<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 11, 1998
REGISTRATION NO. 333-44277
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
RELTEC CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3661 94-3227019
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification
Number)
</TABLE>
------------------------
<TABLE>
<S> <C>
5900 LANDERBROOK DRIVE, SUITE 300 VALERIE GENTILE SACHS
CLEVELAND, OHIO 44124-4019 VICE PRESIDENT AND GENERAL COUNSEL
(440) 460-3600 RELTEC CORPORATION
(Address, including Zip Code, and Telephone 5900 LANDERBROOK DRIVE, SUITE 300
Number, including Area Code, of Registrant's CLEVELAND, OHIO 44124-4019
Principal Executive Offices) (440) 460-3600
(Name, Address, including Zip Code, and
Telephone Number, including Area Code,
of Agent for Service)
</TABLE>
COPIES TO:
<TABLE>
<S> <C>
RAYMOND Y. LIN VINCENT PAGANO, JR.
Latham & Watkins Simpson Thacher & Bartlett
885 Third Avenue 425 Lexington Avenue
New York, New York 10022 New York, New York 10017
(212) 906-1200 (212) 455-2000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
COMMON STOCK, $.01 PAR VALUE............................................................ $170,775,000 $50,378.63(2)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act.
(2) A fee of $47,200 was paid in connection with the filing of this registration
statement on January 14, 1998. A fee of $949.25 was paid on March 10, 1998,
and the remaining fee of $2,229.38 is being paid herewith.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED MARCH 11, 1998
5,500,000 SHARES
[LOGO]
COMMON STOCK
-----------------
OF THE 5,500,000 SHARES OF COMMON STOCK OFFERED, 4,500,000 SHARES ARE BEING
OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND
1,000,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND
CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." ALL OF THE
SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. SHARES OF
COMMON STOCK ARE BEING RESERVED FOR SALE TO DIRECTORS, OFFICERS, EMPLOYEES,
BUSINESS ASSOCIATES AND RELATED PERSONS OF THE COMPANY AT THE INITIAL PUBLIC
OFFERING PRICE. SUCH PERSONS ARE EXPECTED TO PURCHASE, IN THE AGGREGATE, UP TO
18% OF THE COMMON STOCK OFFERED. PRIOR TO THIS OFFERING, THERE HAS BEEN NO
PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED
THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE WILL BE BETWEEN $24 AND
$27. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS
TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
------------------------
THE COMMON STOCK HAS BEEN APPROVED FOR LISTING, SUBJECT TO NOTICE OF ISSUANCE,
ON THE NEW YORK STOCK
EXCHANGE UNDER THE SYMBOL "RLT."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------------
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.
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
PER SHARE................................. $ $ $
TOTAL (3)................................. $ $ $
</TABLE>
- ------------------------
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $1,200,000.
(3) THE COMPANY HAS GRANTED THE U.S. UNDERWRITERS AN OPTION, EXERCISABLE WITHIN
30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF 825,000
ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS UNDERWRITING DISCOUNTS AND
COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY. IF THE U.S.
UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL PRICE TO PUBLIC,
UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO COMPANY WILL BE
$ , $ AND $ , RESPECTIVELY. SEE "UNDERWRITERS."
------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY SIMPSON THACHER & BARTLETT, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT
DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1998 AT THE OFFICE OF
MORGAN STANLEY & CO. INCORPORATED, NEW YORK, NEW YORK, AGAINST PAYMENT THEREFOR
IN IMMEDIATELY AVAILABLE FUNDS.
-------------------
MORGAN STANLEY DEAN WITTER SALOMON SMITH BARNEY
GOLDMAN, SACHS & CO.
DEUTSCHE MORGAN GRENFELL
LEHMAN BROTHERS
J.P. MORGAN & CO.
, 1998
<PAGE>
[diagram of network architecture and
photographs of selected products]
RELTEC CORPORATION
A leader in the design, manufacture and sale of a broad range of
telecommunications systems, products and services to wireline and wireless
service providers and original equipment manufacturers in North America and
around the globe.
Most of RELTEC's systems, products and services can be found in the access
portion of the telecommunications network, also referred to as the local loop.
They can be categorized as: Access Systems, Integrated Wireless Solutions and
Network Components and Services.
ACCESS SYSTEMS
RELTEC designs, manufactures, markets and supports a suite of local loop access
solutions, including traditional Next Generation Digital Loop Carrier (NGDLC)
systems, Fiber-to-the-Curb (FTTC) systems, Digital Subscriber Loop (xDSL)
solutions and pairgain products.
INTEGRATED WIRELESS SOLUTIONS
RELTEC is one of the leading global independent suppliers of integrated
electromechanical subsystems used in wireless base stations. These subsystems
are sold to the major telecommunications OEMs and wireless service providers
and, together with the radio electronics manufactured by the wireless OEMs,
comprise what is commonly referred to as a base station. RELTEC also designs and
manufactures outside plant, power systems, cabling and other products and
provides installation services for wireless OEMs and service providers.
NETWORK COMPONENTS AND SERVICES
New Components include: outside plant products, power systems, modular power
products, network test and monitoring systems and data networking racks.
RELTEC's products are marketed under the Lorain-Registered Trademark-,
Rainford-TM- and Reliable Electric-Registered Trademark- brand names. Network
Services include project management and aftermarket services.
Significant growth in data, video and voice communications traffic in recent
years has caused service providers to focus on increasing the bandwidth of the
public switched telephone network. The emergence of cost-effective new
technologies is creating opportunities for telecommunications providers to
increase the access network bandwidth. Among these technologies are:
DIGITAL LOOP CARRIERS (DLC)
DLCs extend the digital capabilities of the network from the central office to a
remote terminal closer to the customer. NGDLCs support a fiber feed from the
central office to the remote terminal, thereby pushing fiber deeper into the
access portion of the network.
FIBER-TO-THE-CURB (FTTC)
FTTC systems push fiber deeper within the access network (local loop) to a short
distance from each customer so that the final transmission can take place at
very high speeds over traditional twisted pair copper architecture.
DIGITAL SUBSCRIBER LINE (XDSL)
xDSL technologies provide broadband services over existing copper twisted pairs
by modulating and demodulating digital signals.
HYBRID FIBER COAX (HFC)
HFC leverages the existing coaxial infrastructure of cable television operators
and enhances the bandwidth and performance characteristics by adding additional
fiber and two-way amplifiers.
WIRELESS LOCAL LOOP (WLL)
WLL uses radio frequency communications instead of traditional wireline
technologies (e.g., copper) to provide network access.
RELTEC sells its telecommunications systems, products and services to a broad
range of customers on a global basis, including RBOCs, CLECs, IXCs, independent
telephone companies, wireless service providers, private network operators,
OEMs, PTTs, cable systems operators, distributors and other service providers.
The Company enjoys strong relationships with these customers and many of its
products have become standardized.
Opportunities exist for the development, expansion and enhancement of
telecommunications infrastructures throughout the world. As a result, RELTEC
maintains global manufacturing, service and sales operations. The Company has
two wholly-owned entities and two joint ventures in China and a joint venture in
Japan. It currently is expanding its worldwide resources and capabilities in
Brazil, China, Costa Rica, Hong Kong, Japan, Mexico, New Zealand, Singapore and
the United Kingdom. RELTEC's strategy is to build integrated businesses within
each global region (North America, Europe, Latin America and Asia/Pacific)
including manufacturing, product development, marketing, sales and general
management.
2
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SHARES OF COMMON STOCK OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFERING OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT 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.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................... 4
Risk Factors..................................... 11
The Company...................................... 17
Use of Proceeds.................................. 17
Dividend Policy.................................. 18
Capitalization................................... 19
Dilution......................................... 20
Selected Consolidated Financial Data............. 21
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 25
Business......................................... 32
Management....................................... 45
<CAPTION>
PAGE
---------
<S> <C>
Certain Relationships and Related Transactions... 57
Principal Stockholders........................... 59
Description of Certain Indebtedness.............. 60
Description of Capital Stock..................... 61
Shares Eligible for Future Sale.................. 63
Certain United States Tax Consequences to
Non-United States Holders...................... 64
Underwriters..................................... 68
Legal Matters.................................... 71
Experts.......................................... 71
Available Information............................ 72
Glossary......................................... G-1
Index to Financial Statements.................... F-1
</TABLE>
------------------------
The Company intends to furnish its stockholders annual reports containing
audited consolidated financial statements examined by an independent accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing interim unaudited consolidated financial information.
------------------------
[LOGO]
, RELTEC-Registered Trademark-, Advanced Copper Solutions-SM-,
Deep Fiber Solutions-SM-, DISCHS-Registered Trademark-,
FIBERCAST-TM-, FIBERSTHR-TM-, Lorain-Registered Trademark-, MatrixExpress-TM-,
Rainford-TM-, Reliable Electric-Registered Trademark- and Vortex-TM- are
trademarks or service marks of the Company. All other trademarks, service marks
or brand names appearing in this Prospectus are the property of their respective
holders.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
3
<PAGE>
PROSPECTUS SUMMARY
THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. IN
EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER
THE VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING, BUT NOT LIMITED
TO, THE MATTERS SET FORTH UNDER THE CAPTION "RISK FACTORS," WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING
STATEMENTS. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "GLOSSARY" BEGINNING ON PAGE G-1 FOR
DEFINITIONS OF VARIOUS ACRONYMS AND TECHNICAL TERMS USED IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES
THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
THE COMPANY
RELTEC Corporation ("RELTEC" or the "Company") is a leader in the design,
manufacture and sale of a broad range of telecommunications systems, products
and services to wireline and wireless service providers and OEMs in North
America and around the globe. Most of the Company's systems, products and
services can be found in the access portion of the telecommunications network,
also referred to as the local loop. The Company's systems, products and services
can be categorized as follows:
- - ACCESS SYSTEMS--The Company believes it is one of the top three U.S. suppliers
of next generation digital loop carrier (NGDLC) systems, which the Company
markets under the DISCHS brand name. In addition, RELTEC is a leader in
providing fiber-to-the-curb (FTTC) systems, with what it believes are more
installed FTTC lines in the United States than all other suppliers combined.
In 1997, Access Systems accounted for net sales of $283.6 million, or 32.0% of
the Company's total net sales.
- - INTEGRATED WIRELESS SOLUTIONS--The Company is one of the leading global
independent suppliers of integrated electro-mechanical subsystems used in
outdoor wireless base stations. These subsystems are sold to the major
telecommunications OEMs and wireless service providers and, together with the
radio electronics manufactured by the wireless OEMs, comprise what is commonly
referred to as a base station. RELTEC also designs and manufactures outside
plant, power systems, cabling and other products and provides installation
services for wireless OEMs and service providers. In 1997, Integrated Wireless
Solutions accounted for net sales of $195.3 million, or 22.0% of the Company's
total net sales.
- - NETWORK COMPONENTS AND SERVICES--Network Components include outside plant
products (enclosures, environmental control and heat management systems, and
advanced connection and protection products); power systems and modular power
products; network test and monitoring systems; and data networking racks.
Network Services include program management and aftermarket services. In 1997,
Network Components and Services accounted for net sales of $408.3 million, or
46.0% of the Company's total net sales.
The significant growth in voice, data and video communications traffic in
recent years has caused service providers to focus on increasing the bandwidth
of the public switched telephone network (PSTN). Transmission speed is limited
by the bandwidth of the "slowest" portion of the network, which is typically
found in the access segment. Until recently, technological solutions to improve
the performance of the access portion of the telephone network were generally
not cost effective for broad-based deployment by service providers. In the
current environment, however, the opportunity for telecommunications equipment
providers to increase the access network bandwidth is being driven by (i)
customer demand for improved data and wireless communications, (ii) the
emergence of new service providers, created by significant regulatory changes
and (iii) the emergence of cost-effective, new technologies which are enabling
increased bandwidth. As a result of the accelerating changes that are occurring
in the telecommunications industry, service providers are requiring flexible and
scalable solutions that not only meet their needs today but also will permit
easy, cost-effective enhancements in the future.
4
<PAGE>
The Company's objective is to build and maintain a leading market position
across a broad range of systems, products and services for wireline and wireless
communications networks globally. Key elements of the Company's strategy
include:
- - LEVERAGE EXPERTISE TO PROVIDE INTEGRATED SYSTEMS SOLUTIONS -- The Company
believes that its customers place a high degree of value on its ability to
deliver integrated systems solutions due to the increasing complexity of
system-level components and their desire to simplify their strategic supply
chains. The Company intends to continue to leverage its experience of over 60
years in providing high quality network components to design high value
integrated systems solutions.
- - INCREASE BANDWIDTH IN THE ACCESS NETWORK -- Much of the Company's research and
development focus has been and will continue to be on designing architectures
that cost-effectively increase the bandwidth in the access portion of the
PSTN.
- - CAPITALIZE ON ESTABLISHED CUSTOMER RELATIONSHIPS -- The Company believes that
the longevity and breadth of its relationships with a number of major
customers provide competitive advantages. The Company intends to capitalize on
its longstanding relationships with major customers to introduce new system
solutions, products and services more rapidly than its competitors.
- - EXPAND GLOBAL PRESENCE -- RELTEC's global strategy is to increase its sales,
design, marketing and manufacturing capabilities within each major region of
the world, leveraging its existing customer relationships, product offerings
and technologies.
- - CONTINUE TO IMPROVE MARGINS AND QUALITY -- The Company is continuing to focus
on improving margins and further improving the quality of its systems and
products.
- - PURSUE ACQUISITIONS, STRATEGIC INVESTMENTS AND JOINT VENTURES -- The Company
has used and expects to continue to use acquisitions, strategic investments
and joint ventures as an integral part of executing its growth strategies.
RELTEC sells its telecommunications systems, products and services to a
broad range of customers on a global basis. The Company's customers for its
Access Systems are primarily wireline telecommunications service providers such
as BellSouth, GTE, SBC Communications, Sprint and U S WEST. The customers for
the Company's Integrated Wireless Solutions are primarily telecommunications
OEMs such as Lucent Technologies, Motorola, Nokia, Northern Telecom and Siemens.
Network Components and Services are sold to a wide range of telecommunications
service providers, OEMs, cable system operators and distributors.
The Company has over 20 manufacturing and service locations in the United
States, Canada, China, Mexico and the United Kingdom. The Company has sales
offices and distributor relationships throughout North America, Europe, Latin
America and Asia/Pacific. In 1997, approximately 25% of the Company's sales
originated outside the United States.
Management and partnerships affiliated with Kohlberg Kravis Roberts & Co.,
L.P. ("KKR") purchased the Company in August 1995 (the "RELTEC Acquisition") for
approximately $475.0 million, excluding fees and expenses of $18.0 million. The
existing shareholders have invested an aggregate of $345.5 million, at an
average price of $6.90 per share, in the Common Stock of the Company. Based upon
the midpoint of the range of the estimated offering price set forth on the cover
of this Prospectus, the aggregate value of the Common Stock held by the existing
holders would be approximately $1.3 billion. Since the RELTEC Acquisition, net
sales have grown from $513.8 million in 1995 to $887.2 million in 1997, a
compounded annual growth rate of 31.4%.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
U.S. Offering............................... 4,500,000 shares
International Offering...................... 1,000,000 shares
Total............................... 5,500,000 shares
Common Stock to be outstanding after the
Offering.................................. 55,538,608 shares(1)
Use of proceeds by the Company.............. For repayment of approximately $130.3 million
of indebtedness and for general corporate
purposes. See "Use of Proceeds."
Proposed New York Stock Exchange symbol..... RLT
</TABLE>
- ------------------------
(1) Based on the number of shares outstanding at December 31, 1997, including
295,104 shares of redeemable common stock which cease to be redeemable upon
consummation of the Offering and excluding (i) 3,648,040 shares of Common
Stock issuable upon exercise of stock options outstanding as of December 31,
1997, of which options to purchase 1,128,818 shares were then exercisable
and (ii) 5,076,211 shares of Common Stock reserved for future issuance under
the Company's equity plans. See "Management--Benefit Plans."
RISK FACTORS
Prospective purchasers should consider all of the information contained in
this Prospectus before making an investment in shares of Common Stock. In
particular, prospective purchasers should consider the factors set forth herein
under "Risk Factors."
6
<PAGE>
SUMMARY FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The following summary financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's Consolidated and Combined Financial Statements and
the Notes thereto and the other information contained elsewhere in this
Prospectus. The summary historical combined financial data for the years ended
December 31, 1993 and 1994 are derived from the audited Combined Financial
Statements of the Company ("Predecessor B") prior to the acquisition of Reliance
Electric Company ("Reliance"), the former corporate parent of the Company, by
Rockwell International Corporation ("Rockwell") effective January 1, 1995 (the
"Rockwell Acquisition"). The historical combined financial data for the seven
months ended July 31, 1995 are derived from the audited combined financial
statements of RELTEC ("Predecessor A") prior to its acquisition by management
and KKR (the "RELTEC Acquisition") on July 31, 1995. The RELTEC Acquisition has
been accounted for under the purchase method of accounting and accounting
adjustments in connection therewith have been reflected in the financial data.
The summary combined financial data of Predecessor B are not comparable with the
Company's financial data subsequent to January 1, 1995 in all respects.
7
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR B
-------------------- PREDECESSOR A SUCCESSOR
------------- -----------------------------------
YEAR ENDED SEVEN MONTHS FIVE MONTHS YEAR ENDED
DECEMBER 31, ENDED ENDED DECEMBER 31,
-------------------- JULY 31, DECEMBER 31, --------------------
1993 1994 1995 1995 1996 1997
--------- --------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................... $ 438.1 $ 458.9 $ 288.3 $ 225.5 $ 689.4 $ 887.2
Cost of sales(1).................................... 309.6 322.3 205.3 166.2 482.9 633.4
--------- --------- ------ ------ --------- ---------
Gross profit........................................ 128.5 136.6 83.0 59.3 206.5 253.8
Operating expenses:
Research and product engineering.................. 39.5 42.4 27.1 18.3 46.5 55.7
Selling and administrative........................ 57.7 62.6 39.1 27.6 75.7 94.1
Goodwill and intangible amortization.............. 12.5 12.7 11.6 9.0 24.5 31.9
Write-off of acquired in-process research and
development..................................... -- -- 32.9 35.3 8.9 0.7
Other (income) expense............................ 4.7 0.8 -- 0.9 (0.2) (1.8)
--------- --------- ------ ------ --------- ---------
Total operating expenses 114.4 118.5 110.7 91.1 155.4 180.6
--------- --------- ------ ------ --------- ---------
Operating income (loss)............................. 14.1 18.1 (27.7) (31.8) 51.1 73.2
Interest expense.................................... 31.5 32.1 19.0 12.5 25.6 18.6
Income tax provision................................ 0.7 0.6 (14.1) (13.9) 17.4 29.6
Cumulative effect of change in accounting method and
extraordinary charge, net of tax benefit.......... -- 1.3 -- -- 6.3 --
--------- --------- ------ ------ --------- ---------
Net income (loss)(2)................................ $ (18.1) $ (15.9) $ (32.6) $ (30.4) $ 1.8 $ 25.0
--------- --------- ------ ------ --------- ---------
--------- --------- ------ ------ --------- ---------
Basic earnings (loss) per common share:
Income (loss) before extraordinary charge(3)(4)... $ (0.88) $ 0.20 $ 0.51
Net income (loss)(4).............................. (0.88) 0.04 0.51
Diluted earnings (loss) per common share:
Income (loss) before extraordinary charge(3)(5)... (0.88) 0.20 0.50
Net income (loss)(5).............................. (0.88) 0.04 0.50
OTHER FINANCIAL DATA:
Net cash provided by (used for) operating
activities........................................ $ 3.9 $ 5.0 $ (6.6) $ 19.3 $ 61.6 $ 33.9
Net cash used for investing activities.............. (13.9) (14.5) (6.3) (5.5) (111.9) (64.2)
Net cash provided by (used for) financing
activities........................................ 8.8 8.9 14.9 (11.9) 54.6 33.5
EBITDA(6)........................................... 37.8 41.4 (6.7) (16.2) 93.7 126.9
Capital expenditures................................ 15.0 13.8 6.3 5.5 16.9 26.5
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1997
----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
--------- -----------
BALANCE SHEET DATA:
Working capital............................................................................. $ 127.2 $ 148.1
Total assets................................................................................ 804.6 804.6
Total long-term obligations(7).............................................................. 285.4 172.6
Stockholders' equity........................................................................ 343.5 477.2
</TABLE>
(FOOTNOTES ON NEXT PAGE)
8
<PAGE>
- ------------------------
(1) For the year ended December 31, 1996, cost of sales includes nonrecurring
purchase accounting charges of $1.3 million related to the write-off of
inventory acquisition step-up.
(2) The Company's operating results include the following nonrecurring amounts:
<TABLE>
<CAPTION>
PREDECESSOR B
-------------- PREDECESSOR A SUCCESSOR
-------------- ---------------------------
YEAR ENDED SEVEN FIVE MONTHS YEAR ENDED
DECEMBER 31, MONTHS ENDED DECEMBER 31,
-------------- ENDED JULY 31, DECEMBER 31, ------------
1993 1994 1995 1995 1996 1997
------ ------ -------------- ------------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Nonrecurring purchase accounting charges:
Acquired in-process research and development................... $-- $-- $ 32.9 $ 35.3 $ 8.9 $ 0.7
Acquired inventory step-up..................................... -- -- -- 11.3 1.3 --
Gain on curtailment of pension benefits.......................... -- -- -- -- -- (6.5)
Reserve for investment in NextWAVE............................... -- -- -- -- -- 5.0
Facility closing and relocation costs............................ 4.7 0.8 -- -- 2.5 --
Receipt from software settlement agreement....................... -- -- -- -- (2.5) --
Discontinued financing transaction............................... -- -- -- 0.9 -- --
------ ------ ----- ----- ----- -----
Total nonrecurring adjustments, pretax....................... $ 4.7 $ 0.8 $ 32.9 $ 47.5 $10.2 $(0.8)
------ ------ ----- ----- ----- -----
------ ------ ----- ----- ----- -----
</TABLE>
(3) Income (loss) before extraordinary charge represents earnings (loss) per
share before an extraordinary charge of $6.3 million or $(0.16) per share
for the year ended December 31, 1996.
(4) Calculated based on a weighted average number of shares outstanding of
34,363,638, 39,498,277 and 48,837,053 for the five months ended December 31,
1995 and for the years ended December 31, 1996 and 1997, respectively.
(5) Calculated based on a weighted average number of shares and options
outstanding of 34,363,638, 39,834,904 and 49,705,758 for the five months
ended December 31, 1995 and for the years ended December 31, 1996 and 1997,
respectively.
(6) EBITDA represents earnings before interest expense, income taxes,
depreciation and goodwill and intangible amortization expense. Adjusted
EBITDA represents EBITDA adjusted for the effects of other nonrecurring
(income) expense and nonrecurring purchase accounting charges described in
note (2) above. Management believes that in addition to cash flows and net
income, EBITDA and adjusted EBITDA are useful performance measures for
assessing the operating performance of the Company because, together with
net income and cash flows, EBITDA and adjusted EBITDA provide investors with
an additional basis to evaluate the ability of the Company to incur and
service debt and to fund acquisitions and other capital expenditures.
Adjusted EBITDA does not represent net income or cash flows from operating,
investing or financing activities as defined by GAAP and does not
necessarily indicate that cash flows will be sufficient to fund cash needs
nor may these measures be comparable to similarly titled measures reported
by other companies. It should not be considered as an alternative to net
income as an indication of the Company's operating performance or to cash
flows as a measure of liquidity. The following table reconciles net income
(loss) before cumulative effect of change in accounting and extraordinary
charge to EBITDA and adjusted EBITDA:
9
<PAGE>
<TABLE>
<CAPTION>
SUCCESSOR
PREDECESSOR B PREDECESSOR A ----------------------
-------------------- --------------- YEAR
SEVEN ENDED
YEAR ENDED DECEMBER MONTHS DECEMBER
31, ENDED FIVE MONTHS 31,
-------------------- JULY 31, ENDED DEC. ---------
1993 1994 1995 31, 1995 1996
--------- --------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net income (loss) before cumulative effect of change in
accounting and extraordinary charge....................... $ (18.1) $ (14.6) $ (32.6) $ (30.4) $ 8.1
Adjustments:
Interest expense......................................... 31.5 32.1 19.0 12.5 25.6
Income taxes............................................. 0.7 0.6 (14.1) (13.9) 17.4
Depreciation expense..................................... 11.2 10.6 9.4 6.6 18.1
Goodwill amortization (a)................................ 10.7 10.7 6.5 4.5 12.9
Intangible amortization.................................. 1.8 2.0 5.1 4.5 11.6
--------- --------- ------ ----------- ---------
EBITDA..................................................... 37.8 41.4 (6.7) (16.2) 93.7
Total nonrecurring adjustments (b)....................... 4.7 0.8 32.9 47.5 10.2
--------- --------- ------ ----------- ---------
Adjusted EBITDA............................................ $ 42.5 $ 42.2 $ 26.2 $ 31.3 $ 103.9
--------- --------- ------ ----------- ---------
--------- --------- ------ ----------- ---------
<CAPTION>
1997
---------
<S> <C>
Net income (loss) before cumulative effect of change in
accounting and extraordinary charge....................... $ 25.0
Adjustments:
Interest expense......................................... 18.6
Income taxes............................................. 29.6
Depreciation expense..................................... 21.8
Goodwill amortization (a)................................ 17.7
Intangible amortization.................................. 14.2
---------
EBITDA..................................................... 126.9
Total nonrecurring adjustments (b)....................... (0.8)
---------
Adjusted EBITDA............................................ $ 126.1
---------
---------
</TABLE>
- ------------------------------
(a) Not tax deductible or tax-affected.
(b) Refer to note (2) above.
(7) Includes redeemable preferred stock, redeemable common stock, long-term debt
obligations, pension and postretirement benefits and other noncurrent
obligations. For purposes of the December 31, 1997 "As Adjusted" amounts,
redeemable common stock has been reclassified to stockholders' equity. The
295,104 shares of redeemable common stock will cease to be redeemable upon
consummation of the Offering. See "Certain Relationships and Related
Transactions."
10
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED HEREIN, PROSPECTIVE INVESTORS
SHOULD CAREFULLY CONSIDER THE RISK FACTORS SET FORTH BELOW BEFORE MAKING AN
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
RAPID TECHNOLOGICAL CHANGE AND IMPORTANCE OF NEW PRODUCTS
Technology in the telecommunications equipment industry has evolved, and is
expected to continue to evolve, rapidly. The introduction of new products,
technologies and applications and the emergence of new industry standards can
render existing products or products in development obsolete. Rapid and
significant changes in technology have compelled telecommunications equipment
suppliers to invest significant amounts in new technology in order to remain
competitive. Any failure by the Company to anticipate or respond on a
cost-effective and timely basis to technological developments, changes in
industry standards or customer requirements, or any significant delays in
product development or introduction, could have a material adverse effect on the
Company's ability to compete in the telecommunications equipment industry.
UNCERTAIN MARKET FOR BROADBAND SYSTEMS
Although the Company has made significant investments in developing its
proprietary broadband systems, there can be no assurance that consumer demand
for, or customer purchases of, broadband platforms generally will reach the
levels or will occur at the times anticipated by the Company in the United
States or internationally. In addition, in the event of significant demand for
broadband technology, there can be no assurance that the Company's broadband
platform will be compatible with the industry standards ultimately adopted or
generally accepted for such systems. Development, customer acceptance and the
timing of such development or customer acceptance of new technologies and
applications is inherently uncertain, and there can be no assurance that systems
such as the Company's broadband platform will be commercially successful.
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS
The Company's operating results may fluctuate significantly from quarter to
quarter due to several factors, including, without limitation, the volume and
timing of orders from and shipments to major customers, the timing of new
product announcements by and the availability of products from the Company or
its competitors, the overall level of capital expenditures by public network
providers, market acceptance of new and enhanced versions of the Company's
products, variations in the mix of products, systems and services sold by the
Company or its sales channels and the availability and cost of key components.
The Company's expense levels are based in part on expectations of future
revenues. If revenue levels in a particular period do not meet expectations,
operating results will be adversely affected. In addition, the Company's results
of operations are subject to seasonal factors. The Company has historically
experienced a stronger demand for certain of its products at certain times
during the year, particularly its outdoor products, primarily as a result of
customer budget cycles and appropriate weather for installation of the Company's
systems.
LONG AND UNPREDICTABLE SALES CYCLES
The Company expects that the period of time between initial customer contact
with respect to the evaluation of the purchase of a product and an actual
purchase order may span a year or more. In addition, even when committed to
proceed with deployment of equipment, telecommunications carriers and service
providers typically undertake extensive and lengthy product evaluation and
factory acceptance and field testing of new equipment before purchasing and
installing any of it in their networks. Additionally, the purchase of network
equipment is typically carried out by network operators with multiyear
purchasing programs, which may increase or decrease annually as the operators
adjust their capital equipment budgets
11
<PAGE>
and purchasing priorities. The Company's customers do not typically share
information on the duration or magnitude of planned purchasing programs, nor do
they consistently provide to the Company advance notice of contemplated changes
in their capital equipment budgets and purchasing priorities. These
uncertainties substantially complicate the Company's manufacturing planning.
Curtailment or termination of customer purchasing programs, decreases in
customer capital budgets or reduction in the purchasing priority assigned to
equipment produced by the Company, particularly if significant and unanticipated
by the Company, could have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows.
COMPETITION
The telecommunications equipment industry is highly competitive, and the
Company believes that competition may increase substantially as the introduction
of new technologies, deployment of broadband networks and potential regulatory
changes create new opportunities for established and new companies in the
industry. In addition, a number of the Company's competitors have significantly
greater financial and other resources than the Company to meet new competitive
opportunities. RELTEC's Access Systems products compete in North America with
products offered by DSC Communications, Lucent Technologies, Northern Telecom
and Advanced Fibre Communications. In addition, the Company's Access Systems
products compete indirectly with companies that produce alternate technologies
such as PairGain Technologies, ADTRAN and ADC Telecommunications. RELTEC's
Integrated Wireless Solutions products compete primarily on a regional basis
with Hoffman Schroff, Rittal and Zero Corporation, as well as with a number of
captive or allied manufacturing companies serving telecommunications OEMs. Most
of the independent competitors for Integrated Wireless Solutions do not provide
the same range of integrated capabilities that the Company offers. RELTEC's
Network Components and Services compete by product and region with a variety of
manufacturers and service providers, the largest of which include Lucent
Technologies, Northern Telecom, Siecor, Raychem and Argus Technologies, as well
as several other telecommunications OEMs.
The rapid technological developments within the telecommunications industry
have resulted in frequent changes to the Company's group of competitors. The
Company believes its success in competing with other manufacturers of
telecommunications products depends primarily on its engineering, manufacturing
and marketing skills, the price, quality and reliability of its products and its
delivery and service capabilities. The Company may face increasing pricing
pressures from current and future competitors in certain or all of the markets
for its products and services.
The Company believes that technological change, the increasing addition of
data, video and other services to networks, continuing regulatory change and
industry consolidation or new entrants will continue to cause rapid evolution in
the competitive environment of the telecommunications equipment market, the full
scope and nature of which is difficult to predict. Increased competition could
result in price reductions, reduced margins and loss of market share by the
Company. The Company believes industry regulatory change may create new
opportunities for suppliers of telecommunications equipment; however, the
Company expects that such opportunities may attract increased competition from
others as well. The Company also believes that the rapid technological changes
which characterize the telecommunications industry will continue to make the
markets in which the Company competes attractive to new entrants. There can be
no assurance that the Company will be able to compete successfully with its
existing or new competitors or that competitive pressures faced by the Company
will not materially and adversely affect its business, financial condition,
results of operations or cash flows.
HISTORY OF NET LOSSES
For the years ended December 31, 1993 and 1994, the seven months ended July
31, 1995, the five months ended December 31, 1995, and the years ended December
31, 1996 and 1997, the Company incurred a net loss of $18.1 million, $15.9
million, $32.6 million and $30.4 million and had net income of
12
<PAGE>
$1.8 million and $25.0 million, respectively. There can be no assurance that the
Company will not incur additional losses in the future.
CHANGING REGULATORY ENVIRONMENT
The telecommunications industry is subject to regulation in the United
States and other countries. Federal and state agencies regulate most of the
Company's U.S. customers. The Company's business will be dependent upon the
telecommunications industry in the United States and internationally, which is
affected by regulation. Legislation has been adopted in the United States that
lifts certain restrictions on the ability of companies, including certain
customers of the Company, to compete with the Company. In particular, the RBOCs
are no longer prohibited from commercially manufacturing the types of equipment
and systems that the Company produces. The resulting effect of such legislation
on the market for the Company's products is difficult to predict at this time.
Changes in current or future laws or regulations in the United States or
elsewhere could have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows.
CUSTOMER CONCENTRATION
The universe of potential customers for the Company's products is relatively
limited. Moreover, increased competition among telecommunications companies has
produced a trend toward consolidation within the industry, absorbing some new
market entrants and reducing the number of existing telephone companies. As
companies combine operations, they may seek to realize economies of scale by
consolidating their network architectures or limiting the number of outside
suppliers of equipment. In the event that a significant existing customer of the
Company is merged with another telecommunications company, there can be no
assurance that such customer will continue to purchase its systems from the
Company. In 1997, sales to the Company's top five customers--BellSouth, GTE,
Nokia, SBC Communications and Sprint--represented approximately 46% of the
Company's total sales. Of these customers only BellSouth and Sprint accounted
for more than 10% of the Company's total sales during the same period. The loss
of a significant customer could have a material adverse effect on the Company's
business, financial condition, results of operations or cash flows.
RESEARCH AND PRODUCT DEVELOPMENT
Management believes that the Company's success will depend on its ability to
develop and introduce in a timely manner new products and enhancements to its
existing products. The Company has announced the development of a number of new
products including its international NGDLC platform and small line size NGDLC
platforms. There can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of such new products and enhancements, or that its new
products and enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance. Announcements of currently planned or
other new product offerings by the Company or its competitors may cause
customers to defer or cancel the purchase of existing Company products. The
Company's inability to develop on a timely basis new products or enhancements to
existing products, or the failure of such new products or enhancements to
achieve market acceptance, could have a material adverse effect on the Company's
business, financial condition, results of operations or cash flows.
In addition, new products and enhancements offered by the Company may
contain undetected or unresolved errors when they are first introduced or as new
versions are released. There can be no assurance that despite extensive testing
by the Company, errors will not be found in new products or upgrades after
commencement of commercial shipments, resulting in delays in or loss of market
acceptance and sales, diversion of development resources, injury to the
Company's reputation or increased service and warranty costs, any of which could
have a material adverse effect on the Company's business, financial condition,
results of operations or cash flows.
13
<PAGE>
RISKS ASSOCIATED WITH ACQUISITIONS
The Company expects to continue to identify and acquire companies with
complementary products or services that may be expected to enhance the Company's
operations and profitability. However, there can be no assurance that the
Company will be able to acquire suitable acquisition targets on acceptable
terms. In addition, if the Company completes any such acquisitions, there can be
no assurance that the Company will be able to integrate the operations of any
acquired company successfully with existing operations or that any of such
acquisitions will prove profitable. Completed acquisitions may reduce the
financial resources available to the Company to invest in product development or
other internal growth.
INTERNATIONAL OPERATIONS
International sales accounted for 14%, 24% and 25% of the Company's net
sales in 1995, 1996 and 1997, respectively, and the Company expects that
international sales will increase as a percentage of net sales in the future. In
addition, the Company expects to commit substantial resources to expand into new
markets internationally. The Company has manufacturing operations located in
Canada, China, Mexico and the United Kingdom. Due to its export sales and
international manufacturing operations, the Company is subject to the risks of
conducting business internationally, including unexpected changes in legislative
or regulatory requirements, currency fluctuations which could materially and
adversely affect U.S. dollar revenues or operating expenses, tariffs and other
barriers and restrictions, potentially longer payment cycles, greater difficulty
in accounts receivable collection, potentially adverse taxes, and the burdens of
complying with a variety of foreign laws and telecommunications standards. The
Company also is subject to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships, in
connection with its international operations. There can be no assurance that
such factors will not have a material adverse effect on the Company's operations
in the future or require the Company to modify significantly its current
business practices. In addition, the laws of certain foreign countries may not
protect the Company's proprietary technology to the same extent as do the laws
of the United States. See "Business -- Manufacturing and Facilities."
POTENTIAL NEED FOR ADDITIONAL CAPITAL RESOURCES
The Company expects to fund its anticipated additional capital requirements
through existing resources, internally generated funds and additional debt or
equity financing as appropriate. There can be no assurance, however, that the
Company will be successful in producing sufficient cash flow or raising
additional debt or equity capital on terms that it will consider acceptable. In
addition, the Company's future capital requirements will depend upon a number of
factors, including research and development and marketing expenses, staffing
levels and customer growth, as well as other factors that will not be within the
Company's control such as competitive conditions or governmental regulation.
Failure to generate sufficient funds may have a material adverse effect on the
Company's business, financial condition, results of operations or cash flows.
INTELLECTUAL PROPERTY
The Company relies on a combination of patents, trade secrets, trademarks,
copyrights and other intellectual property law, nondisclosure agreements and
other protective measures to protect its proprietary rights. The Company also
utilizes unpatented proprietary know-how and trade secrets and employs various
methods to protect its trade secrets and know-how. Although the Company employs
a variety of intellectual property in the development and manufacturing of its
products, it believes that none of such intellectual property is individually
critical to its current operations. Taken as a whole, the Company believes its
intellectual property rights are significant and that the loss of all or a
substantial portion of such rights could have a material adverse effect on its
results of operations. There can be no assurance that the Company's intellectual
property protection measures will be sufficient to prevent misappropriation of
the Company's technology. In addition, the laws of many foreign countries do not
protect the Company's intellectual properties to the same extent as the laws of
the United States. From time to time, the Company may desire or be required to
renew or to obtain licenses from others in order to
14
<PAGE>
further develop and market commercially viable products effectively. There can
be no assurance that any necessary licenses will be available on reasonable
terms.
COMPANY SUBJECT TO CONTROL OF THE KKR PARTNERSHIPS
Following the Offering, CMT Associates, L.P. and KKR Partners II, L.P. (the
"KKR Partnerships") will own approximately 76.8% of the outstanding Common Stock
of the Company on a fully diluted basis. KKR Associates, L.P., a New York
limited partnership ("KKR Associates"), is the general partner of the KKR
Partnerships and therefore indirectly controls RELTEC and has the power to elect
a majority of its directors, appoint new management and approve any action
requiring the approval of the holders of Common Stock, including adopting
amendments to RELTEC's Certificate of Incorporation and approving mergers or
sales of substantially all of the Company's assets. In addition, the majority
ownership position of the KKR Partnerships may preclude or slow the consummation
of an unsolicited bid to acquire the Company. There can be no assurance that the
interests of the KKR Partnerships and KKR Associates will not conflict with the
interests of the other holders of Common Stock.
ENVIRONMENTAL MATTERS
The Company is subject to comprehensive and changing foreign, federal,
state, provincial and local environmental requirements, including those
governing discharges to the air and water, the handling and disposal of solid
and hazardous wastes and the remediation of contamination associated with
releases of hazardous substances. The Company believes that it is in compliance
with current environmental requirements. Nevertheless, the Company uses solvents
and other hazardous substances, and as is the case with manufacturers in
general, if a release of hazardous substances occurs on or from the Company's
properties, the Company may be held liable and may be required to pay the cost
of remedying the condition. The amount of any such liability could be material.
On March 11, 1998, the Company received a notice from the United States
Environmental Protection Agency that its Lorain Products division may be a
potentially responsible party in connection with a superfund site in Kansas
City. The notice stated that over 1,500 parties sent materials to the site.
Although the Company is not able at this time to estimate the cost to it of its
responsibility for this site, the Company's preliminary review of its records
and publicly available information leads it to believe that the Company's
allocable share, if any, of the clean-up costs of this site would not be
material.
The Company has made, and will continue to make, expenditures to comply with
current and future environmental requirements. The Company anticipates that it
may incur additional capital expenditures and will incur operating costs in the
future to comply with existing laws and regulations and new requirements arising
from new or amended statutes. In addition, because the applicable regulatory
agencies have not yet promulgated final standards for some existing
environmental programs, the Company cannot at this time reasonably estimate the
cost for compliance with these additional requirements. The amount of any such
compliance cost could be material.
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Following the Offering there can be no assurance that a regular trading market
for the Common Stock will either develop or be sustained. The initial public
offering price for the Company's Common Stock will be established as a result of
negotiations between the Underwriters and the Company and may not reflect the
market price of the Common Stock following the Offering. The market price of the
Common Stock will be subject to fluctuations in response to quarterly financial
reports, analysts' earnings estimates, announcements of new products and
innovations by the Company or its competitors, general conditions in the
telecommunications equipment and service industry and other market factors. In
addition, the stock market in recent years has experienced extreme price and
volume fluctuations that often have no relationship or a disproportionate
relationship to the operating performance of the listed companies. These
fluctuations may adversely affect the market price of the Company's stock.
15
<PAGE>
RELIANCE ON KEY MANAGEMENT
The Company is dependent on the retention of, and the continued performance
by, its senior management. There can be no assurance that key management
personnel will continue to remain in the employ of RELTEC, and the loss of such
personnel could have a material adverse effect on the Company.
IMMEDIATE DILUTION
Purchasers of the Common Stock will experience an immediate and substantial
dilution of $24.00 per share. To the extent that outstanding options to purchase
the Company's Common Stock are exercised, there will be future dilution. See
"Dilution."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS
The existing stockholders of the Company may benefit from the initial public
offering of Common Stock through the creation of a liquid trading market and
through a potential increase in the market value of their shares. Following the
Offering, shares are expected to trade in a regular public trading market.
Although the Common Stock held by the existing stockholders of the Company is
not being registered in connection with the Offering, the existing shareholders
may be able to sell their shares into the public market upon registration of
such shares pursuant to certain registration rights or once such shares
otherwise cease to constitute restricted securities. In addition, the price at
which the Company's Common Stock publicly trades after the Offering may result
in a substantial increase in the market value of the shares held by existing
stockholders. The difference between the midpoint of the range of the estimated
initial public offering price set forth on the cover of this Prospectus and the
weighted average price per share to the existing stockholders is $18.60 per
share.
SHARES ELIGIBLE FOR FUTURE SALE
As of December 31, 1997, the Company had 50,038,608 shares of Common Stock
outstanding (excluding shares of Common Stock offered hereby). After the
Offering, the holders of shares of Common Stock issued prior to the Offering
will be entitled to certain registration rights under the Securities Act, at the
expense of the Company. Such shares may also be sold under Rule 144 of the
Securities Act, depending on the holding period of such securities and subject
to significant restrictions in the case of shares held by persons deemed to be
affiliates of the Company. In addition, the Company had outstanding 2,990,821
shares issued pursuant to Regulation S in connection with the Rainford
Acquisition on September 3, 1996 which may be resold into the United States
without registration under the Securities Act. No prediction can be made as to
the effect, if any, that future sales of shares, or the availability of shares
for future sale, will have on the market price of the Common Stock prevailing
from time to time. Sales of substantial amounts of Common Stock (including
shares issued upon the exercise of stock options), or the perception that such
sales could occur, may adversely affect prevailing market prices for the Common
Stock. The Company has agreed not to offer, sell, contract to sell or otherwise
dispose of any Common Stock for a period of 180 days after the date of this
Prospectus without the written consent of Morgan Stanley & Co. Incorporated. The
KKR Partnerships, certain shareholders and executive officers of the Company
also have agreed not to offer, sell, contract to sell or otherwise dispose of
any Common Stock for a period of 180 days after the date of this Prospectus
without the written consent of Morgan Stanley & Co. Incorporated, except that,
subject to certain conditions, 295,104 shares held by the Rysaffe Trustee
Company (CI) Limited may be sold after 30 days from the date of this Prospectus.
The KKR Partnerships have no current intention to sell their Common Stock upon
the expiration of such period. As of December 31, 1997, without giving effect to
the Offering, the KKR Partnerships, certain shareholders and the executive
officers in the aggregate owned 49,701,188 shares of Common Stock, including
shares of Common Stock issuable pursuant to existing stock options. See
"Principal Stockholders" and "Shares Eligible for Future Sale."
16
<PAGE>
THE COMPANY
RELTEC is a leader in the design, manufacture and sale of a broad range of
telecommunications systems, products and services to wireline and wireless
service providers and OEMs in North America and around the globe. Most of the
Company's systems, products and services can be found in the access portion of
the telecommunications network. The Company conducts business in a single
industry segment, the global telecommunications equipment market. This segment
includes integrated systems and components for voice, video and data
communications. For management purposes, the Company's net sales are classified
into three groupings: Access Systems, Integrated Wireless Solutions and Network
Components and Services.
The Company was formed in July 1995 by management and the KKR Partnerships
to acquire Reliance Comm/Tec Corporation from the Reliance Electric Company, a
subsidiary of Rockwell International Corporation. Reliance Comm/Tec Corporation
was the successor to telecommunications equipment businesses that have been in
continuous operation for over 60 years.
The Company was incorporated in Delaware in June 1995 as "K-Tec Holdings,
Inc." In October 1995, the Company changed its name to RELTEC Holdings, Inc.,
and in January 1998, the Company changed its name to RELTEC Corporation. The
Company's principal executive offices are located at 5900 Landerbrook Drive,
Suite 300, Cleveland, Ohio 44124-4019, and the telephone number at that address
is (440) 460-3600.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,500,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$130.3 million ($150.0 million if the over-allotment option granted to the
Underwriters by the Company is exercised in full), after deducting underwriting
discounts and commissions and offering expenses and calculated based on an
assumed initial offering price of $25.50 per share, which is the midpoint of the
range of the estimated offering price per share set forth on the cover of this
Prospectus. A portion of the net proceeds will be used to repay indebtedness
under the Company's credit facility with The Chase Manhattan Bank (the "New
Credit Facility") and the Company's money market lines of credit with Bank One,
Columbus, N.A., Caisse National de Agricole and The Sanwa Bank, Limited ("Money
Market Lines of Credit").
At December 31, 1997, the weighted average interest rates on the New Credit
Facility and the Money Market Lines of Credit were 6.92% and 7.18% per annum,
respectively. The New Credit Facility expires on September 30, 2003, and
borrowings under the Money Market Lines of Credit mature at specified dates less
than one year after incurrence.
The Company expects to use the remaining proceeds, if any, for general
corporate purposes, including the funding of working capital requirements.
Pending such uses, the Company will invest the net proceeds of the Offering in
investment-grade, interest-bearing securities.
From time to time, the Company evaluates opportunities to enter into
potential acquisitions, strategic investments, joint ventures or other similar
transactions and may use a portion of the net proceeds to enter into such
transactions. There are no present understandings or agreements with respect to
any such transactions, and there can be no assurance that the Company will enter
into any such arrangements.
17
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any future earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future. The declaration and payment in the future of any cash dividends will be
at the election of the Company's Board of Directors and will depend upon the
earnings, capital requirements and financial position of the Company, future
debt covenants, general economic conditions and other pertinent factors.
In addition, the Company has certain limitations or restrictions on its
ability to pay dividends. The Company is a holding company that conducts its
operations through a number of its subsidiaries, and has no business operations
of its own. Accordingly, the Company is dependent on the receipt of cash from
its subsidiaries to pay dividends, as well as to meet its expenses and other
obligations generally. Certain of the Company's debt instruments contain
financial covenants and other restrictions that prohibit or restrict the payment
of dividends by the Company's subsidiaries to RELTEC and by RELTEC to its
stockholders. See "Description of Certain Indebtedness."
18
<PAGE>
CAPITALIZATION
The following table sets forth the current maturities of debt and
capitalization of the Company at December 31, 1997 and as adjusted to give
effect to the sale by the Company of 5,500,000 shares of Common Stock at an
assumed initial public offering price of $25.50 per share, which is the midpoint
of the range of the estimated offering price per share set forth on the cover of
this Prospectus, and the appli-cation of the estimated net proceeds therefrom.
