORS, L.L.C.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997
1. ORGANIZATION
Iron Horse Investors, L.L.C. (the Company) is newly formed limited liability
company formed in Delaware and capitalized on September 8, 1997. The
consolidated balance sheet includes the assets of the Company and its
wholly-owned subsidiary, United Defense Industries Inc., a Delaware corporation.
In October 1997, the Company was funded with $173 million of equity capital
from Carlyle Fund Investment Partnerships which was invested in United Defense
Industries, Inc. On October 6, 1997, United Defense Industries, Inc. acquired
(the Acquisition) 100% of the partnership interest of United Defense, L.P. (the
Partnership) in a transaction that will be accounted for as a purchase business
combination. The Acquisition was for an aggregate purchase price, subject to
provisions for adjustments, of $850 million.
There have been no operations of the Company as of September 30, 1997.
Accordingly, statements of the Company's operations and cash flows have not been
included herein.
United Defense Industries, Inc. funded the Acquisition, including fees and
expenses incurred in connection with the Acquisition, from the equity capital
referred to above and $925 million of debt facilities.
F-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
United Defense Industries, Inc.
We have audited the accompanying balance sheet of United Defense Industries,
Inc. (a wholly-owned subsidiary of Iron Horse Investors, L.L.C.) as of September
30, 1997. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of United Defense Industries, Inc. at
September 30, 1997 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Washington, DC
February 4, 1998
F-5
<PAGE>
UNITED DEFENSE INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF IRON HORSE INVESTORS, L.L.C.)
BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<S> <C>
ASSETS
Cash................................................................................ $ 1,000
---------
Total assets.................................................................. $ 1,000
---------
---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Stockholder's equity:
Common stock, par value $.01 per share
Authorized--400,000 shares; Issued and outstanding--100,000 shares.............. $ 1,000
---------
Total liabilities and stockholder's equity.................................... $ 1,000
---------
---------
</TABLE>
See accompanying note.
F-6
<PAGE>
UNITED DEFENSE INDUSTRIES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF IRON HORSE INVESTORS, L.L.C.)
NOTE TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997
1. ORGANIZATION
United Defense Industries, Inc. (the Company) is a newly formed corporation
incorporated in Delaware and capitalized on September 8, 1997. The Company is
100% owned by Iron Horse Investors, L.L.C. The Company was formed to acquire
(the Acquisition) directly or indirectly 100% of the partnership interests of
United Defense, L.P. (the Partnership). The Partnership designs, develops and
manufactures various tracked armored combat vehicles and a wide spectrum of
weapons delivery systems for the armed forces of the United States and nations
around the world.
On October 6, 1997, the Company acquired 100% of the partnership interests
of the Partnership in a transaction that will be accounted for as a purchase
business combination. The acquisition of the partnership interests were for an
aggregate purchase price, subject to provisions for adjustment, of $850 million.
There have been no operations of the Company as of September 30, 1997.
Accordingly, statements of the Company's operations and cash flows have not been
included herein.
The Company funded the Acquisition, including fees and expenses incurred in
connection with the Acquisition, from a combination of approximately $173
million equity capital from Iron Horse Investors, L.L.C. and $925 million of
debt facilities.
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Partners
United Defense, L.P.
