<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1998
REGISTRATION NO. 333-51415
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NEWCOR, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
3714
(Primary Standard Industrial
Classification Code Number)
38-0865770
(I.R.S. Employer
Identification Number)
AND THE FOLLOWING ADDITIONAL REGISTRANTS, EACH A SUBSIDIARY GUARANTOR:
<TABLE>
<S> <C> <C>
MICHIGAN ROCHESTER GEAR, INC. 38-2379349
WISCONSIN PLASTRONICS PLUS, INC. 39-1513019
MICHIGAN GRAND MACHINING COMPANY 38-1447019
MICHIGAN DECO TECHNOLOGIES, INC. 38-3111177
MICHIGAN DECO INTERNATIONAL, INC. 38-3188128
MICHIGAN TURN-MATIC, INC. 38-1876306
(State or other jurisdiction of (Exact name of Guarantor (IRS Employer
incorporation or organization) as specified in its charter) Identification Number)
</TABLE>
1825 SOUTH WOODWARD AVENUE, SUITE 240, BLOOMFIELD HILLS, MICHIGAN 48302, (248)
253-2400
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------
For Each Registrant:
W. JOHN WEINHARDT
1825 SOUTH WOODWARD AVENUE, SUITE 240
BLOOMFIELD HILLS, MICHIGAN 48302
(248) 253-2400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
with copies to:
Kent E. Shafer, Esq.
Miller, Canfield, Paddock and Stone, P.L.C.
150 West Jefferson Avenue
Detroit, Michigan 48226
(313) 963-6420
------------------------
Approximate date of commencement of proposed sale to the public: Upon
consummation of the Exchange Offer referred to herein.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
------------------
If this form is a post-effective amendment pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
OFFER TO EXCHANGE
ALL OUTSTANDING 9 7/8% SENIOR SUBORDINATED NOTES DUE 2008
($125,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR 9 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008
($125,000,000 PRINCIPAL AMOUNT)
OF NEWCOR, INC.
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON JULY 10, 1998, UNLESS EXTENDED.
- --------------------------------------------------------------------------------
Newcor, Inc., a Delaware corporation (the "Issuer"), hereby offers (the
"Exchange Offer"), upon the terms and subject to the conditions set forth in
this Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange up to an aggregate principal amount of $125,000,000
of its 9 7/8% Series B Senior Subordinated Notes due 2008 (the "Exchange Notes")
for an equal principal amount of its outstanding 9 7/8% Senior Subordinated
Notes due 2008 (the "Notes"), in integral multiples of $1,000. The Exchange
Notes will be substantially identical (including principal amount, interest
rate, maturity and redemption rights) to the notes for which they may be
exchanged pursuant to the Exchange Offer, except that (i) the offer and sale of
the Exchange Notes will have been registered under the Securities Act of 1933,
as amended (the "Securities Act"), and (ii) holders of Exchange Notes will not
be entitled to certain rights of holders of the Notes under the A/B Exchange
Registration Rights Agreement of the Issuer and certain of its subsidiaries that
have guaranteed the Notes and will guarantee the Exchange Notes (the "Subsidiary
Guarantors") dated as of March 4, 1998 (the "Registration Rights Agreement").
The Notes have been, and the Exchange Notes will be, issued under an indenture
(the "Indenture") dated as of March 4, 1998 among the Issuer, the Subsidiary
Guarantors and U.S. Bank Trust National Association (formerly known as First
Trust National Association), as trustee (the "Trustee"). See "Description of
Exchange Notes." There will be no proceeds to the Issuer from this offering;
however, pursuant to the Registration Rights Agreement, the Issuer will bear
certain offering expenses.
The Issuer will accept for exchange any and all validly tendered Notes on
or prior to 5:00 p.m., New York City time, on July 10, 1998 (the "Expiration
Date"), unless the Exchange Offer is extended. Tenders of Notes may be withdrawn
at any time prior to 5:00 p.m. on the Expiration Date; otherwise, such tenders
are irrevocable. U.S. Bank Trust National Association will act as exchange agent
(in such capacity, the "Exchange Agent") in connection with the Exchange Offer.
The Exchange Offer is not conditioned on any minimum principal amount of Notes
being tendered for exchange but is subject to certain other customary
conditions.
The Notes were sold by the Issuer on March 4, 1998 (the "Offering") in
transactions not registered under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act. The Notes were
subsequently resold to qualified institutional buyers in reliance upon Rule 144A
under the Securities Act. Accordingly, the Notes may not be reoffered, resold or
otherwise transferred in the United States unless registered under the
Securities Act or unless an applicable exemption from the registration
requirements of the Securities Act is available. The Exchange Notes are being
offered in order to satisfy certain obligations of the Issuer under the
Registration Rights Agreement. See "The Exchange Offer."
A portion of the net proceeds of the Offering was used to finance the
acquisitions by the Issuer of each of Grand Machining Company, Deco
Technologies, Inc. and Deco International Inc. and of Turn-Matic, Inc. and to
refinance indebtedness of the Issuer incurred in connection with its acquisition
of Machine Tool & Gear, Inc. (collectively, the "Acquisitions"). See "The
Acquisitions."
(continued on inside front cover)
------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE ISSUERS OR SUBSIDIARY GUARANTORS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE EXCHANGE NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE EXCHANGE NOTES
TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER
OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE EXCHANGE
NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is June 10, 1998.
<PAGE> 3
(continued from cover)
Interest on the Exchange Notes will be payable semi-annually on March 1 and
September 1 of each year, commencing September 1, 1998. The Exchange Notes will
mature on March 1, 2008. The Exchange Notes will be redeemable, in whole or in
part, at the option of the Issuer, on or after March 1, 2003 at the redemption
prices set forth herein, plus accrued and unpaid interest and Liquidated Damages
(as defined herein), if any, to the date of redemption. In addition, at any time
prior to March 1, 2001 the Issuer may, at its option, on any one or more
occasions, redeem up to $43,750,000 principal amount of Notes and Exchange Notes
at a redemption price equal to 109.875% of the aggregate principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the redemption date, with the net cash proceeds of one or more public
common stock offerings; provided that at least $81,250,000 aggregate principal
amount of the Notes and Exchange Notes will remain outstanding immediately
following each such redemption. Upon a Change of Control (as defined herein),
each holder of the Exchange Notes will have the right to require the Issuer to
repurchase such holder's Exchange Notes at 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
to the date of repurchase. See "Description of Exchange Notes."
The Exchange Notes will be general unsecured obligations of the Issuer and
will rank subordinate in right of payment to all Senior Debt (as defined herein)
of the Issuer and senior or equal in right of payment to all other existing and
future subordinated indebtedness of the Issuer. The Notes are, and the Exchange
Notes will be, unconditionally guaranteed (the "Subsidiary Guarantees") on a
senior subordinated basis by the Subsidiary Guarantors (as defined herein). The
Subsidiary Guarantees will be general unsecured obligations of the Subsidiary
Guarantors and will rank subordinate in right of payment to all Senior Debt of
the Subsidiary Guarantors and senior or equal in right of payment to all other
existing and future subordinated indebtedness of the Subsidiary Guarantors. The
Exchange Notes and the Notes will rank equally with one another, and each
Subsidiary Guarantor's guarantee of the Exchange Notes will rank equally with
its guarantee of the Notes. As of January 31, 1998, on a pro forma basis after
giving effect to the Acquisitions, the Offering and the application of the
proceeds of the Offering, the Notes would have been subordinate to $10.3 million
of Senior Debt of the Issuer (excluding guarantees by the Issuer of Senior Debt
of its subsidiaries), and the Subsidiary Guarantees would have been subordinate
to $6.1 million of Senior Debt of the Subsidiary Guarantors (excluding
guarantees by the Subsidiary Guarantors of Senior Debt of the Issuer). See
"Description of Exchange Notes."
The Exchange Offer is being made in reliance on certain no-action positions
that have been published by the staff of the Securities and Exchange Commission
(the "Commission") which require each tendering noteholder to represent that it
is acquiring the Exchange Notes in the ordinary course of its business and that
such holder does not intend to participate and has no arrangement or
understanding with any person to participate in a distribution of the Exchange
Notes. In some cases, certain broker-dealers may be required to deliver a
prospectus in connection with the resale of Exchange Notes that they receive in
the Exchange Offer. See "The Exchange Offer" and "Plan of Distribution."
There has not previously been any public market for the Exchange Notes. The
Issuer does not intend to list the Exchange Notes on any securities exchange or
to seek approval for quotation through any automated quotation system. There can
be no assurance that an active market for the Exchange Notes will develop. To
the extent that an active market for the Exchange Notes does develop, the market
value of the Exchange Notes will depend on market conditions (such as yields on
alternative investments), general economic conditions, the Issuer's financial
condition and other factors. Such conditions might cause the Exchange Notes, to
the extent that they are actively traded, to trade at a significant discount
from face value. See "Risk Factors -- Lack of Public Market for Exchange Notes."
ANY NOTES NOT TENDERED AND ACCEPTED IN THE EXCHANGE OFFER WILL REMAIN
OUTSTANDING. TO THE EXTENT ANY NOTES ARE TENDERED AND ACCEPTED IN THE EXCHANGE
OFFER, A HOLDER'S ABILITY TO SELL UNTENDERED NOTES COULD BE ADVERSELY AFFECTED.
FOLLOWING CONSUMMATION OF THE EXCHANGE OFFER, THE HOLDERS OF NOTES WILL CONTINUE
TO BE SUBJECT TO THE EXISTING RESTRICTIONS ON TRANSFER THEREOF. HOLDERS WHO DO
NOT TENDER THEIR NOTES GENERALLY WILL NOT HAVE ANY FURTHER REGISTRATION RIGHTS
UNDER THE REGISTRATION RIGHTS AGREEMENT OR OTHERWISE. SEE "THE EXCHANGE OFFER --
CONSEQUENCES OF FAILURE TO EXCHANGE."
The Exchange Notes generally will be issued in registered, global form
without interest coupons (the "Global Exchange Notes"), which will be deposited
with, or on behalf of, The Depository Trust Company ("DTC") and registered in
its name or in the name of Cede & Co., its nominee. Beneficial interests in the
Global Exchange Notes representing the Exchange Notes will be shown on, and
transfers thereof will be effected through, records maintained by DTC and its
participants. After the initial issuance of the Global Exchange Notes, Exchange
Notes in certificated form will be issued in exchange for the Global Exchange
Notes only on the terms set forth in the Indenture. See "Description of Exchange
Notes -- Book Entry, Delivery and Form."
<PAGE> 4
ADDITIONAL INFORMATION
The Issuer is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Issuer can be inspected and copied at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and the regional
offices of the Commission located at 7 World Trade Center, New York, New York
10048 and 500 West Madison Street, 14th Floor, Chicago, Illinois 60661. Copies
of such materials may be obtained from the Public Reference Section of the
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at its public reference facilities in New York, New York and Chicago, Illinois
at prescribed rates. The Issuer makes its filings with the Commission
electronically. The Commission maintains a Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically, which information can be accessed at http://www.sec.gov.
The Subsidiary Guarantors' financial and other disclosure obligations under
the informational requirements of the Exchange Act will be fulfilled by
including information regarding the Subsidiary Guarantors in the Issuer's
periodic reports.
The Issuer has agreed in the Indenture that, whether or not required by the
rules of the Commission, so long as any Notes or Exchange Notes are outstanding,
it will furnish to the holders of Notes and Exchange Notes (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the Commission on Forms 10-Q and 10-K if the Issuer were required to file
such forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that describes the financial condition and
results of operations of the Issuer and its consolidated subsidiaries and, with
respect to the annual information only, a report thereon by the Issuer's
independent accountants and (ii) all current reports that would be required to
be filed with the Commission if the Issuer were required to file such reports.
For all reporting periods ending on or prior to January 31, 1999, the Issuer has
agreed to include in each Form 10-Q and 10-K a presentation, which need not be
audited, of certain financial information for such period and the twelve months
ended on the last day of such period on a pro forma basis. The Issuer has also
agreed that, following consummation of the Exchange Offer, whether or not
required by the rules of the Commission, it will file a copy of all such
information and reports with the Commission for public availability within the
time periods specified in the Commission's rules (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request.
In addition, the Issuer and the Subsidiary Guarantors have agreed that, for
so long as any Notes or Exchange Notes remain outstanding, they will furnish to
the holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
The Issuer has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act for the registration of the Exchange Notes offered
hereby (the "Registration Statement"). This Prospectus, which constitutes a part
of the Registration Statement, does not contain all the information set forth in
the Registration Statement, certain items of which are contained in exhibits and
schedules to the Registration Statement as permitted by the rules and
regulations of the Commission. For further information about the Issuer and the
Exchange Notes offered hereby, reference is made to the Registration Statement,
including the exhibits (some of which are incorporated by reference to other
Company filings with the Commission) and financial statement schedules thereto,
which may be inspected without charge at the public reference facility
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of which may be obtained from the Commission at prescribed rates or
from the Web site described above. Statements made in this Prospectus concerning
the contents of any documents referred to herein are not necessarily complete.
With respect to each such document filed or incorporated by reference as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement is
qualified in its entirety by such reference.
i
<PAGE> 5
FORWARD-LOOKING STATEMENTS
This Prospectus, including the "Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
sections, contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, which can be identified by the
use of forward-looking terminology, such as "may," "intend," "will," "expect,"
"anticipate," "plan," "management believes," "estimate," "continue," or
"position" or the negative thereof or other variations thereon or comparable
terminology. In particular, any statements, express or implied, concerning
future operating results or the ability to generate revenues, income or cash
flow to service the Notes and Exchange Notes are forward-looking statements.
Investors in the Exchange Notes offered hereby are cautioned that reliance on
any forward-looking statements involves risks and uncertainties and that,
although the Issuer believes that the assumptions on which the forward-looking
statements contained herein are based are reasonable, any of those assumptions
could prove to be inaccurate. As a result, the forward-looking statements based
on those assumptions also could be incorrect, and actual results may differ
materially from any results indicated or suggested thereby. The uncertainties in
this regard include, but are not limited to, those identified herein under "Risk
Factors" and under "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Cautionary Statements Under the 'Safe Harbor'
Provisions of the Private Securities Litigation Reform Act of 1995." In light of
these and other uncertainties, the inclusion of a forward-looking statement
herein should not be regarded as a representation by the Company that the
Company's plans and objectives will be achieved. All forward-looking statements
are expressly qualified by such cautionary statements, and the Company expressly
disclaims any duty to update such forward-looking statements.
ii
<PAGE> 6
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the notes thereto, appearing elsewhere in this Prospectus. Newcor, Inc. (the
"Issuer") acquired substantially all of the assets of Machine Tool & Gear, Inc.
("MT&G") on December 23, 1997 and acquired the stock of each of Grand Machining
Company, Deco Technologies, Inc. and Deco International, Inc. (collectively,
"Deco"), and of Turn-Matic, Inc. ("Turn-Matic") on March 4, 1998. MT&G, Deco and
Turn-Matic are collectively referred to herein as the "Acquired Companies" and
their respective acquisitions are referred to herein as the "MT&G Acquisition,"
the "Deco Acquisition" and the "Turn-Matic Acquisition" and, collectively, as
the "Acquisitions." See "The Acquisitions." Unless the context requires
otherwise, "Newcor" or the "Company" refers to Newcor, Inc. and its
subsidiaries. "Pro forma" information relates to the Company on a pro forma
basis after giving effect to the Acquisitions, the Offering and the application
of the proceeds of the Offering. Unless otherwise indicated, each reference to a
fiscal year is to the Company's fiscal year, which ends on October 31 of the
year specified. Pro forma information as of and for the fiscal year ended
October 31, 1997 includes results for the Acquired Companies as of and for the
twelve months ended September 30, 1997, and pro forma information as of and for
the quarter ended January 31, 1998 includes results for the Acquired Companies
as of and for the three months ended December 31, 1997.
THE COMPANY
GENERAL
The Company is a leading manufacturer of precision machined components and
assemblies for the automotive, medium and heavy duty truck and agricultural
vehicle industries and is a manufacturer of custom rubber and plastic products
primarily for the automotive industry. The Company is also a supplier of
standard and custom machines and systems primarily for the automotive and
appliance industries. The Company's largest customers include leading vehicle
original equipment manufacturers ("OEMs") such as Chrysler Corporation
("Chrysler"), Ford Motor Company ("Ford"), General Motors Corporation ("General
Motors" or "GM") and Deere & Company ("Deere"), and direct suppliers to the OEMs
("Tier 1 suppliers") such as American Axle & Manufacturing, Inc. ("American
Axle") and Detroit Diesel Corporation ("Detroit Diesel"). The Company's products
are typically supplied to customers on a sole-source basis. Sole-source sales
represented approximately 89% of fiscal 1997 pro forma sales. The Company's
management has extensive experience in the automotive supply industry and has
integrated five acquired businesses (excluding the Acquired Companies) into
existing operations over the past 48 months.
Through internal growth and acquisitions, the Company's sales from
continuing operations increased at a compound annual rate of 18.9%, from $65.4
million in fiscal 1993 to $130.8 million in fiscal 1997, and EBITDA (as defined
herein) increased from $1.9 million in fiscal 1993 to $12.6 million in fiscal
1997. The Acquired Companies had aggregate sales of $111.8 million and aggregate
pro forma EBITDA of $19.5 million for the twelve months ended September 30,
1997. On a pro forma basis, the Company had sales and EBITDA of $242.6 million
and $32.1 million, respectively, for fiscal 1997.
The Company's products are used in more than 25 passenger car models and
nearly all light truck and sport utility models manufactured in the United
States, including such leading vehicles as the Ford Taurus, Lincoln Continental,
Chrysler Concorde, Dodge Intrepid, Pontiac Grand Prix, Buick Park Avenue, Ford F
series of light trucks, General Motors C/K series of light trucks and sport
utility vehicles, Jeep sport utility vehicles and Dodge Ram series of light
trucks and sport utility vehicles. In addition, the Company is the leading
independent supplier of precision machined components to Deere's tractor
operations and to Detroit Diesel, the largest producer of engines for class 8
heavy duty trucks in North America.
The Company is organized into three business groups: the Precision Machined
Products Group, the Rubber and Plastic Group and the Special Machines Group.
Certain key products manufactured by each of these groups, and certain key
processes used to manufacture those products, are described in the "Glossary"
section of this Prospectus. Pro forma fiscal 1997 EBITDA amounts presented below
for these groups do not reflect $1.2 million of certain unallocated corporate
expenses.
1
<PAGE> 7
The Precision Machined Products Group produces transmission, powertrain and
engine components and assemblies, primarily for the automotive, medium and heavy
duty truck and agricultural vehicle industries. Automotive products include
gears, gear blanks and shafts for transmissions; bearing caps, oil filter
adapters and manifolds for engines; thrust and pressure plates for power
steering systems; and axles. Products for the medium and heavy duty truck
industry include rocker arm components and assemblies, accessory drive
assemblies and other engine components. Products for the agricultural vehicle
industry include transfer cases, differential cases, transmission housings and
brake pedals. The Precision Machined Products Group generated $172.2 million, or
71.0%, of the Company's pro forma sales and $27.0 million, or 81.0%, of the
Company's pro forma EBITDA in fiscal 1997.
The Rubber and Plastic Group produces cosmetic and functional seals and
boots and functional engine compartment products supplied primarily to the
automotive industry. The group's seals and boots include interior and exterior
floor gear shift lever boots, steering column seals, door lock actuator boots
and a variety of other products that insulate the passenger compartment from the
external environment. The group's functional engine compartment products include
custom designed vacuum reservoirs essential for the operation of air
conditioning, cruise control and other vehicle systems. The Rubber and Plastic
Group generated $48.5 million, or 20.0%, of the Company's pro forma sales and
$3.7 million, or 11.1%, of the Company's pro forma EBITDA in fiscal 1997.
The Special Machines Group designs and manufactures standard and custom
welding, assembly, forming, heat treating and testing machines and systems for
the automotive, appliance and other industries. The Special Machines Group
generated $21.9 million, or 9.0%, of the Company's pro forma sales and $2.6
million, or 7.9%, of the Company's pro forma EBITDA in fiscal 1997.
COMPETITIVE STRENGTHS
Full-Service Supplier with Broad Manufacturing Capabilities. The Company's
diverse range of manufacturing capabilities enables it to tailor manufacturing
processes to meet each customer's specific requirements and reduces the need for
customers to rely on multiple suppliers. The Company specializes in the high
volume production of components and assemblies involving extremely close
tolerances, complex processes and in some cases difficult materials. The
Company's manufacturing operations utilize advanced equipment such as modern
Computer Numerical Control ("CNC") machines, synchronous and non-synchronous
transfer lines, and proprietary custom molding machines. Precision machining
operations include milling, drilling, turning, heat-treating, honing, broaching
and electronic gauging, as well as more demanding processes such as gun
drilling, spline rolling, ultra precision grinding, super-finishing, lapping and
laser welding. Rubber and plastic molding operations include conventional
injection molding, as well as dip molding, slush casting, rotational molding,
injection molding of multiple-durometer products, sonic welding and other
processes. The Company designs and builds much of its own automation and custom
tooling and most of its non-standard machines. Increasingly, the Company also
provides its customers with value-added capabilities such as design and
development, engineering, assembly and testing, and program management from
concept development through production and assembly. Management believes that
the Acquisitions will further enhance the scope of the Company's engineering,
design and assembly capabilities and provide a competitive advantage as OEMs and
their Tier 1 suppliers increasingly rely on and award new business to
established and well-known suppliers.
Efficient, High Quality Operations. The Company's manufacturing expertise
allows it to focus primarily on higher value added, more complex components and
assemblies with very exacting dimensional, finish and cosmetic requirements. The
Company also proactively works with its customers to improve the design and
manufacturing processes used in its products. These initiatives often lead to
improved quality and product performance, improved efficiency and reduced
manufacturing costs. The Company uses the cost savings and other benefits
derived from these efforts to reinforce its customer relationships. In addition,
ISO 9000 and QS 9000 quality certifications are integral to the Company's
operating methodology and commitment to quality. Currently, 11 of the Company's
15 manufacturing facilities are ISO 9000 or QS 9000 certified, with the
remaining four expected to be certified by the end of 1998. Management believes
that the Company's
2
<PAGE> 8
manufacturing expertise and commitment to quality are among the primary reasons
for the Company's strong historical growth and customer loyalty.
Strong Relationships with Customers. Approximately 78% of the Company's pro
forma fiscal 1997 sales were generated by the Company's six largest customers,
each of which the Company has served for over 25 years, and the Company is the
sole-source outside supplier on nearly all of the products it manufactures for
its major customers. The Company has developed collaborative relationships with
its customers by providing them with integrated product development and
manufacturing capabilities, high quality products, timely delivery and excellent
customer service. The Acquired Companies have products and customer bases which
complement the Company's other operations, and the combination of these
businesses makes the Company a larger supplier to several of its key customers
and creates cross-selling opportunities. Management intends to leverage the
Company's selling resources and established customer relationships to introduce
its customers to the full range of products and process capabilities of each of
its operations. For example, the Company plans to introduce its broad precision
machining capabilities to existing Deco customers such as Detroit Diesel.
Product, Vehicle, Customer and Industry Diversification. The Company offers
in excess of 50 different major products, many of which are sole-sourced, for
use on more than 60 different vehicle platforms. These products are sold to
customers who are diversified across the automotive, medium and heavy duty truck
and agricultural vehicle industries, with no single customer accounting for more
than approximately 20% of pro forma 1997 sales. Management believes that this
product, vehicle, customer and industry diversification can help reduce the
Company's dependence on any single source of revenue.
OPERATING STRATEGY
Strengthen Positions in Established Product Niches. The Company's goal is
to continue to develop expertise and expand market presence centered around its
two key operating platforms, which are (i) precision machined transmission,
powertrain and engine components and assemblies for the automotive, medium and
heavy duty truck and agricultural vehicle industries through the Precision
Machined Products Group, and (ii) manufacturing of rubber and plastic cosmetic,
functional sealing and underhood components for the automotive industry through
the Rubber and Plastic Group. Management believes that these two platforms
provide opportunities for profitable growth due to the existence of relatively
few competitors with comparable manufacturing and program management
capabilities.
Capitalize on Increased Outsourcing. Component and assembly outsourcing is
a well established trend in the automotive industry and is becoming increasingly
prevalent in the medium and heavy duty truck and agricultural vehicle
industries. The Company's status as an incumbent supplier positions it to
participate in the growth in outsourcing by capturing incremental business from
existing customers and marketing its experience and capabilities to new
customers with outsourcing needs. Management plans to continue to develop and
market the Company's design, engineering and assembly capabilities and believes
that its diverse process capabilities and full-service supplier status give the
Company the opportunity to compete more effectively for complex, higher
value-added and more profitable assembly work.
Pursue Continuous Operating Improvement. The Company's operating philosophy
is based on the rigorous implementation of lean production systems supported by
world-class quality management and excellence in customer service, as measured
by quality, on-time delivery, timely product launches and low manufacturing
cost. The Company has developed and is implementing a comprehensive company-wide
management system (the "Newcor Operating System") which emphasizes continuous
improvement and integrates a quality operating system, cellular manufacturing,
one-piece flow, working capital management, supply chain management, value
engineering, kaizen, team-oriented problem solving and leadership skills into an
overall culture and system of management. Implementation of the Newcor Operating
System has led to significant improvements in scrap rates, labor productivity,
working capital turnover and other measureables in certain of the Company's
businesses. Management believes that similar improvements can be achieved in
each of the Company's businesses, over time, as training is increased and the
Newcor Operating System is extended to all locations.
3
<PAGE> 9
Selectively Pursue Strategic Acquisitions. Strategic acquisitions have
been, and will continue to be, an integral part of the Company's growth
strategy. The market niches in which the Company operates have a high degree of
fragmentation among competitors, often presenting significant opportunities for
consolidation. Management believes that the Company's reputation and market
leadership make it an attractive strategic acquiror for smaller competitors that
may be unable to meet the necessary investment requirements and increasingly
stringent criteria being imposed by OEMs and their Tier 1 suppliers. Management
plans to continue to pursue acquisition opportunities that are complementary to
the Company's existing niche platforms, particularly those that expand
technological capabilities, product offerings, customer base or geographical
scope. Other key factors management considers when reviewing acquisition
opportunities include the potential for cost savings and cross-selling, and the
opportunity to enhance engineering, assembly and other value-added operating and
program management capabilities.
The Company's and Subsidiary Guarantors' principal executive offices are
located at 1825 S. Woodward Ave., Suite 240, Bloomfield Hills, Michigan 48302.
The telephone number for each of them is (248) 253-2400.
THE ACQUISITIONS
MT&G. On December 23, 1997, the Company purchased substantially all of the
assets of MT&G, a Corunna, Michigan based manufacturer of high volume, precision
machined components. MT&G's products include differential pinion and side gears,
output shafts and rear axle shafts for the automotive industry. MT&G's sales and
pro forma EBITDA for the twelve months ended September 30, 1997 were $21.8
million and $3.4 million, respectively. Newcor acquired MT&G for $27.3 million,
consisting of approximately $5.6 million in cash and $21.7 million in the form
of a promissory note (bearing interest at 8% per annum and payable in full on
the closing date of the Offering), plus the assumption of approximately $5.8
million of debt. A key strategic consideration in management's decision to
acquire MT&G was that American Axle has recently awarded MT&G long-term
contracts to machine near net shape gears for the General Motors C/K series of
light trucks and sport utility vehicles. MT&G has commenced production of the
gears and is scheduled to reach full production levels early in the third
quarter of fiscal 1998. MT&G's historical results do not reflect this new
business from American Axle.
Deco. On March 4, 1998, the Company acquired the stock of the three
companies comprising Deco, a Royal Oak, Michigan based manufacturer of high
volume, precision machined components and assemblies. Deco's products include
rocker arm components and assemblies, transmission shafts, axle shafts, thrust
and pressure plates and other products for the medium and heavy duty truck and
automotive industries. Deco's sales and pro forma EBITDA for the twelve months
ended September 30, 1997 were $74.2 million and $11.1 million, respectively.
Sales and pro forma EBITDA for the year ended December 31, 1997 were $75.5
million and $10.7 million, respectively. Newcor acquired Deco for $54.9 million
in cash, subject to certain net book value adjustments.
Turn-Matic. On March 4, 1998, the Company acquired the stock of Turn-Matic,
a Clinton Township, Michigan based manufacturer of high volume, precision
machined components and assemblies. Turn-Matic manufactures engine components
including oil filter adapters, main bearing caps and intake and exhaust
manifolds for the automotive industry. Turn-Matic's sales and pro forma EBITDA
for the twelve months ended September 30, 1997 were $15.8 million and $5.0
million, respectively. Newcor acquired Turn-Matic for $17.0 million in cash,
subject to certain net book value adjustments, plus contingent future payments
(not to exceed $3.5 million in total) based on profitability of the Turn-Matic
business over a five-year period following the closing.
RECENT DEVELOPMENTS
On May 21, 1998, the Company announced sales of $55.4 million for the
second quarter ended April 30, 1998, an increase of $20.8 million over sales of
$34.6 million for the second quarter of fiscal 1997. For the six
4
<PAGE> 10
months ended April 30, 1998, the Company announced sales of $85.5 million, an
increase of $22.9 million over sales of $62.6 million for the same period one
year ago.
The Company announced net income of $753,000, or $0.15 per share, in the
second quarter ended April 30, 1998, compared with $1,082,000, or $0.22 per
share, in the second quarter of fiscal 1997. For the six months ended April 30,
1998, the Company announced a net loss of $279,000, or $0.06 per share, compared
with net income of $1,448,000, or $0.29 per share, for the same period one year
ago. Net income for the second quarter of $753,000 improved significantly
compared with the first quarter net loss of $1,032,000 but was below the net
income reported for the second quarter of fiscal year 1997, primarily due to:
(i) continued lower sales and profits within the Special Machines Group, due to
the relatively slower rate of new orders being booked since the third quarter of
fiscal 1997 and (ii) lower profitability within the Rubber and Plastic Group
which, although improved compared to the first quarter of 1998, continued to be
adversely affected by higher than normal hourly labor turnover.
Certain actions that management began to implement during the first and
second quarters of fiscal 1998 with respect to the Special Machines and Rubber
and Plastic Groups are expected to continue to favorably impact those businesses
during the second half of fiscal 1998. In addition, MT&G's new program launch
remains on schedule with full production expected in the third quarter of the
fiscal year.
EBITDA increased to $6.5 million, or 11.7% of sales, in the second quarter
ended April 30, 1998 from $3.4 million, or 9.9% of sales, in the second quarter
of fiscal 1997, and operating income increased to $4.1 million, or 7.4% of
sales, from $2.4 million, or 6.9% of sales, in the second quarter of fiscal
1997. For the six months ended April 30, 1998, EBITDA and operating income were
$7.0 million and $3.3 million, respectively, compared with $5.3 million and $3.3
million, respectively, in fiscal 1997.
The $20.8 million increase in sales and significant increases in EBITDA and
operating income in the second quarter, resulted primarily from the
Acquisitions.
On a pro forma basis, as if the Company had completed all of the
Acquisitions at November 1, 1996, the Company's sales, EBITDA and operating
income for the three and six month periods ended April 30, 1998 and 1997 would
have been as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30 APRIL 30
------------------ ------------------
1998 1997 1998 1997
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Pro forma sales................. $64.3 $63.0 $120.9 $118.4
Pro forma EBITDA................ 8.1 8.7 12.8 15.8
Pro forma operating income...... 5.3 6.0 7.2 10.5
</TABLE>
RISK FACTORS
Prospective investors in the Exchange Notes should carefully consider the
information set forth under the caption "Risk Factors," and all other
information set forth in this Prospectus, prior to tendering their Notes in the
Exchange Offer.
5
<PAGE> 11
THE NOTES OFFERING
The Notes..................... The Notes were sold by the Issuer in the
Offering on March 4, 1998 and were subsequently
resold to qualified institutional buyers
pursuant to Rule 144A under the Securities Act.
Registration Rights
Agreement..................... In connection with the Offering, the Issuer and
the Subsidiary Guarantors entered into the
Registration Rights Agreement, which grants
owners of the Notes certain exchange and
registration rights. The Exchange Offer is
intended to satisfy such exchange and
registration rights, which generally terminate
upon the consummation of the Exchange Offer.
THE EXCHANGE OFFER
Securities Offered............ $125,000,000 aggregate principal amount of
9 7/8% Series B Senior Subordinated Notes due
2008.
The Exchange Offer............ $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of
Notes. As of the date hereof, $125,000,000
aggregate principal amount of Notes are
outstanding. The Issuer will issue the Exchange
Notes on or promptly after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters
issued to third parties, the Issuer believes
that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Notes may be
offered for resale, resold and otherwise
transferred by any owner thereof (other than
any such owner which is an "affiliate" of the
Issuer within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery provisions
of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary
course of such owner's business and that such
owner does not intend to participate and has no
arrangement or understanding with any person to
participate in the distribution of such
Exchange Notes.
Each broker-dealer that receives Exchange Notes
for its own account pursuant to the Exchange
Offer must acknowledge that it will deliver a
prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by
delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may
be used by a broker-dealer in connection with
resales of Exchange Notes received in exchange
for Notes where such Notes were acquired by
such broker-dealer as a result of market-making
activities or other trading activities. The
Issuer has agreed that for a period of one year
after the Exchange Offer is consummated it will
make this Prospectus available to any
broker-dealer for use in connection with any
such resale.
Any owner of Notes who tenders in the Exchange
Offer with the intention to participate, or for
the purpose of participating, in a distribution
of the Exchange Notes could not rely on the
position of
6
<PAGE> 12
the staff of the Commission enunciated in Exxon
Capital Corporation (April 13, 1988) and Morgan
Stanley & Co., Incorporated (June 5, 1991) or
similar no-action letters and, in the absence
of an exemption therefrom, must comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with the resale of the Exchange
Notes. Failure to comply with such requirements
in such instance may result in liability under
the Securities Act for which the seller of the
Exchange Notes is not indemnified by the Issuer
or any Subsidiary Guarantor.
In any state where the Exchange Offer does not
fall under a statutory exemption to such
state's blue sky laws, the Issuer has filed the
appropriate registrations and notices and has
made the appropriate requests to permit the
Exchange Offer to be made in such state.
Expiration Date............... 5:00 p.m., New York City time, on July 10,
1998, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange
Offer is extended.
Interest on the Exchange Notes
and the Notes................. The Exchange Notes will bear interest from
March 4, 1998, the date of issuance of the
Notes that are tendered in exchange for the
Exchange Notes (or the most recent interest
payment date to which interest on such Notes
has been paid). Accordingly, holders of Notes
that are accepted for exchange will not receive
interest on the Notes that is accrued but
unpaid at the time of tender, but such interest
will be payable on the first interest payment
date after the Expiration Date.
Conditions to the Exchange
Offer......................... The Exchange Offer is subject to certain
customary conditions, which may be waived by
the Issuer. See "The Exchange Offer --
Conditions." No federal or state regulatory
requirements (other than securities laws) must
be complied with and no approvals must be
obtained in connection with the Exchange Offer.
Procedures for Tendering
Notes......................... Each holder of Notes (or, in the case of
interests in the Global Notes held by DTC, each
DTC participant listed in an official DTC
proxy) wishing to accept the Exchange Offer
must complete, sign and date the accompanying
Letter of Transmittal, or a facsimile thereof,
in accordance with the instructions contained
herein and therein, and mail or otherwise
deliver the Letter of Transmittal, or such
facsimile, together with the Notes and any
other required documentation, to the Exchange
Agent at the address set forth in the Letter of
Transmittal. By executing the Letter of
Transmittal, such holder or DTC participant
will represent to the Issuer and Subsidiary
Guarantors that, among other things, the holder
or DTC participant or the person receiving the
Exchange Notes, whether or not such person is
the holder of the Notes or DTC participant, is
acquiring the Exchange Notes in the ordinary
course of business and neither the holder or
DTC participant nor any such other person has
any arrangement or understanding with any
person to participate in the distribution of
such Exchange Notes. In lieu of physical
delivery of the certificates
7
<PAGE> 13
representing Notes, tendering DTC participants
may transfer Notes pursuant to the procedure
for book-entry transfer as set forth under "The
Exchange Offer -- Book Entry Transfer; ATOP."
Special Procedures for
Beneficial Owners............. Any beneficial owner whose Notes are registered
in the name of a broker, dealer, commercial
bank, trust company or other nominee and who
wishes to tender should contact such nominee
promptly and instruct such nominee to tender on
such beneficial owner's behalf. Such
instructions should be given in sufficient time
to ensure that the nominee will be able to take
the necessary steps to tender such Notes before
the Expiration Date.
Guaranteed Delivery
Procedures.................... Holders of Notes who wish to tender their Notes
and whose Notes are not immediately available
or who cannot deliver their Notes, the Letter
of Transmittal or any other documents required
by the Letter of Transmittal to the Exchange
Agent (or comply with the procedures for
book-entry transfer) prior to the Expiration
Date must tender their Notes according to the
guaranteed delivery procedures set forth in
"The Exchange Offer -- Guaranteed Delivery
Procedures."
Withdrawal Rights............. Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the
Expiration Date pursuant to the procedures
described under "The Exchange Offer --
Withdrawals of Tenders."
Acceptance of Notes and
Delivery of Exchange Notes.... The Issuer will accept for exchange any and all
Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. However, the
Issuer reserves the right to make any
determination, in its sole discretion, as to
whether or not Notes have been properly
tendered. The Exchange Notes issued pursuant to
the Exchange Offer will be delivered promptly
following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
Federal Income Tax
Consequences.................. The issuance of the Exchange Notes to holders
of the Notes pursuant to the terms set forth in
this Prospectus will not constitute an exchange
for federal income tax purposes. Consequently,
no gain or loss would be recognized by holders
of the Notes upon receipt of the Exchange
Notes. See "Certain Federal Income Tax
Consequences of the Exchange Offer."
Effect on Holders of Notes.... As a result of the making of the Exchange
Offer, the Issuer and the Subsidiary Guarantors
will have fulfilled certain of their
obligations under the Registration Rights
Agreement, and holders of Notes who do not
tender their Notes will generally not have any
further registration rights under the
Registration Rights Agreement or otherwise.
Such holders will continue to hold the
untendered Notes and will be entitled to all
the rights and subject to all the limitations
applicable thereto under the Indenture, except
to the extent such rights or limitations by
their terms terminate or cease to have further
effectiveness as a result of the Exchange
Offer. All untendered Notes will continue to be
subject to certain restrictions on transfer.
Accordingly, if any Notes are tendered and
accepted in
8
<PAGE> 14
the Exchange Offer, the trading market for the
untendered Notes could be adversely affected.
Exchange Agent................ U.S. Bank Trust National Association
9
<PAGE> 15
SUMMARY OF TERMS OF EXCHANGE NOTES
The form and terms of the Exchange Notes are the same as the form and terms
of the Notes (which they replace) except that (i) the Exchange Notes have been
registered under the Securities Act and therefore will not bear legends
restricting the transfer thereof, and (ii) the holders of Exchange Notes
generally will not be entitled to further registration rights under the
Registration Rights Agreement, which rights generally will be satisfied when the
Exchange Offer is consummated. The Exchange Notes will evidence the same debt as
the Notes and will be entitled to the benefits of the Indenture. See
"Description of Exchange Notes."
Securities Offered............ Up to $125.0 million aggregate principal amount
of 9 7/8% Series B Senior Subordinated Notes
due 2008.
Maturity Date................. March 1, 2008.
Interest Payment Dates........ Interest on the Exchange Notes will accrue from
March 4, 1998, the date of issuance of the
Notes (the "Issue Date"), at the rate of 9 7/8%
per annum, payable semi-annually in cash in
arrears on March 1 and September 1 of each
year, commencing September 1, 1998.
Optional Redemption........... On or after March 1, 2003, the Issuer may
redeem the Exchange Notes, at the redemption
prices set forth herein, plus accrued and
unpaid interest and Liquidated Damages, if any,
to the date of redemption. Notwithstanding the
foregoing, at any time prior to March 1, 2001,
the Issuer may redeem up to $43,750,000
principal amount of Notes and Exchange Notes
with the net proceeds of one or more public
offerings of common stock of the Issuer at a
redemption price equal to 109.875% of the
principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
to the date of redemption; provided that at
least $81,250,000 principal amount of the Notes
and Exchange Notes remains outstanding after
each such redemption (excluding Notes and
Exchange Notes held by the Issuer and its
Subsidiaries) and that any such redemption
occurs within 45 days of the closing of such
public offering. See "Description of Exchange
Notes -- Optional Redemption."
Ranking....................... The Exchange Notes will be subordinated in
right of payment to all existing and future
Senior Debt of the Issuer, including all
obligations under the Senior Credit Facility
(as defined herein), and equal or senior in
right of payment to all other existing and
future subordinated indebtedness of the Issuer.
The Exchange Notes and the Notes will rank
equally with one another. At January 31, 1998,
on a pro forma basis, the aggregate principal
amount of Senior Debt of the Issuer outstanding
would have been $10.3 million (excluding Senior
Debt of the Issuer's subsidiaries that is
guaranteed by the Issuer).
Subsidiary Guarantees......... The Notes are, and the Exchange Notes will be,
unconditionally guaranteed on a senior
subordinated basis by all of the Issuer's
domestic Restricted Subsidiaries, including the
Acquired Companies (the "Subsidiary
Guarantors"). The Subsidiary Guarantees will be
subordinated in right of payment to all Senior
Debt of the Subsidiary Guarantors to the same
extent that the Exchange Notes are subordinated
to Senior Debt of the Issuer, and equal or
senior in right of payment to all other
existing or future subordinated
10
<PAGE> 16
indebtedness of the Subsidiary Guarantors. Each
Subsidiary Guarantor's guarantee of the
Exchange Notes will rank equally with its
guarantee of the Notes. At January 31, 1998, on
a pro forma basis, the aggregate principal
amount of Senior Debt of the Subsidiary
Guarantors outstanding (excluding guarantees of
Senior Debt of the Issuer) would have been $6.1
million.
Change of Control............. Upon a Change of Control, each holder of
Exchange Notes will have the right to require
the Issuer to make an offer to purchase all of
such holder's Exchange Notes at a price equal
to 101% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated
Damages, if any, to the date of repurchase. See
"Description of Exchange Notes -- Repurchase at
the Option of Holders -- Change of Control."
Certain Covenants............. The Indenture contains certain covenants which,
among other things, limit the ability of the
Issuer and its Restricted Subsidiaries to: (i)
pay dividends or make certain other
distributions; (ii) repurchase equity
interests; (iii) prepay subordinated
Indebtedness; (iv) incur additional
Indebtedness and issue preferred stock; (v)
incur liens; (vi) merge or consolidate with any
other person or sell, assign, transfer, lease,
convey or otherwise dispose of all or
substantially all of the assets of the Company;
(vii) consummate certain asset sales; (viii)
enter into certain transactions with
affiliates; or (ix) enter into sale and
leaseback transactions. In addition, under
certain circumstances, the Issuer will be
required to make an offer to purchase the
Exchange Notes at a price equal to the
principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
to the date of purchase, with the proceeds of
certain asset sales. See "Description of
Exchange Notes."
Exchange Offer;
Registration Rights......... If: (i) the Exchange Offer is not permitted by
applicable law or (ii) any holder of Transfer
Restricted Securities (as defined) notifies the
Issuer within the prescribed time (A) that it
is or was prohibited by law or Commission
policy from participating in the Exchange
Offer, (B) that it may not resell the Exchange
Notes acquired by it in the Exchange Offer to
the public without delivering a prospectus and
the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or
available for such resales or (C) that it is a
broker-dealer and holds Notes acquired directly
from the Issuer or an affiliate of the Issuer,
the Registration Rights Agreement will require
the Issuer to provide a shelf registration
statement (the "Shelf Registration Statement")
to cover resales by such holders. If the Issuer
fails to satisfy these registration
obligations, it will be required to pay
Liquidated Damages to certain holders of Notes
and/or Exchange Notes under certain
circumstances. See "Description of Exchange
Notes -- Registration Rights; Liquidated
Damages."