This table should be read in conjunction with "Use of Proceeds," "Selected
Consolidated Financial Data" and the Company's Consolidated Financial Statements
and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1997
----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
--------- -----------
<CAPTION>
(IN MILLIONS)
<S> <C> <C>
Current maturities of debt................................................................. $ 20.9 $ --
--------- -----------
--------- -----------
Long-term debt, excluding current maturities............................................... $ 250.3 $ 140.9
Preferred stock, $.01 par value, 1,000,000 shares authorized(1); 1,000 shares of Series A
redeemable preferred stock issued and outstanding at December 31, 1997 with $1,000 per
share redemption value................................................................... 1.0 1.0
Redeemable common stock, $.01 par value, 295,104 shares issued and outstanding............. 3.4 --
Stockholders' equity:
Common stock, $.01 par value; 60,000,000 shares authorized; 49,743,504 shares issued
and outstanding at December 31, 1997(1)(2)........................................... 0.5 0.6
Additional paid-in capital............................................................. 341.2 474.8
Accumulated deficit.................................................................... (3.7) (3.7)
Currency translation adjustment........................................................ 5.5 5.5
--------- -----------
Total stockholders' equity......................................................... 343.5 477.2
--------- -----------
Total capitalization............................................................. $ 598.2 $ 619.1
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) On January 14, 1998, the Company increased its authorized shares of Common
Stock to 150,000,000 and its authorized shares of preferred stock to
20,000,000.
(2) Excludes (i) 3,648,040 shares of Common Stock issuable upon exercise of
stock options outstanding as of December 31, 1997, of which options to
purchase 1,128,818 shares were then exercisable and (ii) 5,076,211 shares of
Common Stock reserved for future issuance under the Company's equity plans.
See "Management--Benefit Plans."
19
<PAGE>
DILUTION
As of December 31, 1997, the Company's net tangible book deficit was $50.5
million, or $(1.02) per share. After giving effect to the sale of the Common
Stock in the Offering (assuming that the Underwriters' over-allotment option is
not exercised) at an assumed initial offering price of $25.50 per share, which
is the midpoint of the range of the estimated offering price per share set forth
on the cover of this Prospectus, and application of the estimated net proceeds
therefrom, the pro forma net tangible book value as of December 31, 1997 was
$83.2 million, or $1.50 per share. This amount represents an immediate increase
in net tangible book value of $2.52 per share to existing shareholders and an
immediate dilution in pro forma net tangible book value of $24.00 per share to
new investors. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................................................ $ 25.50
Consolidated net tangible book deficit per share as of December 31, 1997....................... $ (1.02)
Increase per share attributable to the Offering(1)............................................. 2.52
---------
Pro forma consolidated net tangible book value after the Offering.............................. 1.50
---------
Dilution per share to new investors............................................................ $ 24.00
---------
---------
</TABLE>
- ------------------------
(1) After deducting underwriting discounts and commissions and estimated
offering expenses.
The following table summarizes the differences, on a pro forma basis as of
December 31, 1997, between the existing stockholders and the new investors with
respect to the number of shares purchased from the Company, the total
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................... 50,038,608 90.1% $ 345.5 71.1% $ 6.90
New investors....................................... 5,500,000 9.9 140.3 28.9% 25.50
------------ --------- --------- ---------
Total............................................. 55,538,608 100.0% $ 485.8 100.0%
------------ --------- --------- ---------
------------ --------- --------- ---------
</TABLE>
The tables above assume no exercise of any outstanding options to purchase
Common Stock and is based on shares outstanding at December 31, 1997, excluding
(i) 3,648,040 shares of Common Stock issuable upon exercise of stock options
outstanding as of December 31, 1997, of which options to purchase 1,128,818
shares were then exercisable at a weighted average exercise price of $6.19 per
share and (ii) 5,076,211 shares of Common Stock reserved for future issuance
under the Company's equity plans. The exercise of the options in (i) and (ii)
above will be dilutive to new investors. See "Management--Benefit Plans." At
December 31, 1997, the Company's historical net tangible book deficit of $50.5
million, or $(1.02) per share, excludes 295,104 shares of redeemable common
stock.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's Consolidated and Combined Financial Statements and
the Notes thereto and the other information contained elsewhere in this
Prospectus. The summary historical combined financial data for the years ended
December 31, 1993 and 1994 are derived from the audited Combined Financial
Statements of the Company ("Predecessor B") prior to the Rockwell Acquisition.
The historical combined financial data for the seven months ended July 31, 1995
are derived from the audited combined financial statements of RELTEC
("Predecessor A") prior to the RELTEC Acquisition. The RELTEC Acquisition has
been accounted for under the purchase method of accounting and accounting
adjustments in connection therewith have been reflected in the financial data.
The selected combined financial data of Predecessor B are not comparable with
the Company's financial data subsequent to January 1, 1995 in all respects.
21
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR A SUCCESSOR
PREDECESSOR B ------------- --------------------------
-------------------- YEAR
SEVEN FIVE ENDED
YEAR ENDED MONTHS MONTHS DECEMBER
DECEMBER 31, ENDED ENDED 31,
-------------------- JULY 31, DECEMBER 31, ---------
1993 1994 1995 1995 1996
--------- --------- ------------- --------------- ---------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net sales....................................................... $ 438.1 $ 458.9 $ 288.3 $ 225.5 $ 689.4
Cost of sales(1)................................................ 309.6 322.3 205.3 166.2 482.9
--------- --------- ------ ------ ---------
Gross profit.................................................... 128.5 136.6 83.0 59.3 206.5
Operating expenses:
Research and product engineering................................ 39.5 42.4 27.1 18.3 46.5
Selling and administrative...................................... 57.7 62.6 39.1 27.6 75.7
Goodwill and intangible amortization............................ 12.5 12.7 11.6 9.0 24.5
Write-off of acquired in-process research and development....... -- -- 32.9 35.3 8.9
Other (income) expense.......................................... 4.7 0.8 -- 0.9 (0.2)
--------- --------- ------ ------ ---------
Total operating expenses........................................ 114.4 118.5 110.7 91.1 155.4
--------- --------- ------ ------ ---------
Operating income (loss)......................................... 14.1 18.1 (27.7) (31.8) 51.1
Interest expense................................................ 31.5 32.1 19.0 12.5 25.6
Income tax provision (benefit).................................. 0.7 0.6 (14.1) (13.9) 17.4
Cumulative effect of change in accounting method and
extraordinary charge, net of tax benefit...................... -- 1.3 -- -- 6.3
--------- --------- ------ ------ ---------
Net income (loss)(2)............................................ $ (18.1) $ (15.9) $ (32.6) $ (30.4) $ 1.8
--------- --------- ------ ------ ---------
--------- --------- ------ ------ ---------
Basic earnings (loss) per common share:
Income (loss) before extraordinary charge(3)(4)............... $ (0.88) $ 0.20
Net income (loss)(4).......................................... (0.88) 0.04
Diluted earnings (loss) per common share:
Income (loss) before extraordinary charge(3)(5)............... (0.88) 0.20
Net income (loss)(5).......................................... (0.88) 0.04
OTHER FINANCIAL DATA:
Net cash provided by (used for) operating activities............ $ 3.9 $ 5.0 $ (6.6) $ 19.3 $ 61.6
Net cash used for investing activities.......................... (13.9) (14.5) (6.3) (5.5) (111.9)
Net cash provided by (used for) financing activities............ 8.8 8.9 14.9 (11.9) 54.6
EBITDA(6)....................................................... 37.8 41.4 (6.7) (16.2) 93.7
Capital expenditures............................................ 15.0 13.8 6.3 5.5 16.9
<CAPTION>
1997
---------
STATEMENT OF OPERATIONS DATA:
<S> <C>
Net sales....................................................... $ 887.2
Cost of sales(1)................................................ 633.4
---------
Gross profit.................................................... 253.8
Operating expenses:
Research and product engineering................................ 55.7
Selling and administrative...................................... 94.1
Goodwill and intangible amortization............................ 31.9
Write-off of acquired in-process research and development....... 0.7
Other (income) expense.......................................... (1.8)
---------
Total operating expenses........................................ 180.6
---------
Operating income (loss)......................................... 73.2
Interest expense................................................ 18.6
Income tax provision (benefit).................................. 29.6
Cumulative effect of change in accounting method and
extraordinary charge, net of tax benefit...................... --
---------
Net income (loss)(2)............................................ $ 25.0
---------
---------
Basic earnings (loss) per common share:
Income (loss) before extraordinary charge(3)(4)............... $ 0.51
Net income (loss)(4).......................................... 0.51
Diluted earnings (loss) per common share:
Income (loss) before extraordinary charge(3)(5)............... 0.50
Net income (loss)(5).......................................... 0.50
OTHER FINANCIAL DATA:
Net cash provided by (used for) operating activities............ $ 33.9
Net cash used for investing activities.......................... (64.2)
Net cash provided by (used for) financing activities............ 33.5
EBITDA(6)....................................................... 126.9
Capital expenditures............................................ 26.5
</TABLE>
<TABLE>
<CAPTION>
AS OF
------------------------------------------------------- AS OF
DECEMBER
DECEMBER 31, JULY 31, DECEMBER 31, 31, 1997
-------------------- ----------- -------------------- -----------
BALANCE SHEET DATA: 1993 1994 1995 1995 1996 ACTUAL
--------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Working capital.............................................. $ 79.7 $ 86.6 $ 98.3 $ 89.9 $ 89.5 $ 127.2
Total assets................................................. 565.9 566.9 561.7 566.7 740.3 804.6
Total long-term obligations(7)............................... 739.6 778.1 382.7 324.1 313.0 285.4
Stockholders' equity......................................... -- -- -- 150.3 270.0 343.5
Parent Company (deficit) investment.......................... (230.1) (271.2) 100.0 -- -- --
<CAPTION>
BALANCE SHEET DATA: AS ADJUSTED
-------------
<S> <C>
Working capital.............................................. $ 148.1
Total assets................................................. 804.6
Total long-term obligations(7)............................... 172.6
Stockholders' equity......................................... 477.2
Parent Company (deficit) investment.......................... --
</TABLE>
(FOOTNOTES ON NEXT PAGE)
22
<PAGE>
- ------------------------
(1) For the five months ended December 31, 1995 and year ended December 31,
1996, cost of sales includes nonrecurring purchase accounting charges of
$11.3 million and $1.3 million, respectively, related to the write-off of
inventory acquisition step-up.
(2) The Company's operating results include the following nonrecurring amounts:
<TABLE>
<CAPTION>
PREDECESSOR B
------------- SUCCESSOR
----------------------
YEAR ENDED PREDECESSOR A YEAR
DECEMBER 31, ----------------- ENDED
SEVEN MONTHS FIVE MONTHS DECEMBER 31,
------------- ENDED JULY 31, ENDED DEC. ---------
1993 1994 1995 31, 1995 1996
----- ----- ----------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Nonrecurring purchase accounting charges:
Acquired in-process research and development.............. $ -- $ -- $ 32.9 $ 35.3 $ 8.9
Acquired inventory step-up................................ -- -- -- 11.3 1.3
Gain on curtailment of pension benefits..................... -- -- -- -- --
Reserve for investment in NextWAVE.......................... -- -- -- -- --
Facility closing and relocation costs....................... 4.7 0.8 -- -- 2.5
Receipt from software settlement agreement.................. -- -- -- -- (2.5)
Discontinued financing transaction.......................... -- -- -- 0.9 --
--- --- ----- ----- ---------
Total nonrecurring adjustments, pretax.................. $ 4.7 $ 0.8 $ 32.9 $ 47.5 $ 10.2
--- --- ----- ----- ---------
--- --- ----- ----- ---------
<CAPTION>
1997
---------
<S> <C>
Nonrecurring purchase accounting charges:
Acquired in-process research and development.............. $ 0.7
Acquired inventory step-up................................ --
Gain on curtailment of pension benefits..................... (6.5)
Reserve for investment in NextWAVE.......................... 5.0
Facility closing and relocation costs....................... --
Receipt from software settlement agreement.................. --
Discontinued financing transaction.......................... --
---------
Total nonrecurring adjustments, pretax.................. $ (0.8)
---------
---------
</TABLE>
(3) Income (loss) before extraordinary charge represents earnings (loss) per
share before an extraordinary charge of $6.3 million or $(0.16) per share
for the year ended December 31, 1996.
(4) Calculated based on a weighted average number of shares outstanding of
34,363,638, 39,498,277 and 48,837,053 for the five months ended December 31,
1995 and the years ended December 31, 1996 and 1997, respectively.
(5) Calculated based on a weighted average number of shares and options
outstanding of 34,363,638, 39,834,904 and 49,705,758 for the five months
ended December 31, 1995 and years ended December 31, 1996 and 1997,
respectively.
(6) EBITDA represents earnings before interest expense, income taxes,
depreciation and goodwill and intangible amortization expense. Adjusted
EBITDA represents EBITDA adjusted for the effects of other nonrecurring
(income) expense and nonrecurring purchase accounting charges described in
note (2) above. Management believes that in addition to cash flows and net
income, EBITDA and adjusted EBITDA are useful performance measures for
assessing the operating performance of the Company because, together with
net income and cash flows, EBITDA and adjusted EBITDA provide investors with
an additional basis to evaluate the ability of the Company to incur and
service debt and to fund acquisitions and other capital expenditures.
Adjusted EBITDA does not represent net income or cash flows from operating,
investing or financing activities as defined by GAAP and does not
necessarily indicate that cash flows will be sufficient to fund cash needs
nor may these measures be comparable to similarly titled measures reported
by other companies. It should not be considered as an alternative to net
income as an indication of the Company's operating performance or to cash
flows as a measure of liquidity. The following table reconciles net income
(loss) before cumulative effect of change in accounting and extraordinary
charge to EBITDA and adjusted EBITDA:
23
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR A SUCCESSOR
PREDECESSOR B --------------- ---------------------------------
--------------------
SEVEN FIVE
YEAR ENDED MONTHS MONTHS YEAR ENDED
DECEMBER 31, ENDED ENDED DECEMBER 31,
-------------------- JULY 31, DEC. 31, --------------------
1993 1994 1995 1995 1996 1997
--------- --------- --------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) before cumulative effect of change in
accounting and extraordinary charge.................... $ (18.1) $ (14.6) $ (32.6) $ (30.4) $ 8.1 $ 25.0
Adjustments:
Interest expense....................................... 31.5 32.1 19.0 12.5 25.6 18.6
Income taxes........................................... 0.7 0.6 (14.1) (13.9) 17.4 29.6
Depreciation expense................................... 11.2 10.6 9.4 6.6 18.1 21.8
Goodwill amortization (a).............................. 10.7 10.7 6.5 4.5 12.9 17.7
Intangible amortization................................ 1.8 2.0 5.1 4.5 11.6 14.2
--------- --------- ------ ----------- --------- ---------
EBITDA................................................... 37.8 41.4 (6.7) (16.2) 93.7 126.9
Total nonrecurring adjustments (b)..................... 4.7 0.8 32.9 47.5 10.2 (0.8)
--------- --------- ------ ----------- --------- ---------
Adjusted EBITDA.......................................... $ 42.5 $ 42.2 $ 26.2 $ 31.3 $ 103.9 $ 126.1
--------- --------- ------ ----------- --------- ---------
--------- --------- ------ ----------- --------- ---------
</TABLE>
- ------------------------------
(a) Not tax deductible or tax-affected.
(b) Refer to note (2) above.
(7) Includes redeemable preferred stock, redeemable common stock, long-term debt
obligations, pension and postretirement benefits and other noncurrent
obligations. For purposes of the December 31, 1997 "As Adjusted" amounts,
redeemable common stock has been reclassified to stockholders' equity. The
295,104 shares of redeemable common stock will cease to be redeemable upon
consummation of the Offering. See "Certain Relationships and Related
Transactions."
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE MATTERS DISCUSSED HEREIN MAY INCLUDE "FORWARD-LOOKING STATEMENTS" AS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS
INVOLVE RISKS AND UNCERTAINTIES WHICH COULD RESULT IN OPERATING PERFORMANCE THAT
IS MATERIALLY DIFFERENT FROM MANAGEMENT'S PROJECTIONS. THE SECTION OF THIS
PROSPECTUS ENTITLED "RISK FACTORS" SHOULD BE READ IN CONJUNCTION WITH THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
The Company is a leader in the design, manufacture and sale of a broad range
of telecommunications systems, products and services to wireline and wireless
service providers and OEMs in North America and around the globe. Most of the
Company's systems, products and services can be found in the access portion of
the telecommunications network.
RELTEC Corporation was formed in July 1995 by management and the KKR
Partnerships to acquire Reliance Comm/Tec Corporation from Reliance, a
subsidiary of Rockwell. Reliance Comm/Tec Corporation is the successor to
telecommunications equipment businesses that have been in continuous operation
for over 60 years. Since July 1995, the Company has completed six acquisitions,
strategic investments and joint venture investments for combined consideration
of approximately $185.0 million, the most significant of which was the
acquisition of Rainford Group plc in September 1996 (the "Rainford Acquisition")
for $134.3 million. Rainford is a leading European manufacturer of base station
enclosures and systems for the telecommunications equipment industry.
The Company's acquisitions have been accounted for as purchases.
Accordingly, for financial reporting purposes, an allocation of the purchase
price has been made using estimated fair market values of the assets acquired
and liabilities assumed as of the acquisition date in accordance with Accounting
Principles Board Opinion No. 16--"Business Combinations." The results of these
acquisitions have been included in the accompanying consolidated financial
statements since the respective dates of acquisition.
The Company conducts business in a single industry segment, the global
telecommunications equipment market. This segment includes integrated systems,
components and services for voice, video and data communications. For management
purposes, the Company's net sales are classified into three groupings: Access
Systems, Integrated Wireless Solutions and Network Components and Services.
Sales are recognized when goods are shipped or services are provided. The
Company's products are sold directly to end users, such as RBOCs and other
telecommunications service providers, to telecommunications OEMs and, to a
lesser extent, through third party distributors. For certain products,
particularly in Access Systems, the purchase decision process may be long and
unpredictable, and may involve a lengthy standardization and evaluation process.
The Company sells its products in the United States and internationally. The
Company's non-U.S. sales represented approximately 14%, 24% and 25% of net sales
for the years ended December 31, 1995, 1996 and 1997, respectively. The increase
in international sales in 1996 was due primarily to the Rainford Acquisition.
The majority of the Company's international sales are not denominated in U.S.
dollars. While the Company is subject to fluctuations in foreign currency
exchange rates with respect to income derived from international sales not
denominated in U.S. dollars, the costs associated with a majority of these sales
are in the same currency, which partially mitigates the effect of such
fluctuations.
Historically, currency exchange movements have not had a material effect on
the Company's financial statements. As the Company's non-U.S. operations expand,
the effect of currency fluctuations may have a material impact on the Company's
revenues and costs. At December 31, 1997, the Company had no material unhedged
monetary assets, liabilities or commitments denominated in currencies other than
U.S. dollars. The Company's strategy for managing currency risk is to hedge
foreign currency exposure with respect to firm commitments denominated in
currencies other than the notional currency of the Company's individual business
units.
25
<PAGE>
The Company's operating results may fluctuate significantly from quarter to
quarter due to several factors, including, without limitation, the volume and
timing of orders from and shipments to major customers, the timing of new
product announcements by and the availability of products from the Company or
its competitors, the overall level of capital expenditures by public network
providers, market acceptance of new and enhanced versions of the Company's
products, variations in the mix of products, systems and services sold by the
Company or its sales channels and the availability and cost of key components.
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
PREDECESSOR A SUCCESSOR
----------------- -----------------------------------------
SEVEN MONTH FIVE MONTH YEAR ENDED DECEMBER
PERIOD ENDED PERIOD ENDED 31,
JULY 31, 1995 DECEMBER 31, 1995 1996 1997
----------------- ------------------- --------- ---------
<S> <C> <C> <C> <C>
Net sales................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................ 71.2 73.7 70.0 71.4
----- ----- --------- ---------
Gross profit........................................... 28.8 26.3 30.0 28.6
Operating expenses:
Research and product engineering....................... 9.4 8.1 6.7 6.3
Selling and administrative............................. 13.6 12.2 11.0 10.6
Goodwill and intangible amortization................... 4.0 4.0 3.6 3.6
Write-off of acquired in-process research and
development.......................................... 11.4 15.7 1.3 0.1
Other expense (income)................................. -- 0.4 -- (0.2)
----- ----- --------- ---------
Total operating expenses............................. 38.4 40.4 22.6 20.4
----- ----- --------- ---------
Operating income (loss).................................. (9.6) (14.1) 7.4 8.2
Interest expense......................................... 6.6 5.5 3.7 2.1
Income tax provision (benefit)........................... (4.9) (6.1) 2.5 3.3
Extraordinary charge, net of tax benefit................. -- -- 0.9 --
----- ----- --------- ---------
Net income (loss)........................................ (11.3)% (13.5)% 0.3% 2.8%
----- ----- --------- ---------
----- ----- --------- ---------
</TABLE>
The following table sets forth net sales by product line offerings,
expressed in dollar volumes and as a percentage of total net sales:
<TABLE>
<CAPTION>
PREDECESSOR A SUCCESSOR
---------------------- ----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
SEVEN MONTHS FIVE MONTHS ----------------------------------------------
ENDED ENDED
JULY 31, 1995 DECEMBER 31, 1995 1996 1997
---------------------- ---------------------- ---------------------- ----------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
----------- --------- ----------- --------- ----------- --------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES:
Access Systems.................. $ 53.8 18.7% $ 44.7 19.8% $ 192.3 27.9% $ 283.6 32.0%
Integrated Wireless Solutions... 43.9 15.2 33.8 15.0 140.4 20.4 195.3 22.0
Network Components and
Services...................... 190.6 66.1 147.0 65.2 356.7 51.7 408.3 46.0
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Total........................... $ 288.3 100.0% $ 225.5 100.0% $ 689.4 100.0% $ 887.2 100.0%
----------- --------- ----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- --------- ----------- ---------
</TABLE>
26
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales increased $197.8 million, or 28.7%, to $887.2 million for the year
ended December 31, 1997 from $689.4 million for the year ended December 31,
1996. The increase resulted primarily from higher sales of Access Systems and a
full year of results for Rainford. The growth of Access Systems resulted from
increased sales to existing customers and a major product deployment by a new
customer. Excluding Rainford, Integrated Wireless Solutions sales were slightly
down for the year on weaker international sales of export power products for
wireless networks. Network Components and Services increased over the year due
to a broader customer base. At December 31, 1997, the Company's sales backlog
(total dollar volume of firm sales orders not yet recognized as revenue) had
increased to $156.3 million from $127.8 million at December 31, 1996.
Gross profit increased $47.3 million, or 22.9%, to $253.8 million in 1997
from $206.5 million in 1996. Gross profit as a percentage of net sales decreased
to 28.6% in 1997 from 30.0% in 1996 due to a change in product mix. During 1997
the Company's net sales included a higher volume of Access Systems which carry
margins below those of Network Components and Services. In addition, 1997 net
sales included a full year of lower margin Integrated Wireless Solutions
products offered by Rainford. This decrease was partially offset by an increase
in gross profit as a percentage of sales for the Access Systems products.
Research and product engineering expense increased $9.2 million, or 19.8%,
to $55.7 million in 1997 from $46.5 million in 1996. Research and product
engineering costs declined to 6.3% of net sales in 1997 from 6.7% in 1996
primarily due to the increase in net sales. Approximately half of the Company's
research and product engineering expense in 1997 and 1996 was related to Access
Systems, reflecting the Company's focus on this product line.
Selling and administrative ("S&A") expense increased $18.4 million, or
24.3%, to $94.1 million in 1997 from $75.7 million in 1996. S&A expenses as a
percentage of net sales decreased to 10.6% in 1997 from 11.0% in 1996 primarily
due to higher net sales volume.
Goodwill and intangible amortization increased $7.4 million, or 30.2%, to
$31.9 million in 1997 from $24.5 million in 1996. This increase is primarily the
result of the additional goodwill and intangible amounts resulting from the
Rainford Acquisition. Goodwill and intangible amortization as a percentage of
net sales was 3.6% in 1997 and 1996.
During 1997, $0.7 million of the $1.0 million purchase price for the
acquisition of Fire Networks, Inc. was assigned to acquired in-process research
and development ("R&D") and immediately written off. During 1996, $8.9 million
of the $134.3 million purchase price for the Rainford Acquisition was assigned
to acquired in-process R&D costs and immediately written off. Management
believes that although the estimated additional technology efforts required to
develop the incomplete technology into a commercially viable product are
significant, the costs of such efforts are not material to the Company's
consolidated financial statements. Failure to successfully complete these
projects would not materially affect the Company's consolidated financial
condition, results of operations or cash flows.
Other (income) expense increased to 0.2% of net sales or $1.8 million in
1997. This amount primarily consists of $6.5 million of income related to a
curtailment gain resulting from the December 31, 1997 benefit accrual freeze of
the U.S. defined benefit plans offset by $5.0 million of expense related to the
Company's reserve recorded for its investment in NextWAVE Telecom Inc. Other
(income) expense in 1996 included receipt of a one-time fee of $2.5 million
related to a software settlement, and charges of $1.1 million related to a
facility closing and $1.4 million for a facility relocation. These charges were
primarily for employee severance pay and facility shut-down costs.
Interest expense in 1997 decreased $7.0 million, or 27.3%, to $18.6 million
for 1997 from $25.6 million in 1996. This decrease resulted from reduced levels
of debt and lower interest rates. In September 1996, the Company entered into
the New Credit Facility which improved the terms upon which the Company is able
to borrow funds.
27
<PAGE>
The Company's effective income tax rate decreased to 54.2% in 1997 from
68.2% in 1996 due to higher income before taxes in relation to the levels of
nondeductible goodwill amortization expense and the 1996 write-off of acquired
in-process R&D costs.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE SEVEN MONTH PERIOD ENDED JULY 31,
1995 (PREDECESSOR A) AND FIVE MONTH PERIOD ENDED DECEMBER 31, 1995
RELTEC's net sales increased $175.6 million, or 34.2%, to $689.4 million for
the year ended December 31, 1996 from $513.8 million in 1995 ($288.3 million for
the seven month period ended July 31, 1995 (the "Seven Month Period") and $225.5
million for the five month period ended December 31, 1995 (the "Five Month
Period") (collectively, the "1995 Periods")). Rainford represented $38.4 million
of the total increase. Excluding the effect of the Rainford Acquisition, the
Company's net sales in 1996 increased 26.7% over the 1995 Periods. The primary
contributors to the 1996 sales growth (excluding the Rainford Acquisition) were
strong demand for the Company's DISCHS NGDLC access systems within the United
States and integrated wireless base station enclosures for the United States and
Europe. Network Components and Services net sales increased due to a higher
volume of sales of Central Office products to existing customers and the
execution of a large test systems contract in Latin America. At December 31,
1996, the Company's sales backlog had increased to $127.8 million from $106.9
million at December 31, 1995.
Gross profit increased to $206.5 million in 1996 from $142.3 million in the
1995 Periods. Gross profit as a percentage of net sales increased to 30.0% in
1996 from 28.8% in the Seven Month Period and 26.3% in the Five Month Period in
1995. The increase in gross profit as a percentage of net sales resulted
primarily from greater efficiencies related to producing higher volumes, offset
partially by increased sales of Access Systems products and the effect of
Rainford, both of which carry lower margins. Results of operations for the Five
Month Period include an $11.3 million charge for the write off of inventory
acquisition step-up.
Research and product engineering expense increased $1.1 million or 2.4% to
$46.5 million in 1996, from $45.4 million in the 1995 Periods. Research and
product engineering expense as a percentage of net sales decreased to 6.7% in
1996 from 9.4% in the Seven Month Period and 8.1% in the Five Month Period due
to higher sales volumes and relatively stable research and product engineering
spending. Research and product engineering related to Access Systems represented
slightly less than half of all research and product engineering expense in 1996
and the 1995 Periods.
S&A expense increased $9.0 million, or 13.5%, to $75.7 million in 1996 from
$66.7 million in the 1995 Periods. S&A expense as a percentage of net sales
declined to 11.0% in 1996 from 13.6% in the Seven Month Period and 12.2% in the
Five Month Period. This decrease is primarily the result of stable S&A expense
being spread over higher volumes.
Goodwill and intangible amortization increased $3.9 million, or 18.9%, to
$24.5 million in 1996 from $20.6 million in the 1995 Periods. This increase is
primarily the result of the additional goodwill and intangible amounts resulting
from the Rainford Acquisition. Goodwill and intangible amortization as a
percentage of net sales decreased to 3.6% in 1996 from 4.0% in the 1995 Periods.
During 1996, $8.9 million of the $134.3 million purchase price for the
Rainford Acquisition was allocated to acquired in-process research and
development costs and immediately written off subsequent to the acquisition.
During 1995, $32.9 million in the Seven Month Period and $35.3 million in the
Five Month Period of acquired in-process research and development costs were
written off. As a result of the Rockwell Acquisition (January 1, 1995) and the
RELTEC Acquisition (July 31, 1995) occurring within a seven month period, the
projects written off as part of the Rockwell Acquisition were essentially the
same as those subsequently written off as part of the RELTEC Acquisition.
Management believes the additional technology efforts required to develop the
incomplete technology into commercially viable products were significant, and
that as of December 31, 1997, the Company has successfully completed the
majority of these projects. Costs of the efforts required to complete the
remaining projects are not material to the
28
<PAGE>
Company's consolidated financial statements. Failure to successfully complete
these remaining projects would not materially affect the Company's consolidated
financial condition, results of operations or cash flows.
Interest expense decreased $5.9 million, or 18.7% to $25.6 million in 1996
from $31.5 million in the 1995 Periods. Interest expense as a percentage of net
sales decreased to 3.7% in 1996 from 6.6% in the Seven Month Period and 5.5% in
the Five Month Period. The decrease resulted from lower interest rates on the
New Credit Facility entered into in September 1996 and the exchange of $75.0
million in principal amount of a bridge loan from the Company's majority
shareholder into common and preferred stock.
For 1996 the Company's effective tax rate was 68.2%. The effective tax rate
is higher than the statutory rates in 1996 due to significant amounts of
nondeductible charges for goodwill and acquired in-process R&D costs. The
effective rates for the Company's income tax benefit were 30.2% in the Seven
Month Period and 31.4% in the Five Month Period. These amounts are lower due to
essentially no taxable earnings during these periods.
An extraordinary charge of $6.3 million (net of $3.3 million tax benefit)
was recorded in 1996 to reflect the accelerated amortization of deferred
financing fees associated with the Company's Old Credit Facility which was
extinguished when the New Credit Facility was entered into in September 1996.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial
information of the Company, for the eight quarters ended December 31, 1997, in
dollars. The Company historically has experienced a stronger demand for certain
of its products at certain times during the year, particularly its outdoor
products, primarily as a result of customer budget cycles and appropriate
weather for installation of the Company's systems. These factors may be offset
in part by the growth in product lines or fluctuations in customer order
volumes. This information has been derived from the quarterly financial
statements of the Company which are unaudited but which, in the opinion of
management, have been prepared on the same basis as the audited financial
statements and include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial results for such
periods. This information should be read in conjunction with the Consolidated
and Combined Financial Statements and the Notes thereto and the other financial
information appearing elsewhere in this Prospectus. The operating results for
any previous quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1996 1996(1) 1997 1997 1997
----------- ----------- --------------- --------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
Net sales:
Access Systems....... $ 38.2 $ 52.9 $ 57.4 $ 43.8 $ 59.5 $ 72.8 $ 77.8
Integrated Wireless
Solutions.......... 21.8 24.4 23.9 70.3 55.2 41.8 41.5
Network Components
and Services....... 80.2 86.8 102.6 87.1 82.0 101.4 105.4
----------- ----------- ------ ------ ----------- ----------- ------
Total net sales...... $ 140.2 $ 164.1 $ 183.9 $ 201.2 $ 196.7 $ 216.0 $ 224.7
----------- ----------- ------ ------ ----------- ----------- ------
----------- ----------- ------ ------ ----------- ----------- ------
Gross profit......... $ 40.3 $ 51.5 $ 58.6 $ 56.1 $ 51.7 $ 64.1 $ 69.3
<CAPTION>
DECEMBER 31,
1997
---------------
<S> <C>
Net sales:
Access Systems....... $ 73.5
Integrated Wireless
Solutions.......... 56.8
Network Components
and Services....... 119.5
------
Total net sales...... $ 249.8
------
------
Gross profit......... $ 68.7
</TABLE>
- ------------------------
(1) Reflects the first full quarter of operations after the acquisition of
Rainford on September 3, 1996. Rainford's revenues are primarily reflected
under Integrated Wireless Solutions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are working capital requirements,
capital expenditures and investments such as acquisitions, strategic investments
and joint ventures. The Company's working capital requirements have grown as the
Company has grown. Capital expenditures, exclusive of acquisitions, were $11.8
million, $16.9 million and $26.5 million in 1995, 1996 and 1997, respectively.
The Company anticipates that its capital expenditures for 1998 will be
approximately $52.0 million. Since the RELTEC
29
<PAGE>
Acquisition, the Company has completed six acquisitions, strategic investments
and joint venture investments for a combined consideration of approximately
$185.0 million. Approximately $148.2 million of such consideration was cash with
the remainder common stock and common stock options of the Company.
The Company has funded its liquidity requirements principally from cash
flows from operations and borrowings under its debt facilities, issuances of its
common stock and to a lesser extent, from capital leases for new equipment.
Cash flows from operating activities were $61.6 million and $33.9 million in
1996 and 1997, respectively. Cash flows from operating activities decreased by
$27.7 million in 1997 compared to 1996 primarily due to a license termination
payment of $11.0 million and a comparatively minor increase in accounts payable
offset by higher net earnings. Refer to Note 8 of the Combined and Consolidated
Financial Statements for further discussion of the license termination.
In connection with the RELTEC Acquisition in July 1995, the Company entered
into the $325.0 million Old Credit Facility, providing $195.0 million of term
loans and $130.0 million of revolving credit, and a $135.0 million bridge loan
("Bridge Loan") from one of the KKR Partnerships. In September 1995, the Company
converted $35.0 million of the Bridge Loan into common equity and repaid $25.0
million of the Bridge Loan from borrowings under the Old Credit Facility. In
August 1996, the remaining portion of the Bridge Loan was exchanged for $74.0
million of common stock and $1.0 million of redeemable preferred stock. The Old
Credit Facility was extinguished in September 1996. At the same time, the
Company entered into the $450.0 million New Credit Facility. The New Credit
Facility consists of a $350.0 million domestic revolving facility and a $100.0
million multi-currency revolving facility. The New Credit Facility contains
provisions for a $30.0 million (or pound sterling equivalent) short-term credit
facility as well as for letters of credit. The New Credit Facility matures on
September 30, 2003. Pursuant to the terms of the New Credit Facility, the
available commitment under the New Credit Facility will be reduced from $450.0
million on September 30, 1999 by $35.0 million, and by $35.0 million per year on
each September 30 thereafter until the balance matures on September 30, 2003.
Principal payments under the New Credit Facility are not otherwise required
until maturity unless there are certain changes in the Company's business
activities as specified in the New Credit Facility. At December 31, 1997, the
weighted average interest rate on the New Credit Facility was 6.92% compared to
6.50% at December 31, 1996. At December 31, 1997, the aggregate borrowing
availability under the New Credit Facility was $175.9 million. In October 1996,
the Company also entered into a two-year interest rate swap agreement to reduce
its variable interest rate exposure on borrowings under the New Credit Facility.
The swap fixed the interest rate at 6.11% on a notional amount of $100.0
million. Under prevailing market rates at December 31, 1997 and 1996, the fair
value of the swap agreement was a liability of $0.3 million and $0.5 million,
respectively.
In May 1997, the Company entered into promissory notes with several banks
for $40.0 million of unsecured and uncommitted Money Market Lines of Credit in
addition to the New Credit Facility. At December 31, 1997, $3.7 million was
outstanding at a weighted average interest rate of 7.18%.
In April 1997, the KKR Partnerships contributed an additional $50.0 million
to stockholders' equity in exchange for shares of common stock. In addition,
employee shareholders and the Company's employee savings plan purchased $2.5
million of common stock during 1997.
The Company believes that its cash balances, proceeds from this Offering,
cash generated from future operations and its existing credit facilities will be
adequate to satisfy anticipated working capital requirements, capital
expenditures for equipment and investment requirements for the next twelve
months. As business and market conditions permit, the Company may, from time to
time, invest in or acquire complementary technologies, products or businesses.
These activities may require the Company to seek additional equity or debt to
fund such activities, which could result in dilution to existing stockholders.
RELTEC is self-insured for workers' compensation in the State of Ohio and
for certain employee medical program payments. RELTEC carries insurance for any
Ohio workers' compensation claim in excess of $250,000 and is insured for any
medical claim in excess of $300,000. In addition, RELTEC
30
<PAGE>
maintains deductibles of $250,000 for all other workers' compensation, general
liability (including product liability) and auto liability lines of coverage.
The Company believes that it carries adequate reserves against any claims made
pursuant to self-insured policies. Such reserves were $8.5 million as of
December 31, 1997.
The Company has assessed its financial and operational systems and developed
plans to modify and/or replace those systems impacted by the year 2000 issue. A
program is currently underway to implement new business systems that, among
other things, will address all affected systems with a completion date prior to
the year 2000. The Company currently estimates that the cost of this program
will be approximately $31.0 million of which approximately $15.0 million has
been expended through December 31, 1997.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130 -- "Reporting Comprehensive
Income" ("SFAS 130"). This Statement discusses how to report and display
comprehensive income and its components in a full set of general-purpose
financial statements. Also in June of 1997, the FASB issued Statement of
Financial Accounting Standards No. 131 -- "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). This Statement establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to shareholders. SFAS 130 and SFAS 131 must be implemented by
RELTEC in 1998. The Company has not completed its evaluation of these
statements, but does not anticipate a material impact on the consolidated
financial statements from the adoption of the additional disclosure requirements
of these accounting standards.
31
<PAGE>
BUSINESS
GENERAL
RELTEC is a leader in the design, manufacture and sale of a broad range of
telecommunications systems, products and services to wireline and wireless
service providers and OEMs in North America and around the globe. Most of the
Company's systems, products and services can be found in the access portion of
the telecommunications network, also referred to as the local loop. The
Company's products and services can be categorized as follows:
- - ACCESS SYSTEMS -- The Company believes it is one of the top three U.S.
suppliers of next generation digital loop carrier (NGDLC) systems, which the
Company markets under the DISCHS brand name. In addition, RELTEC is a leader
in providing fiber-to-the-curb (FTTC) systems, with what it believes are more
installed FTTC lines in the United States than all other suppliers combined.
In 1997, Access Systems accounted for net sales of $283.6 million, or 32.0% of
the Company's total net sales.
- - INTEGRATED WIRELESS SOLUTIONS -- The Company is one of the leading global
independent suppliers of integrated electro-mechanical subsystems used in
outdoor wireless base stations. These subsystems are sold to the major
telecommunications OEMs and wireless service providers and, together with the
radio electronics manufactured by the wireless OEMs, comprise what is commonly
referred to as a base station. RELTEC also designs and manufactures outside
plant, power systems, cabling and other products and provides installation
services for wireless OEMs and service providers. In 1997, Integrated Wireless
Solutions accounted for net sales of $195.3 million, or 22.0% of the Company's
total net sales.
- - NETWORK COMPONENTS AND SERVICES -- Network Components include: outside plant
products (enclosures, environmental control and heat management systems, and
advanced connection and protection products); power systems and modular power
products; network test and monitoring systems; and data networking racks.
Network Services include program management and aftermarket services. In 1997,
Network Components and Services accounted for net sales of $408.3 million, or
46.0% of the Company's total net sales.
INDUSTRY BACKGROUND
The significant growth in voice, data and video communications traffic in
recent years has caused service providers to focus on increasing the bandwidth
of the PSTN. Transmission speed is limited by the bandwidth of the "slowest"
portion of the network, which is typically found in the access segment. Until
recently, technological solutions to improve the performance of the access
portion of the telephone network were generally not cost effective for
broad-based deployment by service providers. In the current environment,
however, the opportunity for telecommunications equipment providers to increase
the access network bandwidth is being driven by (i) customer demand for improved
data and wireless communications, (ii) the emergence of new service providers,
created by significant regulatory changes and (iii) the emergence of
cost-effective, new technologies which are enabling increased bandwidth.
CURRENT BANDWIDTH LIMITATIONS IN THE ACCESS NETWORK
Most of the existing access portion of the PSTN consists of a copper based
system that was designed to deliver analog voice communications, or plain old
telephone service (POTS). The copper-based analog network, however, does not
have the bandwidth or functionality to support the growing demand for new
services such as high-speed data and video communications. In addition,
traditional copper-based networks require significant maintenance expenditures.
In response to these limitations, service providers began installing digital
fiber optic technology which permits higher speed, higher volume and more
reliable transmission of information. To date, however, the use of digital fiber
optic technology has generally been limited to network backbones and central
office interconnections within high-density traffic areas because of the
historically high cost of deployment and feasibility of installation. In
addition to fiber-based PSTN
32
<PAGE>
enhancements, several other technologies are being deployed as an alternative to
the traditional copper-based access network. Those technologies include fixed
wireless and hybrid fiber coax (HFC) solutions, both of which, in certain
applications, can transmit signals at significantly higher bandwidth rates than
traditional unmodulated signals over copper.
DEMAND DRIVERS
DATA COMMUNICATIONS. The need for high-speed data transmission has emerged
as the major driver behind customers' demand for increased wireline network
bandwidth. The emergence of the Internet and the corresponding explosion of
Internet related traffic over the PSTN has clearly illustrated its inherent
bandwidth limitations, particularly in the access portion of the network. These
bandwidth limitations have been highlighted not only by the rapid increase in
the number of users seeking to access the Internet, but also the increasingly
bandwidth intensive content on the Internet, such as active graphics and video.
Remote access to corporate LANs by business professionals while at home or while
traveling is also driving the need for more bandwidth.
WIRELESS COMMUNICATIONS. Another important driver of increased demand is
wireless communica-
tions. Wireless communication has grown dramatically over the last decade
including cellular service, PCS, fixed wireless and wireless data transmission.
In developed nations, mobile wireless has grown significantly in recent years as
a result of the convenience of mobility and decreases in the cost per minute of
usage. In addition, in many parts of the world the existing wireless
infrastructure is predominately based on analog technology. Many of these
systems are being replaced or upgraded to digital technology in an effort to
increase capacity and to offer an expanded range of services. In less developed
nations, fixed wireless has emerged as an alternative to traditional wireline
infrastructure owing to the potential for faster deployment, lower construction
costs and lower operating costs. Ease of deployment and operation is critical as
many of these developing nations recognize that their telecommunications
infrastructure is potentially the single greatest catalyst of economic growth.
EMERGENCE OF NEW SERVICE PROVIDERS
Global regulatory changes are increasing the number of competitors in the
access portion of the network and are further accelerating the need for service
providers to upgrade their networks and increase their service offerings. In the
United States, recent deregulation has facilitated competition in the local
exchange for local and long distance telephone service and video services.
Competitors which have emerged and potentially could take customers from
incumbent service providers include competitive local exchange carriers,
interexchange carriers, Internet service providers, cable operators and electric
utilities. Cable operators are already beginning to provide data transmission
services to customers by leveraging the high bandwidth capabilities of their
coaxial cable based infrastructure. In wireless markets, the FCC has completed
several auctions of wireless spectrum to enable the new competitors to enter the
market and enable the deployment of PCS and other wireless services.
Internationally, a number of developed and developing nations have privatized
the state-owned telecommunications monopolies and opened the market to new
service providers. For example, in Europe a consortium of countries has recently
allowed the entrance of new competitors into their local markets.
EMERGENCE OF NEW TECHNOLOGIES
Certain products and services have been introduced in recent years to (i)
increase the speed and quality of digital transmission over copper wires, (ii)
push fiber deeper into the access portion of the network and (iii) provide an
alternate means of accessing the wireline network backbone. While the cost of
deployment of these numerous solutions varies significantly, technological
developments have made each of these solutions much more cost effective in
recent years.
33
<PAGE>
Examples of these technologies include:
DIGITAL LOOP CARRIERS -- DLCs extend the digital capabilities of the network
from the central office to a remote terminal closer to the customer. NGDLCs
support a fiber feed from the central office to the remote terminal, thereby
pushing fiber deeper into the access portion of the network.
FIBER-TO-THE-CURB -- FTTC systems push fiber deeper within the access
network to a short distance from each customer so that the final transmission
can take place at very high speeds over traditional twisted pair copper
architecture. FTTC systems take advantage of the extremely high bandwidth
characteristics of fiber optic systems.
DIGITAL SUBSCRIBER LINE -- xDSL technologies provide broadband services over
existing copper twisted pairs by modulating and demodulating digital signals.
HYBRID FIBER COAX -- HFC leverages the existing coaxial infrastructure of
cable television operators and enhances the bandwidth and performance
characteristics by adding additional fiber and two-way amplifiers. CATV
operators are deploying cable modems capable of providing high speed data
transmission.
WIRELESS LOCAL LOOP -- WLL uses radio frequency communications instead of
traditional wireline technologies (E.G., copper) to provide network access. In
certain applications WLL can potentially enable faster deployment, lower
construction costs and lower operating costs than traditional wireline access
networks. WLL has the greatest potential in areas with lower population density,
where it can more cost-effectively provide the primary service platform for both
mobile and fixed telecommunications.
The Company believes that the telecommunications industry will continue to
expand and evolve rapidly. As a result of the accelerating changes in the
telecommunications industry, service providers are requiring flexible and
scaleable solutions that not only meet their needs today but also will permit
easy, cost-effective enhancements in the future. In addition, as new enabling
technologies are deployed throughout the access portion of the network, there is
a corresponding demand for high quality infrastructure products such as outside
plant and power supplies.
STRATEGY
The Company's objective is to build and maintain a leading market position
across a broad range of systems, products and services for wireline and wireless
communications networks globally. RELTEC's Access Systems, Integrated Wireless
Solutions systems and Network Components and Services address critical portions
of the access segment of the network. Key elements of the Company's strategy
include:
- - LEVERAGE EXPERTISE TO PROVIDE INTEGRATED SYSTEMS SOLUTIONS -- The Company
believes that its customers place a high degree of value on its ability to
deliver integrated systems solutions due to the increasing complexity of
system-level components and their desire to simplify their strategic supply
chains. The Company intends to continue to leverage its experience of over 60
years in providing high quality network components to design high value
integrated systems solutions. For example, the Company's DEEP FIBER SOLUTIONS
FTTC system integrates environmentally hardened optics and electronics, sealed
enclosures, sophisticated connection and protection solutions, power
assemblies and power systems, system design and system integration.
- - INCREASE BANDWIDTH IN THE ACCESS NETWORK -- Much of the Company's research and
development focus has been and will continue to be on designing architectures
that cost-effectively increase the bandwidth in the access portion of the
PSTN. Specifically, RELTEC's DEEP FIBER SOLUTIONS FTTC system and its ADVANCED
COPPER SOLUTIONS xDSL product offerings provide alternative means to deliver
broadband functionality to the public network. The Company also provides
advanced feature sets including high speed, "always on" Internet connectivity
and analog and digital broadcast video services.
34
<PAGE>
- - CAPITALIZE ON ESTABLISHED CUSTOMER RELATIONSHIPS -- The Company believes that
the longevity and breadth of its relationships with a number of major
customers provide competitive advantages. The Company intends to capitalize on
its longstanding relationships with major customers to introduce new system
solutions, products and services more rapidly than its competitors.
- - EXPAND GLOBAL PRESENCE -- RELTEC believes that significant growth in the
telecommunications market will also occur outside of North America as the
result of deregulation and the recognition by many developing nations that a
telecommunications infrastructure is one of the most important enablers of
economic growth. RELTEC's global strategy is to increase its sales, design,
marketing and manufacturing capabilities within each major region of the
world, leveraging its existing customer relationships, product offerings and
technologies.
- - CONTINUE TO IMPROVE MARGINS AND QUALITY -- The Company is continuing to focus
on improving margins and further improving the quality of its systems and
products. The Company's goal is to be the preferred supplier of high quality,
low cost systems and products for its customers. The Company recently
reorganized all of its North American manufacturing operations under common
management in order to address this strategic directive.
- - PURSUE ACQUISITIONS, STRATEGIC INVESTMENTS AND JOINT VENTURES -- The Company
has used and expects to continue to use acquisitions, strategic investments
and joint ventures as an integral part of executing its growth strategies in
Access Systems, Integrated Wireless, and Network Components and Services.
Since July 1995, the Company has completed six such transactions for a
combined consideration of approximately $185 million.
PRODUCTS AND SERVICES
The Company's products and services can be categorized into three general
groupings: (i) Access Systems, (ii) Integrated Wireless Solutions and (iii)
Network Components and Services.
ACCESS SYSTEMS
RELTEC designs, manufactures, markets and supports a suite of local loop
access solutions, including traditional NGDLC systems, FTTC systems, xDSL
solutions and traditional pairgain products. Since 1988, the Company has shipped
over $1.3 billion of Access Systems products. The Company believes RELTEC is
well-positioned to compete in the local loop access markets because of its
strong brand name, its long-standing relationships with customers, the broad
range of its access product offerings and its technologically innovative and
flexible products. The Company's flexible solutions platforms enable customers
to pursue scaleable rollout strategies for traditional POTS and broadband data
and video services, while leveraging their investment in existing
infrastructure.