We have audited the accompanying consolidated balance sheets of United
Defense, L.P. and its subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, partners' capital, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the partnership'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 consolidated financial position of United Defense,
L.P. and its subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Washington, DC
January 15, 1997
F-8
<PAGE>
UNITED DEFENSE, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and marketable securities.......................................... $ 896 $ 23 $ 11,107
Short-term investment with FMC Corporation.............................. 30,350 19,497 --
Trade receivables....................................................... 98,929 85,483 77,883
Inventories (Note 3).................................................... 232,285 345,738 330,192
Other current assets.................................................... 9,165 4,021 4,776
---------- ---------- -------------
Total current assets...................................................... 371,625 454,762 423,958
Investments in affiliated companies....................................... 7,662 7,192 10,869
Property, plant and equipment (Note 4).................................... 475,891 466,493 460,776
Less--accumulated depreciation............................................ 360,087 359,163 359,590
---------- ---------- -------------
Net property, plant and equipment....................................... 115,804 107,330 101,186
Patents and deferred charges (Note 5)..................................... 39,132 34,194 25,841
Prepaid pension cost (Note 6)............................................. 35,381 41,501 50,284
---------- ---------- -------------
Total assets.............................................................. $ 569,604 $ 644,979 $ 612,138
---------- ---------- -------------
---------- ---------- -------------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable, trade and other....................................... $ 98,385 $ 71,723 $ 56,454
Advanced payments....................................................... 194,276 258,990 274,072
Accrued and other liabilities........................................... 62,698 72,400 84,508
Due to FMC Corporation for current services............................. 5,011 5,094 5,787
---------- ---------- -------------
Total current liabilities................................................. 360,370 408,207 420,821
Accrued pension cost (Note 6)............................................. 17,765 25,641 31,069
Accrued postretirement benefit cost (Note 7).............................. 35,036 31,493 29,246
---------- ---------- -------------
Total liabilities......................................................... 413,171 465,341 481,136
Commitments and contingencies (Notes 9, 11, 12 and 13)
Partners' capital:
FMC Corporation......................................................... 122,989 136,889 106,649
Harsco Corporation...................................................... 33,444 42,749 24,353
---------- ---------- -------------
Total partners' capital................................................... 156,433 179,638 131,002
---------- ---------- -------------
Total liabilities and partners' capital................................... $ 569,604 $ 644,979 $ 612,138
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
See accompanying notes.
F-9
<PAGE>
UNITED DEFENSE, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ----------------------
1994 1995 1996 1996 1997
------------ ---------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Sales.......................................... $ 1,076,259 $ 967,553 $ 1,029,333 $ 745,922 $ 913,925
Costs and expenses:
Cost of sales.................................. 809,813 746,701 820,845 595,757 754,977
Selling, general and administrative expenses... 131,822 122,675 128,455 89,992 91,413
Research and development....................... 16,311 12,422 12,853 9,143 12,096
------------ ---------- ------------ ---------- ----------
Total expenses............................... 957,946 881,798 962,153 694,892 858,486
Earnings related to investments in foreign
affiliates................................... 12,471 21,393 31,916 31,243 13,521
------------ ---------- ------------ ---------- ----------
Income from operations........................... 130,784 107,148 99,096 82,273 68,960
Other income (expense):
Interest....................................... 2,569 2,744 1,933 2,024 1,456
Miscellaneous, net............................. 52 (798) -- 195 --
------------ ---------- ------------ ---------- ----------
Income before income taxes....................... 133,405 109,094 101,029 84,492 70,416
Provision for income taxes (Note 2).............. 3,878 1,429 2,859 -- 1,523
------------ ---------- ------------ ---------- ----------
Net income....................................... $ 129,527 $ 107,665 $ 98,170 $ 84,492 $ 68,893
------------ ---------- ------------ ---------- ----------
------------ ---------- ------------ ---------- ----------
</TABLE>
See accompanying notes.
F-10
<PAGE>
UNITED DEFENSE, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
FMC HARSCO TOTAL
---------- ---------- -----------
<S> <C> <C> <C>
Initial partnership contributions as of January 1, 1994...................... $ 124,740 $ 29,600 $ 154,340
Distributions 1994........................................................... (90,117) (70,054) (160,171)
1994 net income.............................................................. 69,736 59,791 129,527
---------- ---------- -----------
Balance, December 31, 1994................................................... 104,359 19,337 123,696
Distributions 1995........................................................... (37,117) (37,811) (74,928)
1995 net income.............................................................. 55,747 51,918 107,665
---------- ---------- -----------
Balance, December 31, 1995................................................... 122,989 33,444 156,433
Distributions 1996........................................................... (36,999) (37,966) (74,965)
1996 net income.............................................................. 50,899 47,271 98,170
---------- ---------- -----------
Balance, December 31, 1996................................................... 136,889 42,749 179,638
Distributions (Unaudited).................................................... (63,719) (50,690) (114,409)
Liabilities transferred from FMC (Unaudited)................................. (1,872) (1,248) (3,120)
Net income nine months ended September 30, 1997 (Unaudited).................. 35,351 33,542 68,893
---------- ---------- -----------
Balance, September 30, 1997 (Unaudited)...................................... $ 106,649 $ 24,353 $ 131,002
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes.
