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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 1999
REGISTRATION NO. 333-71397
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------------
TRANSDIGM INC.
TRANSDIGM HOLDING COMPANY
MARATHON POWER TECHNOLOGIES COMPANY
(Exact name of each of the co-registrants as specified in its respective
charter)
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DELAWARE 3728 13-3733378
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification
Code Number)
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8233 IMPERIAL DRIVE
WACO, TEXAS 76712
(254) 776-0650
(Address, including zip code, and telephone number, including area code, of
each of the co-registrants' principal executive offices)
------------------------------
PETER B. RADEKEVICH
CHIEF FINANCIAL OFFICER
TRANSDIGM HOLDING COMPANY
8233 IMPERIAL DRIVE
WACO, TEXAS 76712
(254) 776-0650
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPY TO:
KIRK A. DAVENPORT, ESQ.
LATHAM & WATKINS
885 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 906-1200
--------------------------
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 being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, 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. / /
--------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER NEW NOTES OFFERING PRICE(1) FEE(1)(2)
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10 3/8% Senior Subordinated Notes due 2008(3)..... $125,000,000 100% $125,000,000 $34,750
Guarantees of the 10 3/8 Senior Subordinated Notes
due 2008(4)..................................... N/A N/A N/A N/A
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(1) The registration fee has been calculated pursuant to Rule 457(a), Rule
457(f)(2) and Rule 457(n) under the Securities Act of 1933, as amended. The
Proposed Maximum Aggregate Offering Price is estimated solely for the
purpose of calculating the registration fee.
(2) Paid with the initial filing of the Registration Statement.
(3) The 10 3/8% Senior Subordinated Notes due 2008 will be the obligations of
TransDigm Inc.
(4) Each of TransDigm Holding Company and Marathon Power Technologies Company
will guarantee on an unconditional basis the obligations of TransDigm Inc.
under the 10 3/8% Senior Subordinated Note due 2008. Pursuant to Rule
457(n), no additional registration fee is being paid in respect of the
guarantees. The guarantees are not traded separately.
THE CO-REGISTRANTS HEREBY AMEND 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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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SUBJECT TO COMPLETION, DATED FEBRUARY 5, 1999
PROSPECTUS
OFFER TO EXCHANGE ALL OUTSTANDING
10 3/8% SENIOR SUBORDINATED NOTES DUE 2008
($125,000,000 AGGREGATE PRINCIPAL AMOUNT OUTSTANDING)
FOR
10 3/8% SENIOR SUBORDINATED NOTES DUE 2008
OF
TRANSDIGM INC.
We are offering to exchange all of our outstanding 10 3/8% Senior
Subordinated Notes due 2008 ("Old Notes") for our registered 10 3/8% Senior
Subordinated Notes due 2008 ("New Notes"). The Old Notes and New Notes are
collectively referred to as the "Notes." The Old Notes were issued on December
3, 1998. The terms of the New Notes are identical to the terms of the Old Notes
except that the New Notes are registered under the Securities Act of 1933, as
amended, and therefore are freely transferable.
*PLEASE CONSIDER THE FOLLOWING:
- - You should carefully review the Risk Factors beginning on page 11 of this
Prospectus.
- - Our offer to exchange Old Notes for New Notes will be open until 5:00 p.m.,
New York City time, on , 1999, unless we extend the offer.
- - You should also carefully review the procedures for tendering the Old Notes
beginning on page 21 of this Prospectus.
- - If you fail to tender your Old Notes, you will continue to hold unregistered
securities and your ability to transfer them could be adversely affected.
- - No public market currently exists for the Notes. We do not intend to list the
New Notes on any securities exchange and, therefore, no active public market
is anticipated.
INFORMATION ABOUT THE NOTES:
- - The Notes will mature on December 1, 2008.
- - We will pay interest on the Notes semi-annually on June 1 and April 1 of each
year beginning June 1, 1999 at the rate of 10 3/8% per annum.
- - We may redeem the Notes on or after December 1, 2003 at certain rates set
forth on page 68 of this Prospectus.
- - We also have the option until December 1, 2001, to redeem up to 35% of the
original aggregate principal amount of the Notes with the net proceeds of
certain equity offerings.
- - The Notes are unsecured obligations and are subordinated to our existing and
future senior debt.
- - The Notes are fully and unconditionally guaranteed on an unsecured senior
subordinated basis by our domestic subsidiary and our parent holding company.
- - If we undergo a change of control or sell certain of our assets, we may be
required to offer to purchase Notes from you.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1999
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TABLE OF CONTENTS
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PAGE
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WHERE YOU CAN FIND MORE INFORMATION........................................................................ ii
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.................................................. ii
PROSPECTUS SUMMARY......................................................................................... 1
RISK FACTORS............................................................................................... 11
TRANSACTIONS............................................................................................... 20
THE EXCHANGE OFFER......................................................................................... 21
USE OF PROCEEDS............................................................................................ 28
CAPITALIZATION............................................................................................. 29
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION..................................................... 30
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA.............................................. 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 39
BUSINESS................................................................................................... 46
MANAGEMENT................................................................................................. 56
PRINCIPAL STOCKHOLDERS..................................................................................... 61
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................. 63
DESCRIPTION OF OTHER INDEBTEDNESS.......................................................................... 65
DESCRIPTION OF THE NEW NOTES............................................................................... 67
REGISTRATION RIGHTS........................................................................................ 105
BOOK-ENTRY; DELIVERY AND FORM.............................................................................. 108
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS.................................................... 110
PLAN OF DISTRIBUTION....................................................................................... 111
EXPERTS.................................................................................................... 112
LEGAL MATTERS.............................................................................................. 112
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
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WHERE YOU CAN FIND MORE INFORMATION
Upon effectiveness of the Registration Statement of which this Prospectus is
a part, we will file annual and quarterly and other information with the
Securities and Exchange Commission (the "Commission"). You may read and copy any
reports, statements and other information we file at the Commission's public
reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois.
Please call 1-800-SEC-0330 for further information on the public reference
rooms. Our filings will also be available to the public from commercial document
retrieval services and at the web site maintained by the Commission at
http://www.sec.gov.
We, together with our domestic subsidiary and our parent holding company
(the "Guarantors"), have filed a Registration Statement on Form S-4 to register
with the Commission the New Notes to be issued in exchange for the Old Notes.
This Prospectus is part of that Registration Statement. As allowed by the
Commission's rules, this Prospectus does not contain all of the information you
can find in the Registration Statement or the exhibits to the Registration
Statement.
WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS ABOUT THE TRANSACTIONS WE DISCUSS IN THIS PROSPECTUS OTHER THAN
THOSE CONTAINED HEREIN. IF YOU ARE GIVEN ANY INFORMATION OR REPRESENTATIONS
ABOUT THESE MATTERS THAT IS NOT DISCUSSED, YOU MUST NOT RELY ON THAT
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY SECURITIES ANYWHERE OR TO ANYONE WHERE OR TO WHOM WE ARE NOT
PERMITTED TO OFFER OR SELL SECURITIES UNDER APPLICABLE LAW. THE DELIVERY OF THIS
PROSPECTUS OFFERED HEREBY DOES NOT, UNDER ANY CIRCUMSTANCES, MEAN THAT THERE HAS
NOT BEEN A CHANGE IN OUR AFFAIRS SINCE THE DATE HEREOF. IT ALSO DOES NOT MEAN
THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AFTER THIS DATE.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements about our
financial condition, results of operations and business. You can find many of
these statements by looking for words such as "believes," "expects,"
"anticipates," "estimates," or similar expressions used in this Prospectus or
incorporated herein.
This Prospectus includes "forward looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended, including, in particular, the statements about our plans,
strategies and prospects under the headings "Prospectus Summary," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." Although we believe that our plans, intentions and expectations
reflected in or suggested by such forward-looking statements are reasonable, we
can give no assurance that such plans, intentions or expectations will be
achieved. Important factors that could cause actual results to differ materially
from the forward looking statements we make in this Prospectus are set forth
below under the caption "Risk Factors" and elsewhere in this Prospectus. All
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by those cautionary statements.
You are cautioned not to place undue reliance on such statements, which
speak only as of the date of this Prospectus or, in the case of documents
incorporated by reference, the date of such document.
We do not undertake any responsibility to release publicly any revisions to
these forward-looking statements to take into account events or circumstances
that occur after the date of this Prospectus. Additionally, we don't undertake
any responsibility to update you on the occurrence of any unanticipated events
which may cause actual results to differ from those expressed or implied by the
forward-looking statements contained or incorporated by reference to this
Prospectus.
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PROSPECTUS SUMMARY
IN THIS PROSPECTUS, THE WORDS "TRANSDIGM" AND "COMPANY" REFER TO TRANSDIGM
INC., THE ISSUER OF THE OLD NOTES AND THE NEW NOTES, AND ITS SUBSIDIARIES. THE
TERM "HOLDINGS" REFERS TO THE PARENT HOLDING COMPANY OF TRANSDIGM, WHICH HAS NO
ASSETS OTHER THAN THE TRANSDIGM CAPITAL STOCK. THE FOLLOWING SUMMARY CONTAINS
BASIC INFORMATION ABOUT THE COMPANY AND THIS EXCHANGE OFFER. IT DOES NOT CONTAIN
ALL THE INFORMATION THAT IS IMPORTANT TO YOU. FOR A MORE COMPLETE UNDERSTANDING
OF THIS EXCHANGE OFFER, WE ENCOURAGE YOU TO READ THIS ENTIRE DOCUMENT AND THE
DOCUMENTS WE HAVE REFERRED YOU TO.
THE EXCHANGE OFFER
We completed on December 3, 1998 the private offering of $125 million of
10 3/8% Senior Subordinated Notes due 2008. We entered into a registration
rights agreement with the initial purchasers in the private offering of such Old
Notes in which we agreed, among other things, to deliver to you this Prospectus
and to complete this exchange offer within 185 days of the original issuance of
such Old Notes. You are entitled to exchange in this exchange offer Old Notes
that you hold for registered New Notes with substantially identical terms. If
this exchange offer is not completed within 185 days of the original issuance of
the Old Notes, then the interest rates on such Old Notes will increase initially
by 0.50%. You should read the discussion under the headings "-Summary
Description of the New Notes," "Description of the New Notes" and "Registration
Rights" for further information regarding the New Notes.
We believe that the New Notes that will be issued in this exchange offer may
be resold by you without compliance with the registration and prospectus
delivery provisions of the Securities Act, subject to certain conditions. You
should read the discussion under the headings "-Summary of the Terms of Exchange
Offer" and "The Exchange Offer" for further information regarding this exchange
offer and resale of the New Notes.
THE COMPANY
TRANSDIGM INC.
8233 Imperial Drive
Waco, Texas 76712
(254) 776-0650
We are a leading supplier of highly engineered aircraft components for use
on nearly all commercial and military aircraft. We sell our products to
commercial airlines (such as United Airlines and Continental Airlines), large
commercial transport and regional and business aircraft original equipment
manufacturers (such as Boeing, Bombardier and Cessna) and various agencies of
the United States government. We compete in product specific markets that we
estimate range in size from $10 million to $100 million in annual revenues. For
fiscal 1998, the Company generated net sales, operating income and EBITDA, As
Defined, of $110.9 million, $36.8 million and $43.5 million, respectively.
Our business is comprised of three business units: (1) AdelWiggins Group,
(2) AeroControlex Group, and (3) Marathon Power Technologies Company, each of
which has a long history in the aircraft components industry. AdelWiggins
manufactures an extensive line of fuel and hydraulic system connectors and
specialized clamps, heaters and refueling systems. AeroControlex manufactures
customized fuel pumps, compressors, valves, couplings and mechanical and
electromechanical controls. Marathon manufactures nickel cadmium batteries and
static inverters. TransDigm Inc. was formed in 1993 through a management-led
buyout of the Aerospace Components Group of IMO Industries Inc. In addition,
Marathon was acquired in August 1997 as a strategic complement to the
Adelwiggins and AeroControlex businesses.
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BUSINESS STRATEGY
Key elements of our strategy are:
- - PROVIDE VALUE ADDED PRODUCTS TO CUSTOMERS. We will continue to focus on
marketing and manufacturing highly engineered products to customers that place
a premium on our capabilities. We have effectively communicated to aircraft
operators that our products will spare them future costs because our products
are more reliable, perform better and require less maintenance. We can realize
substantial gross margins on our aftermarket sales (i.e. sales to airlines as
opposed to original equipment manufacturers) because of our reputation for
quality and because we are the only supplier for many of the parts that we
market. We intend to continue to develop and market aftermarket products that
carry higher gross margins by emphasizing their benefits to customers.
- - GENERATE NEW BUSINESS INITIATIVES. In the past, we have successfully
identified and commercialized new business opportunities to drive revenue
growth. We have been particularly effective in creating aftermarket
opportunities by developing superior parts for aircraft already in service.
New business has contributed significantly to our 14% compound annual net
sales growth rate (excluding Marathon) since fiscal 1994. We believe that this
growth rate is well above the industry average during the same period. We
intend to continue to aggressively pursue growth opportunities through our new
business initiatives.
- - REALIZE PRODUCTIVITY SAVINGS. We will continue to focus on improving our
operating margins through manufacturing improvements and increases in employee
productivity. Management has achieved significant increases in productivity
since fiscal 1994. We have redesigned our business practices and manufacturing
processes in order to maximize efficiency. For example, we now employ
performance incentives to encourage our employees to operate multiple
manufacturing stations in order to minimize overall labor costs. Through this
initiative and others like it, we have significantly increased sales without
hiring new employees.
- - PURSUE STRATEGIC ACQUISITIONS. We intend to aggressively pursue acquisitions
that we believe will allow us to enhance value, reduce costs and develop new
business. The aircraft component industry is highly fragmented, with small
operators owning many of the companies. We believe that the industry is
experiencing consolidation due to customer requirements, inherent economies of
scale and technological advancements that favor more sophisticated companies.
We completed the Marathon acquisition in August 1997. We regularly engage in
discussions with respect to other acquisition and investment opportunities.
See the section "Risk Factors--Risks Related to Potential Future
Acquisitions."
RECENT DEVELOPMENTS
In connection with the offering of the Old Notes, Holdings consummated a
recapitalization pursuant to an agreement and plan of merger. The former equity
holders of Holdings received as consideration in the recapitalization $330.0
million of which $279.7 million was paid in cash, $20.0 million was paid in the
form of Holdings' pay-in-kind notes and Holdings' common stock and approximately
$30.3 million was retained by such equity holders in the form of equity interest
in Holdings.
In connection with the recapitalization, Odyssey Investment Partners Fund,
LLC and its co-investors invested $100.2 million of cash equity in Holdings. As
a result of the recapitalization, Odyssey and its co-investors own approximately
73.7%, and certain continuing equity holders of Holdings own approximately
26.3%, in each case, of the outstanding shares of Holdings common stock on a
fully diluted basis.
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ODYSSEY INVESTMENT PARTNERS FUND, LLC
As a result of the recapitalization, TransDigm is controlled by Odyssey, a
private equity fund engaged in making investments in established, middle market
companies. Although Odyssey was formed in 1997, its principals collectively have
over 70 years of private equity experience and have been responsible for a
number of very successful transactions, including: Williams Scotsman, Inc.,
Monarch Marking Systems, Inc. and TriStar Aerospace Co. The principals' recent
experience in the aerospace industry includes the September 1996 management
buyout and concurrent merger of TriStar Aerospace Co. and Aviall Aerospace, a
division of Aviall, Inc.
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SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
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Securities to be Exchanged.......... On December 3, 1998, we issued $125.0 million
aggregate principal amount of Old Notes to the
initial purchasers (the "Original Offering") in a
transaction exempt from the registration requirements
of the Securities Act of 1933, as amended (the
"Securities Act"). The terms of the New Notes and the
Old Notes are substantially identical in all material
respects, except that the New Notes will be freely
transferable by the holders except as otherwise
provided in this Prospectus. See "Description of the
New Notes."
The Exchange Offer.................. $1,000 principal amount of New Notes in exchange for
each $1,000 principal amount of Old Notes. As of the
date hereof, Old Notes representing $125.0 million
aggregate principal amount are outstanding.
Based on interpretations by the staff of the
Commission, as set forth in no-action letters issued
to certain third parties unrelated to us, we,
together with Holdings and Marathon (together with
Holdings, the "Guarantors") believe that New Notes
issued pursuant to the exchange offer in exchange for
Old Notes may be offered for resale, resold or
otherwise transferred by holders thereof (other than
any holder which is an "affiliate" of the Company or
the Guarantors within the meaning of Rule 405 under
the Securities Act, or a broker-dealer who purchased
Old Notes directly from us to resell pursuant to Rule
144A or any other available exemption under the
Securities Act), without compliance with the
registration and prospectus delivery requirements of
the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holders'
business and such holders have no arrangement with
any person to engage in a distribution of New Notes.
However, the Commission has not considered the
exchange offer in the context of a no-action letter
and we cannot be sure that the staff of the
Commission would make a similar determination with
respect to the exchange offer as in such other
circumstances. Furthermore, each holder, other than a
broker-dealer, must acknowledge that it is not
engaged in, and does not intend to engage in, a
distribution of such New Notes and has no arrangement
or understanding to participate in a distribution of
New Notes. Each broker-dealer that receives New Notes
for its own account pursuant to the exchange offer
must acknowledge that it will comply with the
prospectus delivery requirements of the Securities
Act in connection with any resale of such New Notes.
Broker-dealers who acquired Old Notes directly from
us and not as a result of market-making activities or
other trading activities may not rely on the staff's
interpretations discussed above or participate in the
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exchange offer and must comply with the prospectus
delivery requirements of the Securities Act in order
to resell the Old Notes.
Registration Rights Agreement....... We sold the Old Notes on December 3, 1998, in a
private placement in reliance on Section 4(2) of the
Securities Act. The Old Notes were immediately resold
by the initial purchasers in reliance on Rule 144A
and Regulation S under the Securities Act. In
connection with the sale, we, together with the
Guarantors, entered into a Registration Rights
Agreement with the initial purchasers (the
"Registration Rights Agreement") requiring us to make
the exchange offer. The Registration Rights Agreement
further provides that we, together with the
Guarantors, must (i) cause the Registration Statement
with respect to the exchange offer to be declared
effective within 150 days of the date on which we
issued the Old Notes and (ii) consummate the exchange
offer on or before the 185th business day following
the date on which we issued the Old Notes. See "The
Exchange Offer--Purpose and Effect."
Expiration Date..................... The exchange offer will expire at 5:00 p.m., New York
City time, , 1999 or a later date and time if
we extend it (the "Expiration Date").
Withdrawal.......................... The tender of the Old Notes pursuant to the exchange
offer may be withdrawn at any time prior to the
Expiration Date. Any Old Notes not accepted for
exchange for any reason will be returned without
expense as soon as practicable after the expiration
or termination of the exchange offer.
Interest on the New Notes and the
Old Notes......................... Interest on the New Notes will accrue from the date
of the original issuance of the Old Notes or from the
date of the last payment of interest on the Old
Notes, whichever is later. No additional interest
will be paid on Old Notes tendered and accepted for
exchange.
Conditions to the Exchange Offer.... The exchange offer is subject to certain customary
conditions, certain of which may be waived by us. See
"The Exchange Offer--Conditions to Exchange Offer."
Procedures for Tendering Old
Notes............................. Each holder of the Old Notes wishing to accept the
exchange offer must complete, sign and date the
letter of transmittal, or a copy thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver the letter of
transmittal, or the copy, together with the Old Notes
and any other required documentation, to the exchange
agent at the address set forth herein. Persons
holding the Old Notes through the Depository Trust
Company ("DTC") and wishing to accept the exchange
offer must do so pursuant to DTC's Automated Tender
Offer Program, by which each tendering
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participant will agree to be bound by the letter of
transmittal. By executing or agreeing to be bound by
the letter of transmittal, each holder will represent
to us and the Guarantors that, among other things,
(i) the New Notes acquired pursuant to the exchange
offer are being obtained in the ordinary course of
business of the person receiving such New Notes, (ii)
the holder is not engaging in and does not intend to
engage in a distribution of such New Notes, (iii) the
holder does not have an arrangement or understanding
with any person to participate in the distribution of
such New Notes, and (iv) the holder is not an
"affiliate," as defined under Rule 405 promulgated
under the Securities Act, of the Company or the
Guarantors.
Under certain circumstances specified in the
Registration Rights Agreement, we may be required to
file a "shelf" registration statement for a
continuous offering pursuant to Rule 415 under the
Securities Act in respect of the Old Notes. See
"Registration Rights."
We will accept for exchange any and all Old Notes
which are properly tendered (and not withdrawn) in
the exchange offer prior to the Expiration Date. The
New Notes issued pursuant to the exchange offer will
be delivered promptly following the Expiration Date.
See "The Exchange Offer-- Terms of the Exchange
Offer."
Exchange Agent...................... is serving as Exchange Agent (the "Exchange Agent")
in connection with the exchange offer.
Federal Income Tax Considerations... We believe the exchange of Old Notes for New Notes
pursuant to the exchange offer will not constitute a
sale or an exchange for federal income tax purposes.
See "Certain United States Federal Income Tax
Considerations."
Effect of Not Tendering............. Old Notes that are not tendered or that are tendered
but not accepted will, following the completion of
the exchange offer, continue to be subject to the
existing restrictions upon transfer thereof. We will
have no further obligation to provide for the
registration under the Securities Act of such Old
Notes.
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SUMMARY OF THE TERMS OF THE NEW NOTES
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Issuer....................................... TransDigm Inc.
Securities Offered........................... $125,000,000 in aggregate principal amount of
10 3/8% senior subordinated notes due 2008.
Maturity..................................... December 1, 2008.
Interest Rate................................ 10 3/8% per year.
Interest Payment Dates....................... June 1 and December 1, beginning on June 1,
1999. Interest will accrue from December 3,
1998.
Guarantees................................... Holdings, the parent holding company of
TransDigm, will unconditionally guarantee the
New Notes. However, you should not rely upon
the guarantee by Holdings because Holdings
has no assets other than its equity interest
in TransDigm. In addition, our domestic
subsidiary will unconditionally guarantee the
New Notes.
If we create or acquire a new domestic
subsidiary, it will guarantee the New Notes
unless we designate the subsidiary as an
"unrestricted subsidiary" under the indenture
or the subsidiary does not have significant
assets.
Ranking...................................... The New Notes will be unsecured senior
subordinated obligations of the Company and
will rank junior to our existing and future
senior debt. The guarantees by Holdings and
our subsidiaries will be subordinated to
existing and future senior debt of Holdings
and our subsidiaries, respectively. As of
September 30, 1998, pro forma for the
transactions described under the heading "The
Transactions," we and our subsidiaries would
have had $93.1 million of senior debt,
excluding approximately $26.9 million that we
would have had available to borrow under our
New Credit Facility, and Holdings would have
had $113.1 million of senior debt at face
value.
Optional Redemption.......................... We cannot redeem the New Notes until December
1, 2003. Thereafter we may redeem some or all
of the New Notes at the redemption prices
listed in the "Description of the New Notes"
section under the heading "Optional
Redemption," plus accrued interest.
Optional Redemption after Public Equity At any time (which may be more than once)
Offerings.................................. before December 1, 2001, we can choose to buy
back up to 35% of the outstanding Notes
(including New Notes) with money that we
raise in certain equity offerings, as long
as:
- we pay 110.375% of the face amount of the
Notes, plus accrued interest;
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- we buy the Notes back within 120 days of
completing such equity offering; and
- at least 65% of the aggregate principal
amount of Notes issued remains outstanding
afterwards.
Change of Control Offer...................... If a change in control of the Company occurs,
we may be required to give holders of the New
Notes the opportunity to sell us their New
Notes at 101% of their face amount, plus
accrued interest.
We might not be able to pay you the required
price for New Notes you present to us at the
time of a change of control, because:
- we might not have enough funds at that
time; or
- the terms of our senior debt may prevent
us from paying.
Asset Sale Proceeds.......................... If we engage in asset sales, we generally
must either invest the net cash proceeds from
such sales in our business within a period of
time, repay senior debt or make an offer to
purchase a principal amount of the New Notes
equal to the excess net cash proceeds. The
purchase price of the New Notes will be 100%
of their principal amount, plus accrued
interest.
Certain Indenture Provisions................. The indenture governing the New Notes will
contain covenants limiting our (and most or
all of our subsidiaries') ability to:
- incur additional debt or enter into sale
and leaseback transactions;
- pay dividends or distributions on capital
stock or repurchase capital stock;
- issue stock of subsidiaries;
- make certain investments;
- create liens on our assets to secure debt;
- enter into transactions with affiliates;
- merge or consolidate with another company;
and
- transfer and sell assets.
These covenants are subject to a number of
important limitations and exceptions.
Risk Factors................................. See "Risk Factors" beginning on page 11 for a
description of certain of the risks you
should consider.
</TABLE>
8
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary historical consolidated financial
information of Holdings and the Company. The summary historical consolidated
financial data for the fiscal years ended September 30, 1998, 1997, and 1996
have been derived from Holdings' consolidated financial statements, which have
been audited by Deloitte & Touche LLP, independent auditors. The summary
historical consolidated audited financial data for the fiscal years ended
September 30, 1995 and 1994, which have also been derived from Holdings'
consolidated financial statements, have been adjusted to give retroactive effect
to the change in accounting for put warrants as described in Note 17 to the
Consolidated Historical Financial Statements of Holdings included elsewhere in
this Prospectus. Because Holdings has no operations of its own and, prior to the
Recapitalization, had no assets or liabilities other than its equity interest in
the Company, the historical consolidated financial information of Holdings for
each of the years in the five-year period ended September 30, 1998 are identical
to the historical consolidated financial information of the Company. The pro
forma financial information set forth below gives effect to the Transactions as
if they had occurred at the beginning of the period or as of the balance sheet
date, as applicable. The pro forma financial information is not necessarily
indicative of either future results of operations or the results that might have
occurred if the foregoing transactions had been consummated on such date. There
can be no assurance that assumptions used in the preparation of the pro forma
financial data will prove to be correct. The Marathon Acquisition was completed
on August 8, 1997.
You should read the following table together with the "Unaudited Pro Forma
Consolidated Financial Information" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections and the Consolidated
Historical Financial Statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------
UNAUDITED
PRO FORMA THE
COMPANY
-------------
1994 1995 1996 1997(1) 1998 1998
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net Sales.................................................. $ 52,028 $ 57,095 $ 62,897 $ 78,159 $ 110,868 $ 110,868
Gross Profit............................................... 9,151 17,029 21,023 28,856 51,473 51,473
Selling and administrative................................. 6,244 6,167 6,459 7,561 10,473 10,373
Amortization of intangibles................................ 4,062 4,002 3,838 2,089 2,438 2,438
Research and development................................... 784 1,058 836 1,116 1,724 1,724
--------- --------- --------- --------- --------- -------------
Operating income (loss) (2)................................ (1,939) 5,802 9,890 18,090 36,838 36,938
Interest expense, net...................................... 4,823 5,193 4,510 3,463 3,175 22,789
Warrant put value adjustment (3)........................... 868 736 2,160 4,800 6,540 --
--------- --------- --------- --------- --------- -------------
Pre-tax income (loss)...................................... (7,630) (127) 3,220 9,827 27,123 14,149
Provision (benefit) for income taxes....................... (2,307) 134 2,045 5,193 12,986 5,376
--------- --------- --------- --------- --------- -------------
Income (loss) before extraordinary item.................... (5,323) (261) 1,175 4,634 14,137 8,773
Extraordinary item (4)..................................... -- -- -- (1,462) -- --
--------- --------- --------- --------- --------- -------------
Net income (loss).......................................... $ (5,323) $ (261) $ 1,175 $ 3,172 $ 14,137 $ 8,773
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------
OTHER FINANCIAL DATA:
Cash flows provided by (used in):
Operating activities..................................... $ 1,115 $ 3,972 $ 18,695 $ 17,468 $ 23,455 $ 12,734
Investing activities..................................... (3,595) 702 (2,494) (43,160) (4,295) (4,295)
Financing activities..................................... 1,851 (4,560) (13,475) 28,153 (5,071) (6,198)
EBITDA, As Defined (5)..................................... 9,875 13,168 17,213 24,522 43,547 43,647
EBITDA, As Defined, margin................................. 19.0% 23.1% 27.4% 31.4% 39.3% 39.4%
Depreciation and amortization.............................. $ 7,341 $ 7,366 $ 7,323 $ 5,766 $ 6,467 $ 6,467
Capital expenditures....................................... 1,941 1,702 2,494 2,285 5,061 5,061
Ratio of earnings to fixed charges (6)..................... -- -- 1.7x 3.7x 9.0x 1.6x
Ratio of EBITDA, As Defined, to interest expense........... 2.1x 2.5x 3.8x 7.1x 13.7x 1.9x
Ratio of EBITDA, As Defined, less capital expenditures to
interest expense......................................... 1.6x 2.2x 3.3x 6.4x 12.1x 1.7x
Ratio of total debt to EBITDA, As Defined.................. 3.7x 2.4x 1.1x 2.0x 1.0x 5.0x
BALANCE SHEET DATA (AT END OF PERIOD)
Working capital............................................ $ 12,592 $ 17,730 $ 16,300 $ 16,520 $ 16,654 $ 12,977
Total assets............................................... 71,554 65,758 57,666 101,969 115,785 106,662
Long-term debt, including current portion.................. 36,399 32,074 19,124 50,000 45,000 218,114
Total stockholders' equity (deficit)....................... 19,745 19,285 19,670 22,613 36,427 (129,010)
</TABLE>
9
<PAGE>
- ------------------------------
(1) The Company acquired Marathon on August 8, 1997. The acquisition was
accounted for as a purchase. The results of operations of Marathon are
included in Holdings' consolidated financial statements from the date of
such acquisition. See Marathon's historical financial statements and the
notes thereto included elsewhere in this Prospectus.
(2) Operating income (loss) includes the effect of a non-cash charge of $4,473
in fiscal 1994 due to a purchase accounting adjustment to inventory
associated with the acquisition of the Aerospace Components Group of IMO and
a non-cash charge of $666 in fiscal 1997 and $242 in fiscal 1998 due to, in
each case, a purchase accounting adjustment to inventory associated with the
acquisition of Marathon. The $100 adjustment to the Company's 1998 pro forma
operating income represents the elimination of the advisory fee payable to
an affiliate of one of the Company's stockholders.
(3) In connection with the formation of the Company on September 30, 1993, the
Company issued subordinated notes which included detachable warrants to
purchase approximately 16,000 shares of non-voting common stock of Holdings
at a price of $0.10 per share, exercisable upon certain change of control
events, including the Recapitalization. The warrant put value adjustment for
each period indicated reflects the increase in the estimated put value of
these warrants that occurred during that period.
(4) The extraordinary charge in fiscal 1997 relates to costs associated with the
retirement of the subordinated notes referred to in footnote (3) above
issued at the time of the Company's formation in 1993.
(5) EBITDA, As Defined, represents earnings before interest, taxes, depreciation
and amortization and the warrant put value adjustments and prior to the
impact of the purchase accounting adjustments to inventory referred to in
footnote (2) above and the extraordinary item referred to in footnote (4)
above as follows:
<TABLE>
<CAPTION>
PRO FORMA THE
COMPANY
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before extraordinary item...................... $ (5,323) $ (261) $ 1,175 $ 4,634 $ 14,137 $ 8,773
Adjustments:
Income tax provision (benefit)............................. (2,307) 134 2,045 5,193 12,986 5,376
Interest expense........................................... 4,823 5,193 4,510 3,463 3,175 22,789
Depreciation and amortization.............................. 7,341 7,366 7,323 5,766 6,467 6,467
--------- --------- --------- --------- --------- -------------
4,534 12,432 15,053 19,056 36,765 43,405
Warrant put value adjustment............................... 868 736 2,160 4,800 6,540 --
Inventory purchase accounting adjustment................... 4,473 -- -- 666 242 242
--------- --------- --------- --------- --------- -------------
EBITDA, As Defined........................................... $ 9,875 $ 13,168 $ 17,213 $ 24,522 $ 43,547 $ 43,647
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------
</TABLE>
Although EBITDA, As Defined, is not a measure of performance calculated in
accordance with GAAP, the Company believes that EBITDA, As Defined, is
accepted as a generally recognized measure of performance in the Company's
industry. Nevertheless, this measure should not be considered in isolation
or as a substitute for operating income, net income, net cash provided by
operating activities or any other measure for determining the Company's
operating performance or liquidity which is calculated in accordance with
GAAP.
(6) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes plus fixed charges. Fixed charges
consist of interest expense, amortization of debt expense and the portion
(approximately 33%) of rental expense that management believes is
representative of the interest component of rental expense. Earnings were
insufficient to cover fixed charges by $7,630 and $127 for fiscal 1994 and
1995, respectively.
10
<PAGE>
RISK FACTORS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT INCLUDING,
IN PARTICULAR, THE STATEMENTS ABOUT THE COMPANY'S PLANS, STRATEGIES, AND
PROSPECTS UNDER THE HEADINGS "PROSPECTUS SUMMARY," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "BUSINESS."
ALTHOUGH WE BELIEVE THAT OUR PLANS, INTENTIONS AND EXPECTATIONS REFLECTED IN OR
SUGGESTED BY SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CAN GIVE NO
ASSURANCE THAT SUCH PLANS, INTENTIONS OR EXPECTATIONS WILL BE ACHIEVED.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
FORWARD-LOOKING STATEMENTS WE MAKE IN THIS PROSPECTUS ARE SET FORTH BELOW AND
ELSEWHERE IN THIS PROSPECTUS. ALL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY, HOLDINGS OR PERSONS ACTING ON OUR BEHALF ARE EXPRESSLY QUALIFIED IN
THEIR ENTIRETY BY THE FOLLOWING CAUTIONARY STATEMENTS.
FAILURE TO EXCHANGE OLD NOTES--IF YOU DO NOT PROPERLY TENDER YOUR OLD NOTES,
YOU WILL CONTINUE TO HOLD UNREGISTERED OLD NOTES AND YOUR ABILITY TO TRANSFER
OLD NOTES WILL BE ADVERSELY AFFECTED.
We will only issue New Notes in exchange for Old Notes that are timely
received by the Exchange Agent together with all required documents, including a
properly completed and signed letter of transmittal. Therefore, you should allow
sufficient time to ensure timely delivery of the Old Notes and you should
carefully follow the instructions on how to tender your Old Notes. Neither we
nor the Exchange Agent are required to tell you of any defects or irregularities
with respect to your tender of the Old Notes. If you do not tender your Old
Notes or if we do not accept your Old Notes because you did not tender your Old
Notes properly, then, after we consummate the exchange offer, you may continue
to hold Old Notes that are subject to the existing transfer restrictions. In
addition, if you tender your Old Notes for the purpose of participating in a
distribution of the New Notes, you will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the New Notes. If you are a broker-dealer that
receives New Notes for your own account in exchange for Old Notes that you
acquired as a result of market-making activities or any other trading
activities, you will be required to acknowledge that you will deliver a
prospectus in connection with any resale of such New Notes. After the exchange
offer is consummated, if you continue to hold any Old Notes, you may have
difficulty selling them because there will be less Old Notes outstanding. In
addition, if a large amount of Old Notes are not tendered or are tendered
improperly, the limited amount of New Notes that would be issued and outstanding
after we consummate the exchange offer could lower the market price of such New
Notes.
SUBSTANTIAL LEVERAGE--OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT
THE FINANCIAL HEALTH OF THE COMPANY AND PREVENT US FROM FULFILLING OUR
OBLIGATIONS UNDER THE NEW NOTES.
The Company has a significant amount of indebtedness. The following chart
shows certain important Company credit statistics and is presented as at
September 30, 1998 and for the year then ended, in each case, on a pro forma
basis assuming we had completed the offering of the Old Notes and the other
Transactions as of the date or at the beginning of the period specified below:
<TABLE>
<CAPTION>
PRO FORMA
AT SEPTEMBER 30, 1998
---------------------
<S> <C>
(DOLLARS IN MILLIONS)
Total indebtedness.......................................................................... $ 218.1
Stockholders' equity (deficit).............................................................. (129.0)
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
FOR THE YEAR ENDED
SEPTEMBER 30, 1998
---------------------
<S> <C>
Ratio of earnings to fixed charges............................................................ 1.6x
</TABLE>
11
<PAGE>
In addition, Holdings has an additional $20.0 million of indebtedness
represented by the face value of the Holdings PIK Notes (all of which will be
senior to Holdings' guarantee of these New Notes) and, as at September 30, 1998,
on a pro forma basis, Holdings would have had a stockholders' deficit of
approximately $135.4 million. See "Unaudited Pro Forma Consolidated Financial
Information."
Our substantial indebtedness could have important consequences to you. For
example, it could:
- - make it more difficult for us to satisfy our obligations with respect to the
New Notes;
- - increase our vulnerability to general adverse economic and industry
conditions;
- - limit our ability to fund future working capital, capital expenditures,
research and development costs and other general corporate requirements;
- - require us to dedicate a substantial portion of our cash flow from operations
to payments on our indebtedness, thereby reducing the availability of our cash
flow to fund working capital, capital expenditures, research and development
efforts and other general corporate purposes;
- - limit our flexibility in planning for, or reacting to, changes in our business
and the industry in which we operate;
- - place us at a competitive disadvantage compared to our competitors that have
less debt; and
- - limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional funds. And,
failing to comply with those covenants could result in an event of default
which, if not cured or waived, could have a material adverse effect on us.
See "Description of the New Notes" and "Description of Other Indebtedness."
ADDITIONAL BORROWINGS AVAILABLE--DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND
OUR SUBSIDIARIES MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT. THIS COULD
FURTHER EXACERBATE THE RISKS DESCRIBED ABOVE.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The terms of the indenture do not fully prohibit us
or our subsidiaries from doing so. As at September 30, 1998, on a pro forma
basis, our New Credit Facility would have permitted additional borrowings of up
to $26.9 million and all of those borrowings would be senior to the New Notes
and the guarantees of the New Notes. If new debt is added to our and the
guarantors' current debt levels, the related risks that we and they now face
could intensify.
See "Capitalization," "Selected Historical Consolidated Financial Data" and
"Description of the New Notes" and "Description of Other Indebtedness."
ABILITY TO SERVICE DEBT--TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS
BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness, including
the New Notes, and to fund planned capital expenditures and research and
development efforts will depend on our ability to generate cash in the future.
This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
Based on our current level of operations and anticipated cost savings and
revenue growth, we believe our cash flow from operations, available cash and
available borrowings under our New Credit Facility, will be adequate to meet our
future liquidity needs for at least the next several years.
We cannot assure you, however, that our business will generate sufficient
cash flow from operations, that currently anticipated cost savings and revenue
growth will be realized on schedule or at all or that future borrowings will be
available to us under our New Credit Facility in amounts sufficient
12
<PAGE>
to enable us to pay our indebtedness, including the New Notes, or to fund our
other liquidity needs. We may need to refinance all or a portion of our
indebtedness, including the New Notes, on or before maturity. We cannot assure
you that we will be able to refinance any of our indebtedness, including our New
Credit Facility and the New Notes, on commercially reasonable terms or at all.
SUBORDINATION--YOUR RIGHT TO RECEIVE PAYMENTS ON THE NEW NOTES IS JUNIOR TO
OUR EXISTING INDEBTEDNESS AND POSSIBLY ALL OF OUR FUTURE BORROWINGS. FURTHER,
THE GUARANTEES OF THE NEW NOTES WILL BE JUNIOR TO ALL THE GUARANTORS' EXISTING
INDEBTEDNESS AND POSSIBLY TO ALL THEIR FUTURE BORROWINGS.
The New Notes and the guarantees rank behind all of our and the guarantors'
existing indebtedness (other than trade payables) and all of our and all the
guarantors' future borrowings (other than trade payables), except any future
indebtedness that expressly provides that it ranks equal with, or junior in
right of payment to, the New Notes and the guarantees. As a result, upon any
distribution to our creditors or the creditors of the guarantors in a
bankruptcy, liquidation or reorganization or similar proceeding relating to us
or the guarantors or our or their property, the holders of senior debt of our
Company and the guarantors will be entitled to be paid in full in cash before
any payment may be made with respect to the New Notes or the guarantees.
In addition, all payments on the New Notes and the guarantees will be
blocked in the event of a payment default on senior debt and may be blocked for
up to 179 of 360 consecutive days in the event of certain non-payment defaults
on senior debt.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to our Company or the guarantors, holders of the New Notes
will participate with trade creditors and all other holders of subordinated
indebtedness of the Company and the guarantors in the assets remaining after we
and the guarantors have paid all of the senior debt. However, because the
indenture requires that amounts otherwise payable to holders of the New Notes in
a bankruptcy or similar proceeding be paid to holders of senior debt instead,
holders of the New Notes may receive less, ratably than holders of trade
payables in any such proceeding. In any of these cases, we and the guarantors
may not have sufficient funds to pay all of our creditors and holders of New
Notes may receive less, ratably than the holders of senior debt.
Assuming we had completed the exchange offer on September 30, 1998, on a
pro-forma basis after giving effect to the Transactions, the Notes and the
guarantees by our domestic subsidiary would have been subordinated to $93.1
million of senior debt under our New Credit Facility. In addition, the New
Credit Facility would have provided for up to approximately $26.9 million of
additional borrowings. Holdings' guarantee of the New Notes would have been
subordinated to $113.1 million of senior debt consisting of the guarantee of the
New Credit Facility and the face value of the Holdings PIK Notes. We are
permitted to borrow substantial additional indebtedness, including senior debt,
in the future under the terms of the indenture.
LIMITED VALUE OF HOLDINGS GUARANTEE--YOU SHOULD NOT RELY ON THE GUARANTEE BY
HOLDINGS IN THE EVENT WE CANNOT MAKE PAYMENTS UPON THE NEW NOTES.
The New Notes will be guaranteed by Holdings, our parent holding company, on
a senior subordinated basis. You should not rely on this guarantee because
Holdings has no assets other than our capital stock. If we cannot make payments
under the New Notes, Holdings probably cannot make payments either. In addition,
this guarantee will be subordinated to all senior debt of Holdings (on a pro
forma basis after giving effect to the Transactions, consisting of Holdings'
guarantee of the $93.1 million of borrowings under the New Credit Facility and
the $20.0 million of borrowings consisting of the face value of the Holdings PIK
Notes as of September 30, 1998), whose holders would be paid before you in the
event of a liquidation.
13
<PAGE>
DEPENDENCE ON MAJOR CUSTOMERS--OUR COMPANY RELIES HEAVILY ON CERTAIN
CUSTOMERS FOR MUCH OF OUR SALES.
Our three largest customers for the fiscal year ended September 30, 1998
were Aviall (a distributor of aftermarket parts to airlines throughout the
world), Boeing (including McDonnell Douglas) and various agencies of the United
States government. These customers accounted for approximately 20%, 14% and 9%,
respectively, of our consolidated net sales in fiscal 1998.
Our top ten customers accounted for approximately 61% of our consolidated
net sales for fiscal 1998.
The loss of any one or more of these key customers could have a material
adverse effect on our business. See "Business--Customers" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CUSTOMER CONTRACTS--WE GENERALLY DO NOT HAVE GUARANTEED FUTURE SALES OF OUR
PRODUCTS. FURTHER, WE ARE OBLIGATED UNDER FIXED PRICE CONTRACTS WITH SOME OF OUR
CUSTOMERS, SO WE TAKE THE RISK FOR COST OVERRUNS.
As is customary in our business, we do not have long-term contracts with
most of our customers. In those cases where we do, for example with Boeing and
the United States government, our customers may terminate these contracts on
short notice.
We also have entered into fixed-price contracts with some of our customers,
where we agree to perform the work for a fixed price and, accordingly, realize
all the benefit or detriment resulting from any decreased or increased costs for
making these products. Sometimes we accept a fixed-price contract for a product
which we have not yet produced, which increases the risks of delays or cost
overruns.
We also have some contracts with customers which establish prices for
certain of our components based upon the volume the customer purchases. A number
of these contracts do not permit the Company to recover for increases in input
prices, taxes or labor costs, although some contracts provide for renegotiation
to address certain material adverse changes. Any such increases are likely to
have an adverse effect on our business.
AIRCRAFT COMPONENTS INDUSTRY RISKS--OUR BUSINESS IS SENSITIVE TO THE NUMBER
OF FLIGHT HOURS THAT OUR CUSTOMERS' PLANES SPEND ALOFT AND TO OUR CUSTOMERS'
PROFITABILITY. THESE ITEMS ARE, IN TURN, AFFECTED BY GENERAL ECONOMIC
CONDITIONS. IN ADDITION, OUR SALES TO MANUFACTURERS OF NEW LARGE AIRCRAFT ARE
CYCLICAL.
We compete in the aircraft component segment of the aerospace industry. This
segment is sensitive to changes in the number of miles flown by paying customers
of commercial airlines ("revenue passenger miles") and, to a lesser extent, to
changes in the profitability of the commercial airline industry and the size and
age of the worldwide aircraft fleet.
Revenue passenger miles and airline profitability have historically been
correlated with the general economic environment, although international events
can also play a key role. For example, in 1991 revenue passenger miles declined
as a result of increased security concerns among airline customers following the
Gulf War. Although 1991 was the only year in the last ten years in which revenue
passenger miles declined, any future reduction would reduce the use of
commercial aircraft and, consequently, the need for spare parts and new
aircraft. During periods of reduced airline profitability, some airlines may
elect to delay purchases of spare parts, preferring instead to deplete existing
inventories.
If demand for new aircraft and spare parts decreases, there may be a
decrease in demand for certain of our products. Therefore, any future decline in
revenue passenger miles, airline profitability or
14
<PAGE>
the size of the worldwide aircraft fleet, for any reason, could have a material
adverse effect on our business. See "Business--Industry Overview."
In addition, sales to manufacturers of large commercial aircraft, which
accounted for less than 20% of our annual net sales in fiscal 1998, have
historically experienced periodic downturns. In the past, these sales have been
affected by airline profitability, which is impacted by fuel and labor costs and
price competition, and other things. Due in part to these factors, the number of
large commercial aircraft delivered dropped from a peak of approximately 756
aircraft in 1991 to approximately 370 aircraft in 1995, according to a trade
report.
We believe that by concentrating on products with strong aftermarket demand
and on smaller regional planes, we have reduced our exposure to downturns in
this sector. Prior downturns have adversely effected our net sales, gross margin
and net income. These and certain other factors may cause a downturn in sales to
manufacturers of large commercial aircraft in the future which may have a
material adverse effect on our business.
