<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
RULE 424(A) PROSPECTUS
REGISTRATION NO. 033-52255
SUBJECT TO COMPLETION
AUGUST 1, 1994
INTERNATIONAL CONTROLS CORP.
$200,000,000 % First Priority Senior Secured Notes due 2001
100,000 Units consisting of $100,000,000 % Senior Subordinated Notes due 2004
and Warrants to Purchase Shares of Common Stock
-----------
International Controls Corp. ("International Controls") and certain of its
subsidiaries (each, an "Issuer," and together with International Controls, the
"Issuers") are hereby offering on a joint and several basis (the "Senior Note
Offering") $200,000,000 aggregate principal amount of % First Priority Senior
Secured Notes due 2001 (the "Senior Notes"). In addition, International Controls
is hereby offering (the "Unit Offering," and together with the Senior Note
Offering, the "Offering") 100,000 units (the "Units"), each consisting of $1,000
principal amount of International Controls' % Senior Subordinated Notes due
2004 (the "Senior Subordinated Notes," and together with the Senior Notes, the
"Notes") and one warrant to purchase initially shares of common stock,
par value $.01 per share (the "Common Stock"), of International Controls (each a
"Warrant," and the Warrants, together with the Notes and the Units, the
"Securities"). The Senior Subordinated Notes and the Warrants will not be
separately transferable until February 15, 1995 or such earlier date as (i) the
Underwriters may determine or (ii) the Warrants become exercisable (the
"Separation Date").
Interest on the Senior Notes is payable in cash semi-annually on May 1 and
November 1 of each year, commencing November 1, 1994. Interest on the Senior
Subordinated Notes is payable in cash semi-annually on February 1 and August 1
of each year, commencing February 1, 1995. The Senior Notes will be redeemable
at the option of the Issuers, in whole or in part, at any time on or after
November 1, 1998, and the Senior Subordinated Notes will be redeemable at the
option of International Controls, in whole or in part, at any time on or after
August 1, 1999, in each case at the respective redemption prices set forth
herein, together with accrued and unpaid interest, if any, to the date of
redemption. Upon a Change of Control (as defined herein), (i) holders of the
Senior Notes may require the Issuers to repurchase the Senior Notes and (ii)
holders of the Senior Subordinated Notes may require International Controls to
repurchase the Senior Subordinated Notes, in each case at a redemption price
equal to 101% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of repurchase. In addition, the Senior Notes will
be subject to mandatory annual sinking fund payments of $10 million payable on
November 1 in each of the years 1995 through 2000.
The Issuers will be required to apply up to $40 million of the aggregate net
proceeds to International Controls of any Public Offering (as defined herein)
effected through November 1, 1999 to the redemption of the Senior Notes at a
redemption price equal to % of the principal amount of such Senior Notes,
together with accrued and unpaid interest, if any, to the date of redemption.
The Issuers, in the case of the Senior Notes, or International Controls, in the
case of the Senior Subordinated Notes, will have the option to apply the
aggregate net proceeds in excess of $40 million of any Public Offering effected
through August 1, 1997 to the redemption of (i) up to $20 million aggregate
principal amount of the Senior Notes and (ii) up to $30 million aggregate
principal amount of the Senior Subordinated Notes, at redemption prices equal to
% of the principal amount of the Senior Notes and % of the principal
amount of the Senior Subordinated Notes, as the case may be, in each case
together with any accrued and unpaid interest, if any, to the date of
redemption; PROVIDED that $110 million in aggregate principal amount of the
Senior Notes or $70 million in aggregate principal amount of the Senior
Subordinated Notes, as the case may be, remains outstanding immediately
following such redemption.
Any redemptions (whether mandatory or optional) of the Senior Notes other
than sinking fund payments shall be applied first against the aggregate
principal amount of the Senior Notes which become due and payable at maturity
and thereafter against sinking fund payments in inverse order of payment.
The Senior Notes will be senior secured obligations of the Issuers and will
rank PARI PASSU in right of payment with all other senior indebtedness of the
Issuers and senior in right of payment to all subordinated indebtedness of the
Issuers. The Senior Notes will be secured by a first priority security interest
in a substantial portion of the Issuers' real property, property and equipment
and other assets, including 1,350 taxi medallions, but excluding inventory,
accounts receivable and certain other assets (which will be subject to a lien
under the New Credit Facility (as defined herein)). The Senior Notes will also
be secured by a pledge of all the outstanding shares of capital stock (the
"Pledged Stock") of subsidiaries of International Controls now or hereafter
directly or indirectly owned by International Controls (other than the capital
stock of American Country Insurance Company and its subsidiaries) and a lien on
certain patents, trademarks and other intellectual property of the Issuers, in
each case on an equal and ratable basis with the security interest securing the
obligations of the Issuers under the New Credit Facility.
The Senior Subordinated Notes will be senior subordinated obligations of
International Controls and will be subordinated in right of payment to all
senior indebtedness (including, without limitation, the Senior Notes and the
obligations under the New Credit Facility); PROVIDED, HOWEVER, that the Senior
Subordinated Notes will rank PARI PASSU with or senior in right of payment to
all existing and future indebtedness of International Controls that is expressly
subordinated to senior indebtedness. Since International Controls is a holding
company, the Senior Subordinated Notes will be effectively subordinated to all
existing and future liabilities of International Controls' subsidiaries. After
giving effect to the application of the estimated net proceeds of the Offering
and the other transactions contemplated hereby (the "Refinancing"),
International Controls would have had outstanding consolidated indebtedness of
$348.4 million at March 31, 1994, including approximately $48.4 million of
secured revolving credit indebtedness estimated to be drawn under the New Credit
Facility, and the subsidiaries of International Controls would have had total
liabilities (including trade payables and indebtedness under the New Credit
Facility and the Senior Notes) of $541.5 million.
Each Warrant will initially entitle the holder thereof to purchase shares
of Common Stock of International Controls at an exercise price of $.01 per
share, which represent in the aggregate 7.5% of the outstanding Common Stock of
International Controls on a fully diluted basis as of the date of issuance of
the Warrants. In the event that an Initial Public Offering (as defined herein)
is not consummated on or prior to , 1995, the number of shares
purchasable per Warrant will be increased to shares of Common Stock of
International Controls, which represent in the aggregate 10.0% of the
outstanding Common Stock of International Controls on a fully diluted basis as
of the date of issuance of the Warrants. The Warrants will become exercisable on
February 1, 2004, or upon the earlier occurrence of (i) a Change of Control or
(ii) an Initial Public Offering.
The New York Stock Exchange has approved the listing of the Senior Notes,
subject to the satisfaction of certain listing requirements. After the
Separation Date, International Controls intends to apply to list the Senior
Subordinated Notes on the New York Stock Exchange. There can be no assurance
that the Notes will be listed.
--------------------
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE COMMISSIONER OF INSURANCE OF THE STATE OF NORTH CAROLINA HAS NOT APPROVED OR
DISAPPROVED THIS OFFERING NOR HAS THE COMMISSIONER PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS.
<TABLE>
<CAPTION>
PRICE
TO UNDERWRITING
PUBLIC(1) DISCOUNTS(2)
<S> <C> <C>
Per Senior Note......................................................... % %
Total................................................................... $ $
Per Unit................................................................ $ %
Total................................................................... $ $
<CAPTION>
PROCEEDS
TO
THE ISSUERS(3)
<S> <C>
Per Senior Note......................................................... %
Total................................................................... $
Per Unit................................................................ %
Total................................................................... $
<FN>
(1) Plus accrued interest, if any, from , 1994.
(2) See "Underwriting" for information regarding the indemnification of the
Underwriters.
(3) Before deducting expenses payable by the Issuers estimated at $ .
</TABLE>
--------------------
The Securities are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by them and subject to various prior
conditions, including the right of the Underwriters to reject any order in whole
or in part. It is expected that delivery of the Securities will be made at the
offices of Alex. Brown & Sons Incorporated, New York, New York on or about
, 1994.
ALEX. BROWN & SONS SPP HAMBRO & CO.
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1994
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES, THE
UNITS AND/OR THE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
AVAILABLE INFORMATION
The Issuers have filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all amendments
and exhibits thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Securities. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Statements made in this Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete; with respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matters involved, and each such statement
shall be deemed qualified in its entirety by this reference.
International Controls is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder, and in accordance therewith files
reports, proxy statements (if required) and other information with the
Commission. Such reports, proxy statements and other information, including the
Registration Statement, may be inspected and copied (at prescribed rates) at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and at the Commission's Regional Offices
located at Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New
York 10048. International Controls' 12 3/4% Senior Subordinated Debentures due
2001 and its Subordinated Discount Debentures due January 1, 2006 are listed on
the American Stock Exchange. Reports, proxy statements, and other information
can also be inspected at the office of the American Stock Exchange, 86 Trinity
Place, New York, New York 10006-1881.
The Issuers will furnish holders of the Securities with copies of reports,
proxy statements or other information as specified in "Description of Warrants
- -- Reports," "Description of Notes -- Certain Covenants -- Provision of
Financial Statements."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS
PROSPECTUS TO (I) THE "ISSUERS," IN THE CASE OF THE SENIOR NOTES, MEAN
INTERNATIONAL CONTROLS CORP. ("INTERNATIONAL CONTROLS"), CHECKER MOTORS
CORPORATION ("MOTORS"), CHECKER MOTORS CO., L.P. ("CHECKER L.P."), CMC KALAMAZOO
INC., YELLOW CAB COMPANY, CHICAGO AUTOWERKS INC., SOUTH CHARLESTON STAMPING &
MANUFACTURING COMPANY ("SCSM"), GREAT DANE TRAILERS, INC. ("GREAT DANE"), GREAT
DANE TRAILERS TENNESSEE, INC., GREAT DANE TRAILERS NEBRASKA, INC. AND GREAT DANE
LOS ANGELES, INC., (II) THE "ISSUERS," IN THE CASE OF THE SENIOR SUBORDINATED
NOTES, MEAN ONLY INTERNATIONAL CONTROLS, AND (III) THE "COMPANY" MEAN
INTERNATIONAL CONTROLS AND ITS CONSOLIDATED SUBSIDIARIES (WHICH FOR THIS PURPOSE
INCLUDES A PARTNERSHIP WHICH IS CONTROLLED BY INTERNATIONAL CONTROLS).
THE COMPANY
OVERVIEW
International Controls is a holding company that is engaged in four
principal lines of business. Great Dane manufactures a full line of truck
trailers for the over-the-road tractor trailer long and short haul markets and
containers and chassis for intermodal shipping. Motors manufactures sheet metal
stampings for automotive components and subassemblies, primarily for General
Motors Corporation ("GM"). The Company's Yellow Cab Company division ("Yellow
Cab") is currently the largest owner of taxicabs and provider of taxi-related
services in Chicago, Illinois. American Country Insurance Company ("Country")
underwrites property and casualty insurance, including taxicab insurance,
workers' compensation and other commercial and personal lines.
Prior to 1987, International Controls engaged in various engineering,
aerospace and manufacturing operations, including truck trailer manufacturing.
In 1987, International Controls was taken private in a leveraged buyout
transaction and initiated a plan of divestitures to reduce bank debt. In 1989,
with Great Dane as its only remaining business, International Controls acquired
Motors and immediately thereafter, the major shareholders of Motors obtained
control of International Controls through a reverse acquisition (the "Reverse
Acquisition").
TRAILER MANUFACTURING
Great Dane, which generated approximately 78% of the Company's revenues and
62% of the Company's total segment operating profit (segment gross profit less
selling, general and administrative expenses) for the year ended December 31,
1993, designs, manufactures and distributes a full line of both standard and
customized truck trailers (including dry freight vans, refrigerated trailers
("reefers") and platform trailers) and intermodal containers and chassis. In
1993, Great Dane was the largest manufacturer of truck trailers in the United
States with a 12.7% total market share, including an estimated leading 37.9%
share of the reefer market and a 23.3% share of the intermodal container and
chassis market. Great Dane believes it offers the broadest line of products in
the industry and emphasizes the production of customized and proprietary
products which generally have higher margins than more standard products. Great
Dane sells and services its trailers primarily through a nationwide network of
branches and independent dealers to gain access to a diversified customer base.
During the past several years, Great Dane has undertaken a number of
strategic initiatives designed to improve its competitive position and
capitalize on the growing intermodal container and chassis market. Accordingly,
Great Dane reduced corporate overhead through management consolidation,
increased operating efficiencies and capacity through plant reconfigurations,
and initiated product cost reduction and new product development programs. Great
Dane also increased its manufacturing flexibility by adapting certain of its
assembly lines to be efficient in filling both large and small orders, and
expanded its distribution network domestically, as well as in Canada and Mexico,
in order to provide new outlets for its products and high margin parts and
services business.
3
<PAGE>
Furthermore, during 1992, Great Dane entered the intermodal container and
chassis market as its engineering department, working in conjunction with J.B.
Hunt Transport ("J.B. Hunt"), one of the largest truckload carriers in the U.S.,
developed a unique line of intermodal containers and matching ultra lightweight
chassis. "Intermodal containers," as used in this Prospectus, refers to
containers which are designed to travel principally on rail car, and which, when
removed from the rail car, can be placed on a chassis for transportation by
truck to and from a rail yard. These products enable Great Dane's customers to
take advantage of new double stack intermodal shipping methods, generally the
most economical method of hauling freight over long and intermediate distances.
Great Dane believes that intermodal transportation, which has been expanding at
an approximately 10% compounded annual growth rate since 1988, will provide a
significant growth opportunity as carriers replace some or all of their trailers
with containers and chassis.
Great Dane's objectives are to increase its share of the truck trailer
market and continue to capitalize on the growing intermodal market. To achieve
these objectives, Great Dane will continue to emphasize the development of high
quality innovative products and improve the efficiency of its assembly
operations. Great Dane is presently adapting certain of its assembly lines to
produce either intermodal containers or truck trailers on the same line. In
addition, Great Dane plans to utilize its expanded distribution network and
manufacturing flexibility to broaden its customer base by increasing sales to
large customers.
AUTOMOTIVE PRODUCTS OPERATIONS
Through SCSM and its Kalamazoo, Michigan facility ("CMC Kalamazoo"), Motors,
together with its customers, develops, designs and manufactures a broad range of
sheet metal automotive components and subassemblies, including tailgates,
fenders, doors, roofs and hoods, primarily for sale to North American original
equipment manufacturers ("OEMs"). These operations generated approximately 14%
of the Company's revenues and 29% of the Company's total segment operating
profit for the year ended December 31, 1993. Motors focuses on the higher-growth
light truck, sports utility vehicle and van segments of the market and currently
supplies products primarily to GM. Other customers include Freightliner Corp.
and Saturn Corporation, and SCSM recently signed a contract with Mercedes-Benz
to produce parts for its new sports utility vehicle commencing in 1996 for the
1997 model year.
Through the purchase of SCSM in 1989 and the expansion of that facility's
press lines, Motors acquired a modernized stamping facility covering an area of
more than 900,000 square feet. Unlike many of its competitors, SCSM presently
has the equipment to supply complete assemblies including large stampings and
related assembly parts. SCSM provides a full complement of services, including
design, engineering and manufacturing, which enables the Company to play an
integral role in the development and execution of product programs for its
customers. SCSM's ability to provide customer service, timely delivery and
quality products at competitive prices has resulted in the receipt of GM's "Mark
of Excellence" award.
VEHICULAR OPERATIONS
The vehicular operations generated approximately 5% of the Company's
revenues and 12% of the Company's total segment operating profit during the year
ended December 31, 1993. Yellow Cab is the largest taxicab fleet owner in the
City of Chicago ("Chicago") and, as of March 31, 1994, owned approximately 2,370
or 44% of the 5,400 taxicab licenses ("licenses" or "medallions") available in
Chicago. Yellow Cab's primary business is the leasing of its medallions and
vehicles to independent taxi operators through two programs: the owner-operator
program and the daily lease program. In contrast to the daily lease program, the
owner-operator program, which covers approximately 65% of the medallions owned
by the Company, relieves Yellow Cab of vehicle maintenance and repair costs, as
well as the cost of housing and storing a large fleet. The Company also provides
a variety of other services to taxi drivers and non-affiliated medallion
holders, including insurance coverage through Country and repair and maintenance
services through Chicago AutoWerks.
4
<PAGE>
INSURANCE OPERATIONS
Country generated approximately 3% of the Company's revenues and an
aggregate of $3.9 million of pre-tax income (comprising approximately $2.0
million of segment operating loss and approximately $5.9 million of portfolio
interest income) during the year ended December 31, 1993. During 1993, 67% of
Country's total premium revenue was attributable to non-affiliated
property/casualty lines, primarily workers' compensation, commercial automobile
and commercial multiple peril. The remainder of Country's premium revenues was
attributable to affiliated taxi liability, collision and workers' compensation
insurance in the State of Illinois. Through its longstanding relationship with
Yellow Cab, Country has developed a comprehensive understanding of the
associated risks of taxicab insurance underwriting and presently is one of the
few voluntary providers of such insurance. Country's strategy is to expand its
non-affiliated personal and commercial/casualty property lines by entering new
markets including Southern Illinois and the states surrounding Illinois while
maintaining its affiliated taxi liability and collision business. Country is
currently rated "A" by A.M. Best.
PROPOSED REFINANCING
The Company is implementing a refinancing (the "Refinancing") designed (a)
to increase its liquidity through (i) reduced amortization requirements and (ii)
the removal of certain restrictions on the use of cash from the Company's
subsidiaries providing for more flexible and efficient cash management and (b)
to simplify its corporate structure, thereby enhancing its ability to obtain
future financing. The Refinancing includes the following (all amounts are as of
March 31, 1994):
(A) the offering of the Securities;
(B) the entering into the New Credit Facility by the Issuers, consisting
of a revolving credit facility and pursuant to which an initial borrowing of
approximately $48.4 million (the "Initial Borrowing") will be made;
(C) the repayment of substantially all of the indebtedness of
International Controls' subsidiaries in the aggregate principal amount of
approximately $86.0 million;
(D) the redemption of all of the approximately $132.0 million
outstanding aggregate principal amount of International Controls' 12 3/4%
Senior Subordinated Debentures due 2001 (the "12 3/4% Debentures") at
103.18% of their principal amount, together with accrued and unpaid interest
to the date of redemption (the "12 3/4% Debenture Redemption");
(E) the redemption of all of the approximately $61.3 million outstanding
aggregate principal amount of International Controls' Subordinated Discount
Debentures due January 1, 2006 (the "14 1/2% Debentures") at their principal
amount, together with accrued and unpaid interest to the date of redemption
(the "14 1/2% Debenture Redemption");
(F) the redemption of all of the outstanding $30.0 million aggregate
principal amount of International Controls' senior notes (the "Existing
Notes") bearing interest at an annual rate of 3.5% above the prime rate of
interest, held by the stockholders of International Controls, maturing on
the earlier of September 30, 1997 or the payment in full of certain
subsidiary indebtedness (the "Existing Note Redemption"); and
(G) the redemption for $37.0 million (the "Minority Interest
Redemption") of the minority capital account in Checker L.P. which was being
amortized over a twenty-five year period, ending in December 2013, with
interest at a rate of 7.0%, and any minority equity interest in Checker L.P.
Simultaneously with the consummation of the Minority Interest Redemption,
Checker L.P. will be liquidated and its assets distributed to Motors, which will
immediately contribute these assets (except for the capital stock of Country) to
three newly-formed subsidiaries, CMC Kalamazoo Inc., Yellow Cab Company and
Chicago AutoWerks Inc., each of which is an Issuer.
See "Proposed Refinancing," "Use of Proceeds" and "Capitalization."
Before giving effect to the Refinancing, scheduled principal payments on
outstanding indebtedness in each of the five years ending December 31, 1998 are
$19.3 million, $44.4 million, $9.1 million, $54.1 million and $19.6 million,
respectively. After giving effect to the Refinancing, scheduled principal
payments on outstanding indebtedness for each of the next five years would be
$10 million, consisting of mandatory sinking fund payments with respect to the
Senior Notes. In addition, up to $40 million of the Senior Notes are required to
be redeemed in the event the Company effects any Public Offering during this
period. See "Description of Notes -- Sinking Fund," "-- Mandatory Redemption"
and "-- Additional Optional Redemptions."
5
<PAGE>
ORGANIZATION
The chart below sets forth the corporate structure of the Company after
giving effect to the Refinancing:
[CHART]
[See Appendix A]
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ $200,000,000 principal amount of % First Priority
Senior Secured Notes due 2001 of the Issuers and 100,000
Units, each consisting of $1,000 principal amount of
% Senior Subordinated Notes due 2004 of International
Controls and one Warrant to purchase initially
shares of Common Stock of International Controls. The
Senior Subordinated Notes and the Warrants will not
trade separately until February 15, 1995 or such earlier
date as (i) the Underwriters may determine or (ii) the
Warrants become exercisable. See "Description of Notes,"
"Description of Units" and "Description of Warrants."
Use of Proceeds................... The Issuers will use the net proceeds from the sale of
the Securities, together with proceeds of an estimated
$48.4 million of initial borrowings under the New Credit
Facility and approximately $22.2 million of Company cash
(assuming the Offering had been consummated on March 31,
1994) to (i) redeem all of the outstanding 12 3/4%
Debentures, (ii) redeem all of the outstanding 14 1/2%
Debentures, (iii) redeem the Existing Notes, (iv) retire
substantially all of the indebtedness of International
Controls' subsidiaries, and (v) redeem the minority
capital account and any minority interest in Checker
L.P. See "Use of Proceeds," "Proposed Refinancing" and
"Business -- Legal Proceedings -- Executive Life Liti-
gation."
</TABLE>
THE SENIOR NOTES
<TABLE>
<S> <C>
Issuers........................... The Senior Notes will be the joint and several
obligations of International Controls, Great Dane, Great
Dane Trailers Tennessee, Inc., Great Dane Trailers
Nebraska, Inc., Great Dane Los Angeles, Inc., Motors,
Checker L.P., CMC Kalamazoo Inc., Yellow Cab Company,
Chicago AutoWerks Inc. and SCSM.
Interest Payment Dates............ May 1 and November 1 of each year, commencing November
1, 1994.
Sinking Fund...................... The Senior Notes will be subject to mandatory annual
sinking fund payments of $10 million on November 1 in
each of the years 1995 through 2000. See "Description of
Notes -- Sinking Fund."
Mandatory Redemption.............. The Issuers will be required to apply up to $40 million
of the net proceeds to International Controls of any
Public Offering effected through November 1, 1999 to the
redemption of the Senior Notes at a redemption price
equal to % of the principal amount of such Senior
Notes, together with accrued and unpaid interest, if
any, to the date of redemption. See "Description of
Notes -- Mandatory Redemption."
Optional Redemption............... The Senior Notes will be redeemable at the option of the
Issuers, in whole or in part, at any time on or after
November 1, 1998, at the redemption prices set forth
herein, together with accrued and unpaid interest, if
any, to the date of redemption. See "Description of
Notes -- Optional Redemption."
Any redemptions (whether mandatory or optional) of the
Senior Notes other than sinking fund payments shall be
applied first against the aggregate principal amount of
the Senior Notes
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
which become due and payable at maturity and thereafter
against sinking fund payments in inverse order of
payment. See "Description of Notes -- Additional
Optional Redemptions."
Security.......................... The Senior Notes will be secured by a first priority
security interest in a substantial portion of the
Issuers' real property, property and equipment and other
assets, including 1,350 taxi medallions, but excluding
inventory, accounts receivable and certain other assets
(which will be subject to a lien under the New Credit
Facility). The Senior Notes will also be secured by a
pledge of the Pledged Stock and a lien on certain
patents, trademarks and other intellectual property of
the Issuers, in each case on an equal and ratable basis
with the security interest securing the obligations of
the Issuers under the New Credit Facility. See
"Description of Notes -- Security for the Senior Notes."
Ranking........................... The Senior Notes will be senior secured obligations of
the Issuers and will rank PARI PASSU in right of payment
with all other senior indebtedness of the Issuers
(including the obligations under the New Credit
Facility) and senior in right of payment to all
subordinated obligations of the Issuers, including the
obligations of International Controls under the Senior
Subordinated Notes.
</TABLE>
THE SENIOR SUBORDINATED NOTES
<TABLE>
<S> <C>
Issuer............................ International Controls.
Interest Payment Dates............ February 1 and August 1 of each year, commencing
February 1, 1995.
Mandatory Redemption.............. None.
Optional Redemption............... The Senior Subordinated Notes are redeemable at the
option of International Controls, in whole or in part,
at any time on or after August 1, 1999, at the
redemption prices set forth herein, plus accrued and
unpaid interest, if any, to the date of redemption. See
"Description of Notes -- Optional Redemption."
Ranking........................... The Senior Subordinated Notes will be senior
subordinated obligations of International Controls and
will be subordinated in right of payment to all senior
indebtedness (including, without limitation, the Senior
Notes and the obligations under the New Credit
Facility); PROVIDED, HOWEVER, that the Senior Subor-
dinated Notes will rank senior in right of payment to
all existing and future indebtedness of International
Controls that is expressly subordinated to senior
indebtedness except for any future indebtedness of
International Controls which expressly provides that it
is PARI PASSU with the Senior Subordinated Notes (and,
until redemption thereof, the 12 3/4% Debentures). Since
International Controls is a holding company, the Senior
Subordinated Notes will also be effectively subordinated
to all existing and future liabilities (including trade
payables and obligations under the Senior Notes and the
New Credit Facility) of International Controls'
subsidiaries, including the Issuers under the Senior
Notes. After giving effect to the Refinancing,
International Controls would have had outstanding $248.4
million of indebtedness at March 31, 1994 ranking senior
in right of payment to the Senior Subordinated Notes,
the subsidiaries
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
would have had total liabilities of $541.5 million and
there would have been no indebtedness junior to the
Senior Subordinated Notes.
</TABLE>
GENERAL PROVISIONS OF THE NOTES
<TABLE>
<S> <C>
Additional Optional Redemptions... The Issuers, in the case of the Senior Notes, or
International Controls, in the case of the Senior
Subordinated Notes, will have the option to apply the
aggregate net proceeds in excess of $40 million of any
Public Offering effected through August 1, 1997 to the
redemption of (i) up to $20 million aggregate principal
amount of the Senior Notes and (ii) up to $30 million
aggregate principal amount of the Senior Subordinated
Notes, at redemption prices equal to % of the
principal amount of the Senior Notes and % of the
principal amount of the Senior Subordinated Notes, as
the case may be, in each case together with accrued and
unpaid interest, if any, to the date of redemption;
PROVIDED that $110 million in aggregate principal amount
of the Senior Notes or $70 million in aggregate princi-
pal amount of the Senior Subordinated Notes, as the case
may be, remain outstanding immediately following such
redemption.
Change of Control................. Upon a Change of Control (as defined in the indentures
governing the Notes (the "Indentures")), each holder of
Notes may require the Issuers, in the case of the Senior
Notes, or International Controls, in the case of the
Senior Subordinated Notes, to repurchase all or a
portion of such holder's Notes at a purchase price equal
to 101% of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date of
repurchase. See "Description of Notes -- Change of
Control."
Certain Restrictions.............. The Indentures will contain covenants with respect to
the following matters: (i) limitations on additional
indebtedness; (ii) limitations on restricted payments;
(iii) limitations on transactions with affiliates; (iv)
limitations on compensation paid to certain affiliates;
(v) the application of the proceeds of certain asset
sales (including the obligation under certain circum-
stances to repurchase the Notes with such proceeds);
(vi) limitations on liens; (vii) limitations on
guarantees by subsidiaries; (viii) limitations on the
issuance and sale of capital stock of subsidiaries; (ix)
limitations on dividends and other payment restrictions
affecting subsidiaries; and (x) restrictions on mergers,
consolidations and transfers of all or substantially all
of the assets of the Issuers and International Controls,
as the case may be, to another person. In addition, the
Senior Subordinated Note Indenture will prohibit the
incurrence of indebtedness that is subordinated to any
senior indebtedness and senior to the Senior
Subordinated Notes. See "Description of Notes -- Certain
Covenants."
Original Issue Discount........... The Senior Subordinated Notes will be issued with
original issue discount for federal income tax purposes.
As a result, purchasers of Senior Subordinated Notes
will be required to recognize such original issue
discount as ordinary income in advance of the receipt of
the cash payments to which such income is attributable.
See "Certain Federal Income Tax Consequences."
</TABLE>
9
<PAGE>
THE WARRANTS
<TABLE>
<S> <C>
Warrants.......................... Each Warrant will initially entitle the holder thereof
to purchase shares of Common Stock of International
Controls at an exercise price of $.01 per share, which
represent in the aggregate 7.5% of the outstanding
Common Stock of International Controls on a fully
diluted basis as of the date of issuance of the
Warrants. In the event that an Initial Public Offering
is not consummated on or prior to , 1995,
the number of shares purchasable per Warrant will be
increased to shares of Common Stock of International
Controls which represent in the aggregate 10.0% of the
outstanding Common Stock of International Controls on a
fully diluted basis as of the date of issuance of the
Warrants.
It is the present intention of International Controls,
subject to various factors including prevailing market
conditions, to effect an Initial Public Offering of its
Common Stock within the next twelve months. There can be
no assurance if or when any such offering will be
consummated. Any such offering will be made only by
means of a prospectus pursuant to a registration state-
ment filed with the Securities and Exchange Commission.
Exercise.......................... The Warrants will become exercisable (an "Exercise
Event") on February 1, 2004, or upon the earlier
occurrence of (i) a Change of Control or (ii) an Initial
Public Offering.
Expiration........................ August 1, 2004.
</TABLE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective purchasers of the Securities should carefully consider the matters
set forth under "Risk Factors" prior to making an investment decision.
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial information set forth below is derived
from the consolidated financial statements of the Company for the years ended
December 31, 1989, 1990, 1991, 1992 and 1993, which have been audited by Ernst &
Young, independent auditors, and from the consolidated financial statements of
the Company for the three-month periods ended March 31, 1993 and 1994. The
summary consolidated financial information provided for the three-month periods
reflects all adjustments (consisting of normal recurring accruals) considered
for a fair presentation of such data. The results of interim periods may not be
indicative of results for the full year. The following summary information
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- ----------------------
1989 1990 1991 1992 1993 1993 1994
--------- ------------ --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Trailer Manufacturing............ $ 575,793 $ 491,532 $ 400,196 $ 536,336 $ 711,862 $ 153,623 $ 215,050
Automotive Products.............. 99,886 133,401 84,401 112,631 127,925 34,685 38,253
Vehicular Operations............. 44,404 45,006 43,527 40,580 42,103 10,262 10,518
Insurance Operations............. 18,304 23,272 27,142 27,186 27,436 6,363 7,859
--------- ------------ --------- --------- --------- --------- ---------
Total Revenues................... $ 738,387 $ 693,211 $ 555,266 $ 716,733 $ 909,326 $ 204,933 $ 271,680
--------- ------------ --------- --------- --------- --------- ---------
--------- ------------ --------- --------- --------- --------- ---------
Segment Operating Profit (Loss):
(1)
Trailer Manufacturing............ $ 26,508 $ 13,109(2) $ 7,059 $ 17,590 $ 32,381 $ 5,144 $ 14,300
Automotive Products.............. 10,561 9,669 (4,237) 11,622 15,306 4,491 5,409
Vehicular Operations............. 9,437 9,751 7,139 5,727 6,251 1,323 1,330
Insurance Operations (3)......... (190) (980) (2,872) (1,557) (1,947) (450) (710)
--------- ------------ --------- --------- --------- --------- ---------
Total Segment Operating Profit... 46,316 31,549 7,089 33,382 51,991 10,508 20,329
Corporate Expenses................. (7,457) (8,115) (4,398) (4,396) (4,646) (1,192) (938)
Interest Expense (4)............... (57,879) (61,596) (47,425) (42,726) (41,614) (10,465) (10,044)
Interest Income.................... 15,494 14,696 11,634 8,895 7,396 2,018 1,660
Other Income (Expense)............. 4,704 (941) (1,078) (2,023) 3,494 991 604
Special Charge (5)................. -- -- -- -- (7,500) -- --
--------- ------------ --------- --------- --------- --------- ---------
Income (Loss) Before Minority
Equity, Income Taxes,
Extraordinary Items and Accounting
Changes........................... 1,178 (24,407) (34,178) (6,868) 9,121 1,860 11,611
Minority Equity.................... (2,424) (2,296) 1,931 -- -- -- --
Income Tax Benefit (Expense)....... (610) 6,429 5,241 (687) (5,757) (2,604) (5,225)
Extraordinary Items (6)............ 4,799 27,749 31,188 -- -- -- --
Accounting Changes (7)............. -- -- -- -- (46,626) (46,626) --
--------- ------------ --------- --------- --------- --------- ---------
Net Income (Loss).................. $ 2,943 $ 7,475 $ 4,182 $ (7,555) $ (43,262) $ (47,370) $ 6,386
--------- ------------ --------- --------- --------- --------- ---------
--------- ------------ --------- --------- --------- --------- ---------
OTHER DATA:
Total Depreciation and Amortization
Expense (8)....................... $ 48,149 $ 49,791 $ 26,401 $ 26,506 $ 28,089 $ 6,747 $ 6,882
Capital Expenditures............... 20,513 21,564 16,457 17,549 20,006 7,843 6,903
EBITDA (9)......................... 80,200 61,940(2) 38,304 60,889 84,658 18,675 28,070
Ratio of EBITDA to Cash Interest
Expense (4)....................... 2.6x 1.7x -- 1.5x 2.1x 1.9x 2.9x
Ratio of Earnings to Fixed Charges
(10).............................. 1.0x -- -- -- 1.2x 1.2x 2.1x
Pro Forma Ratio of EBITDA to Cash
Interest Expense (11)............. -- -- -- -- 1.9x -- 2.6x
Pro Forma Ratio of Earnings to
Fixed Charges (12)................ -- -- -- -- 1.0x -- 1.9x
</TABLE>
(CONTINUED ON FOLLOWING PAGE)
11
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------------------------------------- ----------------------
1989 1990 1991 1992 1993 1993 1994
--------- ------------ --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Working Capital.................... $ 68,829 $ 81,111 $ 48,559 $ 51,091 $ 51,136 $ 61,119 $ 30,339
Property, Plant and Equipment --
Net............................... 134,691 133,116 125,681 119,492 122,355 129,274 123,111
Total Assets....................... 536,084 537,677 481,305 493,763 517,336 514,779 527,158
Long-Term Debt (Including Current
Maturities)....................... 405,167 376,692 312,324 305,368 291,273 316,028 287,113
Shareholders' Deficit.............. (111,799) (104,745) (98,374) (106,296) (149,517) (153,355) (143,538)
<FN>
- ------------------
(1) Segment operating profit (loss) is segment gross profit (loss) less segment
selling, general and administrative expenses.
(2) After deducting $7,500 of plant restructuring costs.
(3) Segment operating profit for the insurance operations does not include
portfolio interest income.
(4) Interest expense includes (dollars in thousands):
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1989 1990 1991 1992 1993 1993 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash interest expense...................... $ 30,873 $ 36,556 $ 46,081 $ 41,251 $ 39,948 $ 10,068 $ 9,577
Amortization of debt discount.............. 26,638 24,690 1,045 1,181 1,372 324 393
Amortization of debt expense............... 368 350 299 294 294 73 74
--------- --------- --------- --------- --------- --------- ---------
Total Interest Expense................. $ 57,879 $ 61,596 $ 47,425 $ 42,726 $ 41,614 $ 10,465 $ 10,044
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<FN>
(5) Represents cost to the Company of the settlement of certain litigation with
the Boeing Company. See "Business -- Legal Proceedings -- Boeing Litigation"
and Note H to Notes to Consolidated Financial Statements -- December 31,
1993.
(6) Extraordinary items in all years relate to the gain or loss on the
repurchase of indebtedness. See Note L to Notes to Consolidated Financial
Statements -- December 31, 1993.
(7) The accounting changes represent the cumulative effect of changes in
accounting principles as a result of the adoption, as of January 1, 1993, of
the provisions of Statement of Financial Accounting Standards ("SFAS") No.
106, "Employers Accounting for Postretirement Benefits Other Than Pensions,"
and SFAS No. 109, "Accounting for Income Taxes." See Notes I and K to Notes
to Consolidated Financial Statements -- December 31, 1993.
(8) Total depreciation and amortization expense includes (dollars in thousands):
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1989 1990 1991 1992 1993 1993 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Depreciation and amortization............... $ 18,186 $ 20,784 $ 20,931 $ 21,054 $ 23,295 $ 5,571 $ 5,631
Amortization of cost in excess of net assets
acquired................................... 1,252 1,250 1,250 1,250 1,250 312 313
Amortization of debt discount............... 26,638 24,690 1,045 1,181 1,372 324 393
Amortization of debt expense................ 368 350 299 294 294 73 74
Other amortization.......................... 1,705 2,717 2,876 2,727 1,878 467 471
--------- --------- --------- --------- --------- --------- ---------
Total Depreciation and Amortization..... $ 48,149 $ 49,791 $ 26,401 $ 26,506 $ 28,089 $ 6,747 $ 6,882
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<FN>
(9) EBITDA represents income (loss) before minority equity, income taxes,
extraordinary items and accounting changes plus cash interest expense, total
depreciation and amortization expense and special charges. The Company
believes that EBITDA provides useful information regarding the Company's
ability to service its debt; however, EBITDA does not represent cash flow
from operations and should not be considered as a substitute for net income,
as an indicator of the Company's operating performance or for cash flow as a
measure of liquidity.
(10) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income before minority equity, income taxes, extraordinary items,
accounting changes and fixed charges. Fixed charges consist of (i) cash
interest expense, (ii) amortization of debt discount and debt expense, and
(iii) that portion of operating lease rental expense which is representative
of the interest factor (deemed by management to be one-third of rental
expense). The Company's earnings were insufficient to cover fixed charges by
(in thousands) $24,407, $34,178 and $6,868 for the years ended December 31,
1990, 1991 and 1992, respectively.
(11) The adjustments made to the historical ratios of EBITDA to cash interest
expense to arrive at the pro forma ratios were to give effect to the
Refinancing as if it had occurred as of the first day of the period. No
adjustments have been made to reflect interest which will accrue on the
12 3/4% Debentures and the 14 1/2% Debentures during the requisite 30-day
notice periods.
(12) The only adjustments made to the historical ratio of earnings to fixed
charges to arrive at the pro forma ratio were to give effect to the change
in fixed charges resulting from the Refinancing.
</TABLE>
12
<PAGE>
RISK FACTORS
Prospective purchasers of the Securities should evaluate the following
factors, as well as the other information set forth in this Prospectus, before
making an investment in the Securities.
SUBSTANTIAL LEVERAGE
The Company currently is and, following the completion of the Refinancing,
will continue to be substantially leveraged. After giving effect to the
Refinancing, the Company's consolidated indebtedness would have been $348.4
million at March 31, 1994. See "Proposed Refinancing," "Use of Proceeds,"
"Capitalization," and "Selected Consolidated Financial Data." In addition, the
Company anticipates that the New Credit Facility would have provided
approximately $32.2 million of available additional funds at March 31, 1994, as
determined for certain groups of subsidiaries by a formula based on accounts
receivable and inventory of such groups of borrowers, subject to International
Controls' ability to meet certain financial tests. (However, International
Controls, as a holding company, does not presently have any availability (other
than through its subsidiaries) under the New Credit Facility.)
Based upon its current level of operations and anticipated growth, the
Company believes that available cash flow, together with available borrowings
under the New Credit Facility, will be adequate to meet the Company's
anticipated requirements for working capital, capital expenditures, interest
payments and sinking fund payments. There can be no assurance, however, that the
Company's businesses will continue to generate cash flow at or above current
levels or otherwise in sufficient amounts to pay the principal and interest on
the Notes or to satisfy the Issuers' and International Controls' obligations to
repurchase the Notes in the event of a Change of Control.
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including, but not limited to, the
following: (i) the Company's ability to obtain additional financing for working
capital, capital expenditures, acquisitions, general corporate purposes,
refinancing of indebtedness or other purposes may be impaired; (ii) a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of the principal of and interest on its indebtedness, thereby
reducing the funds available to the Company for its operations; (iii) the
Company is more highly leveraged than certain of its competitors, which may
place the Company at a competitive disadvantage; (iv) certain of the Company's
borrowings are and will continue to be at variable rates of interest, which
could result in higher interest expenses in the event of increases in interest
rates; and (v) the Company's high degree of leverage may make it more vulnerable
to economic downturns and may limit its ability to withstand competitive
pressures.
RANKING OF THE NOTES; HOLDING COMPANY STRUCTURE
The Senior Notes will be joint and several senior obligations of the Issuers
and will rank PARI PASSU in right of payment with all other existing and future
senior indebtedness of the Issuers (including, without limitation, the New
Credit Facility) and senior in right of payment to all subordinated obligations
of the Issuers. After giving effect to the Refinancing, the Issuers would have
had approximately $48.4 million of indebtedness outstanding at March 31, 1994
ranking PARI PASSU in right of payment with the Senior Notes. The Senior
Subordinated Notes will be senior subordinated obligations of International
Controls and will be subordinated in right of payment to all existing and future
senior indebtedness of International Controls (including, without limitation,
the Senior Notes and the New Credit Facility). After giving effect to the
Refinancing, International Controls would have had $248.4 million of
indebtedness outstanding at March 31, 1994 ranking senior in right of payment to
the Senior Subordinated Notes. See "Description of New Credit Facility" and
"Description of Notes."
Since International Controls is a holding company, the Senior Subordinated
Notes will be effectively subordinated to all existing and future liabilities
(including trade payables and obligations under the New Credit Facility and the
Senior Notes) of International Controls' subsidiaries. All of the Company's
operations are conducted, substantially all of the tangible assets of the
Company are held by, and all of the Company's operating revenues are derived
from, operations of the subsidiaries. Therefore, International Controls' ability
to make interest and principal payments when due to holders of the Senior
13
<PAGE>
Subordinated Notes, or to repurchase the Senior Subordinated Notes in the event
of a Change of Control, is entirely dependent upon the receipt of sufficient
funds from its subsidiaries. International Controls' subsidiaries are separate
and distinct legal entities and have no obligations, contingent or otherwise, to
pay any amounts due pursuant to the Senior Subordinated Notes or to make any
funds available therefor, whether in the form of loans, dividends or otherwise.
Under the New Credit Facility, subsidiaries of International Controls are
generally permitted to pay dividends or make other distributions or loans to
International Controls in order to make scheduled principal and interest
payments on the Notes (but not any accelerated payments, including if
International Controls is required to repurchase Notes upon a Change of Control
or, under certain circumstances, after the sale of assets as described under
"Description of Notes -- Certain Covenants"); PROVIDED, HOWEVER, that no such
dividends or other distributions or loans will be permitted (i) if a payment
default is continuing under the New Credit Facility or a change in control (as
defined in the New Credit Facility) or certain events of insolvency occur, or
(ii) upon the occurrence of a default under the New Credit Facility (other than
a default described in (i) above) until the earlier of (a) the 179th day
following delivery of notice of such occurrence to International Controls or (b)
the curing or waiving of such other default. Since International Controls is the
sole obligor under the Senior Subordinated Notes, this prohibition would prevent
International Controls from receiving cash from its subsidiaries required to
make interest and principal payments on the Senior Subordinated Notes.
Notwithstanding the foregoing, the holders of the Notes are not restricted under
the terms of the Indentures from accelerating the Indebtedness thereunder upon
the happening of an event of default under the Indentures. Since the Issuers are
co-obligors under the Senior Notes, this prohibition will not have a similar
effect on holders of the Senior Notes with respect to the Issuers.
LIMITATIONS ON SECURITY FOR THE SENIOR NOTES
The Issuers' obligations to pay the principal of, premium, if any, and
interest on the Senior Notes will be secured by a first priority security
interest in the following collateral (the "Collateral"): (a) the Pledged Stock,
together with all dividends, interests, cash, instruments and other property and
proceeds from time to time received, receivable or otherwise distributed in
respect of or in exchange for any of the foregoing and any account, instrument
or security in which any of the foregoing is deposited or invested, including
any earnings thereon; (b) all equipment and fixtures (together with all
improvements and additions thereto and replacements thereof) now owned or
hereafter acquired by the Issuers and their respective subsidiaries and used in
connection with, as the case may be, the Issuers' trailer manufacturing
operations, automotive products operations and vehicular operations (including
all vehicles in Motors' taxicab fleet); (c) the assets in the Collateral Account
(as hereinafter defined); (d) 1,350 taxi medallions associated with Motors'
vehicular operations (which is the maximum number currently permitted under
applicable law; the remaining taxi medallions will be subject to a negative
pledge); (e) interests, now owned and hereafter acquired, in real properties
consisting of the facilities associated with the Issuers' trailer manufacturing
operations located in Savannah, Georgia, Brazil, Indiana and Wayne, Nebraska
(together with all additions, improvements and accessions thereto) (the "Real
Property Collateral"); (f) certain patents, trademarks and other intellectual
property of the Issuers; (g) to the extent applicable, all proceeds and products
of any and all of the foregoing Collateral; and (h) all books and records
relating to any of the foregoing Collateral. The security interests in the
Pledged Stock (clause (a)) and the patents, trademarks and other intellectual
property (clause(f)) and the proceeds and products therefrom (including the
portion of assets in the Collateral Account (clause (c)) which are part of the
Shared Collateral (as defined herein)) will be secured on an equal and ratable
basis with the security interest granted to the lenders under the New Credit
Facility. However, the Senior Notes will not be secured by the inventory,
accounts receivable and certain other assets of the Issuers and the proceeds
therefrom (which assets will secure the Issuers' obligations under the New
Credit Facility).
The Issuers will be permitted under certain circumstances to release
Collateral from the lien of the Collateral Documents (as defined herein),
subject to the satisfaction of certain requirements set forth in the Collateral
Documents. See "Description of Notes -- Possession, Use and Release of
Collateral."
14
<PAGE>
The net carrying amount on the Company's books of the Collateral (including
Shared Collateral other than the Pledged Stock) as of March 31, 1994 was
approximately $115.0 million. (The Company carries the value of its taxi
medallions on its books at zero.) While the Company has obtained appraisals of
certain of the Collateral, appraisals have not been performed for all assets
constituting Collateral. Neither the Senior Note Trustee nor the Collateral
Agent (as defined herein) has obtained appraisals or made any investigations
(including as to environmental matters) of the Collateral. The ability of the
holders of the Senior Notes to foreclose on the Collateral will be subject to
the terms of the Collateral Documents and to certain limitations arising under
applicable bankruptcy and insolvency laws. There can be no assurance that the
proceeds of any sale of Collateral would be sufficient to satisfy payments due
on the Senior Notes. If such proceeds were insufficient to pay all amounts due
on the Senior Notes, then holders of the Senior Notes (to the extent not paid
from the proceeds of the sale of the Collateral) would only have an unsecured
claim against any remaining unencumbered assets of the Issuers. As a result,
there is a risk that holders of the Senior Notes will receive substantially less
than their investment upon any liquidation of the Issuers. See "-- Environmental
Matters," "Description of Notes -- Security for the Senior Notes" and "--
Certain Bankruptcy Limitations."
COMPETITION
Two of the Company's primary businesses, trailer manufacturing and
automotive products manufacturing, are highly competitive. The Company competes
with other truck trailer manufacturers and automotive stamping companies of
varying sizes (including the in-house capabilities of certain automotive
manufacturers), some of which have greater financial resources than the Company.
In addition, barriers to entry in the truck trailer manufacturing industry are
low and, therefore, it is possible that additional competitors could enter the
market at any time. Although Great Dane is presently the largest manufacturer in
the truck trailer industry, there can be no assurance that it will be able to
maintain or increase its market share.
CYCLICAL BUSINESS
The truck trailer industry is dependent on the trucking industry in general
and the automotive parts industry is dependent on the automotive industry. Poor
economic conditions in either industry could have a material adverse effect on
the Company. Sales of new truck trailers have historically been subject to
cyclical variations based both on general economic conditions and a five to
seven-year replacement cycle. The poor economic conditions in the United States
in 1990 and 1991 had an adverse effect on industry-wide demand for new truck
trailers, causing industry shipments of new truck trailers to fall to their
lowest level since 1983. Although sales have rebounded from these low levels,
there can be no assurance that such growth will continue.
GOVERNMENT REGULATIONS OF TRUCK TRAILERS
The federal government regulates certain safety features incorporated in the
design of truck trailers. Changes or anticipation of changes in these
regulations can have a material impact on the cost of manufacturing truck
trailers and on Great Dane's customers and may adversely affect the financial
condition of the Company.
RELIANCE ON MAJOR CUSTOMERS
Great Dane has entered the container manufacturing business in reliance on a
large order from J.B. Hunt. There can be no assurance that Great Dane will be
able to attract other substantial customers for these products. J.B. Hunt
accounted for approximately 13% of Great Dane's revenues for the year ended
December 31, 1993.
The Company's automotive products operations rely heavily on sales to GM.
For the year ended December 31, 1993, sales to GM accounted for approximately
95% of the automotive products operations' revenues and approximately 13% of the
Company's revenues. The automotive products industry has experienced increased
pricing pressure from OEMs which are taking aggressive measures to reduce their
operating costs, including significant price reductions from suppliers. Although
opportunities for new business may arise for Motors as a result of GM's pressure
on other suppliers, future earnings of this
15
<PAGE>
segment of the Company's business may be materially adversely affected by the
price reductions required or requested by GM or by decisions by GM to utilize
its own facilities to manufacture these products. Although GM provides 13 week
forecasts of its purchasing requirements, changes in its production may result
in changes to these requirements. In addition, although the Company is
attempting to diversify its customer base, there can be no assurance that the
Company will be able to reduce its reliance on GM in the foreseeable future.
CONTROL OF THE COMPANY
David R. Markin owns 32.5% of the common stock of International Controls and
each of three other individuals owns 22.5% of the Common Stock (before giving
effect to the exercise of the Warrants). Therefore, Mr. Markin, together with
any one of the three other stockholders, or the other three stockholders acting
together, effectively has control of the Company and would have sufficient
voting power to determine the outcome of any corporate transaction or other
matter requiring stockholder approval.
ENVIRONMENTAL MATTERS
The Company's operations are subject to numerous federal, state and local
laws and regulations pertaining to the discharge of materials into the
environment. The Company has taken steps related to such matters in order to
minimize the risks of potentially harmful aspects of its operations on the
environment. From time to time, the Company has incurred expenses to improve its
facilities in accordance with applicable laws. Great Dane has changed its
manufacturing process to comply with new regulations controlling the emission of
chlorofluorocarbons.
International Controls also remains obligated to indemnify purchasers of
prior subsidiaries for environmental contamination, if any, of properties owned
by such subsidiaries. The Company's expenditures related to the foregoing
environmental matters and indemnification obligations have not had, and the
Company does not currently anticipate that such expenditures will have, a
material adverse effect on the Company's financial condition, although there can
be no assurance that this will remain the case.
Real property pledged as security to a lender, such as a holder of the
Senior Notes, may be subject to known and unforeseen environmental risks. Under
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, a secured lender may be held liable, in limited circumstances,
for the costs of remediating or preventing releases or threatened releases of
hazardous substances at mortgaged property. There may be similar risks to
secured lenders under various state laws and common law theories. In this
regard, the Senior Note Trustee or the holders of the Senior Notes would need to
evaluate the impact of these potential liabilities before determining to
foreclose on mortgaged properties securing the Senior Notes and exercising other
available remedies. In addition, the Senior Note Trustee may decline to
foreclose upon the mortgaged property or exercise remedies available to the
extent that it does not receive indemnification to its satisfaction which may
include indemnification from the holders of the Senior Notes. See "Description
of Notes -- Security for the Senior Notes."
IMPACT OF CITY REGULATION AND EXPIRATION OF ANNUAL LIMIT ON NEW MEDALLION
ISSUANCE
The City of Chicago ("Chicago") regulates Yellow Cab's operations through
rates of fare, maintenance, lease rates, insurance and inspection requirements,
as well as through taxes, license fees and other means. Chicago has recently
given the Commissioner of Consumer Services broad powers to set maximum lease
rates, which, in certain instances, have been set at lower rates than those
currently charged by Yellow Cab. Although Yellow Cab has filed a petition for
higher rates than those set by the Commissioner and is allowed to continue
charging its current rates pending action on its petition, there can be no
assurance that it will be successful or that in the future it will be able to
pass through any increased costs by lease rate increases or other means.
The agreement between Yellow Cab and Chicago, pursuant to which increases in
the total number of outstanding medallions in Chicago are limited to a maximum
of 100 annually, expires on December 31, 1997. There can be no assurance as to
how many medallions Chicago will issue after the expiration of the
16
<PAGE>
agreement, nor as to the effect, if any, on the Company, of such issuance,
including the effect on medallion values. Although Yellow Cab has sold
medallions during the past year at selling prices of approximately $38,000 per
medallion, there can be no assurance that such values will continue to prevail
in the market, especially after December 31, 1997. See "Business -- Vehicular
Operations -- Regulatory Issues."
FRAUDULENT CONVEYANCE RISK
The incurrence by the Issuers of indebtedness under the Notes, and, in the
case of the Senior Notes, the granting of any security interest as security
therefor, may be subject to review under federal and state fraudulent conveyance
laws if a bankruptcy, reorganization or rehabilitation case or similar
proceeding is commenced or a lawsuit is commenced by or on behalf of unpaid
creditors of the Issuers or International Controls, as the case may be. Under
these laws, if a court were to find that, at the time the Notes were issued or
the security interests were granted under the Senior Note Indenture, (a) an
Issuer incurred such indebtedness or issued the Notes with the intent of
hindering, delaying or defrauding current or future creditors or (b)(i) an
Issuer received less than reasonably equivalent value or fair consideration for
incurring such indebtedness or issuing the Notes, and (ii) an Issuer (A) was
insolvent or was rendered insolvent by reason of the incurrence of such
indebtedness or the issuance of the Notes, (B) was engaged, or about to engage,
in a business or transaction for which its assets constituted unreasonably small
capital, (C) intended to incur, or believed that it would incur, debts beyond
its ability to pay as such debts matured (as all of the foregoing terms are
defined in or interpreted under relevant fraudulent conveyance laws) or (D) was
a defendant in an action for money damages or had a judgment for money damages
docketed against it (if, in either case, after final judgment the judgment is
unsatisfied), such court could avoid or subordinate the Notes to presently
existing and future indebtedness of the Issuers and take other action
detrimental to the holders of the Notes, including, under certain circumstances,
invalidating the Notes.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction which is being applied in any
such proceeding. Generally, however, an Issuer would be considered insolvent if,
at the time it incurred the indebtedness under the New Credit Facility or
incurred the indebtedness constituting the Notes either (i) the fair market
value (or fair saleable value) of its assets is less than the amount required to
pay the probable liability on its total existing debts and liabilities
(including contingent liabilities) as they become absolute and matured or (ii)
it is incurring debt beyond its ability to pay as such debt matures. The Issuers
believe that they are receiving fair consideration for their incurrence of
indebtedness under the New Credit Facility and their issuance of the Notes and
that they will not be rendered insolvent thereby.
POTENTIAL LACK OF FUNDING FOR CHANGE OF CONTROL OFFER
In the event of a Change of Control, the Issuers in the case of the Senior
Notes and International Controls in the case of the Senior Subordinated Notes
will be required, subject to certain conditions, to offer to purchase all
outstanding Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of repurchase. After
giving effect to the Refinancing, the Issuers may not have sufficient funds
available to purchase all of the outstanding Notes were they to be tendered in
response to an offer made as a result of a Change of Control. In addition, the
Issuers' ability to repurchase the Notes upon the occurrence of a Change of
Control will be restricted by the New Credit Facility. Further, rights of the
holders of the Senior Subordinated Notes upon the occurrence of a Change of
Control will be subordinate to the rights of the holders of the Senior Notes.
See "Description of Notes -- Certain Covenants -- Purchase of Notes Upon a
Change of Control."
DIVIDEND POLICY
International Controls has not paid cash dividends on its capital stock in
recent years and does not intend to pay cash dividends on the Common Stock in
the foreseeable future. Furthermore, International Controls' ability to pay
dividends is limited by the Indentures and prohibited by the New Credit
Facility.
17
<PAGE>
CERTAIN ISSUES RELATING TO ORIGINAL ISSUE DISCOUNT
The Senior Subordinated Notes will be issued with original issue discount
for federal income tax purposes. For purposes of computing original issue
discount, the Senior Subordinated Notes and the Warrants will be treated as a
Unit and the issue price of the Unit will be allocated between the Senior
Subordinated Notes and the Warrants. As a result, purchasers of Senior
Subordinated Notes will be required to recognize such original issue discount as
ordinary income in advance of the receipt of the cash payments to which such
income is attributable. See "Certain Federal Income Tax Consequences" for a more
detailed discussion of the federal income tax consequences to the purchasers of
the Units.
If a bankruptcy case is commenced by or against International Controls under
Title 11 of the United States Code, as amended (the "Bankruptcy Code"), the
claim of a holder of Senior Subordinated Notes with respect to the principal
amount thereof may be limited to an amount equal to the sum of (i) the portion
of the original issue price of the Units allocable to the Senior Subordinated
Notes ($ per $1,000 Unit purchase price) and (ii) that portion of the
original issue discount that is not deemed to constitute "unmatured interest"
for purposes of the Bankruptcy Code. "Unmatured interest" means that portion of
the original issue discount that was not amortized as of the date of the
bankruptcy filing. The amortized amount determined by a bankruptcy court may not
be the same amount previously included in income by the holder for federal
income tax purposes.
ABSENCE OF PUBLIC MARKET
The Securities constitute new issues of securities with no established
trading market. In addition, the Common Stock into which the Warrants are
exercisable are presently held by four individuals. The New York Stock Exchange
has approved the listing of the Senior Notes, subject to the satisfaction of
certain listing requirements. After the Separation Date, International Controls
intends to apply to list the Senior Subordinated Notes on the New York Stock
Exchange. There can be no assurance that the Notes will be listed. The Company
does not intend to list the Warrants or the Common Stock underlying the Warrants
(the "Warrant Shares") on any securities exchange or to seek inclusion thereof
through the National Association of Securities Dealers Automated Quotation
System. No assurance can be given that any trading market for the Securities or
the Warrant Shares will develop or, if any such market does develop, as to the
liquidity of the Securities or the Warrant Shares. If the Senior Notes or the
Units are traded after their initial issuance, they may trade at a discount from
their initial offering price depending upon prevailing interest rates, the
market for similar securities, the performance of the Company and other factors.
The Underwriters have informed the Company that they intend to make a market in
the Senior Notes and in the Units until the Separation Date, and in the Notes
and the Warrants thereafter. However, the Underwriters are not obligated to do
so, and any such market making may be discontinued at any time without notice.
Therefore, no assurance can be given as to whether an active trading market will
develop or be maintained. In addition, the Senior Subordinated Notes and the
Warrants will not be separately transferable until the Separation Date and the
Warrants are not exercisable until the occurrence of any Exercise Event. See
"Description of Warrants" and "Underwriting."
POTENTIAL COMMON STOCK OFFERING
It is the present intention of International Controls, subject to various
factors including prevailing market conditions, to effect an Initial Public
Offering of its Common Stock within the next twelve months. There can be no
assurance if or when any such offering will be consummated. Any such offering
will be made only by means of a prospectus pursuant to a registration statement
filed with the Securities and Exchange Commission. If the offering is
consummated, the net proceeds to International Controls up to $40 million would
be required to be applied to the redemption of the Senior Notes, and the
Warrants would become exercisable.
18
<PAGE>
PROPOSED REFINANCING
The Company is pursuing the Refinancing in order (a) to increase its
liquidity through (i) reduced amortization and (ii) the removal of certain
restrictions on the use of Company cash providing for more flexible and
efficient cash management, and (b) to simplify its corporate structure, thereby
enhancing its ability to obtain future financing. The Refinancing includes the
following primary components: the Offering, the Initial Borrowing, the 12 3/4%
Debenture Redemption, the 14 1/2% Debenture Redemption, the Existing Note
Redemption, the Minority Interest Redemption, the repayment of subsidiary
indebtedness and the liquidation of Checker L.P., all as described below.
SOURCES AND USES OF FUNDS
The estimated sources and uses of funds which would have been required to
consummate the Refinancing as of March 31, 1994 are as follows:
<TABLE>
<S> <C>
SOURCES OF FUNDS:
(IN THOUSANDS)
Senior Note Offering........................ $ 200,000
Unit Offering............................... 100,000
New Credit Facility......................... 48,375
Company Cash................................ 22,216
-----------
Total....................................... $ 370,591
-----------
-----------
USES OF FUNDS:
(IN THOUSANDS)
Retire Subsidiary Debt...................... $ 85,988
Redemption of 12 3/4% Debentures(1)......... 136,238
Redemption of 14 1/2% Debentures(1)......... 61,347
Existing Note Redemption.................... 30,000
Minority Interest Redemption................ 37,000
Pay Accrued Interest........................ 6,018
Transaction Fees and Expenses............... 14,000
-----------
Total....................................... $ 370,591
-----------
-----------
<FN>
- --------------
(1) Excludes interest which will accrue until the expiration of the requisite
30-day notice periods, and which will be funded through internal cash flow
and/or additional borrowings under the New Credit Facility (as defined
herein).
</TABLE>
NEW CREDIT FACILITY AND REPAYMENT OF SUBSIDIARY INDEBTEDNESS
The New Credit Facility provides for a revolving credit facility of up to
$95.0 million. The Company intends to use approximately $48.4 million of the New
Credit Facility together with a portion of the proceeds of the Offering and
Company cash to retire the following indebtedness of International Controls'
subsidiaries (all interest rates and principal amounts are as of March 31,
1994), in each case together with accrued but unpaid interest to the date of the
Initial Borrowing: (a) a term loan maturing in March 1995 with an interest rate
of 7.5%, in the principal amount of approximately $20.4 million; (b) a revolving
loan due in March 1995 with an interest rate of 7.5%, in the principal amount of
approximately $16.9 million; (c) a term loan maturing in July 1996 with an
interest rate of 7.25%, in the principal amount of $5.0 million; (d) a term loan
maturing in April 2008 with an interest rate of 5.0%, in the principal amount of
approximately $10.8 million; (e) a line of credit loan due in September 1994
with an interest rate of 7.0%, in the principal amount of $5.0 million; (f) a
term loan due in September 1997 with an interest rate of 7.25%, in the principal
amount of approximately $21.0 million; and (g) miscellaneous indebtedness in the
aggregate amount of approximately $6.9 million. For a description of certain
terms of the New Credit Facility, see "Description of New Credit Facility." All
amounts set forth above assume that the Refinancing had taken place on March 31,
1994.