F-11
<PAGE>
UNITED DEFENSE, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................................... $ 129,527 $ 107,665 $ 98,170 $ 84,492 $ 68,893
Adjustments for noncash components of net income:
Depreciation...................................... 28,993 26,728 26,327 19,316 19,331
Amortization of restructuring costs............... -- -- 12,667 9,500 9,673
Other............................................. 78 (3,543) 519 (4,560) (7,636)
Changes in assets and liabilities:
Trade receivables............................... 7,401 (17,678) 13,446 33,217 7,600
Inventories..................................... (2,609) (49,320) (113,453) (83,632) 15,546
Other current assets............................ (964) 780 5,144 6,052 (745)
Prepaid pension cost............................ (5,898) (3,446) (6,120) (3,006) (8,783)
Restructuring costs............................. (7,044) (23,498) (7,778) (7,778) --
Accounts payable, trade and other............... (2,290) 23,327 (26,662) (38,237) (15,278)
Advanced payments............................... (8,613) 28,859 64,714 27,725 15,082
Accrued and other liabilities................... 21,912 4,038 9,702 (2,306) 11,626
Due to FMC Corporation for current services..... 2,513 2,498 83 13,033 693
Accrued pension cost............................ 6,072 5,419 7,876 -- 5,428
Accrued postretirement benefit cost............. (3,069) (7,171) (3,543) 2,875 (2,247)
---------- ---------- ----------- ---------- ----------
Cash provided by operating activities............... 166,009 94,658 81,092 56,691 119,183
---------- ---------- ----------- ---------- ----------
INVESTING ACTIVITIES
Capital spending.................................... (18,259) (24,124) (22,396) (16,504) (20,125)
Disposal of property, plant and equipment........... 1,138 3,640 4,543 3,302 6,938
Short-term investment with FMC Corporation.......... -- (30,350) 10,853 8,600 19,497
---------- ---------- ----------- ---------- ----------
Cash (used) provided in investing activities........ (17,121) (50,834) (7,000) (4,602) 6,310
---------- ---------- ----------- ---------- ----------
FINANCING ACTIVITIES
Cash contributions from Partners.................... 41,670
Partner distributions............................... (160,171) (74,928) (74,965) (52,985) (114,409)
---------- ---------- ----------- ---------- ----------
Cash used in financing activities................... (118,501) (74,928) (74,965) (52,985) (114,409)
---------- ---------- ----------- ---------- ----------
Increase (decrease) in cash and marketable
securities........................................ 30,387 (31,104) (873) (896) 11,084
Cash and marketable securities, beginning of
period............................................ 1,613 32,000 896 896 23
---------- ---------- ----------- ---------- ----------
Cash and marketable securities, end of period....... $ 32,000 $ 896 $ 23 $ -- $ 11,107
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
See accompanying notes.
F-12
<PAGE>
UNITED DEFENSE, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. FORMATION OF UNITED DEFENSE, L.P.
On January 28, 1994, FMC Corporation (FMC) and Harsco Corporation (Harsco)
announced completion of a series of agreements to combine certain assets and
liabilities of FMC's Defense Systems Group (DSG) and Harsco's BMY Combat Systems
Division (BMY). The effective date of the combination was January 1, 1994. The
combined company, United Defense, L. P. (the partnership), operates as a limited
partnership. FMC is the Managing General Partner with a 60% equity interest and
Harsco Defense Holding is a Limited Partner holding a 40% equity interest.
The partnership designs, develops and manufactures various tracked armored
combat vehicles and a wide spectrum of weapons delivery systems for the armed
forces of the United States and nations around the world.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements include the accounts of the partnership and its
wholly owned subsidiaries. Intercompany accounts and transactions are eliminated
in consolidation.
The financial information presented as of any date other than December 31
has been prepared from the books and records without audit. In the opinion of
management, the accompanying unaudited financial statements contain all
adjustments, consisting only of normal recurring adjustments, except as
described herein, necessary to present fairly the partnership's financial
position as of September 30, 1997, the results of its operations and its cash
flows for the nine months ended September 30, 1997 and 1996, and the changes in
partners' capital for the nine months ended September 30, 1997. The results of
operations presented are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes, in particular, estimates of contract cost and revenues used
in the earnings recognition process. Actual results could differ from those
estimates.