REDUCTION IN DEFENSE SPENDING--A DECLINE IN THE U.S. DEFENSE BUDGET MAY
ADVERSELY AFFECT OUR SALES OF PARTS USED IN MILITARY AIRCRAFT.
In fiscal 1998, approximately 27.0% of our sales were related to products
used in military aircraft, in each case, over half of which were spare parts
provided to various governmental agencies.
In general, the United States' defense budget has been declining or stable
in recent years, resulting in reduced or stable demand for new aircraft and, to
a lessor extent, spare parts. The United States' defense budget may continue to
decline and sales of defense related items to foreign governments may decrease.
If there is a decline which reduces demand for our components, our business may
be adversely affected.
GOVERNMENT REGULATION--OUR BUSINESS WOULD BE ADVERSELY AFFECTED IF WE LOST
OUR GOVERNMENT PERMITS OR IF FUTURE, MORE ONEROUS GOVERNMENT REGULATIONS WERE
ENACTED.
The aircraft component industry is highly regulated in the United States and
in other countries. In order to sell our components, our Company and the
components we manufacture must be certified by the FAA, the United States
Department of Defense and similar agencies in foreign countries and by
individual manufacturers.
If material authorizations or approvals were revoked or suspended, our
business would be adversely affected. In the future, if new and more stringent
government regulations are adopted or if industry oversight increases, our
business may be adversely affected. See "Business--Governmental Regulation."
To the extent that we operate outside the United States, we are subject to
the Foreign Corrupt Practices Act (the "FCPA"), which generally prohibits United
States companies and their intermediaries from bribing foreign officials for the
purpose of obtaining or keeping business or otherwise obtaining favorable
treatment. In particular, we may be held liable for actions taken by our
strategic or local partners even though such partners are foreign companies that
are not subject to the FCPA. Any determination that we have violated the FCPA
could result in sanctions that could have a material adverse effect on our
business.
RISKS ASSOCIATED WITH OUR WORKFORCE--WE ARE DEPENDENT ON OUR HIGHLY TRAINED
EMPLOYEES AND ANY WORK STOPPAGE OR DIFFICULTY HIRING SIMILAR EMPLOYEES WOULD
ADVERSELY AFFECT OUR BUSINESS.
Because our products are complicated and very detailed, we are highly
dependent on an educated and trained workforce. We could be adversely affected
by a shortage of skilled employees.
At September 30, 1998, approximately 30% of our employees were unionized.
Our collective bargaining agreements expire in April 1999 and November 2000.
Although we believe that our relations
15
<PAGE>
with our employees are good, we cannot assure you that we will be able to
negotiate a satisfactory renewal of these collective bargaining agreements or
that our employee relations will remain stable.
Because we maintain a relatively small inventory of finished goods and
operate on relatively short lead times for our products, any work shortage could
have a material adverse effect on our business. "See Business--Employees."
RISKS ASSOCIATED WITH SUPPLIERS--OUR BUSINESS IS DEPENDENT ON THE
AVAILABILITY OF CERTAIN COMPONENTS AND RAW MATERIALS THAT WE BUY FROM SUPPLIERS.
Our business is affected by the price and availability of the raw materials
and component parts that we use to manufacture our components. Our business,
therefore, could be adversely affected by factors affecting our suppliers, or by
increased costs of such raw materials or components if we are unable to pass
along such price increases to our customers. Because we maintain a relatively
small inventory of raw materials and component parts, our business could be
adversely affected if we are unable to obtain these raw materials and components
from our suppliers on favorable terms. See "Business--Raw Materials and
Patents."
POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES--WE MAY BE LIABLE FOR
PENALTIES UNDER A VARIETY OF ENVIRONMENTAL LAWS, EVEN IF WE DID NOT CAUSE ANY
ENVIRONMENTAL PROBLEMS. CHANGES IN ENVIRONMENTAL LAWS OR UNEXPECTED
INVESTIGATIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Our business and our facilities are subject to a number of federal, state
and local laws and regulations, which govern, among other things, the discharge
of hazardous materials into the air and water as well as the handling, storage
and disposal of such materials.
Pursuant to certain environmental laws, a current or previous owner or
operator of land may be liable for the costs of investigation, removal or
remediation of hazardous materials at such property. These laws typically impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of any hazardous materials. Persons who arrange (as defined under
these statutes) for the disposal or treatment of hazardous materials also may be
liable for the costs of investigation, removal or remediation of such substances
at the disposal or treatment site, regardless of whether the affected site is
owned or operated by them. See "Business--Environmental Matters."
Because we own and operate a number of facilities, and because we arrange
for the disposal of hazardous materials at many disposal sites, we may incur
costs for investigation, removal and remediation, as well as capital costs
associated with compliance with these laws. Although such environmental costs
have not been material in the past and are not expected to be material in the
future, changes in environmental laws or unexpected investigations and clean-up
costs could have a material adverse effect on our business.
DEPENDENCE ON KEY PERSONNEL--IF WE LOSE OUR SENIOR MANAGEMENT OR TECHNICAL
PERSONNEL, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
The success of our Company is dependent upon our senior management, as well
as on our ability to attract and retain qualified personnel, including
engineers. There is substantial competition for these kinds of personnel in the
aircraft component industry. We may not be able to (1) retain our existing
senior management or engineering staff, (2) fill new positions or vacancies
created by expansion or turnover, or (3) attract additional qualified personnel.
Although we have entered into employment agreements with certain executive
officers, these agreements may not be renewed. See "Management-- Employment
Agreements."
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RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND ASIAN FINANCIAL
MARKETS--OUR INTERNATIONAL BUSINESS EXPOSES US TO RISKS RELATING TO INCREASED
REGULATION AND POLITICAL OR ECONOMIC INSTABILITY, GLOBALLY OR WITHIN CERTAIN
FOREIGN COUNTRIES.
Approximately 16% of our fiscal 1998 sales were sold directly to foreign
end-users. In addition, a portion of the products we sell to domestic
distributors are resold to foreign end-users. These sales are subject to
numerous additional risks, including the impact of foreign government
regulations, currency fluctuations, political uncertainties and differences in
business practices.
Foreign governments could adopt regulations or take other actions that would
have an adverse impact on our business or market opportunities abroad.
Furthermore, the political, cultural and economic climate outside the United
States may not be favorable to our business and growth strategy.
The Asian markets are important markets for airlines and the large
commercial aircraft manufacturers. For example, Boeing has developed a large
backlog of aircraft sales to customers in Asia, and the current crisis in the
Asian financial markets has resulted in some deferrals and cancellations of
deliveries. This may result in significant cancellation of orders or additional
deferral of deliveries for new aircraft or negatively impact these
manufacturers. The resulting decreased demand in the aftermarket could adversely
affect our business.
RISKS RELATED TO POTENTIAL FUTURE ACQUISITIONS--WE INTEND TO PURSUE FUTURE
ACQUISITIONS AND ARE CONSIDERING A SPECIFIC ACQUISITION WHICH, IF CONSUMMATED,
WOULD SUBSTANTIALLY INCREASE THE LEVEL OF OUR INDEBTEDNESS AND MAY ADVERSELY
AFFECT OUR BUSINESS IF WE CANNOT EFFECTIVELY INTEGRATE THESE NEW OPERATIONS.
We intend to pursue acquisitions that we believe will present opportunities
to realize significant synergies, operating expense reductions or overhead cost
savings and increase our market position. This acquisition strategy may require
substantial capital, and we may not be able to raise the necessary funds on
satisfactory terms or at all.
We regularly engage in discussions with respect to potential acquisition and
investment opportunities. If we consummate any future acquisitions, our
capitalization and results of operations may change significantly and you will
not have the opportunity to evaluate the economic, financial and other relevant
information that we will consider in determining the application of these funds.
Although we currently have no binding agreements with respect to any future
acquisitions and we cannot assure you that we will be able to reach agreement
with respect to any future acquisition, such acquisitions would likely result in
the incurrence of debt and contingent liabilities and an increase in interest
expense and amortization expenses related to goodwill and other intangible
assets, which could have a material adverse effect upon our business.
Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies, services and products of the
acquired companies and the diversion of management's attention from other
business concerns. For all of these reasons, if any such acquisitions occur, our
business could be adversely affected.
COMPETITION--WE MAY BE UNABLE TO REPAY THE NEW NOTES IF WE DO NOT
SUCCESSFULLY COMPETE WITHIN OUR INDUSTRY.
We operate in a highly competitive industry and compete against a number of
companies, including divisions of larger companies, some of which have
significantly greater financial, technological and marketing resources than us.
We believe that our ability to compete depends on product performance, short
lead-time and timely delivery, competitive pricing, superior customer service
and support and continued certification under customer quality requirements and
assurance programs. We may not be able to compete successfully with respect to
these or other factors. See "Business-- Competition."
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CONTROL BY ODYSSEY--WE ARE CONTROLLED BY ODYSSEY, WHOSE INTERESTS MAY NOT BE
ALIGNED WITH YOURS.
Odyssey and its co-investors indirectly own approximately 73.7% of the
equity interests in our parent company, Holdings, on a fully diluted basis and,
therefore, have the power, subject to certain exceptions, to control Holdings.
They also control the appointment of management and the entering into of
mergers, sales of substantially all assets and other extraordinary transactions.
The interests of Odyssey may not in all cases be aligned with yours. See "The
Transactions" and "Certain Relationships and Related Transactions."
IMPACT OF YEAR 2000 ISSUE--THE YEAR 2000 PROBLEM MAY RESULT IN DECREASED
SALES FOR US IF CERTIFICATIONS WE RECEIVED FROM OUR VENDORS ARE INACCURATE OR IF
OUR CUSTOMERS AND SUPPLIERS DO NOT ADEQUATELY ADDRESS THEIR YEAR 2000 CONCERNS.
We have completed a review of our computer systems and are completing a
review of our embedded systems in order to assess our exposure to Year 2000
issues. We purchased all of our computer software from third party vendors and
are relying on those vendors to make their software Year 2000 compliant. Except
for the vendor of our e-mail system, such vendors have provided us with third
party certifications that their systems are Year 2000 compliant.
We do not, however, currently have any information concerning the Year 2000
compliance status of our suppliers and customers, including various agencies of
the United States government.
In the event that Year 2000 problems arise within our Company, or that our
significant suppliers or customers, including various agencies of the United
States government, do not successfully and timely achieve Year 2000 compliance,
the result may be a delay in our receiving orders and collecting payments,
leading to a temporary loss of revenue. We have incurred $180,000 in costs
associated with Year 2000 compliance and anticipate incurring $150,000 of
additional costs in the future. We may, however, have to bear further Year 2000
costs and expenses which could have a material adverse effect on our business.
The Company has no formal contingency plan in the event Year 2000 problems
arise.
PRODUCT LIABILITY; CLAIMS EXPOSURE--WE COULD BE ADVERSELY AFFECTED AS A
RESULT OF A LAWSUIT IF ONE OF OUR COMPONENTS CAUSES AN AIRCRAFT TO CRASH AND WE
ARE NOT COVERED BY OUR INSURANCE POLICIES.
Our operations expose us to potential liabilities for personal injury or
death as a result of the failure of an aircraft component that has been
designed, manufactured or serviced by us. While management believes that our
liability insurance is adequate to protect us from future products liability
claims, if claims were to arise, such insurance coverage may not be adequate.
Additionally insurance coverage may not be able to be maintained in the
future at an acceptable cost. Any such liability not covered by insurance or for
which third party indemnification is not available could have a material adverse
effect on our business.
FINANCING CHANGE OF CONTROL OFFER--WE MAY NOT HAVE THE ABILITY TO RAISE THE
FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE
INDENTURE.
Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all outstanding New Notes. However,
it is possible that we will not have sufficient funds at the time of the change
of control to make the required repurchase of New Notes or that restrictions in
our New Credit Facility will not allow such repurchases. In addition, certain
important corporate events, such as leveraged recapitalizations that would
increase the level of our indebtedness, would not constitute a "Change of
Control" under the indenture. See "Description of the New Notes-Change of
Control."
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FRAUDULENT CONVEYANCE MATTERS--FEDERAL AND STATE STATUTES ALLOW COURTS,
UNDER SPECIFIC CIRCUMSTANCES, TO VOID THE NEW NOTES AND THE GUARANTEES AND
REQUIRE NOTEHOLDERS TO RETURN PAYMENTS RECEIVED FROM THE COMPANY OR THE
GUARANTORS.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, the New Notes and the guarantees could be voided, or
claims in respect of the New Notes or the guarantees could be subordinated to
all other debts of the Company or any guarantor if, among other things, the
Company or such guarantor, at the time it incurred the indebtedness evidenced by
the New Notes or its guarantee:
- - received less than reasonably equivalent value or fair consideration for the
incurrence of such indebtedness; or
- - was insolvent or rendered insolvent by reason of such incurrence; or
- - was engaged in a business or transaction for which the Company's or such
guarantor's remaining assets constituted unreasonably small capital; or
- - intended to incur, or believed that it would incur, debts beyond its ability
to pay such debts as they mature.
In addition, any payment by the Company or such guarantor pursuant to the
New Notes or a guarantee could be voided and required to be returned to the
Company or such guarantor, or to a fund for the benefit of the creditors of the
Company or such guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, the Company or a
guarantor would be considered insolvent if:
- - the sum of its debts, including contingent liabilities, were greater than the
fair saleable value of all of its assets,
- - if the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and mature, or
- - it could not pay its debts as they become due.
Based upon information currently available to us, we believe that the New
Notes and the guarantees are being incurred for proper purposes and in good
faith and that we, and each of the Guarantors:
- - are solvent and will continue to be solvent after giving effect to the
issuance of the New Notes and the guarantees, as the case may be;
- - will have enough capital for carrying on our business and the business of each
of the Guarantors after the issuance of the New Notes and the guarantees, as
the case may be; and
- - will be able to pay our debts.
NO PRIOR MARKET FOR THE NEW NOTES--YOU CANNOT BE SURE THAT AN ACTIVE TRADING
MARKET WILL DEVELOP FOR THE NEW NOTES.
The New Notes are a new issue of securities with no established trading
market and will not be listed on any securities exchange. The liquidity of the
trading market in the New Notes, and the market price quoted for the New Notes,
may be adversely affected by changes in the overall market for high yield
securities and by changes in our financial performance or prospects or in the
prospects for companies in our industry generally. As a result, you cannot be
sure that an active trading market will develop for the New Notes.
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TRANSACTIONS
In connection with the completion of the offering of the Old Notes, Holdings
consummated a recapitalization of Holdings (the "Recapitalization") pursuant to
an agreement and plan of merger, dated August 3, 1998, as amended, between Phase
II Acquisition Corp. and Holdings (the "Merger Agreement"). Concurrently with
the offering of the Old Notes, the Company entered into a credit agreement
providing for a six-year $30.0 million revolving credit facility (the "Revolving
Credit Facility"), $2.6 million of which was funded to consummate the
Recapitalization, and a 6-year $45.0 million Tranche A Term Loan Facility (the
"Tranche A Facility") and a 7 1/2-year $45.0 million Tranche B Term Loan
Facility (the "Tranche B Facility" and, together with the Revolving Credit
Facility and the Tranche A Facility, the "New Credit Facility"), each of which
was fully funded to consummate the Recapitalization. Additional borrowings under
the Revolving Credit Facility are available for certain permitted acquisitions
and for general corporate purposes, including working capital requirements. See
"Description of Other Indebtedness--The Company--The New Credit Facility."
In connection with the Recapitalization, Odyssey and its co-investors
invested approximately $100.2 million of cash equity in Holdings (the "Odyssey
Investment"). The equity holders of Holdings received as consideration in the
Recapitalization $330.0 million of which $279.7 million was paid in cash, $20.0
million was paid in the form of Holdings' pay-in-kind notes due 2009 of Holdings
(the "Holdings PIK Notes") and Holdings' common stock and $30.3 million was paid
in the form of common stock and options of Holdings that was retained by the
shareholders of Holdings (the "Rollover Investment"). As a result of the
consummation of the Transactions, Odyssey and its co-investors own approximately
73.7%, and certain continuing equity holders of Holdings own approximately
26.3%, in each case, of the outstanding shares of Holdings common stock on a
fully diluted basis.
The offering of the Old Notes, the Recapitalization, the Odyssey Investment,
the issuance of the Holdings PIK Notes and the related borrowings under the New
Credit Facility are collectively referred to herein as the "Transactions."
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THE EXCHANGE OFFER
PURPOSE AND EFFECT
In connection with the sale by the Company of the Old Notes on December 3,
1998, the Company and the Guarantors entered into a registration rights
agreement (the "Registration Rights Agreement"), dated December 3, 1998, with
the initial purchasers, which requires that the Company and the Guarantors file
a registration statement under the Securities Act with respect to the New Notes
(the "Registration Statement") and, upon the effectiveness of that Registration
Statement, offer to the holders of the Old Notes the opportunity to exchange
their Old Notes for a like principal amount of New Notes. The New Notes will be
issued without a restrictive legend and generally may be reoffered and resold by
the holder without registration under the Securities Act. The Registration
Rights Agreement further provides that the Company must (i) cause the
Registration Statement with respect to the exchange offer to be declared
effective within 150 days of the date on which the Company issued the Old Notes
and (ii) consummate the exchange offer on or before the 185th day following the
date on which the Company issued the Old Notes. Except as provided below, upon
the completion of the exchange offer, the Company's obligations with respect to
the registration of the Old Notes and the New Notes will terminate. A copy of
the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement, of which this Prospectus is a part, and this summary of
the material provisions of the Registration Rights Agreement does not purport to
be complete and is qualified in its entirety by reference to the complete
Registration Rights Agreement. As a result of the timely filing and the
effectiveness of the Registration Statement, the Company will not have to pay
certain additional interest on the Old Notes provided in the Registration Rights
Agreement. Following the completion of the exchange offer (except as set forth
in the paragraph immediately below), holders of Old Notes not tendered will not
have any further registration rights and those Old Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for the Old Notes could be adversely affected upon consummation of the
exchange offer.
In order to participate in the exchange offer, a holder must represent to
the Company, among other things, that (i) the New Notes acquired pursuant to the
exchange offer are being obtained in the ordinary course of business of the
holder, (ii) the holder is not engaging in and does not intend to engage in a
distribution of the New Notes, (iii) the holder does not have an arrangement or
understanding with any person to participate in the distribution of the New
Notes and (iv) the holder is not an "affiliate," as defined under Rule 405
promulgated under the Securities Act, of the Company or the Guarantors. Under
certain circumstances specified in the Registration Rights Agreement, the
Company may be required to file a "shelf" registration statement for a
continuous offering pursuant to Rule 415 under the Securities Act in respect of
the Old Notes. See "Registration Rights." For purposes of the foregoing,
"Transfer Restricted Securities" means each Old Note until (i) the date on which
such Note has been exchanged by a person other than a broker-dealer for an New
Note in the exchange offer, (ii) following the exchange by a broker-dealer in
the Exchange Offer of an Old Note for an New Note, the date on which such New
Note is sold to a purchaser who receives from such broker-dealer on or prior to
the date of such sale a copy of this Prospectus, (iii) the date on which such
Old Note has been effectively registered under the Securities Act and disposed
of in accordance with such "shelf" registration statement or (iv) the date on
which such Old Note is distributed to the public pursuant to Rule 144 under the
Act or may be distributed to the public pursuant to Rule 144(k) under the Act.
See "--Procedures for Tendering."
Based on an interpretation by the Commission's staff set forth in no-action
letters issued to third parties unrelated to the Company, the Company believes
that, with the exceptions set forth below, New Notes issued pursuant to the
exchange offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other than any holder which is an
"affiliate" of the Company within the meaning of Rule 405 promulgated under the
Securities Act, or a broker-dealer who purchased Old Notes directly from the
Company to resell pursuant to Rule 144A or any other
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available exemption promulgated under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that the New Notes are acquired in the ordinary course of business of
the holder and the holder does not have an arrangement or understanding with any
person to participate in the distribution of such New Notes. Any holder who
tenders in the exchange offer for the purpose of participating in a distribution
of the New Notes cannot rely on this interpretation by the Commission's staff
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution." Broker-dealers who acquired Old Notes directly from us
and not as a result of market-making activities or other trading activities may
not rely on the staff's interpretations discussed above or participate in the
exchange offer and must comply with the prospectus delivery requirements of the
Securities Act in order to sell the Old Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Following the completion of the exchange offer (except as set forth in the
second paragraph under "--Purpose and Effect" above), holders of Old Notes not
tendered will not have any further registration rights and those Old Notes will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market for a holder's Old Notes could be adversely affected
upon completion of the exchange offer if the holder does not participate in the
exchange offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the letter of transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
, 1999, or such date and time to which we extend the offer. The Company
will issue $1,000 principal amount of New Notes in exchange for each $1,000
principal amount of outstanding Old Notes accepted in the exchange offer.
Holders may tender some or all of their Old Notes pursuant to the exchange
offer. However, Old Notes may be tendered only in integral multiples of $1,000
in principal amount.
The form and terms of the New Notes are substantially the same as the form
and terms of the Old Notes except that the New Notes have been registered under
the Securities Act and will not bear legends restricting their transfer. The New
Notes will evidence the same debt as the Old Notes and will be issued pursuant
to, and entitled to the benefits of, the Indenture pursuant to which the Old
Notes were issued.
As of the date hereof, Old Notes representing $125.0 million aggregate
principal amount were outstanding and there was one registered holder, a nominee
of DTC. This Prospectus, together with the letter of transmittal, is being sent
to such registered holder and to others believed to have beneficial interests in
the Old Notes. The Company intends to conduct the exchange offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission promulgated thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as, and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company. If any tendered Old
Notes are not accepted for exchange because of an invalid tender, the occurrence
of certain other events set forth herein or otherwise, certificates for any such
unaccepted Old Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after , 1999, unless the exchange
offer is extended.
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Holders who tender Old Notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the exchange offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the exchange offer. See
"--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date shall be 5:00 p.m., New York City time, on ,
1999, unless the Company, in its sole discretion, extends the exchange offer, in
which case the expiration date shall mean the latest date and time to which the
exchange offer is extended. In order to extend the exchange offer, the Company
will notify the Exchange Agent and each registered holder of any extension by
oral or written notice prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date. The Company
reserves the right, in its sole discretion, (i) to delay accepting any Old
Notes, to extend the exchange offer or, if any of the conditions set forth under
"--Conditions to Exchange Offer" shall not have been satisfied, to terminate the
exchange offer, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent, or (ii) to amend the terms of the exchange
offer in any manner. In the event that the Company makes a material or
fundamental change to the terms of the exchange offer, the Company will file a
post-effective amendment to the Registration Statement.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender the Old Notes in the exchange offer.
Except as set forth under "--Book Entry Transfer," to tender in the exchange
offer a holder must complete, sign, and date the letter of transmittal, or a
copy thereof, have the signatures thereon guaranteed if required by the letter
of transmittal, and mail or otherwise deliver the letter of transmittal or copy
to the Exchange Agent prior to the expiration date. In addition, (i)
certificates for such Old Notes must be received by the Exchange Agent along
with the letter of transmittal prior to the expiration date, (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Notes, if that procedure is available, into the Exchange Agent's account at DTC
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
expiration date or (iii) the holder must comply with the guaranteed delivery
procedures described below. To be tendered effectively, the letter of
transmittal and other required documents must be received by the Exchange Agent
at the address set forth under "--Exchange Agent" prior to the expiration date.
The tender by a holder that is not withdrawn before the expiration date will
constitute an agreement between that holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the letter of
transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company, or other nominee and who wishes to
tender should contact the registered holder promptly and instruct the registered
holder to tender on the beneficial owner's behalf. If the beneficial owner
wishes to tender on the owner's own behalf, the owner must, prior to completing
and executing the letter of transmittal and delivering the owner's Old Notes,
either make appropriate arrangements to
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register ownership of the Old Notes in the beneficial owner's name or obtain a
properly completed bond power from the registered holder. The transfer of
registered ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined) unless Old
Notes tendered pursuant thereto are tendered (i) by a registered holder who has
not completed the box entitled "Special Registration Instruction" or "Special
Delivery Instructions" on the letter of transmittal or (ii) for the account of
an Eligible Institution. If signatures on a letter of transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, the guarantee
must be by any eligible guarantor institution that is a member of or participant
in the Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Program or an "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution").
If the letter of transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, the Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by the registered holder
as that registered holder's name appears on the Old Notes.
If the letter of transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the letter of
transmittal unless waived by the Company.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the exchange offer (including the instructions in the letter of
transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent, nor any other person shall incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering holders,
unless otherwise provided in the letter of transmittal, as soon as practicable
following , 1999, unless the exchange offer is extended.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding after the
expiration date or, as set forth under "--Conditions to the exchange offer," to
terminate the exchange offer and, to the extent permitted by applicable law,
purchase Old Notes in the open market, in privately negotiated transactions, or
otherwise. The terms of any such purchases or offers could differ from the terms
of the exchange offer.
By tendering, each holder will represent to the Company that, among other
things, (i) the New Notes acquired pursuant to the exchange offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the registered holder, (ii) the holder is
not engaging in and does not intend to engage in a distribution of such New
Notes, (iii) the holder does not have an arrangement or understanding with any
person to participate in the distribution of such New Notes and (iv) the holder
is not an "affiliate," as defined under Rule 405 of the Securities Act, of the
Company.
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In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the exchange offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed letter of
transmittal (or, with respect to the DTC and its participants, electronic
instructions in which the tendering holder acknowledges its receipt of and
agreement to be bound by the letter of transmittal), and all other required
documents. If any tendered Old Notes are not accepted for any reason set forth
in the terms and conditions of the exchange offer or if Old Notes are submitted
for a greater principal amount than the holder desires to exchange, such
unaccepted or non-exchanged Old Notes will be returned without expense to the
tendering holder thereof (or, in the case of Old Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described below, such
nonexchanged Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the exchange offer.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution."
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
exchange offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes being tendered by
causing the Book-Entry Transfer Facility to transfer such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the Book-
Entry Transfer Facility, the letter of transmittal or copy thereof, with any
required signature guarantees and any other required documents, must, in any
case other than as set forth in the following paragraph, be transmitted to and
received by the Exchange Agent at the address set forth under "--Exchange Agent"
on or prior to the expiration date or the guaranteed delivery procedures
described below must be complied with.
DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept the exchange offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system in lieu of sending a signed, hard copy letter of
transmittal. DTC is obligated to communicate those electronic instructions to
the Exchange Agent. To tender Old Notes through ATOP, the electronic
instructions sent to DTC and transmitted by DTC to the Exchange Agent must
contain the character by which the participant acknowledges its receipt of and
agrees to be bound by the letter of transmittal.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the expiration date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the expiration date, the Exchange
Agent receives from such Eligible Institution a properly completed and duly
executed letter of transmittal (or a facsimile thereof) and notice of guaranteed
delivery, substantially in the form provided by the Company (by telegram, telex,
fax transmission, mail or hand delivery), setting forth the name and address of
the holder of Old Notes
25
<PAGE>
and the amount of Old Notes tendered, stating that the tender is being made
thereby and guaranteeing that within three New York Stock Exchange, Inc.
("NYSE") trading days after the date of execution of the notice of guaranteed
delivery, the certificates for all physically tendered Old Notes, in proper form
for transfer, or a Book-Entry Confirmation, as the case may be, will be
deposited by the Eligible Institution with the Exchange Agent and (iii) the
certificates for all physically tendered Old Notes, in proper form for transfer,
or a Book-Entry Confirmation, as the case may be, are received by the Exchange
Agent within three NYSE trading days after the date of execution of the notice
of guaranteed delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the expiration date.
For a withdrawal of a tender of Old Notes to be effective, a written or (for
DTC participants) electronic ATOP transmission notice of withdrawal must be
received by the Exchange Agent at its address set forth under "--Exchange Agent"
prior to 5:00 p.m., New York City time, on the expiration date. Any such notice
of withdrawal must (i) specify the name of the person having deposited the Old
Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be
withdrawn (including the certificate number or numbers and principal amount of
such Old Notes), (iii) be signed by the holder in the same manner as the
original signature on the letter of transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee register the transfer of
such Old Notes into the name of the person withdrawing the tender, and (iv)
specify the name in which any such Old Notes are to be registered, if different
from that of the Depositor. All questions as to the validity, form, and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the exchange offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender, or termination of the
exchange offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures under "--Procedures for Tendering" at any time on or prior to
the expiration date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the exchange offer if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, the Company determines that the exchange offer
violates applicable law, any applicable interpretation of the staff of the
Commission or any order of any governmental agency or court of competent
jurisdiction.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended. In any such event
26
<PAGE>
the Company is required to use every reasonable effort to obtain the withdrawal
of any stop order at the earliest possible time.
EXCHANGE AGENT
All executed letters of transmittal should be directed to the Exchange
Agent. has been appointed as Exchange Agent for the exchange offer.
Questions, requests for assistance and requests for additional copies of this
Prospectus or of the letter of transmittal should be directed to the Exchange
Agent addressed as follows:
[ ]
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL: BY HAND OR OVERNIGHT DELIVERY:
[ ] ]
</TABLE>
BY FACSIMILE:
(ELIGIBLE INSTITUTIONS ONLY)
[ ]
FOR INFORMATION OR
CONFIRMATION BY TELEPHONE:
[ ]
Originals of all documents sent by facsimile should be sent promptly
by registered or certified mail, by hand or by overnight delivery service.
FEES AND EXPENSES
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the exchange offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Company. The estimated cash
expenses to be incurred in connection with the exchange offer will be paid by
the Company and are estimated in the aggregate to be $ , which includes
fees and expenses of the Exchange Agent, accounting, legal, printing, and
related fees and expenses.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct the
Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the exchange offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
27
<PAGE>
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the New Notes. In
consideration for issuing the New Notes as contemplated in this Prospectus, we
will receive in exchange Old Notes in like principal amount, which will be
canceled and as such will not result in any increase in our indebtedness.
The Company used the net proceeds of the offering of the Old Notes, together
with borrowings under the New Credit Facility, (i) to finance, in part, the
Recapitalization, (ii) to repay indebtedness, and (iii) to pay related fees and
expenses. The following table sets forth the sources and uses of funds for the
Transactions:
<TABLE>
<CAPTION>
AMOUNT
-------------------
<S> <C>
(DOLLARS IN
MILLIONS)
SOURCES:
Cash...................................................................... $ 20.0
New Credit Facility(1).................................................... 92.6
Old Notes................................................................. 125.0
Holdings PIK Notes and Common Stock(2).................................... 20.0
Odyssey Investment........................................................ 100.2
Rollover Investment(3).................................................... 30.3
------
Total Sources......................................................... $ 388.1
------
------
USES:
Payment of consideration in Recapitalization(4)........................... $ 299.7
Rollover Investment(3).................................................... 30.3
Repayment of indebtedness and accrued interest(5)......................... 45.1
Fees and expenses(6)...................................................... 13.0
------
Total uses............................................................ $ 388.1
------
------
</TABLE>
- ------------------------
(1) The New Credit Facility provides for aggregate borrowings of up to $120.0
million, consisting of a $45.0 million Tranche A Facility, a $45.0 million
Tranche B Facility and a $30.0 million revolving credit facility, of which,
as of December 3, 1998, approximately $27.4 million was undrawn and
available for certain permitted acquisitions and for general corporate
purposes, including working capital requirements. See "Description of Other
Indebtedness--The Company--The New Credit Facility."
(2) Represents $20.0 million in the form of Holdings PIK Notes and common stock
of Holdings that were issued to certain shareholders of Holdings in the
Recapitalization.
(3) Represents approximately $30.3 million in the form of shares of common stock
and options retained by certain continuing equity holders of Holdings.
(4) Includes (i) payments after expenses to certain equity holders of Holdings
of $283.3 million of which $263.3 million was paid in cash and $20.0 million
was paid in the form of Holdings PIK Notes and common stock of Holdings and
(ii) payment of certain management bonuses and certain of the Company's
expenses totalling approximately $16.4 million. See "Certain Relationships
and Related Transactions."
(5) Represents refinancing of long-term debt consisting of $45.0 million of
borrowings with a maturity of 2003 and bearing an interest rate, as of
December 3, 1998, of 6.9% under the Company's prior credit agreement and
accrued interest thereon of $0.1 million.
(6) Includes a $3.5 million fee paid to Odyssey in connection with the
Recapitalization. See "Certain Relationships and Related Transactions."
28
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1998, on a historical basis and of the Company and
Holdings on a pro forma basis after giving effect to the Transactions as if they
had occurred on September 30, 1998. This table should be read in conjunction
with the information contained in "Use of Proceeds," "Unaudited Pro Forma
Consolidated Financial Information" and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" as
well as the Consolidated Historical Financial Statements and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------------
PRO FORMA
----------------------
THE
ACTUAL COMPANY HOLDINGS
--------- ---------- ----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Cash and cash equivalents...................................................... $ 19,486 $ -- $ --
--------- ---------- ----------
--------- ---------- ----------
Total debt (including current maturities):
Term debt.................................................................... $ 45,000 $ -- $ --
New Credit Facility(1)....................................................... -- 93,114 93,114
Old Notes.................................................................... -- 125,000 125,000
Holdings PIK Notes (net of unamortized discount of $2.6 million)............. -- -- 17,400
--------- ---------- ----------
Total debt................................................................. 45,000 218,114 235,514
--------- ---------- ----------
Stockholders' equity (deficit):
Common stock $0.01 par value and paid-in capital............................... 24,281 24,281 109,081
Other stockholders' equity (deficit)........................................... 12,146 (153,291) (244,458)
--------- ---------- ----------
Total stockholders' equity (deficit)........................................... 36,427 (129,010) (135,377)
--------- ---------- ----------
Total capitalization........................................................... $ 81,427 $ 89,104 $ 100,891
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
- ------------------------
(1) The New Credit Facility consists of: (i) the Revolving Credit Facility which
provides for borrowings of up to $30.0 million, of which approximately $2.6
million was drawn in connection with the Recapitalization with the remainder
undrawn at closing and available for certain permitted acquisitions and for
general corporate purposes, including working capital requirements; (ii) the
Tranche A Facility, which provides for term debt of $45.0 million; and (iii)
the Tranche B Facility which provides for term debt of $45.0 million. See
"Description of Other Indebtedness--The Company--The New Credit Facility."
For purposes of the September 30, 1998 pro forma presentation above, $3.1
million was assumed to have been drawn on the Revolving Credit Facility in
connection with the Recapitalization because the Company had less cash and
cash equivalents on that date.
29
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following pro forma consolidated financial information of the Company
and Holdings has been derived by the application of pro forma adjustments to
Holdings' historical consolidated financial statements for the year ended
September 30, 1998 The pro forma consolidated statements of operations give
effect to the Recapitalization and related transactions as if such transactions
had been consummated on October 1, 1997. The pro forma consolidated balance
sheet gives effect to the Recapitalization and related transactions as if such
transactions had occurred as of September 30, 1998. The adjustments necessary to
fairly present this pro forma consolidated financial information have been made
based on available information and in the opinion of management are reasonable
and are described in the accompanying notes. The pro forma consolidated
financial information should not be considered indicative of actual results that
would have been achieved had the Recapitalization and related transactions been
consummated on the respective dates indicated and do not purport to indicate
balance sheet data or results of operations as of any future date or for any
future period. You should read the pro forma consolidated financial statements
together with the "Use of Proceeds," the "The Transactions" and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections and the Consolidated Historical Financial Statements and
the notes thereto, and other financial information included elsewhere in this
Prospectus.
The pro forma adjustments were applied to the respective historical
consolidated financial statements to reflect and account for the Transactions as
a recapitalization. As a result, such adjustments will have no impact on the
historical basis of either the Company's or Holdings' assets and liabilities.
Accordingly, the Transactions have not impacted the historical basis of the
Company's and Holding's assets and liabilities.
The unaudited consolidated pro forma statement of operations does not
include pro forma adjustments for certain non-recurring costs and charges,
consisting primarily of compensation costs for one-time management bonuses and
stock options which were cancelled, in each case, in conjunction with the
Recapitalization, the cost of terminating a financial advisory services
agreement with an affiliate of the Company's largest stockholder, the write-off
of deferred financing costs, and professional, advisory and financing fees. A
one-time charge of approximately $39.6 million ($28.8 million after tax) was
recorded in the first quarter of fiscal 1999. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."
30
<PAGE>
TRANSDIGM INC.
TRANSDIGM HOLDING COMPANY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HOLDINGS
COMPANY PRO FORMA COMPANY PRO PRO FORMA PRO
HISTORICAL ADJUSTMENTS(1) FORMA ADJUSTMENTS(2) FORMA
---------- -------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Net sales.................................. $ 110,868 -- $ 110,868 -- $ 110,868
Cost of sales.............................. 59,395 -- 59,395 -- 59,395
---------- -------------- ------------- ------- -----------
Gross profit............................... 51,473 -- 51,473 -- 51,473
---------- -------------- ------------- ------- -----------
Operating expenses:
Selling and administrative............... 10,473 $ (100)(a) 10,373 -- 10,373
Amortization of intangibles.............. 2,438 -- 2,438 -- 2,438
Research and development................. 1,724 -- 1,724 -- 1,724
---------- -------------- ------------- ------- -----------
Total operating expenses............... 14,635 (100) 14,535 -- 14,535
---------- -------------- ------------- ------- -----------
Income from operations..................... 36,838 100 36,938 -- 36,938
Interest expense--net...................... 3,175 19,614(b) 22,789 $ 2,630(a) 25,419
Warrant put value adjustment............... 6,540 (6,540)(c) -- -- --
---------- -------------- ------------- ------- -----------
Income before income taxes................. 27,123 (12,974) 14,149 (2,630) 11,519
Income tax provision....................... 12,986 (7,610)(d) 5,376 (1,026)(b) 4,350
---------- -------------- ------------- ------- -----------
Net income................................. $ 14,137 $ (5,364) $ 8,773 $ (1,604) $ 7,169
---------- -------------- ------------- ------- -----------
---------- -------------- ------------- ------- -----------
EBITDA, As Defined (3)..................... $ 43,547 $ 100 $ 43,647 -- $ 43,647
Cash flow provided by (used in):
Operating activities..................... 23,455 (10,721) 12,734 -- 12,734
Investing activities..................... (4,295) -- (4,295) -- (4,295)
Financing activities..................... (5,071) (1,127) (6,198) -- (6,198)
</TABLE>
31
<PAGE>
TRANSDIGM INC.
TRANSDIGM HOLDING COMPANY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(1) The amounts in this column represent the adjustments necessary to
determine the Company's pro forma results of operations as follows:
(a) This adjustment represents the elimination of the annual advisory
fee payable to an affiliate of the Company's former largest stockholder.
(b) The adjustment to interest expense reflects the following:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
-----------------------
<S> <C>
Interest expense on existing indebtedness to be retired in
connection with the Transactions.......................... $ (3,358)
Interest income on cash and cash equivalents................ 450
Amortization of debt issuance costs on existing
indebtedness.............................................. (267)
-------
Net interest expense........................................ (3,175)
Interest expense on New Credit Facility (at a weighted
average rate of 9.0%)..................................... 8,370
Interest expense on the Notes............................... 12,969
Amortization of debt issuance costs......................... 1,450
-------
Total adjustment............................................ $ 19,614
-------
-------
</TABLE>
(c) This adjustment represents the elimination of the warrant put value
adjustment. The warrants were retired in connection with the
Recapitalization.
(d) The tax effect of pro forma adjustments to income before income
taxes is based on the estimated applicable statutory tax rates. No tax
effect is recorded for the elimination of the warrant put value adjustment.
The income tax adjustment also excludes the tax effect of non-recurring
costs and charges described previously.
(2) The amounts in this column represent the adjustments necessary to
determine Holdings' pro forma consolidated statement of operations as follows:
(a) This adjustment represents interest expense on the Holdings PIK
Notes, including amortization of debt issuance costs and the debt discount.
(b) This adjustment represents the tax effect of pro forma adjustments
to income before income taxes and is based on the estimated applicable
statutory tax rates. The income tax adjustment also excludes the tax effect
of non-recurring costs and charges described previously.
32
<PAGE>
TRANSDIGM INC.
TRANSDIGM HOLDING COMPANY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
(3) EBITDA, As Defined, represents earnings before interest, taxes,
depreciation and amortization and the warrant put value adjustment and prior to
the impact of the purchase accounting adjustments to inventory associated with
the acquisition of Marathon as follows:
<TABLE>
<CAPTION>
COMPANY COMPANY PRO HOLDINGS PRO
HISTORICAL FORMA FORMA
----------- ------------- ------------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Net income..................................................... $ 14,137 $ 8,773 $ 7,169
Adjustments:
Income tax provision......................................... 12,986 5,376 4,350
Interest expense............................................. 3,175 22,789 25,419
Depreciation and amortization................................ 6,467 6,467 6,467
----------- ------------- ------------
36,765 43,405 43,405
Warrant put value adjustment................................. 6,540 -- --
Marathon inventory purchase accounting adjustment............ 242 242 242
----------- ------------- ------------
EBITDA, As Defined............................................. $ 43,547 $ 43,647 $ 43,647
----------- ------------- ------------
----------- ------------- ------------
</TABLE>
33
<PAGE>
TRANSDIGM INC.
TRANSDIGM HOLDING COMPANY
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (1)
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY PRO FORMA COMPANY PRO FORMA HOLDINGS
HISTORICAL ADJUSTMENTS(2) PRO FORMA ADJUSTMENTS (3) PRO FORMA
----------- -------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 19,486 $ (19,486)(a) $ -- $ -- $ --
Accounts receivable............................ 12,530 -- 12,530 -- 12,530
Inventories.................................... 18,280 -- 18,280 -- 18,280
10,780(a)
Other.......................................... 3,964 236(b) 4,200 (380)(b) 14,600
----------- -------------- ----------- --------------- -----------
Total current assets......................... 54,260 (19,250) 35,010 10,400 45,410
Property, plant and equipment--net............... 21,951 -- 21,951 -- 21,951
Intangibles & other--net......................... 39,574 10,127(c) 49,701 253(c) 49,954
----------- -------------- ----------- --------------- -----------
TOTAL............................................ $ 115,785 $ (9,123) $ 106,662 $ 10,653 $ 117,315
----------- -------------- ----------- --------------- -----------
----------- -------------- ----------- --------------- -----------
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
$ (5,000)(d)
Current portion of long-term debt.............. $ 5,000 6,127(d) $ 6,127 $ -- $ 6,127
Accounts payable............................... 5,667 -- 5,667 -- 5,667
Accrued liabilities............................ 10,239 (100)(d) 10,139 (380)(b) 9,759
Put warrants (4)............................... 16,700 (16,700)(e) -- -- --
----------- -------------- ----------- --------------- -----------
Total current liabilities.................... 37,606 (15,673) 21,933 (380) 21,553
Long-term debt:
Secured bank financing......................... 40,000 (40,000)(d) -- -- --
New Credit Facility............................ -- 86,987(d) 86,987 -- 86,987
Old Notes...................................... -- 125,000(d) 125,000 -- 125,000
Holdings PIK Notes............................. -- -- -- 17,400(d) 17,400
Other Liabilities................................ 1,752 -- 1,752 -- 1,752
----------- -------------- ----------- --------------- -----------
Total liabilities............................ 79,358 156,314 235,672 17,020 252,692
----------- -------------- ----------- --------------- -----------
Stockholders' equity (deficit)
102,800(e)
Capital stock.................................. 24,281 -- 24,281 (18,000)(h) 109,081
(117,933)(f)
(2,014)(g)
10,780(a)
Retained earnings (deficit).................... 12,900 (165,437)(e) (152,537) 18,000(h) (243,704)
Minimum pension liability adjustment........... (754) -- (754) -- (754)
----------- -------------- ----------- --------------- -----------
Total stockholders' equity (deficit)........... 36,427 (165,437) (129,010) (6,367) (135,377)
----------- -------------- ----------- --------------- -----------
TOTAL.......................................... $ 115,785 $ (9,123) $ 106,662 $ 10,653 $ 117,315
----------- -------------- ----------- --------------- -----------
----------- -------------- ----------- --------------- -----------
</TABLE>
34
<PAGE>
TRANSDIGM INC.
TRANSDIGM HOLDING COMPANY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(1) Set forth below are the sources and uses of funds pertaining to the
Transactions, categorized by their impact on the Company and Holdings,
respectively and adjustments for intercompany fund flows. See "Use of Proceeds."
The sources and uses below assume the Transactions were consummated on September
30, 1998.
<TABLE>
<CAPTION>
COMPANY HOLDINGS INTERCOMPANY TOTAL
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
SOURCES:
Existing cash................................................. $ 19,486 $ -- $ -- $ 19,486
New Credit Facility........................................... 93,114 -- -- 93,114
Old Notes..................................................... 125,000 -- -- 125,000
Holdings PIK Notes and Common Stock........................... -- 20,000 -- 20,000
Odyssey Investment............................................ -- 100,200 -- 100,200
Rollover Investment........................................... -- 30,300 -- 30,300
Dividend from the Company to Holdings......................... -- 181,767 (181,767) --
---------- ---------- ------------- ----------
Total....................................................... $ 237,600 $ 332,267 $ (181,767) $ 388,100
---------- ---------- ------------- ----------
---------- ---------- ------------- ----------
USES:
Payment of consideration in Recapitalization.................. $ -- $ 299,700 $ -- $ 299,700
Rollover Investment........................................... -- 30,300 -- 30,300
Repayment of existing indebtedness and accrued interest....... 45,100 -- -- 45,100
Fees and expenses............................................. 10,733 2,267 -- 13,000
Dividend from the Company to Holdings......................... 181,767 -- (181,767) --
---------- ---------- ------------- ----------
Total....................................................... $ 237,600 $ 332,267 $ (181,767) $ 388,100
---------- ---------- ------------- ----------
---------- ---------- ------------- ----------
</TABLE>
(2) The amounts in this column represent the adjustments necessary to
determine the Company's pro forma consolidated balance sheet after giving effect
to the Transactions.
(a) This adjustment reflects the use of cash of $19.5 million on the
balance sheet as of September 30, 1998 to fund a portion of the
Recapitalization. In management's opinion, the existing cash will not need
to be used to meet ordinary working capital needs. The actual cash on hand
upon consummation of the Recapitalization was more than this assumed amount.
(See "Use of Proceeds").
(b) This adjustment represents the recognition of the estimated tax
benefits attributable to the write-off of unamortized debt issuance costs
relating to the Company's existing indebtedness (see (c) below).