THE OFFERING AND THE HOLDING COMPANY REDEMPTIONS
The net proceeds to the Issuers from the Offering are estimated to be
approximately $ million after deducting expenses relating to the Offering.
Such net proceeds are intended to be used to redeem the 12 3/4% Debentures (for
which an annual $18.0 million sinking fund payment would otherwise be due
commencing in August 1997) pursuant to the 12 3/4% Debenture Redemption, the
14 1/2% Debentures pursuant to the 14 1/2% Debenture Redemption, the Existing
Notes pursuant to the Existing Note Redemption, the Minority Interest pursuant
to the Minority Interest Redemption and any balance of subsidiary indebtedness
not repaid from borrowings under the New Credit Facility or Company cash.
International Controls intends, simultaneously with the consummation of the
Offering, to issue notices of redemption
19
<PAGE>
with respect to the 12 3/4% Debenture Redemption and the 14 1/2% Debenture
Redemption. The funds required for the redemption of the 12 3/4% Debentures and
the 14 1/2% Debentures will be held in escrow until the requisite 30-day notice
periods have expired (during which time interest will continue to accrue) and
payment can be made. Interest on the 12 3/4% Debentures and 14 1/2% Debentures
for such 30-day period is estimated to be approximately $1.3 million, net of
estimated interest earnings from the escrow account. The Existing Note
Redemption and the Minority Interest Redemption will be effected upon the
consummation of the Offering.
LIQUIDATION OF CHECKER L.P.
After consummation of the Minority Interest Redemption, Motors will own all
of the equity interests in Checker L.P. To simplify the corporate structure, and
because certain of the tax advantages that existed at the time Checker L.P. was
established no longer exist, Checker L.P. will be liquidated and its assets
distributed to Motors, which will immediately contribute these assets (except
for the capital stock of Country) to three newly-formed subsidiaries, CMC
Kalamazoo Inc., Yellow Cab Company and Chicago AutoWerks Inc., each of which is
an Issuer.
USE OF PROCEEDS
The net proceeds to be received by the Issuers from the sale of the
Securities are estimated to be approximately $ million after deducting an
estimated $ million in expenses estimated to be incurred in connection with the
Offering.
The Issuers intend to use the net proceeds of the Offering in the manner
specified in "Proposed Refinancing." See "Proposed Refinancing."
DIVIDENDS
International Controls has not, in recent years, paid dividends on the
Common Stock, and does not intend to pay dividends in the foreseeable future. As
a holding company, the ability of International Controls to pay dividends is
dependent upon the receipt of dividends or other payments from its subsidiaries.
The payment of dividends by International Controls is also limited by the
Indentures and prohibited by the New Credit Facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," "Description of Notes" and "Description of New
Credit Facility." Any determination to pay dividends in the future will be at
the discretion of the Board of Directors of International Controls and will be
dependent upon the Company's results of operations, financial condition,
contractual restrictions, and other factors deemed relevant at that time by the
Board of Directors of International Controls.
20
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company and its subsidiaries as of March 31, 1994, and as adjusted to give
effect to the Refinancing as described under "Proposed Refinancing" and "Use of
Proceeds." The table should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1994
-----------------------------
HISTORICAL AS ADJUSTED
----------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash.............................................. $ 32,608 $ 10,392
----------- ---------------
----------- ---------------
Short-Term Subsidiary Debt........................ $ 5,000 $ 0
----------- ---------------
Long-Term Debt (including current maturities):
New Credit Facility............................. 0 48,375
Subsidiary Debt (1)............................. 80,988 0
Existing Notes.................................. 30,000 0
Senior Notes offered hereby..................... 0 200,000
Senior Subordinated Notes offered hereby........ 0 100,000(2)
12 3/4% Senior Subordinated Debentures (net of
unamortized discount).......................... 121,261 0
14 1/2% Subordinated Discount Debentures (net of
unamortized discount).......................... 54,864 0
----------- ---------------
Total Long-Term Debt (including current
maturities).................................. 287,113 348,375
Minority Interest................................. 39,898 0(3)
Shareholders' Deficit:
Common Stock, par value $0.01................... 90 90
Additional paid-in capital (2).................. 14,910 14,910
Retained-earnings deficit....................... (29,831) (41,896)(4)
Notes receivable from shareholders.............. (625) (625)
Amounts paid in excess of Motors' net assets.... (127,748) (127,748)
Unrealized depreciation on Insurance
Subsidiary's investments in certain debt and
equity securities.............................. (334) (334)
----------- ---------------
Total Shareholders' Deficit................... (143,538) (155,603)
----------- ---------------
Total Capitalization........................ $ 188,473 $ 192,772
----------- ---------------
----------- ---------------
<FN>
- --------------
(1) Includes $2.4 million outstanding on a term loan made to SCSM in November
1993, the proceeds of which were used by SCSM to purchase a press.
(2) The Senior Subordinated Notes are being sold as Units with the Warrants. The
fair value of the Warrants, which has not been determined, will be based on
final pricing and such fair value will be credited to additional paid-in
capital with a corresponding reduction in Senior Subordinated Notes.
(3) Reflects redemption of minority interest in Checker L.P. See "Business --
Legal Proceedings -- Executive Life Litigation."
(4) The charge to retained-earnings deficit results from an extraordinary charge
to earnings from:
</TABLE>
<TABLE>
<S> <C>
Write off debt discount on 12 3/4% Debentures............................ $ (10,779)
Write off debt discount on 14 1/2% Debentures............................ (6,483)
Premium paid on repurchase of 12 3/4% Debentures......................... (4,198)
Gain on retirement of minority interest.................................. 2,898
Tax effect of above adjustments.......................................... 6,497
---------
Charge to historical retained-earnings deficit........................... $ (12,065)
---------
---------
</TABLE>
21
<PAGE>
THE COMPANY
International Controls is a holding company that is engaged in four
principal lines of business. Great Dane manufactures a full line of truck
trailers for the over-the-road tractor trailer long and short haul markets and
containers and chassis for domestic intermodal shipping. Motors manufactures
sheet metal stampings for automotive components and subassemblies, primarily for
GM. Yellow Cab is currently the largest owner of taxicabs and provider of
taxi-related services in Chicago, Illinois. Country underwrites property and
casualty insurance, including taxicab insurance, workers' compensation and other
commercial and personal lines.
Prior to 1987, International Controls engaged in various engineering,
aerospace and manufacturing operations, including truck trailer manufacturing.
In 1987, International Controls was taken private in a leveraged buyout
transaction and initiated a plan of divestitures to reduce bank debt. In 1989,
with Great Dane as its only remaining business, International Controls acquired
Motors and immediately thereafter, the major shareholders of Motors obtained
control of International Controls through the Reverse Acquisition.
Simultaneously with the consummation of the Offering, the minority capital
account and any minority equity interest in Checker L.P. will be redeemed. See
"Proposed Refinancing -- The Offering and the Holding Company Redemptions" and
"-- Liquidation of Checker L.P.," "Use of Proceeds" and "Business -- Legal
Proceedings -- Executive Life Litigation."
International Controls was incorporated in 1959 under the laws of the State
of Florida. International Controls currently maintains its principal executive
offices at Checker L.P.'s facility at 2016 North Pitcher Street, Kalamazoo,
Michigan 49007 and its phone number is (616) 343-6121.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data derived
from the consolidated financial statements of International Controls Corp. and
subsidiaries for the five years ended December 31, 1993, which have been audited
by Ernst & Young, independent auditors. The selected consolidated financial data
for the three-month periods ended March 31, 1993 and 1994, were derived from the
consolidated financial statements of the Company, which reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
such data. The operating results for the three months ended March 31, 1994, are
not necessarily indicative of the operating results for the full year. The
following financial data should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------ ---------------------
1989 1990 1991 1992 1993 1993 1994
--------- ------------ --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................... $ 738,387 $ 693,211 $ 555,266 $ 716,733 $ 909,326 $ 204,933 $ 271,680
Cost of Revenues....................... 624,138 584,680 480,543 610,870 778,805 175,631 230,835
--------- ------------ --------- --------- --------- --------- ---------
Gross Profit........................... 114,249 108,531 74,723 105,863 130,521 29,302 40,845
Selling, General and Administrative
Expense............................... 75,390 77,597 72,032 76,877 83,176 19,986 21,454
Plant Restructuring Costs.............. -- 7,500 -- -- -- -- --
--------- ------------ --------- --------- --------- --------- ---------
Income from Operations................. 38,859 23,434 2,691 28,986 47,345 9,316 19,391
Interest Expense (1)................... (57,879) (61,596) (47,425) (42,726) (41,614) (10,465) (10,044)
Interest Income........................ 15,494 14,696 11,634 8,895 7,396 2,018 1,660
Other Income (Expense)................. 4,704 (941) (1,078) (2,023) 3,494 991 604
Special Charge (2)..................... -- -- -- -- (7,500) -- --
--------- ------------ --------- --------- --------- --------- ---------
Income (Loss) Before Minority Equity,
Income Taxes, Extraordinary Items and
Accounting Changes.................... 1,178 (24,407) (34,178) (6,868) 9,121 1,860 11,611
Minority Equity........................ (2,424) (2,296) 1,931 -- -- -- --
Income Tax Benefit (Expense)........... (610) 6,429 5,241 (687) (5,757) (2,604) (5,225)
Extraordinary Items (3)................ 4,799 27,749 31,188 -- -- -- --
Accounting Changes (4)................. -- -- -- -- (46,626) (46,626) --
--------- ------------ --------- --------- --------- --------- ---------
Net Income (Loss)...................... $ 2,943 $ 7,475 $ 4,182 $ (7,555) $ (43,262) $ (47,370) $ 6,386
--------- ------------ --------- --------- --------- --------- ---------
--------- ------------ --------- --------- --------- --------- ---------
OTHER DATA:
Total Depreciation and Amortization
Expense (5)........................... $ 48,149 $ 49,791 $ 26,401 $ 26,506 $ 28,089 $ 6,747 $ 6,882
Capital Expenditures................... 20,513 21,564 16,457 17,549 20,006 7,843 6,903
EBITDA (6)............................. 80,200 61,940(7) 38,304 60,889 84,658 18,675 28,070
Ratio of EBITDA to Cash Interest
Expense (1)........................... 2.6x 1.7x -- 1.5x 2.1x 1.9x 2.9x
Ratio of Earnings to Fixed Charges
(8)................................... 1.0x -- -- -- 1.2x 1.2x 2.1x
</TABLE>
(CONTINUED ON FOLLOWING PAGE)
23
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1989 1990 1991 1992 1993 1993 1994
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital........................ $ 68,829 $ 81,111 $ 48,559 $ 51,091 $ 51,136 $ 61,119 $ 30,339
Property, Plant and Equipment -- Net... 134,691 133,116 125,681 119,492 122,355 129,274 123,111
Total Assets........................... 536,084 537,677 481,305 493,763 517,336 514,779 527,158
Long-Term Debt (Including Current
Maturities)........................... 405,167 376,692 312,324 305,368 291,273 316,028 287,113
Shareholders' Deficit.................. (111,799) (104,745) (98,374) (106,296) (149,517) (153,355) (143,538)
<FN>
- ------------------
(1) Interest expense includes (dollars in thousands):
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1989 1990 1991 1992 1993 1993 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash interest expense.................. $ 30,873 $ 36,556 $ 46,081 $ 41,251 $ 39,948 $ 10,068 $ 9,577
Amortization of debt discount.......... 26,638 24,690 1,045 1,181 1,372 324 393
Amortization of debt expense........... 368 350 299 294 294 73 74
--------- --------- --------- --------- --------- --------- ---------
Total Interest Expense............... $ 57,879 $ 61,596 $ 47,425 $ 42,726 $ 41,614 $ 10,465 $ 10,044
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<FN>
(2) Represents cost to the Company of the settlement of certain litigation with
the Boeing Company. See "Business -- Legal Proceedings -- Boeing
Litigation" and Note H to Notes to Consolidated Financial Statements --
December 31, 1993.
(3) Extraordinary items in all years relate to the gain or loss on the
repurchase of indebtedness. See Note L to Notes to Consolidated Financial
Statements -- December 31, 1993.
(4) The accounting changes represent the cumulative effect of changes in
accounting principles as a result of the adoption, as of January 1, 1993,
of the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 106, "Employers Accounting for Postretirement Benefits Other Than
Pensions," and SFAS No. 109, "Accounting for Income Taxes." See Notes I and
K to Notes to Consolidated Financial Statements -- December 31, 1993.
(5) Total depreciation and amortization expense includes (dollars in
thousands):
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1989 1990 1991 1992 1993 1993 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Depreciation and amortization.......... $ 18,186 $ 20,784 $ 20,931 $ 21,054 $ 23,295 $ 5,571 $ 5,631
Amortization of cost in excess of net
assets acquired....................... 1,252 1,250 1,250 1,250 1,250 312 313
Amortization of debt discount.......... 26,638 24,690 1,045 1,181 1,372 324 393
Amortization of debt expense........... 368 350 299 294 294 73 74
Other amortization..................... 1,705 2,717 2,876 2,727 1,878 467 471
--------- --------- --------- --------- --------- --------- ---------
Total Depreciation and
Amortization........................ $ 48,149 $ 49,791 $ 26,401 $ 26,506 $ 28,089 $ 6,747 $ 6,882
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<FN>
(6) EBITDA represents income (loss) before minority equity, income taxes,
extraordinary items and accounting changes plus cash interest expense,
total depreciation and amortization expense and special charges. The
Company believes that EBITDA provides useful information regarding the
Company's ability to service its debt; however, EBITDA does not represent
cash flow from operations and should not be considered as a substitute for
net income, as an indicator of the Company's operating performance or for
cash flow as a measure of liquidity.
(7) After deducting $7,500 of plant restructuring costs.
(8) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before minority equity, income taxes,
extraordinary items, accounting changes and fixed charges. Fixed charges
consist of (i) cash interest expense, (ii) amortization of debt discount
and debt expense, and (iii) that portion of operating lease rental expense
which is representative of the interest factor (deemed by management to be
one-third of rental expense). The Company's earnings were insufficient to
cover fixed charges by (in thousands) $24,407, $34,178 and $6,868 for the
years ended December 31, 1990, 1991 and 1992, respectively.
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
In January 1989, International Controls purchased all of the outstanding
common stock of Motors, the general partner of Checker L.P., for a purchase
price of $138.8 million (the "Checker Acquisition"). Immediately thereafter,
four of the five former shareholders of Motors purchased, through Checker
Holding Corp. ("Holding"), all of the outstanding common stock of International
Controls for $45 million. Holding was created solely for the purpose of
acquiring the stock of International Controls and was subsequently merged into
International Controls. Holding was capitalized with an equity contribution of
$15 million and loans aggregating $30 million from the former Motors
shareholders. The Reverse Acquisition has been accounted for as if Motors had
acquired International Controls, since there has been no significant change in
control of Motors.
Under generally accepted accounting principles for reverse acquisitions, the
net assets of Motors acquired in the Checker Acquisition could not be revalued
to estimated fair market value. Accordingly, the $127.7 million excess of the
amount paid over the historical book value of Motors' net assets has been
accounted for as a separate component reducing shareholders' equity and is not
subject to amortization.
In August 1989, Motors acquired all of the outstanding common stock of SCSM
for a purchase price of $19.9 million (including expenses of $0.3 million) in
cash for SCSM's stock and $4 million in cash for a noncompete agreement. The
acquisition was funded with proceeds from a new bank loan. In connection with
the acquisition, Motors also assumed, and Checker L.P. guaranteed, $12.7 million
of the seller's obligation to the State of West Virginia. In addition, both
Motors and Checker L.P. guaranteed loans aggregating $5.6 million made by the
State of West Virginia and Volkswagen of America, Inc. to SCSM.
RECENT OPERATING RESULTS
For the three months ended June 30, 1994, the Company's preliminary
financial information indicates that revenue increased 23.2% from $225.4 million
last year to $277.6 million, its operating profit increased 75.6% from $13.5
million last year to $23.7 million and its EBITDA increased 50.7% from $21.3
million last year (before giving effect to a special charge of $7.5 million) to
$32.1 million. These increases primarily reflect higher sales of truck trailers,
intermodal containers and chassis as well as automotive stamping parts. The
results of interim periods may not be indicative of results for the full year.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1994, COMPARED TO THREE MONTHS ENDED MARCH 31,
1993:
Revenues increased $66.7 million during the three months ended March 31,
1994, as compared to the same period of 1993. The higher revenues are
principally attributed to higher trailer segment revenues ($61.4 million),
primarily associated with a higher volume of sales of containers and chassis and
trailers. Automotive segment revenues increased $3.6 million during the three
months ended March 31, 1994, as compared to the same period in 1993. General
increases in volume to accommodate automotive customers' demands were the
principal reason for the revenue increases.
The Company's operating profit (gross profit less selling, general and
administrative expenses) increased $10.1 million in the 1994 period compared to
the 1993 period. This increase is attributed to an increase of trailer segment
operating profits ($9.2 million) which is principally due to higher sales of
Great Dane's product lines and improved margins, and an increase of automotive
segment operating profits ($0.9 million) principally due to higher sales.
Income tax expense is higher for financial statement purposes than would be
computed if the statutory rate were used because of state income taxes and the
impact of the reporting of certain income and expense items in the financial
statements which are not taxable or deductible for income tax purposes.
25
<PAGE>
1993 COMPARED TO 1992:
During 1993, revenues increased $192.6 million and gross profit increased
$24.7 million as compared to 1992. The trailer segment and the automotive
segment operations benefited from increased demand for their products. Trailer
segment revenues increased by $175.5 million as compared to 1992, primarily due
to the sale of containers and chassis which were introduced in late 1992 and
sold principally to one customer, and a higher volume of truck trailer sales.
Automotive segment revenues increased $15.3 million as compared to 1992.
Increased production of the General Motors Blazer and Suburban models and Crew
Cab products and other general increases in volumes to accommodate automotive
customers' demands are the principal reasons for the increase. Vehicular segment
revenues increased $1.5 million in 1993 as compared to 1992. The increase was
attributed to lease rate increases obtained in 1993 to cover certain vehicular
segment cost increases. The revenue increase was somewhat offset by the impact
of tendering medallions to Chicago.
The factors impacting sales, as discussed previously, had the effect of
increasing the Company's 1993 operating profit (gross profit less selling,
general and administrative expenses) by $18.4 million as compared to 1992.
Trailer segment operating profit increased by $14.8 million as compared to 1992.
This increase is principally due to higher volumes, partly offset by higher
selling, general and administrative expenses ("S G & A"). Higher volumes were
also the principal reason for an increase of $3.7 million of automotive segment
operating profits as compared to 1992.
S G & A expenses were $6.3 million higher in 1993 as compared to 1992, but
as a percentage of sales, S G & A expense is 1.6 percentage points lower in 1993
as compared to 1992.
Other expenses decreased $5.5 million in 1993 as compared to 1992. The
decrease in expenses resulted primarily from $1.4 million in income from the
settlement of a dispute in 1993 and $2.8 million in income from sales of taxi
medallions in 1993.
On February 8, 1989, the Boeing Company ("Boeing") filed a lawsuit naming
International Controls, together with three prior subsidiaries of International
Controls, as defendants in Case No. CV89-199MA, United States District Court for
the District of Oregon. In that lawsuit, Boeing sought damages and declaratory
relief for past and future costs resulting from alleged groundwater
contamination at a location in Gresham, Oregon, where the three prior
subsidiaries of International Controls formerly conducted business operations.
On December 22, 1993, International Controls entered into a settlement with
Boeing, settling all claims asserted by Boeing in the lawsuit. Pursuant to the
settlement terms, International Controls will pay Boeing $12.5 million over the
course of five years, $5 million of which has been committed by certain
insurance carriers in the form of cash or irrevocable letters of credit.
Accordingly, the Company recorded a $7.5 million special charge during 1993 to
provide for the cost associated with this legal proceeding. In accordance with
the settlement agreement, the claims against International Controls and the
three former subsidiaries have been dismissed and Boeing has released and
indemnified International Controls with respect to certain claims.
1992 COMPARED TO 1991:
During 1992, revenues increased $161.5 million and gross profit increased
$31.1 million as compared to 1991. The trailer and the automotive segment
operations were positively impacted by increased demand for their products.
Trailer segment revenues increased by $136.1 million as compared to 1991,
primarily resulting from a higher volume of truck trailer sales. Automotive
segment revenues increased $28.2 million as compared to 1991. Increased
production of GM's Blazer and Suburban models and Crew Cab products for the 1993
model year and other general increases in volumes to accommodate automotive
customers' demands were partly offset by a $6.1 million decrease in revenues
associated with the coordination of tooling programs for GM. Vehicular segment
revenues decreased $2.9 million as compared to 1991. The decrease in revenues is
principally attributed to a continuing downturn in taxicab leasing in Chicago,
as well as a decrease in the number of cabs available for lease from Yellow Cab
as a result of the settlement agreement reached with Chicago in 1988. The
negative trend to revenue changes
26
<PAGE>
for this segment could continue if the economic environment does not improve and
if the segment is not successful in continuing to develop new sources of revenue
as the settlement agreement requires the tendering of 100 additional licenses to
Chicago in each of the next five years.
The factors impacting sales, as discussed previously, had the effect of
increasing the Company's 1992 operating profit by $26.3 million as compared to
1991. Trailer segment operating profit increased by $10.5 million as compared to
1991. This increase is principally due to higher volumes, partly offset by
higher selling, general and administrative expenses ("S G & A"). Higher volumes
were also the principal reason for an increase of $15.9 million of automotive
segment operating profits as compared to 1991. Automotive segment S G & A
expenses were only slightly higher in 1992 as compared to 1991. Vehicular
segment operating profits decreased $1.4 million in 1992 compared to 1991 due to
lower revenues. While efforts were made to reduce vehicular segment operating
costs through the combination of the Company's then existing two taxicab
operations in late 1991, the decrease in revenues previously discussed was not
fully offset by decreased operating and sales, general and administrative costs.
S G & A expenses were $4.9 million higher in 1992 as compared to 1991, but
as a percentage of sales, S G & A expense is 2.2 percentage points lower in 1992
as compared to 1991.
Other expenses increased $0.9 million in 1992 as compared to 1991. Higher
gains realized on investment transactions during 1992 compared to 1991 were
offset by lower gains on sale of assets in 1992 as compared to 1991.
Interest expense was $4.7 million lower in 1992 than in 1991. The decrease
can be attributed to lower interest rates during 1992 compared to 1991 as well
as lower levels of debt outstanding during 1992 compared to 1991.
There is no minority equity expense in 1992 because Executive Life Insurance
Company ("ELIC") was placed into conservatorship in 1991 and as a result, its
interest in Checker L.P. and rights under the Partnership Agreement became
limited to the right to receive the balance of its capital account on April 11,
1991. "See "Business -- Legal Proceedings -- Executive Life Litigation."
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Available cash and cash equivalents, cash flow generated from operations
($66.9 million, $12.4 million, $37.8 million, $25.2 million and $30.7 million
for the years ended December 31, 1989, 1990, 1991, 1992 and 1993, respectively),
proceeds from borrowings and proceeds from the disposal of assets have provided
sufficient liquidity and capital resources for the Company to conduct its
operations.
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
The impact of adopting SFAS No. 106 was a charge to net income of $29.7 million
(net of taxes of $16.5 million) which was recorded as a cumulative effect
adjustment in the quarter ended March 31, 1993.
The Company also adopted the provisions of SFAS No. 109, "Accounting for
Income Taxes," effective January 1, 1993. The impact of adopting SFAS No. 109
was a charge to net income of $16.9 million which was recorded as a cumulative
effect adjustment in the quarter ended March 31, 1993.
During the quarter ended March 31, 1993, the Company adopted the provisions
of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short Duration and
Long Duration Contracts." Because of the type of insurance contracts Country
provides, the adoption of this statement had no impact on earnings; however, it
requires the disaggregation of various balance sheet accounts. For financial
reporting purposes, the 1992 balance sheet and statement of cash flows have been
restated as if SFAS No. 113 were adopted as of the beginning of the earliest
period presented. During the quarter ended March 31, 1994, the Company adopted
the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
Although the adoption of SFAS Nos. 106, 109, 113 and 115 has collectively
had a significant effect on the Company's financial position, it has not
adversely affected liquidity and capital resources.
27
<PAGE>
Great Dane's debt agreement with certain banks matures in March 1995.
Accordingly, this debt is classified as a current liability at March 31, 1994.
Refinancing is anticipated to be accomplished prior to maturity and,
accordingly, it is not anticipated that working capital will be adversely
affected.
Purchases of property, plant and equipment have averaged approximately $18
million per year over the past three years and have been funded principally by
cash flow generated from operations as well as proceeds from disposals of
assets. Purchases of property, plant and equipment for 1994 are anticipated to
be approximately $26.0 million and are expected to be funded principally by cash
flow generated from operations.
During the fourth quarter of 1993, International Controls entered into a
settlement of the Boeing litigation (see "Business -- Legal Proceedings --
Boeing Litigation"). It is anticipated that the settlement ($12.5 million over
five years) will be paid by International Controls through recoveries from
insurance carriers, the sale of assets of certain of the subsidiaries, cash
currently on hand and cash flow generated from operations.
GM, a major customer of the Company's automotive products segment, is
resorting to many measures, including obtaining significant price reductions
from its suppliers, in an effort to reduce its operating costs. Management of
the Company's automotive products segment is currently engaged in discussions
with GM concerning future pricing of parts presently being manufactured.
Automotive products segment management believes that it has adequately provided
in its near-term financial plans for any price reductions which may result from
its current discussions with GM. However, price reductions in excess of those
anticipated could have a material adverse effect on the automotive products
operations.
IMPACT OF INFLATION
Recently, due to competitive market conditions, the Company has been unable
to factor all cost increases into selling prices for its products and services.
The Company does not believe, however, that the impact of inflation affects the
Company any more than it affects the Company's competitors.
28
<PAGE>
BUSINESS
GENERAL
International Controls is a holding company that is engaged in four
principal lines of business. Great Dane manufactures a full line of truck
trailers for the over-the-road tractor trailer long and short haul markets and
containers and chassis for intermodal shipping. Motors manufactures sheet metal
stampings for automotive components and subassemblies, primarily for GM. The
Company's Yellow Cab division is currently the largest owner of taxicabs and
provider of taxi-related services in Chicago, Illinois. Country underwrites
property and casualty insurance, including taxicab insurance, workers'
compensation and other commercial and personal lines.
TRAILER MANUFACTURING OPERATIONS
OVERVIEW
Great Dane, which generated approximately 78% of the Company's revenues and
62% of the Company's total segment operating profit for the year ended December
31, 1993, designs, manufactures and distributes a full line of both standard and
customized truck trailers (including dry freight vans, reefers and platform
trailers) and intermodal containers and chassis. In 1993, Great Dane was the
largest manufacturer of truck trailers in the United States with a 12.7% total
market share, including an estimated leading 37.9% share of the reefer market
and a 23.3% share of the intermodal container and chassis market. Great Dane
believes it offers the broadest line of products in the industry and emphasizes
the production of customized and proprietary products which generally have
higher margins than more standard products. Great Dane sells and services its
trailers primarily through a nationwide network of branches and independent
dealers to gain access to a diversified customer base.
INDUSTRY OVERVIEW
The new truck trailer industry, with annual revenues of approximately $3.1
billion, is cyclical and competitive and closely tied to overall economic
conditions as well as to regulatory changes. In addition, new truck trailers
have traditionally had a five to seven-year replacement cycle. In 1990 and 1991,
the industry experienced a severe downturn due to the recession in the United
States. The industry recovered in 1992 and 1993 due in large part to the general
improvement in the U.S. economy, the replacement of a large number of truck
trailers sold in the mid-1980's and, to a lesser extent, new regulations in
certain states permitting longer truck lengths.
The national truck trailer market is highly fragmented, with approximately
180 companies operating in the truck trailer manufacturing industry. In 1993,
the two largest companies, Great Dane and Wabash National Corporation, accounted
for approximately 24% of the market and the ten largest companies accounted for
approximately 65% of sales. The basis of competition in the truck trailer
industry is product quality and durability, price, flexibility in design and
engineering, warranties, service and relationships. Due in large part to the
quality of its products and its strong distribution system, the Company believes
that Great Dane has built sustainable competitive advantages in each of these
important areas.
Recently, the transportation industry began shifting toward intermodal
containers and chassis. Since 1988, intermodal container traffic has grown by a
compounded annual growth rate of approximately 10%. "Intermodal" refers to the
transition from one mode of transportation to another and, as used in this
Prospectus, refers to the transition from rail to road. "Intermodal containers,"
as used in this Prospectus, refers to containers which are designed to travel
principally on rail, and which, when removed from the rail car, can be placed on
a chassis for transportation by truck to and from a rail yard. The emphasis on
intermodal transportation is being led by J.B. Hunt, which is integrating rail
and truck support of goods for its end customers on what J.B. Hunt has informed
Great Dane it believes is a more cost-effective basis.
29
<PAGE>
BUSINESS STRATEGIES
During the past several years, Great Dane has undertaken a number of
strategic initiatives designed to improve its competitive position and
capitalize on the growing intermodal container and chassis market. Accordingly,
Great Dane reduced corporate overhead through management consolidation,
increased operating efficiencies and capacity through plant reconfigurations,
and initiated product cost reduction and new product development programs. Great
Dane also increased its manufacturing flexibility by adapting certain of its
assembly lines to be efficient in filling both large and small orders, and
expanded its distribution network domestically, as well as in Canada and Mexico,
in order to provide new outlets for its products and high margin parts and
services business.
Furthermore, during 1992, Great Dane entered the intermodal container and
chassis market as its engineering department, working in conjunction with J.B.
Hunt, one of the largest truckload carriers in the U.S., developed a unique line
of intermodal containers and matching ultra-lightweight chassis. Great Dane's
intermodal containers are designed for use on rail but may also be transported
over the road on chassis to and from rail yards. These products enable Great
Dane's customers to take advantage of new double stack intermodal shipping
methods, believed by J.B. Hunt to be the most economical method of hauling
freight over long and intermediate distances. In connection with an
approximately $121 million initial purchase order from J.B. Hunt for these new
intermodal products, the Company installed new assembly lines in three existing
factories and initiated production for the order during the first and second
quarters of 1993. In late 1993 and in 1994, Great Dane received additional
orders of approximately $48 million and $16 million, respectively, from J.B.
Hunt. Although J.B. Hunt's requirements for these containers and chassis will
level off, Great Dane believes that J.B. Hunt's success may lead other carriers
to replace some or all of their trailers with containers and chassis. Great Dane
believes that intermodal transportation, which has been expanding at an
approximately 10% compounded annual growth rate in the United States since 1988,
will provide a significant growth opportunity as carriers replace some or all of
their trailers with containers and chassis.
Great Dane's objectives are to increase its share of the truck trailer
market and capitalize on the growing intermodal market. To achieve these
objectives, Great Dane will continue to emphasize the development of high
quality innovative products and improve the efficiency of its assembly
operations. Great Dane is currently developing and testing a new line of
ultra-lightweight flatbeds, as well as developing a new floor for its reefers.
Great Dane is also presently adapting certain of its assembly lines to produce
either intermodal containers or truck trailers on the same line. In addition,
Great Dane plans to utilize its expanded distribution network and manufacturing
flexibility to broaden its customer base by increasing sales to large customers.
PRODUCTS
GENERAL. Great Dane's principal products include vans, reefers, platform
trailers and intermodal containers and chassis. During 1992 and 1993, the sale
of these products accounted for 80% and 82% of Great Dane's revenues,
respectively. Great Dane's trailers and intermodal containers are manufactured
in sizes ranging from 28 to 57 feet. Great Dane offers 11 versions of its
various trailers and sells virtually all of these versions on a regular basis.
In addition to this standard line of products, its flexible assembly operations
enable Great Dane to customize products for its customers at premium prices.
Set forth below is a description of Great Dane's share of the market for its
principal products during 1993. All figures are based on estimated shipments.
<TABLE>
<CAPTION>
PRODUCT TYPE GREAT DANE UNIT SALES INDUSTRY UNIT SALES GREAT DANE SHARE
- ------------------------------------------------- ---------------------- ------------------- ---------------------
<S> <C> <C> <C>
Vans............................................. 14,132 123,100 11.5%
Reefers.......................................... 8,034 21,200 37.9%
Platform Trailers................................ 1,767 16,200 10.9%
Intermodal Containers and Chassis................ 10,301 44,200 23.3%
</TABLE>
30
<PAGE>
VANS. Vans are used primarily for the transportation of dry freight. Great
Dane believes that it offers the greatest variety of vans in the industry with
four primary styles: sheet and post, aluminum plate, ThermaCube and Fiberglass
Reinforced Plastic Plywood. Great Dane sells vans primarily to for-hire
truckload carriers, private carriers and leasing companies.
Great Dane's highest volume van product is the sheet and post van. These
trailers haul general non-refrigerated freight. Great Dane's models offer custom
design features in order to improve their appearance, durability and resale
value when compared to certain competitors' models.
Great Dane's aluminum plate vans were developed in late 1991. These vans
utilize thicker and more durable sidewalls than sheet and post vans and offer
significantly more interior space since they are constructed without interior
liners. Great Dane's aluminum plate van is considered a premium product and, due
to the current low price of aluminum, is a cost efficient alternative to the
sheet and post van.
Great Dane's ThermaCube van was developed and brought to market in late
1990. The ThermaCube van currently uses a technology licensed to Great Dane by
Graaff KG ("Graaff"), a German limited partnership. The ThermaCube process
involves injecting high density foam between two thin skins of aluminum or other
suitable material and bonding them into a single panel. ThermaCube vans are
lightweight and offer superior width, space, strength and thermal properties.
Since it has completed the maximum royalty payment under its agreement with
Graaff, Great Dane's current and future usage of this technology for trailers is
royalty free.
Fiberglass Reinforced Plastic Plywood vans account for a small percentage of
Great Dane's van sales. They offer increased inside width but are 300 pounds
heavier than sheet and post vans. These vans are very durable and therefore are
used predominantly in large metropolitan areas.
REEFERS. Great Dane's reefers are specialized products that command premium
pricing. The Company believes that it is the largest supplier of reefers in the
industry (with a 37.9% share in 1993) and the only company to offer more than
one type of reefer. Great Dane currently sells three types of reefers: Classic
(either aluminum or stainless steel), Superseal and ThermaCube. The
refrigeration cooling units are not manufactured by Great Dane.
The Classic reefer, essentially a sheet and post reefer, is particularly
suitable for the food distribution market because it has been engineered to
accept numerous structural modifications such as side doors and
multi-temperature refrigeration compartments. Classic reefers are sold primarily
to private carriers and truck leasing companies.
The Superseal reefer is Great Dane's lightweight, lower-priced model. This
product offers fewer options than the Classic reefer but is most popular with
for-hire carriers. Since its purchase by Great Dane in 1988, its market share
has steadily increased due to product improvements and the use of Great Dane's
national distribution network.
Great Dane believes that its proprietary ThermaCube reefer is the most
efficient and technologically advanced reefer in the industry. It offers large
cubic capacity and inside width, side wall strength and superior thermal
properties. It is currently the flagship of two of the largest reefer carriers
in the U.S. and it is gaining popularity among medium-sized carriers.
PLATFORM TRAILERS. Platform trailers are flatbeds or open deck trailers.
Great Dane offers a full line of platform trailers, consisting of drop frame,
extendible, curtainside and straight frame trailers. Drop frame flatbeds are
designed for heavy duty hauling where low deck heights are required. Extendible
flatbeds are used for self-supporting loads (e.g., pre-stressed concrete).
Curtainside flatbeds are used where side loading and cover is required. The
primary customers for Great Dane's platform trailers are for-hire material
haulers, which would include steel haulers, pre-stressed concrete carriers and
builders. Great Dane is developing and testing a new line of ultra-lightweight
flatbeds intended to increase substantially its market share.
INTERMODAL CONTAINERS AND CHASSIS. In conjunction with the growth of
intermodal container transportation, Great Dane's engineers developed a
specialized container (which can be double stacked
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<PAGE>
during rail transport) and chassis that allow a trucking company to haul
containerized loads which are similar in size and weight to those carried on
conventional over the road trailers. These containers use either aluminum plate
or the ThermaCube technology, which is Great Dane's composite wall construction,
to offer greater inside width, higher cubic capacity and greater strength than
can be obtained by conventional sheet and post construction. Further, these
containers are 500 to 1,000 pounds lighter and the chassis are 1,000 to 1,500
pounds lighter than products now in use with similar carrying capacities. The
Company believes that it is one of the two largest U.S. manufacturers of
intermodal containers and chassis and the only domestic producer of reefer
containers. Great Dane is expecting to produce, for J.B. Hunt and others, a
total of approximately 4,700 intermodal containers and a total of 5,400 chassis
in 1994.
SERVICES
GENERAL. Great Dane's business includes aftermarket parts and accessories
sales, used trailer sales and retail services (including repair and maintenance)
which enable it to be a full-service provider. The parts and service operations
have historically been a stable source of higher margin business.
AFTERMARKET PARTS AND ACCESSORIES SALES. Sales of replacement parts and
accessories are an important source of higher margin revenues for Great Dane,
and provide a value-added service which attracts and maintains Great Dane's
customer base. Parts and accessories are marketed through 51 full-line dealers,
19 parts-only dealers and 17 Great Dane-owned branch operations. Dealers and
branches sell parts either over-the-counter or through their respective retail
services.
USED TRAILERS. To be competitive in the sale of new trailers, it is often
necessary to accept used trailers in trade. Great Dane's larger retail branches
employ individuals who are responsible for trade-in appraisals and selling used
trailers. Great Dane believes that its nationwide distribution system provides
it with superior used trailer marketing capabilities.
RETAIL SERVICES. Great Dane owns and operates 17 full-service retail
branches, which provide repair and maintenance services. These retail branches
also provide warranty support to Great Dane's customers.
The chart below sets forth the percentage of Great Dane's total sales and
gross profit represented by each product or service category.
<TABLE>
<CAPTION>
% OF % OF GROSS
SALES PROFITS
-------------------- --------------------
PRODUCT OR SERVICE CATEGORY 1992 1993 1992 1993
- ----------------------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
New Truck Trailers and Containers and Chassis...................................... 79.6 82.5 59.4 63.5
Parts Sales........................................................................ 11.1 9.3 25.5 23.0
Used Trailers...................................................................... 6.6 6.0 3.9 3.7
Retail Services.................................................................... 2.7 2.2 11.2 9.8
</TABLE>
BACKLOG
At December 31, 1993, Great Dane's backlog totalled $365 million and
consisted of approximately $295 million of trailer orders and approximately $70
million of container and chassis orders, while at December 31, 1992 the backlog
totalled $255 million and consisted of $134 million and $121 million,
respectively. Great Dane's backlog of truck trailer orders was approximately $70
million at December 31, 1991.
MARKETING, DISTRIBUTION AND SALES
Great Dane believes it has the largest marketing organization in the United
States trailer industry. Sales and comprehensive support service functions are
implemented through 17 Company-owned branches (accounting for 51% of unit sales
excluding J.B. Hunt), 51 independent dealers throughout the United States,
Canada and Mexico (accounting for 49% of unit sales excluding J.B. Hunt), and 19
parts-only dealers. Great Dane's nationwide distribution system enables it to
reach a diversified customer base consisting of: for-hire carriers (such as J.B.
Hunt, Direct Transit, KLLM and Landair), private carriers (such
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<PAGE>
as Pepsico, Burger King, Publix, Winn Dixie and Food Lion) and leasing companies
(such as Ryder, Penske, Rollins, XTRA and Ruan). Except for J.B. Hunt, no
customer accounted for more than 5% of total revenues in 1993. With the
exception of a small percentage of used trailer sales, all sales are made
through Great Dane's distribution system.
Great Dane's sales force includes approximately 126 sales representatives in
dealerships and 43 sales representatives in its branches. Great Dane's Executive
Vice President of Sales oversees and coordinates the sales effort and is
assisted by five district managers. The Company's sales force is given
incentives to meet revenue and/or profitability targets.
Under an agreement with Associates Corporation of North America
("Associates"), Great Dane has agreed to refer to Associates, until the last
quarter of 1996, those of Great Dane's customers who request financing and Great
Dane has guaranteed 50% of Associates' losses (to a potential maximum of $1.25
million each year) if a trailer is repossessed. Great Dane has not experienced
any material losses under this agreement.
Great Dane provides five year warranties to its customers and estimates its
warranty costs are only 0.8% of its sale price.
MANUFACTURING AND OPERATIONS
MANUFACTURING. Great Dane has four manufacturing facilities, located in
Savannah, Georgia; Memphis, Tennessee; Wayne, Nebraska; and Brazil, Indiana.
Certain of Great Dane's manufacturing operations include flexible assembly lines
that allow Great Dane to customize its products in a cost-efficient manner.
Great Dane exercises strict quality control by screening suppliers and
conducting inspections throughout the production process. Great Dane is
currently implementing a total quality management program that endorses employee
involvement, empowerment and continuous cost improvement.
RESEARCH AND DEVELOPMENT. Great Dane currently employs a corporate
engineering department with 36 employees, which is higher than the industry
average. Great Dane makes extensive use of computer-aided design ("CAD")
technology to support production engineering. Great Dane's use of CAD technology
accelerates the development of product innovations and manufacturing
efficiencies. Great Dane's new products must meet strict quality and durability
standards and must pass strenuous road test procedures. Great Dane believes that
it is the only trailer manufacturer with on-site road simulation testing
capability.
Great Dane is currently developing a new proprietary floor for its
ThermaCube and certain Classic reefers which will eliminate wood components,
thereby increasing the life of the floor, increasing the capacity of the reefer,
simplifying the manufacturing process and reducing the cost to manufacture the
reefer. Great Dane is also developing and testing a new line of
ultra-lightweight flatbeds intended to increase its market share.
SUPPLIES AND RAW MATERIALS. Purchased materials represent approximately 81%
of direct cost of goods sold and are purchased on a centralized basis in order
to achieve economies of scale. Great Dane purchases a variety of raw materials
and sub-assemblies from various vendors with short-term contracts. Aluminum,
wood, tires and steel account for a significant portion of materials costs.
Great Dane has not experienced major shortages in these materials, but prices
may fluctuate. However, Great Dane attempts to minimize purchased material price
fluctuations by utilizing just-in-time inventory systems, thereby coordinating
the purchase of certain materials with customer orders.
ENVIRONMENTAL. Certain of Great Dane's manufacturing processes involve the
emission of chlorofluorocarbons, but Great Dane is changing those processes to
comply with new regulations and does not believe that this change will have a
material adverse effect on its operations. The manufacturing process does not
require a large quantity of any material classified as hazardous.
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<PAGE>
Great Dane is involved in a small number of environmental matters.
Management believes that the expenses associated with Great Dane's involvement
are not material in the aggregate.
PATENTS, LICENSES AND TRADEMARKS
The Company believes its "Great Dane" trademark, which identifies all of its
products, to be of value and to contribute significantly to the wide acceptance
of its products.
AUTOMOTIVE PRODUCTS OPERATIONS
OVERVIEW
Through CMC Kalamazoo and SCSM, Motors operates an automotive parts stamping
facility in Kalamazoo, Michigan and a larger, more modern facility, in South
Charleston, West Virginia, which was acquired in 1989. Motors, together with its
customers, develops, designs and manufactures a broad range of sheet metal
automotive components and subassemblies, including tailgates, fenders, doors,
hoods and roofs, primarily for sale to North American OEMs. These operations
generated approximately 14% of the Company's revenues and 29% of the Company's
total segment operating profit for the year ended December 31, 1993.
INDUSTRY OVERVIEW
The North American automotive parts industry is composed of two distinct
sectors, the original equipment market and the automotive aftermarket.
Substantially all of Motors' sales are to the original equipment market.
Industry factors which affect the automotive segment's current and future
competitiveness, growth and performance include, among others, trends in the
automotive market and policies of OEMs with respect to suppliers.
The overall market for new cars and light trucks in the United States and
Canada is large and cyclical, with a trend line annual growth of 2.3% from 1983
to 1993. While the trend line demand for cars has remained relatively flat over
this period, demand for minivan, sports utility vehicles and light trucks has
grown at a compound annual growth rate of 7.3% over this period. The Company
believes it is well positioned as a supplier of sheet metal components and
subassemblies to the OEMs in this high-growth market segment.
Generally, the OEM selects a supplier to work in conjunction with the OEM's
design team to design and develop a component which will satisfy the OEM's
purchasing standards. OEMs also evaluate and rate suppliers using rigorous
programs which encompass quality, cost control, reliability of delivery, new
technology implementation and overall management leadership and structure. As a
result, new supplier policies have sharply reduced the number of component
suppliers.
Because of ever-increasing global competition, OEMs are continually
upgrading their supplier policies. The OEMs are requiring suppliers to meet ever
stricter standards of quality, overall cost reductions and increased support for
up-front design, engineering and project management. These requirements are
continually accelerating the trend toward consolidation of the OEMs' supplier
base.
MANUFACTURING
Unlike certain of its smaller competitors, SCSM has the equipment and
versatility to produce a wide variety of automotive stamping products, carrying
out substantially all phases of a project under one roof. SCSM produces
approximately 150 products at its over 900,000 square foot modernized facility.
Its principal products include tailgate and liftgate assemblies, door
assemblies, hood assemblies, fender assemblies, wheelhouses, pillars, back
panels, floor panels, deck lids, body side panels, roof outer panels and related
parts. SCSM currently processes 8,000 tons of steel per month for 400 part
numbers and currently ships between 45,000 and 50,000 pieces per day to its
customers from 940 dies. SCSM currently utilizes between 55% and 65% of its
production capacity in terms of equipment load. Volume fluctuations at SCSM are
managed by use of overtime and temporary manpower. Management is pursuing new
long-term commitments to utilize SCSM's available capacity.
The major portion of tooling design, build and prototype for SCSM is
performed by selected suppliers under close supervision. Die maintenance and
engineering changes are completed in SCSM's
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<PAGE>
own 60,000 square foot die room which houses approximately 60 tool and die
makers. The tool room handles all die maintenance and engineering changes
in-house, including all serious die trouble such as major breaks.
CMC Kalamazoo also fabricates and assembles automotive products for those
jobs whose end product must be delivered in the surrounding Midwest region,
since transportation is a growing cost in this industry.
MARKETING AND CUSTOMERS
The automotive segment focuses on the higher-growth light truck, sports
utility vehicle and van segments of the market and currently supplies products
primarily for GM. At the present time, Motors is supplying parts on the
following GM vehicles: Suburban, Blazer, S-10 Blazer, Crew Cab, M Van (Astro and
Safari), full-size G Van, CK Truck and J Car (Cavalier). The Company has been
advised that GM plans to begin production of a four-door version of the
full-size Blazer. SCSM has supplied the roof module and other parts for the
two-door model for the past two years and is expecting to be GM's supplier of
the roof module for the four-door version. The automotive segment also supplies
parts for GM's services organization.
Management has attempted to broaden its customer base. The effect of that
effort is evidenced by the expansion of the customer base to include, among
others, Freightliner Corp. and Saturn Corporation. In addition, the automotive
segment recently signed a contract with Mercedes-Benz to produce parts for its
new sports utility vehicle for which production is expected to begin in 1996 for
the 1997 model year. Mercedes-Benz is providing the funding necessary for the
tooling to produce these parts.
Shipments of customer orders from both SCSM and CMC Kalamazoo are made on a
daily or weekly basis as required by the customer. GM provides an estimated
13-week shipping forecast which is used for material and fabrication planning
purposes. Nevertheless, changes in production by the customer may be reflected
in increases or decreases of these forecasts.
CMC Kalamazoo and SCSM are committed to customer satisfaction by producing
parts and providing the necessary support systems to assure conformity to
customer requirements. As evidence of success in these areas, SCSM has been
awarded GM's "Mark of Excellence" Award.
VEHICULAR OPERATIONS
OVERVIEW
The vehicular operations generated approximately 5% of the Company's
revenues and 12% of the Company's total segment operating profit during the year
ended December 31, 1993. Yellow Cab is the largest taxicab fleet owner in
Chicago and as of March 31, 1994, owned approximately 2,370 or 44% of the
approximately 5,400 medallions available in Chicago. Yellow Cab's primary
business is the leasing of its medallions and vehicles to independent taxi
operators through two programs: the owner-operator program and the daily lease
program. The Company also provides a variety of other services to taxi drivers
and non-affiliated medallion holders, including insurance coverage through
Country and repair and maintenance services through Chicago AutoWerks.
THE OWNER-OPERATOR AND DAILY LEASE PROGRAMS
Pursuant to Yellow Cab's owner-operator program, an independent,
non-employee taxi operator leases from Yellow Cab a license and vehicle, with an
option to purchase the vehicle beginning at the end of the second year. During
the lease term (generally five years), Yellow Cab receives a weekly lease
payment for the vehicle as well as a weekly fee to cover the use of Yellow Cab's
license and other services provided by Yellow Cab and its affiliates, including
use of its colors and tradename, liability insurance coverage, radio dispatch,
repair and maintenance. Most operators also purchase the required collision
insurance from Country. See "Business-Insurance Operations."
Despite the name of the Yellow Cab "owner-operator program," taxi drivers
participating in the program do not take ownership of the vehicles, unless they
exercise their option to purchase the vehicle at the end of the initial lease
term and, even when the operators take ownership of the vehicle, Yellow
35
<PAGE>
Cab retains ownership of the medallion, which is then transferred to a new
vehicle. Nevertheless, owner-operators take responsibility for the maintenance
and storage of their vehicles and are responsible for compliance with all
Chicago and Yellow Cab regulations. Thus, Yellow Cab is relieved of these
maintenance and repair costs as well as the cost of housing and storing this
significant portion of its large fleet. As of March 31, 1994, approximately 65%
of the Company's medallions were leased under the owner-operator program.
The daily lease program allows drivers to lease a medallion and a vehicle
for 12 hours, 24 hours, or for a weekend. All leases must be paid in advance. As
Yellow Cab has increased its emphasis on the more profitable owner-operator
program, its daily lease program has been used largely as a source and training
operation for new owner-operators. Through a "new licensee introductory offer,"
those recipients of new chauffeurs' licenses who are at least 23 years old may
lease a vehicle and a medallion from Yellow Cab at reduced rates for the first
five days following their receipt of a license. Management believes that Yellow
Cab holds a greater than 75% share of the total "off-the-street" taxi leasing
market in Chicago.
THE MEDALLIONS
As of March 31, 1994, Yellow Cab owned approximately 2,370 of the roughly
5,400 medallions available in Chicago. In order to retain these licenses, the
Company must comply with the regulations of Chapter 9-112 of the Municipal Code
of Chicago (governing public passenger vehicles), including the payment of
annual taxicab license fees, currently $500 per vehicle.
Pursuant to a 1988 agreement with Chicago to settle various lawsuits, Yellow
Cab is required to relinquish to Chicago and not renew 100 taxicab licenses on
January 1 of each year through 1997 (the "Agreement"). In addition, the
Agreement limits to 100 per year the number of new licenses that Chicago may add
to the total outstanding through 1997, bringing the total number of available
licenses to a maximum of 5,700 on December 31, 1997. At the required surrender
rate, assuming no additional medallions are sold by Yellow Cab, Yellow Cab would
hold approximately 2,070 medallions after January 1, 1997, or approximately 36%
of the maximum total then-to-be outstanding. Under the Agreement, no person
other than Motors and its affiliated companies can own more than 25% of the
licenses in Chicago.
The scheduled decline in the number of licenses allowed to be held by Yellow
Cab pursuant to the Agreement has had, and will continue to have, a negative
effect on the revenue-generating capability of the taxi leasing operations.
Although Yellow Cab has been able to offset these declines to some extent
through increases in the average lease rates charged to its customers, in
December 1993, Chicago passed an ordinance which gives the Commissioner of
Consumer Services broad powers to set maximum lease rates. See "-- Regulatory
Issues." The Company has also sought to increase its vehicular operations'
revenues by offering ancillary services to the increasing number of unaffiliated
taxi cab drivers through Chicago AutoWerks. At the same time, as the number of
medallions held by Yellow Cab declines, Yellow Cab will require fewer new
vehicles to support its taxi leasing operations and, consequently, a lower level
of capital spending.
The Agreement has also had the effect of allowing the Company to sell
licenses in the open market for the first time since 1982. In 1993 and the first
quarter of 1994, the Company sold 73 and 4 medallions, respectively, at an
average price of $38,000 each, a historical high. Although the value of Yellow
Cab's fleet of vehicles is reflected on the Company's balance sheet, the
significant value of its medallions is not.
THE VEHICLE FLEET
Under Chicago regulations, no medallion holder may operate a vehicle older
than seven model years. Each year, Yellow Cab orders new vehicles to replace
those that are expected to be removed from service during the next year. Yellow
Cab has given increased emphasis to selling its older used cars during the past
several years. Recent efforts have included a program of increased advertising
and marketing, and the development of this segment of business beyond the
immediate region. At March 31, 1994, Yellow Cab owned approximately 2,370
vehicles at a net book value of $14.0 million (net of depreciation of $19.4
million).
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<PAGE>
MAINTENANCE, REPAIR AND PARTS SALES
Chicago AutoWerks provides preventive and other maintenance services,
primarily to Yellow Cab and non-affiliated taxi drivers, and also, as a licensed
full-line auto repair shop, to the public. Chicago AutoWerks maintains a body
shop at which major repairs can be made. As an authorized Chevrolet and Ford
warrantor, Chicago AutoWerks also repairs those manufacturers' vehicles that are
under warranty and bills the manufacturers directly.
Chicago AutoWerks serves the dispatching needs of Yellow Cab and
non-affiliated drivers, maintains the radios in their taxicabs and supplies
emergency radio services they require. Chicago AutoWerks also sells automotive
parts.
COMPETITION
Although Yellow Cab is the largest provider of taxicab related services in
Chicago, it faces competition from a number of other medallion owners who lease
medallions and vehicles to independent operators. The most significant of these
competitors are Flash Cab Company and American United Cab Association. Yellow
Cab management believes that each of these competitors owns approximately 150 to
200 medallions although each competitor operates under a variety of individual
cab service names and logos.
LIABILITY INSURANCE
Yellow Cab currently maintains liability insurance coverage for losses of up
to $350,000 per occurrence as well as an "excess layer" of coverage for losses
over $600,000 and up to $29,000,000. The initial $350,000 layer of insurance is
issued by Country. See "Business-Insurance Operations." During several periods
in the past, Yellow Cab did not maintain the level of coverage that Yellow Cab
currently maintains. As a result, there were, as of March 31, 1994, eight
outstanding claims against Yellow Cab for which it is not fully covered by
third-party insurance. As of that date, Yellow Cab maintained balance sheet
reserves totalling approximately $2,650,000 for these claims. Management
believes that these reserves will be sufficient to cover its outstanding claims.
REGULATORY ISSUES
Yellow Cab's operations are regulated extensively by the Department of
Consumer Services of Chicago which regulates Chicago taxicab operations with
regard to certain requirements including vehicle maintenance, insurance and
inspections, among others. The City Council of Chicago has authority for setting
taxicab rates of fare. Effective January 18, 1994, rates of fare paid by
passengers increased by 10%. However, lessors had the right to increase, until
May 1, 1994, the rates paid by lessee drivers by not more than 2.8% of the lease
rate in effect on December 1, 1993. After May 1, 1994, lessors may not charge
more than the rates prescribed by the Commissioner (which, in certain
categories, are less than the rates currently charged by Yellow Cab) without the
consent of the City of Chicago. The rates in effect on May 1, 1994, including
the 2.8% increase, may remain in effect pending a petition and appeal for a
higher rate. Yellow Cab increased its rates by the maximum allowed 2.8% prior to
May 1, 1994 and has filed, in a timely manner, a petition to increase its rates
still further. Yellow Cab intends to pursue that proposal to final hearing.
ENVIRONMENTAL ISSUES
Yellow Cab owns eleven parcels of real estate, all situated in Chicago. Some
of these sites have previously been used for the storage and servicing of
taxicabs and some of the sites continue to be so used. These sites, therefore,
involve gasoline and oil underground storage tanks which may create a hazardous
waste product if the tanks on any parcel now leak or have in the past leaked.
Yellow Cab has registered in accordance with law all of its underground
tanks with the Office of the State Fire Marshall for the State of Illinois and
has secured site assessments from environmental engineers and consultants
concerning the nature and extent of any hazardous discharge. Under the Illinois
Underground Storage Tank Fund Law, virtually all clean-up costs associated with
leaking tanks are covered by a guaranty fund, which is administered by the
Illinois Environmental Protection Agency and reimburses these costs except for
the first $10,000 per site. Even assuming reimbursement is denied or unavailable
from this guaranty fund, the Company believes that the liability for clean-up
expenses on sites which have not already been cleaned up will not be material.
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INSURANCE OPERATIONS
Country generated approximately 3% of the Company's revenues and an
aggregate of $3.9 million of pre-tax income (comprising approximately $2.0
million of segment operating loss and approximately $5.9 million of portfolio
interest income) during the year ended December 31, 1993. During 1993, 67% of
Country's total premium revenue was attributable to non-affiliated
property/casualty lines, primarily worker's compensation, commercial automobile
and commercial multiple peril. The remainder of Country's premium revenues was
attributable to affiliated taxi liability, collision and worker's compensation
insurance in the State of Illinois. Through its longstanding relationship with
Yellow Cab, Country has developed a comprehensive understanding of the
associated risks of taxicab insurance underwriting and presently is one of the
few voluntary providers of such insurance. Country's strategy is to expand its
non-affiliated personal and commercial/casualty property lines by entering new
markets including southern Illinois and the states surrounding Illinois while
maintaining its affiliated taxi liability and collision business. Country is
currently rated "A" by A.M. Best.
The taxicab liability coverage which Country writes carries a $350,000 limit
of liability for each occurrence. In addition, Country makes collision insurance
available to licensees and owner-operators at premium rates which are comparable
to the rates charged by competitors for equivalent coverage. Country also writes
full lines of commercial and personal property and casualty insurance for risks
located in Chicago and the surrounding metropolitan area. With the exception of
a specialty public transportation program, which program policies are reinsured
for amounts above $350,000, all non-affiliate policies are reinsured for amounts
above $150,000.
During 1993, new management was brought into Country to review and manage
its lines of business with a view to dropping or reducing its exposure in
certain lines and expanding Country's operations within its geographic region.
Country intends to limit its exposure by not writing in excess of two-and-
one-half times the amount of its statutory surplus, which the Company believes
to be a conservative approach.
Country is domiciled in the State of Illinois and is a licensed carrier in
Michigan as well as being admitted as an excess and surplus lines carrier in 33
other states. Country has commenced expansion of its business in Southern
Illinois by contracting with established agencies in Peoria, Decatur and
Champaign, Illinois and intends to emphasize personal lines of insurance, such
as homeowners and commercial multiple peril and automobile liability and
collision. Country is also applying for licenses in other states, such as
Wisconsin and Indiana. To the best of management's knowledge, Country is in
compliance with all applicable statutory requirements and regulations.
INFORMATION CONCERNING BUSINESS SEGMENTS
Certain financial data with respect to the Company's business segments
appear in Note N of Notes to Consolidated Financial Statements -- December 31,
1993 and are incorporated herein by reference.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 1993, the Company employed a total of approximately 5,055
people. The table below details the number of persons employed as of that date
in each of the Company's business segments:
<TABLE>
<CAPTION>
ADMINISTRATIVE
HOURLY AND EXECUTIVE
----------- -------------------
<S> <C> <C>
Trailer Manufacturing Operations....................................................... 3,265 546
Automotive Products Operations......................................................... 697 142
Vehicular Operations................................................................... 228 21
Insurance Operations................................................................... 8 148
</TABLE>
Approximately 295 employees in the Company's trailer manufacturing
operations, 286 in the Company's automotive products operations, and 63 in the
Company's vehicular operations are covered by collective bargaining agreements.
During 1993, Checker L.P. entered into a new contract with the Allied Industrial
Workers of America, AFL-CIO, Local 682 in Kalamazoo, Michigan, currently known
as Local
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Union No. 7682 of The United Paperworkers International Union, AFL-CIO, which
expires in May 1996. Checker L.P. is party to a contract with D.U.O.C. Local
777, a division of National Production Workers of Chicago and Vicinity, Local
777, which expires in November 1995. During 1993, Great Dane Trailers Tennessee,
Inc., a subsidiary of Great Dane, negotiated a new contract (expiring in January
1996) with Talbot Lodge No. 61 of the International Association of Machinists
and Aerospace Workers. In general, the Company believes its relationship with
its employees to be satisfactory. Although there have been attempts to unionize
various of the Company's divisions in the past few years, including SCSM and the
Great Dane plant in Brazil, Indiana, such attempts have, to date, been
unsuccessful.
PROPERTIES
International Controls currently maintains its principal executive offices
at Checker L.P.'s facility in Kalamazoo, Michigan.
The location and general description of the principal properties owned or
leased by the Company are as follows:
<TABLE>
<CAPTION>
OWNED OR LEASED;
IF LEASED,
LOCATION TYPE OF FACILITY AREA/FACILITY SQUARE FOOTAGE EXPIRATION YEAR
- ----------------------------- ------------------------------- ----------------------------- ------------------
<S> <C> <C> <C>
TRAILER MANUFACTURING
OPERATIONS:
Savannah, Georgia............ Manufacturing Plant and Office 61 acres/455,000 sq. ft. Owned
Brazil, Indiana.............. Manufacturing Plant and Office 80 acres/564,000 sq. ft. Owned
Memphis, Tennessee........... Manufacturing Plant 8 acres/107,000 sq. ft. Leased; 2003
3.5 acres/13,000 sq. ft. Owned
Wayne, Nebraska.............. Manufacturing Plant and Office 35 acres/179,000 sq. ft. Owned
14 Locations in 10 States.... Sales and Service Branches 98 acres/303,000 sq. ft. Owned
15 Locations in 10 States.... Sales and Service Branches 34 acres/218,000 sq. ft. Leased; 1994
to 2015
AUTOMOTIVE PRODUCTS OPERATIONS:
Kalamazoo, Michigan.......... Manufacturing Plant and Office 71 acres/750,000 sq. ft. Owned
South Charleston, Manufacturing Plant and Office 922,000 sq. ft. Leased; 2028
West Virginia...............