REVENUE RECOGNITION FOR CONTRACTS-IN-PROGRESS
Sales are recognized on most production contracts as deliveries are made or
accepted. Sales under cost reimbursement contracts for research, engineering,
prototypes, repair and maintenance and certain other contracts are recorded as
costs are incurred and include estimated fees in the proportion that costs
incurred to date bear to total estimated costs. Changes in estimates for sales
and profits are recognized in the period in which they are determinable using
the cumulative catch-up method. Claims are considered in the estimated contract
performance at such time as realization is probable. Any anticipated losses on
contracts are charged to operations as soon as they are determinable.
During 1996, the partnership recognized a $14.3 million reduction in cost of
sales as a result of a settlement with the U.S. government on the cost of a
component supplied by the U.S. government on a
F-13
<PAGE>
UNITED DEFENSE, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1995 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
group of related contracts. Cost of sales for the nine months ended September
30, 1997 includes approximately $13.5 million of non-cash charges recorded for
the quarter ended September 1997 for changes in estimated contract profitability
related to contractual issues with customers and other matters resulting from
the periodic reassessment of the estimated profitability of contracts in
progress.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined on the last-in, first-out (LIFO) basis, except for inventories
relating to long-term contracts. Inventoried costs relating to long-term
contracts not valued on the LIFO basis are stated at the actual production cost
incurred to date, reduced by amounts recognized as cost of sales. The costs
attributed to units delivered under contracts are based on gross margins
expected to be realized over the life of the related contract. Gross margins are
based on the estimated revenue less the estimated cost of all units expected to
be produced over the life of the related contract.
Inventory costs include manufacturing overhead. Costs normally associated
with general and administrative functions, independent research and bid and
proposal are expensed as incurred.
BMY had followed the accounting practice of capitalizing general and
administrative expense in inventory. To conform with the partnership's
accounting policy and the agreement between FMC and Harsco, $7.4 million of such
expenses, which were included in the inventory contributed by Harsco, were
charged against income during 1994.
INVESTMENTS IN AFFILIATED COMPANIES
The investment in a majority owned foreign joint venture in Turkey is
carried at cost since there is uncertainty regarding the partnership's ability
to control this venture or to repatriate earnings. Income is recognized as
dividends are received. The partnership had accounted for its investment in a
foreign joint venture in Saudi Arabia at cost through 1995 because of
uncertainties as to the long-term prospects for this venture. In 1996,
consistent with a significant expansion of the venture's business and positive
long-term prospects for the business, the partnership changed from the cost to
the equity method. The impact on the partnership's results of operations was not
material. Equity in earnings from this venture was $3.8 million for the year
ended December 31, 1996 and $3.1 million and $8.2 million for the nine months
ended September 30, 1996 and 1997. Dividends received related to investments
accounted for using the cost method were $12.5 million, $21.4 million and $28.1
million during the years ended December 31, 1994, 1995 and 1996, respectively
and $28.1 million and $5.3 million for the nine months ended September 30, 1996
and 1997.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation is provided
principally on the sum-of-the-years digits and straight-line methods over
estimated useful lives of the assets (land improvements-- twenty years;
buildings--twenty to thirty-five years; and machinery and equipment--three to
twelve years). Gains and losses realized upon sale or retirement of assets are
included in other income.
F-14
<PAGE>
UNITED DEFENSE, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1995 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Maintenance and repairs are expensed as incurred. Expenditures that extend
the useful life of property, plant and equipment or increase its productivity
are capitalized and depreciated.
ADVANCED PAYMENTS RECEIVED FROM CUSTOMERS
Amounts advanced by customers as deposits on orders not yet billed and
progress payments on contracts-in-progress are recorded as current liabilities.
FINANCIAL INSTRUMENTS
The fair values of financial instruments approximated their carrying values
at December 31, 1995 and 1996. Fair values have been determined through
information obtained from market sources and management estimates.