In 1988, RELTEC was the first company to offer a NGDLC system in the United
States and since such time has shipped over five million access lines of
capacity. The Company has standardized NGDLC products at many of the largest
telecommunications companies in the United States, including BellSouth, GTE, SBC
Communications, Sprint and U S WEST. Once a system has been introduced in a
telecommunications district, the district will standardize the system to
minimize spares and training requirements. The Company believes that
standardized incumbent systems represent a longer term commitment between the
customer and supplier.
TRADITIONAL NGDLC SYSTEM
RELTEC believes that it is one of the top three U.S. suppliers of NGDLC
products using the latest transmission technology for copper, fiber and coaxial
cable networks. The Company sells its NGDLC systems under the DISCHS brand name.
Most of these systems are configured as large traditional NGDLC system to
provide POTS services with line size configurations in the range of 384 to 2,000
access lines. The
35
<PAGE>
system architecture typically consists of an optical transmitter at the central
office terminal (COT) and a host digital remote terminal (HDT) located in the
local loop, with a final drop to the customer over traditional twisted pair
copper.
BROADBAND SYSTEMS
In recent years, RELTEC has broadened its NGDLC offering to include an
advanced, broadband ready platform, as well as data and video feature sets that
allow service providers to offer high speed Internet access and broadcast and
interactive video services over the same system as POTS. The Company offers two
broadband ready systems solutions:
DEEP FIBER SOLUTIONS -- The Company's DEEP FIBER SOLUTIONS system
consists of a traditional COT and HDT, but also extends fiber access to
within 500 feet of the subscriber. Instead of a copper drop from the HDT to
a passive pedestal located near the subscriber's home, fiber is extended
from the HDT to an Optical Network Unit (ONU) located within 500 feet of the
subscriber. The ONU contains active optical electronics that receive the
optical signal from the HDT and convert this signal back to a traditional
electrical signal. At the ONU, the electrical signal is transmitted to the
subscriber over copper or coaxial cable.
The Company believes it is the only company that offers an FTTC solution
that can be deployed economically within 500 feet of the subscriber. Because
the final drop is within 500 feet of the subscriber, the physical
characteristics of the drop cable (the "baseband" characteristics) permit
signal transmission at rates up to 155 Mbps without requiring the addition
of passband modulation electronics such as ISDN or xDSL. In addition, the
Company's DEEP FIBER SOLUTIONS system has significantly lower power
requirements than competing systems and requires only a single fiber (as
opposed to separate upstream and downstream fibers). As a result, the
Company believes that its DEEP FIBER SOLUTIONS system, in certain new
network buildouts, such as MDUs, can be currently deployed at a cost
comparable to the cost of deploying a copper-based system. In addition, the
Company believes that the lifetime cost of its DEEP FIBER SOLUTIONS system
will be significantly lower than copper-based systems due to the inherently
lower maintenance requirements of fiber-based systems. The DEEP FIBER
SOLUTIONS system is the result of RELTEC's ability to leverage its
competencies across access electronics, electronic packaging, heat
management, power and services and its extensive experience within the
physical layer of the local loop. To date, the Company has shipped over
$120.0 million of DEEP FIBER SOLUTIONS systems with a total capacity of over
500,000 lines.
RELTEC has developed advanced data and video feature sets for its DEEP
FIBER SOLUTIONS system that allow users of its systems to deliver high-speed
Internet access and analog and digital broadcast and interactive video
services. The FIBERSTHR feature set allows the DISCHS system to deliver
high-speed Internet access to the ONU using an Ethernet connection.
Individual users connect to the ONU using broadly available traditional LAN
connection devices such as an Ethernet network interface card (NIC). Access
via FIBERSTHR provides a reliable "always on" connection to the Internet
with lower power requirements than other FTTC alternatives. An important
feature for service providers is that the FIBERSTHR architecture provides a
direct connection to the Internet without passing through the CO switch,
which eliminates many of the congestion problems in many metropolitan
switching centers. The FIBERCAST feature set allows the DISCHS system to
deliver analog and digital broadcast and interactive video services. Both
these feature sets can also be readily adapted to address the MSO market for
both upgrade and new build applications. For example, a broadcast "cable"
signal can be purchased by a service provider from a MSO on a wholesale
basis, connected to the HDT and then routed to the appropriate ONU and
ultimately the appropriate subscriber.
ADVANCED COPPER SOLUTIONS -- RELTEC's ADVANCED COPPER SOLUTIONS system
is a platform that allows service providers to take advantage of their
extensive installed base of copper access lines.
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These solutions require line cards to be inserted in the DISCHS COT and HDT
and a terminal at the subscriber's premises. The basic system architecture
consists of a traditional COT and HDT along with modulation/demodulation
electronics in the CO, the HDT and at the subscriber's premises. The Company
believes that individual service providers will decide on "chip level"
solutions for providing high speed data transmission over existing copper.
RELTEC's ADVANCED COPPER SOLUTIONS system gives its customers the
flexibility to make their own "chip level" decisions not dependent on any
particular technology or technical standards for xDSL. Once the decision is
made, RELTEC has the capability to incorporate multiple xDSL solutions from
a range of vendors into its NGDLC system.
SMALL NGDLC SYSTEM
The Company has also recently broadened its NGDLC offering to include
smaller line size systems. Currently, RELTEC offers a 192 line NGDLC system
targeted at smaller line size systems, and expects to offer 24 and 96 line
versions by the end of 1998. Since these smaller systems utilize the same line
cards as the larger systems, the Company believes that those customers that have
large system and small system requirements will prefer using those suppliers who
can offer both solutions since it reduces inventory requirements and simplifies
supply chain management.
INTERNATIONAL NGDLC SYSTEM
To date, all of RELTEC's NGDLC systems have been sold in North America using
Bellcore/ANSI standards. Many areas outside of North America use ITU standards
which are different from Bellcore/ ANSI standards. In addition, feature
requirements are often different, requiring different system designs,
particularly in emerging countries. Principally as a result of these two factors
and in light of what the Company believes is a large market opportunity, the
Company is developing a system solution based on ITU standards under the brand
name MATRIXEXPRESS. Initially, MATRIXEXPRESS will have an E-1 interface, and the
Company currently expects to upgrade MATRIXEXPRESS to SDH compatible fiber optic
capabilities at a later date. The Company is presently involved in litigation
that if determined adversely to the Company could affect the development and
deployment of MATRIXEXPRESS. See "--Legal Proceedings" and "Risk Factors--Rapid
Technological Changes and Importance of New Products."
TRADITIONAL PAIRGAIN
The Company also offers a family of single and multi-channel carrier product
lines that support from one to eight additional voice circuits per pair of
copper. The broad bandwidth of the recently redesigned two channel AML analog
carrier allows service providers to economically offer second line services to
customers who require support for analog modems used for Internet access.
SERVICES
The Company also offers Access Systems design and installation services.
RELTEC believes this capability is particularly important to CLEC customers who
often do not have the same scope of engineering resources that traditional RBOC
customers possess. The Company expanded its capabilities in providing services
to CLECs through its purchase of a privately held St. Louis-based services
company. The Company expects to continue focusing on providing these services to
CLECs, particularly for MDU applications.
INTEGRATED WIRELESS SOLUTIONS
The Company is one of the leading global independent suppliers of integrated
electro-mechanical subsystems used in outdoor wireless base stations. The
Company has supplied over 40,000 outdoor integrated base station systems to
major OEM telecommunications systems integrators in Europe, North America and
around the globe. RELTEC currently provides an electro-mechanical subsystem to
wireless
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radio OEMs and service providers that, in conjunction with radio electronics
manufactured by the wireless OEMs, comprises the network element commonly
referred to as a base station. The electro-mechanical subsystem consists of an
environmentally hardened electronic enclosure, a heat management system, a high
speed backplane, cabling, a power conversion and distribution system, RF
combiners and filters and monitoring and control systems. The Company currently
manufactures most of these components and purchases certain of these components
from third parties. By exploiting the Company's competencies in outdoor base
stations, RELTEC is offering a similarly integrated base station product for
indoor applications and has received initial orders for such products to be
delivered in 1998. Increasingly, RELTEC provides integration services to its
major OEM customers by designing and manufacturing the complete
electro-mechanical subsystem, including those components that are purchased or
consigned from third party suppliers. In addition, the Company provides its OEM
customers a single point of design control on a global basis in conjunction with
the ability to manufacture systems in-region at a number of locations to local
specifications and with local materials and labor. RELTEC believes this ability
is a competitive advantage and that it will become increasingly important to the
global telecommunications OEMs.
In addition to integrated base stations, RELTEC also designs AC-DC power
transfer pedestals, standalone base station enclosures and configured
environmentally controlled vaults, power conversion and distribution systems and
a number of other products, and sells these products to major wireless service
providers and to wireless OEMs. The Company also provides system turn-up
services for many of these customers.
NETWORK COMPONENTS AND SERVICES
Network Components and Services include outside plant products, power
systems, network test products, and project management and aftermarket services.
RELTEC believes that many of its core competencies within Network Components and
Services enhance its ability to design and manufacture more feature rich and
cost competitive Access Systems and Integrated Wireless Solutions systems. The
Company's experience as an active participant in various portions of the access
portion of the PSTN for over 60 years enables it to design and implement highly
effective Network Components and Services. As service providers choose to
install more sophisticated systems, Network Component sales are expected to
increase as the access network is upgraded to meet the requirements of the more
sophisticated systems. For example, as more ADVANCED COPPER SOLUTIONS systems
are installed, copper infrastructure needs to be upgraded and/or replaced, and
as more DEEP FIBER SOLUTIONS systems are deployed, passive pedestals are
replaced with ONUs.
OUTSIDE PLANT
The Company supplies connection, protection and enclosure products for the
outside plant portion of the local loop. The Company believes its design
expertise and competencies in heat management, electromagnetic protection and
enclosure construction are competitive advantages as networks become more
sophisticated with remote intelligence and complex electronics migrating closer
to the service subscriber. Products are marketed under the RELIABLE ELECTRIC and
RAINFORD brand names. The Company supplies products in the following general
categories: distribution pedestals, building entrance terminals, cross connect
terminals, cable television enclosure products, fiber optic splice enclosures,
large electronic configuration cabinets, central office main distribution
frames, heat management systems, power surge protection devices and connection
blocks and terminals.
POWER
RELTEC believes it is a leading supplier of power equipment to service
providers and telecommunications OEMs throughout the world. The communications
power business is built on the premise that a telephone network must provide
uninterrupted services as a lifeline for its subscriber base.
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As a result, there exists a need for a source of energy back-up. RELTEC's power
products have been marketed under the LORAIN brand name for over 60 years and
have become known for high quality, reliable communications power. RELTEC's
power products and systems can be categorized as follows: large power systems
for central office applications, smaller cabinet power systems with "plug and
play" flexibility, modular power systems, custom power subsystems sold to OEMs,
DC distribution and DC-DC conversion systems and traditional ringing and
signaling equipment. In addition, the Company manufactures hardware and develops
software that allow for remote monitoring and control of power systems.
RELTEC recently introduced its next generation family of power products
under the VORTEX brand name. Based on a single integrated platform for a broad
range of wireline and wireless requirements, this comprehensive,
microprocessor-based, "plug and play" architecture offers intelligent local and
remote power system access that is easily expanded for virtually limitless
system configuration and control. VORTEX allows for software-based
configuration, management, monitoring and remote access.
TEST SYSTEMS
RELTEC's test systems products allow service providers to routinely monitor
the performance of copper cable pairs used for transport of their subscriber's
telephone service and perform electrical tests on copper lines experiencing
customer repair problems. Functioning as part of the service provider's
operation support system, RELTEC supplies measurement units for installation in
switching offices and remote network elements along with application software
which interprets and analyzes data from the measurement units and supplies
comprehensive reports from which service providers can manage their workforce
and coordinate repair of customer outages. RELTEC's test systems products have
been installed in a number of major companies in the United States and have been
successfully deployed throughout the world. RELTEC has deployed its test systems
in numerous locations throughout China through the Company's joint venture in
Guangzhou. RELTEC believes there is a significant opportunity for its test
systems products in a number of developing nations as they focus on enhancing
their telecommunications infrastructure.
SERVICES
RELTEC complements its product offerings with a comprehensive range of
network services which leverage its extensive experience in managing
communication system deployments. The Company focuses its service offerings on
two primary segments: program management and aftermarket services. Program
management consists primarily of engineering and installation services and
includes the complete coordination of network and system design and materials,
equipment and skill-set management. RELTEC also provides a broad range of
aftermarket services, including site contract maintenance, breakdown service,
spare parts provisioning, equipment depot repair and customer training. The
Company's service offerings support both RELTEC products as well as those
products manufactured by other suppliers. As service providers refocus their
efforts on providing revenue generating services, the Company expects to benefit
from a greater level of multiple site program management and outsourcing
opportunities.
GLOBALIZATION
The Company had total non-U.S. sales of approximately $222.2 million, or 25%
of net sales, in 1997. For a geographical breakdown of net sales and operating
profits for 1997, refer to Note 3 to the Company's Consolidated and Combined
Financial Statements. Besides the direct sales of its systems and services
around the world, RELTEC supplies a range of products to OEMs such as Lucent
Technologies, Motorola, Nokia, Northern Telecom and Siemens which, in turn,
export the finished goods outside the countries in which they are manufactured.
Due to international standards for Access Systems that are different from
standards applicable in the United States, the Company's international growth
efforts to date have been focused primarily on
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increasing sales of Integrated Wireless Solutions and Network Components and
Services. The Company is currently developing its MATRIXEXPRESS platform that is
compliant with international standards in order to compete in this rapidly
growing market.
The Company maintains global manufacturing, service and sales operations.
The Company has two wholly-owned entities in China -- a power systems company
located in Beijing and an international design center located in Chengdu. The
Company also has two joint ventures in China, one dedicated to test systems and
another which produces main distribution frames and other outside plant products
for the Chinese market. RELTEC's partner in the test systems joint venture is
one of the academic research and development affiliates of the Chinese Ministry
of Post and Telecommunications that participates in the development of the
specifications for a number of products used by the telephone companies in
China, including test. The Company's joint venture in Japan produces power
protection devices, primarily for international distribution. The Company is
currently focused on expanding its worldwide resources and capabilities in
Europe, Latin America and Asia/Pacific. It has established sales offices in
Brazil, China, Costa Rica, Hong Kong, Japan, Mexico, New Zealand, Singapore,
Spain and the United Kingdom. It is the Company's strategy to build integrated
businesses within each global region (North America, Europe, Latin America and
Asia/Pacific) including manufacturing, product development, marketing, sales and
general management.
SALES AND MARKETING
SALES ORGANIZATION
The Company's sales organization divides sales responsibilities into four
geographic regions -- North America, Europe, Latin America and Asia/Pacific. In
addition to the Company's direct sales force, the Company has relationships with
sales representative organizations, agents and distributors in order to expand
its sales and distribution channels. The Company maintains multifaceted
relationships with its customers, involving a broad range of RELTEC employees at
all levels who interface with their respective counterparts. The Company's sales
effort is directed by regional vice presidents and sales managers who are
responsible for relationships with targeted customers. The sales management team
for each customer is responsible for maintaining contacts with their customer
counterparts who have planning and policy responsibility. At the same time,
RELTEC sales engineers with specialized product/service knowledge work with
customers to sell their specific offerings at key levels throughout the customer
organization.
MARKETING ORGANIZATION
Marketing is structured along product and channel lines for the major
product areas. For each major product area there is a vice president of
marketing who is supported by product directors, managers and specialists. A
corporate marketing council and marketing staff coordinates activities among the
business units and provides marketing support services including marketing
communications, marketing research, trademark administration and other
commercial support activities. The Company's marketing organizations develop
strategies for product lines and, along with the Company's sales force, develop
key account/market strategies and define product/service functions and features.
Marketing is responsible for sales support, contract negotiations, in-depth
product presentations, interfacing with operations, setting price levels to
achieve targeted margins, developing new services/business opportunities and
writing proposals in response to customer requests for information or
quotations.
CUSTOMERS
RELTEC sells its telecommunications systems, products and services to a
broad range of customers on a global basis, including the RBOCs, CLECs, IXCs,
independent telephone companies, wireless service providers, private network
operators, OEMs, PTTs, cable systems operators, distributors and other service
providers. The Company enjoys strong relationships with these customers and many
of its products have
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become standardized. In addition to other factors, as a result of the high costs
associated with replacing standardized products, RELTEC believes it achieves
high levels of repeat business from these customers.
Some of the Company's customers are listed below:
<TABLE>
<S> <C>
Ameritech Motorola
AT&T Nokia
Bell Atlantic (including NYNEX) Northern Telecom
Bell Canada Rogers Communications
BellSouth SBC Communications (including Pacific
Brooks Fiber Telesis)
Cisco Systems Siemens
Cox Communications Sprint
GTE Telmex
Lucent Technologies Teleport Communications Group
MCI Communications U S WEST
WorldCom
</TABLE>
In 1997, sales to the Company's top five customers--BellSouth, GTE, Nokia,
SBC Communications and Sprint--represented approximately 46% of the Company's
total sales. Of these customers only BellSouth (17%) and Sprint (11%) accounted
for more than 10% of the Company's total sales during the same period. The loss
of a significant customer could have a material adverse effect on the Company's
business. See "Risk Factors--Customer Concentration."
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends on its ability to adapt
to the rapidly changing telecommunications environment, to maintain its
significant expertise in core technologies and to continue to meet and
anticipate its customers' needs. The Company continually reviews and evaluates
technological changes affecting the telecommunications market and invests
substantially in applications-based research and development. The Company is
committed to an ongoing program of new product development that combines
internal development efforts with acquisitions, joint ventures and licensing or
marketing arrangements relating to new products and technologies from sources
outside the Company.
The Company has focused its recent research and development expenditures on
commercializing its broadband access systems including its DEEP FIBER SOLUTIONS
and ADVANCED COPPER SOLUTIONS along with Network Components that support these
initiatives. The Company believes that its extensive experience in the design
and implementation of high quality network components such as outside plant
products, heat management and power supplies has enabled it to develop
high-value integrated systems solutions. As a result of these development
efforts, the Company believes it has created an industry-leading platform for
cost-effective broadband delivery.
A core component of RELTEC's globalization strategy is the establishment of
design centers in each of North America, Europe, Latin America and Asia/Pacific.
To further this strategy, during 1997, the Company established its Asia/Pacific
design center in Chengdu, China. Management believes that local design
capability will enable the Company to develop products and feature sets that
better match local requirements and development standards and accelerate the
development process by optimizing development communication and expediting
market feedback.
COMPETITION
The telecommunications equipment industry is highly competitive, and the
Company believes that competition may increase substantially as the introduction
of new technologies, deployment of broadband networks and potential regulatory
changes create new opportunities for established and new companies in the
industry. In addition, a number of the Company's competitors have significantly
greater financial and
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other resources than the Company to meet new competitive opportunities. RELTEC's
Access Systems products compete in North America with products offered by DSC
Communications, Lucent Technologies, Northern Telecom and Advanced Fibre
Communications, among others. In addition, the Company's Access Systems products
compete indirectly with companies that produce alternate technologies such as
PairGain Technologies, ADTRAN and ADC Telecommunications. RELTEC's Integrated
Wireless Solutions products compete primarily on a regional basis with Hoffman
Schroff, Rittal and Zero Corporation, as well as with a number of captive or
allied manufacturing companies serving telecommunications OEMs. Most of the
independent competitors for Integrated Wireless Solutions do not provide the
same range of integrated capabilities that the Company offers. RELTEC's Network
Components and Services compete by product and region with a variety of
manufacturers and service providers, the largest of which include Lucent
Technologies, Northern Telecom, Siecor, Raychem and Argus Technologies, as well
as several other telecommunications OEMs.
The rapid technological developments within the telecommunications industry
have resulted in frequent changes to the Company's group of competitors. The
Company believes its success in competing with other manufacturers of
telecommunications products depends primarily on its engineering, manufacturing
and marketing skills, the price, quality and reliability of its products and its
delivery and service capabilities. The Company may face increasing pricing
pressures from current and future competitors in certain or all of the markets
for its products and services.
The Company believes that technological change, the increasing addition of
data, video and other services to networks, continuing regulatory change and
industry consolidation or new entrants will continue to cause rapid evolution in
the competitive environment of the telecommunications equipment market, the full
scope and nature of which is difficult to predict. Increased competition could
result in price reductions, reduced margins and loss of market share by the
Company. The Company believes regulatory change in the industry may create new
opportunities for suppliers of telecommunications equipment; however, the
Company expects that such opportunities may attract increased competition from
others as well. The Company also believes that the rapid technological changes
which characterize the telecommunications industry will continue to make the
markets in which the Company competes attractive to new entrants. There can be
no assurance that the Company will be able to compete successfully with its
existing or new competitors or that competitive pressures faced by the Company
will not materially and adversely affect its business, operating results and
financial condition.
MANUFACTURING AND FACILITIES
The Company seeks to deliver its products on time and defect-free, utilizing
processes that are designed with employee involvement and are based on
just-in-time delivery and focused work cells principles. All major operations
meet ISO-9001 international manufacturing standards. The Company is committed to
providing high-quality products that are cost effective to its customers.
As of December 31, 1997, the Company operated 31 facilities worldwide
comprising its world headquarters and 20 principal manufacturing and service
locations. Some of the Company's manufacturing locations contain more than one
facility.
The following table sets forth a summary of these facilities by region:
<TABLE>
<CAPTION>
OWNED FACILITIES LEASED FACILITIES
----------------------------- ---------------------------
APPROX. APPROX.
NUMBER OF AREA (SQ. AREA (SQ.
GEOGRAPHIC LOCATION FACILITIES FT.) NUMBER FT.)
- ------------------------------------------------ --------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
North America................................... 10 840,724 8 507,945
Europe.......................................... 1 70,000 4 298,147
Latin America................................... -- -- 4 120,965
Asia/Pacific.................................... -- -- 4 118,901
-- --
------------ ------------
Total......................................... 11 910,724 20 1,045,958
-- --
-- --
------------ ------------
------------ ------------
</TABLE>
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The Company has a 74% interest in a CO mainframe and protection joint
venture in Shanghai, China, manufactures power protection devices through a
joint venture relationship in Japan and has a 60% interest in a joint venture to
establish its test systems business in Guangzhou, China. The Company also has a
50% interest in a joint venture in the United States (Dantherm Inc.) that
provides thermal management systems for electronic cabinetry.
The Company believes it has sufficient production capacity to meet current
demand for its product offerings. The Company anticipates expanding capacity as
required by leasing, acquiring or building new production facilities. Certain
components used in the Company's products, including certain specific integrated
circuits, are only available from a single source or limited number of
suppliers. Some of the Company's sole-source suppliers are companies which from
time to time allocate parts to telephone equipment manufacturers due to market
demand for telecommunications equipment. Many of the Company's competitors are
much larger and may be able to obtain priority allocations from these shared
suppliers, thereby limiting or making unreliable the sources of supply for these
components. The Company has no supply commitments from its vendors and generally
purchases components on a purchase order basis as opposed to entering into long
term procurement agreements with vendors. To date, the Company has generally
been able to obtain adequate supplies in a timely matter from vendors or, when
necessary, to meet production needs from alternative vendors. The Company
believes that, in most cases, alternate vendors can be identified if current
vendors are unable to fulfill needs. If the Company is unable to obtain
sufficient quantities of these or any other components or if there is a
significant increase in the price of key components, delays or reductions in
manufacturing or product shipments could occur which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
INTELLECTUAL PROPERTY
The Company relies on a combination of patents, trade secrets, trademarks,
copyrights and other intellectual property law, nondisclosure agreements and
other protective measures to protect its proprietary rights. The Company also
utilizes unpatented proprietary know-how and trade secrets and employs various
methods to protect its trade secrets and know-how. Although the Company employs
a variety of intellectual property in the development and manufacturing of its
products, it believes that none of such intellectual property is individually
critical to its current operations. Taken as a whole, the Company believes its
intellectual property rights are significant and that the loss of all or a
substantial portion of such rights could have a material adverse effect on its
results of operations. There can be no assurance that the Company's intellectual
property protection measures will be sufficient to prevent misappropriation of
the Company's technology. In addition, the laws of many foreign countries do not
protect the Company's intellectual properties to the same extent as the laws of
the United States. From time to time, the Company may desire or be required to
renew or to obtain licenses from others in order to further develop and market
commercially viable products effectively. There can be no assurance that any
necessary licenses will be available on reasonable terms.
EMPLOYEES
As of December 31, 1997, RELTEC had 5,273 employees worldwide, including
4,151 employees in operations and engineering, 356 employees in sales and
marketing and 766 employees in corporate and administration. As of December 31,
1997, approximately 65 of the Company's U.S. employees were subject to a
collective bargaining agreement. In addition, certain of its employees in the
United Kingdom, Canada and Mexico are represented by unions. The Company
believes its relationship with its employees is good.
ENVIRONMENTAL MATTERS
The Company is subject to comprehensive and changing foreign, federal, state
and local environmental requirements, including those governing discharges to
the air and water, the handling and disposal of solid and hazardous wastes and
the remediation of contamination associated with releases of
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hazardous substances. The Company believes that it is in compliance with current
environmental requirements. Nevertheless, the Company uses solvents and other
hazardous substances, and as is the case with manufacturers in general, if a
release of hazardous substances occurs on or from the Company's properties the
Company may be held liable and may be required to pay the cost of remedying the
condition. The amount of any such liability could be material.
The Company has made, and will continue to make, expenditures to comply with
current and future environmental requirements with respect to its facilities. In
each of the last three years, the Company's capital expenditures for
environmental compliance have been less than $1.0 million. The Company
anticipates that it may incur additional capital expenditures and will incur
operating costs in the future to comply with existing laws and regulations and
new requirements arising from new or amended statutes. In addition, because the
applicable regulatory agencies have not yet promulgated final standards for some
existing environmental programs, the Company cannot, at this time, reasonably
estimate the cost for compliance with these additional requirements. The amount
of any such compliance cost could be material.
In connection with the RELTEC Acquisition, Rockwell agreed to indemnify the
Company for certain environmental matters. Rockwell is obligated to provide 100%
indemnification for environmental matters relating to the St. Stephen, South
Carolina facility, which was transferred to Rockwell in February 1995. In
addition, Rockwell agreed to indemnify the Company for 75% of clean-up costs and
third-party liabilities exceeding $3.0 million resulting from contaminants
released at the Company's facilities prior to the RELTEC Acquisition provided
that the clean-up costs and third-party liabilities are incurred pursuant to a
governmental order or decree, or at the express direction of a governmental
entity. The above-described indemnification obligations expire fifteen years
from the closing of the RELTEC Acquisition.
LEGAL PROCEEDINGS
In October 1995, Vicor Corporation and its licensing affiliate VLT
Corporation (collectively, "VLT") filed suit against the Company alleging
underpayment of royalties and other defaults under an agreement pursuant to
which VLT licensed to the Company the right to use certain technology related to
power conversion. The case is currently pending in the United States District
Court in Boston, Massachusetts. In June 1997, the Company notified VLT that it
was exercising its right to terminate the agreement because the Company was not
using the VLT technology in any products with material sales. The Company
believes that it has meritorious defenses to VLT's claims and intends to defend
vigorously this suit.
In November 1997, Advanced Fibre Communications, Inc. ("AFC") filed suit
against the Company in a California state court alleging trade secret
misappropriation and other wrongful acts related to the Company's engagement of
Vidar Sun Moon Star ("VSMS") to provide certain engineering services. VSMS is a
licensee of certain AFC technology and AFC alleges that the Company wrongfully
obtained AFC's proprietary information from VSMS related to the Company's
MATRIXEXPRESS product. AFC is seeking injunctive relief as well as monetary
damages. The Company believes that AFC's claims are without merit and intends to
defend vigorously this suit. If the Company is unsuccessful, the Company may be
unable to continue the development, marketing or sale of its MATRIXEXPRESS
product or may be required to modify the current design, which would delay the
deployment of MATRIXEXPRESS. See "Business--Products and Services--Access
Systems--International NGDLC System" and "Risk Factors--Rapid Technological
Changes and Importance of New Products."
On March 11, 1998, the Company received a notice from the United States
Environmental Protection Agency that its Lorain Products division may be a
potentially responsible party in connection with a superfund site in Kansas
City. The notice stated that over 1,500 parties sent materials to the site.
Although the Company is not able at this time to estimate the cost to it of its
responsibility for this site, the Company's preliminary review of its records
and publicly available information leads it to believe that the Company's
allocable share, if any, of the clean-up costs of this site would not be
material.
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MANAGEMENT
DIRECTORS AND OFFICERS
The Bylaws of the Company provide that the directors will be elected
annually. All directors of the Company hold office until the election and
qualification of their successors. Executive officers of the Company are chosen
by the Board of Directors of the Company and serve at its discretion. The
following sets forth certain information regarding the corporate officers,
directors and operating officers of the Company and its operating subsidiaries:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
CORPORATE OFFICERS
Dudley P. Sheffler................................... 53 President, CEO and Director
W. Michael Corkran................................... 44 President, North America and Asia/Pacific
Patrick L. Welker.................................... 51 President, Europe and Latin America
Scott A. Fine........................................ 38 Vice President, Finance
Valerie Gentile Sachs................................ 42 Vice President, General Counsel and Secretary
David G. Phelps...................................... 47 Vice President, Human Resources
John L. Wilson....................................... 48 Vice President, Controller
Ronald W. Baker...................................... 42 Treasurer
DIRECTORS
James H. Greene, Jr.................................. 47 Director
Henry R. Kravis...................................... 54 Director
Alexander Navab, Jr.................................. 32 Director
George R. Roberts.................................... 54 Director
OPERATING OFFICERS
Nicholas A. Camino................................... 57 Vice President/General Manager, Services
Lisa A. Coffman...................................... 37 Vice President, North American Operations
Armando E. Cuesta.................................... 56 Vice President/General Manager, Latin America
Alan W. Ferguson..................................... 50 Managing Director, Europe Wireless
Pantelis P. Paradissis............................... 60 Vice President, Chief Technology Officer
Michael K. Pratt..................................... 43 Vice President/General Manager, Access Systems
Richard L. Schwob.................................... 51 Vice President/General Manager, Network Components
Philip Y. Shih....................................... 40 Vice President/General Manager, Asia/Pacific
</TABLE>
CORPORATE OFFICERS
DUDLEY P. SHEFFLER has been President and CEO of the Company and a director
of the Company since August 1995. He has served as President of the Company and
its predecessor since 1981. Mr. Sheffler was a director of Reliance Electric
Company from 1993 to 1995 and held a number of management positions in finance,
operations and engineering at Reliance since 1970. Mr. Sheffler is a director of
the Telecommunication Industry Association.
W. MICHAEL CORKRAN has been President, North America and Asia/Pacific and
has had responsibility for the worldwide coordination of wireline activities
since July 1997. Prior to that, he was Vice President/ General Manager, Reliable
Electric Division of the Company (outside plant) and its predecessor since 1993.
From 1990 to 1993, Mr. Corkran served as Director of Marketing for the Reliable
Electric Division and, prior thereto, held various management positions at
Reliance Electric Corporation since 1976.
45
<PAGE>
PATRICK L. WELKER has been President, Europe and Latin America and has had
responsibility for worldwide coordination of wireless activities since July
1997. Prior to that, Mr. Welker was Vice President/ General Manager, Access
Systems of the Company and its predecessor since 1993. From 1991 to 1993, Mr.
Welker was the Vice President and General Manager of the Engineered Systems
Division of Reliance Comm/Tec Corporation and from 1990 to 1991, he served as
General Manager of Reliance Comm/Tec Canada.
SCOTT A. FINE has been Vice President, Finance since December 1997. Mr. Fine
joined the Company in 1996 as Vice President, Strategic Planning & Business
Development after having been in the Investment Banking Division at Goldman,
Sachs & Co. for the previous eleven years. Prior thereto, Mr. Fine was
associated with McKinsey & Company, Inc., a worldwide strategic consulting firm.
VALERIE GENTILE SACHS has been Vice President, General Counsel and Secretary
since December 1997. Prior to that, Mrs. Sachs worked for M.A. Hanna Company for
over nine years, where her last position was Senior Associate Counsel.
DAVID G. PHELPS has been Vice President, Human Resources for the Company and
its predecessor since 1986. Prior to assuming his current position, Mr. Phelps
was Director, Human Resources for Transmission Products at Reliance Comm/Tec.
JOHN L. WILSON has been Vice President and Controller of the Company since
August 1995. From 1993 to August 1995, Mr. Wilson was the Controller of the
Company and its predecessor and prior thereto, from 1989 to 1993, he served as
Controller of the Lorain Products Division of Reliance Comm/Tec. Mr. Wilson held
management positions in audit with Exxon Corporation for ten years before
joining Reliance Electric Company.
RONALD W. BAKER has been the Treasurer of the Company since August 1995.
Prior thereto and since 1978, he held various positions in accounting and
treasury with the Company, its predecessor and Reliance Electric Company.
DIRECTORS
JAMES H. GREENE, JR. has been a director of the Company since June 1995 and
is a member of the limited liability company which serves as the general partner
of KKR and a general partner of KKR Associates. He is also a director of
Accuride Corporation, Bruno's, Inc., Owens-Illinois, Inc., Owens-Illinois Group,
Inc., Randall's Food Markets, Inc., Safeway Inc. and Union Texas Petroleum
Holdings, Inc.
HENRY R. KRAVIS has been a director of the Company since August 1995. He is
a managing member of the limited liability company which serves as the general
partner of KKR and a general partner of KKR Associates. He is also a director of
Accuride Corporation, Amphenol Corporation, Borden, Inc., Bruno's, Inc., Evenflo
& Spalding Holdings Corporation, The Gillette Company, IDEX Corporation,
KinderCare Learning Centers, Inc., KSL Recreation Group, Inc., Merit Behavioral
Care Corporation, Newsquest Capital plc, Owens-Illinois, Inc., Owens-Illinois
Group, Inc., PRIMEDIA, Inc., Randall's Food Markets, Inc., Safeway Inc.,
Sotheby's Holdings, Inc., Union Texas Petroleum Holdings, Inc. and World Color
Press, Inc.
ALEXANDER NAVAB, JR. has been a director of the Company since June 1995. He
has been an executive of KKR and a limited partner of KKR Associates since 1993.
From 1991 to 1993, Mr. Navab was an associate at James D. Wolfensohn, Inc. He is
also a director of Borden, Inc., KSL Recreation Group, Inc., Newsquest Capital
plc and World Color Press, Inc.
GEORGE R. ROBERTS has been a director of the Company since August 1995. He
is a managing member of the limited liability company which serves as the
general partner of KKR and a general partner of KKR Associates. He is also a
director of Accuride Corporation, Amphenol Corporation, Borden, Inc., Bruno's,
46
<PAGE>
Inc., Evenflo & Spalding Holdings Corporation, IDEX Corporation, KinderCare
Learning Centers, Inc., KSL Recreation Group, Inc., Merit Behavioral Care
Corporation, Owens-Illinois, Inc., Owens-Illinois Group, Inc., PRIMEDIA, Inc.,
Randall's Food Markets, Inc., Safeway Inc., Union Texas Petroleum Holdings, Inc.
and World Color Press, Inc.
Messrs. Kravis and Roberts are first cousins.
The Board of Directors intends to appoint two additional directors who are
not affiliated with the Company or KKR promptly following the sale of shares
pursuant to the Offering. The additional directors have not yet been identified.
OPERATING OFFICERS
NICHOLAS A. CAMINO has been Vice President/General Manager, Network Services
since 1989. Prior thereto he held various positions in project management,
applications engineering and systems marketing at Reliance Electric Company and
Reliance Comm/Tec.
LISA A. COFFMAN was appointed Vice President, North American Operations in
August 1997. Prior to that, Ms. Coffman worked for Motorola, Inc. for 15 years
in various manufacturing positions. Most recently, Ms. Coffman had
responsibility for Manufacturing Operations for Motorola's Boynton Beach Paging
Facility, which services the North America and Latin America markets.
ARMANDO E. CUESTA has been Vice President and General Manager, Latin America
since November 1997. Prior to that he was President of ECI Telecom Americas, a
wholly owned subsidiary of ECI Telecom LTD, since July 1996. From 1992 to July
1996, Mr. Cuesta was Senior Vice President--Americas Operations for Telematics
International Inc., a wholly owned subsidiary of ECI Telecom LTD.
ALAN W. FERGUSON has been Managing Director, Europe Wireless since July
1997. Prior to that, he was Group Managing Director of Rainford since October
1994. Prior to that, he held a number of senior managerial positions with
GEC-Plessey Telecommunications. Mr. Ferguson joined RELTEC with the acquisition
of Rainford in 1996.
PANTELIS P. PARADISSIS has been Vice President and Chief Technology Officer
of the Company since January 1997. Prior to that, he was Vice President/General
Manager, Lorain Products Division of Reliance Comm/Tec since 1989. Mr.
Paradissis joined Lorain Products in 1961 and has held a variety of engineering
and marketing positions since then with Reliance Comm/Tec and its predecessor.
MICHAEL K. PRATT has been Vice President/General Manager Access Systems
since July 1997. Prior to that Mr. Pratt was Vice President, Access Products
unit since July 1996. Prior to joining the Company in July 1996, Mr. Pratt held
various positions with DSC Communications Corporation.
RICHARD L. SCHWOB has been Vice President/General Manager Network Components
since January 1997. Prior to that he was Vice President, Sales for the Company
and its predecessor since 1988. From 1987 to 1988, Mr. Schwob served as the
Director of Marketing of Reliance Comm/Tec and from 1969 to 1984, he held
various positions at Reliance Comm/Tec and its predecessor in sales and
marketing.
PHILIP Y. SHIH has been Vice President/General Manager, Asia/Pacific for the
Company since January 1997 after joining the Company in August, 1996 as Vice
President/General Manager-China. Prior to that he worked for AT&T Bell
Laboratories for ten years and Chief Representative, AT&T West China Region with
his most recent position being General Manager, AT&T Chengdu Telecommunications
Company.
COMMITTEES OF THE BOARD OF DIRECTORS
Following the Offering, the Board of Directors will have three standing
committees: an Audit Committee, a Compensation Committee and an Executive
Committee. Messrs. Sheffler, Greene and
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<PAGE>
Navab comprise the Executive Committee of the Board of Directors. Currently, the
Audit Committee consists of Messrs. Greene and Navab. The Company intends to
appoint to the Audit Committee only persons who qualify as an "independent"
director for purposes of the rules and regulations of the NYSE. The Audit
Committee will select and engage, on behalf of the Company, the independent
public accountants to audit the Company's annual financial statements, and will
review and approve the planned scope of the annual audit. The Compensation
Committee will establish remuneration levels for certain officers of the Company
and will perform such functions as provided under the Company's employee benefit
programs and executive compensation programs. Currently, Messrs. Greene and
Navab serve as members of the Compensation Committee.
COMPENSATION OF DIRECTORS
Directors who are also employees of the Company receive no remuneration for
serving as directors. Each director who is not an employee of the Company
receives an annual retainer of $25,000 and a grant of non-qualified stock
options to purchase 10,000 shares of the Company's Common Stock under the
Company's Equity Plan. In addition, the Equity Plan provides for a grant of
stock options to purchase 10,000 shares of the Company's Common Stock in the
event that such non-employee Director purchases 5,000 shares of the Company's
Common Stock. The Company maintains a deferred compensation plan, effective
January 1, 1996, for non-employee directors of the Company (the "Directors'
Deferred Compensation Plan"). Such directors may defer all or a portion of their
compensation to a deferred compensation account under the Directors' Deferred
Compensation Plan. Deferred compensation accounts are credited with interest at
the prime rate, and amounts in deferred compensation accounts become
distributable on the date that the director ceases to be a director or such
earlier time approved by the Board of Directors. All directors will be
reimbursed for reasonable expenses incurred to attend director and committee
meetings.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by the Delaware General Corporation Law (the "DGCL"), a
director of the Company shall not be liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director. Under the DGCL,
liability of a director may not be limited (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or that involve intentional misconduct or a knowing violation
of law, (iii) in respect of certain unlawful dividend payments or stock
redemptions or repurchases and (iv) for any transaction from which the director
derives an improper personal benefit. The effect of the provisions of the
Company's Certificate of Incorporation is to eliminate the rights of the Company
and its stockholders (through stockholders' derivative suits on behalf of the
Company) to recover monetary damages against a director for breach of the
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior), except in the situations described in
clauses (i) through (iv) above. This provision does not limit or eliminate the
rights of the Company or any stockholder to seek nonmonetary relief such as an
injunction or rescission in the event of a breach of a director's duty of care.
In addition, the Company's Bylaws provide that the Company shall indemnify its
directors, officers, employees and agents against losses incurred by any such
person by reason of the fact that such person was acting in such capacity.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and each of the four other most highly compensated
executive officers of the Company (the "Named Executive Officers") during the
year ended December 31, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------------------------- COMPENSATION
OTHER ANNUAL ------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION LTIP PAYOUTS COMPENSATION(1)
- ----------------------------------------- ---------- ---------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Dudley P. Sheffler....................... $ 400,000 $ 370,080 $ -- $ -- $ 13,226
President and Chief
Executive Officer
W. Michael Corkran....................... 200,000 133,640 -- -- --
President, North America
and Asia/Pacific
Patrick L. Welker........................ 200,000 133,640 -- -- 2,574
President, Europe and Latin
America
Alan W. Ferguson(2)...................... 189,750 97,531 -- -- 18,975
Managing Director,
Europe
Richard L. Schwob........................ 179,000 92,006 -- -- 2,496
Vice President and
General Manager
</TABLE>
- ------------------------
(1) Includes (a) payments equal to lost Company savings plan matching
contributions resulting from Code limitations (to Mr. Sheffler, Mr. Welker,
and Mr. Schwob) and (b) a contribution to Mr. Ferguson's Personal Pension
Plan in the United Kingdom.
(2) Mr. Ferguson joined RELTEC with the acquisition of Rainford by RELTEC
effective September 1, 1996. In 1997, Mr. Ferguson's annual salary was
L115,000, his Bonus was L57,500 and the contribution to his Personal Pension
Plan was 10% of his annual salary, or L11,500, all of which were converted
to U.S. dollars at a conversion rate of $1.65 per L1.00.
STOCK OPTIONS GRANTED IN 1997
The following table sets forth information concerning individual grants of
stock options made by the Company during the year ended December 31, 1997 to
each of the Named Executive Officers.
49
<PAGE>
OPTION GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
------------------------------------------------------ AT ASSUMED ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
- -------------------------------- ----------- --------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Dudley P. Sheffler.............. 60,000 6.7% $ 12.50 4/15/07 $ 471,671 $ 1,195,307
President and Chief
Executive Officer
W. Michael Corkran.............. 55,000 6.1 12.50 4/15/07 432,365 1,095,698
President, North America
and Asia/Pacific
Patrick L. Welker............... 21,200 2.4 12.50 4/15/07 166,657 422,342
President, Europe and 20,000 2.2 12.50 7/31/07 157,224 398,436
Latin America
Alan W. Ferguson................ 20,000 2.2 12.50 4/15/04 101,775 237,179
Managing Director,
Europe
Richard L. Schwob............... 21,200 2.4 12.50 4/15/07 166,657 422,342
Vice President and
General Manager
</TABLE>
AGGREGATED OPTION EXERCISES
None of the Named Executive Officers exercised options in 1997. The
following table sets forth information concerning stock options held by each of
the Named Executive Officers at December 31, 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS
1997 AT DECEMBER 31, 1997(1)
SHARES ACQUIRED VALUE -------------------------- ---------------------------
NAME ON EXERCISE (#) REALIZED EXERCISEABLE UNEXERCISEABLE EXERCISEABLE UNEXERCISEABLE
- --------------------------------- ----------------- ----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Dudley P. Sheffler .............. None N/A 132,000 228,000 $ 2,616,000 $ 4,314,000
President and Chief Executive
Officer
W. Michael Corkran .............. None N/A 43,000 92,000 799,000 1,556,000
President, North America and
Asia/Pacific
Patrick L. Welker ............... None N/A 50,640 96,560 976,320 1,732,280
President, Europe and Latin
America
Alan W. Ferguson ................ None N/A 165,378 187,200 3,460,760 2,604,800
Managing Director, Europe
Richard L. Schwob ............... None N/A 46,640 80,560 924,320 1,524,280
Vice President and General
Manager
</TABLE>
- ------------------------
(1) Calculated by subtracting the option price from the initial public offering
price (assumed to be the mid-range price of $25.50 per share).
50
<PAGE>
BENEFIT PLANS
RETIREMENT PLANS
GENERAL
The Company maintains a number of "tax qualified" retirement plans,
including a 401(k) savings plan, that are each generally available to a broad
classification of its employees. In addition, the Company also maintains frozen
defined benefit pension plans (the "Pension Plans") for certain eligible
salaried and hourly employees (including the Named Executive Officers). Benefits
under the Pension Plans are generally determined on the basis of average
compensation and/or years of service. Effective December 31, 1997, benefit
accruals under the Pension Plans were frozen. Compensation taken into account
under the Pension Plans generally includes salary and bonus and other
compensation disclosed in the Summary Compensation Table. The normal retirement
age under the Pension Plans is 65; however, retirement before age 65 can be
elected under certain conditions. Pension amounts will be reduced to reflect
retirement prior to age 65.
SUPPLEMENTAL RETIREMENT PLAN FOR KEY EMPLOYEES
The Company maintains a Supplemental Retirement Plan for Key Employees (the
"Supplemental Plan"), an unfunded "non-qualified" plan that covers certain
employees designated by the Board (including the Named Executive Officers) who
participate in the Pension Plans and the Deferred Compensation Plan described
below or whose benefits under the Pension Plans are limited due to restrictions
imposed by federal tax laws. Effective December 31, 1997, benefit accruals under
the Supplemental Plan were frozen. Benefits under the Supplemental Plan are
based on years of service (including years of service not taken into account
under the Pension Plan) and total annual compensation as reported in the Summary
Compensation Table and, for participants in the Deferred Compensation Plan, a
specified percentage of average awards under such plan multiplied by years of
service.
SPECIAL RETIREMENT PROGRAM FOR ELECTED OFFICERS
The Company also maintains a deferred compensation plan (the "Special
Retirement Program") for principal officers of the Company who participated in a
similar predecessor plan of Reliance Electric Company. A principal officer must
have served as such for at least two years and, upon retirement, must have at
least ten years of service with the Company to be eligible to participate in the
Special Retirement Program. Eligibility to participate in the Special Retirement
Program is subject to the approval of the Board of Directors of the Company in
the event of retirement prior to the normal retirement date. An individual will
not be eligible to participate in the Special Retirement Program in the event of
retirement prior to reaching age 55.
The maximum retirement allowance provided under the Special Retirement
Program upon a participant's retirement (or at age 60, if retirement commences
before age 60), will be 50% of the average of the three best years of total
"compensation" (salary plus annual bonus), less pension attributable to the
Company contributions under the Company Pension Plan, the Supplemental
Retirement Plan and any retirement plan of a prior employer following retirement
from the Company, and less 50% of primary Social Security benefit. The maximum
retirement allowance of 50% will be payable to the person holding, on
retirement, the office of Chief Executive Officer of the Company, and to any
other participant with 15 years of service with the Company upon retirement. If
a participant, other than the Chief Executive Officer of the Company, has less
than 15 years of service upon retirement, the retirement allowance will be
reduced by .2777% for each month of service less than 180 months. Under the
Special Retirement Program, the group life and medical insurance coverage (other
than salary continuation) in effect for a participant at the time of early
retirement will be continued until normal retirement.
DEFERRED COMPENSATION PLAN
The Company also maintains an unfunded "non-qualified" deferred compensation
plan (the "Deferred Compensation Plan") for elected officers, non-employee
directors and other key employees of
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<PAGE>
the Company and its subsidiaries and affiliates, pursuant to which the Company
may elect to award deferred compensation to any of such officers and employees
each calendar year. In addition, because federal law places limitations on
contributions to the Company's 401(k) retirement savings plan and the defined
contribution retirement plan, the Company contributes to the Deferred
Compensation Plan for each participant the amount of matching employer
contributions to which the participant would be entitled under the 401(k)
savings plan and/or the defined contribution retirement plan but for such
limitations. Book entry accounts maintained for each employee under the Deferred
Compensation Plan are credited quarterly with interest at the rate specified by
the Board from time to time (currently at the prime rate). The amounts credited
to such accounts will become distributable at age 65 or earlier with the
approval of the Board of Directors of the Company. In addition, in the event of
a "change of control" (as defined under the Deferred Compensation Plan), payment
of all accounts shall be accelerated and payable in a lump sum within 30 days
after such event.