11
<PAGE> 17
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
The following table sets forth (i) summary historical financial data of the
Company for the three fiscal years ended October 31, 1997 and the three months
ended January 31, 1997 and 1998 and (ii) summary pro forma financial data for
the fiscal year ended October 31, 1997 and the three months ended January 31,
1998. The summary historical statement of income and balance sheet data for the
Company for the fiscal years ended October 31, 1995, 1996 and 1997 are derived
from the audited consolidated financial statements of the Company included
elsewhere in this Prospectus. The summary historical financial data as of
January 31, 1998 and for the three months ended January 31, 1997 and 1998 are
derived from unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus which, in the opinion of management, include all
adjustments, consisting of only normal, recurring adjustments, necessary for a
fair presentation of the financial condition and results of operations of the
Company for such periods. The results of operations for interim periods are not
necessarily indicative of a full year's operations. The summary pro forma
statements of income data and other financial data for the fiscal year ended
October 31, 1997 and the three months ended January 31, 1998 were prepared to
illustrate the effect of the Offering and the Acquisitions as if each had
occurred on November 1, 1996, and the results for the Acquired Companies had
been included for the twelve months ended September 30, 1997 and the three
months ended December 31, 1997. The summary pro forma balance sheet at January
31, 1998 was prepared to illustrate the effect of the Offering and the
Acquisitions as if each had occurred on January 31, 1998. The pro forma data is
presented for informational purposes only and may not be indicative of the
results of operations or the financial position of the Company that would have
been obtained if the Acquisitions and Offering had in fact been completed as of
such dates, and is not intended to project the results of operations or the
financial position of the Company for any future date or period. The following
table should be read in conjunction with the "Selected Consolidated Historical
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Unaudited Pro Forma Condensed Consolidated
Financial Data," and the consolidated financial statements of the Company and
the financial statements of Acquired Companies and the related notes and other
financial information presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31,(1) THREE MONTHS ENDED JANUARY 31,
---------------------------------------- --------------------------------
PRO PRO
FORMA FORMA
1995 1996 1997 1997 1997 1998 1998
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales................................. $90,173 $111,744 $130,848 $242,609 $27,975 $ 30,134 $ 56,575
Gross margin.......................... 16,618 22,657 23,765 49,782 5,330 3,711 9,392
Operating income (loss) from
continuing operations............... 5,354 6,781 8,303 21,385 922 (778) 1,926
Interest expense...................... 1,504 1,787 2,070 13,877 432 825 3,451
Income (loss) from continuing
operations.......................... 2,391 3,558 3,890 4,558 366 (1,032) (1,027)
OTHER FINANCIAL DATA:
EBITDA(2)............................. $ 8,204 $ 10,403 $ 12,583 $ 32,136 $ 1,925 $ 499 $ 4,677
EBITDA margin(3)...................... 9.1% 9.3% 9.6% 13.2% 6.9% 1.7% 8.3%
Gross margin percentage............... 18.4 20.3 18.2 20.5 19.1 12.3 16.6
Operating margin percentage........... 5.9 6.1 6.3 8.8 3.3 (2.6) 3.4
Depreciation and amortization from
continuing operations............... $ 2,850 $ 3,622 $ 4,280 $ 10,751 $ 1,003 $ 1,277 $ 2,751
Capital expenditures for continuing
operations.......................... 4,580 2,946 3,539 7,991 620 1,749 2,419
Ratio of earnings to fixed
charges(4).......................... 3.2x 3.5x 3.4x 1.5x 2.1x -- --
Ratio of EBITDA to interest
expense(5).......................... 5.5 5.8 6.1 2.4 4.5 0.6 1.4
Ratio of debt to EBITDA(6)............ 3.2 2.4 2.6 4.4 19.0 139.2 30.2
Adjusted working capital turns(7)..... 4.7 5.3 7.5 NA NA NA NA
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, AS OF JANUARY 31,
----------------------------- -----------------------------
PRO
FORMA
1995 1996 1997 1997 1998 1998
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital................................ $26,575 $ 14,951 $ 17,938 $18,017 $ 16,899 $ 21,789
Total assets................................... 77,553 77,499 90,883 89,357 124,449 204,578
Total debt..................................... 26,200 25,400 33,100 36,500 69,450 141,400
Shareholders' equity........................... 25,909 24,441 27,415 24,572 26,137 26,137
</TABLE>
12
<PAGE> 18
- -------------------------
(1) Fiscal years 1995 and 1996 statement of income data excludes discontinued
operations which resulted from the sale of the Company's Wilson Automation
division on May 6, 1996.
(2) "EBITDA" is operating income (loss) from continuing operations plus
depreciation and amortization. EBITDA does not represent and should not be
considered as an alternative to net income or cash flow from operations, as
determined by generally accepted accounting principles ("GAAP"). The
Company's presentation may not be comparable to similar measures reported by
other companies. Newcor believes EBITDA and related ratios provide useful
information regarding a company's ability to service and/or incur
indebtedness. EBITDA does not take into account the Company's working
capital requirements, debt service requirements, capital expenditure
requirements and other commitments. Thus, it is not necessarily indicative
of amounts that may be available for discretionary use.
(3) EBITDA margin is calculated by dividing EBITDA by sales for each of the
applicable periods.
(4) Calculated by dividing earnings by total fixed charges. Earnings consist of
earnings before income taxes and fixed charges. Fixed charges consist of
interest expense, amortization of deferred financing costs and the portion
of rental expense (one-third) that the Company believes to be representative
of interest. The Company's earnings were insufficient to cover fixed charges
by $1.6 million for the three months ended January 31, 1998. On a pro forma
basis, earnings were insufficient to cover fixed charges by $1.5 million for
the three months ended January 31, 1998.
(5) Calculated by dividing EBITDA by cash interest expense, which excludes
amortization of deferred financing costs.
(6) Calculated by dividing year-end total debt by EBITDA.
(7) Calculated by dividing sales by average adjusted working capital. Average
adjusted working capital is defined as the monthly average of accounts
receivable and inventory for each fiscal year less the monthly average of
accounts payable for each fiscal year. Accounts receivable, inventory and
accounts payable balances associated with the Company's discontinued Wilson
Automation operation have been removed from this calculation.
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RISK FACTORS
Prospective investors in the Exchange Notes should carefully consider the
Risk Factors set forth below prior to tendering their Notes in the Exchange
Offer. This Prospectus, including the "Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
sections, includes forward-looking statements. See "Forward-Looking Statements,"
above. Although the Company believes that its plans, intentions and expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such plans, intentions or expectations will be achieved.
Important factors that could cause actual results to differ materially from
those included in or suggested by any forward-looking statements are set forth
below and elsewhere in this Prospectus. All forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Risk Factors set forth below.
LEVERAGE
The Company is highly leveraged. On January 31, 1998, on a pro forma basis,
the Company would have had total indebtedness of approximately $141.4 million
(of which $125.0 million would have consisted of the Notes and the balance would
have consisted of $6.1 million of industrial revenue bonds and $300,000 of
revolving credit loans and a $10.0 million term loan under the Senior Credit
Facility) and shareholders' equity of approximately $26.1 million. Tangible
shareholders' equity would have been a deficit of $70.4 million. The Company is
permitted to incur additional indebtedness in the future subject to certain
limitations. See "Pro Forma Capitalization," "Selected Consolidated Historical
Financial Data" and "Description of Exchange Notes."
The Company's ability to make scheduled payments of principal of, or to pay
the interest or Liquidated Damages, if any, on, or to refinance, its
indebtedness (including the Exchange Notes) or to fund planned capital
expenditures will depend on its future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond its control. Based upon the current level of
operations of the Company and future business which has been awarded, management
believes that cash flow from operations and available cash, together with
available borrowings under the Senior Credit Facility, will be adequate to meet
the Company's future liquidity needs until the scheduled expiration of the
Senior Credit Facility, at which time the Company would expect to replace the
Senior Credit Facility. There can be no assurance that the Company's business
will generate sufficient cash flow from operations, that anticipated growth
opportunities and operating improvements will be realized or that future
borrowings will be available under the Senior Credit Facility in an amount
sufficient to enable the Company to service its indebtedness, including the
Exchange Notes, or to fund its other liquidity needs. The Senior Credit
Facility, a term loan thereunder and a $6.1 million industrial revenue bond
issue mature prior to the maturity of the Exchange Notes, and there can be no
assurance that the Company will be able to replace the Senior Credit Facility,
or refinance any other Indebtedness, on commercially reasonable terms or at all.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The degree to which the Company is leveraged could have important
consequences to holders of the Exchange Notes, including, but not limited to:
(i) making it more difficult for the Company to satisfy its obligations with
respect to the Exchange Notes, (ii) increasing the Company's vulnerability to
general adverse economic and industry conditions, (iii) limiting the Company's
ability to obtain additional financing to fund future working capital, capital
expenditures and other general corporate requirements, or to fund acquisitions,
(iv) requiring the dedication of a substantial portion of the Company's cash
flow from operations to the payment of principal of, and interest on, its
indebtedness, thereby reducing the availability of such cash flow to fund
working capital, capital expenditures, research and development or other general
corporate purposes, (v) limiting the Company's flexibility in planning for, or
reacting to, changes in its business and the industries it serves, and (vi)
placing the Company at a competitive disadvantage compared to less leveraged
competitors. In addition, the Indenture and the Senior Credit Facility contain
financial and other restrictive covenants that limit the ability of the Company
to, among other things, borrow additional funds. Failure by the Company to
comply with such covenants could result in an event of default which, if not
cured or waived, could have a
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material adverse effect on the Company's financial condition, results of
operations and debt service capability. See "Description of Exchange Notes" and
"Description of Other Debt -- Senior Credit Facility."
RANKING
The Exchange Notes will be subordinated in right of payment to all current
and future Senior Debt of the Issuer, and the Subsidiary Guarantees of the
Exchange Notes will be subordinated in right of payment to all current and
future Senior Debt of the Subsidiary Guarantors. Upon any distribution to
creditors of the Issuer or any Subsidiary Guarantor in a liquidation or
dissolution of the Issuer or any Subsidiary Guarantor or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Issuer or such Subsidiary Guarantor or its property, the holders of Senior Debt
of the Issuer or such Subsidiary Guarantor, respectively, will be entitled to be
paid in full before any payment may be made with respect to the Exchange Notes
or the related Subsidiary Guarantee. In addition, the subordination provisions
of the Indenture provide that payments with respect to the Exchange Notes and
the Subsidiary Guarantees will be blocked in the event of a payment default on
Designated Senior Debt (as defined) and may be blocked for up to 179 days each
year in the event of certain non-payment defaults on Designated Senior Debt. In
the event of a bankruptcy, liquidation or reorganization of the Issuer, holders
of the Exchange Notes will participate ratably with all holders of subordinated
indebtedness of the Issuer that is deemed to be of the same class as the
Exchange Notes (including the Notes), and potentially with all general creditors
of the Issuer other than holders of Senior Debt, based upon the respective
amounts owed to each holder or creditor, in the remaining assets of the Issuer.
In any of the foregoing events, there can be no assurance that there would be
sufficient assets in the Issuer or the Subsidiary Guarantors to pay amounts due
on the Exchange Notes. As a result, holders of Exchange Notes may receive less,
ratably, than the holders of other debt of the Issuer or of a Subsidiary
Guarantor, including Senior Debt.
As of January 31, 1998, on a pro forma basis, the aggregate Senior Debt of
the Company (including $300,000 of revolving credit borrowings and a $10.0
million term loan under the Senior Credit Facility and $6.1 million of
industrial revenue bonds) would have been approximately $16.4 million, and
approximately $49.0 million would have been available for additional borrowing
under the Senior Credit Facility. The Indenture permits the incurrence of
additional indebtedness, including Senior Debt, by the Issuer and its
subsidiaries in the future, subject to certain limitations. See "Description of
Exchange Notes -- Incurrence of Indebtedness and Issuance of Preferred Stock"
and "Description of Other Debt -- Senior Credit Facility."
CYCLICAL NATURE OF INDUSTRIES SERVED
The markets served by the Company are highly cyclical and, in large part,
impacted by the strength of the economy generally, by prevailing interest rates
and by other factors which may have an effect on the level of sales of
automotive and other vehicles. The markets for medium and heavy duty trucks and
for automotive and agricultural vehicles, for which the Company supplies
components, have all experienced strength in recent years, but have experienced
significant downturns in the past. Such downturns have materially adversely
affected the revenues, profitability and cash flow of suppliers to these
industries, including the Company, and there can be no assurance that one or all
such industries will not experience similar downturns in the future. An economic
recession may impact substantially leveraged companies, such as the Company,
more than similarly situated companies with less leverage. A cyclical decline in
overall demand in any of the markets served by the Company could have a material
adverse effect on the Company's financial condition, results of operations and
debt service capability.
RELIANCE ON PRINCIPAL CUSTOMERS
In fiscal 1997, the Company derived 78.0% of its pro forma revenues from
its six largest customers, including 20.1% from Detroit Diesel, 19.4% from Ford,
15.9% from Deere, 8.7% from General Motors, 7.4% from Chrysler and 6.5% from
American Axle. Although the Company presently has ongoing supply relationships
with each of these customers, there can be no assurance that sales to these
customers will continue at the same levels or at all. Each of these customers
has, and regularly exercises, substantial negotiating leverage over its
suppliers, including the Company, including requests for price reductions and
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other concessions. From time to time, suppliers to these large customers,
including the Company, enter into agreements mandating periodic price
reductions, which thereby effectively require such suppliers to improve their
efficiency and reduce costs in order to maintain profit margins, and the Company
is presently a party to several such contracts. Continuation of these key
customer relationships is dependent upon the customers' satisfaction with the
price, quality and delivery of the Company's products and the Company's
engineering capabilities and customer services. While management believes its
relationships with its customers are mutually satisfactory, if any of these
customers were to reduce substantially or discontinue its purchases from the
Company, the financial condition, results of operations and debt service
capability of the Company could be materially adversely affected. See
"Business."
ACHIEVING ACQUISITION PERFORMANCE GOALS
The Acquisitions are expected to nearly double the Company's sales, and the
success of the Acquired Companies is critical to the Company's future operating
performance and cash flow, including its ability to service the Exchange Notes.
There can be no assurance that the Acquired Companies will meet the Company's
expectations, or that they will perform consistent with their historical
operating performance. Because the Acquired Companies constitute a significant
part of the Company, failure of the Acquired Companies to maintain their
historical performance levels could have a material adverse impact on the
Company's financial condition, results of operations and debt service
capability. In addition, start up of a significant new program launch at MT&G
will require substantial attention from management. The dilution of management's
attention could also have an adverse impact on the operating results of the
Company. There can be no assurance that MT&G's new program will meet
management's expectations or be successful.
COMPETITION
The Company operates in an industry which is highly competitive though
fragmented. If any customer becomes dissatisfied with the Company's prices,
quality or timeliness of delivery, it could award future business or, in an
extreme case, move existing business to a competitor. There can be no assurance
that the Company's products will continue to compete successfully with the
products of competitors, including OEMs themselves, many of which are
significantly larger and have greater financial and other resources than the
Company. See "Business -- Competition."
LABOR RELATIONS AND LABOR MARKET CONDITIONS
Approximately 28% of the Company's employees at April 30, 1998 were
represented by the United Steel Workers or United Auto Workers. Collective
bargaining agreements with these unions will expire at various times in 1999 and
beyond. In addition, most of the Company's customers employ workforces
represented by the United Auto Workers and other unions, and many of these
customers have experienced work stoppages at various times in the past. A
dispute between the Company and its employees, or between any of its major
customers and such customers' employees, could have a material adverse effect on
the Company's financial condition, results of operations and debt service
capability. In addition, sustained economic growth in the United States has
resulted in lower unemployment and higher demand for labor in many locations,
including certain locations in the Company's Rubber and Plastic Group. Such
market conditions have adversely impacted the Company's operations at certain
locations in recent periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Developments." There can
be no assurance that labor market conditions will not materially adversely
affect one or more of the Company's businesses or continue to adversely affect
the Rubber and Plastic business in the future.
POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES
The Company's operations are subject to various foreign, federal, state and
local environmental laws, ordinances and regulations, including those governing
discharges into the air and water, the storage, handling and disposal of solid
and hazardous wastes, the remediation of soil and groundwater contaminated by
petroleum products or hazardous substances or wastes and the health and safety
of employees ("Environmental Laws"). The nature of the Company's current and
former operations and the history of industrial uses at some
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of its facilities expose the Company to the risk of liabilities or claims with
respect to environmental and related worker health and safety matters.
Compliance with Environmental Laws, stricter interpretations of or amendments to
such laws or more vigorous enforcement policies by regulatory agencies may
require material expenditures by the Company.
In addition, under certain Environmental Laws a current or previous owner
or operator of property may be liable for the costs of removal or remediation of
certain hazardous substances or petroleum products on, under or in such
property, without regard to whether the owner or operator knew of, or caused,
the presence of the contaminants, and regardless of whether the practices that
resulted in the contamination were legal at the time they occurred. The presence
of, or failure to remediate properly, such substances may adversely affect the
ability to sell or rent such property or to borrow using such property as
collateral. Most of the Company's facilities have been in operation for many
years, and several of such facilities have undergone little or no invasive
testing to determine the presence or absence of environmental contamination.
Persons who generate, arrange for the disposal or treatment of, or dispose of
hazardous substances may be liable for the costs of investigation, remediation
or removal of such hazardous substances at or from the disposal or treatment
facility, regardless of whether the facility is owned or operated by such
person. Finally, the owner of a site may be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from a site. For example, the Company is aware that
contamination exists at both properties that Newcor recently acquired from MT&G.
Management believes that the Company's risk of liability for damages resulting
from this contamination is limited by the structure of the MT&G Acquisition,
certain indemnification rights the Company has against the seller of the MT&G
assets and a 1995 Michigan statute that limits the responsibility of purchasers
of commercial property for cleanup costs. There can be no assurance, however,
that the Company will not be subject to future claims with respect to such
contamination, including possible claims by third parties for alleged damages or
injuries resulting from the contamination at these sites.
The Company cannot predict what Environmental Laws will be enacted in the
future, how existing or future Environmental Laws will be administered or
interpreted or what environmental conditions may be found to exist on its
properties. Compliance with more stringent Environmental Laws, as well as more
vigorous enforcement policies of the regulatory agencies or stricter
interpretation of those Laws, and discovery of new conditions may require
additional expenditures by the Company. There can be no assurance that one or
more of the foregoing will not have a material adverse effect on the Company's
financial condition, results of operations or debt service capability.
OTHER CONTINGENT LIABILITIES
The Company could potentially be liable to indemnify customers with respect
to certain equipment sold by a divested division which equipment is currently
the subject of patent infringement litigation being defended by one of its
customers. It also has indemnification obligations relating to businesses it
sold during the past two years. See "Business -- Legal Proceedings and
Contingencies" and Note O of the notes to the Company's consolidated financial
statements. There can be no assurance that liability for such indemnification
obligations will not have a material adverse effect on the Company's financial
condition, results of operations or debt service capability.
RESTRICTIVE DEBT COVENANTS
The Indenture and the Senior Credit Facility contain a number of
significant covenants. Either or both of such agreements, among other things,
restrict the ability of the Issuer and its subsidiaries to (i) declare dividends
or redeem or repurchase capital stock, (ii) prepay, redeem or purchase debt,
including the Exchange Notes, (iii) incur liens and engage in sale-leaseback
transactions, (iv) make loans and investments, (v) incur additional
indebtedness, (vi) amend or otherwise alter debt and other material agreements,
(vii) make capital expenditures, (viii) engage in mergers, acquisitions and
asset sales, (ix) enter into transactions with affiliates and (x) alter the
business it conducts. There can be no assurance that those restrictive covenants
will not adversely affect the Company's future ability to operate its business.
In addition, the Senior Credit Facility contains restrictive covenants and
requires the Company to maintain specified
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financial ratios and satisfy certain financial tests, including a debt service
coverage ratio test, a net worth test, a funded debt (net of excess cash) to
total liabilities (net of excess cash) plus net worth test and a funded debt
(net of excess cash) to EBITDA test. See "Description of Other Debt -- Senior
Credit Facility." Although the Company is presently in compliance with these
covenants, if the Company in the future becomes unable to meet these tests or
otherwise becomes unable to borrow under the Senior Credit Facility due to a
default, the Company's liquidity could be materially adversely affected.
FRAUDULENT CONVEYANCE
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer or conveyance law, if, among other
things, the Issuer or any Subsidiary Guarantor, at the time it incurred the
indebtedness evidenced by the Notes and Exchange Notes, the Indenture, or its
Subsidiary Guarantee, (i) (a) was or is insolvent or rendered insolvent by
reason of such occurrence or (b) was, is, or was about to be, engaged in a
business or transaction for which the assets remaining with the Issuer or such
Subsidiary Guarantor constituted unreasonably small capital or (c) intended or
intends to incur, or believed or believes that it would incur, debts beyond its
ability to pay such debts as they mature, and (ii) the Issuer, or such
Subsidiary Guarantor, received or receives less than reasonably equivalent value
or fair consideration for the incurrence of such indebtedness, then the Notes
and Exchange Notes, the Indenture (to the extent applicable to such Subsidiary
Guarantor) and the Subsidiary Guarantees, and any pledge or other security
interest securing such indebtedness, could be voided or avoided, or claims in
respect of the Notes and Exchange Notes, the Indenture (to the extent applicable
to such Subsidiary Guarantor) or the Subsidiary Guarantees could be subordinated
to all other debts of the Issuer or such Subsidiary Guarantor, as the case may
be. In addition, the payment of interest and principal by the Issuer pursuant to
the Notes and Exchange Notes or the payment of amounts by a Subsidiary Guarantor
pursuant to a Subsidiary Guarantee could be voided or avoided and required to be
returned to the person making such payment, or to a fund for the benefit of the
creditors of the Issuer or such Subsidiary Guarantor, as the case may be.
The measures which a court would apply for purposes of determining the
foregoing considerations will vary depending upon the law applied in any
proceeding with respect to the foregoing. Generally, however, the Issuer or a
Subsidiary Guarantor would be considered insolvent if (i) the sum of its debts,
including contingent liabilities, unliquidating liabilities, and unmatured
liabilities, were greater than the saleable value of all of its assets at a fair
valuation or if the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and mature or
(ii) it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, the Issuer and each Subsidiary Guarantor believes that, after
giving effect to the indebtedness incurred in connection with the Offering, the
Acquisitions and the establishment of the Senior Credit Facility, it was not
insolvent, did not have unreasonably small capital for the business in which it
was engaged and did not incur debts beyond its ability to pay such debts as they
mature. There can be no assurance, however, as to what standard a court would
apply in making such determinations or that a court would agree with the
Issuer's or the Subsidiary Guarantors' conclusions in this regard. In addition,
the liability of each Subsidiary Guarantor under the Indenture is limited to the
amount that will result in its Subsidiary Guarantee not constituting a
fraudulent conveyance or improper corporate distribution, and there can be no
assurance as to what standard a court would apply in making a determination as
to what would be the maximum liability of each Subsidiary Guarantor. See
"Description of Exchange Notes -- Subsidiary Guarantees."
INABILITY TO PURCHASE NOTES AND EXCHANGE NOTES UPON A CHANGE OF CONTROL
Upon a Change of Control, the Issuer will be required to offer to
repurchase all outstanding Notes and Exchange Notes at 101% of the principal
amount thereof plus accrued and unpaid interest and Liquidated Damages, if any,
to the date of repurchase. The occurrence of a Change of Control constitutes an
event of default under the Senior Credit Facility, which could result in
acceleration of the indebtedness thereunder. There can be no assurance that
sufficient funds will be available at the time of any Change of Control to make
any required repurchases of Notes and Exchange Notes or that prohibitions in the
Senior Credit Facility
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would be waived to allow the Issuer to make such required repurchases. In
addition, the Issuer could enter into certain transactions, including certain
recapitalizations, that would not constitute a Change of Control but would
increase the amount of debt outstanding at such time. See "Description of
Exchange Notes -- Repurchase at the Option of Holders."
ABSENCE OF A PUBLIC MARKET
The Notes currently are owned by a relatively small number of beneficial
owners. The Notes have not been registered under the Securities Act.
Accordingly, the Notes may only be offered or sold pursuant to an exemption from
the registration requirements of the Securities Act or pursuant to an effective
registration statement.
The Exchange Notes will constitute a new class of securities with no
established trading market. Although the Exchange Notes will generally be
permitted to be resold or otherwise transferred by nonaffiliates of the Issuer
without compliance with the registration requirements of the Securities Act,
there can be no assurance as to the liquidity of any markets that may develop
for the Exchange Notes, the ability of holders of the Exchange Notes to sell
their Exchange Notes or the prices at which holders would be able to sell their
Exchange Notes. Future trading prices of the Exchange Notes will depend on many
factors, including, among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. Donaldson, Lufkin &
Jenrette Securities Corporation, McDonald & Company Securities, Inc. and ING
Baring (U.S.) Securities, Inc. (collectively, the "Initial Purchasers") have
advised the Issuer that they currently intend to make a market in the Exchange
Notes offered hereby. However, they are not obligated to do so, and any market
making may be discontinued at any time without notice. The Issuer does not
intend to apply for listing of the Exchange Notes on any securities exchange.
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Exchange Agent of
such Notes, a properly completed and duly executed Letter of Transmittal and all
other required documents. Therefore, owners of the Notes desiring to tender such
Notes in exchange for Exchange Notes should allow sufficient time to ensure
timely delivery. The Issuer is under no duty to give notification of defects or
irregularities with respect to the tenders of Notes for exchange. Notes that are
not tendered or are tendered but not accepted will, following the consummation
of the Exchange Offer, continue to be subject to the existing restrictions on
transfer thereof, and on consummation of the Exchange Offer, the registration
rights under the Registration Rights Agreement generally will terminate. In
addition, any owner of Notes who tenders in the Exchange Offer for the purpose
of participating in a distribution of the Exchange Notes, in the absence of an
exemption therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the Exchange
Notes. Each broker-dealer that receives Exchange Notes for its own account in
exchange for Notes, where such Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. To the extent that Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Notes could be
adversely affected. See "The Exchange Offer."
RESTRICTIONS ON TRANSFER
The Notes were offered and sold by the Issuer in a private offering exempt
from registration under the Securities Act and have been resold pursuant to Rule
144A under the Securities Act. As a result, the Notes may not be reoffered or
resold by purchasers except pursuant to an effective registration statement
under the Securities Act or pursuant to an applicable exemption from the
requirement for such registration, and the Notes bear legends reflecting those
restrictions. Each owner of Notes (other than any owner who is an affiliate of
the Issuer) who duly exchanges Notes for Exchange Notes in the Exchange Offer
generally will receive Exchange Notes that are freely transferable under the
Securities Act. Owners of Notes who participate in the Exchange Offer should be
aware, however, that if they accept the Exchange Offer for the purpose of
engaging in a distribution, the Exchange Notes may not be publicly reoffered or
resold without complying with the
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registration and prospectus delivery requirements of the Securities Act. As a
result, each owner of Notes accepting the Exchange Offer will be deemed to have
represented, by its acceptance of the Exchange Offer, that it acquired the
Exchange Notes in the ordinary course of business and that it is not engaged in,
and does not intend to engage in, a distribution of the Exchange Notes.
The Notes currently may be sold pursuant to the restrictions set forth in
Rule 144A under the Securities Act or pursuant to another available exemption
under the Securities Act without registration under the Securities Act. To the
extent that Notes are tendered and accepted in the Exchange Offer, the trading
market for the untendered and tendered but unaccepted Notes could be adversely
affected.
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THE EXCHANGE OFFER
The following discussion sets forth or summarizes what the Company believes
to be the material terms of the Exchange Offer, including those set forth in the
Letter of Transmittal distributed with this Prospectus. This summary is
qualified in its entirety by reference to the full text of the documents
underlying the Exchange Offer, copies of which are filed or incorporated by
reference as exhibits to the Registration Statement of which this Prospectus is
a part and are incorporated herein by reference. The term "Holder" with respect
to the Exchange Offer means any person in whose name the Notes are registered on
the books of the Issuer or any other person who has obtained a properly
completed bond power from the registered holder.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Notes were sold by the Issuer on the Issue Date and were subsequently
resold to qualified institutional buyers pursuant to Rule 144A under the
Securities Act. In connection with the Offering, the Issuer and the Subsidiary
Guarantors entered into the Registration Rights Agreement, which requires, among
other things, that the Issuer and the Subsidiary Guarantors (i) file with the
Commission a registration statement under the Securities Act with respect to the
Exchange Notes (which obligation has been satisfied by the filing of the
Registration Statement), (ii) use their best efforts to cause such registration
statement to become effective under the Securities Act at the earliest possible
time and in any event within 135 days after the Issue Date and (iii) upon the
effectiveness of that registration statement, commence and consummate the
Exchange Offer. A copy of the Registration Rights Agreement has been filed with
the Commission and is incorporated by reference as an exhibit to the
Registration Statement.
Any Notes tendered and exchanged in the Exchange Offer will reduce the
principal amount of Notes outstanding. Following the consummation of the
Exchange Offer, Holders of the Notes who did not tender their Notes generally
will not have any further registration rights under the Registration Rights
Agreement, and such Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for such Notes could be
adversely affected. The Notes are currently eligible for sale pursuant to Rule
144A through the PORTAL System of the National Association of Securities
Dealers, Inc. Because the Issuer anticipates that most Holders will elect to
exchange their Notes for Exchange Notes due to the absence of restrictions on
the resale of Exchange Notes under the Securities Act, the Issuer anticipates
that the liquidity of the market for any Notes remaining after the consummation
of the Exchange Offer may be substantially limited.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Issuer will accept any and all Notes
validly tendered and not withdrawn prior to 5:00 p.m. New York City time on the
Expiration Date. The Issuer will issue $1,000 principal amount of Exchange Notes
in exchange for each $1,000 principal amount of outstanding Notes accepted in
the Exchange Offer. Holders may tender some or all of their Notes pursuant to
the Exchange Offer. However, Notes may be tendered only in integral multiples of
$1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Notes except that (i) the Exchange Notes have been registered under the
Securities Act and hence will not bear legends restricting the transfer thereof
and (ii) the holders of the Exchange Notes generally will not be entitled to
certain rights under the Registration Rights Agreement, which rights generally
will terminate upon consummation of the Exchange Offer. The Exchange Notes will
evidence the same debt as the Notes and will be entitled to the benefits of the
Indenture.
Holders of Notes do not have any appraisal or dissenters' rights under the
Delaware General Corporation Law or the Indenture in connection with the
Exchange Offer. The Issuer intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder, including Rule 14e-1 thereunder.
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The Issuer will be deemed to have accepted validly tendered Notes when, as
and if the Issuer has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering Holders for the
purpose of receiving the Exchange Notes from the Issuer.
If any tendered Notes are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth herein or otherwise,
the certificates for any such unaccepted Notes will be returned, without
expense, to the tendering Holder thereof as promptly as practicable after the
Expiration Date.
Holders who tender Notes in the Exchange Offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Notes pursuant to
the Exchange Offer. The Issuer will pay all charges and expenses, other than
transfer taxes in certain circumstances, in connection with the Exchange Offer.
See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time, on the
expiration date for the Exchange Offer set forth on the cover page of this
Prospectus unless the Issuer, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" will mean the latest date and
time to which the Exchange Offer is extended.
To extend the Exchange Offer, the Issuer will notify the Exchange Agent of
any extension by oral or written notice, followed by a public announcement
thereof no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
The Issuer reserves the right, in its reasonable judgment, (i) to delay
accepting any Notes, to extend the Exchange Offer or to terminate the Exchange
Offer if any of the conditions set forth below under "-- Conditions" shall not
have been satisfied, by giving oral or written notice of such delay, extension
or termination to the Exchange Agent or (ii) to amend the terms of the Exchange
Offer in any manner. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by a public announcement
thereof. If the Exchange Offer is amended in a manner determined by the Issuer
to constitute a material change, the Issuer will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered Holders, and depending upon the significance of the amendment and the
manner of disclosure to the registered Holders, the Issuer will extend the
Exchange Offer for a period of five to ten business days if the Exchange Offer
would otherwise expire during such five to ten business-day period.
If the Issuer does not consummate the Exchange Offer or, in lieu thereof,
the Issuer does not file and cause to become effective a resale shelf
registration for the Notes within the time periods set forth herein, liquidated
damages will accrue and be payable to Holders of affected Notes in the amounts
specified in the Registration Rights Agreement ("Liquidated Damages"). See
"Registration Rights; Liquidated Damages."
Without limiting the manner in which the Issuer may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Issuer shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON EXCHANGE NOTES
The Exchange Notes will bear interest from the Issue Date (or the most
recent interest payment date to which interest on the Notes has been paid).
Accordingly, holders of Notes that are accepted for exchange will not receive
interest that is accrued but unpaid on the Notes at the time of tender, but such
interest will be payable on the first interest payment date after the Expiration
Date. Interest on the Exchange Notes will be payable semiannually on each March
1 and September 1, commencing on September 1, 1998.
22
<PAGE> 28
PROCEDURES FOR TENDERING
Only a Holder of Notes (or, in the case of Global Notes held by DTC, a DTC
participant listed in an official DTC proxy) may tender such Notes in the
Exchange Offer. To tender in the Exchange Offer, a Holder or DTC participant
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal
and mail or otherwise deliver such Letter of Transmittal or such facsimile,
together with the Notes and any other required documents, to the Exchange Agent
so as to be received by the Exchange Agent at the address set forth below prior
to 5:00 p.m., New York City time, on the Expiration Date. Delivery of the Notes
may be made by book-entry transfer in accordance with the procedures described
below. Confirmation of such book-entry transfer must be received by the Exchange
Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Holder or DTC participant will
make to the Issuer and Subsidiary Guarantors the representation set forth below
in the second paragraph under the heading "-- Resale of Exchange Notes."
The tender by a Holder or DTC participant and the acceptance thereof by the
Issuer will constitute an agreement between such Holder or DTC participant and
the Issuer in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER OR DTC PARTICIPANT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT
HOLDERS AND DTC PARTICIPANTS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE
AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE
SENT TO THE ISSUER. BENEFICIAL OWNERS MAY REQUEST THEIR RESPECTIVE BROKERS,
DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE
TRANSACTIONS FOR SUCH BENEFICIAL OWNERS.
Any beneficial owner whose Notes are held through a broker, dealer,
commercial bank, trust company or other nominee and who wishes to tender should
contact such nominee promptly and instruct such nominee to tender on such
beneficial owner's behalf. Such instructions should be given in sufficient time
to ensure that the nominee will be able to take the necessary steps to tender
such Notes before the Expiration Date.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined later in
this paragraph) unless the Notes tendered pursuant thereto are tendered (i) by a
registered Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and unless waived by the Issuer, evidence satisfactory to
the Issuer of their authority to so act must be submitted with the Letter of
Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Notes and withdrawal of tendered Notes will be
determined by the Issuer in its sole discretion, which determination will be
final and binding. The Issuer reserves the absolute right to reject any and all
Notes not properly tendered or any Notes the Issuer's acceptance of which would,
in the opinion of counsel for the Issuer, be unlawful. The Issuer also reserves
the right to waive any defects, irregularities or conditions of tender as to
particular Notes. The Issuer's interpretation of the terms and conditions of the
Exchange Offer (including the
23
<PAGE> 29
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Notes must be cured within such time as the Issuer determines. Although the
Issuer intends to notify Holders of defects or irregularities with respect to
tenders of Notes, none of the Issuer, any Subsidiary Guarantor, the Exchange
Agent or any other person will incur any liability for failure to give such
notification. Tenders of Notes will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
BOOK-ENTRY TRANSFER; ATOP
The Issuer understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish an account with respect to the
Notes at DTC for the purpose of facilitating the Exchange Offer, and subject to
the establishment thereof, any financial institution that is a participant in
DTC may make book-entry delivery of the Notes by causing DTC to transfer such
Notes into the Exchange Agent's account with respect to the Notes in accordance
with DTC's procedures for such transfer.
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for the Book-Entry Facility Automated Tender Offer Program ("ATOP").
Accordingly, DTC participants listed on an official DTC proxy may electronically
transmit their acceptance of the Exchange Offer by causing DTC to transfer Notes
to the Exchange Agent in accordance with DTC's ATOP procedures for transfer. DTC
will then send an Agent's Message to the Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the confirmation of a book-entry
transfer, which states that DTC has received an express acknowledgement from the
participant in DTC tendering Notes which are the subject of such book-entry
confirmation, that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal and that the Issuer and Subsidiary Guarantors
may enforce such agreement against the participant. In the case of an Agent's
Message relating to guaranteed delivery, the term means a message transmitted by
DTC and received by the Exchange Agent which states that DTC has received an
express acknowledgement from the participant in DTC tendering Notes that such
participant has received and agrees to be bound by the Notice of Guaranteed
Delivery.
Each DTC participant transmitting an acceptance of the Exchange Offer
through the ATOP procedures will be deemed to have agreed to be bound by the
terms of the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Notes and (i) whose Notes are not
immediately available, (ii) who cannot deliver their Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the Expiration
Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Notes and the principal amount of Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within three New York
Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof), together with the certificate(s)
representing the Notes (or a confirmation of book-entry transfer of such
Notes into the Exchange Agent's account at DTC) and any other documents
required by the Letter of Transmittal, will be deposited by the Eligible
Institution with the Exchange Agent; and
24
<PAGE> 30
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Notes in proper form for transfer (or a confirmation of book-entry transfer
of such Notes into the Exchange Agent's account at DTC) and all other
documents required by the Letter of Transmittal, are received by the
Exchange Agent within three New York Stock Exchange trading days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Notes in the Exchange Offer, a written or facsimile
transmission notice of withdrawal must be received by the Exchange Agent at the
address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Notes to be withdrawn (the "Depositor"), (ii)
identify the Notes to be withdrawn (including the certificate number(s) and
principal amount of such Notes or, in the case of Notes transferred by
book-entry transfer, the name and number of the account at DTC to be credited),
(iii) be signed by the Holder or DTC participant in the same manner as the
original signature on the Letter of Transmittal by which such Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee register the transfer of
such Notes into the name of the person withdrawing the tender and (iv) specify
the name in which any such Notes are to be registered, if different from that of
the Depositor. All questions as to the validity, form and eligibility (including
time or receipt) of such notices will be determined by the Issuer, whose
determination will be final and binding on all parties. Any Notes so withdrawn
will be deemed not to have been validly tendered for purposes of the Exchange
Offer, and no Exchange Notes will be issued with respect thereto unless the
Notes so withdrawn are validly retendered. Any Notes which have been tendered
but which are not accepted for exchange will be returned to the Holder thereof
without cost to such Holder as soon as practicable after withdrawal, rejection
of tender or termination of the Exchange Offer. Properly withdrawn Notes may be
retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Issuer will not
be required to accept for exchange, or to exchange Exchange Notes for, any
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Notes, if:
(a) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted which, in the reasonable
judgment of the Issuer, might materially impair the ability of the Issuer
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Issuer; or
(b) any governmental approval has not been obtained, which approval
the Issuer, in its reasonable judgment, deems necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Issuer determines in its reasonable judgment that any of the
conditions are not satisfied, the Issuer may (i) refuse to accept any Notes and
return all tendered Notes to the tendering Holders, (ii) extend the Exchange
Offer and retain all Notes tendered prior to the expiration of the Exchange
Offer, subject, however, to the rights of Holders to withdraw such Notes (see
"-- Withdrawals of Tenders") or (iii) waive such unsatisfied conditions with
respect to the Exchange Offer and accept all properly tendered Notes which have
not been withdrawn. If such waiver constitutes a material change to the Exchange
Offer, the Issuer will promptly disclose such waiver by means of a prospectus
supplement that will be distributed to the registered Holders, and depending
upon the significance of the waiver and the manner of disclosure to the
registered
25
<PAGE> 31
Holders, the Issuer will extend the Exchange Offer for a period of five to ten
business days if the Exchange Offer would otherwise expire during such five to
ten business-day period.
EXCHANGE AGENT
U.S. Bank Trust National Association will act as Exchange Agent for the
Exchange Offer with respect to the Notes.
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal for the Notes and requests for
copies of Notice of Guaranteed Delivery should be directed to the Exchange
Agent, addressed as follows:
By registered or certified mail, overnight mail or courier service or
in person by hand:
<TABLE>
<CAPTION>
By Registered, Certified, or
Overnight Mail or Courier: By Hand: By First Class Mail:
- ---------------------------- -------- --------------------
<S> <C> <C>
U.S. Bank Trust N.A. U.S. Bank Trust N.A. U.S. Bank Trust N.A.
Attn: Specialized Finance 4th Floor Bond Drop Window P.O. Box 64485
SPFT0414 180 East Fifth Street St. Paul, MN 55164-9549
180 East Fifth Street St. Paul, MN 55101
St. Paul, MN 55101
</TABLE>
By facsimile:
612-244-1537
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Issuer. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telephone, facsimile or in person by employees of the Issuer and
its affiliates.
The Issuer has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or other persons
soliciting acceptances of the Exchange Offer. However, the Issuer will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith and pay
other registration expenses, including fees and expenses of the Trustee, filing
fees, blue sky fees and printing and distribution expenses.
The Issuer will pay all transfer taxes, if any, applicable to the exchange
of the Notes pursuant to the Exchange Offer. If, however, Exchange Notes or the
Notes for principal amounts not tendered or accepted for exchange are to be
delivered to, or are to be issued in the name of, any person other than the
registered Holder of the Notes tendered, or if tendered Notes are registered in
the name of any person other than the person signing the Letter of Transmittal,
or if a transfer tax is imposed for any reason other than the exchange of the
Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other person) will be payable
by the tendering Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Notes, which is the aggregate principal amount of the Notes, as reflected in the
Company's accounting records on the date of exchange. Accordingly, no gain or
loss for accounting purposes will be recognized in connection with the Exchange
Offer. The expenses of the Exchange Offer will be amortized over the term of the
Exchange Notes.
RESALE OF EXCHANGE NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Issuer believes that Exchange
Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered
for resale, resold and otherwise transferred by any owner of such Exchange Notes
(other than any such owner which is an "affiliate" of the Issuer within the
meaning of Rule 405 under the Securities Act)
26
<PAGE> 32
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such owner's business and such owner does not intend to
participate, and has no arrangement or understanding with any person to
participate, in the distribution of such Exchange Notes. Any owner of Notes who
tenders in the Exchange Offer with the intention to participate, or for the
purpose of participating, in a distribution of the Exchange Notes may not rely
on the position of the staff of the Commission enunciated in Exxon Capital
Holdings Corporation (April 13, 1988) and Morgan Stanley & Co., Incorporated
(June 5, 1991) or similar no-action letters but rather must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. In addition, any such resale transaction
should be covered by an effective registration statement containing the selling
security holders information required by Item 507 of Regulation S-K under the
Securities Act. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Notes, where such Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, may be a statutory underwriter and must acknowledge that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes.
By tendering in the Exchange Offer, each Holder (or DTC participant, in the
case of tenders of interests in the Global Notes held by DTC) will represent to
the Issuer and Subsidiary Guarantors that, among other things, (i) the Exchange
Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such Exchange Notes, whether or not
such person is the registered Holder or DTC participant, (ii) neither the Holder
or DTC participant nor any such other person has an arrangement or understanding
with any person to participate in the distribution of such Exchange Notes and
(iii) the Holder or DTC participant and such other person acknowledge that if
they participate in the Exchange Offer for the purpose of distributing the
Exchange Notes (a) they must, in the absence of an exemption therefrom, comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale of the Exchange Notes and cannot rely on the
no-action letters referenced above and (b) failure to comply with such
requirements in such instance could result in such Holder or DTC participant or
such other person incurring liability under the Securities Act for which such
Holder or DTC participant or such other person is not indemnified by the Issuer
or any Subsidiary Guarantor. Further, by tendering in the Exchange Offer, each
Holder or DTC participant and such other person that may be deemed an
"affiliate" (as defined under Rule 405 of the Securities Act) of the Issuer will
represent to the Issuer and Subsidiary Guarantors that such Holder or DTC
participant and such other person understand and acknowledge that the Exchange
Notes may not be offered for resale, resold or otherwise transferred by that
Holder or DTC participant or such other person without registration under the
Securities Act or an exemption therefrom.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Issuer and Subsidiary
Guarantors will have fulfilled one of their obligations under the Registration
Rights Agreement, and Holders of Notes who do not tender their Notes generally
will not have any further registration rights under the Registration Rights
Agreement or otherwise. Accordingly, any Holder of Notes that does not exchange
that Holder's Notes for Exchange Notes will continue to hold the untendered
Notes and will be entitled to all the rights and limitations applicable thereto
under the Indenture, except to the extent that such rights or limitations, by
their terms, terminate or cease to have further effectiveness as a result of the
Exchange Offer.
The Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Notes may be
reoffered, resold, pledged or otherwise transferred only (i) to a person whom
the Holder reasonably believes is a qualified institutional buyer in a
transaction meeting the requirements of Rule 144A, (ii) in an offshore
transaction complying with Rule 903 or 904 of Regulation S, (iii) pursuant to an
exemption from registration under the Securities Act provided by Rule 144
thereunder (if available), (iv) to an institutional "accredited investor" (as
defined in Rule 501(a)(1), (2), (3) or(7) of Regulation D under the Securities
Act) that, prior to such transfer, furnishes the Trustee with a signed letter
containing certain representations and agreements relating to such transfer and
an opinion of
27
<PAGE> 33
counsel acceptable to the Issuer that such transfer is in compliance with the
Securities Act, (v) in accordance with another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel
acceptable to the Issuer), (vi) to the Issuer or any of its subsidiaries, (vii)
pursuant to an effective registration statement under the Securities Act, and,
in each case, in accordance with all applicable securities laws of the states of
the United States. See "Risk Factors -- Restrictions on Transfer."
OTHER
Participation in the Exchange Offer is voluntary, and Holders should
carefully consider whether to accept. Holders of the Notes are urged to consult
their financial and tax advisers in making their own decisions on what action to
take.
The Issuer may in the future seek to acquire untendered Notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Issuer has no present plans to acquire any Notes that are not
tendered in the Exchange Offer or to file a registration statement to permit
resales of any untendered Notes.
In any state where the Exchange Offer does not fall under a statutory
exemption to the blue sky rules, the Issuer by the date the Exchange Offer
commences will have filed the appropriate registrations and notices and will
have made the appropriate requests to permit the Exchange Offer to be made in
such state.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF THE EXCHANGE OFFER
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service (the "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 conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to Holders. Certain Holders of the Notes (including insurance
companies, tax-exempt organizations, financial institutions, broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. Each Holder of a
Note should consult its own tax adviser as to the particular tax consequences of
exchanging such Holder's Notes for Exchange Notes, including the applicability
and effect of any state, local or foreign tax laws.