ENVIRONMENTAL
Under the Participation Agreement between FMC and Harsco each partner
generally is financially accountable to the partnership for environmental
conditions occurring prior to formation of the partnership at facilities or
properties previously operated or used in their respective businesses, to the
extent that costs incurred are not recovered from third parties or not covered
by environmental accruals contributed by the parties at formation. At December
31, 1995 and 1996, $4.9 million and $4.2 million, respectively, of the FMC
contributed accruals and $1.7 million and $1.4 million, respectively, of the
Harsco contributed accruals are unused.
INCOME TAXES
As a limited partnership, income or loss passes to the partners and is
taxable at that level, except for taxes payable on the income of the
partnership's Foreign Sales Corporation (FSC) subsidiary. The FSC paid income
taxes amounting to $3.6 million, $3.5 million and $1.8 million during 1994, 1995
and 1996, respectively.
CASH FLOWS
Marketable securities consists of investments with initial maturities of
three months or less.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1994 the partnership adopted the provisions of FAS 112,
"Employer's Accounting for Postemployment Benefits." This statement requires
accrual of liabilities for postemployment benefits provided to former or
inactive employees, their beneficiaries, and covered dependents after
employment, but before retirement, if those liabilities can be reasonably
estimated. Adoption of FAS 112 resulted in a charge to the partnership's 1994
earnings amounting to $826,000.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified in the accompanying
financial statements to conform with the current year's presentation.
F-15
<PAGE>
UNITED DEFENSE, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1995 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
3. INVENTORIES
Inventories consist predominantly of costs for contracts in process and are
valued as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
At actual production cost............................. $ 25,751 $ 12,590 $ --
At cost, determined on a last-in, first out basis..... 206,534 333,148 330,192
---------- ---------- -------------
$ 232,285 $ 345,738 $ 330,192
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
The current replacement cost of LIFO inventories exceeded their recorded
values by approximately $25.4 million, $31.7 million, and $39.7 million at
December 31, 1995 and 1996 and September 30, 1997, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
Buildings............................................................. $ 53,272 $ 55,305
Machinery and equipment............................................... 395,468 382,573
Land and improvements................................................. 16,798 17,008
Construction in progress.............................................. 10,353 11,607
---------- ----------
475,891 466,493
Less: Accumulated depreciation........................................ 360,087 359,163
---------- ----------
Net property, plant and equipment..................................... $ 115,804 $ 107,330
---------- ----------
---------- ----------
</TABLE>
5. ADVANCE AGREEMENT
In October 1994 the partnership entered into an Advance Agreement with the
U.S. Department of Defense. Under the terms of the Agreement, the partnership is
permitted to defer certain costs associated with consolidation and restructuring
of its ground systems businesses that are incurred from January 1, 1994 through
September 30, 1996. Costs deferred will then be allocated ratably to contracts
with the Department of Defense for thirty-six months beginning January 1, 1996.
As of December 31, 1995 and 1996, consolidation and restructuring costs deferred
amount to $30.5 million and $38.3 million, respectively, and are included in
patents and deferred charges in the accompanying balance sheet. Accumulated
amortization as of December 31, 1996 was $12.7 million. Costs amortized during
the year ended December 31, 1996 and the nine months ended September 30, 1996
and 1997 were $12.7 million, $9.5 million and $9.7 million, respectively.
F-16
<PAGE>
UNITED DEFENSE, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1995 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
6. RETIREMENT PLANS
Substantially all of the partnership's domestic employees are covered by
retirement plans. Plans covering salaried employees provide pension benefits
based on years of service and compensation. Plans covering hourly employees
generally provide benefits of stated amounts for each year of service.
The partnership's funding policy is to make contributions based on the
projected unit credit method and to limit contributions to amounts that are
currently deductible for tax purposes.