(c) This adjustment represents the recognition of $10.7 million of debt
issuance costs associated with the New Credit Facility and the Notes less
the write-off of $0.6 million of unamortized debt issuance costs relating to
the Company's existing indebtedness.
(d) This adjustment represents the recognition of the New Credit
Facility of $93.1 million and the Notes of $125.0 million along with the
repayment of $45.1 million of existing indebtedness (current and long-term
portion) and accrued interest. The amount of the new indebtedness that is
expected to be payable within one year is $6.1 million. The actual amount
borrowed under the New Credit Facility was less than $93.1 million because
the Company's cash balances utilized in the Transactions were more than the
$19.5 million assumed under (1) above. (See "Use of Proceeds.")
35
<PAGE>
(e) This adjustment includes the following:
- - The recognition of a $181.8 million cash dividend to Holdings which is
comprised of the proceeds from the New Credit Facility and the Notes (see Note
(d) above) and the Company's cash balance as of September 30, 1998 (see Note
(a) above), less the repayment of existing indebtedness and fees and expenses
related to the Transactions.
- - The elimination of the outstanding warrants of $16.7 million.
- - A $0.4 million after-tax charge resulting from the write-off of unamortized
deferred loan costs relating to the Company's existing indebtedness which was
repaid.
(3) The amounts in this column represent the adjustments related to the
Holdings PIK Notes and other adjustments necessary to determine Holdings' pro
forma consolidated balance sheet after giving effect to the Transactions.
(a) This adjustment represents the recognition of the estimated income
tax benefits resulting from the settlement of Holdings' stock options in
connection with the Transactions and the estimated fees and expenses related
to the Recapitalization.
(b) This adjustment represents the reclassification of the Company's
accrued income tax liability against Holdings' income tax receivable
associated with the settlement of stock options and the fees and expenses
(see (a) above).
(c) This adjustment represents the recognition of deferred loan costs
associated with the Holdings PIK Notes.
(d) This adjustment represents the recognition of the Holdings PIK Notes
(including unamortized discount of $2.6 million).
(e) This adjustment represents the issuance of $100.2 million of
additional capital stock to Odyssey and $2.6 million of capital stock in
connection with the Holdings PIK Notes.
(f) This adjustment represents the payment of consideration for the
Recapitalization along with the settlement of the stock options determined
as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
Value of common stock, options and warrants.......................................................... $ 330,000
Rollover Investment.................................................................................. (30,300)
-----------
Payment of consideration in the Recapitalization..................................................... 299,700
Dividend received from the Company................................................................... (181,767)
-----------
Total................................................................................................ $ 117,933
-----------
-----------
</TABLE>
(g) This adjustment represents the recognition of a $2.0 million expense
for certain fees and expenses related to the Recapitalization.
(h) This adjustment recognizes the elimination of capital stock and
paid-in capital associated with the shares of common stock that were
repurchased in connection with the Recapitalization.
(4) In connection with the formation of the Company on September 30, 1993,
the Company issued subordinated notes which included detachable warrants to
purchase approximately 16,000 shares of non-voting common stock of Holdings at a
price of $0.10 per share, exercisable upon certain change of control events. If
no such event had occurred before July 31, 1999, warrant holders had the right
to require the Company to repurchase the warrants at their then-appraised fair
market value, which is known as the "put value." The carrying value of the put
warrants represents the estimated put value of the warrants on September 30,
1998 based upon the provisions of the Transactions. The put warrants were
retired in connection with the Recapitalization.
36
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
information of Holdings and the Company. The selected historical consolidated
financial data for the fiscal years ended September 30, 1998, 1997, and 1996
have been derived from Holdings' consolidated financial statements, which have
been audited by Deloitte & Touche LLP, independent auditors. The selected
historical consolidated audited financial data for the fiscal years ended
September 30, 1995 and 1994, which have also been derived from Holdings'
consolidated financial statements, have been adjusted to give retroactive effect
to the change in accounting for put warrants as described in Note 17 to the
Consolidated Historical Financial Statements of Holdings included elsewhere in
this Prospectus. Because Holdings has no operations of its own and, prior to the
Recapitalization, had no assets or liabilities other than its equity interest in
the Company, the historical consolidated financial information of Holdings for
each of the years in the five-year period ended September 30, 1998 are identical
to the historical consolidated financial information of the Company. The pro
forma financial information set forth below gives effect to the Transactions as
if they had occurred at the beginning of the period or as of the balance sheet
date, as applicable. The pro forma financial information is not necessarily
indicative of either future results of operations or the results that might have
occurred if the foregoing transactions had been consummated on such date. There
can be no assurance that assumptions used in the preparation of the pro forma
financial data will prove to be correct. The Marathon Acquisition was completed
on August 8, 1997.
You should read the following table together with the "Unaudited Pro Forma
Consolidated Financial Information" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections and the Consolidated
Historical Financial Statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------
UNAUDITED
PRO FORMA THE
COMPANY
-------------
1994 1995 1996 1997(1) 1998 1998
--------- --------- --------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net Sales.................................................. $ 52,028 $ 57,095 $ 62,897 $ 78,159 $ 110,868 $ 110,868
Gross Profit............................................... 9,151 17,029 21,023 28,856 51,473 51,473
Selling and administrative................................. 6,244 6,167 6,459 7,561 10,473 10,373
Amortization of intangibles................................ 4,062 4,002 3,838 2,089 2,438 2,438
Research and development................................... 784 1,058 836 1,116 1,724 1,724
--------- --------- --------- ----------- --------- -------------
Operating income (loss) (2)................................ (1,939) 5,802 9,890 18,090 36,838 36,938
Interest expense, net...................................... 4,823 5,193 4,510 3,463 3,175 22,789
Warrant put value adjustment (3)........................... 868 736 2,160 4,800 6,540 --
--------- --------- --------- ----------- --------- -------------
Pre-tax income (loss)...................................... (7,630) (127) 3,220 9,827 27,123 14,149
Provision (benefit) for income taxes....................... (2,307) 134 2,045 5,193 12,986 5,376
--------- --------- --------- ----------- --------- -------------
Income (loss) before extraordinary item.................... (5,323) (261) 1,175 4,634 14,137 8,773
Extraordinary item (4)..................................... -- -- -- (1,462) -- --
--------- --------- --------- ----------- --------- -------------
Net income (loss).......................................... $ (5,323) $ (261) $ 1,175 $ 3,172 $ 14,137 $ 8,773
--------- --------- --------- ----------- --------- -------------
--------- --------- --------- ----------- --------- -------------
OTHER FINANCIAL DATA:
Cash flows provided by (used in):
Operating activities..................................... $ 1,115 $ 3,972 $ 18,695 $ 17,468 $ 23,455 $ 12,734
Investing activities..................................... (3,595) 702 (2,494) (43,160) (4,295) (4,295)
Financing activities..................................... 1,851 (4,560) (13,475) 28,153 (5,071) (6,198)
EBITDA, As Defined (5)..................................... 9,875 13,168 17,213 24,522 43,547 43,647
EBITDA, As Defined, margin................................. 19.0% 23.1% 27.4% 31.4% 39.3% 39.4%
Depreciation and amortization.............................. $ 7,341 $ 7,366 $ 7,323 $ 5,766 $ 6,467 $ 6,467
Capital expenditures....................................... 1,941 1,702 2,494 2,285 5,061 5,061
Ratio of earnings to fixed charges(6)...................... -- -- 1.7x 3.7x 9.0x 1.6x
Ratio of EBITDA, As Defined, to interest expense........... 2.1x 2.5x 3.8x 7.1x 13.7x 1.9x
Ratio of EBITDA, As Defined, less capital expenditures to
interest expense......................................... 1.6x 2.2x 3.3x 6.4x 12.1x 1.7x
Ratio of total debt to EBITDA, As Defined.................. 3.7x 2.4x 1.1x 2.0x 1.0x 5.0x
BALANCE SHEET DATA (AT END OF PERIOD)
Working capital............................................ $ 12,592 $ 17,730 $ 16,300 $ 16,520 $ 16,654 $ 12,977
Total assets............................................... 71,554 65,758 57,666 101,969 115,785 106,662
Long-term debt, including current portion.................. 36,399 32,074 19,124 50,000 45,000 218,114
Total stockholders' equity................................. 19,745 19,285 19,670 22,613 36,427 (129,010)
</TABLE>
37
<PAGE>
- ------------------------
(1) The Company acquired Marathon on August 8, 1997. The acquisition was
accounted for as a purchase. The results of operations of Marathon are
included in Holdings' consolidated financial statements from the date of
such acquisition. See Marathon's historical financial statements and the
notes thereto included elsewhere in this Prospectus.
(2) Operating income (loss) includes the effect of a non-cash charge of $4,473
in fiscal 1994 due to a purchase accounting adjustment to inventory
associated with the acquisition of the Aerospace Components Group of IMO and
a non-cash charge of $666 in fiscal 1997 and $242 in fiscal 1998 due to a
purchase accounting adjustment to inventory associated with the acquisition
of Marathon. The $100 adjustment to the Company's 1998 pro forma operating
income represents the elimination of the advisory fee payable to an
affiliate of one of the Company's stockholders.
(3) In connection with the formation of the Company on September 30, 1993, the
Company issued subordinated notes which included detachable warrants to
purchase approximately 16,000 shares of non-voting common stock of Holdings
at a price of $0.10 per share, exercisable upon certain change of control
events, including the Recapitalization. The warrant put value adjustment for
each period indicated reflects the increase in the estimated put value of
these warrants that occurred during that period.
(4) The extraordinary charge in fiscal 1997 relates to costs associated with the
retirement of the subordinated notes referred to in footnote (3) above
issued at the time of the Company's formation in 1993.
(5) EBITDA, As Defined, represents earnings before interest, taxes, depreciation
and amortization and the warrant put value adjustments and prior to the
impact of the purchase accounting adjustments to inventory referred to in
footnote (2) above and the extraordinary item referred to in footnote (4)
above as follows:
<TABLE>
<CAPTION>
PRO FORMA
THE COMPANY
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before extraordinary
item................................ $ (5,323) $ (261) $ 1,175 $ 4,634 $ 14,137 $ 8,773
Adjustments:
Income tax provision (benefit)...... (2,307) 134 2,045 5,193 12,986 5,376
Interest expense.................... 4,823 5,193 4,510 3,463 3,175 22,789
Depreciation and amortization....... 7,341 7,366 7,323 5,766 6,467 6,467
--------- --------- --------- --------- --------- -------------
4,534 12,432 15,053 19,056 36,765 43,405
Warrant put value adjustment........ 868 736 2,160 4,800 6,540 --
Inventory purchase accounting
adjustment........................ 4,473 -- -- 666 242 242
--------- --------- --------- --------- --------- -------------
EBITDA, As Defined.................... $ 9,875 $ 13,168 $ 17,213 $ 24,522 $ 43,547 $ 43,647
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------
</TABLE>
Although EBITDA, As Defined, is not a measure of performance calculated in
accordance with GAAP, the Company believes that EBITDA, As Defined, is
accepted as a generally recognized measure of performance in the Company's
industry. Nevertheless, this measure should not be considered in isolation
or as a substitute for operating income, net income, net cash provided by
operating activities or any other measure for determining the Company's
operating performance or liquidity which is calculated in accordance with
GAAP.
(6) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes plus fixed charges. Fixed charges
consist of interest expense, amortization of debt expense and the portion
(approximately 33%) of rental expense that management believes is
representative of the interest component of rental expense. Earnings were
insufficient to cover fixed charges by $7,630 and $127 for fiscal 1994 and
1995, respectively.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE STATEMENTS IN THIS DISCUSSION REGARDING THE INDUSTRY OUTLOOK, THE
COMPANY'S EXPECTATIONS REGARDING THE FUTURE PERFORMANCE OF ITS BUSINESSES, AND
THE OTHER NONHISTORICAL STATEMENTS IN THIS DISCUSSION ARE FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO NUMEROUS RISKS AND
UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO THE RISKS AND UNCERTAINTIES
DESCRIBED IN THE "RISK FACTORS" SECTION. YOU SHOULD READ THE FOLLOWING
DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF THE COMPANY
TOGETHER WITH THE SECTIONS ENTITLED "RISK FACTORS" AND "SELECTED HISTORICAL
CONSOLIDATED FINANCIAL DATA" AND WITH THE CONSOLIDATED HISTORICAL FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE
COMPANY'S FISCAL YEAR ENDS ON SEPTEMBER 30 OF THE YEARS INDICATED.
OVERVIEW
TransDigm is a leading supplier of highly engineered aircraft components for
use on nearly all commercial and military aircraft. The Company sells its
products to commercial airlines and aircraft maintenance facilities in the
aftermarket, to most original equipment manufacturers ("OEMs") of aircraft and
to various agencies of the United States government. Sales of the Company's
products are made directly to these organizations as well as through U.S. and
international distributors who maintain inventories throughout the world of
products purchased from the Company and others. The Company generates most of
its EBITDA, As Defined from sales of replacement parts in the aftermarket (i.e.
to airlines). This is because most of the Company's OEM sales are on an
exclusive sole source basis; therefore, in most cases, the Company is the only
certified provider of these parts in the aftermarket. Because aftermarket parts
sales are driven by the size of the worldwide aircraft fleet, they are
relatively stable and generate recurring revenues over the life of an aircraft
that are many times the size of the original OEM purchases.
The Company provides its products to commercial airlines (such as United
Airlines and Continental Airlines), large commercial transport and regional and
business aircraft OEMs (such as Boeing, Bombardier and Cessna) and various
agencies of the United States government. While aftermarket and OEM sales have
historically each accounted for approximately half of the Company's net sales,
aftermarket sales typically carry a substantially higher gross margin than sales
to OEMs.
Management believes that the aircraft components industry has historically
been sensitive to changes in revenue passenger miles and, to a lesser extent, to
airline profitability, each of which has historically been correlated with
changes in general economic conditions, and the size and age of the worldwide
aircraft fleet. On a worldwide basis, revenue passenger miles have increased
from approximately 978 billion in 1985 to approximately 1,719 billion in 1996 at
a compound annual growth rate of approximately 6%. See "Business--Industry." In
addition, management believes less than 20% of the Company's annual net sales
during fiscal 1998 were attributable to sales to manufacturers of large
commercial transports such as Boeing and Airbus. As a result, increases and
decreases in the manufacture of large commercial transports only affect a
portion of the Company's net sales.
Management has, since 1993, implemented a number of programs that have had a
positive impact on the profitability and strategic positioning of the Company.
To ensure a competitive cost structure, the Company consolidated the Adel
Fasteners and Wiggins Connectors divisions into AdelWiggins and the AeroProducts
and Controlex divisions into AeroControlex and, in fiscal 1994, consolidated the
Company's four manufacturing facilities into two locations. Beginning in fiscal
1994, management reorganized the business along 11 major product lines in order
to streamline new business initiatives, increase accountability and facilitate
greater responsiveness to customer needs.
The Company's historical financial results are also affected by the
acquisition of Marathon on August 8, 1997. Marathon's operations were
consolidated with those of the Company as of the acquisition date.
39
<PAGE>
The Transactions were recorded as a recapitalization for accounting
purposes. As a result of the Transactions, including the financing and the
application of the proceeds thereof, the Company incurred certain nonrecurring
costs and charges, consisting primarily of compensation costs for management
bonuses and stock options which were canceled in conjunction with the
Recapitalization, the cost of terminating a financial advisory services
agreement with an affiliate of one of the Company's stockholders, the write-off
of deferred financing costs, and professional, advisory and financing fees. A
one-time charge of approximately $39.6 million ($28.8 million after tax) was
recorded in the first quarter of fiscal 1999. Because the cash costs included in
this charge were funded principally through the proceeds of the offering of the
Old Notes and borrowings under the New Credit Facility, this cost did not
materially impact the Company's liquidity, ongoing operations or market
position. For a discussion of the consequences of the incurrence of indebtedness
in connection with the Transactions, see the heading "--Liquidity and Capital
Resources" in this section.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operating
data of the Company as a percentage of net sales.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Net sales................................................................................ 100.0% 100.0% 100.0%
Gross profit............................................................................. 33.4 36.9 46.4
Selling and administrative............................................................... 10.3 9.7 9.4
Amortization of intangibles.............................................................. 6.1 2.7 2.2
Research and development................................................................. 1.3 1.4 1.6
--------- --------- ---------
Operating income......................................................................... 15.7 23.1 33.2
Interest expense, net.................................................................... 7.2 4.4 2.9
Warrant put value adjustment (1)......................................................... 3.4 6.1 5.9
Provision for income taxes............................................................... 3.2 6.6 11.7
Extraordinary item....................................................................... 0.0 1.9 0.0
--------- --------- ---------
Net income............................................................................... 1.9% 4.1% 12.7%
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) In connection with the formation of the Company on September 30, 1993, the
Company issued subordinated notes which included detachable warrants to
purchase approximately 16,000 shares of non-voting common stock of Holdings
at a price of $0.10 per share, exercisable upon certain change of control
events, including the Recapitalization. The warrant put value adjustment for
each period indicated reflects the increase in the estimated put value of
these warrants that occurred during that period.
CHANGES IN RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1997
- - NET SALES. Net sales increased by $32.7 million, or 42%, to $110.8 million for
fiscal 1998 from $78.1 million for fiscal 1997. Approximately $19.5 million of
this increase was attributable to the acquisition of Marathon on August 8,
1997. The remainder of the increase was attributable to an increase in sales
volume resulting from new business initiatives, higher selling prices
primarily related to aftermarket sales and an industry-wide increase in
demand.
- - GROSS PROFIT. Gross profit (net sales less cost of sales) increased by $22.6
million, or 78.8%, to $51.5 million for fiscal 1998 from $28.8 million for
fiscal 1997. Approximately $8.7 million of this
40
<PAGE>
increase was attributable to the acquisition of Marathon. The remainder of the
increase was attributable to the higher selling prices and sales volumes and
internal productivity initiatives. Gross profit increased as a percentage of
net sales from 36.9% in the 1997 period to 46.4% in fiscal 1998. This increase
was primarily attributable to higher selling prices and manufacturing
efficiencies resulting from the internal productivity initiatives and the
increase in sales volumes.
- - SELLING AND ADMINISTRATIVE. Selling and administrative expense increased by
$2.9 million, or 38.2%, to $10.5 million for fiscal 1998 from $7.6 million for
fiscal 1997. This increase was primarily attributable to the Marathon
acquisition. Selling and administrative expenses as a percentage of net sales
remained relatively constant at 9.7% in fiscal 1997 and 9.4% in fiscal 1998.
- - AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased by $0.3
million, or 14.3%, to $2.4 million for fiscal 1998 from $2.1 million for
fiscal 1997. Higher goodwill amortization relating to the acquisition of
Marathon was partially offset by a reduction in amortization of other
intangible assets which became fully amortized in fiscal 1997.
- - RESEARCH AND DEVELOPMENT. Research and development expense increased by $0.6
million, or 54.5%, to $1.7 million for fiscal 1998 from $1.1 million for
fiscal 1997. This increase was primarily attributable to the acquisition of
Marathon. Research and development expense as a percentage of net sales
remained relatively constant at 1.4% in fiscal 1997 and 1.6% in fiscal 1998.
- - OPERATING INCOME. Operating income increased by $18.7 million, or 103.3%, to
$36.8 million for fiscal 1998 from $18.1 million for fiscal 1997.
Approximately $4.6 million of this increase was attributable to the
acquisition of Marathon and the remainder to the other increases in gross
profit discussed above. As a percentage of revenues, operating income
increased to 33.2% in fiscal 1998 from 23.1% in fiscal 1997.
- - INTEREST EXPENSE. Interest expense for fiscal 1998 approximated the amount for
fiscal 1997 at $3.2 million and $3.5 million, respectively. An increase in
borrowings related to the acquisition of Marathon was partially offset by
lower borrowing costs resulting from refinancing of the Company's subordinated
notes.
- - INCOME TAXES. Income tax expense as a percentage of income before income taxes
and the non-deductible warrant put value adjustment increased to 38.6% in
fiscal 1998 from 35.5% in fiscal 1997. The increase in the effective rate
resulted from higher non-deductible expenses, including the amortization of
goodwill recognized in connection with the Marathon acquisition.
- - NET INCOME. Net income increased by $10.9 million, or 340.6%, to $14.1 million
for fiscal 1998 from $3.2 million for fiscal 1997 primarily as result of the
factors referred to above and an extraordinary loss in 1997 partially offset
by the warrant put value adjustment.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1996
- - NET SALES. Net sales increased by $15.3 million, or 24.3%, to $78.2 million
for fiscal 1997 from $62.9 million for fiscal 1996. This increase was
primarily attributable to an industry-wide increase in demand and increases in
sales volume resulting from new business initiatives as well as higher selling
prices primarily related to aftermarket sales. The remainder of the increase,
or approximately $3.0 million, was attributable to the acquisition of
Marathon.
- - GROSS PROFIT. Gross profit increased by $7.9 million, or 37.6%, to $28.9
million for fiscal 1997 from $21.0 million for fiscal 1996. This increase was
attributable to the higher selling prices and sales volumes and internal
productivity initiatives, all of which was partially offset by higher cost of
sales at Marathon resulting from the write-up of Marathon's inventory in place
at the time of the Marathon acquisition. Gross profit also increased as a
percentage of net sales from 33.4% in fiscal 1996 to 36.9% in fiscal 1997.
This increase was primarily attributable to higher selling prices and
41
<PAGE>
manufacturing efficiencies resulting from the internal productivity
initiatives and the increase in sales volumes, as partially offset by the
acquisition of Marathon.
- - SELLING AND ADMINISTRATIVE. Selling and administrative expense increased by
$1.1 million, or 16.9%, to $7.6 million for fiscal 1997 from $6.5 million for
fiscal 1996. This increase was primarily attributable to the acquisition of
Marathon, the increase in sales volume (which increased commission expense)
and the relocation of the Company's corporate headquarters. Selling and
administrative expenses declined as a percentage of net sales from 10.3% in
fiscal 1996 to 9.7% in fiscal 1997 due to the increase in net sales referred
to above coupled with an effort to control expenses.
- - AMORTIZATION OF INTANGIBLES. Amortization of intangibles decreased by $1.7
million, or 44.7%, to $2.1 million for fiscal 1997 from $3.8 million for
fiscal 1996. Amortization of intangibles decreased by $2.0 million as a result
of the termination of an agreement not to compete at the end of fiscal 1996,
partially offset by higher amortization of goodwill relating to the
acquisition of Marathon.
- - RESEARCH AND DEVELOPMENT. Research and development expense increased by $0.3
million, or 37.5%, to $1.1 million for fiscal 1997 from $0.8 million for
fiscal 1996. This increase was primarily attributable to continued new product
development. Research and development expense as a percentage of net sales
remained relatively constant at 1.3% in fiscal 1996 and 1.4% in fiscal 1997.
- - OPERATING INCOME. Operating income increased by $8.2 million, or 82.8%, to
$18.1 million for fiscal 1997 from $9.9 million for fiscal 1996. As a
percentage of revenues, operating income increased to 23.1% in fiscal 1997
from 15.7% in fiscal 1996. This increase was primarily attributable to the
increase in sales volume and gross profits referred to above.
- - INTEREST EXPENSE. Interest expense decreased by $1.0 million, or 22.2%, to
$3.5 million for fiscal 1997 from $4.5 million for fiscal 1996 as a result of
a decrease in the average level of outstanding borrowings during fiscal 1997.
- - INCOME TAXES. Income tax expense as a percentage of income before income taxes
and the non-deductible warrant put value adjustment decreased to 35.5% in
fiscal 1997 from 38.0% in fiscal 1996. The decrease in the effective rate
resulted from foreign sales corporation earnings in fiscal 1997, partially
offset by higher non-deductible expenses, including the amortization of
goodwill recognized in connection with the Marathon acquisition.
- - NET INCOME. Net income increased by $2.0 million, or 166.7%, to $3.2 million
for fiscal 1997 from $1.2 million for fiscal 1996 primarily as result of the
factors noted above partially offset by the warrant put value adjustment and a
$1.5 million extraordinary loss in fiscal 1997.
- - EXTRAORDINARY LOSS. The extraordinary loss in fiscal 1997 of $1.5 million
represents prepayment costs and the write-off of unamortized debt issuance
costs, net of income tax benefits, related to the redemption of the
subordinated notes which were refinanced with a new $70.0 million credit
facility in September 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $23.5 million of cash from operating activities in
fiscal 1998 compared to $17.5 million in fiscal 1997 and $18.7 million in 1996.
Such increase in operating cash flows is due to improved operating results
partially offset by higher working capital.
Cash used in investing activities was approximately $4.3 million in fiscal
1998 compared with $43.2 million in fiscal 1997 and $2.5 million in fiscal 1996.
Cash used in investing activities in fiscal 1997 includes $40.9 million related
to the acquisition of Marathon (net of cash acquired of $0.7 million). The
Company's expenditures for property, plant and equipment were $2.5 million in
fiscal 1996, $2.3 million in fiscal 1997 and $5.1 million in fiscal 1998.
42
<PAGE>
Cash used in financing activities for fiscal 1998 was $5.1 million compared
to cash provided by financing activities of $28.2 million for fiscal 1997 and
cash used in financing activities of $13.5 million for fiscal 1996. During
fiscal 1997, the Company obtained a $70.0 million credit facility, the
outstanding balance under which has been repaid in connection with the
Transactions. Borrowings under this facility of $50.0 million in fiscal 1997
were used to help finance the Marathon acquisition and redeem the Company's
outstanding subordinated notes.
In connection with the Recapitalization, the Company incurred substantial
indebtedness and refinanced certain other indebtedness including all borrowings
under the prior credit facility. See the "Capitalization" section. As of
September 30, 1998, on a pro forma basis, Holdings had indebtedness consisting
of $20.0 million in face value of the Holdings PIK Notes and the Company had
indebtedness consisting of (i) $125.0 million in principal amount of the Old
Notes and (ii) $93.1 million of borrowings under the New Credit Facility, which
consisted of an assumed initial draw of $3.1 million under a $30.0 million
Revolving Credit Facility, a $45.0 million term loan under the Tranche A
Facility and a $45.0 million term loan under the Tranche B Facility. The actual
amount borrowed under the Revolving Credit Facility as of the consummation of
the Transactions on December 3, 1998 was $2.6 million because the Company's cash
balances utilized in the Transactions were more than the amount assumed for the
purposes of presenting the pro forma financial information. See "Unaudited Pro
Forma Consolidated Financial Information" and the notes thereto. The interest
rate for the New Credit Facility is, at the Company's option, either (i) a
floating rate equal to the Base Rate (as defined) plus the Applicable Margin, or
(ii) the Eurodollar Rate (as defined) for fixed periods of one, two, three, or
six months, plus the Applicable Margin. The New Credit Facility is subject to
mandatory prepayment with a defined percentage of net proceeds from certain
asset sales, insurance proceeds or other awards (payable in connection with the
loss, destruction or condemnation of any assets), certain new debt and equity
offerings and 50% of excess cash flow (as defined in the New Credit Facility) in
excess of a predetermined amount under the New Credit Facility.
The Old Notes bear, and the New Notes will bear, interest at 10 3/8%. The
New Notes and the Old Notes will not require principal payments prior to
maturity. The Revolving Credit Facility and the Tranche A Facility will each
mature on the six year anniversary of the initial borrowing date and the Tranche
B Facility will mature on the seven and a half year anniversary of the initial
borrowing date. The New Credit Facility requires the Company to amortize the
outstanding indebtedness under each of the Tranche A Facility and the Tranche B
Facility, commencing in year 1999, and contains restrictive covenants that will,
among other things, limit the incurrence of additional indebtedness, the payment
of dividends, transactions with affiliates, asset sales, acquisitions, mergers
and consolidations, liens and encumbrances, and prepayments of other
indebtedness. See the "Description of the New Notes" and "Description of Other
Indebtedness--The Company--The New Credit Facility" section.
The Company's primary cash needs will consist of capital expenditures and
debt service. The Company incurs capital expenditures for the purpose of
maintaining and replacing existing equipment and facilities and, from time to
time, for facility expansion. Capital expenditures totaled approximately $2.5
million, $2.3 million and $5.1 million in fiscal 1996, fiscal 1997 and fiscal
1998, respectively. The Company estimates that capital expenditures will total
approximately $5.6 million in fiscal 1999.
The Company intends to pursue additional acquisitions that present
opportunities to realize significant synergies, operating expense economies or
overhead cost savings or to increase the Company's market position. The Company
regularly engages in discussions with respect to potential acquisitions and
investments. However, there are no binding agreements with respect to any
material acquisitions at this time, and we cannot assure you that we will be
able to reach an agreement with respect to any future acquisition. The Company's
acquisition strategy may require substantial capital, and no assurance can be
given that the Company will be able to raise any necessary funds on terms
acceptable to the Company or at all. If the Company incurs additional debt to
finance acquisitions, its total interest expense will increase. See "Risk
Factors--Risks Related to Potential Future Acquisitions."
43
<PAGE>
The Company's ability to make scheduled payments of principal of, or to pay
the interest on, or to refinance, its indebtedness (including the New Notes and
the Old Notes), or to fund planned capital expenditures and research and
development will depend on their future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond their control. Based upon the current level of
operations and anticipated cost savings and revenue growth, management believes
that cash flow from operations and available cash, together with available
borrowings under the New Credit Facility, will be adequate to meet the Company's
future liquidity needs for at least the next few years. The Company may,
however, need to refinance all or a portion of the principal of the New Notes
and the Old Notes on or prior to maturity. There can be no assurance that the
Company's business will generate sufficient cash flow from operations, that
anticipated revenue growth and operating improvements will be realized or that
future borrowings will be available under the New Credit Facility in an amount
sufficient to enable the Company to service its indebtedness, including the New
Notes and the Old Notes, or to fund its other liquidity needs. In addition,
there can be no assurance that the Company will be able to effect any such
refinancing on commercially reasonable terms or at all. See the "Risk Factors"
section.
BACKLOG
Management believes that sales order backlog (i.e. orders for products that
have not yet been shipped) is a useful indicator of sales to OEMs. As of
September 30, 1998, the Company estimated its sales order backlog at $43.2
million compared to an estimated $40.9 million as of September 30, 1997. The
majority of the purchase orders outstanding as of September 30, 1998 are
scheduled for delivery within the next twelve months. Purchase orders are
generally subject to cancellation by the customer prior to shipment. The level
of unfilled purchase orders at any given date during the year will be materially
affected by the timing of the Company's receipt of purchase orders and the speed
with which those orders are filled. Accordingly the Company's backlog as of
September 30, 1998 is not necessarily indicative of actual shipments or sales
for any future period, and period-to-period comparisons may not be meaningful.
FOREIGN OPERATIONS
The Company manufactures virtually all of its products in the United States.
However, a significant portion of the Company's current sales are conducted
abroad. These sales are subject to numerous additional risks, including the
impact of foreign government regulations, currency fluctuations, political
uncertainties and differences in business practices. There can be no assurance
that foreign governments will not adopt regulations or take other action that
would have a direct or indirect adverse impact on the business or market
opportunities of the Company within such governments' countries. Furthermore,
there can be no assurance that the political, cultural and economic climate
outside the United States will be favorable to the Company's operations and
growth strategy.
INFLATION
Many of the Company's raw materials and operating expenses are sensitive to
the effects of inflation, which could result in higher operating costs. The
effects of inflation on the Company's businesses during fiscal 1998, 1997 and
1996 were not significant.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
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equity section of a statement of financial position. The Company will adopt this
standard during fiscal 1999.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
statement requires that a public business enterprise report financial and
descriptive information about its reportable operating segments such as a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. The Company will adopt this standard during fiscal 1999.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employer's Disclosures about Pensions and Other Postretirement Benefits."
The statement requires an enterprise to disclose certain information about its
pension and postretirement benefits, including a reconciliation of beginning and
ending balances of the benefit obligation, the funded status of the plans, and
the amount of net periodic benefit cost recognized. The Company will adopt this
standard in fiscal 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The Company will adopt this
standard during fiscal 2000.
While management has not completed its analysis of these new accounting
standards, the adoption of these standards is not expected to have a material
effect on the Company's financial statements.
IMPACT OF YEAR 2000 ISSUE
We have completed a review of our computer systems and are completing a
review of our embedded systems in order to assess our exposure to Year 2000
issues. We purchased all of our computer software from third party vendors and
are relying on those vendors to make their software Year 2000 compliant. Except
for the vendor of our e-mail system, such vendors have provided us with third
party certifications that their systems are Year 2000 compliant.
We do not, however, currently have any information concerning the Year 2000
compliance status of our suppliers and customers, including various agencies of
the United States government.
In the event that Year 2000 problems arise within our Company or that our
significant suppliers or customers, including various agencies of the United
States government, do not successfully and timely achieve Year 2000 compliance,
the result may be a delay in our receiving orders and collecting payments,
leading to a temporary loss of revenue. We have incurred $180,000 in costs
associated with Year 2000 compliance and anticipate incurring $150,000 of
additional costs in the future. We may, however, have to bear further Year 2000
costs and expenses which could have a material adverse effect on our business.
The Company has no formal contingency plan in the event Year 2000 problems
arise; however, the Company's accounting and business information systems are
not complex and manual procedures could be performed for a period of time to
provide the information necessary to continue to operate the business.
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BUSINESS
THE COMPANY
TransDigm is a leading supplier of highly engineered aircraft components for
use on nearly all commercial and military aircraft. The Company sells its
products to commercial airlines, aircraft maintenance facilities, aircraft OEMs
and to various agencies of the United States government. The Company generates
most of its EBITDA, As Defined from sales of replacement parts in the
aftermarket (i.e. airlines). This is because most of the Company's OEM sales are
on an exclusive sole source basis; therefore, in most cases, the Company is the
only certified provider of these parts in the aftermarket. Because aftermarket
parts sales are driven by the size of the worldwide aircraft fleet, they are
relatively stable and generate recurring revenues over the life of an aircraft
that are many times the size of the original OEM purchases. In addition, because
the Company has over 40 years of experience in most of its product lines, it
benefits from a large and growing installed base of aircraft. For fiscal 1998,
the Company generated net sales, operating income and EBITDA, As Defined, of
$110.9 million, $36.8 million and $43.5 million, respectively.
TransDigm differentiates itself based on its engineering and manufacturing
capabilities, and typically will not bid on non-proprietary "build to print"
business. The Company has developed strong product brand names within the
airline industry and a reputation for high quality, reliability and customer
service. The Company focuses on developing highly customized products to solve
specific problems of aircraft operators and manufacturers. Management estimates
that over 80% of the Company's products are of proprietary design. The Company
provides its products to commercial airlines (such as United Airlines and
Continental Airlines), large commercial transport and regional and business
aircraft OEMs (such as Boeing, Bombardier and Cessna) and various agencies of
the United States government. While aftermarket and OEM sales each typically
account for approximately half of the Company's revenues, aftermarket sales
typically carry a substantially higher gross margin than sales to OEMs.
The Company is comprised of three business units: (i) AdelWiggins, (ii)
AeroControlex, and (iii) Marathon, each of which has a long history in the
aircraft components industry. AdelWiggins manufactures an extensive line of fuel
and hydraulic system connectors and specialized clamps, heaters and refueling
systems. AeroControlex manufactures customized fuel pumps, compressors, valves,
couplings and mechanical and electromechanical controls. Marathon manufactures
nickel cadmium batteries and static inverters. Marathon was acquired in August
1997 as a strategic complement to the AdelWiggins and AeroControlex businesses.
TransDigm was formed in 1993 through a management-led buyout of IMO. Since
its formation, the Company has successfully established leadership positions in
well-defined, profitable niches of the aircraft components market that it
believes offer sustainable growth opportunities.
INDUSTRY OVERVIEW
The aircraft components industry is highly fragmented, consisting of a large
number of small, specialized companies and a limited number of well-capitalized
companies. The Company competes in product specific markets which it estimates
range in size from $10 million to $100 million in annual revenues. The Company
believes that the small size of its markets, combined with the industry's
stringent regulatory approvals and the need to make significant investments in
research and development reduces the risk of new entrants. Management believes
its markets are too small to attract large aerospace companies. In addition,
management believes the financial resources and technical expertise required to
compete in these markets are beyond the reach of most small companies. Finally
all potential competitors must meet the certification requirements and
qualification approvals required by the FAA and aircraft OEMs.
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AFTERMARKET
Aircraft components need to be serviced regularly to meet FAA standards and
aircraft reliability requirements. Demand for aftermarket parts depends on
revenue passenger miles and, to a lesser extent, on airline profitability, each
of which has historically been correlated with changes in general economic
conditions, and the size and age of the worldwide aircraft fleet. Since certain
modern aircraft can have useful lives of 30 years or more, spare parts and
repair and overhaul services can often generate more sales than the OEM program
at significantly higher margins. Management further believes that aftermarket
sales help to offset declines in OEM demand as historically airlines and air
cargo operators have increased repair and overhaul spending to prolong the life
of older aircraft when they delay purchasing new aircraft. Customers in the
aftermarket segment include airlines, air cargo operators, aircraft leasing
companies, corporate and individual owners of aircraft as well as maintenance,
repair and overhaul facilities and various agencies of the United States
government, including the military. Management believes that aftermarket sales
will continue to be an attractive market as a result of the following factors:
- - Air travel traffic continues to increase. In the United States, large
commercial transport revenue passenger miles have increased from approximately
431 billion in 1987 to approximately 604 billion in 1997, with 1991
representing the only year in the last ten years in which annual revenue
passenger miles decreased. On a worldwide basis, revenue passenger miles have
increased from approximately 978 billion in 1985 to 1,719 billion in 1996.
- - Total aircraft fleet size has continued to increase despite the volatility of
orders and deliveries. At the end of 1997 the large commercial aircraft fleet
consisted of approximately 11,900 aircraft, a 4.5% compound annual increase
from approximately 7,700 aircraft in 1987. Similarly, the regional aircraft
fleet (consisting of turbo-prop and jet aircraft) has increased from
approximately 4,900 units in 1987 to approximately 7,500 units in 1997 and the
business aircraft fleet has increased from approximately 6,100 units in 1987
to approximately 8,700 units in 1997.
- - Aircraft capacity utilization remains at high levels. Passenger load factors
(measured as the percentage of occupied seats per flight) for U.S. carriers
have increased from 62% in 1987 to 68% in 1996, a record for the industry.
During 1997, carriers achieved 69% load factors on a worldwide basis.
OEM
Demand for OEM components depends on new aircraft deliveries. Demand for new
aircraft is a function of (i) demand for air travel, (ii) aircraft operator
profitability, (iii) fleet age, (iii) regulatory mandates such as noise
reduction, and (iv) the lag time between order and delivery, which causes
airlines to order aircraft according to perceived future need.
- - In the early 1990's, many airlines significantly reduced spending on new
aircraft and extended the average age of their fleets due to weakened
financial performance. With the return of airline profitability, commercial
OEMs have experienced a surge in aircraft orders and deliveries which resulted
in large commercial transport deliveries growing from a low of 370 aircraft in
1995 to estimated 774 aircraft by the end of 1998.
- - The regional jet aircraft market has grown significantly in recent years as
turbo-jet powered aircraft have made substantial inroads in a market
traditionally served by the turboprop powered aircraft and some smaller
commercial transports. Regional jets have greater range, faster speed and
lower noise levels and are perceived as safer and more comfortable by
passengers. U.S. regional revenue passenger miles have increased from
approximately 4.0 billion miles in 1987 to approximately 7.7 billion miles in
1996. Regional aircraft deliveries have increased significantly to 115 in 1997
since
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their introduction in 1988. Industry forecasts by the U.S. Regional Airline
Association concluded that approximately 1,280 regional and commuter aircraft
will be delivered between 1998 and 2008.
- - The business jet market is driven by, among other factors, the increasing
popularity of fractional ownership and the increasing demand for more
expedient and convenient travel. Deliveries of executive jets have increased
significantly since 1987.
- - The FAA has mandated that aircraft flying in U.S. airspace comply with Stage 3
noise standards by December 31, 1999. Other countries, particularly in Western
Europe, have instituted similar restrictions. As a result, it is expected that
there will be an increased demand for aircraft during the next several years
as the aircraft which are not retrofitted with "hush kits" are replaced.
- - While military spending for new aircraft has significantly declined with the
end of the cold war, military parts and repair spending has been relatively
stable for the last several years as existing platforms require parts to
remain operational.
COMPETITIVE STRENGTHS
The Company believes that its key competitive strengths are:
- - LARGE INSTALLED PRODUCT BASE AND RECURRING REVENUE STREAM. Management believes
that approximately 70% of the Company's sales are derived from parts for which
it has achieved sole source designation and approximately 80% of the Company's
products are of proprietary design. As a result, the Company has a large and
growing installed base of products on large commercial transport and regional,
business and military platforms. This installed base affords the Company the
opportunity to capture a long-term stream of highly profitable aftermarket
revenues. Over the life of an aircraft, sales of replacement parts can
generate revenues many times the size of the original OEM purchases.
Aftermarket sales generate most of the Company's EBITDA, As Defined because
they typically carry gross margins that are significantly higher than those
generated from OEM sales.
- - PROVEN ABILITY TO DEVELOP NEW PRODUCTS. TransDigm has a successful record of
introducing solutions-oriented products. The Company works closely with
aircraft operators and OEMs to identify their unmet needs, such as a component
that fails to meet performance expectations or that requires excessive
maintenance. The Company then utilizes its engineering and design capabilities
to develop a prototype for a component that increases the value of the product
to the customer. After rigorous testing requirements have been fulfilled and
the Company has obtained necessary regulatory approvals, the product is made
available for sale in the aftermarket and to OEMs. Management believes that
its ability to successfully develop new products has contributed to its
significant growth.
- - DIVERSIFIED BUSINESS MIX. The Company's business is fairly evenly distributed
between sales in the aftermarket and sales to OEMs. Each of these segments are
further distributed among the large commercial transport and regional,
business and military aircraft markets. As a result, the Company is not overly
dependent on any one segment, with the large commercial transport OEM market
accounting for less than 20% of sales in fiscal 1998.
- - LEADING POSITIONS IN NICHE MARKETS. With over 40 years of experience in most
of its product lines, the Company has well-established and highly regarded
products and trade names, such as "Adel," "Wiggins," "Controlex," "Marathon"
and "SuperPower," and is a leader in many of its product lines. For example,
the Company believes that it is the leading supplier of tube connectors for
use in the flexible fluid systems found on most aircraft platforms.
- - EXPERIENCED AND INCENTIVIZED MANAGEMENT TEAM. TransDigm's management team
collectively has over 125 years of industry experience and brings a
disciplined approach to the business. Management has a proven track record of
consolidating operations, reducing overhead and rationalizing costs. Since the
Company was created in 1993, management has successfully integrated four
distinct operating
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divisions and formed AdelWiggins and AeroControlex. Most recently management
has successfully integrated Marathon into the Company. The management team has
dramatically improved the operating performance and strategic position of
TransDigm. EBITDA, As Defined margins have improved from 19.0% in fiscal 1994
to 39.3% in fiscal 1998. In addition, management owns approximately 12.5% of
the capital stock of Holdings on a fully diluted basis, which amount is
subject to an increase to approximately 21.3% if certain performance targets
are met.
BUSINESS STRATEGY
Key elements of TransDigm's strategy are:
- - PROVIDE VALUE ADDED PRODUCTS TO CUSTOMERS. The Company will continue to focus
on marketing and manufacturing highly engineered products to customers that
place a premium on the Company's capabilities. The Company has been effective
in communicating to aircraft operators the value of the Company's products in
terms of cost savings generated by their greater reliability and performance
and reduced maintenance requirements. The Company's reputation for quality and
sole supplier status for many parts has allowed it to achieve substantial
gross margins on its aftermarket products. The Company intends to continue to
develop and market high value added products that carry higher gross margins
by emphasizing their benefits to the customer.
- - GENERATE NEW BUSINESS INITIATIVES. TransDigm has been successful in
identifying and commercializing new business opportunities to drive revenue
growth. The Company has been particularly effective in creating aftermarket
opportunities by developing superior products to retrofit aircraft already in
service. New business has contributed significantly to the Company's 14%
compound annual net sales growth rate (excluding Marathon) since fiscal 1994,
which the Company believes is well in excess of the industry average growth
rate during the same period. The Company intends to continue to aggressively
pursue growth opportunities through its new business initiatives.
- - REALIZE PRODUCTIVITY SAVINGS. Management will continue to focus on improving
operating margins through manufacturing improvements and increases in employee
productivity. Management has achieved significant increases in productivity
since fiscal 1994. Manufacturing facilities have been rationalized and
manufacturing and other business practices have been redesigned to maximize
efficiency. For example, TransDigm encourages its employees through
performance incentives to learn to operate multiple manufacturing stations in
order to minimize overall labor costs. This initiative and others like it have
enabled the Company to significantly increase sales without material increases
in headcount.
- - PURSUE STRATEGIC ACQUISITIONS. The Company intends to aggressively pursue
acquisitions where it believes that it can enhance value, reduce costs and
develop new business. The aircraft component industry is highly fragmented,
with many of the companies in the industry being owned by small operators. The
Company believes the industry is experiencing consolidation due to customer
requirements, inherent economies of scale and technological advancements that
favor more sophisticated competitors. The Company completed the Marathon
acquisition in August 1997. The Company regularly engages in discussions with
respect to other acquisition and investment opportunities. See the section
"Risk Factors" under the heading "Risk Related to Potential Future
Acquisitions."
OPERATING GROUPS
TransDigm was formed in 1993 through a management-led buyout of IMO.
TransDigm operates three business units: Adelwiggins, AeroControlex and
Marathon. AdelWiggins, which is located in Los Angeles, CA and had 177 full time
employees at September 30, 1998, manufactures an extensive line of proprietary
fuel and hydraulic system connectors and specialized clamps, heaters and
refueling systems. AdelWiggins was formed in 1994 from the consolidation of the
Adel Fasteners and Wiggins Connectors
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divisions acquired from IMO. Founded in 1938 and 1925, respectively, both Adel
Fasteners and Wiggins Connectors have had a long history in the aircraft
components industry and enjoy strong brand name recognition.
AeroControlex, which is located in Cleveland, OH and had 183 full-time
employees at September 30, 1998, manufactures proprietary pumps, compressors,
valves, couplings and mechanical controls for commercial and military aircraft
and marine applications. AeroControlex was formed in 1994 from the consolidation
of the Aeroproducts and Controlex divisions acquired from IMO.