The issuance of the Exchange Notes to Holders of the Notes pursuant to the
terms set forth in this Prospectus will not constitute an exchange for United
States federal income tax purposes. Consequently, no gain or loss would be
recognized by Holders of the Notes upon receipt of the Exchange Notes, and
ownership of the Exchange Notes will be considered a continuation of ownership
of the Notes. For purposes of determining gain or loss on the subsequent sale or
exchange of the Exchange Notes, a Holder's basis in the Exchange Notes should be
the same as such Holder's basis in the Notes exchanged therefor. A Holder's
holding period for the Exchange Notes should include the Holder's holding period
for the Notes exchanged therefor. The issue price, original issue discount
inclusion and other tax characteristics of the Exchange Notes should be
identical to the issue price, original issue discount inclusion and other tax
characteristics of the Notes exchanged therefor.
28
<PAGE> 34
THE ACQUISITIONS
MT&G ACQUISITION
On December 23, 1997, the Company purchased substantially all of the assets
of MT&G, a Corunna, Michigan based manufacturer of high volume, precision
machined components. MT&G's products include differential pinion and side gears,
output shafts and rear axle shafts for the automotive industry. A key strategic
consideration in management's decision to acquire MT&G was that American Axle &
Manufacturing, Inc. has recently awarded MT&G long-term contracts to machine
near net shape gears for the new General Motors 800 C/K series of light trucks
and sport utility vehicles. MT&G has commenced production of the gears and is
scheduled to reach full production levels during the second quarter of 1998.
MT&G's historical results do not reflect this new business from American Axle.
MT&G's sales and pro forma EBITDA for the twelve months ended September 30,
1997 were $21.8 million and $3.4 million, respectively. Newcor acquired MT&G for
$27.3 million, consisting of approximately $5.6 million in cash (including
$50,000 paid to each of MT&G's five principal shareholders for five-year
noncompetition agreements) and $21.7 million in the form of a promissory note
(bearing interest at 8.0% per annum and payable in full on the closing date of
the Offering), plus the assumption of approximately $5.8 million of debt.
The agreement provides that MT&G and its five principal shareholders will
indemnify the Company for losses in connection with any breach of
representations, warranties or covenants and certain other specified items. With
certain exceptions, this indemnification is subject to a $50,000 deductible and
a 24-month survival period.
DECO ACQUISITION
On the Issue Date, the Company acquired the stock of the three companies
comprising Deco, a Royal Oak, Michigan based manufacturer of high volume,
precision machined components and assemblies. Deco's products include rocker arm
components and assemblies, transmission shafts, axle shafts, thrust plates and
other products for the medium and heavy duty truck and automotive industries.
Deco's sales and pro forma EBITDA for the twelve months ended September 30, 1997
were $74.2 million and $11.1 million, respectively. Sales and pro forma EBITDA
for the year ended December 31, 1997 were $75.5 million and $10.7 million,
respectively. Newcor acquired Deco for $54.9 million in cash (including $50,000
payable to the selling shareholder under a five-year noncompetition agreement),
subject to certain net book value adjustments.
The agreement provides that the selling shareholder will indemnify the
Company for losses in connection with any breach of his representations,
warranties or covenants and certain other specified items. With certain
exceptions, the indemnification by the selling shareholder is subject to a
$500,000 deductible, a $10.0 million cap and a 24-month survival period.
The selling shareholder is obligated to indemnify for environmental
investigation, clean-up or other response activities only if required by law or
under an existing contract of Deco. Indemnification for environmental response
activities is limited to those incurred to meet the least stringent applicable
standards, and the selling shareholder will not have any indemnification
obligations if the Company becomes aware of the presence of hazardous materials
through any voluntary environmental monitoring, sampling or testing.
Environmental claims are subject to a three-year survival period and to the
$10.0 million cap.
The Company agreed to indemnify the selling shareholder for breaches of the
Company's representations, warranties and covenants (subject to a comparable
$500,000 deductible, $10.0 million cap and 24-month survival period). It also
agreed to indemnify him for certain losses in connection with: (1) any
determination that payment of the purchase price violated or can be set aside
under applicable bankruptcy, fraudulent conveyance or transfer law, the Michigan
Business Corporation Act or similar law; or (2) any liability he may have (other
than to Deco, the Company or certain persons related to him) on account of
information he provided pursuant to provisions of the agreement requiring
cooperation in connection with the Company's financing of the Deco Acquisition
and its reporting obligations under the Exchange Act. Deco is required to
29
<PAGE> 35
indemnify the selling shareholder for certain liabilities for business decisions
as a director or officer of Deco, and the Company has guaranteed Deco's
indemnification obligations.
TURN-MATIC ACQUISITION
On the Issue Date, the Company acquired the stock of Turn-Matic, a Clinton
Township, Michigan based manufacturer of high volume, precision machined
components and assemblies. Turn-Matic manufactures engine components including
oil filter adapters, main bearing caps and intake and exhaust manifolds for the
automotive industry. Turn-Matic's sales and pro forma EBITDA for the twelve
months ended September 30, 1997 were $15.8 million and $5.0 million,
respectively. Newcor acquired Turn-Matic for $17.0 million in cash (including an
aggregate of $200,000 paid to certain selling shareholders for five-year
noncompetition agreements), subject to certain net book value adjustments, plus
contingent future payments (not to exceed $3.5 million in total) based on
profitability of the Turn-Matic business over a five-year period following the
closing.
The agreement provides that the selling shareholders will indemnify the
Company for losses in connection with any breach of representations, warranties
or covenants and certain other specified items. With certain exceptions, this
indemnification is subject to a $75,000 deductible, a $1.7 million cap and a
24-month survival period.
30
<PAGE> 36
PRO FORMA CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company on an actual basis and on a pro forma basis as adjusted to give effect
to the Acquisitions and the Offering as if they had occurred on January 31,
1998. This table should be read in conjunction with "Selected Consolidated
Historical Financial Data," "Unaudited Pro Forma Condensed Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's, MT&G's, Deco's and Turn-Matic's
financial statements and the notes thereto, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1998
-----------------------
ACTUAL PRO FORMA
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash.................................................... $ 86 $ 109
======= ========
Debt:
The Notes............................................. $ -- $125,000
MT&G Note............................................. 21,650 --
Revolving credit facility(1).......................... 31,700 300
Term note (including current portion)................. 10,000 10,000
Limited obligation revenue bonds...................... 6,100 6,100
------- --------
Total debt......................................... 69,450 141,400
Shareholders' equity.................................... 26,137 26,137
------- --------
Total capitalization............................... $95,587 $167,537
======= ========
</TABLE>
- -------------------------
(1) The $31.7 million of borrowings outstanding under the revolving credit
facility in the actual column above consists of $5.6 million of borrowings
to finance the cash portion of the MT&G Acquisition, $5.8 million of debt
assumed by Newcor as part of the MT&G Acquisition that was subsequently
repaid, $5.0 million of borrowings to finance a down payment for the Deco
Acquisition, and $15.3 million of working capital borrowings. The $0.3
million of borrowings outstanding under the revolving credit facility in the
pro forma column consist of working capital borrowings. The revolving credit
facility in effect at January 31, 1998 has since been amended and restated
to constitute the Senior Credit Facility. See "Description of Other Debt --
Senior Credit Facility."
31
<PAGE> 37
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The Unaudited Pro Forma Consolidated Statements of Income of the Company
for the fiscal year ended October 31, 1997 and the quarter ended January 31,
1998 (the "Pro Forma Statements of Income") and the Unaudited Pro Forma
Condensed Consolidated Balance Sheet of the Company as of January 31, 1998 (the
"Pro Forma Balance Sheet" and, together with the Pro Forma Statements of Income,
the "Pro Forma Financial Statements") have been prepared to illustrate the
estimated effect of the Offering and the Acquisitions. The Pro Forma Statements
of Income gives pro forma effect to the Acquisitions as if they had occurred on
November 1, 1996, and the results for the Acquired Companies have been included
for the twelve months ended September 30, 1997 and the three months ended
December 31, 1997. The Pro Forma Balance Sheet gives pro forma effect to the
Offering and the Acquisitions as if they had occurred on January 31, 1998. The
Pro Forma Financial Statements do not purport to be indicative of the results of
operations or financial position of the Company that would have actually been
obtained had such transactions been completed as of the assumed dates and for
the periods presented, or which may be obtained in the future. The pro forma
adjustments are described in the accompanying notes and are based upon available
information and certain assumptions that the Company believes are reasonable.
The Pro Forma Financial Statements should be read in conjunction with the
separate historical financial statements of the Company and each of the Acquired
Companies and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
Each of the Acquisitions will be accounted for by the purchase method of
accounting. Under purchase accounting, the total purchase price will be
allocated to the tangible and intangible assets and liabilities of each of the
Acquired Companies based upon their respective fair values as of the effective
time of their respective acquisitions. The pro forma adjustments represent
management's preliminary determination of purchase accounting adjustments and
are based upon available information and certain assumptions that the Company
believes to be reasonable. Consequently, the amounts reflected in the Pro Forma
Financial Statements are subject to change, and the final amounts may differ
substantially. Therefore, the resulting effect on income from operations may
differ from the pro forma amounts included herein.
32
<PAGE> 38
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
QUARTER ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
NEWCOR MT&G DECO TURN-MATIC CONSOLIDATED
QUARTER OCTOBER 1, 1997 OCTOBER 1, 1997 OCTOBER 1, 1997 QUARTER
ENDED THROUGH THROUGH THROUGH ENDED
JANUARY 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, OFFERING JANUARY 31,
1998 1997 1997 1997 ADJUSTMENTS 1998
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Sales...................... $30,134 $4,109 $18,827 $3,505 $ -- $56,575
Cost of sales.............. 26,423 3,763(1) 14,687(1) 2,310(1) -- 47,183
------- ------ ------- ------ ------- -------
Gross profit............... 3,711 346 4,140 1,195 -- 9,392
Selling, general and
administrative expense... 4,164 245(2) 1,704(2) 204(2) -- 6,317
Amortization expense....... 325 187(3) 504(3) 133(3) -- 1,149
------- ------ ------- ------ ------- -------
Operating income (loss).... (778) (86) 1,932 858 -- 1,926
Interest expense........... (825) --(4) -- --(4) (2,626)(4) (3,451)
Other income (expense)..... (11) --(5) --(5) --(5) -- (11)
------- ------ ------- ------ ------- -------
Income (loss) before income
taxes.................... (1,614) (86) 1,932 858 (2,626) (1,536)
Provision (benefit) for
income taxes............. (582) (29)(6) 657(6) 337(6) (892)(6) (509)
------- ------ ------- ------ ------- -------
Income (loss) from
continuing operations.... (1,032) (57) 1,275 521 (1,734) (1,027)
Earnings (loss) per share
from continuing
operations -- Basic and
Diluted.................. $ (0.21) -- -- -- -- $ (0.21)
Weighted average shares
outstanding (Basic)...... 4,942 -- -- -- -- 4,942
FINANCIAL RATIOS AND OTHER
DATA:
EBITDA(7).................. $ 499 $ 213 $ 2,789 $1,176 -- $ 4,677
Depreciation and
amortization............. 1,277 299 857 318 -- 2,751
Capital expenditures....... 1,749 -- 530 140 -- 2,419
Ratio of earnings to fixed
charges(8)............... -- -- -- -- -- --
Ratio of EBITDA to interest
expense(9)............... 0.6 -- -- -- -- 1.4
Ratio of debt to
EBITDA(10)............... 139.2 -- -- -- -- 30.2
</TABLE>
33
<PAGE> 39
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
NEWCOR MT&G DECO TURN-MATIC CONSOLIDATED
OCTOBER 1, 1996 OCTOBER 1, 1996 OCTOBER 1, 1996
YEAR ENDED THROUGH THROUGH THROUGH YEAR ENDED
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, OFFERING OCTOBER 31,
1997 1997 1997 1997 ADJUSTMENTS 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Sales...................... $130,848 $21,787 $74,177 $15,797 $ $242,609
Cost of sales.............. 107,083 16,414(1) 58,407(1) 10,923(1) -- 192,827
-------- ------- ------- ------- -------- --------
Gross profit............... 23,765 5,373 15,770 4,874 -- 49,782
Selling, general and
administrative expense... 14,880 2,621(2) 6,101(2) 567(2) -- 24,169
Amortization expense....... 879 1,120(3) 2,018(3) 508(3) -- 4,525
Nonrecurring income........ (297) -- -- -- -- (297)
-------- ------- ------- ------- -------- --------
Operating income........... 8,303 1,632 7,651 3,799 -- 21,385
Interest expense........... (2,070) --(4) -- --(4) (11,807)(4) (13,877)
Other income (expense)..... (224) --(5) --(5) --(5) -- (224)
-------- ------- ------- ------- -------- --------
Income before income
taxes.................... 6,009 1,632 7,651 3,799 (11,807) 7,284
Provision (benefit) for
income taxes............. 2,119 555(6) 2,601(6) 1,464(6) (4,013)(6) 2,726
-------- ------- ------- ------- -------- --------
Income from continuing
operations............... 3,890 1,077 5,050 2,335 (7,794) 4,558
Earnings per share from
continuing operations --
Basic and Diluted........ $ 0.79 -- -- -- -- $ 0.92
Weighted average shares
outstanding (Basic)...... 4,940 -- -- -- -- 4,940
FINANCIAL RATIOS AND OTHER
DATA:
EBITDA(7).................. $ 12,583 $ 3,427 $11,081 $ 5,045 -- $ 32,136
Depreciation and
amortization............. 4,280 1,795 3,430 1,246 -- 10,751
Capital expenditures....... 3,539 1,980 1,296 1,176 -- 7,991
Ratio of earnings to fixed
charges(8)............... 3.4x -- -- -- -- 1.5x
Ratio of EBITDA to interest
expense(9)............... 6.1 -- -- -- -- 2.4
Ratio of debt to
EBITDA(10)............... 2.6 -- -- -- -- 4.4
</TABLE>
34
<PAGE> 40
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
For purposes of the Unaudited Pro Forma Consolidated Statement of Income,
it has been assumed that the results of operations of MT&G, Deco and Turn-Matic
for the twelve months ended October 31, 1997 and the three months ended January
31, 1998 would be comparable to their results of operations for the twelve
months ended September 30, 1997 and the three months ended December 31, 1997,
respectively. The Unaudited Pro Forma Statements of Income data for the twelve
months ended September 30, 1997 was derived from internal financial information
for MT&G and Deco and from audited financial statements for Turn-Matic. For the
three months ended December 31, 1997, the unaudited Pro Forma Statements of
Income data was derived from internal financial information.
(1) Represents pro forma cost of sales arrived at as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1997 QUARTER ENDED JANUARY 31, 1998
-------------------------------- -------------------------------
MT&G DECO TURN-MATIC MT&G DECO TURN-MATIC
<S> <C> <C> <C> <C> <C> <C>
Historical cost of sales....... $17,445 $59,754 $11,292 $3,970 $15,031 $2,389
Depreciation(a)................ (6) (1,347) (263) 1 (344) (73)
Capitalizable costs(b)......... (975) -- -- (200) -- --
Rental(c)...................... (50) -- (106) (8) -- (6)
------- ------- ------- ------ ------- ------
Pro forma cost of sales........ $16,414 $58,407 $10,923 $3,763 $14,687 $2,310
======= ======= ======= ====== ======= ======
</TABLE>
(a) Decreased depreciation expense due to extended estimated useful lives,
primarily for machinery and equipment net of additional depreciation
on fair value adjustments to property, plant and equipment.
(b) For the year ended October 31, 1997, represents adjustments for
tooling of $425 and for machinery and equipment and plant construction
costs of $300, all of which were made to conform the accounting to the
Company's accounting practices, and $250 of costs associated with
closing a facility and moving machinery and equipment to remaining
operating facilities. This facility was closed in early calendar 1997.
For the quarter ended January 31, 1998, represents adjustments for
tooling of $150 and for machinery and equipment and plant construction
costs of $50, all of which were made to conform the accounting to the
Company's accounting practices.
(c) For MT&G, reflects elimination of rental expense for a facility leased
by MT&G which the Company acquired as part of the acquisition offset
in part by incremental rental expense for a facility MT&G owned which
the Company did not acquire and has agreed to lease following the
acquisition. For Turn-Matic, reflects elimination of rental expense
for a facility Turn-Matic owned but was not used in operations and
which the Company did not acquire or lease in the Turn-Matic
acquisition.
(2) Represents pro forma selling, general and administrative expenses arrived
at as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1997 QUARTER ENDED JANUARY 31, 1998
------------------------------- ------------------------------
MT&G DECO TURN-MATIC MT&G DECO TURN-MATIC
<S> <C> <C> <C> <C> <C> <C>
Historical selling, general and
administrative expense......... $3,224 $13,214 $ 1,947 $ 395 $3,398 $ 361
Elimination of selling
shareholders' salaries and
benefits....................... (495) (6,713) (1,289) (110) (1,594) (146)
Elimination of nonrecurring
consulting fees................ (108) (400) (91) (40) (100) (11)
------ ------- ------- ------ ------ -----
Pro forma selling, general and
administrative expense......... $2,621 $ 6,101 $ 567 $ 245 $1,704 $ 204
====== ======= ======= ====== ====== =====
</TABLE>
(3) Represents pro forma amortization of goodwill arising from the Acquisitions
which will be amortized on a straight-line basis over twenty years.
35
<PAGE> 41
(4) For the year ended October 31, 1997, represents the net increase in
interest expense to reflect: (i) $12,344 resulting from the Notes at
9.875%; (ii) the annual amortization of financing costs of $450 over the
term of the Notes; and (iii) the elimination of $987 of interest on
existing Company debt repaid from the proceeds from the Notes. For the
quarter ended January 31, 1998, represents the net increase in interest
expense to reflect: (i) $3,086 resulting from the Notes at 9.875%; (ii) the
amortization of financing costs of $112 over the term of the Notes; and
(iii) the elimination of $572 of interest on existing Company debt repaid
from the proceeds from the Notes. Net interest expense at MT&G and
Turn-Matic has been eliminated because MT&G's debt is assumed repaid with
the proceeds of the Offering and Turn-Matic's debt is assumed repaid out of
Turn-Matic's available cash and proceeds of the Offering.
(5) Other income (expense) has been adjusted from historical results for the
following: (i) charitable contributions at MT&G have been eliminated in
order to conform with the Company's charitable giving practice; (ii)
investment earnings at Deco have been eliminated to reflect that
investments at Deco were not acquired; and (iii) a nonrecurring gain on the
sale of machinery and equipment at Turn-Matic has been eliminated to
conform with purchase accounting adjustments.
(6) Calculated as income before income taxes multiplied by the Company's
incremental tax rate of 34.0% for MT&G, Deco and the net increase in
interest expense. For Turn-Matic, income before income taxes was adjusted
for the addition of non-deductible goodwill amortization of $508 for the
year ended October 31, 1997 and for $133 for the quarter ended January 31,
1998. The adjusted amounts were multiplied by the incremental tax rate of
34.0%.
(7) "EBITDA" is operating income (loss) plus depreciation and amortization.
EBITDA does not represent and should not be considered as an alternative to
net income or cash flow from operations, as determined by GAAP. The
Company's presentation may not be comparable to similar measures reported
by other companies. The Company believes EBITDA and related ratios provide
useful information regarding a company's ability to service and/or incur
indebtedness. EBITDA does not take into account the Company's working
capital requirements, debt service requirements, capital expenditure
requirements and other commitments. Thus, it is not necessarily indicative
of amounts that may be available for discretionary use.
(8) Calculated by dividing earnings by total fixed charges. Earnings consist of
earnings before income taxes and fixed charges. Fixed charges consist of
interest expense, amortization of deferred financing costs and the portion
of rental expense (one-third) that the Company believes to be
representative of interest. The Company's earnings were insufficient to
cover fixed charges by $1.6 million for the three months ended January 31,
1998. On a pro forma basis, earnings were insufficient to cover fixed
charges by $1.5 million for the three months ended January 31, 1998.
(9) Calculated by dividing EBITDA by cash interest expense, which excludes
amortization of deferred financing costs.
(10) Calculated by dividing year-end total debt by EBITDA.
36
<PAGE> 42
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
NEWCOR DECO(1) TURN-MATIC(1)
JANUARY 31, DECEMBER 31, DECEMBER 31, PRO FORMA PRO FORMA
1998 1997 1997 ADJUSTMENTS CONSOLIDATED
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and investments.................... $ 86 $13,382 $ 2,927 $ (458)(2) $ 109
(13,382)(3)
(2,446)(4)
Receivables............................. 21,138 6,377 2,006 -- 29,521
Inventories............................. 7,927 2,047 884 600(3) 11,458
Prepaid expenses and other.............. 7,998 172 831 (767)(3) 8,234
-------- ------- ------- -------- --------
Total current assets.................. 37,149 21,978 6,648 (16,453) 49,322
Property, plant and equipment, net........ 37,116 7,744 5,136 4,620(3) 54,616
Goodwill.................................. 40,202 -- -- 50,956(3) 91,158
Other long-term assets.................... 9,982 -- 306 (5,000)(2) 9,482
4,500(2)
(306)(3)
-------- ------- ------- -------- --------
Total assets.......................... $124,449 $29,722 $12,090 $ 38,317 $204,578
======== ======= ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable........................... $ -- $ -- $ 541 $ (541)(4) $ --
Current portion of long-term debt....... 1,333 -- -- -- 1,333
Accounts payable........................ 14,319 3,066 542 -- 17,927
Accrued expenses and other.............. 4,598 2,628 442 605(3) 8,273
-------- ------- ------- -------- --------
Total current liabilities............. 20,250 5,694 1,525 64 27,533
Long-term debt............................ 68,117 1,905 125,000(5) 140,067
(54,955)(4)
Postretirement benefits................... 6,338 -- -- -- 6,338
Pension liability and other............... 3,607 -- 602 294(3) 4,503
-------- ------- ------- -------- --------
Total liabilities..................... 98,312 5,694 4,032 70,403 178,441
Total shareholders' equity............ 26,137 24,028 8,058 (32,086)(3) 26,137
-------- ------- ------- -------- --------
Total liabilities and shareholders'
equity........................... $124,449 $29,722 $12,090 $ 38,317 $204,578
======== ======= ======= ======== ========
</TABLE>
37
<PAGE> 43
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(1) For purposes of the Unaudited Pro Forma Condensed Consolidated Balance
Sheet, the financial condition of Deco and Turn-Matic as of December 31,
1997 has been assumed to be comparable to January 31, 1998. The December 31,
1997 balance sheet was derived from internal financial information for
Turn-Matic and from audited financial statements for Deco.
(2) Reflects the uses of funds for the Offering and Acquisitions as if the
Acquisitions had occurred on January 31, 1998:
<TABLE>
<CAPTION>
NEWCOR DECO TURN-MATIC TOTAL
<S> <C> <C> <C> <C>
Use of Funds:
Acquisition................................... $ -- $54,850(b) $18,058(c) $ 72,908
Retirement of existing bank credit facilities
and other debt.............................. 53,050(a) -- -- 53,050
Application of Deco down payment.............. (5,000) -- -- (5,000)
Fees and expenses of the Offering............. 4,500 -- -- 4,500
------- ------- ------- --------
$52,550 $54,850 $18,058 $125,458
======= ======= ======= ========
</TABLE>
(a) Includes repayment of $31,400 of Company revolving credit borrowings
and repayment of the $21,650 MT&G Note.
(b) Includes repayment of $5,000 of Company revolving credit borrowings
incurred to finance the down payment made in connection with the Deco
Acquisition. Payment was made in December 1997 and recorded in other
long-term assets.
(c) The purchase price shown for Turn-Matic reflects a $1,058 purchase
price adjustment based on the value of Turn-Matic's net assets at
December 31, 1997. Such purchase price adjustment is funded by a
combination of a reduction in cash acquired of $458 and proceeds from
the Offering of $600.
(3) The Acquisitions will be accounted for by the purchase method of accounting,
pursuant to which the purchase price is allocated among the acquired
tangible and intangible assets and assumed liabilities in accordance with
their estimated fair values on the date of acquisition. The purchase price
and preliminary adjustments to historical book value as a result of the
respective acquisitions are as follows:
<TABLE>
<CAPTION>
DECO TURN-MATIC TOTAL
<S> <C> <C> <C>
Elimination of cash and equity investments not
acquired.............................................. $(13,382) $ -- $(13,382)
Elimination of receivable from former shareholder....... -- (767) (767)
Increase in inventory................................... 600 -- 600
Increase in property, plant and equipment to estimated
fair value............................................ 3,756 864 4,620
Estimated goodwill...................................... 40,353 10,603 50,956
Elimination of other long-term assets not acquired...... -- (306) (306)
-------- ------- --------
$ 31,327 $10,394 $ 41,721
======== ======= ========
Increase in accrued liabilities......................... $ 505 $ 100 $ 605
Cost of acquisitions.................................... 54,850 18,058 72,908
Increase in deferred tax liability for fair value
write-up of property and equipment.................... -- 294 294
Elimination of historical shareholders' equity as a
result of purchase accounting......................... (24,028) (8,058) (32,086)
-------- ------- --------
$ 31,327 $10,394 $ 41,721
======== ======= ========
</TABLE>
38
<PAGE> 44
(4) Pro forma debt is derived from the following:
<TABLE>
<CAPTION>
NEWCOR DECO TURN-MATIC TOTAL
<S> <C> <C> <C> <C>
Retirement of existing debt
Current.......................................... $ -- $-- $ 541(a) $ 541
Long-term........................................ 53,050 -- 1,905(a) 54,955
------- -- ------ -------
$53,050 $-- $2,446(a) $55,496
======= == ====== =======
</TABLE>
- -------------------------
(a) Assumed repaid from available Turn-Matic cash.
(5) Reflects the issuance of the Notes in the Offering.
39
<PAGE> 45
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth the selected consolidated historical
financial data of the Company for the five fiscal years ended October 31, 1997.
The selected consolidated historical financial data for the fiscal years ended
October 31, 1995, 1996 and 1997 are derived from the audited consolidated
financial statements of the Company included elsewhere in this Prospectus. The
selected consolidated historical financial data for the fiscal years ended
October 31, 1993 and 1994 are derived from the audited consolidated financial
statements of the Company. The following table should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements of Newcor and
the related notes and other financial information presented elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31,(1) JANUARY 31,
-------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales............................... $65,383 $ 74,116 $90,173 $111,744 $130,848 $ 27,975 $ 30,134
Gross margin........................ 11,645 11,069 16,618 22,657 23,765 5,330 3,711
Selling, general and administrative
expense........................... 11,318 11,719 11,264 15,052 15,759 3,697 4,489
Nonrecurring items, net (gain)
loss.............................. -- -- -- 824 (297) 711 --
------- -------- ------- -------- -------- -------- --------
Operating income (loss) from
continuing operations............. 327 (650) 5,354 6,781 8,303 922 (778)
Interest expense.................... 575 1,111 1,504 1,787 2,070 432 825
Other income (expense).............. 394 174 (229) 178 (224) 74 (11)
------- -------- ------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes.... 146 (1,587) 3,621 5,172 6,009 564 (1,614)
Provision (benefit) for income
taxes............................. 74 (737) 1,230 1,614 2,119 198 (582)
------- -------- ------- -------- -------- -------- --------
Income (loss) from continuing
operations........................ 72 (850) 2,391 3,558 3,890 366 (1,032)
Earnings (loss) per share from
continuing operations -- Basic and
Diluted........................... $ 0.01 $ (0.17) $ 0.49 $ 0.72 $ 0.79 $ 0.07 $ (0.21)
Dividends per share................. $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.05 $ 0.05
Weighted average shares outstanding
(Basic)........................... 4,837 4,895 4,913 4,923 4,940 4,932 4,940
OTHER FINANCIAL DATA:
EBITDA(2)........................... $ 1,920 $ 1,585 $ 8,204 $ 10,403 $ 12,583 $ 1,925 $ 499
EBITDA margin(3).................... 2.9% 2.1% 9.1% 9.3% 9.6% 6.9% 1.7%
Depreciation and amortization,
continuing operations............. $ 1,593 $ 2,235 $ 2,850 $ 3,622 $ 4,280 $ 1,003 $ 1,277
Capital expenditures, continuing
operations........................ 4,951 4,568 4,580 2,946 3,539 620 1,749
Cash provided by (used in):
Operating activities.............. *(5) (2,028) 1,463 7,798 8,442 1,896 417
Investing activities.............. *(5) (12,653) (4,173) (12,120) (14,153) (12,701) (14,819)
Financing activities.............. *(5) 18,886 (6,412) (1,604) 6,828 10,865 14,454
Ratio of earnings to fixed
charges(4)........................ 1.2x -- 3.2x 3.5x 3.4x 2.1x --
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, AS OF JANUARY 31,
-------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................... $25,309 $ 32,186 $26,575 $ 14,951 $ 17,938 $18,017 $ 16,899
Total assets......................... 73,305 84,836 77,553 77,499 90,883 89,357 124,449
Total debt........................... 12,000 31,500 26,200 25,400 33,100 36,500 69,450
Shareholders' equity................. 28,440 25,157 25,909 24,441 27,415 24,572 26,137
</TABLE>
- -------------------------
(1) Fiscal years 1993 through 1996 excludes the discontinued operations of
Wilson Automation sold on May 6, 1996.
(2) "EBITDA" is operating income (loss) from continuing operations plus
depreciation and amortization. EBITDA does not represent and should not be
considered as an alternative to net income or cash flow from operations, as
determined by GAAP. The Company's presentation may not be comparable to
similar measures reported by other companies. The Company believes EBITDA
and related ratios provide useful information regarding a company's ability
to service and/or incur indebtedness. EBITDA does not take into account the
Company's working capital requirements, debt service requirements, capital
expenditure requirements and other commitments. Thus, it is not necessarily
indicative of amounts that may be available for discretionary use.
(3) EBITDA margin is calculated by dividing EBITDA by sales for each of the
applicable periods.
(4) Calculated by dividing earnings by total fixed charges. Earnings consist of
earnings before income taxes and fixed charges. Fixed charges consist of
interest expense, amortization of deferred financing costs and the portion
of rental expense (one-third) that the Company believes to be representative
of interest. The Company's earnings were insufficient to cover fixed charges
by $1.6 million for the fiscal year ended October 31, 1994 and for the three
months ended January 31, 1998, respectively.
(5) Information is unavailable due to the divestiture of Wilson Automation,
which was accounted for as a discontinued operation.
40
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Consolidated Historical Financial Data" and the Company's financial statements
and the notes thereto, included elsewhere herein.
OVERVIEW
The Company is organized into three business groups: the Precision Machined
Products Group, the Rubber and Plastic Group and the Special Machines Group. The
Precision Machined Products Group produces transmission, powertrain and engine
components and assemblies for the automotive and agricultural vehicle
industries. The Rubber and Plastic Group produces cosmetic and functional seals
and boots and functional engine compartment products primarily for the
automotive industry. These two groups had previously been reported as a single
Components and Assemblies segment. Further segmentation has become necessary due
to the growth of the Company's Components and Assemblies business. The Special
Machines Group designs and manufactures welding, assembly, forming, heat
treating and testing machinery and equipment for the automotive, appliance and
other industries.
The last two fiscal years have marked a period of significant change and
transition for the Company. Newcor completed three acquisitions in the Rubber
and Plastic Group during fiscal 1996: Boramco, Inc. and Rubright, Inc. on
January 2, 1996 and Production Rubber Products, Inc. on April 1, 1996. These
acquisitions were combined with Midwest Rubber, a division acquired in fiscal
1992, to strengthen the Company's market position in this segment and to create
the critical mass management considers necessary to effectively provide the
engineering support, innovative products, and product line breadth required to
continue to meet its customers' needs. The Rubber and Plastic Group was further
enhanced with a fourth acquisition, Plastronics Plus, Inc. ("Plastronics"), in
January 1997.
Consistent with management's strategy of reducing the impact on the Company
of the volatility of results of the Special Machines Group, the Company
completed the sale of two of the three divisions within this group in fiscal
1996. On May 6, 1996, the Company sold the business and certain assets of its
Wilson Automation ("Wilson") division. The Wilson divestiture was accounted for
as a discontinued operation, and, accordingly, the results of operations of
Wilson have been removed from continuing operations in the Consolidated
Statements of Income and related notes and reclassified to discontinued
operations for fiscal 1996 and prior years. Effective October 21, 1996, the
Company also sold its Newcor Machine Tool ("NMT") division, which manufactured
multi-stationed metal cutting machines and CNC lathes.
The Company's strategy to build its Precision Machined Products Group as a
high volume automotive supplier took a significant step forward as a result of
the following actions: On March 6, 1997, the Company sold its Eonic, Inc.
("Eonic") division that was principally a low growth, low volume manufacturer of
industrial cams and camshafts. On December 23, 1997, the Company purchased the
assets of MT&G for $27.3 million, and assumed $5.8 million of debt, which was
subsequently retired. MT&G manufactures differential pinion and side gears,
output shafts and rear axle shafts for the automotive industry. Subsequent to
year-end, the Company also purchased the common stock of the three companies
comprising Deco for $54.9 million and the common stock of Turn-Matic for $17.0
million. Deco manufactures high-volume, precision-machined engine and powertrain
components and assemblies for the medium and heavy truck and automotive
industries, while Turn-Matic manufactures high volume, precision machined engine
components and assemblies for the automotive industry. These companies all have
product lines and capabilities that management believes will complement the
Company's other precision machining businesses. In the twelve months ended
September 30, 1997, sales for these three companies aggregated $111.8 million.
Assuming the acquisition of MT&G and the pending acquisitions of Deco and
Turn-Matic had occurred at the beginning of fiscal 1997, the Precision Machined
Products Group sales would have been 71.0% of fiscal 1997 consolidated sales,
while the Rubber and Plastic Group would have decreased to 20.0% of fiscal 1997
consolidated sales and the Special Machines Group would have decreased to 9.0%
of fiscal 1997 consolidated sales. As a result of these acquisitions, the
Company's financial condition and operations for 1998 and future years will
differ substantially compared with those for fiscal 1997 and prior years.
41
<PAGE> 47
RECENT DEVELOPMENTS
On May 21, 1998, the Company announced sales of $55.4 million for the
second quarter ended April 30, 1998, an increase of $20.8 million over sales of
$34.6 million for the second quarter of fiscal 1997. For the six months ended
April 30, 1998, the Company announced sales of $85.5 million, an increase of
$22.9 million over sales of $62.6 million for the same period one year ago.
The Company announced net income of $753,000, or $0.15 per share, in the
second quarter ended April 30, 1998, compared with $1,082,000, or $0.22 per
share, in the second quarter of fiscal 1997. For the six months ended April 30,
1998, the Company announced a net loss of $279,000, or $0.06 per share, compared
with net income of $1,448,000, or $0.29 per share, for the same period one year
ago. Net income for the second quarter of $753,000 improved significantly
compared with the first quarter net loss of $1,032,000 but was below the net
income reported for the second quarter of fiscal year 1997, primarily due to:
(i) continued lower sales and profits within the Special Machines Group, due to
the relatively slower rate of new orders being booked since the third quarter of
fiscal 1997 and (ii) lower profitability within the Rubber and Plastic Group
which, although improved compared to the first quarter of 1998, continued to be
adversely affected by higher than normal hourly labor turnover.
Certain actions that management began to implement during the first and
second quarters of fiscal 1998 with respect to the Special Machines and Rubber
and Plastic Groups are expected to continue to favorably impact those businesses
during the second half of fiscal 1998. In addition, MT&G's new program launch
remains on schedule with full production expected in the third quarter of the
fiscal year.
EBITDA increased to $6.5 million, or 11.7% of sales, in the second quarter
ended April 30, 1998 from $3.4 million, or 9.9% of sales, in the second quarter
of fiscal 1997, and operating income increased to $4.1 million, or 7.4% of
sales, from $2.4 million, or 6.9% of sales, in the second quarter of fiscal
1997. For the six months ended April 30, 1998, EBITDA and operating income were
$7.0 million and $3.3 million, respectively, compared with $5.3 million and $3.3
million, respectively, in fiscal 1997.
The $20.8 million increase in sales and significant increases in EBITDA and
operating income in the second quarter, resulted primarily from the
Acquisitions.
On a pro forma basis, as if the Company had completed all of the
Acquisitions at November 1, 1996, the Company's sales, EBITDA and operating
income for the three and six month periods ended April 30, 1998 and 1997 would
have been as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30 APRIL 30
------------------ ------------------
1998 1997 1998 1997
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Pro forma sales................. $64.3 $63.0 $120.9 $118.4
Pro forma EBITDA................ 8.1 8.7 12.8 15.8
Pro forma operating income...... 5.3 6.0 7.2 10.5
</TABLE>
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JANUARY 31, 1998
The following table illustrates the factors causing the Company's
quarter-to-quarter change in sales by group, including the effect of
acquisitions and change in sales from existing operations.
<TABLE>
<CAPTION>
PRECISION
MACHINED RUBBER AND SPECIAL
PRODUCTS PLASTIC MACHINES TOTAL
(IN THOUSANDS)
<S> <C> <C> <C> <C>
First quarter 1997 sales................ $13,087 $10,057 $ 4,831 $27,975
Acquisitions.......................... 2,031 2,553 -- 4,584
Change from existing business ........ (492) (544) (1,389) (2,425)
------- ------- ------- -------
First quarter 1998 sales................ $14,626 $12,066 $ 3,442 $30,134
======= ======= ======= =======
</TABLE>
42
<PAGE> 48
Except for approximately one month of results for MT&G, acquired on
December 23, 1997, the Company's results for the first quarter of fiscal year
1998 do not include the revenues or profits of MT&G, Deco and Turn-Matic. Sales
of MT&G, Deco and Turn-Matic aggregated $111.8 million for the twelve months
ended September 30, 1997, as compared to the Company's reported fiscal 1997
sales of $130.8 million. As a result of these acquisitions and the related
financing, the Company's financial condition and results of operations for
fiscal 1998 and future years will differ substantially from those for fiscal
1997 and prior years.
Consolidated sales were $30.1 million for the first quarter of 1998, an
increase of $2.1 million, or 7.7%, from first quarter 1997 sales of $28.0
million. Sales for the Precision Machined Products Group increased $1.5 million,
or 11.8%, to $14.6 million, sales for the Rubber and Plastic Group increased
$2.0 million, or 20.0%, to $12.1 million, while sales for the Special Machines
Group decreased $1.4 million, or 28.8%, to $3.4 million. The increase in sales
for the Precision Machined Products Group was due to sales at the recently
acquired MT&G division of approximately $2.0 million, partially offset by
reduced sales as a result of a customer's vehicle assembly line changeover. The
increase in sales for the Rubber and Plastic Group was due to full quarter
results of the Company's Plastronics acquisition that occurred in January 1997,
partially offset by reduced shipment of certain products as a result of customer
production schedules. The sales decrease for the Special Machines Group was
primarily due to not receiving a significant new order that had been
anticipated, as well as delays associated with certain new orders pending final
customer approval.
Consolidated gross profit decreased $1.6 million to $3.7 million in the
first quarter of 1998 from $5.3 million in the first quarter of 1997.
Consolidated gross margin decreased to 12.3% in the first quarter of 1998 from
19.1% in the first quarter of 1997. The decrease in gross profit and gross
margin was due to several reasons including: (i) decreased sales in the Special
Machines Group (which has generally commanded higher margins than other groups);
(ii) lower Precision Machined Products Group sales (excluding the effect of the
MT&G Acquisition) due to a vehicle assembly line changeover at a customer, which
resulted in a temporary halt in the shipment of parts for these vehicles; (iii)
Rubber and Plastic Group results being adversely affected by increased scrap,
high training costs and productivity issues (due to high hourly labor turnover
caused by full employment in local economies) and, to a lesser extent, by
pricing issues on certain coated metal parts produced by the group; and (iv) new
program launch start-up costs at MT&G and one other division within the
Precision Machined Products Group.
Selling, general and administrative expenses (SG&A) increased to $4.2
million in the first quarter of 1998 from $3.5 million in the first quarter of
1997. SG&A as a percentage of sales increased to 13.8% in the first quarter of
1998 from 12.6% in the first quarter of 1997. The increase in SG&A was due to
the following factors: (i) SG&A associated with Acquisitions of approximately
$0.3 million, which resulted from the MT&G Acquisition and a full quarter of
Plastronics SG&A; (ii) expenditures incurred to begin the implementation of a
company-wide information system; (iii) expenditures incurred to continue to
train employees in the Newcor Operating System; and (iv) expansion of the sales
department within the Rubber and Plastic Group. SG&A as a percentage of sales
increased due to the reasons described above.
Amortization expense increased to $0.3 million in the first quarter of 1998
from $0.2 million in the first quarter of 1997 due to the MT&G Acquisition and a
full quarter of Plastronics amortization.
Operating income (loss) by group was as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------
JANUARY 31, 1998 JANUARY 31, 1997
<S> <C> <C>
Precision Machined Products...................... $ 460 $ 995
Rubber and Plastic............................... (468) 441
Special Machines................................. (348) 521
Corporate........................................ (422) (1,035)
----- -------
Total operating income (loss).................. $(778) $ 922
===== =======
</TABLE>
43
<PAGE> 49
Consolidated operating income decreased $1.7 million to a $0.8 million loss
in the first quarter of 1998 from $0.9 million in income in the first quarter of
1997. Consolidated operating margin decreased to (2.6%) of sales in the first
quarter of 1998 from 3.3% of sales in the first quarter of 1997.
Operating income for the Precision Machined Products Group decreased $0.5
million to $0.5 million in the first quarter of 1998 from $1.0 million in the
first quarter of 1997. Operating margin decreased to 3.1% of group sales in the
first quarter of 1998 from 7.6% of group sales in the first quarter of 1997. The
decrease in operating income and margin was primarily due to lower sales at an
existing division within this group due to a vehicle assembly line changeover at
a customer, which resulted in a temporary halt in the shipment of higher margin
parts for these vehicles and to new program launch costs at MT&G and an existing
division within this group.
Operating income for the Rubber and Plastic Group decreased $0.9 million to
a loss of $0.5 million in the first quarter of 1998 from income of $0.4 million
in the first quarter of 1997. Operating margin decreased to (3.9%) of group
sales in the first quarter of 1998 from 4.4% of group sales in the first quarter
of 1997. The decrease in operating income was primarily due to operational
inefficiencies that resulted in increased scrap, high training costs and
productivity issues. These inefficiencies were mainly the result of high labor
turnover caused by full employment in local economies. Expansion of the sales
department within this group also adversely affected operation income. These
developments, and, to a lesser extent, pricing issues on certain coated metal
parts produced by the group, resulted in the operating margin reduction.
Operating income for the Special Machines group decreased $0.9 million to a
loss of $0.4 million in the first quarter of 1998 from income of $0.5 million in
the first quarter of 1997. Operating margin decreased to (10.1%) of group sales
in the first quarter of 1998 from 10.8% in the first quarter of 1997. The
decrease in operating income and operating margin was due to the decline in
sales at the remaining division within this group.
Corporate operating loss improved primarily due to the elimination of the
$0.7 million loss on the sale of Eonic that was incurred during the first
quarter of 1997, partially offset by expenditures incurred to begin the
implementation of a company-wide information system.
Interest expense increased $0.4 million to $0.8 million in the first
quarter of fiscal 1998 from $0.4 million in the first quarter of 1997. The
increase in interest expense was due to additional debt incurred related to: (i)
the MT&G Acquisition, which was comprised of a $3.1 million pre-closing cash
payment, pay off of $5.8 million of existing MT&G debt subsequent to closing and
the issuance of a $21.65 million note; and (ii) a $5.0 million deposit to the
Deco shareholders made in December 1997.
Certain of the factors impacting results for the first quarter of 1998,
such as vehicle assembly line changeover, new program launch and acquisition
related costs, were short-term or nonrecurring in nature. The customer's vehicle
changeover has been completed and the Precision Machined Products Group sales
outlook for the balance of fiscal 1998 is improved compared with the first
quarter. MT&G's new program launch is proceeding on schedule with full
production planned for early in the third quarter of fiscal 1998. Management is
implementing certain actions in response to the lower than expected results by
the Special Machines and Rubber and Plastic Groups, and believes these actions
will begin to favorably impact the performance of those groups during the second
quarter of fiscal 1998.
44
<PAGE> 50
ANNUAL RESULTS OF CONTINUING OPERATIONS
The following table illustrates the factors causing the Company's
year-to-year sales trends by group, including the effect of flow through sales,
acquisitions and divestitures, and net incremental business from operations
owned throughout each fiscal year presented.