The following table summarizes the assumptions used and the components of
the net pension cost for the years ended December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Assumptions:
Weighted average discount rate............................. 8.00% 8.00% 8.00%
Rates of increase in future compensation levels............ 5.00% 5.00% 5.00%
Weighted average expected long-term asset return........... 9.60% 9.62% 9.62%
Components: (IN THOUSANDS)
Service cost................................................ $ 9,976 $ 8,744 $ 9,191
Interest cost on projected benefit obligation.............. 16,967 18,008 19,826
Actual return on plan assets--investment gains............. (6,106) (76,878) (61,135)
Net amortization and deferral.............................. (16,238) 55,886 34,918
------------ ------------ ------------
Net pension cost............................................. $ 4,599 $ 5,760 $ 2,800
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
As part of the partnership's downsizing and consolidation program, an
incentive benefit package, which lowered the early retirement penalty, was
offered to salaried and non-union hourly employees who were at least fifty-five
years of age with ten or more years of service. In addition to the voluntary
program, early retirement penalties were also adjusted for certain salaried and
hourly employees affected by the downsizing and consolidation
Pension expense includes a $3.8 million, $3.7 million and $1.2 million
charge related to special termination benefits (early retirement incentive) and
a $0.9 million, $1.0 million and $0.4 million curtailment charge included in net
amortization and deferral relating to the elimination of employees for 1994,
1995 and 1996, respectively.
F-17
<PAGE>
UNITED DEFENSE, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1995 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
6. RETIREMENT PLANS (CONTINUED)
The funded status of the plans and prepaid or accrued pension cost
recognized in the partnership's financial statements as of December 31, 1995 and
1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
------------------------ ------------------------
OVER- UNDER- OVER- UNDER-
FUNDED FUNDED FUNDED FUNDED
PLANS PLANS PLANS PLANS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Actuarial present value of benefits for service rendered to
date:
Accumulated benefit obligation based on salaries to date,
including vested benefits of $197,675 for 1995 and $219,217
for 1996................................................... $ (102,852) $ (108,287) $ (106,965) $ (125,579)
Additional benefits based on estimated future salary
levels..................................................... -- (32,366) -- (37,115)
----------- ----------- ----------- -----------
Projected benefit obligation................................. (102,852) (140,653) (106,965) (162,694)
Plan assets at fair market value (1)......................... 182,507 153,565 208,380 175,830
----------- ----------- ----------- -----------
Plan assets in excess of projected benefit obligation........ 79,655 12,912 101,415 13,136
Unrecognized net transition asset............................ (10,640) 1,575 (8,512) 1,179
Unrecognized prior-service cost.............................. 2,776 7,535 5,756 6,550
Unrecognized net gain........................................ (36,410) (39,787) (57,158) (46,506)
----------- ----------- ----------- -----------
Net prepaid (accrued) pension cost........................... $ 35,381 $ (17,765) $ 41,501 $ (25,641)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- --------------------------
(1) Primarily equities, bonds and fixed income securities.
7. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
Substantially all of the partnership's employees are covered by
postretirement health care and life insurance benefit programs. Employees
generally become eligible for the retiree benefit plans when they meet minimum
retirement age and service requirements. The cost of providing most of these
benefits is shared with retirees. The partnership has reserved the right to
change or eliminate these benefit plans.
During 1995, the partnership's medical contributions for certain hourly
employees were capped. This change, effective January 1, 1995, reduced the
benefit obligation by $9.9 million, amortizable over the remaining years of
service to full eligibility. Postretirement expenses in 1995 and 1996 include a
$0.9 million gain.
Postretirement expense in 1995 includes a $2.8 million curtailment gain as a
result of the partnership's downsizing and consolidation program.
The partnership funds a trust for retiree health and life benefits for
employees previously covered under the FMC benefit plans. During 1995, the
partnership began funding for benefits previously covered under the Harsco plan.
Actuarial assumptions used to determine costs and the benefit obligation
include a discount rate of 8% and weighted average expected return on long-term
assets of 9% for 1994, 1995, and 1996. The assumed rate of future increases in
per capita cost of health care benefits was 10% in 1995 and 1996, decreasing to
F-18
<PAGE>
UNITED DEFENSE, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1995 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
7. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS (CONTINUED)
6% by the year 2001 and after. Increasing the health care cost trend rates by
one percentage point would increase the accumulated benefit obligation by
approximately $2.8 million and would increase annual service and interest costs
by approximately $0.3 million.