Marathon, which is located Waco, TX and had 178 full-time employees at
September 30, 1998, was acquired by TransDigm in August 1997 as a strategic
addition to its AdelWiggins and AeroControlex business lines. Marathon has been
a leading manufacturer of nickel-cadmium batteries and static inverters to the
aerospace industry since its founding in 1923. Management has successfully
integrated the Marathon business unit into the TransDigm culture and believes
that, over the next several years, Marathon offers upside potential similar to
that achieved with the integration of AdelWiggins and AeroControlex.
PRODUCTS
TransDigm's products are found on virtually all types of aircraft, and the
Company supplies components to all major domestic and international airlines.
Management estimates that over 80% of the Company's products are of proprietary
design and approximately 70% of the Company's sales are derived from parts for
which it has achieved sole source designation. The Company's products are
grouped into eleven major product lines, each of which is profitable and is
operated as a semiautonomous business unit.
Much of the Company's recent success has been due to its identification and
development of new products for sale in the commercial aftermarket. The Company
works closely with customers to identify their unmet needs, such as a component
that fails to meet performance expectations or that requires excessive
maintenance. The Company then utilizes its engineering and design capabilities
to develop a prototype for a component that increases value of the product to
the customer. After rigorous testing requirements have been fulfilled and the
Company has obtained necessary regulatory approvals, the product is made
available for sale in the aftermarket and to OEMs.
ADELWIGGINS. Adelwiggins manufactures over 8,000 SKUs, representing 40% of
the Company's sales for fiscal 1998, which constitute five of the Company's
eleven major product lines: (i) flexible tube connectors, (ii) special
connectors, (iii) Adel clamps, (iv) Wiggins service systems and (v) heaters and
hoses. Tube connectors are fluid line connectors that provide leak tight joints
and are found in flexible fluid systems on most aircraft platforms including
fuel, water, waste and environmental systems. Special connectors are connectors
designed to allow breaking and reconnecting of fluid lines under pressure and
are found in quick disconnect applications including refueling and other fluid
management systems for military, space and rocket launch applications and in
frangible connectors for large commercial transports. Adel clamps include
cushioned clamps, engineered elastomers, bare metal clamps, clampshells, block
clamps and quick release clamps used to support fuel, hydraulic, fluid and
electric lines and are found in a broad variety of clamps located throughout the
airplane, including in engines to address high temperature and high vibration
requirements. Wiggins service systems include proprietary refueling nozzles and
systems, vents, receivers and quick disconnects and are found in mine refueling
equipment and military applications such as tanks and armored vehicles that
require high flow capabilities and universal compatibility. Heaters and hoses
consists of specialized hoses and heaters, including blanket and ribbon heaters,
heater cuffs, heated nipples and gaskets and heated tanks throughout the
aircraft and are designed to prevent freezing of fluids such as potable water
and waste and to provide heat for hot water service applications.
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AdelWiggins designs its products specifically to meet the engineering
requirements of its customers, focusing on aspects such as: reduced-profile or
low-profile geometry, broad ranges of high-temperature service, ease of
installation and, where possible, utilization of advanced materials to maximize
the strength-to-weight ratios of its components. These factors are critical to
both OEMs and commercial airlines given their emphasis on reducing both
acquisition and operating costs. In addition, the Company believes AdelWiggins'
products have a reputation for long service lives and extremely high reliability
in stressful operating environments.
Approximately 60% of AdelWiggins' products are proprietary products designed
to meet specific customer needs. The remaining 40% are industry standard
designs. Roughly 55% of AdelWiggins' products are sole sourced, which is
advantageous to the Company because it creates significant switching costs
associated with the development and qualification of alternative engineered
solutions. This sole sourced status has contributed to AdelWiggins achieving
aftermarket sales of 30% of its net sales in fiscal 1998. See
"Business--Customers."
AEROCONTROLEX. AeroControlex manufactures over 13,000 SKUs, representing
39% of the Company's sales for fiscal 1998, which constitute three of the
Company's eleven major product lines: (i) mechanical controls, (ii) pumps and
(iii) valves and quick disconnects. Mechanical controls include
electromechanical control systems, sliding and ball bearing control cables and
gearboxes which are found in the lavatory drain, throttle control, engine
feedback, landing gear release and in ejection seats and fuel and air systems.
Pumps primarily include gear pumps which are found in hydraulic and fuel systems
applications. Valves and quick disconnects include fuel and air system valves,
compressors and quick disconnects which are found in air conditioning packages
and fuel, radar and potable water systems.
AeroControlex designs, manufactures and sells pumps, compressors, valves,
couplings and mechanical controls primarily for the commercial and military
aircraft markets. AeroControlex has developed a reputation for providing
high-quality, reliable products consistently delivered on time. AeroControlex
works closely with customers to leverage its engineering expertise to create
technical solutions to customer-specific problems. About 95% of AeroControlex
products are proprietary and over 90% are sold on a sole-source basis, which is
advantageous to the Company because its creates significant switching costs
associated with the development and qualification of alternative engineered
solutions. This sole sourced status has contributed to AeroControlex achieving
aftermarket sales of 68% of its net sales in fiscal 1998. See
"Business--Customers."
MARATHON. Marathon manufacturers over 5,000 SKUs, representing 21% of the
Company's sales for fiscal 1998, which constitute three of the Company's eleven
major product lines: (i) vented cell nickel-cadmium batteries, (ii) static
inverters and (iii) sealed cell nickel-cadmium batteries. Vented cell
nickel-cadmium batteries and sealed cell batteries are used for engine starting
and emergency power aboard various aircraft while static inverters convert
direct current to alternating current for use in applications such as flight
instrumentation and communication. Marathon products are used for numerous
military applications, such as the F-16, F-18, Blackhawk, Apache and Cobra
programs. Approximately 50% of Marathon's products have achieved sole sourcing
status with its customers.
Marathon is one of the worlds leading manufacturers of vented cell
nickel-cadmium batteries, which require frequent maintenance, as individual
cells within a battery are replaced throughout the life of the battery.
Marathon, which manufactures and sells both entire batteries and individual
cells, realizes replacement revenue in the aftermarket throughout the life of
the battery as a result of its position as a sole source supplier of products
that accounted for over 50% of its sales. Over 95% of Marathon's sales are
proprietary, the status of which has contributed to Marathon achieving
aftermarket sales of 69% of its net sales in fiscal 1998. Vented cell batteries
are marketed under the Marathon-TM- and SuperPower-TM- brand names.
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SALES AND MARKETING
Consistent with the Company's overall strategy, the Company's sales and
marketing organization is structured to understand and anticipate the needs of
customers in order to continually develop a stream of technical solutions that
generate significant value. Particular focus is on the high-margin, repeatable
aftermarket segment.
The Company has structured its sales efforts along its eleven major product
lines, assigning a Product Line Manager to each line. The Product Line Managers
are expected to grow the sales and profitability of their product line faster
than the served market and to achieve the targeted annual level of booking,
sales, new business and profitability for each product. Assisting the Product
Line Managers are Account Managers and Sales Engineers who are responsible for
covering both major OEM and airline accounts. They are expected to be familiar
with the personnel, organization and needs of specific customers, for achieving
total bookings and new business goals at each account, and, in conjunction with
the Product Line Managers, for determining when additional resources are
required at customer locations. All of the Company's sales personnel are
compensated in part on their bookings and sales and ability to identify and
convert new business opportunities.
Though the majority are employees, the Account Manager function may be
performed by independent representatives depending on the specific customer,
product and geographic location. TransDigm also uses a limited number of
distributors to provide logistical support as well as primary customer contact
with certain smaller accounts. The Company's largest distributor is Aviall,
which provides logistic services to the commercial airlines.
MANUFACTURING AND ENGINEERING
TransDigm maintains three manufacturing facilities. Each facility serves its
respective operating group, and comprises manufacturing, distribution and
engineering as well as corporate functions, including management, sales and
finance. The AdelWiggins, AeroControlex and Marathon facilities encompass
approximately 105,000, 44,000 and 150,000 square feet of manufacturing space in
Los Angeles, California, Cleveland, Ohio and Waco, Texas, respectively. In the
last several years, management has taken a number of steps to improve
productivity and reduce costs, including consolidating operations, developing
improved control systems that allow for accurate product line profit and loss
accounting, investing in equipment and tooling, installing modern information
systems and implementing a broad-based employee training program. Management
believes that the Company's manufacturing systems and equipment are critical
competitive factors that permit it to meet the rigorous tolerances and cost
sensitive price structure of aircraft customers. The Company concentrates in
manufacturing by product line, alternating its equipment among designs as demand
requires. TransDigm is in the process of applying its proven manufacturing
strategy to the Marathon facility, where its expects to be able to substantially
improve Marathon's performance.
Each of the Company's operating groups attempts to differentiate itself from
its competitors by producing highly engineered products at a low cost. The
Company's proprietary products are designed by its engineering staff and
intended to serve an unmet need in the aircraft component industry, particularly
through its new product initiatives. See "--Products." These proprietary designs
must withstand the extraordinary conditions and stresses that will be endured by
products during use and meet the rigorous demands of the Company's customers
tolerance and quality requirements.
The Company uses sophisticated equipment and procedures to ensure the
quality of its products and to comply with military specifications and FAA and
OEM certification requirements. The Company performs a variety of testing
procedures, including testing under different temperature, humidity and altitude
levels, shock and vibration testing and X-ray fluorescent measurement. These
procedures, together with other customer approved techniques for document,
process and quality control, are used throughout the Company's manufacturing
facilities.
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CUSTOMERS
TransDigm's customers include (i) commercial airlines (including national
and regional airlines), particularly for aftermarket MRO components, (ii) large
commercial transport and regional and business aircraft OEMs, (iii) various
agencies of the United States' government, including the United States military,
and (iv) various other industrial customers. The Company's three largest
customers for fiscal 1998, were Aviall (a distributor of aftermarket parts to
airlines throughout the world), Boeing (including McDonnell Douglas) and various
agencies of the United States' government, which accounted for approximately
20%, 14% and 9%, respectively, of the Company's net sales in fiscal 1998. The
Company's top ten customers accounted for approximately 61% of the Company's net
sales for fiscal 1998.
The Company has strong customer relationships with virtually all important
large commercial transport, general aviation and military OEMs. The demand for
the Company's aftermarket parts and services is related to the Company's
extensive installed base and to revenue passenger miles and, to a lesser extent,
to airline profitability and the size and age of the worldwide aircraft fleet.
See "Business--Industry Overview." Some of the Company's business is executed
under long-term agreements with customers which encompass many products under a
common agreement. See "Risk Factors--Customer Contracts." The Company is also a
leading supplier of components used on United States' designed military
aircraft. The Company's products are used on a variety of fighter aircraft, and
helicopters. Military aircraft using the Company's products include the Lockheed
F-15 and F-16, the E2C (Hawkeye) and Blackhawk and Apache helicopters.
COMPETITION
The Company competes with a number of established companies, including
divisions of larger companies, that have significantly greater financial,
technological and marketing resources than the Company. The niche markets within
the aerospace industry served by the Company are relatively fragmented with
several competitors for each of the products and services provided by each of
AdelWiggins, AeroControlex and Marathon. Due to the global nature of the
commercial aircraft industry, competition in these categories comes from both
U.S. and foreign companies. However, the Company knows of no single competitor
that provides the same range of products and services as those provided by the
Company. Competitors in the Company's product lines range in size from divisions
of large corporations to small privately held entitles, with only one or two
components in their entire product line. Certain of the Company's competitors
have significantly greater financial, technological and marketing resources than
the Company. The Company believes that its ability to compete depends
on high product performance, short lead-time and timely delivery, competitive
price, and superior customer service and support. There can be no assurance that
the Company will be able to compete successfully with respect to these or other
factors. See "Risk Factors--Competition."
GOVERNMENTAL REGULATION
The commercial aircraft component industry is highly regulated by both the
FAA in the United States and by the Joint Aviation Authorities in Europe, while
the military aircraft component industry is governed by military quality
specifications. The Company, and the components it manufacturers, are required
to be certified by one or more of these entities, and, in some cases, by
individual OEMs in order to engineer and service parts and components used in
specific aircraft models. If material authorizations or approvals were revoked
or suspended, the operations of the Company would be adversely affected. In the
future, new and more stringent government regulations may be adopted, or
industry oversight may be heightened, which may have an adverse impact on the
Company.
The Company must also satisfy the requirements of its customers, including
OEMs and airlines, that are subject to FAA regulations, and provide these
customers with products and services that
53
<PAGE>
comply with the government regulations applicable to commercial flight
operations. In addition, the FAA requires that various maintenance routines be
performed on aircraft components, and the Company currently satisfies or exceeds
these maintenance standards in its repair and overhaul services. Several of the
Company's operating divisions include FAA-approved repair stations.
The Company's operations are also subject to a variety of worker and
community safety laws. OSHA mandates general requirements for safe workplaces
for all employees. In addition, OSHA provides special procedures and measures
for the handling of certain hazardous and toxic substances. The Company believes
that its operations are in material compliance with OSHA's health and safety
requirement.
RAW MATERIALS AND PATENTS
The components that the Company manufactures require the use of various raw
materials including titanium, aluminum, nickel powder, nickel screen, stainless
steel and cadmium, the availability and prices of which may fluctuate. The price
of raw materials and outside processing represents approximately 20% of the
sales price of the Company's products for fiscal 1998. Price increases in these
supplies may not be able to be recovered. The Company also purchases a variety
of manufactured component parts from various suppliers although the Company is
concentrating its orders among fewer suppliers to strengthen its supplier
relationships. Raw materials and component parts are generally available from
multiple suppliers at competitive prices. However, any delay in the Company's
ability to obtain necessary raw materials and component parts may affect its
ability to meet customer production needs.
The Company has various trade secrets, proprietary information, trademarks,
trade names, patents, copyrights and other intellectual property rights which
the Company believes, in the aggregate (but not individually), are important to
its business.
ENVIRONMENTAL MATTERS
The Company's operations and current and/or former facilities are subject to
federal, state and local environmental laws and to regulation by government
agencies, including the Environmental Protection Agency. Among other matters,
these regulatory authorities impose requirements that regulate the emission,
discharge, generation, management, transportation and disposal of hazardous
materials and pollutants, govern response actions to hazardous materials which
may be or have been released to the environment, and require the Company to
obtain and maintain permits in connection with its operations. The extensive
regulatory framework imposes significant compliance burdens and risks on the
Company. Although management believes that the Company's operations and its
facilities are in compliance in all material respects with applicable
environmental laws, there can be no assurance that future changes in such laws,
regulations or interpretations thereof or the nature of the Company's operations
will not require the Company to make significant additional expenditures to
ensure compliance in the future. Pursuant to certain environmental laws, a
current or previous owner or operator of real property may be liable for the
costs of investigations, removal or remediation of hazardous materials at such
property. Such laws typically impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous
materials. Persons who arrange, or are deemed to have arranged, for disposal or
treatment of hazardous materials also may be liable for the costs of
investigation, removal or remediation of such substances at the disposal or
treatment site, regardless of whether the affected site is owned or operated by
such person. Because the Company owns and/or operates a number of facilities,
and because the Company arranges for the disposal of hazardous materials at many
disposal sites, the Company may incur costs for investigation, removal and
remediation, as well as, capital costs associated with compliance. Although such
environmental costs have not been material in the past and are not expected to
be material in the future, there can be assurance that changes in environmental
laws or unexpected investigations and
54
<PAGE>
clean-up costs will not be material. See "Risk Factors--Potential Exposure to
Environmental Liabilities." The Company does not currently contemplate material
capital expenditures for environmental compliance remediation for fiscal 1999 or
fiscal 2000.
The soil and groundwater beneath the Company's facility in Waco, Texas, have
been impacted by releases of hazardous materials. Because the majority of the
contaminants identified to date are presently below action levels prescribed by
the Texas Natural Resources Conservation Commission ("TNRCC"), the Company does
not believe the condition of the soil and groundwater at the Waco facility will
require incurrence of material capital expenditures; however, there can be no
assurance that additional contamination will not be discovered or that the
remediation required by the TNRCC will not be material to the financial
condition, results of operations or cash flows of the Company.
PROPERTIES AND FACILITIES
The Company owns and operates a 130,000 square foot facility in Los Angeles,
California, a 63,000 square foot facility in Cleveland, Ohio and a 219,000
square foot facility in Waco, Texas which is also the Company's headquarters.
The Company also leases certain of its other facilities. Management believes
that its machinery, plants and offices are in satisfactory operating condition,
and, upon completion of its planned 10,000-20,000 square foot expansion of the
AeroControlex manufacturing facility, will have sufficient capacity to meet
foreseeable future needs without incurring significant additional capital
expenditures.
EMPLOYEES
As of September 30, 1998, the Company had approximately 540 full-time
employees and 45 temporary employees. Approximately 11% of the Company's
employees were represented by the United Steelworkers Union, and approximately
19% were represented by the United Automobile,
Aerospace and Agricultural Implement Workers of America. Collective bargaining
agreements between the Company and these labor unions expire on April 1999 and
November 2000, respectively. The Company considers its relationship with its
employees generally to be satisfactory and does not expect any difficulty in
reaching new collective bargaining agreements.
LEGAL PROCEEDINGS
During the ordinary course of business, the Company is from time to time
threatened with, or may become a party to, legal actions and other proceedings.
While the Company is currently involved in certain legal proceedings, management
believes the results of these proceedings will not have a material effect of the
results of operations of the Company, in part due to certain indemnification
arrangements. The Company believes that its potential exposure to such legal
actions is adequately covered by its aviation product and general liability
insurance.
55
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
The directors, executive officers, and other key employees of the Company
and its subsidiaries are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Douglas W. Peacock................................... 60 Chairman of the Board of Directors and Chief
Executive Officer
W. Nicholas Howley................................... 46 President, Chief Operating Officer and Director
John D. Peterson, Sr. ............................... 54 President, AdelWiggins Group
Raymond F. Laubenthal................................ 37 President, AeroControlex Group
Robert S. Henderson.................................. 42 President, Marathon Power Technologies Company
Peter B. Radekevich.................................. 47 Chief Financial Officer
Stephen Berger....................................... 58 Director
Muzzafar Mirza....................................... 40 Director
William Hopkins...................................... 35 Director
Thomas R. Wall, IV................................... 40 Director
John W. Paxton....................................... 62 Director
</TABLE>
MR. PEACOCK has been Chairman of the Board and Chief Executive Officer of
the Company since its inception in September 1993. He is also a director of
Microporous Products, L.P. Prior to joining the Company, Mr. Peacock spent six
years with IMO Industries Inc. as Executive Vice President of IMO's Instruments
and Aerocomponents Group from 1991-1993, Executive Vice President of Power
Systems from 1989-1991, and managed IMO's turbomachinery business from
1987-1989. Prior to joining IMO, Mr. Peacock spent 15 years in various
managerial positions at Westinghouse Electric Corp. Mr. Peacock received a B.S.
degree in chemical engineering from Washington State and a Ph.D. in physical
chemistry from the University of Illinois. Mr. Peacock holds an Airline
Transport Pilot Rating and routinely commands flights in TransDigm's corporate
aircraft.
MR. HOWLEY has been President, Chief Operating Officer and Director of the
Company since the consummation of the Recapitalization. Mr. Howley served as
Executive Vice President of the Company and President of AeroControlex Group
from the Company's inception in September 1993 to the date of the consummation
of the Recapitalization. Prior to joining the Company, Mr. Howley served as
General Manager of IMO Industries Inc. Aeroproducts division, and Director of
Finance for the 15 divisions of IMO's Turbomachinery, Aerospace, and Power
Transmission groups. Prior to joining IMO, he held various executive positions
at Lansdowne Steel/Lansco Corp., a manufacturer of defense and oil drilling
products, and the Engineering and Construction Group of Raytheon Co. Mr. Howley
received his B.S. in engineering from Drexel University and an MBA from the
Harvard University Graduate School of Business.
MR. PETERSON has been Vice President and President of AdelWiggins Group
since June 1996. From 1990 to June 1996, Mr. Peterson was President of the
Aerospace Fastener Division of Huck
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<PAGE>
International. Mr. Peterson received his B.S. in marketing from Western Illinois
University and an MBA from Northwestern University, Kellogg Graduate School of
Management.
MR. LAUBENTHAL has been President of AeroControlex Group since November
1998. From December 1996 until November 1998, Mr. Laubenthal served as Director
of Manufacturing and Engineering for the AeroControlex Group. From October 1993
to December 1996, Mr. Laubenthal served as Director of Manufacturing for the
AeroControlex group. Mr. Laubenthal received a B.S. degree in mechanical
engineering from Case Western Reserve University and an MBA from Northern
Illinois University.
MR. HENDERSON has been President of Marathon Power Technologies Company
since April 1997. From November 1994 until April 1997, he served as Manager of
Operations for the AdelWiggins Group. From 1991 until 1994 Mr. Henderson served
as Operations Manager at RainBird Sprinkler. Mr. Henderson received his B.A. in
mathematics from Brown University and attended the Harvard University Graduate
School of Business.
MR. RADEKEVICH has been Chief Financial Officer of the Company since the
Company's inception in September 1993. He served as Vice Chairman and Chief
Financial Officer of RDK Capital from 1990 to 1993. Prior to joining RDK
Capital, Mr. Radekevich spent 16 years with General Electric in various
executive and managerial positions in the field of operations, distribution and
finance. Mr. Radekevich holds a bachelor of administration degree from Case
Western Reserve University.
MR. BERGER will serve as a Director of the Company following the
consummation of the Transactions. He is currently chairman of Odyssey Investment
Partners, LLC. Prior to joining Odyssey Investment Partners, LLC, Mr. Berger was
a general partner of Odyssey Partners, LP. From 1990 to 1993, Mr. Berger served
as Chairman and CEO of FGIC, a wholly-owned subsidiary of GE Capital Corp. and
subsequently became Executive Vice President of GE Capital Corp. From 1985 to
1990, Mr. Berger was Executive Director of the Port Authority of New York and
New Jersey Mr. Berger presently serves as a member of the Board of Trustees of
Brandeis University.
MR. MIRZA will serve as a Director of the Company following the consummation
of the Transactions. Mr. Mirza is a member of Odyssey Investment Partners, LLC
and has been a principal in the private equity investing group of Odyssey
Partners, LP since 1993. From 1988 to 1993, Mr. Mirza was employed by the
merchant banking group of GE Capital Corp.
MR. HOPKINS will serve as a Director of the Company following the
consummation of the Transactions. Mr. Hopkins is a member of Odyssey Investment
Partners, LLC and has been a principal in the private equity investing group of
Odyssey Partners, LP since 1994. Prior to joining Odyssey Mr. Hopkins was a
member of the merchant banking group of GE Capital Corp.
MR. WALL joined Kelso & Company in 1983 and has served as a Managing
Director of Kelso & Company since 1990. Mr. Wall presently serves as a member of
the Board of Directors of AMF Bowling, Inc., Consolidated Vision Group, Inc.,
Cygnus Publishing, Inc., iXL Enterprises, Inc., Mitchell Supreme Fuel Company
Mosler Inc., Peebles, Inc., and 21st Century Newspapers, Inc.
MR. PAXTON has been a member of the Board of Directors of Paxar Corporation
("Paxar") and President of Paxar's Printing Solutions Group since October 1997.
He is expected to retire from these positions by the calendar year end 1998. Mr.
Paxton served as Chairman of the Board, President and Chief Executive Officer of
Monarch Marking Systems from October 1995 to October 1997. Prior to joining
Monarch Marking Systems, Mr. Paxton joined Linton Industries ("Linton") as a
Corporate Vice President in 1991 when Linton acquired Intermec Corporation.
During his years at Litton, Mr. Paxton had responsibility for the Industrial
Automation Group. He became Corporate Executive Vice President and Chief
Operating Officer of the Industrial Automation Systems group of Western Atlas,
Inc. when Western Atlas, Inc. was spun off by Litton in March 1994. Mr. Paxton
presently serves
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<PAGE>
as a member of the Board of Directors of Paxar, AIM, National Association of
Manufacturers and World Economic Forum.
BOARD COMMITTEES
The Company's Board of Directors has a Compensation Committee and an Audit
Committee. The Compensation Committee, which is comprised of Messrs. Berger,
Mirza and Hopkins, establishes salaries, incentives and other forms of
compensation for executive officers and administers incentive compensation and
benefit plans provided for employees. The Audit Committee, which is comprised of
Messrs. Berger, Mirza and Hopkins, reviews the Company's audit policies and
oversees the engagement of the Company's independent auditors.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid or accrued by
the Company for services rendered during fiscal 1998, 1997 and 1996 to the Chief
Executive Officer of the Company and each of the four other most highly paid
executive officers of the Company (collectively the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
AWARDS
---------------
ANNUAL COMPENSATION SECURITIES
------------------------------------------------------- UNDERLYING
NAME AND FISCAL OTHER ANNUAL OPTIONS/ ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) SARS COMPENSATION
- --------------------------------------- ----------- ---------- ------------ ---------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Douglas W. Peacock..................... 1998 $ 305,000 $ 2,857,500 $ -- -- $ 23,518(3)
Chairman of the Board 1997 290,000 220,000 -- 3,097 20,400
and CEO 1996 275,000 140,000 -- -- 20,200
W. Nicholas Howley..................... 1998 185,000 2,080,000 -- -- 14,446(4)
President, Chief Operating 1997 175,000 125,000 -- 1,900 13,316
Officer and Director 1996 165,000 85,000 -- -- 12,360
John D. Peterson, Sr................... 1998 175,000 280,000 -- -- 12,392(5)
President of AdelWiggins 1997 166,400 80,000 -- 800 14,216
Group 1996 160,000 25,000 -- -- 4,315
Robert S. Henderson.................... 1998 125,000 450,000 -- -- 10,663(6)
President of Marathon Power 1997 109,000 45,900 -- 200 6,192
Technologies Company 1996 103,000 28,800 -- 800 5,942
Peter B. Radekevich.................... 1998 113,000 196,250 -- -- 8,326(7)
Chief Financial 1997 108,000 40,000 -- 200 7,434
Officer 1996 102,000 25,000 -- 1,200 7,185
</TABLE>
- ------------------------
(1) Bonus for fiscal year 1998 includes a one-time bonus paid by Holdings in
connection with the Recapitalization.
(2) Does not include perquisites and other personal benefits because the value
of these items did not exceed the lesser of $50,000 or 10% of reported
salary and bonus of any of the listed executives.
(3) Includes $17,200 in contribution by the Company, as projected to calendar
year end 1998, to a plan established under Section 401(k) of the Internal
Revenue Code (the "401(k) plan") and $6,318 in Company-paid life insurance.
58
<PAGE>
(4) Includes $12,880 in contribution by the Company, as projected to calendar
year end 1998, to the 401(k) plan and $1,566 in Company-paid life insurance.
(5) Includes $9,800 in contribution by the Company, as projected to calendar
year end 1998, to the 401(k) plan and $2,592 in Company-paid life insurance.
(6) Includes $10,000 in contribution by the Company, as projected to calendar
year end 1998, to the 401(k) plan and $663 in Company-paid life insurance.
(7) Includes $7,320 in contribution by the Company, as projected to calendar
year end 1998, to the 401(k) plan and $1,006 in Company-paid life insurance.
MANAGEMENT STOCKHOLDERS AGREEMENT
In connection with the consummation of the Recapitalization, Holdings,
Odyssey and the employee stockholders of Holdings, including the Named Executive
Officers (the "Management Stockholders") entered into a Management Stockholders'
Agreement (the "Management Stockholders' Agreement") which governs the shares of
common stock of Holdings (the "Common Stock") and options to purchase Common
Stock, in each case, held by such persons (including the Rollover Investment and
new options and shares obtained in connection with the Recapitalization) and
shares acquired upon exercise of options. See "--Stock Option Plan."
The Management Stockholders' Agreement provides that, except for certain
transfers to family members and family trusts, no Management Stockholder may
transfer Common Stock until the fifth anniversary of the Recapitalization, and
thereafter, any proposed transfer will be subject to Holdings' right of first
refusal.
The Management Stockholders' Agreement also provides that upon termination
of the employment of a Management Stockholder, such Management Stockholder will
have certain put rights and Holdings will have certain call rights regarding his
or her Common Stock.
Upon Mr. Peacock's cessation of active service as Chief Executive Officer on
or after the third anniversary of the Recapitalization (see "--Employment
Agreements"), if the Company has achieved specified financial targets, he may
require Holdings to repurchase up to 80% of his Common Stock during the period,
if any, for which he is serving as non-executive Chairman of the Board. Mr.
Peacock may thereafter require repurchase of the remaining 20% of his Common
Stock on or after the fifth anniversary of the Recapitalization or his later
termination of services to the Company. Holdings will be permitted to honor its
obligation to Mr. Peacock by issuing notes under certain circumstances.
If the provisions of any law, the terms of credit and financing arrangements
or Holdings' financial circumstances would prevent Holdings from making a
repurchase of shares pursuant to the Management Stockholders' Agreement,
Holdings will not make such purchase until all such prohibitions lapse, and will
then also pay the Management Stockholder a specified rate of interest on the
repurchase price.
The Management Stockholders' Agreement further provides that in the event of
certain transfers of Common Stock by Odyssey the Management Stockholders may
participate in such transfers and/or Odyssey may require the Management
Stockholders to transfer their shares in such transactions, in each case on a
pro rata basis.
Pursuant to the Management Stockholders' Agreement, certain Management
Stockholders are entitled to participate on a pro rata basis with, and on the
same terms as, Odyssey in any future offering of Common Stock. Such
participation rights will lapse following a public offering of Common Stock.
59
<PAGE>
EMPLOYMENT AGREEMENTS
In connection with the Recapitalization, Holdings will enter into an
employment agreement with Mr. Peacock pursuant to which he will continue to
serve as Chairman of the Board and Chief Executive Officer for a period of at
least five years and with Mr. Howley pursuant to which he will continue to serve
as President and Chief Operating Officer of the Company for a period of at least
five years (together, the "Employment Agreements"). The Employment Agreements
also will provide specified severance benefits in the event of termination of
employment under certain circumstances.
Each of the Employment Agreements will provide that in the event the
respective executive's employment terminates by reason of death, disability,
termination without "cause" or resignation with "good reason" (all as defined in
the Employment Agreements), Holdings will continue payment of base salary, bonus
and other perquisites and benefits, in the case of Mr. Howley, for 15 months
thereafter and, in the case of Mr. Peacock, for 18 months thereafter or, if
terminated prior to the third anniversary of the Recapitalization, until such
third anniversary, whichever is longer.
Pursuant to the Employment Agreements, Messrs. Peacock and Howley will
receive annual base salaries no less than $330,000 and $225,000, respectively
(in each case, subject to annual increases as determined by the Compensation
Committee), and annual cash bonuses based on achievement of performance criteria
established by the Board of Directors. After three years, Mr. Peacock may elect
to continue his service either as Chief Executive Officer or as a non-executive
Chairman and it is intended that Mr. Howley will be his successor.
STOCK OPTION PLAN
Holdings intends to adopt the 1998 Stock Option Plan (the "Option Plan"),
pursuant to which stock options may be granted to Independent Directors (as
defined in the Option Plan), employees and consultants of Holdings, the Company
and any subsidiary of Holdings or the Company (the "Plan Participants"). In
addition, the Option Plan will govern those options retained pursuant to the
Rollover Investment (the "Rollover Options"). A total of 10% of the fully
diluted shares of Common Stock of Holdings as of the Recapitalization was
reserved for issuance under the Option Plan (exclusive of the Rollover
Investment). The Chief Executive Officer will have discretion to select the Plan
Participants and to specify the terms of such options, including the number of
shares, the exercise price and the vesting and expiration of options, subject to
approval by the Compensation Committee.
The Compensation Committee will have discretion under the Option Plan to
adjust options to reflect certain specified events such as stock dividends,
stock splits, recapitalizations, mergers or reorganizations of, or by Holdings.
In addition, the Board of Directors will have the right to amend, suspend or
terminate the Option Plan, subject to stockholder approval for certain
amendments.
The Rollover Options are fully vested and nonforfeitable. In connection with
the Recapitalization, Holdings will grant options to certain employees of the
Company including the Named Executive Officers for the purchase of shares of
Common Stock of Holdings (the "New Options"). Such New Options are intended to
qualify as "incentive stock options" to the extent permitted under the Internal
Revenue Code, and will have an exercise price equal to the price per share paid
by Odyssey in connection with the Recapitalization. Twenty percent of each of
Messrs. Peacock's and Howley's New Options will become vested as of the date of
grant. Subject to the executive's continued employment with and, in the case of
Mr. Peacock, continued service as non executive Chairman of the Board of, the
Company, the remaining 80% of his New Options will become exercisable upon the
earlier of (1) the Company's achievement of specified financial targets or (2)
certain specified dates in the Option Agreement. Furthermore, in the event of a
"change of control" (as defined in the Option Agreement), a specified percentage
of the New Options may become exercisable based upon the terms of such
transaction. The New Options generally will expire 10 years after grant and may
expire earlier in the event of the executive's termination of employment.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of Holdings with respect to each beneficial owner
of more than 5.0% of the outstanding common stock of Holdings and beneficial
ownership of the Common Stock of Holdings by each director and Named Executive
Officer and all directors and executive officers as a group:
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED
------------------------
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE
- ------------------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Stephen Berger (1)(7)...................................................................... 100,240 83.9%
--------- ---
Robert S. Henderson (2).................................................................... 783 *
--------- ---
William Hopkins (3)(7)..................................................................... 100,240 83.9
--------- ---
W. Nicholas Howley (4)..................................................................... 5,943 4.8
--------- ---
Kelso (as defined in footnote (5)) (5)..................................................... 19,234 16.0
--------- ---
Muzzafar Mirza (6)(7)...................................................................... 100,240 83.9
--------- ---
Odyssey Investment Partners Fund, LLC (7).................................................. 100,240 83.9
--------- ---
Douglas W. Peacock (8)..................................................................... 6,304 5.0
--------- ---
John D. Peterson (9)....................................................................... 1,302 1.1
--------- ---
Peter B. Radekevich (10)................................................................... 587 *
--------- ---
Thomas R. Wall, IV (5)..................................................................... 19,234 16.0
--------- ---
All officers and directors as a group (14 members)(11)..................................... 135,692 99.8
--------- ---
</TABLE>
- ------------------------
* Less than 1.0%
(1) Includes 100,240 shares and votes deemed to be beneficially owned by the
General Partner of Odyssey (as defined), of which Mr. Berger is a senior
managing member. As a result, Mr. Berger may be deemed to share voting and
investment power with respect to such shares. Mr. Berger disclaims
beneficial ownership of such shares.
(2) Includes 772 shares purchasable within 60 days upon the exercise of options
held by Mr. Henderson.
(3) Includes 100,240 shares and votes deemed to be beneficially owned by the
General Partner of Odyssey, of which Mr. Hopkins is a managing member. As a
result, Mr. Hopkins may be deemed to share voting and investment power with
respect to such shares. Mr. Hopkins disclaims beneficial ownership of such
shares.
(4) Includes 5,790 shares purchasable within 60 days upon the exercise of
options held by Mr. Howley.
(5) KIA IV-TD, LLC ("KIA IV-TD) and Kelso Equity Partners II, L.P. ("KEP II")
have beneficial ownership of 18,284 and 950 shares, respectively. Due to
their common control, KIA IV-TD, Kelso Partners IV, L.P., the managing
member of KIA IV-TD ("KP IV" and, together with KIA IV-TD and KEP II,
"Kelso"), and KEP II could be deemed to beneficially own each other's
shares, but each disclaims such beneficial ownership. In addition, Mr.
Wall, Joseph S. Schuchert, Frank T. Nickell, George E. Matelich, Michael B.
Goldberg, David I. Wahrhaftig and Frank K. Bynum, Jr. may be deemed to
share beneficial ownership of shares beneficially owned by KIA IV-TD, KP IV
and KEP II by virtue of their status as general partners of KP IV, which is
the managing member of KIA IV-TD, and as general partners of KEP II, but
each disclaims such beneficial ownership. The address of each of KIA IV-TD,
KP IV, KEP II and Messrs. Wall, Schuchert, Nickell, Matelich,
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<PAGE>
Goldberg, Wahrhaftig and Bynum is c/o Kelso & Company, 320 Park Avenue,
24th Floor, New York, New York 10022.
(6) Includes 100,240 shares and votes deemed to be beneficially owned by the
General Partner of Odyssey, of which Mr. Mirza is a managing member. As a
result, Mr. Mirza may be deemed to share voting and investment power with
respect to such shares. Mr. Mirza disclaims beneficial ownership of such
shares.
(7) The principal business address for Odyssey Investment Partners Fund, LLC is
280 Park Avenue, West Tower, 38th Floor, New York, NY 10017. The general
partner of Odyssey Investment Partners Fund LLC, is Odyssey Capital
Partners, LLC, a Delaware limited liability company (the "General Partner
of Odyssey"). In addition to Messrs. Berger, Hopkins and Mirza, Paul D.
Barnett, Brian Kwait and Brian F. Wruble are managing members of the
General Partner of Odyssey and, therefore, may each be deemed to share
voting and investment power with respect to 100,240 share and votes deemed
to be owned by the General Partner of Odyssey. Each of Messrs. Barnett,
Kwait and Wruble disclaims beneficial ownership of such shares.
(8) Includes 6,089 shares purchasable within 60 days upon the exercise of
options held by Mr. Peacock.
(9) Includes 1,270 shares purchasable within 60 days upon the exercise of
options held by Mr. Peterson.
(10) Includes 568 shares purchasable within 60 days upon the exercise of options
held by Mr. Radekevich.
(11) As described in footnotes (1), (3), (5), (6) and (7), Messrs. Berger,
Hopkins and Mirza may each be deemed to share investment and voting power
with respect to 100,240 shares deemed to be beneficially owned by the
General Partner of Odyssey and Mr. Wall may be deemed to share investment
and voting power with respect to 19,234 shares owned by Kelso. Each of
Messrs. Berger, Hopkins, Mirza and Wall disclaims ownership of such shares.
Excluding such shares, all officers and directors as a group beneficially
own 17,030 shares or 12.5%.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TAX ALLOCATION AGREEMENT
The Company and Holdings entered into a Tax Allocation Agreement
concurrently with the consummation of the Recapitalization. Pursuant to such Tax
Allocation Agreement, the Company is obligated to make payments to Holdings
equal to the amount of income taxes that the Company would have owed in respect
of federal and state income taxes on behalf of the Company and its subsidiaries
if the Company and its subsidiaries were, for tax purposes, a separate
consolidated group.
ONE-TIME MANAGEMENT BONUSES
Following the consummation of the Recapitalization, the Company paid certain
members of senior management an aggregate of $5.9 million as a one-time bonus in
connection with the Recapitalization. See "Management--Executive Compensation."
TERMINATION OF FINANCIAL ADVISORY SERVICES AGREEMENT
The Company paid $6.0 million to Kelso & Company, an affiliate of Kelso, in
consideration for the termination of a Financial Advisory Services Agreement.
This payment was made upon consummation of the Recapitalization.
Kelso may be deemed, collectively, to beneficially own 15.4% of the Common
Stock of Holdings on a fully diluted basis. In addition, Mr. Wall, a director of
Holdings and the Company, is a general partner of each of the Kelso entities.
KELSO STOCKHOLDERS AGREEMENT
Pursuant to the Merger Agreement, Holdings, Odyssey and KIA IV-TD and KEP II
entered into a stockholders agreement (the "Stockholders Agreement")
concurrently with consummation of the Recapitalization. The Stockholders
Agreement provides for customary transfer restrictions, tag-along and drag-along
rights, registration rights and an agreement among the parties to vote their
shares of Common Stock, including the agreement of Odyssey to designate a
representative of Kelso to the Board of Directors of the Company. See also
"Management" for a description of certain agreements that have been entered into
with certain members of management in connection with the Recapitalization. See
"-Termination of Financial Advisory Services Agreement."
ODYSSEY FINANCIAL SERVICES
In connection with the Recapitalization, the Company paid Odyssey a fee of
approximately $3.5 million. Odyssey is the majority stockholder of Holdings. In
addition, Messrs. Berger, Hopkins and Mirza, each a director of Holdings and the
Company, are managing members of the General Partner of Odyssey.
RECAPITALIZATION
In connection with the Recapitalization and pursuant to the Merger
Agreement, Phase II Acquisition Corp., a wholly-owned subsidiary of Odyssey,
merged with and into Holdings.
Also, in connection with the Recapitalization and as part of the
consideration for the Merger, Holdings (i) issued $20.0 million in Holdings PIK
Notes and common stock of Holdings and (ii) paid $215.4 million in cash, in each
case, to Kelso. See "Transactions," "--Odyssey Financial Services" and
"--Termination of Financial Advisory Services Agreement."
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DESCRIPTION OF OTHER INDEBTEDNESS
THE COMPANY
THE NEW CREDIT FACILITY
The New Credit Facility consists of (i) a $30.0 million Revolving Credit
Facility maturing six years from the date of the execution of the New Credit
Facility (the "Execution Date") and (ii) a term loan facility in an aggregate
principal amount of $90.0 million, consisting of the $45.0 million Tranche A
Facility maturing six years from the Execution Date and the $45.0 million
Tranche B Facility maturing seven and a half years from the Execution Date.
The New Credit Facility provides that the Company shall repay, to the extent
then outstanding, (i) with respect to the Tranche A Facility, the specified
amount set forth in the New Credit Facility for each quarter beginning on August
15, 1999 and (ii) with respect to the Tranche B Facility, (A) $225,000 each of
the first two quarters beginning on August 15, 1999, (B) $112,500 each of the
remaining quarters during the first six years after the Execution Date and (C)
$7,050,000 each of the following six quarters. In addition, subject to certain
limited exceptions, the New Credit Facility requires mandatory repayment of the
outstanding indebtedness thereunder (and reduction to the commitments
thereunder) with the proceeds from (i) assets sales, (ii) issuance of debt,
(iii) issuance of equity interests and capital contributions, (iv) insurance and
condemnation claims and (v) 50% of annual excess cash flow (as defined in the
New Credit Facility) from operations in excess of a predetermined amount, in
each case, by or of Holdings, the Company or their subsidiaries. The Company
will have the option at any time and from time to time to prepay the outstanding
indebtedness under the New Credit Facility without penalty or premium.
Indebtedness under the New Credit Facility bears interest at the sum of the
(i) Applicable Margin and (ii) at the option of the Company either the Base Rate
or the Eurodollar Rate (as defined in the New Credit Facility). The "Base Rate"
means the higher of (i) the rate that Bankers Trust Company ("BTCo") announces
from time to time as its prime lending rate, as in effect from time to time, and
(ii) 1/2 of 1% in excess of the overnight federal funds rate. The "Applicable
Margin" means the percentage per annum equal to (i) in the case of Tranche A
Facility and Revolving Credit Facility, subject to quarterly step-downs to be
determined based on certain levels of financial performance, (A) bearing an
interest rate determined by the Base Rate, 2.50% and (B) bearing an interest
rate determined by the Eurodollar Rate, 3.50% and (ii) in the case of Tranche B
Facility (A) bearing an interest rate determined by the Base Rate, 3.00% and (B)
bearing an interest rate determined by the Eurodollar Rate, 4.00%.
The New Credit Facility contains various covenants, customary for similar
credit facilities or otherwise appropriate under the circumstances, that (i)
restrict Holdings, the Company and their subsidiaries from various actions,
including, among others, mergers and sales of assets, use of proceeds, granting
of liens, incurrence of indebtedness, voluntary prepayment of indebtedness,
including the Old Notes and the New Notes, capital expenditures, paying
dividends, business activities, investments and acquisitions, transactions with
affiliates, certain restrictions affecting subsidiaries, voluntary prepayment of
other Indebtedness and amendments or modifications to instruments governing such
other Indebtedness and (ii) require the Company to achieve and maintain certain
financial covenants.
The New Credit Facility includes events of default provisions that are
typical for senior credit facilities or otherwise appropriate under the
circumstances. All obligations under the New Credit Facility are guaranteed by
Holdings and each of the subsidiaries, direct and indirect, of the Company. The
indebtedness under the New Credit Facility are secured by a pledge of the stock
of the Company and all of its domestic subsidiaries and a perfected lien and
security interest in assets other than real estate (tangible and intangible) of
the Company, its direct and indirect subsidiaries and Holdings.
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HOLDINGS
HOLDINGS PIK NOTES
Concurrently with the issuance of the Old Notes by the Company, Holdings
issued $20.0 million in aggregate face value of its pay-in-kind notes due 2009
(the "Holdings PIK Notes") to KIA IV-TD and KEP II in connection with the
Recapitalization. The Holdings PIK Notes were issued to KIA IV-TD and KEP II
together with shares of Common Stock of Holdings. The Holdings PIK Notes are
unsecured obligations of Holdings, subordinated to the guarantee of the New
Credit Facility by Holdings, but senior to the guarantee of each of the Old
Notes and the New Notes by Holdings.
Interest on the Holdings PIK Notes accrues at an annual fixed rate of 12%
and is payable semiannually in the form of additional Holdings PIK Notes for
five years after their issuance. Thereafter, cash interest is payable
semi-annually commencing 2004. The Holdings PIK Notes are redeemable at the
option of Holdings, in whole or in part, at a price equal to 100% of the
principal amount thereof for five years after their issuance and thereafter at
the prices set forth in the indenture pursuant to which the Holdings PIK Notes
were issued (the "Holdings Indenture"). If Holdings experiences specific kinds
of changes in control, it must offer to repurchase the Holdings PIK Notes at a
price equal to 101% of the principal amount thereof.
The Holdings PIK Notes contain certain covenants on a consolidated basis,
including covenants that limit (i) indebtedness, (ii) restricted payments, (iii)
distributions by subsidiaries, (iv) transactions with affiliates, (v) sales of
assets and subsidiary stock, (vi) dividend and other payment restrictions, and
(vii) mergers or consolidations. The Holdings PIK Notes contain customary events
of default and the holders of the Holdings PIK Notes have customary registration
rights commencing on the third anniversary of the closing date. The covenants
and default provisions in the Holdings Indenture are substantially similar to
those contained in the Indenture governing the Old Notes and the New Notes, but
are less restrictive in certain respects.