<TABLE>
<CAPTION>
PRECISION
MACHINED RUBBER AND SPECIAL
PRODUCTS PLASTIC MACHINES TOTAL
<S> <C> <C> <C> <C>
1995 Sales............................... $ 42.4 $17.2 $30.6 $ 90.2
Acquisitions........................... -- 13.4 -- 13.4
Net incremental business............... 6.0 1.8 0.3 8.1
------ ----- ----- ------
1996 Sales............................... 48.4 32.4 30.9 111.7
Flow through sales..................... 14.5 -- -- 14.5
Acquisitions........................... -- 13.2 -- 13.2
Divestitures........................... (10.4) -- (6.5) (16.9)
Net incremental business............... 8.0 2.9 (2.6) 8.3
------ ----- ----- ------
1997 Sales............................... $ 60.5 $48.5 $21.8 $130.8
====== ===== ===== ======
</TABLE>
FISCAL 1997 COMPARED WITH FISCAL 1996
The Company achieved record sales in 1997 of $130.8 million, an increase of
$19.1 million, or 17.1%, from 1996 sales of $111.7 million. Sales for the
Precision Machined Products Group increased $12.1 million, or 24.8%, to $60.5
million, sales for the Rubber and Plastic Group increased $16.1 million, or
49.5%, to $48.5 million, while sales for the Special Machines Group decreased
$9.1 million, or 29.2% to $21.8 million. The increase in sales for the Precision
Machined Products Group was due to approximately $8.0 million of increased
product sales within existing divisions and flow through sales of material of
approximately $14.5 million, partially offset by the effect of $10.4 million in
1996 sales attributable to the divested Eonic division. The $14.5 million
increase from flow through sales occurred because a customer that had been
providing material to the Company decided to have the Company purchase the
material and include the value of the material in the selling price. Without the
flow through sales, the Company's overall sales would have increased $4.6
million, or 4.1%, over 1996 sales. The increase in sales for the Rubber and
Plastic Group was primarily due to the inclusion of a full year of results for
three rubber and plastic component companies acquired during the first two
quarters of fiscal 1996, as well as the January 1997 acquisition of Plastronics.
Additional sales from the four acquired Rubber and Plastic Group companies
aggregated approximately $13.2 million during 1997. The remaining growth within
the Rubber and Plastic Group of $2.9 million was due to incremental new business
at the existing division within this group. Sales decreases within the Special
Machines Group were due to the effect of $6.5 million in 1996 sales attributable
to the divested NMT division that was sold during 1996 and a $2.6 million sales
decrease at the remaining division within this group ("Bay City"). The sales
decrease at the Bay City division was due to insufficient new orders to sustain
the business that existed during 1996.
Consolidated gross profit increased $1.1 million to $23.8 million in 1997
from $22.7 million in 1996. The increase in gross profit is attributable to the
increase in sales, partially offset by a decrease in consolidated gross margin.
Consolidated gross margin decreased to 18.2% in 1997 from 20.3% in 1996. The
decrease in margin was primarily attributable to the effect of the $14.5 million
of flow through material sales that the Precision Machined Products Group
purchased in 1997 rather than receiving from the customer during 1996. These
sales generated $0.7 million of incremental gross profit. Other factors that
adversely impacted margin were the decline in sales in the Special Machines
Group (which has generally commanded higher margins than other groups), and
reduced margins due to product mix within this group. In addition, gross margin
within the Rubber and Plastic Group was negatively impacted by production
inefficiencies associated with high labor turnover caused by relatively full
employment and increased costs associated with starting production on new parts
for the 1998 model year. High labor turnover is continuing to affect certain
businesses in the Rubber and Plastic Group in 1998, as described in the Recent
Developments section below. Partially
45
<PAGE> 51
offsetting margin reductions were operating performance gains that resulted from
the Company's continuous improvement programs at certain of the Company's
divisions, particularly within the Precision Machined Products Group. The
genesis of the Company's commitment to continuous improvement began in late 1995
when the Newcor Operating System was introduced with an emphasis on the use of
continuous improvement tools such as cellular manufacturing, one-piece flow,
value engineering, kaizen, and team-oriented problem solving. As is common in
the automotive supplier industry, certain of the Company's long-term contracts
required price reductions over the term of the contract. These price reductions
were largely offset by the impact of pricing on new products and cost reductions
related to the continuous improvement programs.
Selling, general and administrative expenses ("SG&A") increased to $15.8
million in 1997 from $15.1 million in 1996. SG&A as a percentage of sales
decreased to 12.0% in 1997 from 13.5% in 1996. The increase in SG&A expense was
primarily due to the acquisitions in the Rubber and Plastic Group, which added
approximately $2.7 million of SG&A expense in 1997, largely offset by an
approximate $2.3 million reduction due to the divestitures of Eonic and NMT. The
remaining increase in SG&A was principally due to expenditures incurred to
evaluate and select hardware and software and begin the implementation of a
company-wide information system and train employees in the Newcor Operating
System. The primary reason for the decrease in SG&A as a percentage of sales was
the sales increase described above.
Consolidated operating income increased $1.5 million to $8.3 million in
1997 from $6.8 million in 1996, and consolidated operating margin increased to
6.3% of sales in 1997 from 6.1% of sales in 1996.
Operating income for the Precision Machined Products Group increased $1.6
million to $5.3 million in 1997 from $3.7 million in 1996. Operating margin
increased to 8.8% of group sales in 1997 from 7.7% of group sales in 1996. The
increase in operating income was due to $0.7 million of operating income from
the $14.5 million of flow through sales of previously provided customer material
as described above, incremental income associated with new business, the
elimination of significant start up costs that were incurred during 1996 for
certain new business and the reduction of controllable variable costs through
the continued implementation of the Newcor Operating System. The increase was
partially offset by the effect of $0.5 million in 1996 operating income, net of
a nonrecurring disposition charge of $0.2 million, attributable to the divested
Eonic division. Operating margins increased due to the elimination of
significant start up costs that affected 1996 results and implementation of the
Newcor Operating System as described above. The increase in operating margins
within this segment was partially offset by the lower margin on the $14.5
million of flow through sales described above.
Operating income for the Rubber and Plastic Group increased $0.1 million to
$2.0 million in 1997 from $1.9 million in 1996. Operating margin decreased to
4.2% of group sales in 1997 from 5.9% of group sales in 1996. The increase in
operating income was due to incremental income from the acquisitions described
above, largely offset by the effects of production inefficiencies associated
with high labor turnover caused by relatively full employment, increased costs
associated with starting production on new parts for the 1998 model year and an
incremental increase of goodwill amortization of $0.3 million as a result of the
four acquisitions during 1997 and 1996. These developments, and, to a lesser
extent, pricing issues on certain coated metal parts produced by the group,
resulted in the operating margin reduction.
Operating income for the Special Machines Group decreased $0.6 million to
$2.3 million in 1997 from $2.9 million in 1996. Operating margin increased to
10.4% of group sales in 1997 from 9.4% of group sales in 1996. The decrease in
operating income was primarily due to the decline in sales and a shift in
product mix at Bay City, the remaining division in this group, partially offset
by the elimination of $0.6 million in 1996 operating loss from the divested NMT
division, which was principally the nonrecurring loss on the sale of the
division. The overall increase in operating margin was primarily due to the
elimination of the NMT loss, partially offset by the change in product mix at
the Bay City division.
Consolidated operating income benefited from a net gain on the sale of a
building of $1.0 million, which was partially offset by a $0.7 million loss on
the sale of Eonic.
Interest expense was $2.1 million and $1.8 million in 1997 and 1996,
respectively. The increase in interest expense was due to additional debt
incurred to finance the acquisitions in the Rubber and Plastic Group. The
46
<PAGE> 52
effective tax rate was 35.3% in 1997 and 31.2% in 1996. The 1996 rate was
favorably impacted by the final settlement of an IRS audit.
FISCAL 1996 COMPARED TO FISCAL 1995
Consolidated sales in 1996 were $111.7 million, an increase of $21.5
million, or 23.9%, from 1995 sales of $90.2 million. Precision Machined Products
Group sales increased by $6.0 million, or 14.3%, to $48.4 million, sales for the
Rubber and Plastic Group increased $15.2 million, or 89.0%, to $32.4 million and
sales for the Special Machines Group increased $0.3 million, or 0.8%, to $30.9
million. Precision Machined Products Group sales increased as a result of sales
growth due to new parts programs that began production during fiscal 1996 and
1995. The sales growth was primarily the result of significant new orders where
the Company processed material provided by the customer and the value of the
material was not reflected in sales. If the orders had required the Company to
purchase these materials, reported sales would have been somewhat higher. Rubber
and Plastic Group sales increased primarily due to the three acquisitions during
1996, which represented $13.4 million of the sales increase. The remaining
growth within the Rubber and Plastic Group of $1.8 million was due to
incremental new business at the existing division within this group. Within the
Special Machines Group, sales at the divested NMT division decreased $3.6
million, while sales at Bay City, the remaining division, increased $3.9
million, or 18.5%, compared to 1995, as a result of an increase in orders,
primarily for proprietary machines.
Consolidated gross profit increased $6.1 million to $22.7 million in 1996
from $16.6 million in 1995. The increase in gross profit was attributable to the
increase in sales and an increase in consolidated gross margin to 20.3% in 1996
from 18.4% in 1995. The increase was primarily attributable to increased sales
of higher margin proprietary machines within the Special Machines Group and the
sales growth from new parts programs within the Precision Machined Products
Group, where the Company processed material provided by the customer and the
value of material was not reflected in cost of sales. If the orders had required
the Company to purchase these materials, reported gross margin would have been
somewhat lower. The margin increase related to these factors was partially
offset by the significant costs associated with starting production on certain
new orders within the Precision Machined Products Group, and, to a lesser
extent, pricing issues on certain coated metal parts produced at one of the
newly purchased divisions within the Rubber and Plastic Group. As is common in
the automotive supplier industry, certain of the Company's long-term contracts
required price reductions over the term of the contract. These price reductions
were largely offset by the impact of pricing on new products and cost reductions
related to continuous improvement programs.
SG&A increased to $15.1 million in 1996 from $11.3 million in 1995. SG&A as
a percentage of sales increased to 13.5% of sales in 1997 from 12.5% of sales in
1996. The increase was primarily due to $2.0 million of SG&A from the three
acquisitions in the Rubber and Plastic Group and the costs of hiring and
training management personnel to implement the Newcor Operating System,
primarily within the Precision Machined Products Group.
Consolidated operating income increased $1.4 million to $6.8 million in
1996 from $5.4 million in 1995, and consolidated operating margin increased to
6.1% of sales in 1996 from 5.9% of sales in 1995.
Operating income for the Precision Machined Products Group increased $0.1
million to $3.7 million in 1996 from $3.6 million in 1995. Operating margin
decreased to 7.7% of group sales in 1996 from 8.6% of group sales in 1995. The
increase in operating income was due to incremental operating income from new
business, largely offset by significant start up costs that were incurred during
1996 for the new parts programs and, to a lesser extent, the costs of hiring and
training management personnel to implement the Newcor Operating System. The
operating margin decrease that resulted from those factors was partially offset
by margins on new parts programs where the Company processed material provided
by the customer, the value of which was not reflected in sales or cost of sales.
Operating income for the Rubber and Plastic Group increased $0.7 million to
$1.9 million in 1996 from $1.2 million in 1995. Operating margin decreased to
5.9% of group sales in 1996 from 6.8% of group sales in 1995. The increase in
operating income was due to incremental income from the three acquisitions, as
well as from new business, partially offset by $0.3 million of goodwill
amortization and the costs of hiring and training
47
<PAGE> 53
management personnel to implement the Newcor Operating System. Operating margin
decreased as a result of these factors, and, to a lesser extent, pricing issues
on certain coated metal parts produced by the segment.
Operating income for the Special Machines Group increased $0.7 million to
$2.9 million in 1996 from $2.2 million in 1995. Operating margin increased to
9.4% of group sales in 1996 from 7.3% of group sales in 1995. Operating income
increased primarily as a result of sales of high margin proprietary machines at
the Bay City division. Operating income was partially offset by $0.6 million in
1996 operating loss from the NMT division, which was principally the
nonrecurring loss on the sale of the division. The combination of these factors
resulted in the increase in operating margin.
Interest expense was $1.8 million and $1.5 million in 1996 and 1995,
respectively. The increase in interest expense was due to additional debt
related to the acquisitions. The effective income tax rate was 31.2% in 1996,
which was below the statutory rate of 34.0% due to the final settlement of an
IRS audit during 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash outflows during fiscal 1997 of $14.6 million to finance acquisitions
and $3.5 million to purchase capital equipment were partially offset by positive
cash flow of $8.4 million from continuing operations, $2.5 million from the sale
of capital assets, primarily a building and $1.5 million of proceeds from the
sale of Eonic. Cash from continuing operations was primarily provided by
earnings and depreciation and amortization expense.
Cash outflows during the first quarter of 1998 of $13.1 million to finance
the MT&G Acquisition and deposit on Deco and $1.7 million to purchase capital
equipment were financed by increased borrowings of $14.7 million on the
Company's line of credit and positive cash flow of $0.4 million from operations.
Cash from operations was primarily provided by depreciation and amortization
expense, mostly offset by the loss incurred during the quarter.
During fiscal 1996, the Company amended its revolving credit agreement with
a major U.S. bank to allow for a portion of the revolving credit to be replaced
with a seven-year fixed-rate term loan in the amount of $10.0 million with an
annual interest rate of 7.85%. Monthly principal payments on the term loan of
$0.2 million are due from June 1998 through May 2003. At October 31, 1997, the
Company had $17.0 million outstanding on a $25.0 million revolving credit
agreement. Subsequent to October 31, 1997, this revolving credit facility was
amended and restated to become the Senior Credit Facility which upon
consummation of the Offering increased in total availability to $50.0 million.
Availability of funds under the Senior Credit Facility is subject to
satisfaction of certain financial ratios and other conditions, and as a result,
there can be no assurance of the actual amount the Company will be able to
borrow at any time under the Senior Credit Facility. See "Description of Other
Indebtedness -- Senior Credit Facility." At January 31, 1998, the Company had
$31.7 million outstanding on the Senior Credit Facility. Thereafter, a portion
of the net proceeds from the Offering was used to finance the Deco and
Turn-Matic Acquisitions, to refinance the MT&G Note and to pay down the Senior
Credit Facility (including repayment of borrowings incurred to finance the cash
portion of the MT&G Acquisition, debt assumed in connection with that
acquisition and borrowings incurred to finance the down payment made in
connection with the Deco Acquisition, as well as paying down working capital
borrowings).
The Company is highly leveraged as a result of the Offering. The Company's
ability to make scheduled payments of principal of, or to pay the interest or
Liquidated Damages (as defined herein), if any, on, or to refinance, its
indebtedness (including the Exchange Notes) or to fund planned capital
expenditures will depend on its future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond its control.
The Company believes that, through a combination of cash flow from
operations and available cash, together with available credit under the Senior
Credit Facility, it will have adequate cash available to meet its anticipated
needs for fiscal 1998. However, there can be no assurance that the Company's
business will generate sufficient cash flow from operations, that anticipated
growth opportunities and operating improvements will be realized or that future
borrowings will be available under the Senior Credit Facility in an
48
<PAGE> 54
amount sufficient to enable the Company to service its indebtedness, including
the Exchange Notes, or to fund its other liquidity needs, as further discussed
under the "Risk Factors -- Leverage" section of this Prospectus.
During fiscal 1997 and the first quarter of fiscal 1998, the Company
continued to pay a quarterly cash dividend of $.05 per share of common stock.
Total dividends paid were $1.0 million in 1997 and $0.9 million in 1996 and
1995, respectively, and $246,000 and $235,000 in the first quarter of fiscal
1998 and 1997, respectively. The terms of the Notes require suspension of the
cash dividend.
The Company is in the process of implementing a new company-wide Enterprise
Resource Planning (ERP) computer system. One of the anticipated benefits of this
system is year 2000 date conversion without any adverse effect on customers or
disruption to business operations. Implementation of the system is underway with
projected completion during mid 1999. The Company is also communicating with all
of its significant suppliers and large customers to coordinate year 2000
conversion. The identifiable cost of year 2000 compliance and its effect on the
Company's future results of operations is not expected to be material.
CAUTIONARY STATEMENTS UNDER THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section and, in particular, the
information in the first paragraph of the "Results of Operations for the Quarter
Ended January 31, 1998" sub-section hereof concerning the Acquisitions, in the
paragraph of that sub-section concerning certain of the factors impacting
results in fiscal 1998 and the expected impact of management returns thereafter
and in the last paragraph of the "Liquidity and Capital Resources" sub-section
concerning year 2000 conversion constitute "forward-looking statements" within
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. A number of factors could cause actual results to differ materially from
those included in or suggested by such forward-looking statements, including
without limitation: the cyclical nature of the industries served by the Company,
all of which have encountered significant downturns in the past; the level of
production by and demand from the Company's principal customers, upon which the
Company is substantially dependent, including the three major domestic
automobile manufacturers and Deere & Company; whether, when and to what extent
expected orders materialize; whether the Company will be able to successfully
integrate Deco and Turn-Matic and other recent acquisitions such as MT&G and
Plastronics into the Company's pre-existing operations and operate them
profitably; whether the Company's recent initiatives to improve upon the recent
labor turnover experienced in its Rubber and Plastic Group will be successful
and cost-effective; the duration of the start-up phase of MT&G's new program and
the extent to which it is successful; the impact on the Company of actions by
its competitors, some of which are significantly larger and have greater
financial and other resources than the Company; developments with respect to
contingencies, including environmental matters, litigation and retained
liabilities from businesses previously sold by the Company; and the extent to
which the Company's new ERP computer system performs as anticipated and the
accuracy of the information supplied by the Company's suppliers and customers
concerning their year 2000 readiness. All forward-looking statements in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section are qualified by such factors, as well as by the further
discussion of these and other risks and uncertainties of the Company's business
provided in the "Risk Factors" section of this Prospectus. The Company disclaims
any obligation to update any such forward-looking statements.
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<PAGE> 55
BUSINESS
GENERAL
The Company is a leading manufacturer of precision machined components and
assemblies for the automotive, medium and heavy duty truck and agricultural
vehicle industries and is a manufacturer of custom rubber and plastic products
primarily for the automotive industry. The Company is also a supplier of
standard and custom machines and systems primarily for the automotive and
appliance industries. The Company's largest customers include leading vehicle
OEMs such as Chrysler, Ford, General Motors and Deere, and Tier 1 suppliers such
as American Axle and Detroit Diesel. The Company's products are typically
supplied to customers on a sole-source basis. Sole-source sales represented
approximately 89% of fiscal 1997 pro forma sales. The Company's management has
extensive experience in the automotive supply industry and has integrated five
acquired businesses (excluding the Acquired Companies) into existing operations
over the past 48 months.
Through internal growth and acquisitions, the Company's sales from
continuing operations increased at a compound annual rate of 18.9%, from $65.4
million in fiscal 1993 to $130.8 million in fiscal 1997, and EBITDA (as defined
herein) increased from $1.9 million in fiscal 1993 to $12.6 million in fiscal
1997. The Acquired Companies had aggregate sales of $111.8 million and aggregate
pro forma EBITDA of $19.5 million for the twelve months ended September 30,
1997. On a pro forma basis, the Company had sales and EBITDA of $242.6 million
and $32.1 million, respectively, for fiscal 1997.
The Company's products are used in more than 25 passenger car models and
nearly all light truck and sport utility models manufactured in the United
States, including such leading vehicles as the Ford Taurus, Lincoln Continental,
Chrysler Concorde, Dodge Intrepid, Pontiac Grand Prix, Buick Park Avenue, Ford F
series of light trucks, General Motors C/K series of light trucks and sport
utility vehicles, Jeep sport utility vehicles and Dodge Ram series of light
trucks and sport utility vehicles. In addition, the Company is the leading
independent supplier of precision machined components to Deere's tractor
operations and to Detroit Diesel, the largest producer of engines for class 8
heavy duty trucks in North America.
The Company is organized into three business groups: the Precision Machined
Products Group, the Rubber and Plastic Group and the Special Machines Group.
Certain key products manufactured by each of these groups, and certain key
processes used to manufacture those products, are described in the "Glossary"
section of this Offering Memorandum. Pro forma fiscal 1997 EBITDA amounts
presented below for these groups do not reflect $1.2 million of certain
unallocated corporate expenses.
The Precision Machined Products Group produces transmission, powertrain and
engine components and assemblies, primarily for the automotive, medium and heavy
duty truck and agricultural vehicle industries. Automotive products include
gears, gear blanks and shafts for transmissions; bearing caps, oil filter
adapters and manifolds for engines; thrust and pressure plates for power
steering systems; and axles. Products for the medium and heavy duty truck
industry include rocker arm components and assemblies, accessory drive
assemblies and other engine components. Products for the agricultural vehicle
industry include transfer cases, differential cases, transmission housings and
brake pedals. The Precision Machined Products Group generated $172.2 million, or
71.0%, of the Company's pro forma sales and $27.0 million, or 81.0%, of the
Company's pro forma EBITDA in fiscal 1997.
The Rubber and Plastic Group produces cosmetic and functional seals and
boots and functional engine compartment products supplied primarily to the
automotive industry. The group's seals and boots include interior and exterior
floor gear shift lever boots, steering column seals, door lock actuator boots
and a variety of other products that insulate the passenger compartment from the
external environment. The group's functional engine compartment products include
custom designed vacuum reservoirs essential for the operation of air
conditioning, cruise control and other vehicle systems. The Rubber and Plastic
Group generated $48.5 million, or 20.0%, of the Company's pro forma sales and
$3.7 million, or 11.1%, of the Company's pro forma EBITDA in fiscal 1997.
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<PAGE> 56
The Special Machines Group designs and manufactures standard and custom
welding, assembly, forming, heat treating and testing machines and systems for
the automotive, appliance and other industries. The Special Machines Group
generated $21.9 million, or 9.0%, of the Company's pro forma sales and $2.6
million, or 7.9%, of the Company's pro forma EBITDA in fiscal 1997.
COMPETITIVE STRENGTHS
Full-Service Supplier with Broad Manufacturing Capabilities. The Company's
diverse range of manufacturing capabilities enables it to tailor manufacturing
processes to meet each customer's specific requirements and reduces the need for
customers to rely on multiple suppliers. The Company specializes in the high
volume production of components and assemblies involving extremely close
tolerances, complex processes and in some cases difficult materials. The
Company's manufacturing operations utilize advanced equipment such as modern CNC
machines, synchronous and non-synchronous transfer lines, and proprietary custom
molding machines. Precision machining operations include milling, drilling,
turning, heat-treating, honing, broaching and electronic gauging, as well as
more demanding processes such as gun drilling, spline rolling, ultra precision
grinding, super-finishing, lapping and laser welding. Rubber and plastic molding
operations include conventional injection molding, as well as dip molding, slush
casting, rotational molding, injection molding of multiple-durometer products,
sonic welding and other processes. The Company designs and builds much of its
own automation and custom tooling and most of its non-standard machines.
Increasingly, the Company also provides its customers with value-added
capabilities such as design and development, engineering, assembly and testing,
and program management from concept development through production and assembly.
Management believes that the Acquisitions will further enhance the scope of the
Company's engineering, design and assembly capabilities and provide a
competitive advantage as OEMs and their Tier 1 suppliers increasingly rely on
and award new business to established and well-known suppliers.
Efficient, High Quality Operations. The Company's manufacturing expertise
allows it to focus primarily on higher value added, more complex components and
assemblies with very exacting dimensional, finish and cosmetic requirements. The
Company also proactively works with its customers to improve the design and
manufacturing processes used in its products. These initiatives often lead to
improved quality and product performance, improved efficiency and reduced
manufacturing costs. The Company uses the cost savings and other benefits
derived from these efforts to reinforce its customer relationships. In addition,
ISO 9000 and QS 9000 quality certifications are integral to the Company's
operating methodology and commitment to quality. Currently, 11 of the Company's
15 manufacturing facilities are ISO 9000 or QS 9000 certified, with the
remaining four expected to be certified by the end of 1998. Management believes
that the Company's manufacturing expertise and commitment to quality are among
the primary reasons for the Company's strong historical growth and customer
loyalty.
Strong Relationships with Customers. Approximately 78% of the Company's pro
forma fiscal 1997 sales were generated by the Company's six largest customers,
each of which the Company has served for over 25 years, and the Company is the
sole-source outside supplier on nearly all of the products it manufactures for
its major customers. The Company has developed collaborative relationships with
its customers by providing them with integrated product development and
manufacturing capabilities, high quality products, timely delivery and excellent
customer service. The Acquired Companies have products and customer bases which
complement the Company's other operations, and the combination of these
businesses makes the Company a larger supplier to several of its key customers
and creates cross-selling opportunities. Management intends to leverage the
Company's selling resources and established customer relationships to introduce
its customers to the full range of products and process capabilities of each of
its operations. For example, the Company plans to introduce its broad precision
machining capabilities to existing Deco customers such as Detroit Diesel.
Product, Vehicle, Customer and Industry Diversification. The Company offers
in excess of 50 different major products, many of which are sole-sourced, for
use on more than 60 different vehicle platforms. These products are sold to
customers who are diversified across the automotive, medium and heavy duty truck
and agricultural vehicle industries, with no single customer accounting for more
than approximately 20% of pro
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forma 1997 sales. Management believes that this product, vehicle, customer and
industry diversification can help reduce the Company's dependence on any single
source of revenue.
OPERATING STRATEGY
Strengthen Positions in Established Product Niches. The Company's goal is
to continue to develop expertise and expand market presence centered around its
two key operating platforms, which are (i) precision machined transmission,
powertrain and engine components and assemblies for the automotive, medium and
heavy duty truck and agricultural vehicle industries through the Precision
Machined Products Group, and (ii) manufacturing of rubber and plastic cosmetic,
functional sealing and underhood components for the automotive industry through
the Rubber and Plastic Group. Management believes that these two platforms
provide opportunities for profitable growth due to the existence of relatively
few competitors with comparable manufacturing and program management
capabilities.
Capitalize on Increased Outsourcing. Component and assembly outsourcing is
a well established trend in the automotive industry and is becoming increasingly
prevalent in the medium and heavy duty truck and agricultural vehicle
industries. The Company's status as an incumbent supplier positions it to
participate in the growth in outsourcing by capturing incremental business from
existing customers and marketing its experience and capabilities to new
customers with outsourcing needs. Management plans to continue to develop and
market the Company's design, engineering and assembly capabilities and believes
that its diverse process capabilities and full-service supplier status give the
Company the opportunity to compete more effectively for complex, higher
value-added and more profitable assembly work.
Pursue Continuous Operating Improvement. The Company's operating philosophy
is based on the rigorous implementation of lean production systems supported by
world-class quality management and excellence in customer service, as measured
by quality, on-time delivery, timely product launches and low manufacturing
cost. The Company has developed and is implementing the Newcor Operating System,
a comprehensive company-wide management system which emphasizes continuous
improvement and integrates a quality operating system, cellular manufacturing,
one-piece flow, working capital management, supply chain management, value
engineering, kaizen, team-oriented problem solving and leadership skills into an
overall culture and system of management. Implementation of the Newcor Operating
System has led to significant improvements in scrap rates, labor productivity,
working capital turnover and other measureables in certain of the Company's
businesses. Management believes that similar improvements can be achieved in
each of the Company's businesses, over time, as training is increased and the
Newcor Operating System is extended to all locations.
Selectively Pursue Strategic Acquisitions. Strategic acquisitions have
been, and will continue to be, an integral part of the Company's growth
strategy. The market niches in which the Company operates have a high degree of
fragmentation among competitors, often presenting significant opportunities for
consolidation. Management believes that the Company's reputation and market
leadership make it an attractive strategic acquiror for smaller competitors that
may be unable to meet the necessary investment requirements and increasingly
stringent criteria being imposed by OEMs and their Tier 1 suppliers. Management
plans to continue to pursue acquisition opportunities that are complementary to
the Company's existing niche platforms, particularly those that expand
technological capabilities, product offerings, customer base or geographical
scope. Other key factors management considers when reviewing acquisition
opportunities include the potential for cost savings and cross-selling, and the
opportunity to enhance engineering, assembly and other value-added operating and
program management capabilities.
INDUSTRY OVERVIEW
The two primary niches in which the Company operates -- precision machined
transmission, powertrain and engine components and assemblies for the
automotive, medium and heavy duty truck and agricultural vehicle industries
through the Precision Machined Products Group, and manufacturing of rubber and
plastic cosmetic, functional sealing and underhood components for the
automotive, medium and heavy duty truck and agricultural vehicle industries
through the Rubber and Plastic Group -- are highly fragmented. Although
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<PAGE> 58
available data is limited, management believes the Company is among the largest
independent (non-captive) suppliers of such components for the niche markets
served within these industries.
In recent years, the automotive supplier industry has undergone significant
consolidation. To lower costs and improve quality, OEMs have been reducing their
supplier base by increasingly awarding sole-source contracts to
well-established, full-service suppliers. OEMs are increasingly seeking
suppliers capable of providing sub-assemblies and complete assemblies rather
than only separate component parts, and who can offer engineering, design and
testing capabilities. This allows OEMs to focus more fully on overall vehicle
design and assembly, consumer marketing, distribution and other core
competencies. OEMs continuously evaluate suppliers on the basis of product
quality, cost control, reliability of delivery, product design capability,
financial strength, new technology implementation, and the quality and condition
of facilities and overall management. Suppliers that obtain superior ratings are
considered more favorably for sourcing new business.
These trends are also beginning to appear in the medium and heavy duty
truck and agricultural equipment industries. The Company believes that, if these
consolidation trends continue, they will present additional opportunities to
increase penetration in the Company's existing niche markets, both through
internal growth, and through the acquisition of quality companies that
complement its existing business.
OPERATING GROUPS
For each of the last three fiscal years, each operating group has accounted
for the amount and percentage of the Company's sales and pro forma sales for
1997 shown in the table below. Because each of the Acquired Companies operates
in the Precision Machined Products Group, the size of that group is
substantially larger on a pro forma basis. The Company sold two businesses in
the Special Machines Group, reducing the size of that group, during the periods
presented.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31,
-------------------------------------------------------------- PRO FORMA
1995 1996 1997 1997
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Precision Machined
Products.................. $42,382 47.0% $ 48,439 43.4% $ 60,471 46.2% $172,232 71.0%
Rubber and Plastic.......... 17,165 19.0 32,447 29.0 48,517 37.1 48,517 20.0
Special Machines............ 30,626 34.0 30,858 27.6 21,860 16.7 21,860 9.0
------- ----- -------- ----- -------- ----- -------- -----
Consolidated................ $90,173 100.0% $111,744 100.0% $130,848 100.0% $242,609 100.0%
</TABLE>
A discussion of the products manufactured and the customers served by each
of these three groups is set forth below.
PRECISION MACHINED PRODUCTS GROUP
PRODUCTS
The Precision Machined Products Group produces transmission, powertrain and
engine components and assemblies primarily for the automotive, medium and heavy
duty truck and agricultural vehicle industries. The group is typically the
sole-source provider of the components it supplies. Many of the group's products
are essential to a vehicle's reliability or comfort.
Automotive. The group manufactures a broad range of transmission components
including gears, gear blanks, turbine shafts, output shafts and various
assemblies. Powertrain components include differential pinion gears and pins,
differential side gears, stud yokes, slip yokes, machined axles, thrust and
pressure plates and power steering pump assemblies. Engine components include
bearing caps, oil filter adapters, EGR adapters, intake manifolds, exhaust
manifolds and related items.
Medium and Heavy Duty Trucks. The group's principal products for this
market are comprised of powertrain components including axles and hubs and
retainers, and engine components including rocker arm components and assemblies,
fuel pump drive assemblies, air compressor drive assemblies, fan spindle
assemblies and other accessory drive assemblies.
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Agricultural Vehicles. The group's principal products include transmission
components such as transmission housings and reduction housings, powertrain
components such as transfer cases, differential cases and planetary carriers,
and miscellaneous products such as brake pedals and steering arms.
CUSTOMERS
The Precision Machined Products Group has strong niche positions in the
popular light truck, van and sport utility platforms. The group's principal
customers are OEMs such as Chrysler, Deere, Ford and General Motors, and Tier 1
suppliers such as American Axle, CAMI, Inc. ("CAMI"), Detroit Diesel, The Timken
Company ("Timken"), TRW Inc. ("TRW") and Wescast Industries, Inc. ("Wescast").
Each of the Company's precision machining operations has close, long-term
relationships with its major customers. These relationships, coupled with the
essential nature of many of the complex, close tolerance products manufactured
by this group, have enabled the Company to participate with its customers in the
development of products and to receive contracts that range in duration from
annual blanket purchase orders to five years. While these contracts are
contingent on meeting performance requirements that generally include quality,
delivery and pricing, they also typically provide an opportunity to cure
performance shortfalls.
The Company's engineering staff works closely with its OEM customers,
generally for periods of 18 to 30 months prior to the introduction of the
Company's products on an engine or transmission, to develop or adapt specific
components and assemblies to satisfy its customers' requirements. Due to the
expense and long lead times necessary to develop these application-specific
components and assemblies, it is rare for a competitor to replace an incumbent
component supplier such as the Company during the production term of a given
engine or transmission. Accordingly, the Company generally supplies components
to an OEM on a sole-source basis throughout the manufacturing term of a specific
engine or transmission, which has typically ranged from 7 to 15 years for
automobiles and 15 to 20 years for medium and heavy duty trucks and agricultural
equipment.
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The following table sets forth the principal products for which the Company
has been awarded precision machining business, including the vehicle or engine
platform where those products will be used. Where two names are listed together
under the "customer" column, the Company supplies products to the second name
listed, which is a Tier 1 supplier to the OEM listed beside it.
<TABLE>
<CAPTION>
CUSTOMER VEHICLE PRODUCT
<S> <C> <C>
Newcor
Ford Taurus, Sable, Continental, Transmission Output Shafts
Windstar Transmission Turbine Shafts
Contour, Mystique Transmission Pinion Gear
Blanks
Ford/Timken Taurus, Sable, Continental, Transmission Ring Gears
Windstar
Ford/MSP Industries F150 Light Trucks Transmission Parking Gears
Corporation Drive Shaft Stud Yokes
Explorer/Ranger Trucks Drive Shaft Stud Yokes
Ford/Jernberg Industries Jaguar X80 Drive Shaft Slip Yokes
Drive Shaft Weld Yokes
Ford/American Axle F250/F350 Light Trucks Rear Axle Shafts
Deere 9000 Series Agricultural Differential Cases
Tractors Pedals
8000 Series Agricultural Differential Cases
Tractors Transmission Cases
Steering Arms
7000 Series Agricultural Differential Cases
Tractors Reduction Housings
Planetary Carriers
Steering Arms
Pedals
Trax Agricultural Tractors Transmission Cases
Team-Mate II & III Industrial Differential Cases
Tractors
Clark Equipment Company/Funk Industrial Fork Trucks Differential Cases
Manufacturing Company
MT&G
General Motors/American Axle Camaro, C/K & S Series Light Rear Axle Shafts
Trucks, Firebird, Vans Floating Axle Shafts
Output Shafts
Differential Pinion Shafts
General Motors Caprice, Coupe DeVille, Rear Axle Shafts
Roadmaster Floating Axle Shafts
Output Shafts
CAMI Geo Tracker Rear Axle Shafts
Ford Expedition, Navigator & F250 Rear Axle Shafts
Light Trucks
F150 Light Trucks Output Shafts
</TABLE>
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<PAGE> 61
<TABLE>
<CAPTION>
CUSTOMER VEHICLE PRODUCT
<S> <C> <C>
Deco
Detroit Diesel Series 50/55/60 Engines Rocker Arm Assemblies
Accessory Drive Assemblies
Ford Taurus, Contour, Lincoln, Transmission Shafts
Marquis Distributor Cams
Volkswagen AG Golf Thrust and Pressure Plates
General Motors C/K Series Light Trucks Hubs and Retainers
GM Service Steering Knuckles
Chrysler/TRW Cirrus, Stratus Steering Rack Shafts
Mazda Motor Corporation/TRW 626 Steering Rack Shafts
Mercedes-Benz AG/Citation M Class Sport Utility Bearing Caps
Corporation Vehicles
</TABLE>
Turn-Matic
<TABLE>
<S> <C> <C>
Ford F Series Light Trucks, Oil Filter Adapters
Aerostar, Windstar Bearing Caps
Econoline, Mustang, Oil Filter Adapters
Continental
Explorer EGR Adapters
Contour, Mystique Brackets
Falcon (Australia) Intake Manifolds
Ford/Wescast Mustang Exhaust Manifolds
</TABLE>
The Company has been awarded new business (i.e., parts not previously
supplied by the Company) for the model year indicated for the models set forth
below.
<TABLE>
<CAPTION>
MODEL YEAR MODELS
<C> <S>
1998 GM: 800 C/K Series of Light Trucks and Sport Utility
Vehicles, Cadillac STS; Ford: F150/250/350 Light Trucks,
Mustang; Volkswagen Golf
1999 Ford: F150/250/350 Light Trucks, Escort, Small Sport Utility
Vehicles, Jaguar X80, Lincoln Continental LS
2000 Ford Medium Trucks and Motor Homes
</TABLE>
RUBBER AND PLASTIC GROUP
PRODUCTS
The Rubber and Plastic Group produces cosmetic, functional sealing and
underhood components for the automotive industry. Many of the group's components
require innovative technical production solutions to customer-specific
requirements, as well as considerable manufacturing expertise. The Company's
rubber and plastic process capabilities include dip molding, slush casting,
rotational molding, open face casting, injection molding and sonic welding. The
group manufactures both interior components (principally transmission shift
boots, steering column and gearshift lever seals and air conditioning ducts) and
engine compartment and other body components (steering column seals, body and
dash panel grommets and fuel filler seals). The group's injection molding
facilities are used to manufacture vacuum control assemblies, fluid recovery
systems, speaker covers and miscellaneous protective covers. The group also
supplies attachment and restraining products such as clips and brackets.
The Rubber and Plastic Group's products are all manufactured in their final
color (black, clear, white, yellow or blue), with no external post processing.
The product portfolio includes coated metal parts which are
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<PAGE> 62
dipped for sound, environmental or electrical exposure. The group uses rigid and
soft thermoplastics, PVC, sanoprene, polypropylene, silicon, neoprene,
polyethylene and polyurethane materials in its forming and finishing operations,
depending on customer requirements. The group also emphasizes complex products,
such as co-injection molded dual-durometer engine compartment mounts, and
products which require the assembly and testing of multiple components into an
integrated system, such as vacuum boost modules.
CUSTOMERS
The Rubber and Plastic Group's principal customers are OEMs such as
Chrysler, Ford and General Motors, and Tier 1 suppliers such as Robert Bosch
Corporation, Dura Automotive Systems, Inc. ("Dura"), Pollak, a Stoneridge
Company ("Pollak"), and Takata Inc. The Group currently supplies in excess of 50
different major products, many of which are sole-sourced, for use on more than
40 different passenger cars, minivans, light trucks and sport utility vehicles.
As a result of increasing industry focus on total system development and
integration, the Company has begun to target and pursue additional opportunities
with select, high growth Tier 1 suppliers. Using computer aided design and
customer-specific support, the Company is in the process of developing new
plastic, dual-durometer rubber and metal-rubber-plastic products for
introduction within the next two to three years. While there can be no assurance
that the development of these new products can be successfully completed or as
to the quantities which may be sold, based on progress to date, management
believes that, if successful, these programs have the potential to improve the
market position held by the Company.
In addition to serving customers in the automotive industry, the Company
supplies a limited amount of product to customers in the medium and heavy duty
truck and agricultural vehicle industries, including Deere, Detroit Diesel,
Freightliner Corp. and Navistar International Corp. The Company also sells
certain of its products to aftermarket product suppliers and various specialized
industries with product niches similar to those filled by the Company in the
automotive market.
The following table sets forth the principal customers, vehicles and
products for which the Company has been awarded rubber and plastic product
business:
<TABLE>
<CAPTION>
CUSTOMER VEHICLE PRODUCT
<S> <C> <C>
Chrysler Caravan, Cherokee, Dodge Dakota, Transmission Shift Boots
Dodge Neon, Durango, Plymouth Neon,
Plymouth Small Utility Vehicles, Town
& Country, Viper, Voyager, Wrangler
Cherokee, Wrangler Gap Hiders
Breeze, Cirrus, Concorde, Intrepid, Steering Column Seals
LHS, Sebring Convertible, Stratus,
T-300 Light Trucks
Caravan, Concorde, Dodge Neon, Drain Tubes
Intrepid, LHS, Plymouth Neon, Town &
Country, Voyager
Breeze, Cherokee, Cirrus, Concorde, Vacuum Reservoirs and
Dakota, Dodge Neon, Durango, Grand Control Assemblies
Cherokee, Intrepid, LHS, Plymouth
Neon, Plymouth Small Utility
Vehicles, Ram Vans, Sebring
Convertible, Stratus, T-300 Light
Trucks, Wrangler
Ford Heavy Duty Trucks F-700/F-900, Medium Transmission Shift Boots
Duty Trucks, Ranger Light Trucks,
Windstar
Continental, Heavy Duty Trucks, Steering Column Seals
Sable, Taurus, Villager, Windstar
</TABLE>
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<TABLE>
<CAPTION>
CUSTOMER VEHICLE PRODUCT
<S> <C> <C>
Ford/Irvin Industries Inc. F Series Light Trucks, F250 Super Transmission Shift Boots
Pick-up Trucks, Ranger Light Trucks,
Windstar
Ford/Dura Automotive Systems, Inc. Continental, Crown Victoria, Gap Hiders
Econoline, Expedition, Explorer, F
Series Light Trucks, Grand Marquis,
Heavy Duty Sport Utility Vehicles,
Mountaineer, Navigator, Ranger,
Sable, Town Car, Taurus, Windstar
Ford/Dana Corporation Medium Duty Trucks Steering Column Seals
General Motors Chevrolet Light Trucks, Corvette, Transmission Shift Boots
Saturn, Sierra Light Trucks,
Silverado Light Trucks, Topkick and
Kodiak Medium Trucks
Aurora, Bonneville, Century, Gap Hiders
Chevrolet Light Trucks, Corvette,
Deville, Grand Prix, Intrigue,
LeSabre, Lumina, Lumina APV, Monte
Carlo, Oldsmobile 88, Park Avenue,
Regal, Riviera, Seville, Sierra Light
Trucks, Silhouette APV, Supreme,
TransSport APV, Astro Vans, Safari
Vans
Astro, Aurora, Bonneville, Century, Steering Column Seals
DeVille, Eldorado, Grand Prix,
Intrigue, LeSabre, Lumina, Lumina
APV, Monte Carlo, Oldsmobile 88, Park
Avenue, Regal, Riviera, Safari,
Saturn, Seville, Silhouette APV,
Sportvan/Express, Supreme, TransSport
APV, Vandura/Savana, Venture APV
</TABLE>
The Company has been awarded new business (i.e., parts not previously
supplied by the Company) for the model year indicated for the models set forth
below:
<TABLE>
<CAPTION>
MODEL YEAR MODELS
<C> <S>
1998 Chrysler: Intrepid, Concorde, LHS, 300M; Ford: Lincoln
Navigator; GM: Oldsmobile Intrigue, Buick Regal, Buick
Century, Astro Vans, Safari Vans
1999 Ford: F-700 and F-900 Medium Duty Trucks; GM: Chevrolet
Impala, Chevrolet Monte Carlo
2000 Chrysler: Dodge and Plymouth Microvans; Ford P31 Sport
Utility Vehicles; GM: Pontiac AAV, Buick AAV, Oldsmobile AAV
2001 Chrysler: Cirrus, Sebring, Dodge Stratus; Ford Ranger
Speciality Light Trucks
</TABLE>
SPECIAL MACHINES GROUP
PRODUCTS
The Special Machines Group designs and assembles standard and special
custom machines and systems to meet its customers' welding, assembly, forming,
heat treating and testing process requirements. The group has an experienced
team of application and design engineers that customize standard products such
as drum barrel, compressor shell, brake shoe, motor shell, strip, seam and spot
welders to meet specific customer requirements. The group also designs special
purpose machines and systems for customer product applications such as washing
machine drums, refrigerator lines, automotive axles and automotive door and hood
panels. The machines sold by this group frequently are high value capital
expenditures for its customers, with orders
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generally ranging in size from $500,000 to $5.0 million. For this reason, the
group's working capital requirements can vary significantly based on the stage
of contracts in progress.
CUSTOMERS
The Special Machines Group's principal customers are domestic OEMs in the
automotive and appliance industries, but the group's ability to design a broad
spectrum of metal joining applications enables it to sell machines and systems
to customers throughout the world. As a result, emerging industries in less
developed countries such as Brazil and China have resulted in new opportunities
to sell certain standard machines for which the group has a proprietary
advantage. The Special Machine business is affected by the timing of awards and
completion of specific projects and contracts with individual customers.
MARKETING
To improve customer service and strengthen relationships with its key
customers, the Company recently implemented a sales force reorganization, which
included replacing a number of independent sales representatives with in-house
account managers. As a result, the Company currently markets its products
principally through a direct sales staff, most of whom have technical
backgrounds. The sales staff has a thorough knowledge of the Company's products
and acts as a liaison between customers and the Company's engineering and
manufacturing personnel. The Company will continue to use sales representatives
to augment its direct sales staff, particularly when the customer location or
scope of business make outside sales representatives more efficient.
DESIGN, DEVELOPMENT AND ENGINEERING
The Company's Precision Machined Products Group works closely with
customers to design and develop products in order to optimize manufacturability
and product functionality. The group generally is able to develop its own tools,
processes and product prototypes, thereby reducing product variability and lead
times. To meet customer process and product design requirements, the Company
applies engineering techniques such as computer aided design and failure mode
and effects analysis, along with its in-house capability to develop and produce
prototypes using standard manufacturing equipment and processes. The Precision
Machined Products Group provides its customers with full program management
support using the "advanced product quality planning" ("APQP") process, which
controls program timing and seeks to ensure product quality and reliability
through all phases of design, launch and production manufacturing.