1995 EQUITY PLAN
The Company has adopted a Stock Purchase and Option Plan for its employees
effective as of August 1, 1995, as amended and restated effective as of July 18,
1996 (the "1995 Equity Plan"). The principal purposes of the 1995 Equity Plan
are to provide incentives for officers and employees of the Company through
grants of non-qualified stock options ("NQSOs") and restricted stock
(collectively, "Grants") to motivate their personal and active interest in the
Company's development and financial success, and to induce them to remain in the
Company's employment.
Under the 1995 Equity Plan, not more than 5,725,000 shares of Common Stock
are authorized for issuance upon exercise of NQSOs or upon vesting of restricted
stock awards. NQSOs are options to purchase shares of Common Stock that are not
"incentive stock options" within the meaning of Section 422 of the Code.
Restricted stock is Common Stock that is subject to restrictions or conditions
on the participant's right to transfer or sell such stock. Furthermore, the
maximum number of shares that may be subject to Grants under the 1995 Equity
Plan to any individual cannot exceed 1,000,000.
ADMINISTRATION
The Compensation Committee of the Company's Board of Directors administers
the 1995 Equity Plan. It is the current intent of the Compensation Committee not
to make any Grants under the 1995 Equity Plan following the Offering.
Subject to the terms and conditions of the 1995 Equity Plan, the
Compensation Committee has the authority to select the individuals, if any, to
whom Grants are to be made, to determine the number of shares to be subject
thereto and the terms and conditions thereof, and to make all other
determinations and to take all other actions necessary or advisable for the
administration of the 1995 Equity Plan. The Compensation Committee is also
authorized to adopt, amend and rescind rules relating to the administration of
the 1995 Equity Plan.
ELIGIBILITY
Restricted stock and NQSOs under the 1995 Equity Plan may be granted to
individuals who are employees of the Company (or any current or future
subsidiaries of the Company) and certain other individuals selected by the
Compensation Committee for participation in the 1995 Equity Plan. No Grants may
be made under the 1995 Equity Plan to non-employee directors of the Company or
its subsidiaries, except that, in connection with the Rainford Acquisition, the
Compensation Committee was authorized to make Grants of NQSOs to non-employee
directors as rollover options in return for cancellation of certain options
issued by Rainford ("Rollover Options").
GRANTS UNDER THE 1995 EQUITY PLAN
The 1995 Equity Plan provides that the Compensation Committee may grant or
issue restricted stock or NQSOs, or any combination thereof, to any eligible
individual. Each such Grant will be set forth in a
52
<PAGE>
separate agreement with the person receiving the Grant and will indicate the
type, terms and conditions of the Grant.
NON-QUALIFIED STOCK OPTIONS ("NQSOS") will provide for the right to purchase
Common Stock at a specified price per share that may be less than (but except
for Rollover Options not below 50%) the fair market value of a share of Common
Stock on the date of grant, and usually will become exercisable (at the
discretion of the Compensation Committee) in one or more installments after the
grant date, subject to the participant's continued employment with the Company
and/or subject to the satisfaction of individual or Company performance targets
or other conditions established by the Compensation Committee. Exercise of NQSOs
also may be predicated on the purchase of restricted stock by the participant
pursuant to a Grant. NQSOs issued under the 1995 Equity Plan have a maximum
exercise period of ten years from the date of grant.
RESTRICTED STOCK may be sold to participants at various prices per share
(but not less than 50% of the fair market value of a share of Common Stock on
the date such shares are offered) and made subject to such restrictions as may
be determined by the Compensation Committee. Restricted stock typically may be
repurchased by the Company at the original purchase price in the event of
termination of the participant's employment with the Company other than by
reason of death, disability or retirement at age 65 or in the event of certain
impermissible transfers of Common Stock. In general, restricted stock may not be
sold, or otherwise transferred or hypothecated, until restrictions are removed
or expire. Purchasers of restricted stock, unlike recipients of options, will
have voting rights and will receive dividends prior to the time when the
restrictions lapse.
1998 EQUITY PLAN
Prior to the Offering, the 1998 Equity Participation Plan of RELTEC
Corporation (the "Equity Plan") was approved by the Board of Directors and the
stockholders of the Company. The principal purpose of the Equity Plan is to
provide incentives for officers, employees and consultants of the Company
through granting of options, restricted stock and other awards (collectively,
"Awards"), thereby stimulating their personal and active interest in the
Company's development and financial success, and inducing them to remain in the
Company's employment. The Equity Plan is also intended to assist the Company in
attracting and retaining qualified non-employee directors ("Non-Employee
Directors") by providing for the automatic grant of options to Non-Employee
Directors.
The Company has announced that under the Equity Plan it will grant to all
employees that are not current investors in the Company an option to purchase
RELTEC Common Stock at the initial offering price. This program was approved by
the Company's Board of Directors to recognize the efforts of all RELTEC
employees who have contributed to the Company's success, to encourage broad
based employee ownership and to more closely align employees financially with
the Company's shareholders. Option grants will range from 50 shares to 200
shares depending on the seniority and the full or part time status of the
employee. Option grants will only be made in jurisdictions where such grants and
stock holding are legally permitted.
Under the Equity Plan, not more than 5,076,211 shares of Common Stock (or
the equivalent in other equity securities) are authorized for issuance upon
exercise of options, stock appreciation rights ("SARs"), and other Awards, or
upon vesting of restricted or deferred stock awards. Furthermore, the maximum
number of shares which may be subject to options, SARs, restricted stock or
other Awards granted under the Equity Plan to any individual in any calendar
year cannot exceed a certain maximum amount.
The principal features of the Equity Plan are summarized below, but the
summary is qualified in its entirety by reference to the Equity Plan, which is
filed as an exhibit to the registration statement of which this Prospectus is a
part.
ADMINISTRATION
Prior to the Company's initial registration of Common Stock under Section 12
of the Exchange Act, the Compensation Committee of the Board will administer the
Equity Plan. Following such registration,
53
<PAGE>
the entire Board or a committee thereof that consists solely of two or more
members of the Board, each of whom is both a "non-employee director" for
purposes of Rule 16b-3 under the Exchange Act ("Rule 16b-3") and an "outside
director" for the purposes of Section 162(m) of the Code, will administer the
Equity Plan with respect to grants to employees or consultants of the Company
and the full Board will administer the Equity Plan with respect to options
granted to Non-Employee Directors.
Subject to the terms and conditions of the Equity Plan, the Committee has
the authority to select the employees and consultants, if any, to whom Awards
are to be made, to determine the number of shares to be subject thereto and the
terms and conditions thereof, and to make all other determinations and to take
all other actions necessary or advisable for the administration of the Equity
Plan with respect to grants or awards made to employees or consultants. The
Committee (and the Board of Directors) is also authorized to adopt, amend and
rescind rules relating to the administration of the Equity Plan. Notwithstanding
the foregoing, the Board of Directors shall conduct the general administration
of the Equity Plan with respect to Options granted to Non-Employee Directors.
ELIGIBILITY
Options, SARs, restricted stock and other Awards under the Equity Plan may
be granted to individuals who are employees or consultants of the Company (or
any current or future subsidiaries) selected by the Committee for participation
in the Equity Plan. In addition, the Equity Plan provides for automatic grants
of non-qualified stock options to Non-Employee Directors.
NON-EMPLOYEE DIRECTORS
The Equity Plan provides for (i) automatic grants of non-qualified stock
options to purchase a set number of shares of Common Stock to each Non-Employee
Director at the time of election to the Board of Directors (or for each
Non-Employee Director who was a Non-Employee at the time of the initial public
offering of the Company's Common Stock (the "IPO") at the time of the IPO), and
(ii) automatic grants of non-qualified stock options to purchase a set number of
shares of Common Stock to each Non-Employee Director upon each successive
anniversary of such grant date upon which the Non-Employee Director remains a
member of the Board. In addition, the Equity Plan provides that each
Non-Employee Director who purchases 5,000 shares of the Company's Common Stock
during the 90-day period from and including the first date that such
Non-Employee Director is elected to the Board of Directors will be granted on
the date of such purchase non-qualified stock options to purchase 10,000 shares.
For Non-Employee Directors who were Non-Employee Directors at the time of the
IPO, such 90-day period runs from and includes the date of the IPO. Each such
grant shall be set forth in a written agreement between the Company and the
Non-Employee Director indicating the terms and conditions of the option. The
exercise price of such options shall be the fair market value of a share of
Common Stock on the date of grant. Each option shall become exercisable in
cumulative annual installments of one-fifth each on each of the first five
anniversaries of the date of the grant so long as the Non-Employee Director
continues to serve as a director of the Company; provided, however, to the
extent permitted by Rule 16b-3, the Board of Directors may accelerate the
exercisability of options upon the occurrence of certain specified extraordinary
corporate transactions or events, and provided further that upon the occurrence
of a "Change in Control" of the Company (as defined in the Equity Plan) all
outstanding options shall become immediately exercisable. No portion of an
option granted to any Non-Employee Director shall be exercisable after the tenth
anniversary of the date of grant or more than three months after the termination
of the Non-Employee Director's services as director of the Company, provided,
however, that in the event of the Non-Employee Director's death or disability,
the option may be exercised until the earlier of 12 months following such death
or disability or the tenth anniversary of the date of grant.
AWARDS UNDER THE EQUITY PLAN
The Equity Plan provides that the Committee may grant or issue stock
options, SARs, restricted stock, deferred stock, dividend equivalents,
performance awards, stock payments, and other stock related benefits, or any
combination thereof to any eligible employee or consultant. Each such Award will
be set
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<PAGE>
forth in a separate agreement with the person receiving the Award and will
indicate the type, terms and conditions of the Award.
NON-QUALIFIED STOCK OPTIONS ("NQSOS") will provide for the right to purchase
Common Stock at a specified price which, except with respect to NQSOs intended
to qualify as performance-based compensation under Section 162(m) of the Code,
may be less than fair market value on the date of grant (but not less than par
value), and usually will become exercisable (in the discretion of the Committee)
in one or more installments after the grant date, subject to the participant's
continued employment with the Company and/or subject to the satisfaction of
individual or Company performance targets established by the Committee. NQSOs
may be granted for any term specified by the Committee. Notwithstanding the
foregoing, NQSOs granted to Non-Employee Directors shall be subject to the terms
described above. See "--Non-Employee Directors."
INCENTIVE STOCK OPTIONS ("ISOS") will be designed to comply with certain
restrictions contained in the Code. Among such restrictions, ISOs must have an
exercise price not less than the fair market value of a share of Common Stock on
the date of grant, may only be granted to employees, must expire within a
specified period of time following the Optionee's termination of employment, and
must be exercised within ten years after the date of grant; but may be
subsequently modified to disqualify them from treatment as ISOs. In the case of
an ISO granted to an individual who owns (or is deemed to own) at least 10% of
the total combined voting power of all classes of stock of the Company, the
Equity Plan provides that the exercise price must be at least 110% of the fair
market value of a share of Common Stock on the date of grant and the ISO must
expire upon the fifth anniversary of the date of its grant.
RESTRICTED STOCK may be sold to participants at various prices (but not
below par value) and made subject to such restrictions as may be determined by
the Committee. Restricted stock, typically, may be repurchased by the Company at
the original purchase price if the conditions or restrictions are not met. In
general, restricted stock may not be sold, or otherwise transferred or
hypothecated, until restrictions are removed or expire. Purchasers of restricted
stock, unlike recipients of options, will have voting rights and will receive
dividends prior to the time when the restrictions lapse.
DEFERRED STOCK may be awarded to participants, typically without payment of
consideration, but subject to vesting conditions based on continued employment
or on performance criteria established by the Committee. Like restricted stock,
deferred stock may not be sold, or otherwise transferred or hypothecated, until
vesting conditions are removed or expire. Unlike restricted stock, deferred
stock will not be issued until the deferred stock award has vested, and
recipients of deferred stock generally will have no voting or dividend rights
prior to the time when vesting conditions are satisfied.
STOCK APPRECIATION RIGHTS may be granted in connection with stock options or
other Awards, or separately. SARs granted by the Committee in connection with
stock options or other awards typically will provide for payments to the holder
based upon increases in the price of the Company's Common Stock over the
exercise price of the related option or other Awards, but alternatively may be
based upon criteria such as book value. Except as required by Section 162(m) of
the Code with respect to any SAR intended to qualify as performance-based
compensation as described in Section 162(m) of the Code, there are no
restrictions specified in the Equity Plan on the amount of gain realizable from
the exercise of SARs, although restrictions may be imposed by the Committee in
the SAR agreements. The Committee may elect to pay SARs in cash or in Common
Stock or in a combination of both.
DIVIDEND EQUIVALENTS represent the value of the dividends per share paid by
the Company, calculated with reference to the number of shares covered by the
stock options, SARs or other Awards held by the participant.
PERFORMANCE AWARDS may be granted by the Committee on an individual or group
basis. Generally, these Awards will be based upon specific performance targets
and may be paid in cash or in Common Stock or in a combination of both.
Performance Awards may include "phantom" stock Awards that provide for payments
based upon increases in the price of the Company's Common Stock over a
predetermined period. Performance Awards may also include bonuses which may be
granted by the
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Committee on an individual or group basis and which may be payable in cash or in
Common Stock or in a combination of both.
STOCK PAYMENTS may be authorized by the Committee in the form of shares of
Common Stock or an option or other right to purchase Common Stock as part of a
deferred compensation arrangement or otherwise in lieu of or in addition to all
or any part of compensation, including bonuses, that would otherwise be payable
in cash to the employee or consultant.
SECURITIES LAWS AND FEDERAL INCOME TAXES
SECURITIES LAWS. The 1995 Equity Plan and the Equity Plan (the "Equity
Plans") are intended to conform to the extent necessary with all provisions of
the Securities Act and the Exchange Act and any and all regulations and rules
promulgated by the Securities and Exchange Commission thereunder, including,
without limitation, Rule 16b-3. To the extent permitted by applicable law, the
Equity Plans and options or other Awards granted thereunder shall be deemed
amended to the extent necessary to conform to such laws, rules and regulations.
GENERAL FEDERAL TAX CONSEQUENCES. Under current federal laws, in general,
recipients of awards and grants of nonqualified stock options, stock
appreciation rights, restricted stock, deferred stock, dividend equivalents,
performance awards, and stock payments under the Equity Plans are taxable under
Section 83 of the Code upon their receipt of Common Stock or cash with respect
to such awards or grants and, subject to Section 162(m) of the Code, the Company
will be entitled to an income tax deduction with respect to the amounts taxable
to such recipients. Under Sections 421 and 422 of the Code, recipients of ISOs
are generally not taxable on their receipt of Common Stock upon their exercises
of ISOs if the ISOs and option stock are held for certain minimum holding
periods and, in such event, the Company is not entitled to income tax deductions
with respect to such exercises.
SECTION 162(M) LIMITATION. In general, under Section 162(m) of the Code,
income tax deductions of publicly-held corporations may be limited to the extent
total compensation (including base salary, annual bonus, stock option exercises
and non-qualified benefits paid) for certain executive officers exceeds $1
million in any one year. However, under Code Section 162(m), the deduction limit
does not apply to certain "performance-based compensation" established by an
independent compensation committee which is adequately disclosed to, and
approved by, stockholders. In particular, stock options and SARs will satisfy
the "performance-based compensation" exception if the awards are made by a
qualifying compensation committee, the plan sets the maximum number of shares
that can be granted to any person within a specified period and the compensation
is based solely on an increase in the stock price after the grant date (I.E.,
the option exercise price is equal to or greater than the fair market value of
the stock subject to the award on the grant date). Under a Code Section 162(m)
transition rule for compensation plans of corporations which are privately held
and which become publicly held in an initial public offering, the Equity Plans
will not be subject to Code Section 162(m) until the "Transition Date" which is
defined as the earliest of (i) the material modification of the Equity Plans;
(ii) the issuance of all Common Stock and other compensation that has been
allocated under the Equity Plans; or (iii) the first meeting of stockholders at
which directors are to be elected that occurs after December 31, 2001. After the
Transition Date, rights and awards granted under the Equity Plans, other than
options and SARs, will not qualify as "performance-based compensation" for
purposes of Code Section 162(m) unless such rights and awards are granted or
vest upon preestablished objective performance goals, the material terms of
which are disclosed to and approved by the stockholders of the Company.
The Company has attempted to structure the Equity Plans in such a manner
that, after the Transition Date, subject to obtaining stockholder approval of
the Equity Plans, the remuneration attributable to stock options and SARs which
meet the other requirements of Code Section 162(m) will not be subject to the
$1,000,000 limitation. The Company has not, however, requested a ruling from the
IRS or an opinion of counsel regarding this issue.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The KKR Partnerships beneficially own 84.6% of the Company's outstanding
shares of Common Stock on a fully diluted basis, and after giving effect to the
Offering will own 76.8% on a fully diluted basis. As a result the KKR
Partnerships will have the power to elect all of the Company's directors,
appoint new management and approve any action requiring the approval of the
holders of Common Stock. KKR Associates is the general partner of the KKR
Partnerships. The general partners of KKR Associates are Messrs. Henry R.
Kravis, George R. Roberts, Paul E. Raether, Michael W. Michelson, James H.
Greene, Jr., Michael T. Tokarz, Clifton S. Robbins, Edward A. Gilhuly, Perry
Golkin, Scott M. Stuart and Robert I. MacDonnell. Messrs. Kravis, Roberts and
Greene are also directors of the Company, as is Alexander Navab, Jr., who is an
executive of KKR and a limited partner of KKR Associates. Each of the general
partners of KKR Associates is also a member of KKR & Co., L.L.C., which serves
as the general partner of KKR.
From time to time, KKR has received customary investment banking fees for
services rendered to the Company in connection with divestitures, acquisitions
and certain other transactions. KKR received a fee of $7.5 million in cash from
the Company for negotiating the RELTEC Acquisition and arranging the financing
therefor, plus the reimbursement of its expenses in connection therewith. The
Company paid KKR a $2.0 million fee for consulting services related to the
Rainford Acquisition. In the future, KKR will continue to receive customary fees
for services rendered to the Company in connection with acquisitions,
divestitures and certain other transactions. In addition, KKR has agreed to
render management, consulting and financial services to the Company for an
annual fee of $750,000, payable quarterly. During the year ended December 31,
1997 and 1996, and the five months ended December 31, 1995, the Company paid
$0.8 million, $0.8 million and $0.4 million, respectively, to KKR for such
services and for reimbursement of expenses.
In connection with the RELTEC Acquisition, the KKR Partnerships entered into
Securities Purchase Agreements pursuant to which they acquired 28,000,000 shares
of Common Stock and one of the KKR Partnerships, CMT Associates L.P. ("CMT
Associates"), acquired a Subordinated Promissory Note in the principal amount of
$135,000,000 (the "Bridge Loan"). The Bridge Loan was guaranteed by the
Company's sole wholly-owned direct subsidiary. The Securities Purchase
Agreements contain provisions (i) restricting the KKR Partnerships' ability to
sell shares of Common Stock for up to 90 days after the effective date of
certain registration statements, (ii) requiring the Company to reimburse the KKR
Partnerships for all costs and expenses arising in connection with the
administration, enforcement and preservation of rights under the Securities
Purchase Agreements, including, without limitation, all expenses incurred by the
KKR Partnerships in connection with the maintenance of their books and records,
preparation of tax returns and delivery of tax information to their partners and
all travel and other out-of-pocket expenses of KKR Associates in connection with
the operation and business of the KKR Partnerships and their ownership of the
Common Stock and Bridge Loan and (iii) indemnifying the KKR Partnerships and all
of their partners from liabilities, damages and expenses relating to or arising
out of the KKR Partnerships' ownership of the Common Stock and Bridge Loan or
litigation to which such persons are made a party in their capacity as an owner
of such securities.
Also in connection with the RELTEC Acquisition, the KKR Partnerships entered
into the Registration Rights Agreement, dated August 1, 1995, (the "Registration
Rights Agreement") with the Company. Pursuant to such agreement the KKR
Partnerships have the right, under certain circumstances and subject to certain
conditions, to require the Company to register under the Securities Act shares
of Common Stock held by them. In addition, the Registration Rights Agreement
also provides the KKR Partnerships with certain piggyback registration rights.
The Registration Rights Agreement provides, among other things, that the Company
will pay all expenses in connection with the first six demand registrations
requested by the KKR Partnerships and in connection with any registration in
which the KKR Partnerships participates through piggyback registration rights
granted under such agreement.
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In connection with the issuance of shares of Common Stock to employees of
the Company pursuant to the Company's 1995 Equity Plan, such employees granted
CMT Associates certain "drag along" rights and CMT Associates granted such
employee certain "tag along" rights.
On September 7, 1995, CMT Associates exchanged $35.0 million of the
principal amount of the Bridge Loan into 7,000,000 shares of Common Stock
pursuant to the terms of the Bridge Loan. On September 11, 1995, the Company
repaid $25.0 million of the principal amount of the Bridge Loan with proceeds
from borrowings under its then existing bank credit agreement. In August 1996,
CMT Associates exchanged the remaining $75.0 million principal amount for
6,434,783 shares of Common Stock, plus 1,000 shares of Series A Preferred Stock
that was subsequently sold to a third party. On April 1, 1997, CMT Associates
purchased an additional 4,000,000 shares of Common Stock for $50,000,000, which
proceeds were used to repay indebtedness.
In connection with the Rainford Acquisition, 2,951,044 shares of Common
Stock were issued in exchange for certain shares of Rainford Common Stock held
for the benefit of Barry Houghton, the former Chairman of Rainford, and his
family (the "Settlements") pursuant to certain settlement agreements. The
Settlements and the Company entered into a Put/Call Agreement in August 1996.
That agreement provides that if Barry Houghton ceases for any reason to be
employed by the Company or any of its subsidiaries, the Company shall have the
right to purchase some or all of the shares of Common Stock held by the
Settlements at fair market value on the date of his termination. Subject to
certain limitations, upon Barry Houghton ceasing for any reason to be employed
by the Company or any of its subsidiaries the Settlements shall be entitled to
sell to the Company, and the Company shall be required to purchase, up to 10% of
the shares of Common Stock held by the Settlements at fair market value on the
date of his termination. For purpose of the agreement, if the Common Stock is
listed on an exchange, then fair market value shall mean the average of the
closing sales price for the Common Stock for the twenty trading days prior to
the date of his termination. In connection with the Offering, the Settlements
have forfeited their right to put 10% of the shares held by them to the Company.
The Settlements also entered into a Stockholders' Agreement with the Company,
the KKR Partnerships and certain other shareholders of Rainford. In the
Stockholders' Agreement the Settlements granted the KKR Partnerships certain
"drag along" rights and the KKR Partnerships granted the Settlements certain
"tag along" rights. In addition, the Settlements have granted the Company a
right of first refusal with respect to certain transfers of the Common Stock
held by the Settlements and the Company granted the Settlements certain
piggyback registration rights.
In connection with the purchase of Common Stock pursuant to the 1995 Equity
Plan, the Company made loans to certain employees. The only loans to executive
officers were to Susan Clark, formerly General Counsel and Secretary and
currently Vice President/Administration, Latin America, and to Valerie Gentile
Sachs, Vice President and General Counsel. The principal amounts of the loans
are due no later than five years from the date of issuance. Interest accrues and
is paid semi-monthly with certain principal repayments required as part of
annual management incentive awards. The loans are secured by a pledge of the
Common Stock held by such persons. At December 31, 1997, the outstanding
principal balance for Ms. Clark's and Mrs. Sachs' loans were $54,683 and
$218,750, respectively.
The Company believes that the material terms of each of the transactions
described above are no more favorable than those that would have been agreed to
by third parties on an arm's length basis.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock as of December 31, 1997 by (i) each
person who is known by the Company to beneficially own more than 5% of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each of the
executive officers of the Company and (iv) all directors and executive officers
as a group. Unless otherwise indicated, the address of each person named in the
table below is RELTEC Corporation, 5900 Landerbrook Drive, Suite 300, Cleveland,
Ohio 44124-4019.
<TABLE>
<CAPTION>
PERCENT OF TOTAL
--------------------------
PERCENT PERCENT
SHARES ----------- -------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING(2)
- ----------------------------------------------------------------------------- ------------ ----------- -------------
<S> <C> <C> <C>
KKR Associates, L.P.(3)...................................................... 45,434,783 90.8% 81.8%
Henry R. Kravis............................................................ -- -- --
George R. Roberts.......................................................... -- -- --
James H. Greene, Jr........................................................ -- -- --
Rysaffe Trustee Company (CI) Limited......................................... 2,951,044 5.9 5.3
Dudley P. Sheffler(5)........................................................ 282,319 * *
Patrick L. Welker(6)......................................................... 103,959 * *
W. Michael Corkran(7)........................................................ 83,265 * *
Alexander Navab, Jr.(8)...................................................... -- * *
All officers and directors as a group (4 persons, excluding Messrs. Greene,
Kravis and Roberts)(9)..................................................... 469,543 * *
</TABLE>
- ------------------------
* Less than 1%.
(1) For purposes of this table, a person is deemed as of any date to have
"beneficial ownership" of any security that such person has a right to
acquire within 60 days after such date. Shares that each identified
stockholder has the right to acquire within 60 days of the date of the table
set forth above are deemed to be outstanding in calculating the percentage
ownership of such stockholder, but are not deemed outstanding as to any
other person.
(2) Assumes no exercise of the over-allotment option by the Underwriters and
excludes any shares purchased in the Offering by the respective Beneficial
Owner.
(3) Shares of Common Stock shown as owned by KKR Associates are owned of record
by CMT Associates, L.P. and KKR Partners II, L.P. of which KKR Associates is
the sole general partner and as to which it possesses sole voting and
investment power. Messrs. Kravis, Roberts and Greene (who are directors of
the Company) and Messrs. Paul E. Raether, Michael W. Michelson, Michael T.
Tokarz, Clifton S. Robbins, Edward D. Gilhuly, Perry Golkin, Scott M. Stuart
and Robert I. MacDonnell, as general partners of KKR Associates, may be
deemed to share beneficial ownership of any shares beneficially owned by KKR
Associates, but disclaim any such beneficial ownership. The address of KKR
Associates is 9 West 57th Street, New York, New York 10019.
(4) Includes 2,169,501 shares registered in the name of Rysaffe Trustee Company
(CI) Limited A/C BH88 and 781,543 shares registered in the name of Rysaffe
Trustee Company (CI) Limited A/C BH87. The trusts were sponsored by Barry
Houghton MBE, who disclaims beneficial ownership of such shares. The address
of Rysaffe Trustee Company is P.O. Box 141, La Tonnele House, Les Banques,
St. Sampson, Guernsey GY1 3H5, United Kingdom.
(5) Includes an aggregate of 132,000 options that are exercisable within 60 days
of the date hereof and 319 shares held in the 401(k) plan.
(6) Includes an aggregate of 50,640 options that are exercisable within 60 days
of the date hereof and 319 shares held in the 401(k) plan.
(7) Includes an aggregate of 43,000 options that are exercisable within 60 days
of the date hereof and 265 shares held in the 401(k) plan.
(8) Mr. Navab is an executive of KKR and a limited partner of KKR Associates.
Mr. Navab disclaims that he is the beneficial owner of any shares
beneficially owned by KKR Associates.
(9) Includes an aggregate of 259,640 options that are exercisable within 60 days
of the date hereof.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
In September 1996, the Company entered into the $450.0 million New Credit
Facility with The Chase Manhattan Bank which matures on September 30, 2003. The
New Credit Facility consists of a $350.0 million domestic revolving facility
("DRF") and a $100.0 million multi-currency revolving facility ("MCRF"). DRF
loans are denominated in U.S. dollars and maintained at the Base Rate or the
Euro Rate plus percentage margins as specified in the New Credit Facility. MCRF
loans are denominated in U.S. dollars, pounds sterling, deutsche marks and/or
yen and are maintained at the Base Rate or the Euro Rate plus percentage margins
as specified in the New Credit Facility. At December 31, 1997 the Base Rate was
8.5% and the Euro Rate ranged from 5.8% to 6.0%. The percentage margins range up
to 0.125% for the Base Rate and from 0.325% to 1.375% for the Euro Rate. The New
Credit Facility contains provisions to reduce the interest rates and commitment
fees if certain leverage ratios are achieved. At December 31, 1997, the weighted
average interest rate on the New Credit Facility was 6.92%. The New Credit
Facility contains provisions for a $30.0 million (or a pound sterling
equivalent) short-term credit line as well as letters of credit. At December 31,
1997 the New Credit Facility has a facility fee of 0.175% per annum on the total
commitment and a letter of credit facility fee of 0.325% per annum on
outstanding letters of credit. At December 31, 1997, the aggregate availability
under the New Credit Facility was $175.9 million.
The New Credit Facility contains covenants and provisions that restrict,
among other things, the Company's ability to change its business, declare
dividends, grant liens, incur additional indebtedness, exceed a leverage ratio,
meet or exceed a minimum interest coverage ratio and make certain capital
expenditures. The Company was in compliance with these covenants as of December
31, 1997. The New Credit Facility is secured by the capital stock of RELTEC's
subsidiaries and guaranteed by certain subsidiaries.
Pursuant to the terms of the New Credit Facility, the available commitment
under the New Credit Facility will be reduced from $450.0 million on September
30, 1999 by $35.0 million, and by $35.0 million per year on each September 30
thereafter until balance matures on September 30, 2003. Principal payments are
not otherwise required unless the New Credit Facility is required to be reduced
for certain changes in the Company's business activities as defined in the
Credit Agreement.
In May 1997, the Company entered into promissory notes with Bank One,
Columbus, N.A., Caisse National de Agricole and The Sanwa Bank, Limited for
$40.0 million of unsecured and uncommitted Money Market Lines of Credit in
addition to the New Credit Facility. As of December 31, 1997, $3.7 million was
outstanding at a weighted average interest rate of 7.18%. The Money Market Lines
of Credit do not contain any covenants or restrictions.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Certificate of Incorporation of the Company authorizes 150,000,000
shares of Common Stock, par value $0.01 per share ("Common Stock"), and
20,000,000 shares of Preferred Stock, par value $0.01 per share ("Preferred
Stock"), of which 1,000 shares are designated as Series A Redeemable Preferred
Stock ("Series A Preferred Stock"). As of December 31, 1997, the outstanding
capital stock of the Company consisted of 50,038,608 shares of Common Stock held
by 223 stockholders of record and 1,000 shares of Series A Preferred Stock held
by one stockholder of record. The following summaries of certain provisions of
the Common Stock and Preferred Stock do not purport to be complete and are
subject to, and qualified in their entirety by, the provisions of the
Certificate of Incorporation and Bylaws of the Company, which are included as
exhibits to the Registration Statement of which this Prospectus forms a part,
and by applicable law.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders of the Company, and do not have cumulative
voting rights. The holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available for that purpose, subject to
preferences that may be applicable to any outstanding Preferred Stock and any
other provisions of the Company's Certificate of Incorporation. The Company
currently intends to retain any future earnings for use in its business and does
not anticipate paying any cash dividends in the foreseeable future. The
declaration and payment in the future of any cash dividends will be at the
election of the Company's Board of Directors and will depend upon the earnings,
capital requirements and financial position of the Company, future loan
covenants, general economic conditions and other pertinent factors. Holders of
Common Stock have no preemptive or other rights to subscribe for additional
shares. No shares of Common Stock are subject to redemption or a sinking fund.
In the event of any liquidation, dissolution or winding up of the Company, after
payment of the debts and other liabilities of the Company, and subject to the
rights of holders of shares of Preferred Stock, holders of Common Stock are
entitled to share pro rata in any distribution to the stockholders. All of the
outstanding shares of Common Stock are, and the shares offered hereby will be,
fully paid and nonassessable. See "Risk Factors--Company Subject to Control of
the KKR Partnerships," "Dividend Policy," "Dilution," "Shares Eligible for
Future Sale" and "Certain Relationships and Related Transactions."
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to designate and issue Preferred Stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater that the rights of the Common Stock. It is not possible
to state the actual effect of the issuance of any shares of Preferred Stock upon
the rights of holders of the Common Stock until the Board of Directors
determines the specific rights of the holders of such Preferred Stock. However,
the effects might include, among other things, restricting dividends on the
Common Stock, diluting the voting power of the Common Stock, impairing the
liquidation rights of the Common Stock and delaying or preventing a change in
control of the Company without further action by the stockholders.
Holders of Series A Preferred Stock are entitled to receive cumulative
dividends, accruable without interest, at the annual rate of $105.00 per share
for the year ended December 31, 1996, 1997 and 1998; $115.00 per share for the
year ended December 31, 1999; $125.00 for the year ended December 31, 2000; and
$130.00 for each annual period thereafter until redeemed by the Company. The
Company and the holders of Series A Preferred Stock have certain optional
redemption rights which, if exercised, may result in a purchase of Series A
Preferred Stock at the redemption price of $1,000 per share, plus an amount
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equal to any and all accumulated dividends accrued and unpaid thereon. In the
event of a liquidation, dissolution or winding up of the company, the holders of
shares of Series A Preferred Stock shall be entitled to an amount equal to
$1,000 per share, plus an amount equal to any and all accumulated dividends
accrued and unpaid thereon, subject to the rights of holders of senior
securities. In the event of a merger or consolidation where the Company is not
the surviving corporation, the Series A Preferred Stock will be exchanged or
changed into an equal number of shares of preferred stock of such other person
or entity with terms substantially identical to those of the Series A Preferred
Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is a Delaware corporation subject to Section 203 of the General
Corporation Law of the State of Delaware ("Section 203"). Section 203 provides
in general that a stockholder acquiring more than 15% of the outstanding voting
stock of a corporation subject to Section 203 (an "Interested Stockholder") but
less than 85% of such stock may not engage in certain Business Combinations (as
defined in Section 203) with the corporation for a period of three years
subsequent to the date on which the stockholder became an Interested Stockholder
unless (i) prior to such date the corporation's board of directors approved
either the Business Combination or the transaction in which the stockholder
became an Interested Stockholder or (ii) the Business Combination is approved by
the corporation's board of directors and authorized by a vote of at least
66 2/3% of the outstanding voting stock of the corporation not owned by the
Interested Stockholder. A "Business Combination" includes mergers, asset sales
and other transactions resulting in financial benefit to a stockholder. Section
203 could prohibit or delay mergers or other takeover or change of control
attempts with respect to the Company and, accordingly, may discourage attempts
that might result in a premium over the market price for the shares held by
stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The Bank of New
York.
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SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Prior to completion of the Offering, there has been no public market for the
Common Stock of the Company. Sales of substantial amounts of Common Stock in the
public market, or the perception that such sales may occur, could adversely
affect the market price of the Common Stock.
Upon the consummation of the Offering, the Company will have 55,538,608
shares of Common Stock issued and outstanding. All of the 5,500,000 shares of
Common Stock to be sold in the Offering (and any shares sold upon exercise of
the U.S. Underwriters' over-allotment option) will be freely tradable without
restrictions or further registration under the Securities Act, except for any
shares purchased by an "affiliate" of the Company (as that term is defined in
Rule 144 under the Securities Act ("Rule 144")), which will be subject to the
resale limitations of Rule 144. Other than 2,990,821 shares issued in connection
with the Rainford Acquisition pursuant to Regulation S and currently
outstanding, the remaining shares of Common Stock outstanding are "restricted
securities" as that term is defined in Rule 144 and are also subject to certain
restrictions on disposition. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144 or Rule 701 under the Securities Act. Sales of restricted
securities in the public market, or the availability of such shares for sale,
could have an adverse effect on the price of the Common Stock. See "Risk
Factors--Absence of Public Market and Possible Volatility of Stock Price," "Risk
Factors--Immediate Dilution", "Risk Factors-- Shares Eligible for Future Sale"
and "Dilution."
REGISTRATION RIGHTS
The Company and the KKR Partnerships have entered into a registration rights
agreement, dated August 1, 1995 and amended by a certain stock purchase
agreement dated March 31, 1997 (the "Registration Rights Agreement"), pursuant
to which the Company has granted to the KKR Partnerships demand rights, subject
to certain limitations, to cause the Company to file a registration statement
under the Securities Act covering resales of an aggregate of 45,434,783 shares
of Common Stock held by them, and to cause such registration statement to become
effective. The Registration Rights Agreement also grants "piggyback"
registration rights permitting the KKR Partnerships to include their registrable
securities in a registration of securities by the Company, subject to certain
conditions and limitations. The Company is obligated to pay the expenses of such
registrations.
In addition, pursuant to certain stockholder agreements, the Company has
granted "piggyback" registration rights to (i) substantially all of its
employees that have purchased shares of Common Stock and/or that have been
awarded options to purchase shares of Common Stock, (ii) certain shareholders
that purchased shares of Common Stock in connection with the Rainford
Acquisition and (iii) certain institutional investors. Such registration rights
are exercisable only upon registration by the Company of shares of Common Stock
held by the KKR Partnerships. The holders of such registration rights are
entitled to notice of any proposal to register shares held by the KKR
Partnerships and to include their shares in such registration, subject to
certain restrictions, including the right of an underwriter participating in the
offering to limit the number of shares included in such registration. The
Company is obligated to pay the expenses of such piggyback registrations.
RULE 144
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned shares of
Common Stock for at least one year, including a person who may be deemed an
"affiliate" of the Company, is entitled to sell, within any three-month period,
a number of shares that does not exceed the greater of 1% of the total number of
shares of the class of stock sold or the average weekly reported trading volume
of the class of stock being sold during the four calendar weeks preceding such
sale. A person who is not deemed an "affiliate" of the Company at any
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time during the three months preceding a sale and who has beneficially owned
shares for at least two years is entitled to sell such shares under Rule 144
without regard to the volume limitations described above. As defined in Rule
144, an "affiliate" of an issuer is a person that directly or indirectly through
the use of one or more intermediaries controls, is controlled by, or is under
common control with, such issuer. The foregoing summary of Rule 144 is not
intended to be a complete description thereof.
Each of the Company, the KKR Partnerships, the directors, executive officers
and certain other stockholders of the Company has agreed that, without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters, it will not, during the period ending 180 days after the date of
this Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer, lend or dispose of, directly
or indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The restrictions
described in this paragraph do not apply to (x) the sale of Shares to the
Underwriters, (y) the issuance by the Company of shares of Common Stock upon the
exercise of an option or a warrant or the conversion of a security outstanding
on the date of this Prospectus of which the Underwriters have been advised in
writing or (z) transactions by any person other than the Company relating to
shares of Common Stock or other securities acquired in open market transactions
after the completion of the offering of the Shares.
The Company and its directors and officers and certain of the Company's
other present stockholders who hold in the aggregate 49,030,675 shares of Common
Stock have agreed that they will not, directly or indirectly, offer, sell,
contract to sell or otherwise dispose of or transfer any shares of Common Stock
of the Company, or any security convertible into, or exercisable or exchangeable
for, Common Stock for a period of 180 days after the date of this Prospectus,
without the prior written consent of Morgan Stanley & Co. Incorporated, except
that, subject to certain conditions, 295,104 shares held by the Rysaffe Trustee
Company (CI) Limited may be sold after 30 days from the date of this Prospectus.
See "Underwriters."
CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
GENERAL
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by Non-U.S. Holders. As used in this discussion, the term "Non-U.S.
Holder" means any person or entity that is, for United States federal income tax
purposes, a foreign corporation, a non-resident alien individual, a non-resident
fiduciary of a foreign estate or trust, or a foreign partnership. An individual
may, subject to certain exception, be deemed to be a resident alien (as opposed
to a non-resident alien) by virtue of being present in the United States on at
least 31 days in the calendar year and for an aggregate of at least 183 days
during a three-year period ending in the current calendar year (counting for
such purposes all of the days present in the current year, one-third of the days
present in the immediately preceding year, and one-sixth of the days present in
the second preceding year). Resident aliens are subject to United States federal
tax as if they were United States citizens and residents.
This discussion does not address all aspects of United States federal income
and estate taxes or consider any specific facts or circumstances that may apply
to a particular Non-U.S. Holder. Nor does it deal with foreign, state and local
consequences that may be relevant to Non-U.S. Holders. Furthermore, this
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), existing and proposed regulations promulgated
thereunder and public administrative and judicial interpretations thereof, all
of which are subject to changes which could be applied retroactively. EACH
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PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX ADVISOR WITH
RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF ACQUIRING, HOLDING
AND DISPOSING OF COMMON STOCK.
Dividends paid to a Non-U.S. Holder of Common Stock will be subject to
withholding of United States federal income tax at a 30% rate or such lower rate
as may be specified by an applicable income tax treaty, unless the dividends are
effectively connected with the conduct of a trade or business by the Non-U.S.
Holder within the United States. If the dividends are effectively connected with
the conduct of a trade or business by the Non-U.S. Holder within the United
States and, if a tax treaty applies, are attributable to a United States
permanent establishment of the Non-U.S. Holder, the dividends will be subject to
United States federal income tax on a net income basis at applicable graduated
individual or corporate rates and will be exempt from the 30% withholding tax
described above (assuming the necessary certification and disclosure
requirements are met). Any such effectively connected dividends received by a
foreign corporation may, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Dividends paid to an address outside the United States are presumed to be
paid to a resident of such country for purposes of the withholding discussed
above (unless the payor has knowledge to the contrary), and, under currently
applicable United States Treasury regulations, for purposes of determining the
applicability of a tax treaty rate. Under recently promulgated United States
Treasury regulations generally effective with respect to payments made after
December 31, 1998, however, a Non-U.S. Holder of Common Stock who wishes to
claim the benefit of an applicable treaty rate (and avoid backup withholding as
discussed below) will be required to satisfy specified certification and other
requirements, which will include filing a Form W-8 containing the Non-U.S.
Holder's name, address and a certification that such Holder is eligible for the
benefits of the treaty under its Limitations in Benefits Article.
A Non-U.S. Holder of Common Stock who is eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate, timely claim for
refund with the United States Internal Revenue Service (the "Service").
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax on any gain recognized on a disposition of a share of Common Stock
unless (i) subject to the exception discussed below, the Company is or has been
a "United States real property holding corporation" (a "USRPHC") within the
meaning of section 897(c)(2) of the Code at any time within the shorter of the
five-year period preceding such disposition or such Non-U.S. Holder's holding
period (the "Required Holding Period"), (ii) the gain is effectively connected
with the conduct of a trade or business within the United States of the Non-U.S.
Holder and, if a tax treaty applies, is attributable to a permanent
establishment maintained by the Non-U.S. Holder, (iii) the Non-U.S. Holder is an
individual who holds the share of Common Stock as capital asset and is present
in the United States of 183 days or more in the taxable year of the disposition
and either (a) such individual has a "tax home" (as defined for United States
federal income tax purposes) in the United States or (b) the gain is
attributable to an office or other fixed place of business maintained in the
United States by such individual or (iv) the Non-U.S. Holder is subject to tax
pursuant to the Code provisions applicable to certain United States expatriates.
If an individual Non-U.S. Holder falls under clause (ii) or (iv) above, he or
she will be taxed on his or her net gain derived from the sale under regular
United States federal income tax rates. If the individual Non-U.S. Holder falls
under clause (iii) above, he or she will be subject to a flat 30% tax on the
gain derived from the sale which may be offset by United States source capital
losses (notwithstanding the fact that he or she is not considered a resident of
the United States). If a Non-U.S. Holder that is a foreign corporation falls
under clause (ii) above, it will be taxed on its gain under regular graduated
United States federal income tax rates and, in addition, will under certain
circumstances be subject to the branch profits tax equal to 30% of its
effectively connected earnings and profits within the meaning of the Code for
the taxable year, as adjusted for certain items, unless it qualifies for a lower
rate under an applicable income tax treaty.
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A corporation is generally a USRPHC if the fair market value of its United
States real property interests equals or exceeds 50% of the sum of the fair
market value of its worldwide real property interest plus its other assets used
or held for use in a trade or business. The Company believes that it is not
currently a USRPHC. However, a Non-U.S. Holder would generally not be subject to
tax or withholding in respect of such tax, on gain from a sale or other
disposition of Common Stock by reason of the Company's USRPHC status if the
Common Stock is regularly traded on an established securities market ("regularly
traded") during the calendar year in which such sale or disposition occurs,
provided that such holder does not own, actually or constructively, Common Stock
with a fair market value in excess of 5% of the fair market value of all Common
Stock outstanding at any time during the Required Holding Period. The Company
believes that the Common Stock will be treated as regularly traded.
If the Company is or has been a USRPHC within the Required Holding Period,
and if a Non-U.S. Holder owns in excess of 5% of the fair market value of Common
Stock (as described in the preceding paragraph), such Non-U.S. Holder of Common
Stock will be subject to United States federal income tax at regular graduated
rates under certain rules ("FIRPTA tax") on gain recognized on a sale or other
disposition of such Common Stock. In addition, if the Company is or has been a
USRPHC within the Required Holding Period and if the Common Stock were not
treated as regularly traded, a Non-U.S. Holder would be subject to withholding
in respect of FIRPTA tax at a rate of 10% of the amount realized on a sale or
other disposition of Common Stock and could be further subject to FIRPTA tax in
excess of the amounts withheld. Any amount withheld pursuant to such withholding
tax would be creditable against such Non-U.S. Holder's United States federal
income tax liability. Non-U.S. Holders are urged to consult their tax advisors
concerning the potential applicability of these provisions.
FEDERAL ESTATE TAXES
An individual Non-U.S. Holder who (i) is not a citizen or resident of the
United States (as specifically defined for United States estate tax purposes) at
the time of his or her death and (ii) owns, or is treated as owning Common Stock
at the time of his or her death, or has made certain lifetime transfers of an
interest in Common Stock, will be required to include the value of such Common
Stock in his or her gross estate for federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.
UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The Company must report annually to the Service and to each Non-U.S. Holder
the amount of dividends paid to such holder and the tax withheld with respect to
such dividends. These information reporting requirements apply regardless of
whether withholding is required. Copies of the information returns reporting
such dividends and withholding may also be made available to the tax authorities
in the country in which the Non-U.S. Holder resides under the provisions of an
applicable income tax treaty or other agreement with the tax authorities in that
country.
United States backup withholding tax (which, in general, is a withholding
tax imposed at the rate of 31% on certain payments to persons that fail to
furnish certain information under the United States information reporting
requirements) generally will not apply to (a) the payment of dividends paid on
Common Stock to a Non-U.S. Holder at an address outside the United States
(unless the payor has knowledge that the payee is a United States person) or (b)
the payment of the proceeds of the sale of Common Stock to or through the
foreign office of a broker. In the case of the payment of proceeds from such a
sale of Common Stock through a foreign office of a broker that is a United
States person or a "U.S. related person", however, information reporting (but
not backup withholding) is required with respect to the payment unless the
broker has documentary evidence in its files that the owner is a Non-U.S. Holder
(and has no actual knowledge to the contrary) and certain other requirements are
met or the holder otherwise establishes an exemption. For this purpose, a "U.S.
related person" is (i) a "controlled foreign corporation" for United States
federal income tax purposes or (ii) a foreign person 50% or more of whose gross
income from all sources for the three-year period ending with the close of its
taxable year preceding
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the payment (or for such part of the period that the broker has been in
existence) is derived from activities that are effectively connected with the
conduct of a United States trade or business. The payment of the proceeds of a
sale of shares of Common Stock to or through a United States office of a broker
is subject to information reporting and possible backup withholding unless the
owner certifies its non-United States status under penalties of perjury or
otherwise establishes an exemption. Any amounts withheld under the backup
withholding rules from a payment to a Non-U.S. Holder will be allowed as a
refund or a credit against such Non-U.S. Holder's United States federal income
tax liability, provided that the required information is furnished to the
Service.
The Treasury Department recently promulgated final regulations regarding the
withholding and information reporting rules discussed above. In general, the
final regulations do not significantly alter the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. In addition, the final
regulations permit the shifting of primary responsibility for withholding to
certain financial intermediaries acting on behalf of beneficial owners. The
final regulations are generally effective for payments made after December 31,
1998, subject to certain transition rules, Non-U.S. Holders should consult their
own tax advisors with respect to the impact, if any, of the final regulations.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below for whom Morgan Stanley & Co. Incorporated, Smith
Barney Inc., Goldman, Sachs & Co., Deutsche Morgan Grenfell Inc., Lehman
Brothers Inc. and J.P. Morgan Securities Inc. are acting as U.S.
Representatives, and the International Underwriters named below for whom Morgan
Stanley & Co. International Limited, Smith Barney Inc., Goldman Sachs
International, Morgan Grenfell & Co. Limited, Lehman Brothers International
(Europe) and J.P. Morgan Securities Ltd. are acting as International
Representatives, have severally agreed to purchase the respective number of
shares of Common Stock set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated..............................................
Smith Barney Inc...............................................................
Goldman, Sachs & Co............................................................
Deutsche Morgan Grenfell Inc...................................................