VEHICULAR OPERATIONS:
Chicago, Illinois (13 Garages, Parking Lots and 735,000 sq. ft. 11 Owned; 2 Leased
Locations).................. Offices
INSURANCE OPERATIONS:
Chicago, Illinois (3 Offices/Storage Facility 33,000 sq. ft. Leased; 1995 to
Locations).................. 2002
</TABLE>
The principal facilities owned by the Company are considered by the Company
to be well maintained, in good condition and suitable for their intended use.
LEGAL PROCEEDINGS
EXECUTIVE LIFE LITIGATION
By order of the Superior Court of Los Angeles County (the "California
Court") on April 11, 1991, Case No. B5-006-912 (the "California Order"), the
California State Insurance Commissioner was appointed Conservator for Executive
Life Insurance Company ("ELIC"), a limited partner in Checker L.P. By
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<PAGE>
letter dated May 20, 1991, Motors and Checker L.P. advised ELIC and the
Conservator that the appointment of the Conservator pursuant to the California
Order constituted an "Event of Default" under the Partnership Agreement, and
that, therefore, ELIC's rights under the Partnership Agreement and interest in
Checker L.P. were altered. More specifically, Motors and Checker L.P. asserted
that ELIC's rights, as of April 11, 1991, were limited to the right to receive a
payout of its capital account, calculated as of that date, in quarterly
installments over approximately a 23-year period. On June 28, 1991, the
Conservator notified Motors and Checker L.P. that he did not accept the position
set forth in the May 20 letter and that, in his view, ELIC's status as a limited
partner had not been altered.
Motors, Checker L.P. and the Conservator have been in litigation for three
years, each seeking, among other things, a declaration of its rights under the
Partnership Agreement. Motors, Checker L.P. and the Conservator have agreed to
settle the litigation. Pursuant to the settlement, the Company will redeem
ELIC's interest in Checker L.P. for $37.0 million, to be paid upon consummation
of the Offering. In addition, under certain circumstances, if all or
substantially all of the assets of Checker L.P. are sold within five years of
the consummation of the Minority Interest Redemption, ELIC may be entitled to
receive a payment equal to the positive difference between (x) the distribution
ELIC would have received upon liquidation of Checker L.P. as a result of such
transaction, calculated in accordance with the provisions of the Partnership
Agreement as if it had continued to hold its partnership interest, and (y) the
future value of $37.0 million calculated at 15% per annum from the date of the
Minority Interest Redemption to the date of such transaction. The California
Court approved the settlement on May 26, 1994.
BOEING LITIGATION
On February 8, 1989, the Boeing Company ("Boeing") filed a lawsuit naming
International Controls, together with three prior subsidiaries of International
Controls, as defendants in Case No. CV89-119MA, United States District Court for
the District of Oregon. In that lawsuit, Boeing sought damages and declaratory
relief for past and future costs resulting from alleged groundwater
contamination at a location in Gresham, Oregon, where the three prior
subsidiaries of International Controls formerly conducted business operations.
On December 22, 1993, International Controls entered into a settlement with
Boeing, settling all claims asserted by Boeing in the lawsuit. Pursuant to the
settlement terms, International Controls will pay Boeing $12.5 million over the
course of five years, at least $5 million of which is being provided by certain
insurance companies. In accordance with the settlement agreement, Boeing's
claims against International Controls and the three former subsidiaries have
been dismissed and Boeing has released and indemnified International Controls
with respect to certain claims. The Company established a reserve of $7.5
million in 1993 in connection with this matter.
CERTAIN ENVIRONMENTAL MATTERS
Within the past five years, Great Dane and Motors have entered into certain
consent decrees with federal and state governments relating to the cleanup of
waste materials. The aggregate obligations of Great Dane and Motors pursuant to
these consent decrees are not material.
In May 1988, International Controls sold all of the stock of its
subsidiaries, Datron Systems, Inc. and All American Industries, Inc., and in
connection therewith agreed to indemnify the purchaser for, among other things,
certain potential environmental liabilities. The purchaser asserted various
claims for indemnification and had commenced litigation in Connecticut with
respect to alleged contamination at a manufacturing facility owned by a former
second-tier subsidiary. The court denied one of the purchaser's claims and
dismissed another with prejudice. The balance of the claims for reimbursement of
monitoring and clean up costs were dismissed without prejudice. International
Controls and the purchaser have resolved their relative responsibilities for all
claims for cleanup and monitoring costs at the facility through April 1993 and
International Controls paid $350,000 in complete payment of all bills submitted
for work completed prior to that time. International Controls and the purchaser
are continuing to discuss their relative responsibilities for monitoring costs
after that time. International Controls does not believe that its obligations
will be material. The purchaser has also put International Controls on notice
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<PAGE>
of certain other alleged environmental and other matters for which it intends to
seek indemnification as costs are incurred. International Controls does not
believe that its obligations, if any, to pay these claims will be material.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, age and principal position of each
of the executive officers and directors of the Company as of March 31, 1994:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------------------- ----------- --------------------------------------------
<S> <C> <C>
David R. Markin......................................... 63 President, Chief Executive Officer and
Director of International Controls
Allan R. Tessler........................................ 57 Chairman of the Board of International
Controls
Martin L. Solomon....................................... 57 Vice Chairman and Secretary of International
Controls
Wilmer J. Thomas, Jr.................................... 67 Vice Chairman of International Controls
Jay H. Harris........................................... 57 Executive Vice President and Chief Operating
Officer of International Controls
Marlan R. Smith......................................... 50 Treasurer of International Controls
Kevin J. Hanley......................................... 38 Controller of International Controls
Willard R. Hildebrand................................... 54 President and Chief Executive Officer of
Great Dane
Larry D. Temple......................................... 47 Group Vice President of Motors
Jeffrey M. Feldman...................................... 43 President of Yellow Cab
Christopher F. Hammond, III............................. 54 Executive Vice President -- Sales of Great
Dane
Thomas W. Horan......................................... 50 Senior Vice President -- Finance and
Secretary of Great Dane
Fred T. Mote............................................ 59 Senior Vice President -- Operations of Great
Dane
Victor L. Johnson, Jr................................... 76 Senior Vice President -- Legal Affairs of
Great Dane
John T. Wise............................................ 48 President of SCSM
David Hannah............................................ 38 Treasurer/Controller of SCSM
Robert Barnes........................................... 51 Vice President -- Manufacturing of Motors
</TABLE>
BIOGRAPHICAL INFORMATION
David R. Markin, President and Chief Executive Officer of International
Controls since January 11, 1989, has been President and Chief Executive Officer
of Motors since 1970. Mr. Markin serves on the Boards of Directors of Jackpot
Enterprises, Inc., an operator of gaming machines, Enhance Financial Services
Group Inc., a reinsurance company, and Data Broadcasting Corporation, a provider
of market data services to the investment community.
41
<PAGE>
Allan R. Tessler, Chairman of the Board of International Controls since
January 11, 1989, is also Chairman of the Boards of Directors of International
Financial Group, Inc., a merchant banking firm ("IFG"), Enhance Financial
Services Group Inc., a reinsurance company, and Allis-Chalmers Corporation, a
manufacturer of miscellaneous fabricated textile products ("Allis-Chalmers"),
and is Chief Executive Officer of IFG since 1987 and of Allis-Chalmers since
1994. Mr. Tessler serves on the Boards of Directors of Jackpot Enterprises,
Inc., an operator of gaming machines, and The Limited, Inc., a manufacturer and
retailer of apparel. Mr. Tessler is also an attorney and from 1976 through 1988,
he was a member of the Executive Committee of the law firm of Shea & Gould; from
1989 through March 1, 1993, he was of counsel to that firm. Beginning in 1990,
Mr. Tessler and another person were retained by Infotechnology, Inc. and
Financial News Network Inc. as a restructuring team and to serve as Co-Chief
Executive Officers during the restructuring of those companies. As part of the
plan implemented by the restructuring team, those companies were placed in
bankruptcy, from which they emerged in 1992 as Data Broadcasting Corporation, a
provider of market data services to the investment community. Mr. Tessler
continues to serve as Co-Chairman of the Board and Co-Chief Executive Officer of
the restructured company.
Martin L. Solomon, Vice Chairman and Secretary of International Controls
since January 11, 1989, is a private investor. Mr. Solomon was employed as a
securities and portfolio analyst at Steinhardt Partners, an investment firm,
from 1985 through 1987. From 1988 through September 1990, he was the Managing
Partner and Director at Value Equity Associates I, Limited Partnership, an
investment firm. Mr. Solomon serves on the Board of Directors of Xtra
Corporation, a truck leasing company.
Wilmer J. Thomas, Jr., Vice Chairman of International Controls since January
11, 1989, is a private investor. Mr. Thomas served as Treasurer of International
Controls from January 1989 to January 1994. Mr. Thomas serves on the Boards of
Directors of Moore Medical Corp., a pharmaceutical and surgical supply company,
Oak Hills Sportswear Corp., a clothing company, and RCL Capital Corp., a
development stage company whose business objective is to acquire an operating
business.
The executive officers of International Controls and the other Issuers, in
addition to Messrs. Markin, Tessler, Solomon and Thomas, are:
Jay H. Harris has been Executive Vice President and Chief Operating Officer
of International Controls for more than the past five years and a Vice President
of Motors since May 1991. Mr. Harris was a director of International Controls
from 1978 until January 11, 1989.
Marlan R. Smith has been Treasurer of International Controls since January
1994 and Vice President and Treasurer of Motors since March 1988. Prior to being
elected Treasurer of International Controls, he served as Assistant Treasurer
since January 1989.
Kevin J. Hanley has been Controller of International Controls since January
1994 and Secretary and Controller of Motors since December 1989. For more than
five years prior thereto, Mr. Hanley served as a senior manager with Ernst &
Young.
Willard R. Hildebrand, was elected as President and Chief Executive Officer
of Great Dane effective January 1, 1992. Mr. Hildebrand had served as President
and Chief Operating Officer of Fiatallis North America, Inc., a manufacturer of
heavy construction and agricultural equipment, for more than five years prior
thereto.
Larry D. Temple, has been Group Vice President of Motors since September
1989. Mr. Temple served as Vice President of Manufacturing from 1988 to 1989
and, prior thereto, as Assistant Vice President of Manufacturing.
Jeffrey M. Feldman has been President of Yellow Cab since 1983 and Vice
President of Motors since January 1988.
John T. Wise has been President of SCSM for the past two years. He was Vice
President -- General Manager from 1989 to 1992, and prior thereto served as
Plant Manager.
42
<PAGE>
David Hannah has been Treasurer/Controller of SCSM since 1987.
Christopher F. Hammond, III has been Executive Vice President -- Sales of
Great Dane since August 1990. Prior to being elected Executive Vice President --
Sales, Mr. Hammond served as Senior Vice President -- Sales of Great Dane since
January 1988.
Thomas W. Horan has been Senior Vice President -- Finance of Great Dane
since September 1989 and Secretary of Great Dane since June 1991. For more than
five years prior thereto, Mr. Horan served as Controller of International
Controls.
Fred T. Mote has been Senior Vice President -- Operations of Great Dane
since April 1984.
Victor L. Johnson has been Senior Vice President -- Legal Affairs of Great
Dane since April 1994 and prior thereto served as Senior Vice President --
Materials and Planning of Great Dane since November 1979.
Robert Barnes has been Vice President -- Manufacturing of Motors since 1993
and served as Assistant Vice President -- Manufacturing Support Services prior
thereto.
All directors of each Issuer hold office until the next annual meeting of
stockholders of such Issuer or until their successors are elected and qualified.
Each Issuer's officers are elected annually by their respective boards of
directors and hold office until their successors are qualified and chosen.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Each of Messrs. Markin, Solomon, Tessler and Thomas is an executive officer
of International Controls and participates, as a director, in the deliberations
concerning executive officer compensation. During 1993, Mr. Markin served on the
compensation committee of Enhance Financial Services Group Inc. and Data
Broadcasting Corporation and Mr. Tessler served as an executive officer of each
of these companies.
As of December 31, 1993, Country holds $0.9 million principal amount of
Enhance Financial Services Group Inc., 7% Notes due December 1, 1996, of which
company Mr. Markin is a director.
During 1993, 1992 and 1991, the Company used, on a month-to-month basis, an
airplane owned by a corporation of which Mr. Tessler is the sole shareholder.
The Company paid $60,000 per month for such use.
Each of Messrs. Markin, Solomon, Tessler and Thomas provides consulting
services to Yellow Cab and each receives for such services (commencing in
January 1988) $10,000 per month. Messrs. Solomon, Tessler and Thomas also
provide consulting services (a) to Motors for which they each receive monthly
fees of $5,000 (commencing in January 1988) and (b) to Country for which they
each received monthly fees of approximately $18,300 in each of 1993, 1992 and
1991. Mr. Markin serves as a consultant to Chicago AutoWerks, a division of
Checker L.P., for which he receives monthly fees of approximately $1,200
(commencing in January 1988), and to Country, for which he receives monthly fees
of approximately $4,600.
During 1991, 1992, and until March 1, 1993, Mr. Tessler was of counsel to
Shea & Gould, a law firm retained by the Company for certain matters.
Frances Tessler, the wife of Allan R. Tessler, is employed by Smith Barney
Shearson which executes trades for Country's investment portfolio. During 1993
and 1992, Mrs. Tessler received for her services approximately $78,000 and
$69,000, respectively, of the commissions paid to Smith Barney Shearson.
On September 24, 1992, American Country Financial Services Corp. ("AFSC"), a
subsidiary of Country, purchased from The Mid City National Bank of Chicago the
promissory note dated July 30, 1992, made by King Cars, Inc. ("King Cars") in
the principal amount of $381,500 plus accrued interest in the amount of $3,560.
The note, which has been renewed several times, had outstanding principal and
accrued interest as of March 31, 1994 of approximately $423,000 and matures in
December 1994. King Cars is owned by Messrs. Markin, Tessler, Solomon, Thomas
and Feldman. King Cars is a party to an
43
<PAGE>
agreement dated December 15, 1992, with Yellow Cab pursuant to which Yellow Cab
purchases from King Cars display frames for installation in its taxicabs and
King Cars furnishes Yellow Cab advertising copy for insertion into the frames.
King Cars receives such advertising copy as an agent in Chicago for an unrelated
company which is in the business of selling and arranging for local and national
advertising. Of the revenues generated from such advertising, 30% will be
retained by King Cars and the balance will be delivered to Yellow Cab until such
time as Yellow Cab has recovered costs advanced by it for the installation of
advertising frames in 500 of its taxicabs (approximately $78,000). The terms to
Yellow Cab are the same or more favorable than those offered by King Cars to
unrelated third parties.
Each of Messrs. Markin, Solomon, Tessler and Thomas received interest
payments of $704,795 in 1993, $733,356 in 1992 and $897,637 in 1991 pursuant to
the terms of the Existing Notes held by them (See Note G of the Notes to
Consolidated Financial Statements -- December 31, 1993).
COMPENSATION
The following table sets forth the 1993 annual compensation for the Chief
Executive Officers of the Issuers and the five highest paid executive officers
of each Issuer whose total annual salary and bonus exceeded $100,000, as well as
the total compensation paid to each individual for the Company's two previous
fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
- ------------------------------------------- --------- ------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
David R. Markin, .......................... 1993 $ 1,230,000 $ 250,000 $ 246,519(1) $ 2,249(13)
President, Chief Executive Officer and 1992 1,230,000 150,000 239,594(1) 2,182(13)
Director of International Controls 1991 1,230,000 0 258,072(1) 915(13)
Jay H. Harris, ............................ 1993 350,000 250,000 0 2,249(13)
Executive Vice President and 1992 326,016 125,000 0 2,182(13)
Chief Operating Officer of International 1991 302,032 50,000 0 915(13)
Controls
Jeffrey M. Feldman, ....................... 1993 210,000 150,000 85,008(2) 2,249(13)
President of Yellow Cab 1992 186,667 150,000 77,755(2) 2,182(13)
1991 138,906 150,000 53,328(2) 659(13)
Martin L. Solomon, ........................ 1993 0 0 400,000(3) 0
Vice Chairman and Secretary of 1992 0 0 400,000(3) 0
International Controls 1991 0 0 405,000(3) 0
Allan R. Tessler, ......................... 1993 0 0 400,000(3) 0
Chairman of the Board of International 1992 0 0 400,000(3) 0
Controls 1991 0 0 405,000(3) 0
Wilmer J. Thomas, Jr., .................... 1993 0 0 400,000(3) 0
Vice Chairman of International Controls 1992 0 0 400,000(3) 0
1991 0 0 405,000(3) 0
Willard R. Hildebrand, .................... 1993 203,500 150,000 7,314(4) 0
President and Chief Executive Officer of 1992 190,175 105,000 4,133(4) 106,368(14)
Great Dane 1991 31,108 0 134(4) 0
Christopher F. Hammond, III, .............. 1993 131,450 74,000 7,529(5) 0
Executive Vice President -- Sales of Great 1992 125,900 60,000 7,190(5) 0
Dane 1991 122,850 0 5,771(5) 0
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
- ------------------------------------------- --------- ------------- ----------- --------------- ---------------
Thomas W. Horan ........................... 1993 $ 129,050 $ 74,000 $ 9,921(6) $ 0
Senior Vice President -- Finance and 1992 122,700 60,000 7,870(6) 0
Secretary of Great Dane 1991 119,600 0 8,565(6) 0
<S> <C> <C> <C> <C> <C>
Fred T. Mote .............................. 1993 128,150 60,000 9,202(7) 0
Senior Vice President -- Operations of 1992 123,250 60,000 7,695(7) 0
Great Dane 1991 120,850 0 8,106(7) 0
Victor L. Johnson, Jr. .................... 1993 118,350 48,000 18,929(8) 0
Senior Vice President -- Legal Affairs of 1992 114,850 29,000 18,624(8) 0
Great Dane 1991 113,350 0 18,386(8) 0
John T. Wise .............................. 1993 95,900 101,000 13,397(9) 797(14)
President of SCSM 1992 91,500 56,000 9,420(9) 720(14)
1991 87,500 1,682 5,790(9) 300(14)
David Hannah .............................. 1993 69,413 56,000 6,550(10) 825
Treasurer/Controller of SCSM 1992 63,530 34,000 2,598(10) 727
1991 59,576 1,183 585(10) 300
Larry D. Temple ........................... 1993 108,600 125,000 2,744(11) 2,248
Group Vice President of Motors 1992 108,600 60,000 2,761(11) 1,493
1991 84,600 7,500 2,771(11) 362
Marlan R. Smith ........................... 1993 84,000 35,000 3,416(12) 1,190
Treasurer of International Controls 1992 84,000 25,000 2,614(12) 1,046
1991 84,000 3,500 2,519(12) 360
<FN>
- --------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Other compensation
for Mr. Markin includes: 1993 1992 1991
-------- -------- --------
Consulting Fees.......... $190,000 $190,000 $195,000
Life Insurance.......... 41,027 37,023 40,527
Automobile.............. 8,125 5,100 15,400
Club dues............... 7,367 7,471 7,145
-------- -------- --------
$246,519 $239,594 $258,072
-------- -------- --------
-------- -------- --------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(2) Other compensation
for Mr. Feldman includes: 1993 1992 1991
--------- --------- ---------
Consulting Fees................ $ 57,000 $ 57,000 $ 40,000
Life Insurance................ 11,253 10,739 7,861
Automobile.................... 1,748 1,537 1,481
Club dues..................... 15,007 8,479 3,986
--------- --------- ---------
$ 85,008 $ 77,755 $ 53,328
--------- --------- ---------
--------- --------- ---------
(3) Consulting fees.
(4) Other compensation
for Mr. Hildebrand includes: 1993 1992 1991
--------- --------- ---------
Life Insurance................. $ 1,560 $ 806 $ 134
Club dues..................... 3,420 2,400 0
Automobile.................... 2,324 927 0
--------- --------- ---------
$ 7,314 $ 4,133 $ 134
--------- --------- ---------
--------- --------- ---------
</TABLE>
45
<PAGE>
<TABLE>
<S> <C> <C> <C>
(5) Other compensation
for Mr. Hammond includes: 1993 1992 1991
--------- --------- ---------
Life Insurance................ $ 961 $ 720 $ 720
Club Dues..................... 3,820 3,730 3,310
Automobile.................... 2,748 2,740 1,741
--------- --------- ---------
$ 7,529 $ 7,190 $ 5,771
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(6) Other compensation
for Mr. Horan includes: 1993 1992 1991
--------- --------- ---------
Life Insurance................ $ 936 $ 150 $ 150
Club Dues..................... 3,420 3,180 2,940
Automobile.................... 5,565 4,540 5,475
--------- --------- ---------
$ 9,921 $ 7,870 $ 8,565
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(7) Other compensation
for Mr. Mote includes: 1993 1992 1991
--------- --------- ---------
Life Insurance................ $ 1,948 $ 1,530 $ 1,530
Club Dues..................... 840 840 840
Automobile.................... 6,414 5,325 5,736
--------- --------- ---------
$ 9,202 $ 7,695 $ 8,106
--------- --------- ---------
--------- --------- ---------
(8) Other compensation
for Mr. Johnson includes: 1993 1992 1991
--------- --------- ---------
Life Insurance................ $ 10,560 $ 10,560 $ 10,560
Club Dues..................... 3,420 3,180 3,000
Automobile.................... 4,949 4,884 4,826
--------- --------- ---------
$ 18,929 $ 18,624 $ 18,386
--------- --------- ---------
--------- --------- ---------
(9) Other compensation
for Mr. Wise includes: 1993 1992 1991
--------- --------- ---------
Travel Allowance.............. $ 4,800 $ 4,800 $ 4,800
Club Dues..................... 1,562 1,537 505
Profit Sharing................ 6,550 2,596 0
Automobile.................... 485 485 485
--------- --------- ---------
$ 13,397 $ 9,420 $ 5,790
--------- --------- ---------
--------- --------- ---------
(10) Other compensation
for Mr. Hannah includes: 1993 1992 1991
--------- --------- ---------
Club Dues.................... $ 0 $ 0 $ 585
Profit Sharing............... 6,550 2,598 0
--------- --------- ---------
$ 6,550 $ 2,598 $ 585
--------- --------- ---------
--------- --------- ---------
</TABLE>
46
<PAGE>
<TABLE>
<S> <C> <C> <C>
(11) Other compensation
for Mr. Temple includes: 1993 1992 1991
--------- --------- ---------
Life insurance............... $ 1,344 $ 1,331 $ 1,319
Automobile................... 1,400 1,430 1,452
--------- --------- ---------
$ 2,744 $ 2,761 $ 2,771
--------- --------- ---------
--------- --------- ---------
(12) Other compensation
for Mr. Smith includes: 1993 1992 1991
--------- --------- ---------
Car............................ $ 1,400 $ 1,283 $ 1,200
Life Insurance................ 2,016 1,331 1,319
--------- --------- ---------
$ 3,416 $ 2,614 $ 2,519
--------- --------- ---------
--------- --------- ---------
(13) Matching contributions under the Partnership 401(k) plan.
(14) Relocation expenses.
</TABLE>
EMPLOYMENT AGREEMENTS
Checker L.P., as the assignee of Motors, is party to an Amended and Restated
Employment Agreement dated as of November 1, 1985, as further amended, with
David R. Markin pursuant to which Mr. Markin is to serve as President, Chief
Executive Officer and Chief Operating Officer of Checker L.P. until April 30,
1996, subject to extension (the "Termination Date"), at a minimum salary of
$600,000 per annum, together with the payment of certain insurance premiums, the
value of which have been included in the Summary Compensation Table above. The
beneficiaries of these insurance policies are designated by Mr. Markin. Mr.
Markin continues to be eligible to participate in profit sharing, pension or
other bonus plans of Checker L.P. Pursuant to the Amended and Restated
Employment Agreement, in the event of Mr. Markin's death, Checker L.P. shall pay
Mr. Markin's estate the compensation which would otherwise be payable to him for
the period ending on the last day of the month in which death occurs. In
addition, Checker L.P. shall pay to Mr. Markin's beneficiaries deferred
compensation from the date of his death through the Termination Date in an
annual amount equal to one-third of his base salary at the date of his death. In
the event of termination of the Amended and Restated Employment Agreement for
any reason other than cause, disability or death, Mr. Markin shall continue to
serve as a consultant to Checker L.P. for a period of five years, for which he
shall receive additional compensation in the amount of $50,000 per annum.
Checker L.P. has agreed to indemnify Mr. Markin from certain liabilities arising
out of his service to Checker L.P., except for liabilities resulting from his
gross negligence or willful misconduct. Effective January 1, 1994, Mr. Markin
and International Controls memorialized in writing their agreement, pursuant to
which Mr. Markin has been compensated by International Controls since January
11, 1989, on substantially the same terms as are set forth above.
International Controls entered into an employment agreement as of July 1,
1992, with Jay H. Harris pursuant to which Mr. Harris serves as Executive Vice
President and Chief Operating Officer of International Controls until June 30,
1995, subject to extension or earlier termination, at a minimum salary of
$350,000 per annum, an incentive bonus to be determined by the Board of
Directors, and such other fringe benefits and plans as are available to other
executives of International Controls. Upon the happening of certain events,
including a change in control (as defined therein) of International Controls or
retirement after June 30, 1994, Mr. Harris is entitled to compensation in an
amount equal to the greater of (a) five percent of the increase in the Company's
retained earnings, subject to certain adjustments, during the period commencing
on March 31, 1992, and ending on the last day of the month preceding the event
which triggers the payment (the "Termination Payment") and (b) 2.99 times his
then base salary. If Mr. Harris were to die or become disabled, he or his estate
would receive the greater of (a) one year's base compensation or (b) the
Termination Payment. Payments in either case would be made over a period of
time, the length of which would be dependent on the amount due to Mr. Harris.
Mr. Harris has agreed to serve as a consultant to the Company during the first
year after termination for
47
<PAGE>
no compensation beyond his expenses incurred in connection with rendering such
services. International Controls has agreed to indemnify Mr. Harris for certain
liabilities to the full extent allowed by law. Motors has guaranteed
International Controls' obligations.
Checker L.P. is party to an Amended and Restated Employment Agreement dated
as of June 1, 1992, with Jeffrey Feldman pursuant to which Mr. Feldman serves as
President of the vehicular operations segment until February 1, 1996, subject to
extension (the "Termination Date"), at a minimum salary of $200,000 per annum,
together with the payment of certain insurance premiums, the value of which have
been included in the Summary Compensation Table above. The beneficiaries of
these insurance policies are designated by Mr. Feldman. Mr. Feldman is eligible
to participate in profit sharing, pension or other bonus plans implemented by
the vehicular operations segment. Pursuant to the Amended and Restated
Employment Agreement, in the event of Mr. Feldman's death, Checker L.P. shall
pay Mr. Feldman's estate the amount of compensation which would otherwise be
payable to him for the period ending on the last day of the month in which death
occurs. In addition, Checker L.P. shall pay to Mr. Feldman's estate deferred
compensation from the date of his death to the Termination Date in an annual
amount equal to one-third of his base salary at the date of his death. In the
event of the termination of the Amended and Restated Employment for any reason
other than cause, disability or death, Mr. Feldman shall continue to serve as a
consultant to Checker L.P. for a period of five years (if terminated by Mr.
Feldman) or seven years (if terminated by Checker L.P.), for which he shall
receive compensation in the amount of $75,000 per annum. Checker L.P. has agreed
to indemnify Mr. Feldman from certain liabilities, except for those resulting
from his gross negligence or willful misconduct.
Great Dane is party to a letter agreement with Willard R. Hildebrand
pursuant to which Mr. Hildebrand serves as President and Chief Executive Officer
of Great Dane at a starting base salary of $15,833.33 per month ($190,000
annualized), plus incentive compensation and certain other benefits. In the
event of a change of control of Great Dane, prior to November 4, 1994 and the
subsequent termination of his agreement, Mr. Hildebrand would be entitled to
payment of up to three years of his salary less amounts received as of the date
of termination, but in no event less than six months' salary. Mr. Hildebrand's
current annual salary is $275,000.
COMPENSATION PURSUANT TO PLANS
GREAT DANE PENSION PLAN
Great Dane has in effect a defined benefit employee pension plan entitled
Retirement Plan For Great Dane Trailers, Inc. (the "Retirement Plan") covering
substantially all of its employees. Pension benefits are subject to limitations
imposed by the Internal Revenue Code of 1986, as amended, and the Employee
Retirement Income Security Act of 1974, as amended, with respect to the annual
amount of benefits provided by employer contributions.
Effective as of July 1, 1988, the assets and the liabilities attributable to
active and former employees under the Amended and Restated International
Controls Corp. Pension Plan as of June 30, 1988 were transferred to the
Retirement Plan and the Company adopted the Retirement Plan for the benefit of
its employees. With respect to benefits accruing after June 30, 1984, to a
participant who was a participant under the Amended and Restated International
Controls Corp. Pension Plan as of June 30, 1988, the
48
<PAGE>
following table shows the estimated annual benefits payable upon retirement at
age 65 under the plan to specified average annual compensation and years of
benefit service classifications. The following amounts would be reduced by a
Social Security offset:
<TABLE>
<CAPTION>
YEARS OF BENEFIT SERVICE
-----------------------------------------------------------
AVERAGE ANNUAL COMPENSATION 1 5 10 15 20
- ---------------------------------------------------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$100,000............................................ $ 2,000 $ 10,000 $ 20,000 $ 30,000 $ 40,000
150,000............................................ 3,000 15,000 30,000 45,000 60,000
200,000............................................ 4,000 20,000 40,000 60,000 80,000
250,000............................................ 5,000 25,000 50,000 75,000 100,000
300,000............................................ 5,000 25,000 60,000 90,000 115,641*
400,000............................................ 5,000 25,000 80,000 115,641* 115,641*
500,000............................................ 5,000 25,000 100,000 115,641* 115,641*
<FN>
- --------------
* Maximum permitted in 1993
</TABLE>
For those executive officers named above, the following are credited years
of service under the Retirement Plan and 1993 salary covered by the Retirement
Plan:
<TABLE>
<CAPTION>
EXPECTED CREDITED 1993 SALARY
CREDITED YEARS OF YEARS OF SERVICE COVERED BY
SERVICE AT 65 PENSION PLAN
------------------- ----------------- -------------
<S> <C> <C> <C>
Willard R. Hildebrand.............................................. 3 14 $ 235,840
Christopher F. Hammond III......................................... 30 30 207,600
Thomas W. Horan.................................................... 10 25 205,950
Fred T. Mote....................................................... 30 30 190,300
</TABLE>
Mr. Harris has an aggregate of 24 years of benefit service under the
Retirement Plan (8 years) and the Amended and Restated International Controls
Corp. Pension Plan (16 years) and will receive benefits of approximately $74,000
per year at age 65. Mr. Horan has an aggregate of 16 years of benefit service
under the Retirement Plan (10 years) and the Amended and Restated International
Controls Corp. Pension Plan (6 years) and will receive benefits of approximately
$88,000 per year at age 65. Mr. Johnson elected to start receiving benefits
under the Retirement Plan at his normal retirement date and is currently
receiving benefits under the Retirement Plan of approximately $25,000 per year.
PARTNERSHIP PENSION AND EXCESS BENEFIT PLANS
Checker L.P. maintains a defined benefit employee pension plan entitled
Checker Motors Pension Plan (the "Pension Plan") covering substantially all of
its non-union employees, and, effective January 1, 1992, the employees of the
Company.
Checker L.P. also maintains the Checker Motors Co., L.P. Excess Benefit
Retirement Plan (the "Excess Benefit Plan"). An employee of Checker L.P. will
become a participant in the Excess Benefit Plan if the benefits which would be
payable under the Pension Plan are not fully provided thereunder because of the
annual maximum benefit limitations of Section 415 of the Internal Revenue Code
of 1986, as amended. The amount that the participant is entitled to receive
under the Excess Benefit Plan is an amount equal to the amount that would have
been payable under the Pension Plan if Section 415 did not apply, minus the
amount that is actually payable under the Pension Plan. At the present time,
David R. Markin and Jeffrey M. Feldman are the only individuals named above who
would receive benefits under the Excess Benefit Plan. Considered compensation
under the Excess Benefit Plan is limited to $300,000.
49
<PAGE>
Set forth below are the estimated annual benefits for participants in the
Pension Plan (including benefits payable under the Excess Benefit Plan) who have
been employed by Checker L.P. and its predecessors for the indicated number of
years prior to retirement, assuming retirement at age 65 in 1993:
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFITS FOR YEARS OF SERVICE INDICATED
-----------------------------------------------------------
AVERAGE COMPENSATION (AS DEFINED IN PLAN) 10 20 30 40 45
- --------------------------------------------------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$100,000........................................... $ 13,950 $ 28,756 $ 47,024 $ 66,159 $ 75,870
150,000........................................... 21,450 46,256 74,524 103,659 118,370
200,000........................................... 28,950 63,756 102,024 141,159 160,870
250,000........................................... 36,450 81,256 129,524 178,659 203,370
300,000........................................... 43,950 98,756 157,024 216,159 245,870
400,000........................................... 43,950 98,756 157,024 216,159 245,870
500,000........................................... 43,950 98,756 157,024 216,159 245,870
</TABLE>
The above benefit projections were prepared on the assumption that the
participant made participant contributions to the Pension Plan for all years in
which he was eligible to contribute, and that Social Security covered
compensation is $1,750. The benefit projection would be reduced by a Social
Security offset.
For those executive officers named above, the following are credited years
of service under the Pension and Excess Benefit Plans and 1993 salary covered by
the Pension Plan:
<TABLE>
<CAPTION>
CREDITED YEARS OF EXPECTED CREDITED YEARS OF 1993 SALARY COVERED
SERVICE SERVICE AT 65 BY PENSION PLAN
------------------- ----------------------------- --------------------
<S> <C> <C> <C>
David R. Markin................................. 39 41 $ 235,840
Jay H. Harris................................... 2 10 235,840
Jeffrey M. Feldman.............................. 15 37 235,840
Larry D. Temple................................. 22 40 233,600
</TABLE>
SALARY CONTINUATION PLAN
Motors entered into Stated Benefit Salary Continuation Agreements (the
"Agreements") with certain officers and employees (the "Salary Plan") pursuant
to which such participants will receive benefits upon attaining age 65 (or their
beneficiaries will receive benefits upon their death prior to or within 120
months after such executives or employees attain age 65). Motors' obligations
pursuant to the Salary Plan were assumed by Checker L.P. in 1986.
For those executive officers named above, the following table sets forth the
benefits payable pursuant to the Salary Plan:
<TABLE>
<CAPTION>
ANNUAL SURVIVOR
ANNUAL BENEFIT BENEFIT PAYABLE TOTAL
PAYABLE UPON TOTAL BENEFIT UPON DEATH PRIOR SURVIVORSHIP
ATTAINING AGE PAYABLE OVER TO ATTAINING AGE BENEFIT PAYABLE
65 THE YEARS 65 OVER THREE YEARS
--------------- -------------- ---------------- -----------------
<S> <C> <C> <C> <C>
David R. Markin........................... $ 240,000 $ 2,400,000 $ 368,000 $ 1,104,000
Jeffrey M. Feldman........................ 19,950 199,500 79,800 239,400
Larry D. Temple........................... 31,200 312,000 62,400 187,200
</TABLE>
COMPENSATION OF DIRECTORS
The directors did not receive any fees for their services as directors in
1993. See "Compensation Committee Interlocks and Insider Participation."
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Jeffrey M. Feldman is the nephew of David R. Markin.
Checker L.P. has borrowed $2.5 million from Country, which loan is secured
by certain of Checker L.P.'s property.
See also "Compensation Committee Interlocks and Insider Participation."
OWNERSHIP OF COMMON STOCK
The Common Stock, which is the only class of stock of International
Controls, is owned as follows:
<TABLE>
<CAPTION>
NO. OF SHARES OF COMMON
STOCK OF RECORD AND PERCENT OF
NAME BENEFICIALLY OWNED CLASS
- ------------------------------ ----------------------- ----------
<S> <C> <C>
David R. Markin............... 2,936,927.5 32.5
Martin L. Solomon............. 2,033,257.5 22.5
Allan R. Tessler.............. 2,033,257.5 22.5
Wilmer J. Thomas, Jr.......... 2,033,257.5 22.5
-----
100.0%
-----
-----
</TABLE>
The address of each of the shareholders is c/o International Controls Corp.,
2016 North Pitcher Street, Kalamazoo, Michigan 49007.
DESCRIPTION OF NEW CREDIT FACILITY
GENERAL
The following is a summary of the anticipated material terms and conditions
of the New Credit Facility. This summary does not purport to be a complete
description of the New Credit Facility and is subject to the detailed provisions
of the Loan Agreement (the "Loan Agreement") and the various related documents
to be entered into in connection with the New Credit Facility. A draft copy of
the Loan Agreement will be filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The completion of the Offering is subject to
the simultaneous consummation of the New Credit Facility.
Concurrently with the issuance of the Notes, International Controls and the
other Issuers (Motors, Checker L.P., SCSM, Yellow Cab Company, CMC Kalamazoo
Inc. and Chicago AutoWerks Inc. (collectively, the "Checker Borrowers") and
Great Dane, Great Dane Tennessee, Inc., Great Dane Nebraska, Inc. and Great Dane
Los Angeles, Inc. (collectively, the "Great Dane Borrowers" and, together with
International Controls and the Checker Borrowers, the "Borrowers")) will enter
into the New Credit Facility. In connection with the New Credit Facility, NBD
Bank, N.A. ("NBD") has formed a syndicate of lenders (the "Lenders") for which
NBD will serve as agent ("Agent"). The New Credit Facility will consist of a
five-year revolving credit facility of up to an aggregate of $95 million
(including a provision for commercial letters of credit and up to $15 million
which can be utilized for standby letters of credit), subject to International
Controls' ability to meet certain financial tests. The obligations of the
Borrowers under the New Credit Facility will be secured by a lien on the
inventory, accounts receivable and intangible assets, including chattel paper,
instruments, documents and general intangibles (to the extent such intangible
assets are not related to the Shared Collateral or the Note Collateral). In
addition, the Borrowers will pledge to , as collateral
agent (the "Collateral Agent"), for the benefit of the holders of the Senior
Notes and the Lenders, on an equal and ratable basis, a security interest in the
Pledged Stock and a lien on certain patents, trademarks and other intellectual
property of the Borrowers, including the general intangibles related thereto.
Permissible levels of borrowing by International Controls, the Checker
Borrowers and the Great Dane Borrowers under the New Credit Facility will be
determined based on eligible inventory and
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eligible accounts receivable of International Controls, the Checker Borrowers
and the Great Dane Borrowers, respectively (collectively, "Borrowing Base
Requirements"). It is anticipated that the initial borrowing under the New
Credit Facility will be approximately $48.4 million (assuming that the
Refinancing had been consummated as of March 31, 1994). (However, International
Controls, as a holding company, does not presently have any availability (other
than through its subsidiaries) under the New Credit Facility.) All of the
initial borrowing under the New Credit Facility will be used by the Issuers to
repay a portion of the existing indebtedness of the Great Dane Borrowers and the
Checker Borrowers and to pay transaction fees and expenses. The Company
estimates that, upon consummation of the New Credit Facility, Borrowing Base
Requirements would permit additional borrowing of at least $32.2 million at
March 31, 1994, subject to the Company's ability to meet certain financial
tests.
INTEREST RATES; FEES
Until the later of (a) a date which is 180 days after the closing of the New
Credit Facility and (b) the date on which International Controls consummates a
public offering in which the net proceeds to International Controls is at least
$20 million (the "Adjustment Date"), amounts outstanding under the New Credit
Facility will bear interest at a rate per annum equal, at the option of the
Borrowers, to (i) 3.00% above the London Interbank Offered Rate of Interest
("LIBOR") or (ii) .50% plus the greater of (a) NBD's prime rate of interest and
(b) 1.00% above the Federal Funds Rate (the "Base Rate"). Thereafter, amounts
outstanding under the New Credit Facility will bear interest at a fluctuating
rate per annum equal, at the option of the Company, to LIBOR plus the Applicable
Margin or the Base Rate plus the Applicable Margin. The Applicable Margin will
be determined on the basis of the Company's ratio of EBIT to Interest Expense
(as both are defined in the Loan Agreement). The Applicable Margin will range
from 0% to .50% with respect to the Base Rate and from 2.00% to 2.75% with
respect to LIBOR.
Until the Adjustment Date, the Borrowers will pay an unused revolving credit
fee of .50% per annum of the average unused commitment under the New Credit
Facility. Thereafter such fee will range from .375% to .50% (depending upon the
Company's ratio of EBIT to Interest Expense) per annum. The Borrowers will pay
an agency fee as the Borrowers and the Agent may from time to time agree and a
closing fee of $ . If International Controls does not reduce its
indebtedness by at least $20 million on or before June 30, 1995, additional fees
will be payable until such time as its indebtedness is so reduced.
COLLATERAL
The obligations of the Borrowers under the New Credit Facility will be
secured by a lien on the inventory, accounts receivable and intangible assets,
including chattel paper, instruments, documents and general intangibles (to the
extent such intangible assets are not related to the Shared Collateral or the
Note Collateral). In addition, the collateral will include the Pledged Stock and
certain patents, trademarks and other intellectual property of the Borrowers,
all of which will be pledged on an equal and ratable basis with the pledge
securing the Senior Notes.
COVENANTS
Under the Loan Agreement, subsidiaries of International Controls will be
prohibited from paying dividends or making distributions or loans to
International Controls (i) if a payment default is continuing under the New
Credit Facility or a change in control (as defined in the Loan Agreement) or
certain events of insolvency occur, or (ii) upon the occurrence of a default
under the New Credit Facility (other than a default described in (i) above)
until the earlier of (a) the 179th day following delivery of notice of such
occurrence to International Controls or (b) the curing or waiving of such other
default. Since International Controls is the sole obligor under the Senior
Subordinated Notes, this prohibition would prevent International Controls from
receiving cash from its subsidiaries required to make interest and principal
payments on the Senior Subordinated Notes with respect to the Issuers.
Notwithstanding the foregoing, the holders of the Senior Subordinated Notes are
not restricted under the terms of the Senior Subordinated Note Indenture from
accelerating the Indebtedness thereunder upon the happening of an event of
default under the Senior Subordinated Note Indenture. Since the Issuers are
co-obligors under the
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Senior Notes, this prohibition will not have a similar effect on holders of the
Senior Notes. The Loan Agreement will also contain certain other restrictive
covenants, including various reporting requirements and financial covenants
requiring specified levels of current assets to current liabilities and cash
flow, specified fixed charges and interest coverage ratios, and restrictions on
the payment of dividends and compensation by the Company to certain affiliates.
Other restrictive covenants will limit the incurrence of additional
indebtedness, the incurrence of liens, capital expenditures, certain
investments, certain affiliate transactions, the acquisition or disposition of
assets outside of the ordinary course of business and the use of proceeds from
asset sales, in each case with certain exceptions, or subject to the prior
approval of the Lenders. The Loan Agreement will also prohibit any optional
payment, prepayment or redemption of the Senior Notes and any subordinated debt,
including the Senior Subordinated Notes, with certain exceptions, as well as
distributions from the Checker Borrowers or the Great Dane Borrowers to
International Controls to make sinking fund payments or payments of interest or
principal on the Senior Notes (which payments are expected to be made directly
by the Checker Borrowers and the Great Dane Borrowers). After giving effect to
the Refinancing, the Company expects to be in compliance with the financial and
other covenants described above.
EVENTS OF DEFAULT
Events of default under the Loan Agreement will include (i) any failure by
the Company to pay when due amounts owing under the New Credit Facility, (ii)
any failure to meet certain covenants in the Loan Agreement (subject, in certain
circumstances, to materiality standards and cure periods), (iii) the breach of
any representations or warranties in the Loan Agreement (subject, in certain
circumstances, to materiality standards and cure periods), (iv) any failure to
pay amounts (in excess of certain levels) due under certain other agreements or
defaults that result in or permit the acceleration of certain other indebtedness
(including the Notes), (v) unsatisfied judgments in excess of certain amounts,
(vi) a change of control, (vii) certain events of bankruptcy, insolvency or
dissolution, (viii) any Default or Event of Default under the Senior Note
Indenture or the Senior Subordinated Note Indenture and (ix) any Change of
Control.
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DESCRIPTION OF UNITS
Each Unit offered hereby consists of $1,000 principal amount of the Senior
Subordinated Notes and one Warrant to purchase shares of Common Stock. The
Warrants and the Senior Subordinated Notes will not be separately transferable
until the Separation Date. Prior to separation, the Units will be physically
represented by the Senior Subordinated Notes bearing an endorsement representing
beneficial ownership of the related Warrants. Prior to separation, transfer of a
Senior Subordinated Note will also constitute transfer of a holder's beneficial
interest in the related Warrant. On the Separation Date, each Unit will be
deemed to separate into a Senior Subordinated Note and a Warrant and from and
after such time, each Senior Subordinated Note will represent beneficial
ownership of such Senior Subordinated Note only. On or as soon as practicable
after the Separation Date, the Warrant Agent will deliver to each holder of
Senior Subordinated Notes a Warrant certificate or certificates representing the
aggregate number of Warrants represented by such holder's Units immediately
prior to separation.
DESCRIPTION OF WARRANTS
The Warrants will be issued pursuant to a warrant agreement (the "Warrant
Agreement"), dated as of , 1994, between the Company and American
Stock Transfer & Trust Company, as warrant agent (the "Warrant Agent"), a copy
of which is attached as an exhibit to the Registration Statement. The following
summary of certain provisions of the Warrant Agreement does not purport to be
complete and is qualified in its entirety by reference to the Warrant Agreement,
including the definitions therein of certain terms. For purposes of this Section
of the Prospectus, the "Company" shall mean International Controls without its
subsidiaries.
GENERAL
Each Warrant will initially entitle the holder thereof to purchase
shares of Common Stock of the Company (the "Exercise Rate"), at an exercise
price of $.01 per share (the "Exercise Price"), which represent in the aggregate
7.5% of the outstanding Common Stock of International Controls on a fully
diluted basis as of the date of issuance of the Warrants. In the event that an
Initial Public Offering is not consummated on or prior to , 1995, the
Exercise Rate will be increased to shares of Common Stock of International
Controls, which represent in the aggregate 10.0% of the outstanding Common Stock
of International Controls on a fully diluted basis as of the date of issuance of
the Warrants. Unless exercised, the Warrants will automatically expire on August
1, 2004.
The Warrants may be exercised on or after the Exercisability Date by
surrendering to the Company the Warrant certificates evidencing such Warrants,
if any, with the accompanying form of election to purchase, properly completed
and executed, together with payment of the Exercise Price. Payment of the
Exercise Price may be made in the form of cash or a certified or official bank
check payable to the order of the Company. Upon surrender of the Warrant
certificate and payment of the Exercise Price, the Warrant Agent will deliver or
cause to be delivered, to or upon the written order of such holder, stock
certificates representing the number of whole shares of Common Stock or other
securities or property to which such holder is entitled. If less than all of the
Warrants evidenced by a Warrant certificate are to be exercised, a new Warrant
certificate will be issued for the remaining number of Warrants. "Exercisability
Date" is defined in the Warrant Agreement as the date of occurrence of any
Exercise Event. "Exercise Event" is defined in the Warrant Agreement as February
1, 2004, or the earlier occurrence of (i) a Change of Control or (ii) an Initial
Public Offering. "Initial Public Offering" means an underwritten initial public
offering of Qualified Capital Stock (other than Preferred Stock) of the Company
(as such terms are defined in the Indentures) pursuant to a registration
statement that has been declared effective by the Commission pursuant to the
Securities Act which results in gross cash proceeds to the Company of not less
than $20 million.
No service charge will be made for any exercise, exchange or registration of
transfer of Warrant certificates, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
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No fractional shares of Common Stock will be issued upon exercise of the
Warrants. In lieu thereof, the Company will pay a cash adjustment. The holders
of the Warrants have no right to vote on matters submitted to the stockholders
of the Company and have no right to receive cash dividends (other than
extraordinary dividends). The holders of the Warrants are not entitled to share
in the assets of the Company in the event of the liquidation, dissolution or
winding up of the Company's affairs.
ADJUSTMENTS
In addition to the adjustments described above in the event of an Initial
Public Offering, the number of shares of Common Stock purchasable upon the
exercise of the Warrants will be subject to adjustment in certain events,
including: (i) the issuance by the Company of dividends (or other distributions)
on Common Stock payable in Common Stock or other shares of the Company's capital
stock; (ii) subdivisions, combinations and reclassifications of the Common
Stock; (iii) the issuance to all holders of Common Stock of rights, options or
warrants entitling them to subscribe for Common Stock or securities convertible
into, or exchangeable or exercisable for, Common Stock at an offering price (or
with an initial conversion, exchange or exercise price plus such offering price)
which is less than the current market price per share (as defined) of the Common
Stock; (iv) the distribution to all holders of Common Stock of any of the
Company's assets, debt securities or any rights or warrants to purchase
securities (excluding those rights and warrants referred to in clause (iii)
above); (v) the issuance of shares of Common Stock for a consideration per share
less than the current market price; and (vi) the issuance of securities
convertible into or exchangeable for shares of Common Stock for a conversion or
exchange price less than the current market price for a share of Common Stock.
In the event of a taxable distribution to holders of Common Stock which
results in an adjustment to the number of shares of Common Stock or other
consideration for which a Warrant may be exercised, the holders of the Warrants
may, in certain circumstances, be deemed to have received a distribution subject
to United States federal income tax as a dividend. See "Certain Federal Income
Tax Consequences."
No anti-dilution adjustment will be required unless such adjustment would
require an increase or decrease of at least one percent (1%) in the Exercise
Rate; PROVIDED, HOWEVER, that any adjustment which is not made will be carried
forward and taken into account in any subsequent adjustment.
In case of certain consolidations or mergers of the Company, or the sale of
all or substantially all of the assets of the Company to another corporation,
each Warrant shall thereafter be exercisable for the right to receive the kind
and amount of shares of stock or other securities or property to which such
holder would have been entitled as a result of such consolidation, merger or
sale had the Warrants been exercised immediately prior thereto.
AMENDMENT
From time to time, the Company and the Warrant Agent, without the consent of
the holders of the Warrants, may amend or supplement the Warrant Agreement for
certain purposes, including curing defects or inconsistencies or making any
change that does not materially adversely affect the rights of any holder. Any
amendment or supplement to the Warrant Agreement that has a material adverse
effect on the interests of the holders of the Warrants shall require the written
consent of the holders of a majority of the then outstanding Warrants. The
consent of each holder of the Warrants affected shall be required for any
amendment pursuant to which the Exercise Price would be increased or the number
of shares of Common Stock purchasable upon exercise of Warrants would be
decreased (other than pursuant to adjustments provided in the Warrant
Agreement.)
REPORTS
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, the Company will, to the extent permitted under the Exchange Act,
file with the Commission the annual reports, quarterly reports and other
documents which the Company would have been or is required to file with the
Commission pursuant to such Section 13(a) or 15(d) if the Company were or is so
subject, such documents to be filed with the Commission on or prior to the
respective dates (the "Required Filing Dates") by which the Company would have
been or is required so to file such documents if the Company
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were or is so subject. The Company will also in any event (x)(i) within 15 days
of each Required Filing Date file with the Warrant Agent copies of the annual
reports, quarterly reports and other documents which the Company would have been
or is required to file with the Commission pursuant to Section 13(a) or 15(d) of
the Exchange Act if the Company were or is subject to such Section and (ii)
within the earlier of 30 days after the filing of such report or other document
with the Warrant Agent and 45 days of each such Required Filing Date transmit
such report or document by mail to all holders of the Warrants, as their names
and addresses appear in the security register, without cost to such holders and
(y) if filing such documents by the Company with the Commission is not permitted
under the Exchange Act, promptly upon written request supply copies of such
documents to any prospective holders of the Warrants at the Company's cost.
REGISTRATION RIGHTS
The holders of Warrants will be entitled, under certain specified
circumstances and subject to certain limitations, to require the Company to
register under the Securities Act the shares of Common Stock into which the
Warrants have been, or simultaneously with the registration will be, exercised
into Common Stock (the "Registrable Shares"). On or after 120 days following an
Initial Public Offering, the Company will be required to register the
Registrable Shares upon demand of the holders of Registrable Shares on not more
than two occasions so long as the amount of Registrable Shares to be registered
on each occasion has an aggregate fair market value (in the good faith opinion
of the Company) of $5.0 million or more. In addition, the Company will be
required to include the Registrable Shares in a registration of shares of Common
Stock initiated by the Company under the Securities Act (other than an Initial
Public Offering) in which the aggregate gross proceeds to the Company exceed
$20.0 million and any other registration of Common Stock initiated by the
Company under the Securities Act thereafter. In the event the aggregate number
of Registrable Shares requested to be included in any registration, together, in
the case of a registration initiated by the Company, with the shares of Common
Stock to be included in such registration, exceeds the number which in the
opinion of the managing underwriter can be sold in such offering without
materially affecting the offering price of such shares, the number of shares of
each requesting holder to be included in such registration will be reduced pro
rata based on the aggregate number of shares for which registration was
requested.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of International Controls consists of
shares of Common Stock, par value $.01 per share, of which 9,036,700
shares were outstanding on May 1, 1994. As of May 1, 1994, there were 4 holders
of record of the Common Stock. See "Ownership of Common Stock." Upon completion
of the Offering, shares will be issuable upon exercise of the Warrants. All
of the outstanding shares and shares issuable upon exercise of the Warrants will
be "restricted" shares as defined in Rule 144 promulgated under the Securities
Act. All current stockholders of International Controls have agreed not to
offer, sell, or otherwise dispose of any shares of Common Stock without the
prior written consent of the Underwriters for a period of 90 days after the date
of this Prospectus.
The following summary description of International Controls' capital stock
is qualified in its entirety by reference to the Certificate of Incorporation,
as amended, and By-Laws of International Controls, copies of which have been
filed with the Commission.
COMMON STOCK
Each holder of shares of Common Stock is entitled to one vote for each
outstanding share of Common Stock owned by him on each matter properly submitted
to the stockholders for their vote.
Except as may be limited by the terms and provisions of the Indentures and
the New Credit Facility, holders of Common Stock are entitled to any dividend
declared by the Board of Directors out of funds legally available for such
purpose. See "Risk Factors -- Dividend Policy" and "Dividends." Holders of
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Common Stock are entitled to receive on a pro rata basis all remaining assets of
International Controls available for distribution to the holders of Common Stock
in the event of the liquidation, dissolution, or winding up of International
Controls.
Holders of Common Stock have no preemptive or other subscription rights, and
there are no conversion rights or redemption or sinking fund provisions with
respect to such shares. All of the outstanding shares of Common Stock are, and
the shares of Common Stock issuable upon the exercise of the Warrants will be,
upon issuance and payment therefor, fully paid and nonassessable.
TRANSFER AGENT
The transfer agent for the Common Stock will be American Stock Transfer &
Trust Company, New York, New York.
DESCRIPTION OF NOTES
The Senior Notes offered hereby will be issued under an indenture to be
dated as of , 1994 (the "Senior Note Indenture") between
International Controls, Great Dane, Great Dane Trailers Tennessee, Inc., Great
Dane Trailers Nebraska, Inc., Great Dane Los Angeles, Inc., Motors, Checker
L.P., CMC Kalamazoo Inc., Yellow Cab Company, Chicago AutoWerks Inc. and SCSM
(collectively, the "Issuers") and First Fidelity Bank, National Association as
trustee (the "Senior Note Trustee"). The Senior Subordinated Notes will be
issued under an indenture to be dated as of , 1994 (the "Senior
Subordinated Note Indenture" and, together with the Senior Note Indenture, the
"Indentures") between International Controls and Marine Midland Bank, as trustee
(the "Senior Subordinated Note Trustee" and, together with the Senior Note
Trustee, the "Trustees"). Any reference to a "Trustee" means the Senior Note
Trustee or the Senior Subordinated Note Trustee as the context may require. Any
reference to an "Indenture" means the Senior Note Indenture or the Senior
Subordinated Note Indenture as the context may require. Any reference to the
"Issuers" means, in the case of the Senior Notes and the Senior Note Indenture,
all the Issuers, and in the case of the Senior Subordinated Notes and the Senior
Subordinated Note Indenture, International Controls, as the context may require.
References below in this Section of the Prospectus to the "Company" shall mean
International Controls without its subsidiaries. References to "(Section )"
mean the applicable Section of each Indenture.
Copies of the proposed forms of the Indentures have been filed as exhibits
to the Registration Statement of which this Prospectus is a part. The Indentures
are subject to and governed by the Trust Indenture Act. The following summary of
the material provisions of the Indentures does not purport to be complete, and
where reference is made to particular provisions of the Indentures, such
provisions, including the definitions of certain terms, are qualified in their
entirety by reference to all of the provisions of the Indentures and those terms
made a part of the Indentures by the Trust Indenture Act. For definitions of
certain capitalized terms used in the following summary, see "-- Certain
Definitions."
GENERAL
The Senior Notes will mature on November 1, 2001, will be limited to $200
million aggregate principal amount, and will be joint and several senior secured
obligations of the Issuers. See "-- Security," below. The Senior Subordinated
Notes will mature on August 1, 2004, will be limited to $100 million aggregate
principal amount, and will be senior subordinated obligations of the Company.
The Senior Notes will bear interest from , 1994 or from the most recent
interest payment date to which interest has been paid, payable semiannually on
May 1 and November 1, each year, commencing November 1, 1994, to the Person in
whose name the Senior Note (or any predecessor Senior Note) is registered at the
close of business on the or next preceding such interest
payment date. The Senior Subordinated Notes will bear interest from , 1994
or from the most recent interest payment date to which interest has been paid,
payable semiannually on February 1 and August 1, each year, commencing February
1, 1995, to the Person in whose name the Senior Subordinated Note (or any
predecessor Senior Subordinated Note) is registered at the close of business on
the or next preceding such interest payment date.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable at the office or agency of
the Issuers in The City of New York maintained for such purposes; PROVIDED,
HOWEVER, that payment of interest may be made at the option of the Issuers
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by check mailed to the Person entitled thereto as shown on the security
register. (Sections 301, 305, 1002) The Notes will be issued only in fully
registered form without coupons, in denominations of $1,000 and any integral
multiple thereof. (Section 302) No service charge will be made for any
registration of transfer, exchange or redemption of Notes, except in certain
circumstances for any tax or other governmental charge that may be imposed in
connection therewith. (Section 305)
RANKING
The Senior Notes will be joint and several senior secured obligations of the
Issuers and will rank PARI PASSU in right of payment with all other senior
Indebtedness of the Issuers and senior in right of payment to all subordinated
obligations of the Issuers. The Senior Subordinated Notes will be senior
subordinated obligations of the Company and will be subordinated in right of
payment to all Senior Indebtedness (including, without limitation, the Senior
Notes and the obligations under the New Credit Facility), PROVIDED, HOWEVER,
that the Senior Subordinated Notes will rank senior in right of payment to all
existing and future Indebtedness of the Company that is expressly subordinated
to Senior Indebtedness (as defined below) except for any future Indebtedness of
the Company which expressly provides that it is PARI PASSU with the Senior
Subordinated Notes (and, until redemption thereof, the 12 3/4% Debentures).
After giving effect to the sale of the Notes and the application of the
estimated net proceeds of the Refinancing, the Issuers would have had $48.4
million of Indebtedness ranking PARI PASSU in right of payment with the Senior
Notes and $248.4 million of Indebtedness ranking senior in right of payment to
the Senior Subordinated Notes at March 31, 1994.
As a result of the Company's holding company structure, the Company's
creditors, including the holders of the Senior Subordinated Notes, will
effectively be subordinated to all creditors of the Company's subsidiaries,
including, but not limited to, trade creditors, lenders under the New Credit
Facility and holders of the Senior Notes. All of the Company's operations are
conducted, substantially all of the tangible assets of the Company are held by,
and all of the Company's operating revenues are derived from, operations of its
subsidiaries. Therefore, the Company's ability to make interest and principal
payments when due to holders of the Senior Subordinated Notes, or to repurchase
the Senior Subordinated Notes in the event of a Change in Control, is entirely
dependent upon the receipt of sufficient funds from its subsidiaries. The
Company's subsidiaries are separate and distinct legal entities and have no
obligations, contingent or otherwise, to pay any amounts due pursuant to the
Senior Subordinated Notes or to make any funds available therefor, whether in
the form of loans, dividends or otherwise. In the event of the dissolution,
bankruptcy, liquidation or reorganization of the Company, the holders of the
Senior Subordinated Notes may not receive any payments with respect to the
Senior Subordinated Notes until after the payment in full of the claims of the
creditors of the Company's subsidiaries. After giving effect to the Refinancing,
the subsidiaries would have had total liabilities (including trade payables,
obligations under the New Credit Facility and the Senior Notes) of $541.5
million at March 31, 1994.
In addition, by reason of the subordination of the Senior Subordinated
Notes, in the event of liquidation or insolvency, holders of Senior Indebtedness
may recover more, ratably, than the holders of the Senior Subordinated Notes,
and funds which would be otherwise payable to the holders of the Senior
Subordinated Notes will be paid to the holders of the Senior Indebtedness in
full.
SENIOR NOTE INDENTURE SAVINGS CLAUSE
The Senior Note Indenture provides that the obligations under the Senior
Notes or Senior Note Indenture of any Issuer (other than International Controls)
will be reduced to the extent necessary to prevent the obligations of such
Issuer under the Senior Note Indenture or the Senior Notes from violating or
becoming voidable under applicable law relating to fraudulant conveyance or
fraudulent transfer or similar laws affecting the rights of creditors generally.
SUBORDINATION OF SENIOR SUBORDINATED NOTES
The payment of the principal of, premium, if any, and interest on, the
Senior Subordinated Notes will be subordinated, as set forth in the Senior
Subordinated Indenture, in right of payment to the prior payment in full of all
Senior Indebtedness, in cash or cash equivalents or in any other form as
acceptable to holders of Senior Indebtedness.
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Upon the occurrence of any default in the payment of principal, premium, if
any, or interest on any Designated Senior Indebtedness, whether at maturity or
otherwise, no payment (other than payments previously made pursuant to the
provisions described under "-- Defeasance or Covenant Defeasance of Indentures")
or distribution of any assets of the Company of any kind or character (excluding
certain permitted issuances of equity or subordinated securities) shall be made
by the Company on account of the principal of, premium, if any, or interest on,
the Senior Subordinated Notes or any other Indenture Obligation under the Senior
Subordinated Note Indenture or on account of the purchase, redemption,
defeasance or other acquisition of or in respect of the Senior Subordinated
Notes unless and until such default has been cured, waived, or has ceased to
exist or such Designated Senior Indebtedness shall have been discharged or paid
in full, in cash or cash equivalents or in any other form as acceptable to the
holders of Senior Indebtedness.