As a result of the recent acquisition of four rubber and plastic component
manufacturers, the Company believes its Rubber and Plastic Group has achieved
the critical mass necessary to provide its customers full service engineering
and test support for this business platform. Using computer aided design
techniques, the group often takes a leadership role in designing components such
as vacuum reservoirs for power steering systems and styled boots for manual
transmission gear shift levers. In one recent example, the Company successfully
merged two of its proven rubber and plastic process technologies to develop a
proprietary snap-fit boot design which simultaneously addresses the two most
common customer requirements for this type of part: ease of installation and
superior, noise free fit. Design parameters the Company addresses during the
development phase include noise, vibration and harshness analysis. The Company
uses fully equipped prototype and validation labs to validate product designs,
and customers are advised of the passage of critical development and timing
milestones.
By its nature, the Special Machines Group takes an innovative leadership
role in the development, design and assembly of machines and systems to solve
its customers' specific process requirements. The Special Machines Group has a
research and development lab where it is able to simulate various welding
techniques and develop new welding technologies which allow it to tailor
solutions to particular customer design requirements. This often involves
technology which is proprietary to the Company.
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<PAGE> 65
MANUFACTURING
The core manufacturing techniques employed by the Precision Machined
Products Group include CNC turning, milling, boring, drilling, tapping and
burnishing; gun drilling, spline rolling, broaching, induction and carbo nitride
heat treating; tempering, straightening, OD (outside diameter) and centerless
grinding, hard turning, honing and superfinishing; welding, laser welding,
assembly, testing and cleaning. Management believes that this breadth of
in-house process capability provides the Company a competitive advantage.
The Rubber and Plastic Group produces injection molded, dip formed,
rotational molded, slush cast, open face cast and foam molded rubber, plastic
and urethane parts. To produce many of its components the group must develop
innovative technical solutions to customer-specific requirements. The group's
products are all manufactured in their final color (black, clear, white, yellow
or blue) with no external post processing. In its forming and finishing
operations, the Rubber and Plastic Group uses rigid and soft thermoplastics,
PVC, sanoprene, polypropylene, silicon, neoprene, polyethylene and polyurethane
materials. The group also emphasizes complex products, such as co-injection
molded dual-durometer engine compartment mounts, and products that require the
assembly and testing of multiple components into an integrated system, such as
vacuum boost modules.
The Special Machines Group engineers standard and custom machines and
systems to meet specific customer requirements. The machines are designed and
assembled at the Company's facilities in response to the customer's performance
specifications. They are then "run off" to demonstrate function and performance
for the customer's approval. The equipment may require disassembly for shipment
in which case it is reassembled at the customer's facility and may require
another trial run and final approval.
The Newcor Operating System uses visual management techniques and
encourages and facilitates employee participation to improve manufacturing cells
and operations by conducting regular kaizen events. Kaizen is a Japanese word
meaning "good change." Through kaizen, a cross-functional group of employees
analyzes and improves a particular manufacturing or business process. Through
these events, the Company seeks to continuously improve productivity, quality
and employee commitment while reducing work-in-process inventory, floorspace
requirements and lead times.
Each of the Company's operating groups has quality assurance programs and
has implemented monitoring and measurement equipment along with statistical
process control systems, simple fail-safe devices and automated process
control/feedback systems. The Company uses computer aided design, failure mode
and effects analysis and the APQP process in its efforts to ensure product
quality and reliability throughout all phases of design, launch and production
manufacturing. Under the Newcor Operating System, the Company utilizes team
problem solving techniques to drive quality improvement through root cause
analysis and employee participation.
The Company's operations have been recognized in the industries they serve
for their high quality standards. The Company has received Ford's Q1 Award, GM's
Target of Excellence Award, Chrysler's Pentastar Award, Deere's Certified
Supplier Quality Award and numerous QS 9000 certifications. The Company's
operations regularly meet customer expectations and requirements for on-time
delivery, quality levels and cost reductions, all of which have often enabled
the Company to be viewed by its customers as a preferred supplier.
SUBCONTRACTORS AND RAW MATERIAL
In connection with implementing the Newcor Operating System, the Company
has begun to rationalize its production materials, components and services
subcontractor base. The Company has an active supplier development program that,
among other things, assesses supplier capabilities and quality on an on-going
basis. The Company intends to reduce its subcontractor base to a group of key
suppliers that are able to compete effectively in the global market using
continuous quality improvement on a cost effect basis. The principal raw
materials used by the Company are steel bar stock, forgings, gray and nodular
iron castings and various rubber and plastic compounds. In addition, the Company
buys a variety of components, such as metal stampings, motors and electrical
controls. In many cases, the Company partners with its subcontractors and
customers in
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seeking to ensure that materials meet the highest standards for product quality
and value on a global basis. The Company purchases primary production materials
and indirect material and services such as cutting tools and freight at the
corporate level, thereby achieving the economies of scale associated with
centralized purchasing. The Company plans to continue to seek world-class
vendors who offer the latest technology in supplies and components to the
Company's operations. The Company has not experienced any difficulty obtaining
necessary raw materials and subcontractor services.
COMPETITION
The Company operates in very competitive markets where a variety of
suppliers with different subsets of the Company's product lines compete to
supply the stringent demands of large OEMs and Tier 1 suppliers, all of which
regularly exercise their significant bargaining leverage in negotiating terms
with their suppliers, including the Company. Competition is generally based on
quality, delivery, price, design and engineering support and service, with
increasing emphasis on delivery of assemblies or sub-assemblies rather than
individual components. To an extent, the OEMs themselves are sometimes
competitors of their suppliers, since they can produce their own components and
assemblies if they so choose.
In the market for precision-machined engine, transmission and powertrain
components and assemblies, products are generally complex in nature and have
close manufacturing tolerances that require suppliers with sophisticated
equipment, process control and a highly skilled workforce. The Company
principally competes in this market with Linamar Corporation, Simpson
Industries, Inc. and MascoTech, Inc. ("MascoTech"), as well as a number of
smaller companies. Management believes that the Company's size and capabilities
provide it with a competitive advantage over many other suppliers as OEMs and
their Tier 1 suppliers increasingly rely on, and award new business to,
established and well-known suppliers with proven capabilities and adequate
resources. Because of the time required to establish relationships with and
demonstrate process capability to these customers, as well as the financial
resources required to support investments in capital equipment, meaningful entry
into the Company's market niches has historically been difficult.
Management believes that dip molded, slush casted, or rotational molded
rubber and plastic products such as those produced by the Company often have a
competitive advantage over an alternate process such as injection or blow
molding due to lower tooling cost or piece price and/or improved cosmetic
appearance or functionality. While management believes that there are no large
direct competitors possessing all the Company's primary capabilities, Cooper
Tire and Rubber and Yale Rubber are two companies which compete with the Company
in applications where injection molding is a viable alternative to one of the
Company's rubber and plastic processes.
In the Special Machines Group, the Company competes with many small and
medium sized manufacturers of standard and custom machines. The Company's
ability to win new orders is a function of its engineering capabilities and
support to the customer and may depend on success at demonstrating a
technological or innovative advantage.
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<PAGE> 67
PROPERTIES
The Company conducts its business in Company-owned facilities totaling
approximately 518,000 square feet (excluding facilities of divested businesses)
and leased facilities totaling approximately 331,000 square feet of office,
engineering, manufacturing and warehouse space, respectively. All of these
facilities are fully utilized and are suitable to meet the current capacity
needs of the divisions. Leases expire at various times through 2002, and the
Company generally has extension options.
Below is a summary of the existing facilities:
<TABLE>
<CAPTION>
SQUARE TYPE OF
LOCATION FOOTAGE INTEREST PRINCIPAL USE
<S> <C> <C> <C>
THE COMPANY:
Corporate Office
Bloomfield Hills, MI 7,000 Leased Administrative Office
PRECISION MACHINED PRODUCTS
GROUP:
Rochester Gear
Clifford, MI 45,000 Owned Transmission and powertrain components
Blackhawk Engineering
Cedar Falls, IA 54,000 Owned Tractor differential cases, transmission
Waterloo, IA 10,000 Leased cases, steering arms and brake pedals
MT&G
Corunna, MI 100,000 Owned Differential pinion and side gears, output
Fenton, MI 30,000 Leased shafts and rear axle shafts
Fenton, MI 10,000 Owned
Deco
Troy, MI 55,000 Leased Rocker arm components and assemblies,
Royal Oak, MI 107,000 Leased transmission shafts, accessory drive
assemblies and thrust and pressure plates
Turn-Matic
Clinton Township, MI 92,000 Leased Engine oil filter adapters, main bearing
caps and manifolds
RUBBER AND PLASTIC GROUP:
Deckerville Division
Deckerville, MI 85,000 Owned Gear shift boots, steering column seals,
Sandusky, MI 10,000 Owned shift lever gap hiders and windshield
wiper covers
Livonia Division
Livonia, MI 21,000 Leased Coated metal parts
Walkerton Division
Walkerton, IN 33,000 Owned Steering column seals and shift lever gap
hiders
Auburn Hills Division
Auburn Hills, MI 9,000 Leased Shift lever boots
</TABLE>
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<TABLE>
<CAPTION>
SQUARE TYPE OF
LOCATION FOOTAGE INTEREST PRINCIPAL USE
<S> <C> <C> <C>
Plastronics
East Troy, WI 30,000 Owned Vacuum reservoirs and assemblies for air
East Troy, WI 28,000 Owned conditioning, power steering and cruise
control systems, hose and wire brackets
and dash panel grommets
SPECIAL MACHINES GROUP:
Newcor Bay City
Bay City, MI 123,000 Owned Automated welding and assembly systems
DIVESTED BUSINESSES WITH
FACILITIES OWNED BY NEWCOR:
Detroit, MI 58,000 Owned Formerly part of Eonic, which was sold
March 1997
Fraser, MI 40,000 Owned Formerly part of Newcor Machine Tool,
which was sold October 1996
</TABLE>
EMPLOYEES
As of April 30, 1998, the Company had 1,758 employees. Approximately 28% of
these employees are represented by the United Steel Workers or United Auto
Workers ("UAW"). The Company's Special Machines Group has a collective
bargaining agreement with the UAW affecting approximately 60 employees that
expires May 20, 2001. One of the Company's Rubber and Plastic Group operations
has a collective bargaining agreement with the UAW covering approximately 40
employees that expires September 30, 1999. Deco has collective bargaining
agreements with the United Steel Workers affecting approximately 385 employees
that expire June 30, 2001 and June 8, 2002. The Company considers its employee
relations to be generally good. Due to full employment conditions, the Company
has recently experienced high employee turnover in its Rubber and Plastic Group
at certain locations which, in recent periods, has adversely impacted the
Company's operations at those locations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Developments" and "Risk Factors -- Labor Relations and Labor Market Conditions."
ENVIRONMENTAL MATTERS
The Company believes it is in substantial compliance with applicable
environmental laws and regulations. Compliance by the Company with federal,
state and local laws and regulations pertaining to the discharge of material
into the environment has not and, based on presently available information, is
not anticipated to have any material effect upon the Company in conducting its
business and has not required material capital expenditures to achieve
compliance. However, due to the nature of its current and former operations, a
number of which have been in operation for many years and have not been
subjected to invasive testing, the Company does face risk of exposure to
environmentally-related liabilities, as described under "Risk Factors --
Potential Exposure to Environmental Liabilities."
LEGAL PROCEEDINGS AND CONTINGENCIES
The Company has been notified by one of its largest customers that the
customer is defending itself in a patent infringement lawsuit involving certain
processes/methods used on manufacturing equipment supplied by numerous vendors
including one of the Company's former divisions within the Special Machines
Group. Although Newcor is not a named party in this litigation, the Company
retained responsibility for this matter when it sold the related business. To
the extent that the Company incurs liability in connection with this matter, the
Company may have recourse against certain of its component suppliers, and such
component suppliers have been notified of their potential responsibility to the
Company in connection with this action.
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The Company does not possess sufficient information to evaluate the validity of
this claim and, accordingly, is unable to determine whether it will ultimately
be required to make any payment related to this lawsuit, or the extent to which
any such payment could be offset or mitigated by claims against suppliers.
Similar equipment also was sold to other OEMs.
During the past two years, the Company sold several of its businesses,
including the division that produced the equipment described above. In each
case, the Company's agreement with the purchaser requires it to indemnify the
purchaser for various claims including certain environmental, product liability,
warranty and other claims that may arise relating to the conduct of the business
before the date of sale, subject in some cases to limits on the time within
which an indemnification claim may be brought or the maximum amount the Company
may be required to pay. the Company provided for its estimated indemnification
obligations when these businesses were sold and has no reason to believe there
are potential claims against it in excess of this provision, although no
specific amounts are included in such reserve with respect to the patent
infringement action described above.
Various other legal matters arising during the normal course of business
are pending against the Company. Management does not expect that the ultimate
liability, if any, of these matters will have a material effect on future
consolidated financial statements.
SEASONALITY
The businesses of the Precisioned Machined Products and Rubber and Plastic
Groups are seasonal, with lower sales during the OEMs' semi-annual shutdowns in
July and December than at other times of the year.
BACKLOG
The Special Machines Group's backlog was $6.2 million and $9.8 million at
April 30, 1998 and 1997, respectively. All of the backlog orders existing at
April 30, 1998 (all of which management believes to be firm) are expected to be
filled during the current fiscal year. Backlog is not a significant
consideration in the Precision Machined Products and Rubber and Plastic Groups
because they operate primarily under long-term blanket purchase orders, with
purchase requisitions under such blanket purchase orders issued by customers on
a daily basis.
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GLOSSARY
<TABLE>
<CAPTION>
TERM DEFINITION
<S> <C>
Accessory Drive Assemblies Any of a number of assemblies which convert the internal
motion of an engine into motion to drive an engine
"accessory" such as air compressors, power steering pumps,
water pumps, engine cooling fans and others.
Air Conditioning Ducts Rigid ducting which runs behind the dashboard to direct the
flow of HVAC air into the passenger compartment.
Bearing Cap A "U" shaped, machined, cast iron component used to hold the
engine's crank shaft to the engine block.
Body and Dash Panel Grommets Synthetic rubber grommets which encase wiring, and plastic
and metal tubing (fuel, water, oil, etc.) to immobilize them
and protect them from sharp edges they pass through body
panels.
Boring The process of removing material from an internal
cylindrical feature of a workpiece by either spinning the
workpiece or the tool. The tool is forced into the
workpiece, causing unwanted material to shear away,
producing the desired shape.
Broaching The processes of cutting a workpiece by passing it over a
tool with teeth cut into it. Each tooth on the tool shears a
small amount of material from the workpiece. When the
workpiece has passed over the compete tool, it is in the
desired shape.
Burnishing The process of smoothing the surface of a metal component by
forcing a roller or set of rollers against the metal surface
with high pressure (like a rolling pin or steam roller).
Carbonitride Heat Treating The process of heating metal in a furnace while exposing the
metal to an atmosphere rich in carbon and nitrogen. The
carbon and nitrogen are absorbed into the surface of the
steel. The steel is rapidly cooled, causing the steel's
surface to become harder and more wear resistant.
Co-injection Molding Injection molding of two different rubber or plastic
compounds simultaneously to create a single product with
different hardness characteristics in different locations on
the product (see definitions of injection molding and dual
durometer products).
Detuner A slipping mechanism used in the powertrain to protect
critical components from jamming.
Differential Case The structural component that supports the axles, encloses
all drive components for the axle and contains the main
braking system.
Differential Pinion A steel gear, used in pairs, that connects the two
differential side gears in a differential gear set (which
splits the torque from a single driveshaft to the wheels).
Differential Pinion Shaft A cylindrical steel shaft that supports and positions the
differential pinions in a differential gear set.
Differential Side Gears A steel gear, used in pairs, that transmits torque from the
differential pinions to the axle shafts in a differential
gear set.
Dip Forming Formation of a part by dipping a formed mandrel or male
shaped mold into a vat of neoprene, natural latex or
plastisol for a specified length of time and then heating or
curing the part at a specified temperature for a
pre-determined length of time.
Drain Tube A flexible seal that protrudes into the engine compartment
from the firewall to allow air conditioning system
condensate to drain.
</TABLE>
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<PAGE> 71
<TABLE>
<CAPTION>
TERM DEFINITION
<S> <C>
Drive Shaft Slip Yoke A cylindrical steel shaft that connects the driveshaft stud
yoke to the universal joint. It allows the driveshaft to
transmit torque while letting the driveshaft angle fluctuate
as the vehicle's suspension moves up and down.
Drive Shaft Stud Yoke A cylindrical steel shaft that connects the driveshaft to
the slip yoke side of the universal joint. It allows the
driveshaft to transmit torque while letting the driveshaft
length fluctuate as the vehicle's suspension moves up and
down.
Drive Shaft Weld Yoke A cylindrical steel component that connects the driveshaft
to the universal joint. It allows the driveshaft to transmit
torque while letting the driveshaft angle fluctuate as the
vehicle's suspension moves up and down.
Dual Durometer Products Finished rubber or plastic products having different
hardness characteristics (durometers) in different locations
(e.g., a flexible shift lever boot with a rigid snap-in
base).
EGR Adapter A machined aluminum casting that provides a mounting
location for the engine's EGR valve. Frequently, it also
provides the mounting location for the throttle body
adapter, throttle cables and other miscellaneous hardware.
Exhaust Manifold A machined cast iron component that provides a passageway
for the exhaust gasses from each of the engine cylinders to
the exhaust pipe.
Floating Rear Axle Shaft A cylindrical steel shaft that connects the wheel hub to the
rear differential. It transmits torque from the differential
to the wheels.
Fluid & Vacuum Reservoirs and Control Plastic enclosures containing valves, tubes, sensors, etc.
Systems to hold air/vacuum fluids for metered release for vehicle
applications as required (such as air conditioning controls,
cruise control, etc.).
Foam Molding Formation of a part by filling a mold with a foaming plastic
compound, which is heated at a specified temperature for a
pre-determined time period to create a finished part.
Fuel Filler Seals A flexible seal which isolates a vehicle fuel filler pipe
from the body.
Gap Hiders Flexible boot or seal to cover the opening in the steering
column surrounding an automatic transmission shift lever.
Gearshift Lever Boots Flexible synthetic rubber boots or seals which surround
floor-mounted manual gearshift levers to cover up openings
and provide a clean appearance to the interior of the
vehicle (see also definitions of gap hiders and transmission
shift lever boots).
Grinding The process of removing material from a workpiece by forcing
a spinning wheel made of abrasive material into the
workpiece.
Gun Drilling A specialized process for drilling very deep holes. The
drill rotates and is forced into the workpiece though a
bushing or sleeve. The material removed by the drill process
is forced from the hole by coolants at high pressure.
Hard Turning The process of turning steels which have been hardened by
heat treatment. Requires the use of cubic boron nitride or
diamond cutting tools.
Honing The process of removing small amounts of material from a
hole in a workpiece using spinning abrasive stones.
Induction Heat Treating The process of heating steel using electromagnetic
induction. The steel is then rapidly cooled, causing the
steel's surface to become stronger and harder.
</TABLE>
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<PAGE> 72
<TABLE>
<CAPTION>
TERM DEFINITION
<S> <C>
Injection Molding Formation of a part by melting plastic pellets into liquid
plastic, and creating parts by injecting liquid plastic at a
specified temperature between two heated molds and forming
through pressure into desired shape.
Intake Manifold A machined aluminum casting that routes and distributes the
incoming air from the vehicles throttle body to each of the
engine's cylinders.
Milling The process of removing material from a workpiece by forcing
a rotating cutting tool into it. Unwanted material is
sheared away, producing the desired shape.
Oil Filter Adapter A machined aluminum casing that provides a mounting location
for the engine oil filter in a location that is convenient
for servicing the oil filter. Frequently, it also provides a
mounting location for the oil pressure sending unit and
other miscellaneous hardware.
Open Face Casting Formation of a part by filling a cavity mold which may
contain an inner core with soft-plastic PVC or urethane,
which is then heated at a specified temperature for a
pre-determined length of time to create a finished part.
Planetary Carrier It supplies mechanical front wheel drive assist to the
tractor.
Power Steering Pump Assemblies A pump mechanism, powered either mechanically or
electronically, which provides fluid under pressure to
provide the "power assist" in power steering.
Rear Axle Shaft A cylindrical steel shaft that connects the wheel to the
rear differential. It transmits torque from the differential
to the wheels and provides support for the wheel and wheel
bearing.
Reduction Housing A non-shiftable gear box used to reduce the RPMs from an
automatic transmission to the differential housing.
Rocker Arm Components and Assemblies The portion of the engine valve train which activates the
movement of the valves, based on input from the camshaft. An
integral part of an engine's valve train or overhead.
Rotational Molding Formation of a part by pouring a pre-determined amount of
soft-plastic PVC into a preheated mandrel, gyrating the mold
in a specified pattern for a specified time to create a
uniform wall thickness.
Slush Cast Molding Formation of a part by filling a cavity mold with
soft-plastic PVC, which is then heated at a specific
temperature for a pre-determined length of time to create a
part with a uniform wall thickness, and then pouring the
excess material from the mold.
Sonic Welding Welding or fusing two (typically plastic) components
together using ultra-sonic vibrations to heat the mating
surfaces to the point of fusion.
Speaker Covers A rigid cover (typically injection molded) that protects
in-door speakers from moisture.
Spline Rolling The process of forming a spline or serration on a
cylindrical workpiece by rolling the workpiece between two
tools. The tools, called racks, have teeth cut into them
that force the metal on the workpiece to move into the
desired form.
Steering Arms A component that connects the tie rods to the wheels and
also serves as a fender support.
Steering Column Seals Flexible synthetic rubber or plastic seals which cover the
steering column shaft (from the dashboard panel to the
steering gear) to protect the metal shaft from dirt, water,
etc., and to seal the hole in the firewall.
Superfinishing The process of creating very smooth surfaces on workpieces
by polishing the workpiece using extremely fine abrasive
film.
</TABLE>
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<PAGE> 73
<TABLE>
<CAPTION>
TERM DEFINITION
<S> <C>
Tapping The process of creating internal screw threads by either
spinning the workpiece or the tap cutter. The cutter is
forced into the workpiece, causing unwanted material to
shear away, producing the desired screw threads.
Tempering The process of heating metal to a low temperature (300-400
degrees F) and then allowing it to slowly cool. The process
relieves internal stresses and increase the parts life
expectancy.
Thrust and Pressure Plates A high precision mechanism, internal to a power steering
pump, to meter power steering fluid.
Transmission Output Shaft A cylindrical steel shaft that connects the differential
side gear to the inner CV joint on a front wheel drive
automatic transmission. It also serves as the central
support for all planetary gear sets and clutch packs in the
transmission.
Transmission Parking Gear A cylindrical steel disk with large notches cut on the
outside used in an automatic transmission to keep the
vehicle from moving when the transmission is placed into
park.
Transmission Planetary Pinion Gear A small steel gear used in sets of three or four, all
Blank positioned around the outside of a large central gear
(called a sun gear), in an automatic transmission. The gears
are used to reduce driveline speed and increase torque
output. A gear blank is what the part is called before the
teeth are cut. The group makes the blanks and its customers
cut the gear teeth.
Transmission Ring Gear A large steel cylinder with gear teeth cut on the inside. It
Blanks is positioned around the outside of a set of planetary
pinion gears in an automatic transmission. It reduces
driveline speed and increases torque output. A gear ring
blank is what the part is called before the teeth are cut.
The group makes the blanks and its customers cut the gear
teeth.
Transmission Shift Lever Boots/Seals Decorative trim cover which covers the lower portion of a
console- mounted transmission or drive axle shift lever,
which accommodates the movement of the lever back and forth,
while sealing dirt and noise out of the passenger
compartment. Also a second, lower functional seal for dirt
and noise.
Transmission Turbine Shaft A cylindrical steel shaft that connects the torque converter
to the main clutch pack on an automatic transmission. It
provides the primary power input from the engine to the
transmission.
Turning The process of removing material from a cylindrical
workpiece by rapidly spinning the workpiece while forcing a
cutting tool into it. Unwanted material is sheared away,
producing the desired shape.
</TABLE>
68
<PAGE> 74
MANAGEMENT AND DIRECTORS
EXECUTIVE OFFICERS AND DIRECTORS
The table that follows sets forth the name, age at December 31, 1997 and
positions or anticipated positions with the Company of each executive officer of
the Company and each director of the Issuer. Information concerning the business
experience for at least the past five years of each of the persons named is
provided after the table.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C> <C>
William A. Lawson......................... 64 Chairman of the Board
W. John Weinhardt......................... 47 President, Chief Executive Officer and a Director
Robert C. Ballou.......................... 44 Group Vice President Precision Machined Products
John J. Garber............................ 56 Vice President Finance, Chief Financial Officer
and Treasurer
Hale, Keith F............................. 57 Vice President and General Manager of the Deco
Group
Thomas D. Parker.......................... 50 Vice President Human Resources and Secretary
Dennis H. Reckinger....................... 62 Group Vice President Rubber and Plastic
Jerry D. Campell.......................... 57 Director
Shirley E. Gofrank........................ 49 Director
Jack R. Lousma............................ 61 Director
Richard A. Smith.......................... 58 Director
Kurt O. Tech.............................. 76 Director
</TABLE>
William A. Lawson, Chairman of the Board. Chairman and Chief Executive
Officer of Bernal International, Inc., a manufacturer of parts and equipment for
the packaging industry, since October 1995, Mr. Lawson first joined the Issuer's
Board of Directors in 1988. He became Vice Chairman of the Board in December
1990 and Chairman in March 1991 (both of which are considered executive officer
positions). He also is Chairman of W.A. Lawson Associates, an investments and
consulting firm, and a member of the board of directors of Energy Research Corp.
Mr. Lawson's current term of office as a director of the Issuer is scheduled to
expire at the annual meeting of shareholders of the Issuer in 1999.
W. John Weinhardt, President and Chief Executive Officer. Mr. Weinhardt
became the Company's President and Chief Executive Officer in March 1995, after
serving as a Vice President and Group Executive of Danaher Corp., a diversified
manufacturer of automotive products, process-environmental controls and hand
tools, from November 1990 to January 1995 and as President and CEO of its
subsidiary, Fayette Tubular Products, Inc., from November 1991 to January 1995.
In the aggregate, he has 25 years of managerial experience in the manufacture of
automotive components and assemblies. Mr. Weinhardt also became a director of
the Issuer upon joining the Company. His current term as a director is scheduled
to expire at the Issuer's 2001 annual meeting.
Robert C. Ballou, Group Vice President Precision Machined Products. Mr.
Ballou became Group Vice President Precision Machined Products of the Company in
October 1995, after serving as Director of Manufacturing of MascoTech, an
automotive supplier, from August 1992 to September 1995 and as Director of
Manufacturing Services of the Holley Automotive Division of Coltec Inc. from
September 1989 until joining MascoTech.
John J. Garber, Vice President Finance, Chief Financial Officer and
Treasurer. Mr. Garber has been with the Company in his present positions since
September 1991. Mr. Garber began his career in 1966 with Kelsey-Hayes, and by
1988 had advanced to Corporate Controller and CFO of its parent company,
Fruehauf Corporation. He also has served as CFO of Valley Industries, Inc., from
March 1990 until joining the Company.
69
<PAGE> 75
Keith F. Hale, Group Vice President and General Manager of Deco Group. Mr.
Hale became an executive officer of the Company, as Vice President and General
Manager of the Deco Group, at the closing of the Deco Acquisition. He served in
the same capacities with Deco from 1989 until the Deco Acquisition closed. Mr.
Hale recently advised the Company that he intends to retire later this month. He
has agreed to provide consulting services for two years following his retirement
to assist the Company with certain aspects of integrating Deco into its business
structure.
Thomas D. Parker, Vice President Human Resources and Secretary. Mr. Parker
joined the Company as Director of Human Resources in 1983. He was promoted to
Vice President Human Resources in November 1992 and became Secretary in June
1994.
Dennis H. Reckinger, Group Vice President Rubber and Plastic. From 1967
until its acquisition by the Company in August 1992, Mr. Reckinger served as
President and General Manager of Midwest Rubber Company. He continued with the
Company after the acquisition and was appointed its Group Vice President Rubber
and Plastic in November 1995.
Jerry D. Campbell, Director. Mr. Campbell, the Chairman and Chief Executive
Officer of Republic Bancorp Inc., first joined the Issuer's Board of Directors
in 1987. His current term as a director is scheduled to expire at the Company's
annual meeting in calendar year 1999. Mr. Campbell also serves as a director of
PICOM Insurance Company and of its holding company, Professionals Insurance
Company Management Group.
Shirley E. Gofrank, Director. Ms. Gofrank is President and Managing
Director of Gofrank & Mattina, P.C., a public accounting firm. A director of the
Issuer since 1995, her current term is scheduled to expire at the annual meeting
in 2001.
Jack R. Lousma, Director. A veteran of NASA's Sky-Lab and Columbia Space
Shuttle teams with over 27 million miles of space travel to his credit, Mr.
Lousma has been President and Chief Operating Officer of Diamond General
Development Corp., a developer and manufacturer of products for the dental
industry, since July 1996, after serving with Diamond in various other
capacities beginning in 1994, as Vice President Marketing and Sales of Aero
Sport, Inc., a developer and marketer of analyzers for the medical industry,
from 1993 until joining Diamond, and as President of Consortium for
International Earth Science Information Network from 1989 to 1993. He also is
President of Michigan Columbia Corp., an aerospace engineering/consulting
company, and serves on the board of directors of Republic Bank. Mr. Lousma has
been a director of the Issuer since 1991; his current term is scheduled to
expire at the annual meeting in 2000.
Richard A. Smith, Director. Mr. Smith served as the Company's President and
Chief Executive Officer from December 1990 until his retirement in March 1995
and as its President and Chief Operating Officer from May 1986 until his
advancement to CEO. A director of the Issuer since 1987, his current term is
scheduled to expire at the annual meeting in 2000. Mr. Smith also is a director
of Kettering University (formerly GMI Engineering and Management Institute) and
of Coating Specialties, Inc.
Kurt O. Tech, Director. Prior to his retirement in 1980, Mr. Tech was
President of The Cross Company. He has served on the Issuer's Board since 1981;
his current term also is scheduled to expire at the year 2000 annual meeting.
70
<PAGE> 76
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The table that follows provides information, for each of the Company's last
three completed fiscal years in which they were executive officers, concerning
the compensation of W. John Weinhardt, Newcor's Chief Executive Officer ("CEO")
and of all other persons who served as executive officers of the Company during
the fiscal year ended October 31, 1997 (other than Mr. Lawson, whose total 1997
compensation from the Company was as a director of the Issuer).
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------- --------------------------------------------
SECURITIES
OTHER RESTRICTED UNDERLYING
NAME AND FISCAL ANNUAL STOCK STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY(2) BONUS(2) COMPENSATION(3) AWARDS(4) OPTIONS(#)(5) COMPENSATION(6)
<S> <C> <C> <C> <C> <C> <C> <C>
W. J. Weinhardt 1997 $290,000 $221,444 $20,071 $72,863 18,270 shares $28,836(7)
President and CEO 1996 $256,667 $176,000 $20,071 -- 0 shares $26,461(7)
1995 $166,667 $200,000 $20,071 -- 105,000 shares $27,211(7)
R. C. Ballou 1997 $145,000 $127,984 -- $25,125 6,300 shares $ 1,917
Grp VP Precision 1996 $135,000 $ 51,000 -- $16,500 6,300 shares --
Machined Products 1995 $ 11,250 $ 15,000 -- -- 0 shares --
J. J. Garber 1997 $133,100 $ 61,226 -- $16,750 4,200 shares $ 1,684
VP Finance, Treasurer 1996 $126,735 $ 51,315 -- $ 8,250 2,100 shares --
and CFO 1995 $120,700 -- -- -- 0 shares --
T. D. Parker 1997 $100,000 $ 35,742 -- $10,888 2,730 shares $ 1,920
VP Human Resources 1996 $ 92,600 $ 21,988 -- $ 4,125 2,100 shares --
and Secretary 1995 $ 87,780 -- -- -- 0 shares --
D. H. Reckinger 1997 $135,700 $ 10,747 -- $20,100 5,040 shares $ 1,586
Grp VP Rubber and 1996 $129,200 $ 46,784 -- $ 6,188 2,625 shares --
Plastic
J. D. Borseth 1997 $ 66,531 -- -- -- 0 shares $94,208
Former Grp VP(8) 1996 $159,675 $127,943 -- -- 0 shares --
1995 $152,800 -- -- -- 0 shares --
</TABLE>
- -------------------------
(1) Where compensation is reported for less than three years, the named
executive was not an executive officer of the Company during the years
omitted.
(2) Where applicable, includes salary or bonus amounts deferred into the
Company's Savings Plan, a so-called "401(k)" plan, at a named executive's
election. Bonus amounts for 1996 do not include the amount of any bonus
exchanged by a named executive for restricted shares of the Issuer's Common
Stock, $1.00 par value ("Common Stock"), pursuant to the Voluntary Program
of the Company's 1996 Employee Incentive Stock Plan (the "Employee Stock
Plan"). As to such restricted shares, see the "Restricted Stock Awards"
column of this table.
(3) Amounts reported do not include any perquisites or other non-cash benefits
provided to named executives, which in each case and for each fiscal year
did not exceed 10% of the executive's aggregate salary and bonus for the
year. The fiscal year amounts reported for Mr. Weinhardt represent a
so-called "gross up" for taxes payable by him due to the Company's
reimbursement of the life insurance premiums reported in this table under
"All Other Compensation."
(4) Dollars reported in this column for 1997 relate to awards of
transfer-restricted and forfeitable shares of Common Stock made in that
fiscal year to named executives under the Discretionary Program of the
Employee Stock Plan. Dollars reported for 1996 relate to awards of
transfer-restricted but nonforfeitable shares of Common Stock received by
named executives in 1997 under the Voluntary Program of the Employee Stock
Plan in exchange for portions of the cash bonuses awarded to them for fiscal
1996 performance under the Company's cash incentive bonus plan. In each
case, dollars reported have been calculated by multiplying the number of
shares received by the NASDAQ-reported closing price for an unrestricted
share of Common Stock on the pertinent award date. The transfer restrictions
imposed on shares awarded under the Voluntary Program lapse on the first
anniversary of the award date. Subject to
71
<PAGE> 77
earlier vesting upon death, disability or as otherwise provided in the
Employee Stock Plan, the transfer restrictions and risk of forfeiture
imposed on shares awarded under the Discretionary Program lapse on the third
anniversary of the award date. Holders of shares received under either
program possess all of the normal rights of a holder of Common Stock with
respect to these shares, including voting and dividend rights. Shares of
Common Stock received as a dividend upon shares received under the Employee
Stock Plan (the "awarded shares") pursuant to the 5% stock dividend paid by
Newcor on the Common Stock during the last quarter of fiscal 1997 (the "5%
Stock Dividend") are subject to the same transfer restrictions, risk of
forfeiture (if any) and shareholder rights as the awarded shares to which
they relate. As of the last business day of fiscal 1997, the named
executives, respectively, held the following aggregate numbers of shares
received under the Employee Stock Plan or in the 5% Stock Dividend that were
still subject to transfer restrictions: Mr. Weinhardt, 9,135 (all
forfeitable); Mr. Ballou, 5,250 (3,150 forfeitable); Mr. Garber, 3,150
(2,100 forfeitable); Mr. Parker, 1,890 (1,365 forfeitable); Mr. Reckinger,
3,307 (2,520 forfeitable); Mr. Borseth, none.
(5) Shares reported in this column for 1997 all relate to options granted under
the Discretionary Program of the Employee Stock Plan. Further information
concerning this plan is provided below under "Certain Information Concerning
Stock Options." Shares reported for 1996 include 4,000 subject to options
acquired by Mr. Ballou, 2,000 subject to options acquired by Mr. Garber,
1,050 subject to options acquired by Mr. Parker and 1,500 subject to options
acquired by Mr. Reckinger in that year as a result of participation in the
Voluntary Program of the Employee Stock Plan. The other shares reported for
1996 relate to options granted early in fiscal 1997 under the Discretionary
Program of the Company's 1993 Management Stock Incentive Plan, the
provisions of which are similar to those of the Employee Stock Plan. All
share numbers reported have been adjusted for the 5% Stock Dividend.
(6) Except as otherwise indicated in notes (7) and (8), all amounts reported in
this column represent the dollar value of matching contributions made by the
Company for the accounts of named executives under Newcor's 401(k) plan.
(7) For each year, the amount reported includes $26,461, representing
reimbursement of premiums paid by Mr. Weinhardt on a $1,500,000 insurance
policy on his life. Mr. Weinhardt is the owner of this policy; the Company
is not a beneficiary. The amount reported for 1995 also includes $750 of
director fees.
(8) Mr. Borseth's employment by the Company terminated on March 31, 1997. In
connection with his separation from the Company, he received $93,144 in cash
severance benefits, which amount is included under "All Other Compensation."
CERTAIN AGREEMENTS WITH EXECUTIVES
In connection with his engagement as President and CEO, W. John Weinhardt
entered into an employment agreement with the Company for an initial term ending
February 28, 1997. This agreement twice has been extended for an additional one
year periods and would extend for successive one year periods thereafter unless
either party notifies the other during the extended term then in effect that the
notifying party has elected to terminate the agreement at the end of that term.
Under this agreement, Mr. Weinhardt is entitled to receive salary at a specified
annual rate subject to periodic review by the Board (currently $300,000), to
cash bonuses under the Company's cash incentive bonus plan if and as earned, to
participate in other employee benefit plans available to executives of the
Company, to a $1,500,000 insurance policy on his life paid for by the Company
and to specified health insurance coverage for him and his family and certain
other non-cash fringe benefits. A one-time cash bonus of $100,000 also was paid
to Mr. Weinhardt under the agreement at the time he commenced his duties with
the Company. In addition, the agreement contemplated a "guaranteed" bonus of
$100,000 for fiscal 1995, which was paid to Mr. Weinhardt after year-end, and
the grant of options on Common Stock that was made to him in fiscal 1995.
Mr. Weinhardt's employment agreement would terminate immediately upon his
death or permanent disability and is terminable at any time by either party upon
30 days prior written notice to the other. If termination is due to Mr.
Weinhardt's permanent disability or an election by the Company not to the extend
the agreement for an additional term, or if termination is otherwise by the
Company and not for Cause (as defined in the agreement), he will be entitled for
one year following the termination date to continued payment by the Company of
the premiums on his life insurance policy and of his salary at the rate then in
effect (reduced by any amounts payable under the Company's long term disability
policy), to continuation of
72
<PAGE> 78
health insurance and certain other fringe benefits for up to one year after his
termination date, to any bonus earned at the time of termination and to
outplacement services. If termination is by Mr. Weinhardt's death or at his
election, or is by Newcor for Cause, he (or his estate) will be entitled only to
salary earned as of the termination date, and Newcor's other obligations to him
under the agreement also will cease as of that date.
Regardless of the time or circumstances of his employment termination, Mr.
Weinhardt for five years thereafter is prohibited by the employment agreement
from making any attempt to induce or encourage any employee of the Issuer or an
affiliate to leave for employment with a competitor. The agreement also imposes
confidentiality obligations upon Mr. Weinhardt, which continue indefinitely, and
provides that any intellectual property developed or invented by him during the
term of his employment will be the sole and exclusive property of the Issuer.
In connection with his engagement as President and CEO, Mr. Weinhardt and
the Company also entered into another agreement, providing for certain payments
to him in the event that, within eighteen months after a change in control, he
or the Company should terminate his employment. Depending on the reason for
termination and upon whether it is the Company or Mr. Weinhardt that terminates,
either no payments would be required under the agreement or the amount of the
required payments would be either 1.25 or 2.5 times the sum of (a) Mr.
Weinhardt's annual base salary in effect at the termination date or, if higher,
immediately preceding the change in control and (b) his average annual bonus for
the three full Newcor fiscal years (or, if shorter, the entire period of his
employment) immediately preceding the termination date or change in control. The
agreement also provides for continuance of health, life, and similar insurance
coverage for specified time periods following employment termination after a
change in control and, under some circumstances, for outplacement services. In
addition, it provides that, upon the occurrence of a change in control, all
outstanding but theretofore unexercisable options to acquire Common Stock held
by Mr. Weinhardt would become immediately exercisable in full, and that each
Common Stock option held by Mr. Weinhardt would continue to be exercisable for
six months following any termination of his employment within eighteen months
after a change in control or such lesser period as the option would have been
exercisable if his employment had not terminated.
Thomas D. Parker has a similar "change in control" agreement with the
Company. Under his agreement, the maximum cash amount that would be payable if
his employment terminated after a change in control is 1.5 times the sum of his
annual base salary and average bonus, determined as described above.
Each of Robert C. Ballou and Dennis H. Reckinger has a severance agreement
with the Company. Under the current terms of each agreement, both of which are
subject to change at the Company's discretion, if the covered executive were
terminated by the Company other than for cause (as therein defined), he would be
entitled to his salary at the rate in effect at the date of his termination and
to continuation of certain employee benefits for a specified severance period
thereafter (6 months for Mr. Ballou; 12 months for Mr. Reckinger). Mr.
Reckinger's severance agreement also includes a noncompetition agreement by him,
effective for his entire severance period.
73
<PAGE> 79
CERTAIN INFORMATION CONCERNING STOCK OPTIONS
The table that follows provides information concerning grants of stock
options made during the Company's last-ended fiscal year to executives named in
the Summary Compensation Table.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE
SECURITIES % OF TOTAL VALUE AT ASSUMED
UNDERLYING OPTIONS/SARS APPRECIATION FOR
OPTIONS/ GRANTED TO EXERCISE OR OPTION TERM(4)
SARS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED(2) FISCAL YEAR ($/SH)(2) DATE(3) 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
W. J. Weinhardt.............. 18,270 32.3% $8.0357 03/05/2007 $95,432 $241,843
R. C. Ballou................. 6,300 11.2% $8.0357 03/05/2007 $32,907 $ 83,394
J. J. Garber................. 4,200 7.4% $8.0357 03/05/2007 $21,938 $ 55,596
T. D. Parker................. 2,730 4.8% $8.0357 03/05/2007 $14,260 $ 36,137
D. H. Reckinger.............. 5,040 8.9% $8.0357 03/05/2007 $26,326 $ 66,715
J. D. Borseth................ -0- -0- NA NA NA NA
</TABLE>
- -------------------------
(1) All awards reported in this table are options to purchase Common Stock
granted under the Discretionary Program of the Employee Stock Plan. Both
nonqualified and incentive stock options may be awarded under this program
at the discretion of the Compensation/Stock Option Committee of the Issuer's
Board of Directors, but all grants under the program to date have been of
nonqualified stock options. As indicated in note (4) to the Summary
Compensation Table, the plan also includes a Voluntary Program, pursuant to
which a nonqualified stock option on two shares of Common Stock
automatically is awarded for each share acquired in lieu of or in exchange
for a cash bonus. Discretionary grants of so-called "freestanding" stock
appreciation rights also are authorized by the plan, but none to date have
been granted. Generally, all options granted under the Employee Stock Plan,
including the options reported in this table, first become exercisable with
respect to one-quarter of the shares covered by the option on each of the
first, second, third and fourth anniversaries of the date of grant. However,
pursuant to their respective change in control agreements with the Company,
the exercisability of options granted to Mr. Weinhardt and Mr. Parker would
accelerate upon a change in control, and the plan also permits the
Compensation/Stock Option Committee to accelerate the exercisability of
other options upon a change in control. Exercisable options under the plan
may be exercised for cash, by delivery of shares of Common Stock or (in the
case of a nonqualified stock option) by directing retention of shares
otherwise issuable upon exercise of the option.
(2) Adjusted for the 5% Stock Dividend.
(3) The expiration date reported in this table is the latest possible expiration
date for the option reported. If employment terminates earlier than the
expiration date shown, the option may expire or be canceled at an earlier
date.
(4) For each column, "potential realizable value" represents potential gain (net
of exercise price, but without any present value discount) based upon annual
compound price appreciation of the underlying Common Stock at 5% or 10%, as
applicable, through the full option term. The actual value, if any, which
may be realized with respect to a reported option will be dependent upon the
future performance of the Company and the Common Stock and overall market
conditions. There can be no assurance that any values actually realized in
the future will approximate the amounts reflected in either of these
columns.
During fiscal 1997, none of the executives named in the Summary
Compensation Table exercised any stock options granted by the Company. The
following table provides information concerning their holdings of such options
at fiscal year-end. Unexercised options reflected in the table include the
options reported in the immediately preceding table.
74
<PAGE> 80
FISCAL YEAR-END OPTIONS/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FISCAL OPTIONS/SARS AT FISCAL
YEAR-END(1) YEAR-END(2)
------------------------- -------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C>
W. J. Weinhardt................................... 52,500/70,770 $106,874/$124,492
R. C. Ballou...................................... 525/12,075 $6/$10,894
J. J. Garber...................................... 4,922/7,350 $0/$6,450
T. D. Parker...................................... 2,702/4,568 $6,202/$3,842
D. H. Reckinger................................... 3,253/9,819 $1,886/$8,605
J. D. Borseth..................................... 6,300/0 $0/$0
</TABLE>
- -------------------------
(1) Reflects adjustment for the 5% Stock Dividend.