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DESCRIPTION OF THE NEW NOTES
The Company will issue the New Notes under an indenture (the "Indenture")
among itself, the Guarantors and State Street Bank and Trust Company, as Trustee
(the "Trustee"). The following is a summary of the material provisions of the
Indenture. It does not include all of the provisions of the Indenture. We urge
you to read the Indenture because it defines your rights. The form and terms of
the New Notes will be the same as the form and terms of the Old Notes except
that the New Notes will be freely transferable by you except as otherwise
provided in this Prospectus. See "The Exchange Offer--Purpose and Effect". The
terms of the New Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939 ("TIA") as in
effect on the date of the Indenture. A copy of the Indenture may be obtained
from the Company. You can find definitions of certain capitalized terms used in
the following summary under "--Certain Definitions." For purposes of this
section, references to (i) the "Company" mean TransDigm Inc. and not its
Subsidiaries or Holdings and (ii) the "Notes" mean the New Notes and the Old
Notes, in each case, outstanding at any given time and issued under the
Indenture.
These New Notes will be unsecured obligations of the Company, ranking
subordinate in right of payment to all Senior Debt of the Company.
The Company will issue the New Notes in fully registered form in
denominations of $1,000 and integral multiples of $1,000. The Trustee will
initially act as Paying Agent and Registrar. The New Notes may be presented for
registration of transfer and exchange at the offices of the Registrar. The
Company may change any Paying Agent and Registrar without notice to holders of
the New Notes (the "Holders"). The Company will pay principal (and premium, if
any) on the New Notes at the Trustee's corporate office in New York, New York.
At the Company's option, interest also may be paid by mailing a check to the
Holders registered address. Any Old Notes that remain outstanding after the
completion of the Exchange Offer, together with the New Notes issued in
connection with the Exchange Offer, will be treated as a single class of
securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $200.0 million, of
which up to $125.0 million in aggregate principal amount of the Notes will be
outstanding immediately following the Exchange Offer. The Notes will mature on
December 1, 2008. Additional Notes may be issued from time to time, subject to
the limitations set forth under "--Certain Covenants--Limitation on Incurrence
of Additional Indebtedness." Interest on the Notes will accrue at the rate of
10 3/8% per annum and will be payable semiannually in cash on each June 1 and
December 1, commencing on June 1, 1999. The Company will make interest payments
to the persons who are registered Holders at the close of business on the May 15
and November 15 immediately preceding the applicable interest payment date.
Interest on the New Notes will accrue from December 3, 1998 or from the date of
the last payment of interest on the Old Notes, whichever is later. No additional
interest will be paid on Old Notes tendered and accepted for exchange..
The Notes do not contain any mandatory sinking fund.
REDEMPTION
OPTIONAL REDEMPTION. Except as described below, these New Notes are not
redeemable before December 1, 2003. Thereafter, the Company may redeem the New
Notes at its option, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the following redemption prices
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(expressed as percentages of the principal amount thereof) if redeemed during
the twelve month period commencing on December 1 of the year set forth below.
<TABLE>
<S> <C>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
2003.............................................................................. 105.188%
2004.............................................................................. 103.458%
2005.............................................................................. 101.729%
2006 and thereafter............................................................... 100.000%
</TABLE>
In addition, the Company must pay all accrued and unpaid interest on the
Notes redeemed.
OPTIONAL REDEMPTION UPON EQUITY OFFERINGS. On one or more occasions prior
to December 1, 2001, the Company may use the net cash proceeds of one or more
Equity Offerings to redeem up to 35% of the principal amount of the Notes
(including the New Notes) issued under the Indenture at a redemption price of
110.375% of the principal amount thereof plus accrued and unpaid interest
thereon, if any, to the date of redemption; PROVIDED that:
(1) at least 65% of the aggregate principal amount of Notes issued under the
Indenture remains outstanding immediately after any such redemption; and
(2) the Company makes such redemption not more than 120 days after the
consummation of such Equity Offering.
SELECTION AND NOTICE OF REDEMPTION
In the event that the Company chooses to redeem less than all of the Notes,
selection of the Notes for redemption will be made by the Trustee either:
(1) in compliance with the requirements of the principal national securities
exchange, if any, on which such Notes are listed; or
(2) on a PRO RATA basis, by lot or by such method as the Trustee shall deem fair
and appropriate. No Notes of a principal amount of $1,000 or less shall be
redeemed in part.
If a partial redemption is made with the proceeds of an Equity Offering, the
Trustee will select the Notes only on a PRO RATA basis or on as nearly a PRO
RATA basis as is practicable. Notice of redemption will be mailed by first-class
mail at least 30 but not more than 60 days before the redemption date to each
Holder of Notes to be redeemed at its registered address. On and after the
redemption date, interest will cease to accrue on Notes or portions thereof
called for redemption as long as the Company has deposited with the Paying Agent
funds in satisfaction of the applicable redemption price.
SUBORDINATION
The payment of all Obligations on the Notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Debt of the Company including its obligations under the
New Credit Facility.
The holders of Senior Debt will be entitled to receive payment in full in
cash of all Obligations due in respect of Senior Debt (including interest after
the commencement of any bankruptcy or other like proceeding at the rate
specified in the applicable Senior Debt whether or not such interest is an
allowed claim in any such proceeding) before the Holders of Notes will be
entitled to receive any payment with respect to the Notes in the event of any
distribution to creditors of the Company:
(1) in a liquidation or dissolution of the Company;
(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property;
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(3) in an assignment for the benefit of creditors; or
(4) in any marshalling of the Company's assets and liabilities.
The Company also may not make any payment in respect of the Notes if:
(1) a payment default on Designated Senior Debt occurs and is continuing; or
(2) any other default occurs and is continuing on Designated Senior Debt that
permits holders of the Designated Senior Debt to accelerate its maturity and
the Trustee receives a notice of such default (a "Payment Blockage Notice")
from the Representative of any Designated Senior Debt.
Payments on the Notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which such default is
cured or waived; and
(2) in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived (so long as no other event of default
exists) or 180 days after the date on which the applicable Payment Blockage
Notice is received, unless the maturity of any Designated Senior Debt has
been accelerated.
No new Payment Blockage Notice may be delivered unless and until 360 days
have elapsed since the effectiveness of the immediately prior Payment Blockage
Notice.
No nonpayment default that existed or was continuing on the date of delivery
of any Payment Blockage Notice to the Trustee shall be, or be made, the basis
for a subsequent Payment Blockage Notice unless such default shall have been
cured or waived for a period of not less than 90 days.
The Company must promptly notify holders of Senior Debt if payment of the
Notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event of
a bankruptcy, liquidation or reorganization of the Company, Holders of these
Notes may recover less ratably than creditors of the Company who are holders of
Senior Debt. See "Risk Factors--Subordination."
At September 30, 1998, on a pro forma basis after giving effect to the
Transactions, the aggregate principal amount of Senior Debt outstanding of the
Company and Holdings would have been $93.1 million and $113.1 million,
respectively.
GUARANTEE
The obligations of the Company under the Notes and the Indenture will be
guaranteed (the "Guarantees") on a senior subordinated basis by Holdings and the
Domestic Restricted Subsidiaries. The Guarantees will be subordinated in right
of payment to all Senior Debt of Holdings and the Domestic Restricted
Subsidiaries, respectively, to the same extent that the Notes are subordinated
to Senior Debt of the Company. Since Holdings is a holding company with no
significant operations, the Guarantee by Holdings provides little, if any,
additional credit support for the Notes, and investors should not rely on the
Guarantee by Holdings in evaluating an investment in the Notes.
CHANGE OF CONTROL
If a Change of Control occurs, each Holder will have the right to require
that the Company purchase all or a portion of such Holder's Notes pursuant to
the offer described below (the "Change of Control Offer"), at a purchase price
equal to 101% of the principal amount thereof plus accrued interest to the date
of purchase. Within 30 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each Holder,
which notice shall govern the terms of the Change of Control Offer. Such notice
shall state, among other things, the purchase date, which must be no earlier
than 30 days nor later than 60 days from the date such notice
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is mailed, other than as may be required by law (the "Change of Control Payment
Date"). Holders electing to have a Note purchased pursuant to a Change of
Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
Prior to the mailing of the notice referred to above, but in any event
within 30 days following any Change of Control, the Company covenants to:
(1) repay in full all Indebtedness under the New Credit Facility and all other
Senior Debt the terms of which require repayment upon a Change of Control;
or
(2) obtain the requisite consents under the New Credit Facility and all such
other Senior Debt to permit the repurchase of the Notes as provided below.
The Company's failure to comply with the covenant described in the
immediately preceding sentence shall constitute an Event of Default
described in clause (3) and not in clause (2) under "Events of Default"
below.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner in compliance with the Indenture.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
You should note that this provision will not protect you from the adverse
aspects of a highly leveraged transaction, reorganization, restructuring, merger
or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act to the extent such laws and regulations are applicable in
connection with the repurchase of Notes pursuant to a Change of Control Offer.
To the extent that the Company complies with the provisions of any such
securities laws or regulations, the Company shall not be deemed to have breached
its obligations under the "Change of Control" provisions of the Indenture.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively "incur") any Indebtedness (other than Permitted
Indebtedness); PROVIDED, HOWEVER, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company and the Guarantors may incur
Indebtedness (including, without limitation, Acquired Indebtedness) and
Restricted Subsidiaries of the Company that are not Guarantors may incur
Acquired Indebtedness, in each case if on the date of the incurrence of such
Indebtedness, after giving effect to the incurrence thereof, the Consolidated
Fixed Charge Coverage Ratio of the Company would have been greater than 2.0 to
1.0.
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly:
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(1) declare or pay any dividend or make any distribution (other than dividends
or distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock;
(2) purchase, redeem or otherwise acquire or retire for value any Capital Stock
of the Company or any direct or indirect parent of the Company or any
warrants, rights or options to purchase or acquire shares of any class of
such Capital Stock;
(3) make any principal payment on, purchase, defease, redeem, prepay, decrease
or otherwise acquire or retire for value, prior to any scheduled final
maturity, scheduled repayment or scheduled sinking fund payment, any
Indebtedness of the Company that is subordinate or junior in right of
payment to the Notes; or
(4) make any Investment (other than Permitted Investments) (each of the
foregoing actions set forth in clauses (1), (2), (3) and (4) being referred
to as a "Restricted Payment");
if at the time of such Restricted Payment or immediately after giving effect
thereto:
(i) a Default or an Event of Default shall have occurred and be continuing; or
(ii) the Company is not able to incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the "Limitation on
Incurrence of Additional Indebtedness" covenant; or
(iii) the aggregate amount of Restricted Payments (including such proposed
Restricted Payment) made subsequent to the Issue Date (other than
Restricted Payments made pursuant to clauses (2)(i), (3), (4), (5), (6),
(7), (8), (9) and (10) of the following paragraph) shall exceed the sum,
without duplication, of:
(w) 50% of the cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss) of the
Company earned subsequent to the beginning of the first fiscal quarter
commencing after the Issue Date and on or prior to the date the
Restricted Payment occurs (the "Reference Date") (treating such period as
a single accounting period); plus
(x) 100% of the aggregate net cash proceeds (including the fair market value
of property other than cash that would constitute Marketable Securities
or a Permitted Business) received by the Company from any Person (other
than a Subsidiary of the Company) from the issuance and sale subsequent
to the Issue Date and on or prior to the Reference Date of Qualified
Capital Stock of the Company; plus
(y) without duplication of any amounts included in clause (iii)(x) above,
100% of the aggregate net cash proceeds of any equity contribution
received by the Company from a holder of the Company's Capital Stock
(excluding, in the case of clauses (iii)(x) and (y), any net cash
proceeds from an Equity Offering to the extent used to redeem the Notes
in compliance with the provisions set forth under "--Redemption--Optional
Redemption Upon Equity Offerings"); plus
(z) 100% of the aggregate net proceeds (including the fair market value of
property other than cash that would constitute Marketable Securities or a
Permitted Business) of any (A) sale or other disposition of any
Investment (other than a Permitted Investment) made by the Company and
its Restricted Subsidiaries or (B) dividend from, or the sale of the
stock of, an Unrestricted Subsidiary.
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Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit:
(1) the payment of any dividend or the consummation of any irrevocable
redemption within 60 days after the date of declaration of such dividend or
notice of such redemption if the dividend or payment of the redemption
price, as the case may be, would have been permitted on the date of
declaration or notice;
(2) if no Default or Event of Default shall have occurred and be continuing or
shall occur as a consequence thereof, the acquisition of any shares of
Capital Stock of the Company (the "Retired Capital Stock") either (i) solely
in exchange for shares of Qualified Capital Stock of the Company (the
"Refunding Capital Stock") or (ii) through the application of net proceeds
of a substantially concurrent sale for cash (other than to a Subsidiary of
the Company) of shares of Qualified Capital Stock of the Company and, in the
case of subclause (i) of this clause (2), if immediately prior to the
retirement of the Retired Capital Stock the declaration and payment of
dividends thereon was permitted under clause (5) of this paragraph, the
declaration and payment of dividends on the Refunding Capital Stock in an
aggregate amount per year no greater than the aggregate amount of dividends
per annum that was declarable and payable on such Retired Capital Stock
immediately prior to such retirement; PROVIDED that at the time of the
declaration of any such dividends on the Refunding Capital Stock, no Default
or Event of Default shall have occurred and be continuing or would occur as
a consequence thereof;
(3) if no Default or Event of Default shall have occurred and be continuing, the
acquisition of any Indebtedness of the Company that is subordinate or junior
in right of payment to the Notes either (i) solely in exchange for shares of
Qualified Capital Stock of the Company, or (ii) through the application of
net proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary of the Company) of (A) shares of Qualified Capital Stock of the
Company or (B) Refinancing Indebtedness;
(4) if no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof, the declaration and payment of
dividends to holders of any class or series of Designated Preferred Stock
(other than Disqualified Capital Stock) issued after the Issue Date
(including, without limitation, the declaration and payment of dividends on
Refunding Capital Stock in excess of the dividends declarable and payable
thereon pursuant to clause (2) of this paragraph); PROVIDED that, at the
time of such issuance, the Company, after giving effect to such issuance on
a pro forma basis, would have had a Consolidated Fixed Charge Coverage Ratio
of at least 2.0 to 1.0;
(5) payments to Holdings for the purpose of permitting, and in an amount equal
to the amount required to permit, Holdings to redeem or repurchase Holdings'
common equity or options in respect thereof, in each case in connection with
the repurchase provisions of employee stock option or stock purchase
agreements or other agreements to compensate management employees; PROVIDED
that all such redemptions or repurchases pursuant to this clause (5) shall
not exceed $2.0 million in any fiscal year (which amount shall be increased
by the amount of any net cash proceeds received from the sale since the
Issue Date of Capital Stock (other than Disqualified Capital Stock) to
members of the Company's management team that have not otherwise been
applied to the payment of Restricted Payments pursuant to the terms of
clause (iii) of the immediately preceding paragraph and by the cash proceeds
of any "key-man" life insurance policies which are used to make such
redemptions or repurchases) since the Issue Date; PROVIDED, FURTHER, that
the cancellation of Indebtedness owing to the Company from members of
management of the Company or any of its Restricted Subsidiaries in
connection with any repurchase of Capital Stock of Holdings (or warrants or
options or rights to acquire such Capital Stock) will not be deemed to
constitute a Restricted Payment under the Indenture;
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(6) the making of distributions, loans or advances to Holdings in an amount not
to exceed $1.0 million PER ANNUM in order to permit Holdings to pay the
ordinary operating expenses of Holdings (including, without limitation,
directors' fees, indemnification obligations, professional fees and
expenses);
(7) payments to Holdings in respect of taxes pursuant to the terms of the Tax
Allocation Agreement as in effect on the Issue Date and as amended from time
to time pursuant to amendments that do not increase the amounts payable by
the Company or any of its Restricted Subsidiaries thereunder;
(8) repurchases of Capital Stock deemed to occur upon the exercise of stock
options if such Capital Stock represents a portion of the exercise price
thereof;
(9) other Restricted Payments in an aggregate amount not to exceed $7.5 million;
and
(10) distributions to Holdings to fund the Transactions (as described under "Use
of Proceeds") subsequent to the issuance of the Notes.
In determining the aggregate amount of Restricted Payments made subsequent
to the Issue Date in accordance with clause (iii) of the immediately preceding
paragraph, (a) amounts expended pursuant to clauses (1) and (2)(ii) shall be
included in such calculation, PROVIDED such expenditures pursuant to clause (5)
shall not be included to the extent of the cash proceeds received by the Company
from any "key-man" life insurance policies and (b) amounts expended pursuant to
clauses (2)(i), (3), (4), (5), (6), (7), (8), (9) and (10) shall be excluded
from such calculation.
LIMITATION ON ASSET SALES. The Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless:
(1) the Company or the applicable Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the
fair market value of the assets sold or otherwise disposed of (as determined
in good faith by the Company's Board of Directors);
(2) at least 75% of the consideration received by the Company or the Restricted
Subsidiary, as the case may be, from such Asset Sale shall be in the form of
cash or Cash Equivalents and is received at the time of such disposition;
PROVIDED that the amount of:
(a) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet) of the Company or any such
Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the Notes) that are assumed by the transferee of any such
assets;
(b) any notes or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that are converted by the
Company or such Restricted Subsidiary into cash within 90 days of the
receipt thereof (to the extent of the cash received); and
(c) any Designated Noncash Consideration received by the Company or any of
its Restricted Subsidiaries in such Asset Sale having an aggregate fair
market value, taken together with all other Designated Noncash
Consideration received pursuant to this clause (c) that is at that time
outstanding, not to exceed 5% of Total Assets at the time of the receipt
of such Designated Noncash Consideration (with the fair market value of
each item of Designated Noncash Consideration being measured at the time
received and without giving effect to subsequent changes in value), shall
be deemed to be cash for the purposes of this provision or for purposes
of the second paragraph of this covenant; and
(3) upon the consummation of an Asset Sale, the Company shall apply, or cause
such Restricted Subsidiary to apply, the Net Cash Proceeds relating to such
Asset Sale within 365 days of receipt thereof either (A) to prepay any
Senior Debt, or Indebtedness of a Restricted Subsidiary that is not a
Guarantor and, in the case of any such Indebtedness under any revolving
credit facility, effect a corresponding reduction in the availability under
such revolving credit facility (or effect a
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permanent reduction in the availability under such revolving credit facility
regardless of the fact that no prepayment is required in order to do so (in
which case no prepayment should be required)), (B) to reinvest in Productive
Assets, or (C) a combination of prepayment and investment permitted by the
foregoing clauses (3)(A) and (3)(B). Pending the final application of any
such Net Cash Proceeds, the Company or such Restricted Subsidiary may
temporarily reduce Indebtedness under a revolving credit facility, if any,
or otherwise invest such Net Cash Proceeds in Cash Equivalents. On the 366th
day after an Asset Sale or such earlier date, if any, as the Board of
Directors of the Company or of such Restricted Subsidiary determines not to
apply the Net Cash Proceeds relating to such Asset Sale as set forth in
clauses (3)(A), (3)(B) and (3)(C) of the preceding sentence (each, a "Net
Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds
which have not been applied on or before such Net Proceeds Offer Trigger
Date as permitted in clauses (3)(A), (3)(B) and (3)(C) of the next preceding
sentence (each a "Net Proceeds Offer Amount") shall be applied by the
Company or such Restricted Subsidiary to make an offer to purchase (the "Net
Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less
than 30 nor more than 60 days following the applicable Net Proceeds Offer
Trigger Date, from all Holders on a PRO RATA basis, the maximum amount of
Notes that may be purchased with the Net Proceeds Offer Amount at a price
equal to 100% of the principal amount of the Notes to be purchased, plus
accrued and unpaid interest thereon, if any, to the date of purchase;
PROVIDED, HOWEVER, that if at any time any non-cash consideration (including
any Designated Noncash Consideration) received by the Company or any
Restricted Subsidiary of the Company, as the case may be, in connection with
any Asset Sale is converted into or sold or otherwise disposed of for cash
(other than interest received with respect to any such non-cash
consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall
be applied in accordance with this covenant. Notwithstanding the foregoing,
if a Net Proceeds Offer Amount is less than $10.0 million, the application
of the Net Cash Proceeds constituting such Net Proceeds Offer Amount to a
Net Proceeds Offer may be deferred until such time as such Net Proceeds
Offer Amount plus the aggregate amount of all Net Proceeds Offer Amounts
arising subsequent to the Net Proceeds Offer Trigger Date relating to such
initial Net Proceeds Offer Amount from all Asset Sales by the Company and
its Restricted Subsidiaries aggregates at least $10.0 million, at which time
the Company or such Restricted Subsidiary shall apply all Net Cash Proceeds
constituting all Net Proceeds Offer Amounts that have been so deferred to
make a Net Proceeds Offer (the first date the aggregate of all such deferred
Net Proceeds Offer Amounts is equal to $10.0 million or more shall be deemed
to be a Net Proceeds Offer Trigger Date).
Notwithstanding the immediately preceding paragraph, the Company and its
Restricted Subsidiaries will be permitted to consummate an Asset Sale without
complying with such paragraph to the extent that:
(1) at least 75% of the consideration for such Asset Sale constitutes Productive
Assets, cash, Cash Equivalents and/or Marketable Securities; and
(2) such Asset Sale is for fair market value; PROVIDED that any consideration
consisting of cash, Cash Equivalents and/or Marketable Securities received
by the Company or any of its Restricted Subsidiaries in connection with any
Asset Sale permitted to be consummated under this paragraph shall constitute
Net Cash Proceeds subject to the provisions of the preceding paragraph.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 30 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a PRO RATA basis (based on
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amounts tendered). A Net Proceeds Offer shall remain open for a period of 20
business days or such longer period as may be required by law. To the extent
that the aggregate amount of Notes tendered pursuant to a Net Proceeds Offer is
less than the Net Proceeds Offer Amount, the Company may use any remaining Net
Proceeds Offer Amount for general corporate purposes or for any other purpose
not prohibited by the Indenture. Upon completion of any such Net Proceeds Offer,
the Net Proceeds Offer Amount shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any consensual encumbrance or consensual
restriction on the ability of any Restricted Subsidiary of the Company to:
(1) pay dividends or make any other distributions on or in respect of its
Capital Stock;
(2) make loans or advances or pay any Indebtedness or other obligation owed to
the Company or any other Restricted Subsidiary of the Company; or
(3) transfer any of its property or assets to the Company or any other
Restricted Subsidiary of the Company, except for such encumbrances or
restrictions existing under or by reason of:
(a) applicable law;
(b) the Indenture;
(c) non-assignment provisions of any contract or any lease of any Restricted
Subsidiary of the Company entered into in the ordinary course of
business;
(d) any instrument governing Acquired Indebtedness, which encumbrance or
restriction is not applicable to any Person, or the properties or assets
of any Person, other than the Person or the properties or assets of the
Person so acquired;
(e) the New Credit Facility;
(f) agreements existing on the Issue Date to the extent and in the manner
such agreements are in effect on the Issue Date;
(g) restrictions on the transfer of assets subject to any Lien permitted
under the Indenture imposed by the holder of such Lien;
(h) restrictions imposed by any agreement to sell assets or Capital Stock
permitted under the Indenture to any Person pending the closing of such
sale;
(i) any agreement or instrument governing Capital Stock of any Person that
is acquired;
(j) any Purchase Money Note or other Indebtedness or other contractual
requirements of a Securitization Entity in connection with a Qualified
Securitization Transaction; provided that such restrictions apply only to
such Securitization Entity;
(k) other Indebtedness or Permitted Subsidiary Preferred Stock outstanding
on the Issue Date or permitted to be issued or incurred under the
Indenture; PROVIDED that any such restrictions are
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ordinary and customary with respect to the type of Indebtedness being
incurred or Preferred Stock being issued (under the relevant
circumstances);
(l) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business; and
(m) any encumbrances or restrictions imposed by any amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings of the contracts, instruments or
obligations referred to in clauses (a) through (l) above; PROVIDED that
such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are, in the good
faith judgment of the Company's Board of Directors (evidenced by a Board
Resolution) whose judgment shall be conclusively binding, not materially
more restrictive with respect to such dividend and other payment
restrictions than those contained in the dividend or other payment
restrictions prior to such amendment, modification, restatement, renewal,
increase, supplement, refunding, replacement or refinancing.
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will
not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Restricted Subsidiary of the Company) or
permit any Person (other than the Company or a Restricted Subsidiary of the
Company) to own any Preferred Stock of any Restricted Subsidiary of the Company,
other than Permitted Subsidiary Preferred Stock. The provisions of this covenant
will not apply to any of the Guarantors.
LIMITATION ON LIENS. The Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly create, incur, assume
or permit or suffer to exist any Liens of any kind against or upon any property
or assets or any proceeds therefrom, of the Company or any of its Restricted
Subsidiaries whether owned on the Issue Date or acquired after the Issue Date,
in each case to secure Indebtedness or trade payables, unless:
(1) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the Notes, the Notes are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens; and
(2) in all other cases, the Notes are equally and ratably secured,
except for:
(a) Liens existing as of the Issue Date to the extent and in the
manner such Liens are in effect on the Issue Date;
(b) Liens securing Senior Debt;
(c) Liens securing the Notes;
(d) Liens of the Company or a Wholly Owned Restricted Subsidiary of
the Company on assets of any Restricted Subsidiary of the Company;
(e) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness that was secured by a Lien permitted under the
Indenture and which has been incurred in accordance with the provisions
of the Indenture; PROVIDED, HOWEVER, that such Liens do not extend to or
cover any categories of property or assets of the Company or any of its
Restricted Subsidiaries not securing the Indebtedness so Refinanced; and
(f) Permitted Liens.
PROHIBITION ON INCURRENCE OF SENIOR SUBORDINATED DEBT. The Company will
not, and will not permit any Restricted Subsidiary that is a Guarantor to, incur
or suffer to exist Indebtedness that is senior in right of payment to the Notes
or such Guarantor's Guarantee, as the case may be, and subordinate in right of
payment to any other Indebtedness of the Company or such Guarantor, as the case
may be.
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MERGER CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary of the Company to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and the
Company's Restricted Subsidiaries) whether as an entirety or substantially as an
entirety to any Person unless:
(1) either:
(a) the Company shall be the surviving or continuing corporation; or
(b) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, transfer, lease, conveyance or other
disposition the properties and assets of the Company and of the Company's
Restricted Subsidiaries substantially as an entirety (the "Surviving
Entity"):
(x) shall be a corporation organized and validly existing under
the laws of the United States or any State thereof or the District of
Columbia; and
(y) shall expressly assume, by supplemental indenture (in form
and substance satisfactory to the Trustee), executed and delivered to
the Trustee, the due and punctual payment of the principal of, and
premium, if any, and interest on all of the Notes and the performance
of every covenant of the Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or
observed;
(2) except in the case of a merger of the Company with or into a Wholly
Owned Restricted Subsidiary of the Company and except in the case of a
merger entered into solely for the purpose of reincorporating the Company in
another jurisdiction, immediately after giving effect to such transaction
and the assumption contemplated by clause (1)(b)(y) above (including giving
effect to any Indebtedness and Acquired Indebtedness incurred in connection
with or in respect of such transaction), the Company or such Surviving
Entity, as the case may be, shall be able to incur at least $1.00 of
additional Indebtedness pursuant to the "Limitation on Incurrence of
Additional Indebtedness" covenant;
(3) except in the case of a merger of the Company with or into a Wholly
Owned Restricted Subsidiary of the Company and except in the case of a
merger entered into solely for the purpose of reincorporating the Company in
another jurisdiction, immediately after giving effect to such transaction
and the assumption contemplated by clause (1)(b)(y) above (including,
without limitation, giving effect to any Indebtedness and Acquired
Indebtedness incurred and any Lien granted in connection with or in respect
of the transaction), no Default or Event of Default shall have occurred or
be continuing; and
(4) the Company or the Surviving Entity shall have delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is required
in connection with such transaction, such supplemental indenture comply with
the applicable provisions of the Indenture and that all conditions precedent
in the Indenture relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company. However, transfer of assets between or among the Company and its
Restricted Subsidiaries will not be subject to the foregoing covenant.
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The Indenture provides that upon any consolidation, combination or merger or
any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such and that, in the event of a conveyance,
lease or transfer, the conveyor, lessor or transferor will be released from the
provisions of the Indenture.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly, enter
into or permit to occur any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (an "Affiliate Transaction"), other than Affiliate Transactions
on terms that are not materially less favorable than those that might reasonably
have been obtained in a comparable transaction at such time on an arm's-length
basis from a Person that is not an Affiliate of the Company; PROVIDED, HOWEVER,
that for a transaction or series of related transactions with an aggregate value
of $2.5 million or more, at the Company's option, either:
(1) a majority of the disinterested members of the Board of Directors of
the Company shall determine in good faith that such Affiliate Transaction is
on terms that are not materially less favorable than those that might
reasonably have been obtained in a comparable transaction at such time on an
arm's-length basis from a Person that is not an Affiliate of the Company or
(2) the Board of Directors of the Company or any such Restricted
Subsidiary party to such Affiliate Transaction shall have received an
opinion from a nationally recognized investment banking, appraisal or
accounting firm that such Affiliate Transaction is on terms not materially
less favorable than those that might reasonably have been obtained in a
comparable transaction at such time on an arm's-length basis from a Person
that is not an Affiliate of the Company;
and PROVIDED, FURTHER, that for an Affiliate Transaction with an aggregate value
of $10.0 million or more the Board of Directors of the Company or any such
Restricted Subsidiary party to such Affiliate Transaction shall have received an
opinion from a nationally recognized investment banking, appraisal or accounting
firm that such Affiliate Transaction is on terms not materially less favorable
than those that might reasonably have been obtained in a comparable transaction
at such time on an arm's-length basis from a Person that is not an Affiliate of
the Company.
The restrictions set forth in the first paragraph of this covenant shall not
apply to:
(1) reasonable fees and compensation paid to, and indemnity provided on
behalf of, officers, directors, employees or consultants of the Company or
any Restricted Subsidiary of the Company as determined in good faith by the
Company's Board of Directors or senior management;
(2) transactions exclusively between or among the Company and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries, provided such transactions are not otherwise prohibited by the
Indenture;
(3) any agreement as in effect as of the Issue Date or any amendment
thereto or any transaction contemplated thereby (including pursuant to any
amendment thereto) in any replacement agreement thereto so long as any such
amendment or replacement agreement is not more disadvantageous to the
Holders in any material respect than the original agreement as in effect on
the Issue Date;
(4) Restricted Payments or Permitted Investments permitted by the
Indenture;
(5) transactions effected as part of a Qualified Securitization
Transaction;
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(6) the payment of customary annual management, consulting and advisory
fees and related expenses to the Permitted Holders and their Affiliates made
pursuant to any financial advisory, financing, underwriting or placement
agreement or in respect of other investment banking activities, including,
without limitation, in connection with acquisitions or divestitures which
are approved by the Board of Directors of the Company or such Restricted
Subsidiary in good faith;
(7) payments or loans to employees or consultants that are approved by
the Board of Directors of the Company in good faith;
(8) sales of Qualified Capital Stock;
(9) the existence of, or the performance by the Company or any of its
Restricted Subsidiaries of its obligations under the terms of, any
stockholders agreement (including any registration rights agreement or
purchase agreement related thereto) to which it is a party as of the Issue
Date and any similar agreements which it may enter into thereafter;
PROVIDED, HOWEVER, that the existence of, or the performance by the Company
or any of its Restricted Subsidiaries of obligations under, any future
amendment to any such existing agreement or under any similar agreement
entered into after the Issue Date shall only be permitted by this clause (9)
to the extent that the terms of any such amendment or new agreement are not
disadvantageous to the Holders of the Notes in any material respect; and
(10) transactions permitted by and complying with, the provisions of the
"Merger, Consolidation and Sale of Assets" covenant.
FUTURE GUARANTEES BY RESTRICTED SUBSIDIARIES. The Company will not create
or acquire another Domestic Restricted Subsidiary unless such Domestic
Restricted Subsidiary executes and delivers a supplemental indenture to the
Indenture, providing for a senior subordinated guarantee of payment of the Notes
by such Restricted Subsidiary (the "Guarantee").
Notwithstanding the foregoing, any such Guarantee by a Domestic Restricted
Subsidiary of the Notes shall provide by its terms that it shall be
automatically and unconditionally released and discharged, without any further
action required on the part of the Trustee or any Holder, upon any sale or other
disposition (by merger or otherwise) to any Person which is not a Restricted
Subsidiary of the Company of all of the Company's Capital Stock in, or all or
substantially all of the assets of, such Domestic Restricted Subsidiary;
PROVIDED that such sale or disposition of such Capital Stock or assets is
otherwise in compliance with the terms of the Indenture. A form of such
Guarantee will be attached as an exhibit to the Indenture.
CONDUCT OF BUSINESS. The Indenture provides that the Company will not, and
will not permit any of its Restricted Subsidiaries to, engage in any businesses
a majority of whose revenues are not derived from businesses that are the same
or reasonably similar, ancillary or related to, or a reasonable extension,
development or expansion of, the businesses in which the Company and its
Restricted Subsidiaries are engaged on the Issue Date.
REPORTS TO HOLDERS. The Indenture provides that, whether or not required by
the rules and regulations of the Commission, so long as any Notes are
outstanding, the Company will furnish to the Holders of Notes:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations
of the Company and its consolidated Subsidiaries (showing in reasonable
detail, either on the face of the financial statements or in the footnotes
thereto and in Management's Discussion and Analysis of Financial Condition
and Results of Operations, the financial condition and results of operations
of the
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Company and its Restricted Subsidiaries separate from the financial
condition and results of operations of the Unrestricted Subsidiaries of the
Company) and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports, in
each case, within the time periods specified in the Commission's rules and
regulations. For so long as Holdings is a guarantor of the Notes, the
Indenture permits the Company to satisfy its obligations under this covenant
by furnishing financial information relating to Holdings; PROVIDED that the
same is accompanied by consolidating information that explains in reasonable
detail the differences between the information relating to Holdings, on the
one hand, and the information relating to the Company and its Restricted
Subsidiaries on a stand-alone basis, on the other hand.
In addition, following the consummation of the exchange offer contemplated
by the Registration Rights Agreement, whether or not required by the rules and
regulations of the Commission, the Company will file a copy of all such
information and reports with the Commission for public availability within the
time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, the
Company has agreed that, for so long as any Notes remain outstanding, it will
furnish to the Holders and to securities analysts and prospective investors,
upon their request, the information required to be delivered pursuant to Rule
144A(d) (4) under the Securities Act.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(1) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(2) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered pursuant
to a Change of Control Offer or a Net Proceeds Offer on the date specified
for such payment in the applicable offer to purchase) (whether or not such
payment shall be prohibited by the subordination provisions of the
Indenture);
(3) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period of
30 days after the Company receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the Notes
(except in the case of a default with respect to the "Merger, Consolidation
and Sale of Assets" covenant, which will constitute an Event of Default with
such notice requirement but without such passage of time requirement);
(4) the failure to pay at final stated maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount of
any Indebtedness of the Company or any Restricted Subsidiary of the Company
(other than a Securitization Entity) which failure continues for at least 20
days, or the acceleration of the final stated maturity of any such
Indebtedness, which acceleration remains uncured or unrescinded for at least
20 days, if the aggregate principal amount of such Indebtedness, together
with the principal amount of any other such Indebtedness in default for
failure to pay principal at final maturity or which has been accelerated (in
each case with respect to which the 20-day period described above has
passed), aggregates $5.0 million or more at any time;
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(5) one or more judgments in an aggregate amount in excess of $5.0
million shall have been rendered against the Company or any of its
Significant Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and non-appealable; or
(6) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries.
If an Event of Default (other than an Event of Default specified in clause
(6) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding Notes
may declare the principal of and accrued interest on all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same:
(1) shall become immediately due and payable or
(2) if there are any amounts outstanding under the New Credit Facility,
shall become immediately due and payable upon the first to occur of an
acceleration under the New Credit Facility or 5 business days after receipt
by the Company and the Representative under the New Credit Facility of such
Acceleration Notice but only if such Event of Default is then continuing. If
an Event of Default specified in clause (6) above with respect to the
Company occurs and is continuing, then all unpaid principal of, and premium,
if any, and accrued and unpaid interest on all of the outstanding Notes
shall IPSO FACTO become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of acceleration
with respect to the Notes as described in the preceding paragraph, the Holders
of a majority in principal amount of the Notes may rescind and cancel such
declaration and its consequences:
(1) if the rescission would not conflict with any judgment or decree;
(2) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
the acceleration;
(3) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid;
(4) if the Company has paid the Trustee its reasonable compensation and
reimbursed the Trustee for its expenses, disbursements and advances; and
(5) in the event of the cure or waiver of an Event of Default of the
type described in clause (6) of the description above of Events of Default,
the Trustee shall have received an officers' certificate and an opinion of
counsel that such Event of Default has been cured or waived. No such
rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
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Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Notes, except for:
(1) the rights of Holders to receive payments in respect of the
principal of, premium, if any, and interest on the Notes when such payments
are due;
(2) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost
or stolen Notes and the maintenance of an office or agency for payments;
(3) the rights, powers, trust, duties and immunities of the Trustee and
the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or Event
of Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
reorganization and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders cash in U.S. dollars, non-callable U.S.
government obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest
on the Notes on the stated date for payment thereof or on the applicable
redemption date, as the case may be;
(2) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that
(a) the Company has received from, or there has been published by the
Internal Revenue Service a ruling or
(b) since the date of the Indenture, there has been a change in the
applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of counsel
shall confirm that, the Holders will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Legal Defeasance had not
occurred;
(3) in the case of Covenant Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the
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Holders will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not
occurred;
(4) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit (other than a Default or an Event of Default
resulting from the borrowing of funds to be applied to such deposit and the
grant of any Lien securing such borrowing) or insofar as Events of Default
from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under the Indenture (other
than a Default or an Event of Default resulting from the borrowing of funds
to be applied to such deposit and the grant of any Lien securing such
borrowing) or any other material agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries is bound;
(6) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others;
(7) the Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with;
(8) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that:
(a) the trust funds will not be subject to any rights of holders of
Senior Debt, including, without limitation, those arising under the
Indenture; and
(b) after the 91st day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; and
(9) certain other customary conditions precedent are satisfied.
Notwithstanding the foregoing, the opinion of counsel required by clause (2)
above with respect to a Legal Defeasance need not be delivered if all Notes not
therefore delivered to the Trustee for cancellation (1) have become due and
payable, or (2) will become due and payable on the maturity date within one year
under arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the Company.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when
(1) either:
(a) all the Notes theretofore authenticated and delivered (except
lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee
for cancellation or
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(b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable, pursuant to an optional
redemption notice or otherwise, and the Company has irrevocably deposited
or caused to be deposited with the Trustee funds in an amount sufficient
to pay and discharge the entire Indebtedness on the Notes not theretofore
delivered to the Trustee for cancellation, for principal of, premium, if
any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply
such funds to the payment thereof at maturity or redemption, as the case
may be; and
(2) the Company has paid all other sums payable under the Indenture by
the Company,
The Trustee will acknowledge the satisfaction and discharge of the Indenture
if the Company has delivered to the Trustee an officers' certificate and an
opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies, so long as such change does not,
in the opinion of the Trustee, adversely affect the rights of any of the Holders
in any material respect. In formulating its opinion on such matters, the Trustee
will be entitled to rely on such evidence as it deems appropriate, including,
without limitation, solely on an opinion of counsel. Other modifications and
amendments of the Indenture may be made with the consent of the Holders of a
majority in principal amount of the then outstanding Notes issued under the
Indenture, except that, without the consent of each Holder affected thereby, no
amendment may:
(1) reduce the amount of Notes whose Holders must consent to an
amendment;
(2) reduce the rate of or change or have the effect of changing the time
for payment of interest, including defaulted interest, on any Notes;
(3) reduce the principal of or change or have the effect of changing the
fixed maturity of any Notes, or change the date on which any Notes may be
subject to redemption or reduce the redemption price therefor;
(4) make any Notes payable in money other than that stated in the Notes;
(5) make any change in the provisions of the Indenture protecting the
right of each Holder to receive payment of principal of and interest on such
Note on or after the due date thereof or to bring suit to enforce such
payment, or permitting Holders of a majority in principal amount of Notes to
waive Defaults or Events of Default;
(6) after the Company's obligation to purchase Notes arises thereunder,
amend, change or modify in any material respect the obligation of the
Company to make and consummate a Change of Control Offer in the event of a
Change of Control or modify any of the provisions or definitions with
respect thereto after a Change of Control has occurred; or
(7) modify or change any provision of the Indenture or the related
definitions affecting the subordination or ranking of the Notes in a manner
which adversely affects the Holders.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
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THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with or into the Company or
any of its Subsidiaries or that is assumed in connection with the acquisition of
assets from such Person and in each case not incurred by such Person in
connection with, or in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary of the Company or such acquisition, merger or
consolidation.
"AFFILIATE" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
Notwithstanding the foregoing, no Person (other than the Company or any
Subsidiary of the Company) in whom a Securitization Entity makes an Investment
in connection with a Qualified Securitization Transaction shall be deemed to be
an Affiliate of the Company or any of its Subsidiaries solely by reason of such
Investment.
"ASSET ACQUISITION" means (a) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of the Company, or shall be merged with or
into the Company or any Restricted Subsidiary of the Company, or (b) the
acquisition by the Company or any Restricted Subsidiary of the Company of the
assets of any Person (other than a Restricted Subsidiary of the Company) other
than in the ordinary course of business.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Restricted Subsidiary of the Company of:
(1) any Capital Stock of any Restricted Subsidiary of the Company, or
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(2) any other property or assets of the Company or any Restricted
Subsidiary of the Company other than in the ordinary course of business;
PROVIDED, HOWEVER, that Asset Sales or other dispositions shall not include:
(a) a transaction or series of related transactions for which the
Company or its Restricted Subsidiaries receive aggregate consideration of
less than $1.0 million;
(b) the sale, lease, conveyance, disposition or other transfer of all
or substantially all of the assets of the Company as permitted under
"--Certain Covenants--Merger, Consolidation and Sale of Assets" or any
disposition that constitutes a Change of Control;
(c) the sale or discount, in each case without recourse, of accounts
receivable arising in the ordinary course of business, but only in
connection with the compromise or collection thereof;
(d) disposals or replacements of obsolete equipment in the ordinary
course of business;
(e) the sale, lease, conveyance, disposition or other transfer by the
Company or any Restricted Subsidiary of assets or property to one or more
Restricted Subsidiaries in connection with Investments permitted under
the "Limitation on Restricted Payments" covenant or pursuant to any
Permitted Investment; and
(f) sales of accounts receivable, equipment and related assets
(including contract rights) of the type specified in the definition of
"Qualified Securitization Transaction" to a Securitization Entity for the
fair market value thereof, including cash in an amount at least equal to
75% of the fair market value thereof as determined in accordance with
GAAP. For the purposes of this clause (f), Purchase Money Notes shall be
deemed to be cash.
"BOARD OF DIRECTORS" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the Board of Directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"CAPITAL STOCK" means:
(1) with respect to any Person that is a corporation, any and all
shares, interests, participations or other equivalents (however designated
and whether or not voting) of corporate stock, including each class of
Common Stock and Preferred Stock, of such Person and
(2) with respect to any Person that is not a corporation, any and all
partnership or other equity interests of such Person.
"CAPITALIZED LEASE OBLIGATION" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"CASH EQUIVALENTS" means:
(1) marketable direct obligations issued by or unconditionally
guaranteed by, the United States Government or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof;
(2) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one
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year from the date of acquisition thereof and, at the time of acquisition,
having one of the two highest ratings obtainable from either S&P or Moody's;
(3) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances maturing within one
year from the date of acquisition thereof issued by any bank organized under
the laws of the United States of America or any state thereof or the
District of Columbia or any U.S. branch of a foreign bank having at the date
of acquisition thereof combined capital and surplus of not less than $250.0
million;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4) above;
and
(6) investments in money market funds which invest substantially all
their assets in securities of the types described in clauses (1) through (5)
above.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events:
(1) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of
the Company or Holdings to any Person or group of related Persons for
purposes of Section 13(d) of the Exchange Act (a "Group"), other than to the
Permitted Holders or their Related Parties or any Permitted Group;
(2) the approval by the holders of Capital Stock of the Company or
Holdings, as the case may be, of any plan or proposal for the liquidation or
dissolution of the Company or Holdings, as the case may be (whether or not
otherwise in compliance with the provisions of the Indenture);
(3) any Person or Group (other than the Permitted Holders or their
Related Parties or any Permitted Group) shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 40%
of the aggregate ordinary voting power represented by the issued and
outstanding Capital Stock of the Company or Holdings at a time where the
Permitted Holders and their Related Parties in the aggregate own a lesser
percentage of the aggregate ordinary voting power represented by such issued
and outstanding Capital Stock; or
(4) the first day on which a majority of the members of the Board of
Directors of the Company or Holdings are not Continuing Directors.