Upon the occurrence of any default other than a payment default with respect
to any Designated Senior Indebtedness pursuant to which the maturity thereof may
be accelerated (a "Non-payment Default"), and after any applicable grace period
and the receipt by the Senior Subordinated Indenture Trustee and the Company
from a representative of the holder or the holder of any Designated Senior
Indebtedness of a written notice of such default, no payment (other than
payments previously made pursuant to the provisions described under "--
Defeasance or Covenant Defeasance of Indentures") or distribution of any assets
of the Company of any kind or character (excluding certain permitted equity or
subordinated securities) may be made by the Company on account of any principal
of, premium, if any, or interest on, the Senior Subordinated Notes or any other
Indenture Obligation under the Senior Subordinated Note Indenture or on account
of the purchase, redemption, defeasance, or other acquisition of or in respect
of, the Senior Subordinated Notes for the period specified below (the "Payment
Blockage Period").
The Payment Blockage Period shall commence upon the receipt of notice of the
Non-payment Default by the Senior Subordinated Note Trustee and the Company from
a representative of the holder or the holder of any Designated Senior
Indebtedness and shall end on the earliest to occur of (i) 179 days after
receipt of such written notice by the Senior Subordinated Note Trustee (provided
such Designated Senior Indebtedness as to which notice was given shall not
theretofore have been accelerated), (ii) the date on which such Non-payment
Default is cured, waived or ceases to exist or on which such Designated Senior
Indebtedness is discharged or paid in full, in cash or cash equivalents or in
any other form as acceptable to the holders of such Designated Senior
Indebtedness, or (iii) the date on which such Payment Blockage Period shall have
been terminated by written notice to the Company or the Senior Subordinated Note
Trustee from the representatives of holders of Designated Senior Indebtedness or
the holder of any Designated Senior Indebtedness initiating such Payment
Blockage Period, after which, in the case of clause (i), (ii), or (iii), the
Company shall promptly resume making any and all required payments in respect of
the Senior Subordinated Notes, including any missed payments. In no event will a
Payment Blockage Period extend beyond 179 days from the date of the receipt by
the Senior Subordinated Note Trustee of the notice initiating such Payment
Blockage Period (such 179-day period referred to as the "Initial Blockage
Period"). Any number of notices of Non-payment Defaults may be given during the
Initial Blockage Period; PROVIDED that during any period of 365 consecutive days
only one such Payment Blockage Period may commence and the duration of such
period may not exceed 179 days. No Non-payment Default with respect to
Designated Senior Indebtedness that existed or was continuing on the date of the
commencement of any Payment Blockage Period will be, or can be, made the basis
for the commencement of a second Payment Blockage Period, whether or not within
a period of 365 consecutive days, unless such Non-payment Default has been cured
or waived for a period of not less than 90 consecutive days. (Section 1203 of
the Senior Subordinated Note Indenture only)
If the Company fails to make any payment on the Senior Subordinated Notes
when due or within any applicable grace period, whether or not on account of the
payment blockage provisions referred to above, such failure would constitute an
Event of Default under the Senior Subordinated Note Indenture and would enable
the holders of the Senior Subordinated Notes to accelerate the maturity thereof.
See "-- Events of Default."
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The Senior Subordinated Indenture will provide that in the event of (a) any
insolvency or bankruptcy case or proceeding, or any receivership, liquidation,
reorganization or other similar case or proceeding in connection therewith,
relative to the Company or to its assets or (b) any liquidation, dissolution or
other winding up of the Company whether voluntary or involuntary and whether or
not involving insolvency or bankruptcy or (c) any assignment for the benefit of
creditors or any other marshalling of assets or liabilities of the Company, all
Senior Indebtedness must be paid in full, in cash or cash equivalents or in any
other form as acceptable to the holders of Senior Indebtedness, before any
payment or distribution (excluding distributions of certain permitted equity or
subordinated securities) is made on account of the principal of, premium, if
any, or interest on the Senior Subordinated Notes.
"Senior Indebtedness" under the Senior Subordinated Note Indenture means the
principal of, premium, if any, and interest (including interest accruing after
the filing of a petition initiating any proceeding under any state, federal or
foreign bankruptcy laws whether or not allowed as a claim in such proceeding) on
any Indebtedness of the Company (other than as otherwise provided in this
definition), whether outstanding on the date of the Senior Subordinated Note
Indenture or thereafter created, incurred or assumed, and whether at any time
owing, actually or contingent, 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 Senior Subordinated Notes. Without
limiting the generality of the foregoing, "Senior Indebtedness" shall include
the principal of, premium, if any, and interest (including interest accruing
after the filing of a petition initiating any proceeding under any state,
federal or foreign bankruptcy laws whether or not allowed as a claim in such
proceeding ) on all Indebtedness of the Company from time to time owed under the
New Credit Facility and the Senior Notes and the Senior Note Indenture,
PROVIDED, HOWEVER, that any Indebtedness under any refinancing, refunding, or
replacement of the New Credit Facility or the Senior Notes shall not constitute
Senior Indebtedness to the extent that the Indebtedness thereunder is by its
express terms subordinate in right of payment to any other Indebtedness of the
Company. Notwithstanding the foregoing, "Senior Indebtedness" shall not include
(i) Indebtedness evidenced by the Senior Subordinated Notes, (ii) Indebtedness
that is subordinate or junior in right of payment to any Indebtedness of the
Company, (iii) Indebtedness which when incurred, and without respect to any
election under Section 1111(b) of the Bankruptcy Law, is without recourse to the
Company, (iv) Indebtedness which is represented by Redeemable Capital Stock, (v)
any liability for foreign, federal, state, local or other taxes owed or owing by
the Company, (vi) Indebtedness of the Company to a Subsidiary or any other
Affiliate of the Company or any of such Affiliate's subsidiaries and (vii) that
portion of any Indebtedness which at the time of incurrence is issued in
violation of the provisions of the "Limitation on Indebtedness" covenant of the
Senior Subordinated Note Indenture.
"Designated Senior Indebtedness" under the Senior Subordinated Note
Indenture means (i) all Senior Indebtedness under the New Credit Facility, the
Senior Notes and the Senior Note Indenture and (ii) any other Senior
Indebtedness which, at the time of determination, has an aggregate principal
amount outstanding, together with any commitments to lend additional amounts, of
at least $40 million and is specifically designated in the instrument evidencing
such Senior Indebtedness or the agreement under which such Senior Indebtedness
arises as "Designated Senior Indebtedness" by the Company.
As of March 31, 1994, after giving effect to the sale of the Notes and the
application of the estimated net proceeds thereof, the aggregate amount of
Senior Indebtedness (all of which would constitute Designated Senior
Indebtedness) outstanding would have been approximately $248.4 million.
SECURITY FOR THE SENIOR NOTES
Pursuant to the Collateral Documents, the Issuers will pledge as collateral
to the Senior Note Trustee for the benefit of the holders of the Senior Notes a
security interest in certain of their real and personal property summarized
below, together with the proceeds therefrom and permanent additions and
accessions thereto and to the Collateral Agent for the benefit of the holders of
the Senior Notes and the Lenders under the New Credit Facility on an equal and
ratable basis a security interest in the Pledged Stock and certain patents,
trademarks and other intellectual property of the Issuers.
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While the Company has obtained appraisals of certain of the Collateral,
appraisals have not been performed for all assets constituting Collateral. The
net carrying value on the Company's books of the Collateral (including Shared
Collateral other than the Pledged Stock) as of March 31, 1994 was approximately
$115.0 million. (The Company carries the taxi medallions on its books at zero.)
There can be no assurance that the proceeds of any sale of the Collateral in
whole or in part pursuant to the Senior Note Indenture and the Collateral
Documents following an Event of Default would be sufficient to satisfy payments
due on the Senior Notes. See "Risk Factors -- Security." In addition, the
ability of the holders of the Senior Notes to realize upon the Collateral may be
subject to certain bankruptcy law limitations in the event of a bankruptcy. See
"Certain Bankruptcy Limitations" below.
The collateral release provisions of the Senior Note Indenture permit the
release of items of Collateral which are the subject of an Asset Sale and in
other circumstances upon compliance with certain conditions. See "-- Possession,
Use and Release of Collateral." As described under "--Certain Covenants --
Limitation on Sale of Assets," the Net Cash Proceeds of such Asset Sales may be
required to be utilized to make an offer to purchase Senior Notes.
Pursuant to the Collateral Documents, the Issuers will pledge to the Senior
Note Trustee or, in the case of the Shared Collateral, the Collateral Agent, for
its benefit and the benefit of the holders of the Senior Notes, each of the
following assets: (a) the Pledged Stock, together with all dividends, interests,
cash, instruments and other property and proceeds from time to time received,
receivable or otherwise distributed in respect of or in exchange for any of the
foregoing and any account, instrument or security in which any of the foregoing
is deposited or invested, including any earnings thereon; (b) all equipment and
fixtures (together with all improvements and additions thereto and replacements
thereof) now owned or hereafter acquired by the Issuers and their respective
Subsidiaries and used in connection with, as the case may be, the Issuers'
trailer manufacturing operations, automotive products operations and vehicular
operations (including all vehicles in Motors' taxicab fleet); (c) the assets in
the Collateral Account; (d) 1,350 taxi medallions associated with Motors'
vehicular operations (which is the maximum number currently permitted under
applicable law; the remaining taxi medallions will be subject to a negative
pledge); (e) interests, now owned and hereafter acquired, in real properties
consisting of the facilities associated with the Issuers' trailer manufacturing
operations located in Savannah, Georgia, Brazil, Indiana and Wayne, Nebraska
(together with all additions, improvements and accessions thereto) (the "Real
Property Collateral"); (f) certain patents, trademarks and other intellectual
property of the Issuers; (g) to the extent applicable, all proceeds and products
of any and all of the foregoing Collateral; and (h) all books and records
relating to any of the foregoing Collateral. The security interests in the
Pledged Stock (clause (a)) and the patents, trademarks and other intellectual
property (clause (f)) and the proceeds and products therefrom (including the
portion of assets in the Collateral Account (clause (c)) which are part of the
Shared Collateral) will be secured on an equal and ratable basis with the
security interest granted to the Lenders under the New Credit Facility.
Notwithstanding the foregoing, the Senior Notes will not be secured by the
inventory, accounts receivable and certain other assets and the proceeds
therefrom (which assets will secure the Issuers' obligations under the New
Credit Facility).
The security interest in the Collateral will be a first priority interest,
subject only to Liens permitted pursuant to the Senior Note Indenture and the
Collateral Documents and the equal and ratable interests of the Lenders under
the New Credit Facility with respect to the Shared Collateral. Pursuant to the
Pledge, Security and Intercreditor Agreement relating to the Shared Collateral,
either the Lenders under the New Credit Facility or the Senior Note Trustee
shall have the right to direct the Collateral Agent to exercise remedies with
respect to the Shared Collateral.
The Senior Note Indenture and the Collateral Documents will provide that the
Net Cash Proceeds of all Asset Sales of assets constituting Collateral will be
promptly and without any commingling deposited in a Collateral Account held by
the Trustee in the case of any Collateral other than the Shared Collateral and
by the Collateral Agent in the case of the Shared Collateral and be subject to a
first priority perfected Lien in favor of the Senior Note Trustee in the case of
the amounts held by the Senior Note Trustee and on an equal and ratable basis
with the lenders under the New Credit Facility with respect to amounts held by
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the Collateral Agent. Amounts in the Collateral Account will be released in
accordance with the provisions of the Senior Note Indenture and the Collateral
Documents. See "-- Possession, Use and Release of Collateral." All or any part
of the cash held in the Collateral Account shall, if requested by the Issuers,
be invested by the Senior Note Trustee or the Collateral Agent in cash
equivalents; PROVIDED that all such cash equivalents shall continue to be
Collateral.
If an Event of Default occurs under the Senior Note Indenture and a
declaration of acceleration of the Senior Notes occurs as a result thereof, the
Senior Note Trustee and the Collateral Agent, on behalf of the holders of the
Senior Notes, in addition to any rights or remedies available to them under the
Senior Note Indenture, may take such action as they deem advisable to protect
and enforce their rights in the Collateral, including the institution of
foreclosure proceedings. The proceeds received by the Senior Note Trustee and
Collateral Agent from any foreclosure will be applied by the Senior Note Trustee
and Collateral Agent first to pay the expenses of such foreclosure and fees and
other amounts then payable to the Senior Note Trustee and Collateral Agent under
the Senior Note Indenture and the Collateral Documents, and thereafter to pay
all amounts owing to holders of the Senior Notes under the Senior Note
Indenture, the Senior Notes and the Collateral Documents and, in the case of the
Shared Collateral, also to the Lenders under the New Credit Facility under the
terms of the Pledge, Security and Intercreditor Agreement.
Real property pledged as security to a lender may be subject to known or
unforeseen environmental risks. The state of the law is currently unclear as to
whether and under what circumstances clean-up costs or the obligation to take
remedial actions could be imposed upon a secured lender. Under the laws of some
states and under the federal Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended ("CERCLA"), a lender may be liable as an
"owner or operator" for costs of addressing releases or threatened releases of
hazardous substances on a mortgaged property if such lender or its agents or
employees have participated in the management of the operations of the borrower,
even though the environmental damage or threat was caused by a prior owner or
other third party. Excluded from CERCLA's definition of "owner or operator,"
however, is a person "who, without participating in the management of the
facility, holds indicia of ownership primarily to protect his security
interest." This exemption for holders of a security interest such as a secured
lender, which is commonly referred to as the "security interest exemption,"
applies only when the lender acts in a way that is consistent with the
protection of its security interest in the contaminated facility or property.
Thus, if a lender's activities begin to encroach on the day-to-day management of
such facility or property, the lender faces potential liability as an "owner or
operator" under CERCLA. Similarly, when a lender forecloses and takes title to a
contaminated facility or property, unless the foreclosure, and any subsequent
disposition of the facility or property are primarily for the protection of the
security interest, the lender may incur CERCLA liability. In May 1990, the
United States Court of Appeals for the Eleventh Circuit in UNITED STATES V.
FLEET FACTORS CORP., construing CERCLA's security interest exemption, held that
a lender need not have involved itself in the day-to-day operations of the
facility or actually participated in decisions relating to the handling or
disposal of hazardous waste to be liable under CERCLA; rather, liability could
attach to a lender if its involvement with the management of the facility was
broad enough to support the inference that the lender had the capacity to
influence the borrower's treatment of hazardous waste. The United States
Environmental Protection Agency sought to curtail the effect of FLEET FACTORS by
issuing a final rule delineating the range of permissible actions that may be
undertaken by a holder of a contaminated facility without exceeding the bounds
of the security interest exemption. However, that rule was vacated on procedural
grounds by the United States Court of Appeals for the District of Columbia on
February 4, 1994, so that there is likely to be continued uncertainty in this
area. In this regard, the Senior Note Trustee or the holders of the Senior Notes
would need to evaluate the impact of these potential liabilities before
determining to foreclose on mortgaged properties securing the Senior Notes and
exercising other available remedies. In addition, the Senior Note Trustee may
decline to foreclose upon the mortgaged property or exercise remedies available
to the extent that it does not receive indemnification to its satisfaction which
may include indemnification from the holders of the Senior Notes.
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OPTIONAL REDEMPTION
The Senior Notes will be subject to redemption at any time on or after
November 1, 1998, at the option of the Issuers, in whole or in part, on not less
than 30 nor more than 60 days' prior notice in amounts of $1,000 or an integral
multiple thereof at the following redemption prices (expressed as percentages of
the principal amount), if redeemed during the 12-month period beginning on
November 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- --------- -----------------
<S> <C>
1998 %
1999 %
</TABLE>
and thereafter at 100% of the principal amount, in each case together with
accrued and unpaid interest, if any, to the redemption date (subject to the
right of holders of record on relevant record dates to receive interest due on
an interest payment date).
The Senior Subordinated Notes will be subject to redemption at any time on
or after August 1, 1999, at the option of the Company, in whole or in part, on
not less than 30 nor more than 60 days' prior notice in amounts of $1,000 or an
integral multiple thereof at the following redemption prices (ex-pressed as
percentages of the principal amount), if redeemed during the 12-month period
beginning on August 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- --------- -----------------
<S> <C>
1999 %
2000 %
</TABLE>
and thereafter at 100% of the principal amount, in each case together with
accrued and unpaid interest, if any, to the redemption date (subject to the
right of holders of record on relevant record dates to receive interest due on
an interest payment date).
SINKING FUND
The Senior Notes will be redeemable through the operation of a sinking fund
on November 1, 1995, and on November 1 in each year thereafter, up to and
including 2000, on not less than 30 nor more than 60 days' notice, at a sinking
fund redemption price equal to 100% of the principal amount thereof together
with accrued and unpaid interest, if any, to the date of redemption (subject to
the right of holders of record on relevant record dates to receive interest due
on an interest payment date). Prior to of each of the years 1995 to 2000,
inclusive, the Issuers will pay to the Senior Note Trustee, for a mandatory
sinking fund, cash sufficient to redeem on each such date Senior Notes in the
aggregate principal amount of $10 million, provided that Senior Notes reacquired
by the Issuers (but not Senior Notes redeemed) may be used, at the principal
amount thereof, to reduce the amount of any mandatory sinking fund payment in
the inverse order in which they become due. Cash payments for the sinking fund
are to be applied to redeem Senior Notes.
The Senior Subordinated Notes will not be entitled to the benefit of any
sinking fund.
SENIOR NOTE MANDATORY REDEMPTION
The Issuers will be required to apply up to $40 million of the aggregate net
proceeds to the Company of any Public Offering effected through November 1, 1999
to the redemption of the Senior Notes at a redemption price equal to % of
the principal amount of such Senior Notes, together with accrued and unpaid
interest, if any, to the date of redemption (subject to the right of holders of
record on relevant record dates to receive interest due on an interest payment
date). Notice of such redemption is required to be given by the Company to the
Trustee no later than five business days after the consummation of any such
Public Offering.
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ADDITIONAL OPTIONAL REDEMPTIONS
The Issuers, in the case of the Senior Notes, or International Controls, in
the case of the Senior Subordinated Notes, will have the option to apply the
aggregate net proceeds in excess of $40 million of any Public Offering effected
through August 1, 1997 to the redemption of (i) up to $20 million aggregate
principal amount of the Senior Notes and (ii) up to $30 million aggregate
principal amount of the Senior Subordinated Notes, at redemption prices equal to
% of the principal amount of the Senior Notes and % of the principal
amount of the Senior Subordinated Notes, as the case may be, in each case
together with any accrued and unpaid interest, if any, to the date of
redemption; PROVIDED that $110 million in aggregate principal amount of the
Senior Notes or $70 million in aggregate principal amount of the Senior
Subordinated Notes, as the case may be, remains outstanding immediately
following such redemption. Notice of any such optional redemption is required to
be given by the Company to the Trustee not later than 120 days after the
consummation of any such Public Offering.
Any redemptions (whether mandatory or optional) of the Senior Notes other
than sinking fund payments shall be applied first against the aggregate
principal amount of the Senior Notes which become due and payable at maturity
and thereafter against sinking fund payments in inverse order of payment.
If less than all of the Notes are to be redeemed in the case of any of the
foregoing redemptions, the applicable Trustee shall select the Notes or the
portion thereof to be redeemed pro rata, by lot or by any other method the
applicable Trustee shall deem fair and reasonable provided such method is
consistent with the rules of any national securities exchange upon which the
Senior Notes or Senior Subordinated Notes, as the case may be, are listed. (See
Sections 203, 1101, 1105 and 1107)
CERTAIN COVENANTS
The Indentures will contain, among others, the following covenants:
LIMITATION ON INDEBTEDNESS. The Company will not, and will not permit any
Subsidiary to, create, issue, assume, guarantee, or otherwise in any manner
become directly or indirectly liable for or with respect to or otherwise incur
(collectively, "incur") any Indebtedness (other than Permitted Indebtedness but
including any Acquired Indebtedness) unless (i) such Indebtedness is
Indebtedness of the Company, Indebtedness of all of the Issuers (on a joint and
several basis and not subordinated in right of payment to any other Indebtedness
of any of the Issuers), Permitted Subsidiary Indebtedness or Acquired
Indebtedness of a Subsidiary and (ii) at the time of such incurrence the
Consolidated Fixed Charge Coverage Ratio for the Company for the four full
fiscal quarters immediately preceding such incurrence reflected on the Company's
historical financial statements is at least equal to 2.0:1.0 (after giving PRO
FORMA effect to (a) the incurrence of such Indebtedness and (if applicable) the
application of the net proceeds therefrom, including to refinance other
Indebtedness, as if such Indebtedness was incurred, and the application of such
proceeds occurred, at the beginning of such four-quarter period; (b) the
incurrence, repayment or retirement of any other Indebtedness by the Company and
its Subsidiaries since the first day of such four-quarter period as if such
Indebtedness was incurred, repaid or retired at the beginning of such
four-quarter period (except that, in making such computation, the amount of
Indebtedness under any revolving credit facility shall be computed based upon
the average daily balance of such Indebtedness during such four-quarter period);
(c) in the case of Acquired Indebtedness, the related acquisition (as if such
acquisition had been consummated on the first day of such four-quarter period);
and (d) any acquisition or disposition by the Company and its Subsidiaries of
any company or any business or any assets out of the ordinary course of
business, whether by merger, stock purchase or sale, or asset purchase or sale,
or any related repayment of Indebtedness, in each case since the first day of
such four-quarter period, as if such acquisition or disposition had been
consummated on the first day of such four-quarter period). (Section 1008)
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LIMITATION ON RESTRICTED PAYMENTS. (a) The Company will not, and will not
permit any Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders
of, the Company's Capital Stock (other than dividends or distributions
payable in shares of the Company's Qualified Capital Stock or in options,
warrants or other rights to acquire such Qualified Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, any Capital Stock of the Company or any Capital Stock of any
Affiliate of the Company (other than Capital Stock of any Wholly Owned
Subsidiary or Capital Stock held by the Company or any Wholly Owned
Subsidiary) or options, warrants or other rights to acquire such Capital
Stock;
(iii) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to any scheduled principal
payment, any sinking fund payment or maturity, any Indebtedness of the
Company that is expressly subordinate in right of payment to the Senior
Notes or the Senior Subordinated Notes, as the case may be;
(iv) declare or pay any dividend or distribution on any Capital Stock of
any Subsidiary to any Person (other than with respect to any Capital Stock
held by the Company or any of its Wholly Owned Subsidiaries);
(v) incur, create or assume any guarantee of Indebtedness of any
Affiliate of the Company (other than a Wholly Owned Subsidiary of the
Company); or
(vi) make any Investment in any Person (other than any Permitted
Investments);
(all of the foregoing payments described in paragraphs (i) through (vi) above,
other than any such action that is a Permitted Payment (as defined below),
collectively are referred to as "Restricted Payments") unless at the time of and
after giving effect to the proposed Restricted Payment (the amount of any such
Restricted Payment, if other than cash, as determined by the Board of Directors
of the Company, whose determination shall be conclusive and evidenced by a board
resolution), (1) no Default or Event of Default shall have occurred and be
continuing and such Restricted Payment shall not be an event which is, or after
notice or lapse of time or both, would be, an "event of default" under the terms
of any Indebtedness of the Company or its Subsidiaries; (2) immediately before
and immediately after giving effect to such transaction on a PRO FORMA basis,
the Company could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions described under "-- Limitation on
Indebtedness"; and (3) the aggregate amount of all such Restricted Payments
(other than Permitted Payments) declared or made after the date of the
Indentures does not exceed the sum of:
(A) 50% of the aggregate cumulative Consolidated Net Income of the
Company accrued on a cumulative basis during the period beginning on the
first day of the Company's fiscal quarter commencing after the date of the
Indentures and ending on the last day of the Company's last fiscal quarter
ending prior to the date of the Restricted Payment (or, if such aggregate
cumulative Consolidated Net Income shall be a loss, minus 100% of such
loss);
(B) the aggregate Net Cash Proceeds received after the date of the
Indentures by the Company from the issuance or sale (other than to any of
its Subsidiaries) of its Qualified Capital Stock or any options, warrants or
rights to purchase such Qualified Capital Stock of the Company (except, in
each case, to the extent such proceeds are used to purchase, redeem or
otherwise retire Capital Stock or Indebtedness subordinate in right of
payment to the Senior Notes or the Senior Subordinated Notes, as the case
may be, as set forth below);
(C) the aggregate Net Cash Proceeds received after the date of the
Indentures by the Company (other than from any of its Subsidiaries) upon the
exercise of any options or warrants to purchase Qualified Capital Stock of
the Company; and
(D) the aggregate Net Cash Proceeds received after the date of the
Indentures by the Company from debt securities or Redeemable Capital Stock
that have been converted into or exchanged for
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Qualified Capital Stock of the Company to the extent such debt securities or
Redeemable Capital Stock are originally sold for cash plus the aggregate Net
Cash Proceeds received by the Company at the time of such conversion or
exchange.
(b) Notwithstanding the foregoing, and in the case of paragraphs (ii),
(iii), (iv), (v), (vi), (vii) and (viii) below, so long as there is no Default
or Event of Default continuing, the foregoing provisions shall not prohibit the
following actions (each of paragraphs (i) through (ix) being referred to as a
"Permitted Payment"):
(i) the payment of any dividend or distribution within 60 days after the
date of declaration thereof, if at such date of declaration such payment
would be permitted by the provisions of paragraph (a) of this Section and
such payment shall be deemed to have been paid on such date of declaration
for purposes of the calculation required by paragraph (a) of this Section;
(ii) the repurchase, redemption or other acquisition or retirement of
any shares of Capital Stock of the Company in exchange for (including any
such exchange pursuant to the exercise of a conversion right or privilege
which in connection therewith cash is paid in lieu of the issuance of
fractional shares or scrip), or out of the Net Cash Proceeds of, a
substantially concurrent issue and sale for cash (other than to a
Subsidiary) of other Qualified Capital Stock of the Company; PROVIDED that
the Net Cash Proceeds from the issuance of such shares of Qualified Capital
Stock are excluded from clause (3)(B) of paragraph (a) of this Section;
(iii) any repurchase, redemption, defeasance, retirement or acquisition
for value or payment of principal of any Indebtedness subordinate in right
of payment to the Senior Notes or the Senior Subordinated Notes, as the case
may be, in exchange for, or out of the net proceeds of, a substantially
concurrent issuance and sale for cash (other than to a Subsidiary) of any
Qualified Capital Stock of the Company; PROVIDED that the Net Cash Proceeds
from the issuance of such Qualified Capital Stock are excluded from clause
(3)(B) of paragraph (a) of this Section;
(iv) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Indebtedness
subordinate in right of payment to the Senior Notes or the Senior
Subordinated Notes, as the case may be (other than Redeemable Capital Stock)
(a "refinancing"), through the issuance of new Indebtedness subordinated to
the Senior Notes or the Senior Subordinated Notes, as the case may be, of
the Company and, in the case of the Senior Note Indenture, the Issuers;
PROVIDED that any such new Indebtedness (1) shall be in a principal amount
that does not exceed the principal amount so refinanced (or, if such old
Indebtedness provides for an amount less than the principal amount thereof
to be due and payable upon a declaration or acceleration thereof, then such
lesser amount as of the date of determination), plus the lesser of (I) the
stated amount of any premium or other payment required to be paid in
connection with such a refinancing pursuant to the terms of the Indebtedness
being refinanced or (II) the amount of premium or other payment actually
paid at such time to refinance the Indebtedness, plus, in either case, the
amount of expenses of the Company and, in the case of the Senior Note
Indenture, the Issuers; incurred in connection with such refinancing; (2)
has an Average Life to Stated Maturity greater than the remaining Average
Life to Stated Maturity of the Senior Notes or the Senior Subordinated
Notes, as the case may be; (3) has a Stated Maturity for its final scheduled
principal payment later than the Stated Maturity for the final scheduled
principal payment of the Senior Notes or the Senior Subordinated Notes, as
the case may be; and (4) such new Indebtedness is expressly subordinated in
right of payment to the Senior Notes or the Senior Subordinated Notes, as
the case may be, at least to the same extent as the Indebtedness to be
refinanced;
(v) the repurchase, redemption, defeasance, retirement, refinancing or
acquisition for value (collectively, a "repurchase") of all (but not less
than all) the 14 1/2% Debentures and the 12 3/4% Debentures, in each case,
outstanding on the date of the Indentures in accordance with the terms of
the respective instruments governing the terms of such respective
Indebtedness for an aggregate
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consideration not to exceed $ million (plus accrued and unpaid interest
through the date of repurchase) for all 14 1/2% Debentures repurchased and
$ million (plus accrued and unpaid interest through the date of
repurchase) for all 12 3/4% Debentures repurchased;
(vi) in the case of the Senior Note Indenture, the redemption of up to
$30 million aggregate principal amount of the Senior Subordinated Notes
issued pursuant to the Senior Subordinated Note Indenture from the net
proceeds of any Public Offering on or prior to , 1997, in excess of
$40 million at redemption prices not in excess of % of the principal
amount of the Senior Subordinated Notes, together with accrued and unpaid
interest, if any, to the date of redemption; PROVIDED that $70 million in
aggregate principal amount of the Senior Subordinated Notes remains
outstanding immediately following such redemption;
(vii) the repurchase of any Indebtedness which is subordinate in right of
payment to the Senior Notes or the Senior Subordinated Notes, as the case
may be, at a purchase price not greater than 100% of the principal amount of
such Indebtedness pursuant to a provision similar to the covenant described
under "-- Limitation on Sale of Assets"; PROVIDED, that prior to such
repurchase the Issuers have made the Senior Note Offer or the Company has
made the Senior Subordinated Offer, as the case may be, as described under
"-- Limitation on Sale of Assets" and have or has repurchased all Senior
Notes or Senior Subordinated Notes, as the case may be, validly tendered for
payment in connection with such Senior Note Offer or Senior Subordinated
Offer;
(viii) the repurchase of any Indebtedness which is subordinate in right of
payment to the Senior Notes or the Senior Subordinated Notes, as the case
may be, at a purchase price not greater than 101% of the principal amount of
such Indebtedness in the event of a Change of Control pursuant to a
provision similar to the covenant described under "-- Purchase of Notes Upon
a Change of Control"; PROVIDED, that prior to such repurchase the Issuers or
the Company, as the case may be, have or has made the Change of Control
Offer as described in "Purchase of Notes Upon a Change of Control" and have
or has repurchased all Senior Notes or Subordinated Notes, as the case may
be, validly tendered for payment in connection with such Change of Control
Offer; and
(ix) the payment by SCSM of any dividend or distribution on any of its
Capital Stock; PROVIDED that such payments are paid pro rata to all
shareholders and the aggregate amount of any such payments paid to
shareholders (other than the Company and its Wholly Owned Subsidiaries)
within any fiscal year does not exceed 10% of the Consolidated Net Income
(Loss) of SCSM for the previous fiscal year. (Section 1009)
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not permit any Subsidiary to, directly and indirectly, make any loan, advance,
guarantee or capital contribution to, or for the benefit of, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or for the
benefit of, or purchase or lease any property or assets from, or enter into or
amend, or increase the payments by the Company or any of its Subsidiaries under
or otherwise alter the terms of, any contract, agreement or understanding with,
or for the benefit of, any Affiliate of the Company, including pay any
compensation to Affiliates of the Company that are officers or employees of the
Company (each, an "Affiliate Transaction") unless (i) such Affiliate Transaction
is in writing and on terms which are fair and reasonable to the Company or such
Subsidiary, as the case may be, and are at least as favorable to the Company or
such Subsidiary as the terms which could be obtained by the Company or such
Subsidiary, as the case may be, in a comparable transaction made on an
arm's-length basis with a Person who is not such an Affiliate of the Company,
(ii) with respect to any Affiliate Transaction involving aggregate payments in
excess of $2 million, the Company delivers an officer's certificate to the
Trustee certifying that such Affiliate Transaction complies with clause (i)
above and that either (A) such Affiliate Transaction has been approved by a
majority of the Disinterested Directors of the Board of Directors who shall have
determined in good faith that such Affiliate Transaction is on terms which are
fair and reasonable to the Company or such Subsidiary, as the case may be, and
are at least as favorable to the Company or such Subsidiary as the terms which
could be obtained by the Company or such Subsidiary, as the case may be, in a
comparable transaction made on an arm's-length basis with a Person who is not
such an Affiliate of
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the Company or (B) the Company has received an opinion from an Independent
Financial Adviser to the effect that such Affiliate Transaction is fair to the
Company or such Subsidiary, as the case may be, from a financial point of view,
and (iii) with respect to any Affiliate Transaction involving aggregate payments
in excess of $5 million, the Company delivers an officers' certificate to the
Trustee certifying that such Affiliate Transaction complies with clause (i)
above and both clauses (ii)(A) and (ii)(B) above; PROVIDED, HOWEVER, that
Affiliate Transactions shall not include (i) transactions between the Company
and any of its Wholly Owned Subsidiaries or among Wholly Owned Subsidiaries of
the Company (for this purpose a Wholly Owned Subsidiary shall include SCSM if
the Company, directly or indirectly, beneficially owns at least 90% of the
equity interest in SCSM and the remaining equity interest, if any, is
beneficially owned by Persons other than Affiliates of the Company), (ii) any
transaction with an officer or member of the Board of Directors of the Company
or any Subsidiary entered into in the ordinary course of business or (iii)
performance of any agreement or arrangement in existence (written or oral) on
the date of the Indentures in accordance with its terms as in effect on such
date. (Section 1010)
LIMITATION ON COMPENSATION. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, pay to each of Martin L. Solomon, Allan
R. Tessler and Wilmer J. Thomas, Jr. aggregate compensation from the Company and
its Subsidiaries (i) from January 1, 1994 through August 31, 1994 in excess of
66 2/3% of the aggregate compensation which was paid in 1993 to each such person
by the Company and its Subsidiaries as disclosed in this Prospectus and (ii)
after August 31, 1994, more than $75,000 in any twelve month period thereafter.
The Company will not, and will not permit any Subsidiary to, directly or
indirectly, pay to David R. Markin aggregate consulting fees from the Company
and its Subsidiaries (i) from January 1, 1994 through August 31, 1994, in excess
of 66 2/3% of the aggregate consulting fees which he was paid in 1993 by the
Company and its Subsidiaries as disclosed in this Prospectus and (ii) after
August 31, 1994, more than $75,000 in any twelve-month period thereafter.
(Section 1019)
LIMITATION ON SALE OF ASSETS. (a) The Issuers will not, and will not permit
any Subsidiary to, directly or indirectly, consummate an Asset Sale unless (i)
with respect to an Asset Sale involving Collateral, 75% of the Net Cash Proceeds
therefrom are received in cash (except in the case of the disposition of
Collateral related to certain seizures or condemnations) and such Net Cash
Proceeds are deposited in the Collateral Account in accordance with the
Collateral Documents, (ii) with respect to an Asset Sale not involving
Collateral, at least 75% of the proceeds from such Asset Sale are received in
cash, (iii) the applicable Issuers or such Subsidiary receives consideration at
the time of such Asset Sale at least equal to the Fair Market Value of the
shares or assets sold (as determined by the Board of Directors of the applicable
Issuer and evidenced in a board resolution) and (iv) to the extent such Asset
Sale involves Collateral, such Asset Sale complies with the requirements
described under "-- Possession, Use and Release of Collateral."
(b) Subject to the provisions set forth under "-- Possession, Use and
Release of Collateral," the Company may within one year of the Asset Sale either
invest or enter into a legally binding agreement to invest the Net Cash Proceeds
in properties and assets that (as determined by the Board of Directors of the
Company, whose determination shall be conclusive and evidenced by a Board
Resolution) replace the properties and assets that were the subject of the Asset
Sale or in properties and assets that will be used in the businesses of the
Company or its Subsidiaries existing on the date of the Indentures or reasonably
related thereto. If any legally binding agreement to invest any Net Cash
Proceeds is terminated, then the Company may invest such Net Cash Proceeds,
prior to the end of such one-year period or six months from such termination,
whichever is later, in like properties and assets. To the extent that any
property or assets are acquired with the proceeds of an Asset Sale involving the
sale, transfer or other disposition of (i) Note Collateral, such property and
assets shall be subject to the Lien in favor of the Senior Note Trustee pursuant
to the Security Agreement or Mortgages, as the case may be, and shall thereafter
constitute Note Collateral and (ii) Shared Collateral, such property and assets
shall be subject to the Lien in favor of the Senior Note Trustee and the Lenders
under the New Credit Facility pursuant to the Pledge, Security and Intercreditor
Agreement and shall thereafter constitute Shared Collateral. The amount of such
Net Cash Proceeds not used or invested as set forth in this paragraph (or as
provided under "-- Possession, Use and Release of Collateral") constitutes
"Excess Proceeds."
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(c) When the aggregate amount of Excess Proceeds equals $10 million or more,
the Issuers in the case of the Senior Note Indenture and the Company in the case
of the Senior Subordinated Note Indenture shall apply the Excess Proceeds to the
repayment of the Senior Notes and any Pari Passu Indebtedness thereof required
to be repurchased under the instrument(s) governing such Pari Passu Indebtedness
as follows: (i) the Issuers shall make an offer to purchase (a "Senior Note
Offer") from all holders of the Senior Notes in accordance with the procedures
set forth in the Senior Note Indenture in the maximum principal amount
(expressed as a multiple of $1,000) of Senior Notes that may be purchased out of
an amount (the "Note Amount") equal to the product of such Excess Proceeds
multiplied by a fraction, the numerator of which is the outstanding principal
amount of the Senior Notes, and the denominator of which is the sum of the
outstanding principal amount of the Senior Notes and such Pari Passu
Indebtedness (subject to proration in the event such amount is less than the
aggregate Offered Price (as defined herein) of all Senior Notes tendered) and
(ii) to the extent required by such Pari Passu Indebtedness to pay down or
reduce permanently the principal amount of such Pari Passu Indebtedness, the
Issuers shall make an offer to purchase or otherwise repurchase or redeem Pari
Passu Indebtedness (a "Pari Passu Offer") out of an amount (the "Pari Passu Debt
Amount") equal to the excess of the Excess Proceeds over the Note Amount;
PROVIDED that in no event shall the Pari Passu Debt Amount exceed the principal
amount of such Pari Passu Indebtedness plus the amount of any premium required
to be paid to repurchase such Pari Passu Indebtedness. The Senior Note Offer
price shall be payable in cash in an amount equal to 100% of the principal
amount of the Senior Notes plus accrued and unpaid interest, if any, to the date
(the "Offer Date") such Senior Note Offer is consummated (the "Offered Price"),
in accordance with the procedures set forth in the Senior Note Indenture. To the
extent the aggregate amount of Excess Proceeds remaining after giving effect to
the Senior Note Offer and the related Pari Passu Offers (if any) equals $10
million or more, on the Business Day following the date of purchase under the
Senior Note Offer, the Company shall apply the then remaining Excess Proceeds to
the repayment of the Senior Subordinated Notes and any Pari Passu Indebtedness
thereof required to be repurchased under the instruments governing such Pari
Passu Indebtedness pursuant to an offer to purchase (the "Senior Subordinated
Offer"; together with the Senior Note Offer, the "Offers"; reference to an
"Offer" means a Senior Note Offer or a Senior Subordinated Offer as the context
may require) to the holders of the Senior Subordinated Notes and an offer to
purchase or other purchase or redemption of such Pari Passu Indebtedness on the
same terms as the Senior Note Offer and the Pari Passu Offers related thereto as
specified above. Upon completion of the purchase of all the Notes tendered
pursuant to the Offers referred to above or repurchase of the Pari Passu
Indebtedness pursuant to any related Pari Passu Offers, the amount of Excess
Proceeds shall be reset at zero. To the extent that the aggregate amount of
Notes tendered and repurchased and Pari Passu Indebtedness repurchased pursuant
to any Offers referred to above and any related Pari Passu Offers, respectively,
is less than the amount of Excess Proceeds (a "Deficiency"), the Company may use
such Deficiency, or portion thereof, for general corporate purposes.
(d) Whenever the Excess Proceeds received by the Company and its
Subsidiaries exceed $10 million and such Excess Proceeds are not proceeds from
the sale of Collateral, such Excess Proceeds shall, prior to the purchase of
Notes or any Pari Passu Indebtedness described in paragraph (c) above, be set
aside in a separate account pending (i) deposit with the depositary or a paying
agent or the applicable Trustee of the amount required to purchase the Notes or
the repurchase or redemption price of Pari Passu Indebtedness tendered in a
Senior Note Offer or Senior Subordinated Offer or a Pari Passu Offer, (ii)
delivery by the Issuers or the Company, as the case may be, of the Offered Price
to the holders of the Notes tendered in a Senior Note Offer or Senior
Subordinated Offer or Pari Passu Indebtedness tendered in a Pari Passu Offer and
(iii) application, as set forth above, of Excess Proceeds in the business of the
Company and its Subsidiaries; PROVIDED that in no event shall the Issuers or the
Company be required to set aside an amount in excess of the sum of the Note
Amount for the Senior Note Offer and the Note Amount for the Senior Subordinated
Offer and the Pari Passu Debt Amount for the Senior Note Offer and the Senior
Subordinated Offer. Such Excess Proceeds may be invested in Temporary Cash
Investments; PROVIDED that the maturity date of any such investment made after
the amount of Excess Proceeds exceeds $10 million shall not be later than the
Offer Date with respect to the Senior Note Offer (or if no
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Senior Note Offer is required, the Offer Date with respect to the Senior
Subordinated Note Offer). The Issuers in the case of the Senior Note Indenture
and the Company in the case of the Senior Subordinated Note Indenture shall be
entitled to any interest or dividends accrued, earned or paid on such Temporary
Cash Investments; PROVIDED that the Issuers or the Company, as the case may be,
shall not be entitled to such interest if an Event of Default has occurred and
is continuing.
(e) If the Issuers or the Company, as the case may be, becomes obligated to
make an Offer pursuant to clause (c) above, the Notes shall be purchased by the
Issuers or the Company, as the case may be, at the option of the holders
thereof, in whole or in part in integral multiples of $1,000, on a date that is
not earlier than 45 days and not later than 60 days from the date the notice of
the Senior Note Offer or Senior Subordinated Offer is given to holders, or such
later date as may be necessary for the Issuers or the Company, as the case may
be, to comply with the requirements under the Exchange Act, subject to proration
in the event the Note Amount is less than the aggregate Offered Price of all
Notes tendered.
(f) The Issuers shall comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable securities
laws or regulations in connection with an Offer.
(g) The Company will not, and will not permit any Subsidiary to, create or
permit to exist or become effective any restriction (other than restrictions
existing under Indebtedness as in effect on the date of the Indentures as such
Indebtedness may be refinanced or replaced from time to time; PROVIDED that such
restrictions are not less favorable to the holders of Notes than those existing
on the date of the Indentures) that would materially impair the ability of the
Company to make an Offer to purchase the Notes or, if such Offer is made, to pay
for the Notes tendered for purchase.
(h) Notwithstanding the foregoing, the Issuers may, at their option, use any
or all of the Excess Proceeds that are not proceeds from the sale of Collateral
that would have otherwise been made available to purchase Senior Notes pursuant
to a Senior Note Offer to make payments in cash to the Senior Note Trustee to
satisfy sinking fund payments (in which case, the Issuers shall be deemed to
have made a Senior Note Offer for purposes of the Indentures provided that, if
less than all of such Excess Proceeds are used to satisfy sinking fund payments,
the remainder of such Excess Proceeds are made available to purchase Senior
Notes pursuant to a Senior Note Offer).
(i) In making payments constituting Excess Proceeds, the Company shall
first, utilize Excess Proceeds that are not proceeds from the sale of
Collateral, second, utilize Excess Proceeds that are proceeds from the sale of
Shared Collateral and third, utilize Excess Proceeds that are proceeds from the
sale of Note Collateral. (Section 1011)
LIMITATION ON LIENS. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, create, incur, affirm or suffer to exist
any Lien (other than Permitted Liens) of any kind upon any of its property or
assets (including Capital Stock and any intercompany notes) or any income or
profits therefrom, except if the Notes (or a Guarantee, in the case of Liens of
a Guarantor) are directly secured equally and ratably with (or prior to in the
case of Liens with respect to Indebtedness subordinate in right of payment to
the Senior Notes or the Senior Subordinated Notes, as the case may be, or
Indebtedness of a Guarantor subordinated in right of payment to any Guarantee)
the obligation or liability secured by such Lien. (Section 1012)
LIMITATION ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS BY SUBSIDIARIES. (a)
The Company will not permit any Subsidiary, directly or indirectly, to
guarantee, assume or in any other manner become liable with respect to any
Indebtedness of the Company other than the Senior Notes, Indebtedness of an
Issuer under the New Credit Facility or Indebtedness of all the Issuers (on a
joint and several basis and not subordinated in right of payment to any other
Indebtedness of any of the Issuers) unless (i) such Subsidiary simultaneously
executes and delivers a supplemental indenture to each of the Indentures
providing for a guarantee of the Notes and if such Indebtedness is by its terms
expressly subordinated to the Senior Notes or the Senior Subordinated Notes, as
the case may be, any such assumption, guarantee or other liability of such
Subsidiary with respect to such Indebtedness shall be subordinated to such
Subsidiary's assumption, guarantee or other liability with respect to the Notes
to the same extent as such Indebtedness is subordinated to the Senior Notes or
the Senior Subordinated Notes, as the case may be,
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and (ii) such Subsidiary waives and will not in any manner whatsoever claim, or
take the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against the Company or any other Subsidiary as a
result of any payment by such Subsidiary.
(b) Notwithstanding the foregoing, any Guarantee by a Subsidiary of the
Notes pursuant to the foregoing paragraph but not the provisions of "--
Limitation on Issuance and Sale of Capital Stock of Subsidiaries" shall provide
by its terms that it shall be automatically and unconditionally released and
discharged upon any sale, exchange or transfer, to any Person not an Affiliate
of the Company, of all of the Company's Capital Stock in, or all or
substantially all the assets of, such Subsidiary, which sale, exchange or
transfer is in compliance with the Indentures. (Section 1013)
PURCHASE OF NOTES UPON A CHANGE OF CONTROL. If a Change of Control shall
occur at any time, then each holder of Notes shall have the right to require
that the Issuers in the case of the Senior Note Indenture and the Company in the
case of the Senior Subordinated Note Indenture repurchase such holder's Notes in
whole or in part in integral multiples of $1,000, at a purchase price (the
"Change of Control Purchase Price") in cash in an amount equal to 101% of the
principal amount of such Notes, plus accrued and unpaid interest, if any, to the
date of purchase (the "Change of Control Purchase Date"), pursuant to the offer
described below (the "Change of Control Offer") and the other procedures set
forth in the Indentures.
Within 30 days following any Change of Control, the Issuers or the Company,
as the case may be, shall notify the Trustees thereof and give written notice of
such Change of Control to each holder of the Notes, by first-class mail, postage
prepaid, at his address appearing in the applicable security register, stating,
among other things: (a) the Change of Control Purchase Price and that the Change
of Control Purchase Date shall be a certain business day no earlier than 30 days
or later than 60 days from the date such notice is mailed, or such later date as
is necessary to comply with requirements under the Exchange Act; PROVIDED, that
--------
the Change of Control Purchase Date (as set forth in the Senior Subordinated
Note Indenture) established by the Company for the repurchase of the Senior
Subordinated Notes will be a date subsequent to the Change of Control Purchase
Date (as set forth in the Senior Note Indenture) established by the Issuers for
the repurchase of the Senior Notes; (b) that any Senior Note or Senior
Subordinated Note not tendered will continue to accrue interest; (c) that,
unless the Issuers or the Company, as the case may be, default in the payment of
the Change of Control Purchase Price, any Notes accepted for payment pursuant to
the Change of Control Offer shall cease to accrue interest after the Change of
Control Purchase Date; and (d) certain other procedures that a holder of Notes
must follow to accept a Change of Control Offer or to withdraw such acceptance.
(Section 1014)
The Senior Subordinated Note Indenture will provide that, prior to complying
with this provision, the Company shall either repay and discharge all
outstanding Senior Indebtedness (including the Senior Notes) or obtain the
requisite consents, if any, under all agreements governing the outstanding
Senior Indebtedness, or in the case of the Senior Notes, consummate a Change of
Control Offer, to permit the repurchase of Senior Subordinated Notes required by
this provision. Any failure to comply with this paragraph shall constitute a
default of a covenant for purposes of clause (iii) (c) of the first paragraph of
"-- Events of Default."
If a Change of Control Offer is made, there can be no assurance that the
Issuers or the Company, as the case may be, will have available funds sufficient
to pay the Change of Control Purchase Price for any or all of the Notes that
might be delivered by holders of the Notes seeking to accept the Change of
Control Offer and, accordingly, some or all of the holders of the Notes may not
receive the Change of Control Purchase Price for their Notes in the event of a
Change of Control. The failure of the Issuers or the Company, as the case may
be, to make or consummate the Change of Control Offer or pay the Change of
Control Purchase Price when due will give the Trustees and the holders of the
Notes the rights described under "-- Events of Default."
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The term "all or substantially all" as used in the definition of "Change of
Control" has not been interpreted under New York law (which is the governing law
of the Indentures) to represent a specific quantitative test. As a consequence,
in the event the holders of the Notes elected to exercise their rights under the
Indentures and the Issuers or the Company, as the case may be, elected to
contest such election, there could be no assurance as to how a court
interpreting New York law would interpret the phrase.
The existence of a holder's right to require the Issuers or the Company, as
the case may be, to repurchase such holder's Notes upon a Change of Control may
deter a third party from acquiring the Company in a transaction which
constitutes a Change of Control.
The provisions of the Indentures may not afford holders of the Notes the
right to require the Issuers or the Company, as the case may be, to repurchase
the Notes in the event of a highly leveraged transaction or certain transactions
with the Company's management or its affiliates, including a reorganization,
restructuring, merger or similar transaction (including, in certain
circumstances, an acquisition of the Company by their respective managements or
affiliates) involving the Company that may adversely affect holders of the
Notes, if such transaction is not a transaction defined as a Change of Control.
Reference is made to "Certain Definitions" for the definition of "Change of
Control." A transaction involving the Company's management or its affiliates, or
a transaction involving a recapitalization of the Company, may result in a
Change of Control if it is the type of transaction specified by such definition.
The Issuers or the Company, as the case may be, will comply with the
applicable tender offer rules, including Rule 14e-1 under the Exchange Act, and
any other applicable securities laws or regulations in connection with a Change
of Control Offer. (Section 1014)
LIMITATION ON ISSUANCE AND SALE OF CAPITAL STOCK OF SUBSIDIARIES. The
Company will not permit (a) any Subsidiary to issue any Capital Stock (other
than to the Company or any Wholly Owned Subsidiary) or (b) any Person (other
than the Company or a Wholly Owned Subsidiary) to acquire any Capital Stock of
any Subsidiary from the Company or any Wholly Owned Subsidiary except upon the
sale of all of the outstanding Capital Stock of such Subsidiary owned by the
Company or a Wholly Owned Subsidiary except in either case if (i)(a) in the case
of the Senior Notes, the Subsidiary whose Capital Stock is issued or sold is an
Issuer or (b) in the case of the Senior Notes, the Subsidiary whose Capital
Stock is issued or sold is not an Issuer or in the case of the Senior
Subordinated Notes, the Subsidiary whose Capital Stock is issued or sold
guarantees all obligations of the Issuers and the Company, as the case may be,
under the Indentures and the Notes by simultaneously executing and delivering a
supplemental indenture to each of the Indentures providing for such guarantee
(the terms of which guarantee, in the case of the guarantee of the obligations
under the Senior Note Indenture, shall rank no less than PARI PASSU in right of
payment with all Indebtedness of such Subsidiary Guarantor and in the case of
the guarantee of the obligations under the Senior Subordinated Note Indenture,
shall rank subordinate to the guarantee of Senior Indebtedness of the Subsidiary
(including the Senior Notes) and senior in right of payment to all Indebtedness
expressly subordinated to senior Indebtedness except for any future Indebtedness
of such Subsidiary Guarantor which expressly provides that it is PARI PASSU with
the senior subordinated Indebtedness of such Guarantor and PARI PASSU with such
Indebtedness of such Guarantor expressly provided to be PARI PASSU with the
senior subordinated Indebtedness) (provided that this clause (i) shall not be
applicable in the case of the issuance or acquisition of the Capital Stock of
American Country Insurance Company to the extent such guarantee is prohibited by
law), (ii) after giving effect to the sale or issuance of such Capital Stock,
the Company beneficially owns in excess of 50% of the outstanding Capital Stock
of such Subsidiary on a fully diluted basis and (iii) the Capital Stock is
issued or sold in an underwritten public offering pursuant to a registration
statement that has been declared effective by the Commission pursuant to the
Securities Act. (Section 1015)
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not permit any Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any Subsidiary to (a)
pay dividends or make any other distribution on its Capital Stock to the Company
or any other Subsidiary,
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(b) pay any Indebtedness owed to the Company or any Subsidiary, (c) make any
Investment in the Company or any other Subsidiary or (d) transfer any of its
properties or assets to the Company or any Subsidiary, except (i) any
encumbrance or restriction pursuant to an agreement in effect on the date of the
Indentures and listed on a schedule to each of the Indentures, (ii) any
encumbrance or restriction, with respect to a Subsidiary that is not a
Subsidiary of the Company on the date of the Indentures, in existence at the
time such Person becomes a Subsidiary of the Company and not incurred in
connection with, or in contemplation of, such Person becoming a Subsidiary,
(iii) any such encumbrance or restriction in the New Credit Facility as in
effect on the date of the Indentures and (iv) any encumbrance or restriction
existing under any agreement that extends, renews, refinances or replaces the
agreements containing the encumbrances or restrictions in the foregoing clauses
(i) and (ii), PROVIDED that the terms and conditions of any such encumbrances or
restrictions are not materially less favorable to the holders of the Notes than
those under or pursuant to the agreement evidencing the Indebtedness so
extended, renewed, refinanced or replaced. (Section 1016)
IMPAIRMENT OF SECURITY INTEREST. The Senior Note Indenture will provide
that the Company shall not, and shall not permit any Subsidiary to, take or
knowingly or negligently omit to take any action which action or omission might
or would have the result of affecting or impairing the security interest in
favor of the Senior Note Trustee on behalf of itself and the holders of the
Senior Notes, with respect to the Collateral, or, in the case of the Shared
Collateral, the Collateral Agent, on behalf of itself and the holders of the
Senior Notes and the Lenders under the New Credit Facility, and the Company
shall not, and shall not permit any Subsidiary to, grant to any Person (other
than the Senior Note Trustee, on behalf of itself and the holders of the Senior
Notes or, in the case of the Shared Collateral, the Collateral Agent, on behalf
of itself and the holders of the Senior Notes and the Lenders under the New
Credit Facility) or permit or suffer to exist any interest whatsoever in the
Collateral other than Liens permitted by the Collateral Documents and the Senior
Note Indenture including the security interest in the Collateral securing the
New Credit Facility. For this purpose, the sale of the Collateral in accordance
with the terms of the Senior Note Indenture shall not be deemed to impair the
security interest of the Senior Note Trustee with respect to the Collateral or
be a grant of any interest in the Collateral. The Company will not, and will not
permit any of its Subsidiaries to, enter into any agreement or instrument that
by its terms expressly requires that the proceeds received from the sale of any
Collateral be applied to repay any Indebtedness of any Person other than in
accordance with "-- Possession, Use and Release of Collateral" and the
Collateral Documents. (Section 1017 of the Senior Note Indenture only)
LIMITATION ON SUBORDINATED INDEBTEDNESS. The Senior Subordinated Note
Indenture will provide that the Company will not incur, create, issue, assume,
guarantee, or otherwise become directly or indirectly liable with respect to any
Indebtedness that is contractually subordinate or junior in right of payment to
any Senior Debt and contractually senior in any respect in right of payment to
the Senior Subordinated Notes. (Section 1017 of the Senior Subordinated Note
Indenture only)
RELEASE OF BANK LIEN ON VEHICLES AND MEDALLIONS. The Issuers shall take or
cause to be taken all reasonably necessary action to cause the release of Liens
on, and in conjunction therewith, to enable the Senior Note Trustee on behalf of
itself and the holders of the Senior Notes to perfect its first priority
security interest in, the vehicles in Motors' taxicab fleet and 1,350
medallions, so that such release and perfection of the Lien may occur no later
than the 30th day following the date of the Senior Note Indenture (the "Release
Date"). Notwithstanding the foregoing, the Issuers shall not be deemed to have
breached this covenant in the event such release and perfection of the Lien does
not occur by Release Date if such failure to occur is attributable to the
actions (or the lack thereof) of the Senior Note Trustee and its agents and
employees or other Persons other than the Issuers or their Affiliates. In such
event, the Issuers shall take or cause to be taken all reasonably necessary
action to effect the aforementioned release and perfection of the Lien as soon
as possible after the Release Date. (Section 1020 of the Senior Note Indenture
Only)
PROVISION OF FINANCIAL STATEMENTS. Whether or not the Issuers (including
the Company) are subject to Section 13(a) or 15(d) of the Exchange Act, the
Issuers will, to the extent permitted under the Exchange Act, file with the
Commission the annual reports, quarterly reports and other documents
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which the Issuers would have been or are required to file with the Commission
pursuant to such Section 13(a) or 15(d) if the Issuers were or are so subject,
such documents to be filed with the Commission on or prior to the respective
dates (the "Required Filing Dates") by which the Issuers would have been or are
required so to file such documents if the Issuers were or are so subject. The
Issuers will also in any event (x)(i) within 15 days of each Required Filing
Date file with each of the Trustees copies of the annual reports, quarterly
reports and other documents which the Issuers would have been or are required to
file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act
if the Issuers were or are subject to such Section and (ii) within the earlier
of 30 days after the filing of such report or other document with the Trustee
and 45 days of each such Required Filing Date transmit such report or document
by mail to all holders of Notes, as their names and addresses appear in the
applicable security register, without cost to such holders of Notes and (y) if
filing such documents by the Issuers with the Commission is not permitted under
the Exchange Act, promptly upon written request supply copies of such documents
to any prospective holder of Notes at the Issuers' cost. (Section 1018)
ADDITIONAL COVENANTS. The Indentures also contain covenants with respect to
the following matters: (i) payment of principal, premium and interest; (ii)
maintenance of an office or agency in The City of New York; (iii) arrangements
regarding the handling of money held in trust; (iv) maintenance of corporate
existence; (v) payment of taxes and other claims; (vi) maintenance of
properties; and (vii) maintenance of insurance.