(2) For purposes of this column, "value" is determined by subtracting the
aggregate exercise price for the optioned shares from the product of that
number of shares and the NASDAQ-reported closing price for the Common Stock
as of the last business day of fiscal 1997.
NEWCOR, INC. RETIREMENT PLAN
This plan provides vested participants a monthly retirement benefit equal
to years of credited service times 1.1% of the participant's average monthly
earnings (salary and bonus) for the highest consecutive 60-month period
preceding retirement or other employment termination, subject to a limit imposed
under the Internal Revenue Code upon the maximum annual compensation amount that
may be taken into account for purposes of calculating benefits and to another
Code limit upon the maximum annual pension amount that may be paid.
Substantially all salaried employees of the Issuer (including all Company
executive officers named in the Summary Compensation Table) are eligible to
participate in this plan. Participants are vested after five years of
employment. The estimated credited years of service for the executives named in
the Summary Compensation Table are, respectively, as follows: Mr. Weinhardt, two
years; Mr. Ballou, three years; Mr. Garber, six years; Mr. Parker, fourteen
years; Mr. Reckinger, five years; Mr. Borseth, four years. Since January 1,
1997, the maximum annual compensation amount permitted by the Internal Revenue
Code to be considered for calculating Retirement Plan benefits has been
$160,000, subject to future adjustment in $10,000 increments as and when
justified by increases in the cost-of-living. The Code limit on the maximum
annual pension amount that may be paid to any participant currently is $130,000
per year, also subject to adjustment for future cost-of-living increases.
75
<PAGE> 81
The following table shows the estimated annual benefits (which are not
subject to deduction for Social Security benefits or other amounts) payable
under this plan upon retirement at age 63 to persons in the compensation and
years of service classifications indicated, with benefits computed on the basis
of straight life annuities and without taking into account the Internal Revenue
Code compensation limits discussed above. Please note that, under the Code as
currently in effect, the benefits payable under the plan for average annual
compensation above $160,000 would be the same as those reflected in the $160,000
row of the table, rather than as presented therein, except to the extent that a
higher benefit amount may be required in order to preserve the benefit accrued
for a given participant at December 31, 1993, and except to the extent that
higher benefits become permissible due to cost-of-living adjustments.
RETIREMENT PLAN TABLE
<TABLE>
<CAPTION>
AVERAGE YEARS OF SERVICE
ANNUAL ------------------------------------------------------------------------
COMPENSATION 10 15 20 25 30 35 40
<C> <S> <C> <C> <C> <C> <C> <C> <C>
$100,000 ................ $11,000 $16,500 $ 22,000 $ 27,500 $ 33,000 $ 38,500 $ 44,000
125,000 ................ 13,750 20,625 27,500 34,375 41,250 48,125 55,000
150,000 ................ 16,500 24,750 33,000 41,250 49,500 57,750 66,000
160,000 ................ 17,600 26,400 35,200 44,000 52,800 61,600 70,400
175,000 ................ 19,250 28,875 38,500 48,125 57,750 67,375 77,000
200,000 ................ 22,000 33,000 44,000 55,000 66,000 77,000 88,000
225,000 ................ 24,750 37,125 49,500 61,875 74,250 86,625 99,000
250,000 ................ 27,500 41,250 55,000 68,750 82,500 96,250 110,000
300,000 ................ 33,000 49,500 66,000 82,500 99,000 115,500 132,000
350,000 ................ 38,500 57,750 77,000 96,250 115,500 134,750 154,000
400,000 ................ 44,000 66,000 88,000 110,000 132,000 154,000 176,000
450,000 ................ 49,500 74,250 99,000 123,750 148,500 173,250 198,000
500,000 ................ 55,000 82,500 110,000 137,500 165,000 192,500 220,000
</TABLE>
DIRECTORS' COMPENSATION
The Chairman of the Board is paid a quarterly retainer of $7,125, and
non-employee Directors other than the Chairman are paid quarterly retainers of
$3,800, in each case reduced by the cost of any medical/dental benefits provided
to such director by the Company. Non-employee directors also receive a fee of
$750 for each Board meeting attended and a fee of $700 for each committee
meeting attended. Committee chairmen are paid an annual fee as follows:
Executive Committee (Mr. Lawson), none; Finance Committee (Mr. Campbell), $850;
Compensation/Stock Option Committee (Mr. Tech), $1,000; Audit Committee (Mr.
Lousma), $700. Directors may elect to defer all or a portion of their fees,
without interest, for payment in the future and also are reimbursed for travel
and other expenses relating to their attendance at Board and committee meetings.
In addition, subject to the share limits set forth in the Company's 1996
Non-Employee Directors Stock Option Plan (the "Directors Option Plan") at the
adjournment of each organizational meeting of the Board following an annual
meeting, each person then serving as a non-employee director of the Issuer
automatically is granted under this plan a nonqualified stock option covering
1,000 shares of Common Stock. All options so granted have per share exercise
prices equal to a share's grant date Fair Market Value (as defined in the plan),
have maximum terms of 10 years and are exercisable only for cash. Except in the
event of a Change in Control (as therein defined), which would accelerate
exercisability of all options then outstanding, each option granted under the
Directors Option Plan first becomes exercisable with respect to one-quarter of
the shares covered by the option on each of the first, second, third and fourth
anniversaries of the date of grant. Options exercisable at the time a grantee
leaves the Board would continue to be exercisable for one year or, if earlier,
until the tenth anniversary of grant. Options not exercisable at the time a
grantee leaves the Board would expire at that time.
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<PAGE> 82
The Company also maintains a plan that provides retirement benefits to
those non-employee directors who retire from Board service on or after age 65
and after at least 10 years of service as a director, or if such a director dies
while actively serving as a director. The plan currently provides for quarterly
payments equal to 70% of the maximum quarterly retainer paid to active
directors. The only director eligible for benefits if he were to retire
immediately is Mr. Tech.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation/Stock Option Committee of the Board of Directors is a
standing committee of the Board charged with the responsibilities, subject to
full Board approval, of establishing, periodically reevaluating and (as
appropriate) adjusting, and administering Company policies concerning the
compensation of management personnel, including Newcor's CEO and all of its
other executive officers. Throughout fiscal 1997, the members of this committee
were Messrs. Tech, Campbell and Lousma. None of these directors is or ever has
been an officer or employee of the Issuer or any affiliate.
By virtue of his position of Chairman of the Board, Mr. Lawson is entitled
to attend all meetings of this committee, but he is not and never has been a
voting member of the committee. Mr. Lawson is an executive officer and until
March 1995 also was an employee of the Company.
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<PAGE> 83
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
So far as is known to the Company, the only persons who are or may be
beneficial owners (within the meaning of Commission Rule 13d-3) of over 5% of
the Common Stock are the persons indicated in the table that follows.
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES OF PERCENT OF OWNERSHIP OF
OF BENEFICIAL OWNER COMMON STOCK(1) SHARES OF COMMON STOCK(1)
<S> <C> <C>
David L. Babson & Co., Inc.(2)........................ 582,434(2) 11.79%
One Memorial Drive
Cambridge, MA 02142-1300
Dimensional Fund Advisors Inc.(3)..................... 347,381(3) 7.03%
1299 Ocean Avenue
Santa Monica, CA 90401
Kennedy Capital Management, Inc.(4)................... 379,204(4) 8.04%
10829 Olive Boulevard
St. Louis, MO 63141
Catherine A. Gofrank(5)............................... 283,375(5) 5.73%
26555 Evergreen Road
Southfield, MI 48076-4285
Shirley E. Gofrank(6)................................. 277,442(6) 5.61%
3001 W. Big Beaver Road
Troy, MI 48084
</TABLE>
- -------------------------
(1) Where the most recent source of information identified below for a listed
person precedes the payment date of the 5% Stock Dividend, the number of
shares listed in this table has been adjusted for the 5% Stock Dividend.
Except as indicated in note (6), ownership percentages are calculated based
on the number of shares (excluding treasury shares) outstanding at the close
of business on January 31, 1998.
(2) Information concerning David Babson & Co., Inc. ("Babson"), is based on a
Schedule 13G filed with the Commission by Babson, as amended through January
15, 1998. Holdings reported in this schedule are as of December 31, 1997.
The schedule states that Babson is a registered investment adviser and that
the reported shares are owned by numerous of its investment counselling
clients. Based on this schedule Babson has sole voting and dispositive power
over all of these shares.
(3) Information concerning Dimensional Fund Advisors Inc. ("Dimensional"), is
based on a Schedule 13G filed with the Commission by Dimensional, as amended
through February 9, 1998, and a supplementary letter that accompanied the
copy of the most recent amendment of the schedule when it was provided to
Newcor, Inc. Holdings reported in this schedule are as of December 31, 1997.
Based on the schedule, Dimensional has sole voting power over 208,698 of the
reported shares and sole dispositive power over all of them. According to
the schedule and the supplementary letter, Dimensional is a registered
investment adviser and all of the shares reported in the schedule are held
in portfolios of DFA Investment Dimensions Group, Inc., a registered
open-end investment company, or in series of the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional serves as investment manager.
Dimensional disclaims beneficial ownership of all of these shares.
(4) Information concerning Kennedy Capital Management, Inc. ("Kennedy"), is
based on a Schedule 13G filed by Kennedy with the Commission, dated February
10, 1998. Holdings reported in this schedule are as of December 31, 1997.
Based on this schedule, Kennedy has sole voting power over 339,043 of the
reported shares and sole dispositive power over all of them. The schedule
also states that Kennedy is a registered investment adviser.
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<PAGE> 84
(5) Information concerning Catherine A. Gofrank is based on a Schedule 13D filed
by her with the Commission, dated July 8, 1996, and supplementary updating
information concerning some of the reported shares recently provided to
Newcor by her sister, Shirley E. Gofrank, in Ms. Shirley Gofrank's capacity
as a Newcor, Inc. director. Based on this schedule and after giving effect
to the 5% Stock Dividend, Ms. Catherine Gofrank has sole voting and
dispositive power over 48,329 of the reported shares. Based on the schedule
and the supplementary information provided by her sister, the sisters share
voting and dispositive power over the rest of the reported shares, as
successor co-trustees of the trust referred to in note (6).
(6) Information concerning Shirley E. Gofrank is based on a Schedule 13D filed
by her with the Commission, dated July 10, 1996, and supplementary updating
information she recently has provided to Newcor in her capacity as a Newcor,
Inc. director. The reported shares include 41,609 shares over which she has
sole voting and dispositive power, 787 shares subject to options currently
exercisable or that will become exercisable within 60 days (which shares are
treated as outstanding for purposes of calculating her percentage of
ownership) and 235,046 shares over which she shares voting and dispositive
power with her sister, Catherine Gofrank, in their capacity as successor
co-trustees of a trust established by their father during his lifetime. The
reported shares do not include 381 shares owned by Ms. Shirley Gofrank's
husband, over which she has no voting or dispositive power.
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<PAGE> 85
SECURITY OWNERSHIP OF MANAGEMENT AND THE BOARD OF DIRECTORS
The following table sets forth the beneficial ownership (for purposes of
Rule 13d-3) of shares of the Common Stock by each director of the Issuer and
each current or former Newcor executive officer named in the Summary
Compensation Table, based in each case on information provided to Newcor by the
pertinent individual, and of all Issuer directors and current Newcor executive
officers as a group. Except as noted, share percentages are calculated based on
the number of shares of Common Stock (excluding treasury shares) outstanding at
the close of business on January 31, 1998, and each individual named in the
table exercises sole voting and dispositive power with respect to the shares
shown for him or her.
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE OF OWNERSHIP OF
NAME OF BENEFICIAL OWNER COMMON STOCK SHARES OF COMMON STOCK
<S> <C> <C>
Jerry D. Campbell..................................... 111,606(1) 2.26%
Shirley E. Gofrank.................................... 277,442(1)(2)(3) 5.61%
William A. Lawson..................................... 124,309(1) 2.51%
Jack R. Lousma........................................ 6,669(1) 0.13%
Richard A. Smith...................................... 67,897(1)(3) 1.37%
Kurt O. Tech.......................................... 12,281(1) 0.25%
W. John Weinhardt..................................... 102,367(1)(4) 2.04%
Robert C. Ballou...................................... 11,692(1)(4) 0.24%
John Garber........................................... 17,379(1)(4) 0.35%
Keith F. Hale......................................... 0 0.0%
Thomas D. Parker...................................... 6,111(1)(4) 0.12%
Dennis H. Reckinger................................... 11,850(1)(4) 0.24%
John D. Borseth....................................... 16,420(1)(4) 0.33%
All directors and current executive officers as a
group
(11 persons)(1)(2)(3)(4)............................ 749,603 14.80%
</TABLE>
- -------------------------
(1) Includes shares that may be acquired under stock options currently or within
60 days exercisable, as follows: Jerry D. Campbell, 787; Shirley E. Gofrank,
787; William A. Lawson, 16,005; Jack R. Lousma, 787; Richard A. Smith, 787;
Kurt O. Tech, 787; W. John Weinhardt, 83,317; Robert C. Ballou, 3,675; John
J. Garber, 6,497; Thomas D. Parker, 3,909; Dennis H. Reckinger, 5,693; John
D. Borseth, 6,300; all directors and current executive officers as a group,
123,031. For purposes of calculating the group percentage, all optioned
shares (other than those optioned to Mr. Borseth, who no longer is an
executive officer) are treated as outstanding. For purposes of calculating
individual percentages, only the shares optioned to a given individual are
treated as outstanding.
(2) Includes shares held as a co-trustee of a trust, as follows: Shirley E.
Gofrank, 235,046.
(3) Does not include shares held by spouses, the beneficial ownership of which
is disclaimed, as follows: Shirley E. Gofrank, 381; Richard A. Smith, 395.
(4) Includes shares held by the Company's 401(k) plan, as follows: W. John
Weinhardt, 2,565; Robert C. Ballou, 667; John Garber, 317; Thomas D. Parker,
312; Dennis H. Reckinger, 205; John D. Borseth, 145; all directors and
current executive officers as a group, 4,266. The individuals named have
sole dispositive power but no voting power over these shares.
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<PAGE> 86
DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Exchange Notes will be issued pursuant to the same Indenture under
which the Notes were issued. The terms of the Exchange Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939 (the "Trust Indenture Act"). The Exchange Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the Trust Indenture Act for a statement thereof. The following summary of
the material provisions of the Indenture does not purport to be complete and is
qualified by reference to the Indenture, including the definitions therein of
certain terms used below. A copy of the Indenture is incorporated by reference
as an exhibit to the Registration Statement. The definitions of certain terms
used in the following summary are set forth below under "-- Certain
Definitions." For purposes of this summary, the term "Issuer" refers only to
Newcor, Inc. and not to any of its Subsidiaries.
The Exchange Notes will be general unsecured obligations of the Issuer and
will be subordinated in right of payment to all existing and future Senior Debt
of the Issuer and equal or senior in right of payment to all other existing and
future subordinated Indebtedness of the Issuer. The Exchange Notes and the Notes
will rank equally with one another. At January 31, 1998, on a pro forma basis,
after giving effect to the Acquisitions, the Offering and the application of the
net proceeds of the Offering, the Notes would have been subordinate to $10.3
million of Senior Debt of the Issuer (excluding guarantees by the Issuer of
Senior Debt of its Subsidiaries), and the Subsidiary Guarantees would have been
subordinate to $6.1 million of Senior Debt of the Subsidiary Guarantors
(excluding guarantees by the Subsidiary Guarantors of Senior Debt of the
Issuer). The Indenture permits the incurrence of additional Senior Debt in the
future.
Currently, all of the Issuer's Subsidiaries are Restricted Subsidiaries.
However, under certain circumstances, the Issuer will be able to designate
current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants set forth
in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes will be limited in aggregate principal amount to $125.0
million and will mature on March 1, 2008. Interest on the Exchange Notes will
accrue at the rate of 9 7/8% per annum and will be payable semi-annually in
arrears on March 1 and September 1, commencing on September 1, 1998, to Holders
of record on the immediately preceding February 15 and August 15. Interest on
the Exchange Notes will accrue from the most recent date to which interest has
been paid or, if no interest has been paid, from the date of original issuance.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. Principal, premium, if any, and interest and Liquidated Damages
on the Exchange Notes will be payable at the office or agency of the Issuer
maintained for such purpose within the City and State of New York or, at the
option of the Issuer, payment of interest and Liquidated Damages may be made by
check mailed to the Holders of the Exchange Notes at their respective addresses
set forth in the register of Holders of Exchange Notes; provided that all
payments of principal, premium and interest and Liquidated Damages with respect
to Holders of Global Exchange Notes and Exchange Notes the Holders of which have
given wire transfer instructions to the Issuer will be required to be made by
wire transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Issuer, the Issuer's office
or agency in New York will be the office of the Trustee maintained for such
purpose. The Exchange Notes will be issued in denominations of $1,000 and
integral multiples thereof.
SUBSIDIARY GUARANTEES
The Issuer's payment obligations under the Exchange Notes will be jointly
and severally guaranteed by the Subsidiary Guarantors. The Subsidiary Guarantee
of each Subsidiary Guarantor will be subordinated to the prior payment in full
of all Senior Debt of such Subsidiary Guarantor. Each Subsidiary Guarantor's
guarantee of the Exchange Notes will rank equally with its guarantee of the
Notes. As of January 31, 1998, on a pro forma basis, after giving effect to the
Acquisitions, the Subsidiary Guarantees would have been subordinated to
approximately $6.1 million of Senior Debt of the Subsidiary Guarantors
(excluding guarantees by the Subsidiary Guarantors of Senior Debt of the
Issuer). Furthermore, the obligations of each
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<PAGE> 87
Subsidiary Guarantor under its Subsidiary Guarantee will be limited with the
intention that such Subsidiary Guarantee not constitute a fraudulent conveyance
or improper distribution under applicable law. The maximum liability of each
Subsidiary Guarantor for purposes of the foregoing will vary depending upon the
law applied and the standards applied in any proceeding with respect to the
Subsidiary Guarantee. There can be no assurance as to what standard or law a
court would apply in making a determination as to what the maximum liability
would be for each Subsidiary Guarantor. See "Risk Factors -- Fraudulent
Conveyance."
The Indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person) another corporation, Person or entity whether or not affiliated with
such Subsidiary Guarantor unless (i) subject to the provisions of the following
paragraph, the Person formed by or surviving any such consolidation or merger
(if other than such Subsidiary Guarantor) assumes all the obligations of such
Subsidiary Guarantor pursuant to a supplemental indenture in form and substance
reasonably satisfactory to the Trustee, under the Notes, the Exchange Notes, the
Indenture, the Registration Rights Agreement and the Subsidiary Guarantees; (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists; and (iii) the Issuer would be permitted by virtue of the
Issuer's pro forma Fixed Charge Coverage Ratio, immediately after giving effect
to such transaction, to incur at least $1.00 of additional Indebtedness pursuant
to the Fixed Charge Coverage Ratio test set forth in the covenant described
above under the caption "-- Incurrence of Indebtedness and Issuance of Preferred
Stock."
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Subsidiary Guarantor, by way of merger, consolidation
or otherwise, or a sale or other disposition of all of the capital stock of any
Subsidiary Guarantor, then such Subsidiary Guarantor (in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the capital stock of such Subsidiary Guarantor) or the corporation acquiring
the property (in the event of a sale or other disposition of all of the assets
of such Subsidiary Guarantor) will be released and relieved of any obligations
under its Subsidiary Guarantee; provided that the Net Proceeds of such sale or
other disposition are applied in accordance with the applicable provisions of
the Indenture. See "-- Repurchase at Option of Holders -- Asset Sales."
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Exchange
Notes will be subordinated in right of payment, as set forth in the Indenture,
to the prior payment in full of all Senior Debt, whether outstanding on the date
of the Indenture or thereafter incurred.
Upon any distribution to creditors of the Issuer in a liquidation or
dissolution of the Issuer or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Issuer or its property, an
assignment for the benefit of creditors or any marshaling of the Issuer's assets
and liabilities, the holders of Senior Debt will be entitled to receive payment
in full in cash or Cash Equivalents of all Obligations due in respect of such
Senior Debt (including interest after the commencement of any such proceeding at
the rate specified in the applicable Senior Debt) before the Holders of Exchange
Notes will be entitled to receive any payment with respect to the Exchange
Notes, and until all Obligations with respect to Senior Debt are paid in full in
cash or Cash Equivalents, any distribution to which the Holders of Exchange
Notes would be entitled shall be made to the holders of Senior Debt (except that
Holders of Notes may receive and retain Permitted Junior Securities and payments
made from the trust described under "-- Legal Defeasance and Covenant
Defeasance").
The Issuer also may not make any payment upon or in respect of the Exchange
Notes (except in Permitted Junior Securities or from the trust described under
"-- Legal Defeasance and Covenant Defeasance") if (i) a default in the payment
of the principal of, premium, if any, or interest on Designated Senior Debt
occurs and is continuing beyond any applicable period of grace or (ii) any other
default occurs and is continuing with respect to Designated Senior Debt that
permits holders of the Designated Senior Debt as to which such default relates
to accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Issuer or the holders (or their
Representative, if applicable) of any Designated Senior Debt. Payments on the
Exchange Notes may and shall be resumed (a) in the case of a
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<PAGE> 88
payment default, upon the date on which such default is cured or waived and (b)
in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Debt has been accelerated. No new period of payment blockage
may be commenced unless and until (i) 360 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal, premium and Liquidated Damages, if any, and
interest on the Exchange Notes that have come due have been paid in full in
cash. No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice unless such default shall have
been cured or waived for a period of not less than 180 days.
The Indenture further requires that the Issuer promptly notify holders of
Senior Debt if payment of the Exchange Notes is accelerated because of an Event
of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Exchange Notes may recover less
ratably than other creditors of the Issuer or of a Subsidiary Guarantor,
including holders of Senior Debt. On a pro forma basis, after giving effect to
the Offering and the application of the proceeds therefrom, the principal amount
of Senior Debt outstanding at January 31, 1998 would have been $16.4 million.
The Indenture limits, subject to certain financial tests, the amount of
additional Indebtedness, including Senior Debt, that the Issuer and its
Subsidiaries can incur. See "-- Certain Covenants -- Incurrence of Indebtedness
and Issuance of Preferred Stock."
OPTIONAL REDEMPTION
The Exchange Notes will not be redeemable at the Issuer's option prior to
March 1, 2003. Thereafter, the Exchange Notes will be subject to redemption at
any time at the option of the Issuer, in whole or in part, upon not less than 30
nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on March 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2003........................................................ 104.938%
2004........................................................ 103.292%
2005........................................................ 101.646%
2006 and thereafter......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to March 1, 2001, the
Issuer may on any one or more occasions redeem up to $43,750,000 principal
amount of Notes and Exchange Notes at a redemption price of 109.875% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the redemption date, with the net cash proceeds of
one or more public offerings of common stock of the Issuer; provided that at
least $81,250,000 aggregate principal amount of Notes and Exchange Notes will
remain outstanding immediately after the occurrence of such redemption
(excluding Notes and Exchange Notes held by the Issuer and its Subsidiaries);
and provided, further, that such redemption shall occur within 45 days of the
date of the closing of such public offering.
SELECTION AND NOTICE
If less than all of the Exchange Notes are to be redeemed at any time,
selection of Exchange Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Exchange Notes are listed, or, if the Exchange Notes are
not so listed, on a pro rata basis, by lot or by such method as the Trustee
shall deem fair and appropriate; provided that no Exchange Notes of $1,000 or
less shall be redeemed in part. Notices of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each Holder of Exchange Notes to be redeemed at its registered address. Notices
of redemption may not be conditional. If any Exchange Note is to be redeemed in
part only, the notice of redemption that relates to such Exchange Note
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<PAGE> 89
shall state the portion of the principal amount thereof to be redeemed. A new
Exchange Note in principal amount equal to the unredeemed portion thereof will
be issued in the name of the Holder thereof upon cancellation of the original
Exchange Note. Exchange Notes called for redemption become due on the date fixed
for redemption. On and after the redemption date, interest ceases to accrue on
Exchange Notes or portions of them called for redemption.
MANDATORY REDEMPTION
The Issuer is not required to make mandatory redemption or sinking fund
payments with respect to the Exchange Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Exchange Notes
will have the right to require the Issuer to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of such Holder's Exchange Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest and Liquidated Damages thereon, to the date of
purchase (the "Change of Control Payment"). Within ten days following any Change
of Control, the Issuer will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Exchange Notes on the date specified in such notice, which date
shall be no earlier than 30 days and no later than 60 days from the date such
notice is mailed (the "Change of Control Payment Date"), pursuant to the
procedures required by the Indenture and described in such notice. The Issuer
will comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Exchange
Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Issuer will, to the extent
lawful, (1) accept for payment all Exchange Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Exchange Notes or portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustee the Exchange Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of Exchange Notes
or portions thereof being purchased by the Issuer. The Paying Agent will
promptly mail to each Holder of Exchange Notes so tendered the Change of Control
Payment for such Exchange Notes, and the Trustee will promptly authenticate and
mail (or cause to be transferred by book entry) to each Holder a new Exchange
Note equal in principal amount to any unpurchased portion of the Exchange Notes
surrendered, if any; provided that each such new Exchange Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Issuer will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Exchange Notes to require that the
Issuer repurchase or redeem the Exchange Notes in the event of a takeover,
recapitalization or similar transaction.
The Credit Agreement currently prohibits the Issuer from purchasing any
Exchange Notes prior to their maturity, and also provides that a Change of
Control with respect to the Issuer would constitute a default thereunder. Any
future credit agreements or other agreements relating to Senior Debt to which
the Issuer becomes a party may contain similar restrictions and provisions. The
Indenture provides that, prior to complying with the provisions of this
covenant, but in any event within 90 days following a Change of Control, the
Issuer will either repay all outstanding Senior Debt or obtain the requisite
consents, if any, under all agreements governing outstanding Senior Debt to
permit the repurchase of Exchange Notes required by this covenant. If the Issuer
does not obtain such a consent or repay such borrowings, the Issuer will remain
prohibited from purchasing Exchange Notes. In such case, the Issuer's failure to
purchase tendered Exchange Notes would constitute an Event of Default under the
Indenture which would, in turn, constitute as default
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<PAGE> 90
under the Credit Agreement. In such circumstances, the subordination provisions
in the Indenture would likely restrict payments to the Holders of Exchange
Notes.
The Issuer will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Issuer and
purchases all Exchange Notes validly tendered and not withdrawn under such
Change of Control Offer.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Issuer and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act) (ii) the adoption of a plan relating to the liquidation or
dissolution of the Issuer, (iii) the consummation of any transaction (including,
without limitation, any merger or consolidation) the result of which is that any
"person" (as defined above) becomes the "beneficial owner" (as such term is
defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a
person shall be deemed to have "beneficial ownership" of all securities that
such person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 35% of the Voting Stock of the
Issuer (measured by voting power rather than number of shares), (iv) the Issuer
consolidates with, or merges with or into, any Person, or any Person
consolidates with, or merges with or into, the Issuer, in any such event
pursuant to a transaction in which any of the outstanding Voting Stock of the
Issuer is converted into or exchanged for cash, securities or other property,
other than any such transaction where the Voting Stock of the Issuer outstanding
immediately prior to such transaction is converted into or exchanged for Voting
Stock (other than Disqualified Stock) of the surviving or transferee Person
constituting a majority of the outstanding shares of such Voting Stock of such
surviving or transferee Person (immediately after giving effect to such
issuance).
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Issuer and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Exchange Notes to require the
Issuer to repurchase such Exchange Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Issuer and
its Subsidiaries taken as a whole to another Person or group may be uncertain.
ASSET SALES
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Issuer
(or the Restricted Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an officers' certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 75% of the consideration therefor
received by the Issuer or such Restricted Subsidiary is in the form of cash;
provided that the amount of (x) any liabilities (as shown on the Issuer's or
such Restricted Subsidiary's most recent balance sheet), of the Issuer or any
Restricted Subsidiary (other than contingent liabilities and liabilities that
are by their terms subordinated to the Notes or any guarantee thereof) that are
assumed by the transferee of any such assets pursuant to a customary novation
agreement that releases the Issuer or such Restricted Subsidiary from further
liability and (y) any securities, notes or other obligations received by the
Issuer or any such Restricted Subsidiary from such transferee that are
contemporaneously (subject to ordinary settlement periods) converted by the
Issuer or such Restricted Subsidiary into cash (to the extent of the cash
received), shall be deemed to be cash for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Issuer may apply such Net Proceeds, at its option (a) to permanently reduce
Senior Debt (or, if such Senior Debt is revolving Indebtedness under a Credit
Facility, to permanently reduce any related commitments of lenders under the
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Senior Debt) (provided that such reductions shall have no effect on the amount
of Indebtedness permitted to be incurred pursuant to clause (i)(A)(y) of the
second paragraph of the covenant described under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock"), or
(b) to the acquisition of a majority of the assets of, or a majority of the
Voting Stock of, another Permitted Business, the making of a capital expenditure
or the acquisition of other assets that are not classified as current assets
under GAAP and are used or useful in a Permitted Business. Pending the final
application of any such Net Proceeds, the Issuer may temporarily reduce
revolving credit borrowings or otherwise invest such Net Proceeds in any manner
that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that
are not applied or invested as provided in the first sentence of this paragraph
will be deemed to constitute "Excess Proceeds." When the aggregate amount of
Excess Proceeds exceeds $10.0 million, the Issuer will be required to make an
offer (pro rata in proportion to the principal amount (or accreted value, if
applicable) outstanding in respect of any asset sale offer required by the terms
of any pari passu Indebtedness incurred in accordance with the Indenture) to all
Holders of Notes and Exchange Notes (an "Asset Sale Offer") to purchase the
maximum principal amount of Notes and Exchange Notes that may be purchased out
of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of
the principal amount thereof plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the date of purchase, in accordance with the
procedures set forth in the Indenture. To the extent that any Excess Proceeds
remain after consummation of an Asset Sale Offer, the Issuer may use such Excess
Proceeds for any purpose not otherwise prohibited by the Indenture. If the
aggregate principal amount of Notes and Exchange Notes tendered into such Asset
Sale Offer surrendered by Holders thereof (and any pari passu Indebtedness, as
aforesaid) exceeds the amount of Excess Proceeds, the Trustee shall select the
Notes and Exchange Notes to be purchased on a pro rata basis. Upon completion of
such offer to purchase, the amount of Excess Proceeds shall be reset at zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Issuer's or
any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation involving
the Issuer or any of its Restricted Subsidiaries) or to the direct or indirect
holders of the Issuer's or any of its Restricted Subsidiaries' Equity Interests
in their capacity as such (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Issuer or to the Issuer
or a Restricted Subsidiary of the Issuer); (ii) purchase, redeem or otherwise
acquire or retire for value (including, without limitation, in connection with
any merger or consolidation involving the Issuer) any Equity Interests of the
Issuer, (iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the Exchange Notes, except a payment of interest or principal at
Stated Maturity; or (iv) make any Restricted Investment (all such payments and
other actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of and after giving
effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Issuer would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under caption "-- Incurrence of Indebtedness and Issuance
of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Issuer and its Subsidiaries after the
date of the Indenture (excluding Restricted Payments permitted by clauses
(ii), (iii) and (iv) of the next succeeding paragraph), is less than the
sum, without duplication, of (i) 50% of the Consolidated Net Income of the
Issuer for the period (taken as one
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accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Issuer most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Issuer since
the date of the Indenture as a contribution to its common equity capital or
from the issue or sale of Equity Interests of the Issuer (other than
Disqualified Stock) or from the issue or sale of Disqualified Stock or debt
securities of the Issuer that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Issuer), plus
(iii) to the extent that any Restricted Investment that was made after the
date of the Indenture is sold for cash or otherwise liquidated or repaid
for cash, the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment plus (iv) 50% of any dividends
received by the Issuer or a Wholly Owned Restricted Subsidiary that is a
Subsidiary Guarantor after the date of the Indenture from an Unrestricted
Subsidiary of the Issuer, to the extent that such dividends were not
otherwise included in Consolidated Net Income of the Issuer for such
period, plus (v) to the extent that any Unrestricted Subsidiary is
redesignated as a Restricted Subsidiary after the date of the Indenture,
the lesser of (A) the fair market value of the Issuer's Investment in such
Subsidiary as of the date of such redesignation or (B) such fair market
value as of the date on which such Subsidiary was originally designated as
an Unrestricted Subsidiary.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the Issuer
in exchange for, or out of the net cash proceeds of the substantially concurrent
sale (other than to a Subsidiary of the Issuer) of, other Equity Interests of
the Issuer (other than any Disqualified Stock); provided that the amount of any
such net cash proceeds that are utilized for any such redemption, repurchase,
retirement, defeasance or other acquisition shall be excluded from clause (c)
(ii) of the preceding paragraph; (iii) the defeasance, redemption, repurchase or
other acquisition of subordinated Indebtedness with the net cash proceeds from
an incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any
dividend by a Subsidiary of the Issuer to the holders of its common Equity
Interests on a pro rata basis; and (v) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Issuer or any
Subsidiary of the Issuer held by any member of the Issuer (or any of its
Subsidiaries') management pursuant to any management equity subscription
agreement or stock option agreement in effect as of the date of the Indenture;
provided that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed $250,000 in any twelve
month period and no Default or Event of Default shall have occurred and be
continuing immediately after such transaction; (vi) Investments in securities
not constituting cash or Cash Equivalents and received in connection with an
Asset Sale made pursuant to the provisions of the covenant described under "--
Repurchase at the Option of Holders -- Asset Sales" above or any other
disposition of assets not constituting an Asset Sale by reason of the threshold
contained in the definition thereof; and (vii) repurchases of Equity Interests
deemed to occur upon exercise of stock options if such Equity Interests
represent a portion of the exercise price of such options.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the Issuer
and its Restricted Subsidiaries (except to the extent repaid in cash) in the
Subsidiary so designated will be deemed to be Restricted Payments at the time of
such designation and will reduce the amount available for Restricted Payments
under the first paragraph of this covenant. All such outstanding Investments
will be deemed to constitute Investments in an amount equal to the fair market
value of such Investments at the time of such designation. Such designation will
only be permitted if such Restricted Payment would be permitted at such time and
if such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
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The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Issuer or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be determined by the Board of Directors whose
resolution with respect thereto shall be delivered to the Trustee, such
determination to be based upon an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if such fair market
value exceeds $1.0 million. Not later than five Business Days after making any
Restricted Payment, the Issuer shall deliver to the Trustee an officers'
certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant "Restricted
Payments" were computed, together with a copy of any fairness opinion or
appraisal required by the Indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that the Issuer will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Issuer will not issue any Disqualified Stock and
will not permit any of its Subsidiaries to issue any shares of preferred stock;
provided, however, that the Issuer may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock and any Subsidiary Guarantor may
incur Indebtedness or issue preferred stock if the Fixed Charge Coverage Ratio
for the Issuer's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred or such Disqualified Stock or
preferred stock is issued would have been at least 2.0 to 1, if such incurrence
or issuance is on or prior to March 1, 2000, or 2.5 to 1, if such incurrence or
issuance is after March 1, 2000, in each case determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred, or the Disqualified Stock or
preferred stock had been issued, as the case may be, at the beginning of such
four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Issuer and the Subsidiary Guarantors of (A)
revolving credit Indebtedness and letters of credit pursuant to Credit
Facilities; provided that the aggregate principal amount of all revolving
credit Indebtedness (with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of the Issuer and
its Restricted Subsidiaries thereunder) at any time outstanding under all
Credit Facilities after giving effect to such incurrence does not exceed an
amount equal to the greater of (x) $50.0 million of such Indebtedness less
the aggregate amount of all Net Proceeds of Asset Sales applied to
permanently reduce commitments with respect to Credit Facilities pursuant
to the covenant described above under the caption "-- Asset Sales" and (y)
the Borrowing Base; and (B) term Indebtedness under Credit Facilities,
provided that the aggregate principal amount of all term Indebtedness
outstanding under all Credit Facilities after giving effect to such
incurrence does not exceed $10.0 million less the aggregate amount of all
Net Proceeds of Asset Sales that have been applied since the date of the
Indenture to repay term Indebtedness under a Credit Facility pursuant to
the covenant described above under the caption "-- Repurchase at the Option
of Holders -- Asset Sales";
(ii) the incurrence by the Issuer and the Subsidiary Guarantors of the
Existing Indebtedness;
(iii) the incurrence by the Issuer of Indebtedness represented by the
Notes and Exchange Notes and the incurrence by the Subsidiary Guarantors of
the Subsidiary Guarantees;
(iv) the incurrence by the Issuer or the Subsidiary Guarantors of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of the
Issuer or a Subsidiary Guarantor, in an aggregate principal amount not to
exceed $5.0 million at any time outstanding;
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(v) the incurrence by the Issuer or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the Indenture to be
incurred pursuant to the preceding paragraph or clause (ii) or (iii) of
this paragraph;
(vi) the incurrence by the Issuer or any of the Subsidiary Guarantors
of intercompany Indebtedness between or among the Issuer and any of the
Subsidiary Guarantors or between or among Wholly Owned Restricted
Subsidiaries; provided, however, that (i) if the Issuer is the obligor on
such Indebtedness, such Indebtedness is expressly subordinated to the prior
payment in full in cash of all Obligations then due with respect to the
Exchange Notes and (ii)(A) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being held by a Person
other than the Issuer or a Subsidiary Guarantor and (B) any sale or other
transfer of any such Indebtedness to a Person that is not either the Issuer
or a Subsidiary Guarantor shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Issuer or such Subsidiary Guarantor,
as the case may be, that was not permitted by this clause (vii);
(vii) the incurrence by the Issuer or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging (i) interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of this Indenture to be
outstanding; (ii) the value of foreign currencies purchased or received by
the Issuer in the ordinary course of business, or (iii) commodities
purchased in the ordinary course of business for use in a Permitted
Business and not for speculation;
(viii) the guarantee by the Issuer or any of the Subsidiary Guarantors
of Indebtedness of the Issuer or a Subsidiary Guarantor that was permitted
to be incurred by another provision of this covenant;
(ix) the incurrence by the Issuer or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) at any time outstanding, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any Indebtedness incurred pursuant to this clause (ix), not to exceed $15.0
million;
(x) the incurrence by the Issuer or any of its Unrestricted
Subsidiaries of Non-Recourse Debt (excluding Indebtedness owed by such
Unrestricted Subsidiary to the Issuer), provided, however, that if any such
Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary,
such event shall be deemed to constitute an incurrence of Indebtedness by a
Restricted Subsidiary of the Issuer that was not permitted by this clause
(x);
(xi) the incurrence by the Issuer or any of its Restricted
Subsidiaries of Indebtedness incurred in respect of performance, surety and
similar bonds provided by the Issuer and the Restricted Subsidiaries in the
ordinary course of business, and refinancings thereof;
(xii) the incurrence by the Issuer or any of its Restricted
Subsidiaries of Indebtedness for letters of credit relating to workers'
compensation claims and self-insurance or similar requirements in the
ordinary course of business; and
(xiii) the incurrence by the Issuer or any of its Restricted
Subsidiaries of Indebtedness arising from guarantees of Indebtedness of the
Issuer or any Restricted Subsidiary or other agreements of the Issuer or a
Restricted Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or Subsidiary,
other than guarantees of Indebtedness incurred by any person acquiring all
or any portion of such business, assets or Subsidiary for the purpose of
financing such acquisition, provided that the maximum aggregate liability
in respect of all such Indebtedness shall at no time exceed the gross
proceeds actually received by the Issuer and its Subsidiaries in connection
with such disposition.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xiii) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Issuer shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant. Accrual of
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interest, accretion or amortization of original issue discount, the payment of
interest on any Indebtedness in the form of additional Indebtedness with the
same terms, and the payment of dividends on Disqualified Stock in the form of
additional shares of the same class of Disqualified Stock will not be deemed to
be an incurrence of Indebtedness or an issuance of Disqualified Stock for
purposes of this covenant; provided, in each such case, that the amount thereof
is included in Fixed Charges of the Issuer as accrued.
LIENS
The Indenture provides that the Issuer will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien securing Indebtedness or trade payables on any asset now owned or
hereafter acquired, or any income or profits therefrom or assign or convey any
right to receive income therefrom, except Permitted Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Issuer or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any indebtedness owed to the Issuer or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Issuer or
any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Issuer or any of its Restricted Subsidiaries. However, the
foregoing restrictions will not apply to encumbrances or restrictions existing
under or by reason of (a) Existing Indebtedness as in effect on the date of the
Indenture, (b) the Credit Agreement as in effect as of the date of the
Indenture, and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, provided that
such amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacement or refinancings are no more restrictive, taken as a
whole, with respect to such dividend and other payment restrictions than those
contained in the Credit Agreement as in effect on the date of the Indenture, (c)
the Indenture and the Notes and Exchange Notes, (d) applicable law, (e) any
instrument governing Indebtedness or Capital Stock of a Person acquired by the
Issuer or any of its Restricted Subsidiaries as in effect at the time of such
acquisition (except to the extent such Indebtedness was incurred in connection
with or in contemplation of such acquisition), which encumbrance or restriction
is not applicable to any Person, or the properties or assets of any Person,
other than the Person, or the property or assets of the Person, so acquired,
provided that, in the case of Indebtedness, such Indebtedness was permitted by
the terms of the Indenture to be incurred, (f) customary non-assignment
provisions in leases entered into in the ordinary course of business and
consistent with past practices, (g) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired, (h) any
agreement for the sale of a Restricted Subsidiary that restricts distributions
by that Restricted Subsidiary pending its sale, (i) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive, taken
as a whole, than those contained in the agreements governing the Indebtedness
being refinanced, (j) secured Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenant described above under the caption "--
Liens" that limits the right of the debtor to dispose of the assets securing
such Indebtedness, (k) provisions with respect to the disposition or
distribution of assets or property in an Asset Sale (or in a transaction which,
but for it size, would be an Asset Sale), or in joint venture agreements and
other similar agreements entered into in the ordinary course of business and (l)
restrictions on cash or other deposits or net worth imposed by customers under
contracts entered into in the ordinary course of business.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that the Issuer may not consolidate or merge with or
into (whether or not the Issuer is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another
corporation, Person or
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entity unless (i) the Issuer is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other than
the Issuer) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia; (ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Issuer) or the entity or Person to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made assumes all the obligations of the Issuer under the
Registration Rights Agreement, the Notes and Exchange Notes and the Indenture
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee; (iii) immediately after such transaction no Default or Event of Default
exists; and (iv) except in the case of a merger of the Issuer with or into a
Wholly Owned Subsidiary of the Issuer, the Issuer or the entity or Person formed
by or surviving any such consolidation or merger (if other than the Issuer), or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made will, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock."
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Issuer will not, and will not permit any of
its Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless
(i) such Affiliate Transaction is on terms that are no less favorable to the
Issuer or the relevant Subsidiary than those that would have been obtained in a
comparable transaction by the Issuer or such Subsidiary with an unrelated Person
and (ii) the Issuer delivers to the Trustee (a) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $1.0 million, a resolution of the Board of Directors
set forth in an officers' certificate certifying that such Affiliate Transaction
complies with clause (i) above and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of Directors
and (b) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $5.0 million, an
opinion as to the fairness to the Holders of such Affiliate Transaction from a
financial point of view issued by an accounting, appraisal or investment banking
firm of national standing. Notwithstanding the foregoing, the following items
shall not be deemed to be Affiliate Transactions: (i) any employment agreement
entered into by the Issuer or any of its Subsidiaries in the ordinary course of
business and consistent with the past practice of the Issuer or such Subsidiary,
(ii) transactions between or among the Issuer and/or its Restricted
Subsidiaries, (iii) payment of reasonable directors' fees to Persons who are not
otherwise Affiliates of the Issuer, (iv) Restricted Payments that are permitted
by the provisions of the Indenture described above under the caption "--
Restricted Payments," and (v) provision of officers' and directors'
indemnification and insurance in the ordinary course of business to the extent
permitted by applicable law.
SALE AND LEASEBACK TRANSACTIONS
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, enter into any sale and leaseback transaction;
provided that the Issuer may enter into a sale and leaseback transaction if (i)
the Issuer could have (a) incurred Indebtedness in an amount equal to the
Attributable Debt relating to such sale and leaseback transaction pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "-- Incurrence of Additional
Indebtedness and Issuance of Preferred Stock" and (b) incurred a Lien to secure
such Indebtedness pursuant to the covenant described above under the caption "--
Liens," (ii) the gross cash proceeds of such sale and leaseback transaction are
at least equal to the fair market value (as determined in good faith by the
Board of Directors and set forth in an Officers' Certificate delivered to the
Trustee) of the property that is the subject of such sale and leaseback
transaction and (iii) the transfer of assets in such sale and leaseback
transaction is
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permitted by, and the Issuer applies the proceeds of such transaction in
compliance with, the covenant described above under the caption "-- Repurchase
at the Option of the Holders -- Asset Sales."
BUSINESS ACTIVITIES
The Issuer will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent as
would not be material to the Issuer and its Subsidiaries taken as a whole.
PAYMENTS FOR CONSENT
The Indenture provides that neither the Issuer nor any of its Restricted
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Exchange Notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the Indenture or the Exchange Notes unless
such consideration is offered to be paid or is paid to all Holders of the Notes
and Exchange Notes that consent, waive or agree to amend in the time frame set
forth in the solicitation documents relating to such consent, waiver or
agreement.