Lehman Brothers Inc............................................................
J.P. Morgan Securities Inc.....................................................
----------
Subtotal..................................................................... 4,500,000
----------
International Underwriters:
Morgan Stanley & Co. International Limited.....................................
Smith Barney Inc...............................................................
Goldman Sachs International....................................................
Morgan Grenfell & Co. Limited..................................................
Lehman Brothers International (Europe).........................................
J.P. Morgan Securities Ltd.....................................................
----------
Subtotal..................................................................... 1,000,000
----------
Total...................................................................... 5,500,000
----------
----------
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives", respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the shares of Common Stock offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
shares of Common Stock offered hereby (other than those covered by the U.S.
Underwriters' over-allotment option described below) if any such shares are
taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Shares (as defined herein) for the account of anyone
other than a United States or Canadian Person (as defined herein) and (ii) it
has not offered or sold, and will not offer or sell, directly or indirectly, any
Shares or distribute any prospectus relating to the Shares outside of the United
States or Canada or to anyone other than a United States or Canadian Person.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that, with certain
exceptions: (i) it is not purchasing any Shares for the account of any United
States or Canadian Person and (ii) it has not offered or sold, and will not
offer or sell, directly or indirectly, any Shares or distribute any prospectus
relating to the Shares in the United States or Canada or to any United States or
Canadian Person. With respect to any Underwriter that is a U.S. Underwriter and
an International Underwriter, the foregoing representations and
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agreements (i) made by it in its capacity as a U.S. Underwriter apply only to it
in its capacity as a U.S. Underwriter and (ii) made by it in its capacity as an
International Underwriter apply only to it in its capacity as an International
Underwriter. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Agreement between
U.S. and International Underwriters. As used herein, "United States or Canadian
Person" means any national or resident of the United States or Canada, or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and Canada of any
United States or Canadian Person), and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person. All
shares of Common Stock to be purchased by the Underwriters under the
Underwriting Agreement are referred to herein as the "Shares."
Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of any
number of Shares as may be mutually agreed. The per share price of any Shares so
sold shall be the public offering price set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any Shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of Shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
of the Shares a notice stating in substance that, by purchasing such Shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such Shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of Shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such Shares a notice containing
substantially the same statement as is contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and, prior to the date six months after the closing date for the sale of
the Shares to the International Underwriters, will not offer or sell, any Shares
to persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995 (the "U.K. Regulations"), (ii) it has complied and
will comply with all applicable provisions of the Financial Services Act 1986
and the U.K. Regulations with respect to anything done by it in relation to the
Shares in, from or otherwise involving the United Kingdom and (iii) it has only
issued or passed on and will only issue or pass on in the United Kingdom any
document received by it in connection with the offering of the Shares to a
person who is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom
such document may otherwise lawfully be issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or sales
to Japanese
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International Underwriters or dealers and except pursuant to any exemption from
the registration requirements of the Securities and Exchange Law and otherwise
in compliance with applicable provisions of Japanese law. Each International
Underwriter has further agreed to send to any dealer who purchases from it any
of the Shares a notice stating in substance that, by purchasing such Shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, any of such Shares, directly or indirectly, in Japan or to or for
the account of any resident thereof except for offers or sales to Japanese
International Underwriters or dealers and except pursuant to any exemption from
the registration requirements of the Securities and Exchange Law and otherwise
in compliance with applicable provisions of Japanese law, and that such dealer
will send to any other dealer to whom it sells any of such Shares a notice
containing substantially the same statement as is contained in this sentence.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ a share under the public offering price. Any Underwriter
may allow, and such dealers may reallow, a concession not in excess of $ a
share to other Underwriters or to certain dealers. After the initial offering of
the shares of Common Stock, the offering price and other selling terms may from
time to time be varied by the Representatives.
The Company has granted to the U.S. Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to an aggregate of
825,000 additional shares of Common Stock at the public offering price set forth
on the cover page hereof, less underwriting discounts and commissions. The U.S.
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the Offering. To the extent
such option is exercised, each U.S. Underwriter will become obligated, subject
to certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as the number set forth next to such U.S.
Underwriter's name in the preceding table bears to the total number of shares of
Common Stock set forth next to the names of all U.S. Underwriters in the
preceding table.
The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Common Stock offered by them.
The Common Stock has been approved for listing, subject to notice of
issuance, on the NYSE under the symbol "RLT."
Each of the Company, the KKR Partnerships, the directors, executive officers
and certain other stockholders of the Company has agreed that, without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters, it will not, during the period ending 180 days after the date of
this Prospectus, (i) offer, issue, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer, lend or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of Common Stock, whether any
such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise. The
restrictions described in this paragraph do not apply to (x) the sale of Shares
to the Underwriters, (y) the issuance by the Company of shares of Common Stock
upon the exercise of an option or a warrant or the conversion of a security
outstanding on the date of this Prospectus of which the Underwriters have been
advised in writing or (z) transactions by any person other than the Company
relating to shares of Common Stock or other securities acquired in open market
transactions after the completion of the offering of the Shares. Notwithstanding
the foregoing, subject to certain conditions, 295,104 shares held by the Rysaffe
Trustee Company (CI) Limited may be sold after 30 days from the date of this
Prospectus.
At the request of the Company, the Underwriters have reserved for sale, at
the initial offering price, up to 975,000 shares of Common Stock offered hereby
for directors, officers, employees, business
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associates, and related persons of the Company. The number of shares of Common
Stock available for sale to the general public will be reduced to the extent
such persons purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the Underwriters to the general public on the same
basis as the other shares offered hereby.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may overallot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover overallotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing the
Common Stock in the offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
From time to time, certain of the Underwriters and their affiliates have
provided, and may continue to provide, investment banking services to the
Company.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiations
between the Company and the U.S. Representatives. Among the factors to be
considered in determining the initial public offering price will be the future
prospects of the Company and its industry in general, sales, earnings and
certain other financial operating information of the Company in recent periods,
and the price-earnings ratios, price-sales ratios, market prices of securities
and certain financial and operating information of companies engaged in
activities similar to those of the Company. The estimated initial public
offering price range set forth on the cover page of this Preliminary Prospectus
is subject to change as a result of market conditions and other factors.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Latham & Watkins, New York, New York and for the Underwriters by
Simpson Thacher & Bartlett, New York, New York. Certain partners of Latham &
Watkins, members of their respective families, related persons and others have
an indirect interest, through limited partnerships, in less than 1% of the
Common Stock. Such persons do not have the power to vote or dispose of such
shares of Common Stock. Simpson Thacher & Bartlett renders legal services to KKR
on a regular basis.
EXPERTS
The consolidated financial statements of RELTEC Corporation as of December
31, 1997 and 1996 and for the years ended December 31, 1997 and 1996, and the
five month period ended December 31, 1995 and the combined financial statements
of RELTEC Corporation (Predecessor A) for the seven month period ended July 31,
1995, included in this Prospectus and the related financial statement schedule
included elsewhere in the registration statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the registration statement, and are included in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.
71
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement"), under the Securities Act and the rules and regulations thereunder,
for the registration of the Common Stock offered hereby. This Prospectus, which
forms a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain parts of which have
been omitted as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement. Statements contained in
this Prospectus as to the contents of any contracts or other document referred
to herein are not necessarily complete and, where such contract or other
document is an exhibit to the Registration Statement, each such statement is
qualified in all respects by the provisions of such exhibit, to which reference
is hereby made. The Registration Statement can be inspected and copied at
prescribed rates at the public reference facilities maintained by the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. In addition, the Registration Statement is
publicly available through the Commission's site on the Internet's World Wide
Web, located at http:// www.sec.gov. Following the Offering, the Company's
future public filings are expected to be available for inspection at the offices
of the NYSE, 20 Broad Street, New York, New York 10005.
72
<PAGE>
GLOSSARY
<TABLE>
<S> <C>
Access Network.................... The network which connects users' telephone equipment to
the telephone exchange.
ADSL.............................. "Asymmetric Digital Subscriber Line." High speed
technology that enables the transfer of data over
existing copper lines allowing more bandwidth downstream
than upstream.
Analog............................ A method of representing a physical variable such as
speech using a signal which varies continuously in
direct proportion to the variable being represented.
Backplane......................... A circuit board that interconnects a variety of
components to form a system.
Bandwidth......................... The range of frequencies that carry a signal on a
transmission medium. The "wider" the bandwidth, the
greater the volume of information that can be
transmitted.
Baseband.......................... The transmission of signals over limited distances
whereby the signals are placed directly on the
transmission line without any modulation.
Base Station...................... The radio transmitter/receiver and associated equipment
at a fixed location which, in conjunction with other
network components, comprises a wireless network.
CATV.............................. Cable television.
CLEC.............................. "Competitive Local Exchange Carrier." A category of
telephone service provider (carrier) that offers
services in a local exchange that compete with the
incumbent local telephone company.
CO................................ "Central Office." A term commonly used to describe the
location of the switching equipment in the local
exchange.
COT............................... "Central Office Terminal." The component of the DLC
system that resides in the central office.
Digital........................... A method of representing a physical variable such as
speech using numbers such that the numbers vary
discretely in relation to the variable being
represented.
DLC............................... "Digital Loop Carrier." A system that resides in the
local loop which extends the physical reach of the CO
switch and enables the provisioning of new access lines.
E-1............................... An ITU transmission standard which delivers digital
services at a rate of 2.048 Mbps.
Ethernet.......................... Network protocol widely used in local area networks to
connect devices over coaxial cable or twisted pair wire.
FTTC.............................. "Fiber-to-the-Curb." A network architecture that pushes
fiber optic cable closer to the customer premises,
allowing for delivery of higher bandwidth voice, data
and video services.
HDT............................... "Host Digital Terminal." The portion of the DLC system
that resides in the local loop.
</TABLE>
G-1
<PAGE>
<TABLE>
<S> <C>
ISDN.............................. "Integrated Services Digital Network." A digital
transmission standard designed to deliver voice and data
services.
ISO-9001.......................... ISO is the International Standards Organization
responsible for drafting quality procedures. 9001 is the
quality procedure for manufacturing.
ITU............................... "International Telecommunications Union." The
international standards setting body for the
telecommunications industry.
IXC............................... "Interexchange Carrier." A provider of
telecommunications services that connect exchanges. Also
called a long distance carrier.
kbps.............................. "Kilobits per second." A measure of the
information-carrying capacity (i.e., bandwidth) of a
circuit.
LAN............................... "Local Area Network." A private data communications
network linking a variety of network devices that are
located in close proximity.
LEC............................... "Local Exchange Carrier." Any telephone service provider
offering local exchange services.
Local Exchange.................... A switching exchange serving a group of lines that can
be uniquely identified by an area code and the first
three digits of a phone number.
Local Loop........................ The portion of the network which connects users'
telephone equipment to the telephone exchange. Also
referred to as the Access Network.
Mbps.............................. "Megabits per second." A measure of the
information-carrying capacity of a circuit.
MDU............................... "Multiple Dwelling Unit." Generally, an apartment or
condominium building or complex.
MSO............................... "Multiple System Operator." A term applied to cellular
operators and cable television providers that hold
franchises that allow them to provide their services in
different cities.
NGDLC............................. "Next Generation Digital Loop Carrier." A generation of
DLCs which incorporates a fiber-optic connection between
the HDT and the COT.
NIC............................... "Network Interface Card." An add-in circuit board that
enables a computer to connect to a LAN.
OEM............................... "Original Equipment Manufacturer."
ONU............................... "Optical Network Unit." A pedestal device located near
the customer premise which receives the optical signal
from the HDT and converts the signal back to a
traditional electrical signal.
Pairgain.......................... Technology that increases the line capacity of
traditional copper twisted pair.
Passband Modulation Electronics... Electronic circuitry that enables the modulation of
baseband signals to increase the information-carrying
capacity of a circuit over a given distance. Examples
include xDSL and ISDN.
</TABLE>
G-2
<PAGE>
<TABLE>
<S> <C>
PCS............................... "Personal Communications System." A two-way fully
digital wireless telecommunications system operating in
the 1.8 GHz-2.4 GHz frequency band in the U.S.
POTS.............................. "Plain Old Telephone Service." Basic telephone service
with no enhanced features such as call waiting,
conference calling or call forwarding.
PSTN.............................. "Public Switched Telephone Network." Domestic
telecommunications network commonly accessed by
telephones, PBXs and other devices.
PTT............................... "Post Telegraph-Telephone." The incumbent traditional
communications monopoly in a particular country. In many
countries, it is or was a government-owned system.
RBOC.............................. "Regional Bell Operating Company." One of the companies
created by the divestiture of the local exchange
business by AT&T. These currently include Ameritech,
Bell Atlantic (including NYNEX), BellSouth, SBC
Communications (including Pacific Telesis) and U S WEST.
RF................................ "Radio Frequency." Range of electromagnetic frequencies
above audio range and below visible light.
SDH............................... "Synchronous Digital Hierarchy." International version
of SONET standard for high speed fiber optic, digital
transmission networks.
SONET............................. "Synchronous Optical NETwork." Network architecture that
allows fiber optic transmission of voice, video and data
at very high speeds.
WAN............................... "Wide Area Network." A data network that interconnects
LANs.
xDSL.............................. Generic term to describe a variety of point-to-point
network access technologies that allow voice, data and
video to be transported over twisted pair copper wire in
the local loop, at higher transmission speeds over given
distances.
</TABLE>
G-3
<PAGE>
RELTEC CORPORATION
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report......................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997......................... F-3
Consolidated and Combined Statements of Operations for the seven months ended July
31, 1995 (Predecessor A), the five months ended December 31, 1995, and for the years
ended December 31, 1996 and 1997..................................................... F-4
Consolidated and Combined Statements of Cash Flows for the seven months ended July
31, 1995 (Predecessor A), the five months ended December 31, 1995, and for the years
ended December 31, 1996 and 1997..................................................... F-5
Consolidated Statements of Stockholders' Equity for the five months ended December
31, 1995 and for the years ended December 31, 1996 and 1997 and Combined Statement of
Parent Company Investment (Predecessor A) for the seven months ended July 31, 1995... F-6
Notes to the Consolidated and Combined Financial Statements.......................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF RELTEC CORPORATION
We have audited the accompanying consolidated balance sheets of RELTEC
Corporation and its subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 1997 and 1996, and the
five month period ended December 31, 1995 and RELTEC Corporation's ("Predecessor
A") combined statements of operations, parent company investment and cash flows
for the seven month period ended July 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of RELTEC Corporation and its
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years ended December 31, 1997 and 1996,
and the five month period ended December 31, 1995 and the combined results of
operations and cash flows of RELTEC Corporation (Predecessor A) for the seven
months ended July 31, 1995 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Cleveland, Ohio
February 24, 1998
F-2
<PAGE>
RELTEC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------
1996 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 8.7 $ 11.9
Accounts receivable, net........................................................... 108.6 141.4
Inventories........................................................................ 77.6 94.7
Receivable from seller............................................................. 5.0 -
Deferred income taxes.............................................................. 23.6 26.7
Other current assets............................................................... 8.3 18.4
------ ------
Total current assets................................................................. 231.8 293.1
Property, plant and equipment:
Land............................................................................... 3.7 3.7
Buildings and improvements......................................................... 28.8 33.7
Machinery and equipment............................................................ 90.7 116.7
------ ------
Total................................................................................ 123.2 154.1
Less: accumulated depreciation....................................................... 20.3 42.7
------ ------
Property, plant and equipment, net................................................... 102.9 111.4
Goodwill and intangible assets, net.................................................. 394.7 384.0
Other noncurrent assets.............................................................. 10.9 16.1
------ ------
Total assets......................................................................... $ 740.3 $ 804.6
------ ------
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of debt......................................................... $ 12.6 $ 20.9
Accounts payable................................................................... 70.5 78.8
Accrued compensation............................................................... 22.1 28.3
Other current liabilities.......................................................... 37.1 37.9
------ ------
Total current liabilities............................................................ 142.3 165.9
Long-term debt....................................................................... 276.1 250.3
Deferred income taxes................................................................ 15.0 9.8
Retirement and other benefits........................................................ 26.2 24.7
Other noncurrent liabilities......................................................... 6.3 6.0
Preferred stock, $.01 par value, 1,000,000 shares authorized; 1,000 shares of Series
A redeemable preferred stock issued and outstanding with $1,000 per share
redemption value at December 31, 1996 and 1997, respectively....................... 1.0 1.0
Redeemable common stock, $.01 par value; 295,104 shares issued and outstanding....... 3.4 3.4
Commitments and contingencies (Notes 9, 10 and 17)
Stockholders' equity:
Common stock, $.01 par value; 60,000,000 shares authorized, 45,631,675 and
49,743,504 shares issued and outstanding at December 31, 1996 and 1997,
respectively..................................................................... 0.5 0.5
Additional paid-in capital......................................................... 289.4 341.2
Accumulated deficit................................................................ (28.6) (3.7)
Currency translation adjustment...................................................... 8.7 5.5
------ ------
Total stockholders' equity........................................................... 270.0 343.5
------ ------
Total liabilities and stockholders' equity........................................... $ 740.3 $ 804.6
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
RELTEC CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR A YEAR ENDED DECEMBER 31,
SEVEN MONTHS ENDED FIVE MONTHS ENDED ----------------------------
JULY 31, 1995 DECEMBER 31, 1995 1996 1997
------------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
Net sales................................. $288.3 $225.5 $689.4 $887.2
Cost of sales............................. 205.3 166.2 482.9 633.4
------------------- ------------------ ------------- -------------
Gross profit.............................. 83.0 59.3 206.5 253.8
Operating expenses:
Research and product engineering........ 27.1 18.3 46.5 55.7
Selling and administrative.............. 39.1 27.6 75.7 94.1
Goodwill and intangible amortization.... 11.6 9.0 24.5 31.9
Write-off of acquired in-process
research and development.............. 32.9 35.3 8.9 0.7
Other (income) expense.................. -- 0.9 (0.2) (1.8)
------------------- ------------------ ------------- -------------
Total operating expenses.................. 110.7 91.1 155.4 180.6
------------------- ------------------ ------------- -------------
Operating income (loss)................... (27.7 ) (31.8 ) 51.1 73.2
Interest expense.......................... 19.0 12.5 25.6 18.6
------------------- ------------------ ------------- -------------
Income (loss) before income taxes and
extraordinary charge.................... (46.7 ) (44.3 ) 25.5 54.6
Income tax provision (benefit)............ (14.1 ) (13.9 ) 17.4 29.6
------------------- ------------------ ------------- -------------
Income (loss) before extraordinary
charge.................................. (32.6 ) (30.4 ) 8.1 25.0
Extraordinary charge, net of tax
benefit................................. -- -- 6.3 --
------------------- ------------------ ------------- -------------
Net income (loss)......................... $(32.6 ) $(30.4 ) $ 1.8 $ 25.0
------------------- ------------------ ------------- -------------
------------------- ------------------ ------------- -------------
Earnings per common share data (Note 1):
Basic earnings (loss) per common share:
Income (loss) before extraordinary
charge................................ $(0.88 ) $0.20 $0.51
Extraordinary charge.................... -- (0.16) --
------------------ ------------- -------------
Net income (loss)....................... $(0.88 ) $0.04 $0.51
------------------ ------------- -------------
------------------ ------------- -------------
Weighted average shares outstanding....... 34,363,638 39,498,277 48,837,053
Diluted earnings (loss) per common share:
Income (loss) before extraordinary
charge................................ $(0.88 ) $0.20 $0.50
Extraordinary charge.................... -- (0.16) --
------------------ ------------- -------------
Net income (loss)....................... $(0.88 ) $0.04 $0.50
------------------ ------------- -------------
------------------ ------------- -------------
Weighted average shares and options
outstanding............................. 34,363,638 39,834,904 49,705,758
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
RELTEC CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
PREDECESSOR A FIVE MONTHS
SEVEN MONTHS ENDED YEAR ENDED DECEMBER 31,
ENDED DECEMBER 31, ------------------------------
JULY 31, 1995 1995 1996 1997
--------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss).................................... $ (32.6) $ (30.4) $ 1.8 $ 25.0
Adjustments to net income (loss) to arrive at cash
provided by (used for) operating activities:
Depreciation and amortization...................... 21.0 15.6 42.6 53.7
Amortization of deferred financing fees............ -- 0.7 1.2 0.3
Write-off of acquired in-process research and
development and inventory acquisition step-up.... 32.9 46.6 10.2 0.7
Deferred income taxes.............................. (14.5) (18.4) (12.0) (7.5)
Extraordinary charge, net of tax benefit........... -- -- 6.3 --
Changes in operating assets and liabilities
excluding the effect of acquisitions:
Accounts receivable, net......................... (5.9) 1.1 (28.3) (26.3)
Inventories...................................... (0.1) (6.6) (5.5) (12.0)
Accounts payable................................. 3.7 7.7 23.6 5.6
Receivable from seller........................... -- -- 7.4 5.0
License termination.............................. -- -- -- (11.0)
Other assets and liabilities..................... (11.1) 3.0 14.3 0.4
------ ------ ------------- ------
Net cash provided by (used for) operating activities... (6.6) 19.3 61.6 33.9
Investing activities:
Rainford Acquisition, net of $2.5 million cash
acquired........................................... -- -- (95.0) --
Other acquisitions and investments, net of cash
acquired........................................... -- -- -- (29.0)
Purchases of property, plant and equipment........... (6.3) (5.5) (16.9) (26.5)
Investment in new business systems................... -- -- -- (8.7)
------ ------ ------------- ------
Net cash used for investing activities................. (6.3) (5.5) (111.9) (64.2)
Financing activities:
New Credit Facility net borrowings (repayments)...... -- -- 275.4 (20.6)
Money Market lines of credit net borrowings.......... -- -- -- 3.7
Other debt net borrowings (repayments)............... -- -- 0.6 (0.6)
Senior Term Facilities borrowings (repayments)....... -- 25.0 (195.0) --
Old Revolving Facility net repayments................ -- (13.4) (27.1) --
Bridge Loan repayments............................... -- (25.0) -- --
Financing fees paid.................................. -- -- (1.6) --
Common stock issuances............................... -- 1.5 2.5 51.8
Common stock repurchases............................. -- -- (0.2) (0.7)
Preferred stock dividends............................ -- -- -- (0.1)
Net transfers from Parent Company.................... 14.9 -- -- --
------ ------ ------------- ------
Net cash provided by (used for) financing activities... 14.9 (11.9) 54.6 33.5
Net increase in cash and cash equivalents.............. 2.0 1.9 4.3 3.2
Cash and cash equivalents, beginning of period......... 0.5 2.5 4.4 8.7
------ ------ ------------- ------
Cash and cash equivalents, end of period............... $ 2.5 $ 4.4 $ 8.7 $ 11.9
------ ------ ------------- ------
------ ------ ------------- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
RELTEC CORPORATION
COMBINED STATEMENT OF PARENT COMPANY INVESTMENT (PREDECESSOR A)
(IN MILLIONS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN ACCUMULATED CURRENCY
AMOUNT CAPITAL INVESTMENT TRANSLATION TOTAL
-------------------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of January 1, 1995......................... -- $ -- $ -- $ 155.2 $ -- $ 155.2
Net loss...................................... -- -- -- (32.6) -- (32.6)
Net Transfers to Parent Company............... -- -- -- (22.6) -- (22.6)
--------- --------- ----- ------ ----- ---------
As of July 31, 1995........................... -- $ -- $ -- $ 100.0 $ -- $ 100.0
--------- --------- ----- ------ ----- ---------
--------- --------- ----- ------ ----- ---------
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED
------------------------- PAID-IN INVESTMENT CURRENCY
SHARES AMOUNT CAPITAL (DEFICIT) TRANSLATION TOTAL
------------ ----------- ----------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of August 1, 1995..................... 29,000,000 $ 0.3 $ 143.9 $ -- $ -- $ 144.2
Common stock issuances................... 7,306,600 0.1 36.4 -- -- 36.5
Net loss................................. -- -- -- (30.4) -- (30.4)
------------ --- ----------- ------ ----- ---------
As of December 31, 1995.................. 36,306,600 0.4 180.3 (30.4) -- 150.3
Common stock issuances................... 9,658,179 0.1 112.7 -- -- 112.8
Common stock repurchases................. (38,000) -- (0.2) -- -- (0.2)
Reclassification of redeemable common
stock.................................. (295,104) -- (3.4) -- -- (3.4)
Currency translation adjustment.......... -- -- -- -- 8.7 8.7
Net income............................... -- -- -- 1.8 -- 1.8
------------ --- ----------- ------ ----- ---------
As of December 31, 1996.................. 45,631,675 0.5 289.4 (28.6) 8.7 270.0
Common stock issuances................... 4,192,699 -- 52.5 -- -- 52.5
Common stock repurchases................. (80,870) -- (0.7) -- -- (0.7)
Redeemable preferred stock dividends
($105 per share)....................... -- -- -- (0.1) -- (0.1)
Currency translation adjustment.......... -- -- -- -- (3.2) (3.2)
Net income............................... -- -- -- 25.0 -- 25.0
------------ --- ----------- ------ ----- ---------
As of December 31, 1997.................. 49,743,504 $ 0.5 $ 341.2 $ (3.7) $ 5.5 $ 343.5
------------ --- ----------- ------ ----- ---------
------------ --- ----------- ------ ----- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
RELTEC Corporation ("RELTEC" or the "Company") was formed in July 1995 by
management and partnerships affiliated with Kohlberg Kravis Roberts & Co., L.P.
to acquire Reliance Comm/Tec Corporation ("Reliance Comm/Tec") from the Reliance
Electric Company ("Reliance"), a subsidiary of Rockwell International
Corporation ("Rockwell") (the "RELTEC Acquisition"). Rockwell acquired Reliance
effective January 1995 (the "Rockwell Acquisition"). For the seven month period
ended July 31, 1995 the Company is referred to as Predecessor A. The Company was
incorporated in July 1995 as K-Tec Holdings, Inc. In October 1995, the Company
changed its name to RELTEC Holdings, Inc., and in January 1998, the Company
changed its name to RELTEC Corporation.
The Company is a provider of a broad range of systems, products and services
to wireline and wireless service providers and telecommunications OEMs in North
America and around the globe. Most of the Company's systems, products and
services can be found in the access portion of the telecommunications network,
also referred to as the "local loop."
The RELTEC Acquisition totaled approximately $475.0 million excluding $18.0
million of related acquisition and financing costs. The purchase price was
subsequently decreased by $7.1 million in 1995 to account for changes in the
Company's working capital which occurred during the sale process. This amount
plus accrued interest was received by the Company in 1996. During 1996, the
purchase price was decreased by an additional $5.0 million as a result of the
loss of certain business activities as specified in the purchase agreement. This
amount was received by the Company in 1997.
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND COMBINATION
The consolidated financial statements include the accounts of RELTEC
Corporation and its subsidiaries.
All significant intercompany balances and transactions have been eliminated.
RELTEC's investments in 20% to 50% owned companies in which it has the ability
to exercise significant influence over operating and financial policies are
accounted for using the equity method.
The combined financial statements of Predecessor A include the
telecommunications equipment manufacturing and service businesses which were
operated by Reliance and are presented on a basis which reflects Rockwell's
acquisition of Reliance. The Rockwell Acquisition was accounted for as a
purchase. As such, effective January 1995 a portion of Rockwell's purchase price
has been allocated to Predecessor A's assets and liabilities. The combined
financial statements of Predecessor A do not include any purchase price
adjustments related to the Company's acquisition of Reliance Comm/Tec.
The combined statement of operations includes allocations of certain
Reliance corporate expenses (refer to Note 16 for further discussion). RELTEC's
management believes the allocations are reasonable; however, these allocated
expenses are not necessarily indicative of expenses that would have been
incurred by RELTEC on a stand-alone basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-7
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND NATURE OF OPERATIONS (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents include all highly-liquid investments with an original
purchased maturity of three months or less and are stated at cost, which
approximates market value. At December 31, 1996, cash and cash equivalents
included $1.7 million of cash restricted for use in the completion of a
contract.
INVENTORIES
Inventories are valued at the lower of cost or market and are stated on a
first-in, first-out (FIFO) cost basis. Predecessor A maintained inventories on
the last-in, first-out (LIFO) cost basis.
EARNINGS (LOSS) PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128--"Earnings Per Share" ("SFAS
128"). This statement established standards for computing and presenting
earnings per share. The Company adopted the provisions of SFAS 128 in 1997.
Basic earnings per share is computed using the weighted average number of common
shares outstanding during the year; diluted earnings per share is computed after
consideration of the dilutive effect of stock options.
The following table reconciles net income (loss) available for common
stockholders and the weighted average shares outstanding for basic and diluted
earnings per share for the periods presented.
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss)..................................................... $(30.4) $1.8 $25.0
Less: preferred stock dividends....................................... -- -- (0.1 )
------------ ------------ ------------
Net income (loss) available to common stockholders.................... $(30.4 ) $1.8 $24.9
------------ ------------ ------------
------------ ------------ ------------
Basic earnings (loss) per common share:
Weighted average common shares outstanding............................ 34,363,638 39,498,277 48,837,053
Basic earnings (loss) per common share................................ $(0.88 ) $0.04 $0.51
Diluted earnings (loss) per common share:
Weighted average common shares outstanding............................ 34,363,638 39,498,277 48,837,053
Add: effect of dilutive options....................................... -- 336,627 868,705
------------ ------------ ------------
34,363,638 39,834,904 49,705,758
------------ ------------ ------------
------------ ------------ ------------
Diluted earnings (loss) per common share.............................. $(0.88 ) $0.04 $0.50
</TABLE>
Basic and diluted earnings (loss) per common share amounts for the year
ended December 31, 1996 include the effect of an extraordinary charge of $6.3
million or $(0.16) per share. Refer to Note 4 for further discussion.
F-8
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND NATURE OF OPERATIONS (CONTINUED)
SALES RECOGNITION
Sales are recognized when goods are shipped or services are provided. Sales
on long-term contracts (defined as significant contracts with terms of longer
than six months) are recorded on a percentage-of-completion basis, measured by
the cost-to-cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. For financial reporting
purposes, depreciation is computed by the straight-line method over the
estimated useful lives of the assets. The estimated useful lives are up to 45
years for buildings and improvements and three to 12 years for machinery and
equipment. Depreciation is computed principally using accelerated methods for
income tax reporting purposes. Depreciation expense was $21.8 million and $18.1
million for the years ended December 31, 1997 and 1996, respectively, and $6.6
million and $9.4 million for the five months ended December 31, 1995 and the
seven months ended July 31, 1995, respectively.
Leasehold improvements are amortized over the shorter of the useful life or
the remaining lease term. Significant renewals and betterments which
substantially extend the useful life of the asset are capitalized. Upon sale or
other disposition of assets, the cost and related accumulated depreciation or
amortization are removed from the accounts and the resulting gain or loss, if
any, is reflected in income. Maintenance, repairs and renewals of minor amounts
are charged to expense as incurred.
GOODWILL AND INTANGIBLE ASSETS
The excess of cost over the fair value of net assets of businesses acquired
(goodwill) is being amortized, using the straight-line method, over periods
ranging from 15 to 25 years for RELTEC and 25 years for Predecessor A. Other
intangible assets, primarily patents, are amortized using the straight-line
method over the estimated useful lives, ranging up to four years for RELTEC and
three to seven years for Predecessor A.
The Company periodically evaluates the recoverability of goodwill and other
intangible assets by comparing the book value of such assets to expected future
cash flows, on an undiscounted basis, over the remaining amortization period of
the asset.
PRODUCT WARRANTY
Product warranty costs are accrued at the time of sale based on historical
warranty experience and are adjusted as required to reflect subsequent
experience.
WORKERS' COMPENSATION, PRODUCT AND GENERAL LIABILITY COSTS
The consolidated financial statements include RELTEC's estimated costs,
including costs not reimbursable under insurance contracts, of settling workers'
compensation, product and general liability claims. Accruals are determined from
historical claims-incurred experience, using actuarial computations of the
estimated ultimate settlement cost of such claims, including claims incurred but
not yet reported.
F-9
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND NATURE OF OPERATIONS (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development expense for the years ended December 31, 1997 and 1996 was $32.9
million and $28.5 million, respectively, and $10.6 million and $13.7 million for
the five months ended December 31, 1995 and seven months ended July 31, 1995,
respectively.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of non-U.S. subsidiaries are translated into U.S.
dollars at the period-end exchange rate. Operating results are translated at the
average exchange rate for the period. The related translation adjustments are
accumulated in equity. Foreign currency gains (losses) resulting from
transactions are included in the statements of operations. Transaction gains
(losses) for the periods presented were not significant to RELTEC's results of
operations.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS AND INVENTORY ACQUISITION
STEP-UP
In connection with the RELTEC Acquisition and Rockwell Acquisition of the
Company and certain acquisitions by the Company, a portion of each purchase
price was allocated to in-process research and development costs and inventory
acquisition step-up. Subsequent to the acquisition dates, certain of these
amounts were expensed. The Company relied upon independent valuations to
determine the amount of acquired in-process research and development costs and
believes that the write-off of these costs was appropriate because there is no
alternative use for these research and development projects. For the years ended
December 31, 1997 and 1996, and the five months ended December 31, 1995 the
amounts for acquired in-process research and development costs and inventory
acquisition step-up were $0.7 million, $10.2 million and $46.6 million,
respectively. Predecessor A's financial statements for the seven month period
ended July 31, 1995 include a charge of $32.9 million for the write-off of
acquired in-process research and development costs related to the Rockwell
Acquisition.
OTHER (INCOME) EXPENSE
During 1997, the Company entered into a strategic vendor relationship with
NextWAVE Telecom Inc. ("NextWAVE"). In support of this relationship, RELTEC made
an investment of $5.0 million in NextWAVE in the form of a 9.0% promissory note
which was due in January 1998 and has not been collected by the Company. The
Company has not recorded accrued interest and believes that, as of December 31,
1997, there has been an impairment in the value of the promissory note. As such,
the Company recorded a reserve of $5.0 million against the aggregate carrying
value of its investment in NextWAVE. This amount is recorded as other expense in
the statement of operations for the year ended December 31, 1997.
Also recorded in the statement of operations as other income is a $6.5
million curtailment gain resulting from the benefit accrual freeze of the
Company's U.S. defined benefit plans at December 31, 1997 (refer to Note 14 for
further discussion).
FAIR VALUES AND CONCENTRATION OF CREDIT RISK
The recorded value of RELTEC's financial instruments, which includes
accounts receivable and accounts payable, approximates market value. The
carrying value of RELTEC's long-term debt is
F-10
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND NATURE OF OPERATIONS (CONTINUED)
considered to approximate fair value based on the borrowing rates currently
available for loans with similar terms and maturities.
Receivables are from a diverse group of customers in the telecommunications
industry and are generally unsecured. RELTEC maintains a reserve for potential
losses.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130--"Reporting Comprehensive
Income" ("SFAS 130"). This Statement discusses how to report and display
comprehensive income and its components in a full set of general-purpose
financial statements. Also in June of 1997, the FASB issued Statement of
Financial Accounting Standards No. 131--"Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). This Statement establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to shareholders. SFAS 130 and SFAS 131 must be implemented by
RELTEC in 1998. The Company has not completed its evaluation of these
statements, but does not anticipate a material impact on the consolidated
financial statements from the adoption of the additional disclosure requirements
of these accounting standards.
2. ACQUISITIONS
The Company's acquisitions have been accounted for as purchases.
Accordingly, for financial reporting purposes an allocation of the purchase
price has been made using estimated fair market values of the assets acquired
and liabilities assumed as of the acquisition date in accordance with Accounting
Principles Board Opinion No. 16--"Business Combinations". The results of these
acquisitions have been included in the accompanying consolidated financial
statements since the respective dates of acquisition.
CUSTOM DESIGN TELEPHONE SYSTEMS, INC.
In October 1997, the Company acquired all of the capital stock of Custom
Design Telephone Systems, Inc. ("CDTS") for a maximum purchase price of $27.0
million. Based in St. Louis, Missouri, CDTS is a provider of integrated
telecommunications services. Of the $27.0 million purchase price, approximately
$18.0 million was paid on October 30, 1997. The remaining portion of the
purchase price is contingently payable based on the achievement of certain
financial targets. At December 31, 1997, the Company has recorded a $6.0 million
liability for the estimated final purchase price payment. Approximately $18.5
million of the purchase price has been assigned to goodwill and is being
amortized over 25 years.
FIRE NETWORKS, INC.
In September 1997, the Company acquired the assets of Fire Networks, Inc.
("Fire") for $1.0 million. Fire is a Dallas, Texas start-up company specializing
in the design and manufacture of xDSL equipment which enables the simultaneous
transmission of voice and data services over an existing copper telephone wire.
In conjunction with this acquisition, approximately $0.7 million of the purchase
price has been assigned to acquired in-process research and development. This
amount was written-off subsequent to the purchase price allocation.
F-11
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
BALLYNAHINCH MANUFACTURING OPERATIONS
In June 1997, the Company acquired the assets of the Ballynahinch
manufacturing operations ("Bally"), located in County Down, Northern Ireland.
The cost of this acquisition was $4.1 million. Bally specializes in electrical
manufacturing capabilities and complements the Company's other operations that
provide integrated outdoor mobile radio base station enclosures for wireless
communications networks.
RAINFORD GROUP PLC
On September 3, 1996, the Company acquired substantially all of the
outstanding shares of Rainford Group plc ("Rainford"), a European manufacturer
of base station cabinet enclosure systems and supplier of electromagnetic
protection equipment and systems to the telecommunications equipment industry
for $134.3 million, including $6.7 million of acquisition fees (the "Rainford
Acquisition"). The Rainford Acquisition was consummated with $97.5 million of
cash, $34.4 million (2,991,388 shares) of RELTEC common stock and $2.4 million
of Rainford stock options converted into RELTEC stock options. Approximately
$101.2 million of the purchase price was assigned to goodwill, which is being
amortized over 15 years, and $8.9 million of the purchase price was allocated to
acquired in-process research and development and immediately written-off. As
required by current accounting standards, no provision for deferred income taxes
was established for the acquired in-process research and development.
In connection with the Rainford Acquisition, 2,951,044 shares of Common
Stock were issued in exchange for certain shares of Rainford Common Stock held
for the benefit of Barry Houghton and his family (the "Settlements") pursuant to
certain settlement agreements. Subject to certain limitations, upon Barry
Houghton ceasing for any reason to be employed by the Company or any of its
subsidiaries the Settlements shall be entitled to sell to the Company, and the
Company shall be required to purchase, up to 10% of the shares of Common Stock
held by the Settlements at fair market value on the date of his termination.
Related to this agreement, the Company has reclassified the fair market value of
295,104 shares of Common Stock to redeemable Common Stock. However, the Company
does not consider the redemption of Common Stock pursuant to the put agreement
described above to be probable (refer to Note 18 for further discussion). At
December 31, 1997 the fair market value of the redeemable Common Stock was $5.5
million.
The following pro forma financial information has been prepared assuming
that the RELTEC and Rainford Acquisitions (collectively, the "Acquisitions")
occurred on January 1, 1995 and excludes the effects of the Rockwell
Acquisition. One-time nonrecurring charges for the write-off of acquired
in-process research and development costs and inventory acquisition step-up
write-off have also been excluded:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
<CAPTION>
(IN MILLIONS)
<S> <C> <C>
Net sales.................................................................. $ 641.2 $ 742.2
Operating income........................................................... 17.5 49.8
Net income (loss) before extraordinary charge.............................. (18.9) 8.8
</TABLE>
The pro forma financial information is unaudited and not necessarily
indicative of the operating results that would have occurred had the
Acquisitions been consummated as of January 1, 1995, nor is it necessarily
indicative of future operating results.
F-12
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. GEOGRAPHIC AND MARKET DATA
The Company operates in a single industry segment, the global
telecommunications equipment market. This segment includes integrated systems,
products and services used for voice, video and data communications.
For the year ended December 31, 1997, two customers represented
approximately 16.5% and 11.0%, respectively, of RELTEC's net sales. For the year
ended December 31, 1996, one customer represented approximately 16.2% of
RELTEC's net sales. Export sales were less than 10.0% of RELTEC's net sales for
the year ended December 31, 1997 and approximately 11.5% of RELTEC's net sales
for the year ended December 31, 1996.
The following tables summarize financial information of the Company by
groupings and geographic region:
<TABLE>
<CAPTION>
SEVEN MONTHS FIVE MONTHS YEAR ENDED DECEMBER
ENDED ENDED 31,
JULY 31, DECEMBER 31, ---------------------
1995 1995 1996 1997
------------- -------------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net Sales:
Access Systems............ $ 53.8 $ 44.7 $192.3 $ 283.6
Integrated Wireless
Solutions..................... 43.9 33.8 140.4 195.3
Network Components and
Services...................... 190.6 147.0 356.7 408.3
------ ------ ---------- ---------
Total......................... $ 288.3 $225.5 $689.4 $ 887.2
------ ------ ---------- ---------
------ ------ ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
SEVEN MONTHS FIVE MONTHS YEAR ENDED DECEMBER
ENDED ENDED 31,
JULY 31, DECEMBER 31, ---------------------
1995 1995 1996 1997
------------- -------------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net Sales:
U.S.:
Sales to customers........ $ 279.7 $219.6 $621.0 $ 714.1
Sales to affiliates....... 7.9 5.9 8.4 10.9
Europe:
Sales to customers........ -- -- 38.4 129.4
Sales to affiliates....... -- -- -- --
Other International:
Sales to customers........ 8.6 5.9 30.0 43.7
Sales to affiliates....... 4.8 3.5 10.0 5.5
Eliminations.................. (12.7) (9.4) (18.4) (16.4)
------ ------ ---------- ---------
Total......................... $ 288.3 $225.5 $689.4 $ 887.2
------ ------ ---------- ---------
------ ------ ---------- ---------
</TABLE>
F-13
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. GEOGRAPHIC AND MARKET DATA (CONTINUED)
Sales between geographic regions are generally priced to recover cost plus
an appropriate markup for profit.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
<CAPTION>
(IN MILLIONS)
<S> <C> <C>
Identifiable Assets:
U.S................................................................. $ 536.8 $ 589.1
Europe.............................................................. 174.5 170.9
Other International................................................. 29.0 44.6
--------- ---------
Total................................................................... $ 740.3 $ 804.6
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
<CAPTION>
FIVE MONTHS
SEVEN MONTHS ENDED YEAR ENDED
ENDED DECEMBER DECEMBER 31,
JULY 31, 31, --------------------
1995 1995 1996 1997
------------- ----------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating Profit (Loss):
U.S....................... $ (27.1) $ (32.2) $ 46.5 $ 71.1
Europe.................... -- -- 0.1 1.5
Other International....... (0.6) 0.4 4.5 0.6
------ ----------- --------- ---------
Total......................... $ (27.7) $ (31.8) $ 51.1 $ 73.2
------ ----------- --------- ---------
------ ----------- --------- ---------
</TABLE>
4. EXTRAORDINARY CHARGE
During 1996, the Company recorded an extraordinary charge of $6.3 million,
net of a $3.3 million tax benefit, related to the accelerated amortization of
deferred financing fees. The Old Credit Facility entered into as part of the
RELTEC Acquisition was extinguished and a New Credit Facility was established
(refer to Note 9 for further discussion).
5. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
(IN MILLIONS)
Raw materials................................................................ $ 48.3 $ 58.4
Work-in-process.............................................................. 10.8 18.8
Finished goods............................................................... 18.5 17.5
--------- ---------
Total........................................................................ $ 77.6 $ 94.7
--------- ---------
--------- ---------
</TABLE>
F-14
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. GOODWILL, INTANGIBLE ASSETS AND OTHER NONCURRENT ASSETS
Goodwill, intangible assets and other noncurrent assets consisted of the
following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
(IN MILLIONS)
Goodwill, net.............................................................. $ 353.9 $ 355.0
Intangible assets, net..................................................... 40.8 29.0
--------- ---------
Total...................................................................... $ 394.7 $ 384.0
--------- ---------
--------- ---------
Capitalized software....................................................... $ -- $ 8.7
Investments in affiliates.................................................. 2.7 3.2
Deferred financing fees.................................................... 1.6 1.3
Construction funds in escrow............................................... 5.2 --
Other...................................................................... 1.4 2.9
--------- ---------
Total...................................................................... $ 10.9 $ 16.1
--------- ---------
--------- ---------
</TABLE>
Capitalized software represents costs associated with the Company's
implementation of new business systems, which is currently in process.
Amortization of these costs will begin at the in-service date and be computed by
the straight-line method over an estimated useful life ranging from three to
five years. Deferred financing fees are amortized over the term of the related
financing and are classified as interest expense in the accompanying
consolidated statements of operations.
7. MISCELLANEOUS FINANCIAL INFORMATION
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
(IN MILLIONS)
Allowance for doubtful accounts............................................. $ 2.4 $ 3.1
Goodwill--accumulated amortization.......................................... 17.4 35.1
Intangible assets--accumulated amortization................................. 16.1 30.3
</TABLE>
F-15
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
(IN MILLIONS)
Accrued warranty............................................................. $ 7.0 $ 9.0
CDTS acquisition payment..................................................... -- 6.0
Contract termination......................................................... -- 4.2
Income taxes payable......................................................... 5.2 2.2
Interest payable............................................................. 1.5 1.8
License termination.......................................................... 11.0 --
Other........................................................................ 12.4 14.7
--------- ---------
Total........................................................................ $ 37.1 $ 37.9
--------- ---------
--------- ---------
</TABLE>
The CDTS acquisition payment represents the estimated remaining portion of
the purchase price which the Company expects to pay in 1998. The contract
termination represents estimated costs for the settlement of a contract assumed
with the Rainford Acquisition. The license termination liability represents the
settlement of a license agreement with a third party and was paid in 1997.
9. DEBT
In connection with the RELTEC Acquisition, the Company entered into the
$325.0 million Old Credit Facility (the "Old Credit Facility"), providing $195.0
million of term loans and $130.0 million of revolving credit and a $135.0
million bridge loan ("Bridge Loan") with a limited partnership in which KKR
Associates, L.P. is the general partner (the "KKR Partnership") (refer to Note
16 for further discussion). In September 1995, the Company converted $35.0
million of the Bridge Loan into common equity and repaid $25.0 million of the
Bridge Loan from proceeds of borrowings under the Old Credit Facility. During
August, 1996, the KKR Partnership exchanged the Bridge Loan for $74.0 million of
Common Stock and $1.0 million of redeemable Preferred Stock. The redeemable
Preferred Stock was immediately sold to an unrelated third party.
In September 1996, the Company extinguished outstanding amounts under the
Old Credit Facility and refinanced its borrowings under a new $450.0 million
credit facility with a new bank syndicate (the "New Credit Facility") which
matures on September 30, 2003. The New Credit Facility consists of a $350.0
million domestic revolving facility ("DRF") and a $100.0 million multi-currency
revolving facility ("MCRF"). DRF loans are denominated in U.S. dollars and
maintained at the Base Rate or the Euro Rate plus percentage margins as
specified in the New Credit Facility. MCRF loans are denominated in U.S.
dollars, pounds sterling, deutsche marks and yen and are maintained at the Base
Rate or the Euro Rate plus percentage margins as specified in the New Credit
Facility. At December 31, 1997 the Base Rate was 8.5% and the Euro Rate ranged
from 5.8% to 6.0%. The percentage margins range up to 0.125% for the Base Rate
and from 0.325% to 1.375% for the Euro Rate. The New Credit Facility contains
provisions to reduce the interest rates and commitment fees if certain leverage
ratios are achieved. At December 31, 1997, the weighted average interest rate on
the New Credit Facility was 6.92%.
The New Credit Facility contains provisions for a $30.0 million (or a pound
sterling equivalent) short-term credit line as well as letters of credit. The
aggregate facility borrowing availability is reduced for
F-16
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. DEBT (CONTINUED)
amounts outstanding under the short-term credit lines and letters of credit.
Amounts outstanding under the short-term credit lines bear interest at the Base
Rate plus percentage margins as specified in the Credit Agreement. At December
31, 1997, the New Credit Facility has a facility fee of 0.175% per annum on the
total commitment and a letter of credit facility fee of 0.325% per annum on
outstanding letters of credit. At December 31, 1997, the aggregate availability
under the New Credit Facility was $175.9 million. Interest and commitment fees
are payable quarterly. During 1997, interest accrued on the debt obligations at
a weighted average interest rate of 7.05% per annum.
The New Credit Facility contains covenants and provisions that restrict,
among other things, the Company's ability to change its business, declare
dividends, grant liens, incur additional indebtedness, exceed a leverage ratio,
meet or exceed a minimum interest coverage ratio and make certain capital
expenditures. The Company was in compliance with these covenants at December 31,
1997. The New Credit Facility is secured by the capital stock of RELTEC's
subsidiaries and guaranteed by certain subsidiaries.