CONSOLIDATION, MERGER, SALE OF ASSETS
No Issuer (including the Company) shall, in a single transaction or a series
of related transactions, consolidate with or merge with or into any other Person
or sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties and assets to any Person or group of
affiliated Persons, or permit any of its Subsidiaries to enter into any such
transaction or transactions if such transaction or series of related
transactions, in the aggregate, would result in a sale, assignment, conveyance,
transfer, lease or disposition of all or substantially all of the properties and
assets of any Issuer and its Subsidiaries on a Consolidated basis to any other
Person or group of affiliated Persons, unless: (i) at the time of and after
giving effect thereto either (a) such Issuer shall be the continuing corporation
or (b) the Person (if other than such Issuer) formed by such consolidation or
into which such Issuer is merged or the Person which acquires by sale,
assignment, conveyance, transfer, lease or disposition all or substantially all
of the properties and assets of such Issuer and its Subsidiaries on a
Consolidated basis (the "Surviving Entity") shall be a corporation duly
organized and validly existing under the laws of the United States of America,
any state thereof or the District of Columbia and such Person assumes by
supplemental indentures in form reasonably satisfactory to the Trustees, all the
obligations of such Issuer under the Notes and the Indentures, and the
Indentures shall remain in full force and effect; (ii) immediately before and
immediately after giving effect to such transaction on a PRO FORMA basis, no
Default or Event of Default shall have occurred and be continuing; (iii)
immediately after giving effect to such transaction on a PRO FORMA basis, the
Consolidated Net Worth of such Issuer (or the Surviving Entity if such Issuer is
not the continuing obligor under the Indentures) is equal to or greater than the
Consolidated Net Worth of such Issuer immediately prior to such transaction;
(iv) except in the case of a consolidation or merger solely involving the
Issuers, immediately before and immediately after giving effect to such
transaction on a PRO FORMA basis (on the assumption that the transaction
occurred on the first day of the four-quarter period immediately prior to the
consummation of such transaction with the appropriate adjustments with respect
to the transaction being included in such PRO FORMA calculation), the Company
(or the Surviving Entity if the Company is not the continuing obligor under the
Indentures) could incur $1.00 of additional Indebtedness under the provisions of
"-- Certain Covenants -- Limitation on Indebtedness" (other than Permitted
Indebtedness); (v) each Guarantor, if any, unless it is the other party to the
transactions described above, shall have by supplemental indentures confirmed
that its Guarantee shall apply to such Person's obligations under the Indentures
and the Notes after giving effect to such transaction; (vi) if any of the
property or assets of the Company or any of its Subsidiaries would thereupon
become subject to any Lien, the provisions of "-- Certain Covenants --
Limitation on Liens" are complied with; and (vii) such Issuer or the Surviving
Entity shall have delivered, or caused to be
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delivered, to the Trustees, in form and substance reasonably satisfactory to the
Trustees, an officers' certificate and an opinion of counsel, each to the effect
that such consolidation, merger, transfer, sale, assignment, lease or other
transaction and the supplemental indentures in respect thereto comply with the
provisions described herein and that all conditions precedent herein provided
for relating to such transaction have been complied with. (Section 801)
No Guarantor shall, and the Issuers will not permit a Guarantor to, in a
single transaction or series of related transactions, merge or consolidate with
or into any other corporation (other than the Company or any other Guarantor) or
other entity, or sell, assign, convey, transfer, lease or otherwise dispose of
all or substantially all of its properties and assets on a Consolidated basis to
any entity (other than the Company or any other Guarantor) unless: (i) at the
time of and after giving effect thereto, either (a) such Guarantor shall be the
continuing corporation or (b) the entity (if other than such Guarantor) formed
by such consolidation or into which such Guarantor is merged or the entity which
acquires by sale, assignment, conveyance, transfer, lease or disposition the
properties and assets of such Guarantor shall be a corporation duly organized
and validly existing under the laws of the United States, any state thereof or
the District of Columbia and shall expressly assume by supplemental indentures,
executed and delivered to the Trustees, in a form reasonably satisfactory to the
Trustees, all the obligations of such Guarantor under the Notes and the
Indentures; (ii) immediately before and immediately after giving effect to such
transaction on a PRO FORMA basis, no Default or Event of Default shall have
occurred and be continuing; and (iii) such Guarantor shall have delivered to the
Trustees, in form and substance reasonably satisfactory to the Trustees, an
officers' certificate and an opinion of counsel, each stating that such
consolidation, merger, sale, assignment, conveyance, transfer, lease or
disposition and such supplemental indentures comply with the Indentures, and
thereafter all obligations of the predecessor shall terminate. (Section 801)
In the event of any transaction described in and complying with the
conditions listed in the immediately preceding paragraphs in which any Issuer or
any Guarantor is not the continuing corporation, the successor Person formed or
remaining shall succeed to, and be substituted for, and may exercise every right
and power of, such Issuer or such Guarantor, as the case may be, and such Issuer
or such Guarantor, as the case may be, shall be discharged from all obligations
and covenants under the Indentures, the Notes or such Guarantee, as the case may
be; PROVIDED that in the case of a transfer by lease, the predecessor shall not
be released from the payment of principal and interest on the Notes or such
Guarantee, as the case may be. (Section 802)
EVENTS OF DEFAULT
An Event of Default will occur under either Indenture (except as provided
below) if:
(i) there shall be a default in the payment of any interest on any
Senior Note or Senior Subordinated Note, as the case may be, when it becomes
due and payable, and such default shall continue for a period of 30 days;
(ii) there shall be a default in the payment of the principal of (or
premium, if any, on) any Senior Note or Senior Subordinated Note, as the
case may be, when and as the same shall become due and payable (at maturity,
upon acceleration, optional or mandatory redemption, required repurchase or
otherwise);
(iii) (a) there shall be a default in the performance, or breach, of any
covenant or agreement of any Issuer or any Guarantor under the Senior Note
Indenture or the Senior Subordinated Note Indenture, as the case may be, or,
in the case of the Senior Notes, the Collateral Documents (other than a
default in the performance, or breach, of a covenant or agreement which is
specifically dealt with in paragraphs (i) or (ii) or in clauses (b), (c) and
(d) of this paragraph (iii)) and such default or breach shall continue for a
period of 60 days after written notice has been given, by certified mail,
(x) to the Issuers by the applicable Trustee or (y) to the Issuers and the
applicable Trustee by the holders of at least 25% in aggregate principal
amount of the outstanding Senior Notes or Senior Subordinated Notes, as the
case may be; (b) there shall be a default in the performance or breach of
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the provisions described in "-- Consolidation, Merger, Sale of Assets"; (c)
the Issuers shall have failed to make or consummate a Change of Control
Offer in accordance with the provisions of "-- Certain Covenants -- Purchase
of Notes Upon a Change of Control"; or (d) the Issuers shall have failed to
make or consummate a Senior Note Offer in the case of the Senior Notes or an
Offer in the case of the Senior Subordinated Notes in accordance with the
provisions of "-- Certain Covenants -- Limitation on Sale of Assets";
(iv) (a) in the case of the Senior Note Indenture, any default in the
payment of principal, premium, if any, or interest on any Indebtedness shall
have occurred under any agreements, indentures or instruments under which
the Company or any Subsidiary then has outstanding Indebtedness which
aggregate in excess of $5 million when the same shall become due and payable
and continuation of such default after any applicable grace period and, if
such Indebtedness has not already matured at its final maturity in
accordance with its terms, the holder of such Indebtedness shall have the
right to accelerate such Indebtedness or (b) in the case of either
Indenture, an event of default as defined in any of the agreements,
indentures or instruments described in clause (a) of this paragraph (iv)
shall have occurred and the Indebtedness thereunder, if not already matured
at its final maturity in accordance with its terms, shall have been
accelerated;
(v) one or more judgments, orders or decrees for the payment of money in
excess of $5 million, either individually or in the aggregate, shall be
entered against the Company or any Subsidiary or any of their respective
properties and shall not be discharged and either (a) enforcement
proceedings shall have been commenced upon such judgment, order or decree or
(b) there shall have been a period of 60 consecutive days during which a
stay of enforcement of such judgment or order, by reason of an appeal or
otherwise, shall not be in effect;
(vi) in the case of the Senior Note Indenture, any Collateral Document
shall for any reason cease to be, or be asserted in writing by any Issuer
not to be, in full force and effect and enforceable in accordance with its
terms, or any security interest purported to be created by any Collateral
Document, shall cease to be a valid and perfected first priority security
interest in any Collateral subject only to Permitted Liens or any
representation or warranty of the Issuers contained in the Collateral
Documents shall cease to be true and correct or the Issuers shall be in
default on any covenant contained in the Collateral Documents;
(vii) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of any Issuer or
any Material Subsidiary in an involuntary case or proceeding under any
applicable Bankruptcy Law or (b) a decree or order adjudging any Issuer or
any Material Subsidiary bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment or composition of or in respect of any Issuer or any
Material Subsidiary under any applicable Federal or state law, or appointing
a custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of any Issuer or any Material Subsidiary or of any
substantial part of its property, or ordering the winding up or liquidation
of its affairs, and any such decree or order for relief shall continue to be
in effect, or any such other decree or order shall be unstayed and in
effect, for a period of 60 consecutive days;
(viii) (a) any Issuer or any Material Subsidiary commences a voluntary
case or proceeding under any applicable Bankruptcy Law or any other case or
proceeding to be adjudicated bankrupt or insolvent, (b) any Issuer or any
Material Subsidiary consents to the entry of a decree or order for relief in
respect of such Issuer or such Material Subsidiary in an involuntary case or
proceeding under any applicable Bankruptcy Law or to the commencement of any
bankruptcy or insolvency case or proceeding against it, (c) any Issuer or
any Material Subsidiary files a petition or answer or consent seeking
reorganization or relief under any applicable Federal or state law, (d) any
Issuer or any Material Subsidiary (x) consents to the filing of such
petition or the appointment of, or taking possession by, a custodian,
receiver, liquidator, assignee, trustee, sequestrator or similar official of
such Issuer or such Material Subsidiary or of any substantial part of its
property, (y) makes an
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assignment for the benefit of creditors or (z) admits in writing its
inability to pay its debts generally as they become due or (e) any Issuer or
any Material Subsidiary takes any corporate action in furtherance of any
such actions in this paragraph (viii); or
(ix) in the case of the Senior Note Indenture, any party secured by the
Collateral, other than the Senior Note Trustee or the Collateral Agent
acting at the direction of the Senior Note Trustee on behalf of itself or
the holders of the Senior Notes, commences proceedings, or gives notice that
it intends to commence proceedings, to foreclose upon any portion of the
Collateral or has exercised any right under applicable law or the Collateral
Documents (or any other mortgage, pledge or security documents) to take
ownership or effect the transfer of such Collateral in lieu of foreclosure;
or the Lenders under the New Credit Facility commence proceedings, or give
notice that they intend to commence proceedings, to foreclose upon any
material portion of the collateral securing the obligations thereunder or
have exercised any right under applicable law or security documents to take
ownership or effect the transfer of such collateral in lieu of foreclosure.
If an Event of Default (other than as specified in paragraphs (vii) and
(viii) of the prior paragraph) shall occur and be continuing, the applicable
Trustee or the holders of not less than 25% in aggregate principal amount of the
Senior Notes or the Senior Subordinated Notes, as the case may be, then
outstanding may declare by notice to the Issuers (or the Issuers and the
applicable Trustee if notice is given by the Holders) the Senior Notes or the
Senior Subordinated Notes, as the case may be, due and payable immediately at
their principal amount together with accrued and unpaid interest, if any, to the
date the Notes shall have become due and payable and thereupon the applicable
Trustee may, at its discretion, proceed to protect and enforce the rights of the
holders of Senior Notes or the Senior Subordinated Notes, as the case may be, by
appropriate judicial proceeding. If an Event of Default specified in paragraph
(vii) or (viii) of the prior paragraph occurs and is continuing, then all the
Senior Notes and the Senior Subordinated Notes shall IPSO FACTO become and be
immediately due and payable, in an amount equal to the principal amount of the
Senior Notes and the Senior Subordinated Notes together with accrued and unpaid
interest, if any, to the date the Senior Notes and the Senior Subordinated Notes
become due and payable, without any declaration or other act on the part of the
applicable Trustee or any holder.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the applicable Trustee, the
holders of at least a majority in aggregate principal amount of Senior Notes or
the Senior Subordinated Notes, as the case may be, outstanding, by written
notice to the Issuers and the applicable Trustee, may rescind and annul such
declaration and its consequences if (a) the Issuers have paid or deposited with
the applicable Trustee a sum sufficient to pay (i) all sums paid or advanced by
the applicable Trustee under the applicable Indenture and the reasonable
compensation, expenses, disbursements and advances of the applicable Trustee,
its agents and counsel, (ii) all overdue interest on all Senior Notes or the
Senior Subordinated Notes, as the case may be, (iii) the principal of and
premium, if any, on any Senior Notes or the Senior Subordinated Notes, as the
case may be, which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Senior Notes or the
Senior Subordinated Notes, as the case may be, and (iv) to the extent that
payment of such interest is lawful, interest upon overdue interest at the rate
borne by the Senior Notes or the Senior Subordinated Notes, as the case may be;
and (b) all Events of Default, other than the non-payment of principal of the
Senior Notes or the Senior Subordinated Notes, as the case may be, which have
become due solely by such declaration of acceleration, have been cured or
waived. (Section 502)
The holders of not less than a majority in aggregate principal amount of the
Senior Notes or the Senior Subordinated Notes, as the case may be, outstanding
may on behalf of the holders of all the Senior Notes or the Senior Subordinated
Notes, as the case may be, waive any past defaults under the applicable
Indenture and their consequences, except a default in the payment of the
principal of, premium, if any, or interest on any Senior Note or Senior
Subordinated Note, as the case may be, or in respect of a covenant
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or provision which under the applicable Indenture cannot be modified or amended
without the consent of the holder of each Senior Note or Senior Subordinated
Note, as the case may be, outstanding affected thereby. (Section 513)
The Issuers are also required to notify the applicable Trustee within five
business days of the occurrence of any Default. (Section 501)
The Trust Indenture Act contains limitations on the rights of the Trustees,
should either of them become a creditor of any Issuer or any Guarantor, to
obtain payment of claims in certain cases or to realize on certain property
received by them in respect of any such claims, as security or otherwise. The
Trustees are permitted to engage in such other transactions, PROVIDED that if
they acquire any conflicting interest they must eliminate such conflict upon the
occurrence of an Event of Default or else resign.
POSSESSION, USE AND RELEASE OF COLLATERAL
Upon compliance by the Issuers with the conditions set forth below in
respect of any Asset Sale, the Senior Note Trustee or, in the case of Shared
Collateral, the Collateral Agent will release the Released Interests (as
hereinafter defined) from the Lien of the Collateral Documents and reconvey the
Released Interests to the Issuers. (Section 1207 of the Senior Note Indenture
Only)
Other than with respect to Trust Moneys, which are subject to release from
the lien of the Collateral Documents as provided under "--Use of Trust Moneys"
below, the Issuers will have the right to obtain a release of items of
Collateral (the "Released Interests") subject to an Asset Sale upon compliance
with the condition precedent that the Issuers deliver to the Senior Note Trustee
or, in the case of the Shared Collateral, the Collateral Agent the following:
(a) A notice from the Issuers requesting the release of Released
Interests and attaching all the documents referred to below, (i) describing
with particularity the proposed Released Interests, (ii) specifying the fair
market value of such Released Interests on a date within 60 days of such
notice (the "Valuation Date"), (iii) certifying that the purchase price
received is not less than the fair market value of the Released Interests as
of the date of such release and, to the extent such fair market value is
determined by an Independent Financial Advisor, annexing such Independent
Financial Advisor's determination to such notice, (iv) stating that the
release of such Released Interests will not interfere with or impede the
Senior Note Trustee's or, in the case of Shared Collateral, the Collateral
Agent's ability to realize the value of the remaining Collateral and will
not impair the maintenance and operation of the remaining Collateral and (v)
accompanied by a counterpart of the instruments proposed to give effect to
the release fully executed and acknowledged (if applicable) by all parties
thereto other than the Senior Note Trustee or, in the case of the Shared
Collateral, the Collateral Agent;
(b) An officers' certificate of the Issuers certifying that (i) such
Asset Sale covers only the Released Interests and complies with the terms
and conditions of the Senior Note Indenture and the applicable Collateral
Documents with respect to Asset Sales, (ii) all Net Cash Proceeds from the
sale of any of the Released Interests will be applied in accordance with the
provisions of the Senior Note Indenture in respect of Asset Sales and in the
event that the Net Cash Proceeds for such Asset Sale are used to purchase
additional assets, specifying the assets intended to be so purchased, (iii)
no Default or Event of Default under the Senior Note Indenture is in effect
or continuing on the date of such certificate, the Valuation Date or the
date of such Asset Sale, (iv) the release of the Released Interests will not
result in a Default or Event of Default under the Senior Note Indenture and
(v) all conditions precedent in the Senior Note Indenture relating to the
release in question have been complied with;
(c) The Net Cash Proceeds and other non-cash consideration received from
the Asset Sale required to be delivered to the Senior Note Trustee or, in
the case of the Shared Collateral, the Collateral Agent pursuant to the
Senior Note Indenture and the Collateral Documents, and, if any property
other than cash is included in such consideration, such instruments of
conveyance, assignment and transfer, if any, as may be necessary, in the
opinion of counsel, to subject to the Lien of the Collateral Documents all
the right, title and interest of the Issuers in and to such property;
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(d) One or more opinions of counsel which, when considered collectively,
shall be substantially to the effect (i) that any obligation included in the
consideration for any Released Interest and to be received by the Senior
Note Trustee or, in the case of the Shared Collateral, the Collateral Agent
pursuant to paragraph (c) above is a valid and binding obligation
enforceable in accordance with its terms, subject to such customary
exceptions regarding equitable principles and creditors' rights generally as
shall be reasonably acceptable to the Senior Note Trustee or the Collateral
Agent and that the Collateral Documents are effective to create a valid and
perfected security interest in such obligation, subject to customary
exceptions, (ii) either (1) that such instruments of conveyance, assignment
and transfer as have been or are then delivered to the Senior Note Trustee
or, in the case of the Shared Collateral, the Collateral Agent are
sufficient to subject to the Lien of the Collateral Documents all the right,
title and interest of the Issuers in and to any property, other than cash or
Cash Equivalents, that is included in the consideration for the Released
Interests and to be received by the Senior Note Trustee or, in the case of
the Shared Collateral, the Collateral Agent pursuant to paragraph (c) above,
or (2) that no instruments of conveyance, assignment or transfer are
necessary for such purpose, (iii) that the Issuers have corporate or
partnership power to own all property included in the consideration for such
release, and (iv) that all conditions precedent provided in the Senior Note
Indenture and the Collateral Documents relating to the Asset Sale and such
release of the Released Interests have been complied with;
(e) If any Released Interest is only a portion of a discrete parcel of
Real Property, evidence that a title company shall have committed to issue
an endorsement to the title insurance policy relating to the affected
Mortgaged Property confirming that after such release, the Lien of the
applicable Mortgage continues unimpaired as a first priority perfected Lien
upon the remaining Mortgaged Property subject only to "Prior Liens" (as
defined in the applicable Mortgage); and
(f) All additional documentation, including Opinions of Counsel, if any,
required by the Section 314(d) of the Trust Indenture Act prior to the
release of Collateral by the Senior Note Trustee or, in the case of the
Shared Collateral, the Collateral Agent.
Any Net Cash Proceeds of an Asset Sale involving Collateral (other than
Shared Collateral) shall be deposited with the Senior Note Trustee or, in the
case of Shared Collateral, shall be deposited with the Collateral Agent, in each
case held in the Collateral Account in accordance with the terms of the Senior
Note Indenture and the Collateral Documents. The Company may withdraw such
proceeds from the Collateral Account (i) to purchase or otherwise acquire assets
as described in paragraph (b) of "Certain Covenants -- Limitations on Sale of
Assets," which assets shall thereafter become subject to the Lien of the
Collateral Documents as described therein, (ii) to purchase indebtedness
(including the Notes) in accordance with paragraph (c) of "Certain Covenants --
Limitation on Sale of Assets" or (iii) to the extent such proceeds are not so
utilized in connection with clause (ii) above due to a Deficiency, to utilize
such proceeds for general corporate purposes as described in paragraph (c) of
"Certain Covenants -- Limitation on Sale of Assets."
So long as no Event of Default shall have occurred and be continuing, the
Issuers may, without any release or consent by the Senior Note Trustee or the
Collateral Agent, sell or otherwise dispose of any machinery, equipment,
furniture, apparatus, tools or implements or other similar property which at
such time is subject to the Lien of the Collateral Documents, which may have
become worn out, obsolete or otherwise in need of replacement or repair, not
exceeding (A) individually $500,000, in fair market value, and (B) in the
aggregate in any twelve month period, $5,000,000, in fair market value.
USE OF TRUST MONEYS
All Trust Moneys shall be held by the Senior Note Trustee or, in the case of
the Shared Collateral, the Collateral Agent, as a part of the Collateral
securing the Senior Notes and, as long as no Event of Default shall have
occurred and be continuing, shall either (i) in the case of Trust Moneys
constituting Net Cash Proceeds from Asset Sales be released to the Issuers for
reinvestment in the business of the Company in accordance with "--Certain
Covenants -- Limitation on Sale of Assets" above and subject to receipt by the
Senior Note Trustee or, in the case of the Shared Collateral, the Collateral
Agent of certain documents
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set forth in the Senior Note Indenture or the Collateral Agent or (ii) in the
case of Trust Moneys constituting any Excess Proceeds, at the written direction
of the Issuers pursuant to an Offer, be applied by the Senior Note Trustee or
the Collateral Agent from time to time to the payment of the principal of,
premium, if any, and interest on any Senior Notes, at maturity or upon
redemption in each case in accordance with the terms of the Senior Note
Indenture and the Collateral Documents; PROVIDED, HOWEVER, that to the extent
that the Offer is not fully subscribed to by the Holders, the Issuers may obtain
a release of any unutilized portion of the Excess Proceeds from the Lien of the
Collateral Documents, subject to compliance with the terms of the Senior Note
Indenture. The Issuers may also withdraw Trust Moneys constituting the proceeds
of insurance upon any part of the Collateral or an award for any Collateral
taken by eminent domain to reimburse the Issuers for repair or replacement of
such Collateral, subject to certain conditions.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURES
The Issuers may, at their option and at any time, elect to have the
obligations of the Issuers and any Guarantor discharged with respect to the
outstanding Senior Notes or Senior Subordinated Notes, as the case may be
("defeasance"). Such defeasance means that the Issuers and any Guarantor shall
be deemed to have paid and discharged the entire Indebtedness represented by the
outstanding Senior Notes or Senior Subordinated Notes, as the case may be, and
the Collateral would be released from the Lien in favor of the holders of the
Senior Notes except for (i) the rights of holders of outstanding Senior Notes or
Senior Subordinated Notes, as the case may be, to receive payments in respect of
the principal of, premium, if any, and interest on such Senior Notes or Senior
Subordinated Notes, as the case may be, solely from the trust fund as described
below, when such payments are due, (ii) the Issuers' obligations with respect to
the Senior Notes or Senior Subordinated Notes, as the case may be, concerning
issuing temporary Senior Notes or temporary Senior Subordinated Notes, as the
case may be, registration of Senior Notes or Senior Subordinated Notes, as the
case may be, mutilated, destroyed, lost or stolen Senior Notes or Senior
Subordinated Notes, as the case may be, and the maintenance of an office or
agency for payment and money for security payments held in trust, (iii) the
rights, powers, trusts, duties and immunities of the applicable Trustee and (iv)
the defeasance provisions of the applicable Indenture. In addition, the Issuers
may, at their option and at any time, elect to have the obligations of the
Issuers and any Guarantor released with respect to certain covenants (PROVIDED
that the Issuers' obligations to pay interest, premium, if any, and principal on
the Senior Notes or Senior Subordinated Notes, as the case may be, under the
applicable Indenture shall remain in full force and effect as long as the Senior
Notes or Senior Subordinated Notes, as the case may be, are outstanding), that
are described in the applicable Indenture ("covenant defeasance") and any
omission to comply with such obligations shall not constitute a Default or an
Event of Default with respect to the Senior Notes or Senior Subordinated Notes,
as the case may be. In the event covenant defeasance occurs, certain events (not
including non-payment, enforceability of any Guarantee, bankruptcy and
insolvency events) described under "-- Events of Default" will no longer
constitute an Event of Default with respect to the Senior Notes or Senior
Subordinated Notes, as the case may be. (Sections 401, 402 and 403)
In order to exercise either defeasance or covenant defeasance, (i) the
Issuers must irrevocably deposit with the applicable Trustee, in trust, for the
benefit of the holders of the Senior Notes or Senior Subordinated Notes, as the
case may be, cash in United States dollars, U.S. Government Obligations (as
defined in the Indentures), 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 and discharge the principal of, premium, if any, and
interest on the outstanding Senior Notes or Senior Subordinated Notes, as the
case may be, on the Stated Maturity of such principal or installment of
principal (or on any date after , 1998 in the case of the Senior
Notes and , 1999 in the case of the Senior Subordinated Notes (such
date being referred to as the applicable "Defeasance Redemption Date"), if when
exercising either defeasance or covenant defeasance, the Issuers have delivered
to the applicable Trustee an irrevocable notice to redeem all of the outstanding
Senior Notes or Senior Subordinated Notes, as the case may be, on the applicable
Defeasance Redemption Date); (ii) in the case of defeasance, the Issuers shall
have delivered to the applicable Trustee an opinion of independent counsel in
the
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United States stating that (A) the Issuers have received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of the
applicable 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 will
confirm that, the holders of the outstanding Senior Notes or Senior Subordinated
Notes, as the case may be, will not recognize income, gain or loss for federal
income tax purposes as a result of such defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such defeasance had not occurred; (iii) in the
case of covenant defeasance, the Issuers shall have delivered to the applicable
Trustee an opinion of independent counsel in the United States to the effect
that the holders of the outstanding Senior Notes or Senior Subordinated Notes,
as the case may be, will not recognize income, gain or loss for federal income
tax purposes as a result of such covenant defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such covenant defeasance had not occurred; (iv)
no Default or Event of Default shall have occurred and be continuing on the date
of such deposit or insofar as clause (vii) or (viii) under the first paragraph
under "-- Events of Default" is concerned, at any time during the period ending
on the 91st day after the date of deposit; (v) such defeasance or covenant
defeasance shall not cause the applicable Trustee to have a conflicting interest
with respect to any securities of any Issuer or any Guarantor; (vi) such
defeasance or covenant defeasance shall not result in a breach or violation of,
or constitute a Default under, the applicable Indenture or any other material
agreement or instrument to which any Issuer or any Guarantor is a party or by
which it is bound; (vii) the Issuers shall have delivered to the applicable
Trustee an opinion of independent counsel in the United States to the effect
that (A) the trust funds will not be subject to any rights of holders of
Indebtedness, including, without limitation, those arising under the applicable
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; (viii) the
Issuers shall have delivered to the applicable Trustee an officers' certificate
stating that the deposit was not made by the Issuers with the intent of
preferring the holders of the Senior Notes or Senior Subordinated Notes, as the
case may be, or any Guarantee over the other creditors of any Issuer or any
Guarantor with the intent of defeating, hindering, delaying or defrauding
creditors of the Company, any Guarantor or others; (ix) no event or condition
shall exist that would prevent the Company from making payments of the principal
of, premium, if any, and interest on the Senior Notes or Senior Subordinated
Notes, as the case may be, on the date of such deposit or at any time ending on
the 91st day after the date of such deposit; and (x) the Company shall have
delivered to the applicable Trustee an officers' certificate and an opinion of
independent counsel, each stating that all conditions precedent provided for
relating to either the defeasance or the covenant defeasance, as the case may
be, have been complied with. (Section 404)
CERTAIN BANKRUPTCY LIMITATIONS
The right of the Senior Note Trustee to repossess and dispose of the
Collateral upon the occurrence of an Event of Default is likely to be
significantly impaired by applicable Bankruptcy Law if a bankruptcy proceeding
were to be commenced by or against any Issuer prior to the Collateral Agent
having disposed of the Collateral. Under the Bankruptcy Law, a secured creditor
such as the Senior Note Trustee and, in the case of the Shared Collateral, the
Collateral Agent on behalf of the holders of the Senior Notes is prohibited from
repossessing its security from a debtor in a bankruptcy case, or from disposing
of security repossessed from such debtor, without bankruptcy court approval.
Moreover, the Bankruptcy Law permits the debtor to continue to retain and to use
collateral even though the debtor is in default under the applicable debt
instruments, provided that the secured creditor is given "adequate protection."
The meaning of the term "adequate protection" may vary according to
circumstances, but it is intended in general to protect the value of the secured
creditor's interest in the collateral and may include cash payments or the
granting of additional security, if and at such times as the court in its
discretion determines, for any diminution in the value of the collateral as a
result of the stay of repossession or disposition or any use of the collateral
by the debtor during the pendency of the bankruptcy case. In view of the lack of
a precise definition of the term "adequate protection" and the broad
discretionary powers of a bankruptcy court, it is impossible to predict how long
payments under the Senior Notes could be delayed following commencement of a
bankruptcy case, whether or when the
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Senior Note Trustee and, in the case of the Shared Collateral, the Collateral
Agent could repossess or dispose of the Collateral or whether or to what extent
holders of the Senior Notes would be compensated for any delay in payment or
loss of value of the Collateral through the requirement of "adequate
protection."
SATISFACTION AND DISCHARGE
Each Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Senior Notes or Senior
Subordinated Notes, as the case may be, as expressly provided for in the
applicable Indenture) as to all outstanding Senior Notes or Senior Subordinated
Notes, as the case may be, when (i) either (a) all the Senior Notes or Senior
Subordinated Notes, as the case may be, theretofore authenticated and delivered
(except lost, stolen or destroyed Senior Notes or Senior Subordinated Notes, as
the case may be, which have been replaced or paid and Senior Notes or Senior
Subordinated Notes, as the case may be, for whose payment funds have been
deposited in trust by the Issuers and thereafter repaid to the Issuers or
discharged from such trust) have been delivered to the applicable Trustee for
cancellation or (b) all Senior Notes or Senior Subordinated Notes, as the case
may be, not theretofore delivered to the applicable Trustee for cancellation (x)
have become due and payable, (y) will become due and payable at their Stated
Maturity within one year, or (z) are to be called for redemption within one year
under arrangements satisfactory to the applicable Trustee for the giving of
notice of redemption by the applicable Trustee in the name, and at the expense,
of the Issuers, and either any Issuer or any Guarantor has irrevocably deposited
or caused to be deposited with the applicable Trustee as trust funds in trust an
amount sufficient to pay and discharge the entire indebtedness on the Senior
Notes or Senior Subordinated Notes, as the case may be, not theretofore
delivered to the applicable Trustee for cancellation, including principal of,
premium, if any, and accrued interest on such Senior Notes or Senior
Subordinated Notes, as the case may be, at such Maturity; (ii) any Issuer or any
Guarantor have paid or caused to be paid all other sums payable under the
applicable Indenture by the Issuers and any Guarantor; and (iii) the Issuers and
any Guarantor have delivered to the applicable Trustee an officers' certificate
and an opinion of counsel in the United States each stating that all conditions
precedent under the applicable Indenture relating to the satisfaction and
discharge of the applicable Indenture have been complied with, and that such
satisfaction and discharge will not result in a breach or violation of, or
constitute a default under, the applicable Indenture or any other material
agreement or instrument to which any Issuer is a party or by which it is bound.
(Section 1301)
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indentures and, in the case of the
Senior Notes, the Collateral Documents may be made by the Issuers, any
Guarantor, if any, and the applicable Trustee with the consent of the holders of
not less than a majority in aggregate outstanding principal amount of the Senior
Notes or Senior Subordinated Notes, as the case may be; PROVIDED, HOWEVER, that
no such modification or amendment may, without the consent of the holder of each
outstanding Senior Note or Senior Subordinated Note, as the case may be,
affected thereby: (i) change the Stated Maturity of the principal of, or any
installment of interest on, any Senior Note or Senior Subordinated Note, as the
case may be, or waive a default in the payment of the principal of, or interest
on any Senior Note or Senior Subordinated Note, as the case may be, or reduce
the principal amount thereof or the rate of interest thereon or any premium
payable upon the redemption thereof, or change the coin or currency in which the
principal of any Senior Note or Senior Subordinated Note, as the case may be, or
any premium or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment after the Stated Maturity thereof;
(ii) amend, change or modify the obligation of the Issuers to make and
consummate a Change of Control Offer in the event of a Change of Control in
accordance with "-- Certain Covenants -- Purchase of Notes Upon a Change of
Control" or make and consummate an Offer in accordance with "-- Certain
Covenants -- Limitation on Sale of Assets", including, in each case, amending,
changing or modifying any of the definitions with respect thereto; (iii) reduce
the percentage in principal amount of outstanding Notes, the consent of whose
holders is required for any such supplemental indenture, or the consent of whose
holders is required for any waiver; (iv) modify any of the provisions relating
to supplemental indentures requiring the consent of holders or relating to the
waiver of past defaults or
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relating to the waiver of certain covenants, except to increase the percentage
of outstanding Notes required for such actions or to provide that certain other
provisions of such Indenture cannot be modified or waived without the consent of
the holder of each Senior Note or Senior Subordinated Note, as the case may be,
affected thereby; (v) except as otherwise permitted under "-- Consolidation,
Merger, Sale of Assets," consent to the assignment or transfer by any Issuer or
any Guarantor of any of its rights and obligations under the Indentures; (vi)
amend or modify any of the provisions of (1) in the case of the Senior Notes,
the Senior Note Indenture in any manner which subordinates the Senior Notes in
right of payment to other Indebtedness of the Issuers or which subordinates any
Guarantee of obligations under the Senior Note Indenture in right of payment to
other Indebtedness of such Guarantor, or (2) in the case of the Senior
Subordinated Notes, the Senior Subordinated Note Indenture relating to the
priority or right of payment of the Senior Subordinated Notes or any Guarantee
in a manner adverse to the holders of the Senior Subordinated Notes; and (vii)
in the case of the Senior Notes, consent to the release of any Collateral from
any Lien created by the Collateral Documents or permit the creation of any Lien
on the Collateral except in each case in accordance with the terms of the Senior
Note Indenture and the Collateral Documents. (Section 902)
The holders of a majority in aggregate principal amount of the Senior Notes
or Senior Subordinated Notes, as the case may be, outstanding may waive
compliance with certain restrictive covenants and provisions of the applicable
Indenture. (Section 1022 of the Senior Note Indenture and Section 1021 of the
Senior Subordinated Note Indenture)
GOVERNING LAW
The Indentures and the Notes will be governed by, and construed in
accordance with, the laws of the State of New York, without giving effect to the
conflicts of law principles thereof.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from such Person, in each case, other than Indebtedness
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary or such acquisition. Acquired Indebtedness shall be deemed to be
incurred on the date of the related acquisition of assets from any Person or the
date the acquired Person becomes a Subsidiary.
"Affiliate" means, with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person (or any partner of such
Person) or (ii) any other Person that owns, directly or indirectly, 5% or more
of such specified Person's (or any partner of such Person's) equity ownership or
Voting Stock or any executive officer or director of either of such Persons. For
the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person directly or indirectly, whether through ownership of voting securities,
by contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (i) any Capital Stock
of any Subsidiary; (ii) all or substantially all of the properties and assets of
any division or line of business of the Company or its Subsidiaries; or (iii)
any other properties or assets of the Company or any Subsidiary, other than in
the ordinary course of business. For the purposes of this definition, the term
"Asset Sale" shall not include any transfer of properties and assets (1) that is
governed by the provisions described under "Consolidation, Merger, Sale of
Assets" or (2) that are of the Company to any Wholly Owned Subsidiary, or of any
Subsidiary to the Company or any Wholly Owned Subsidiary in accordance with the
terms of the Indentures.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years
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from the date of determination to the date or dates of each successive scheduled
principal payment of such Indebtedness multiplied by (b) the amount of each such
principal payment by (ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11 of the United States Code, as amended, or
any similar United States Federal or state law relating to bankruptcy,
insolvency, receivership, winding-up, liquidation, reorganization or relief of
debtors or any amendment to, succession to or change in any such law.
"Board of Directors" means the board of directors of any Issuer or any
Guarantor, as the case may be, or any duly authorized committee of such board.
"Borrowing Base" means the sum of (a) 60% of the inventory owned by the
Company or any Subsidiary and (b) 85% of the trade accounts receivable owned by
the Company or any Subsidiary (less any reserves relating to such receivables)
(in each case as recorded on the books and records of the Company on a
consolidated basis in accordance with GAAP).
"Capital Lease Obligation" of any Person means any obligation of such Person
and its subsidiaries on a Consolidated basis under any capital lease of real or
personal property which, in accordance with GAAP, has been recorded as a
capitalized lease obligation.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock.
"Change of Control" means the occurrence of any of the following events: (i)
(A) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act), other than the Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have beneficial ownership of all shares
that such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
shares of Voting Stock representing the right to vote more than 45% of the
general voting power (the "Voting Power") under ordinary circumstances to elect
at least a majority of the board of directors, managers or trustees of the
Company (irrespective of whether or not at the time stock of any other class or
classes shall have or might have voting power by reason of the happening of any
contingency) and (B) the Permitted Holders own less than 50% of the Voting
Power; (ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election to such Board of Directors or
whose nomination for election by the stockholders of the Company, was approved
by a vote of 66 2/3% of the members of the Board of Directors of the Company
then still in office who were either members of the Board of Directors of the
Company at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute at least
two-thirds of such Board of Directors then in office; (iii) the Company
consolidates with or merges with or into any Person or conveys, transfers or
leases all or substantially all of its assets to any Person, or any corporation
consolidates with or into the Company, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Company is changed into
or exchanged for cash, securities or other property, other than any such
transaction (X) where the outstanding Voting Stock of the Company is not changed
or exchanged at all (except to the extent necessary to reflect a change in the
jurisdiction of incorporation of the Company) or (Y) where (A) the outstanding
Voting Stock of the Company is changed into or exchanged for (x) Voting Stock of
the surviving corporation or the Company which is not Redeemable Capital Stock
or (y) cash, securities and other property (other than Capital Stock of the
surviving corporation) in an amount which could be paid by the Company as a
Restricted Payment as described under "-- Certain Covenants -- Limitation on
Restricted Payments" (and such amount shall be treated as a Restricted Payment
subject to the provisions in the Indentures described under "Certain Covenants
- -- Limitation on Restricted Payments") and (B) no "person" or "group" other than
the Permitted Holders owns immediately after such transaction, directly or
indirectly, more than 45% of the total Voting Power of the surviving corporation
or the Permitted Holders own 50% or more of the total
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Voting Power of the surviving corporation; or (iv) the Company is liquidated or
dissolved or adopts a plan of liquidation or dissolution other than in a
transaction which complies with the provisions described under "--
Consolidation, Merger, Sale of Assets."
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means, collectively, all of the property and assets in which a
security interest is granted or are pledged pursuant to the Collateral
Documents.
"Collateral Account" means the collateral account or accounts established
pursuant to the Senior Note Indenture and the Collateral Documents.
"Collateral Agent" means the collateral agent under the Pledge, Security and
Intercreditor Agreement.
"Collateral Document" means, collectively, the Mortgages, the Security
Agreement, the Pledge, Security and Intercreditor Agreement and all security
agreements, mortgages, deeds of trust, pledges, collateral assignment or other
instruments evidencing or creating any security interest in favor of the Senior
Note Trustee or the Collateral Agent in all or any portion of the Collateral, in
each case, as amended, amended and restated, supplemented or otherwise modified
from time to time.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if, at any time after the
date of the Indentures such Commission is not existing and performing the duties
now assigned to it under the Trust Indenture Act, then the body performing such
duties at such time.
"Consolidated Fixed Charge Coverage Ratio" of any Person means, for any
period, the ratio of (a) the sum of Consolidated Net Income, Consolidated
Interest Expense, Consolidated Income Tax Expense and Consolidated Non-Cash
Charges deducted in computing Consolidated Net Income (Loss), in each case for
such period, of such Person and its Consolidated Subsidiaries on a Consolidated
basis, all determined in accordance with GAAP to (b) the sum of (I) Consolidated
Interest Expense of such Person for such period and (II) the product of (x) all
cash dividends (including the payment of accreted or accumulated dividends) paid
on any Preferred Stock of such Person during such period times (y) a fraction,
the numerator of which is one and the denominator of which is one minus the then
current combined federal, state and local statutory income tax rate (but not
less than zero) of such Person, expressed as a decimal, in each case, on a
Consolidated basis and in accordance with GAAP; PROVIDED that (i) in making such
computation, the Consolidated Interest Expense attributable to interest on any
Indebtedness computed on a pro forma basis and (A) bearing a floating interest
rate shall be computed as if the rate in effect on the date of computation had
been the applicable rate for the entire period and (B) which was not outstanding
during the period for which the computation is being made but which bears, at
the option of the Company, a fixed or floating rate of interest, shall be
computed by applying, at the option of such Person, either the fixed or floating
rate, and (ii) in making such computation, the Consolidated Interest Expense of
such Person attributable to interest on any Indebtedness under a revolving
credit facility computed on a pro forma basis shall be computed based upon the
average daily balance of such Indebtedness during the applicable period.
"Consolidated Income Tax Expense" means for any period, as applied to any
Person, the provision for federal, state, local and foreign income taxes of such
Person and its Consolidated Subsidiaries for such period as determined in
accordance with GAAP.
"Consolidated Interest Expense" of any Person means, without duplication,
for any period, as applied to any Person, the sum of (a) the interest expense of
such Person and its Consolidated Subsidiaries for such period, on a Consolidated
basis, including, without limitation, (i) amortization of debt discount, (ii)
the net cost under Interest Rate Agreements (including amortization of
discounts), and (iii) the interest portion of any deferred payment obligation
plus (b) the interest expense attributable to Capital Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person during such period
in each case as determined in accordance with GAAP.
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"Consolidated Net Income (Loss)" of any Person means, for any period, the
Consolidated net income (loss) of such Person and its Consolidated Subsidiaries
for such period as determined in accordance with GAAP, adjusted, to the extent
included in calculating such Consolidated net income (or loss), by excluding,
without duplication, (i) all extraordinary gains and losses, (ii) the portion of
net income (or loss) of such Person and its Consolidated Subsidiaries allocable
to minority interests in unconsolidated Persons to the extent that cash
dividends or distributions have not actually been received by such Person or one
of its Consolidated Subsidiaries, (iii) net income (or loss) of any Person
combined with such Person or any of its Subsidiaries on a "pooling of interests"
basis attributable to any period prior to the date of combination, (iv) any gain
or loss, net of taxes, realized upon the termination of any employee pension
benefit plan, (v) aggregate net gains (less all fees and expenses relating
thereto) in respect of dispositions of assets other than in the ordinary course
of business, (vi) the net income of any Subsidiary to the extent that the
declaration of dividends or similar distributions by that Subsidiary of that
income is not at the time permitted, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulations applicable to that Subsidiary or its
stockholders and (vii) any gain arising from the acquisition of any securities,
or the extinguishment, under GAAP, of any Indebtedness of such Person.
"Consolidated Net Worth" means, with respect to any Person, the Consolidated
stockholders' equity (excluding Redeemable Capital Stock) of such Person and its
Subsidiaries, as determined in accordance with GAAP.
"Consolidated Non-Cash Charges" of any Person means, for any period, the
aggregate depreciation, amortization and other non-cash charges of such Person
and its Consolidated Subsidiaries for such period, as determined in accordance
with GAAP (excluding any non-cash charge which requires an accrual or reserve
for cash charges for any future period).
"Consolidation" means, with respect to any Person, the consolidation of the
accounts of such Person and each of its subsidiaries if and to the extent the
accounts of such Person and each of its subsidiaries would normally be
consolidated with those of such Person, all in accordance with GAAP. The term
"Consolidated" shall have a similar meaning.
"Default" means any event which is, or after notice or passage of any time
or both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series of
related transactions, a member of the Board of Directors who does not have any
material direct or indirect financial interest in or with respect to such
transaction or series of related transactions.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing
buyer.
"GAAP" means generally accepted accounting principles in the United States,
consistently applied, which are in effect on the date of the Indentures.
"Guarantee" means the guarantee by any Guarantor of the Indenture
Obligations.
"Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person referred to in the definition of Indebtedness contained in
this Section guaranteed directly or indirectly in any manner by such Person, or
in effect guaranteed directly or indirectly by such Person through an agreement
(i) to pay or purchase such Indebtedness or to advance or supply funds for the
payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as
lessee or lessor) property, or to purchase or sell services, primarily for the
purpose of enabling the debtor to make payment of such Indebtedness or to assure
the holder of such Indebtedness against loss, (iii) to supply funds to, or in
any other manner invest in, the debtor (including any agreement to pay for
property or services without requiring that such property be received or such
services be rendered), (iv) to maintain working capital or equity capital of
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the debtor, or otherwise to maintain the net worth, solvency or other financial
condition of the debtor or (v) otherwise to assure a creditor against loss;
PROVIDED that the term "guarantee" shall not include endorsements for collection
or deposit, in either case in the ordinary course of business.
"Guarantor" means any guarantor of the Indenture Obligations.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities arising in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such Person in
connection with any letters of credit issued under letter of credit facilities,
acceptance facilities or other similar facilities and in connection with any
agreement to purchase, redeem, exchange, convert or otherwise acquire for value
any Capital Stock of such Person, or any warrants, rights or options to acquire
such Capital Stock, now or hereafter outstanding, (ii) all obligations of such
Person evidenced by bonds, notes, debentures or other similar instruments, (iii)
all indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person (even if
the rights and remedies of the seller or lender under such agreement in the
event of default are limited to repossession or sale of such property), but
excluding trade payables arising in the ordinary course of business, (iv) all
obligations under Interest Rate Agreements of such Person (except for
obligations which have been included in the Consolidated Net Income of such
Person other than as Consolidated Interest Expense), (v) all Capital Lease
Obligations of such Person, (vi) all Indebtedness referred to in clauses (i)
through (v) above of other Persons and all dividends of other Persons, the
payment of which is secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any Lien, upon or
with respect to property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or become
liable for the payment of such Indebtedness, (vii) all Guaranteed Debt of such
Person, (viii) all Redeemable Capital Stock valued at the greater of its
voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid
dividends, and (ix) any amendment, supplement, modification, deferral, renewal,
extension, refunding or refinancing of any Indebtedness of the types referred to
in clauses (i) through (viii) above. For purposes hereof, the "maximum fixed
repurchase price" of any Redeemable Capital Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on
any date on which Indebtedness shall be required to be determined pursuant to
the applicable Indenture, and if such price is based upon, or measured by, the
Fair Market Value of such Redeemable Capital Stock, such fair market value to be
determined in good faith by the Board of Directors of such Person.
"Indenture Obligations" means the obligations of the Issuers and any other
obligor under either of the Indentures or under the Senior Notes or the Senior
Subordinated Notes, as the case may be, including any Guarantor, to pay
principal of, premium, if any, and interest when due and payable, and all other
amounts due or to become due under or in connection with either of the
Indentures, the Senior Notes or the Senior Subordinated Notes, as the case may
be, and the performance of all other obligations to the applicable Trustee and
the holders of the Senior Notes or the Senior Subordinated Notes, as the case
may be, under the applicable Indenture and the Senior Notes or the Senior
Subordinated Notes, as the case may be, according to the terms thereof.
"Independent Financial Advisor" means an accounting, appraisal, investment
banking or consulting firm of nationally recognized standing that is, in the
reasonable and good faith judgment of the Board of Directors of the Company,
qualified to perform the task for which such firm has been engaged and
disinterested and independent with respect to the Company and its Affiliates.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest rate
protection agreements (including, without limitation, interest rate swaps, caps,
floors, collars and similar agreements) and/or other types of interest rate
hedging agreements from time to time.
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"Investment" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees), or other extension of credit 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, acquisition or ownership by such Person of any Capital Stock, bonds,
notes, debentures or other securities issued or owned by, any other Person and
all other items that are or would be classified as investments on a balance
sheet prepared in accordance with GAAP.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
security interest, hypothecation or other encumbrance upon or with respect to
any property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired.
"Material Subsidiary" means any Subsidiary of the Company (a) revenues
attributable to which for the then most recently completed four fiscal quarters
constituted 2% or more of the Consolidated revenues of the Company or (b) the
assets of which at the end of the Company's most recently completed fiscal
quarter constituted 2% of the Consolidated assets of the Company at the end of
such period.
"Maturity" when used with respect to any Senior Note or Senior Subordinated
Note means the date on which the principal of such Senior Note or Senior
Subordinated Note becomes due and payable as therein provided or as provided in
the applicable Indenture, whether at Stated Maturity, the Offer Date or any
redemption date and whether by declaration of acceleration, Change of Control
Offer in respect of a Change of Control, Senior Note Offer or Senior
Subordinated Offer in respect of an Asset Sale, call for redemption or
otherwise.
"Mortgage" means each mortgage, deed of trust, or similar security
instrument which from time to time affects any property that secures the
Issuers' obligations in respect of the Senior Notes, as any such instrument may
be amended, amended and restated, supplemented or otherwise modified from time
to time.
"Mortgaged Property" shall have the meaning assigned to such term in each of
the Mortgages.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale by any Person,
the proceeds thereof in the form of cash or cash equivalents including payments
in respect of deferred payment obligations when received in the form of, or
stock or other assets when disposed for, cash or cash equivalents (except to the
extent that such obligations are financed or sold with recourse to the Company
or any Subsidiary) net of (i) brokerage commissions and other reasonable fees
and expenses (including fees and expenses of counsel and investment bankers)
related to such Asset Sale, (ii) provisions for all taxes payable as a result of
such Asset Sale, (iii) payments made to retire Indebtedness where payment of
such Indebtedness is secured by the assets or properties the subject of such
Asset Sale, (iv) amounts required to be paid to any Person (other than the
Company or any Subsidiary) owning a beneficial interest in the assets subject to
the Asset Sale and (v) appropriate amounts to be provided by the Company or any
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 Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an officers'
certificate delivered to the applicable Trustee and (b) with respect to any
issuance or sale of Capital Stock or options, warrants or rights to purchase
Capital Stock, or debt securities or Capital Stock that have been converted into
or exchanged for Capital Stock, as referred to under "-- Certain Covenants --
Limitation on Restricted Payments," the proceeds of such issuance or sale in the
form of cash or cash equivalents, net of attorney's fees, accountant's fees and
brokerage, consultation, underwriting and other fees and expenses actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"New Credit Facility" means the Loan Agreement, dated as of ,
1994, among International Controls Corp., Great Dane Trailers, Inc., Great Dane
Trailers Nebraska, Inc., Great Dane Trailers Tennessee, Inc., Great Dane Los
Angeles, Inc., Checker Motors Corporation, Checker Motors Co., L.P., South
Charleston Stamping & Manufacturing Company, Yellow Cab Company, Chicago
Autowerks Inc.,
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CMC Kalamazoo Inc., NBD Bank, N.A., as agent, and the lenders party thereto, as
such agreement may be amended, renewed, extended, substituted, refinanced,
restructured, replaced, supplemented or otherwise modified from time to time
(including, without limitation, any successive renewals, extensions,
substitutions, refinancings, restructurings, replacements, supplementations or
other modifications of the foregoing).
"Note Collateral" means, collectively, all of the property and assets that
are from time to time subject to a first priority Lien and security interest in
favor of the Senior Note Trustee for the benefit of the Senior Note holders
pursuant to the Mortgages and the Security Agreement.
"Pari Passu Indebtedness" means any Indebtedness of any Issuer that is PARI
PASSU in right of payment to the Senior Notes or the Senior Subordinated Notes,
as the case may be.
"Permitted Holders" means (i) David R. Markin, Martin L. Solomon, Allan R.
Tessler and Wilmer J. Thomas, Jr. or any one of them, (ii) any trusts created
for the benefit of the persons described in clause (i) or members of any such
person's immediate family; and (iii) in the event of the incompetence or death
of any of the persons described in clause (i), such person's estate, executor,
administrator, committee or other personal representatives or beneficiaries.
"Permitted Indebtedness" means the following:
(i) Indebtedness of the Company or any Subsidiary (including Indebtedness in
respect of which the Company and one or more Subsidiaries are co-obligors) under
the New Credit Facility in an aggregate principal amount not to exceed the
amount of the Borrowing Base calculated as of the date of incurrence of such
Indebtedness (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability thereunder); (ii) Indebtedness of the
Issuers pursuant to the Notes; (iii) Indebtedness of the Company or any
Subsidiary outstanding on the date of the Indentures and listed on a schedule
thereto; (iv) Indebtedness (a) of the Company owing to a Subsidiary or (b) of a
Wholly Owned Subsidiary owing to the Company or another Wholly Owned Subsidiary
(which for purposes of this clause (iv) shall include SCSM so long as the
Company beneficially owns, directly or indirectly, at least 90% of the
outstanding capital stock of SCSM); PROVIDED that any such Indebtedness is made
pursuant to an intercompany note in the form attached as an exhibit to the
Indentures and, in the case of Indebtedness of the Company owing to a
Subsidiary, is subordinated in right of payment from and after such time as the
Notes shall become due and payable (whether at Stated Maturity, upon
acceleration or otherwise) to the payment and performance of the Company's
obligations under the Notes; PROVIDED, FURTHER, that (x) any disposition, pledge
or transfer of any such Indebtedness to a Person (other than the Company or a
Wholly Owned Subsidiary) shall be deemed to be an incurrence of such
Indebtedness by the obligor not permitted by this clause (iv) and (y) any
transaction pursuant to which any Wholly Owned Subsidiary, which has
Indebtedness owing to the Company or any other Wholly Owned Subsidiary, ceases
to be a Wholly Owned Subsidiary shall be deemed to be the incurrence of
Indebtedness by the Company or such other Wholly Owned Subsidiary that is not
permitted by this clause (iv); (v) any renewals, extensions, substitutions,
refundings, refinancings or replacements (collectively, a "refinancing") of any
Indebtedness described in clauses (ii) and (iii) of this definition of
"Permitted Indebtedness," including any successive refinancings so long as the
aggregate principal amount of Indebtedness represented thereby is not increased
by such refinancing plus the lesser of (I) the stated amount of any premium or
other payment required to be paid in connection with such a refinancing pursuant
to the terms of the Indebtedness being refinanced or (II) the amount of premium
or other payment actually paid at such time to refinance the Indebtedness, plus,
in either case, the amount of expenses of the Issuers incurred in connection
with such refinancing and such refinancing does not reduce or advance the
Average Life to Stated Maturity or the Stated Maturity of such Indebtedness;
(vi) guarantees by the Company or any Subsidiary of a line of credit of Checker
Taxi Association, Inc. in an aggregate principal amount outstanding not to
exceed at any given time $1 million; (vii) guarantees of any Subsidiary made in
accordance with the provisions of "-- Certain Covenants -- Limitation on
Issuances of Guarantees of Indebtedness by Subsidiaries" or "-- Limitation on
Issuance and Sale of Capital Stock of Subsidiaries;" (viii) guarantees by
Subsidiaries of Indebtedness of third parties incurred in the ordinary course of
business consistent with
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past practice; PROVIDED that the aggregate liabilities or obligations of the
Subsidiaries thereunder do not exceed at any given time $15 million; (ix) earned
but unpaid compensation of present and future directors and executive officers
of either the Company or any of its Subsidiaries; and (x) Indebtedness of the
Company and any Subsidiary (including indebtedness in respect of which the
Company and one or more Subsidiaries are co-obligors) in addition to that
described in paragraphs (i) through (ix) of this definition of "Permitted
Indebtedness" in an aggregate principal amount outstanding not to exceed at any
given time $25 million.
"Permitted Investment" means (i) Investments in any Wholly Owned Subsidiary
or Investments by the Company or any Subsidiary in a Person, if as a result of
such Investment (a) such Person becomes a Wholly Owned Subsidiary or (b) such
Person is merged or consolidated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or any
Wholly Owned Subsidiary; (ii) Investments in the Notes; (iii) Indebtedness of
the Company or a Subsidiary described under clause (iv), (vi), (vii) or (viii)
of the definition of "Permitted Indebtedness"; (iv) Temporary Cash Investments;
(v) Investments in existence on the date of the Indentures; and (vi) Investments
by American Country Insurance Company or any other Subsidiary in the ordinary
course of the insurance business and in accordance with the statutes and
governmental regulations regulating its affairs in its domestic jurisdiction.
"Permitted Liens" means the following:
(i) any Lien existing, or provided for under arrangements existing, as of
the date of the Indentures; (ii) any Lien arising by reason of (1) any judgment,
decree or order of any court or other governmental authority, if appropriate
legal proceedings which may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the period
within which such proceedings may be initiated shall not have expired; (2)
taxes, assessments or similar charges not yet delinquent or which are being
contested in good faith; (3) security for the payment of workers' compensation,
unemployment insurance, other social security benefits or other
insurance-related obligations (including but not limited to in respect of
deductibles, self-insured retention amounts and premiums and adjustments
thereto); (4) deposits or pledges in connection with bids, tenders, leases and
contracts (other than contracts for the payment of money); (5) zoning
restrictions, easements, licenses, reservations, provisions, covenants,
conditions, waivers, restrictions on the use of property or minor irregularities
of title (and with respect to leasehold interests, mortgages, obligations, liens
and other encumbrances incurred, created, assumed or permitted to exist and
arising by, through or under a landlord or owner of the leased property, with or
without consent of the lessee), rights of way, sewers, electric lines, telegraph
or telephone lines or other similar purposes, none of which materially impairs
the use of any parcel of property material to the operation of the business of
the Company and its Subsidiaries taken as a whole or the value of such property
for the purpose of such business; (6) deposits or pledges to secure public or
statutory obligations, progress payments, surety and appeal bonds or other
obligations of like nature incurred in the ordinary course of business; or (7)
operation of law in favor of landlords, mechanics, carriers, warehousemen,
materialmen, laborers, employees, suppliers or the like, incurred in the
ordinary course of business for sums which are not yet delinquent or are being
contested in good faith by negotiations or by appropriate proceedings which
suspend the collection thereof; (iii) any Lien securing Acquired Indebtedness
created prior to (and not created in connection with or in contemplation of) the
incurrence of such Indebtedness by the Company or any Subsidiary, which
Indebtedness is permitted under the provisions of "-- Certain Covenants --
Limitation on Indebtedness"; (iv) any Lien securing Indebtedness incurred under
the New Credit Facility; (v) any Lien on the Collateral securing Indebtedness
incurred under the Senior Notes and Senior Note Indenture and Liens expressly
permitted by the Collateral Documents; (vi) any Lien on assets or property not
constituting Collateral created by Subsidiaries to secure Indebtedness of such
Subsidiaries to the Company; (vii) any Lien securing Purchase Money Obligations
and Capital Lease Obligations incurred pursuant to the provisions of "-- Certain
Covenants -- Limitation on Indebtedness"; (viii) any Lien on assets or property
not constituting Collateral securing Indebtedness incurred pursuant to paragraph
(x) of the definition of Permitted Indebtedness; (ix) any Lien on assets or
property not constituting Collateral
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securing Permitted Subsidiary Indebtedness; (x) until released in accordance
with "Certain Covenants -- Release of Bank Lien on Vehicles," the Lien on
vehicles in Motors' taxicab fleet and on certain medallions associated therewith
existing on the date of this Indenture; and (xi) any extension, renewal,
refinancing or replacement, in whole or in part, of any Lien described in the
foregoing clauses (i), (iii) and (v) so long as (1) the amount of security is
not increased thereby, (2) the aggregate amount of Indebtedness or other
obligations secured by the Lien after such extension, renewal, refinancing or
replacement does not exceed the aggregate amount of the Indebtedness or other
obligations secured by the existing Lien prior to such extension, renewal,
refinancing or replacement plus an amount equal to the lesser of (a) the stated
premium required to be paid in connection with such an extension, renewal,
refinancing or replacement pursuant to the terms of the Indebtedness or (b) the
amount of any premium actually paid by the Issuers to accomplish such extension,
renewal, refinancing or replacement and (3) the Indebtedness secured by such
Lien (other than Permitted Indebtedness) is permitted under the provisions of
"-- Certain Covenants -- Limitation on Indebtedness."
"Permitted Subsidiary Indebtedness" means Indebtedness of the Subsidiaries
of the Company in the aggregate principal amount outstanding not to exceed $25
million at any given time under any agreement providing for subsidized financing
from any federal or state governmental agency.
"Person" means any individual, corporation, limited liability company,
limited or general partnership, joint venture, association, joint-stock company,
trust, unincorporated organization or government or any agency or political
subdivisions thereof.
"Pledge, Security and Intercreditor Agreement" means the pledge, security
and intercreditor agreement dated the date of the Senior Note Indenture among
the Company, the Senior Note Trustee, NBD Bank, N.A., as agent under the New
Credit Facility, and , as collateral agent, as amended,
amended and restated, supplemented or otherwise modified from time to time as
permitted thereby.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over Capital
Stock of any other class in such Person.
"Public Offering" means an underwritten public offering of Qualified Capital
Stock of the Company pursuant to a registration statement that has been declared
effective by the Commission pursuant to the Securities Act which results in cash
proceeds being received by the Company.
"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of the Company or its Subsidiaries, and any
additions and accessions thereto, which are purchased by the Company or any
Subsidiary at any time after the Notes are issued; PROVIDED, that (i) the
security agreement or conditional sales or other title retention contract
pursuant to which the Lien on such assets is created (collectively, a "Purchase
Money Security Agreement") shall be entered into within 90 days after the
purchase or substantial completion of the construction of such assets and shall
at all times be confined solely to the assets so purchased or acquired, any
additions and accessions thereto and any proceeds therefrom, (ii) at no time
shall the aggregate principal amount of the outstanding Indebtedness secured
thereby be increased, except in connection with the purchase of additions and
accessions thereto and except in respect of fees and other obligations in
respect of such Indebtedness and (iii)(A) the aggregate outstanding principal
amount of Indebtedness secured thereby (determined on a per asset basis in the
case of any additions and accessions) shall not at the time such Purchase Money
Security Agreement is entered into exceed 100% of the purchase price to the
Company or any Subsidiary of the assets subject thereto or (B) the Indebtedness
secured thereby shall be with recourse solely to the assets so purchased or
acquired, any additions and accessions thereto and any proceeds therefrom.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
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"Real Property" means any interest in any real property or any portion
thereof, whether owned in fee or leased or otherwise owned.
"Redeemable Capital Stock" means any Capital Stock that, either by its terms
or by the terms of any security into which it is convertible or exchangeable or
otherwise, is, or upon the happening of an event or passage of time would be,
required to be redeemed prior to any Stated Maturity of the principal of the
Notes or is redeemable at the option of the holder thereof at any time prior to
any such Stated Maturity, or is convertible into or exchangeable for debt
securities at any time prior to any such Stated Maturity at the option of the
holder thereof.
"Security Agreement" means the security agreement dated the date of the
Senior Note Indenture between the Company and the Senior Note Trustee as
amended, amended and restated, supplemented or otherwise modified from time to
time as permitted thereby.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Note Indenture" means the indenture, dated as of ,
1994, among the Issuers and First Fidelity Bank, National Association, as
trustee, as such agreement may be amended, renewed, extended, substituted,
refinanced, replaced, supplemented or otherwise modified from time to time
(including, without limitation, any successive renewals, extensions,
substitutions, refinancings, restructurings, replacements, supplementations or
other modifications of the foregoing).
"Senior Notes" means the % Senior Secured Notes due 2001 of the Issuers
issued pursuant to the Senior Note Indenture.
"Senior Subordinated Note Indenture" means the indenture, dated as of
, 1994, among the Company and Marine Midland Bank, as trustee, as
such agreement may be amended, renewed, extended, substituted, refinanced,
replaced, supplemented or otherwise modified from time to time (including,
without limitation, any successive renewals, extensions, substitutions,
refinancings, restructurings, replacements, supplementations or other
modifications of the foregoing).
"Senior Subordinated Notes" means the Company's % Senior Subordinated
Notes due 2004 issued pursuant to the Senior Subordinated Note Indenture.
"Shared Collateral" means, collectively, all of the property and assets
subject to a Lien and security interest in favor of the Senior Note Trustee and
the Lenders under the New Credit Facility on an equal and ratable basis pursuant
to the Pledge, Security and Intercreditor Agreement.
"Stated Maturity" when used with respect to any Indebtedness or any
installment of interest thereon, means the dates specified in such Indebtedness
as the fixed date on which the principal of such Indebtedness or such
installment of interest, as the case may be, is due and payable.
"Subordinated Indebtedness" means Indebtedness of any of the Issuers
subordinated in right of payment to the Senior Notes.
"Subsidiary" means any Person a majority of the equity ownership or the
Voting Stock of which is at the time owned, directly or indirectly, by the
Company or by one or more other Subsidiaries, or by the Company and one or more
other Subsidiaries.
"Temporary Cash Investments" means (i) any evidence of Indebtedness,
maturing not more than one year after the date of acquisition, issued by the
United States of America, or an instrumentality or agency thereof, and
guaranteed fully as to principal, premium, if any, and interest by the United
States of America, (ii) any certificate of deposit or money market deposit,
maturing not more than one year after the date of acquisition, issued by, or
time deposit of, a commercial banking institution that is a member of the
Federal Reserve System and that has combined capital and surplus and undivided
profits of not less than $250,000,000, whose debt has a rating, at the time as
of which any investment therein is made, of "P-1" (or higher) according to
Moody's Investors Service, Inc. ("Moody's") or any successor rating agency, or
"A-1" or higher according to Standard & Poor's Corporation ("S&P") or any
successor rating agency, (iii) commercial paper, maturing not more than 180 days
after the date of acquisition, issued by a
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corporation (other than an Affiliate or Subsidiary of the Company) organized and
existing under the laws of the United States of America with a rating, at the
time as of which any investment therein is made, of "P-1" (or higher) according
to Moody's or any successor rating agency or "A-1" (or higher) according to S&P
or any successor rating agency and (iv) any repurchase obligation with a term of
not more than 90 days for direct obligations of the United States of America
entered into with a bank meeting the qualifications described in clause (ii)
above.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Trust Moneys" means all cash or Cash Equivalents received by the Senior
Note Trustee or, in the case of Shared Collateral, the Collateral Agent: (a) in
exchange for the release of property from the Lien of any of the Collateral
Documents; (b) as compensation for or proceeds of the sale of all or any part of
the Collateral taken by eminent domain or purchased by, or sold pursuant to any
order of, a governmental authority or otherwise disposed of; (c) as proceeds of
insurance upon any, all or part of the Collateral (other than any liability
insurance proceeds payable to the Senior Note Trustee or the Collateral Agent
for any loss, liability or expense incurred by it); (d) pursuant to certain
provisions of the Mortgages; or (e) as proceeds of any other sale or other
disposition of all or any part of the Collateral by or on behalf of the Senior
Note Trustee or the Collateral Agent or any collection, recovery, receipt,
appropriation or other realization of or from all or any part of the Collateral
pursuant to the Collateral Documents or otherwise; or (f) for application under
the Senior Note Indenture as provided in the Senior Note Indenture or any
Collateral Document, or whose disposition is not otherwise specifically provided
for in the Senior Note Indenture or in any Collateral Document.