The following table summarizes the components of net postretirement benefit
cost for the years ended December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost............................................................ $ 1,372 $ 1,412 $ 1,174
Interest cost on accumulated postretirement benefit obligation.......... 4,576 3,935 4,159
Actual return on plan assets--investment (gains) losses................. 364 (4,468) (4,916)
Net amortization and deferral........................................... (2,203) (1,685) 981
--------- --------- ---------
Net periodic postretirement benefit cost................................ $ 4,109 $ (806) $ 1,398
--------- --------- ---------
--------- --------- ---------
</TABLE>
The funded status of the plans and accrued postretirement benefit cost
recognized in the partnership's financial statements as of December 31, 1995 and
1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
Accumulated postretirement obligation:
Retirees...................................................................... $ (33,135) $ (35,734)
Fully eligible active participants............................................ (5,244) (5,515)
Other active participants..................................................... (14,433) (14,905)
---------- ----------
Accumulated postretirement benefit obligation................................... (52,812) (56,154)
Plan assets at fair market value (1)............................................ 32,164 38,630
---------- ----------
Accumulated postretirement benefit obligation in excess of plan assets.......... (20,648) (17,524)
Unrecognized net gains.......................................................... (14,388) (13,969)
---------- ----------
Accrued postretirement benefit cost............................................. $ (35,036) $ (31,493)
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) Primarily equities and fixed income securities.
8. EMPLOYEES' THRIFT AND STOCK PURCHASE PLAN
Substantially all of the partnership's employees are eligible to participate
in the partnership's defined contribution savings plans designed to comply with
the requirements of the Employee Retirement Income Security Act of 1974 (ERISA)
and Section 401(k) of the Internal Revenue Code. Charges against income for
matching contributions to the plans were $6.2 million, $6.6 million and $7.7
million in 1994, 1995 and 1996, respectively.
9. COMMITMENTS AND CONTINGENT LIABILITIES
The partnership leases office space, plants and facilities, and various
types of manufacturing, data processing and transportation equipment. Rent
expense for 1994, 1995 and 1996 was $10.8 million, $12.8
F-19
<PAGE>
UNITED DEFENSE, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1995 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
9. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
million and $12.9 million, respectively. Minimum future rentals under
noncancellable leases, excluding a related party lease (See Note 12), are
estimated to be payable $8.4 million in 1997, $6.4 million in 1998, $3.5 million
in 1999, $0.6 million in 2000, $0.5 million in 2001, and $0.6 million
thereafter. The real estate leases generally provide for payment of property
taxes, insurance and repairs by the partnership.
The partnership is subject to claims and suits arising in the ordinary
course of its operations. In the opinion of management, the ultimate resolution
of any current pending legal proceedings will not have a material effect on the
partnership's financial position or results of operations.
At December 31, 1996, the partnership has outstanding letters of credit in
the amount of $80.1 million as collateral for performance on long-term
contracts.
10. PARTNERS' CAPITAL
Under the agreements of formation of the partnership, FMC and Harsco were
required to contribute net assets with an historical net book value of $154.3
million.
The agreement provides for allocation of profits and losses and distribution
of available cash generally on the basis of the partner's equity ownership
interests, after giving effect to a limited partner preferred distribution and
certain other items as agreed to by the partners. Under the terms of the
partnership agreement the partnership is required to make quarterly tax
distributions to each partner equal to the product of (i) such partner's share
of the adjusted taxable income of the partnership times (ii) 40%. In addition,
the partnership is required to make certain other distributions to the partners.
Such required distributions are also made with reference to the partnership's
adjusted taxable income.
FMC has the option to purchase or cause the partnership to purchase Harsco's
interest in the partnership for 110% of the appraised value of Harsco's interest
in the partnership subject to adjustment, as provided for in the partnership
agreement. Harsco has the option to require the partnership to purchase its
interest in the partnership for 95% of the appraised value of its partnership
interest similarly subject to adjustment as provided for in the partnership
agreement.