"COMMON STOCK" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"CONSOLIDATED EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of such Person's:
(1) Consolidated Net Income; and
(2) to the extent Consolidated Net Income has been reduced thereby:
(a) all income taxes and foreign withholding taxes of such Person and
its Restricted Subsidiaries paid or accrued in accordance with GAAP for
such period;
(b) Consolidated Interest Expense;
(c) Consolidated Non-cash Charges less any non-cash items increasing
Consolidated Net Income for such period (other than normal accruals in
the ordinary course of business), all as
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determined on a consolidated basis for such Person and its Restricted
Subsidiaries in accordance with GAAP; and
(d) any cash charges resulting from the Transactions that are
incurred prior to the six month anniversary of the Issue Date.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four-Quarter Period") ending prior to the date of the
transaction giving rise to the need to calculate the Consolidated Fixed Charge
Coverage Ratio for which financial statements are available (the "Transaction
Date") to Consolidated Fixed Charges of such Person and, in the case of the
Company and the Guarantors, for the Four-Quarter Period. In addition to and
without limitation of the foregoing, for purposes of this definition,
"Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after
giving effect on a pro forma basis for the period of such calculation to:
(1) the incurrence or repayment of any Indebtedness or the issuance of
any Designated Preferred Stock of such Person or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to
the need to make such calculation and any incurrence or repayment of other
Indebtedness or the issuance or redemption of other Preferred Stock (and the
application of the proceeds thereof), other than the incurrence or repayment
of Indebtedness in the ordinary course of business for working capital
purposes pursuant to revolving credit facilities, occurring during the
Four-Quarter Period or at any time subsequent to the last day of the
Four-Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment or issuance or redemption, as the case may be (and
the application of the proceeds thereof), had occurred on the first day of
the Four-Quarter Period; and
(2) any Asset Sales or other dispositions or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the
need to make such calculation as a result of such Person or one of its
Restricted Subsidiaries (including any Person who becomes a Restricted
Subsidiary as a result of the Asset Acquisition) incurring, assuming or
otherwise being liable for Acquired Indebtedness and also including any
Consolidated EBITDA (including any pro forma expense and cost reductions and
other operating improvements that have occurred or are reasonably expected
to occur, all as determined in accordance with Regulation S-X promulgated
under the Securities Act) attributable to the assets which are the subject
of the Asset Acquisition or Asset Sale or other disposition and without
regard to clause (4) of the definition of Consolidated Net Income) occurring
during the Four-Quarter Period or at any time subsequent to the last day of
the Four-Quarter Period and on or prior to the Transaction Date, as if such
Asset Sale or other disposition or Asset Acquisition (including the
incurrence or assumption of any such Acquired Indebtedness) occurred on the
first day of the Four-Quarter Period. If such Person or any of its
Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a
third Person, the preceding sentence shall give effect to the incurrence of
such guaranteed Indebtedness as if such Person or any Restricted Subsidiary
of such Person had directly incurred or otherwise assumed such other
Indebtedness that was so guaranteed.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated Fixed
Charge Coverage Ratio":
(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal
to the rate of interest on such Indebtedness in effect on the Transaction
Date; and
(2) notwithstanding clause (1) of this paragraph, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest
is covered by agreements relating to Interest Swap
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Obligations, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
"CONSOLIDATED FIXED CHARGES" means, with respect to any Person for any
period, the sum, without duplication, of:
(1) Consolidated Interest Expense; PLUS
(2) the product of (x) the amount of all cash dividend payments on any
series of Preferred Stock of such Person times (y) a fraction, the numerator
of which is one and the denominator of which is one minus the then current
effective consolidated federal, state and local income tax rate of such
Person, expressed as a decimal; PLUS
(3) the product of (x) the amount of all dividend payments on any series
of Permitted Subsidiary Preferred Stock times (y) a fraction, the numerator
of which is one and the denominator of which is one minus the then current
effective consolidated federal, state and local income tax rate of such
Person, expressed as a decimal; PROVIDED that with respect to any series of
Preferred Stock that was not paid cash dividends during such period but that
is eligible to be paid cash dividends during any period prior to the
maturity date of the Notes, cash dividends shall be deemed to have been paid
with respect to such series of Preferred Stock during such period for
purposes of this clause (3).
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the sum of, without duplication:
(1) the aggregate of all cash and non-cash interest expense with respect
to all outstanding Indebtedness of such Person and its Restricted
Subsidiaries, including the net costs associated with Interest Swap
Obligations, for such period determined on a consolidated basis in
conformity with GAAP, but excluding amortization or write-off of debt
issuance costs;
(2) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period; and
(3) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person and its
Restricted Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, for any period, the aggregate net income
(or loss) of the Company and its Restricted Subsidiaries for such period on a
consolidated basis, determined in accordance with GAAP and without any deduction
in respect of Preferred Stock dividends; PROVIDED that there shall be excluded
therefrom:
(1) gains and losses from Assets Sales (without regard to the $1.0
million limitation set forth in the definition thereof) and the related tax
effects according to GAAP;
(2) gains and losses due solely to fluctuations in currency values and
the related tax effects according to GAAP;
(3) all extraordinary, unusual or nonrecurring charges, gains and losses
(including, without limitation, all restructuring costs and any expense or
charge related to the repurchase of Capital Stock or warrants or options to
purchase Capital Stock), and the related tax effects according to GAAP;
(4) the net income (or loss) of any Person acquired in a pooling of
interests transaction accrued prior to the date it becomes a Restricted
Subsidiary of the Company or is merged or consolidated with or into the
Company or any Restricted Subsidiary of the Company;
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(5) the net income (but not loss) of any Restricted Subsidiary of the
Company to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of the Company of that income is
prohibited by contract, operation of law or otherwise;
(6) the net loss of any Person, other than a Restricted Subsidiary of
the Company;
(7) the net income of any Person, other than a Restricted Subsidiary of
the Company, except to the extent of cash dividends or distributions paid to
the Company or a Restricted Subsidiary of the Company by such Person;
(8) in the case of a successor to the referent Person by consolidation
or merger or as a transferee of the referent Person's assets, any earnings
of the successor corporation prior to such consolidation, merger or transfer
of assets; and
(9) any non-cash compensation charges, including any arising from
existing stock options resulting from any merger or recapitalization
transaction.
For purposes of clause (iii)(w) of the first paragraph of the "Limitation on
Restricted Payments" covenant, Consolidated Net Income shall be reduced by any
cash dividends paid with respect to any series of Designated Preferred Stock.
"CONSOLIDATED NON-CASH CHARGES" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash charges and
expenses of such Person and its Restricted Subsidiaries reducing Consolidated
Net Income of such Person and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP (excluding any such
charges that require an accrual of or a reserve for cash payments for any future
period other than accruals or reserves associated with mandatory repurchases of
equity securities).
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of the Company or Holdings who:
(1) was a member of such Board of Directors on the Issue Date; or
(2) was nominated for election or elected to such Board of Directors by
any of the Permitted Holders or with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"CREDIT FACILITIES" means one or more debt facilities (including, without
limitation, the New Credit Facility) or commercial paper facilities with banks
or other institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from such lenders against such
receivables) and/or letters of credit or banker's acceptances.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"DEFAULT" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"DESIGNATED NONCASH CONSIDERATION" means any noncash consideration received
by the Company or one of its Restricted Subsidiaries in connection with an Asset
Sale that is designated as Designated Noncash Consideration pursuant to an
Officers' Certificate executed by the principal executive officer and the
principal financial officer of the Company or such Restricted Subsidiary at the
time of such Asset Sale. Any particular item of Designated Noncash Consideration
will cease to be considered to be outstanding once it has been sold for cash or
Cash Equivalents. At the time of receipt of any Designated Noncash
Consideration, the Company shall deliver an Officers' Certificate to the Trustee
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which shall state the fair market value of such Designated Noncash Consideration
and shall state the basis of such valuation, which shall be a report of a
nationally recognized investment banking, appraisal or accounting firm with
respect to the receipt in one or a series of related transactions of Designated
Noncash Consideration with a fair market value in excess of $10.0 million.
"DESIGNATED PREFERRED STOCK" means Preferred Stock that is so designated as
Designated Preferred Stock, pursuant to an Officers' Certificate executed by the
principal executive officer and the principal financial officer of the Company,
on the issuance date thereof, the cash proceeds of which are excluded from the
calculation set forth in clause (iii)(x) of the first paragraph of the
"Limitation on Restricted Payments" covenant.
"DESIGNATED SENIOR DEBT" means
(1) Indebtedness under or in respect of the New Credit Facility and
(2) any other Indebtedness constituting Senior Debt which, at the time
of determination, has an aggregate principal amount of at least $25.0
million and is specifically designated in the instrument evidencing such
Senior Debt as "Designated Senior Debt" by the Company.
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable at the option of the holder thereof), or upon the
happening of any event (other than an event which would constitute a Change of
Control), matures (excluding any maturity as the result of an optional
redemption by the issuer thereof) or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or is redeemable at the sole option of the
holder thereof (except, in each case, upon the occurrence of a Change of
Control) on or prior to the final maturity date of the Notes.
"DOMESTIC RESTRICTED SUBSIDIARY" means any Restricted Subsidiary of the
Company that is incorporated under the laws of the United States or any state
thereof or the District of Columbia.
"EQUITY OFFERING" means any offering of Qualified Capital Stock of Holdings
or the Company; provided that:
(1) in the event of an offering by Holdings, Holdings contributes to the
capital of the Company the portion of the net cash proceeds of such offering
necessary to pay the aggregate redemption price (plus accrued interest to
the redemption date) of the Notes to be redeemed pursuant to the provisions
described under "--Redemption--Optional Redemption upon Equity Offerings"
and,
(2) in the event such equity offering is not in the form of a public
offering registered under the Securities Act, the proceeds received by the
Company directly or indirectly from such offering are not less than $10.0
million.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in
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such other statements by such other entity as may be approved by a significant
segment of the accounting profession of the United States, as in effect from
time to time.
"GUARANTEE" means:
(1) the guarantee of the Notes by Holdings and the Domestic Restricted
Subsidiaries of the Company; and
(2) the guarantee of the Notes by any Restricted Subsidiary required
under the terms of the "Future Guarantees by Restricted Subsidiaries"
covenant.
"GUARANTOR" means any Restricted Subsidiary that incurs a Guarantee;
provided that upon the release and discharge of such Restricted Subsidiary from
its Guarantee in accordance with the Indenture, such Restricted Subsidiary shall
cease to be a Guarantor.
"HEDGING AGREEMENT" means any agreement with respect to the hedging of price
risk associated with the purchase of commodities used in the business of the
Company and its Restricted Subsidiaries, so long as any such agreement has been
entered into in the ordinary course of business and not for purposes of
speculation.
"INDEBTEDNESS" means with respect to any Person, without duplication:
(1) all Obligations of such Person for borrowed money;
(2) all Obligations of such Person evidenced by bonds, debentures, notes
or other similar instruments;
(3) all Capitalized Lease Obligations of such Person;
(4) all Obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
Obligations under any title retention agreement (but excluding trade
accounts payable and other accrued liabilities arising in the ordinary
course of business);
(5) all Obligations for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar credit transaction;
(6) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (1) through (5) above and clause (8)
below;
(7) all Obligations of any other Person of the type referred to in
clauses (1) through (6) which are secured by any Lien on any property or
asset of such Person, the amount of such Obligation being deemed to be the
lesser of the fair market value of such property or asset or the amount of
the Obligation so secured;
(8) all Obligations under currency agreements and interest swap
agreements of such Person; and
(9) all Disqualified Capital Stock issued by such Person with the amount
of Indebtedness represented by such Disqualified Capital Stock being equal
to the greater of its voluntary or involuntary liquidation preference and
its maximum fixed repurchase price, but excluding accrued dividends, if any.
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the Board of Directors of the issuer of such
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Disqualified Capital Stock. For the purposes of calculating the amount of
Indebtedness of a Securitization Entity outstanding as of any date, the face or
notional amount of any interest in receivables or equipment that is outstanding
as of such date shall be deemed to be Indebtedness but any such interests held
by Affiliates of such Securitization Entity shall be excluded for purposes of
such calculation.
"INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"INVESTMENT" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and its Restricted Subsidiaries in accordance with normal trade
practices of the Company or such Restricted Subsidiary, as the case may be. If
the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Common Stock of any direct or indirect Restricted Subsidiary of
the Company such that, after giving effect to any such sale or disposition, such
Restricted Subsidiary is no longer a Restricted Subsidiary of the Company (or,
in the case of a Restricted Subsidiary that is not Wholly Owned Restricted
Subsidiary of the Company, such Restricted Subsidiary has a minority interest
that is held by an Affiliate of the Company that is not a Restricted Subsidiary
of the Company), the Company shall be deemed to have made an Investment on the
date of any such sale or disposition equal to the fair market value of the
Common Stock of such Restricted Subsidiary not sold or disposed of.
"ISSUE DATE" means December 3, 1998, the date of original issuance of the
Old Notes.
"LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"MARKETABLE SECURITIES" means publicly traded debt or equity securities that
are listed for trading on a national securities exchange and that were issued by
a corporation whose debt securities are rated in one of the three highest rating
categories by either S&P or Moody's.
"MOODY'S" means Moody's Investors Service, Inc.
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Restricted Subsidiaries from such Asset Sale net of:
(1) reasonable out-of-pocket expenses and fees relating to such Asset
Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions);
(2) taxes paid or payable after taking into account any reduction in
consolidated tax liability due to available tax credits or deductions and
any tax sharing arrangements; and
(3) appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP,
against any liabilities associated with such Asset Sale and retained by the
Company or any Restricted Subsidiary, as the case may be, after such Asset
Sale, including, without limitation, pension and other post-employment
benefit
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liabilities, liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset Sale.
"NEW CREDIT FACILITY" means the Credit Agreement dated as of the Issue Date
among the Company, the lenders party thereto in their capacities as lenders
thereunder and Bankers Trust Company, as administrative agent, together with the
related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder or adding Restricted
Subsidiaries of the Company as additional borrowers or guarantors thereunder)
all or any portion of the Indebtedness under such agreement or any successor or
replacement agreement and whether by the same or any other agent, lender or
group of lenders.
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"PERMITTED BUSINESS" means any business (including stock or assets) that
derives a majority of its revenues from the business engaged in by the Company
and its Restricted Subsidiaries on the Issue Date and/or activities that are
reasonably similar, ancillary or related to, or a reasonable extension,
development or expansion of, the businesses in which the Company and its
Restricted Subsidiaries are engaged on the Issue Date.
"PERMITTED GROUP" means any group of investors that is deemed to be a
"person" (as such term is used in Section 13(d)(3) of the Exchange Act) by
virtue of the Stockholders Agreements, as the same may be amended, modified or
supplemented from time to time, provided that no single Person (together with
its Affiliates), other than the Permitted Holders and their Related Parties, is
the "beneficial owner" (as such term is used in Section 13(d) of the Exchange
Act), directly or indirectly, of more than 50% of the voting power of the issued
and outstanding Capital Stock of the Company or Holdings (as applicable) that is
"beneficially owned" (as defined above) by such group of investors.
"PERMITTED HOLDERS" means Odyssey Investment Partners Fund, LP, its
Affiliates and any general or limited partners of Odyssey Investment Partners
Fund, L.P.
"PERMITTED INDEBTEDNESS" means, without duplication, each of the following:
(1) Indebtedness under the Notes in an aggregate principal amount not to
exceed $125.0 million;
(2) Indebtedness of the Company or any of its Restricted Subsidiaries
incurred pursuant to one or more Credit Facilities in an aggregate principal
amount at any time outstanding not to exceed $155.0 million, less:
(A) the aggregate amount of Indebtedness of Securitization Entities
at the time outstanding, less
(B) the amount of all mandatory principal payments actually made by
the Company or any such Restricted Subsidiary since the Issue Date with
the Net Proceeds of an Asset Sale in respect of term loans under a Credit
Facility (excluding any such payments to the extent refinanced at the
time of payment), and
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(C) further reduced by any repayments of revolving credit borrowings
under a Credit Facility with the Net Cash Proceeds of an Asset Sale that
are accompanied by a corresponding commitment reduction thereunder;
PROVIDED that the amount of Indebtedness permitted to be incurred
pursuant to the Credit Facilities in accordance with this clause (2)
shall be in addition to any Indebtedness permitted to be incurred
pursuant to the Credit Facilities in reliance on, and in accordance with,
clauses (7), (13) and (14) below;
(3) other indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date reduced by the amount of any scheduled
amortization payments or mandatory prepayments when actually paid or
permanent reductions thereon;
(4) Interest Swap Obligations of the Company or any of its Restricted
Subsidiaries covering Indebtedness of the Company or any of its Restricted
Subsidiaries; PROVIDED that any Indebtedness to which any such Interest Swap
Obligations correspond is otherwise permitted to be incurred under the
Indenture; and PROVIDED, FURTHER, that such Interest Swap Obligations are
entered into, in the judgment of the Company, to protect the Company or any
of its Restricted Subsidiaries from fluctuation in interest rates on its
outstanding Indebtedness;
(5) Indebtedness of the Company or any Restricted Subsidiary under
Hedging Agreements and Currency Agreements;
(6) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any such
Restricted Subsidiaries; PROVIDED, HOWEVER, that:
(a) if the Company is the obligor on such Indebtedness and the payee
is a Restricted Subsidiary that is not a Guarantor, such Indebtedness is
expressly subordinated to the prior payment in full in cash of all
Obligations with respect to the Notes and
(b) (1) any subsequent issuance or transfer of Capital Stock that
results in any such Indebtedness being held by a Person other than the
Company or a Restricted Subsidiary thereof and
(2) any sale or other transfer of any such Indebtedness to a Person
that is not either the Company or a Restricted Subsidiary thereof (other
than by way of granting a Lien permitted under the Indenture or in
connection with the exercise of remedies by a secured creditor) shall be
deemed, in each case, to constitute an incurrence of such Indebtedness by
the Company or such Restricted Subsidiary, as the case may be, that was
not permitted by this clause (6);
(7) Indebtedness (including Capitalized Lease Obligations) incurred by
the Company or any of its Restricted Subsidiaries to finance the purchase,
lease or improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any person
owning such assets) in an aggregate principal amount outstanding not to
exceed $5.0 million;
(8) Refinancing Indebtedness;
(9) guarantees by the Company and its Restricted Subsidiaries of each
other's Indebtedness; PROVIDED that such Indebtedness is permitted to be
incurred under the Indenture and PROVIDED, FURTHER, that in the event such
Indebtedness (other than Acquired Indebtedness) is incurred pursuant to the
Consolidated Fixed Charge Coverage Ratio, such guarantees are by the Company
or a Guarantor only;
(10) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary of the Company providing for indemnification, adjustment of
purchase price, earn out or other similar
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obligations, in each case, incurred or assumed in connection with the
disposition of any business, assets or a Restricted Subsidiary of the
Company, other than guarantees of Indebtedness incurred by any Person
acquiring all or any portion of such business, assets or Restricted
Subsidiary for the purpose of financing such acquisition; PROVIDEDthat the
maximum assumable liability in respect of all such Indebtedness shall at no
time exceed the gross proceeds actually received by the Company and its
Restricted Subsidiaries in connection with such disposition;
(11) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
of the Company in the ordinary course of business;
(12) the incurrence by a Securitization Entity of Indebtedness in a
Qualified Securitization Transaction that is not recourse to the Company or
any Subsidiary of the Company (except for Standard Securitization
Undertakings);
(13) Indebtedness incurred by the Company or any of the Guarantors in
connection with the acquisition of a Permitted Business which Indebtedness
is incurred on or prior to September 30, 1999; PROVIDED that on the date of
the incurrence of such Indebtedness, after giving effect to the incurrence
thereof and the use of proceeds therefrom, the Consolidated Fixed Charge
Coverage Ratio of the Company would be greater than the greater of (x) the
Consolidated Fixed Charge Coverage Ratio of the Company immediately prior to
the incurrence of such Indebtedness and (y) the Consolidated Fixed Charge
Coverage Ratio of the Company on the Issue Date;
(14) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount does not exceed $10.0 million
at any one time outstanding (which amount may, but need not, be incurred in
whole or in part under a Credit Facility);
(15) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; PROVIDED, HOWEVER, that such indebtedness is
extinguished within five business days of incurrence; and
(16) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, issued in the ordinary course of
business of the Company or such Restricted Subsidiary, including, without
limitation, in order to provide security for workers' compensation claims or
payment obligations in connection with self-insurance or similar
requirements in the ordinary course of business and other Indebtedness with
respect to workers' compensation claims, self-insurance obligations,
performance, surety and similar bonds and completion guarantees provided by
the Company or any Restricted Subsidiary of the Company in the ordinary
course of business.
For purposes of determining compliance with the "Limitation on Incurrence of
Additional Indebtedness" covenant, in the event that an item of Indebtedness
meets the criteria of more than one of the categories of Permitted Indebtedness
described in clauses (1) through (16) above or is entitled to be incurred
pursuant to the Consolidated Fixed Charge Coverage Ratio provisions of such
covenant, the Company shall, in its sole discretion, classify (or later
reclassify) such item of Indebtedness in any manner that complies with such
covenant. Accrual of interest, accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of additional
Indebtedness with the same terms, and the payment of dividends on Disqualified
Capital Stock in the form of additional shares of the same class of Disqualified
Capital Stock will not be deemed to be an incurrence of Indebtedness or an
issuance of Disqualified Capital Stock for purposes of the "Limitations on
Incurrence of Additional Indebtedness" covenant.
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"PERMITTED INVESTMENTS" means:
(1) Investments by the Company or any Restricted Subsidiary of the
Company in any Restricted Subsidiary of the Company (other than a Restricted
Subsidiary of the Company in which an Affiliate of the Company that is not a
Restricted Subsidiary of the Company holds a minority interest) (whether
existing on the Issue Date or created thereafter) or any Person (including
by means of any transfer of cash or other property) if as a result of such
Investment such Person shall become a Restricted Subsidiary of the Company
(other than Restricted Subsidiary of the Company in which an Affiliate of
the Company that is not a Restricted Subsidiary of the Company holds a
minority interest) or that will merge with or consolidate into the Company
or a Restricted Subsidiary of the Company and Investments in the Company by
any Restricted Subsidiary of the Company;
(2) investments in cash and Cash Equivalents;
(3) loans and advances to employees and officers of the Company and its
Restricted Subsidiaries for bona fide business purposes in an aggregate
principal amount not to exceed $5.0 million at any one time outstanding;
(4) Currency Agreements, Hedging Agreements and Interest Swap
Obligations entered into in the ordinary course of business and otherwise in
compliance with the Indenture;
(5) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers or in good
faith settlement of delinquent obligations of such trade creditors or
customers;
(6) Investments made by the Company or its Restricted Subsidiaries as a
result of consideration received in connection with an Asset Sale made in
compliance with the "Limitation on Asset Sales" covenant;
(7) Investments existing on the Issue Date;
(8) accounts receivable created or acquired in the ordinary course of
business;
(9) guarantees by the Company or a Restricted Subsidiary of the Company
permitted to be incurred under the Indenture;
(10) additional Investments having an aggregate fair market value, taken
together with all other Investments made pursuant to this clause (10) that
are at that time outstanding, not to exceed $10.0 million (with the fair
market value of each Investment being measured at the time made and without
giving effect to subsequent changes in value);
(11) any Investment by the Company or a Subsidiary of the Company in a
Securitization Entity or any Investment by a Securitization Entity in any
other Person in connection with a Qualified Securitization Transaction;
provided that any Investment in a Securitization Entity is in the form of a
Purchase Money Note or an equity interest; and
(12) Investments the payment for which consists exclusively of Qualified
Capital Stock of the Company.
"PERMITTED LIENS" means the following types of Liens:
(1) Liens for taxes, assessments or governmental charges or claims
either:
(a) not delinquent; or
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(b) contested in good faith by appropriate proceedings and as to
which the Company or its Restricted Subsidiaries shall have set aside on
its books such reserves as may be required pursuant to GAAP;
(2) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen and repairmen and other Liens imposed by
law incurred in the ordinary course of business for sums not yet delinquent
or being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(3) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(4) judgment Liens not giving rise to an Event of Default;
(5) easements, rights-of-way zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company or
any of its Restricted Subsidiaries;
(6) any interest or title of a lessor under any Capitalized Lease
Obligation;
(7) purchase money Liens to finance property or assets of the Company or
any Restricted Subsidiary of the Company acquired, constructed or improved
in the ordinary course of business; PROVIDED, HOWEVER, that
(a) the related purchase money Indebtedness shall not exceed the cost
of such property or assets and shall not be secured by any property or
assets of the Company or any Restricted Subsidiary of the Company other
than the property and assets so acquired and
(b) the Lien securing such Indebtedness shall be created within 90
days of such acquisition;
(8) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(9) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(10) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(11) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(12) Liens securing Indebtedness under Currency Agreements and Hedging
Agreements;
(13) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary with respect to obligations that do not in the
aggregate exceed $5.0 million at any one time outstanding;
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(14) Liens on assets transferred to a Securitization Entity or an assets
of a Securitization Entity, in either case incurred in connection with a
Qualified Securitization Transaction;
(15) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its
Restricted Subsidiaries;
(16) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(17) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of custom duties in connection with the
importation of goods;
(18) Liens securing Acquired Indebtedness incurred in compliance with
the "Limitation on Incurrence of Additional Indebtedness" covenant;
(19) Liens placed upon assets of a Restricted Subsidiary of the Company
that is not a Guarantor to secure Indebtedness of such Restricted Subsidiary
that is otherwise permitted under the Indenture; and
(20) Liens existing on the Issue Date, together with any Liens securing
Indebtedness incurred in reliance on clause (8) of the definition of
Permitted Indebtedness in order to refinance the Indebtedness secured by
Liens existing on the Issue Date; PROVIDED that the Liens securing the
refinancing Indebtedness shall not extend to property other than that
pledged under the Liens securing the Indebtedness being refinanced.
"PERMITTED SUBSIDIARY PREFERRED STOCK" means any series of Preferred Stock
of a Restricted Subsidiary of the Company that constitutes Qualified Capital
Stock and has a fixed dividend rate, the liquidation value of all series of
which, when combined with the aggregate amount of Indebtedness of the Company
and its Restricted Subsidiaries incurred pursuant to clause (14) of the
definition of Permitted Indebtedness, does not exceed $5.0 million.
"PERSON" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a governmental
agency or political subdivision thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"PRODUCTIVE ASSETS" means assets (including Capital Stock) that are used or
usable by the Company and its Restricted Subsidiaries in Permitted Businesses.
"PURCHASE MONEY NOTE" means a promissory note of a Securitization Entity
evidencing a line of credit, which may be irrevocable, from the Company or any
Subsidiary of the Company in connection with a Qualified Securitization
Transaction to a Securitization Entity, which note shall be repaid from cash
available to the Securitization Entity other than amounts required to be
established as reserves pursuant to agreements, amounts paid to investors in
respect of interest and principal and amounts paid in connection with the
purchase of newly generated receivables or newly acquired equipment.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock.
"QUALIFIED SECURITIZATION TRANSACTION" means any transaction or series of
transactions that may be entered into by the Company or any of its Restricted
Subsidiaries pursuant to which the Company or any of its Subsidiaries may sell,
convey or otherwise transfer to:
(1) a Securitization Entity (in the case of a transfer by the Company or
any of its Restricted Subsidiaries); and
(2) any other Person (in the case of a transfer by a Securitization
Entity), or may grant a security interest in any accounts receivable or
equipment (whether now existing or arising or
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acquired in the future) of the Company or any of its Restricted
Subsidiaries, and any assets related thereto including, without limitation,
all collateral securing such accounts receivable and equipment, all
contracts and contract rights and all guarantees or other obligations in
respect of such accounts receivable and equipment, proceeds of such accounts
receivable and equipment and other assets (including contract rights) which
are customarily transferred or in respect of which security interests are
customarily granted in connection with assets securitization transactions
involving accounts receivable and equipment.
"RECAPITALIZATION" means the recapitalization of Holdings consummated on the
Issue Date.
"REFINANCE" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing, modification, replacement,
restatement, refunding, deferral, extension, substitution, supplement,
reissuance or resale of existing or future Indebtedness (other than intercompany
Indebtedness), including any additional Indebtedness incurred to pay interest or
premiums required by the instruments governing such existing or future
Indebtedness as in effect at the time of issuance thereof ("Required Premiums")
and fees in connection therewith; PROVIDED that any such event shall not:
(1) directly or indirectly result in an increase in the aggregate
principal amount of Permitted Indebtedness, except to the extent such
increase is a result of a simultaneous incurrence of additional
Indebtedness:
(a) to pay Required Premiums and related fees; or
(b) otherwise permitted to be incurred under the Indenture; and
(2) create Indebtedness with a Weighted Average Life to Maturity at the
time such Indebtedness is incurred that is less than the Weighted Average
Life to Maturity at such time of the Indebtedness being refinanced,
modified, replaced, renewed, restated, refunded, deferred, extended,
substituted, supplemented, reissued or resold.
"RELATED PARTY" with respect to any Permitted Holder means:
(a) (1) any spouse, sibling, parent or child of such Permitted
Holder; or
(2) the estate of any Permitted Holder during any period in which
such estate holds Capital Stock of the Company for the benefit of any
Person referred to in clause (a)(1); or
(b) any trust, corporation, partnership, limited liability company or
other entity, the beneficiaries, stockholders, partners, owners or
Persons beneficially owning an interest of more than 50% of which consist
of, or the sole managing partner or managing member of which is, one or
more Permitted Holders and/or such other Persons referred to in the
immediately preceding clause (a).
"REPRESENTATIVE" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; PROVIDED that if, and
for so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute the
holders of a majority in outstanding principal amount of such Designated Senior
Debt in respect of any Designated Senior Debt.
"RESTRICTED SUBSIDIARY" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's.
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"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"SECURITIZATION ENTITY" means a Wholly Owned Subsidiary of the Company (or
another Person in which the Company or any Subsidiary of the Company makes an
Investment and to which the Company or any Subsidiary of the Company transfers
accounts receivable or equipment and related assets) which engages in no
activities other than in connection with the financing of accounts receivable or
equipment and which is designated by the Board of Directors of the Company (as
provided below) as a Securitization Entity:
(1) no portion of the Indebtedness or any other Obligations (contingent
or otherwise) of which:
(a) is guaranteed by the Company or any Restricted Subsidiary of the
Company (excluding guarantees of Obligations (other than the principal
of, and interest on, Indebtedness)) pursuant to Standard Securitization
Undertakings;
(b) is recourse to or obligates the Company or any Restricted
Subsidiary of the Company in any way other than pursuant to Standard
Securitization Undertakings; or
(c) subjects any property or asset of the Company or any Restricted
Subsidiary of the Company, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to Standard
Securitization Undertakings;
(2) with which neither the Company nor any Restricted Subsidiary of the
Company has any material contract, agreement, arrangement or understanding
other than on terms no less favorable to the Company or such Restricted
Subsidiary than those that might be obtained at the time from Persons that
are not Affiliates of the Company, other than fees payable in the ordinary
course of business in connection with servicing receivables of such entity;
and
(3) to which neither the Company nor any Restricted Subsidiary of the
Company has any obligations to maintain or preserve such entity's financial
condition or cause such entity to achieve certain levels of operating
results.
Any such designation by the Board of Directors of the Company shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution of the Company giving effect to such designation and an
Officers' Certificate certifying that such designation complied with foregoing
conditions.
"SENIOR DEBT" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of the Company or any Guarantor, whether outstanding on the Issue
Date or thereafter created, incurred or assumed, unless, in the case of any
particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Notes. Without
limiting the generality of the foregoing, "Senior Debt" shall also include the
principal of, premium, if any, interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the
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documentation with respect thereto, whether or not such interest is an allowed
claim under applicable law) on, and all other amounts owing in respect of:
(x) all monetary obligations of every nature of the Company or any
Guarantor under the New Credit Facility, including, without limitation,
obligations to pay principal and interest, reimbursement obligations under
letters of credit, fees, expenses and indemnities;
(y) all Interest Swap Obligations (and guarantees thereof); and
(z) all obligations (and guarantees thereof) under Currency Agreements
and Hedging Agreements, in each case whether outstanding on the Issue Date
or thereafter incurred.
Notwithstanding the foregoing, "Senior Debt" shall not include:
(i) any Indebtedness of the Company or a Guarantor to the Company or
to a Subsidiary of the Company;
(ii) other than the Holdings PIK Notes, any Indebtedness to, or
guaranteed on behalf of, any shareholder, director, officer or employee
of the Company or any Subsidiary of the Company (including, without
limitation, amounts owed for compensation) other than a shareholder who
is also a lender (or an Affiliate of a lender) under the Credit
Facilities (including the New Credit Facility);
(iii) Indebtedness to trade creditors and other amounts incurred in
connection with obtaining goods, materials or services;
(iv) Indebtedness represented by Disqualified Capital Stock;
(v) any liability for federal, state, local or other taxes owed or
owing by the Company;
(vi) that portion of any Indebtedness incurred in violation of the
Indenture provisions set forth under "Limitation on Incurrence of
Additional Indebtedness" (but, as to any such obligation, no such
violation shall be deemed to exist for purposes of this clause (vi) if
the holder(s) of such obligation or their representative and the Trustee
shall have received an Officer's Certificate of the Company to the effect
that the incurrence of such Indebtedness does not (or in the case of
revolving credit indebtedness, that the incurrence of the entire
committed amount thereof at the date on which the initial borrowing
thereunder is made) would not violate such provisions of the Indenture;
(vii) Indebtedness which, when incurred and without respect to any
election under Section 1111(b) of Title 11, United States Code, is
without recourse to the Company; and
(viii) any Indebtedness which is, by its express terms, subordinated
in right of payment to any other Indebtedness of the Company.
"SIGNIFICANT SUBSIDIARY," with respect to any Person, means any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Securities
Act.
"STANDARD SECURITIZATION UNDERTAKINGS" means representations, warranties,
covenants and indemnities entered into by the Company or any subsidiary of the
Company which are reasonably customary in an accounts receivable or equipment
transaction.
"STOCKHOLDERS AGREEMENTS" means those certain stockholders agreements
entered into in connection with the Recapitalization.
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"SUBSIDIARY," with respect to any Person, means:
(i) any corporation of which the outstanding Capital Stock having at
least a majority of the votes entitled to be cast in the election of
directors under ordinary circumstances shall at the time be owned,
directly or indirectly by such Person; or
(ii) any other Person of which at least a majority of the voting
interest under ordinary circumstances is at the time, directly or
indirectly, owned by such Person.
"TAX ALLOCATION AGREEMENT" means the tax allocation agreement dated as of
the Issue Date between Holdings and the Company.
"TOTAL ASSETS" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as set forth on the Company's most recent consolidated
balance sheet.
"U.S. SUBSIDIARY" means any Subsidiary of the Company that is incorporated
under the laws of the United States or any State thereof or the District of
Columbia.
"UNRESTRICTED SUBSIDIARY" of any Person means:
(1) any Subsidiary of such Person that at the time of determination
shall be or continue to be designated an Unrestricted Subsidiary by the
Board of Directors of such Person in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless
such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any
property of, the Company or any other Subsidiary of the Company that is not a
Subsidiary of the Subsidiary to be so designated; PROVIDED that:
(1) the Company certifies to the Trustee that such designation complies
with the "Limitation on Restricted Payments" covenant; and
(2) each Subsidiary to be so designated and each of its Subsidiaries has
not at the time of designation, and does not thereafter, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable
with respect to any Indebtedness pursuant to which the lender has recourse
to any of the assets of the Company or any of its Restricted Subsidiaries.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary only if (x) immediately after giving effect to such
designation, the Company is able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant and (y)
immediately before and immediately after giving effect to such designation, no
Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the then outstanding aggregate principal amount of such
Indebtedness; into
(2) the sum of the total of the products obtained by multiplying;
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payment of principal, including payment
at final maturity, in respect thereof; by
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(b) the number of years (calculated to the nearest one-twelfth) which
will elapse between such date and the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means any Wholly Owned
Subsidiary of such Person which at the time of determination is a Restricted
Subsidiary.
"WHOLLY OWNED SUBSIDIARY" of any Person means any Subsidiary of such Person
of which all the outstanding voting securities (other than in the case of a
Restricted Subsidiary that is incorporated in a jurisdiction other than a State
in the United States or the District of Columbia, directors' qualifying shares
or an immaterial amount of shares required to be owned by other Persons pursuant
to applicable law) are owned by such Person or any Wholly Owned Subsidiary of
such Person.
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REGISTRATION RIGHTS
THE SUMMARY SET FORTH BELOW OF CERTAIN PROVISIONS OF THE REGISTRATION RIGHTS
AGREEMENT DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO, AND IS QUALIFIED IN
ITS ENTIRETY BY, ALL THE PROVISIONS OF THE REGISTRATION RIGHTS AGREEMENT, A COPY
OF WHICH HAS BEEN FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT.
The Company, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement on December 3, 1998 (the "Issue Date") pursuant to
which each of the Company and the Guarantors agreed that they will, at their
expense, for the benefit of holders of the Old Notes (the "Holders"), (i) within
60 days after the Issue Date (the "Filing Date"), file a registration statement
on an appropriate registration form (the "Exchange Offer Registration
Statement") with respect to a registered offer (the "Exchange Offer") to
exchange the Old Notes for these New Notes, guaranteed on a senior subordinated
basis by the Guarantors, which New Notes will have terms substantially identical
in all material respects to the Old Notes (except that the New Notes will not
contain terms with respect to transfer restrictions) and (ii) cause the Exchange
Offer Registration Statement to be declared effective under the Securities Act
within 150 days after the Issue Date. Upon the Exchange Offer Registration
Statement being declared effective, the Company will offer these New Notes (and
related securities) in exchange for surrender of the Old Notes. The Company will
keep the Exchange Offer open for not less than 30 days (or longer if required by
applicable law) after the date notice of the Exchange Offer is mailed to the
Holders. For each of the Old Notes surrendered to the Company pursuant to the
Exchange Offer, the Holder who surrendered such Old Note will receive an New
Note having a principal amount equal to that of the surrendered Old Note.
Interest on each New Note will accrue (A) from the later of (i) the last
interest payment date on which interest was paid on the Old Note surrendered in
exchange therefor, or (ii) if the Old Note is surrendered for exchange on a date
in a period which includes the record date for an interest payment date to occur
on or after the date of such exchange and as to which interest will be paid, the
date of such interest payment date or (B) if no interest has been paid on such
Old Note, from the Issue Date.
Based on an interpretation by the Commission's staff set forth in no-action
letters issued to third parties unrelated to the Company, the Company believes
that, with the exceptions set forth below, New Notes issued pursuant to the
exchange offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other than any holder which is an
"affiliate" of the Company within the meaning of Rule 405 promulgated under the
Securities Act, or a broker-dealer who purchased Old Notes directly from the
Company to resell pursuant to Rule 144A or any other available exemption
promulgated under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that the New
Notes are acquired in the ordinary course of business of the holder and the
holder does not have an arrangement or understanding with any person to
participate in the distribution of such New Notes. Any holder who tenders in the
exchange offer for the purpose of participating in a distribution of the New
Notes cannot rely on this interpretation by the Commission's staff and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution." Broker-dealers who acquired Old Notes directly from us
and not as a result of market-making activities or other trading activities may
not rely on the staff's interpretations discussed above or participate in the
exchange offer and must comply with the prospectus delivery requirements of the
Securities Act in order to sell the Old Notes.
If, (i) because of any change in law or in currently prevailing
interpretations of the Staff of the Commission, the Company is not permitted to
effect an exchange offer, (ii) the exchange offer is not consummated within 185
days of the Issue Date or (iii) in certain circumstances, certain holders of
unregistered Old Notes so request, or (iv) in the case of any Holder that
participates in the exchange
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offer, such Holder does not receive New Notes on the date of the exchange that
may be sold without restriction under state and federal securities laws (other
than due solely to the status of such Holder as an affiliate of the Company
within the meaning of the Securities Act), then in each case, the Company will
(x) promptly deliver to the Holders and the Trustee written notice thereof and
(y) at its sole expense, (a) as promptly as practicable, file a shelf
registration statement covering resales of the Old Notes (the "Shelf
Registration Statement"); and (b) use their best efforts to keep effective the
Shelf Registration Statement until the earlier of two years after its effective
date or such time as all of the applicable Old Notes have been sold thereunder.
The Company will, in the event that a Shelf Registration Statement is filed,
provide to each Holder copies of the prospectus that is a part of the Shelf
Registration Statement, notify each such Holder when the Shelf Registration
Statement for the Old Notes has become effective and take certain other actions
as are required to permit unrestricted resales of the Old Notes. A Holder that
sells Old Notes pursuant to the Shelf Registration Statement will be required to
be named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement that are applicable
to such a Holder (including certain indemnification rights and obligations).
If the Company fails to comply with the above provisions or if the Exchange
Offer Registration Statement or the Shelf Registration Statement fails to become
effective, then, as liquidated damages, additional interest (the "Additional
Interest") shall become payable in respect of the Old Notes as follows:
(i) if (A) neither the Exchange Offer Registration Statement or Shelf
Registration Statement is filed with the Commission on or prior to the
applicable filing date or (B) notwithstanding that the Company has
consummated or will consummate an exchange offer, the Company is required to
file a Shelf Registration Statement and such Shelf Registration Statement is
not filed on or prior to the date required by the Registration Rights
Agreement, then commencing on the day after either such required filing
date, Additional Interest shall accrue on the principal amount of the Old
Notes at a rate of 0.50% per annum for the first 90 days immediately
following each such filing date, such Additional Interest rate increasing by
an additional 0.50% per annum at the beginning of each subsequent 90-day
period; or
(ii) if (A) neither the Exchange Offer Registration Statement nor a
Shelf Registration Statement is declared effective by the Commission on or
prior to 90 days after the applicable filing deadline set for such filing in
the Registration Rights Agreement or (B) notwithstanding that the Company
has consummated or will consummate an exchange offer, the Company is
required to file a Shelf Registration Statement and such Shelf Registration
Statement is not declared effective by the Commission on or prior to the
90th day following the filing date deadline set for such filing in the
Registration Rights Agreement, then, commencing on the day after such 90th
day following the filing deadline set for such filing in the Registration
Rights Agreement, Additional Interest shall accrue on the principal amount
of the Old Notes at a rate of 0.50% per annum for the first 90 days
immediately following such date, such Additional Interest rate increasing by
an additional 0.50% per annum at the beginning of each subsequent 90-day
period; or
(iii) if (A) the Company has not exchanged New Notes for all Old Notes
validly tendered in accordance with the terms of the exchange offer on or
prior to the 185th day after the Issue Date or (B) if applicable, the Shelf
Registration Statement ceases to be effective at any time prior to the
second anniversary of the Issue Date (other than after such time as all Old
Notes have been disposed of thereunder), then Additional Interest shall
accrue on the principal amount of the Old Notes at a rate of 0.50% per annum
for the first 90 days commencing on (x) the 185th day after the Issue Date,
in the case of (A) above, or (y) the day such Shelf Registration Statement
ceases
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to be effective in the case of (B) above, such Additional Interest rate
increasing by an additional 0.50% per annum at the beginning of each
subsequent 90-day period;
PROVIDED, HOWEVER, that the Additional Interest rate on the Old Notes may not
accrue under more than one of the foregoing clauses (i)-(iii) at any one time
and at no time shall the aggregate amount of Additional Interest accruing exceed
in the aggregate 1.0% per annum; PROVIDED, FURTHER, HOWEVER, that (1) upon the
filing of the Exchange Offer Registration Statement or a Shelf Registration
Statement (in the case of clause (i) above), (2) upon the effectiveness of the
Exchange Offer Registration Statement or a Shelf Registration Statement (in the
case of clause (ii) above), or (3) upon the exchange of New Notes for all Old
Notes tendered (in the case of clause (iii)(A) above), or upon the effectiveness
of the Shelf Registration Statement which had ceased to remain effective (in the
case of clause (iii)(B) above), Additional Interest on the Old Notes as a result
of such clause (or the relevant subclause thereof), as the case may be, shall
cease to accrue.
Any amounts of Additional Interest due pursuant to clause (i), (ii) or (iii)
above will be payable in cash on the original interest payment dates for the Old
Notes.
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BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the New Notes will be issued in fully
registered form without interest coupons.
Except as described herein under the heading "-Certificated Securities," New
Notes will initially be represented by a permanent global New Note in fully
registered form without interest coupons (the "Global Note") and will be
deposited with the Trustee as custodian for The Depositary Trust Company ("DTC")
and registered in the name of a nominee of such depositary.
THE GLOBAL NOTE
The Company expects that pursuant to procedures established by DTC (i) upon
the issuance of the Global Note, DTC or its custodian will credit, on its
internal system, the principal amount of the individual beneficial interests
represented by the Global Note to the respective accounts of persons who have
accounts with such depositary and (ii) ownership of beneficial interests in the
Global Note will be shown on, and the transfer of such ownership will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants). Ownership of beneficial interests
in the Global Notes will be limited to persons who have accounts with DTC
("participants") or persons who hold interests through participants.
So long as DTC, or its nominee, is the registered owner or holder of the New
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the New Notes represented by the Global Note for all purposes
under the Indenture. No beneficial owner of an interest in the Global Note will
be able to transfer that interest except in accordance with DTC's procedures, in
addition to those provided for under the Indenture.
Payments of the principal of, premium (if any), and interest on, the Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee or any paying agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in the Global Note
held through such participants will be governed by standing instructions and
customary practice, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same-day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell New Notes to persons in
states that require physical delivery of the New Notes, or to pledge such
securities, such holder must transfer its interest in the Global Note, in
accordance with the normal procedures of DTC and with the procedures set forth
in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of New Notes (including the presentation of New Notes for
exchange as described below) only at the direction of one or more participants
to whose accounts the DTC interests in the Global Note are credited and only in
respect of such portion of the aggregate principal amount of New Notes as to
which such participant or participants has or have given such direction.
However, if there is an Event
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of Default under the Indenture applicable to the Global Note, DTC will exchange
the Global Note for Certificated Securities, which it will distribute to its
participants.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures and such procedures may be discontinued
at any time. Neither the Company nor the Trustee will have any responsibility
for the performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
CERTIFICATED SECURITIES
Certificated securities shall be issued in exchange for the Old Notes in the
exchange offer or for beneficial interest in the Global Note, in each case, if
requested by a holder of such Old Note or such beneficial interests,
respectively. In addition, certificated securities shall be issued in exchange
for beneficial interests in the Global Note if DTC is at any time unwilling or
unable to continue as a depositary for the Global Note and a successor
depositary is not appointed by the Company within 90 days.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following general discussion summarizes certain of the material U.S.
federal income tax aspects of the exchange offer to holders of the Old Notes.
This discussion is summary for general information only and does not consider
all aspects of the Old Notes in light of such holder's personal circumstances.
This discussion also does not address the U.S. federal income tax consequences
to holders subject to special treatment under the U.S. federal income tax laws,
such as dealers in securities, or foreign currency, tax-exempt entities, banks,
thrifts, insurance companies, persons that hold the Old Notes as part of a
"straddle", a "hedge" against currency risk or a "conversion transaction";
persons that have a "functional currency" other than the U.S. dollar, and
investors in pass-through entities. In addition, this discussion does not
prescribe any tax consequences arising out of the tax laws of any state, local
or foreign jurisdiction.
This discussion is based upon the Code, existing and presupposed regulations
thereunder, Internal Revenue Service ("IRS") rulings and pronouncements and
judicial decision now in effect, all of which are subject to change (possibly on
a retroactive basis). The Company has not and will not seek any rulings or
opinions from the IRS or counsel with respect to the matters discussed below.
There can be no assurance that the IRS will not take positions concerning the
tax consequences of the exchange offer which are difference from those discussed
herein.
HOLDERS OF THE OLD NOTES SHOULD CONSULT THEIR OWN ADVISORS CONCERNING THE
APPLICATION OF U.S. FEDERAL INCOME TAX LAWS, AS WELL AS THE LAWS OF ANY STATE,
LOCAL OR FOREIGN JURISDICTION, TO THE EXCHANGE OFFER IN LIGHT OF THEIR
PARTICULAR SITUATIONS.