"Voting Stock" means stock of the class or classes pursuant to which the
holders thereof have in respect of a corporation, the general voting power under
ordinary circumstances to elect at least a majority of the board of directors,
managers or trustees of a corporation (irrespective of whether or not at the
time stock of any other class or classes shall have or might have voting power
by reason of the happening of any contingency).
"Wholly Owned Subsidiary" means a corporate Subsidiary all the outstanding
Capital Stock (other than directors' qualifying shares) or a partnership
Subsidiary all the equity interest of which are owned by the Company or another
Wholly Owned Subsidiary.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material federal income tax
consequences expected to result to holders from the purchase, ownership and
disposition of Senior Notes, Senior Subordinated Notes and Warrants. The summary
is based on current provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), applicable Treasury Regulations, judicial authority and
administrative rulings and practice. There can be no assurance that the Internal
Revenue Service (the "IRS") will not take a contrary view, and no ruling from
the IRS has been or will be sought. Legislative, judicial or administrative
changes or interpretations may be forthcoming that could alter or modify the
statements and conclusions set forth herein. Any such changes or interpretations
may or may not be retroactive and could affect the federal income tax
consequences to holders of Senior Notes, Senior Subordinated Notes or Warrants.
For purposes of this Section of the Prospectus, the "Company" shall mean
International Controls without its subsidiaries.
The following summary is for general information only. The tax treatment of
a holder of Senior Notes, Senior Subordinated Notes or Warrants may vary
depending on such holder's particular situation. This discussion does not
address the federal income tax consequences of the ownership of Senior Notes,
Senior Subordinated Notes or Warrants that are not held as capital assets within
the meaning of Section 1221 of the Code, nor does it discuss the effect of any
state, local or foreign tax law on the holder of Senior Notes, Senior
Subordinated Notes or Warrants. Certain holders (including, but not limited to,
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) may be subject to special rules not discussed
below. EACH PURCHASER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE
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PARTICULAR TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF SENIOR
NOTES, SENIOR SUBORDINATED NOTES OR WARRANTS, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
STATED INTEREST ON SENIOR NOTES AND SENIOR SUBORDINATED NOTES
Holders of Senior Notes and Senior Subordinated Notes will be required to
include stated interest in gross income for federal income tax purposes in
accordance with the holder's method of accounting for federal income tax
purposes. Holders using the accrual method of tax accounting must include stated
interest in income as it accrues and holders using the cash method of tax
accounting must include stated interest in income as it is actually or
constructively received by them.
ORIGINAL ISSUE DISCOUNT ON THE SENIOR SUBORDINATED NOTES
The Senior Subordinated Notes will be issued with original issue discount,
and each holder of Senior Subordinated Notes will be required to include in its
gross income original issue discount income as described below.
Original issue discount on each Senior Subordinated Note will equal the
excess of the stated redemption price at maturity of the Senior Subordinated
Note over its issue price. A holder of a Senior Subordinated Note issued with
original issue discount must include original issue discount in income as
ordinary interest income as the original issue discount accrues on the basis of
a constant yield to maturity, regardless of whether the holder uses the cash or
accrual method of tax accounting. Generally, original issue discount must be
included in income in advance of the receipt of cash representing such income.
In general, the "issue price" of a Senior Subordinated Note is determined by
allocating the "issue price" of the Unit to the Senior Subordinated Note and
Warrant comprising such Unit on the basis of the proportion which the fair
market value of each such element of the Unit bears to the sum of the fair
market value of both elements in the Unit. The "issue price" of a Unit is the
initial offering price to the public (excluding underwriters, placement agents
and wholesalers) at which a substantial amount of Units are first sold. The
Company has allocated $ and $ to be the issue price of a Senior
Subordinated Note and a Warrant, respectively, and this allocation is binding on
each holder of a Unit, other than a holder that explicitly discloses that its
allocation of the "issue price" of the Unit is different from the Company's
allocation. Such disclosure generally must be made on a statement attached to
such holder's timely filed federal income tax return for its taxable year that
includes the acquisition date of the Unit. However, the Company's allocation is
not binding on the IRS.
The stated redemption price at maturity of a Senior Subordinated Note will
equal the sum of all payments other than any "qualified stated interest"
payments. Qualified stated interest is stated interest that is unconditionally
payable in cash or in property (other than debt instruments of the issuer) at
least annually at a single fixed rate.
The holder of a Senior Subordinated Note issued with original issue discount
must include in gross income, for all days during its taxable year on which it
holds such Senior Subordinated Note, the sum of the "daily portions" of original
issue discount. The amount of original issue discount includible in income by a
holder will be computed by allocating to each day during a taxable year a pro
rata portion of the original issue discount that accrued during the relevant
accrual period. The accrual periods for a Senior Subordinated Note may be of any
length and may vary in length over the Senior Subordinated Note's term, provided
that each accrual period is no longer than one year and each scheduled payment
of principal or interest occurs either on the final day of an accrual period or
on the first day of an accrual period. The amount of original issue discount
that will accrue during an accrual period is the excess, if any, of (i) the
product of the "adjusted issue price" of the Senior Subordinated Note at the
beginning of the accrual period and its original yield to maturity (determined
on the basis of compounding at the end of each accrual period and properly
adjusted for the length of the particular accrual period) over (ii) the amount
of any qualified stated interest allocable to the accrual period. There are
special rules for determining the original issue discount allocable to an
accrual period where an interval between payments of qualified stated interest
contains more than one accrual period. The adjusted issue price of a
94
<PAGE>
Senior Subordinated Note at the beginning of any accrual period is the sum of
its issue price, plus prior accruals of original issue discount, reduced by the
total payments made with respect to such Senior Subordinated Note in all prior
periods, other than qualified stated interest payments.
The Company will make annual reports to the IRS and holders of the Senior
Subordinated Notes regarding the amount of original issue discount accrued on
the Senior Subordinated Notes during the year on the basis of accrual periods.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL INTEREST DISCOUNT
In general, a holder may elect to treat all interest on any Senior Note or
Senior Subordinated Note as original issue discount and calculate the amount
includible in gross income under the constant yield method described above. For
the purposes of this election, interest includes, among other items, stated
interest, original issue discount, market discount, and DE MINIMIS market
discount, as adjusted by any amortizable bond premium or acquisition premium.
The election is to be made for the taxable year in which the holder acquired the
Senior Note or Senior Subordinated Note and may not be revoked without the
consent of the IRS. As discussed below, this election may affect the tax
treatment of other debt instruments held by a holder. Therefore, holders should
consult with their own tax advisors about this election.
ACQUISITION PREMIUM
If a holder purchases a Senior Subordinated Note at an "acquisition
premium," the holder reduces the amount of original issue discount includible in
income in each taxable year by the portion of acquisition premium allocable to
that year. A Senior Subordinated Note is purchased at an acquisition premium if
immediately after the purchase, the purchaser's adjusted basis in the Senior
Subordinated Note is greater than the Senior Subordinated Note's adjusted issue
price but not greater than the sum of all amounts payable on the Senior
Subordinated Note after the purchase date, other than payments of qualified
stated interest. In general, the reduction in original issue discount includible
in income in a taxable year is determined by multiplying the daily portion of
original issue discount by a fraction the numerator of which is the excess of
the adjusted basis of the Senior Subordinated Note immediately after the
acquisition over the adjusted issue price of the Senior Subordinated Note and
the denominator of which is the excess of the sum of all amounts payable on the
Senior Subordinated Note after the purchase date, other than payments of
qualified stated interest, over its adjusted issue price. Rather than using the
above fraction, the holder, may, as discussed above, elect to treat all
interest, including for this purpose, acquisition premium, as original issue
discount.
MARKET DISCOUNT
If a Senior Note or a Senior Subordinated Note is acquired at a "market
discount," some or all of any gain realized on a sale or other disposition,
partial principal payment or payment at maturity, of the Senior Note or the
Senior Subordinated Note may be treated as ordinary income (generally, as
interest income), as described below. For this purpose, "market discount" is the
excess of (i) the stated redemption price at maturity of a Senior Note or the
adjusted issue price of a Senior Subordinated Note over (ii) the holder's tax
basis in the Senior Note or Senior Subordinated Note subject to a statutory DE
MINIMIS exception. Under the statutory DE MINIMIS exception, market discount
will be considered to be zero if it is less than 1/4 of 1% of the stated
redemption price at maturity of the Senior Note or the Senior Subordinated Note,
as the case may be, multiplied by the number of complete years to maturity of
the Note from the date the holder purchased it. Unless a holder has elected to
include the market discount in income as it accrues, any gain realized on any
subsequent disposition of the Senior Note or the Senior Subordinated Note (other
than in connection with certain nonrecognition transactions) or any partial
principal payment or payment at maturity with respect to the Senior Note or the
Senior Subordinated Note will be treated as ordinary income to the extent of the
market discount that is treated as having accrued during the period the Senior
Note or the Senior Subordinated Note was held. In addition, if the Senior Note
or the Senior Subordinated Note is disposed of in any transaction other than a
sale,
95
<PAGE>
exchange, or involuntary conversion (E.G., a gift), ordinary income will be
recognized to the extent of accrued market discount as if such Senior Note or
Senior Subordinated Note had been sold at its then fair market value.
The amount of market discount treated as having accrued will be determined
either (i) on a ratable basis by multiplying the market discount times a
fraction, the numerator of which is the number of days the Senior Note or the
Senior Subordinated Note was held by the holder and the denominator of which is
the total number of days after the date such holder acquired the Senior Note or
the Senior Subordinated Note up to and including the date of its maturity, or
(ii) if the holder so elects, on a constant interest rate method. A holder may
make this election with respect to any Senior Note or Senior Subordinated Note
and such election is irrevocable.
A holder of a Senior Note or a Senior Subordinated Note may elect to include
market discount in income currently, through the use of either the ratable
inclusion method or the elective constant interest rate method. If such an
election is made, a holder will not be required to recharacterize gain on the
disposition of, and certain payments in respect of, the Senior Note or the
Senior Subordinated Note to the extent of accrued market discount. Once made,
the election to include market discount in income currently applies to all
Senior Notes, Senior Subordinated Notes and other obligations of the holder that
are purchased at a market discount during the first taxable year for which the
election is made, and during all subsequent taxable years of the holder, unless
the IRS consents to a revocation of the election. If an election is made to
include market discount in income currently, the holder's basis for the Senior
Note or the Senior Subordinated Note will be increased by the market discount
thereon as it is included in income.
If a holder makes the election (discussed above) to treat as original issue
discount all interest on a debt instrument that has market discount, the holder
is deemed to have made the election to accrue currently market discount using a
constant interest rate method on all other debt instruments with market
discount. In addition, if the holder has previously made the election to accrue
market discount currently, the conformity requirements of that election are
satisfied for debt instruments with respect to which the holder elects to treat
all interest as original issue discount.
Unless a holder who acquires a Senior Note or a Senior Subordinated Note at
a market discount elects to include market discount in income currently, such
holder may be required to defer all or a portion of any interest expense that
may otherwise be deductible on any indebtedness incurred or maintained to
purchase or carry the Senior Note or the Senior Subordinated Note.
AMORTIZABLE BOND PREMIUM
If a holder purchases a Senior Note or a Senior Subordinated Note and,
immediately after the purchase, the adjusted basis of the Senior Note or the
Senior Subordinated Note exceeds the sum of all amounts payable on the Senior
Note or the Senior Subordinated Note after the purchase date, other than
qualified stated interest, the Senior Note or the Senior Subordinated Note has
"premium." A holder that purchases a Senior Subordinated Note at a premium is
not required to include original issue discount in income. A holder may elect to
amortize the premium over the remaining term of the Senior Note or the Senior
Subordinated Note (or, in certain circumstances, until an earlier call date).
In the case of a debt instrument that may be called at a premium prior to
maturity, an earlier call date of the debt instrument is treated as the maturity
date of the debt instrument and the amount of bond premium is determined by
treating the amount payable on such call date as the amount payable at maturity
if such a calculation produces a smaller amortizable bond premium than the
method described in the preceding paragraph. If the debt instrument is not
redeemed on such call date, the remaining bond premium may be amortized to a
later call date or to maturity under the rules set forth above. If a debt
instrument purchased at a premium is redeemed prior to its maturity, a purchaser
who has elected to amortize bond premium may deduct any remaining unamortized
bond premium as an ordinary loss in the taxable year of the redemption.
96
<PAGE>
If premium is amortized, except as provided in Treasury Regulations, the
amount of interest that must be included in the holder's income for each period
ending on an interest payment date or stated maturity, as the case may be, will
be reduced by the portion of premium allocable to the interest payment based on
the yield to maturity of the Senior Note or the Senior Subordinated Note under a
constant interest rate method. If such an election to amortize premium is not
made, a holder must include the full amount of each interest payment in income
in accordance with the holder's regular method of tax accounting and will
include the premium in its tax basis for the Senior Note or Senior Subordinated
Note for purposes of computing its gain or loss on the sale or other disposition
or payment of the principal amount of the Senior Note or the Senior Subordinated
Note.
An election to amortize premium would apply to amortizable premium on all
Senior Notes, Senior Subordinated Notes and other bonds the interest on which is
includible in the holder's gross income held at the beginning of the holder's
first taxable year to which the election applies or thereafter acquired, and may
be revoked only with the consent of the IRS. The election to treat all interest,
including for this purpose amortizable premium, as original issue discount is
deemed to be an election to amortize premium under Section 171(c) of the Code
for purposes of the conformity requirements of that section. In addition, if the
holder has already made an election to amortize premium, the conformity
requirements will be deemed satisfied with respect to any Senior Notes or Senior
Subordinated Notes for which the holder makes an election to treat all interest
as original issue discount.
DISPOSITION OF THE SENIOR NOTES AND SENIOR SUBORDINATED NOTES
In general, upon a disposition of a Senior Note or a Senior Subordinated
Note by sale, exchange, redemption or other taxable disposition, a holder will
recognize gain or loss equal to the difference between (i) the amount realized
on the disposition (other than amounts received attributable to accrued
interest) and (ii) the holder's tax basis in the Senior Note or the Senior
Subordinated Note. A holder's tax basis in a Senior Note or a Senior
Subordinated Note generally will equal the cost to the holder of the Senior Note
or the Senior Subordinated Note (net of accrued interest), which, in the case of
an initial holder of a Senior Subordinated Note, is the portion of the issue
price of a Unit allocated to the Senior Subordinated Note, increased by amounts
includible in income as original issue discount or market discount (if the
holder elects to include market discount in income on a current basis) and
reduced by any amortized premium and any payments other than payments of
qualified stated interest made on the Senior Note or the Senior Subordinated
Note.
Assuming that the Senior Note or the Senior Subordinated Note is held as a
capital asset, such gain or loss (except to the extent that the market discount
rules otherwise provide) will generally constitute capital gain or loss, and
will be long-term capital gain or loss if the holder has held the Senior Note or
the Senior Subordinated Note for longer than one year at the time of the
disposition.
EXERCISE, OWNERSHIP, DISPOSITION AND EXPIRATION OF WARRANTS
No gain or loss will be recognized by a holder of a Warrant on the purchase
of the Company's Common Stock for cash on the exercise of the Warrant (except
with respect to any cash paid in lieu of the issuance of fractional shares of
Common Stock). A holder's tax basis in the Warrant prior to exercise will be
added to the Exercise Price of the Warrant and will constitute the holder's tax
basis in the Company's Common Stock received on the exercise of the Warrant. The
holding period of the Company's Common Stock so received will not include the
time during which the holder held the Warrant.
Adjustments to the Exercise Rate of the Warrants, or a failure to make such
adjustments, pursuant to the terms of the Warrants may result in taxable
distributions to holders of Warrants or to holders of the Company's Common
Stock, respectively, under Section 305 of the Code to the extent of the
Company's current or accumulated earnings and profits, regardless of whether
there is a distribution of cash or property.
Assuming that the Common Stock would be held as a capital asset by a holder,
the redemption of a Warrant by the Company, the sale or other taxable
disposition of a Warrant by such holder other than to the Company and the
expiration of an unexercised Warrant, generally will be treated as a sale or
97
<PAGE>
exchange of a capital asset and any gain or loss recognized will generally be
capital gain or loss and will be long-term capital gain or loss if the holder
has held the Warrant for longer than one year at the time of the redemption,
disposition or expiration. In the case of a redemption, sale or other taxable
disposition of a Warrant, the amount of the gain or loss recognized will be
equal to the difference between the amount realized on the redemption, sale or
other taxable disposition and the holder's tax basis in the Warrant. In the case
of the expiration of an unexercised Warrant, the holder will recognize loss
equal to the holder's tax basis in the Warrant. As discussed above, an initial
holder's tax basis in a Warrant will be equal to the portion of the issue price
of the Unit allocated to the Warrant.
BACKUP WITHHOLDING
A holder of Senior Notes, Senior Subordinated Notes or Warrants may be
subject to backup withholding at the rate of 31% with respect to interest paid
on, original issue discount accrued on and gross proceeds of a sale or
redemption of Senior Notes, Senior Subordinated Notes or Warrants, unless (i)
the holder is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact or (ii) the holder provides a correct
taxpayer identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A holder of a Senior Note, a Senior Subordinated Note or a
Warrant who does not provide the Issuers with his or her correct taxpayer
identification number may be subject to penalties imposed by the IRS.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH PURCHASER OF
SENIOR NOTES, SENIOR SUBORDINATED NOTES OR WARRANTS SHOULD CONSULT HIS OR HER
TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO HIM OR HER OF THE
ACQUISITION, OWNERSHIP AND DISPOSITION OF SENIOR NOTES, SENIOR SUBORDINATED
NOTES OR WARRANTS, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS.
UNDERWRITING
Subject to certain terms and conditions of the Underwriting Agreement, Alex.
Brown & Sons Incorporated and SPP Hambro & Co. (the "Underwriters") have agreed
to purchase from the Company the following respective principal amounts of
Senior Notes and Units:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT NUMBER OF
UNDERWRITERS OF SENIOR NOTES UNITS
- ----------------------------------------------------------------------- ----------------- -----------
<S> <C> <C>
Alex. Brown & Sons Incorporated........................................ $
SPP Hambro & Co........................................................
----------------- -----------
Total.............................................................. $ 200,000,000 100,000
----------------- -----------
----------------- -----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent.
The Underwriting Agreement also provides that the Company will indemnify the
Underwriters against certain liabilities and expenses, including liabilities
under the Securities Act, or will contribute to payments that the Underwriters
may be required to make in respect thereof. The nature of the Underwriters'
obligations is such that they are committed to purchase all of the Senior Notes
and Units if any Senior Notes and Units are purchased.
The Underwriters propose to offer the Senior Notes and Units directly to the
public initially at the public offering prices set forth on the cover page of
this Prospectus. After the initial public offering of the Senior Notes and
Units, the offering prices and other selling terms may be changed by the
Underwriters.
There is no existing trading market for the Securities and there can be no
assurance as to the liquidity of any market that may develop for the Securities.
The Underwriters have advised the Company that they currently intend to make a
market in the Senior Notes and the Units until the Separation Date and in the
Notes and Warrants thereafter. However, the Underwriters are not obligated to do
so, and any such market making may be discontinued at any time without notice.
98
<PAGE>
The Company has agreed not to issue, sell or offer any debt securities or
shares of Common Stock or securities convertible into Common Stock without the
prior consent of the Underwriters for a period of 90 days after the date of this
Prospectus.
NBD Bank, N.A. will receive a fee of $ from the Company for acting as the
Company's financial advisor in connection with the Offering.
LEGAL MATTERS
The validity of the Securities will be passed upon for the Company by Hutton
Ingram Yuzek Gainen Carroll & Bertolotti, New York, New York. Certain legal
matters will be passed upon for the Underwriters by Fried, Frank, Harris,
Shriver & Jacobson (a partnership including professional corporations), New
York, New York. As to certain matters concerning the laws of the States of
Florida, New Jersey, Georgia, Tennessee, West Virginia, Nebraska and Delaware,
Hutton Ingram Yuzek Gainen Carroll & Bertolotti and Fried, Frank, Harris,
Shriver & Jacobson will rely upon the opinions of Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, P.A., Miami, Florida; McCarter & English, Newark, New
Jersey; Hunter, Maclean, Exley & Dunn, P.C., Savannah, Georgia; Tuke, Yopp &
Sweeney, Nashville, Tennessee; Bowles Rice McDavid Graff & Love, Charleston,
West Virginia; Rembolt Ludtke Parker & Berger, Lincoln, Nebraska; and Morris
Nichols Arsht & Tunnell, Wilmington, Delaware, respectively.
EXPERTS
The respective consolidated financial statements of International Controls
Corp., Great Dane Trailers, Inc. and Checker Motors Corporation (Issuer Group)
as of December 31, 1993 and 1992, and for each of the three years in the period
ended December 31, 1993, appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young, independent auditors, as set forth in their
reports thereon appearing elsewhere herein and in the Registration Statement,
and are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.
99
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The following consolidated financial statements are submitted herewith:
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Index To Financial Statements Covered By Report Of Independent Auditors
Report of Independent Auditors........................................................................... F-3
Consolidated Balance Sheets as of December 31, 1992 and 1993............................................. F-4
Consolidated Statements of Shareholders' Deficit for the Years Ended December 31, 1991, 1992 and 1993.... F-5
Consolidated Statements of Operations for the Years Ended December 31, 1991, 1992
and 1993............................................................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1991, 1992
and 1993............................................................................................... F-7
Notes to Consolidated Financial Statements -- December 31, 1993.......................................... F-8
Index to Financial Statements (Unaudited):
Consolidated Balance Sheets at March 31, 1994, and December 31, 1993..................................... F-26
Consolidated Statements of Operations for the Three Months Ended March 31, 1993, and March 31, 1994...... F-27
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1993, and March 31, 1994...... F-28
Notes to Consolidated Financial Statements -- March 31, 1994............................................. F-29
</TABLE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES--ISSUER GROUP
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Index To Financial Statements Covered By Report Of Independent Auditors
Report of Independent Auditors........................................................................... F-33
Consolidated Balance Sheets as of December 31, 1992 and 1993............................................. F-34
Consolidated Statements of Shareholders' Deficit for the Years Ended December 31, 1991, 1992 and 1993.... F-35
Consolidated Statements of Operations for the Years Ended December 31, 1991, 1992
and 1993............................................................................................... F-36
Consolidated Statements of Cash Flows for the Years Ended December 31, 1991, 1992
and 1993............................................................................................... F-37
Notes to Consolidated Financial Statements -- December 31, 1993.......................................... F-38
Index to Financial Statements (Unaudited):
Consolidated Balance Sheets at December 31, 1993 and March 31, 1994, and................................. F-55
Consolidated Statements of Operations for the Three Months Ended March 31, 1993, and March 31, 1994...... F-56
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1993, and March 31, 1994...... F-57
Notes to Consolidated Financial Statements -- March 31, 1994............................................. F-58
</TABLE>
F-1
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Index To Financial Statements Covered By Report Of Independent Auditors
Report of Independent Auditors........................................................................... F-63
Consolidated Balance Sheets as of December 31, 1992 and 1993............................................. F-64
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1991, 1992 and 1993..... F-65
Consolidated Statements of Operations for the Years Ended December 31, 1991, 1992
and 1993............................................................................................... F-66
Consolidated Statements of Cash Flows for the Years Ended December 31, 1991, 1992
and 1993............................................................................................... F-67
Notes to Consolidated Financial Statements -- December 31, 1993.......................................... F-68
Index to Financial Statements (Unaudited):
Consolidated Balance Sheets at December 31, 1993 and March 31, 1994...................................... F-78
Consolidated Statements of Operations for the Three Months Ended March 31, 1993, and March 31, 1994...... F-79
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1993, and March 31, 1994...... F-80
Notes to Consolidated Financial Statements -- March 31, 1994............................................. F-81
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
International Controls Corp.
We have audited the accompanying consolidated balance sheets of
International Controls Corp. and subsidiaries as of December 31, 1993 and 1992,
and the related consolidated statements of operations, shareholders' deficit and
cash flows for each of the three years in the period ended December 31, 1993.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
International Controls Corp. and subsidiaries at December 31, 1993 and 1992, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles.
As discussed in Notes I and K to the consolidated financial statements, the
Company changed its methods of accounting for postretirement benefits other than
pensions and income taxes in the year ended December 31, 1993.
/s/ ERNST & YOUNG
Kalamazoo, Michigan
March 1, 1994
F-3
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1992 1993
--------- ---------
<S> <C> <C>
Cash and cash equivalents................................................... $ 42,199 $ 40,078
Accounts receivable, less allowance for doubtful accounts of $623 (1992)
and $748 (1993) (Note G)................................................... 64,115 75,701
Current portion of finance lease receivables................................ 2,352 764
Inventories (Notes D and G)................................................. 71,861 94,112
Other current assets........................................................ 8,897 11,059
--------- ---------
TOTAL CURRENT ASSETS.................................................... 189,424 221,714
Property, plant and equipment, net (Notes E, G and H)....................... 119,492 122,355
Insurance Subsidiary's investments (Note F)................................. 84,616 90,838
Noncurrent finance lease receivables (Notes C and H)........................ 2,863 575
Insurance Subsidiary's reinsurance receivable............................... 17,366 11,378
Cost in excess of net assets acquired, net of accumulated amortization
of $5,002 (1992) and $6,252 (1993)......................................... 44,993 43,743
Trademark, net of accumulated amortization of $1,400 (1992) and $1,750
(1993)..................................................................... 12,046 11,696
Other assets................................................................ 22,963 15,037
--------- ---------
TOTAL ASSETS............................................................ $ 493,763 $ 517,336
--------- ---------
--------- ---------
</TABLE>
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<S> <C> <C>
Accounts payable............................................................ $ 56,684 $ 77,876
Notes payable (Note G)...................................................... 5,000 5,000
Income taxes payable (Note K)............................................... 6,739 7,726
Accrued compensation........................................................ 13,729 15,838
Accrued interest............................................................ 11,596 11,746
Other accrued liabilities................................................... 28,833 38,071
Current portion of long-term debt........................................... 15,752 14,321
--------- ---------
TOTAL CURRENT LIABILITIES............................................... 138,333 170,578
Long-term debt, excluding current portion (Note G):
Shareholders.............................................................. 30,000 30,000
Other..................................................................... 259,616 246,952
--------- ---------
289,616 276,952
Insurance Subsidiary's unpaid losses and loss adjustment expenses........... 75,780 71,179
Unearned insurance premiums................................................. 10,463 9,547
Deferred income taxes....................................................... 11,187 9,803
Postretirement benefits other than pensions (Note I)........................ -- 49,609
Other noncurrent liabilities................................................ 33,654 39,053
Minority interest (Notes H and J)........................................... 41,026 40,132
--------- ---------
TOTAL LIABILITIES....................................................... 600,059 666,853
Shareholders' deficit (Notes A, F and G):
Common stock, par value $0.01:
Authorized 15,000,000 shares
Outstanding 9,036,700 shares............................................ 90 90
Additional paid-in capital................................................ 14,910 14,910
Retained earnings (deficit)............................................... 7,045 (36,217)
Unrealized appreciation on Insurance Subsidiary's investments in equity
securities............................................................... 32 73
Notes receivable from shareholders........................................ (625) (625)
Amount paid in excess of Checker's net assets............................. (127,748) (127,748)
--------- ---------
TOTAL SHAREHOLDERS' DEFICIT............................................. (106,296) (149,517)
Commitments and contingencies (Note H)......................................
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT............................. $ 493,763 $ 517,336
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION AMOUNT PAID
(DEPRECIATION) NOTES IN EXCESS OF
ADDITIONAL ON INVESTMENTS RECEIVABLE CHECKER'S
COMMON PAID-IN RETAINED IN EQUITY FROM NET ASSETS
STOCK CAPITAL EARNINGS SECURITIES SHAREHOLDERS (NOTE A)
------------- ----------- ---------- --------------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1991.......... $ 90 $ 14,910 $ 10,418 $ (1,790) $ (625) $ (127,748)
Unrealized appreciation on investment
in equity securities................ -- -- -- 2,189 -- --
Net income........................... -- -- 4,182 -- -- --
--- ----------- ---------- ------- ------ ------------
BALANCES AT DECEMBER 31, 1991........ 90 14,910 14,600 399 (625) (127,748)
Unrealized depreciation on investment
in equity securities................ -- -- -- (367) -- --
Net loss............................. -- -- (7,555) -- -- --
--- ----------- ---------- ------- ------ ------------
BALANCES AT DECEMBER 31, 1992........ 90 14,910 7,045 32 (625) (127,748)
Unrealized appreciation on investment
in equity securities................ -- -- -- 41 -- --
Net loss............................. -- -- (43,262) -- -- --
--- ----------- ---------- ------- ------ ------------
BALANCES AT DECEMBER 31, 1993........ $ 90 $ 14,910 $ (36,217) $ 73 $ (625) $ (127,748)
--- ----------- ---------- ------- ------ ------------
--- ----------- ---------- ------- ------ ------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Trailer manufacturing and distribution................................ $ 400,196 $ 536,336 $ 711,862
Automotive products manufacturing..................................... 84,401 112,631 127,925
Vehicular operations including rental income of $39,946 (1991);
$37,382 (1992); and $38,360 (1993)................................... 43,527 40,580 42,103
Insurance premiums earned............................................. 27,142 27,186 27,436
------------ ------------ ------------
555,266 716,733 909,326
COST OF REVENUES:
Cost of sales......................................................... (428,949) (561,546) (728,471)
Cost of vehicular operations.......................................... (30,801) (30,120) (30,916)
Cost of insurance operations.......................................... (20,793) (19,204) (19,418)
------------ ------------ ------------
(480,543) (610,870) (778,805)
------------ ------------ ------------
GROSS PROFIT............................................................ 74,723 105,863 130,521
Operating expenses:
Selling, general and administrative expense........................... (72,032) (76,877) (83,176)
Interest expense........................................................ (47,425) (42,726) (41,614)
Interest income......................................................... 11,634 8,895 7,396
Other income (expense), net............................................. (1,078) (2,023) 3,494
Special charge -- Note H................................................ -- -- (7,500)
------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY EQUITY, INCOME TAXES, EXTRAORDINARY ITEMS
AND ACCOUNTING CHANGES................................................. (34,178) (6,868) 9,121
Minority equity (Note J)................................................ 1,931 -- --
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY ITEMS AND ACCOUNTING
CHANGES................................................................ (32,247) (6,868) 9,121
Income tax benefit (expense) (Note K)................................... 5,241 (687) (5,757)
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND ACCOUNTING CHANGES......... (27,006) (7,555) 3,364
Extraordinary items (Note L)............................................ 31,188 -- --
------------ ------------ ------------
INCOME (LOSS) BEFORE ACCOUNTING CHANGES................................. 4,182 (7,555) 3,364
Accounting changes (Notes I and K)...................................... -- -- (46,626)
------------ ------------ ------------
Net income (loss)....................................................... $ 4,182 $ (7,555) $ (43,262)
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of shares used in per share computations........ 9,037 9,037 9,037
------------ ------------ ------------
------------ ------------ ------------
INCOME (LOSS) PER SHARE:
Loss before extraordinary items and accounting changes................ $ (2.99) $ (0.84) $ 0.37
Extraordinary items (Note L).......................................... 3.45 -- --
Accounting changes (Notes I and K).................................... -- -- (5.16)
------------ ------------ ------------
NET INCOME (LOSS) PER SHARE......................................... $ 0.46 $ (0.84) $ (4.79)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1991 1992 1993
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................... $ 4,182 $ (7,555) $ (43,262)
Adjustment to reconcile net income (loss) to net cash provided by
operating activities:
Accounting changes...................................................... -- -- 46,626
Extraordinary items..................................................... (31,188) -- --
Depreciation and amortization........................................... 20,931 21,054 23,295
Deferred income tax expense (benefit)................................... 3,288 (4,311) (8,512)
Amortization of cost in excess of net assets acquired................... 1,250 1,250 1,250
Amortization of debt discount........................................... 1,045 1,181 1,372
Net loss on sale of property, plant and equipment....................... 275 217 207
Investment losses (gains)............................................... 1,646 (690) (1,079)
Decrease in minority equity............................................. (1,992) -- --
Other noncash charges................................................... 3,980 6,386 7,562
Changes in operating assets and liabilities:
Accounts receivable................................................... 7,647 (12,788) (11,970)
Finance lease receivables............................................. 7,213 5,131 4,408
Inventories........................................................... (784) (7,820) (22,251)
Insurance Subsidiary's reinsurance receivable......................... 11,731 (5,634) 5,988
Unbilled tooling charges.............................................. 35,181 -- --
Other assets.......................................................... 536 -- (5,309)
Accounts payable...................................................... (1,129) 8,281 21,193
Income taxes.......................................................... (17,398) 4,489 824
Unpaid losses and loss adjustment expenses............................ 2,204 5,046 (4,601)
Unearned insurance premiums........................................... (347) 4,673 (917)
Postretirement benefits other than pension............................ -- -- 4,497
Other liabilities..................................................... (10,460) 6,288 11,359
---------- ---------- ----------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES.............................. 37,811 25,198 30,680
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................................ (16,457) (17,549) (20,006)
Proceeds from disposal of property, plant and equipment and other
productive assets........................................................ 2,685 2,783 2,599
Purchase of investments................................................... (19,228) (32,190) (64,052)
Proceeds from sale of investments......................................... 18,732 31,617 65,019
---------- ---------- ----------
NET CASH FLOW USED IN INVESTING ACTIVITIES.................................. (14,268) (15,339) (16,440)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.................................................. 20,530 32,090 2,500
Repayments of borrowings.................................................. (43,610) (39,772) (17,967)
Return of limited partner's capital....................................... (821) (1,035) (894)
---------- ---------- ----------
NET CASH FLOW USED IN FINANCING ACTIVITIES.................................. (23,901) (8,717) (16,361)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ (358) 1,142 (2,121)
Beginning cash and cash equivalents......................................... 41,415 41,057 42,199
---------- ---------- ----------
ENDING CASH AND CASH EQUIVALENTS............................................ $ 41,057 $ 42,199 $ 40,078
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE A -- ORGANIZATION
The Company has two operating subsidiaries, Great Dane Trailers, Inc.
("Great Dane") and Checker Motors Corporation ("Checker"). During 1989, the
Company purchased all of the common stock of Checker, the general partner of
Checker Motors Co., L.P. (the "Partnership"), a Delaware limited partnership
(the "Checker acquisition").
Immediately after the Checker acquisition, substantially all of Checker's
former shareholders purchased, through Checker Holding Corp. ("Holding"), all of
the outstanding common stock of the Company (the "Holding buyout"). Holding was
created solely for the purpose of acquiring the stock of the Company and was
subsequently merged into the Company. The Holding buyout has been accounted for
as if Checker acquired the Company (a "reverse acquisition"), since there was no
significant change in control of Checker.
Under generally accepted accounting principles for reverse acquisitions, the
net assets of Checker acquired in the Checker acquisition cannot be revalued to
estimated fair value. Accordingly, the $127.7 million excess of the amount paid
over the historical book value of Checker's net assets has been accounted for as
a separate component reducing shareholders' equity and is not subject to
amortization. The fair value of Checker's net assets, as estimated by
management, is significantly greater than historical book value, but no
appraisal of fair value is available.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of International Controls Corp. and its subsidiaries, including a
wholly-owned trailer leasing company, other greater than 50% owned companies,
the Partnership and the Partnership's wholly-owned subsidiaries, including
American Country Insurance Company ("Insurance Subsidiary"). All significant
intercompany accounts and transactions have been eliminated.
CASH EQUIVALENTS: The Company considers all highly liquid investments,
other than Insurance Subsidiary investments, with a maturity of three months or
less when purchased to be cash equivalents.
INVENTORIES: Inventories are stated at the lower of cost or market. The
cost of inventories is determined principally on the last-in, first-out ("LIFO")
method.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost. Depreciation is provided based on the assets' estimated useful lives,
principally by the straight-line method.
Estimated depreciable lives are as follows:
<TABLE>
<S> <C>
Buildings...................................................... 10-40 years
Transportation equipment....................................... 2-6 years
Machinery, equipment, furniture and fixtures................... 3-12 years
</TABLE>
INTANGIBLE ASSETS: Intangible assets, principally cost in excess of net
assets acquired, noncompete agreements and a trademark, are being amortized on
the straight-line basis over periods of 4 to 40 years.
MINORITY INTEREST: Minority interest represents the limited partner's
allocable share of the Partnership's net assets (see Notes H and J) and the
limited partner's allocable share of net assets of South Charleston Stamping &
Manufacturing Company ("SCSM").
REVENUE RECOGNITION: Revenues from sales of trailers that are manufactured
in response to customers' orders are recorded when such products are completed
and invoiced. Finance income is recognized as other income over the term of the
finance leases by applying the simple interest method to scheduled monthly
collections. Rental income from vehicle leases is recognized as earned. Vehicles
are generally
F-8
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
leased on a daily or weekly basis to unaffiliated operators. Insurance
Subsidiary premiums are recognized as income ratably over the period covered by
the policies. Unearned premium reserves are calculated on the monthly pro-rata
basis. Realized gains and losses on investments are determined on a specific
identification basis and are included in the determination of net income.
DEBT ISSUE EXPENSE: Expenses incurred in connection with the issuance of
debt are capitalized and amortized as interest expense over the life of the
debt.
LOSSES AND LOSS ADJUSTMENT EXPENSES: The Insurance Subsidiary's liability
for unpaid losses and loss adjustment expenses represents an estimate of the
ultimate net costs of all losses which are unpaid at the balance sheet dates,
and is determined using case-basis evaluations and statistical analysis. These
estimates are continually reviewed and any adjustments which become necessary
are included in current operations. Since the liability is based on estimates,
the ultimate settlement of losses and the related loss adjustment expenses may
vary from the amounts included in the consolidated financial statements.
INSURANCE SUBSIDIARY REINSURANCE: During 1993, the Company adopted the
provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short
Duration and Long Duration Contracts" ("SFAS No. 113"). Because of the type of
insurance contracts the Company's Insurance Subsidiary provides, the adoption of
this statement had no impact on earnings; however, it requires the
disaggregation of various balance sheet accounts. For financial reporting
purposes, the 1992 balance sheet and the 1991 and 1992 statements of cash flows
have been restated as if this statement were adopted as of the beginning of the
earliest period presented.
RECLASSIFICATION: Certain 1991 and 1992 amounts have been reclassified to
conform to the 1993 presentation.
NOTE C -- TRAILER LEASING OPERATIONS
Great Dane, through a wholly-owned leasing subsidiary, leases trailers under
operating and sales-type leases ("finance lease receivables"). The following is
a summary of the components of the subsidiary's net investment in finance lease
receivables (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1992 1993
--------- ---------
<S> <C> <C>
Minimum lease payments receivable............................................. $ 6,563 $ 1,678
Less: Unearned income......................................................... (669) (180)
Allowance for doubtful accounts........................................... (679) (159)
--------- ---------
5,215 1,339
Less amounts reflected as current............................................. (2,352) (764)
--------- ---------
Noncurrent portion............................................................ $ 2,863 $ 575
--------- ---------
--------- ---------
</TABLE>
Minimum lease payments are receivable as follows: $1.0 million in 1994, $0.3
million in 1995 and $0.4 million in 1996.
Trailers subject to operating leases are included in transportation
equipment in the accompanying consolidated balance sheets. The cost and
accumulated depreciation of such trailers were $1.5 million and $0.6 million,
respectively, at December 31, 1992, and $0.5 million and $0.2 million,
respectively, at December 31, 1993.
F-9
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE D -- INVENTORIES
Inventories are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1992 1993
--------- ---------
<S> <C> <C>
Raw materials................................................................. $ 44,005 $ 53,105
Work-in-process............................................................... 8,803 10,956
Finished goods................................................................ 19,053 30,051
--------- ---------
$ 71,861 $ 94,112
--------- ---------
--------- ---------
</TABLE>
Inventories would not differ materially if the first-in, first-out costing
method were used for inventories costed by the LIFO method.
NOTE E -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1992 1993
----------- -----------
<S> <C> <C>
Land and buildings......................................................... $ 46,131 $ 54,167
Transportation equipment................................................... 37,392 32,830
Machinery, equipment, furniture and fixtures............................... 106,261 125,067
----------- -----------
189,784 212,064
Less accumulated depreciation and amortization............................. (70,292) (89,709)
----------- -----------
$ 119,492 $ 122,355
----------- -----------
----------- -----------
</TABLE>
NOTE F -- INVESTMENTS
Insurance Subsidiary investments, which are generally reserved for Insurance
Subsidiary operations, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1992 1993
--------- ---------
<S> <C> <C>
Fixed maturities (bonds and notes) -- at cost, adjusted for amortization of
premium or discount and other than temporary declines in market value........ $ 75,950 $ 77,229
Equity securities (common and non-redeemable preferred stocks) -- at current
market value (cost $8,634 in 1992 and $13,536 in 1993 )...................... 8,666 13,609
--------- ---------
$ 84,616 $ 90,838
--------- ---------
--------- ---------
</TABLE>
F-10
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE F -- INVESTMENTS (CONTINUED)
The amortized cost, gross unrealized gains and losses and estimated market
values of fixed-maturity investments held by the Insurance Subsidiary as of
December 31, 1993, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ------ ---- -------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies........... $7,276 $ 283 $-- $7,559
Obligations of states and political
subdivisions................................... 21,984 561 -- 22,545
Mortgage-backed securities...................... 2,873 156 -- 3,029
Corporate and other debt securities............. 45,096 3,119 103 48,112
------- ------ ---- -------
$77,229 $4,119 $103 $81,245
------- ------ ---- -------
------- ------ ---- -------
</TABLE>
The amortized cost and estimated market value of fixed-maturity investments
at December 31, 1993, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
-------- --------
<S> <C> <C>
Due in one year or less.................................................... $11,998 $12,209
Due after one year through five years...................................... 24,918 25,880
Due after five years through ten years..................................... 21,989 23,313
Due after ten years........................................................ 15,451 16,814
-------- --------
74,356 78,216
Mortgage-backed securities................................................. 2,873 3,029
-------- --------
$77,229 $81,245
-------- --------
-------- --------
</TABLE>
Proceeds from sales of fixed-maturity investments were $21.7 million for
1992 and $57.2 million for 1993. Gross gains of $0.6 million and no gross losses
were realized during 1992 and gross gains of $1.2 million and gross losses of
$0.2 million were realized during 1993.
Bonds with an amortized cost of $2.2 million at December 31, 1993, were on
deposit to meet certain regulatory requirements.
F-11
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE F -- INVESTMENTS (CONTINUED)
Realized gains (losses) for 1991, 1992 and 1993, including other than
temporary declines in market value and unrealized appreciation (depreciation) on
fixed maturities and equity security investments of the Insurance Subsidiary,
are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
FIXED EQUITY
MATURITIES SECURITIES TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
1991
Realized losses.................................................. $ (897) $ (730) $ (1,627)
Unrealized appreciation.......................................... -- 1,847 1,847
----------- ----------- ---------
$ (897) $ 1,117 $ 220
----------- ----------- ---------
----------- ----------- ---------
1992
Realized gains................................................... $ 34 $ 656 $ 690
Unrealized depreciation.......................................... -- (367 ) (367)
----------- ----------- ---------
$ 34 $ 289 $ 323
----------- ----------- ---------
----------- ----------- ---------
1993
Realized gains................................................... $ 983 $ 95 $ 1,078
Unrealized appreciation.......................................... -- 41 41
----------- ----------- ---------
$ 983 $ 136 $ 1,119
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
NOTE G -- BORROWINGS
Long-term debt is summarized below (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1992 1993
----------- -----------
<S> <C> <C>
12 3/4% Senior Subordinated Debentures less debt discount of $12,330 in
1992 and $11,124 in 1993.................................................. $ 119,710 $ 120,916
14 1/2% Subordinated Discount Debentures less debt discount of $6,697 in
1992 and $6,531 in 1993................................................... 54,650 54,816
Notes payable to shareholders.............................................. 30,000 30,000
Great Dane term loan payable............................................... 26,167 21,511
Great Dane Revolving credit line........................................... 17,620 17,132
Partnership term loan payable.............................................. 28,500 22,500
Equipment term loan........................................................ 7,300 5,500
Economic Development term loan............................................. 11,389 10,909
Installment notes.......................................................... 5,079 979
Other debt................................................................. 4,953 7,010
----------- -----------
305,368 291,273
Less current portion....................................................... (15,752) (14,321)
----------- -----------
$ 289,616 $ 276,952
----------- -----------
----------- -----------
</TABLE>
Interest on the $132 million face value of 12 3/4% Senior Subordinated
Debentures is payable semiannually at the stated rate. The recorded debt
discount is being amortized as interest expense over the expected life of the
debentures using an imputed interest rate of approximately 15% compounded
semiannually. Under the terms of the debentures, the Company's payment of
dividends is limited to, among other things, 50% of consolidated net income
subsequent to June 30, 1986, plus $12 million. At
F-12
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE G -- BORROWINGS (CONTINUED)
December 31, 1993, the Company was restricted from paying a dividend. The
debentures are redeemable at the option of the Company in whole or in part at a
decreasing premium. The debentures are subject to redemptions through a sinking
fund whereby the Company is required to make five annual sinking fund payments
of $18 million commencing August 1, 1996, with the final payment due August 1,
2001.
Interest on the $61 million face value of 14 1/2% Subordinated Discount
Debentures is payable semiannually at the stated rate. The recorded debt
discount is being amortized as interest expense over the expected life of the
debentures using an imputed interest rate of approximately 16.7% compounded
semiannually. The 14 1/2% debentures are subject to redemption through a sinking
fund whereby the Company is required to redeem, at their face value, on January
1 in each of the years 1997 through 2005, 7 1/2% of the principal amount of the
debentures outstanding on January 1, 1997. The balance of debentures are due
January 1, 2006. The debentures are callable any time at their face value and
are subordinated to all present or future indebtedness of the Company not
expressly subordinated to, or on a parity with, the debentures.
The notes payable to shareholders are due September 30, 1997, or upon the
earlier payment in full of obligations under both the 1992 Partnership Loan and
Guaranty Agreement and the 1990 Great Dane loan and security agreement and bear
interest payable quarterly in arrears at an annual rate equal to the prime rate
of a New York bank (5.5% at December 31, 1993) plus 3 1/2%.
In March 1990, Great Dane entered into a five year loan and security
agreement ("Agreement") with certain banks. The Agreement made available to
Great Dane a $33 million five-year term loan and a $47 million revolving credit
line. In 1993, the maximum revolving credit line was increased to $65 million.
The amount available under the revolving credit line is based upon the amount of
Great Dane's eligible trade accounts receivable and inventory as defined in the
Agreement. The additional amount available under the revolving credit line under
the borrowing base terms of the Agreement totaled $32.3 million at December 31,
1993. The term loan is payable in equal monthly installments of $0.34 million
plus interest at the bank's prime interest rate (6% at December 31, 1993) plus
1 1/2%, with the balance due in March 1995. The revolving credit line is due in
1995 and requires interest payments at the bank's prime rate (6% at December 31,
1993) plus 1 1/2%.
All borrowings under the Agreement are fully secured by substantially all of
the Great Dane assets not pledged elsewhere. The Agreement requires Great Dane
to, among other things, comply with certain financial covenants, and limits
additional loans to the Company, limits additions to and sales of Great Dane's
fixed assets and limits additional Great Dane borrowings. Under the most
restrictive covenant, no additional transfers of funds to the Company are
available until after December 31, 1993.
During 1992, the Partnership entered into a Loan and Guaranty Agreement with
a bank pursuant to which the bank provided a $30 million term loan to the
Partnership. The term loan requires twenty quarterly principal payments of $1.5
million, plus interest at the bank's prime rate (6% at December 31, 1993) plus
1 1/4%, which payments commenced December 31, 1992. The term loan is secured by
substantially all of the Partnership's assets, excluding the stock of the
Insurance Subsidiary. The term loan agreement, which is guaranteed by Checker,
requires Checker to, among other things, comply with certain financial covenants
and limits additional loans to Checker.
The equipment term loan requires quarterly payments of $0.5 million plus
interest at the bank's prime rate (6% at December 31, 1993) plus 1 1/4%. The
obligation is secured by certain machinery and equipment with a net carrying
amount of $6.5 million at December 31, 1993.
F-13
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE G -- BORROWINGS (CONTINUED)
In connection with the Partnership term loan and the equipment term loan,
Checker is required to comply with certain financial covenants.
The economic development term loan, which is guaranteed by Checker, is
payable by SCSM to the West Virginia Economic Development Authority, and
requires monthly payments of $0.1 million, including interest at 5% with the
unpaid balance due 2008. The interest rate will be adjusted in April 1998 and
2003, so as to remain equal to 75% of the base rate, as defined, plus 1/2%. The
loan is secured by certain machinery and equipment with a net carrying amount of
$25.1 million at December 31, 1993.
The installment notes are secured by the Company's finance lease receivables
and by the Company's rights under certain operating leases. The notes bear
interest at various fixed rates averaging approximately 10.9% and are payable in
varying monthly installments through 1995.
Maturities of long-term debt for the four years subsequent to 1994 are as
follows: $44.4 million in 1995, $9.1 million in 1996, $54.1 million in 1997 and
$19.6 million in 1998.
Interest paid totaled $43.3 million in 1991, $42.4 million in 1992 and $39.8
million in 1993.
SCSM has a line of credit with a bank totaling $7.5 million at December 31,
1993. Borrowing under the line ($5.0 million at December 31, 1993) bears
interest at the bank's prime rate (6% at December 31, 1993) plus 1%.
The Partnership has a $5.0 million line of credit with a bank. Borrowings
under the line ($0 at December 31, 1993) bear interest at the bank's prime rate
(6% at December 31, 1993) plus 1%.
In February 1994, the Company filed a Registration Statement on Form S-1
with the Securities and Exchange Commission in connection with an overall
refinancing of the Company's outstanding indebtedness. The proposed refinancing,
as described in the registration statement, involves the Company entering into a
credit facility consisting of a $60 million term loan and a revolving credit
facility which would provide up to $115 million, subject to the Company's
ability to meet certain financial tests (the term loan and the revolving credit
facility being known as the "New Credit Facility"). Additionally, the Company is
proposing to offer $265 million (adjusted from $225 million) of new Senior
Secured Notes (the "Senior Notes"). If the refinancing is successfully
completed, the proceeds from the new Credit Facility would be utilized to redeem
substantially all of the currently outstanding indebtedness of the Company's
subsidiaries and the proceeds from the offering of the Senior Notes would be
used to redeem parent company indebtedness and to redeem the Minority Interest
held by ELIC, in each case together with any accrued interest and transaction
fees and expenses. A successful completion of the refinancing, the terms of
which are still subject to change, is expected to help the Company achieve
increased liquidity from reduced principal debt amortization requirements, the
removal of certain restrictions on the use of cash from the Company's
subsidiaries and more flexible and efficient cash management at the holding
company level.
NOTE H -- COMMITMENTS AND CONTINGENCIES
On February 8, 1989, the Boeing Company ("Boeing") filed a lawsuit naming
the Company, together with three prior subsidiaries of the Company, as
defendants in Case No. CV89-119MA, United States District Court for the District
of Oregon. In that lawsuit, Boeing sought damages and declaratory relief for
past and future costs resulting from alleged groundwater contamination at a
location in Gresham, Oregon, where the three prior subsidiaries of the Company
formerly conducted business operations. On December 22, 1993, the Company
entered into a settlement with Boeing, settling all claims asserted by Boeing in
the lawsuit. Pursuant to the settlement terms, the Company will pay Boeing $12.5
million over the course of five years, $5 million of which has been committed by
certain insurance companies in the
F-14
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE H -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
form of cash or irrevocable letters of credit. Accordingly, no further
adjustment is necessary to the $7.5 million special charge which was recorded in
the quarter ended June 30, 1993, to provide for the cost associated with this
legal proceeding. In accordance with the settlement agreement, Boeing will move
to dismiss its claims against the Company and the three former subsidiaries and
will release and indemnify the Company with respect to certain claims.
On March 4, 1992, Checker received notice that the Insurance Commissioner of
the State of California, as Conservator and Rehabilitator of ELIC, a limited
partner of the Partnership, had filed an Amendment to the Application for Order
of Conservation filed in Superior Court of the State of California for the
County of Los Angeles. The amendment seeks to add to the Order, dated April 11,
1991, Checker, the Partnership and Checker Holding Corp. III, a limited partner
of the Partnership. The amendment alleges that the action by Checker invoking
provisions of the Partnership Agreement that alter ELIC's rights in the
Partnership upon the occurrence of certain events is improper and constitutes an
impermissible forfeiture of ELIC's interest in the Partnership and a breach of
fiduciary duty to ELIC. The amend-ment seeks (a) a declaration of the rights of
the parties in the Partnership and (b) damages in an unspecified amount. The
Partnership believes that it has meritorious defenses to the claims of ELIC. The
Partnership has been in litigation on these issues for almost three years with
each party seeking, among other things, a declaration of its rights under the
Partnership Agreement. The Company has offered to redeem ELIC's minority
interest in the Partnership and SCSM for $32 million. If ELIC's rights under the
Partnership Agreement had not been altered, net income for 1991, 1992 and 1993
would have been reported at $3.3 million, $0.7 million and $0.6 million less,
respectively, than the amounts reported (see Note J).
In 1988, Great Dane entered into an operating agreement with the purchaser
of a previously wholly-owned finance company ("Finance"). Under the terms of the
agreement, the purchaser is given the opportunity to finance certain sales of
Great Dane. The 1988 operating agreement requires that Great Dane, among other
things, (i) not finance the sale of its products for the first eight years and
(ii) maintain a minimum net worth as defined in the agreement. In addition,
under this operating agreement, Great Dane is liable to the purchaser for 50% of
losses incurred in connection with the realization of certain new receivables
financed by the purchaser subsequent to the sale of Finance subject to certain
maximums. Failure to comply with these requirements of the agreement would
result in Great Dane having to repay the purchaser varying amounts reducing to
$5 million during the year ending September 8, 1996. At December 31, 1993, Great
Dane was in compliance with the provisions of the operating agreement.
In addition, the Company's installment notes are payable to Finance. At
December 31, 1993, the Company was directly liable for the installment notes and
has guaranteed the realization of receivables of approximately $4.8 million in
connection with the sale of Finance and is partially responsible for the
realization of new receivables of approximately $121.3 million financed by the
purchaser under the operating agreement subject to certain maximums. In addition
to Great Dane's guarantee, these receivables are also collateralized by a
security interest in the respective trailers originally sold by Great Dane. A
loss reserve of $3.1 million, for potential losses that may be incurred on the
ultimate realization of these receivables, is included in other accrued
liabilities in the December 31, 1993, consolidated balance sheet.
To secure certain obligations, the Company and its subsidiaries had
outstanding letters of credit aggregating approximately $9.3 million at December
31, 1992, and $3.4 million at December 31, 1993, which letters of credit were
fully secured by cash deposits included in other assets in the consolidated
balance sheets. In addition, Great Dane has standby letters of credit
aggregating approximately $7.5 million outstanding at December 31, 1993.
F-15
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE H -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company and its subsidiaries lease real estate and equipment. Certain
leases are renewable and provide for monthly rentals, real estate taxes and
other operating expenses. The Company believes that, in the normal course of
business, leases that expire will be renewed or replaced by other leases. Rental
expense under operating leases was approximately $3.6 million in 1991, $3.8
million in 1992 and $4.8 million in 1993. Minimum rental obligations for all
noncancelable operating leases at December 31, 1993 are as follows: $2.9 million
in 1994, $2.7 million in 1995, $2.6 million in 1996, $2.5 million in 1997, $2.4
million in 1998 and $16.5 million thereafter.
Management believes that none of the above legal actions, guarantees or
commitments will have a material adverse effect on the Company's consolidated
financial position.
NOTE I -- RETIREMENT PLANS
The Company and its subsidiaries have defined benefit pension plans
applicable to substantially all employees. The contributions to these plans are
based on computations by independent actuarial consultants. The Company's
general funding policy is to contribute amounts required to maintain funding
standards in accordance with the Employee Retirement Income Security Act.
Employees' benefits are based on years of service and the employees' final
average earnings, as defined by the plans.
Net periodic pension cost includes the following components (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned (normal cost)......................... $ 1,527 $ 1,473 $ 1,752
Interest on projected benefit obligation.............................. 3,404 3,565 3,972
Return on investments................................................. (2,761) (2,718) (2,867)
Net amortization and deferral......................................... 322 129 328
Curtailment loss...................................................... 456 -- --
--------- --------- ---------
Net periodic pension cost charged to expense.......................... $ 2,948 $ 2,449 $ 3,185
--------- --------- ---------
--------- --------- ---------
</TABLE>
During 1991, as a result of the effect of the continued economic recession
on the automotive industry, the number of active pension plan participants in
one of the subsidiaries' defined benefit plans was substantially reduced during
1991, resulting in a $0.5 million curtailment loss.
Gains and losses and prior service cost are amortized over periods ranging
from seven to fifteen years. Other assumptions used in the calculation of the
actuarial present value of the projected benefit obligation were as follows:
<TABLE>
<CAPTION>
1991 AND 1992 1993
--------------- -------------
<S> <C> <C>
Discount rate........................................................ 8 1/4% 7 1/2%
Rate of increase in compensation levels.............................. 4% - 5% 4% - 4 1/4%
Long-term rate of return on assets................................... 5% - 9 1/2% 5% - 9 1/2%
</TABLE>
F-16
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE I -- RETIREMENT PLANS (CONTINUED)
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1992 1993
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations................................................ $ 37,181 $ 41,846
---------- ----------
---------- ----------
Accumulated benefit obligation............................................ $ 39,503 $ 44,731
---------- ----------
---------- ----------
Plan assets (principally guaranteed investment contracts with insurance
companies)................................................................. $ 33,191 $ 37,174
Projected benefit obligation................................................ 46,771 54,568
---------- ----------
Projected benefit obligation in excess of plan assets....................... (13,580) (17,394)
Unrecognized prior service cost............................................. 963 1,115
Unrecognized net loss....................................................... 1,046 6,177
Minimum liability........................................................... (1,722) (1,450)
Unrecognized net obligation at transition................................... 2,048 1,819
---------- ----------
Pension liability recognized in the balance sheets.......................... (11,245) (9,733)
Less Noncurrent liability................................................... 6,857 6,442
---------- ----------
Current pension liability................................................... $ (4,388) $ (3,291)
---------- ----------
---------- ----------
</TABLE>
Relative positions and undertakings in multiemployer pension plans covering
certain of the Partnership's employees are not presently determinable.
Expense related to defined contribution plans, which is based on a
stipulated contribution for hours worked or employee contributions, approximated
$0.4 million in 1991, $0.5 million in 1992 and $0.7 million in 1993.
The Company and its subsidiaries provide postretirement health care and life
insurance benefits to eligible retired employees. The Company's policy is to
fund the cost of medical benefits as paid. Prior to 1993, the Company recognized
expense in the year the benefits were provided. The amount charged to expense
for these benefits was approximately $2.0 million in 1991 and $2.5 million in
1992. Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." This statement
requires the accrual of the cost of providing postretirement benefits, including
medical and life insurance coverage, during the active service period of the
employee. The Company recorded a charge of $29.7 million (net of taxes of $16.5
million), or $3.29 per share, during 1993 to reflect the cumulative effect of
this change in accounting principle.
F-17
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE I -- RETIREMENT PLANS (CONTINUED)
The following table sets forth the plan's funded status reconciled with
amounts recognized in the Company's consolidated balance sheet at December 31,
1993 (in thousands):
<TABLE>
<S> <C>
Accumulated postretirement obligation:
Retirees............................................................... $ (34,040)
Fully eligible active plan participants................................ (4,319)
Other active plan participants......................................... (11,218)
---------
(49,577)
Unrecognized net loss.................................................. 1,119
Unrecognized prior service cost........................................ (3,432)
---------
Accrued postretirement benefit liability recorded in balance sheet..... (51,890)
Less Noncurrent portion................................................ 49,609
---------
Current portion of postretirement benefit liability.................... $ (2,281)
---------
---------
</TABLE>
Net periodic postretirement benefit cost for the year ended December 31,
1993, includes the following components (in thousands):
<TABLE>
<S> <C>
Service cost............................................................... $ 634
Interest cost.............................................................. 3,888
---------
$ 4,522
---------
---------
</TABLE>
The health care cost trend rate ranges from 13.6% down to 5.0% over the next
14 years and remains level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1993, by $4.0 million. The weighted-average discount rate used in
determining the accumulated postretirement benefit obligation was 7.5% at
December 31, 1993.
The effect of adopting SFAS No. 106 decreased 1993 pre-tax income by $2.0
million as compared to 1992.
NOTE J -- MINORITY EQUITY
On April 11, 1991, ELIC was placed in conservatorship. In accordance with
the provisions of the Partnership Agreement, the Partnership continues, but
ELIC's interest in the Partnership and rights under the Partnership Agreement
are limited to the right to receive the balance of its capital account as
calculated and on the terms set forth in the Partnership Agreement. For
financial reporting purposes, partnership earnings had previously been allocated
to ELIC's capital account based on book income and the minority equity amount
was calculated accordingly (the "GAAP Capital Account Amount"). The Partnership
Agreement, however, provides for allocations of the partnership earnings to
ELIC's capital account on a basis that differs from book income and calculation
of the minority equity amount thereunder is to be made accordingly (the
"Partnership Agreement Capital Account Amount"). Because the provisions of the
Partnership Agreement require that ELIC's capital account be fixed and
calculated as of April 11, 1991, minority equity for the year ended December 31,
1991, includes a $2.3 million credit representing the adjustment of ELIC's
capital account from the GAAP Capital Account Amount as of April 11, 1991, to
the Partnership Agreement Capital Account Amount as of the same date (the "Final
Capital Account"). The Final Capital Account, which totaled $40.1 million at
December 31, 1993, is being paid out in level quarterly installments of $0.9
million, including interest at 7% per annum, through the year 2013.