Pursuant to the terms of the New Credit Facility, the available commitment
under the New Credit Facility will be reduced from $450.0 million on September
30, 1999 by $35.0 million, and by $35.0 million per year on each September 30
thereafter until balance matures on September 30, 2003. Principal payments are
not otherwise required unless the New Credit Facility is required to be reduced
for certain changes in the Company's business activities as defined in the
Credit Agreement.
In October 1996, the Company entered into an interest rate swap agreement to
reduce its variable interest rate exposure on borrowings under the New Credit
Facility. The swap fixes the interest rate at 6.11% on a notional amount of
$100.0 million for two years. Interest is payable quarterly beginning January
28, 1997 and is recorded in interest expense. Under the prevailing market rates
at December 31, 1997 and 1996, the fair value of the swap agreement was a
liability of $0.3 million and $0.5 million, respectively.
In May 1997, the Company entered into promissory notes with several banks
("Money Market Lines of Credit") for $40.0 million of unsecured and uncommitted
credit lines, outside the New Credit Facility. At December 31, 1997, $3.7
million was outstanding at a weighted average interest rate of 7.18%. Borrowings
under the Money Market Lines of Credit mature at specified dates less than one
year after incurrence.
The Company also maintains several lines of credit for its non-U.S.
affiliates. At December 31, 1997, aggregate borrowings outstanding under these
facilities were $3.7 million with interest rates ranging from 6.25% to 9.18%
F-17
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. DEBT (CONTINUED)
At December 31, 1997, the Company is also contingently liable for $1.3
million of outstanding letters of credit issued prior to the RELTEC Acquisition.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
(IN MILLIONS)
New Credit Facility........................................................ $ 275.4 $ 254.8
Money Market Lines of Credit............................................... -- 3.7
Capital lease obligation................................................... 9.0 9.0
Other debt................................................................. 4.3 3.7
--------- ---------
Total debt................................................................. 288.7 271.2
Current maturities......................................................... 12.6 20.9
--------- ---------
Total long-term debt....................................................... $ 276.1 $ 250.3
--------- ---------
--------- ---------
</TABLE>
Borrowings denominated in British pounds sterling outstanding under the New
Credit Facility at December 31, 1997 and 1996 were $79.8 million and $68.4
million, respectively.
As of December 31, 1997, aggregate maturities of debt obligations in each of
the next five years are as follows (in millions):
<TABLE>
<S> <C>
1998................................................................ $ 20.9
1999................................................................ 0.3
2000................................................................ --
2001................................................................ --
2002................................................................ --
Thereafter.......................................................... 250.0
</TABLE>
Predecessor A's financial statements for the period ended July 31, 1995
include interest expense to the parent company on an inter-company note which
carried an interest rate of 4.3%.
Interest paid was $18.0 million, $26.9 million and $7.8 million for the
years ended December 31, 1997 and 1996, and the five months ended December 31,
1995, respectively.
10. LEASES
RELTEC leases certain facilities and equipment under operating leases, many
of which contain renewal options and escalation clauses. Total rental expense
was $10.1 million and $6.6 million for the years ended December 31, 1997 and
1996, and $3.1 million and $4.5 million for the five months ended December 31,
1995 and seven months ended July 31, 1995, respectively.
F-18
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. LEASES (CONTINUED)
Minimum future rental commitments under operating leases having
non-cancelable lease terms in excess of one year are as follows (in millions):
<TABLE>
<S> <C>
1998............................................................... $ 5.7
1999............................................................... 4.3
2000............................................................... 3.1
2001............................................................... 2.2
2002............................................................... 2.1
Thereafter......................................................... 8.1
-----
Total.......................................................... $ 25.5
-----
-----
</TABLE>
During 1996, the Company entered into a capital lease agreement which
requires variable lease payments based on a variable market rate. As of December
31, 1997, the variable rate was 4.3%. As of December 31, 1997, obligations under
this capital lease are $0.4 million annually through 2002 and $16.3 million
thereafter and include $9.3 million of interest expense.
11. REDEEMABLE PREFERRED STOCK
During 1996, the Company issued 1,000 shares of Series A Redeemable
Preferred Stock (the "Preferred Stock"). The Preferred Stock has annual dividend
requirements of $105 per share for each of the years ending December 31, 1996,
1997 and 1998; $115 per share for the year ending December 31, 1999; $125 per
share for the year ending December 31, 2000; and $130 per share for each year
ending December 31 thereafter. Dividends are cumulative and payable quarterly
beginning January 1, 1997. The Company can redeem the Preferred Stock at any
time at a redemption price of $1,000 per share plus accrued dividends (the
"Redemption Price"). The holders of Preferred Stock can cause the redemption of
the Preferred Stock at any time after July 1, 2003 or earlier in the occurrence
of a triggering event, as defined in the Preferred Stock Certificate of
Designation, at the Redemption Price. The Preferred Stock has no general voting
rights.
12. COMMON STOCK AND STOCK OPTION PLAN
Holders of shares of common stock of RELTEC Corporation ("Common Stock") are
entitled to one vote per share on matters to be voted on by the stockholders,
and to receive dividends when and as declared by the Board of Directors. Holders
of Common Stock are not entitled to preemptive rights and have no subscription,
redemption or conversion privileges. The Common Stock does not have cumulative
voting rights. The rights, preferences and privileges of holders of Common Stock
are subject to the rights of the holders of shares of any series of preferred
stock issued or that may be issued in the future. At December 31, 1997 and 1996,
loans to employees for the purchase of Common Stock were $0.9 million and $0.6
million, respectively. These amounts have been presented as a reduction of
additional paid-in capital.
On August 1, 1995, RELTEC Corporation adopted the 1995 Stock Purchase and
Option Plan for Employees of RELTEC Corporation and Subsidiaries (the "Equity
Plan") under which employees of RELTEC may be permitted to purchase common stock
and/or be granted options to purchase shares of common stock of RELTEC. In 1996
and 1997, the plan was amended to increase the number of shares which could be
issued under the Equity Plan to 5,000,000 and 5,725,000, respectively. At
December 31, 1997, 5,148,789 shares were issued under the Equity Plan.
F-19
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. COMMON STOCK AND STOCK OPTION PLAN (CONTINUED)
Common Stock options expire in periods ranging from seven to ten years from
the date of grant. Approximately sixty percent of the options granted vest
proratably over periods of up to five years ("Term Options"). Vesting of the
remaining options is dependent on RELTEC achieving certain financial objectives,
but in no event later than terms ranging from six years and eleven months to
seven years and eleven months ("Performance Options").
A summary of the changes in the stock options granted under the Equity Plan
is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------------ -----------------
<S> <C> <C>
Outstanding, August 1, 1995................................... -- $ --
Granted..................................................... 1,875,600 5.00
------------
Outstanding, December 31, 1995................................ 1,875,600 5.00
Granted..................................................... 1,211,021 9.56
Forfeited................................................... (38,000) 5.00
------------
Outstanding, December 31, 1996................................ 3,048,621 6.81
Granted..................................................... 897,247 12.50
Forfeited................................................... (297,428) 7.53
Exercised................................................... (400) 5.00
------------
Outstanding, December 31, 1997................................ 3,648,040 8.14
------------
------------
</TABLE>
<TABLE>
<S> <C> <C>
Options exercisable at December 31,:
1995.............................................. -- $ --
1996.............................................. 413,639 4.52
1997.............................................. 1,128,818 6.19
</TABLE>
Stock options outstanding at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- --------------------------------- ----------- ---------------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
$ 2.83-$ 5.00 1,951,053 7.4 $ 4.76 880,107 $ 4.54
$10.56-$11.50 807,907 6.2 11.46 123,294 11.50
$12.50-$14.97 889,080 8.8 12.53 125,417 12.50
----------- ----------
3,648,040 7.5 8.14 1,128,818 6.19
</TABLE>
The Company accounts for the Equity Plan under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized for all common stock and common stock
options issued with a price equal to fair market value. The Company has
recognized compensation cost for all common stock and common stock options
issued with a price below fair market value. For common stock options, such
expense is recognized over the vesting period of the options. In 1997, the
Company recognized compensation expense of approximately $0.7 million related to
common stock and common stock options issued below fair market value. At
December 31, 1997, unrecognized deferred compensation was approximately $0.9
million. Had compensation cost for the Equity Plan been determined consistent
with the fair value methodology of Statement of Financial
F-20
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. COMMON STOCK AND STOCK OPTION PLAN (CONTINUED)
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), the Company's net income (loss) would have been the following pro forma
amounts:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
FIVE MONTHS ENDED --------------------
DECEMBER 31, 1995 1996 1997
------------------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS, EXCEPT SHARE DATA)
Net income (loss) as reported......................... $ (30.4) $ 1.8 $ 25.0
Pro forma net income (loss)........................... (30.6) 1.2 24.2
Pro forma earnings (loss) per share:
Basic............................................... $ (0.89) $ 0.03 $ 0.49
Diluted............................................. (0.89) 0.03 0.48
</TABLE>
The pro forma earnings (loss) per share amounts for the year ended December
31, 1996 include the effect of an extraordinary charge of $6.3 million or
$(0.16) per share. Refer to Note 4 for further discussion.
Under SFAS 123, the fair value of each option is estimated on the date of
grant using the Minimum Value option pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1995 ISSUANCES 1996 ISSUANCES 1997 ISSUANCES
--------------- --------------- ---------------
<S> <C> <C> <C>
Risk-free interest rate....................... 6.35% 6.18% 5.84%
Expected life (years)......................... 10.0 7.5 9.5
Expected volatility........................... -- -- --
Expected dividends............................ $ -- $ -- $ --
</TABLE>
The weighted average fair market values of options granted during 1995, 1996
and 1997 was $2.35, $4.33 and $5.43, respectively.
13. INCOME TAXES
Income tax provision (benefit) includes:
<TABLE>
<CAPTION>
FIVE MONTHS YEAR ENDED
ENDED DECEMBER 31,
DECEMBER 31, --------------------
1995 1996 1997
------------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS)
Current taxes:
U.S. federal.............................................. $ 3.5 $ 23.9 $ 27.8
State and local........................................... 0.5 3.8 4.7
Non-U.S................................................... 0.5 1.7 4.6
------ --------- ---------
Total..................................................... $ 4.5 $ 29.4 $ 37.1
------ --------- ---------
Deferred taxes:
Federal and state $ (18.2) $ (10.8) $ (5.8)
Non-U.S................................................... (0.2) (1.2) (1.7)
------ --------- ---------
Total..................................................... (18.4) (12.0) (7.5)
------ --------- ---------
Total income tax provision (benefit) $ (13.9) $ 17.4 $ 29.6
------ --------- ---------
------ --------- ---------
</TABLE>
F-21
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
Income taxes differ from amounts computed at the U.S. statutory rate due to:
<TABLE>
<CAPTION>
FIVE MONTHS YEAR ENDED
ENDED DECEMBER 31,
DECEMBER 31, --------------------
1995 1996 1997
------------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS)
Expected income tax provision (benefit) at statutory
rates.................................................... $ (15.5) $ 8.9 $ 19.1
Nondeductible amortization................................. 1.5 7.6 6.2
State, local taxes and other............................... 0.1 0.9 4.3
------ --------- ---------
Total income tax provision (benefit)....................... $ (13.9) $ 17.4 $ 29.6
------ --------- ---------
------ --------- ---------
</TABLE>
Temporary differences and loss carryforwards which gave rise to deferred tax
assets and (liabilities) consisted of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
<CAPTION>
(IN MILLIONS)
<S> <C> <C>
Deferred income tax assets (liabilities):
Inventory............................................................... $ 13.0 $ 14.2
Pension, postretirement and postemployment benefits..................... 11.0 10.2
Capital lease obligation................................................ 3.6 3.6
Self-insurance reserves................................................. 3.3 3.5
Accrued warranty........................................................ 2.2 3.5
Tax loss carryforwards.................................................. 1.7 0.7
Intangible assets....................................................... (14.5) (12.1)
Property and equipment.................................................. (17.1) (16.7)
Construction funds in escrow............................................ (2.1) --
Other................................................................... 7.5 10.0
--------- ---------
Net deferred taxes...................................................... $ 8.6 $ 16.9
--------- ---------
--------- ---------
</TABLE>
For income tax reporting purposes, the Company has state net operating loss
carryforwards that aggregate approximately $10.8 million at December 31, 1997.
Such carryforwards have various expiration dates beginning in the year 2000.
RELTEC has not provided for U.S. income and foreign withholding taxes on
undistributed earnings of its non-U.S. subsidiaries because management intends
to permanently reinvest those earnings. Undistributed earnings of non-U.S.
subsidiaries were not significant at December 31, 1997.
Income taxes paid were $43.0 million and $20.5 million for the years ended
December 31, 1997 and 1996, respectively, and $6.5 million during the five
months ended December 31, 1995.
For Predecessor A, the results of RELTEC's domestic operations were included
in the consolidated U.S. return of its parent. The actual tax benefit generated
by RELTEC was settled through an intercompany account with the parent. On a
stand-alone basis, RELTEC would not have recognized any income tax benefit in
its statement of operations; as such, the benefit has been credited to the
parent company investment. The actual amount credited to the parent company
investment for the seven months ended July 31, 1995 was $1.0 million.
F-22
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
For the seven month period ended July 31, 1995, the provision (benefit) for
income taxes consisted of a current tax provision of $0.4 million and a deferred
tax provision (benefit) of $(14.5) million. The current provision for income
taxes relates to non-U.S. taxes. The deferred provision relates to the write-off
of acquired in-process research and development costs.
14. PENSION PLANS
RELTEC maintains pension plans which cover certain employees and provide for
monthly pension payments to eligible employees upon retirement. Plans covering
salaried employees provide benefits based on years of credited service and
compensation. Pension benefits for certain hourly employees are based on years
of service and specified benefits amounts. RELTEC's funding policy in the United
States is to contribute amounts necessary to meet or exceed ERISA funding
requirements, and elsewhere to fund amounts in accordance with local
regulations. Pension plan assets consist primarily of United States government
obligations, fixed income investments and equity securities whose values are
subject to fluctuations of the securities market.
As part of the RELTEC Acquisition, the Company's employee benefit plan
obligations and related plan assets were determined on a stand-alone basis and
recorded in the consolidated balance sheet as part of the allocation of the
purchase price. A pension asset valuation and transfer from the seller's trust
accounts into RELTEC's trust accounts was completed in August 1996.
SPECIAL RETIREMENT PROGRAM FOR ELECTED OFFICERS
The Special Retirement Program applies to principal officers who have served
as such for at least two years and, upon retirement, must have at least ten
years of service with the Company. An individual will not be eligible to
participate in the Special Retirement Program in the event of retirement prior
to reaching age 55 without the approval of the Board of Directors.
The maximum retirement allowance will be 50% of the average of the three
best years of total "compensation" less pension attributable to the Company
contributions under the Company Pension Plan, the Supplemental Retirement Plan
and any retirement plan of a prior employer following retirement from the
Company, and less 50% of primary Social Security benefit. The maximum retirement
allowance of 50% will be payable to the person holding, on retirement, the
office of Chief Executive Officer of the Company, and to any other participant
with 15 years of service with the Company upon retirement. Under the Special
Retirement Program, the group life and medical insurance coverage (other than
salary continuation) in effect for a participant at the time of early retirement
will be continued until normal retirement.
DEFERRED COMPENSATION PLAN
Under the Deferred Compensation Plan, the Company may elect to award
deferred compensation to any elected officer or other key employee. In addition,
the Company contributes to the Deferred Compensation Plan for each participant
the amount of matching employer contributions to which the participant would be
entitled under the 401(k) savings plan and/or the defined contribution
retirement plan but for federal law limitations on Company contributions. Book
entry accounts for each participant are credited quarterly with interest at the
rate specified by the Board of Directors from time to time. The amounts credited
to participants' accounts will become distributable at age 65 or earlier at the
approval of the Board of Directors. In addition, in the event of a "change of
control" payment of all accounts shall be accelerated and payable in a lump sum
within 30 days of such event.
F-23
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. PENSION PLANS (CONTINUED)
Effective December 31, 1997, benefit accruals under the U.S. defined benefit
pension plans were frozen. Pursuant to the provisions of SFAS No. 88 "Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," the benefit plan freeze resulted in the recognition of
$6.5 million of curtailment gains in 1997. This amount has been presented as
other income in the statement of operations. Beginning in 1998, the Company will
implement a new defined contribution retirement benefit plan for its U.S.
employees.
The following table reconciles the funded status of the Company's defined
benefit plans:
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997
---------------------------- ----------------------------
STATUS OF PLAN(S) OVER-FUNDED UNDER-FUNDED OVER-FUNDED UNDER-FUNDED
- ------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(IN MILLIONS)
Accumulated benefit obligation,
principally vested................. $ 16.1 $ 26.6 $ 18.3 $ 36.9
Effect of projected salary
increases.......................... 0.5 5.5 0.6 0.3
----- ------ ----- ------
Projected benefit obligation......... 16.6 32.1 18.9 37.2
Fair value of plan assets............ 18.6 22.2 23.0 28.1
----- ------ ----- ------
Plan assets greater/ (less) than
projected benefit obligation....... 2.0 (9.9) 4.1 (9.1)
Unrecognized cumulative net gain..... (1.0) (2.3) (3.0) (0.1)
----- ------ ----- ------
Prepaid (accrued) pension costs...... $ 1.0 $ (12.2) $ 1.1 $ (9.2)
----- ------ ----- ------
----- ------ ----- ------
</TABLE>
Net periodic pension costs included in the accompanying consolidated
statements of operations consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
FIVE MONTHS DECEMBER 31,
ENDED --------------------
DECEMBER 31, 1995 1996 1997
------------------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS)
Service cost--benefits earned.......................... $ 1.7 $ 4.1 $ 4.6
Interest accrued on accumulated benefit obligation..... 1.3 3.2 3.8
Actual return on plan assets........................... (1.8) (4.2) (9.2)
Net amortization and deferrals......................... 0.6 1.2 5.3
----- --------- ---------
Net periodic pension cost.............................. $ 1.8 $ 4.3 $ 4.5
----- --------- ---------
----- --------- ---------
</TABLE>
Net periodic pension cost included in Predecessor A's financial statements
for the period ended July 31, 1995 was $2.1 million.
F-24
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. PENSION PLANS (CONTINUED)
The following assumptions were used for determining the Company's defined
benefit plan obligations and net periodic pension cost:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1995 1996 1997
----- ----- -----
Weighted average discount rate..................................... 7.5% 7.5% 7.0%
Salary increase.................................................... 4.5% 4.5% 4.5%
Asset return....................................................... 9.0% 9.0% 9.0%
</TABLE>
The Company sponsors a defined contribution savings and investment plan
covering substantially all U.S. RELTEC salaried employees. Employer
contributions to the plan are 50% of employee contributions, up to 6% of each
covered employee's salary. RELTEC's contributions were $2.4 million for each of
the years ended December 31, 1997 and 1996, and $0.9 million and $1.3 million
for the five month period ended December 31, 1995 and the seven month ended July
31, 1995, respectively.
15. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides postretirement benefits other than pensions, primarily
health care and life insurance, for certain eligible U.S. retirees.
Postretirement benefits are unfunded. Effective December 31, 1997, the Company
amended certain provisions of its postretirement benefit plan for U.S. employees
primarily to require minimum eligibility at age 55 and 10 years of service with
credited service beginning at age 45. The effect of these amendments resulted in
unrecognized prior service costs of $7.8 million which will be amortized to
future net periodic postretirement cost.
Net periodic postretirement benefit costs consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
SEVEN MONTHS FIVE MONTHS DECEMBER 31,
ENDED ENDED --------------------
JULY 31, 1995 DECEMBER 31, 1995 1996 1997
--------------- --------------------- --------- ---------
<S> <C> <C> <C> <C>
(IN MILLIONS)
Service cost............................... $ 0.5 $ 0.2 $ 0.6 $ 0.6
Interest cost.............................. 0.9 0.4 0.9 0.9
--- --- --- ---
Net periodic postretirement benefit cost... $ 1.4 $ 0.6 $ 1.5 $ 1.5
--- --- --- ---
--- --- --- ---
</TABLE>
The following table reconciles the funded status of the Company's
postretirement benefit obligation:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
<CAPTION>
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retired participants..................................................... $ 2.5 $ 3.4
Fully eligible active plan participants.................................. 3.4 1.8
Other active plan participants........................................... 7.1 2.3
Unrecognized prior service costs......................................... -- 7.8
Unrecognized cumulative net gain (loss).................................. -- (1.0)
--------- ---------
Accrued postretirement benefit obligation................................ $ 13.0 $ 14.3
--------- ---------
--------- ---------
</TABLE>
F-25
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
15. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The actuarial present value of the accumulated postretirement benefit
obligation was determined using a discount rate of 7.0% and 7.5% at December 31,
1997 and 1996, respectively. Health care cost inflation is assumed to be 8.5%,
declining gradually to 5.5% in 2017 and thereafter. A 1.0% increase in the
assumed health care cost rates would increase the service and interest cost
components, in aggregate, by approximately $0.2 million and increase the
accumulated postretirement benefit obligation by approximately $0.3 million.
16. RELATED PARTY TRANSACTIONS
On April 1, 1997, the Company's largest stockholder, a limited partnership
in which KKR Associates, L.P. is the general partner, invested an additional
$50.0 million in RELTEC in exchange for 4,000,000 shares of common stock. The
cash proceeds were used to repay borrowings under the New Credit Facility.
At December 31, 1997, two limited partnerships in which KKR Associates, L.P.
is a general partner owned 90.8% of the Company's outstanding Common Stock. The
remaining 9.2% of outstanding Common Stock is owned by management investors, an
employee savings plan and other third parties.
Kohlberg Kravis Roberts & Co., L.P. ("KKR") provides certain management,
consulting and financial services to the Company for an annual fee. Such
services include, but are not necessarily limited to, advice and assistance
concerning any and all aspects of the operation, planning and financing of the
Company. During the years ended December 31, 1997 and 1996, and the five months
ended December 31, 1995, the Company paid $0.8 million, $0.8 million and $0.4
million, respectively, to KKR for management fees and reimbursement of expenses.
During 1996, RELTEC paid $2.0 million to KKR for consulting services related
to the Rainford Acquisition and $7.5 million in 1995 for services rendered in
connection with the RELTEC Acquisition.
Predecessor A's financial statements include charges for certain direct
expenses which were administered centrally by Reliance including insurance,
pensions and certain other items. Annual allocations were also made for common
services provided by Reliance such as cash management and other treasury, legal,
patent, tax, corporate accounting, audit and communication services.
Administrative expense includes $3.9 million for the seven months ended July 31,
1995 for such allocated expenses. Settlement of RELTEC's related
receivable/payable resulting from these transactions was done through an
intercompany account which has been included in the parent company investment.
17. CONTINGENCIES
Various lawsuits, claims and proceedings have been or may be instituted or
asserted against the Company relating to the conduct of its business, including
those pertaining to environmental, safety and health, employment and contract
matters. Although the outcome of litigation cannot be predicted with certainty
and some lawsuits, claims or proceedings may be disposed of unfavorably to the
Company, management believes the disposition of matters which are pending or
asserted will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
18. SUBSEQUENT EVENTS (UNAUDITED)
Prior to the Offering, the 1998 Equity Participation Plan of RELTEC
Corporation (the "Equity Plan") was approved by the Board of Directors and the
stockholders of the Company. The principal purpose of the Equity Plan is to
provide incentives for officers, employees and consultants of the Company
through granting of options, restricted stock and other awards (collectively,
"Awards"), thereby stimulating their personal and active interest in the
Company's development and financial success, and inducing them to
F-26
<PAGE>
RELTEC CORPORATION
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
18. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
remain in the Company's employment. The Equity Plan is also intended to assist
the Company in attracting and retaining qualified non-employee directors
("Non-Employee Directors") by providing for the automatic grant of options to
Non-Employee Directors.
Under the Equity Plan, not more than 5,076,211 shares of Common Stock (or
the equivalent in other equity securities) are authorized for issuance upon
exercise of options, stock appreciation rights ("SARs"), and other Awards, or
upon vesting of restricted or deferred stock awards. No amounts have been issued
under the Equity Plan as of January 31, 1998.
On January 14, 1998, the Company increased its authorized shares of common
stock to 150,000,000 and its authorized shares of preferred stock to 20,000,000.
In connection with the Offering, the Settlements have forfeited their right
to put 10% of the shares held by them to the Company.
F-27
<PAGE>
[LOGO]
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[ALTERNATE]
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED MARCH 11, 1998
5,500,000 SHARES
[LOGO]
COMMON STOCK
-----------------
OF THE 5,500,000 SHARES OF COMMON STOCK OFFERED, 1,000,000 SHARES ARE BEING
OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL
UNDERWRITERS AND 4,500,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED
STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE "UNDERWRITERS." ALL OF THE
SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY.
SHARES OF COMMON STOCK ARE BEING RESERVED FOR SALE TO DIRECTORS,
OFFICERS, EMPLOYEES, BUSINESS ASSOCIATES AND RELATED PERSONS OF THE
COMPANY AT THE INITIAL PUBLIC OFFERING PRICE. SUCH PERSONS ARE
EXPECTED TO PURCHASE, IN THE AGGREGATE, UP TO 18% OF THE COMMON
STOCK OFFERED. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC
MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY
ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE
WILL BE BETWEEN $24 AND $27. SEE "UNDERWRITERS" FOR A
DISCUSSION OF THE FACTORS TO BE CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
------------------------
THE COMMON STOCK HAS BEEN APPROVED FOR LISTING, SUBJECT TO NOTICE OF ISSUANCE,
ON THE NEW YORK STOCK
EXCHANGE UNDER THE SYMBOL "RLT."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------------
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.
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
PER SHARE................................. $ $ $
TOTAL (3)................................. $ $ $
</TABLE>
- ------------------------
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $1,200,000.
(3) THE COMPANY HAS GRANTED THE U.S. UNDERWRITERS AN OPTION, EXERCISABLE WITHIN
30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF 825,000
ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS UNDERWRITING DISCOUNTS AND
COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY. IF THE U.S.
UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL PRICE TO PUBLIC,
UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO COMPANY WILL BE
$ , $ AND $ , RESPECTIVELY. SEE "UNDERWRITERS."
------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY SIMPSON THACHER & BARTLETT, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT
DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1998 AT THE OFFICE OF
MORGAN STANLEY & CO. INCORPORATED, NEW YORK, NEW YORK, AGAINST PAYMENT THEREFOR
IN IMMEDIATELY AVAILABLE FUNDS.
-------------------
MORGAN STANLEY DEAN WITTER SALOMON SMITH BARNEY INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
DEUTSCHE MORGAN GRENFELL
LEHMAN BROTHERS
J.P. MORGAN SECURITIES LTD.
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of Common Stock registered hereby,
all of which expenses, except for the Securities and Exchange Commission
registration fee, the National Association of Securities Dealers, Inc. filing
fee and the New York Stock Exchange listing application fee, are estimates:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
Securities and Exchange Commission registration fee.................................................. $ 50,379
National Association of Securities Dealers, Inc. filing fee.......................................... 17,577
New York Stock Exchange listing application fee...................................................... 87,200
Legal fees and expenses.............................................................................. 250,000
Accounting fees and expenses......................................................................... 175,000
Printing and engraving fees and expenses............................................................. 450,000
Blue Sky fees and expenses........................................................................... 30,000
Transfer Agent fees and expenses..................................................................... 10,200
Miscellaneous expenses............................................................................... 129,644
----------
Total.......................................................................................... 1,200,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is a Delaware corporation. Reference is made to Section
102(b)(7) of the Delaware General Corporation Law (the "DGCL"), which enables a
corporation in its original certificate of incorporation or an amendment thereto
to eliminate or limit the personal liability of a director for violations of the
director's fiduciary duty, except (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the DGCL (providing for liability of
directors for unlawful payments of dividends of unlawful stock purchase or
redemptions) or (iv) for any transaction from which a director derived an
improper personal benefit.
Reference is also made to Section 145 of the DGCL, which provides that a
corporation may indemnify any person, including an officer or director, who is,
or is threatened to be made, party to any threatened, pending or completed legal
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person was an officer, director, employee or agent
of such corporation or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such officer,
director, employee or agent acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the corporation's best interest and, for
criminal proceeding, had no reasonable cause to believe that his conduct was
unlawful. A Delaware corporation may indemnify any officer or director in any
action by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses that
such officer or director actually and reasonably incurred.
II-1
<PAGE>
Article V of the Bylaws of the Company (filed as Exhibit 3.2) provides for
indemnification of the officers and directors to the full extent permitted by
applicable law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since August 1, 1995, the Company has sold unregistered securities in the
amounts, at the times and for the aggregate amounts of consideration listed
below. The securities were sold to purchasers directly by the Company, and such
sales did not involve any underwriter. The Company considers these securities to
have been offered and sold in transactions not involving any public offering and
therefore, to be exempted from registration under Section 4(2) of the Securities
Act of 1933, as amended (the "Securities Act") and Rule 701 and Regulation S
thereunder.
On August 1, 1995, the Company issued 29,000,000 shares of Common Stock to
the KKR Partnerships and management investors under the Company's 1995 Stock
Purchase and Option Plan For Employees of RELTEC Holdings, Inc. and Subsidiaries
(the "Employee Stock Plan") for aggregate consideration of $145,000,000. Of such
shares, 92,000 shares have been retired by the Company.
On September 7, 1995, the Company issued 7,000,000 shares of Common Stock to
one of the KKR Partnerships for consideration of $35,000,000.
On November 10, 1995, the Company issued 306,600 shares of Common Stock to
management investors under its Employee Stock Plan for aggregate consideration
of $1,533,000. Of such shares, 22,000 shares have been retired by the Company.
Between January 25, 1996 and August 6, 1996, the Company issued 2,000 shares
of Common Stock to one individual investor for consideration of $10,000 and
84,849 shares of Common Stock to one of the Company's employee benefit plans for
aggregate consideration of $424,245. In addition, during the same period the
Company issued 1,000 shares of Common Stock to replace a lost share certificate,
which shares subsequently were retired by the Company.
On August 30, 1996, the Company issued 6,434,783 shares of Common Stock to
one of the KKR Partnerships for aggregate consideration of $32,173,915.
On September 3, 1996, the Company issued 2,990,862 shares of Common Stock to
non-U.S. management investors under its Employee Stock Plan for aggregate
consideration of $34,394,913 pursuant to a sale exempt from registration
pursuant to Regulation S under the Securities Act. Of such shares, 41 shares
have been retired by the Company.
In September 1996, the Company issued 1,000 shares of its Series A
Redeemable Preferred Stock to one of the KKR Partnerships for consideration of
$1,000,000.
Between September 9, 1996 and March 27, 1997, the Company issued 155,527
shares of Common Stock to management investors under its Employee Stock Plan for
aggregate consideration of $1,811,777. Of such shares, 17,829 shares have been
retired by the Company. In addition, during the same period the Company issued
26,060 shares of Common Stock to one of the Company's employee benefit plans for
aggregate consideration of $312,375.
On April 1, 1997, the Company issued 4,000,000 shares to one of the KKR
Partnerships for aggregate consideration of $50,000,000.
Between May 12, 1997 and December 26, 1997, the Company issued 144,080
shares of Common Stock to management investors under its Employee Stock Plan for
aggregate consideration of $1,801,000 and 25,717 shares of Common Stock to one
of the Company's employee benefit plans for aggregate consideration of $321,462.
In addition, during the same period the Company issued 2,000 shares of Common
Stock to replace a lost share certificate retired by the Company.
II-2
<PAGE>
ITEM 16. EXHIBITS.
(a) EXHIBITS:
The following exhibits are filed pursuant to Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement among RELTEC Corporation and the Underwriters named therein.
3.1 Certificate of Incorporation of RELTEC Corporation.
3.2 Bylaws of RELTEC Corporation.
*4.1 Form of Common Stock Certificate.
4.2 See Exhibits 3.1 and 3.2 of this Registration Statement for provisions of the Certificate of
Incorporation and Bylaws of RELTEC Corporation defining the rights of holders of Common Stock.
*5.1 Opinion of Latham & Watkins regarding the legality of the securities being issued.
10.1 RELTEC Holdings, Inc. Deferred Compensation Plan (Effective August 1, 1995) for elected officers and
other key employees.
10.2 RELTEC Holdings, Inc. Directors' Deferred Compensation Plan (Effective January 1, 1996).
10.3 RELTEC Corporation Special Retirement Program for Elected Officers (Effective August 1, 1995).
10.4 RELTEC Corporation Supplemental Retirement Plan for Key Employees (Effective August 1, 1995).
10.5 Amended and Restated 1995 Stock Purchase and Option Plan for Employees of RELTEC Holdings, Inc. and
Subsidiaries.
*10.6 1998 Equity Participation Plan of RELTEC Corporation.
10.7 Amended and Restated Credit Agreement, dated as of September 20, 1996 (the "Amended and Restated Credit
Agreement"), among RELTEC Holdings, Inc., RELTEC (UK) Limited, various lending institutions and The Chase
Manhattan Bank, as Agent.
10.8 Form of DRF ("domestic revolving facility") Note under the Amended and Restated Credit Agreement.
10.9 Form of MCRF ("multi-currency revolving facility") Note under the Amended and Restated Credit Agreement.
10.10 Form of Swingline Note under the Amended and Restated Credit Agreement.
10.11 Amended and Restated Company Pledge Agreement, dated as of September 20, 1996, among RELTEC Holdings,
Inc. and The Chase Manhattan Bank, as Agent.
10.12 U.K. Pledge Agreement, dated as of September 20, 1996, among RELTEC (UK) Limited and The Chase Manhattan
Bank, as Agent.
10.13 Amended and Restated Subsidiary Pledge Agreement, dated as of September 20, 1996, among RELTEC
Corporation, RELTEC Foreign Holdings, Inc. and The Chase Manhattan Bank, as Agent.
10.14 Amended and Restated Subsidiary Guarantee, dated as of September 20, 1996, among RELTEC Corporation,
RELTEC Holdings, Inc. and The Chase Manhattan Bank, as Agent.
21.1 Subsidiaries of RELTEC Corporation.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
*23.1 Consent of Deloitte & Touche LLP regarding the financial statements of RELTEC Corporation.
23.2 Consent of Grant Thornton LLP regarding the financial statements of Rainford Group plc.
*23.3 Consent of Latham & Watkins (included in the opinion filed as Exhibit 5.1 hereto).
24.1 Powers of Attorney (included on the signature page hereto).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Filed herewith.
As permitted by Item 601(b)(4) of Regulation S-K, the Company has not filed
with this Registration Statement certain instruments defining the rights of
holders of long-term debt of the Company, if any, because the total amount of
securities authorized under any of such instruments does not exceed 10% of the
total assets of the Company and its subsidiaries on a consolidated basis. The
Company agrees to furnish a copy of any such agreements to the Securities and
Exchange Commission upon request.
(b) FINANCIAL STATEMENT SCHEDULES:
Schedule II--Valuation and Qualifying Accounts.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of New York, State of New
York on March 10, 1998.
<TABLE>
<S> <C> <C>
RELTEC CORPORATION
By: /s/ VALERIE GENTILE SACHS
-----------------------------------------
Name: Valerie Gentile Sachs
Title: Vice President, General Counsel and
Secretary
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
*
- ------------------------------ President, Chief Executive March 10, 1998
Dudley P. Sheffler Officer and Director
*
- ------------------------------ Director March 10, 1998
James H. Greene, Jr.
*
- ------------------------------ Director March 10, 1998
Henry R. Kravis
*
- ------------------------------ Director March 10, 1998
Alexander Navab, Jr.
*
- ------------------------------ Director March 10, 1998
George R. Roberts
* Vice President--Controller
- ------------------------------ (principal accounting March 10, 1998
John L. Wilson officer)
<TABLE>
<S> <C> <C>
*By: /s/ VALERIE GENTILE SACHS
---------------------------------------
Valerie Gentile Sachs
(ATTORNEY-IN-FACT)
</TABLE>
II-5
<PAGE>
SCHEDULE II
RELTEC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE TWO YEARS ENDED DECEMBER 31, 1997, THE FIVE MONTHS ENDED DECEMBER 31,
1995
AND THE SEVEN MONTHS ENDED JULY 31, 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONS
----------------------------
PERIODS ENDED BALANCE AT CHARGED TO CHARGED TO
- ---------------------------------------------- BEGINNING OF COSTS AND OTHER BALANCE AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ---------------------------------------------- --------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
7/31/95 $ 1.4 $ 0.1 $ -- $ 0.1 $ 1.4
12/31/1995 1.4 0.4 -- 0.4 1.4
12/31/1996 1.4 0.3 0.9(a) (0.2) 2.4
12/31/1997 2.4 1.1 0.1(a) (0.5) 3.1
VALUATION OF INVESTMENT IN NEXTWAVE
12/31/1997 $ 0.0 $ 5.0 $ -- $ -- $ 5.0
</TABLE>
- ------------------------
(a) Other adjustments relate to the Company's 1996 acquisition of Rainford and
1997 acquisition of CDTS.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement among RELTEC Corporation and the Underwriters named therein.
3.1 Certificate of Incorporation of RELTEC Corporation.
3.2 Bylaws of RELTEC Corporation.
*4.1 Form of Common Stock Certificate.
4.2 See Exhibits 3.1 and 3.2 of this Registration Statement for provisions of the Certificate of
Incorporation and Bylaws of RELTEC Corporation defining the rights of holders of Common Stock.
*5.1 Opinion of Latham & Watkins regarding the legality of the securities being issued.
10.1 RELTEC Holdings, Inc. Deferred Compensation Plan (Effective August 1, 1995) for elected officers and
other key employees.
10.2 RELTEC Holdings, Inc. Directors' Deferred Compensation Plan (Effective January 1, 1996).
10.3 RELTEC Corporation Special Retirement Program for Elected Officers (Effective August 1, 1995).
10.4 RELTEC Corporation Supplemental Retirement Plan for Key Employees (Effective August 1, 1995).
10.5 Amended and Restated 1995 Stock Purchase and Option Plan for Employees of RELTEC Holdings, Inc. and
Subsidiaries.
*10.6 1998 Equity Participation Plan of RELTEC Corporation.
10.7 Amended and Restated Credit Agreement, dated as of September 20, 1996 (the "Amended and Restated Credit
Agreement"), among RELTEC Holdings, Inc., RELTEC (UK) Limited, various lending institutions and The Chase
Manhattan Bank, as Agent.
10.8 Form of DRF ("domestic revolving facility") Note under the Amended and Restated Credit Agreement.
10.9 Form of MCRF ("multi-currency revolving facility") Note under the Amended and Restated Credit Agreement.
10.10 Form of Swingline Note under the Amended and Restated Credit Agreement.
10.11 Amended and Restated Company Pledge Agreement, dated as of September 20, 1996, among RELTEC Holdings,
Inc. and The Chase Manhattan Bank, as Agent.
10.12 U.K. Pledge Agreement, dated as of September 20, 1996, among RELTEC (UK) Limited and The Chase Manhattan
Bank, as Agent.
10.13 Amended and Restated Subsidiary Pledge Agreement, dated as of September 20, 1996, among RELTEC
Corporation, RELTEC Foreign Holdings, Inc. and The Chase Manhattan Bank, as Agent.
10.14 Amended and Restated Subsidiary Guarantee, dated as of September 20, 1996, among RELTEC Corporation,
RELTEC Holdings, Inc. and The Chase Manhattan Bank, as Agent.
21.1 Subsidiaries of RELTEC Corporation.
*23.1 Consent of Deloitte & Touche LLP regarding the financial statements of RELTEC Corporation.
23.2 Consent of Grant Thornton LLP regarding the financial statements of Rainford Group plc.
*23.3 Consent of Latham & Watkins (included in the opinion filed as Exhibit 5.1 hereto).
24.1 Powers of Attorney (included on the signature page hereto).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Filed herewith.
<PAGE>
5,500,000 Shares
RELTEC Corporation
Common Stock, par value $0.01 per share
UNDERWRITING AGREEMENT
__________, 1998
<PAGE>
_____________, 1998
Morgan Stanley & Co. Incorporated
Smith Barney Inc.
Goldman, Sachs & Co.
Deutsche Morgan Grenfell Inc.
Lehman Brothers Inc.
J.P. Morgan Securities Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
Smith Barney Inc.
Goldman Sachs International
Morgan Grenfell & Co. Limited
Lehman Brothers International (Europe)
J.P. Morgan Securities Ltd.
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Ladies and Gentlemen:
RELTEC Corporation, a Delaware corporation (the "Company"),
proposes to issue and sell to the several Underwriters (as defined below)
5,500,000 shares of its Common Stock, par value $0.01 per share (the "Firm
Shares").
It is understood that, subject to the conditions hereinafter
stated, 4,500,000 Firm Shares (the "U.S. Firm Shares") will be sold to the
several U.S. Underwriters named in Schedule I hereto (the "U.S.
Underwriters") in connection with the offering and sale of such U.S. Firm
Shares in the United States and Canada to United States and Canadian Persons
(as such terms are defined in the Agreement Between U.S. and International
Underwriters of even date herewith), and 1,000,000 Firm Shares (the
"International Shares") will be sold to the several International
Underwriters named in Schedule II hereto (the "International Underwriters")
in connection with the offering and sale of such International Shares outside
the United States and Canada to persons other than United States and Canadian
Persons. Morgan Stanley & Co. Incorporated, Smith Barney Inc., Goldman,
Sachs & Co., Deutsche Morgan Grenfell Inc., Lehman Brothers Inc. and J.P.
Morgan Securities Inc. shall act as representatives (the "U.S.
Representatives") of the several U.S. Underwriters, and Morgan Stanley & Co.
International Limited, Smith Barney Inc., Goldman Sachs International, Morgan
Grenfell & Co.
<PAGE>
2
Limited, Lehman Brothers International (Europe) and J.P. Morgan Securities
Ltd. shall act as representatives (the "International Representatives") of
the several International Underwriters. The U.S. Underwriters and the
International Underwriters are hereinafter collectively referred to as the
"Underwriters".
The Company also proposes to issue and sell to the several U.S.
Underwriters not more than an additional 825,000 shares of its Common Stock,
par value $0.01 per share (the "Additional Shares"), if and to the extent
that the U.S. Representatives shall have determined to exercise, on behalf of
the U.S. Underwriters, the right to purchase such shares of common stock
granted to the U.S. Underwriters in Section 2 hereof. The Firm Shares and
the Additional Shares are hereinafter collectively referred to as the
"Shares". The shares of Common Stock, par value $0.01 per share, of the
Company to be outstanding after giving effect to the sales contemplated
hereby are hereinafter referred to as the "Common Stock".
The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement relating to the Shares. The
registration statement contains two prospectuses to be used in connection
with the offering and sale of the Shares: the U.S. prospectus, to be used in
connection with the offering and sale of Shares in the United States and
Canada to United States and Canadian Persons, and the international
prospectus, to be used in connection with the offering and sale of Shares
outside the United States and Canada to persons other than United States and
Canadian Persons. The international prospectus is identical to the U.S.
prospectus except for the outside front cover page. The registration
statement as amended at the time it becomes effective, including the
information (if any) deemed to be part of the registration statement at the
time of effectiveness pursuant to Rule 430A under the Securities Act of 1933,
as amended (the "Securities Act"), is hereinafter referred to as the
"Registration Statement"; the U.S. prospectus and the international
prospectus in the respective forms first used to confirm sales of Shares are
hereinafter collectively referred to as the "Prospectus". If the Company has
filed an abbreviated registration statement to register additional shares of
Common Stock pursuant to Rule 462(b) under the Securities Act (the "Rule 462
Registration Statement"), then any reference herein to the term "Registration
Statement" shall be deemed to include such Rule 462 Registration Statement.
As part of the offering contemplated by this Agreement, Morgan Stanley &
Co. Incorporated ("Morgan Stanley") and Smith Barney Inc. ("Smith
Barney")have each agreed to reserve out of the Shares set forth opposite
their name on
<PAGE>
3
Schedule I to this Agreement, up to ________shares and ___________ shares,
respectively, for sale to the Company's employees, officers, and directors
and other parties associated with the Company (collectively, "Participants"),
as set forth in the Prospectus under the heading "Underwriters" (the
"Directed Share Program"). The Shares to be sold by Morgan Stanley and Smith
Barney pursuant to the Directed Share Program (the "Directed Shares") will be
sold by Morgan Stanley and Smith Barney pursuant to this Agreement at the
public offering price. Any Directed Shares not orally confirmed will be
offered to the public by Morgan Stanley and Smith Barney as set forth in the
Prospectus.
1. Representations and Warranties. The Company represents and
warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain as of the date of such amendment or supplement any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, (ii)
the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder and (iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain as of the date of such
amendment or supplement any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this paragraph
do not apply to statements or omissions in the Registration Statement or
the Prospectus based upon information relating to any Underwriter furnished
to the Company in writing by such Underwriter through you expressly for use
therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property
and to conduct its business as
<PAGE>
4
described in the Prospectus and is duly qualified to transact business and
is in good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to
own its property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole; all of the issued shares of capital stock of each subsidiary of the
Company have been duly and validly authorized and issued, are fully paid
and non-assessable and are owned directly or through one or more
subsidiaries by the Company, free and clear of all liens, encumbrances,
equities or claims other than (i) as created by or arise under the Amended
and Restated Credit Agreement dated as of September 20, 1996 among the
Company, RELTEC (UK) Limited, the Various Lending Institutions named
therein and The Chase Manhattan Bank, as agent, as amended (the "Credit
Agreement") and (ii) such other liens as are not, individually or in the
aggregate, material to the Company and its subsidiaries, taken as a whole.
(e) This Agreement has been duly authorized, executed and delivered
by the Company.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus under the
caption "Description of Capital Stock."
(g) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid and
non-assessable.
(h) The Shares have been duly authorized and, when issued and
delivered by the Company against payment therefor by the Underwriters in
accordance with the terms of this Agreement, will be validly issued, fully
paid and non-assessable, and the issuance of such
<PAGE>
5
Shares will not be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene
any provision of applicable law or the certificate of incorporation or
by-laws of the Company or any agreement or other instrument binding upon
the Company or any of its subsidiaries that is material to the Company and
its subsidiaries, taken as a whole, or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company or
any of its subsidiaries, and no consent, approval, authorization or order
of, or qualification with, any governmental body or agency is required for
the performance by the Company of its obligations under this Agreement,
except such as may be required by the securities or Blue Sky laws of the
various States of the United States in connection with the offer and sale
of the U.S. Firm Shares and except such as may be required by the
securities laws of any jurisdiction in which International Shares may be
offered or sold by the International Underwriters.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that
set forth in the Prospectus (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement).
(k) There are no legal or governmental proceedings pending or,
to the knowledge of the Company, threatened to which the Company or any
of its subsidiaries is a party or to which any of the properties of the
Company or any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not so
described, or any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that
are not described or filed as required.
(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in
all material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
<PAGE>
6
(m) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds therefrom as
described in the Prospectus, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
(n) The Company and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not, singly or in
the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(o) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(p) Except as otherwise disclosed in the Registration Statement,
there are no contracts, agreements or understandings between the Company
and any person granting such person the right to require the Company to
file a registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such
securities with the Shares registered pursuant to the Registration
Statement.
(q) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or
with any person or affiliate located in Cuba.
(r) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) the Company and
its
<PAGE>
7
subsidiaries have not incurred any material liability or obligation, direct
or contingent, nor entered into any material transaction not in the
ordinary course of business; (2) the Company has not purchased any of its
outstanding capital stock, except as pursuant to the terms of the several
Stockholder's Agreements executed by employee stockholders of the Company,
nor declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock other than ordinary and customary dividends; and
(3) there has not been any material change in the capital stock, short-term
debt or long-term debt of the Company and its subsidiaries, except in each
case as described in the Prospectus.
(s) The Company and its subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except (i) such as are described in the
Prospectus, (ii) such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made of
such property by the Company and its subsidiaries and (iii) such as do not
have a material adverse effect on the Company and its subsidiaries, taken
as a whole; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries, in each case except as
described in the Prospectus.
(t) Except as otherwise disclosed in the Registration Statement, the
Company and its subsidiaries own or possess, or can acquire on reasonable
terms, all material patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names currently employed
by them in connection with the business now operated by them, and neither
the Company nor any of its subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with respect to
any of the foregoing which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(u) No material labor dispute with the employees of the Company or
any of its subsidiaries exists,
<PAGE>
8
except as described in the Prospectus, or, to the knowledge of the Company,
is imminent; and the Company is not aware of any existing, threatened or
imminent labor disturbance by the employees of any of its principal
suppliers, manufacturers or contractors that could have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(v) The Company and its subsidiaries are insured by the insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor any of its subsidiaries has been
refused any insurance coverage sought or applied for; and neither the
Company nor any of its subsidiaries has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole, except as described in the Prospectus.