11. SIGNIFICANT CUSTOMER AND EXPORT SALES
Sales to various agencies of the U.S. Government aggregated $614.9 million,
$719.1 million and $819.9 million during 1994, 1995 and 1996, respectively. At
December 31, 1995 and 1996, trade accounts receivable from the U.S. Government
totaled $77.4 million and $44.1 million, respectively. Export sales, including
sales to foreign governments transacted through the U.S. Government, were $433.2
million, $216.3 million and $194.2 million during 1994, 1995 and 1996,
respectively. The geographic regions in which the Company transacts its export
sales are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Europe........................................................... $ 43.8 $ 9.4 $ 51.0
Far East......................................................... 207.9 155.3 115.7
Middle East...................................................... 181.5 51.6 27.5
--------- --------- ---------
Total........................................................ $ 433.2 $ 216.3 $ 194.2
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-20
<PAGE>
UNITED DEFENSE, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1995 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
12. RELATED PARTY TRANSACTIONS
The partnership has contracted with FMC for various administrative and
support services. These services include computer services, systems and
programming, data communications, employee relocation support, payroll
processing, insurance and general management support. During the years ended
December 31, 1994, 1995 and 1996, the partnership paid $42.4 million, $39.8
million and $35.2 million, respectively, to FMC for their support.
The partnership leases office and manufacturing facilities in San Jose,
California from FMC. Under the lease agreement monthly rent payments are
comprised of fixed base rent plus depreciation on the facilities. Fixed base
rent is $2.0 million per year and the lease expires December 31, 2003. During
1994, 1995 and 1996 the partnership incurred rent amounting to $4.2 million,
$3.9 million and $3.7 million, respectively, under this lease.
Sales of inventory to FMC during 1994, 1995 and 1996 amounted to $2.8
million, $1.5 million and $1.1 million, respectively. Management believes that
such transactions were consummated on terms substantially similar to those that
would arise in transactions with third parties.
During 1995, the partnership entered into an agreement with FMC and Harsco
whereby the partnership's excess cash balances up to $40 million are invested
with FMC. Interest on these funds is earned based on the average monthly cost of
FMC's U.S. dollar revolver-related short-term borrowings for such month. In
addition, the partnership may offer short-term loans, not to exceed ninety days,
to the partners if funds are not immediately needed for working capital.
Interest on short-term borrowings is equal to LIBOR without premium. Interest on
all loans to FMC totaled $1.1 million and $1.8 million in 1995 and 1996.
13. EVENT SUBSEQUENT TO DATE OF AUDITOR'S REPORT
Alliant Techsystems Inc. ("Alliant Tech"), a subcontractor to the
partnership in connection with the partnership's Paladin howitzer prime
contract, has asserted a claim against the partnership alleging wrongful
termination of that subcontract by the partnership. The partnership maintains
that it terminated the Alliant Tech subcontract work in accordance with its
termination rights under the applicable subcontract agreement and pursuant to a
corresponding U.S. Army termination for convenience of the portion of the
partnership's prime contract that covered the pertinent components supplied by
Alliant Tech. Alliant Tech has asserted in writing its intention to pursue this
claim against the partnership for approximately $17 million in damages, but no
litigation has commenced. Management believes that the partnership has a valid
defense to this claim. However, no assurances can be given that the partnership
will be successful in its defense of this claim, in the event that the claim
were further pursued by Alliant.
F-21
<PAGE>
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No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
the Prospectus, and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the securities to which it relates. This Prospectus does
not constitute an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.............................. 4
Risk Factors.................................... 19
The Exchange Offer.............................. 29
Use of Proceeds................................. 38
Capitalization.................................. 38
Unaudited Pro Forma Financial Data.............. 39
Selected Historical Financial Data.............. 46
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 48
Business........................................ 58
Management...................................... 75
Certain Transactions............................ 81
Principal Stockholders.......................... 82
The Acquisition................................. 83
Description of Certain Indebtedness............. 85
Description of the Notes........................ 87
Certain Federal Income Tax Considerations....... 121
Plan of Distribution............................ 121
Legal Matters................................... 122
Experts......................................... 122
Available Information........................... 122
Index to Financial Statements................... F-1
</TABLE>
UNITED DEFENSE
INDUSTRIES, INC.
8 3/4% SENIOR SUBORDINATED
NOTES DUE 2007
FOR ALL OUTSTANDING
8 3/4 SENIOR SUBORDINATED
NOTES DUE 2007
---------------------
PROSPECTUS
---------------------
FEBRUARY 16, 1998
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