F-18
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE K -- INCOME TAXES
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes." As
permitted under the new rules, prior years financial statements have not been
restated. The Company recorded a charge of $16.9 million, or $1.87 per share,
during 1993 to reflect the cumulative effect of this change in accounting
principle. Application of FAS 109 decreased 1993 pre-tax income by approximately
$1.5 million primarily because of FAS 109's requirement to record assets
acquired in prior business combinations at pre-tax amounts. Deferred income
taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1993 are as follows (dollars in thousands):
<TABLE>
<S> <C>
Deferred tax liabilities:
Property, plant and equipment........................................... $ 31,646
Finance lease receivables............................................... 517
Debenture discount...................................................... 4,647
Intangible assets....................................................... 5,249
Inventory............................................................... 3,624
Other................................................................... 645
---------
46,328
Deferred tax assets:
Other postretirement benefits........................................... 18,961
Pension................................................................. 3,377
Reserves................................................................ 10,986
Bad debt reserve........................................................ 1,601
Other................................................................... 5,555
---------
40,480
Valuation allowance....................................................... (1,000)
---------
39,480
---------
Net Deferred Tax Liabilities.............................................. $ 6,848
---------
---------
</TABLE>
The components of income tax benefit (expense) before extraordinary items
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
LIABILITY
DEFERRED METHOD METHOD
-------------------- ----------
1991 1992 1993
--------- --------- ----------
<S> <C> <C> <C>
Current taxes:
Federal............................................................ $ 9,261 $ (3,296) $ (10,244)
State.............................................................. (732) (1,702) (4,025)
--------- --------- ----------
8,529 (4,998) (14,269)
Deferred taxes..................................................... (3,288) 4,311 8,512
--------- --------- ----------
Income tax benefit (expense)....................................... $ 5,241 $ (687) $ (5,757)
--------- --------- ----------
--------- --------- ----------
</TABLE>
F-19
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE K -- INCOME TAXES (CONTINUED)
The components of the deferred tax benefit (expense) are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1991 1992
--------- ---------
<S> <C> <C>
Tax depreciation less than (in excess of) book depreciation..................... $ (2,215) $ 1,742
Finance leases.................................................................. (17) (37)
Deferred compensation........................................................... (4) (1)
Inventory reserves.............................................................. 15 505
Financing costs................................................................. (22) (75)
Warranty reserves............................................................... 17 22
Other reserves.................................................................. (660) 602
Partnership allocation.......................................................... 1,485 1,469
Alternative minimum tax......................................................... (2,223) --
Other........................................................................... 336 84
--------- ---------
Deferred tax benefit (expense).................................................. $ (3,288) $ 4,311
--------- ---------
--------- ---------
</TABLE>
Income tax benefit (expense) differs from the amount computed by applying
the statutory federal income tax rate to income (loss) before income taxes and
extraordinary items. The reasons for these differences are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
LIABILITY
DEFERRED METHOD METHOD
-------------------- ---------
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Computed expected tax benefit (expense)............................... $ 10,964 $ 2,335 $ (3,192)
(Increase) decrease in taxes resulting from:
State income taxes, net of federal income tax benefit............... (483) (1,123) (2,616)
Appraisal depreciation.............................................. (1,033) (1,024) --
Amortization of goodwill and other items............................ (530) (530) (643)
Nontaxable Partnership income....................................... 1,400 574 446
Increase in tax accruals............................................ (4,527) (319) --
Other............................................................... (550) (600) 248
--------- --------- ---------
Actual tax benefit (expense).......................................... $ 5,241 $ (687) $ (5,757)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income taxes paid totaled $8.6 million in 1991, $3.9 million in 1992 and
$13.4 million in 1993.
NOTE L -- EXTRAORDINARY ITEMS
During 1991, the Company repurchased $66.2 million face value ($58.7 million
net carrying value) of the 14 1/2% Subordinated Discount Debentures at an
average cost of 36% of face value. Additionally, the Company repurchased $7.6
million face value ($6.8 million net carrying value) of the 12 3/4% Senior
Subordinated Debentures at an average cost of 40% of face value. The resulting
gain of $23.2 million on these repurchases, net of taxes of $14.8 million, has
been classified as an extraordinary item. Upon the completion of the
Corporation's 1990 federal income tax return, management elected to treat
certain extraordinary gains under an alternative election available under the
Internal Revenue Code, which resulted in these gains, on which deferred income
taxes had been provided in prior periods, not being subject to tax. This change
in estimate had the effect of increasing the extraordinary gain and net income
by $8 million in the year ended December 31, 1991 resulting in a total gain of
$31.2 million.
F-20
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE M -- RELATED PARTY TRANSACTIONS
An officer of Checker is the owner of a taxicab association established in
1988 in the City of Chicago to which both Company affiliated and independent
taxi drivers may belong for a fee, and through which the members may obtain
automobile liability insurance from the Insurance Subsidiary and other
maintenance and rental services. The association purchases services from various
Checker operations and reimburses the operations for certain management, general
and administrative costs. Amounts received from the association totaled $2.6
million in 1991, $3.3 million in 1992 and $4.4 million in 1993. At December 31,
1993, Checker has guaranteed certain of the association's obligations totaling
$0.7 million.
The Company leases an airplane owned by a corporation of which a director is
the sole shareholder. Lease expenses totaled $0.7 million each year in 1991,
1992 and 1993.
Each of the Company's directors provides consulting services. Annual
expenses incurred relating to these consulting services totaled $1.4 million
each year in 1991, 1992 and 1993.
NOTE N -- INDUSTRY SEGMENT INFORMATION
The Company operates in four principal segments:
TRAILER MANUFACTURING SEGMENT -- Manufacturing and distribution of
highway truck trailers.
AUTOMOTIVE PRODUCTS SEGMENT -- Manufacturing metal stampings and
assemblies and coordination of related tooling production for motor vehicle
manufacturers.
VEHICULAR OPERATIONS SEGMENT -- Leasing taxicabs.
INSURANCE OPERATIONS SEGMENT -- Providing property and casualty
insurance coverage to the Partnership and to outside parties.
Trailer Manufacturing segment sales to J. B. Hunt totaled approximately $1.2
million in 1991, $50.0 million in 1992 and $92.3 million in 1993.
Automotive product net sales to General Motors Corporation totaled
approximately $80.3 million in 1991, $109.1 million in 1992 and $121.5 million
in 1993 (includes accounts receivable and unbilled tooling charges of $5.7
million, $8.9 million and $8.9 million at December 31, 1991, 1992 and 1993,
respectively).
F-21
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE N -- INDUSTRY SEGMENT INFORMATION (CONTINUED)
Industry segment data is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
TRAILER AUTOMOTIVE VEHICULAR INSURANCE
MANUFACTURING PRODUCTS OPERATIONS OPERATIONS ELIMINATIONS CONSOLIDATED
--------- ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1991
Revenues:
Outside customers............. $400,196 $84,401 $43,527 $27,142 $ -- $555,266
Intersegment sales............ -- 5 3,635 12,735 (16,375) --
--------- ------- ------- ------- -------- ---------
$400,196 $84,406 $47,162 $39,877 $(16,375) $555,266
--------- ------- ------- ------- -------- ---------
--------- ------- ------- ------- -------- ---------
Operating profit (loss)......... $ 7,059 $(4,237) $7,139 $(2,872) $ 7,089
Corporate expenses.............. (4,398)
Interest income:
Segment....................... 2,255 6,917 9,172
Corporate..................... 2,462
Interest expense:
Segment....................... (8,061) (8,061)
Corporate..................... (39,364)
Other expenses, net............. (1,078)
Minority equity................. 1,931
---------
Loss before income taxes and
extraordinary items............ $(32,247)
---------
---------
Identifiable assets............. $227,551 $67,258 $28,357 $112,016 $435,182
Partnership assets.............. 31,531
Corporate assets................ 14,592
---------
Total assets at December 31,
1991........................... $481,305
---------
---------
Depreciation and amortization:
Segment....................... $ 5,910 $4,237 $10,369 $ 367 $ 20,883
Other......................... 48
Capital expenditures............ 3,208 1,190 10,181 1,878 16,457
</TABLE>
F-22
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE N -- INDUSTRY SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
TRAILER AUTOMOTIVE VEHICULAR INSURANCE
MANUFACTURING PRODUCTS OPERATIONS OPERATIONS ELIMINATIONS CONSOLIDATED
--------- ------- ------- ------- -------- ---------
1992
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Outside customers............. $536,336 $112,631 $40,580 $27,186 $ -- $716,733
Intersegment sales............ -- 1 4,043 13,161 (17,205) --
--------- ------- ------- ------- -------- ---------
$536,336 $112,632 $44,623 $40,347 $(17,205) $716,733
--------- ------- ------- ------- -------- ---------
--------- ------- ------- ------- -------- ---------
Operating profit (loss)......... $ 17,590 $11,622 $5,727 $(1,557) $ 33,382
Corporate expenses.............. (4,396)
Interest income:
Segment....................... 1,168 6,321 7,489
Corporate..................... 1,406
Interest expense:
Segment....................... (5,852) (5,852)
Corporate..................... (36,874)
Other expenses, net............. (2,023)
---------
Loss before income taxes and
extraordinary items............ $ (6,868)
---------
Identifiable assets............. $230,465 $66,561 $25,516 $117,960 $440,502
Partnership assets.............. 38,712
Corporate assets................ 14,549
---------
Total assets at December 31,
1992........................... $493,763
---------
---------
Depreciation and amortization:
Segment....................... $ 6,303 $4,148 $10,099 $ 462 $ 21,012
Other......................... 42
Capital expenditures............ 4,996 1,889 10,412 252 17,549
</TABLE>
F-23
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE N -- INDUSTRY SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
TRAILER AUTOMOTIVE VEHICULAR INSURANCE
MANUFACTURING PRODUCTS OPERATIONS OPERATIONS ELIMINATIONS CONSOLIDATED
--------- ------- ------- ------- -------- ---------
1993
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Outside customers............. $711,862 $127,925 $42,103 $27,436 $ -- $909,326
Intersegment sales............ -- -- 4,346 13,400 (17,746) --
--------- ------- ------- ------- -------- ---------
$711,862 $127,925 $46,449 $40,836 $(17,746) $909,326
--------- ------- ------- ------- -------- ---------
--------- ------- ------- ------- -------- ---------
Operating profit (loss)......... $ 32,381 $15,306 $6,251 $(1,947) $ -- $ 51,991
Corporate expense............... (4,646)
Interest income:
Segment....................... 428 5,877 6,305
Corporate..................... 1,091
Interest expense:
Segment....................... (4,811) (4,811)
Corporate..................... (36,803)
Special charge.................. (7,500)
Other income, net............... 3,494
---------
Income before income taxes and
extraordinary items............ $ 9,121
---------
---------
Identifiable assets............. $259,837 $67,937 $20,493 $116,692 $464,959
Partnership assets.............. 37,701
Corporate assets................ 14,676
---------
Total assets at December 31,
1993........................... $517,336
---------
---------
Depreciation and amortization... $ 8,280 $4,991 $9,530 $ 494 $ 23,295
Capital expenditures............ 7,265 4,728 7,913 100 20,006
</TABLE>
Intersegment sales are accounted for at prices comparable to normal unaffiliated
customer sales. Corporate and Partnership assets consist of short-term
investments, savings deposits and certain other assets. Insurance Operations
identifiable assets for 1991 and 1992 have been restated to reflect the adoption
of SFAS No. 113.
F-24
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993
NOTE O -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
the fair value of financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
FINANCE LEASE RECEIVABLES: The fair values of the Company's finance lease
receivables are estimated using discounted cash flow analyses based on current
market rates for similar types of financing.
INDEBTEDNESS: The carrying amounts of the Company's notes payable to
shareholders, Great Dane term loan payable, Great Dane revolving credit line,
Partnership term loan payable, equipment term loan, economic development term
loan and line of credit approximate their fair value. The fair values of the
Company's 12 3/4% Senior Subordinated Debentures and 14 1/2% Subordinated
Discount Debentures are based on quoted market prices. The fair values of the
Company's other indebtedness is estimated using discounted cash flow analyses
based on current market rates.
The carrying amounts and fair values of the Company's finance lease
receivables and indebtedness at December 31, 1993, are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
----------------- -----------
<S> <C> <C>
Finance lease receivables............................................ $ 1,339 $ 1,339
Long-term debt and notes payable..................................... $ 296,273 $ 300,940
</TABLE>
NOTE P -- SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1992 QUARTER ENDED 1993 QUARTER ENDED
---------------------------------------------- ---------------------------------------------
SEPTEMBER DECEMBER SEPTEMBER DECEMBER
MARCH 31 JUNE 30 30 31 MARCH 31 JUNE 30 30 31
--------- -------- --------- --------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........... $166,079 $185,070 $177,453 $188,131 $204,933 $225,407 $230,655 $248,331
Gross profit....... 24,437 27,551 26,115 27,760 29,302 33,808 31,126 36,285
Income (loss)
before accounting
changes........... (2,885) 105 (4,307) (468) (744) 1,350 (536) 3,294
Accounting
changes........... -- -- -- -- (46,626) -- -- --
Net income
(loss)............ (2,885) 105 (4,307) (468) (47,370) 1,350 (536) 3,294
Income (loss) per
share:
Income (loss)
before
accounting
changes......... $ (0.32) $ 0.01 $ (0.48) $ (0.05) $ (0.08) $ 0.15 $ (0.06) $ 0.36
Accounting
changes......... -- -- -- -- (5.16) -- -- --
Net income
(loss).......... (0.32) 0.01 (0.48) (0.05) (5.24) 0.15 (0.06) 0.36
</TABLE>
F-25
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1994
1993 (UNAUDITED)
-------------- ------------
<S> <C> <C>
Cash and cash equivalents.......................................................... $ 40,078 $ 32,608
Accounts receivable, less allowance for doubtful accounts of
$748 (1993) and $883 (1994)...................................................... 75,701 100,819
Inventories....................................................................... 94,112 86,060
Other current assets.............................................................. 11,823 13,344
-------------- ------------
TOTAL CURRENT ASSETS............................................................ 221,714 232,831
Property, plant and equipment, net................................................ 122,355 123,111
Insurance Subsidiary's investments................................................ 90,838 89,134
Insurance Subsidiary's reinsurance receivable..................................... 11,378 11,405
Cost in excess of net assets acquired, net of accumulated amortization of $6,252
(1993) $6,565 (1994)............................................................. 43,743 43,430
Trademark, net of accumulated amortization of
$1,750 (1993) $1,838 (1994)...................................................... 11,696 11,608
Other assets...................................................................... 15,612 15,639
-------------- ------------
TOTAL ASSETS...................................................................... $ 517,336 $ 527,158
-------------- ------------
-------------- ------------
</TABLE>
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<S> <C> <C>
Accounts payable................................................... $ 77,876 $ 77,932
Notes payable...................................................... 5,000 5,000
Income taxes payable............................................... 7,726 12,466
Accrued compensation............................................... 15,838 16,435
Accrued interest................................................... 11,746 6,018
Other accrued liabilities.......................................... 38,071 37,647
Current portion of long-term debt.................................. 14,321 46,994
----------- -----------
TOTAL CURRENT LIABILITIES...................................... 170,578 202,492
Long-term debt, excluding current portion:
Shareholders................................................... 30,000 30,000
Other.......................................................... 246,952 210,119
----------- -----------
276,952 240,119
Insurance Subsidiary's unpaid losses and loss adjustment
expenses.......................................................... 71,179 72,077
Unearned insurance premiums........................................ 9,547 16,239
Deferred income taxes.............................................. 9,803 9,950
Postretirement benefits other than pensions........................ 49,609 50,012
Other noncurrent liabilities....................................... 39,053 39,909
Minority interest.................................................. 40,132 39,898
----------- -----------
TOTAL LIABILITIES.............................................. 666,853 670,696
Shareholders' deficit:
Common stock, par value $0.01:
Authorized 15,000,000 shares
Outstanding 9,036,700 shares................................... 90 90
Additional paid-in capital....................................... 14,910 14,910
Retained earnings deficit........................................ (36,217) (29,831)
Unrealized appreciation (depreciation) on Insurance Subsidiary's
investments in certain debt and equity securities -- Note E..... 73 (334)
Notes receivable from shareholders............................... (625) (625)
Amount paid in excess of Checker's net assets.................... (127,748) (127,748)
----------- -----------
TOTAL SHAREHOLDERS' DEFICIT.................................... (149,517) (143,538)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT........................ $ 517,336 $ 527,158
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
--------------------------
1993 1994
------------ ------------
<S> <C> <C>
Revenues.............................................................................. $ 204,933 $ 271,680
Cost of revenues...................................................................... (175,631) (230,835)
------------ ------------
GROSS PROFIT.......................................................................... 29,302 40,845
Selling, general and administrative expense........................................... (19,986) (21,454)
Interest expense...................................................................... (10,465) (10,044)
Interest income....................................................................... 2,018 1,660
Other income, net..................................................................... 991 604
------------ ------------
Income before income taxes and accounting changes..................................... 1,860 11,611
Income tax expense.................................................................... (2,604) (5,225)
------------ ------------
INCOME (LOSS) BEFORE ACCOUNTING CHANGES............................................... (744) 6,386
Accounting changes, net of income taxes............................................... (46,626) --
------------ ------------
NET INCOME (LOSS)..................................................................... $ (47,370) $ 6,386
------------ ------------
------------ ------------
Weighted average number of shares used in per share computations...................... 9,037 9,037
------------ ------------
------------ ------------
Income (loss) per share:
Before accounting changes........................................................... $ (0.08) $ 0.71
Accounting changes.................................................................. (5.16) --
------------ ------------
NET INCOME (LOSS) PER SHARE........................................................... $ (5.24) $ 0.71
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1993 1994
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................................................... $ (47,370) $ 6,386
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Accounting changes................................................................... 46,626 --
Depreciation and amortization........................................................ 5,571 5,631
Deferred income tax benefit.......................................................... (1,834) (581)
Amortization of cost in excess of net assets acquired................................ 312 313
Amortization of debt discount........................................................ 324 393
Net (gain) loss on sale of property, plant and equipment............................. (18) --
Investment gains..................................................................... (103) (274)
Other noncash charges................................................................ 1,446 2,626
Changes in operating assets and liabilities:
Accounts receivable................................................................ (21,933) (25,281)
Inventories........................................................................ (7,084) 8,052
Insurance Subsidiary's reinsurance receivable...................................... 5,101 (27)
Other assets....................................................................... (3,477) (1,149)
Accounts payable................................................................... 8,533 56
Income taxes....................................................................... 1,523 5,840
Unpaid losses and loss adjustment expenses......................................... (4,898) 897
Unearned insurance premiums........................................................ 2,999 6,692
Postretirement benefits other than pension......................................... -- 403
Other liabilities.................................................................. (433) (7,791)
---------- ----------
NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES................................. (14,715) 2,186
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............................................. (7,843) (6,903)
Proceeds from disposal of property, plant and equipment and other productive assets.... 1,466 516
Purchase of investments available for sale............................................. -- (3,901)
Purchase of investments held to maturity............................................... (6,789) (20,493)
Proceeds from sale of investments available for sale................................... -- 346
Proceeds from maturities and redemption of investments held to maturity................ 13,845 25,423
Other.................................................................................. 54 143
---------- ----------
NET CASH FLOW PROVIDED BY (USED IN) INVESTING ACTIVITIES................................. 733 (4,869)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings............................................................... 15,091 --
Repayments of borrowings............................................................... (4,755) (4,553)
Return of limited partner's capital.................................................... (217) (234)
---------- ----------
NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES................................. 10,119 (4,787)
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS.................................................... (3,863) (7,470)
Beginning cash and cash equivalents...................................................... 42,199 40,078
---------- ----------
ENDING CASH AND CASH EQUIVALENTS......................................................... $ 38,336 $ 32,608
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying consolidated financial statements of International Controls
Corp. and Subsidiaries (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information, the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In Management's
opinion, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 1994, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1994. For further
information, refer to the audited consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1993.
NOTE B -- PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of International
Controls Corp. and its subsidiaries, including a wholly-owned trailer leasing
company, Checker Motors Co., L.P. ("Partnership") and the Partnership's
wholly-owned subsidiaries, including American Country Insurance Company
("Insurance Subsidiary").
NOTE C -- INVENTORIES
Inventories are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1993 1994
-------------- -----------
<S> <C> <C>
Raw materials and supplies.................................... $ 53,105 $ 53,457
Work-in-process............................................... 10,956 12,619
Finished goods................................................ 30,051 19,984
-------------- -----------
$ 94,112 $ 86,060
-------------- -----------
-------------- -----------
</TABLE>
NOTE D -- INCOME TAXES
The Company's estimated effective tax rate differs from the statutory rate
because of state income taxes as well as the impact of the reporting of certain
income and expense items in the financial statements which are not taxable or
deductible for income tax purposes. The values of assets and liabilities
acquired in a transaction accounted for as a purchase are recorded at estimated
fair values which result in an increase in the net asset value over the tax
basis for such net assets.
NOTE E -- ACCOUNTING CHANGES
Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." In accordance with this statement,
prior period financial statements have not been restated to reflect the change
in accounting principle. The opening balance of shareholders' deficit was
decreased by $1.4 million (net of $0.8 million in deferred income taxes) to
reflect the net unrealized holding gains on securities classified as
available-for-sale previously carried at amortized cost or lower of cost or
market.
Insurance company management evaluated the investment portfolio and, based
on the Insurance Subsidiary's ability and intent, has classified securities
between the held-to-maturity and available-for-sale categories. Held-to-maturity
securities are stated at amortized cost. Debt securities not classified as held-
to-maturity and marketable equity securities are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
shareholders' deficit.
F-29
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31,1994
(UNAUDITED)
NOTE E -- ACCOUNTING CHANGES (CONTINUED)
Following is a summary of held-to-maturity and available-for-sale securities
as of March 31, 1994:
<TABLE>
<CAPTION>
HELD-TO-MATURITY
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. Government
corporations and agencies..................................... $ 4,297 $ 154 $ 35 $ 4,416
Obligations of states and political sub-divisions.............. 11,338 144 178 11,304
Mortgage-backed securities..................................... 3,659 28 35 3,652
Corporate and other debt securities............................ 25,178 592 381 25,389
--------- ----- ----- -----------
Total held to maturity....................................... $ 44,472 $ 918 $ 629 $ 44,761
--------- ----- ----- -----------
--------- ----- ----- -----------
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Obligations of states and political sub-divisions.............. $ 10,287 $ 29 $ 279 $ 10,037
Corporate and other debt securities............................ 19,253 1,023 499 19,777
--------- ----------- ----------- -----------
Total debt securities........................................ 29,540 1,052 778 29,814
Equity securities.............................................. 15,773 371 1,296 14,848
--------- ----------- ----------- -----------
Total available for sale..................................... $ 45,313 $ 1,423 $ 2,074 $ 44,662
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
F-30
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31,1994
(UNAUDITED)
NOTE E -- ACCOUNTING CHANGES (CONTINUED)
The amortized cost and estimated market value of debt and marketable equity
securities at March 31, 1994, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
HELD-TO-MATURITY
----------------------
ESTIMATED
COST FAIR VALUE
--------- -----------
<S> <C> <C>
Due in one year or less............................................ $ 5,448 $ 5,508
Due after one year through five years.............................. 24,904 25,178
Due after five years through ten years............................. 8,032 8,062
Due after ten years................................................ 2,429 2,360
--------- -----------
40,813 41,108
Mortgage-backed securities......................................... 3,659 3,653
--------- -----------
$ 44,472 $ 44,761
--------- -----------
--------- -----------
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
----------------------
ESTIMATED
COST FAIR VALUE
--------- -----------
<S> <C> <C>
Due in one year or less............................................ $ 550 $ 577
Due after one year through five years.............................. 645 673
Due after five years through ten years............................. 15,381 15,432
Due after ten years................................................ 12,964 13,132
--------- -----------
29,540 29,814
Equity securities.................................................. 15,773 14,848
--------- -----------
$ 45,313 $ 44,662
--------- -----------
--------- -----------
</TABLE>
Effective January 1, 1994, the Company adopted the provisions of SFAS No.
112, "Employers' Accounting for Postemployment Benefits." The adoption of this
SFAS did not affect net income. In accordance with this Statement, prior period
financial statements have not been restated to reflect the change in accounting
method.
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
The Company recorded a charge of $29.7 million (net of taxes of $16.5 million),
or $3.29 per share, during the quarter ended March 31, 1993 to reflect the
cumulative effect of this change in accounting principle.
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
109, "Accounting for Income Taxes." The Company recorded a charge of $16.9
million, or $1.87 per share, during the quarter ended March 31, 1993, to reflect
the cumulative effect of this change in accounting principle.
During the quarter ended March 31, 1993, the Company adopted the provisions
of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short Duration and
Long Duration Contracts". Because of the type of insurance contracts the
Company's Insurance Subsidiary provides, the adoption of this statement had no
impact on earnings; however, it requires the disaggregation of various balance
sheet accounts.
F-31
<PAGE>
INTERNATIONAL CONTROLS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31,1994
(UNAUDITED)
NOTE F -- CONTINGENCIES
On February 8, 1989, the Boeing Company ("Boeing") filed a lawsuit naming
the Company, together with three prior subsidiaries of the Company, as
defendants in Case No. CV89-119MA, United States District Court for the District
of Oregon. In that lawsuit, Boeing sought damages and declaratory relief for
past and future costs resulting from alleged groundwater contamination at a
location in Gresham, Oregon, where the three prior subsidiaries of the Company
formerly conducted business operations. On December 22, 1993, the Company
entered into a settlement with Boeing, settling all claims asserted by Boeing in
the lawsuit. Pursuant to the settlement terms, the Company will pay Boeing $12.5
million over the course of five years, $5 million of which has been committed by
certain insurance companies in the form of cash or irrevocable letters of
credit. In accordance with the settlement agreement, Boeing's claims against the
Company and the three former subsidiaries have been dismissed with prejudice and
Boeing has released and indemnified the Company with respect to certain claims.
On March 4, 1992, Checker received notice that the Insurance Commissioner of
the State of California, as Conservator and Rehabilitator of Executive Life
Insurance Company of California ("ELIC"), a limited partner of the Partnership,
had filed an Amendment to the Application for Order of Conservation filed in
Superior Court of the State of California for the County of Los Angeles (the
"Court"). The amendment seeks to add to the Order, dated April 11, 1991,
Checker, the Partnership and Checker Holding Corp. III ("Holding III"), a
limited partner of the Partnership. The amendment alleges that the action by
Checker invoking provisions of the Partnership Agreement that alter ELIC's
rights in the Partnership upon the occurrence of certain events is improper and
constitutes an impermissible forfeiture of ELIC's interest in the Partnership
and a breach of fiduciary duty to ELIC. The amendment seeks (a) a declaration of
the rights of the parties in the Partnership and (b) damages in an unspecified
amount. The Partnership believes that it has meritorious defenses to the claims
of ELIC. On April 15, 1994, the Company and the Conservator entered into a
letter agreement pursuant to which the Company agreed to purchase ELIC's
interest in the Partnership for $37 million, subject to completion of the
refinancing described under the caption, "Item 2 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations." The letter agreement
has been submitted to the Court for approval.
F-32
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Checker Motors Corporation
We have audited the accompanying consolidated balance sheets of Checker
Motors Corporation (a wholly-owned subsidiary of International Controls Corp.)
and subsidiaries (Issuer Group) as of December 31, 1993 and 1992, and the
related consolidated statements of operations, stockholders's deficit and cash
flows for each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Checker Motors Corporation and subsidiaries (Issuer Group) at December 31, 1993
and 1992, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1993, in conformity
with generally accepted accounting principles.
As discussed in Notes E and G to the consolidated financial statements, in
1993, the Corporation changed its methods of accounting for postretirement
benefits other than pensions and income taxes.
March 1, 1994, except for Note A
as to which the date is July 26, 1994
F-33
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
December 31,
--------------------
1992 1993
--------- ---------
<S> <C> <C>
Current Assets
Cash and cash equivalents................................................. $ 29,549 $ 31,580
Accounts receivable....................................................... 9,957 10,334
Current portion of notes receivable....................................... 511 180
Inventories -- Note C..................................................... 9,152 10,600
Other current assets...................................................... 2,394 2,580
--------- ---------
Total Current Assets.................................................... 51,563 55,274
Other Assets
Notes receivable, excluding current portion............................... 288 66
Other..................................................................... 6,303 4,473
--------- ---------
6,591 4,539
Amount Due From Parent...................................................... 240 363
Property, Plant and Equipment -- Note D
Land...................................................................... 1,355 1,355
Buildings and improvements................................................ 5,725 5,989
Machinery and equipment................................................... 69,686 75,528
Vehicles held for lease................................................... 34,196 30,054
--------- ---------
110,962 112,926
Less allowances for depreciation, including $20,141 related to vehicles
held
for lease (1993 -- $19,448).............................................. 45,937 51,281
--------- ---------
65,025 61,645
--------- ---------
Total Assets............................................................ $ 123,419 $ 121,821
--------- ---------
--------- ---------
</TABLE>
LIABILITIES AND STOCKHOLDER'S DEFICIT
<TABLE>
<S> <C> <C>
Current Liabilities
Notes payable to bank -- Note D........................................... $ 5,000 $ 5,000
Accounts payable.......................................................... 9,853 12,823
Income taxes -- Note G.................................................... 744 744
Accrued compensation...................................................... 4,884 6,021
Accrued interest.......................................................... 99 191
Other accrued liabilities................................................. 6,695 8,072
Current portion of long-term debt......................................... 8,568 9,412
--------- ---------
Total Current Liabilities............................................... 35,843 42,263
Long-Term Debt, excluding current portion -- Note D....................... 45,730 38,776
Other Liabilities
Reserves for self-insurance............................................... 4,398 3,490
Accrued pension costs -- Note E........................................... 4,432 4,160
Deferred compensation 1,865 1,948
Postretirement benefits other than pension -- Note E...................... -- 17,403
Deferred taxes............................................................ 806 3,457
--------- ---------
11,501 30,458
Minority Interest -- Notes F and H.......................................... 41,026 40,132
Stockholder's Deficit -- Notes A and D
Common stock, $1 par value:
Authorized -- 1,000 shares
Outstanding -- 1,000 shares............................................. 1 1
Additional paid-in capital................................................ 1,624 1,624
Retained earnings (deficit)............................................... 4,903 (15,779)
Receivable from Parent -- Note L.......................................... (16,584) (15,029)
Notes receivable -- Note J................................................ (625) (625)
--------- ---------
(10,681) (29,808)
--------- ---------
Commitments and Contingencies -- Note H
Total Liabilities and Stockholder's Deficit................................. $ 123,419 $ 121,821
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
F-34
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(dollars in thousands)
<TABLE>
<CAPTION>
Receivable
Additional Retained from Notes
Common Paid-In Earnings Parent-- Receivable
Stock Capital (Deficit) Note J --Note J
------------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1991................ $ 1 $ 1,624 $ 9,588 $ 581 $ (625)
Net income................................. 1,086
Distribution in excess of net equity....... (13,139) 13,139
Cash to Parent............................. (22,100)
Charges by Parent -- net................... 8,380
--- ----------- --------- ----------- ------
Balances at December 31, 1991.............. 1 1,624 (2,465) -- (625)
Net income................................. 7,368
Cash to Parent............................. (21,250)
Charges by Parent -- net................... 4,666
--- ----------- --------- ----------- ------
Balances at December 31, 1992.............. 1 1,624 4,903 (16,584) (625)
Net loss................................... (4,098)
Distribution in excess of net equity....... (16,584) 16,584
Cash to Parent............................. (19,674)
Charges by Parent -- net................... 4,645
--- ----------- --------- ----------- ------
Balances at December 31, 1993.............. $ 1 $ 1,624 $ (15,779) $ (15,029) $ (625)
--- ----------- --------- ----------- ------
--- ----------- --------- ----------- ------
</TABLE>
See notes to consolidated financial statements.
F-35
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1991 1992 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net sales -- Note I................................................ $ 84,401 $ 112,631 $ 127,925
Revenue from vehicular operations, including rental income of
$39,946 (1992 -- $37,382; 1993 -- $38,360)........................ 43,527 40,580 42,103
Interest income.................................................... 1,605 748 902
Other income, net.................................................. 2,177 194 5,083
---------- ---------- ----------
131,710 154,153 176,013
Costs and expenses:
Cost of sales.................................................... 82,612 95,585 105,444
Expenses of vehicular operations................................. 30,801 30,119 30,904
Selling, general and administrative.............................. 12,357 10,901 12,867
Interest......................................................... 7,346 6,736 6,587
133,116 143,341 155,802
---------- ---------- ----------
Income (Loss) Before Minority Equity, Income Taxes and Accounting
Changes........................................................... (1,406) 10,812 20,211
Minority equity -- Note F.......................................... 1,931 -- --
---------- ---------- ----------
Income Before Income Taxes and Accounting Changes.................. 525 10,812 20,211
Income Taxes -- Note G:
Current.......................................................... 447 2,809 4,644
Deferred (credit)................................................ (1,008) 635 2,228
---------- ---------- ----------
(561) 3,444 6,872
---------- ---------- ----------
Income Before Accounting Changes................................... 1,086 7,368 13,339
Accounting changes, net of income taxes -- Notes E and G........... -- -- (17,437)
---------- ---------- ----------
NET INCOME (LOSS).................................................. $ 1,086 $ 7,368 $ (4,098)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December31,
-------------------------------
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities
Net income (loss)................................................. $ 1,086 $ 7,368 $ (4,098)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Accounting changes -- -- 17,437
Depreciation.................................................... 14,606 14,247 14,521
Amortization.................................................... 842 893 800
Loss on sale of property, plant and equipment................... 240 13 30
Provision for deferred income taxes (credit).................... (1,008) 635 2,228
Decrease in minority equity..................................... (1,995) -- --
Changes in operating assets and liabilities:
Accounts receivable........................................... (1,588) (2,204) (380)
Inventories................................................... (299) 1,156 (1,448)
Unbilled tooling charges...................................... 35,181 -- --
Other assets.................................................. 5,049 2,664 3,907
Accounts payable.............................................. (5,247) (2,272) 2,960
Accrued compensation.......................................... 514 701 1,137
Postretirement benefits other than pensions................... -- -- 1,185
Other liabilities............................................. (6,934) 760 (420)
--------- --------- ---------
Net Cash Provided by Operating Activities........................... 40,447 23,961 37,859
Investing Activities
Purchases of property, plant and equipment........................ (11,371) (12,300) (12,641)
Proceeds from sale of property, plant and equipment............... 2,572 1,406 1,470
Proceeds from sales of investments................................ 1,570 -- --
Amount due from (to) Parent....................................... (389) (16,714) 1,432
--------- --------- ---------
Net Cash Used in Investing Activities............................... (7,618) (27,608) (9,739)
Financing Activities
Proceeds from borrowings 1,500 28,500 --
Principal payments on borrowings.................................. (5,066) (24,368) (8,610)
Distributions in excess of net equity............................. (13,139) -- (16,584)
Return of limited partner's capital............................... (821) (1,035) (895)
--------- --------- ---------
Net Cash Provided by (Used In) Financing Activities................. (17,526) 3,097 (26,089)
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents.................... 15,303 (550) 2,031
Cash and cash equivalents at beginning of year...................... 14,796 30,099 29,549
--------- --------- ---------
Cash and Cash Equivalents at End of Year............................ $ 30,099 $ 29,549 $ 31,580
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993
NOTE A -- ORGANIZATION
Checker Motors Corporation (the "Corporation") is a wholly-owned subsidiary
of International Controls Corp. ("ICC"). The Corporation is the general partner
of Checker Motors Co., L.P. (the "Partnership"), a Delaware limited partnership,
of which Executive Life Insurance Company of California ("ELIC") and Checker
Holding Corp. III ("Holding III"), a wholly-owned subsidiary of the Corporation,
are the limited partners (see Notes F and H). The Corporation's other
subsidiary, South Charleston Stamping & Manufacturing Company ("SCSM") is a
90%-owned subsidiary.
In accordance with the proposed offering by ICC of new Senior Secured Notes,
Senior Subordinated Notes and Warrants, and a New Credit Facility consisting of
a revolving credit facility, the Corporation and its subsidiaries (which, for
this purpose, includes a partnership controlled by the Corporation), except for
American Country Insurance Company, a wholly-owned regulated property and
casualty insurance company of the Partnership, and its subsidiary ("Insurance
Subsidiary"), will become co-issuers for the Senior Secured Notes of the
proposed refinancing. Accordingly, the accompanying financial statements include
the Corporation and its subsidiaries that will become co-issuers for the Senior
Secured Notes, collectively the "Issuer Group," as defined under the terms of
the proposed indenture.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Corporation, SCSM, Holding III, the Partnership and the
Partnership's wholly-owned subsidiaries, except the Insurance Subsidiary, after
elimination of all significant intercompany accounts and transactions.
CASH EQUIVALENTS: The Corporation considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
The cash equivalents carrying amount reported in the balance sheet approximates
its fair value.
INVENTORIES: Certain inventories are valued at the lower of Last-In,
First-Out (LIFO) cost or market, with the balance at the lower of First-In,
First-Out (FIFO) cost or market.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost. Plant and equipment, other than vehicles, are depreciated principally by
the straight-line method. Vehicles held for lease are depreciated by the
sum-of-the-years digits method. Depreciation is based upon the estimated useful
lives of the various classes of plant and equipment.
RENTAL INCOME: Rental income from vehicle leases is recognized as earned.
Vehicles are generally leased on a daily or weekly basis to unaffiliated
operators.
RETIREMENT PLANS: Subsidiaries sponsor several defined benefit and defined
contribution retirement plans and participate in a multiemployer pension plan,
which plans cover all employees. Benefits under the plans are generally related
to an employee's length of service, wages and benefits and, where applicable,
contributions. The costs of these plans are determined on the basis of actuarial
cost methods or stipulated contribution rates for hours worked or employee
contributions. The funding policy is generally to contribute amounts required to
maintain funding standards in accordance with the Employee Retirement Income
Security Act.
MINORITY INTEREST: Minority interest represents ELIC's allocable share of
SCSM's and the Partnership's net assets (see Note F).
INCOME TAXES: Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes (see Note G).
F-38
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE C -- INVENTORIES
Inventories are classified as follows at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1992 1993
--------- ---------
<S> <C> <C>
Finished products.............................................................. $ 2,459 $ 2,110
Work-in-process................................................................ 1,647 2,104
Raw material................................................................... 5,046 6,386
--------- ---------
$ 9,152 $ 10,600
--------- ---------
--------- ---------
</TABLE>
Inventories aggregating $3.3 million and $4.1 million at December 31, 1992
and 1993, respectively, are stated at cost determined by the LIFO method. If the
FIFO method had been used for all inventories, the amounts reported would have
been $0.9 million higher at December 31, 1992 and 1993.
NOTE D -- BORROWINGS
Long-term debt consists of the following obligations at December 31 (dollars
in thousands):
<TABLE>
<CAPTION>
1992 1993
--------- ---------
<S> <C> <C>
Partnership term loan payable to bank......................................... $ 28,500 $ 22,500
Equipment term loan payable to bank........................................... 7,300 5,500
Term loan payable to bank..................................................... -- 2,500
Economic development term loan................................................ 11,389 10,909
Equipment term loan payable to
Economic Development Authority.............................................. 1,566 1,355
SCSM promissory note.......................................................... 3,043 2,924
Partnership promissory note................................................... 2,500 2,500
--------- ---------
54,298 48,188
Less current portion.......................................................... 8,568 9,412
--------- ---------
$ 45,730 $ 38,776
--------- ---------
--------- ---------
</TABLE>
During September 1992, the Partnership entered into a Loan and Guaranty
Agreement with a bank pursuant to which the bank provided a $30 million term
loan to the Partnership. The Partnership term loan requires twenty quarterly
principal payments of $1.5 million, plus interest at the bank's prime rate (6%
at December 31, 1993) plus 1.25% which payments commenced December 31, 1992. The
term loan is secured by substantially all of the Partnership's assets.
The equipment term loan payable to a bank requires quarterly payments of
$0.5 million plus interest at the bank's prime rate (6% at December 31, 1993)
plus 1.25%. The obligation is secured by certain machinery and equipment with a
net carrying amount of $6.5 million at December 31, 1993.
During November 1993, SCSM entered into a secured term loan agreement with a
bank pursuant to which the bank provided a $2.5 million term loan. The proceeds
of the term loan were used to finance the acquisition of and is fully secured by
certain equipment. The term loan requires quarterly payments of $0.13 million
plus interest at the bank's prime rate (6% at December 31, 1993) plus 1.25%
which payments commence in January 1994.
In connection with the Partnership term loan, equipment term loan payable to
a bank, and the term loan payable to a bank, the Corporation is required to
comply with certain financial covenants and the agreements limit additional
loans to the Corporation.
F-39
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE D -- BORROWINGS (Continued)
The economic development term loan is payable by SCSM to the West Virginia
Economic Development Authority and requires monthly payments of $0.1 million
including interest at 5.0% with the unpaid balance due in 2008. The interest
rate will be adjusted in April 1998 and 2003 so as to remain equal to 75% of the
base rate, as defined, plus 1/2%. The loan is secured by certain machinery and
equipment with a net carrying amount of $25.1 million at December 31, 1993.
The equipment term loan payable to the Economic Development Authority by
SCSM is secured by machinery and equipment and requires monthly payments of
$0.03 million, including interest at 6.875%. The obligation is secured by
certain machinery and equipment with a net carrying amount of $1.4 million at
December 31, 1993.
The SCSM promissory note is payable to Volkswagen of America and is secured
by machinery and equipment and requires monthly payments of $0.03 million,
including interest at 5.0%. The interest rate will be adjusted in April 1998 and
2003 so as to remain equal to 75% of the base rate, as defined, plus 1/2%.
The Partnership promissory note is payable to the Insurance Subsidiary and
is secured by a mortgage on real estate. Interest is payable quarterly at an
annual interest rate of 8 1/2% on the outstanding balance. The entire principal
balance is due in October 1999.
Required principal payments on borrowings for the four years following 1994
are $9.5 million in 1995, $9.1 million in 1996, $6.0 million in 1997 and $1.6
million in 1998.
SCSM maintains a $7.5 million line of credit with a bank ($5 million
utilized at December 31, 1993) which bears interest at the bank's base lending
rate (6% at December 31, 1993) plus 1% and is secured by SCSM's accounts
receivable and inventory.
The Partnership has a $5 million line of credit with a bank. Borrowings
under the line ($0 at December 31, 1993) bears interest at the bank's prime rate
(6% at December 31, 1993) plus 1%.
Interest paid totaled $7.4 million in 1991, $7.8 million in 1992 and $6.5
million in 1993.
The carrying amounts of the Corporation's borrowings approximates its fair
value.
F-40
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE E -- RETIREMENT PLANS
The following table sets forth the funded status of the defined benefit
plans and amounts recognized in the consolidated balance sheets at December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1992 1993
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................................... $ 22,647 $ 22,960
---------- ----------
---------- ----------
Accumulated benefit obligation.............................................. $ 23,446 $ 23,770
---------- ----------
---------- ----------
Projected benefit obligation................................................ $ (24,246) $ (24,693)
Plan assets at fair value (primarily guaranteed investment contracts with
insurance companies)....................................................... 17,827 18,300
---------- ----------
Projected excess plan liabilities........................................... (6,419) (6,393)
Unrecognized prior service cost............................................. 1,078 1,210
Unrecognized net gain....................................................... (1,138) (1,101)
Unrecognized net obligation at transition................................... 2,048 1,819
Minimum liability........................................................... (1,722) (1,450)
---------- ----------
Pension liability recognized in the balance sheets.......................... (6,153) (5,915)
Less noncurrent portion..................................................... 4,432 4,160
---------- ----------
Current Pension Liability................................................... $ (1,721) $ (1,755)
---------- ----------
---------- ----------
</TABLE>
Pension expense for defined benefit plans includes the following components
(dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Service costs--benefits earned (normal cost)................. $ 544 $ 484 $ 497
Interest cost on projected benefit obligation................ 1,810 1,874 1,910
Actual return on plan assets................................. (1,452) (1,551) (1,592)
Net amortization and deferral................................ 364 291 311
Curtailment loss............................................. 456 -- --
--------- --------- ---------
Net Periodic Pension Cost.................................... $ 1,722 $ 1,098 $ 1,126
--------- --------- ---------
--------- --------- ---------
</TABLE>
As a result of the effect of the continued economic recession on the
automotive industry, the number of active pension plan participants in one of
the Partnership's defined benefit plans was substantially reduced during 1991
resulting in a curtailment loss of $0.5 million.
Assumptions used in accounting for defined benefit plans were as follows for
all three years:
<TABLE>
<S> <C>
Discount rate................................................... 8 1/4%
Rate of increase in compensation levels, if applicable.......... 4%
9% -
Expected long-term rate of return on assets..................... 9 1/2%
</TABLE>
Unrecognized prior service costs and unrecognized net gains and losses are
being amortized straight-line over 15 years.
Relative positions and undertakings in multiemployer pension plans are not
presently determinable.
Expense related to defined contribution plans totaled $0.4 million in 1991,
$0.5 million in 1992, and $0.7 million in 1993.
F-41
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE E -- RETIREMENT PLANS (Continued)
The Partnership provides postretirement health care and life insurance
benefits to eligible retired employees. The Partnership's policy is to fund the
cost of medical benefits as paid. Prior to 1993, the Partnership recognized
expense in the year the benefits were provided. The amount charged to expense
for these benefits was approximately $0.4 million in 1991 and $0.5 million in
1992. In 1993, the Partnership adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This statement requires the
accrual of the cost of providing postretirement benefits, including medical and
life insurance coverage, during the active service period of the employee. A
charge of $11.2 million (net of taxes of $5.8 million) was recorded during 1993
to reflect the cumulative effect of this change in accounting principle.
The following table sets forth the plans' funded status reconciled with
amounts recognized in the Corporation's consolidated balance sheet at December
31, 1993 (in thousands):
<TABLE>
<S> <C>
Accumulated postretirement obligation: Retirees........................ $ (8,297)
Fully eligible active plan participants (2,160)
Other active plan participants......................................... (4,110)
---------
(14,567)
Unrecognized net gain.................................................. (162)
Unrecognized prior service cost benefit................................ (3,432)
---------
Accrued postretirement benefit liability recorded in balance sheet..... (18,161)
Less noncurrent portion................................................ 17,403
---------
Current portion of postretirement benefit liability.................... $ (758)
---------
---------
</TABLE>
Net periodic postretirement benefit cost for the year ended December 31,
1993, includes the following components (in thousands):
<TABLE>
<S> <C>
Service cost............................................................. $ 357
Interest cost............................................................ 1,337
---------
$1,694
---------
---------
</TABLE>
The health care cost trend rate ranges from 13.6% down to 5.5% over the next
14 years and remains level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1993, by $3.0 million. The weighted-average discount rate used in
determining the accumulated postretirement benefit obligation was 7.5% at
December 31, 1993.
The effect of adopting SFAS No. 106 decreased 1993 pre-tax income by $1.1
million as compared to 1992.
NOTE F -- MINORITY EQUITY
The Corporation, as general partner of the Partnership, has an income
allocation agreement with the limited partners. Net income has generally been
allocated to the partners as follows:
During the initial period (commencing with the date of formation of the
Partnership, March 5, 1986, and terminating on the earlier to occur of December
31, 1990, or the date at which ELIC's excess capital account, as defined, shall
equal at least $40 million) net income was generally allocated 90% to ELIC and
10% to the General Partner.
F-42
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE F -- MINORITY EQUITY (Continued)
During 1988, the $40 million threshold was achieved and net income was,
thereafter, allocated 90% to the General Partner and 10% to ELIC as provided by
the Partnership Agreement.
On April 11, 1991, ELIC was placed in conservatorship. In accordance with
the provisions of the Partnership Agreement, the Partnership continues, but
ELIC's interest in the Partnership and rights under the Partnership Agreement
are limited to the right to receive the balance of its capital account as
calculated and on the terms set forth in the Partnership Agreement. For
financial reporting purposes, Partnership earnings had previously been allocated
to ELIC's capital account based on book income and the minority equity was
calculated accordingly (the "GAAP Capital Account Amount"). The Partnership
Agreement, however, provides for allocations of Partnership earnings to ELIC's
capital account on a basis that differs from book income and calculation of the
minority equity amount thereunder is to be made accordingly (the "Partnership
Agreement Capital Account Amount"). Because the provisions of the Partnership
Agreement require that ELIC's capital account be fixed and calculated as of
April 11, 1991, the minority equity includes a $2.3 million credit representing
the adjustment from the GAAP Capital Account Amount as of April 11, 1991, to the
Partnership Agreement Capital Account Amount as of the same date (the "Final
Capital Account"). The Final Capital Account is being paid out in level
quarterly installments, including interest at 7% per annum, through the year
2013 (see Note H).
On June 24, 1991, Holding III was formed and in exchange for issuing its
stock to and becoming a wholly-owned subsidiary of the Corporation, Holding III
was allocated a 1% Limited Partner interest in the Partnership. The amended
Partnership Agreement now provides that net income is allocated 99% to the
General Partner and 1% to the Limited Partner, Holding III.
The Partnership Agreement requires that a distribution for federal, state
and local income taxes of the General and Limited Partners be accrued based on
each partner's distributive share of Partnership earnings.
Through April 10, 1991, distributions to ELIC were also accrued to provide
for the payment, as funds were available, of the principal component of ELIC's
excess capital account in quarterly installments of constant blended payments
(with interest computed at 7% per annum) over 25 years. Effective April 11,
1991, distributions to ELIC were accrued to provide for the payment, as funds
were available, of the principal component of ELIC's Final Capital Account in
quarterly installments of constant blended payments (with interest computed at
7% per annum) through the year 2013. Cash of $20.4 million and $19.9 million was
distributed during 1992 and 1993, respectively, to the General Partner.
Distributions of $6.0 million were accrued to the General Partner during 1990.
Cash of $0.9 million during 1991, $1.2 million during 1992, and $1.1 million
during 1993 was distributed to the Limited Partners. Additional distributions of
$1.3 million are accrued to the Limited Partners at December 31, 1993.
NOTE G -- INCOME TAXES
Effective January 1, 1993, the Corporation adopted the provisions of
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes" ("FAS No. 109"). As permitted under the new rules, prior year financial
statements have not been restated. The Corporation recorded a charge of $6.2
million during 1993 to reflect the cumulative effect of the change in accounting
principle.
F-43
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE G -- INCOME TAXES (Continued)
Under the provisions of FAS No. 109, deferred income taxes reflect the net
tax effect of temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Corporation's deferred tax liabilities
and assets as of December 31, 1993, are as follows (dollars in thousands):
<TABLE>
<S> <C>
Deferred tax liabilities:
Property, plant and equipment............................................. $ 12,035
Other..................................................................... 781
---------
12,816
Deferred tax assets:
Other postretirement benefits............................................. 6,172
Pensions.................................................................. 1,620
Reserves.................................................................. 2,567
---------
10,359
Valuation allowance....................................................... 1,000
9,359
---------
Net deferred tax liabilities.............................................. $ 3,457
---------
---------
</TABLE>
The Corporation's taxable income, except for taxable income of the Insurance
Subsidiary, is included in the consolidated federal income tax return of ICC.
For financial reporting purposes, federal income tax expense is provided by the
Corporation as if it was filing a separate income tax return.
Amounts paid to ICC for the Corporation's income tax expense on a separate
return basis amounted to $0.4 million in 1991, $2.8 million in 1992 and $4.6
million in 1993.
The components of the deferred tax (benefit) expense are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Year Ended December
31,
--------------------
1991 1992
--------- ---------
<S> <C> <C>
Tax depreciation (less than) in excess of book depreciation....................... $ 1,981 $ 1,134
Inventory reserves................................................................ -- (232)
Partnership allocation............................................................ (719) (1,034)
Alternative minimum tax........................................................... (2,393) 772
Other............................................................................. 123 (5)
--------- ---------
Deferred tax (benefit) expense.................................................... $ (1,008) $ 635
--------- ---------
--------- ---------
</TABLE>
Income tax (benefit) expense differs from the amount computed by applying
the statutory federal income tax rate to income (loss) before income taxes and
extraordinary items. The reasons for these differences are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
Liability
Deferred Method Method
-------------------- ---------
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Computed expected tax (benefit) expense............................................ $ (478) $ 3,748 $ 7,074
Increase (decrease) in taxes resulting from: Partnership differences............... (51) 6 (11)
Nontaxable dividend income......................................................... -- (237) (735)
Other.............................................................................. (32) (73) 544
--------- --------- ---------
Actual tax (benefit) expense....................................................... $ (561) $ 3,444 $ 6,872
</TABLE>
F-44
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE H -- COMMITMENTS AND CONTINGENCIES
On March 4, 1992, the Corporation received notice that the Insurance
Commissioner of the State of California, as Conservator and Rehabilitator of
ELIC, a limited partner of the Partnership, had filed an Amendment to the
Application for Order of Conservation filed in Superior Court of the State of
California for the County of Los Angeles. The amendment seeks to add to the
Order, dated April 11, 1991, the Corporation, the Partnership and Checker
Holding Corp. III, a limited partner of the Partnership. The amendment alleges
that the action by the Corporation invoking provisions of the Partnership
Agreement that alter ELIC's rights in the Partnership upon the occurrence of
certain events is improper and constitutes an impermissible forfeiture of ELIC's
interest in the Partnership and a breach of fiduciary duty to ELIC. The
amendment seeks (a) a declaration of the rights of the parties in the
Partnership and (b) damages in an unspecified amount. The Partnership believes
that it has meritorious defenses to the claims of ELIC. The Partnership has been
in litigation on these issues for almost three years with each party seeking,
among other things, a declaration of its rights under the Partnership Agreement.
The Company has offered to redeem ELIC's minority interest in the Partnership
and SCSM for $32 million. If ELIC's rights under the Partnership Agreement had
not been altered, net income for 1991 and 1992 would have been reported at $3.3
million and $0.7 million less, respectively, and net loss for 1993 would have
been reported at $0.7 million less than the amounts reported (see Note F).
The Corporation and its subsidiaries are also involved in various other
legal actions in the normal course of business. None of the various legal
actions are expected to have a material effect on the consolidated financial
statements.
The Corporation and its subsidiaries lease real estate and equipment.
Certain leases are renewable and provide for monthly rentals, real estate taxes
and other operating expenses. Rental expense under operating leases was
approximately $1.2 million in 1991, $1.1 million in 1992, and $1.3 million in
1993. Minimum rental obligations for all noncancellable operating leases at
December 31, 1993 are as follows: $1.4 million in 1994, $1.4 million in 1995,
$1.4 million in 1996, $1.3 million in 1997, $1.3 million in 1998 and $13.3
million thereafter.
NOTE I -- INDUSTRY SEGMENT INFORMATION
The Corporation and its obligor subsidiaries operate in two principal
segments:
AUTOMOTIVE PRODUCTS SEGMENT -- Manufacturing metal stampings and
assemblies and coordination of related tooling production for motor vehicle
manufacturers.
VEHICULAR OPERATIONS SEGMENT -- Leasing taxicabs.
Automotive product net sales to a major customer amounted to approximately
$80.3 million in 1991, $109.1 million in 1992, and $121.5 million in 1993
(including accounts receivable and unbilled tooling charges of $5.7 million,
$8.9 million and $8.9 million at December 31, 1991, 1992, and 1993,
respectively). ICC charges the Corporation a fee for general and administrative
costs. Amounts charged totaled $0.7 million in 1991, 1992 and 1993.
F-45
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE I -- INDUSTRY SEGMENT INFORMATION -- (Continued)
<TABLE>
<CAPTION>
Automotive Vehicular
Products Operations Eliminations Consolidated
----------- ----------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
1991
Revenues:
Outside customers................................... $ 84,401 $ 43,527 $ -- $ 127,928
Intersegment sales.................................. 5 3,635 (3,640) --
----------- ----------- ------------- -------------
$ 84,406 $ 47,162 $ (3,640) $ 127,928
----------- ----------- ------------- -------------
----------- ----------- ------------- -------------
Operating profit (loss)............................... $ (4,237) $ 7,139 $ 2,902
Corporate expenses.................................... (744)
Interest income:
Corporate........................................... 1,605
Interest expense...................................... (7,346)
Other income, net..................................... 2,177
Minority equity....................................... 1,931
-------------
Income before income taxes............................ $ 525
-------------
-------------
Identifiable assets................................... $ 67,258 $ 28,357 $ 95,615
Partnership assets.................................... 32,384
Corporate assets...................................... (132)
-------------
Total assets at December 31, 1991..................... $ 127,867
-------------
-------------
Depreciation.......................................... $ 4,237 $ 10,369 $ 14,606
Capital expenditures.................................. 1,190 10,181 11,371
</TABLE>
F-46
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE I -- INDUSTRY SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
Automotive Vehicular
Products Operations Eliminations Consolidated
----------- ----------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
1992
Revenues:
Outside customers................................... $ 112,631 $ 40,580 $ -- $ 153,211
Intersegment sales.................................. 1 4,043 (4,044) --
----------- ----------- ------------- -------------
$ 112,632 $ 44,623 $ (4,044) $ 153,211
----------- ----------- ------------- -------------
----------- ----------- ------------- -------------
Operating profit...................................... $ 11,623 $ 5,727 $ 17,350
Corporate expenses.................................... (744)
Interest income:
Corporate........................................... 748
Interest expense...................................... (6,736)
Other income, net..................................... 194
-------------
Income before income taxes............................ $ 10,812
-------------
-------------
Identifiable assets................................... $ 66,561 $ 25,516 $ 92,077
Partnership assets.................................... 31,458
Corporate assets...................................... (116)
-------------
Total assets at December 31, 1992..................... $ 123,419
-------------
-------------
Depreciation.......................................... $ 4,148 $ 10,099 $ 14,247
Capital expenditures.................................. 1,889 10,411 12,300
</TABLE>
F-47
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE I -- INDUSTRY SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
Automotive Vehicular
Products Operations Eliminations Consolidated
----------- ----------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
1993
Revenues:
Outside customers................................... $ 127,925 $ 42,103 $ -- $ 170,028
Intersegment sales.................................. -- 4,346 (4,346) --
----------- ----------- ------------- -------------
$ 127,925 $ 46,449 $ (4,346) $ 170,028
----------- ----------- ------------- -------------
----------- ----------- ------------- -------------
Operating profit (loss)............................... $ 15,307 $ 6,250 $ 21,557
Corporate expenses.................................... (744)
Interest income:
Corporate........................................... 902
Interest expense...................................... (6,587)
Other income, net..................................... 5,083
-------------
Income before income taxes and accounting changes..... $ 20,211
-------------
-------------
Identifiable assets................................... $ 67,937 $ 20,493 $ 88,430
Partnership assets.................................... 33,644
Corporate assets...................................... (253)
-------------
Total assets at December 31, 1993..................... $ 121,821
-------------
-------------
Depreciation.......................................... $ 4,990 $ 9,531 $ 14,521
Capital expenditures.................................. 4,728 7,913 12,641
</TABLE>
Intersegment sales are accounted for at prices comparable to normal
unaffiliated customer sales. Corporate and Partnership assets consist of
short-term investments, savings deposits and certain other assets.
F-48
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE J -- RELATED PARTY TRANSACTIONS
The Corporation's various operations purchase workers compensation, general
liability and property and casualty insurance from the Insurance Subsidiary.
Insurance expense for policies purchased by the Corporation totaled $12.7
million in 1991, $13.2 million in 1992 and $13.4 million in 1993. The Insurance
Subsidiary also declared dividends of $1.0 million and $3.0 million in 1992 and
1993, payable to Checker Motors Corporation. These dividends are included in
other income. No dividend was declared by the Insurance Subsidiary in 1991.
An officer of a subsidiary is the owner of a taxicab association established
in 1988 in the City of Chicago to which both affiliated and unaffiliated taxi
drivers may be members for a fee, and through which the members may obtain
automobile liability insurance from the Insurance Subsidiary and other
maintenance and rental services. The association purchases services from various
of the Partnership's operations and reimburses the operations for certain
management, general and administrative costs. Amounts received from the
association totaled $2.6 million in 1991, $3.3 million in 1992 and $4.4 million
in 1993. At December 31, 1993, the Corporation and the Partnership have
guaranteed certain of the association's obligations totaling $0.7 million.
Each of the Corporation's directors provides consulting services to the
Corporation or its subsidiaries. Annual expenses incurred relating to these
consulting services totaled $0.8 million.
The notes receivable of $0.6 million are for common stock purchased in March
1986 by the former stockholders of the Corporation. The notes are noninterest
bearing and have no fixed repayment schedule.
Subsequent to year end, the Corporation distributed $15.0 million to ICC and
the receivable from parent was discharged. Accordingly, the receivable from
parent has been classified as a reduction in stockholder's equity in the balance
sheet.