NO SENIOR SUBORDINATED DEBT
The Indenture provides that (i) the Issuer will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Notes, and (ii) no Subsidiary Guarantor will
incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to Guarantees of
Senior Debt or to Senior Debt of such Subsidiary Guarantor and senior in any
respect in right of payment to the Subsidiary Guarantees.
ADDITIONAL SUBSIDIARY GUARANTEES
The Indenture provides that if the Issuer or any of its Restricted
Subsidiaries shall acquire or create another Restricted Subsidiary, which has
not been properly designated as an Unrestricted Subsidiary in accordance with
the Indenture for as long as it continues to constitute an Unrestricted
Subsidiary, after the date of the Indenture, then such newly acquired or created
Restricted Subsidiary shall become a Subsidiary Guarantor and execute a
Supplemental Indenture and deliver an Opinion of Counsel, in accordance with the
terms of the Indenture; provided, that (i) the Subsidiary Guarantee of such
Subsidiary Guarantor may be subordinated to Senior Debt of such Subsidiary
Guarantor, and (ii) such Restricted Subsidiary shall not be required to issue a
Subsidiary Guarantee if such Restricted Subsidiary is a Foreign Subsidiary and
such Foreign Subsidiary has not guaranteed and does not guarantee any other
Indebtedness of the Issuer or any other Restricted Subsidiary of the Issuer.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Exchange Notes are outstanding, the Issuer will furnish to the
Holders of Exchange Notes (i) all quarterly and annual financial information
that would be required to be contained in a filing with the Commission on Forms
10-Q and 10-K if the Issuer were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations of
the Issuer and its consolidated Subsidiaries (showing in reasonable detail,
either on the face of the financial statements or in the footnotes thereto and
in Management's Discussion and Analysis of Financial Condition and Results of
Operations, the financial condition and results of operations of the Issuer and
its Restricted Subsidiaries separate from the financial condition and results of
operations of the Unrestricted Subsidiaries of the Issuer) and, with respect to
the annual information only, a report thereon by the Issuer certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Issuer were required to file
such reports, in each case within the time periods specified in the Commission's
rules and
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regulations. For all reporting periods ending on or prior to January 31, 1999,
the Issuer shall include in each Form 10-Q and Form 10-K a presentation, which
need not be audited, of sales, operating income, interest expense, depreciation
and amortization, and capital expenditures for such operating period and the
twelve months ended on the last day of such reporting period, on a pro forma
basis consistent with the presentation under the "Unaudited Pro Forma
Consolidated Statement of Income" section of this Prospectus. In addition,
following the consummation of the Exchange Offer, whether or not required by the
rules and regulations of the Commission, the Issuer will file a copy of all such
information and reports with the Commission for public availability within the
time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, the
Issuer and the Subsidiary Guarantors have agreed that, for so long as any
Exchange Notes remain outstanding (unless the Issuer is subject to the reporting
requirements of the Exchange Act), they will furnish to the Holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes or Exchange Notes (whether or not
prohibited by the subordination provisions of the Indenture); (ii) default in
payment when due of the principal of or premium, if any, on the Notes or
Exchange Notes whether or not prohibited by the subordination provisions of the
Indenture); (iii) failure by the Issuer or any of its Subsidiaries to comply
with the provisions described under the captions "-- Repurchase at the Option of
the Holder -- Change of Control," "-- Repurchase at the Option of the Holder --
Asset Sales," "-- Certain Covenants -- Restricted Payments," "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock," or "--
Merger, Consolidation or Sale of Assets"; (iv) failure by the Issuer or any of
its Subsidiaries for 60 days after notice to comply with any of its other
agreements in the Indenture or the Notes or Exchange Notes; (v) default under
any mortgage, indenture or instrument under which there may be issued or by
which there may be secured or evidenced any Indebtedness for money borrowed by
the Issuer or any of its Subsidiaries (or the payment of which is guaranteed by
the Issuer or any of its Subsidiaries) whether such Indebtedness or guarantee
now exists, or is created after the date of the Indenture, which default (a) is
caused by a failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b) results in
the acceleration of such Indebtedness prior to its express maturity and, in each
case, the principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been a Payment
Default or the maturity of which has been so accelerated, aggregates $5.0
million or more; (vi) failure by the Issuer or any of its Subsidiaries to pay
final judgments aggregating in excess of $5.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days; (vii) except as permitted by
the Indenture, any Subsidiary Guarantee shall be held in any judicial proceeding
to be unenforceable or invalid or shall cease for any reason to be in full force
and effect or any Subsidiary Guarantor, or any Person acting on behalf of any
Subsidiary Guarantor, shall deny or disaffirm its obligations under its
Subsidiary Guarantee; and (viii) certain events of bankruptcy or insolvency with
respect to the Issuer or any of its Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes and
Exchange Notes may declare all the Notes and Exchange Notes to be due and
payable immediately. Notwithstanding the foregoing, in the case of an Event of
Default arising from certain events of bankruptcy or insolvency, with respect to
the Issuer, any Subsidiary Guarantor constituting a Significant Subsidiary or
any group of Subsidiary Guarantors that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes and Exchange Notes will become due
and payable without further action or notice. Holders of the Exchange Notes may
not enforce the Indenture or the Exchange Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Notes and Exchange Notes may direct the Trustee
in its exercise of any trust or power. The Trustee may withhold from Holders of
the Exchange Notes notice of any continuing
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Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Issuer with the
intention of avoiding payment of the premium that the Issuer would have had to
pay if the Issuer then had elected to redeem the Exchange Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Exchange Notes. If an Event of Default occurs prior
to March 1, 2003 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Issuer with the intention of avoiding the
prohibition on redemption of the Exchange Notes prior to March 1, 2003, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Exchange Notes.
The Holders of a majority in aggregate principal amount of the Notes and
Exchange Notes then outstanding by notice to the Trustee may on behalf of the
Holders of all of the Notes and Exchange Notes waive any existing Default or
Event of Default and its consequences under the Indenture except a continuing
Default or Event of Default in the payment of interest on, or the principal of,
the Notes or Exchange Notes.
The Issuer is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuer is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Issuer,
as such, shall have any liability for any obligations of the Issuer under the
Notes or Exchange Notes, the Indenture or the Subsidiary Guarantees or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder of Exchange Notes by accepting an Exchange Note waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the Exchange Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Exchange Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Exchange Notes
to receive payments in respect of the principal of, premium, if any, and
interest and Liquidated Damages on such Exchange Notes when such payments are
due from the trust referred to below, (ii) the Issuer obligations with respect
to the Exchange Notes concerning issuing temporary Exchange Notes, registration
of Exchange Notes, mutilated, destroyed, lost or stolen Exchange Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Issuer obligations in connection therewith and (iv) the Legal
Defeasance provisions of the Indenture. In addition, the Issuer may, at its
option and at any time, elect to have the obligations of the Issuer released
with respect to certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Exchange Notes.
In the event Covenant Defeasance occurs, certain events (not including
non-payment, bankruptcy, receivership, rehabilitation and insolvency events)
described under "-- Events of Default and Remedies" will no longer constitute an
Event of Default with respect to the Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Exchange Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages on the outstanding Exchange Notes on the stated maturity or
on the applicable redemption date, as the case may be, and the Issuer must
specify whether the Exchange Notes
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are being defeased to maturity or to a particular redemption date; (ii) in the
case of Legal Defeasance, the Issuer shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Issuer has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders of the outstanding Exchange Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Issuer shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Exchange Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit (other than a Default or Event of Default resulting from
the borrowing of funds to be applied to such deposit) or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which the Issuer or any of its Subsidiaries is a party or by
which the Issuer or any of its Subsidiaries is bound; (vi) the Issuer must have
delivered to the Trustee an opinion of counsel to the effect that, assuming no
intervening bankruptcy of the Issuer between the date of deposit and the 91st
day following the deposit and assuming no Holder of Exchange Notes is an insider
of the Issuer, after the 91st day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Issuer must deliver to the Trustee an officers' certificate stating that the
deposit was not made by the Issuer with the intent of preferring the Holders of
Exchange Notes over the other creditors of the Issuer or with the intent of
defeating, hindering, delaying or defrauding creditors of the Issuer or others;
and (viii) the Issuer must deliver to the Trustee an officers' certificate and
an opinion of counsel, each stating that all conditions precedent provided for
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Issuer may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Issuer is not required to transfer or exchange
any Exchange Note selected for redemption. Also, the Issuer is not required to
transfer or exchange any Exchange Note for a period of 15 days before a
selection of Exchange Notes to be redeemed.
The registered Holder of an Exchange Note will be treated as the owner of
it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Exchange Notes may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the Notes and Exchange
Notes then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes and
Exchange Notes), and any existing default or compliance with any provision of
the Indenture or the Notes or Exchange Notes may be waived with the consent of
the Holders of a majority in principal amount of the then outstanding Notes and
Exchange Notes (including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for, Notes and Exchange
Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Exchange Notes held by a non-consenting Holder): (i) reduce
the principal amount of Notes and Exchange Notes whose Holders must consent to
an amendment, supplement or waiver, (ii) reduce the principal of or
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change the fixed maturity of any Exchange Note or alter the provisions with
respect to the redemption of the Exchange Notes (other than provisions relating
to the covenants described above under the caption "-- Repurchase at the Option
of Holders"), (iii) reduce the rate of or change the time for payment of
interest on any Exchange Note, (iv) waive a Default or Event of Default in the
payment of principal of or premium, if any, or interest on the Exchange Notes
(except a rescission of acceleration of the Notes and Exchange Notes by the
Holders of at least a majority in aggregate principal amount of the Notes and
Exchange Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Exchange Note payable in money other than that
stated in the Exchange Notes, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of
Exchange Notes to receive payments of principal of or premium, if any, or
interest on the Exchange Notes, (vii) waive a redemption payment with respect to
any Exchange Note (other than a payment required by one of the covenants
described above under the caption "-- Repurchase at the Option of Holders") or
(viii) make any change in the foregoing amendment and waiver provisions. In
addition, any amendment to the provisions of Article 10 of the Indenture (which
relate to subordination) will require the consent of the Holders of at least 75%
in aggregate principal amount of the Notes and Exchange Notes then outstanding
if such amendment would adversely affect the rights of Holders of Notes or
Exchange Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes
or Exchange Notes, the Issuer and the Trustee may amend or supplement the
Indenture or the Exchange Notes to cure any ambiguity, defect or inconsistency,
to provide for uncertificated Exchange Notes in addition to or in place of
certificated Exchange Notes, to provide for the assumption of the Issuer or any
Subsidiary Guarantor's obligations to Holders of Exchange Notes in the case of a
merger or consolidation or sale of all or substantially all of the Issuer's or
such Subsidiary Guarantor's assets, to make any change that would provide any
additional rights or benefits to the Holders of Notes and Exchange Notes or that
does not adversely affect the legal rights under the Indenture of any such
Holder, or to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Issuer, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
and Exchange Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Exchange Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
BOOK-ENTRY, DELIVERY AND FORM
Exchange Notes exchanged for Notes sold to Qualified Institutional Buyers
and Notes offered and sold in offshore transactions in reliance on Regulation S,
if any, initially will be in the form of one or more registered global notes
without interest coupons (collectively, the "Global Exchange Notes"). Upon
issuance, the Global Exchange Notes will be deposited with the Trustee, as
custodian for The Depository Trust Company ("DTC"), in New York, New York, and
registered in the name of DTC or its nominee for credit to the accounts of DTC's
Direct and Indirect Participants (as defined below). Transfer of beneficial
interests in Global Exchange Notes will be subject to the applicable rules and
procedures of DTC and its Direct or Indirect Participants (including, if
applicable, those of the Euroclear System ("Euroclear") and Cedel Bank, societe
anonyme ("CEDEL")), which may change from time to time.
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The Global Exchange Notes may be transferred, in whole and not in part,
only to another nominee of DTC or to a successor of DTC or its nominee in
certain limited circumstances. Beneficial interests in the Global Exchange Notes
may be exchanged for Notes in certificated form in certain limited
circumstances. See "-- Transfer of Interests in Global Exchange Notes for
Certificated Exchange Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Exchange
Notes may be presented for registration of transfer and exchange at the offices
of the Registrar.
DEPOSITORY PROCEDURES
DTC has advised the Issuer that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of its Participants. The Direct Participants
include securities brokers and dealers (including the Initial Purchasers),
banks, trust companies, clearing corporations and certain other organizations
including Euroclear and CEDEL. Access to DTC's system is also available to other
entities that clear through or maintain a direct or indirect custodial
relationship with a Direct Participant (collectively, the "Indirect
Participants").
DTC has also advised the Issuer that, pursuant to DTC's procedures, (i)
upon deposit of the Global Exchange Notes, DTC will credit the accounts of the
Direct Participants designated by the Initial Purchasers with portions of the
principal amount of the Global Exchange Notes that have been allocated to them
by the Initial Purchasers and (ii) DTC will maintain records of the ownership
interests of such Direct Participants in the Global Exchange Notes and the
transfer of ownership interests by and between Direct Participants. DTC will not
maintain records of the ownership interests of, or the transfer of ownership
interests by and between, Indirect Participants or other owners of beneficial
interests in the Global Exchange Notes. Direct Participants and Indirect
Participants must maintain their own records of the ownership interests of, and
the transfer of ownership interests by and between, Indirect Participants and
other owners of beneficial interests in the Global Exchange Notes.
Investors in the Global Exchange Notes may hold their interests therein
directly through DTC, if they are Direct Participants in DTC, or indirectly
through organizations (such as Euroclear and CEDEL) which are Direct
Participants in DTC. Morgan Guaranty Trust Company of New York, Brussels office,
is the operator and depository of Euroclear, and Citibank, N.A., is the operator
and depository of CEDEL. Therefore, they will each be recorded on DTC's records
as the holders of all ownership interests held by them on behalf of Euroclear
and CEDEL, respectively. Euroclear and CEDEL must maintain on their own records
the ownership interests, and transfers of ownership interests by and between,
their own customers' securities accounts. DTC will not maintain such records.
All ownership interests in any Global Exchange Notes, including those of
customers' securities accounts held through Euroclear or CEDEL, may be subject
to the procedures and requirements of DTC.
The laws of some states in the United States require that certain persons
take physical delivery in definitive, certificated form, of securities that they
own. This may limit or curtail the ability to transfer beneficial interests in a
Global Exchange Note to such persons. Because DTC can act only on behalf of
Direct Participants, which in turn act on behalf of Indirect Participants and
others, the ability of a person having a beneficial interest in a Global
Exchange Note to pledge such interest to persons or entities that are not Direct
Participants in DTC, or to otherwise take actions in respect of such interests,
may be affected by the lack of physical certificates evidencing such interests.
For certain other restrictions on the transferability of the Exchange Notes see
"-- Transfers of Interests in Global Exchange Notes for Certificated Exchange
Notes."
EXCEPT AS DESCRIBED IN "TRANSFERS OF INTERESTS IN GLOBAL EXCHANGE NOTES FOR
CERTIFICATED EXCHANGE NOTES," OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL
EXCHANGE NOTES WILL NOT HAVE EXCHANGE NOTES REGISTERED IN THEIR NAMES, WILL NOT
RECEIVE PHYSICAL DELIVERY OF EXCHANGE NOTES IN CERTIFICATED FORM AND WILL NOT BE
CONSIDERED THE REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY
PURPOSE.
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Under the terms of the Indenture, the Issuer, the Subsidiary Guarantors and
the Trustee will treat the persons in whose names the Exchange Notes are
registered (including Exchange Notes represented by Global Exchange Notes) as
the owners thereof for the purpose of receiving payments and for any and all
other purposes whatsoever. Payments in respect of the principal, premium,
Liquidated Damages, if any, and interest on Global Exchange Notes registered in
the name of DTC or its nominee will be payable by the Trustee to DTC or its
nominee as the registered holder under the Indenture. Consequently, neither the
Issuer, any Subsidiary Guarantor, the Trustee nor any agent of the Issuer, any
Subsidiary Guarantor or the Trustee has or will have any responsibility or
liability for (i) any aspect of DTC's records or any Direct Participant's or
Indirect Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Exchange Notes or for maintaining,
supervising or reviewing any of DTC's records or any Direct Participant's or
Indirect Participant's records relating to the beneficial ownership interests in
any Global Exchange Note or (ii) any other matter relating to the actions and
practices of DTC or any of its Direct Participants or Indirect Participants.
DTC has advised the Issuer that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Exchange Notes is to credit the accounts of the relevant Direct Participants
with such payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Exchange Notes as
shown on DTC's records. Payments by Direct Participants and Indirect
Participants to the beneficial owners of the Exchange Notes will be governed by
standing instructions and customary practices between them and will not be the
responsibility of DTC, the Trustee, the Issuer or the Subsidiary Guarantors.
Neither the Issuer, the Subsidiary Guarantors nor the Trustee will be liable for
any delay by DTC or its Direct Participants or Indirect Participants in
identifying the beneficial owners of the Exchange Notes, and the Issuer, the
Subsidiary Guarantor and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee as the registered
owner of the Exchange Notes for all purposes.
The Global Exchange Notes will trade in DTC's Same-Day Funds Settlement
System and, therefore, transfers between Direct Participants in DTC will be
effected in accordance with DTC's procedures, and will be settled in immediately
available funds. Transfers between Indirect Participants (other than Indirect
Participants who hold an interest in the Exchange Notes through Euroclear or
CEDEL) who hold an interest through a Direct Participant will be effected in
accordance with the procedures of such Direct Participant but generally will
settle in immediately available funds. Transfers between and among Indirect
Participants who hold interests in the Exchange Notes through Euroclear and
CEDEL will be effected in the ordinary way in accordance with their respective
rules and operating procedures.
Cross-market transfers between Direct Participants in DTC, on the one hand,
and Indirect Participants who hold interests in the Exchange Notes through
Euroclear or CEDEL, on the other hand, will be effected by Euroclear's or
CEDEL's respective nominee through DTC in accordance with DTC's rules on behalf
of Euroclear or CEDEL; however, delivery of instructions relating to crossmarket
transactions must be made directly to Euroclear or CEDEL, as the case may be, by
the counterparty in accordance with the rules and procedures of Euroclear or
CEDEL and within their established deadlines (Brussels time for Euroclear and UK
time for CEDEL). Indirect Participants who hold interest in the Exchange Notes
through Euroclear and CEDEL may not deliver instructions directly to Euroclear's
or CEDEL's nominee. Euroclear or CEDEL will, if the transaction meets its
settlement requirements, deliver instructions to its respective nominee to
deliver or receive interests on Euroclear's or CEDEL's behalf in the relevant
Global Exchange Note in DTC, and make or receive payment in accordance with
normal procedures for same-day fund settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the Exchange Notes through Euroclear or
CEDEL purchasing an interest in a Global Exchange Note from a Direct Participant
in DTC will be credited, and any such crediting will be reported to Euroclear or
CEDEL during the European business day immediately following the settlement date
of DTC in New York. Although recorded in DTC's accounting records as of DTC's
settlement date in New York, Euroclear and CEDEL customers will not have access
to the cash amount credited to their accounts as a result of a sale of an
interest in a Global Exchange Note to a DTC Participant until the European
business day for Euroclear or CEDEL immediately following DTC's settlement date.
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DTC has advised the Issuer that it will take any action permitted to be
taken by a holder of Exchange Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Exchange Notes are
credited and only in respect of such portion of the aggregate principal amount
of the Exchange Notes to which such Direct Participant or Direct Participants
has or have given direction. However, if there is an Event of Default under the
Exchange Notes, DTC reserves the right to exchange Global Exchange Notes
(without the direction of one or more of its Direct Participants) for legended
Exchange Notes in certificated form, and to distribute such certificated forms
of Exchange Notes to its Direct Participants. See "-- Transfers of Interests in
Global Exchange Notes for Certificated Exchange Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
to facilitate transfers of interests in the Global Exchange Notes among Direct
Participants, including Euroclear and CEDEL, they are under no obligation to
perform or to continue to perform such procedures, and such procedures may be
discontinued at any time. None of the Issuer, the Subsidiary Guarantors, the
Initial Purchasers or the Trustee shall have any responsibility for the
performance by DTC, Euroclear or CEDEL or their respective Direct and Indirect
Participants of their respective obligations under the rules and procedures
governing any of their operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Issuer believes
to be reliable, but the Issuer takes no responsibility for the accuracy thereof.
TRANSFERS OF INTERESTS IN GLOBAL EXCHANGE NOTES FOR CERTIFICATED EXCHANGE
NOTES
An entire Global Exchange Note may be exchanged for definitive Exchange
Notes in registered, certificated form without interest coupons ("Certificated
Exchange Notes") if (i) DTC (x) notifies the Issuer that it is unwilling or
unable to continue as depositary for the Global Exchange Notes and the Issuer
thereupon fails to appoint a successor depositary within 90 days or (y) has
ceased to be a clearing agency registered under the Exchange Act, (ii) the
Issuer, at its option, notifies the Trustee in writing that it elects to cause
the issuance of Certificated Exchange Notes or (iii) there shall have occurred
and be continuing a Default or an Event of Default with respect to the Exchange
Notes. In any such case, the Issuer will notify the Trustee in writing that,
upon surrender by the Direct and Indirect Participants of their interest in such
Global Exchange Note, Certificated Exchange Notes will be issued to each person
that such Direct and Indirect Participants and the DTC identify as being the
beneficial owner of the related Exchange Notes.
Beneficial interests in Global Exchange Notes held by any Direct or
Indirect Participant may be exchanged for Certificated Exchange Notes upon
request to DTC, by such Direct Participant (for itself or on behalf of an
Indirect Participant), to the Trustee in accordance with customary DTC
procedures. Certificated Exchange Notes delivered in exchange for any beneficial
interest in any Global Exchange Note will be registered in the names, and issued
in any approved denominations, requested by DTC on behalf of such Direct or
Indirect Participants (in accordance with DTC's customary procedures).
Neither the Issuer, the Subsidiary Guarantors nor the Trustee will be
liable for any delay by the holder of any Global Exchange Note or DTC in
identifying the beneficial owners of Exchange Notes, and the Issuer and the
Trustee may conclusively rely on, and will be protected in relying on,
instructions from the holder of the Global Exchange Note or DTC for all
purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Exchange Notes
represented by the Global Exchange Notes (including principal, premium, if any,
interest and Liquidated Damages, if any) be made by wire transfer of immediately
available same day funds to the accounts specified by the holder of interests in
such Global Exchange Note. With respect to Certificated Exchange Notes, the
Issuer will make all payments of principal, premium, if any, interest and
Liquidated Damages, if any, by wire transfer of immediately available same day
funds to the accounts specified by the holders thereof or, if no such account is
specified, by mailing a check to each such holder's registered address. The
Issuer expects that secondary trading in the Certificated Exchange Notes will
also be settled in immediately available funds.
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CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the Voting Stock of a Person shall be
deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Issuer and its Subsidiaries taken as a
whole will be governed by the provisions of the Indenture described above under
the caption "-- Repurchase at the Option of Holders -- Change of Control" and/or
the provisions described above under the caption "-- Merger, Consolidation or
Sale of Assets" and not by the provisions of the Asset Sale covenant), and (ii)
the issue or sale by the Issuer or any of its Subsidiaries of Equity Interests
of any of the Issuer Subsidiaries, in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (a) that
have a fair market value in excess of $1.0 million or (b) for net proceeds in
excess of $1.0 million. Notwithstanding the foregoing, the following items shall
not be deemed to be Asset Sales: (i) a transfer of assets by the Issuer to a
Wholly Owned Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary to
the Issuer or to another Wholly Owned Restricted Subsidiary, (ii) an issuance of
Equity Interests by a Wholly Owned Restricted Subsidiary to the Issuer or to
another Wholly Owned Restricted Subsidiary, and (iii) a Restricted Payment that
is permitted by the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments."
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Borrowing Base" means, as of any date, an amount equal to the sum of (a)
85% of the face amount of all accounts receivable owned by the Issuer and its
Subsidiaries as of such date that are not more than 60 days past due, and (b)
50% of the book value of all inventory owned by the Issuer and its Subsidiaries
as of such date, calculated on a consolidated basis and in accordance with GAAP.
To the extent that information is not available as to the amount of accounts
receivable or inventory as of a specific date, the Issuer may utilize the most
recent available information for purposes of calculating the Borrowing Base.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership (whether general
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or limited) or membership interests and (iv) any other interest or participation
that confers on a Person the right to receive a share of the profits and losses
of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of deposit
and eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case with any domestic commercial bank
having capital and surplus in excess of $500 million and a Thompson Bank Watch
Rating of "B" or better, (iv) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clauses (ii)
and (iii) above entered into with any financial institution meeting the
qualifications specified in clause (iii) above, (v) commercial paper having the
highest rating obtainable from Moody's Investors Service, Inc. or Standard &
Poor's Corporation and in each case maturing within six months after the date of
acquisition, (vi) money market funds at least 95% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (i) - (v) of this
definition, and (vii) with respect to Investments by Foreign Subsidiaries, the
local currency of such Foreign Subsidiaries.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations, but excluding
amortization of debt issuance costs), to the extent that any such expense was
deducted in computing such Consolidated Net Income, plus (iv) depreciation,
amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) and other non-cash expenses (excluding any such non-cash expense to the
extent that it represents an accrual of or reserve for cash expenses in any
future period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Subsidiaries for such period to the extent that
such depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income, minus (v) non-cash items increasing such
Consolidated Net Income for such period, in each case, on a consolidated basis
and determined in accordance with GAAP. Notwithstanding the foregoing, the
provision for taxes on the income or profits of, and the depreciation and
amortization and other non-cash expenses of, a Subsidiary of the referent Person
shall be added to Consolidated Net Income to compute Consolidated Cash Flow only
to the extent that a corresponding amount would be permitted at the date of
determination to be dividended to the Issuer by such Subsidiary without prior
governmental approval (that has not been obtained), and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Subsidiary
thereof that is a Guarantor, (ii) the Net Income of any Restricted Subsidiary
shall be excluded to the extent that the declaration or payment of dividends or
similar distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement,
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instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders, (iii) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded, (iv) the
cumulative effect of a change in accounting principles shall be excluded, and
(v) the Net Income (but not loss) of any Unrestricted Subsidiary shall be
excluded, whether or not distributed to the Issuer or one of its Subsidiaries.
"Credit Agreement" means that certain Third Amended and Restated Revolving
Credit Agreement, dated as of January 15, 1998, as amended, by and between the
Issuer and Comerica Bank, providing for up to $50.0 million of revolving credit
borrowings and $10.0 million of term Indebtedness, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced or refinanced from time to time.
"Credit Facilities" means, with respect to the Issuer, one or more debt
facilities (including, without limitation, the Credit Agreement) or commercial
paper facilities with banks or other institutional lenders providing for
revolving credit loans, term loans, receivables financing (including through the
sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
in whole or in part from time to time. Indebtedness under Credit Facilities
outstanding on the Issue Date shall be deemed to have been incurred on such date
in reliance on the exception provided by clause (i) of the definition of
Permitted Indebtedness.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) any Indebtedness outstanding under the
Credit Agreement or otherwise owed by the Issuer or any of its Subsidiaries to
Comerica Bank and (ii) any other Senior Debt permitted under the Indenture the
principal amount of which is, on the date of designation, $25 million or more
and that has been designated by the Issuer as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Exchange Notes mature; provided, however, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require the Issuer to repurchase such Capital Stock upon the occurrence
of a Change of Control or an Asset Sale shall not constitute Disqualified Stock
if the terms of such Capital Stock provide that the Issuer may not repurchase or
redeem any such Capital Stock pursuant to such provisions unless such repurchase
or redemption complies with the covenant described above under the caption "--
Certain Covenants -- Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Issuer and its
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the Issue Date, until such amounts are repaid including, without limitation,
a $6.1 million reimbursement obligation to Comerica Bank by Rochester Gear, Inc.
and the Issuer's guaranty thereof.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations, but excluding
amortization of debt issuance costs) and (ii) the consolidated interest of such
Person and its Restricted Subsidiaries that was capitalized during such period,
and (iii) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or
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one of its Restricted Subsidiaries or secured by a Lien on assets of such Person
or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is
called upon) and (iv) the product of (a) all dividend payments, whether or not
in cash, on any series of preferred stock of such Person or any of its
Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests of the Issuer (other than Disqualified Stock)
or to the Issuer or a Restricted Subsidiary of the Issuer, times (b) a fraction,
the numerator of which is one and the denominator of which is one minus the then
current combined federal, state and local statutory tax rate of such Person,
expressed as a decimal, in each case, on a consolidated basis and in accordance
with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the referent
Person or any of its Restricted Subsidiaries incurs, assumes, Guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues or
redeems preferred stock subsequent to the commencement of the period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio is
made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect (to the extent permitted by Regulation S-X)
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by the Issuer or any of its Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income, and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Restricted Subsidiaries
following the Calculation Date.
"Foreign Subsidiary" means any Subsidiary not organized and validly
existing under the laws of the United States or any state thereof or the
District of Columbia.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements; (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates, and (iii) agreements or arrangements designed to protect such Person
against fluctuations in the value of foreign currency.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or
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representing any Hedging Obligations, excepting from the foregoing any such
balance that constitutes an accrued expense or trade payable, if and to the
extent any of the foregoing (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all Indebtedness of others secured
by a Lien on any asset of such Person (whether or not such Indebtedness is
assumed by such Person) and, to the extent not otherwise included, the Guarantee
by such Person of any indebtedness of any other Person. The amount of any
Indebtedness outstanding as of any date shall be (i) the accreted value thereof,
in the case of any Indebtedness issued with original issue discount, and (ii)
the principal amount thereof, together with any interest thereon that is more
than 30 days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Issuer or any Subsidiary of the Issuer sells or otherwise disposes of any
Equity Interests of any direct or indirect Subsidiary of the Issuer such that,
after giving effect to any such sale or disposition, such Person is no longer a
Subsidiary of the Issuer, the Issuer shall be deemed to have made an Investment
on the date of any such sale or disposition equal to the fair market value of
the Equity Interests of such Subsidiary not sold or disposed of in an amount
determined as provided in the final paragraph of the covenant described above
under the caption "-- Certain Covenants -- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Issuer or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Senior Debt
secured by a Lien on the asset or assets that were the subject of such Asset
Sale and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Issuer
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) as to which the lenders have
been notified in writing that they will not have any recourse to the stock or
assets of the Issuer or any of its Restricted Subsidiaries.
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"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means (a) any business in which the Issuer and its
Subsidiaries were engaged on the Issue Date or any reasonable extension or
expansion of such businesses and (b) any business similar or related to the
manufacture, design, marketing, distribution or resale of automotive parts or
plastic products, parts, components or assemblies.
"Permitted Investments" means (a) any Investment in the Issuer or in a
Wholly Owned Restricted Subsidiary of the Issuer that is a Subsidiary Guarantor;
(b) any Investment in Cash Equivalents; (c) any Investment by the Issuer or any
Restricted Subsidiary of the Issuer in a Person, if as a result of such
Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary of the
Issuer and a Subsidiary Guarantor or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Issuer or a Wholly Owned Restricted
Subsidiary of the Issuer that is a Subsidiary Guarantor and that is engaged in
the same or a similar line of business as the Issuer and its Subsidiaries were
engaged in on the date of the Indenture; (d) any Investment made as a result of
the receipt of non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under the caption "--
Repurchase at the Option of Holders -- Asset Sales"; (e) any acquisition of
assets solely in exchange for the issuance of Equity Interests (other than
Disqualified Stock) of the Issuer; (f) Investments in Unrestricted Subsidiaries,
when taken together with all other Investments made pursuant to this clause (f)
that are at the time outstanding, having an aggregate fair market value
(measured on the date such Investment was made without giving effect to
subsequent changes in value) not to exceed $15.0 million; and (g) other
Investments in any Person having an aggregate fair market value (measured on the
date each such Investment was made and without giving effect to subsequent
changes in value), when taken together with all other Investments made pursuant
to this clause (g) that are at the time outstanding, not to exceed $10 million.
"Permitted Junior Securities" means Equity Interests in the Issuer or any
Subsidiary Guarantor or debt securities that are subordinated to all Senior Debt
(and any debt securities issued in exchange for Senior Debt) to substantially
the same extent as, or to a greater extent than, the Exchange Notes are
subordinated to Senior Debt pursuant to Article 10 of the Indenture.
"Permitted Liens" means (i) Liens on assets of the Issuer or any of its
Subsidiaries securing Indebtedness under Credit Facilities that was permitted by
the terms of the Indenture to be incurred; (ii) Liens in favor of the Issuer;
(iii) Liens on property of a Person existing at the time such Person is merged
into or consolidated with the Issuer or any Subsidiary of the Issuer; provided
that such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Issuer; (iv) Liens on property existing at
the time of acquisition thereof by the Issuer or any Subsidiary of the Issuer,
provided that such Liens were in existence prior to the contemplation of such
acquisition; (v) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (v) Liens to secure Indebtedness
(including Capital Lease Obligations) permitted by clause (iv) of the second
paragraph of the covenant entitled "Incurrence of Indebtedness and Issuance of
Preferred Stock" covering only the assets acquired with such Indebtedness; (vi)
Liens existing on the date of the Indenture; (vii) Liens for taxes, assessments
or governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor;
(viii) Liens on assets of the Issuer or any Restricted Subsidiary to secure
Senior Debt that was permitted by the Indenture to be incurred; (ix) Liens on
assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of
Unrestricted Subsidiaries; (x) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (xi) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Issuer or any of the Restricted Subsidiaries; (xii)
Liens encumbering property or assets under construction arising from progress or
partial payments by a customer of the Issuer or its Restricted
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Subsidiaries relating to such property or assets; (xiii) any interest or title
of a lessor in the property subject to any Capitalized Lease or operating lease;
(xiv) Liens arising from filing Uniform Commercial Code financing statements
regarding leases; (xv) Liens in favor of customs and revenue authorities arising
as a matter of law to secure payment of customs duties in connection with the
importation of goods; (xvi) Liens encumbering customary initial deposits and
margin deposits, and other Liens that are either within the general parameters
customary in the industry and incurred in the ordinary course of business, in
each case securing Hedging Obligations; (xvii) Liens arising out of conditional
sale, title retention, consignment or similar arrangements for the sale of goods
entered into by the Issuer or any of the Restricted Subsidiaries in the ordinary
course of business in accordance with the past practices of the Issuer and the
Restricted Subsidiaries prior to the Issue Date; and (xviii) Liens incurred in
the ordinary course of business of the Issuer or any Subsidiary of the Issuer
with respect to obligations that do not exceed $5.0 million at any one time
outstanding and that (a) are not incurred in connection with the borrowing of
money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (b) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of business by the Issuer or such Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Issuer
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Issuer or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); provided that: (i) the principal amount
(or accreted value, if applicable) of such Permitted Refinancing Indebtedness
does not exceed the principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses incurred
in connection therewith); (ii) such Permitted Refinancing Indebtedness has a
final maturity date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Exchange Notes, such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and is subordinated in right of
payment to, the Exchange Notes on terms at least as favorable to the Holders of
Exchange Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the Issuer or by the
Subsidiary who is the obligor on the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Debt" means (i) all Indebtedness outstanding under Credit
Facilities and all Hedging Obligations with respect thereto, (ii) any other
Indebtedness permitted to be incurred by the Issuer or any Subsidiary Guarantor
(including any Indebtedness under Credit Facilities or Hedging Obligations), as
applicable, under the terms of the Indenture, unless the instrument under which
such Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Exchange Notes and (iii) all Obligations
with respect to the foregoing. Notwithstanding anything to the contrary in the
foregoing, Senior Debt will not include (v) any liability for federal, state,
local or other taxes owed or owing by the Issuer, (w) any Indebtedness of the
Issuer to any of its Subsidiaries or other Affiliates, (x) any Indebtedness of
the Company which is classified as nonrecourse in accordance with GAAP or any
secured claim arising in respect thereof by reason of the application of section
1111(b)(1) of the United States bankruptcy code, (y) any trade payables or (z)
any Indebtedness that is incurred in violation of the Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original
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documentation governing such Indebtedness, and shall not include any contingent
obligations to repay, redeem or repurchase any such interest or principal prior
to the date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantor" means each of (i) Grand Machining Company, Deco
Technologies, Inc., Deco International, Inc., Turn-Matic, Inc., Rochester Gear,
Inc., and Plastronics Plus, Inc., and (ii) any other Subsidiary that executes a
Subsidiary Guarantee in accordance with the provisions of the Indenture, and
their respective successors and assigns.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
resolution; but only to the extent that such Subsidiary: (a) has no Indebtedness
other than Non-Recourse Debt; (b) is not party to any agreement, contract,
arrangement or understanding with the Issuer or any Restricted Subsidiary of the
Issuer unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Issuer or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of the Issuer; (c) is a Person with respect to which neither the
Issuer nor any of its Restricted Subsidiaries has any direct or indirect
obligation (x) to subscribe for additional Equity Interests or (y) to maintain
or preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; (d) has not guaranteed or otherwise
directly or indirectly provided credit support for any Indebtedness of the
Issuer or any of its Restricted Subsidiaries; and (e) has at least one director
on its board of directors that is not a director or executive officer of the
Issuer or any of its Restricted Subsidiaries and has at least one executive
officer that is not a director or executive officer of the Issuer or any of its
Restricted Subsidiaries. Any such designation by the Board of Directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments." If, at any time, any Unrestricted Subsidiary
would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it
shall thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred
by a Restricted Subsidiary of the Issuer as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the covenant
described under the caption "Incurrence of Indebtedness and Issuance of
Preferred Stock," the Issuer shall be in default of such covenant). The Board of
Directors of the Issuer may at any time designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided that such designation shall be deemed to be
an incurrence of Indebtedness by a Restricted Subsidiary of the Issuer of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if (i) such Indebtedness is permitted under the covenant
described under the caption "-- Certain Covenants -- Incurrence of Indebtedness
and Issuance of Preferred Stock," calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference period,
and (ii) no Default or Event of Default would be in existence following such
designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest
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one-twelfth) that will elapse between such date and the making of such payment,
by (ii) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Subsidiaries of
such Person and one or more Wholly Owned Subsidiaries of such Person.
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DESCRIPTION OF NOTES
The Notes evidence the same indebtedness as that which will be evidenced by
the Exchange Notes and are entitled to the benefits of the Indenture. The form
and terms of the Notes are the same as the form and terms of the Exchange Notes
except that none of the Notes was registered under the Securities Act.
Therefore, the Notes may not be offered or sold within the United States or to,
or for the account or benefit of, U.S. persons except pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act. Accordingly, the Notes bear legends restricting the transfer
thereof. In addition, with certain exceptions, the Notes may not be sold or
transferred to, or acquired on behalf of, any pension or welfare plan (as
described in Section 3 of the Employee Retirement Income Security Act of 1974).
For a description of the terms of the Exchange Notes, see "Description of
Exchange Notes."
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Issuer, the Subsidiary Guarantors and the Initial Purchasers entered
into the Registration Rights Agreement, pursuant to which the Issuer and
Subsidiary Guarantors agreed to file the Registration Statement with the
Commission within 60 days of the Issue Date and use their respective best
efforts to have it declared effective at the earliest possible time. The Issuer
and the Subsidiary Guarantors also agreed to use their best efforts to cause the
Registration Statement to be effective continuously, to keep the Exchange Offer
open for a period of not less than 20 business days and cause the Exchange Offer
to be consummated no later than the 30th business day after it is declared
effective by the Commission. Pursuant to the Exchange Offer, certain Holders of
Notes which constitute Transfer Restricted Securities may exchange their
Transfer Restricted Securities for registered Exchange Notes. To participate in
the Exchange Offer, each Holder must make the representations and take the other
actions described under "The Exchange Offer."
If (i) the Exchange Offer is not permitted by applicable law or Commission
policy or (ii) any Holder of Notes which are Transfer Restricted Securities
notifies the Issuer during the pendency of, or prior to the 20th business day
following the consummation of, the Exchange Offer that (a) it is or was, as the
case may be, prohibited by law or Commission policy from participating in the
Exchange Offer, (b) it may not resell the Exchange Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus, and this
Prospectus is not appropriate or available for such resales by it, or (c) it is
a broker-dealer and holds Notes acquired directly from the Issuer or any of the
Issuer's affiliates, the Issuer and the Subsidiary Guarantors will file with the
Commission a Shelf Registration Statement to register for public resale the
Transfer Restricted Securities held by any such Holder who provides the Issuer
with certain information for inclusion in the Shelf Registration Statement.
For the purposes of the Registration Rights Agreement, "Transfer Restricted
Securities" means (i) each Note and the related Subsidiary Guarantees until the
earliest to occur of (a) the date on which such Note is exchanged in the
Exchange Offer for an Exchange Note which is entitled to be resold to the public
by the Holder thereof without complying with the prospectus delivery
requirements of the Securities Act, (b) the date on which such Note has been
disposed of in accordance with the Shelf Registration Statement, or (c) the date
on which such Note is distributed to the public pursuant to Rule 144 under the
Securities Act and (ii) each Exchange Note acquired by a Broker-Dealer for its
own account as a result of market making or other trading activities until the
date on which such Exchange Note is disposed of by a Broker-Dealer pursuant to
the "Plan of Distribution" contemplated by this Prospectus (including delivery
of this Prospectus).
The Registration Rights Agreement provides that (i) if the Issuer or the
Subsidiary Guarantors fail to file a registration statement relating to the
Exchange Offer with the Commission on or prior to the 60th day after the Issue
Date (which requirement has been satisfied by filing the Registration
Statement), (ii) if the Registration Statement is not declared effective by the
Commission on or prior to the 135th day after the Issue Date, (iii) if the
Exchange Offer is not consummated on or before the 30th business day after the
Registration Statement is declared effective, (iv) if obligated to file the
Shelf Registration Statement and the Issuer and the Subsidiary Guarantors fail
to file the Shelf Registration Statement with the Commission on or prior to the
30th day after such filing obligation arises, (v) if obligated to file a Shelf
Registration Statement and the Shelf Registration Statement is not declared
effective on or prior to the 60th day after the obligation to file a Shelf
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Registration Statement arises, or (vi) if the Registration Statement or the
Shelf Registration Statement, as the case may be, is declared effective but
thereafter ceases to be effective or useable in connection with resales of the
Transfer Restricted Securities, for such time of non-effectiveness or
non-usability (each, a "Registration Default"), the Issuer and the Subsidiary
Guarantors agree to pay to each Holder of Transfer Restricted Securities
affected thereby liquidated damages ("Liquidated Damages") in an amount equal to
$0.05 per week per $1,000 in principal amount of Transfer Restricted Securities
held by such Holder for each week or portion thereof that the Registration
Default continues for the first 90 day period immediately following the
occurrence of such Registration Default. The amount of the Liquidated Damages
shall increase by an additional $0.05 per week per $1,000 in principal amount of
Transfer Restricted Securities with respect to each subsequent 90 day period
until all Registration defaults have been cured, up to a maximum amount of
Liquidated Damages of $0.50 per week per $1,000 in principal amount of Transfer
Restricted Securities. The Issuer and the Subsidiary Guarantors shall not be
required to pay Liquidated Damages for more than one Registration Default at any
given time. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
All accrued Liquidated Damages shall be paid by the Issuer or the
Subsidiary Guarantors to Holders entitled thereto by wire transfer to the
accounts specified by them or by mailing checks to their registered address if
no such accounts have been specified.
DESCRIPTION OF OTHER DEBT
SENIOR CREDIT FACILITY
The Issuer has entered into a Third Amended and Restated Revolving Credit
Agreement ("Senior Credit Facility") with Comerica Bank ("Comerica"). The Senior
Credit Facility provides for both a revolving credit facility, letters of credit
and a term loan.
Revolving Credit Facility. The Senior Credit Facility provides for a
revolving credit facility in the amount of $50.0 million, less the amount of
letters of credit outstanding under the Senior Credit Facility. The revolving
credit facility matures on February 28, 2001. Amounts outstanding bear interest
at an interest rate equal to, at the option of the Issuer, either (A) the
greater of (i) the prime rate of Comerica and (ii) a designated federal funds
rate plus 1.0%, and (B) a reserve adjusted eurodollar rate plus a margin
determined by reference to the ratio of the Company's Funded Debt to EBITDA,
which margin will not be less than 0.5% nor greater than 2.5%.
Letters of Credit. The Senior Credit Facility also provides for the
issuance of letters of credit by Comerica at the request of the Issuer up to an
aggregate amount of $3.0 million.
Term Loan Facility. The Senior Credit Facility also provides for a term
loan of $10.0 million, of which $10.0 million in principal was outstanding as of
January 31, 1998. The term loan is payable in monthly principal installments of
$166,667 with the first monthly principal installment payable in June 1998. The
term loan matures on May 10, 2003 and bears interest at 7.85%.
Security. All indebtedness owed Comerica by the Issuer is secured by all or
substantially all of non-real estate assets of the Issuer and its domestic
subsidiaries and is also secured by the facilities of Rochester Gear, Inc.
("Rochester Gear") located in Clifford, Michigan and Oakland, Michigan. All
domestic subsidiaries of the Issuer have guaranteed the payment of such
indebtedness. Pursuant to the Senior Credit Facility, Comerica has the right at
any time to require the Issuer and each of its present and future subsidiaries
to grant to Comerica a lien on any real and personal property on which it does
not then have a lien. The Issuer is also required to cause any future
subsidiaries to guaranty all indebtedness owed to Comerica by the Issuer.