The exchange of Old Notes for New Notes pursuant to the exchange offer
should not constitute a taxable exchange. As a result, a holder (i) should not
recognize taxable gains of loss as a result of exchanging Old Notes for New
Notes pursuant to the exchange offer, (ii) the holding period of the New Notes
should include the holding period of the Old Notes exchanged therefor and (iii)
the adjusted tax basis of the New Notes should be the same as the adjusted tax
basis of the Old Notes exchange therefore immediately before the exchange.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with the resales of New Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. The Company has agreed that for a period of up to 180
days after the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer that requests such document in the
letter of transmittal for use in connection with any such resale.
The Company and the Guarantors will not receive any proceeds from any sale
of New Notes by broker-dealers or any other persons. New Notes received by
broker-dealers for their own account pursuant to the exchange offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such New
Notes. Any broker-dealer that resells New Notes that were received by it for its
own account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders of Old Notes (including any broker-dealers), and certain
parties related to such holders, against certain liabilities, including
liabilities under the Securities Act.
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EXPERTS
The consolidated financial statements of TransDigm Holding Company as of
September 30, 1998 and 1997, and for each of the three years in the period ended
September 30, 1998, included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of Marathon Power Technologies Company
as of December 31, 1996 and 1995 and for each of the two years in the period
ended December 31, 1996 included in this Prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Latham & Watkins, New York, New York.
111
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
TRANSDIGM HOLDING COMPANY
Report of Deloitte & Touche LLP, Independent Auditors................................ F-2
Consolidated Balance Sheets as of September 30, 1998 and 1997........................ F-3
Consolidated Statements of Income and Retained Earnings (Deficit) for each of the
three years in the period ended September 30, 1998................................. F-4
Consolidated Statements of Cash Flows for each of the three years in the period ended
September 30, 1998................................................................. F-5
Notes to Consolidated Financial Statements for each of the three years in the period
ended September 30, 1998........................................................... F-6
MARATHON POWER TECHNOLOGIES COMPANY
Report of PricewaterhouseCoopers LLP, Independent Accountants........................ F-19
Consolidated Balance Sheets as of December 31, 1996 and 1995......................... F-20
Consolidated Statements of Operations and Retained Earnings for each of the two years
in the period ended December 31, 1996.............................................. F-21
Consolidated Statements of Cash Flows for each of the two years in the period ended
December 31, 1996.................................................................. F-22
Notes to the Consolidated Financial Statements for each of the two years in the
period ended December 31, 1996..................................................... F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
TransDigm Holding Company
We have audited the accompanying consolidated balance sheets of TransDigm
Holding Company and its subsidiaries (the "Company") as of September 30, 1998
and 1997, and the related consolidated statements of income and retained
earnings (deficit) and of cash flows for each of the three years in the period
ended September 30, 1998. 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 TransDigm Holding Company and
its subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
As discussed in Note 17 to the consolidated financial statements, in 1998,
the Company retroactively changed its method of accounting for put warrants.
DELOITTE & TOUCHE LLP
Cleveland, Ohio
November 9, 1998 (except for Note 18 for which the date is December 3, 1998)
F-2
<PAGE>
TRANSDIGM HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
ASSETS (NOTE 9)
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 19,486 $ 5,397
Accounts receivable--Net (Note 4)....................................................... 12,530 12,475
Inventories (Note 5).................................................................... 18,280 17,410
Deferred income taxes (Note 11)......................................................... 3,799 3,902
Prepaid expenses and other.............................................................. 165 313
---------- ----------
Total current assets................................................................ 54,260 39,497
PROPERTY, PLANT AND EQUIPMENT--Net (Note 6)............................................... 21,951 21,022
INTANGIBLE ASSETS--Net (Note 7)........................................................... 35,294 37,508
DEBT ISSUE COSTS--Net..................................................................... 606 873
DEFERRED INCOME TAXES (Note 11)........................................................... 3,674 3,069
---------- ----------
TOTAL..................................................................................... $ 115,785 $ 101,969
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 9).............................................. $ 5,000 $ 5,000
Accounts payable........................................................................ 5,667 5,275
Accrued liabilities (Note 8)............................................................ 10,239 12,702
Put warrants (Notes 9 and 17)........................................................... 16,700 --
---------- ----------
Total current liabilities........................................................... 37,606 22,977
LONG-TERM DEBT--Less current portion (Note 9)............................................. 40,000 45,000
PUT WARRANTS (Notes 9 and 17)............................................................. -- 10,160
NON-CURRENT PORTION OF ACCRUED PENSION COSTS (Note 10).................................... 1,752 1,219
---------- ----------
Total liabilities................................................................... 79,358 79,356
---------- ----------
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDERS' EQUITY:
Capital stock (Note 12)................................................................. 24,281 24,352
Retained earnings (deficit)............................................................. 12,900 (1,237)
Minimum pension liability adjustment (Note 10).......................................... (754) (502)
---------- ----------
Total stockholders' equity.......................................................... 36,427 22,613
---------- ----------
TOTAL..................................................................................... $ 115,785 $ 101,969
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
TRANSDIGM HOLDING COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- --------- ---------
NET SALES (Note 4).............................................................. $ 110,868 $ 78,159 $ 62,897
COST OF SALES (Including charge of $242 in 1998 and $666 in 1997 due to
inventory purchase accounting adjustment) (Note 2)............................ 59,395 49,303 41,874
---------- --------- ---------
GROSS PROFIT.................................................................... 51,473 28,856 21,023
---------- --------- ---------
OPERATING EXPENSES:
Selling and administrative.................................................... 10,473 7,561 6,459
Amortization of intangibles................................................... 2,438 2,089 3,838
Research and development...................................................... 1,724 1,116 836
---------- --------- ---------
Total operating expenses.................................................. 14,635 10,766 11,133
---------- --------- ---------
INCOME FROM OPERATIONS.......................................................... 36,838 18,090 9,890
INTEREST EXPENSE--NET........................................................... 3,175 3,463 4,510
WARRANT PUT VALUE ADJUSTMENT (Note 17).......................................... 6,540 4,800 2,160
---------- --------- ---------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS............................... 27,123 9,827 3,220
INCOME TAX PROVISION (Note 11).................................................. 12,986 5,193 2,045
---------- --------- ---------
INCOME BEFORE EXTRAORDINARY LOSS................................................ 14,137 4,634 1,175
EXTRAORDINARY LOSS FROM EXTINGUISHMENT OF DEBT, NET OF INCOME TAXES OF $975
(Note 9)...................................................................... -- 1,462 --
---------- --------- ---------
NET INCOME...................................................................... 14,137 3,172 1,175
---------- --------- ---------
RETAINED EARNINGS (DEFICIT) BEGINNING OF YEAR:
As previously reported........................................................ -- (1,985) (4,537)
Accounting change (Note 17)................................................... -- (2,424) (1,047)
---------- --------- ---------
As restated................................................................... (1,237) (4,409) (5,584)
---------- --------- ---------
RETAINED EARNINGS (DEFICIT), END OF YEAR........................................ $ 12,900 $ (1,237) $ (4,409)
---------- --------- ---------
---------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
TRANSDIGM HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ----------
OPERATING ACTIVITIES:
Net income.................................................................. $ 14,137 $ 3,172 $ 1,175
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation.............................................................. 4,029 3,677 3,485
Amortization of intangibles............................................... 2,438 2,089 3,838
Amortization of debt discount and debt issue costs........................ 267 757 1,267
Warrant put value adjustment.............................................. 6,540 4,800 2,160
Deferred income taxes..................................................... (341) (1,733) 839
Extraordinary charge for early extinguishment of debt (Note 9)............ -- 1,462 --
Changes in assets and liabilities, net of effects from acquisition of
business (Note 2):
Accounts receivable..................................................... (821) (1,343) 2,790
Inventories............................................................. (870) 337 1,794
Prepaid expenses and other assets....................................... 148 787 (361)
Accounts payable........................................................ 392 1,233 1,224
Accrued and other liabilities........................................... (2,464) 2,230 484
---------- ---------- ----------
Net cash provided by operating activities................................. 23,455 17,468 18,695
---------- ---------- ----------
INVESTING ACTIVITIES:
Capital expenditures........................................................ (5,061) (2,285) (2,494)
Acquisition of Marathon Power Technologies Company, net of cash acquired of
$748 (Note 2)............................................................. 766 (40,875) --
---------- ---------- ----------
Net cash used in investing activities....................................... (4,295) (43,160) (2,494)
---------- ---------- ----------
FINANCING ACTIVITIES:
Proceeds from term loan net of fees of $873................................. -- 49,127 --
Net repayments under revolving credit loans................................. -- -- (6,690)
Repayment of term and subordinated notes including prepayment charge of $867
in 1997 (Note 9).......................................................... (5,000) (20,867) (6,500)
Proceeds from issuance of capital stock..................................... -- 67 115
Purchase of capital stock................................................... (71) (174) (400)
---------- ---------- ----------
Net cash provided by (used in) financing activities......................... (5,071) 28,153 (13,475)
---------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS..................................... 14,089 2,461 2,726
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................................. 5,397 2,936 210
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR........................................ $ 19,486 $ 5,397 $ 2,936
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest...................................... $ 3,640 $ 2,600 $ 3,483
---------- ---------- ----------
---------- ---------- ----------
Cash paid during the year for income taxes.................................. $ 13,490 $ 5,468 $ 700
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
TRANSDIGM HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1. DESCRIPTION OF THE BUSINESS AND MERGER
TransDigm Holding Company ("Holding") through its wholly-owned operating
subsidiary, TransDigm Inc. ("TransDigm"), is a premier supplier of proprietary
mechanical components servicing the aircraft, mining, marine and other
manufacturing industries. TransDigm along with its wholly-owned subsidiary,
Marathon Power Technologies Company ("Marathon"), offers a broad line of
component products including tube connectors, valves, batteries, static
inverters, pumps, quick disconnects, clamps and ball bearing and sliding
controls. Holding has no operations, liabilities or assets except for its
investment in TransDigm.
On August 3, 1998, Phase II Acquisition Corp. ("Acquiror"), an entity formed
by affiliates of Odyssey Investment Partners, LP ("Odyssey") and Holding entered
into a definitive agreement and plan of merger which agreement was amended on
November 9, 1998 (the "Merger Agreement" or the "Merger"). Pursuant to the terms
of the Merger, Acquiror will be merged with and into Holding, with Holding being
the surviving corporation in the Merger (the "Surviving Corporation"). In the
Merger, holders of Holding's outstanding common stock will be entitled to
receive, in exchange for each outstanding share of common stock (except for
shares held directly or indirectly by Holding or the Rolled Shares, as defined
below) the "Per Share Merger Consideration" as defined in the Merger Agreement.
The aggregate consideration payable pursuant to the Merger, including amounts
payable to holders of options and warrants, is expected to be approximately
$299.7 million.
In connection with the Merger, Kelso Investment Associates IV, LP and Kelso
Equity Partners II, L.P. (collectively "Kelso") will retain approximately 15.4%
of the Surviving Corporation's outstanding common stock (the "Rolled Shares")
subject to adjustment for certain transactions prior to closing. In addition,
certain members of management of Holding agreed, in connection with and as a
condition to entering into the Merger Agreement, to rollover stock options with
an estimated gross and net value of approximately $17.2 million and $13.7
million, respectively.
The Merger is intended to be treated as a recapitalization for financial
reporting purposes which will have no impact on the historical basis of
Holding's consolidated assets and liabilities. The Merger is subject to
customary closing conditions, including the termination or expiration of the
relevant waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of
1976, as amended, Holding having a minimum consolidated net worth, as defined,
at closing of not less than $52 million and funding of committed financing.
Odyssey has received financing commitments for the transactions from Bankers
Trust Corporation, whose commitments are subject to certain conditions.
Simultaneously with the Merger, Holding and TransDigm will refinance all of
its existing debt (Note 9). The Merger, the refinancing, and payment of fees and
expenses are expected to be funded by (i) existing cash balances, (ii)
investments by Odyssey of $100.2 million, (iii) funds from a new $120 million
Senior Credit Facility, (iv) funds from $125 million senior subordinated notes
and (v) Holding PIK notes and additional common stock of $20 million issued to
certain stockholders. After consummation of the Merger, Holding anticipates that
it will have approximately $27.0 million available for working capital, certain
permitted acquisitions and for general corporate purposes under the new Senior
Credit Facility.
Upon consummation of the Merger, Odyssey and its co-investors will own
approximately 73.7% of the Surviving Corporation's common stock and Kelso and
other continuing stockholders will own approximately 26.3% of the outstanding
shares of Holdings' common stock on a fully diluted basis.
F-6
<PAGE>
TRANSDIGM HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1. DESCRIPTION OF THE BUSINESS AND MERGER (CONTINUED)
During each of the years ended September 30, 1998, 1997 and 1996, TransDigm
paid Kelso a management fee of approximately $0.1 million.
2. ACQUISITION
On August 8, 1997, TransDigm acquired all of the outstanding common stock of
Marathon for approximately $41.6 million in cash (including acquisition
expenses), $4 million of which was placed into two $2 million escrow accounts
(an environmental escrow and an indemnity escrow) to indemnify TransDigm in the
event certain defined environmental and other costs were incurred by Marathon or
TransDigm subsequent to the acquisition. At September 30, 1997, a post-closing
purchase price adjustment of approximately $.8 million was due from the seller
(see Note 4), which was received during November 1997 from the indemnity escrow.
The remainder of the indemnity escrow was released to the seller during the year
ended September 30, 1998. The environmental escrow account expires after the
occurrence of certain defined events in the Stock Purchase Agreement. During
September 1998, the seller filed a lawsuit against the Company to release the
environmental escrow alleging that the Company had violated the requirements of
the Stock Purchase Agreement relating to the investigation of the presence of
certain contaminants at the Marathon facility in Texas (Note 15). The Company
has filed counter claims against the seller and the ultimate outcome of this
matter cannot presently be determined.
The acquisition has been accounted for using the purchase method and,
accordingly, the accompanying consolidated financial statements include the
operating results of Marathon since the date of the acquisition. The acquisition
was financed with available cash of approximately $11.6 million and the proceeds
of senior term debt of approximately $30 million. The excess of the aggregate
purchase price over the fair market value of net assets acquired of
approximately $28.9 million was recognized as goodwill.
The following table summarizes the unaudited consolidated pro forma results
of operations, as if the acquisition had occurred at the beginning of the
following periods:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
<CAPTION>
(UNAUDITED)
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Net sales............................................................... $ 96,075 $ 82,425
Income before income taxes and extraordinary items...................... 11,220 9,190
Net income.............................................................. 3,894 1,522
</TABLE>
Pro forma net income for the year ended September 30, 1997 includes an
extraordinary loss from extinguishment of debt (net of income taxes of $975) of
$1,462. Pro forma net income for the year ended September 30, 1996 includes an
extraordinary gain from Marathon's extinguishment of debt (net of income taxes
of $135) of $230.
F-7
<PAGE>
TRANSDIGM HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
2. ACQUISITION (CONTINUED)
This pro forma information does not purport to be indicative of the results
that actually would have been obtained if the operations had been combined
during the periods presented and is not intended to be a projection of future
results.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION--The accompanying consolidated financial statements include
the accounts of TransDigm Holding Company and subsidiaries (collectively the
"Company"). All significant intercompany balances and transactions have been
eliminated.
SALES AND EARNINGS--The Company follows the guidelines of AICPA Statement of
Position 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" (the contract method of accounting) for substantially
all commercial and governmental contracts. Under the contract method of
accounting, the Company's sales are primarily under fixed-price contracts,
certain of which require delivery of products over several years. Sales and
profit on each contract are recognized primarily in accordance with the
percentage-of-completion method of accounting, using the units of delivery
method. Revisions of estimated profits on contracts are included in earnings by
the reallocation method, which spreads the change in estimate over future
deliveries. Any anticipated losses on contracts are charged to earnings when
identified.
CASH EQUIVALENTS--The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS--The Company reserves for amounts
determined to be uncollectible based on specific identification and historical
experience.
INVENTORIES--Inventories are stated at the lower of cost or market. Cost of
inventories is determined by the average cost and the first-in, first-out (FIFO)
methods. In accordance with industry practice, all inventories are classified as
current assets even though a portion of the inventories is not expected to be
realized within one year.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at
cost. Depreciation is computed using the straight-line method at rates based on
the estimated useful lives of the assets.
DEBT ISSUE COSTS AND DISCOUNTS--The cost of obtaining financing for the
acquisition as well as debt discounts are amortized using the interest method
over the respective terms of the related debt issues.
INTANGIBLE ASSETS--Intangible assets are amortized on a straight-line basis
over their respective estimated useful lives ranging from 2 to 40 years. The
Company assesses the recoverability of intangibles by determining whether the
amortization over the remaining life can be recovered through projected
undiscounted cash flows from future operations.
INCOME TAXES--The Company accounts for income taxes using an asset and
liability approach. Deferred taxes are recorded for the difference between the
book and tax basis of various assets and liabilities.
PRODUCT WARRANTY COSTS--The Company provides a one year warranty on certain
products beginning on the date the product is installed on an aircraft. A
provision for estimated sales returns and the cost of repairs is recorded at the
time of sale and periodically adjusted to reflect actual experience.
F-8
<PAGE>
TRANSDIGM HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4. ACCOUNTS RECEIVABLE, MAJOR CUSTOMERS AND EXPORT SALES
Accounts receivable consist of the following at September 30 (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Due from U.S. government or prime contractors under
U.S. government programs.............................................. $ 1,217 $ 773
Commercial customers.................................................... 11,578 11,439
Marathon post-closing purchase price adjustment (Note 2)................ -- 766
Allowance for uncollectible amounts..................................... (265) (503)
--------- ---------
Accounts receivable--net................................................ $ 12,530 $ 12,475
--------- ---------
--------- ---------
</TABLE>
The Company's sales and receivables are concentrated in the aircraft
industry. The Company's customers consist primarily of original equipment
manufacturers of aircraft and aircraft subassemblies, commercial airlines,
distributors, and various agencies of the United States government, including
the U.S. military.
For the year ended September 30, 1998, two customers represented
approximately 20% and 14%, respectively, of the Company's net sales. One
customer represented approximately 15% of the Company's net sales during the
year ended September 30, 1997 and a group of related customers represented
approximately 11% of the Company's net sales for the year ended September 30,
1996.
Export sales were $17.8 million in 1998, $15.5 million in 1997 and $12.3
million in 1996.
Approximately 9.6% of the Company's receivables at September 30, 1998 were
due from one customer and approximately 14.5% of the receivables were due from
entities which principally operate outside of the United States. Credit is
extended based on an evaluation of the customer's financial condition and
collateral is generally not required.
F-9
<PAGE>
TRANSDIGM HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
5. INVENTORIES
Inventories consist of the following at September 30 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Work-in-progress and finished goods............................................... $ 10,577 $ 14,913
Raw materials and purchased component parts....................................... 12,038 6,268
--------- ---------
Total........................................................................... 22,615 21,181
Reserve for excess and obsolete inventory......................................... (4,335) (3,771)
--------- ---------
Inventories--net.................................................................. $ 18,280 $ 17,410
--------- ---------
--------- ---------
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at September 30
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and improvements........................................................... $ 4,683 $ 4,667
Buildings and improvements...................................................... 8,125 7,575
Machinery and equipment......................................................... 26,198 21,977
Construction in progress........................................................ 150 265
---------- ----------
Total......................................................................... 39,156 34,484
Accumulated depreciation........................................................ (17,205) (13,462)
---------- ----------
Property, plant and equipment--net.............................................. $ 21,951 $ 21,022
---------- ----------
---------- ----------
</TABLE>
7. INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, consist of the following
at September 30 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Goodwill.................................................................................... $ 33,341 $ 34,155
Technology and other........................................................................ 1,953 3,353
--------- ---------
Total....................................................................................... $ 35,294 $ 37,508
--------- ---------
--------- ---------
</TABLE>
Accumulated amortization of intangibles was $16.5 million at September 30,
1998 and $14 million at September 30, 1997.
F-10
<PAGE>
TRANSDIGM HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following at September 30 (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Compensation and related benefits....................................... $ 3,993 $ 4,025
Estimated losses on uncompleted contracts............................... 3,012 3,733
Sales returns and repairs............................................... 1,391 1,797
Environmental costs..................................................... 280 683
Income taxes............................................................ 380 266
Interest................................................................ 135 350
Other................................................................... 1,048 1,848
--------- ---------
Total................................................................... $ 10,239 $ 12,702
--------- ---------
--------- ---------
</TABLE>
9. DEBT
SUMMARY--The Company's long-term debt consists of the following at September
30 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Term loans.............................................................. $ 45,000 $ 50,000
Current maturities...................................................... (5,000) (5,000)
--------- ---------
Long-term portion....................................................... $ 40,000 $ 45,000
--------- ---------
--------- ---------
</TABLE>
REVOLVING CREDIT, SWING LINE, AND TERM LOANS--During the year ended
September 30, 1997, the Company obtained a new $70 million credit facility with
a group of financial institutions which consist of a $20 million revolving
credit line (including $1 million of available swing line loans) and $50 million
of term loans. At September 30, 1998, the Company had $20 million of borrowings
(the entire revolving credit line) available under the credit facility. Any
amounts borrowed under the revolving credit and swing line loans mature in the
year 2003 and amounts borrowed under the term loans mature on various dates
through the year 2003.
Borrowings under the credit facility bear interest at the Company's option
of (1) the Alternate Base Rate plus .25% or (2) the LIBO rate for Eurodollar
loans plus 1.25%, payable quarterly. The Alternate Base Rate is equal to the
highest of (a) the Prime Rate, (b) the Base CD Rate plus 1% or (c) the Federal
Funds Effective Rate plus .5%. The interest rate on outstanding borrowings at
September 30, 1998 was approximately 6.9%.
Any amounts borrowed under the credit facility are collateralized by
substantially all of the tangible assets of the Company. The agreement also
contains a number of restrictive covenants that, among other things, limit the
ability of the Company to incur indebtedness, pay dividends, engage in mergers
and consolidations, engage in transactions with affiliates, make capital
expenditures, engage in sales of assets or the stock of a subsidiary company and
make certain investments. The agreement also requires the maintenance of a
minimum net worth as well as debt to adjusted earnings, interest coverage, and
other ratios.
F-11
<PAGE>
TRANSDIGM HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
9. DEBT (CONTINUED)
The maturities of the Company's term loans are as follows: 1999--$5 million;
2000 through 2003-- $10 million each year.
SUBORDINATED NOTES--During the year ended September 30, 1997, the Company
redeemed, in advance of their scheduled maturity, outstanding subordinated notes
which had a carrying value at the time of the redemption of approximately $19.3
million ($20 million principal balance net of an unamortized discount of
approximately $.7 million). As a result of the redemption, the Company
recognized an extraordinary loss of approximately $1.5 million (net of a current
income tax benefit of approximately $1 million) on the early extinguishment of
debt which included prepayment costs of approximately $.8 million and the
write-off of the remaining unamortized debt issue costs of approximately $1
million. The subordinated notes bore interest at an annual rate of 13%, payable
semi-annually.
The subordinated notes included detachable warrants to purchase
approximately 16,000 shares of non-voting common stock of TransDigm Holding
Company at a price of $.10 per share which were not affected by the redemption
of the subordinated notes. The warrants are not exercisable except in connection
with the following triggering events: public offering of TransDigm Holding
Company's common stock, a business combination in which the Company is not the
surviving entity, and a change of control (see Note 1). If no transaction
constituting a triggering event is consummated prior to July 31, 1999, warrant
holders have the right to exercise a put option requiring the Company to
repurchase all of the warrants at their then appraised fair market value. If the
warrant holders have not exercised their put option prior to September 30, 2001,
then TransDigm Holding Company will have the right to call the warrants at their
then appraised fair market value.
10. RETIREMENT PLANS
The Company has two non-contributory, defined benefit pension plans which
together cover all of its union employees. The plans provide benefits of stated
amounts for each year of service. The Company's funding policy is to contribute
actuarially determined amounts allowable under Internal Revenue Service
regulations. The plans' assets consist primarily of guaranteed investment
contracts with an insurance company.
Net periodic pension cost of the defined benefit plans consists of the
following for the years ended September 30 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost--benefits earned during the period..................... $ 86 $ 74 $ 72
Interest cost on projected benefit obligation....................... 306 288 262
Actual return on plan assets........................................ (190) (136) (130)
Net amortization and deferral....................................... 94 101 28
--------- --------- ---------
Net periodic pension cost........................................... $ 296 $ 327 $ 232
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-12
<PAGE>
TRANSDIGM HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
10. RETIREMENT PLANS (CONTINUED)
The following table sets forth the funded status of the plans and amounts
recognized in the Company's consolidated balance sheets at September 30 (dollars
in thousands).
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligation, substantially
all vested............................................................... $ 4,969 $ 4,096
Plan assets at fair value.................................................. 2,817 2,232
--------- ---------
Projected benefit obligation in excess of plan assets...................... 2,152 1,864
Unrecognized net loss from past experience different from that assumed..... (1,196) (791)
Unamortized prior service cost............................................. (226) (98)
Adjustment required to recognize additional minimum liability.............. 1,422 889
--------- ---------
Accrued pension cost recognized in the consolidated balance sheets (current
and long-term portions).................................................. $ 2,152 $ 1,864
--------- ---------
--------- ---------
</TABLE>
The assumptions used to determine net periodic pension cost as well as the
funded status are:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Discount rate................................................................... 6.5% 7.5%
Long-term rate of return on plan assets......................................... 7.5% 7.5%
</TABLE>
The provisions of Financial Accounting Standards Board Statement No. 87,
"Employers' Accounting for Pensions" require recognition in the balance sheet of
an additional minimum liability and related intangible asset (limited by the
amount of unamortized prior service cost) for pension plans with accumulated
benefits in excess of plan assets. At September 30, 1998 and 1997, an additional
liability of $1.4 million and $.9 million, respectively, is reflected in the
consolidated balance sheets. At September 30, 1998 and 1997, the liability
exceeded the unrecognized prior service cost resulting in a charge to
stockholders' equity, net of taxes, of $.8 million and $.5 million,
respectively.
The Company also sponsors a defined contribution employee savings plan which
covers substantially all of the Company's non-union employees. Under the plan,
the Company contributes a percentage of employee compensation and matches a
portion of employee contributions to the plan. The cost recognized for such
contributions under this plan for the years ended September 30, 1998, 1997 and
1996 was approximately $.6 million in all years.
F-13
<PAGE>
TRANSDIGM HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
11. INCOME TAXES
The provision (benefit) for income taxes consists of the following for the
years ended September 30 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current......................................................... $ 13,327 $ 6,926 $ 2,897
Deferred........................................................ (341) (1,733) 839
Benefit of operating loss carryforward.......................... -- -- (1,691)
--------- --------- ---------
Total........................................................... $ 12,986 $ 5,193 $ 2,045
--------- --------- ---------
--------- --------- ---------
</TABLE>
The difference between the provision for income taxes at the federal
statutory income tax rate and the tax shown in the consolidated statements of
income and retained earnings (deficit) for the years ended September 30 is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory rate of 35% (34% in 1997 and 1996)............. $ 9,493 $ 3,341 $ 1,095
State and local income taxes.................................... 1,053 445 160
Nondeductible warrant put value adjustment...................... 2,289 1,632 734
Benefit from foreign sales corporation.......................... (349) (394) --
Nondeductible goodwill amortization............................. 353 70 --
Other--net...................................................... 147 99 56
--------- --------- ---------
Provision for income taxes...................................... $ 12,986 $ 5,193 $ 2,045
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of the deferred tax assets at September 30 consist of the
following (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSET:
Estimated losses on uncompleted contracts.................................. $ 1,175 $ 1,300
Employee benefits.......................................................... 649 743
Sales returns and repairs.................................................. 548 541
Other accrued liabilities.................................................. 1,427 1,318
--------- ---------
Total...................................................................... $ 3,799 $ 3,902
--------- ---------
--------- ---------
NON-CURRENT ASSET:
Intangible assets.......................................................... $ 3,724 $ 3,638
Retirement obligations..................................................... 596 401
Property, plant and equipment.............................................. (646) (970)
--------- ---------
Total...................................................................... $ 3,674 $ 3,069
--------- ---------
--------- ---------
</TABLE>
F-14
<PAGE>
TRANSDIGM HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
12. STOCKHOLDERS' EQUITY
CAPITAL STOCK--Authorized capital stock of the Company consists of 900,000
shares of common stock (voting), par value $.01 per share and 100,000 shares of
Class A (non-voting) common stock. At September 30, 1998, outstanding common
shares were 236,120 of voting common stock and 13,750 of Class A non-voting
common stock. There was no change in the number of outstanding Class A
non-voting shares during the years ended September 30, 1998, 1997 and 1996.
During the years ended September 30, 1998, 1997, and 1996, the Company
issued voting common shares, principally to employees and members of its board
of directors, as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- ---------
<S> <C> <C> <C>
Number of shares........................................................ -- 200 575
--- --- ---------
--- --- ---------
Proceeds................................................................ -- $ 67 $ 115
--- --- ---------
--- --- ---------
</TABLE>
During the years ended September 30, 1998, 1997, and 1996, the Company also
repurchased certain voting common shares, principally from terminated employees,
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----- --------- ---------
<S> <C> <C> <C>
Number of shares....................................................... 175 410 1,085
--- --------- ---------
--- --------- ---------
Acquisition cost....................................................... $ 71 $ 174 $ 400
--- --------- ---------
--- --------- ---------
</TABLE>
STOCK OPTIONS--The Company has certain stock option plans for its employees.
The options generally vest upon the earlier of: (1) the occurrence of certain
events such as the achievement of certain earnings targets or a change in the
control of the Company or (2) certain specified dates in the option agreements.
A summary of the status of the Company's stock option plans as of September 30,
1998, 1997 and 1996 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------ ------------------------------ ---------
<S> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES
--------- ------------------- --------- ------------------- ---------
Outstanding at beginning of year....... 37,467 $ 158 31,150 $ 116 36,700
Granted................................ -- -- 7,597 324 4,900
Exercised.............................. -- -- (220) 145 (5,090)
Forfeited.............................. -- -- (1,060) 147 (5,360)
--------- --------- ---------
Outstanding at end of year............. 37,467 158 37,467 158 31,150
--------- --------- ---------
--------- --------- ---------
Exercisable at end of year............. 19,670 113 17,121 110 14,792
--------- --------- ---------
--------- --------- ---------
<CAPTION>
<S> <C>
WEIGHTED-AVERAGE
EXERCISE PRICE
-------------------
Outstanding at beginning of year....... $ 105
Granted................................ 200
Exercised.............................. 100
Forfeited.............................. 100
Outstanding at end of year............. 116
Exercisable at end of year............. 106
</TABLE>
F-15
<PAGE>
TRANSDIGM HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
12. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
at September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------
<S> <C> <C> <C>
WEIGHTED-AVERAGE
EXERCISE NUMBER REMAINING NUMBER
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- ------------------------------------------------- ----------- --------------------- -----------
$100............................................. 25,170 5.8 17,020
154............................................. 400 6.8 200
200............................................. 4,900 7.5 2,450
335............................................. 6,997 8.5
----------- -----------
37,467 19,670
----------- -----------
----------- -----------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans. No compensation cost
has been recognized for its stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method specified in
Statement of Financial Accounting Standards No. 123, the Company's net income
for the years ended September 30, 1998 and 1997 would have been reduced by
approximately $115,000 in both years.
The weighted average fair value of options granted during fiscal 1997 and
1996 was $950,000 and $340,000, respectively. The fair value of the options
granted was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions for grants in both fiscal
1997 and 1996: risk-free interest rates ranging from 6.25% to 6.85%, expected
life of seven years, expected volatility and dividend yield of 0%.
13. LEASES
TransDigm leases office space for its corporate headquarters and one of its
divisions. The lease requires rental payments of approximately $200,000 per year
through the initial term of the lease, which expires in 1999. TransDigm may also
be required to share in the operating costs of the facility under certain
conditions. TransDigm has the option to renew the lease for an additional five
years beyond the expiration of the initial lease term. TransDigm also has
commitments under operating leases for vehicles and equipment. Rental expense
was $599,000 in 1998, $540,000 in 1997, and $570,000 in 1996. Future, minimum
rental commitments at September 30, 1998 under operating leases having initial
or remaining non-cancelable lease terms exceeding one year are $383,000 in 1999,
$166,000 in 2000, $79,000 in 2001, and $29,000 in 2002.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, accounts
receivable and payable, and accrued liabilities approximate their fair value due
to the short-term maturities of these assets and liabilities. The Company also
believes that the aggregate fair value of its term loans approximates its
carrying amount because the interest rates on the debt are reset on a frequent
basis to reflect current market rates.
F-16
<PAGE>
TRANSDIGM HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
15. CONTINGENCIES
ENVIRONMENTAL--The soil and groundwater beneath the Company's facility in
Waco, Texas have been impacted by releases of hazardous materials. The resulting
contaminants of concern have been delineated and characterized. Because the
majority of these contaminants are presently below action levels prescribed by
the Texas Natural Resources Conservation Commission ("TNRCC"), and because an
escrow (Note 2) was previously funded to cover the cost of remediation that
TNRCC might require for those contaminants currently in excess of action limits,
management does not believe the condition of the soil and groundwater at the
Waco facility will require incurrence of material expenditures.
OTHER--While the Company is currently involved in certain legal proceedings,
management believes the results of these proceedings will not have a material
effect on the financial condition, results of operations or cash flows of the
Company. During the ordinary course of business, the Company is from time to
time threatened with, or may become a party to, legal actions and other
proceedings. The Company believes that its potential exposure to such legal
actions is adequately covered by its aviation product and general liability
insurance.
16. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Company will adopt this
standard during fiscal 1999.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
statement requires that a public business enterprise report financial and
descriptive information about its reportable operating segments such as a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. The Company will adopt this standard during fiscal 1999.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employer's Disclosures about Pensions and Other Postretirement Benefits."
The statement requires an enterprise to disclose certain information about its
pension and postretirement benefits, including a reconciliation of beginning and
ending balances of the benefit obligation, the funded status of the plans, and
the amount of net periodic benefit cost recognized. The Company will adopt this
standard during fiscal 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an
F-17
<PAGE>
TRANSDIGM HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
16. NEW ACCOUNTING STANDARDS (CONTINUED)
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The Company will adopt this standard during fiscal 2000.
While management has not completed its analysis of these new accounting
standards, the adoption of these standards is not expected to have a material
effect on the Company's financial statements.
17. ACCOUNTING CHANGE
In connection with the planned registration of the Senior Subordinated Notes
described in Note 1 with the Securities and Exchange Commission ("Commission"),
the Company has retroactively adopted a new method of accounting for the put
warrants issued in 1993 (see Note 9). The Company adopted the new method to
comply with the requirements of the Commission for put warrants. Under the new
method of accounting, the Company has recorded a liability for the estimated put
value of the warrants and is recognizing changes in the estimated put value in
earnings. Previously, the Company recognized the warrants as a component of
stockholders' equity and adjusted the carrying value of the warrants on a
straight-line basis for the difference between their original recorded amount of
$1.6 million and their estimated put value in July 1999, with an offsetting
charge to the Company's retained earnings (deficit). The Company has restated
its 1997 and 1996 consolidated financial statements for this change in
accordance with the provisions of Accounting Principles Board Opinion No. 20,
"Accounting Changes." The significant effects of the change in accounting on the
Company's consolidated statements of income and retained earnings (deficit) are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
As previously reported:
Income before extraordinary loss......................................... $ 9,434 $ 3,335
Net income............................................................... 7,972 3,335
As restated:
Income before extraordinary loss......................................... 4,634 1,175
Net income............................................................... 3,172 1,175
</TABLE>
Because the Merger described in Note 1 constitutes a "triggering event"
pursuant to the terms of the warrants, the warrant holders will be permitted to
exercise their put option in connection with the closing of the transaction.
Accordingly, the Company has adjusted the carrying value of the warrants in the
accompanying September 30, 1998 consolidated balance sheet to their estimated
fair value.
18. SUBSEQUENT EVENT
The Merger described in Note 1 was completed on December 3, 1998.
* * * * * * *
F-18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Marathon Power Technologies Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Marathon
Power Technologies Company and its subsidiary at December 31, 1996 and 1995, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Dallas, Texas
January 17, 1997
F-19
<PAGE>
MARATHON POWER TECHNOLOGIES COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 326 $ 79
Accounts receivable, less allowance for doubtful accounts of $25 and $24 at December 31,
1996 and 1995, respectively............................................................. 2,419 2,636
Inventories............................................................................... 3,191 3,076
Deferred income taxes..................................................................... 321 292
Prepaid income taxes...................................................................... 40 119
Other current assets...................................................................... 68 67
--------- ---------
Total current assets.................................................................. 6,365 6,269
Property, plant and equipment............................................................. 6,496 6,570
--------- ---------
Total assets.......................................................................... $ 12,861 $ 12,839
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 776 $ 719
Accrued expenses.......................................................................... 2,108 2,238
Short-term debt........................................................................... 518 476
Current maturities of long-term debt...................................................... 475 --
--------- ---------
Total current liabilities............................................................. 3,877 3,433
--------- ---------
Deferred income taxes....................................................................... 339 216
Long-term debt.............................................................................. 2,025 5,000
--------- ---------
Total long-term liabilities........................................................... 2,364 5,216
--------- ---------
Commitments and contingencies (Note 13)
Shareholders' equity:
Common stock, $.01 par value; 50,000 shares authorized, 30,000 shares issued and
outstanding............................................................................. 1 1
Capital in excess of par value............................................................ 2,999 2,999
Retained earnings......................................................................... 3,628 1,198
Treasury stock, at cost; 75 shares........................................................ (8) (8)
--------- ---------
Total shareholders' equity............................................................ 6,620 4,190
--------- ---------
Total liabilities and shareholders' equity.......................................... $ 12,861 $ 12,839
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
MARATHON POWER TECHNOLOGIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Net sales................................................................................... $ 20,065 $ 18,072
Cost of goods sold.......................................................................... 11,833 11,280
--------- ---------
Gross profit................................................................................ 8,232 6,792
Selling expenses............................................................................ 1,286 1,024
General and administrative expenses......................................................... 3,100 2,959
--------- ---------
Income from operations...................................................................... 3,846 2,809
Interest expense............................................................................ (403) (644)
--------- ---------
Income before income taxes and extraordinary items.......................................... 3,443 2,165
Provision for income taxes.................................................................. (1,243) (759)
--------- ---------
Income before extraordinary items........................................................... 2,200 1,406
Extraordinary gain on extinguishment of debt, net of income taxes........................... 230 --
--------- ---------
Net income.................................................................................. 2,430 1,406
Retained earnings (accumulated deficit), beginning of period................................ 1,198 (208)
--------- ---------
Retained earnings, end of period............................................................ $ 3,628 $ 1,198
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
MARATHON POWER TECHNOLOGIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Cash flows from operating activities:
Net income................................................................................. $ 2,430 $ 1,406
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary gain on early extinguishment of debt, net of income taxes................ (230) --
Depreciation and amortization.......................................................... 766 673
Deferred income tax provision.......................................................... 94 175
Other.................................................................................. (4) --
Changes in operating assets and liabilities:
Accounts receivable.................................................................... 217 (500)
Inventories............................................................................ (246) 604
Prepaid income taxes................................................................... 79 (119)
Other current assets................................................................... (1) 126
Accounts payable....................................................................... 57 313
Accrued expenses....................................................................... (130) (293)
Income taxes payable................................................................... -- (45)
--------- ---------
Net cash provided by operating activities............................................ 3,032 2,340
--------- ---------
Cash flows from investing activities:
Property, plant and equipment additions.................................................... (702) (363)
Property, plant and equipment dispositions................................................. 10 --
--------- ---------
Net cash used in investing activities................................................ (692) (363)
--------- ---------
Cash flows from financing activities:
Net increase of line of credit............................................................. 42 476
Repayment of long-term debt................................................................ (2,125) (3,000)
Other...................................................................................... (10) --
Acquisition of treasury stock.............................................................. -- (8)
--------- ---------
Net cash used in financing activities................................................ (2,093) (2,532)
--------- ---------
Net increase (decrease) in cash and cash equivalents......................................... 247 (555)
Cash and cash equivalents at beginning of period............................................. 79 634
--------- ---------
Cash and cash equivalents at end of period................................................... $ 326 $ 79
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................................................. $ 459 $ 672
Income taxes............................................................................. $ 1,198 $ 748
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
MARATHON POWER TECHNOLOGIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND FORMATION
Marathon Power Technologies Company ("Company") was organized in March 1994
and purchased substantially all of the net assets of Marathon Power
Technologies, a wholly-owned subsidiary of American Premier Underwriters, Inc.,
on May 19, 1994. The Company, located in Waco, Texas, manufactures vented and
sealed nickel cadmium rechargeable batteries which are used in aviation and
consumer electrical equipment. The Company also manufactures static inverters,
used largely in the aviation industry, which convert DC power into AC power, as
well as other items, such as battery chargers. The Company maintains a
subsidiary in the United Kingdom used primarily for distribution of vented
products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION--The financial statements include the accounts
of the Company and its wholly-owned subsidiary after elimination of intercompany
transactions and balances. Certain reclassifications were made to conform prior
year amounts to the current year presentation.
USE OF ESTIMATES--Financial statements prepared in conformity with generally
accepted accounting principles require management to make estimates and
assumptions about reported amounts of assets and liabilities; disclosure of
contingent assets and liabilities and reported amounts of revenues and expenses.
Management must also make estimates and judgments about future results of
operations related to specific elements of the business in assessing
recoverability of assets and recorded values of liabilities. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash on hand
and short-term investments with original maturities of three months or less.
CREDIT CONCENTRATIONS--The Company sells products chiefly to aviation
companies and/or suppliers to aviation companies, generally on an unsecured
basis. The Company provides estimated reserves against accounts receivable for
collection losses.
INVENTORIES--Inventories are stated at the lower of cost or market, cost
being determined on a first-in first-out basis.
PROPERTY PLANT AND EQUIPMENT--Property, plant and equipment, including
assets under capital lease, are carried at acquisition cost. Depreciation and
amortization are computed on the straight-line basis over the estimated
remaining useful lives of the assets (ranging from 2 to 30 years) and the
remaining term of capital leases, respectively. Repair and maintenance
expenditures are charged to operations as incurred, and expenditures for major
renewals and betterments are capitalized. When units of property are disposed,
the cost and related accumulated depreciation are removed from the accounts, and
the resulting gains or losses are included in operations.
REVENUE RECOGNITION--Sales revenue and related cost of sales are recognized
as products are shipped to customers. In the normal course of business, the
Company provides for product defects through the issuance of one to two year
warranties covering its products. The costs associated with these warranties are
accrued at the time of sale which totaled $130,000 and $232,000 in 1996 and
1995, respectively.
F-23
<PAGE>
MARATHON POWER TECHNOLOGIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES--Deferred income taxes are provided for differences between tax
laws and financial accounting standards regarding the recognition and
measurement of assets, liabilities, revenues and expenses. Such differences
result principally from different methods of purchase price allocation for tax
and financial accounting purposes and depreciation.
FAIR VALUE OF FINANCIAL INSTRUMENTS--Management believes the recorded values
of financial instruments approximate their current fair values as such items are
current in nature and/or generally bear variable interest rates which adjust
yield to derive current market value.
STOCK-BASED COMPENSATION--In October 1995, Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation" ("SFAS 123") was
issued. This statement requires the fair value of stock options and other
stock-based compensation issued to employees to either be included as
compensation in the statement of operations, or the pro forma effect on net
income of such compensation expense to be disclosed in the footnotes to the
Company's financial statements commencing with the Company's year ending
December 31, 1996. The Company has adopted SFAS 123 on a disclosure basis only.
As such, implementation of SFAS 123 is not expected to impact the Company's
consolidated balance sheet or consolidated statement of operations.
3. INVENTORIES
Inventories comprise the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Raw materials.............................................................. $ 887 $ 716
Work-in-process............................................................ 1,601 1,731
Finished goods............................................................. 703 629
--------- ---------
$ 3,191 $ 3,076
--------- ---------
--------- ---------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprise the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Land....................................................................... $ 693 $ 693
Building and improvements.................................................. 3,379 3,370
Machinery and equipment.................................................... 3,550 3,258
Other...................................................................... 678 294
--------- ---------
8,300 7,615
Less accumulated depreciation and amortization............................. 1,804 1,045
--------- ---------
$ 6,496 $ 6,570
--------- ---------
--------- ---------
</TABLE>
Routine repairs and maintenance charged to expense were $108,000 and $161,
000 for the years ended December 31, 1996 and 1995, respectively.
F-24
<PAGE>
MARATHON POWER TECHNOLOGIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACCRUED LIABILITIES
Accrued liabilities comprise the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Customer rebates........................................................... $ 690 $ 200
Compensation............................................................... 583 788
Warranty................................................................... 435 535
Other...................................................................... 400 715
--------- ---------
$ 2,108 $ 2,238
--------- ---------
--------- ---------
</TABLE>
6. LONG-TERM DEBT
Long-term debt comprises the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
$3,000 revolving credit facility with a bank, bearing interest at 0.25%
above prime at December 31, 1996 (8.5%) and 1.0% above prime at December
31, 1995 (9.5%) on the outstanding balance, principal and interest
payable upon deposit of available funds, available until June 1999....... $ 518 $ 476
Note payable to a bank, bearing interest at 0.25% above prime at December
31, 1996 (8.5%) and 1.0% above prime at December 31, 1995 (9.5%) payable
in varying installments through June 1999................................ 2,500 2,500
Subordinated note payable to a corporation, interest payable quarterly at
9.0%, principal due in two installments through May 2000................. -- 2,500
--------- ---------
3,018 5,476
Less current maturities.................................................... 993 476
--------- ---------
$ 2,025 $ 5,000
--------- ---------
--------- ---------
</TABLE>
The Company's revolving credit facility includes an additional $750,000
overadvance facility under which no borrowings were outstanding in 1996 or 1995.
The overadvance facility will be reduced to $500,000, $250,000 and $0 on January
1, April 1, and July 1 of 1997, respectively. The Company pays a commitment fee
of .25% per annum of the daily average of the unused portion of the revolving
credit facility. Prior to October 1996, the commitment fee paid was .5%.
The above debt is secured by the Company's assets and common stock and is
restricted by certain financial covenants including capital base, debt ratio and
current ratio requirements, among others.