F-49
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE K -- SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1992 Quarter Ended 1993 Quarter Ended
----------------------------------------------------- ----------------------
March 31 June 30 September 30 December 31 March 31 June 30
----------- --------- -------------- ------------- ----------- ---------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenues....................................... $ 38,775 $ 40,050 $ 34,609 $ 39,777 $ 44,947 $ 44,583
Gross Profit................................... 7,860 8,628 4,437 6,582 8,603 10,148
Income (loss) before accounting changes........ 3,861 3,096 (750) 1,161 5,583 3,117
Accounting changes............................. -- -- -- -- (17,437) --
Net income (loss).............................. 3,861 3,096 (750) 1,161 (11,854) 3,117
Income (loss) per share:
Income (loss) before
accounting changes.......................... $ 3,861 $ 3,096 $ (750) $ 1,161 $ 5,583 $ 3,117
Accounting changes........................... -- -- -- -- (17,437) --
Net income (loss)............................ 3,861 3,096 (750) 1,161 (11,854) 3,117
<CAPTION>
September 30 December 31
-------------- -------------
<S> <C> <C>
Revenues....................................... $ 37,258 $ 43,240
Gross Profit................................... 6,611 8,318
Income (loss) before accounting changes........ 1,256 3,383
Accounting changes............................. -- --
Net income (loss).............................. 1,256 3,383
Income (loss) per share:
Income (loss) before
accounting changes.......................... $ 1,256 $ 3,383
Accounting changes........................... -- --
Net income (loss)............................ 1,256 3,383
</TABLE>
F-50
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE L -- SUMMARY OF ISSUER AND NON-ISSUER GROUPS -- (Continued)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1992 December 31, 1993
------------------------------------------------------ --------------------------
Consolidated Non-Issuer Issuer Consolidated Non-Issuer
Checker Group Eliminations Group Checker Group
------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Total current assets....................... $ 68,500 $ 16,928 $ (10) $ 51,563 $ 70,582 $ 15,487
Amount due from parent..................... 240 -- -- 240 363 --
Property, plant and equipment, net......... 66,641 1,615 -- 65,025 62,866 1,221
Insurance Subsidiary investments........... 84,616 84,616 -- -- 90,838 90,838
Deferred income taxes...................... 2,558 -- (2,558) -- -- --
Other assets............................... 26,068 21,977 2,500 6,591 18,100 16,061
------------- ----------- ------------- ----------- ------------- -----------
Total Assets................................. $ 248,623 $ 125,136 $ (68) $ 123,419 $ 242,749 $ 123,607
------------- ----------- ------------- ----------- ------------- -----------
------------- ----------- ------------- ----------- ------------- -----------
LIABILITIES AND STOCKHOLDER'S DEFICIT:
Total current liabilities.................. $ 39,702 $ 3,849 $ (10) $ 35,843 $ 46,744 $ 4,660
Long-term debt, excluding current
portion................................... 43,230 -- 2,500 45,730 36,276 --
Insurance Subsidiary's unpaid losses and
loss adjustment expenses.................. 75,780 75,780 -- -- 71,179 71,179
------------- ----------- ------------- ----------- ------------- -----------
Other liabilities.......................... 66,773 11,688 (2,558) 52,527 83,639 13,049
------------- ----------- ------------- ----------- ------------- -----------
Total liabilities.......................... 225,485 91,317 (68) 134,100 237,838 88,888
------------- ----------- ------------- ----------- ------------- -----------
Total stockholder's deficit................ 23,138 33,819 -- (10,681) 4,911 34,719
Total Liabilities and Stockholder's
Deficit..................................... $ 248,623 $ 125,136 $ (68) $ 123,419 $ 242,749 $ 123,607
------------- ----------- ------------- ----------- ------------- -----------
------------- ----------- ------------- ----------- ------------- -----------
<CAPTION>
Issuer
Eliminations Group
------------- -----------
<S> <C> <C>
ASSETS
Total current assets....................... $ 179 $ 55,274
Amount due from parent..................... -- 363
Property, plant and equipment, net......... -- 61,645
Insurance Subsidiary investments........... -- --
Deferred income taxes...................... -- --
Other assets............................... 2,500 4,539
------------- -----------
Total Assets................................. $ 2,679 $ 121,821
------------- -----------
------------- -----------
LIABILITIES AND STOCKHOLDER'S DEFICIT:
Total current liabilities.................. $ 179 $ 42,263
Long-term debt, excluding current
portion................................... 2,500 38,776
Insurance Subsidiary's unpaid losses and
loss adjustment expenses.................. -- --
------------- -----------
Other liabilities.......................... -- 70,590
------------- -----------
Total liabilities.......................... 2,679 151,629
------------- -----------
Total stockholder's deficit................ -- (29,808)
Total Liabilities and Stockholder's
Deficit..................................... $ 2,679 $ 121,821
------------- -----------
------------- -----------
</TABLE>
F-51
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE L -- SUMMARY OF ISSUER AND NON-ISSUER GROUPS
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
December 31, 1991
------------------------------------------------------
Consolidated Non-Issuer Issuer
Checker Group Eliminations Group
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Revenues................................................. $ 155,070 $ 39,877 $ 12,735 $ 127,928
Cost of revenues......................................... (134,206) (33,528) (12,735) (113,413)
Gross Profit............................................. 20,864 6,349 -- 14,515
------------- ----------- ------------- -----------
SG&A expense............................................. (21,842) (9,485) -- (12,357)
Interest expense......................................... (7,346) -- -- (7,346)
Interest income.......................................... 8,522 6,917 -- 1,605
Other income (expense) net............................... 1,723 (454) -- 2,177
Minority equity in Partnership earnings.................. 1,931 -- -- 1,931
Income before income taxes............................... 3,852 3,327 -- 525
Income tax expense....................................... (236) (797) -- 561
Net Income............................................... $ 3,616 $ 2,530 $ -- $ 1,086
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
<CAPTION>
December 31, 1992
------------------------------------------------------
Consolidated Non-Issuer Issuer
Checker Group Eliminations Group
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Revenues................................................. $ 180,397 $ 40,346 $ 13,160 $ 153,211
Cost of revenues......................................... (144,909) (32,365) (13,160) (125,704)
Gross Profit............................................. 35,488 7,981 -- 27,507
SG&A expense............................................. (20,704) (9,803) -- (10,901)
Interest expense......................................... (6,736) -- -- (6,736)
Interest income.......................................... 7,281 6,533 -- 748
Other income (expense) net............................... 928 1,734 1,000 194
------------- ----------- ------------- -----------
Income before income taxes............................... 16,257 6,445 1,000 10,812
Income tax expense....................................... (5,429) (1,985) -- (3,444)
------------- ----------- ------------- -----------
Net Income............................................... $ 10,828 $ 4,460 $ 1,000 $ 7,368
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
</TABLE>
F-52
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE L -- SUMMARY OF ISSUER AND NON-ISSUER GROUPS (Continued)
CONSOLIDATED STATEMENTS OF OPERATIONS -- (Continued)
<TABLE>
<CAPTION>
December 31, 1993
------------------------------------------------------
Consolidated Non-Issuer Issuer
Checker Group Eliminations Group
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Revenues................................................. $ 197,464 $ 40,836 $ 13,400 $ 170,028
Cost of revenues......................................... (155,766) (32,818) (13,400) (136,348)
------------- ----------- ------------- -----------
Gross Profit............................................. 41,698 8,018 -- 33,680
SG&A expense............................................. (23,097) (10,230) -- (12,867)
Interest expense......................................... (6,587) -- -- (6,587)
Interest income.......................................... 6,779 5,877 -- 902
Other income (expense) net............................... 3,980 1,897 3,000 5,083
------------- ----------- ------------- -----------
Income before income taxes and accounting changes........ 22,773 5,562 3,000 20,211
Income tax expense....................................... (8,369) (1,497) -- (6,872)
------------- ----------- ------------- -----------
Income before accounting changes......................... 14,404 4,065 3,000 13,339
Accounting changes, net of income taxes.................. (17,643) (206) -- (17,437)
------------- ----------- ------------- -----------
Net Income (Loss)........................................ $ (3,239) $ 3,859 $ 3,000 $ (4,098)
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31, 1991
------------------------------------------------------
Consolidated Non-Issuer Issuer
Checker Group Eliminations Group
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Cash flow from operating activities:
Net income............................................. $ 3,616 $ 2,530 $ -- $ 1,086
Adjustments to reconcile net income to net cash
provided by operating activities...................... 13,397 (818) -- 14,215
Changes in operating assets and liabilities............ 29,044 6,398 2,500 25,146
Net cash flow provided by operating activities........... 46,057 8,110 2,500 40,447
Net cash flow used in investing activities............... (11,315) (3,697) -- (7,618)
Net cash flow used in financing activities............... (15,026) -- (2,500) (17,526)
------------- ----------- ------------- -----------
Increase in cash and cash equivalents.................... 19,716 4,413 -- 15,303
Beginning cash and cash equivalents...................... 15,777 981 -- 14,796
------------- ----------- ------------- -----------
Ending Cash and Cash Equivalents......................... $ 35,493 $ 5,394 $ -- $ 30,099
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
</TABLE>
F-53
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE L -- SUMMARY OF ISSUER AND NON-ISSUER GROUPS (Continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (Continued)
<TABLE>
<CAPTION>
December 31, 1992
------------------------------------------------------
Consolidated Non-Issuer Issuer
Checker Group Eliminations Group
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Cash flow from operating activities:
Net income............................................. $ 10,828 $ 4,460 $ 1,000 $ 7,368
Adjustments to reconcile net income to net cash
provided by operating activities...................... 14,580 (1,208) -- 15,788
Changes in operating assets and liabilities............ 3,950 5,645 2,500 805
------------- ----------- ------------- -----------
Net cash flow provided by operating activities........... 29,358 8,897 3,500 23,961
Net cash flow used in investing activities............... (33,714) (6,106) -- (27,608)
Net cash flow provided by (used in) financing
activities.............................................. 5,597 (1,000) (3,500) 3,097
------------- ----------- ------------- -----------
Increase (decrease) in cash and cash equivalents......... 1,241 1,791 -- (550)
Beginning cash and cash equivalents...................... 35,493 5,394 -- 30,099
------------- ----------- ------------- -----------
Ending Cash and Cash Equivalents......................... $ 36,734 $ 7,185 $ -- $ 29,549
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
<CAPTION>
December 31, 1993
------------------------------------------------------
Consolidated Non-Issuer Issuer
Checker Group Eliminations Group
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)...................................... $ (3,239) $ 3,859 $ 3,000 $ (4,098)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities...................... 34,772 (244) -- 35,016
Changes in operating assets and liabilities.............. 8,576 4,139 2,504 6,941
------------- ----------- ------------- -----------
Net cash flow provided by operating activities........... 40,109 7,754 5,504 37,859
Net cash flow used in investing activities............... (14,937) (5,202) (4) (9,739)
Net cash flow used in financing activities............... (23,589) (3,000) (5,500) (26,089)
------------- ----------- ------------- -----------
Increase (decrease) in cash and cash equivalents......... 1,583 (448) -- 2,031
Beginning cash and cash equivalents...................... 36,734 7,185 -- 29,549
------------- ----------- ------------- -----------
Ending Cash and Cash Equivalents......................... $ 38,317 $ 6,737 $ -- $ 31,580
</TABLE>
F-54
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1993 1994
-------------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................................ $ 31,580 $ 424,339
Accounts receivable.................................................................. 10,334 15,082
Inventories.......................................................................... 10,600 10,464
Other current assets................................................................. 2,760 5,689
-------------- -----------
Total current assets............................................................. 55,274 55,574
Property, plant and equipment, net................................................... 61,645 62,311
Amount due from Parent............................................................... 363 6,766
Other assets......................................................................... 4,539 4,193
-------------- -----------
Total Assets......................................................................... $ 121,821 $ 128,844
-------------- -----------
-------------- -----------
LIABILITIES AND STOCKHOLDER'S DEFICIT:
Notes payable........................................................................ $ 5,000 $ 5,000
Accounts payable..................................................................... 12,823 15,777
Income taxes payable................................................................. 744 1,687
Accrued compensation................................................................. 6,021 5,700
Accrued interest..................................................................... 191 178
Other accrued liabilities............................................................ 8,072 8,014
Current portion of long-term debt.................................................... 9,412 9,424
-------------- -----------
Total current liabilities........................................................ 42,263 45,780
Long-term debt, excluding current portion............................................ 38,776 36,413
Deferred income taxes................................................................ 3,457 3,261
Postretirement benefits other than pensions.......................................... 17,403 17,465
Other noncurrent liabilities......................................................... 9,598 9,144
Minority interest.................................................................... 40,132 39,898
-------------- -----------
Total liabilities................................................................ 151,629 151,961
Stockholder's deficit:
Common stock, par value $1.00:
Authorized 1,000 shares
Outstanding 1,000 shares......................................................... 1 1
Additional paid-in capital........................................................... 1,624 1,624
Retained earnings deficit............................................................ (15,779) (24,117)
Receivable from Parent............................................................... (15,029) --
Notes receivable..................................................................... (625) (625)
-------------- -----------
Total stockholder's deficit...................................................... (29,808) (23,117)
-------------- -----------
Total Liabilities and Stockholder's Deficit.......................................... $ 121,821 $ 128,844
-------------- -----------
-------------- -----------
</TABLE>
See notes to consolidated financial statements.
F-55
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March
31,
--------------------------
1993 1994
------------ ------------
<S> <C> <C>
Revenues.............................................................................. $ 44,947 $ 48,771
Cost of revenues...................................................................... (36,344) (38,478)
------------ ------------
Gross profit.......................................................................... 8,603 10,293
Selling, general and administrative expense........................................... (2,976) (3,752)
Interest expense...................................................................... (1,751) (1,571)
Interest income....................................................................... 330 147
Other income, net..................................................................... 3,087 3,749
------------ ------------
Income before income taxes and accounting changes..................................... 7,293 8,866
Income tax expense.................................................................... (1,711) (2,175)
------------ ------------
Income before accounting changes...................................................... 5,582 6,691
Accounting changes, net of income taxes............................................... (17,437) --
------------ ------------
Net income (loss)..................................................................... $ (11,855) $ 6,691
</TABLE>
See notes to consolidated financial statements.
F-56
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1993 1994
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................................................... $ (11,855) $ 6,691
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Accounting changes................................................................... 17,437 --
Depreciation and amortization........................................................ 3,782 3,766
Deferred income tax benefit.......................................................... (106) (196)
Net (gain) loss on sale of property, plant and equipment............................. 13 (61)
Changes in operating assets and liabilities:
Accounts receivable................................................................ (2,973) (4,748)
Inventories........................................................................ (550) 136
Other assets....................................................................... (1,973) (2,782)
Accounts payable................................................................... 3,627 2,953
Income taxes....................................................................... -- 943
Postretirement benefits other than pension......................................... -- 62
Other liabilities.................................................................. 1,676 (846)
---------- ----------
Net cash flow provided by operating activities........................................... 9,078 5,918
Cash flows from investing activities:
Purchases of property, plant and equipment............................................. (4,424) (4,536)
Proceeds from disposal of property, plant and equipment................................ 837 364
Amount due from (to) Parent............................................................ 15,798 8,626
---------- ----------
Net cash flow provided by investing activities........................................... 12,211 4,454
Cash flows from financing activities:
Repayments of borrowings............................................................... (1,987) (2,350)
Distributions in excess of net equity.................................................. (16,584) (15,029)
Return of limited partner's capital...................................................... (217) (234)
---------- ----------
Net cash flow used in financing activities............................................... (18,788) (17,613)
---------- ----------
Increase (decrease) in cash and cash equivalents......................................... 2,501 (7,241)
Beginning cash and cash equivalents...................................................... 29,549 31,580
---------- ----------
Ending cash and cash equivalents......................................................... $ 32,050 $ 24,339
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
March 31, 1994
(unaudited)
Note A -- BASIS OF PRESENTATION
The accompanying consolidated financial statements of Checker Motors
Corporation and subsidiaries (the "Corporation") have been prepared in
accordance with generally accepted accounting principles for interim financial
information, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In Management's opinion, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 1994, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1994. For further information, refer to the Corporation's audited consolidated
financial statements and footnotes thereto for the year ended December 31, 1993.
Note B -- PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Checker Motors
Corporation and its subsidiaries that will become co-issuers under the terms of
an indenture in connection with a proposed refinancing. Accordingly, the
accounts of American Country Insurance Company, a wholly-owned regulated
property and casualty insurance subsidiary of the Corporation, and its
subsidiary, have been excluded from the consolidated financial statements as
they will not be co-issuers under the terms of the proposed refinancing.
Note C -- INVENTORIES
Inventories are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1993 1994
-------------- -----------
<S> <C> <C>
Finished goods................................................ $ 2,110 $ 5,693
Work-in-process............................................... 2,104 2,516
Raw materials and supplies.................................... 6,386 2,255
-------------- -----------
$ 10,600 $ 10,464
-------------- -----------
-------------- -----------
</TABLE>
Note D -- INCOME TAXES
The Corporation's estimated effective tax rate differs from the statutory
rate because of the impact of the reporting of certain income and expense items
in the financial statements which are not taxable or deductible for income tax
purposes. The values of assets and liabilities acquired in a transaction
accounted for as a purchase are recorded at estimated fair values which result
in an increase in the net asset value over the tax basis for such net assets.
Note E -- ACCOUNTING CHANGES
Effective January 1, 1994, the Corporation adopted the provisions of SFAS
No. 112, "Employers' Accounting for Postemployment Benefits." The adoption of
this SFAS did not affect net income. In accordance with this Statement, prior
period financial statements have not been restated to reflect the change in
accounting method.
Effective January 1, 1993, the Corporation adopted the provisions of SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The Corporation recorded a charge of $11.2 million (net of taxes of
$5.8 million) during the quarter ended March 31, 1993, to reflect the cumulative
effect of this change in accounting principle.
F-58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHECKER MOTORS CORPORATION AND SUBSIDIARIES -- ISSUER GROUP
March 31, 1994
(unaudited)
Note E -- ACCOUNTING CHANGES (Continued)
Effective January 1, 1993, the Corporation adopted the provisions of SFAS
No. 109, "Accounting for Income Taxes." The Corporation recorded a charge of
$6.2 million during the quarter ended March 31, 1993, to reflect the cumulative
effect of this change in accounting principle.
Note F -- CONTINGENCIES
On March 4, 1992, the Corporation received notice that the Insurance
Commissioner of the State of California, as Conservator and Rehabilitator of
Executive Life Insurance Company of California ("ELIC"), a limited partner of
the Partnership, had filed an Amendment to the Application for Order of
Conservation filed in Superior Court of the State of California for the County
of Los Angeles (the "Court"). The amendment seeks to add to the Order, dated
April 11, 1991, the Corporation, the Partnership and Checker Holding Corp. III
("Holding III"), a limited partner of the Partnership. The amendment alleges
that the action by the Corporation invoking provisions of the Partnership
Agreement that alter ELIC's rights in the Partnership upon the occurrence of
certain events is improper and constitutes an impermissible forfeiture of ELIC's
interest in the Partnership and a breach of fiduciary duty to ELIC. The
amendment seeks (a) a declaration of the rights of the parties in the
Partnership and (b) damages in an unspecified amount. The Partnership believes
that it has meritorious defenses to the claims of ELIC. On April 15, 1994, the
Corporation and the Conservator entered into a letter agreement pursuant to
which the Corporation agreed to purchase ELIC's interest in the Partnership for
$37 million. The letter agreement has been submitted to the Court for approval.
F-59
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES--ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
March 31, 1994
NOTE G -- SUMMARY OF ISSUER AND NON-ISSUER GROUPS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1993 March 31, 1994 (Unaudited)
------------------------------------------------------- ---------------------------
Consolidated Non-Issuer Issuer Consolidated Non-Issuer
Checker Group Eliminations Group Checker Group
------------- ------------ ------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Total current assets.................... $ 70,582 $ 15,487 $ 179 $ 55,274 $ 73,097 $ 19,183
Amount due from parent.................. 363 -- -- 363 6,766 --
Property, plant and equipment, net...... 62,866 1,221 -- 61,645 63,503 1,192
Insurance Subsidiary investments........ 90,838 90,838 -- -- 89,134 89,134
Deferred income taxes................... -- -- -- -- 252 --
Other assets............................ 18,100 16,061 2,500 4,539 19,150 17,457
------------- ------------ ------------- ----------- ------------- ------------
Total Assets.............................. $ 242,749 $ 123,607 $ 2,679 $ 121,821 $ 251,902 $ 126,966
------------- ------------ ------------- ----------- ------------- ------------
------------- ------------ ------------- ----------- ------------- ------------
LIABILITIES AND STOCKHOLDER'S DEFICIT:
Total current liabilities............... $ 46,741 $ 4,660 $ 179 $ 42,263 $ 47,682 $ 3,562
Long-term debt, excluding current
portion................................ 36,276 -- 2,500 38,776 33,913 --
Insurance Subsidiary's unpaid losses and
loss adjustment expenses............... 71,179 71,179 -- -- 72,078 72,078
Other liabilities....................... 83,639 13,049 -- 70,590 89,105 19,085
------------- ------------ ------------- ----------- ------------- ------------
Total liabilities....................... 237,838 88,888 2,679 151,629 242,778 94,725
Total stockholder's deficit............. 4,911 34,719 -- (29,808) 9,124 32,241
------------- ------------ ------------- ----------- ------------- ------------
Total Liabilities and Stockholder's
Deficit.................................. $ 242,749 $ 123,607 $ 2,679 $ 121,821 $ 251,902 $ 126,966
------------- ------------ ------------- ----------- ------------- ------------
------------- ------------ ------------- ----------- ------------- ------------
<CAPTION>
Issuer
Eliminations Group
------------- -----------
<S> <C> <C>
ASSETS
Total current assets.................... $ 1,660 $ 55,574
Amount due from parent.................. -- 6,766
Property, plant and equipment, net...... -- 62,311
Insurance Subsidiary investments........ -- --
Deferred income taxes................... (252 ) --
Other assets............................ 2,500 4,193
------------- -----------
Total Assets.............................. $ 3,908 $ 128,844
------------- -----------
------------- -----------
LIABILITIES AND STOCKHOLDER'S DEFICIT:
Total current liabilities............... $ 1,660 $ 45,780
Long-term debt, excluding current
portion................................ 2,500 36,413
Insurance Subsidiary's unpaid losses and
loss adjustment expenses............... -- --
Other liabilities....................... (252 ) 69,768
------------- -----------
Total liabilities....................... 3,908 151,961
Total stockholder's deficit............. -- (23,117)
------------- -----------
Total Liabilities and Stockholder's
Deficit.................................. $ 3,908 $ 128,844
------------- -----------
------------- -----------
</TABLE>
F-60
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES--ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
March 31, 1994
NOTE G -- SUMMARY OF ISSUER AND NON-ISSUER GROUPS (Continued)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Quarter Ended March 31, 1993
-------------------------------------------------------
Consolidated Non-Issuer Issuer
Checker Group Eliminations Group
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenues................................................ $ 51,310 $ 9,601 $ 3,238 $ 44,947
Cost of Revenues........................................ (40,741) (7,635) (3,238) (36,344)
------------- ------------ ------------- -----------
Gross profit............................................ 10,569 1,966 -- 8,603
SG&A Expense............................................ (5,457) (2,481) -- (2,976)
Interest Expense........................................ (1,751 ) -- -- (1,751)
Interest Income......................................... 1,929 1,599 -- 330
Other income, net....................................... 310 223 3,000 3,087
------------- ------------ ------------- -----------
Income before income taxes and accounting changes....... 5,600 1,307 3,000 7,293
Income tax expense...................................... (2,161 ) (450 ) -- (1,711)
------------- ------------ ------------- -----------
Income before accounting changes........................ 3,439 857 3,000 5,582
Accounting changes, net of income taxes................. (17,643 ) (206 ) -- (17,437)
------------- ------------ ------------- -----------
Net Income (Loss)....................................... $ (14,204 ) $ 651 $ 3,000 $ (11,855)
------------- ------------ ------------- -----------
------------- ------------ ------------- -----------
<CAPTION>
Quarter Ended March 31, 1994 (Unaudited)
-------------------------------------------------------
Consolidated Non-Issuer Issuer
Checker Group Eliminations Group
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenues................................................ $ 56,630 $ 10,969 $ 3,110 $ 48,771
Cost of Revenues........................................ (44,476) (9,108) (3,110) (38,478)
------------- ------------ ------------- -----------
Gross profit............................................ 12,154 1,861 -- 10,293
SG&A Expense............................................ (6,377 ) (2,625 ) -- (3,752)
Interest Expense........................................ (1,571 ) -- -- (1,571)
Interest Income......................................... 1,787 1,640 -- 147
Other income, net....................................... 1,007 258 3,000 3,749
------------- ------------ ------------- -----------
Income before income taxes.............................. 7,000 1,134 3,000 8,866
Income tax expense...................................... (2,380 ) (205 ) -- (2,175)
------------- ------------ ------------- -----------
Net Income.............................................. $ 4,620 $ 929 $ 3,000 $ 6,691
------------- ------------ ------------- -----------
------------- ------------ ------------- -----------
</TABLE>
F-61
<PAGE>
CHECKER MOTORS CORPORATION AND SUBSIDIARIES--ISSUER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
March 31, 1994
NOTE G -- SUMMARY OF ISSUER AND NON-ISSUER GROUPS (Continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended March 31, 1993
------------------------------------------------------
Consolidated Non-Issuer Issuer
Checker Group Eliminations Group
------------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)..................................... $ (14,202) $ 653 $ 3,000 $ (11,855)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities........... 21,502 376 -- 21,126
Changes in operating assets and liabilities........... (1,605) (1,412) -- (193)
------------- ------------ ------------- ----------
Net cash flow provided by (used in) operating
activities............................................. 5,695 (383 ) 3,000 9,078
Net cash flow provided by investing activities.......... 13,249 1,038 -- 12,211
Net cash flow used in financing activities.............. (18,788 ) (3,000 ) (3,000 ) (18,788)
------------- ------------ ------------- ----------
Increase (decrease) in cash and cash equivalents........ 156 (2,345 ) -- 2,501
Beginning cash and cash equivalents..................... 36,734 7,185 -- 29,549
------------- ------------ ------------- ----------
Ending Cash and Cash Equivalents........................ $ 36,890 $ 4,840 $ -- $ 32,050
------------- ------------ ------------- ----------
------------- ------------ ------------- ----------
<CAPTION>
Quarter Ended March 31, 1994
------------------------------------------------------
Consolidated Non-Issuer Issuer
Checker Group Eliminations Group
------------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
Cash flow from operating activities:
Net income............................................ $ 4,621 $ 930 $ 3,000 $ 6,691
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities........... 3,385 (124) -- 3,509
Changes in operating assets and liabilities........... (5,424 ) (1,142 ) -- (4,282)
------------- ------------ ------------- ----------
Net cash flow provided by (used in) operating
activities............................................. 2,582 (336 ) 3,000 5,918
Net cash flow provided by investing activities.......... 5,765 1,311 -- 4,454
Net cash flow used in financing activities.............. (17,613 ) (3,000 ) (3,000 ) (17,613)
------------- ------------ ------------- ----------
Decrease in cash and cash equivalents................... (9,266 ) (2,025 ) -- (7,241)
Beginning cash and cash equivalents..................... 38,317 6,737 -- 31,580
------------- ------------ ------------- ----------
Ending Cash and Cash Equivalents........................ $ 29,051 $ 4,712 $ -- $ 24,339
------------- ------------ ------------- ----------
------------- ------------ ------------- ----------
</TABLE>
F-62
<PAGE>
Report of Independent Auditors
Board of Directors
Great Dane Trailers, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Great Dane
Trailers, Inc. and subsidiaries (a wholly-owned subsidiary of International
Controls Corp.) as of December 31, 1992 and 1993, and the related consolidated
statements of operations, shareholder's equity and cash flows for each of the
three years in the period ended December 31, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Great Dane Trailers, Inc. and subsidiaries at December 31, 1992 and 1993, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, in 1993
the Company changed its methods of accounting for income taxes and
postretirement benefits other than pensions.
Atlanta, Georgia
March 1, 1994
F-63
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of International Controls Corp.)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------
1992 1993
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................................. $ 513 $ 285
Accounts receivable, less allowance for doubtful accounts of $618 and $700............ 44,029 56,205
Current portion of finance lease receivables (Note D)................................. 2,352 764
Inventories (Note C).................................................................. 62,709 83,512
Deferred tax benefits (Note J)........................................................ 4,567 1,466
Other current assets.................................................................. 832 1,023
----------- -----------
Total current assets................................................................ 115,002 143,255
Property, plant and equipment, net (Note E)........................................... 52,851 59,490
Noncurrent finance lease receivables (Note D)......................................... 2,863 575
Cost in excess of net assets acquired, net of accumulated amortization of $5,000 and
$6,250............................................................................... 44,993 43,743
Trademark, net of accumulated amortization of $1,400 and $1,750....................... 12,046 11,696
Other assets.......................................................................... 2,710 1,078
Total assets........................................................................ $ 230,465 $ 259,837
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable...................................................................... $ 43,209 $ 61,061
Current portion of long-term debt (Note F)............................................ 7,184 4,910
Accrued compensation.................................................................. 8,548 9,542
Accrued insurance (Note G)............................................................ 6,234 6,920
Income taxes payable (Note J)......................................................... 1,362 2,888
Other accrued liabilities............................................................. 11,824 13,279
Total current liabilities............................................................. 78,361 98,600
----------- -----------
Long-term debt, excluding current portion (Note F).................................... 42,026 34,944
Deferred income taxes (Note J)........................................................ -- 12,272
Postretirement benefits (Note I)...................................................... -- 17,443
Other noncurrent liabilities.......................................................... 11,456 11,357
SHAREHOLDER'S EQUITY (NOTE K)
Common stock, No par value:
Authorized 200 shares; issued 100 shares.............................................. 1,212 1,212
Paid-in capital....................................................................... 100,429 95,016
Receivable from Parent................................................................ (5,413) (1,245)
Retained earnings (deficit)........................................................... 2,394 (9,762)
----------- -----------
Total shareholder's equity.......................................................... 98,622 85,221
----------- -----------
Total liabilities and shareholder's equity.......................................... $ 230,465 $ 259,837
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-64
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
GREAT DANE TRAILERS, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of International Controls Corp.)
(dollars in thousands)
<TABLE>
<CAPTION>
Retained
Common Paid-in Receivable Earnings
Stock Capital from Parent (Deficit)
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Balances at January 1, 1991.................................... $ 1,212 $ 174,729 $ (28,841) $ 1,014
Cash to Parent................................................. (50,125)
Charges by Parent (Note K)..................................... 4,682
Net Loss....................................................... (3,056)
----------- ----------- ----------- ----------
Balances at December 31, 1991.................................. 1,212 174,729 (74,284) (2,042)
Dividend (Note K).............................................. (74,300) 74,300
Cash to Parent................................................. (12,000)
Charges by Parent (Note K)..................................... 6,571
Net Income..................................................... 4,436
----------- ----------- ----------- ----------
Balances at December 31, 1992.................................. 1,212 100,429 (5,413) 2,394
Dividend (Note K).............................................. (5,413) 5,413
Cash to Parent................................................. (16,000)
Charges by Parent (Note K)..................................... 14,755
Net Loss....................................................... (12,156)
----------- ----------- ----------- ----------
Balances at December 31, 1993.................................. $ 1,212 $ 95,016 $ (1,245) $ (9,762)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
See notes to consolidated financial statements.
F-65
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
GREAT DANE TRAILERS, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of International Controls Corp.)
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenues................................................................... $ 400,196 $ 536,336 $ 711,862
Cost of revenues........................................................... 346,337 465,961 623,040
----------- ----------- -----------
GROSS PROFIT 53,859 70,375 88,822
Selling, general and administrative expenses............................... 46,800 52,785 56,441
Interest expense........................................................... 8,061 5,852 4,811
Other expense, net......................................................... 546 1,238 62
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES..... (1,548) 10,500 27,508
Income taxes (Note J)...................................................... 1,508 6,064 12,536
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES...................... (3,056) 4,436 14,972
Cumulative effect of accounting changes:
Postretirement benefits (net of income taxes of $5,925) (Note I)......... -- -- (9,260)
Income taxes (Note J).................................................... -- -- (17,868)
----------- ----------- -----------
NET INCOME (LOSS) $ (3,056) $ 4,436 $ (12,156)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-66
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of International Controls Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1991 1992 1993
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................... $ (3,056) $ 4,436 $ (12,156)
Adjustments to reconcile net income (loss) to net cash flow provided by
operating activities:
Cumulative effect of accounting changes................................. -- -- 27,128
Depreciation............................................................ 5,910 6,303 8,280
Amortization of cost in excess of net assets acquired................... 1,250 1,250 1,250
Other amortization and non cash charges................................. 2,035 1,900 1,329
Deferred Federal income taxes........................................... 991 (574) (5,913)
Provision for losses on receivables and warranty claims................. 1,477 3,799 5,614
Collections of finance lease receivables................................ 7,330 5,131 4,408
Changes in operating assets and liabilities:
Accounts receivables.................................................... 10,091 (12,316) (12,560)
Finance lease receivable................................................ (117) -- --
Inventories............................................................. (485) (8,976) (20,803)
Other assets............................................................ 238 219 (374)
Accounts payable........................................................ 3,889 10,232 17,852
Income taxes............................................................ 531 831 1,364
Other liabilities....................................................... (5,911) 7,135 925
Items charged by Parent:
Federal income taxes.................................................... 229 5,555 14,755
Other direct charges.................................................... 3,593 (686) --
---------- ---------- ----------
Net cash flow provided by operating activities.............................. 27,995 24,239 31,099
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................................ (3,208) (4,996) (7,265)
Collection of letter of credit deposit.................................... 471 6,719 --
Proceeds from disposal of property, plant and equipment................... 98 930 1,125
Other..................................................................... 752 438 169
---------- ---------- ----------
Net cash flow provided by (used in) investing activities.................... (1,887) 3,091 (5,971)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing................................................... 16,530 1,090 --
Principal payments on debt................................................ (11,358) (16,499) (9,356)
Increase in receivable from Parent........................................ (50,125) (12,000) (16,000)
---------- ---------- ----------
Net cash flow used in financing activities.................................. (44,953) (27,409) (25,356)
---------- ---------- ----------
Decrease in cash and cash equivalents..................................... (18,845) (79) (228)
Beginning cash and cash equivalents....................................... 19,437 592 513
---------- ---------- ----------
ENDING CASH AND CASH EQUIVALENTS............................................ $ 592 $ 513 $ 285
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-67
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of International Controls Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993
NOTE A -- ORGANIZATION AND BUSINESS
Great Dane Trailers, Inc. ("Company") is a wholly-owned subsidiary of
International Controls Corp. ("Parent"). The Company is engaged in the
manufacture and distribution of highway truck trailers and intermodal containers
and chassis to common carriers, supermarket chains, leasing companies, and
independent carriers. The consolidated financial statements include the accounts
of the Company and its subsidiaries after elimination of all significant
intercompany accounts and transactions.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS: The Company considers all highly liquid investments with
a maturity of three months or less, when purchased, to be cash equivalents.
CONCENTRATION OF CREDIT RISK: The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral. Payment is generally due within 30 days from delivery. Credit losses
have been consistent with management's expectations.
INVENTORY VALUATION: Inventories are stated at the lower of cost or market.
The cost of inventories is determined principally on the last-in, first-out
("LIFO") method.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION: Property, plant and
equipment are carried at cost. Depreciation is provided based on the assets
estimated useful lives, principally on the straight-line method.
Estimated depreciable lives are as follows:
<TABLE>
<S> <C>
Buildings...................................................... 10-40 years
Transportation equipment....................................... 2-6 years
Machinery, equipment, furniture and fixtures................... 3-12 years
</TABLE>
INTANGIBLE ASSETS: The cost of intangible assets, principally cost in
excess of net assets acquired and trademark, are being amortized on the
straight-line basis over a period of 40 years. Expenses incurred in connection
with the issuance of debt are capitalized and amortized as interest expense over
the life of the loan.
REVENUE RECOGNITION: Revenue from the sale of products that the Company
manufactures in response to customer's orders is recorded when such products are
complete and invoiced. Finance income is recognized as other income over the
term of the finance leases by applying the simple interest method to scheduled
monthly collections.
MAJOR CUSTOMER: Sales to J.B. Hunt comprised 13.0% of revenues in 1993. No
other customer accounted for 10% or more of consolidated revenue.
INCOME TAXES: Effective January 1, 1993, the Company changed its method of
accounting for income taxes from the deferred method under Accounting Principles
Board Statement No. 11 to the liability method by adopting Statement of
Financial Accounting Standards No. 109 ("FAS 109"). FAS 109 requires that
deferred tax liabilities and assets be established based on the difference
between the financial statement and income tax basis of assets and liabilities
using existing tax rates. Financial statements for periods prior to 1993 have
not been restated for the effects of adoption of FAS 109. The effect on prior
years of adopting FAS 109 has been reported as the cumulative effect of an
accounting change.
POSTRETIREMENT BENEFITS: Effective January 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 106 ("FAS 106"), a method of
accounting for postretirement benefits by
F-68
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of International Controls Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
accrual of the costs of such benefits during the periods employees provide
service to the Company. The Company previously accounted for such costs as
expense when incurred. The effect on prior years, representing that portion of
future retiree benefit costs related to past service of both active and retired
employees at the date of adoption, has been reported as the cumulative effect of
an accounting change and such prior years have not been restated.
EARNINGS PER SHARE: The Company is a wholly-owned subsidiary of
International Controls Corp. Earnings per share information is not presented
because it is not meaningful.
RECLASSIFICATIONS: Certain 1991 and 1992 amounts have been reclassified to
conform to the 1993 presentation.
NOTE C -- INVENTORIES
Inventories are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1992 1993
--------- ---------
<S> <C> <C>
Raw materials................................................................. $ 38,959 $ 46,719
Work-in-process............................................................... 7,156 8,852
Finished Goods................................................................ 16,594 27,941
--------- ---------
$ 62,709 $ 83,512
--------- ---------
--------- ---------
</TABLE>
If the FIFO method had been used for those inventories costed by the LIFO
method, inventories would not have been significantly different.
NOTE D -- TRAILER LEASING OPERATIONS
The Company, through a wholly-owned leasing subsidiary, leases trailers
under operating and sales type financing leases ("Finance lease receivables").
The following is a summary of the components of the subsidiary's net investment
in Finance lease receivables (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1992 1993
--------- ---------
<S> <C> <C>
Minimum lease payments receivable............................................... $ 6,563 $ 1,678
Less: Unearned income........................................................... (669) (180)
Allowance for doubtful receivables.......................................... (679) (159)
--------- ---------
5,215 1,339
Less amounts reflected as current............................................... (2,352) (764)
--------- ---------
Noncurrent portion.............................................................. $ 2,863 $ 575
--------- ---------
--------- ---------
</TABLE>
Minimum finance lease payments are receivable as follows (dollars in
thousands): $1,014 in 1994, $314 in 1995, and $350 in 1996.
The terms of the Company's trailer operating leases vary generally from
month to month up to 7 years. At December 31, 1993, the Company had no long-term
noncancellable operating leases.
F-69
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of International Controls Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE D -- TRAILER LEASING OPERATIONS (Continued)
Trailers subject to operating leases are included in transportation
equipment in the consolidated balance sheets. The cost and accumulated
depreciation of such trailers are as follows (dollars in thousands): $1,485 and
$565, respectively, at December 31, 1992 and $499 and $239, respectively, at
December 31, 1993.
NOTE E -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1992 1993
---------- ----------
<S> <C> <C>
Land and buildings.......................................................... $ 38,649 $ 46,418
Transportation equipment.................................................... 3,196 2,776
Machinery, equipment, furniture and fixtures................................ 33,908 47,026
---------- ----------
75,753 96,220
Less accumulated depreciation and amortization.............................. (22,902) (36,730)
---------- ----------
$ 52,851 $ 59,490
---------- ----------
---------- ----------
</TABLE>
NOTE F -- LONG-TERM DEBT
Long-term debt is summarized below (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1992 1993
--------- ---------
<S> <C> <C>
Term loan..................................................................... $ 26,167 $ 21,511
Revolving line of credit...................................................... 17,620 17,132
Installment notes............................................................. 5,079 979
Other debt.................................................................... 344 232
--------- ---------
49,210 39,854
Less current portion.......................................................... (7,184) (4,910)
--------- ---------
$ 42,026 $ 34,944
--------- ---------
--------- ---------
</TABLE>
In March 1990, the Company entered into a 5-year loan and security agreement
("Agreement") with certain banks. The Agreement made available to the Company a
5-year term loan of $33 million and a revolving credit line up to a maximum of
$47 million. In 1993, the maximum revolving line of credit was increased to $65
million and a $2.8 million capital expenditure term loan commitment was
approved. The amount available under the revolving credit line is based upon the
amount of the Company's eligible trade accounts receivable and inventory as
defined in the Agreement and is reduced by outstanding Letters of Credit.
The term loan is repayable in equal monthly installments of approximately
$342 thousand plus interest with the remaining balance due in March, 1995. The
term loan and revolving credit line require an interest rate of 1.5% above the
agent bank's prime interest rate (6% at December 31, 1993). Borrowing under the
credit agreement is secured by substantially all of the Company's assets.
The Agreement requires the Company, among other things, to maintain certain
financial covenants, and limits (i) cash transfers by the Company to its Parent
(ii) additions to fixed assets, (iii) sale of assets, and (iv) additional
borrowing. Any material adverse change in the Company's or its Parent's assets,
liabilities, financial condition or results of operations would constitute a
default under the Agreement.
F-70
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of International Controls Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE F -- LONG-TERM DEBT (Continued)
The installment notes are secured by the Company's finance lease receivables
and by the Company's rights under certain operating leases. The notes bear
interest at various rates averaging approximately 10.9% at December 31, 1993 and
are payable in varying monthly installments through 1995.
The fair value of the Company's long-term debt is estimated using discounted
cash flow analyses, based upon current market rates for similar types of
borrowing arrangements. Based on these analyses, the fair value of the Company's
long-term debt does not significantly differ from its carrying value.
Interest paid totaled $8.3 million in 1991, $5.9 million in 1992 and $4.8
million in 1993.
Maturities of long-term debt are as follows (dollars in thousands): $4,910
in 1994 and $34,944 in 1995.
NOTE G -- COMMITMENTS AND CONTINGENCIES
The Company has entered into an operating agreement with the purchaser of
its previously wholly-owned finance Company, Great Dane Finance Company
("Finance"). Under the terms of the agreement, the purchaser is given the
opportunity to finance certain sales of the Company. The Company is liable to
the purchaser for 50% of losses, subject to certain maximums, incurred in
connection with the financing. At December 31, 1993, $121.3 million was subject
to this arrangement. These receivables are also collateralized by a security
interest in the trailers originally sold by the Company. In connection with the
sale of Finance, the Company has guaranteed the full realization of $4.8 million
of receivables at December 31, 1993. A loss reserve of $3.1 million for losses
that may be incurred on the ultimate realization of the operating agreement and
guaranteed receivables is included in other accrued liabilities at December 31,
1993.
The operating agreement also requires that the Company, among other things,
(i) not finance the sale of its products through September 8, 1996 and (ii)
maintain a minimum net worth as defined in the agreement. Failure to comply with
these requirements of the agreement would result in the Company having to repay
the purchaser varying amounts. The amounts vary from $7 million through
September 8, 1994 and reduce to $5 million during the year ending September 8,
1996. At December 31, 1993, the Company was in compliance with the terms of the
operating agreement.
Under the Company's insurance programs, coverage is obtained for
catastrophic exposures as well as those risks required to be insured by law or
contract. It is the policy of the Company to retain a significant portion of
certain expected losses related primarily to product and vehicle liability,
workers' compensation, health care benefits, long term disability and
comprehensive general liability.
Provisions for losses expected under these programs are recorded based upon
estimates of the aggregate liability for claims incurred. Such estimates utilize
certain actuarial assumptions followed in the insurance industry. At December
31, 1993, the Company provided standby letters of credit aggregating
approximately $7.6 million in connection with certain insurance programs.
The Company leases certain real estate and equipment. Certain leases are
renewable and provide for monthly rentals, real estate taxes, and other
operating expenses. The Company believes that, in the normal course of business,
leases that expire will be renewed or replaced by other leases. Rental expense
under operating leases was approximately $1.7 million in 1991, $2.0 million in
1992 and $2.1 million in 1993. Minimum rental obligations for all noncancellable
operating leases at December 31, 1993 are as follows (dollars in thousands):
$818 in 1994, $624 in 1995, $524 in 1996, $405 in 1997, $246 in 1998 and $425
thereafter.
F-71
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of International Controls Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE H -- RETIREMENT PLANS
The Company has defined benefit pension plans applicable to substantially
all employees including, prior to 1992, certain employees of the Parent.
Employees' benefits are based on years of service and the employees' final
average earnings, as defined by the plans. The contributions to the plans
administered by the Company are based on computations by independent actuarial
consultants.
The Company's general funding policy is to contribute the minimum amounts
required to maintain funding standards in accordance with the Employee
Retirement Income Security Act.
In connection with the restructuring of the Savannah manufacturing facility,
the Company provided an enhanced early retirement window for certain displaced
workers. In accordance with Financial Accounting Standards Board Statement No.
88, the estimated cost of this early retirement window was provided for in the
1990 financial statements and the cost was revised as all factors became known.
Net periodic pension costs include the following components (dollars in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Service cost-benefit earned (normal cost)................................ $ 982 $ 989 $ 1,255
Interest on projected benefit obligation................................. 1,594 1,691 2,068
Return on investments.................................................... (1,309) (1,167) (1,275)
Net amortization and deferral............................................ (42) (162) 17
--------- --------- ---------
1,225 1,351 2,065
Net amount provided for early retirement incentive program............... 631 380 --
--------- --------- ---------
Net periodic pension cost................................................ $ 1,856 $ 1,731 $ 2,065
--------- --------- ---------
--------- --------- ---------
</TABLE>
Gains and losses and prior service cost are amortized over seven years.
Other assumptions used in the accounting for the defined benefit plans were as
follows:
<TABLE>
<CAPTION>
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Discount rate.............................................................. 9.00% 8.50% 7.50%
Rate of increase in compensation levels.................................... 5.00% 5.00% 4.25%
Long-term rate of return on assets......................................... 5-9% 5-9% 5-9%
</TABLE>
F-72
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of International Controls Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE H -- RETIREMENT PLANS (Continued)
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
1992 1993
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................................................ $ 14,534 $ 18,885
--------- ---------
--------- ---------
Accumulated benefit obligation........................................................... $ 16,057 $ 20,961
--------- ---------
--------- ---------
Plan assets (principally guaranteed investment contracts with insurance companies)....... $ 15,364 $ 18,874
Projected benefit obligation............................................................. 22,525 29,875
--------- ---------
Projected benefit obligation in excess of plan assets.................................... (7,161) (11,001)
Unrecognized prior service cost.......................................................... (115) (93)
Unrecognized net loss.................................................................... 2,184 7,278
--------- ---------
Pension liability recognized in the financial statements................................. $ (5,092) $ (3,816)
--------- ---------
--------- ---------
</TABLE>
NOTE NOTE I -- OTHER POSTRETIREMENT BENEFIT PLANS
The Company provides unfunded postretirement medical benefits under a
defined benefit plan, but with defined dollar limitations of the Company's
contributions. In 1986, the Company discontinued providing postretirement life
insurance benefits and medical benefits that supplement medicare for retired
employees and their dependents. Accordingly, the group of active employees who
are eligible to participate in the medical plan is restricted to "plan-vested"
employees. In 1990, in connection with the restructuring of the Savannah
manufacturing facilities, the Company provided for the post retirement medical
costs for certain eligible employees.
The Company also offers a prescription drug program, medical and dental
plans, and two life insurance plans to a limited group of retirees and their
dependents. The Company's postretirement medical plans include the following
cost sharing provisions: (i) the Company's increase in employer contributions
per retiree per year for health, prescription drugs and dental expense will be
limited to 6% per year, using 1992 as the base year, (ii) the Company's overall
average contribution per employee per year for health and prescription drug
expenses will be limited to $6,000 per beneficiary who is ineligible for
Medicare and $3,000 per beneficiary who is eligible for Medicare.
If the Company's average costs rise above the established limits, the
difference will be passed on to covered retirees in the form of increased
contributions.
The Company's adoption of FAS 106 effective January 1, 1993 changed the
method of accounting for such postretirement benefits. The benefits are now
accrued over the period the employees provide services to the Company. Prior to
the change, costs were charged to expense as incurred. The Company immediately
recognized the transition obligation of adopting FAS 106. The effect on years
prior to 1993, representing that portion of unrecognized future retiree benefit
costs related to past service of both active and retired employees has been
reported as the cumulative effect of an accounting change and prior periods have
not been restated. The cumulative effect of adopting FAS 106 as of January 1,
1993 was to decrease net income by approximately $9.3 million (net of income
taxes of $5.9 million). Postretirement benefit costs were approximately $.5
million in 1991, $.7 million in 1992 and $1.6 in 1993
F-73
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of International Controls Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1993
NOTE NOTE I -- OTHER POSTRETIREMENT BENEFIT PLANS (Continued)
(compared to $.7 million under the previous method of accounting). The following
table presents the plan's funded status reconciled with amounts recognized in
the Company's balance sheet at December 31, 1993 (dollars in thousands):
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Retirees........................................................................ $ 10,243
Other active plan participants.................................................. 6,307
Fully eligible active plan participants......................................... 2,639
---------
Accumulated postretirement benefit obligation..................................... 19,189
Unrecognized net loss............................................................. (746)
---------
Accrued postretirement benefit obligation......................................... $ 18,443
---------
---------
</TABLE>
Net periodic postretirement benefit cost for 1993 includes the following
components (dollars in thousands):
<TABLE>
<S> <C>
Service cost attributed to service during the year................................. $ 259
Interest cost on accumulated postretirement benefit obligation..................... 1,360
---------
Net periodic postretirement benefit cost........................................... $ 1,619
---------
---------
</TABLE>
Actuarial assumptions used in determining 1993 cost and the accumulated
postretirement benefit obligation includes a discount rate of 7.5%.
F-74
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDARIES
(A Wholly-Owned Subsidary of International Controls Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993
Note J -- INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by FAS
109. The cumulative effect of this adoption was a decrease in net income of
$17.9 million. Application of FAS 109 decreased 1993 pretax income by
approximately 1.5 million primarily because of FAS 109's requirement to record
assets acquired in prior business combinations at pre-tax amounts. As permitted
under the new rules, prior years' financial statements have not been restated.
The results of operations of the Company and its subsidiaries are included
in consolidated Federal income tax returns filed by the Parent. Provision for
income taxes for the Company is computed principally as if the Company filed a
separate return. Certain tax adjustments were made in consolidation by the
Parent and were not allocated to the Company because they resulted from tax
consequences of transactions not related to the Company's operation. Such
adjustments, if allocated to the Company would have had the effect of reducing
the Company's tax basis in its fixed assets by $20.6 million at December 31,
1992. These adjustments were pushed down to the Company in 1993 in connection
with the adoption of FAS 109.
Deferred income taxes reflect the tax effects of differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes. Significant components of the Company's deferred tax liabilities
and assets as of December 31, 1993 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax liabilities:
Inventory....................................................... $ 3,241
Fixed assets.................................................... 18,636
Trademarks...................................................... 4,756
Finance lease receivable........................................ 517
---------
Total deferred tax liabilities.................................... 27,150
Deferred tax assets:
Other postretirement benefits................................... 7,530
Warranty reserve................................................ 2,973
Insurance reserves.............................................. 1,937
Bad debt reserve................................................ 1,599
Pension......................................................... 1,264
Vacation reserves............................................... 1,002
Other........................................................... 40
---------
Total deferred tax assets......................................... 16,345
---------
Net deferred tax liability........................................ $ 10,805
---------
---------
</TABLE>
F-75
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDARIES
(A Wholly-Owned Subsidary of International Controls Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993
Note J -- INCOME TAXES (Continued)
The components of income tax expense are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Current taxes:
Federal....................................................... $ 220 $ 5,411 $ 14,755
State......................................................... 297 1,227 3,694
--------- --------- ---------
517 6,638 18,449
Deferred (benefit) expense.................................... 991 (574) (5,913)
--------- --------- ---------
Income tax expense............................................ $ 1,508 $ 6,064 $ 12,536
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of the deferred tax expense (benefit), computed under the
deferred method, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December
31,
1991 1992
--------- ---------
<S> <C> <C>
Tax depreciation in excess of book depreciation............................. $ 233 $ 249
Accrued compensation........................................................ (253) (622)
Plant restructuring reserve................................................. 972 (9)
Inventory reserves.......................................................... 15 (273)
Other reserves.............................................................. 24 81
--------- ---------
Deferred tax (benefit) expense.............................................. $ 991 $ (574)
--------- ---------
--------- ---------
</TABLE>
Tax expense differs from the amount computed by applying the Federal income
tax rate to income before income taxes. The reasons for these differences are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Computed expected tax expense (benefit)....................... $ (526) $ 3,570 $ 9,628
Increase in taxes resulting from: State income taxes, net of
Federal income tax benefit................................... 196 805 1,658
Appraisal depreciation........................................ 1,033 1,024 -
Amortization of goodwill...................................... 544 544 438
Other......................................................... 261 121 812
--------- --------- ---------
Actual tax expense............................................ $ 1,508 $ 6,064 $ 12,536
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company received a $.4 million refund of state income taxes in 1991 and
paid state income taxes of $.2 million in 1992 and $2.3 million in 1993.
F-76
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDARIES
(A Wholly-Owned Subsidary of International Controls Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993
Note K -- RELATED PARTY TRANSACTIONS
The Parent provides management and various administrative services to the
Company. The significant administrative functions performed by the Parent on
behalf of the Company are as follows:
INSURANCE ADMINISTRATION: The Company's liability and certain workers'
compensation insurance programs are included with the Parent's insurance policy.
Prior to April 1992, the Parent charged the Company for its allocated insurance
expense. Effective April 1992, the Company has been making payments directly to
the insurance companies and maintains separate insurance reserves.
TAX ADMINISTRATION: The Company's results are included in the Parent's
consolidated Federal income tax returns.
The Parent charged the Company for the Company's portion of the above items
as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Insurance and other..................................................... $ 3,593 $ (686) $ --
Federal income taxes.................................................... 1,089 7,257 14,755
</TABLE>
The reimbursement for Federal income taxes represents the current Federal
liability for the Company determined principally on a separate return basis.
DIVIDEND: In March 1992 and 1993, the Company declared a $74.3 and $5.4
million dividend, respectively, to the Parent and reduced its receivable due
from the Parent.
Note L -- SELECTED QUARTERLY DATA (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
1992 Quarter Ended
-------------------------------------------------------
March 31 June 30 September 30 December 31
----------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues...................................... $ 120,503 $ 138,073 $ 136,111 $ 141,649
Gross profit.................................. 15,125 17,570 18,336 19,344
Net income.................................... 230 1,009 962 2,235
</TABLE>
<TABLE>
<CAPTION>
1993 Quarter Ended
-------------------------------------------------------
March 31 June 30 September 30 December 31
----------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues...................................... $ 153,623 $ 173,779 $ 186,685 $ 197,775
Gross profit.................................. 18,729 22,040 22,625 25,428
Income before accounting change............... 2,708 4,081 3,618 4,565
Net income (loss)............................. (24,420) 4,081 3,618 4,565
</TABLE>
F-77
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of International Controls Corp.)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS:
<TABLE>
<CAPTION>
December March 31,
31, 1993 1994
----------- -----------
(unaudited)
<S> <C> <C>
Cash and cash equivalents.......................................... $ 285 $ 286
Accounts receivable, less allowance for doubtful accounts.......... 56,205 72,331
Current portion of finance lease receivables....................... 764 526
Inventories........................................................ 83,512 75,596
Deferred tax benefit............................................... 1,466 2,391
Other current assets............................................... 1,023 1,004
----------- -----------
Total current assets........................................... 143,255 152,134
Property, plant and equipment, net................................. 59,490 59,608
Noncurrent finance lease receivables............................... 575 --
Cost in excess of net assets acquired, net of accumulated
amortization...................................................... 43,743 43,430
Trademark, net of accumulated amortization......................... 11,696 12,340
Other assets....................................................... 1,078 --
----------- -----------
Total assets................................................... $ 259,837 $ 267,512
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY:
Accounts payable................................................... $ 61,061 $ 60,492
Current portion of long-term debt.................................. 4,910 37,570
Accrued compensation............................................... 9,542 10,400
Accrued insurance.................................................. 6,920 7,824
Income taxes payable............................................... 2,888 2,618
Other accrued liabilities.......................................... 13,279 14,613
----------- -----------
Total current liabilities...................................... 98,600 133,517
Long-term debt, excluding current portion.......................... 34,944 82
Deferred income taxes.............................................. 12,272 11,180
Postretirement benefits............................................ 17,443 17,853
Other noncurrent liabilities....................................... 11,357 13,218
SHAREHOLDER'S EQUITY
Common stock, No par value:
Authorized 200 shares; issued 100 shares......................... 1,212 1,212
Paid-in capital.................................................... 95,016 95,016
Receivable from Parent............................................. (1,245) (2,000)
Retained deficit................................................... (9,762) (2,566)
----------- -----------
Total shareholder's equity..................................... 85,221 91,662
----------- -----------
Total liabilities and shareholder's equity..................... $ 259,837 $ 267,512
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-78
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of International Controls Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1993 1994
----------- -----------
<S> <C> <C>
Revenues................................................................................ $ 153,623 $ 215,050
Cost of revenues........................................................................ 134,894 186,359
----------- -----------
GROSS PROFIT............................................................................ 18,729 28,691
Selling, general and administrative expenses............................................ 13,585 14,391
Interest expense........................................................................ 1,182 902
Other expense (income), net............................................................. (708) 579
----------- -----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES.................. 4,670 12,819
Income taxes............................................................................ 1,962 5,623
----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES................................... 2,708 7,196
Cumulative effect of accounting changes:
Postretirement benefits (net of income taxes of $5,925)............................... (9,260) --
Income taxes.......................................................................... (17,868) --
----------- -----------
NET INCOME (LOSS)....................................................................... $ (24,420) $ 7,196
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-79
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of International Controls Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1993 1994
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................................... $ (24,420) $ 7,196
Adjustments to reconcile net income (loss) to net cash flow provided by (used in)
operating activities:
Cumulative effect of accounting changes............................................... 27,128 --
Depreciation.......................................................................... 1,869 1,971
Amortization of cost in excess of net assets acquired................................. 579 584
Other amortization and other non cash charges......................................... 41 62
Deferred Federal income taxes......................................................... (1,600) (2,017)
Provision for losses on receivables and warranty claims............................... 907 2,155
Collections of finance lease receivables.............................................. 1,318 813
Changes in operating assets and liabilities:
Accounts receivable................................................................. (16,909) (16,289)
Finance lease receivables........................................................... 58 --
Inventories......................................................................... (6,535) 7,916
Other assets........................................................................ (1,156) 39
Accounts payable.................................................................... 6,919 (569)
Income taxes........................................................................ 448 830
Other liabilities................................................................... 2,714 2,275
Items charged by Parent:
Federal income taxes................................................................ 2,925 6,245
---------- ---------
Net cash flow provided by (used in) operating activities.................................. (5,714) 11,211
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.............................................. (3,401) (2,303)
Proceeds from disposal of property, plant and equipment................................. 629 152
Other................................................................................... 54 143
---------- ---------
Net cash flow used in investing activities................................................ (2,718) (2,008)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing................................................................. 15,091 --
Principal payments on debt.............................................................. (2,768) (2,202)
Increase in receivable from Parent...................................................... (4,000) (7,000)
---------- ---------
Net cash flow provided by (used in) financing activities.................................. 8,323 (9,202)
---------- ---------
(Increase) decrease in cash and cash equivalents........................................ (109) 1
Beginning cash and cash equivalents..................................................... 513 285
---------- ---------
ENDING CASH AND CASH EQUIVALENTS.......................................................... $ 404 $ 286
---------- ---------
---------- ---------
</TABLE>
See notes to consolidated financial statements.
F-80
<PAGE>
GREAT DANE TRAILERS, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of International Controls Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 1994
(unaudited)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Great Dane
Trailers, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In Management's opinion, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 1994, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1994. For further information, refer to the audited consolidated
financial statements and footnotes thereto.
NOTE B--INVENTORIES
Inventories are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1993 1994
-------------- -----------
<S> <C> <C>
Raw materials and supplies....................................... $ 46,719 $ 47,764
Work-in-process.................................................. 8,852 10,103
Finished goods................................................... 27,941 17,729
-------------- -----------
$ 83,512 $ 75,596
-------------- -----------
-------------- -----------
</TABLE>
NOTE C--INCOME TAXES
The Company's estimated effective tax rate differs from the statutory rate
because of state income taxes as well as the impact of the reporting of certain
income and expense items in the financial statements which are not taxable or
deductible for income tax purposes.
NOTE D--ACCOUNTING CHANGES
Effective January 1, 1993, the Company adopted the provisions of FAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
The Company recorded a charge of $9.3 million (net of taxes of $5.9 million),
during the quarter ended March 31, 1993 to reflect the cumulative effect of
this change in accounting principle.
Effective January 1, 1993, the Company adopted the provisions of FAS No.
109, "Accounting for Income Taxes." The Company recorded a charge of $17.9
million, during the quarter ended March 31, 1993, to reflect the cumulative
effect of this change in accounting principle.
F-81
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE ISSUERS
OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE ISSUERS SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.......................... 2
Prospectus Summary............................. 3
Risk Factors................................... 13
Proposed Refinancing........................... 19
Use of Proceeds................................ 20
Dividends...................................... 20
Capitalization................................. 21
The Company.................................... 22
Selected Consolidated Financial Data........... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 25
Business....................................... 29
Management..................................... 41
Certain Relationships and Related
Transactions.................................. 51
Ownership of Common Stock...................... 51
Description of New Credit Facility............. 51
Description of Units........................... 54
Description of Warrants........................ 54
Description of Capital Stock................... 56
Description of Notes........................... 57
Certain Federal Income Tax
Consequences.................................. 93
Underwriting................................... 98
Legal Matters.................................. 99
Experts........................................ 99
Index to Financial Statements.................. F-1
</TABLE>
$300,000,000
INTERNATIONAL
CONTROLS CORP.
$200,000,000 % First Priority
Senior Secured Notes due 2001
100,000 Units Consisting of
$100,000,000 % Senior
Subordinated Notes due 2004
and
Warrants to Purchase Shares of Common Stock
-------------
PROSPECTUS
-------------
ALEX. BROWN & SONS
INCORPORATED
SPP HAMBRO & CO.
, 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
APPENDIX A
EXPLANATION OF CORPORATE STRUCTURE CHART
The following is an explanation of the corporate structure chart
which appears on page 6 of the Prospectus. The purpose of the chart is to
illustrate the basic corporate structure of the Company and its subsidiaries.
That chart shows the following:
Checker Motors Corporation and Great Dane Trailers, Inc. are
100%-owned subsidiaries of International Controls Corp.
Great Dane Trailer, Nebraska, Inc., Great Dane Trailers Tennessee,
Inc., and Great Dane Los Angeles, Inc., are 100%-owned subsidiaries of
Great Dane. South Charleston Stamping & Manufacturing Company is 90%-owned by
Motors and 10%-owned by Executive Life Insurance Company.
Yellow Cab Company, Chicago AutoWerks Inc., CMC Kalamazoo Inc. and
American Country Insurance Company are 100%-owned subsidiaries of Motors.