(w) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
business, and neither the Company nor any of its subsidiaries has received
any notice of proceedings relating to the revocation or modification of any
such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would have a material adverse effect on the Company and its subsidiaries,
taken as a whole, except as described in the Prospectus.
(x) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (1) transactions are executed in accordance with management's
general or specific authorizations and (2) transactions are recorded as
necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain asset
accountability.
Furthermore, the Company represents and warrants to Morgan Stanley and
Smith Barney that (i) the Registration Statement, the Prospectus and any
preliminary prospectus comply, and any further amendments or supplements thereto
will comply, with any applicable laws or regulations of foreign jurisdictions in
which the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed
<PAGE>
9
Share Program, and that (ii) no authorization, approval, consent, license,
order, registration or qualification of or with any government, governmental
instrumentality or court, other than such as have been obtained, is necessary
under the securities laws and regulations of foreign jurisdictions in which the
Directed Shares are offered outside the United States.
2. Agreements to Sell and Purchase. The Company hereby agrees to
sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective number of Firm Shares set forth in Schedules I and II
hereto opposite its name at U.S.$ a share ("Purchase Price").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the U.S. Underwriters the Additional Shares, and the U.S. Underwriters shall
have a one-time right to purchase, severally and not jointly, up to 825,000
Additional Shares at the Purchase Price. If the U.S. Representatives, on behalf
of the U.S. Underwriters, elect to exercise such option, the U.S.
Representatives shall so notify the Company in writing not later than 30 days
after the date of this Agreement, which notice shall specify the number of
Additional Shares to be purchased by the U.S. Underwriters and the date on which
such shares are to be purchased. Such date may be the same as the Closing Date
(as defined below) but not earlier than the Closing Date nor later than ten
business days after the date of such notice. Additional Shares may be purchased
as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the U.S. Firm Shares.
If any Additional Shares are to be purchased, each U.S. Underwriter agrees,
severally and not jointly, to purchase the number of Additional Shares (subject
to such adjustments to eliminate fractional shares as the U.S. Representatives
may determine) that bears the same proportion to the total number of Additional
Shares to be purchased as the number of U.S. Firm Shares set forth in Schedule I
hereto opposite the name of such U.S. Underwriter bears to the total number of
U.S. Firm Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of the Prospectus, (i) offer,
<PAGE>
10
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Shares to be sold hereunder or (B) the issuance by the Company of
shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof of which the
Underwriters have been advised in writing or (C) the grant of stock options as
contemplated by the 1998 Equity Participation Plan of the Company.
3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
U.S.$ a share (the "Public Offering Price") and to certain dealers
selected by you at a price that represents a concession not in excess of U.S.$
a share under the Public Offering Price, and that any Underwriter may allow,
and such dealers may reallow, a concession, not in excess of U.S.$ a share,
to any Underwriter or to certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be made
to the Company in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on ____________, 1998, or at
such other time on the same or such other date, not later than _________, 1998,
as shall be designated in writing by you. The time and date of such payment
are hereinafter referred to as the "Closing Date".
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than _______, 1998, as shall be designated in
writing by the U.S. Representatives. The time and date of such payment are
hereinafter referred to as the "Option Closing Date".
<PAGE>
11
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations of
the Company to sell the Shares to the Underwriters and the several obligations
of the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction
of the possible change, in the rating accorded any of the Company's
securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2)
under the Securities Act; and
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your judgment, is
material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, to the
<PAGE>
12
effect set forth in Section 5(a)(i) above and to the effect that the
representations and warranties of the Company contained in this Agreement
are true and correct as of the Closing Date and that the Company has
complied with all of the agreements and satisfied all of the conditions on
its part to be performed or satisfied hereunder on or before the Closing
Date.
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Latham & Watkins, outside counsel for the Company, dated the
Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly existing
and in good standing under the laws of the jurisdiction of its
incorporation, and has the corporate power and authority to own or lease
its property and to conduct its business as described in the Prospectus;
(ii) each subsidiary of the Company listed on Exhibit B hereto
(collectively the "Material Subsidiaries") has been duly incorporated, is
validly existing and in good standing under the laws of the jurisdiction of
its incorporation, and has the corporate power and authority to own or
lease its property and to conduct its business as described in the
Prospectus;
(iii) the shares of Common Stock outstanding prior to the issuance
of the Shares have been duly authorized and are validly issued, fully paid
and non-assessable;
(iv) the Shares have been duly authorized by the Company and,
when issued and delivered to the Underwriters against payment therefor in
accordance with the terms of this Agreement, will be validly issued, fully
paid and non-assessable, and the issuance of such Shares will not be
subject to any preemptive or similar rights arising by operation of United
States federal law or the General Corporation Law of the State of Delaware
(the "DGCL") or under the certificate of incorporation or by-laws of the
Company;
(v) this Agreement has been duly authorized, executed and
delivered by the Company;
(vi) the execution and delivery by the Company of, the
issuance and sale of Shares by the Company pursuant to and the compliance
by the Company, as of the date of this
<PAGE>
13
opinion, with all of the provisions of, this Agreement will
not contravene any provision of United States federal or New York State
law, or the DGCL or the certificate of incorporation or by-laws of the
Company, and no consent, approval, authorization or order of, or
qualification with, any United States federal or New York State
governmental body or agency or any Delaware governmental body or agency
acting pursuant to the DGCL is required for the issue and sale of Shares
by the Company pursuant to, and the compliance by the Company, as of the
date of this opinion, with all of the provisions of this Agreement,
except such as have been obtained under the Securities Act and such as
may be required by the securities or Blue Sky laws of the various states
in connection with the offer and sale of the Shares by the U.S.
Underwriters;
(vii) the statements (A) in the Prospectus under the captions
"Description of Capital Stock," "Shares Eligible for Future Sale," "Certain
United States Tax Consequences to Non-United States Holders," and
paragraphs 1, 2, 9, 11, 12, 13 and 16 under the caption "Underwriters" and
(B) in the Registration Statement in Items 14 and 15, in each case insofar
as such statements constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly present the information called for
with respect to such legal matters, documents and proceedings and are
accurate in all material respects;
(viii) the Company is not an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended;
(ix) to the best of such counsel's knowledge, the execution and
delivery by the Company of, the issuance and sale of Shares by the
Company pursuant to, and the compliance by the Company with all of the
provisions of, this Agreement will not contravene the Credit Agreement;
and
(x) the Registration Statement and the Prospectus comply as to
form in all material respects with the requirements for registration
statements on Form S-1 under the Securities Act and the rules and
regulations of the Commission thereunder; it being understood, however,
that such counsel expresses no opinion with respect to the financial
statements, schedules and other financial and statistical data included in
the Registration Statement or the Prospectus, and that, in
<PAGE>
14
passing upon the compliance as to form of the Registration Statement and
the Prospectus, such counsel may assume that the statements made therein
are correct and complete.
In addition, such counsel shall state that they have
participated in conferences with officers and other representatives of
the Company, representatives of the independent public accountants for
the Company, and representatives of the Underwriters, at which the
contents of the Registration Statement and the Prospectus and related
matters were discussed and, although such counsel is not passing upon,
and does not assume any responsibility for, the accuracy, completeness
or fairness of the statements contained in the Registration Statement
and the Prospectus and has not made any independent check or
verification thereof, except as and to the extent set forth in paragraph
(vii) above, during the course of such participation (relying on factual
matters to the extent such counsel has deemed appropriate upon the
statements of officers and other representatives of the Company), no
facts came to such counsel's attention that caused such counsel to
believe that the Registration Statement, at the time it became
effective, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus, as
of the Closing Date, contained an untrue statement of a material fact or
omitted to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; it being understood that such counsel expresses no
belief with respect to the financial statements, schedules and other
financial and statistical data included in the Registration Statement or
the Prospectus.
In rendering such opinion, such counsel may rely, as to matters of
fact (but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials.
With respect to Section 5(c)(ix) above, such counsel may state that its
opinion and belief are based upon its participation in the preparation of
the Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are without
independent check or verification, except as specified. The opinion of
Latham & Watkins described in this Section 5(c) shall be rendered to the
Underwriters at the request of the Company and shall so state therein.
<PAGE>
15
(d) The Underwriters shall have received on the Closing Date an
opinion of Valerie Gentile Sachs, Vice President, General Counsel and
Secretary of the Company, dated the Closing Date, to the effect that:
(i) the Company is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires
such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole;
(ii) each Material Subsidiary of the Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires
such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole;
(iii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(iv) all of the issued shares of capital stock of each Material
Subsidiary of the Company have been duly and validly authorized and issued,
are fully paid and non-assessable and are owned directly by the Company,
free and clear of all liens, encumbrances, equities or claims, except for
such as are created by or arise under the Credit Agreement and such other
liens as are not individually or in the aggregate, material to the Company
and its subsidiaries, taken as a whole;
(v) to the best of such counsel's knowledge, the execution and
delivery by the Company of, and the issuance and sale of Shares by the
Company pursuant to, and the compliance by the Company with all of the
provisions of, this Agreement will not contravene (A) any agreement or
other instrument binding upon the Company or any of its subsidiaries
that is material to the Company and its subsidiaries, taken as a whole,
except for the Credit Agreement as to which Latham & Watkins will
provide such opinion, or (B) any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company
or any of its subsidiaries;
(vi) after due inquiry, such counsel does not know of any legal
or governmental proceedings pending or threatened to which the Company or
any of its subsidiaries is a party or to which any of the properties of the
Company or any of its subsidiaries is subject that are required to be
described in the
<PAGE>
16
Registration Statement or the Prospectus and are not so described or of any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required; and
(vii) the Company and its subsidiaries (A) are in compliance with
any and all applicable Environmental Laws, (B) have received all permits,
licenses or other approvals required of them under applicable Environmental
Laws to conduct their respective businesses and (C) are in compliance with
all terms and conditions of any such permit, license or approval, except
where such noncompliance with Environmental Laws, failure to receive
required permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
(e) The Underwriters shall have received on the Closing Date an
opinion of Simpson Thacher & Bartlett, counsel for the Underwriters, dated
the Closing Date, covering the matters referred to in Sections 5(c)(iv),
5(c)(v), 5(c)(vii) (but only as to the statements in the Prospectus under
"Description of Capital Stock" and paragraphs 1, 2, 9, 11, 12, 13 and 16
under the caption "Underwriters") and 5(c)(ix) above. With respect to
Section 5(c)(ix) above, Simpson Thacher & Bartlett may state that their
opinion and belief are based upon their participation in the preparation of
the Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are without
independent check or verification, except as specified.
(f) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to the Underwriters,
from Deloitte & Touche LLP, independent public accountants, containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements
and certain financial information contained in the Registration Statement
and the Prospectus; provided that the letter delivered on the Closing Date
shall use a "cut-off date" not earlier than the date hereof.
(g) The "lock-up" agreements, each substantially in the form of
Exhibit B hereto, between you and
<PAGE>
17
certain shareholders, officers and directors of the Company identified on
Exhibit C hereto relating to sales and certain other dispositions of shares
of Common Stock or certain other securities, delivered to you on or before
the date hereof, shall be in full force and effect on the Closing Date.
(h) The several obligations of the U.S. Underwriters to purchase
Additional Shares hereunder are subject to the delivery to the U.S.
Representatives on the Option Closing Date of such documents as they may
reasonably request with respect to the good standing of the Company, the
due authorization and issuance of the Additional Shares and other matters
related to the issuance of the Additional Shares.
6. Covenants of the Company. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, nine signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
Section 6(c) below, as many copies of the Prospectus and any supplements
and amendments thereto or to the Registration Statement as you may
reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with sales
by an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when the Prospectus is delivered to a purchaser, not misleading, or if, in
the opinion of counsel for the Underwriters, it is necessary to amend
<PAGE>
18
or supplement the Prospectus to comply with applicable law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to the
Underwriters and to the dealers (whose names and addresses you will furnish
to the Company) to which Shares may have been sold by you on behalf of the
Underwriters and to any other dealers upon request, either amendments or
supplements to the Prospectus so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request, provided, however, that the Company shall not be obligated to file
any general consent to service of process or qualify as a foreign
corporation in any jurisdiction in which it is not so qualified.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the
twelve-month period ending March 31, 1999 that satisfies the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
(f) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid
all expenses incident to the performance of its obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the
Company's counsel and the Company's accountants (including, without
limitation, Deloitte & Touche LLP and Grant Thornton LLP) in connection
with the registration and delivery of the Shares under the Securities Act
and all other fees or expenses in connection with the preparation and
filing of the Registration Statement, any preliminary prospectus, the
Prospectus and amendments and supplements to any of the foregoing,
including all printing costs associated therewith, and the mailing and
delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to
the transfer and delivery of the Shares to the Underwriters, including any
transfer or other taxes payable thereon, (iii) the cost of printing or
producing any Blue Sky or Legal Investment memorandum in connection with
the offer and sale of the Shares under state securities laws and all
expenses in connection with the qualification of the Shares for offer and
sale under state securities laws as provided
<PAGE>
19
in Section 6(d) hereof, including filing fees and the reasonable fees and
disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky or Legal Investment
memorandum, (iv) all filing fees and the reasonable fees and disbursements of
counsel to the Underwriters incurred in connection with the review and
qualification of the offering of the Shares by the National Association of
Securities Dealers, Inc. (the "NASD"), (v) all fees and expenses in
connection with the preparation and filing of the registration statement on
Form 8-A relating to the Common Stock and all costs and expenses incident to
listing the Shares on the New York Stock Exchange, (vi) the cost of printing
certificates representing the Shares, (vii) the costs and charges of any
transfer agent, registrar or depositary, (viii) the costs and expenses of the
Company relating to investor presentations on any "road show" undertaken in
connection with the marketing of the offering of the Shares, including,
without limitation, expenses associated with the production of road show
slides and graphics, fees and expenses of any consultants engaged in
connection with the road show presentations with the prior approval of the
Company, travel and lodging expenses of the representatives and officers of
the Company and any such consultants, and one-half the cost of any aircraft
chartered in connection with the road show provided that at least one
representative of the Company is present and (ix) all other costs and
expenses incident to the performance of the obligations of the Company
hereunder for which provision is not otherwise made in this Section. It is
understood, however, that except as provided in this Section, Section 7
entitled "Indemnity and Contribution", and the last paragraph of Section 9
below, the Underwriters will pay all of their costs and expenses, including
fees and disbursements of their counsel, stock transfer taxes payable on
resale of any of the Shares by them and any advertising expenses connected
with any offers they may make.
(g) That in connection with the Directed Share Program, the Company will
ensure that the Directed Shares will be restricted to the extent required
by the NASD or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. Morgan Stanley and Smith
Barney will notify the Company as to which Participants will need to be so
restricted. The Company will direct the transfer agent to place stop
transfer restrictions upon such securities for such period of time.
(h) To pay all fees and disbursements of counsel incurred by the
Underwriters in connection with the
<PAGE>
20
Directed Share Program and stamp duties, similar taxes or duties or other
taxes, if any, incurred by the Underwriters in connection with the Directed
Share Program, but only to the extent counsel's involvement was approved
by the Company.
(i) The Company represents and warrants that in the Stockholder's
Agreements entered into between the Company and the existing shareholders
of the Company (other than shareholders listed on Exhibit C hereto), such
existing shareholders agreed that, if any shares of Common Stock of the
Company were offered to the public pursuant to an effective registration
statement under the Securities Act of 1933, as amended, they would not
effect any public sale or distribution of any shares of the Common Stock
not covered by such registration statement within seven days prior to, or
within 180 days after, the effective date of such registration statement,
unless otherwise agreed to in writing by the Company. The Company agrees
not to waive such 180 day "lock-up" period with respect to any existing
shareholder.
Furthermore, the Company covenants with Morgan Stanley and Smith Barney
that the Company will comply with all applicable securities and other applicable
laws, rules and regulations in each foreign jurisdiction in which the Directed
Shares are offered in connection with the Directed Share Program.
7. Indemnity and Contribution. (a) The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably
incurred in connection with defending or investigating any such action or
claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto) and any materials prepared by or with the consent of the
Company for distribution to offerees in connection with the Directed Share
Program, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages or liabilities are caused by any untrue statement or omission or
alleged untrue statement or omission based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through
you expressly for use therein; provided, however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not
inure to the benefit of any
<PAGE>
21
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased Shares, or any person controlling such Underwriter, if a
copy of the Prospectus (as then amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to have
been delivered, at or prior to written confirmation of the sale of the Shares to
such person, and if the Prospectus (as so amended or supplemented) would have
cured the defect giving rise to such losses, claims, damages or liabilities,
unless such failure is the result of noncompliance by the Company with Section
6(a) hereof.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
such Underwriter, but only with reference to information relating to such
<PAGE>
22
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to Section 7(a) or 7(b), such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may designate in such
proceeding and shall pay the reasonable fees and disbursements of such
counsel related to such proceeding. In any such proceeding, any indemnified
party shall have the right to retain its own counsel, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless (i) the indemnifying party and the indemnified party shall have
mutually agreed to the retention of such counsel or (ii) the named parties to
any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying
party shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate
firm (in addition to any local counsel) for all such indemnified parties and
that all such fees and expenses shall be reimbursed as they are incurred.
Such firm shall be designated in writing by Morgan Stanley & Co.
Incorporated, in the case of parties indemnified pursuant to Section 7(a),
and by the Company, in the case of parties indemnified pursuant to Section
7(b). The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on
claims that are the subject matter of such proceeding.
<PAGE>
23
(d) To the extent the indemnification provided for in Section 7(a)
or 7(b) is unavailable to an indemnified party or insufficient in respect of
any losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable
by such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided
by clause 7(d)(i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause 7(d)(i) above but also the relative fault of the
Company on the one hand and of the Underwriters on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one
hand and the Underwriters on the other hand in connection with the offering
of the Shares shall be deemed to be in the same respective proportions as the
net proceeds from the offering of the Shares (before deducting expenses)
received by the Company and the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover of the Prospectus, bear to the aggregate Public Offering Price of the
Shares. The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct
or prevent such statement or omission. The Underwriters' respective
obligations to contribute pursuant to this Section 7 are several in
proportion to the respective number of Shares they have purchased hereunder,
and not joint.
<PAGE>
24
(e) The Company and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in Section 7(d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 7 are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter or by or on behalf of the Company, its officers or directors or
any person controlling the Company and (iii) acceptance of and payment for any
of the Shares.
8. Termination. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred
<PAGE>
25
any outbreak or escalation of hostilities or any change in financial markets or
any calamity or crisis that, in your judgment, is material and adverse and (b)
in the case of any of the events specified in clauses 8(a)(i) through 8(a)(iv),
such event, singly or together with any other such event, makes it, in your
judgment, impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
9. Effectiveness; Defaulting Underwriters. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I or Schedule
II bears to the aggregate number of Firm Shares set forth opposite the names of
all such non-defaulting Underwriters, or in such other proportions as you may
specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; provided
that in no event shall the number of Shares that any Underwriter has agreed to
purchase pursuant to this Agreement be increased pursuant to this Section 9 by
an amount in excess of one-ninth of such number of Shares without the written
consent of such Underwriter. If, on the Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares and the aggregate
number of Firm Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Firm Shares to be purchased, and
arrangements satisfactory to you and the Company for the purchase of such Firm
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and in the
Prospectus or in any other documents or arrangements may be effected. If, on
the Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to
<PAGE>
26
purchase Additional Shares or (ii) purchase not less than the number of
Additional Shares that such non-defaulting Underwriters would have been
obligated to purchase in the absence of such default. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
10. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
11. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
12. Headings. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
<PAGE>
27
Very truly yours,
RELTEC Corporation
By:_______________________
Name:
Title:
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
SMITH BARNEY INC.
GOLDMAN, SACHS & CO.
DEUTSCHE MORGAN GRENFELL INC.
LEHMAN BROTHERS INC.
J.P. MORGAN SECURITIES INC.
Acting severally on behalf of themselves
and the several U.S. Underwriters
named in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:___________________________
Name:
Title:
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
SMITH BARNEY INC.
GOLDMAN SACHS INTERNATIONAL
MORGAN GRENFELL & CO. LIMITED
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
J.P. MORGAN SECURITIES LTD.
Acting severally on behalf of themselves
and the several International Underwriters
named in Schedule II hereto.
By: Morgan Stanley & Co. International Limited
By: ____________________________
Name:
Title:
<PAGE>
SCHEDULE I
U.S. UNDERWRITERS
Number of
Firm Shares
Underwriter To Be Purchased
Morgan Stanley & Co. Incorporated
Smith Barney Inc.
Goldman, Sachs & Co.
Deutsche Morgan Grenfell Inc.
Lehman Brothers Inc.
J.P. Morgan Securities Inc.
[NAMES OF OTHER U.S. UNDERWRITERS]
_______________
Total U.S. Firm Shares ..............
===============
<PAGE>
SCHEDULE II
INTERNATIONAL UNDERWRITERS
Number of
Firm Shares
Underwriter To Be Purchased
Morgan Stanley & Co. International Limited
Smith Barney Inc.
Goldman Sachs International
Morgan Grenfell & Co. Limited
Lehman Brothers International (Europe)
J.P. Morgan Securities Ltd.
[NAMES OF OTHER INTERNATIONAL CO-MANAGERS]
_______________
Total International Firm Shares ......
===============
<PAGE>
EXHIBIT A
MATERIAL SUBSIDIARIES
1. RELTEC Communications Inc., a Delaware corporation
2. RELTEC Foreign Holdings, Inc., a Delaware corporation
<PAGE>
2
EXHIBIT B
[FORM OF LOCK-UP LETTER]
____________, 1998
Morgan Stanley & Co. Incorporated
Smith Barney Inc.
Goldman, Sachs & Co.
Deutsche Morgan Grenfell Inc.
Lehman Brothers Inc.
J.P. Morgan Securities Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Morgan Stanley & Co. International Limited
Smith Barney Inc.
Goldman Sachs International
Morgan Grenfell & Co. Limited
Lehman Brothers International (Europe)
J.P. Morgan Securities Ltd.
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Ladies and Gentlemen:
The undersigned understands that Morgan Stanley & Co. Incorporated
("Morgan Stanley") and Morgan Stanley & Co. International Limited ("MSIL")
propose to enter into an Underwriting Agreement (the "Underwriting Agreement")
with RELTEC Corporation, a Delaware corporation (the "Company") providing for
the public offering (the "Public Offering") by the several Underwriters,
including Morgan Stanley and MSIL (the "Underwriters") of _____ shares (the
"Shares") of the Common Stock, par value $0.01 per share of the Company (the
"Common Stock").
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period commencing
on the date hereof and ending 180 days after the date of the final prospectus
relating to the Public Offering (the "Prospectus"), (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any
<PAGE>
3
option or contract to sell, grant any option, right or warrant to purchase,
lend, or otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, or (2) enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership
of the Common Stock, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (a) the sale of
any Shares to the Underwriters pursuant to the Underwriting Agreement, (b)
transactions relating to shares of Common Stock or other securities acquired in
open market transactions after the completion of the Public Offering or (c) the
issuance by the Company of shares of Common Stock upon the exercise of an option
or warrant or the conversion of a security outstanding on the date hereof of
which the Underwriters have been advised in writing. In addition, the
undersigned agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 180 days after the date of the Prospectus, make any
demand for or exercise any right with respect to, the registration of any shares
of Common Stock or any security convertible into or exercisable or exchangeable
for Common Stock.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
---------------------------------
(Name)
---------------------------------
(Address)
<PAGE>
4
EXHIBIT C
SHAREHOLDERS TO EXECUTE A LOCK-UP AGREEMENT
PURSUANT TO SECTION 5(g) OF THE UNDERWRITING AGREEMENT
Dudley R. Sheffler
W. Michael Corkran
Patrick L. Welker
Scott A. Fine
Valerie Gentile Sachs
David G. Phelps
John L. Wilson
Ronald W. Baker
James H. Greene, Jr.
Henry R. Kravis
Alexander Navab, Jr.
George R. Roberts
Nicholas A. Camino
Lisa A. Coffman
Armando E. Cuesta
Alan W. Ferguson
Pantelis P. Paradissis
Michael K. Pratt
Richard L. Schwob
Philip Y. Shih
Barry Houghton MBE
Rysaffe Trustee Company (CI) Limited
CMT Associates, L.P.
KKR Partners II, L.P.
KKR Associates, L.P.
<PAGE>
Exhibit 4.1
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
[LOGO] RELTEC [GRAPHIC]
THIS CERTIFICATE IS TRANSFERABLE
IN NEW YORK, NY
CUSIP 759527 10 4
RELTEC CORPORATION
This Certifies that
is the owner of
FULLY-PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE OF
(CERTIFICATE OF STOCK)
RELTEC CORPORATION (THE "CORPORATION") TRANSFERABLE ON THE BOOKS OF THE
CORPORATION BY THE HOLDER HEREOF IN PERSON OR BY ITS DULY AUTHORIZED ATTORNEY,
UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE AND
THE SHARES REPRESENTED HEREBY ARE ISSUED AND SHALL BE HELD SUBJECT TO ALL OF
THE PROCEDURES OF THE CHARTER OF THE CORPORATION AND THE BYLAWS OF THE
CORPORATION AND ANY AMENDMENTS THERETO. THIS CERTIFICATE IS NOT VALID UNLESS
COUNTERSIGNED AND REGISTERED BY THE TRANSFER AGENT AND REGISTRAR.
IN WITNESS WHEREOF, THE CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
EXECUTED ON ITS BEHALF BY ITS DULY AUTHORIZED OFFICERS.
DATED:
COUNTERSIGNED AND REGISTERED RELTEC CORPORATION /s/ Dudley P. Sheffler
THE BANK OF NEW YORK CORPORATE PRESIDENT AND CHIEF
TRANSFER AGENT SEAL EXECUTIVE OFFICER
AND REGISTRAR 1995
BY DELAWARE /s/ Valerie Gentile Sachs
* VICE PRESIDENT-GENERAL
AUTHORIZED SIGNATURE COUNSEL AND SECRETARY
<PAGE>
RELTEC CORPORATION
THE CORPORATION WILL FURNISH TO ANY STOCKHOLDER ON REQUEST AND WITHOUT
CHARGE A FULL STATEMENT OF THE DESIGNATIONS AND ANY PREFERENCES, CONVERSION
AND OTHER RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS,
QUALIFICATIONS, AND TERMS AND CONDITIONS OF REDEMPTION OF THE STOCK OF EACH
CLASS WHICH THE CORPORATION IS AUTHORIZED TO ISSUE, OF THE DIFFERENCES IN THE
RELATIVE RIGHTS AND PREFERENCES BETWEEN THE SHARES OF EACH CLASS OF EACH
SERIES WHICH THE CORPORATION IS AUTHORIZED TO ISSUE TO THE EXTENT THAT THEY
HAVE BEEN SET, AND OF THE AUTHORITY OF THE BOARD OF DIRECTORS TO SET THE
RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES. SUCH REQUEST MAY BE
MADE TO THE SECRETARY OF THE CORPORATION OR ITS TRANSFER AGENT.
The following abbreviations, which used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF TRF MIN ACT -- .........Custodian (until age.........)
TEN ENT -- as tenants by the entireties (Cust)
JT TEN -- as joint tenants with right of ...........under Uniform Transfers
survivorship and not as tenants (Minor)
in common to Minors Act.........................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,_____________________________HEREBY SELL, ASSIGN AND
TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
| |
| |
- ---------------------------------------
___________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
_________________________________________________SHARES OF COMMON STOCK
REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE
AND APPOINT
________________________________________________________________ATTORNEY
TO TRANSFER THE SAID SHARES OF COMMON STOCK ON THE BOOKS OF THE WITHIN NAMED
CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED_____________________________
___________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THIS
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
By_______________________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
Exhibit 5
[LETTERHEAD OF LATHAM & WATKINS]
March 10, 1998
RELTEC Corporation
5900 Landerbrook Drive, Suite 300
Cleveland, Ohio 44124-4019
Re: Registration Statement on Form S-1 (File No. 333-44277) of
RELTEC Corporation, Relating to 6,325,000 Shares of Common Stock
----------------------------------------------------------------
Ladies and Gentlemen:
In connection with the registration by RELTEC Corporation, a Delaware
Corporation (the "Company"), of 6,325,000 shares of common stock, par value
$0.01 per share (the "Shares"), under the Securities Act of 1933, as amended
(the "Act"), on Form S-1 (File No. 333-44277) filed with the Securities and
Exchange Commission (the "Commission") on January 14, 1998, as amended by
Amendment No. 1 filed with the Commission on February 5, 1998, Amendment No. 2
filed with the Commission on February 25, 1998 and Amendment No. 3 filed with
the Commission on March 11, 1998 (collectively, the "Registration Statement"),
you have requested our opinion with respect to the matters set forth below.
In our capacity as your counsel in connection with such registration,
we are familiar with the proceedings taken by the Company in connection with the
authorization, issuance and sale of the Shares. In addition, we have made such
legal and factual examinations and inquiries, including an examination of
originals or copies certified or otherwise identified to our satisfaction of
such documents, corporate records and instruments, as we have deemed necessary
or appropriate for purposes of this opinion.
<PAGE>
RELTEC Corporation
March 10, 1998
Page 2
In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals and the
conformity to authentic original documents of all documents submitted to us as
copies.
We are opining herein as to the effect on the subject transaction only
of the federal laws of the United States, the internal laws of the State of New
York and the General Corporation Law of the State of Delaware, and we express no
opinion with respect to the applicability thereto, or the effect thereon, of the
laws of any other jurisdiction or, in the case of Delaware, any other laws, or
as to any matters of municipal law or the laws of any local agencies within any
state.
Subject to the foregoing, it is our opinion that each of the Shares
has been duly authorized and, upon issuance, delivery and payment therefor in
the manner contemplated by the Registration Statement, will be validly issued,
fully paid and non-assessable.
We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm contained under the
heading "Legal Matters."
Very truly yours,
/s/ LATHAM & WATKINS
LATHAM & WATKINS
<PAGE>
Exhibit 10.6
THE 1998 EQUITY PARTICIPATION PLAN
OF
RELTEC CORPORATION
RELTEC Corporation, a Delaware corporation, has adopted The 1998 Equity
Participation Plan of RELTEC Corporation (the "Plan"), effective February 17,
1998, for the benefit of its eligible employees, Consultants and directors. The
Plan consists of two plans, one for the benefit of Employees (as such term is
defined below) and Consultants (as such term is defined below) and one for the
benefit of Non-Employee Directors (as such term is defined below).
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, Employees and
Consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock and/or
rights which recognize such growth, development and financial success.
(2) To enable the Company to obtain and retain the services of directors,
Employees and Consultants considered essential to the long range success of the
Company by offering them an opportunity to own stock in the Company and/or
rights which will reflect the growth, development and financial success of the
Company.
ARTICLE I.
DEFINITIONS
Section 1.1. General
Wherever the following terms are used in this Plan they shall have the
meanings specified below, unless the context clearly indicates otherwise.
Section 1.2. Affiliate
"Affiliate" shall mean (a) with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control with,
such Person, and (b) with respect to the Company, also any entity designated by
the Board of Directors of the Company in which the Company or one of its
Affiliates has an interest, and (c) with respect to KKR, also any Affiliate of
any partner of KKR. For purposes of the Plan, "control" shall have the meaning
given such term under Rule 405 of the Securities Act of 1933.
Section 1.3. Award
"Award" shall mean a grant of an Option, Performance Award, Stock
Appreciation Right, Dividend Equivalent, Restricted Stock or Deferred Stock
under this Plan.
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Section 1.4. Award Limit
"Award Limit" shall mean 400,000 shares of Common Stock.
Section 1.5. Board
"Board" shall mean the Board of Directors of the Company.
Section 1.6. Change in Control
"Change in Control" shall mean (i) a sale of all or substantially all of
the assets of the Company to a Person who is not an Affiliate of KKR or an
entity in which the stockholders of the Company immediately prior to such
transaction do not control more than 50% of the voting stock of the Company
immediately following the transaction, (ii) a sale by KKR or any of its
Affiliates resulting in more than 50% of the voting stock of the Company being
held by a Person or Group that does not include KKR or any of its Affiliates or
(iii) a merger or consolidation of the Company into another Person which is not
an Affiliate of KKR or an entity in which the stockholders of the Company
immediately prior to such transaction do not control more than 50% of the voting
power immediately following the transaction.
Section 1.7. Code
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Section 1.8. Committee
"Committee" shall mean the Compensation Committee of the Board, or the
full Board or another committee the Board, appointed as provided in Section 9.1.
Section 1.9. Common Stock
"Common Stock" shall mean the common stock of the Company, par value $0.01
per share, and any equity security of the Company issued or authorized to be
issued in the future, but excluding any preferred stock and any warrants,
options or other rights to purchase Common Stock. Debt securities of the Company
convertible into Common Stock shall be deemed equity securities of the Company.
Section 1.10. Company
"Company" shall mean RELTEC Corporation, a Delaware corporation.
Section 1.11. Consultant
"Consultant" shall mean an individual who is engaged to perform services
for the Company or any Subsidiary who is not an Employee or Non-Employee
Director and who is designated as a Consultant by the Committee.
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Section 1.12. Deferred Stock
"Deferred Stock" shall mean Common Stock awarded under Article VII of this
Plan.
Section 1.13. Director
"Director" shall mean a member of the Board.
Section 1.14. Dividend Equivalent
"Dividend Equivalent" shall mean a right to receive the equivalent value
(in cash or Common Stock) of dividends paid on Common Stock, awarded under
Article VII of this Plan.
Section 1.15. Employee
"Employee" shall mean any officer or other employee (as defined in
accordance with Section 3401(c) of the Code) of the Company, or of any
corporation which is a Subsidiary.
Section 1.16. Exchange Act
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
Section 1.17. Fair Market Value
"Fair Market Value" of a share of Common Stock as of a given date shall be
(i) the closing price of a share of Common Stock on the principal exchange on
which shares of Common Stock are then trading, if any (or as reported on any
composite index which includes such principal exchange), on the trading day
previous to such date, or if shares were not traded on the trading day previous
to such date, then on the next preceding date on which a trade occurred, or (ii)
if Common Stock is not traded on an exchange but is quoted on Nasdaq or a
successor quotation system, the mean between the closing representative bid and
asked prices for the Common Stock on the trading day previous to such date as
reported by Nasdaq or such successor quotation system; or (iii) if Common Stock
is not publicly traded on an exchange and not quoted on Nasdaq or a successor
quotation system, the Fair Market Value of a share of Common Stock as
established by the Committee (or the Board, in the case of Options granted to
Non-Employee Directors) acting in good faith.
Section 1.18. Grantee
"Grantee" shall mean an Employee or Consultant granted a Performance
Award, Dividend Equivalent, Stock Payment or Stock Appreciation Right, or an
award of Deferred Stock, under this Plan.
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Section 1.19. Group
"Group" shall mean two or more Persons acting together as a partnership,
limited partnership, syndicate or other group for the purpose of acquiring,
holding or disposing of securities of the Company.
Section 1.20. Incentive Stock Option
"Incentive Stock Option" shall mean an option which conforms to the
applicable provisions of Section 422 of the Code and which is designated as an
Incentive Stock Option by the Committee.
Section 1.21. KKR
"KKR" shall mean Kohlberg Kravis Roberts & Co., L.P.
Section 1.22. Non-Employee Director
"Non-Employee Director" shall mean a member of the Board who is not an
Employee of the Company.
Section 1.23. Non-Qualified Stock Option
"Non-Qualified Stock Option" shall mean an Option which is designated as
such at the time of grant or which is not designated as an Incentive Stock
Option by the Committee.
Section 1.24. Option
"Option" shall mean a stock option granted under Article III of this Plan.
An Option granted under this Plan shall, as determined by the Committee, be
either a Non-Qualified Stock Option or an Incentive Stock Option; provided,
however, that Options granted to Non-Employee Directors and Consultants shall be
Non-Qualified Stock Options.
Section 1.25. Optionee
"Optionee" shall mean an Employee, Consultant or Non-Employee Director
granted an Option under this Plan.
Section 1.26. Participant
"Participant" shall mean an individual who is a Grantee, Optionee or
Restricted Stockholder.
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Section 1.27. Performance Award
"Performance Award" shall mean a cash bonus, stock bonus or other
performance or incentive award that is paid in cash, Common Stock or a
combination of both, awarded under Article VII of this Plan.
Section 1.28. Person
"Person" shall mean an individual, partnership, corporation, business
trust, limited liability company, joint stock company, trust, unincorporated
association, joint venture, governmental authority or other entity of whatever
nature.
Section 1.29. Plan
"Plan" shall mean The 1998 Equity Participation Plan of RELTEC
Corporation.
Section 1.30. QDRO
"QDRO" shall mean a qualified domestic relations order as defined by the
Code or Title I of the Employee Retirement Income Security Act of 1974, as
amended, or the rules thereunder.
Section 1.31. Restricted Stock
"Restricted Stock" shall mean Common Stock awarded under Article VI of
this Plan.
Section 1.32. Restricted Stockholder
"Restricted Stockholder" shall mean an Employee, Consultant or
Non-Employee Director granted an award of Restricted Stock under Article VI of
this Plan.
Section 1.33. Rule 16b-3
"Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange Act, as
such Rule may be amended from time to time.
Section 1.34. Section 162(m) Participant
"Section 162(m) Participant" shall mean any Employee designated by the
Committee as an Employee whose compensation for the fiscal year in which the
Employee is so designated or a future fiscal year may be subject to the limit on
deductible compensation imposed by Section 162(m) of the Code.
Section 1.35. Stock Appreciation Right
"Stock Appreciation Right" shall mean a stock appreciation right granted
under Article VIII of this Plan.
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Section 1.36. Stock Payment
"Stock Payment" shall mean (i) a payment in the form of shares of Common
Stock, or (ii) an Option or other right to purchase shares of Common Stock, as
part of a deferred compensation arrangement, made in lieu of all or any portion
of the compensation, including without limitation, salary, bonuses and
commissions, that would otherwise become payable to an Employee or Consultant in
cash, awarded under Article VII of this Plan.
Section 1.37. Stockholder's Agreement
"Stockholder's Agreement" shall mean the Stockholder's Agreement between
the Company and any Participant applicable to any grant or award to such
Participant.
Section 1.38. Subsidiary
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing 50 percent
or more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
Section 1.39. Termination of Consultancy
"Termination of Consultancy" shall mean the time when the engagement of a
Participant as a Consultant to the Company or a Subsidiary is terminated for any
reason, with or without cause, including, but not by way of limitation, by
resignation, discharge, death or retirement; but excluding terminations where
there is a simultaneous commencement of employment with the Company or any
Subsidiary. The Committee, in its sole discretion, shall determine the effect of
all matters and questions relating to Termination of Consultancy, including, but
not by way of limitation, the question of whether a Termination of Consultancy
resulted from a discharge for good cause, and all questions of whether a
particular leave of absence constitutes a Termination of Consultancy.
Notwithstanding any other provision of this Plan, the Company or any Subsidiary
has an absolute and unrestricted right to terminate a Consultant's service at
any time for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.
Section 1.40. Termination of Directorship
"Termination of Directorship" shall mean the time when an Optionee who is
a Non-Employee Director ceases to be a Director for any reason, including, but
not by way of limitation, a termination by resignation, failure to be elected,
death or retirement. The Board, in its sole discretion, shall determine the
effect of all matters and questions relating to Termination of Directorship with
respect to Non-Employee Directors.
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Section 1.41. Termination of Employment
"Termination of Employment" shall mean the time when the employee-employer
relationship between a Participant and the Company or any Subsidiary is
terminated for any reason, with or without cause, including, but not by way of
limitation, a termination by resignation, discharge, death, disability or
retirement; but excluding (i) terminations where there is a simultaneous
reemployment or continuing employment of a Participant by the Company or any
Subsidiary, (ii) at the discretion of the Committee, terminations which result
in a temporary severance of the employee-employer relationship, and (iii) at the
discretion of the Committee, terminations which are followed by the simultaneous
establishment of a consulting relationship by the Company or a Subsidiary with
the former employee. The Committee, in its sole discretion, shall determine the
effect of all matters and questions relating to Termination of Employment,
including, but not by way of limitation, the question of whether a Termination
of Employment resulted from a discharge for good cause, and all questions of
whether a particular leave of absence constitutes a Termination of Employment;
provided, however, that, with respect to Incentive Stock Options unless
otherwise determined by the Committee in its discretion, a leave of absence,
change in status from an employee to an independent contractor or other change
in the employee-employer relationship shall constitute a Termination of
Employment if, and to the extent that, such leave of absence, change in status
or other change interrupts employment for the purposes of Section 422(a)(2) of
the Code and the then applicable regulations and revenue rulings under said
Section. Notwithstanding any other provision of this Plan, the Company or any
Subsidiary has an absolute and unrestricted right to terminate an Employee's
employment at any time for any reason whatsoever, with or without cause, except
to the extent expressly provided otherwise in writing.
ARTICLE II.
SHARES SUBJECT TO PLAN
Section 2.1. Shares Subject to Plan
(a) The shares of stock subject to Awards shall be Common Stock,
initially shares of the Company's Common Stock, par value $0.01 per share.
The aggregate number of such shares which may be issued upon the exercise
of Awards under the Plan shall not exceed five million seventy six
thousand two hundred and eleven (5,076,211). The shares of Common Stock
issuable upon the exercise of such Awards may be either previously
authorized but unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to Awards
granted under the Plan to any individual in any calendar year shall not
exceed the Award Limit. To the extent required by Section 162(m) of the
Code, shares subject to Options which are canceled continue to be counted
against the Award Limit and if, after grant of an Option, the price of
shares subject to such Option is reduced, the transaction will be treated
as a cancelation of the Option and a grant of a new Option and both the
Option deemed to be canceled and the Option deemed to be granted will be
counted against the Award Limit. Furthermore, to the extent required by
Section 162(m) of the Code, if, after
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grant of a Stock Appreciation Right, the base amount on which stock
appreciation is calculated is reduced to reflect a reduction in the Fair
Market Value of the Company's Common Stock, the transaction will be
treated as a cancelation of the Stock Appreciation Right and a grant of a
new Stock Appreciation Right and both the Stock Appreciation Right deemed
to be canceled and the Stock Appreciation Right deemed to be granted will
be counted against the Award Limit.
Section 2.2. Add-back of Options and Other Rights
If any Option, or other right to acquire shares of Common Stock under any
other award under this Plan, expires or is canceled without having been fully
exercised, or is exercised in whole or in part for cash as permitted by this
Plan, the number of shares subject to such Option or other right but as to which
such Option or other right was not exercised prior to its expiration,
cancelation or exercise may again be optioned, granted or awarded hereunder,
subject to the limitations of Section 2.1. Furthermore, any shares subject to
Options or other awards which are adjusted pursuant to Section 10.3 and become
exercisable with respect to shares of stock of another corporation shall be
considered canceled and may again be optioned, granted or awarded hereunder,
subject to the limitations of Section 2.1. Shares of Common Stock which are
delivered by the Optionee or Grantee or withheld by the Company upon the
exercise of any Option or other award under this Plan, in payment of the
exercise price thereof, may again be optioned, granted or awarded hereunder,
subject to the limitations of Section 2.1. If any share of Restricted Stock is
forfeited by the Grantee or repurchased by the Company pursuant to Section 6.6
hereof, such share may again be optioned, granted or awarded hereunder, subject
to the limitations of Section 2.1. Notwithstanding the provisions of this
Section 2.2, no shares of Common Stock may again be optioned, granted or awarded
if such action would cause an Incentive Stock Option to fail to qualify as an
incentive stock Option under Section 422 of the Code unless the Committee
determines that such Option is no longer intended to so qualify.
ARTICLE III.
GRANTING OF OPTIONS
Section 3.1. Eligibility
Any Employee or Consultant selected by the Committee pursuant to Section
3.4(a)(i) shall be eligible to be granted an Option. Each Non-Employee Director
of the Company shall be granted Options at the times and in the manner set forth
in Section 3.4(d).
Section 3.2. Disqualification for Stock Ownership
No person may be granted an Incentive Stock Option under this Plan if such
person, at the time the Incentive Stock Option is granted, owns stock possessing
more than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any then existing Subsidiary or parent corporation
(within the meaning of Section 422 of the Code) unless such Incentive Stock
Option conforms to the applicable provisions of Section 422 of the Code.
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Section 3.3. Qualification of Incentive Stock Options
No Incentive Stock Option shall be granted to any person who is not an
Employee.
Section 3.4. Granting of Options
(a) The Committee shall from time to time, in its sole discretion,
and subject to applicable limitations of this Plan:
(i) Select from among the Employees and Consultants (including
Employees or Consultants who have previously received Options or
other awards under this Plan) such of them as in its opinion should
be granted Options;
(ii) Subject to the Award Limit, determine the number of
shares to be subject to such Options granted to the selected
Employees or Consultants;
(iii) Subject to Section 3.3, determine whether such Options
are to be Incentive Stock Options or Non-Qualified Stock Options and
whether such Options are to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with this Plan; provided, however, that the terms and
conditions of Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall
include, but not be limited to, such terms and conditions as may be
necessary to meet the applicable provisions of Section 162(m) of the
Code.
(b) Upon the selection of an Employee or Consultant to be granted an
Option, the Committee shall instruct the Secretary of the Company to issue
the Option and may impose such conditions on the grant of the Option as it
deems appropriate. Without limiting the generality of the preceding
sentence, the Committee may, in its discretion and on such terms as it
deems appropriate, require as a condition on the grant of an Option to an
Employee or Consultant that the Employee or Consultant surrender for
cancelation some or all of the unexercised Options, Awards or other rights
which have been previously granted to him under this Plan or otherwise. An
Option, the grant of which is conditioned upon such surrender, may have an
Option price lower (or higher) than the exercise price of such surrendered
Option, Award or other right, may cover the same (or a lesser or greater)
number of shares as such surrendered Option, Award or other right, may
contain such other terms as the Committee deems appropriate, and shall be
exercisable in accordance with its terms, without regard to the number of
shares, price, exercise period or any other term or condition of such
surrendered Option, Award or other right.
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(c) Any Incentive Stock Option granted under this Plan may be
modified by the Committee to disqualify such Option from treatment as an
"incentive stock option" under Section 422 of the Code.
(d) During the term of the Plan
(i) Each person who is a Non-Employee Director as of the date
of the consummation of the initial public offering of Common Stock
automatically shall be granted (A) an Option to purchase ten
thousand (10,000) shares of Common Stock (subject to adjustment as
provided in Section 10.3) on the date of such initial public
offering, and (B) an Option to purchase that number of shares of
Common Stock (subject to adjustment as provided in Section 10.3)
equal to the ratio of (1) the product of (I) six and (II) the
amount of the annual retainer then payable by the Company to its
Non-Employee Directors to (2) the then Fair Market Value of a
share of Common Stock on the date of each annual meeting of
stockholders after such initial public offering of Common Stock at
which the Non-Employee Director is reelected to the Board.
(ii) Each person who is initially elected to the Board and who
is a Non-Employee Director at the time of such initial election
automatically shall be granted (A) an Option to purchase ten
thousand (10,000) shares of Common Stock (subject to adjustment as
provided in Section 10.3) on the date of such initial election and
(B) an Option to purchase that number of shares of Common Stock
(subject to adjustment as provided in Section 10.3) equal to the
ratio of (1) the product of (I) six and (II) the amount of the
annual retainer then payable by the Company to its Non-Employee
Directors to (2) the then Fair Market Value of a share of Common
Stock on the date of each annual meeting of stockholders after such
initial election at which the Non-Employee Director is reelected to
the Board. Members of the Board who are employees of the Company who
subsequently retire from the Company and remain on the Board will
not receive an initial Option grant pursuant to clause (A) of the
preceding sentence, but to the extent that they are otherwise
eligible, will receive, after retirement from employment with the
Company, Options as described in clause (B) of the preceding
sentence.
(iii) If, prior to the 90th day following the date any
Non-Employee Director is elected to the Board (or the date of the
initial public offering of Common Stock for each person who is a
Non-Employee Director as of such date), such Non-Employee Director
purchases at least five thousand (5,000) shares of Common Stock
(either in the form of an award of Restricted Stock under this
Plan, or otherwise), then such Non-Employee Director shall be
granted an Option to purchase ten thousand (10,000) shares of Common
Stock (subject to adjustment as provided in Section 10.3).
Notwithstanding Section 4.2(iv), the exercise price of the shares
subject to Options granted under this Section 3.4(d)(iii) shall be
equal to the average per share price paid by the Non-Employee
Director to purchase the 5,000 (or more) shares of Common Stock as
described in the preceding sentence of this Section 3.4(d)(iii).