F-25
<PAGE>
MARATHON POWER TECHNOLOGIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
In 1996, the Company extinguished its $2,500,000 subordinated note payable
for a cash payment of $2,125,000, obtained from a combination of operating cash
flows and an increase in borrowings under the line of credit. The difference
between the carrying amount of the note and the cash paid to the holder of such
borrowings (and related expenses of $10,000) was recorded as an extraordinary
gain on the early extinguishment of debt of $365,000 ($230,000 net of income
taxes). The effective tax rate for the extraordinary gain was 37.0%.
Aggregate maturities of long-term debt as of December 31, 1996 are as
follows (dollars in thousands):
<TABLE>
<S> <C>
1997................................................................ $ 993
1998................................................................ 900
1999................................................................ 1,125
2000................................................................ --
2001................................................................ --
---------
$ 3,018
---------
---------
</TABLE>
7. INCOME TAXES
Income tax provision comprises the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Current
Federal.................................................................... $ 1,060 $ 536
State...................................................................... 154 48
--------- ---------
Total current............................................................ 1,214 584
--------- ---------
Deferred:
Federal.................................................................... 25 156
State...................................................................... 4 19
--------- ---------
Total deferred........................................................... 29 175
--------- ---------
Provision for income taxes before extraordinary gain..................... 1,243 759
Income tax expense from extraordinary gain................................... 135 --
--------- ---------
Total provision for income taxes......................................... $ 1,378 $ 759
--------- ---------
--------- ---------
</TABLE>
F-26
<PAGE>
MARATHON POWER TECHNOLOGIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The effective tax rate on earnings before income taxes and extraordinary
items was different than the federal statutory tax rate. The following summary
reconciles the federal statutory tax rate and provision with the actual
effective rate and provision:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Federal income tax expense................................................. 34.0% 34.0%
State taxes, net of federal expense........................................ 3.0% 3.1%
Disallowed meals and entertainment......................................... 0.2% 1.4%
Valuation allowance........................................................ -- (2.8%)
Other...................................................................... (1.1%) (0.7%)
--- ---
36.1% 35.0%
--- ---
--- ---
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's net deferred tax assets and liabilities comprise the
following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Deferred tax assets and liabilities
Accruals and reserves...................................................... $ 321 $ 292
Asset allocation difference................................................ (339) (216)
--------- ---------
Net deferred tax asset (liability)....................................... $ (18) $ 76
--------- ---------
--------- ---------
</TABLE>
8. SALES TO MAJOR CUSTOMERS
The Company made sales to various U.S. governmental agencies representing
14.0% and 7.0% of net sales in 1996 and 1995, respectively. Sales to two of the
Company's nongovernmental customers represent 25.6% and 22.8%, respectively, of
net sales in 1996 and 31.3% and 29.5% respectively, in 1995. These customers
also represented 20.4% and 34.6%, respectively, of outstanding trade receivables
at December 31, 1996 and 28.0% and 22.6%, respectively, at December 31, 1995. In
the normal course of business, the Company extends credit on open account to its
customers, including U.S. governmental agencies and distributors of the
Company's products. Extensions of credit to all customers are closely monitored
and no significant credit losses have occurred during the years ended December
31, 1996 and 1995.
9. RESEARCH AND DEVELOPMENT
The Company is engaged in several research and development projects. Costs
associated with these projects are charged to operations when incurred. Research
and development costs are included in general and administrative expenses and
totaled $362,000 and $279,000 in 1996 and 1995, respectively.
F-27
<PAGE>
MARATHON POWER TECHNOLOGIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS
The Company paid management fees of $200,000 and $181,000 during 1996 and
1995, respectively, which are included in general and administrative expenses,
to its principal shareholder under an agreement which calls for quarterly
installments equal to 1.0% of quarterly net sales. Included in accrued
liabilities other (Note 5) are management fees payable of $51,000 and $46,000 as
of December 31, 1996 and 1995, respectively.
Included in treasury stock at December 31, 1996 and 1995 are 75 shares of
the Company's common stock which was repurchased from a former employee during
1995 for approximately $8,000.
11. STOCK OPTIONS
The Company established an incentive stock option plan in 1994 under which
options to acquire an aggregate of 3,000 shares of the Company's common stock
may be granted to employees and consultants of the Company. The plan requires
that the exercise price for each stock option be not less than 100% of the fair
market value of common stock at the time the option is granted. Both
nonqualified stock options and incentive stock options, as defined by the
Internal Revenue Code of 1986, as amended, may be granted under the plan. The
options are nontransferable and are cancelable if the optionee's employment or
other association with the Company is terminated for any reason. The plan and
all underlying options terminate on January 1, 2005 or earlier. As of December
31, 1996 and 1995, options of 2,681 and 2,531, respectively, had been granted
under the plan.
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
OPTIONS PRICE
----------- -----------
<S> <C> <C>
Options granted (initially) in 1995..................................... 2,531 $ 100
Exercised............................................................. -- --
Canceled/Expired...................................................... -- --
----- -----
Outstanding at December 31, 1995........................................ 2,531 100
Options granted in 1996................................................. 150 100
Exercised............................................................. -- --
Canceled/Expired...................................................... -- --
----- -----
Outstanding at December 31, 1996........................................ 2,681 $ 100
----- -----
----- -----
</TABLE>
As of December 31, 1996 and 1995, options for 1,609 and 1,012 shares,
respectively, were exercisable under the Company's stock option plan.
The fair market values of options as of their grant dates were approximately
$49 and $42 per option in December 1996 and 1995, respectively, based on
comparison of the fair market value of the underlying shares and the net present
value of the exercise price over the period of exercisability at a risk free
market rate of 7.9% and 5.7%, respectively. No dividend payments or volatility
in stock prices were assumed in the fair market value calculations.
F-28
<PAGE>
MARATHON POWER TECHNOLOGIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS (CONTINUED)
No compensation expense was recorded during 1996 or 1995 for options issued
under the plan since the Company accounts for such transactions in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Had the
Company included the stock-based compensation in the consolidated statement of
operations, $17,000 and $28,000 in additional employee compensation expenses,
net of the effect of income taxes, would have been recorded in 1996 and 1995,
respectively. This would result in pro forma net income of $2,413,000 and
$1,378,000, respectively.
12. EMPLOYEE BENEFITS
The Company sponsors a defined contribution retirement plan for Company
employees. Employees are eligible to participate in the plan on the first day of
the calendar quarter following their employment date. The Company makes annual
contributions to the plan equal to 50% of the employees contribution (up to a
maximum of 6% of each employee's compensation). The Company's expense under this
plan was $68,000 and $62,000 in 1996 and 1995, respectively.
The Company sponsors a self-funded employee welfare benefit plan which
provides comprehensive medical benefits to Company employees and their
dependents. All full-time employees become eligible on the first day of the
month following the month in which they complete 30 days of service. The Company
incurred expenses of $366,000 and $304,000 under this plan during the years
ended December 31, 1996 and 1995, respectively.
13. COMMITMENTS AND CONTINGENCIES
Under the terms of the May 19, 1994 asset purchase agreement, the Company is
indemnified for any preacquisition environment remediation costs. The Company
had accrued $36,000 and $25,000 at December 31, 1996 and 1995, respectively, for
additional hazardous waste disposal costs.
The Company is party to certain legal proceedings incidental to its
business. Certain claims arising in the ordinary course of business have been
filed or are pending against the Company. Management does not believe the
outcome of any of these proceedings will materially affect the Company's
financial position or results of operations. Under the terms of the May 19, 1994
asset purchase agreement, the Company is indemnified for any preacquisition
legal costs. The Company accrues for claims that are both probable and for which
expected loss can be reasonably estimated.
F-29
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
-----------------------------------------------------------------
PROSPECTUS
-----------------------------------------------------------------
TRANSDIGM INC.
OFFER TO EXCHANGE ITS
10 3/8% SENIOR SUBORDINATED NOTES
DUE 2008 WHICH HAVE BEEN
REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OF ITS OUTSTANDING
10 3/8% SENIOR SUBORDINATED NOTES DUE 2008
, 1999
------------------------------------------------------------------
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999, ALL DEALERS EFFECTING TRANSACTIONS IN THESES
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware ("DGCL")
provides that a corporation has the power to indemnify any director or officer,
or former director or officer, who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) against the expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with the defense of any action by
reason of being or having been directors or officers, if such person shall have
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, provided that such person had no reasonable cause to
believe his conduct was unlawful, except that, if such action shall be in the
right of the corporation, no such indemnification shall be provided as to any
claim, issue or matter as to which such person shall have been judged to have
been liable to the corporation unless and only to the extent that the Court of
Chancery of the State of Delaware (the "Court of Chancery"), or any court in
such suit or action was brought, shall determine upon application that, despite
the liability judgment, but in view of all of the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses as
the Court of Chancery or such other court shall deem proper.
Accordingly, each of (i) the Restated Certificate of Incorporation (dated
September 28, 1993) and the amendments thereto (dated December 21, 1993) of
TransDigm Holding Company (filed herewith as Exhibits 3.1 and 3.2,
respectively), (ii) the Certificate of Incorporation (dated July 2, 1993) and
the amendments thereto (dated July 22, 1993) of TransDigm Inc. (filed herewith
as Exhibits 3.4 and 3.5, respectively), (iii) the Certificate of Incorporation
(dated March 28, 1994) and the amendments thereto (dated May 18, 1994 and May
24, 1994) of Marathon Power Technologies Company (filed herewith as Exhibits
3.7, 3.8 and 3.9, respectively), provide that subject to certain exceptions,
TransDigm Holding Company, TransDigm Inc. and Marathon Power Technologies
Company (collectively, the "Co-Registrants" and, individually, the
"Co-Registrant") shall indemnify each of its respective director or officer
against any and all expenses (including attorneys' fees), judgments, fines,
excise taxes assessed with respect to any employee benefit plan, or penalties
and amounts paid in settlement actually and reasonably incurred by such director
or officer in connection with any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative
(including an action by or in the right of such Co-Registrant), to which such
director or officer is, was or at any time becomes a party, or is threatened to
be made a party, by reason of the fact that such director or officer is, was or
at any time becomes a director or officer of such Co-Registrant, or is, or was
serving, or at any time serves at the request of such Co-Registrant as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise. The Restated Certificate of Incorporation or the Certificate
of Incorporation, as applicable, and the amendments thereto also provide that
the respective Co-Registrant shall advance expenses (including attorneys' fees)
actually and reasonably incurred by its director or officer in defending any
proceeding and any judgments, fines or amounts to be paid in settlement thereof.
The Restated Certificate of Incorporation or the Certificate of Incorporation,
as applicable, and the amendments thereto provide, however, that the foregoing
provisions shall not require the respective Co-Registrant to pay any indemnity
(i) for which payment is actually made to such director or officer under a valid
and collectible insurance policy, except in respect of any excess beyond the
amount of payment under such insurance; (ii) for which such director or officer
is indemnified by the respective Co-Registrant pursuant to applicable law or
otherwise than pursuant to the Restated Certificate of Incorporation or the
Certificate of Incorporation, as applicable, of the respective Co-Registrant;
(iii) for an accounting of profits made from the purchase or sale by such
director or officer of securities of the respective Co-Registrant within the
meaning of
II-1
<PAGE>
Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or
similar provisions of any state statutory law or common law; (iv) on account of
such director's or officer's conduct which is finally adjudged by a court to
have been knowingly fraudulent, deliberately dishonest or willful misconduct; or
(v) if a final decision by a court having jurisdiction in the matter shall
determine that such indemnity is not lawful. Such indemnification shall not be
deemed exclusive of any other rights to which a director or officer seeking
indemnification may be entitled under any statute, the Bylaws, other provisions
of the Restated Certificate of Incorporation or the Certificate of
Incorporation, as applicable, of the respective Co-Registrant, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in
such director's or officer's official capacity and as to action in any other
capacity while holding such office.
Furthermore, a director of a Co-Registrant shall not be liable to the
respective Co-Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (a) for any breach of the
director's duty of loyalty to the respective Co-Registrant or its stockholders,
(b) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (c) for the unlawful payment of a
dividend, unlawful stock purchase or unlawful redemption, (d) for any
transaction from which the director derived an improper personal benefit, or
such exemption from liability or limitation thereof is not permitted under the
DGCL as currently in effect or as the same may hereafter be amended.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
*2.1 Agreement and Plan of Merger, dated August 3, 1998, between Phase II Acquisition Corp. and TransDigm
Holding Company.
*2.2 Amendment One, dated November 9, 1998, to the Agreement and Plan of Merger between Phase II Acquisition
Corp. and TransDigm Holding Company.
*3.1 Restated Certificate of Incorporation, filed on September 28, 1993, of TransDigm Holding Company.
*3.2 Certificate of Amendment, filed on December 21, 1993, of the Restated Certificate of Incorporation of
TransDigm Holding Company.
*3.3 Certificate of Ownership and Merger, filed on December 3, 1998, merging Phase II Acquisition Corp. with
and into TransDigm Holding Company.
*3.4 Certificate of Incorporation, filed on July 2, 1993, of NovaDigm Acquisition, Inc. (TransDigm Inc.).
*3.5 Certificate of Amendment, filed on July 22, 1993, of the Certificate of Incorporation of NovaDigm
Acquisition, Inc. (TransDigm Inc.).
*3.6 Certificate of Ownership and Merger, filed on September 13, 1993, merging IMO Aerospace Company with and
into TransDigm Inc.
*3.7 Certificate of Incorporation, filed on March 28, 1994, of MPT Acquisition Corp. (Marathon Power
Technologies Company).
*3.8 Certificate of Amendment, filed on May 18, 1994, of the Certificate of Incorporation of MPT Acquisition
Corp. (Marathon Power Technologies Company).
*3.9 Certificate of Amendment, filed on May 24, 1994, of the Certificate of Incorporation of MPT Acquisition
Corp. (Marathon Power Technologies Company).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
*3.10 Bylaws of TransDigm Holding Company.
*3.11 Bylaws of NovaDigm Acquisition, Inc. (TransDigm Inc.).
*3.12 Bylaws of MPT Acquisition Corp. (Marathon Power Technologies Company).
*4.1 Indenture, dated December 3, 1998, among TransDigm Inc., TransDigm Holding Company and Marathon Power
Technologies Company and State Street Bank and Trust Company, as trustee, relating to $125,000,000
aggregate principal amount of 10 3/8% Senior Subordinated Notes due 2008 and the registered 10 3/8%
Senior Subordinated Notes due 2008.
*4.2 Specimen Certificate of 10 3/8% Senior Subordinated Notes due 2008 (the "Old Notes") (included in Exhibit
4.1 hereto).
*4.3 Specimen Certificate of the registered 10 3/8% Senior Subordinated Notes due 2008 (the "New Notes")
(included in Exhibit 4.1 hereto).
*4.4 Registration Rights Agreement, dated December 3, 1998, among TransDigm Inc., TransDigm Holding Company
and Marathon Power Technologies Company and BT Alex. Brown Incorporated and Credit Suisse First Boston
Corporation.
*4.5 Indenture, dated December 3, 1998, between TransDigm Holding Company and State Street Bank and Trust
Company, as trustee, relating to $20,000,000 aggregate principal amount of 12% Pay-in-Kind Senior Notes
due 2009.
*4.6 Specimen Certificate of 12% Pay-in-Kind Senior due 2008 (included in Exhibit 4.5 hereto).
*4.7 Registration Rights Agreement, dated December 3, 1998, among TransDigm Holding Company and Kelso
Investment Associates IV, L.P. and Kelso Equity Partners II, L.P.
*4.8 Credit Agreement, dated December 3, 1998, among TransDigm Inc., TransDigm Holding Company and Marathon
Power Technologies Company and Bankers Trust Company, as the administrative agent, and the various
financial institutions parties thereto.
4.9 First Amendment to the Credit Agreement, dated December 10, 1998, among TransDigm Inc., TransDigm Holding
Company and Marathon Power Technologies Company and Bankers Trust Company, as the administrative agent,
and the various financial institutions parties thereto.
*4.10 Specimen Revolving Note evidencing the revolving borrowings under the Credit Agreement (included in
Exhibit 4.8 hereto).
*4.11 Specimen Term A Note evidencing the Term A credit advances under the Credit Agreement (included in
Exhibit 4.8 hereto).
*4.12 Specimen Term B Note evidencing the Term B credit advances under the Credit Agreement (included in
Exhibit 4.8 hereto).
*4.13 Security Agreement, dated December 3, 1998, among TransDigm Inc., TransDigm Holding Company and Marathon
Power Technologies Company and Bankers Trust Company, as the administrative agent under the Credit
Agreement.
*4.14 Pledge Agreement, dated December 3, 1998, among TransDigm Inc., TransDigm Holding Company and Marathon
Power Technologies Company and Bankers Trust Company, as the administrative agent under the Credit
Agreement.
*4.15 Form of Assignment of Security Interest in United States Copyrights by TransDigm Inc., TransDigm Holding
Company and Marathon Power Technologies Company for the benefit of Bankers Trust Company, as the
administrative agent under the Credit Agreement (included in Exhibit 4.13 hereto).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
*4.16 Form of Assignment of Security Interest in United States Trademarks and Patents by TransDigm Inc.,
TransDigm Holding Company and Marathon Power Technologies Company for the benefit of Bankers Trust
Company, as the administrative agent under the Credit Agreement (included in Exhibit 4.13 hereto).
+5.1 Opinion of Latham & Watkins regarding the validity of the New Notes.
+10.1 Stockholders' Agreement, dated , 1999, by and among TransDigm Holding Company, Odyssey
Investment Partners Fund, LP, Odyssey Coinvestors, LLC, KIA IV-TD, LLC and Kelso Equity Partners II, L.P.
*10.2 Stockholders' Agreement, dated December 3, 1998, by and among TransDigm Holding Company, Odyssey
Investment Partners Fund and certain employee stockholders of TransDigm Holding Company.
*10.3 Tax Allocation Agreement, dated December 3, 1998, between TransDigm Holding Company and TransDigm Inc.
+10.4 Employment Agreement, dated , 1999, between TransDigm Holding Company and Douglas W. Peacock.
+10.5 Employment Agreement, dated , 1999, between TransDigm Holding Company and W. Nicholas Howley.
*10.6 TransDigm Inc. Senior Executive Benefits Plan.
+10.7 Annual Incentive Compensation Plan for Key Management Employees of TransDigm Inc.
*12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.
*12.2 Statement of Computation of Ratio of EBITDA, As Defined, to Cash Interest Expense.
*12.3 Statement of Computation of Ratio of EBITDA, As Defined, less Capital Expenditures to Cash Interest
Expense.
*12.4 Statement of Computation of Ratio of Total Debt to EBITDA.
+21.1 Subsidiaries of TransDigm Holding Company.
+23.1 Consent of Latham & Watkins (included in their opinion filed as Exhibit 5.1 hereto).
23.2 Consent of Deloitte & Touche LLP.
*23.3 Consent of PricewaterhouseCoopers LLP.
*24.1 Power of Attorney of TransDigm Holding Company, TransDigm Inc. and Marathon Power Technologies (included
on signature pages to this Registration Statement on Form S-4).
+25.1 Statement of Eligibility and Qualification (form T-1) under the Trust Indenture Act of 1939 of State
Street Bank and Trust Company.
*27.1 Financial Data Schedule.
+99.1 Form of Letter of Transmittal and related documents to be used in conjunction with the exchange offer.
</TABLE>
- ------------------------
+ To be filed as an amendment
* Previously filed
II-4
<PAGE>
SCHEDULES OMITTED
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the information required by
such omitted schedules is set forth in the financial statements or the notes
thereto.
ITEM 22. UNDERTAKINGS.
Each of the undersigned Co-Registrants hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the respective
Co-Registrant pursuant to the foregoing provisions described under Item 20
above, or otherwise, the respective Co-Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim of indemnification against
such liabilities (other than the payment by the respective Co-Registrant of
expenses incurred or paid by a director, officer or controlling person of such
Co-Registrant in the successful defense of any action, suit paid by a director,
officer or controlling person of such Co-Registrant in the successful defense of
any action, suit or proceeding) is asserted against such Co-Registrant by such
director, officer or controlling person in connection with the securities being
registered, such Co-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 of whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
Each of the undersigned Co-Registrants hereby undertakes (i) to respond to
requests for information that is incorporated by reference into this Prospectus
pursuant to Items 4, 10(b), 11, or 13 of Form S-4, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This undertaking also includes documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
Each of the undersigned Co-Registrants hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
Each of the undersigned Co-Registrants hereby undertakes to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement: (i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement (notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement); and (iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
Each of the undersigned Co-Registrants hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this Registration Statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called
II-5
<PAGE>
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the application form.
Each of the undersigned Co-Registrants hereby undertakes that every
prospectus: (i) that is filed pursuant to the immediately preceding paragraph or
(ii) that purports to meet the requirements of Section 10(a)(3) of the
Securities Act of 1933, as amended, and is used in connection with an offering
of securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Each of the undersigned Co-Registrants hereby undertakes to remove from
registration by means of a post-effective amendment any of the securities being
registered which remain unsold at the termination of the exchange offer.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, each
of the Co-Registrants has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Waco, State of Texas, on February 5, 1999.
<TABLE>
<S> <C> <C>
TRANSDIGM INC.
By: /s/ PETER B. RADEKEVICH
-----------------------------------------
Peter B. Radekevich
CHIEF FINANCIAL OFFICER
TRANSDIGM HOLDING COMPANY
By: /s/ PETER B. RADEKEVICH
-----------------------------------------
Peter B. Radekevich
CHIEF FINANCIAL OFFICER
MARATHON POWER TECHNOLOGIES COMPANY
By: /s/ PETER B. RADEKEVICH
-----------------------------------------
Peter B. Radekevich
CHIEF FINANCIAL OFFICER
</TABLE>
II-7
<PAGE>
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and
directors of TransDigm Inc., a Delaware corporation (the "Company"), for himself
and not for one another, does hereby constitute and appoint Peter B. Radekevich,
his true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Registration Statement with
respect to the proposed issuance, offer, exchange and delivery by the Company of
its registered 10 3/8% Senior Subordinated Notes due 2008, or any registration
statement for this offering that is to be effective upon the filing pursuant to
rule 462(b) under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chief Executive Officer
* (Principal Executive
- ------------------------------ Officer) and Chairman of February 5, 1999
Douglas W. Peacock the Board
President and Chief
* Operating Officer
- ------------------------------ (Principal Executive February 5, 1999
W. Nicholas Howley Officer) and Director
* Chief Financial Officer
- ------------------------------ (Principal Financial and February 5, 1999
Peter B. Radekevich Accounting Officer
*
- ------------------------------ Director February 5, 1999
Stephen Berger
*
- ------------------------------ Director February 5, 1999
William Hopkins
*
- ------------------------------ Director February 5, 1999
Muzzafar Mirza
*
- ------------------------------ Director February 5, 1999
John W. Paxton
*
- ------------------------------ Director February 5, 1999
Thomas R. Wall, IV
</TABLE>
*By: /s/ PETER B.
RADEKEVICH
------------------------
Peter B. Radekevich
Attorney-in-fact
II-8
<PAGE>
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and
directors of TransDigm Holding Company, a Delaware corporation ("Holdings"), for
himself and not for one another, does hereby constitute and appoint Peter B.
Radekevich, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement with respect to the proposed issuance, offer, exchange and delivery by
Holdings of its guarantee of TransDigm Inc.'s registered 10 3/8% Senior
Subordinated Notes due 2008, or any registration statement for this offering
that is to be effective upon the filing pursuant to rule 462(b) under the
Securities Act of 1933, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chief Executive Officer
* (Principal Executive
- ------------------------------ Officer) and Chairman of February 5, 1999
Douglas W. Peacock the Board
President and Chief
* Operating Officer
- ------------------------------ (Principal Executive February 5, 1999
W. Nicholas Howley Officer) and Director
* Chief Financial Officer
- ------------------------------ (Principal Financial and February 5, 1999
Peter B. Radekevich Accounting Officer
*
- ------------------------------ Director February 5, 1999
Stephen Berger
*
- ------------------------------ Director February 5, 1999
William Hopkins
*
- ------------------------------ Director February 5, 1999
Muzzafar Mirza
*
- ------------------------------ Director February 5, 1999
John W. Paxton
*
- ------------------------------ Director February 5, 1999
Thomas R. Wall, IV
</TABLE>
*By: /s/ PETER B.
RADEKEVICH
------------------------
Peter B. Radekevich
Attorney-in-fact
II-9
<PAGE>
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and
directors of Marathon Power Technologies Company, a Delaware corporation
("Marathon"), for himself and not for one another, does hereby constitute and
appoint Peter Radekevich, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this
Registration Statement with respect to the proposed issuance, offer, exchange
and delivery by Marathon of its guarantee of TransDigm Inc.'s registered 10 3/8%
Senior Subordinated Notes due 2008, or any registration statement for this
offering that is to be effective upon the filing pursuant to rule 462(b) under
the Securities Act of 1933, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chief Executive Officer
* (Principal Executive
- ------------------------------ Officer) and Chairman of February 5, 1999
Douglas W. Peacock the Board
*
- ------------------------------ President (Principal February 5, 1999
Robert S. Henderson Executive Officer)
* Chief Financial Officer
- ------------------------------ (Principal Financial and February 5, 1999
Peter B. Radekevich Accounting Officer
*
- ------------------------------ Director February 5, 1999
W. Nicholas Howley
</TABLE>
*By: /s/ PETER B.
RADEKEVICH
------------------------
Peter B. Radekevich
Attorney-in-fact
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
*2.1 Agreement and Plan of Merger, dated August 3, 1998, between Phase II Acquisition Corp. and TransDigm
Holding Company.
*2.2 Amendment One, dated November 9, 1998, to the Agreement and Plan of Merger between Phase II Acquisition
Corp. and TransDigm Holding Company.
*3.1 Restated Certificate of Incorporation, filed on September 28, 1993, of TransDigm Holding Company.
*3.2 Certificate of Amendment, filed on December 21, 1993, of the Restated Certificate of Incorporation of
TransDigm Holding Company.
*3.3 Certificate of Ownership and Merger, filed on December 3, 1998, merging Phase II Acquisition Corp. with
and into TransDigm Holding Company.
*3.4 Certificate of Incorporation, filed on July 2, 1993, of NovaDigm Acquisition, Inc. (TransDigm Inc.).
*3.5 Certificate of Amendment, filed on July 22, 1993, of the Certificate of Incorporation of NovaDigm
Acquisition, Inc. (TransDigm Inc.).
*3.6 Certificate of Ownership and Merger, filed on September 13, 1993, merging IMO Aerospace Company with and
into TransDigm Inc.
*3.7 Certificate of Incorporation, filed on March 28, 1994, of MPT Acquisition Corp. (Marathon Power
Technologies Company).
*3.8 Certificate of Amendment, filed on May 18, 1994, of the Certificate of Incorporation of MPT Acquisition
Corp. (Marathon Power Technologies Company).
*3.9 Certificate of Amendment, filed on May 24, 1994, of the Certificate of Incorporation of MPT Acquisition
Corp. (Marathon Power Technologies Company).
*3.10 Bylaws of TransDigm Holding Company.
*3.11 Bylaws of NovaDigm Acquisition, Inc. (TransDigm Inc.).
*3.12 Bylaws of MPT Acquisition Corp. (Marathon Power Technologies Company).
*4.1 Indenture, dated December 3, 1998, among TransDigm Inc., TransDigm Holding Company and Marathon Power
Technologies Company and State Street Bank and Trust Company, as trustee, relating to $125,000,000
aggregate principal amount of 10 3/8% Senior Subordinated Notes due 2008 and the registered 10 3/8%
Senior Subordinated Notes due 2008.
*4.2 Specimen Certificate of 10 3/8% Senior Subordinated Notes due 2008 (the "Old Notes") (included in Exhibit
4.1 hereto).
*4.3 Specimen Certificate of the registered 10 3/8% Senior Subordinated Notes due 2008 (the "New Notes")
(included in Exhibit 4.1 hereto).
*4.4 Registration Rights Agreement, dated December 3, 1998, among TransDigm Inc., TransDigm Holding Company
and Marathon Power Technologies Company and BT Alex. Brown Incorporated and Credit Suisse First Boston
Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
*4.5 Indenture, dated December 3, 1998, between TransDigm Holding Company and State Street Bank and Trust
Company, as trustee, relating to $20,000,000 aggregate principal amount of 12% Pay-in-Kind Senior Notes
due 2009.
*4.6 Specimen Certificate of 12% Pay-in-Kind Senior due 2008 (included in Exhibit 4.5 hereto).
*4.7 Registration Rights Agreement, dated December 3, 1998, among TransDigm Holding Company and Kelso
Investment Associates IV, L.P. and Kelso Equity Partners II, L.P.
*4.8 Credit Agreement, dated December 3, 1998, among TransDigm Inc., TransDigm Holding Company and Marathon
Power Technologies Company and Bankers Trust Company, as the administrative agent, and the various
financial institutions parties thereto.
4.9 First Amendment to the Credit Agreement, dated December 10, 1998, among TransDigm Inc., TransDigm Holding
Company and Marathon Power Technologies Company and Bankers Trust Company, as the administrative agent,
and the various financial institutions parties thereto.
*4.10 Specimen Revolving Note evidencing the revolving borrowings under the Credit Agreement (included in
Exhibit 4.8 hereto).
*4.11 Specimen Term A Note evidencing the Term A credit advances under the Credit Agreement (included in
Exhibit 4.8 hereto).
*4.12 Specimen Term B Note evidencing the Term B credit advances under the Credit Agreement (included in
Exhibit 4.8 hereto).
*4.13 Security Agreement, dated December 3, 1998, among TransDigm Inc., TransDigm Holding Company and Marathon
Power Technologies Company and Bankers Trust Company, as the administrative agent under the Credit
Agreement.
*4.14 Pledge Agreement, dated December 3, 1998, among TransDigm Inc., TransDigm Holding Company and Marathon
Power Technologies Company and Bankers Trust Company, as the administrative agent under the Credit
Agreement.
*4.15 Form of Assignment of Security Interest in United States Copyrights by TransDigm Inc., TransDigm Holding
Company and Marathon Power Technologies Company for the benefit of Bankers Trust Company, as the
administrative agent under the Credit Agreement (included in Exhibit 4.13 hereto).
*4.16 Form of Assignment of Security Interest in United States Trademarks and Patents by TransDigm Inc.,
TransDigm Holding Company and Marathon Power Technologies Company for the benefit of Bankers Trust
Company, as the administrative agent under the Credit Agreement (included in Exhibit 4.13 hereto).
+5.1 Opinion of Latham & Watkins regarding the validity of the New Notes.
+10.1 Stockholders' Agreement, dated , 1999, by and among TransDigm Holding Company, Odyssey
Investment Partners Fund, LP, Odyssey Coinvestors, LLC, KIA IV-TD, LLC and Kelso Equity Partners II,
L.P.
*10.2 Stockholders' Agreement, dated December 3, 1998, by and among TransDigm Holding Company, Odyssey
Investment Partners Fund and certain employee stockholders of TransDigm Holding Company.
*10.3 Tax Allocation Agreement, dated December 3, 1998, between TransDigm Holding Company and TransDigm Inc.
+10.4 Employment Agreement, dated , 1999, between TransDigm Holding Company and Douglas W.
Peacock.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
+10.5 Employment Agreement, dated , 1999, between TransDigm Holding Company and W. Nicholas
Howley.
*10.6 TransDigm Inc. Senior Executive Benefits Plan.
+10.7 Annual Incentive Compensation Plan for Key Management Employees of TransDigm Inc.
*12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.
*12.2 Statement of Computation of Ratio of EBITDA, As Defined, to Cash Interest Expense.
*12.3 Statement of Computation of Ratio of EBITDA, As Defined, less Capital Expenditures to Cash Interest
Expense.
*12.4 Statement of Computation of Ratio of Total Debt to EBITDA.
+21.1 Subsidiaries of TransDigm Holding Company.
+23.1 Consent of Latham & Watkins (included in their opinion filed as Exhibit 5.1 hereto).
23.2 Consent of Deloitte & Touche LLP.
*23.3 Consent of PricewaterhouseCoopers LLP.
*24.1 Power of Attorney of TransDigm Holding Company, TransDigm Inc. and Marathon Power Technologies (included
on signature pages to this Registration Statement on Form S-4).
+25.1 Statement of Eligibility and Qualification (form T-1) under the Trust Indenture Act of 1939 of State
Street Bank and Trust Company.
*27.1 Financial Data Schedule.
+99.1 Form of Letter of Transmittal and related documents to be used in conjunction with the exchange offer.
</TABLE>
- ------------------------
+ To be filed as an amendment
* Previously filed
<PAGE>
Exhibit 4.9.
FIRST AMENDMENT
FIRST AMENDMENT (this "Amendment"), dated as of December 10,
1998, among TRANSDIGM HOLDING COMPANY, a Delaware corporation ("Holdings"),
TRANSDIGM INC., a Delaware corporation (the "Borrower"), the lenders party to
the Credit Agreement referred to below on the date hereof and immediately before
giving effect to this Amendment (the "Existing Lenders"), BANKERS TRUST COMPANY,
as Administrative Agent (the "Administrative Agent"), and each of the lenders
listed on Schedule A hereto (the "New Lenders"). All capitalized terms used
herein and not otherwise defined shall have the respective meanings provided
such terms in the Credit Agreement referred to below.
W I T N E S S E T H :
WHEREAS, Holdings, the Borrower, the Existing Lenders and the
Agent are parties to a Credit Agreement, dated as of December 3, 1998 (the
"Credit Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement
as herein provided;
NOW, THEREFORE, it is agreed:
1. Each of the Existing Lenders severally and not jointly
hereby sells and assigns to each of the New Lenders without recourse and without
representation or warranty (other than as expressly provided herein), and each
New Lender hereby purchases and assumes from each of the Existing Lenders, that
interest in and to each of such Existing Lender's rights and obligations in
respect of those Tranches of Loans set forth on Schedule B hereto under the
Credit Agreement as of the date hereof which in the aggregate represents such
New Lender's PRO RATA share (for each such New Lender, its "Pro Rata Share") in
such Tranches of Loans as set forth on such Schedule B (calculated after giving
effect to this Amendment), and such Pro Rata Share represents all of the
outstanding rights and obligations under the Credit Agreement in respect of the
Tranches of Loans that are being sold and assigned to each New Lender pursuant
to this Amendment, including, without limitation, in the case of any assignment
of outstanding A Term Loans, B Term Loans and/or portion of the Total Revolving
Loan Commitment, all rights and obligations with respect to such New Lender's
Pro Rata Share of such outstanding A Term Loans, B Term Loans and/or portion of
the Total Revolving Loan Commitment, respectively. After giving effect to this
Amendment, each Lender's outstanding A Term Loans, B Term Loans and Revolving
Loan Commitment will be as set forth on Schedule C hereto.
2. In accordance with the requirements of Section 13.04(b) of
the Credit Agreement, on the First Amendment Effective Date (as defined below),
(i) the Credit Agreement shall be amended by deleting Annex I thereto in its
entirety and by inserting in lieu thereof a new Annex I in the form of Schedule
C hereto and (ii) the Borrower agrees that it will issue an appropriate A Term
Note, B Term Note and Revolving Note, as applicable, to each Lender who
<PAGE>
so requests such Note or Notes in conformity with the requirements of Section
1.05 of the Credit Agreement.
3. On and after the First Amendment Effective Date, Annex II
to the Credit Agreement shall be amended by deleting such Annex in its entirety
and inserting in lieu thereof a new Annex II in the form of Schedule D hereto.
4. Each Existing Lender (i) represents and warrants that it is
the legal and beneficial owner of the interest being assigned by it hereunder
and that such interest is free and clear of any adverse claim; (ii) makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with the
Credit Agreement or the other Credit Documents or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of the Credit
Agreement or the other Credit Documents or any other instrument or document
furnished pursuant thereto; and (iii) makes no representation or warranty and
assumes no responsibility with respect to the financial condition of Holdings or
any of its Subsidiaries or the performance or observance by Holdings or any of
its Subsidiaries of any of their obligations under the Credit Agreement or the
other Credit Documents to which any such Person is a party or any other
instrument or document furnished pursuant thereto.
5. Each New Lender (i) confirms that it has received a copy of
the Credit Agreement and the other Credit Documents, together with copies of the
financial statements referred to therein and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Amendment; (ii) agrees that it will, independently
and without reliance upon the Agent or any other Lender and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under the Credit
Agreement; (iii) confirms that it is an Eligible Transferee under Section
13.04(b) of the Credit Agreement; (iv) appoints and authorizes the
Administrative Agent and the Collateral Agent to take such action as agent on
its behalf and to exercise such powers under the Credit Agreement and the other
Credit Documents as are delegated to the Administrative Agent and the Collateral
Agent by the terms thereof, together with such powers as are reasonably
incidental thereto; (v) agrees that it will perform in accordance with their
terms all of the obligations which by the terms of the Credit Agreement are
required to be performed by it as a Lender; and (vi) to the extent legally
entitled to do so, agrees to promptly submit the forms described in Section
13.04(b) of the Credit Agreement.
6. Each of the Existing Lenders, the New Lenders and the
Administrative Agent hereby agree that (A) all amounts accrued with respect to
the A Term Loans, B Term Loans, outstanding Revolving Loans and the Total
Unutilized Revolving Loan Commitment prior to the delivery by such New Lender of
the amount referred to in clause (ii) of Section 11 of this Amendment shall be
for the account of the Existing Lenders, respectively, and that all such amounts
accrued on and after the delivery of such amounts referred to in clause (ii) of
such Section 11 shall be for the account of such New Lender based upon its
relevant Pro Rata Share and (B) the Documentation Agent shall not have any
duties under the Credit Documents other than in its capacity as a Lender except
as may be specifically assigned from time to time after the First Amendment
Effective Date with the consent of the Documentation Agent.
<PAGE>
7. In accordance with Section 13.04(b) of the Credit
Agreement, on and as of the date upon which each of the New Lenders delivers the
amounts referred to in clause (ii) of Section 11 of this Amendment, each New
Lender shall become a "Lender" under, and for all purposes of, the Credit
Agreement and the other Credit Documents and the Administrative Agent shall
record the transfers contemplated hereby in the Register.
8. This Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement or any other Credit Document.
9. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with the Borrower and the Agent.
10. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK.
11. Subject to Section 12 of this Amendment, this Amendment
shall become effective on the date (the "First Amendment Effective Date") when
(i) Holdings, the Borrower, the Administrative Agent, each Existing Lender and
each New Lender shall have signed a counterpart hereof (whether the same or
different counterparts) and shall have delivered (including by way of facsimile
transmission) the same to the Administrative Agent at the Notice Office and (ii)
each New Lender shall have delivered to the Administrative Agent, for the
respective accounts of the Existing Lenders, an amount equal to such New
Lender's relevant Pro Rata Share of the outstanding A Term Loans, B Term Loans
and/or Revolving Loans being assigned to such New Lender.
12. Notwithstanding Section 11 of this Amendment, if for any
reason any New Lender shall not have (i) signed a counterpart hereof and
delivered the same to the Administrative Agent at the Notice Office and (ii)
delivered to the Administrative Agent an amount equal to such New Lender's
relevant Pro Rata Share of the outstanding A Term Loans, B Term Loans and/or
Revolving Loans being assigned to such New Lender, in each case on or prior to
December 10, 1998, then, if each Existing Lender agrees, this Amendment shall
become effective notwithstanding such failure, provided that (x) Schedule C
shall be modified to delete any such New Lender and such New Lender's relevant
Pro Rata Share shall be reallocated among the Existing Lenders in such manner as
the Existing Lenders shall agree and (y) the signature pages of this Amendment
shall be deemed revised to delete such New Lender's name therefrom.
13. From and after the First Amendment Effective Date, all
references in the Credit Agreement and each of the Credit Documents to the
Credit Agreement shall be deemed to be references to the Credit Agreement as
amended hereby.
* * *
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
TRANSDIGM HOLDING COMPANY
By
-------------------------------------
Title:
TRANSDIGM INC.
By
-------------------------------------
Title:
BANKERS TRUST COMPANY,
Individually and as Administrative Agent
By
-------------------------------------
Title:
CREDIT SUISSE FIRST BOSTON,
Individually and as Syndication Agent
By
-------------------------------------
Title:
By:
-------------------------------------
Title:
<PAGE>
NEW LENDERS:
BANK OF NOVA SCOTIA
By
-------------------------------------
Title:
FLEET NATIONAL BANK,
Individually and as Documentation Agent
By
-------------------------------------
Title:
NBD BANK
By
-------------------------------------
Title:
GENERAL ELECTRIC CAPITAL CORPORATION
By
-------------------------------------
Title:
HELLER FINANCIAL, INC.
By
-------------------------------------
Title:
NATIONAL CITY BANK
By
-------------------------------------
Title:
-5-
<PAGE>
FIRST DOMINION CAPITAL
By
-------------------------------------
Title:
INDOSUEZ CAPITAL FUNDING II A, LIMITED
By
-------------------------------------
Title:
INDOSUEZ CAPITAL FUNDING IV, L.P.
By:
-------------------------------------
Title:
PARIBAS CAPITAL FUNDING LLC
By:
-------------------------------------
Title:
SANKATY HIGH YIELD ASSET PARTNERS, L.P.
By
-------------------------------------
Title:
-6-
<PAGE>
<TABLE>
<CAPTION>
Schedule A
to
FIRST AMENDMENT
NEW LENDERS
<S> <C> <C>
Bank of Nova Scotia
Fleet National Bank
NBD Bank
General Electric Capital Corporation
Heller Financial, Inc.
National City Bank
Indosuez Capital Funding
Paribas Capital LLC
Sankaty High Yield Asset Partners, L.P.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE B
to
FIRST AMENDMENT
RELEVANT PERCENTAGES
LENDER A TERM LOANS B TERM LOANS REVOLVING LOANS
- ------ ------------ ------------ ---------------
<S> <C> <C> <C>
Bankers Trust Company 17.05% 20.02777777778% 17.05%
Credit Suisse First Boston 13.95% 2.75% 13.95%
Bank of Nova Scotia 13.333333333% 13.33333333333%
Fleet National Bank 9.166666667% 9.166666666667% 9.166666666667%
NBD Bank 13.333333333% 13.33333333333%
General Electric Capital
Corporation 9.166666667% 9.166666666667% 9.166666666667%
Heller Financial, Inc. 12% 4.444444444444% 12%
National City Bank 12% 4.444444444444% 12%
Indosuez Capital Funding II A,
Limited 8.333333333333%
Indosuez Capital Funding IV,
L.P. 8.333333333333%
Paribas Capital 16.66666666667%
Sankaty High Yield 16.66666666667%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Schedule C
to
FIRST AMENDMENT
COMMITMENTS
Outstanding Outstanding Outstanding
LENDER A TERM LOANS B TERM LOANS REVOLVING LOANS
- ------ ------------- ------------ ---------------
<S> <C> <C> <C>
Bankers Trust Company $7,672,500 $ 9,012,500 $5,115,000
Credit Suisse First Boston $6,277,500 $1,237,500 $4,185,000
Bank of Nova Scotia $6,000,000 $0 $4,000,000
Fleet National Bank $4,125,000 $4,125,000 $2,750,000
NBD Bank $6,000,000 $0 $4,000,000
General Electric Capital Corporation $4,125,000 $4,125,000 $2,750,000
Heller Financial Inc. $5,400,000 $2,000,000 $3,600,000
National City Bank $5,400,000 $2,000,000 $3,600,000
Indosuez Capital Funding II A, Limited $0 $3,750,000 $0
Indosuez Capital Funding IV, L.P. $0 $3,750,000 $0
Paribas Capital LLC $0 7,500,000 $0
Sankaty High Yield Asset Partners, L.P. $0 7,500,000 $0
Total: $45,000,000 $45,000,000 $30,000,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Schedule D
to
FIRST AMENDMENT
LENDER ADDRESSES
<S> <C>
BANKERS TRUST COMPANY 130 Liberty Street
New York, NY 10006
Attention: Greg Shefrin
Telephone No.: (212) 250-1724
Facsimile No.: (212) 250-7218
CREDIT SUISSE FIRST BOSTON 11 Madison Avenue
New York, NY 10010
Attention: Bill O'Daly
Telephone No.: (212) 325-9909
Facsimile No.: (212) 325-8388
BANK OF NOVA SCOTIA One Liberty Plaza
New York, NY 10006
Attention: Robert Gaviglio
Telephone No.: (212) 225-5054
Facsimile No.: (212) 225-5090
FLEET BANK One Federal Street
Mail Stop: MA OF D03C
Boston, MA 02110
Attention: Jim Silva
Telephone No.: (617) 346-4399
Facsimile No.: (617) 346-4806
NBD BANK 611 Woodward Street
Detroit, MI 48226
Attention: Paul DeMelo
Telephone No.: (313) 225-2520
Facsimile No.: (313) 225-1212
GE CAPITAL CORPORATION 335 Madison Avenue
New York, NY 10017
Attention: Kenneth Li
Telephone No.: (212) 370-8040
Facsimile No.: (212) 983-8767
HELLER FINANCIAL INC. 500 West Monroe Street
Chicago, IL 60661
Attention: Linda Wolf
Telephone No.: (312) 441-7894
Facsimile No.: (312) 441-7357
</TABLE>
<PAGE>
Schedule D
Page 2
<TABLE>
<S> <C>
NATIONAL CITY BANK 1900 East North Street
7th Floor
Cleveland, OH 44114
Attention: Joseph Robinson
Telephone No.: (216) 575-9254
Facsimile No.: (216) 575-9396
INDOSUEZ CAPITAL FUNDING 1211 Avenue of the Americas
New York, NY 10036
Attention: Maklikah Buchweitz
Telephone No.: (212) 278-2213
Facsimile No.: (212) 278-2254
PARIBAS CAPITAL LLC 787 Seventh Avenue
New York, NY 10019
Attention: Francois Gauvin
Telephone No.: (212) 841-2548
Facsimile No.: (212) 841-2363
SANKATY HIGH YIELD ASSET PARTNERS, 2 Copley Place
L.P. Boston, MA 02116
Attention: Diane Exter
Telephone No.: (617) 572-3216
Facsimile No.: (617) 572-3274
</TABLE>
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-71397, relating to $125,000,000 of 10-3/8% Senior Subordinated Notes
due 2008, of TransDigm Inc. on Form S-4 of our report dated November 9, 1998
(except for Note 18 for which the date is December 3, 1998) relating to the
consolidated financial statements of TransDigm Holding Company appearing in
the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Summary Historical
and Pro Forma Financial Data," "Selected Historical and Pro Forma Consolidated
Financial Data" and "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Cleveland, Ohio
February 5, 1999