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ARTICLE IV.
TERMS OF OPTIONS
Section 4.1. Option Agreement
Each Option shall be evidenced by a written Stock Option Agreement, which
shall be executed by the Optionee and an authorized officer of the Company and
which shall contain such terms and conditions as the Committee (or the Board, in
the case of Options granted to Non-Employee Directors) shall determine,
consistent with this Plan. Stock Option Agreements evidencing Options intended
to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code shall contain such terms and conditions as may be
necessary to meet the applicable provisions of Section 162(m) of the Code. Stock
Option Agreements evidencing Incentive Stock Options shall contain such terms
and conditions as may be necessary to meet the applicable provisions of Section
422 of the Code.
Section 4.2. Option Price
The price per share of the shares subject to each Option shall be set
by the Committee; provided, however, that such price shall be no less than
the par value of a share of Common Stock, unless otherwise permitted by
applicable state law, and (i) in the case of Options intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the
Code, such price shall not be less than 100% of the Fair Market Value of a
share of Common Stock on the date the Option is granted; (ii) in the case of
Incentive Stock Options, such price shall not be less than 100% of the Fair
Market Value of a share of Common Stock on the date the Option is granted (or
the date the Option is modified, extended or renewed for purposes of Section
424(h) of the Code); (iii) in the case of Incentive Stock Options granted to
an individual then owning (within the meaning of Section 424(d) of the Code)
more than 10% of the total combined voting power of all classes of stock of
the Company or any Subsidiary or parent corporation thereof (within the
meaning of Section 422 of the Code) such price shall not be less than 110% of
the Fair Market Value of a share of Common Stock on the date the Option is
granted (or the date the Option is modified, extended or renewed for purposes
of Section 424(h) of the Code); and (iv) except as otherwise provided in
Section 3.4(d)(iii), in the case of Options granted to Non-Employee Directors
such price shall be equal to the average Fair Market Value of a share of
Common Stock during the 30-day period ending on the date the Option is
granted; provided, however, that (except as otherwise provided in Section
3.4(d)(iii)) the price of each share subject to each Option granted to
Non-Employee Directors on the date of the initial public offering of Common
Stock shall equal the initial public offering price (net of underwriting
discounts and commissions) per share of Common Stock.
Section 4.3. Option Term
The term of an Option shall be set by the Committee in its discretion;
provided, however, that, (i) in the case of Options granted to Non-Employee
Directors, the term shall be ten (10) years from the date the Option is granted,
without variation or acceleration hereunder, but subject to Section 5.6, and
(ii) in the case of Incentive Stock Options, the term shall not be more than ten
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(10) years from the date the Incentive Stock Option is granted, or five (5)
years from such date if the Incentive Stock Option is granted to an individual
then owning (within the meaning of Section 424(d) of the Code) more than 10% of
the total combined voting power of all classes of stock of the Company or any
Subsidiary or parent corporation thereof (within the meaning of Section 422 of
the Code). Except as limited by requirements of Section 422 of the Code and
regulations and rulings thereunder applicable to Incentive Stock Options, the
Committee may extend the term of any outstanding Option in connection with any
Termination of Employment or Termination of Consultancy of the Optionee, or
amend any other term or condition of such Option relating to such a termination.
Section 4.4. Option Vesting
(a) The period during which the right to exercise an Option in whole
or in part vests in the Optionee shall be set by the Committee and the
Committee may determine that an Option may not be exercised in whole or in
part for a specified period after it is granted; provided, however, that
Options granted to Non-Employee Directors shall become exercisable in
cumulative annual installments of 20% on each of the first, second, third,
fourth and fifth anniversaries of the date of Option grant, without
variation or acceleration hereunder except as provided in Section 10.3(b).
At any time after grant of an Option, the Committee may, in its sole
discretion, accelerate the period during which an Option (except an Option
granted to a Non-Employee Director) vests.
(b) No portion of an Option which is unexercisable at Termination of
Employment, Termination of Directorship or Termination of Consultancy, as
applicable, shall thereafter become exercisable, except as may be
otherwise provided by the Committee in the case of Options granted to
Employees or Consultants either in the Stock Option Agreement or by action
of the Committee following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section
422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by an Optionee during any calendar year
(under the Plan and all other incentive stock option plans of the Company
and any parent or subsidiary corporation (within the meaning of Section
422 of the Code of the Company) exceeds $100,000, such Options shall be
treated as Non-Qualified Options to the extent required by Section 422 of
the Code. The rule set forth in the preceding sentence shall be applied by
taking Options into account in the order in which they were granted. For
purposes of this Section 4.4(c), the Fair Market Value of stock shall be
determined as of the time the Option with respect to such stock is
granted.
Section 4.5. Consideration
In consideration of the granting of an Option, the Optionee shall agree,
in the written Stock Option Agreement, to render faithful and efficient service
to the Company or any Subsidiary. Nothing in this Plan or in any Stock Option
Agreement hereunder shall confer upon any Optionee any right to continue in the
employ of, or as a Consultant for, the Company or any
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Subsidiary, or as a director of the Company, or shall interfere with or restrict
in any way the rights of the Company and any Subsidiary, which are hereby
expressly reserved, to discharge any Optionee at any time for any reason
whatsoever, with or without good cause.
ARTICLE V.
EXERCISE OF OPTIONS
Section 5.1. Partial Exercise
An exercisable Option may be exercised in whole or in part. However, an
Option shall not be exercisable with respect to fractional shares and the
Committee (or the Board, in the case of Options granted to Non-Employee
Directors) may require that, by the terms of the Option, a partial exercise be
with respect to a minimum number of shares.
Section 5.2. Manner of Exercise
All or a portion of an exercisable Option shall be deemed exercised upon
delivery of all of the following to the Secretary of the Company or his office:
(a) A written notice complying with the applicable rules established
by the Committee (or the Board, in the case of Options granted to
Non-Employee Directors) stating that the Option, or a portion thereof, is
exercised. The notice shall be signed by the Optionee or other person then
entitled to exercise the Option or such portion of the Option;
(b) Such representations and documents as the Committee (or the
Board, in the case of Options granted to Non-Employee Directors), in its
sole discretion, deems necessary or advisable to effect compliance with
all applicable provisions of the Securities Act of 1933, as amended, and
any other federal or state securities laws or regulations. The Committee
or Board may, in its sole discretion, also take whatever additional
actions it deems appropriate to effect such compliance including, without
limitation, placing legends on share certificates and issuing
stop-transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 10.1 by any person or persons other than the Optionee, appropriate
proof of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares
with respect to which the Option, or portion thereof, is exercised.
However, the Committee (or the Board, in the case of Options granted to
Non-Employee Directors), may in its discretion (i) allow a delay in
payment up to thirty (30) days from the date the Option, or portion
thereof, is exercised; (ii) allow payment, in whole or in part, through
the delivery of shares of Common Stock owned by the Optionee, duly
endorsed for transfer to the Company with a Fair Market Value on the date
of delivery equal to the aggregate exercise price of the Option or
exercised portion thereof; (iii) allow payment, in whole or in part,
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through the surrender of shares of Common Stock then issuable upon
exercise of the Option having a Fair Market Value on the date of Option
exercise equal to the aggregate exercise price of the Option or exercised
portion thereof; (iv) allow payment, in whole or in part, through the
delivery of property of any kind which constitutes good and valuable
consideration; (v) allow payment, in whole or in part, through the
delivery of a full recourse promissory note bearing interest (at no less
than such rate as shall then preclude the imputation of interest under the
Code) and payable upon such terms as may be prescribed by the Committee or
the Board; (vi) allow payment, in whole or in part, through the delivery
of a notice that the Optionee has placed a market sell order with a broker
with respect to shares of Common Stock then issuable upon exercise of the
Option, and that the broker has been directed to pay a sufficient portion
of the net proceeds of the sale to the Company in satisfaction of the
Option exercise price; or (vii) allow payment through any combination of
the consideration provided in the foregoing subparagraphs (ii), (iii),
(iv), (v) and (vi). In the case of a promissory note, the Committee (or
the Board, in the case of Options granted to Non-Employee Directors) may
also prescribe the form of such note and the security to be given for such
note. The Option may not be exercised, however, by delivery of a
promissory note or by a loan from the Company when or where such loan or
other extension of credit is prohibited by law.
Section 5.3. Conditions to Issuance of Stock Certificates
The Company shall not be required to issue or deliver any certificate or
certificates for shares of stock purchased upon the exercise of any Option or
portion thereof prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges
on which such class of stock is then listed;
(b) The completion of any registration or other qualification of
such shares under any state or federal law, or under the rulings or
regulations of the Securities and Exchange Commission or any other
governmental regulatory body which the Committee or Board shall, in its
sole discretion, deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any state
or federal governmental agency which the Committee (or Board, in the case
of Options granted to Non-Employee Directors) shall, in its sole
discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee (or Board, in the case of Options
granted to Non-Employee Directors) may establish from time to time for
reasons of administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax.
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Section 5.4. Rights as Stockholders
The holders of Options shall not be, nor have any of the rights or
privileges of, stockholders of the Company in respect of any shares purchasable
upon the exercise of any part of an Option unless and until certificates
representing such shares have been issued by the Company to such holders.
Section 5.5. Ownership and Transfer Restrictions
The Committee (or Board, in the case of Options granted to Non-Employee
Directors), in its sole discretion, may impose such restrictions on the
ownership and transferability of the shares purchasable upon the exercise of an
Option as it deems appropriate. Any such restriction shall be set forth in the
respective Stock Option Agreement or Stockholder's Agreement or other written
agreement between the Company and the Optionee and may be referred to on the
certificates evidencing such shares. The Committee may require the Employee to
give the Company prompt notice of any disposition of shares of Common Stock
acquired by exercise of an Incentive Stock Option within (i) two years from the
date of grant (including the date the Option is modified, extended or renewed
for purposes of Section 424(h) of the Code) or (ii) one year after the transfer
of such shares to such Employee. The Committee may direct that the certificates
evidencing shares acquired by exercise of an Option refer to such requirement.
Section 5.6. Limitations on Exercise of Options Granted to Non-Employee
Directors
No Option granted to a Non-Employee Director may be exercised to any
extent by anyone after the first to occur of the following events:
(a) The expiration of twelve (12) months from the date of the
Optionee's death;
(b) The expiration of twelve (12) months from the date of the
Optionee's Termination of Directorship by reason of his permanent and
total disability (within the meaning of Section 22(e)(3) of the Code);
(c) The expiration of three (3) months from the date of the
Optionee's Termination of Directorship for any reason other than such
Optionee's death or his permanent and total disability, unless the
Optionee dies within said three-month period; or
(d) The expiration of ten years from the date the Option was
granted.
ARTICLE VI.
AWARD OF RESTRICTED STOCK
Section 6.1. Eligibility
Subject to the Award Limit, Restricted Stock may be awarded to any
Employee who the Committee determines is an Employee or any Consultant whom the
Committee determines
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should receive such an award. In addition, each Non-Employee Director shall be
eligible to receive an award of Restricted Stock in accordance with Section
3.4(d)(iii); provided, however, that the purchase price for each share of Common
Stock subject to such an Award shall be equal to the Fair Market Value of a
share of Common Stock on the date of purchase; provided, further, that such
shares of Restricted Stock awarded to a Non-Employee Director shall be subject
to such restrictions, if any, as provided by the Board.
Section 6.2. Award of Restricted Stock
(a) The Committee may from time to time, in its sole discretion:
(i) Select from among the Employees or Consultants (including
Employees or Consultants who have previously received other awards
under this Plan) such of them as in its opinion should be awarded
Restricted Stock; and
(ii) Determine the purchase price, if any, and other terms and
conditions applicable to such Restricted Stock, consistent with this
Plan.
(b) The Committee shall establish the purchase price, if any, and
form of payment for Restricted Stock; provided, however, that such
purchase price shall be no less than the par value of the Common Stock to
be purchased, unless otherwise permitted by applicable state law. In all
cases, legal consideration shall be required for each issuance of
Restricted Stock.
(c) Upon the selection of an Employee or Consultant to be awarded
Restricted Stock, the Committee shall instruct the Secretary of the
Company to issue such Restricted Stock and may impose such conditions on
the issuance of such Restricted Stock as it deems appropriate.
Section 6.3. Restricted Stock Agreement
Restricted Stock shall be issued only pursuant to a written Restricted
Stock Agreement, which shall be executed by the selected Employee, Consultant or
Non-Employee Director and an authorized officer of the Company and which shall
contain such terms and conditions as the Committee shall determine, consistent
with this Plan.
Section 6.4. Consideration
As consideration for the issuance of Restricted Stock, in addition to
payment of any purchase price, the Restricted Stockholder shall agree, in the
written Restricted Stock Agreement, to render faithful and efficient service
to the Company or any Subsidiary. Nothing in this Plan or in any Restricted
Stock Agreement hereunder shall confer on any Restricted Stockholder any
right to continue in the employ of, as a Consultant for, or as a Non-Employee
Director of the Company or any Subsidiary or shall interfere with or restrict
in any way the rights of the Company and any Subsidiary, which are hereby
expressly reserved, to discharge any Restricted Stockholder at any time for
any reason whatsoever, with or without good cause.
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Section 6.5. Rights as Stockholders
Subject to Section 6.6, upon delivery of the shares of Restricted Stock to
the escrow holder pursuant to Section 6.8, the Restricted Stockholder shall
have, unless otherwise provided by the Committee, all the rights of a
stockholder with respect to said shares, subject to the restrictions in his
Restricted Stock Agreement, including the right to receive all dividends and
other distributions paid or made with respect to the shares; provided, however,
that in the discretion of the Committee, any extraordinary distributions with
respect to the Common Stock shall be subject to the restrictions set forth in
Section 6.6.
Section 6.6. Restriction
All shares of Restricted Stock issued under this Plan (including any
shares received by holders thereof with respect to shares of Restricted Stock as
a result of stock dividends, stock splits or any other form of recapitalization)
shall, in the terms of each individual Restricted Stock Agreement, be subject to
such restrictions, if any, as the Committee shall provide, which restrictions
may include, without limitation, restrictions concerning voting rights and
transferability and restrictions based on duration of employment with the
Company, Company performance and individual performance; provided, however,
that, except with respect to shares of Restricted Stock granted pursuant to
Section 6.10, by action taken after the Restricted Stock is issued, the
Committee may, on such terms and conditions as it may determine to be
appropriate, remove any or all of the restrictions imposed by the terms of the
Restricted Stock Agreement. Restricted Stock may not be sold or encumbered until
all restrictions are terminated or expire. If no consideration was paid by the
Restricted Stockholder upon issuance, a Restricted Stockholder's rights in
unvested Restricted Stock shall lapse upon Termination of Employment,
Termination of Consultancy or Termination of Directorship, as applicable, with
the Company; provided, however, that the Committee in its sole and absolute
discretion may provide that such rights shall not lapse in the event of
Termination of Employment following a "change of ownership control" (within the
meaning of Treasury Regulation Section 1.62-27(e)(2)(v) or any successor
regulation thereto) of the Company or because of the Restricted Stockholder's
death or disability; provided, further, except with respect to shares of
Restricted Stock granted pursuant to Section 6.10, the Committee in its sole and
absolute discretion may provide that no such right of repurchase shall exist in
the event of a Termination of Employment, Termination of Consultancy, or
Termination of Directorship without cause or following any change in control or
ownership of the Company or because of the Restricted Stockholder's retirement,
or otherwise.
Section 6.7. Repurchase of Restricted Stock
The Committee shall provide in the terms of each individual Restricted
Stock Agreement that the Company shall have the right to repurchase from the
Restricted Stockholder the Restricted Stock then subject to restrictions under
the Restricted Stock Agreement immediately upon a Termination of Employment,
Termination of Consultancy or Termination of Directorship, as applicable,
between the Restricted Stockholder and the Company, at a cash price per share
equal to the price paid by the Restricted Stockholder for such Restricted Stock;
provided, however, that the Committee in its sole and absolute discretion may
provide that no such right of
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repurchase shall exist in the event of a Termination of Employment following a
"change of ownership or control" (within the meaning of Treasury Regulation
Section 1.162-27(e)(2)(v) or any successor regulation thereto) of the Company or
because of the Restricted Stockholder's death or disability; provided, further,
that, except with respect to shares of Restricted Stock granted pursuant to
Section 6.10 the Committee in its sole and absolute discretion may provide that
no such right of repurchase shall exist in the event of a Termination of
Employment, Termination of Consultancy or Termination of Directorship without
cause or following any change in control or ownership of the Company or because
of the Restricted Stockholder's retirement, or otherwise.
Section 6.8. Escrow
The Secretary of the Company or such other escrow holder as the
Committee may appoint shall retain physical custody of each certificate
representing Restricted Stock until all of the restrictions that may have
been imposed under the Restricted Stock Agreement with respect to the shares
evidenced by such certificate expire or shall have been removed.
Section 6.9. Legend
In order to enforce the restrictions that may be imposed upon shares of
Restricted Stock hereunder, the Committee shall cause a legend or legends to be
placed on certificates representing all shares of Restricted Stock that are
still subject to any such restrictions under Restricted Stock Agreements, which
legend or legends shall make appropriate reference to the conditions imposed
thereby.
Section 6.10. Provisions Applicable to Section 162(m) Participants.
(a) Notwithstanding anything in the Plan to the contrary, the
Committee may grant Restricted Stock to a Section 162(m) Participant the
restrictions with respect to which lapse upon the attainment of
performance goals for the Company which are related to one or more of the
following business criteria: (i) pre-tax income, (ii) operating income,
(iii) cash flow, (iv) earnings per share, (v) return on equity, (vi)
return on invested capital or assets, (vii) cost reductions or savings,
(viii) funds from operations, (ix) appreciation in the fair market value
of Common Stock and (x) earnings before any one or more of the following
items: interest, taxes, depreciation or amortization.
(b) To the extent necessary to comply with the performance-based
compensation requirements of Section 162(m)(4)(C) of the Code, with
respect to Restricted Stock which may be granted to one or more Section
162(m) Participants, no later than ninety (90) days following the
commencement of any fiscal year in question or any other designated fiscal
period or period of service (or such other time as may be required or
permitted by Section 162(m) of the Code), the Committee shall, in writing,
(i) designate one or more Section 162(m) Participants, (ii) select the
performance goal or goals applicable to the fiscal year or other
designated fiscal period or period of service, (iii) establish the various
targets and amounts of Restricted Stock which may be earned for such
fiscal year or other designated fiscal period or period of service and
(iv) specify
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the relationship between performance goals and targets and the amounts of
Restricted Stock to be earned by each Section 162(m) Participant for such
fiscal year or other designated fiscal period or period of service.
Following the completion of each fiscal year or other designated fiscal
period or period of service, the Committee shall certify in writing
whether the applicable performance targets have been achieved for such
fiscal year or other designated fiscal period or period of service. In
determining the amount earned by a Section 162(m) Participant, the
Committee shall have the right to reduce (but not to increase) the amount
payable at a given level of performance to take into account additional
factors that the Committee may deem relevant to the assessment of
individual or corporate performance for the fiscal year or other
designated fiscal period or period of service.
ARTICLE VII.
PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS
DEFERRED STOCK, STOCK PAYMENTS
Section 7.1. Eligibility.
Subject to the Award Limit, one or more Performance Awards, Dividend
Equivalents, awards of Deferred Stock, and/or Stock Payments may be granted to
any Employee or Consultant whom the Committee determines should receive such an
award.
Section 7.2. Performance Awards
Any Employee or Consultant selected by the Committee may be granted one or
more Performance Awards. The value of such Performance Awards may be linked to
the market value, book value, net profits or other measure of the value of
Common Stock or other specific performance criteria determined appropriate by
the Committee, in each case on a specified date or dates or over any period or
periods determined by the Committee, or may be based upon the appreciation in
the market value, book value, net profits or other measure of the value of a
specified number of shares of Common Stock over a fixed period or periods
determined by the Committee. In making such determinations, the Committee shall
consider (among such other factors as it deems relevant in light of the specific
type of award) the contributions, responsibilities and other compensation of the
particular Employee or Consultant.
Section 7.3. Dividend Equivalents
Any Employee or Consultant selected by the Committee may be granted
Dividend Equivalents based on the dividends declared on Common Stock, to be
credited as of dividend payment dates, during the period between the date an
Option, Stock Appreciation Right, Deferred Stock or Performance Award is
granted, and the date such Option, Stock Appreciation Right, Deferred Stock or
Performance Award is exercised, vests or expires, as determined by the
Committee. Such Dividend Equivalents shall be converted to cash or additional
shares of Common Stock by such formula and at such time and subject to such
limitations as may be determined by the Committee. With respect to Dividend
Equivalents granted with respect to Options intended to be qualified
performance-based compensation for purposes of Section
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162(m) of the Code, such Dividend Equivalents shall be payable regardless of
whether such Option is exercised.
Section 7.4. Stock Payments
Any Employee or Consultant selected by the Committee may receive Stock
Payments in the manner determined from time to time by the Committee. The number
of shares shall be determined by the Committee and may be based upon the Fair
Market Value, book value, net profits or other measure of the value of Common
Stock or other specific performance criteria determined appropriate by the
Committee, determined on the date such Stock Payment is made or on any date
thereafter.
Section 7.5. Deferred Stock
Any Employee or Consultant selected by the Committee may be granted an
award of Deferred Stock in the manner determined from time to time by the
Committee. The number of shares of Deferred Stock shall be determined by the
Committee and may be linked to the market value, book value, net profits or
other measure of the value of Common Stock or other specific performance
criteria determined to be appropriate by the Committee, in each case on a
specified date or dates or over any period or periods determined by the
Committee. Common Stock underlying a Deferred Stock award will not be issued
until the Deferred Stock award has vested, pursuant to a vesting schedule or
performance criteria set by the Committee. Unless otherwise provided by the
Committee, a Grantee of Deferred Stock shall have no rights as a Company
stockholder with respect to such Deferred Stock until such time as the award has
vested and the Common Stock underlying the award has been issued.
Section 7.6. Performance Award Agreement, Dividend Equivalent Agreement,
Deferred Stock Agreement, Stock Payment Agreement
Each Performance Award, Dividend Equivalent, award of Deferred Stock
and/or Stock Payment shall be evidenced by a written agreement, which shall be
executed by the Grantee and an authorized Officer of the Company and which shall
contain such terms and conditions as the Committee shall determine, consistent
with this Plan.
Section 7.7. Term
The term of a Performance Award, Dividend Equivalent, award of Deferred
Stock and/or Stock Payment shall be set by the Committee in its discretion.
Section 7.8. Exercise or Purchase Price
The Committee may establish the exercise or purchase price of a
Performance Award, shares of Deferred Stock, or shares received as a Stock
Payment; provided, however, that such price shall not be less than the par value
for a share of Common Stock, unless otherwise permitted by applicable state law.
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Section 7.9. Exercise Upon Termination of Employment
A Performance Award, Dividend Equivalent, award of Deferred Stock and/or
Stock Payment is exercisable or payable only while the Grantee is an Employee or
Consultant; provided, however, that the Committee in its sole and absolute
discretion may provide that the Performance Award, Dividend Equivalent, award of
Deferred Stock and/or Stock Payment may be exercised or paid subsequent to a
Termination of Employment following a "change of control or ownership" (within
the meaning of Section 1.162-27(e)(2)(v) or any successor regulation thereto) of
the Company; provided, further, that except with respect to Performance Awards
granted pursuant to Section 7.12, the Committee in its sole and absolute
discretion may provide that the Performance Awards may be exercised or paid
following a Termination of Employment or a Termination of Consultancy without
cause, or following a change in control of the Company, or because of the
Grantee's retirement, death or disability, or otherwise.
Section 7.10. Payment on Exercise
Payment of the amount determined under Section 7.1 or 7.2 above shall be
in cash, in Common Stock or a combination of both, as determined by the
Committee. To the extent any payment under this Article VII is effected in
Common Stock, it shall be made subject to satisfaction of all provisions of
Section 5.3.
Section 7.11. Consideration
In consideration of the granting of a Performance Award, Dividend
Equivalent, award of Deferred Stock and/or Stock Payment, the Grantee shall
agree, in a written agreement, to render faithful and efficient service to the
Company or any Subsidiary. Nothing in this Plan or in any agreement hereunder
shall confer on any Grantee any right to continue in the employ of, or as a
Consultant for, the Company or any Subsidiary or shall interfere with or
restrict in any way the rights of the Company and any Subsidiary, which are
hereby expressly reserved, to discharge any Grantee at any time for any reason
whatsoever, with or without good cause.
Section 7.12. Provisions Applicable to Section 162(m) Participants
(a) Notwithstanding anything in the Plan to the contrary, the
Committee may grant any performance or incentive awards described in
Article VII to a Section 162(m) Participant that vest or become
exercisable or payable upon the attainment of performance goals for the
Company which are related to one or more of the following business
criteria: (i) pre-tax income, (ii) operating income, (iii) cash flow, (iv)
earnings per share, (v) return on equity, (vi) return on invested capital
or assets, (vii) cost reductions or savings, (viii) funds from operations,
(ix) appreciation in the fair market value of Common Stock and (x)
earnings before any one or more of the following items:
interest, taxes, depreciation or amortization.
(b) To the extent necessary to comply with the performance-based
compensation requirements of Section 162(m)(4)(C) of the Code, with
respect to performance or incentive awards described in Article VII which
may be granted to one or
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more Section 162(m) Participants, no later than ninety (90) days following
the commencement of any fiscal year in question or any other designated
fiscal period or period of service (or such other time as may be required
or permitted by Section 162(m) of the Code), the Committee shall, in
writing, (i) designate one or more Section 162(m) Participants, (ii)
select the performance goal or goals applicable to the fiscal year or
other designated fiscal period or period of service, (iii) establish the
various targets and bonus amounts which may be earned for such fiscal year
or other designated fiscal period or period of service and (iv) specify
the relationship between performance goals and targets and the amounts to
be earned by each Section 162(m) Participant for such fiscal year or other
designated fiscal period or period of service. Following the completion of
each fiscal year or other designated fiscal period or period of service,
the Committee shall certify in writing whether the applicable performance
targets have been achieved for such fiscal year or other designated fiscal
period or period of service. In determining the amount earned by a Section
162(m) Participant, the Committee shall have the right to reduce (but not
to increase) the amount payable at a given level of performance to take
into account additional factors that the Committee may deem relevant to
the assessment of individual or corporate performance for the fiscal year
or other designated fiscal period or period of service.
ARTICLE VIII.
STOCK APPRECIATION RIGHTS
Section 8.1. Grant of Stock Appreciation Rights
A Stock Appreciation Right may be granted to any Employee or Consultant
selected by the Committee. A Stock Appreciation Right may be granted (i) in
connection and simultaneously with the grant of an Option, (ii) with respect to
a previously granted Option, or (iii) independent of an Option. A Stock
Appreciation Right shall be subject to such terms and conditions not
inconsistent with this Plan as the Committee shall impose and shall be evidenced
by a written Stock Appreciation Right Agreement, which shall be executed by the
Grantee and an authorized officer of the Company. The Committee, in its
discretion, may determine whether a Stock Appreciation Right is to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code
and Stock Appreciation Right Agreements evidencing Stock Appreciation Rights
intended to so qualify shall contain such terms and conditions as may be
necessary to meet the applicable provisions of Section 162(m) of the Code.
Without limiting the generality of the foregoing, the Committee may, in its
discretion and on such terms as it deems appropriate, require as a condition of
the grant of a Stock Appreciation Right to an Employee or Consultant that the
Employee or Consultant surrender for cancelation some or all of the unexercised
Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments, or other rights
which have been previously granted to him under this Plan or otherwise. A Stock
Appreciation Right, the grant of which is conditioned upon such surrender, may
have an exercise price lower (or higher) than the exercise price of the
surrendered Option or other award, may cover the same (or a lesser or greater)
number of shares as such surrendered Option or other award, may contain such
other terms as the Committee deems appropriate, and shall be exercisable in
accordance with its terms,
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without regard to the number of shares, price, exercise period or any other term
or condition of such surrendered Option or other award.
Section 8.2. Coupled Stock Appreciation Rights
(a) A Coupled Stock Appreciation Right ("CSAR") shall be related to
a particular Option and shall be exercisable only when and to the extent
the related Option is exercisable.
(b) A CSAR may be granted to the Grantee for no more than the number
of shares subject to the simultaneously or previously granted Option to
which it is coupled.
(c) A CSAR shall entitle the Grantee (or other person entitled to
exercise the Option pursuant to this Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the
extent then exercisable pursuant to its terms) and to receive from the
Company in exchange therefor an amount determined by multiplying the
difference obtained by subtracting the Option exercise price from the Fair
Market Value of a share of Common Stock on the date of exercise of the
CSAR by the number of shares of Common Stock with respect to which the
CSAR shall have been exercised, subject to any limitations the Committee
may impose.
Section 8.3. Independent Stock Appreciation Rights
(a) An Independent Stock Appreciation Right ("ISAR") shall be
unrelated to any Option and shall have a term set by the Committee. An
ISAR shall be exercisable in such installments as the Committee may
determine. An ISAR shall cover such number of shares of Common Stock as
the Committee may determine. The exercise price per share of Common Stock
subject to each ISAR shall be set by the Committee. An ISAR is exercisable
only while the Grantee is an Employee or Consultant; provided that the
Committee may determine that the ISAR may be exercised subsequent to
Termination of Employment or Termination of Consultancy without cause, or
following a change in control of the Company, or because of the Grantee's
retirement, death or disability, or otherwise.
(b) An ISAR shall entitle the Grantee (or other person entitled to
exercise the ISAR pursuant to this Plan) to exercise all or a specified
portion of the ISAR (to the extent then exercisable pursuant to its terms)
and to receive from the Company an amount determined by multiplying the
difference obtained by subtracting the exercise price per share of the
ISAR from the Fair Market Value of a share of Common Stock on the date of
exercise of the ISAR by the number of shares of Common Stock with respect
to which the ISAR shall have been exercised, subject to any limitations
the Committee may impose.
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Section 8.4. Payment and Limitations on Exercise
(a) Payment of the amount determined under Section 8.2(c) and 8.3(b)
above shall be in cash, in Common Stock (based on its Fair Market Value as
of the date the Stock Appreciation Right is exercised) or a combination of
both, as determined by the Committee. To the extent such payment is
effected in Common Stock it shall be made subject to satisfaction of all
provisions of Section 5.3 above pertaining to Options.
(b) Grantees of Stock Appreciation Rights may be required to comply
with any timing or other restrictions with respect to the settlement or
exercise of a Stock Appreciation Right, including a window-period
limitation, as may be imposed in the discretion of the Board or Committee.
Section 8.5. Consideration
In consideration of the granting of a Stock Appreciation Right, the
Grantee shall agree, in the written Stock Appreciation Right Agreement, to
render faithful and efficient service to the Company or any Subsidiary. Nothing
in this Plan or in any Stock Appreciation Right Agreement hereunder shall confer
on any Grantee any right to continue in the employ of, or as a Consultant for,
the Company or any Subsidiary or shall interfere with or restrict in any way the
rights of the Company and any Subsidiary, which are hereby expressly reserved,
to discharge any Grantee at any time for any reason whatsoever, with or without
good cause.
ARTICLE IX.
ADMINISTRATION
Section 9.1. Compensation Committee; Subcommittee
(a) The Compensation Committee shall consist of three or more Directors,
appointed by and holding office at the pleasure of the Board, none of whom shall
be an Employee. Appointment of Committee members shall be effective upon
acceptance of appointment. Committee members may resign at any time by
delivering written notice to the Board. Vacancies in the Committee may be filled
by the Board.
(b) A Subcommittee consisting of two or more Committee members, appointed
by and serving office at the pleasure of the Board, each of whom is both a
"non-employee director" as defined by Rule 16b-3 and an "outside director" for
purposes of Section 162(m) of the Code may be appointed at any time during which
(i) two or more Board members qualify as both "non-employee directors" and
"outside directors" and (ii) any other member of the Committee does not qualify
as both a "non-employee director" and an "outside director."
Section 9.2. Duties and Powers of Committee
It shall be the duty of the Committee to conduct the general
administration of this Plan in accordance with its provisions. The Committee and
the Subcommittee shall have the power to interpret this Plan, the Stockholder's
Agreements and the agreements pursuant to which Awards
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are granted and to adopt such rules for the administration, interpretation
and application of this Plan as are consistent therewith and to interpret,
amend or revoke any such rules. Notwithstanding the foregoing, the full
Board, acting by a majority of its members in office, shall conduct the
general administration of the Plan (i) with respect to Options granted to
Non-Employee Directors and (ii) at any time when there is no Subcommittee as
described in Section 9.1(b) and not all of the Committee members are
"non-employee directors" as defined by Rule 166-3, with respect to any person
who is subject to Section 16 of the Exchange Act at the time such person is
granted an Option. Any such grant or award under this Plan need not be the
same with respect to each Participant. Any such interpretations and rules
with respect to Incentive Stock Options shall be consistent with the
provisions of Section 422 of the Code. In its sole discretion, the Board may
at any time and from time to time exercise any and all rights and duties of
the Committee under this Plan except with respect to matters which under Rule
16b-3 or Section 162(m) of the Code (as each may be applicable), or any
regulations or rules issued thereunder, are required to be determined in the
sole discretion of the Committee (or the Subcommittee, as applicable).
Section 9.3. Majority Rule
The Committee and the Subcommittee shall each act by a majority of its
members in attendance at a meeting where quorum is present or by a memorandum
or other written instrument signed by all members of the Committee.
Section 9.4. Compensation; Professional Assistance; Good Faith Actions
Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities which members of the Committee incur in connection with the
administration of this Plan shall be borne by the Company. The Committee and the
Subcommittee may, with the approval of the Board, employ attorneys, consultants,
accountants, appraisers, brokers or other persons. The Committee, the Company
and the Company's officers and Directors shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee, the Board or the
Subcommittee in good faith shall be final and binding upon all Participants, the
Company and all other interested persons. No members of the Committee or the
Board shall be personally liable for any action, determination or interpretation
made in good faith with respect to this Plan or any Award, and all members of
the Committee and the Board shall be fully protected by the Company in respect
of any such action, determination or interpretation.
ARTICLE X.
MISCELLANEOUS PROVISIONS
Section 10.1. Not Transferable
Awards under this Plan may not be sold, pledged, assigned, or transferred
in any manner other than by will or the laws of descent and distribution or
pursuant to a QDRO, unless and until such rights or awards have been exercised,
or the shares underlying such rights or awards have been issued, and all
restrictions applicable to such shares have lapsed. No Award or interest or
right therein shall be liable for the debts, contracts or engagements of the
Participant or his successors in interest or shall be subject to disposition by
transfer, alienation, anticipation,
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pledge, encumbrance, assignment or any other means whether such disposition be
voluntary or involuntary or by operation of law by judgment, levy, attachment,
garnishment or any other legal or equitable proceedings (including bankruptcy),
and any attempted disposition thereof shall be null and void and of no effect,
except to the extent that such disposition is permitted by the preceding
sentence.
During the lifetime of the Participant, only he may exercise an Award (or
any portion thereof) granted to him under the Plan, unless it has been disposed
of pursuant to a QDRO. After the death of the Participant, any exercisable
portion of an Award may, prior to the time when such portion becomes
unexercisable under the Plan or the applicable Stock Option Agreement or other
agreement, be exercised by his personal representative or by any person
empowered to do so under the deceased Participant's will or under the then
applicable laws of descent and distribution.
Section 10.2. Amendment, Suspension or Termination of this Plan
Except as otherwise provided in this Section 10.2, this Plan may be wholly
or partially amended or otherwise modified, suspended or terminated at any time
or from time to time by the Board or the Committee. However, without approval of
the Company's stockholders given within twelve months before or after the action
by the Board or the Committee, no action of the Board or the Committee may,
except as provided in Section 10.3, increase the limits imposed in Section 2.1
on the maximum number of shares which may be issued under this Plan, and no
action of the Board or the Committee may be taken that would otherwise require
stockholder approval as a matter of applicable law, regulation or rule. The
Award Limit may be increased by the Board or the Committee at any time and from
time to time, and Awards may be granted with respect to a number of shares not
in excess of such increased Award Limit; provided, however, that no such
increase of the Award Limit shall be effective unless and until such increase is
approved by the Company's stockholders and if such approval is not obtained all
Awards granted with respect to a number of shares in excess of the Award Limit
in effect prior to such increase shall be canceled and shall become null and
void. No amendment, suspension or termination of this Plan shall, without the
consent of the Participant alter or impair any rights or obligations under any
Awards theretofore granted, unless the Award itself otherwise expressly so
provides. No Award may be granted during any period of suspension or after
termination of this Plan, and in no event may any Incentive Stock Option be
granted under this Plan after the first to occur of the following events:
(a) The expiration of ten years from the date the Plan is adopted by
the Board; or
(b) The expiration of ten years from the date the Plan is approved
by the Company's stockholders under Section 10.4.
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Section 10.3. Changes in Common Stock or Assets of the Company, Acquisition or
Liquidation of the Company and Other Corporate Events
(a) Subject to Section 10.3(d), in the event that the Committee (or the
Board, in the case of Options granted to Non-Employee Directors) determines that
any dividend or other distribution (whether in the form of cash, Common Stock,
other securities, or other property), recapitalization, reclassification, stock
split, reverse stock split, reorganization, merger, consolidation, split-up,
spin-off, combination, repurchase, liquidation, dissolution, or sale, transfer,
exchange or other disposition of all or substantially all of the assets of the
Company (including, but not limited to, a Change in Control), or exchange of
Common Stock or other securities of the Company, issuance of warrants or other
rights to purchase Common Stock or other securities of the Company, or other
similar corporate transaction or event, in the Committee's sole discretion (or
in the case of Options granted to Non-Employee Directors, the Board's sole
discretion), affects the Common Stock such that an adjustment is determined by
the Committee to be appropriate in order to prevent dilution or enlargement of
the benefits or potential benefits intended to be made available under the Plan
or with respect to an Award, then the Committee (or the Board, in the case of
Options granted to Non-Employee Directors) shall, in such manner as it may deem
equitable, adjust any or all of
(i) the number and kind of shares of Common Stock (or other
securities or property) with respect to which Awards may be granted
(including, but not limited to, adjustments of the limitations in
Section 2.1 on the maximum number and kind of shares which may be
issued and adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Awards, and
(iii) the grant or exercise price with respect to any Option,
Performance Award, Stock Appreciation Right, Dividend
Equivalent or Stock Payment.
(b) Subject to Sections 10.3(b)(vii) or Section 10.3(d), in the event of
any Change in Control or other transaction or event described in Section 10.3(a)
or any unusual or nonrecurring transactions or events affecting the Company, any
affiliate of the Company, or the financial statements of the Company or any
affiliate, or of changes in applicable laws, regulations, or accounting
principles, the Committee (or the Board, in the case of Options granted to
Non-Employee Directors) in its discretion is hereby authorized to take any one
or more of the following actions whenever the Committee (or the Board, in the
case of Options granted to Non-Employee Directors) determines that such action
is appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to any Option, right or other award under this Plan, to facilitate such
transactions or events or to give effect to such changes in laws, regulations or
principles:
(i) In its sole discretion, and on such terms and conditions
as it deems appropriate, the Committee (or the Board, in the case of
Options granted to Non-Employee Directors) may provide, either by the
terms of the agreement or by action taken
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prior to the occurrence of such transaction or event and either
automatically or upon the request of the Participant, for either the
purchase of any such Award for an amount of cash equal to the amount that
could have been attained upon the exercise of such Award had such Award
been currently exercisable or payable or fully vested or the replacement
of such Award with other rights or property selected by the Committee (or
the Board, in the case of Options granted to Non-Employee Directors) in
its sole discretion;
(ii) In its sole discretion, the Committee (or the Board, in
the case of Options granted to Non-Employee Directors) may provide, either
by the terms of such Award or by action taken prior to the occurrence of
such transaction or event that it cannot vest, be exercised or become
payable after such event;
(iii) In its sole discretion, and on such terms and conditions
as it deems appropriate, the Committee (or the Board, in the case of
Options granted to Non-Employee Directors) may provide, either by the
terms of such Award or by action taken prior to the occurrence of such
transaction or event, that for a specified period of time prior to such
transaction or event, such Award shall be exercisable as to all shares
covered thereby, notwithstanding anything to the contrary in (i) Section
4.4 or (ii) the provisions of such Award;
(iv) In its sole discretion, and on such terms and conditions
as it deems appropriate, the Committee (or the Board, in the case of
Options granted to Non-Employee Directors) may provide, either by the
terms of such Award or by action taken prior to the occurrence of such
transaction or event, that upon such event, such Award be assumed by the
successor or survivor corporation, or a parent or subsidiary thereof, or
shall be substituted for by similar Awards covering the stock of the
successor or survivor corporation, or a parent or subsidiary thereof, with
appropriate adjustments as to the number and kind of shares and prices;
and
(v) In its sole discretion, and on such terms and conditions
as it deems appropriate, the Committee (or the Board, in the case of
Options granted to Non-Employee Directors) may make adjustments in the
number and type of shares of Common Stock (or other securities or
property) subject to outstanding Awards and/or in the terms and conditions
of (including the grant or exercise price), and the criteria included in,
outstanding Awards which may be granted in the future.
(vi) In its sole discretion, and on such terms and conditions
as it deems appropriate, the Committee may provide either by the terms of
a Restricted Stock award or Deferred Stock award or by action taken prior
to the occurrence of such event that, for a specified period of time prior
to such event, the restrictions imposed under a Restricted Stock Agreement
or a Deferred Stock Agreement upon some or all shares of Restricted Stock
or Deferred Stock may be terminated, and, in the case of Restricted Stock,
some or all shares of such Restricted Stock may cease to be subject to
repurchase under Section 6.6 or forfeiture under Section 6.5 after such
event.
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(vii) None of the foregoing discretionary actions taken under this
Section 10.3(b) shall be permitted with respect to Options granted under
Section 3.4(d) to Non-Employee Directors to the extent that such
discretion would be inconsistent with the applicable exemptive conditions
of Rule 16b-3. In the event of a Change in Control, each Option granted to
a Non-Employee Director shall be exercisable as to all shares covered
thereby immediately prior to the consummation of such Change in Control
and subject to such consummation, notwithstanding anything to the contrary
in Section 4.4 or the vesting schedule of such Options.
(c) Subject to Section 10.3(d) and 10.8, the Committee (or the
Board, in the case of Options granted to Non-Employee Directors) may, in its
discretion, include such further provisions and limitations in any Award
agreement or certificate, as it may deem equitable and in the best interests of
the Company.
(d) With respect to any Award granted to any Section 162(m)
Participant that is intended to qualify as performance-based compensation
under Section 162(m)(4)(C), no adjustment or action described in this Section
10.3 or in any other provision of the Plan shall be authorized to the extent
that such adjustment or action would cause such Award to fail to so qualify
under Section 162(m)(4)(C) or any successor provision thereto. Furthermore,
no such adjustment or action shall be authorized to the extent such
adjustment or action would result in short-swing profits liability under
Section 16 or violate the exemptive conditions of Rule 16b-3 unless the
Committee (or the Board, in the case of Options granted to Non-Employee
Directors) determines that the Option or other award is not to comply with
such exemptive conditions. The number of shares of Common Stock subject to
any Award shall always be rounded to the next whole number.
Section 10.4. Approval of Plan by Stockholders
This Plan will be submitted for the approval of the Company's stockholders
within twelve months after the date of the Board's initial adoption of this
Plan. Awards may be granted prior to such stockholder approval, provided that
such Awards shall not vest or be exercisable prior to the time when this Plan is
approved by the stockholders, and provided further that if such approval has not
been obtained at the end of said twelve-month period all Awards previously
granted under this Plan shall thereupon be canceled and become null and void.
Section 10.5. Tax Withholding
The Company shall be entitled to require payment in cash or deduction from
other compensation payable to each Participant of any sums required by federal,
state or local tax law to be withheld with respect to the issuance, vesting,
exercise or payment of any Award. The Committee (or the Board, in the case of
Options granted to Non-Employee Directors) may in its discretion and in
satisfaction of the foregoing requirement allow such Participant to elect to
have the Company withhold shares of Common Stock otherwise issuable under such
Award (or allow
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the return of shares of Common Stock) having a Fair Market Value equal to the
sums required to be withheld.
Section 10.6. Loans
The Committee may, in its discretion, extend one or more loans to
Employees in connection with the exercise or receipt of an Award granted under
this Plan. The terms and conditions of any such loan shall be set by the
Committee.
Section 10.7. Forfeiture Provisions
Pursuant to its general authority to determine the terms and conditions
applicable to awards under the Plan, the Committee (or the Board, in the case of
Options granted to Non-Employee Directors) shall have the right (to the extent
consistent with the applicable exemptive conditions of Rule 16b-3) to provide,
in the terms of Options or other awards made under the Plan, or to require the
recipient to agree by separate written instrument, that (i) any proceeds, gains
or other economic benefit actually or constructively received by the recipient
upon any receipt or exercise of the award, or upon the receipt or resale of any
Common Stock underlying such award, must be paid to the Company, and (ii) the
award shall terminate and any unexercised portion of such award (whether or not
vested) shall be forfeited, if (a) a Termination of Employment, Termination of
Consultancy or Termination of Directorship occurs prior to a specified date, or
within a specified time period following receipt or exercise of the award, or
(b) the recipient at any time, or during a specified time period, engages in any
activity in competition with the Company, or which is inimical, contrary or
harmful to the interests of the Company, as further defined by the Committee (or
the Board, as applicable).
Section 10.8. Limitations Applicable to Section 16 Persons and Performance-Based
Compensation
Notwithstanding any other provision of this Plan, this Plan, and any Award
granted to any individual who is then subject to Section 16 of the Exchange Act,
shall be subject to any additional limitations set forth in any applicable
exemptive rule under Section 16 of the Exchange Act (including any amendment to
Rule 16b-3 of the Exchange Act) that are requirements for the application of
such exemptive rule. To the extent permitted by applicable law, the Plan, and
Awards granted hereunder shall be deemed amended to the extent necessary to
conform to such applicable exemptive rule. Furthermore, notwithstanding any
other provision of this Plan, any Option, Stock Appreciation Right or
performance or incentive award described in Article VII which is granted to a
Section 162(m) Participant and is intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall be subject
to any additional limitations set forth in Section 162(m) of the Code (including
any amendment to Section 162(m) of the Code) or any regulations or rulings
issued thereunder that are requirements for qualification as performance-based
compensation as described in Section 162(m)(4)(C) of the Code, and this Plan
shall be deemed amended to the extent necessary to conform to such requirements.
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Section 10.9. Effect of Plan Upon Options and Compensation Plans.
The adoption of this Plan shall not affect any other compensation or
incentive plans in effect for the Company or any Subsidiary. Nothing in this
Plan shall be construed to limit the right of the Company (i) to establish any
other forms of incentives or compensation for Employees, Directors or
Consultants of the Company or any Subsidiary or (ii) to grant or assume Options
or other rights or awards otherwise than under this Plan in connection with any
proper corporate purpose including but not by way of limitation, the grant or
assumption of Options in connection with the acquisition by purchase, lease,
merger, consolidation or otherwise, of the business, stock or assets of any
corporation, partnership, limited liability company, firm or association.
Section 10.10. Compliance with Laws
This Plan, the granting and vesting of Awards under this Plan and the
issuance and delivery of shares of Common Stock and the payment of money under
this Plan or under Awards granted hereunder are subject to compliance with all
applicable federal and state laws, rules and regulations (including but not
limited to state and federal securities law and federal margin requirements) and
to such approvals by any listing, regulatory or governmental authority as may,
in the opinion of counsel for the Company, be necessary or advisable in
connection therewith. Any securities delivered under this Plan shall be subject
to such restrictions, and the person acquiring such securities shall, if
requested by the Company, provide such assurances and representations to the
Company as the Company may deem necessary or desirable to assure compliance with
all applicable legal requirements. To the extent permitted by applicable law,
the Plan, or Awards granted hereunder shall be deemed amended to the extent
necessary to conform to such laws, rules and regulations.
Section 10.11. Titles
Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of this Plan.
Section 10.12. Governing Law
This Plan and any agreements hereunder shall be administered, interpreted
and enforced under the internal laws of the State of Delaware without regard to
conflicts of laws thereof.
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I hereby certify that the foregoing Plan was duly adopted by the Board of
Directors of RELTEC Corporation on February 17, 1998.
Executed on this ____ day of March, 1998.
RELTEC CORPORATION
----------------------
Secretary
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Stockholders and Board of Directors
of RELTEC Corporation
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-44277 of RELTEC Corporation of our report dated February 24, 1998 appearing
in the Prospectus, which is part of such Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of RELTEC Corporation,
listed in Item 16. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
March 11, 1998