Covenants. The Senior Credit Facility contains a number of covenants that,
among other things, restrict the ability of the Issuer and its subsidiaries to
dispose of or acquire assets, incur additional indebtedness, prepay other
indebtedness, amend certain debt instruments (including without limitation the
Indenture), pay dividends or redeem stock, merge, consolidate, issue guarantees,
create liens on assets, enter into negative pledge agreements and make
investments, and which otherwise restrict certain corporate activities. In
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addition, the Senior Credit Facility requires that the Issuer and its
subsidiaries on a consolidated basis comply with certain financial covenants.
The amount the Company can actually borrow under the Senior Credit Facility at
any given time will be dependent upon its performance as measured by such
covenants.
The Senior Credit Facility requires the Company to have Net Worth not less
than the Base Net Worth Amount as of the last day of each fiscal quarter,
beginning January 31, 1998. The Base Net Worth Amount for the January 31, 1998
measurement is equal to $22.5 million. The Base Net Worth Amount is increased on
the last day of each subsequent fiscal quarter by an amount equal to one-half of
the Company's net income for such fiscal quarter. Once increased, the Base Net
Worth Amount does not decrease. "Net Worth" means an amount computed in
accordance with generally accepted accounting principles consistently applied by
subtracting total liabilities from total assets, but adjusted to exclude the
following, to the extent such items impact the Company's financial statements
after February 10, 1998: (i) charges related to legal proceedings, (ii) charges
related to restructuring activities, (iii) gains or losses on sales of
businesses or operations and (iv) income or losses from divested or discontinued
operations.
The Senior Credit Facility also requires the Company to have as of the last
day of each fiscal quarter for the Applicable Measuring Period ending on such
date, commencing April 30, 1998, a ratio of EBITDA less capital expenditures to
principal and interest payments payable with respect to any indebtedness of the
Company (including capital leases) of not less than 1.5 to 1.0.
The Applicable Measuring Period for the last day of each fiscal quarter is
the four fiscal quarters ending on such date, except that (a) the Applicable
Measuring Period for April 30, 1998 is the three-month period then ending, (b)
the Applicable Measuring Period for July 31, 1998 is the six-month period then
ending, and (c) the Applicable Measuring Period for October 31, 1998 is the
nine-month period then ending.
Further, the Senior Credit Facility requires the Company to have, as of the
end of each fiscal quarter, commencing on April 30, 1998, a ratio of Funded Debt
to Total Liabilities plus Net Worth of not more than (a) .85 to 1.0 as of the
end of each fiscal quarter ending before October 31, 1998, (b) .80 to 1.0 as of
the end of each fiscal quarter ending on or after October 31, 1998 and before
October 31, 1999, and (c) .75 to 1.0 as of the end of each fiscal quarter ending
on or after October 31, 1999. "Funded Debt" means the Company's indebtedness for
borrowed money and the principal component of its capital lease obligations,
less cash and cash equivalents to the extent exceeding $2.0 million. "Total
Liabilities" means all liabilities of the Company as determined in accordance
with generally accepted accounting principles consistently applied, less cash
and cash equivalents to the extent exceeding $2.0 million.
Additionally, the Senior Credit Facility requires the Company to have, as
of the end of each fiscal quarter, commencing on April 30, 1998, a ratio of
Funded Debt as of such date to EBITDA for the Applicable Measuring Period of not
more than (a) 6.0 to 1.0 as of the end of each fiscal quarter ending before
October 31, 1998, (b) 5.5 to 1.0 as of the end of each fiscal quarter ending on
or after October 31, 1998 and before October 31, 1999, and (c) 4.5 to 1.0 for
all fiscal quarters ending on or after October 31, 1999. The EBITDA used in
calculating this ratio is (a) for the fiscal quarter ending April 30, 1998, four
times the Company's EBITDA for that quarter, (b) for the fiscal quarter ending
July 31, 1997, twice the Company's EBITDA for the six months then ended, (c) for
the quarter ending October 31, 1998, one and one-third of the Company's EBITDA
for the nine months then ended, and (d) for each subsequent fiscal quarter, the
Company's EBITDA for the four quarters then ended.
For purposes of these calculations, EBITDA will be deemed to include an
assumed amount of EBITDA for Deco and Turn-Matic for the period from February 1,
1998 through the date they were actually acquired by the Company.
Events of Default. The Senior Credit Facility contains customary events of
default relating to nonpayment of principal or interest, material inaccuracy of
representations and warranties, violation of covenants, cross-default to other
indebtedness, certain events of bankruptcy and insolvency, judgments in an
aggregate amount greater than $100,000 against the Issuer or its subsidiaries,
invalidity of any guarantee or security interest, the revocation of any guaranty
or a change in control of the Issuer.
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ROCHESTER GEAR BOND INDEBTEDNESS
The Michigan Strategic Fund ("MSF") issued its limited obligation refunding
revenue bonds ("Bonds") in the amount of $6.1 million in 1995 for the benefit of
Rochester Gear. Rochester Gear is obligated to pay to the MSF all amounts
necessary to pay all principal, interest, purchase price and premium, if any, on
the Bonds.
Letter of Credit. Rochester Gear has supplied a letter of credit ("Letter
of Credit") on which the trustee for the holders of the Bonds can draw to pay
principal of the Bonds, principal and interest on Bonds tendered for purchase
and an amount equal to 35 days interest. The Letter of Credit presently is
issued by Comerica. Rochester Gear has entered into a reimbursement agreement
with Comerica (the "Reimbursement Agreement"), pursuant to which it has agreed
to reimburse Comerica for all payments made by Comerica under the Letter of
Credit, to pay it an annual fee equal to 1.0% of the amount of the Letter of
Credit, and to indemnify Comerica from any and all losses, costs, and damages
which it may suffer in connection with the Letter of Credit. These obligations
of Rochester Gear are secured by a mortgage on its manufacturing facilities in
Clifford, Michigan, and Oakland, Michigan and by substantially all of its other
assets. The Issuer also has guaranteed the obligations of Rochester Gear to
Comerica, which guarantee is secured by substantially all the assets of the
Issuer (other than real estate) and is indirectly secured by all assets of its
domestic Subsidiaries (other than real estate).
Interest Rate. The Bonds may bear interest at different interest rates
during applicable interest periods, each of which interest rate is equal to the
interest rate determined by a remarketing agent as being the lowest rate of
interest which would permit the Bonds to be remarketed at par on the first day
of the applicable interest period.
Purchase of Bonds. Each Bondholder has the right to cause the purchase of
his interest in the Bonds and, to the extent that such Bonds are not remarketed,
the trustee for the Bondholders is required to draw on the Letter of Credit to
pay the purchase price for the tendered Bonds. If the payment of such purchase
price is not available under the Letter of Credit, Rochester Gear is obligated
to fund the payment of the purchase price.
The Bonds are subject to mandatory purchase upon the occurrence of certain
events, which events include the failure of Rochester Gear to supply a new
letter of credit, to obtain an extension of the then outstanding letter of
credit, or to provide for an alternative credit facility meeting certain
requirements 25 days prior to the date that the then outstanding letter of
credit expires, terminates, or is released, and failure by the issuer of the
Letter of Credit, or a replacement letter of credit, to maintain a specified
creditworthiness rating.
Events of Default. The indenture pursuant to which the Bonds were issued
contains various customary events of default, including events relating to
nonpayment of principal, interest, fees, or the purchase price of a Bond,
violations of covenants, the occurrence of an event of default under the
Reimbursement Agreement and certain events of bankruptcy and insolvency.
The Reimbursement Agreement contains various events of default that are
customary in loan agreements, including events relating to nonpayment of any
moneys due Comerica under the Reimbursement Agreement or otherwise, material
inaccuracy of representations and warranties, violation of covenants, cross-
default to other indebtedness, uninsured judgments in the aggregate over
$250,000, material change in ownership of Rochester Gear and failure to maintain
certain employee benefit plans or default in performing requirements in
connection therewith.
CERTAIN FEDERAL TAX CONSIDERATIONS FOR FOREIGN PERSONS
THIS SUMMARY IS OF A GENERAL NATURE AND IS INCLUDED HEREIN SOLELY FOR
INFORMATIONAL PURPOSES. IT IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED AS
BEING, LEGAL OR TAX ADVICE. NO REPRESENTATION WITH RESPECT TO THE CONSEQUENCES
TO ANY PARTICULAR PURCHASER OF THE EXCHANGE NOTES IS MADE. PROSPECTIVE
PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR
PARTICULAR CIRCUMSTANCES.
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The following discussion is a summary of certain United States federal
income and estate tax consequences of the ownership and disposition of the
Exchange Notes by a Foreign Person (as hereinafter defined), based upon current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
judicial decisions, and administrative interpretations, all of which are subject
to change at any time by legislative, judicial or administrative action. Any
such changes may be applied retroactively in a manner that could adversely
affect a holder of the Exchange Notes. There can be no assurance that the
Internal Revenue Service (the "IRS") will not challenge the conclusions stated
below, and no ruling from the IRS has been or will be sought on any of the
matters discussed below.
The following discussion does not purport to be a complete analysis of all
the potential federal income tax effects relating to the ownership and
disposition of the Exchange Notes by Foreign Persons or any other person, and,
without limiting the generality of the foregoing, this summary does not address
the effect of any special rules applicable to certain types of purchasers
(including dealers in securities, insurance companies, financial institutions,
tax-exempt entities, and persons who hold Exchange Notes as part of a straddle,
hedge, or conversion transaction). This discussion is limited to Foreign Persons
other than former United States citizens described in Section 877(a) of the Code
or former residents of the United States described in Sections 877(e) or
7701(b)(10) of the Code and is limited to Foreign Persons who hold the Exchange
Notes as capital assets within the meaning of Section 1221 of the Code. This
discussion does not address the effect of any state, local, or foreign tax laws.
Holders of Exchange Notes who are Foreign Persons are urged to consult their own
tax advisors regarding the specific tax consequences to them of owning and
disposing of Exchange Notes.
CERTAIN U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO FOREIGN PERSONS
For purposes of this discussion, the term "U.S. Person" means (i) an
individual who is a citizen or resident of the United States, (ii) a corporation
or partnership created or organized in or under the laws of the United States or
any state thereof, (iii) an estate the income of which is subject to United
States federal income taxation regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. The term "Foreign
Person" means a person other than a U.S. Person.
Any interest or Liquidation Damages earned on an Exchange Note by a holder
who is a Foreign Person will be considered "portfolio interest" and will not be
subject to United States federal income tax, and will not be subject to United
States tax withholding (except for "backup withholding" in the circumstances
described below), if:
(1) such Foreign Person is neither (i) a "controlled foreign
corporation" that is related to the Issuer as described in Section
881(c)(3)(C) of the Code, (ii) a bank that has purchased Exchange Notes
pursuant to an extension of credit made in the ordinary course of its trade
or business, nor (iii) a person who owns, directly or under the attribution
rules of Section 871(h)(3)(C) of the Code, 10% or more of the voting power
in the Issuer;
(2) the person who would otherwise be required to withhold tax from
payments of such interest (the "withholding agent") is furnished an IRS
Form W-8 (or equivalent), signed under penalties of perjury, identifying
the beneficial owner of the Note and stating that the beneficial owner of
the Exchange Note is a Foreign Person; and
(3) the interest is not effectively connected with the conduct of a
trade or business within the United States by the Foreign Person.
Any interest or Liquidated Damages (other than "portfolio interest") earned
on an Exchange Note by a Foreign Person will be subject to United States federal
income tax and withholding at a rate of 30% (or at a lower rate under an
applicable tax treaty) if this interest or Liquidated Damages is not effectively
connected with the conduct of a trade or business within the United States by
this Foreign Person.
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Any interest or Liquidated Damages earned on an Exchange Note, and any gain
realized on a sale or exchange (including a redemption) of an Exchange Note,
that is effectively connected with the conduct of a trade or business within the
United States by the Foreign Person will be subject to United States federal
income tax at regular graduated rates (and, if the Foreign Person is a
corporation, may also be subject to a United States branch profits tax). Such
income will not be subject to United States income tax withholding, however, if
the Foreign Person furnishes the proper certificate to the withholding agent.
Any gain realized by a Foreign Person on a sale or exchange (including a
redemption) of an Exchange Note will not be subject to United States federal
income tax or withholding if (i) the gain is not effectively connected with the
conduct of a trade or business within the United States by the Foreign Person,
and (ii) in the case of a Foreign Person who is an individual, such individual
is not present in the United States for 183 days or more in the taxable year of
the sale or exchange, or the individual does not have a "tax home" in the United
States and the gain is not attributable to an office or other fixed place of
business maintained in the United States by the individual.
For United States estate tax purposes, the gross estate of an individual
who is not a U.S. citizen or resident (as specially defined for United States
estate tax purposes) and who holds an Exchange Note at the time of his death is
not deemed to include such Exchange Note if the interest thereon constitutes
"portfolio interest" (without regard to whether the "portfolio interest"
certification requirements are satisfied).
BACKUP WITHHOLDING AND INFORMATION REPORTING
Information reporting on IRS Form 1099 and backup withholding will not
apply to payments made by the Issuer or any agent thereof to a holder of an
Exchange Note if the holder has furnished a certification under penalties of
perjury that it is a Foreign Person, or has otherwise demonstrated that it
qualifies for an applicable exemption, provided that neither the Issuer nor such
agent has actual knowledge to the contrary. The interest and any Liquidated
Damages earned by a Foreign Person will generally be reported, however, by the
Issuer on IRS Form 1042S.
If a Foreign Person sells an Exchange Note through a United States office
of a broker, the broker is required to file an information report and is
required to withhold 31% of the sale proceeds unless the Foreign Person
certifies under penalties of perjury its non-United States status (and the payor
does not have actual knowledge to the contrary) or otherwise establishes an
exemption. If a Foreign Person sells an Exchange Note through a foreign office
of a broker, backup withholding is not required; but information reporting is
required if the broker does not have documentary evidence that the holder is a
Foreign Person and if (i) the broker is a U.S. Person, (ii) the broker is a
"controlled foreign corporation" (as defined in Section 957 of the Code), or
(iii) the broker derives 50% or more of its gross income for a specified three
year period from the conduct of a trade or business in the United States.
Any amount withheld from payment to a holder under the backup withholding
rules will generally be allowed as a credit against such holder's United States
federal income tax liability, if any, and may entitle such holder to a refund,
provided that the required information is furnished to the IRS.
NEW FINAL REGULATIONS
Recently, the U.S. Treasury Department has promulgated final regulations
regarding the withholding and information reporting rules discussed above. In
general, the final regulations do not significantly alter the substantive
withholding and information reporting requirements but unify current
certification procedures and forms and clarify reliance standards. Special rules
apply which permit the shifting of primary responsibility for withholding to
certain financial intermediaries acting on behalf of beneficial owners. The
final regulations are generally effective for payments made after December 31,
1998, subject to certain transition rules. Foreign Persons are urged to consult
their own tax advisors with respect to these final regulations.
114
<PAGE> 120
PLAN OF DISTRIBUTION
Any broker or dealer registered under the Exchange Act (a "Broker-Dealer")
who holds Transfer Restricted Securities that were acquired for the account of
such Broker-Dealer as a result of market-making activities or other trading
activities (other than Notes acquired from the Issuer or any Affiliate of the
Company) may exchange such Transfer Restricted Securities pursuant to the
Exchange Offer. Each Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by any Broker-Dealer in connection
with resales of Exchange Notes received in exchange for Notes where such Notes
were acquired as a result of market-making activities or other trading
activities. The Issuer and Subsidiary Guarantors have agreed that, for a period
of one year after the Exchange Offer is consummated, they will make this
Prospectus, as amended or supplemented, available to any Broker-Dealer for use
in connection with any such resale.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Broker-Dealers. Exchange Notes received by Broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to the purchaser or to or through brokers or dealers who
may receive compensation in the form of commissions or concessions from any such
Broker-Dealer and/or the purchasers of any such Exchange Notes. Any
Broker-Dealer that resells the Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that, by acknowledging that it will
deliver and by delivering a prospectus, a Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of one year after the date of consummation of the Exchange
Offer, the Issuer will promptly send additional copies of this Prospectus and
any amendment or supplement to this Prospectus to any Broker-Dealer that
requests such documents in the Letter of Transmittal. The Issuer has agreed to
pay certain expenses incident to the Exchange Offer, other than commission or
concessions of any brokers or dealers, and will indemnify the holders of the
Exchange Notes (including any Broker-Dealers) against certain liabilities,
including liabilities under the Securities Act.
By acceptance of the Exchange Offer, each Broker-Dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer agrees that,
upon receipt of notice from the Issuer of the happening of any event which makes
any statement in this Prospectus untrue in any material respect or which
requires the making of any changes in this Prospectus in order to make the
statements therein not misleading (which notice the Issuer agrees to deliver
promptly to such Broker-Dealer), such Broker-Dealer will suspend use of the
Prospectus until the Issuer and Subsidiary Guarantors have amended or
supplemented this Prospectus to correct such misstatement or omission and have
furnished copies of the amended or supplemental Prospectus to such
Broker-Dealer.
LEGAL MATTERS
The validity of the issuance of the Exchange Notes offered hereby will be
passed on for the Issuer by Miller, Canfield, Paddock and Stone, P.L.C.,
Detroit, Michigan.
EXPERTS
The financial statements of (i) the Company at October 31, 1997 and 1996
and for each of the three years in the period ended October 31, 1997, (ii) MT&G
at December 31, 1996 and for the year ended
115
<PAGE> 121
December 31, 1996, (iii) Deco at December 31, 1997, 1996 and 1995 and for each
of the three years in the period ended December 31, 1997 and (iv) Turn-Matic at
September 30, 1997 and for the year then ended that are included in this
Prospectus, and the financial statements from which certain of the Summary and
Selected Financial Data included in this Prospectus have been derived, have been
audited by Coopers & Lybrand, L.L.P, independent accountants, as indicated in
their reports appearing herein and elsewhere in the Registration Statement. Such
financial statements have been included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
116
<PAGE> 122
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
NEWCOR, INC.
Report of Independent Accountants........................... F-2
Consolidated Statements of Income for the years ended
October 31, 1997, 1996 and 1995........................... F-3
Consolidated Statements of Income for the three months ended
January 31, 1998 and 1997 (Unaudited)..................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended October 31, 1997, 1996 and 1995............... F-5
Consolidated Balance Sheets as of October 31, 1997 and
1996...................................................... F-6
Condensed Consolidated Balance Sheet as of January 31, 1998
(Unaudited)............................................... F-7
Consolidated Statements of Cash Flows for the years ended
October 31, 1997, 1996 and 1995........................... F-8
Condensed Consolidated Statements of Cash Flows for the
three months ended January 31, 1998 and 1997
(Unaudited)............................................... F-9
Notes to Consolidated Financial Statements.................. F-10
MACHINE TOOL & GEAR, INC.
Report of Independent Accountants........................... F-22
Balance Sheets as of September 30, 1997 (Unaudited) and
December 31, 1996......................................... F-23
Statements of Income and Retained Earnings for the
nine-months ended September 30, 1997 and 1996 (Unaudited)
and for the year ended December 31, 1996.................. F-24
Statements of Cash Flows for the nine-months ended September
30, 1997 and 1996 (Unaudited) and for the year ended
December 31, 1996......................................... F-25
Notes to Financial Statements............................... F-26
THE DECO GROUP
Report of Independent Accountants........................... F-30
Combined Balance Sheets as of December 31, 1997, 1996 and
1995...................................................... F-31
Combined Statements of Income and Retained Earnings for the
years ended December 31, 1997, 1996 and 1995.............. F-32
Combined Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-33
Notes to Financial Statements............................... F-34
TURN-MATIC, INC.
Report of Independent Accountants........................... F-39
Balance Sheets as of September 30, 1997 and December 31,
1997 (Unaudited).......................................... F-40
Statements of Income and Retained Earnings for the year
ended September 30, 1997 and for the three months ended
December 31, 1997 and 1996 (Unaudited).................... F-41
Statements of Cash Flows for the year ended September 30,
1997 and for the three months ended December 31, 1997 and
1996 (Unaudited).......................................... F-42
Notes to Financial Statements............................... F-43
</TABLE>
F-1
<PAGE> 123
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Newcor, Inc.
We have audited the consolidated balance sheets of Newcor, Inc. and
Subsidiaries as of October 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for the years ended
October 31, 1997, 1996, and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Newcor, Inc.
and Subsidiaries as of October 31, 1997, and 1996 and the consolidated results
of operations and cash flows for the years ended October 31, 1997, 1996, and
1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Detroit, Michigan
December 5, 1997, except as to the information
presented in Note B, for which the date is
January 16, 1998.
F-2
<PAGE> 124
NEWCOR, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Sales....................................................... $130,848 $111,744 $ 90,173
Cost of sales............................................... 107,083 89,087 73,555
-------- -------- --------
Gross margin................................................ 23,765 22,657 16,618
Selling, general and administrative expense................. 15,759 15,052 11,264
Nonrecurring items, net (gain) loss......................... (297) 824 --
-------- -------- --------
Operating income from continuing operations................. 8,303 6,781 5,354
Other income (expense):
Interest expense.......................................... (2,070) (1,787) (1,504)
Other..................................................... (224) 178 (229)
-------- -------- --------
Income from continuing operations before income taxes....... 6,009 5,172 3,621
Provision for income taxes.................................. 2,119 1,614 1,230
-------- -------- --------
Income from continuing operations........................... 3,890 3,558 2,391
-------- -------- --------
Discontinued operations:
Loss from discontinued operations, net of income tax
benefit of $611 and $853, respectively................. -- (1,203) (1,510)
Loss on sale of discontinued operations, net of income tax
benefit of $1,800...................................... -- (3,500) --
-------- -------- --------
Loss from discontinued operations........................... -- (4,703) (1,510)
-------- -------- --------
Net income (loss)........................................... $ 3,890 $ (1,145) $ 881
======== ======== ========
Amounts per share of common stock -- Basic and Diluted:
Income from continuing operations......................... $ 0.79 $ 0.72 $ 0.49
Loss from discontinued operations......................... -- (0.96) (0.31)
======== ======== ========
Net income (loss)......................................... $ 0.79 $ (0.24) $ 0.18
======== ======== ========
Weighted average common shares outstanding.................. 4,940 4,923 4,913
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
<PAGE> 125
NEWCOR, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JANUARY 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Sales....................................................... $30,134 $27,975
Cost of sales............................................... 26,423 22,645
------- -------
Gross margin................................................ 3,711 5,330
Selling, general and administrative expense................. 4,164 3,511
Amortization expense........................................ 325 186
Nonrecurring items, net loss................................ 711
------- -------
Operating income (loss)..................................... (778) 922
Other income (expense):
Interest expense.......................................... (825) (432)
Other..................................................... (11) 74
------- -------
Income (loss) before income taxes........................... (1,614) 564
Provision (benefit) for income taxes........................ (582) 198
------- -------
Net income (loss)........................................... $(1,032) $ 366
======= =======
Amounts per share of common stock:
Net income (loss) -- Basic................................ $ (0.21) $ 0.07
Net income (loss) -- Diluted.............................. $ (0.21) $ 0.07
Weighted average common shares outstanding.................. 4,942 4,932
======= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
<PAGE> 126
NEWCOR, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL IN UNFUNDED TOTAL
COMMON EXCESS PENSION RETAINED SHAREHOLDERS'
STOCK OF PAR LIABILITY EARNINGS EQUITY
------ ---------- --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, November 1, 1994..................... $4,676 $ 374 $(1,319) $21,426 $25,157
Unfunded pension liability.................. 783
Net income.................................. 881
Cash dividends, $.20 per share.............. (936)
Shares issued under employee stock plans.... 3 21
------ ------ ------- ------- -------
Balance, October 31, 1995..................... 4,679 395 (536) 21,371 $25,909
Unfunded pension liability.................. 481
Net loss.................................... (1,145)
Cash dividends, $.20 per share.............. (938)
Shares issued under employee stock plans.... 18 116
------ ------ ------- ------- -------
Balance, October 31, 1996..................... 4,697 511 (55) 19,288 $24,441
Unfunded pension liability.................. (44)
Net income.................................. 3,890
Cash dividends, $.20 per share.............. (954)
Shares issued under employee stock plans.... 10 72
Stock dividend, 5%.......................... 235 1,675 (1,910)
------ ------ ------- ------- -------
Balance, October 31, 1997..................... $4,942 $2,258 $ (99) $20,314 $27,415
====== ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
<PAGE> 127
NEWCOR, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
OCTOBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current Assets:
Cash...................................................... $ 34 $ 34
Accounts receivable....................................... 22,523 17,369
Inventories............................................... 8,084 8,196
Prepaid expenses and other................................ 7,219 4,634
Deferred income taxes..................................... 1,453 1,891
------- -------
Total current assets........................................ 39,313 32,124
Property, plant and equipment, net of accumulated
depreciation.............................................. 28,119 23,131
Prepaid pension expense..................................... 3,180 3,871
Cost in excess of assigned value of acquired companies, net
of amortization........................................... 16,080 12,689
Net assets held for sale.................................... -- 3,844
Other long-term assets...................................... 4,191 1,840
------- -------
Total assets...................................... $90,883 $77,499
======= =======
LIABILITIES
Current Liabilities:
Current portion of long-term debt......................... $ 833 $ --
Accounts payable.......................................... 14,874 10,175
Accrued payroll and related expenses...................... 3,584 3,401
Other accrued liabilities................................. 2,084 3,597
------- -------
Total current liabilities................................... 21,375 17,173
Long-term debt.............................................. 32,267 25,400
Postretirement benefits other than pensions................. 6,338 6,345
Pension liability and other................................. 3,488 4,140
------- -------
Total liabilities................................. 63,468 53,058
------- -------
SHAREHOLDERS' EQUITY
Preferred stock, no par value,
Authorized: 1,000 shares. Issued: None
Common stock, par value $1 per share.
Authorized: 10,000 shares.
Issued: 4,942 shares in 1997 and 4,697 shares in
1996.................................................. 4,942 4,697
Capital in excess of par.................................... 2,258 511
Unfunded pension liability.................................. (99) (55)
Retained earnings........................................... 20,314 19,288
------- -------
Total shareholders' equity........................ 27,415 24,441
------- -------
Total liabilities and shareholders' equity........ $90,883 $77,499
======= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
<PAGE> 128
NEWCOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
JANUARY 31,
1998
--------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C>
Current Assets:
Cash...................................................... $ 86
Accounts receivable....................................... 21,138
Inventories............................................... 7,927
Other current assets...................................... 7,998
--------
Total current assets........................................ 37,149
Property, plant and equipment, net of accumulated
depreciation of $15,496................................... 37,116
Goodwill, net of amortization............................... 40,202
Other long-term assets...................................... 9,982
--------
Total assets...................................... $124,449
========
LIABILITIES
Current Liabilities:
Current portion of long-term debt......................... $ 1,333
Accounts payable.......................................... 14,319
Other accrued liabilities................................. 4,598
--------
Total current liabilities................................... 20,250
Long-term debt.............................................. 68,117
Postretirement benefits and other........................... 9,945
--------
Total liabilities................................. 98,312
--------
SHAREHOLDERS' EQUITY
Preferred stock, no par value, Authorized: 1,000 shares.
Issued: None
Common stock, par value $1 per share.
Authorized: 10,000 shares.
Issued: 4,942 shares in 1998........................... 4,942
Capital in excess of par.................................... 2,258
Unfunded pension liability.................................. (99)
Retained earnings........................................... 19,036
--------
Total shareholders' equity........................ 26,137
--------
Total liabilities and shareholders' equity........ $124,449
========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-7
<PAGE> 129
NEWCOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Income from continuing operations........................ $ 3,890 $ 3,558 $ 2,391
Adjustments to reconcile net income to net cash provided
by operating activities:
Loss on sale of businesses............................ 711 824 --
Depreciation and amortization......................... 4,280 3,622 2,850
Deferred income taxes................................. 692 (637) 1,577
Pensions.............................................. (125) (893) 451
Gain on sale of capital assets........................ (1,025) (168) (354)
Other -- net.......................................... 888 (27) (131)
Changes in operating assets and liabilities:
Accounts receivable................................. (3,258) 444 (3,072)
Inventories......................................... 1,498 747 (815)
Other current assets................................ 320 (2,004) (790)
Accounts payable.................................... 1,741 2,921 (1,783)
Accrued liabilities................................. (1,170) (589) 1,139
-------- -------- --------
Cash provided by continuing operating activities......... 8,442 7,798 1,463
-------- -------- --------
Cash provided by (used in) discontinued operations....... (1,117) 5,931 9,096
-------- -------- --------
Investing Activities:
Capital expenditures..................................... (3,539) (2,946) (4,580)
Proceeds from sale of businesses......................... 1,500 1,984 --
Acquisitions, net of cash acquired....................... (14,581) (11,578) --
Proceeds from sale of capital assets..................... 2,467 420 407
-------- -------- --------
Net cash used in investing activities.................... (14,153) (12,120) (4,173)
-------- -------- --------
Financing Activities:
Net borrowings (repayments) on revolving credit line..... 7,700 (10,800) (11,000)
Term note proceeds....................................... -- 10,000 --
Revenue bond proceeds.................................... -- -- 6,100
Principal payment on bonds............................... -- -- (600)
Shares issued under employee stock plans................. 82 134 24
Cash dividends paid...................................... (954) (938) (936)
-------- -------- --------
Net cash provided by (used in) financing activities...... 6,828 (1,604) (6,412)
-------- -------- --------
Increase (decrease) in cash.............................. -- 5 (26)
Cash, beginning of year.................................. 34 29 55
-------- -------- --------
Cash, end of year........................................ $ 34 $ 34 $ 29
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-8
<PAGE> 130
NEWCOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JANUARY 31,
--------------------------
1998 1997
----------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Operating Activities:
Net income (loss)......................................... $ (1,032) $ 366
Depreciation and amortization.......................... 1,277 1,003
Other -- net........................................... 8 (407)
Changes in operating assets and liabilities, net....... 164 934
-------- --------
Net cash provided by operations........................... 417 1,896
-------- --------
Investing Activities:
Capital expenditures...................................... (1,749) (620)
Acquisitions, net of cash acquired........................ (13,070) (12,081)
-------- --------
Net cash used in investing activities..................... (14,819) (12,701)
-------- --------
Financing Activities:
Net borrowings (repayments) on revolving credit line...... 14,700 11,100
Cash dividends paid....................................... (246) (235)
-------- --------
Net cash from financing activities........................ 14,454 10,865
-------- --------
Increase in cash.......................................... 52 60
Cash, beginning of period................................. 34 34
-------- --------
Cash, end of period....................................... 86 94
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-9
<PAGE> 131
NEWCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
A. ACCOUNTING POLICIES
Description of the Business: Newcor, Inc. and its subsidiaries (the
"Company") design and manufacture precision machined components and assemblies
and custom rubber and plastic products primarily for the automotive and
agricultural vehicle markets. The Company is also a supplier of standard and
specialty machines and equipment systems mainly for the automotive and appliance
industries.
Principles of Consolidation -- The consolidated financial statements
include the accounts of Newcor, Inc. and all subsidiaries. All significant
intercompany accounts and transactions are eliminated.
Interim Financial Information -- The unaudited interim basic financial
statements included herein as of January 31, 1998 and for the three-month
periods ended January 31, 1998 and 1997 include, in the opinion of management,
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly the Company's financial position, results of operations, and cash
flows. Operating results for the three-months ended January 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
October 31, 1998.
Inventory Valuation -- Inventories are stated at the lower of cost or net
realizable value. Costs, other than those specifically identified to contracts,
are determined primarily on the first-in, first-out (FIFO) basis.
Contract Accounting -- The percentage of completion method of accounting is
used by the Company's Special Machines segment. Sales and gross profit are
recognized as work is performed based on the relationship between actual costs
incurred and total estimated costs at completion. Sales and gross profit are
adjusted prospectively for revisions in estimated total contract costs and
contract values. Estimated losses are recognized when determinable.
Property, Plant and Equipment -- Property, plant and equipment is stated at
cost and is depreciated using the straight-line method. The general range of
lives is fifteen to thirty years for building and land improvements and four to
ten years for machinery, office equipment and vehicles.
Cost in Excess of Assigned Value of Acquired Companies -- The costs of
acquired companies that exceed the assigned value at dates of acquisition
(goodwill) are generally being amortized over a twenty year period using the
straight-line method. Several factors are used to evaluate the recoverability of
goodwill, including management's plans for future operations, recent operating
results and each division's projected undiscounted cash flows. Accumulated
amortization was $2,715 and $1,825 at October 31, 1997 and 1996, respectively.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of "
(FAS 121) was adopted in fiscal 1997. FAS 121 requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. The effect of
adopting FAS 121 was not material.
Income Taxes -- Deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities.
Use of Estimates -- The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires the Company to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Financial Instruments -- The carrying amount of the Company's financial
instruments, which includes cash, accounts receivable, accounts payable, notes
payable and long-term debt approximates their fair value at
F-10
<PAGE> 132
NEWCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A. ACCOUNTING POLICIES -- (CONTINUED)
October 31, 1997 and 1996. Fair values have been determined through information
obtained from market sources and management estimates.
Stock dividend -- On June 11, 1997, the Company declared a 5% stock
dividend which was paid on September 12, 1997 to shareholders of record on
August 14, 1997. The dividend was charged to retained earnings in the amount of
$1,910. Per share amounts and shares outstanding included in the accompanying
consolidated financial statements and notes are based on the increased number of
shares giving retroactive effect to the stock dividend.
Earnings per share -- Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (FAS 128) establishes an updated standard for computing and
presenting earnings per share. The statement is effective in fiscal 1998 but
will not result in a materially different reported earnings per share amount for
the Company.
Reclassifications -- Certain items in prior years' financial statements
have been reclassified to conform with the presentation used in the year ended
October 31, 1997.
B. FISCAL 1998 ACQUISITIONS
In December 1997, the Company purchased the assets and business of Machine
Tool & Gear, Inc. ("MT&G") for $27.25 million plus the assumption of
approximately $5.8 million of debt, which was subsequently retired. MT&G
manufactures differential pinion and side gears, output shafts and rear axle
shafts for the automotive industry. For these assets, the Company paid cash of
$2.5 million in October 1997 and an additional $3.1 million in December 1997. A
promissory note for $21.65 million, paying interest at 8%, has been issued for
the balance of the purchase price. The note is due at the completion of
acquisition financing. If acquisition financing is not completed by April 15,
1998, then the Company must pay $5.0 million of the note, with the balance
payable on May 23, 1998. On December 5, 1997, the Company's revolving credit
agreement was increased from $25.0 million to $37.0 million to pay off acquired
bank debt and make the down payment on the MT&G acquisition. On January 15,
1998, the revolving credit agreement was amended to allow the Company to
increase total availability to $50.0 million upon satisfaction of certain
conditions relating to the acquisition financing described below.
The Company signed a definitive agreement to purchase the common stock of
the three companies comprising The Deco Group ("Deco") for approximately $55
million in cash in December 1997. Deco manufactures high-volume, complex
machined components and assemblies for the medium and heavy truck and automotive
industries. Deco's products include rocker arms and assemblies, transmission
shafts, axle shafts, thrust plates and other specialized products. The Company
made a non-refundable $5.0 million deposit to the Deco shareholders at the time
the agreement was signed.
In January 1998, the Company signed a definitive agreement to purchase the
common stock of Turn-Matic, Inc. ("Turn-Matic") for approximately $17 million in
cash. Contingent consideration of up to $3.5 million may be paid if
profitability achieves certain levels over the next five years. Turn-Matic
manufactures high volume, precision machined close tolerance components and
assemblies for the automotive industry. Turn-Matic's products include oil filter
adapters, main bearing caps, EGR spacers, intake and exhaust manifolds, steering
brackets and throttle body adapters.
The Company is in the process of reviewing alternatives to complete the
financing of its MT&G acquisition and finance the pending acquisitions of Deco
and Turn-Matic. The most likely financing methods are subordinated debt,
increased bank borrowings, or a combination of both.
It is anticipated that the Company's current and future domestic
subsidiaries, presently representing Plastronics and Rochester Gear only, will
be full and unconditional guarantors of obligations issued under any
F-11
<PAGE> 133
NEWCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. FISCAL 1998 ACQUISITIONS -- (CONTINUED)
financing alternatives. The following summarized financial information is
derived from the combined financial statements of the two wholly-owned
subsidiaries as of October 31, 1997 and 1996, and for the years then ended. No
intercompany balances or transactions occurred among the subsidiaries during the
periods presented.
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Current assets.............................................. $11,400 $ 3,200
======= =======
Total assets................................................ $30,800 $14,400
======= =======
Current liabilities......................................... $ 6,200 $ 2,800
======= =======
Long-term debt.............................................. $ 6,100 $ 6,100
======= =======
Sales....................................................... $29,200 $17,000
======= =======
Operating income............................................ $ 2,300 $ 1,000
======= =======
</TABLE>
The Company plans to consummate the Deco and Turn-Matic acquisitions
contemporaneously with the consummation of financing. All three acquisitions
will be accounted for using the purchase method of accounting. The cost in
excess of net assets acquired of approximately $72 million will be amortized on
a straight-line basis over twenty years.
C. FISCAL 1997 AND 1996 ACQUISITIONS
On January 13, 1997, the Company purchased for cash the common stock of
Plastronics Plus, Inc. (Plastronics), a Wisconsin corporation. Plastronics
primarily manufactures custom plastic injection-molded components for the
automotive industry. The purchase price was approximately $8 million in cash
plus the assumption of $4.1 million of Plastronics debt, which was subsequently
retired. The purchase was financed through the Company's existing line of credit
facility. The acquisition was accounted for using the purchase method of
accounting. The cost in excess of net assets acquired of approximately $4
million is being amortized on a straight-line basis over twenty years.
In December 1995, the Company signed three separate definitive agreements
to purchase for cash certain assets of three unrelated companies in the molded
rubber and plastic component parts industry. Each company primarily manufactures
parts for the automotive industry. Two of the acquisitions were completed on
January 2, 1996, and the third was completed on April 1, 1996. The total
purchase price for all three acquisitions was approximately $11.6 million. The
acquisitions were accounted for using the purchase method of accounting. The
cost in excess of net assets acquired of approximately $8 million is being
amortized on a straight-line basis over twenty years.
The 1996 unaudited pro forma results of operations as if the four
acquisitions described above had been acquired at the beginning of fiscal 1996
would have been sales of $133,023, income from continuing operations of $3,965
($.81 per share) and net loss of $738 ($.15 per share). These pro forma results
do not purport to be indicative of the results that would have occurred had the
acquisitions been made at the beginning of fiscal 1996 or which may occur in the
future. The unaudited pro forma results of operations for 1997 would have
approximated the 1997 actual reported results.
D. DISCONTINUED OPERATIONS
The Company sold the business and certain assets of its Wilson Automation
division (Wilson) on May 6, 1996. All receivables, the land and building, and
certain liabilities were retained by the Company. The building was leased to the
buyer through April 30, 2001. Although assets were sold at approximately net
book
F-12
<PAGE> 134
NEWCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
D. DISCONTINUED OPERATIONS -- (CONTINUED)
value, accruals were established for curtailment of the pension plan, employee
separation costs, costs associated with the collection of accounts receivable
and additional liabilities related to contracts for which the Company retained
responsibility. These accruals coupled with the operating loss from the
measurement date (March 31, 1996) to the sale date resulted in a net loss of
$3.5 million on the disposition of Wilson. The remaining accruals at October 31,
1997 are not material. Summary operating results of discontinued operations
through the measurement date are as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Revenues.................................................... $ 9,173 $26,457
Loss before income taxes.................................... (1,814) (2,363)
Benefit from income taxes................................... 611 853
Net loss from discontinued operations....................... (1,203) (1,510)
</TABLE>
The Company sold the Wilson land and building during 1997 for approximately
$2.3 million, net of selling expenses. The pre-tax net gain on this disposition
was $1,008 and has been recognized as a nonrecurring item in the consolidated
statements of income.
E. BUSINESS DISPOSITIONS AND NET ASSETS HELD FOR SALE
On March 6, 1997, the Company sold the business and substantially all
assets of its Eonic operation. Although assets were sold at approximately net
book value, accruals were established for employee separation costs, costs
associated with the collection of accounts receivable and pension plan costs,
resulting in an additional $711 loss on disposition being recognized as a
nonrecurring item in the consolidated statements of income. The Company received
cash of $1.5 million, which was used to reduce long-term debt and a $816 note
due over six years. The note pays interest equal to the prime interest rate. The
Company was negotiating an agreement to sell this division during 1996 and,
accordingly, classified the net assets of this division as a long-term asset at
October 31, 1996.
On October 21, 1996, the Company sold the business and substantially all
assets of its Newcor Machine Tool operation. Although assets were sold at
approximately net book value, accruals were established for employee separation
costs, costs associated with the collection of accounts receivable and pension
plan costs. The Company recorded a loss of $824 at October 31, 1996 for the loss
on the sale of Newcor Machine Tool and the estimated loss on disposition of
Eonic. The remaining accruals associated with these dispositions at October 31,
1997 were not material.
F. INVENTORIES
Inventories at October 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Costs and estimated earnings of uncompleted contracts in
excess of related billings of $1,066 in 1997 and $225 in
1996...................................................... $2,379 $4,075
Raw materials............................................... 3,752 2,641
Work in process and finished goods.......................... 1,953 1,480
------ ------
$8,084 $8,196
====== ======
</TABLE>
Costs and estimated earnings of uncompleted contracts in excess of related
billings represents revenue recognized under the percentage of completion method
in excess of amounts billed.
F-13
<PAGE> 135
NEWCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
G. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at October 31, 1997 and 1996 is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Land and improvements....................................... $ 1,096 $ 1,036
Buildings................................................... 11,815 11,956
Machinery................................................... 25,457 20,935
Office and transportation equipment......................... 3,078 2,893
Construction in progress.................................... 1,217 723
------- -------
42,663 37,543
Less accumulated depreciation............................... 14,544 14,412
------- -------
$28,119 $23,131
======= =======
</TABLE>
H. OPERATING LEASES
The Company leases certain manufacturing equipment and facilities, office
space and other equipment under lease agreements accounted for as operating
leases. Rent expense related to these leases aggregated approximately $1,342,
$866, and $355 in 1997, 1996 and 1995, respectively.
Future minimum rental payments for leases extending beyond one year from
October 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
OCTOBER 31, AMOUNT
- ----------- ------
<S> <C>
1998........................................................ $1,437
1999........................................................ 1,297
2000........................................................ 1,220
2001........................................................ 1,257
2002........................................................ 1,246
Thereafter.................................................. 2,678
------
$9,135
======
</TABLE>
The Company also entered into operating lease commitments in October 1997
for approximately $11 million of equipment, the terms of which have not been
finalized, but are expected to extend over seven years.
I. CREDIT ARRANGEMENTS AND LONG-TERM DEBT
A summary of long-term debt at October 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Revolving credit line....................................... $17,000 $ 9,300
Term note................................................... 10,000 10,000
Limited obligation revenue bonds, variable interest rate
(average 3.8% in 1997 and 3.6% in 1996), payable January
1, 2008................................................... 6,100 6,100
------- -------
$33,100 $25,400
======= =======
</TABLE>
As of October 31, 1997, the Company had $17 million outstanding under a
revolving credit agreement with a major U.S. bank which was scheduled to expire
February 28, 1999. At that time the credit agreement
F-14
<PAGE> 136
NEWCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
I. CREDIT ARRANGEMENTS AND LONG-TERM DEBT -- (CONTINUED)
allowed for maximum borrowings of $25 million. The rate of interest on
outstanding borrowings is principally at the Eurodollar base rate plus 1% or
6.63%. Borrowings under the credit agreement are primarily supported by
Eurodollar notes principally with maturities of three months or less. During
1996, the Company converted $10 million from the revolving credit agreement to a
term note. The interest rate is fixed at 7.85%. The term note requires quarterly
interest payments through May 1998 and monthly interest and principal payments
from June 1998 through May 2003. The revolving credit agreement and the term
note require the Company to comply with certain financial covenants including
working capital, total debt and tangible net worth.
As mentioned in Note B., the Company increased its revolving credit
agreement to $37 million on December 5, 1997. On January 15, 1998, the revolving
credit agreement was amended to allow the Company to increase total availability
to $50.0 million upon satisfaction of certain conditions relating to the
acquisition financing for MT&G, Deco and Turn-Matic. The revolving credit
agreement is collateralized by substantially all of the Company's non-real
estate assets and by Rochester Gear, Inc. real estate. The current expiration
date for the revolving credit agreement is February 28, 2001.
In September 1995, Rochester Gear, Inc., a wholly owned subsidiary of the
Company (the Subsidiary), entered into a loan agreement whereby $6.1 million of
limited obligation refunding revenue bonds were issued. These bonds which mature
on January 1, 2008 are collateralized by the Subsidiary's land, building and
equipment and guaranteed by the Company.
Total interest payments aggregated $2,114, $2,109, and $1,553 in 1997,
1996, and 1995, respectively. Annual maturities of long-term debt are as
follows:
<TABLE>
<CAPTION>
YEAR
ENDING
OCTOBER 31, AMOUNT
- ----------- -------
<S> <C>
1998......................................................... $ 833
1999......................................................... 19,000
2000......................................................... 2,000
2001......................................................... 2,000
2002......................................................... 2,000
Thereafter................................................... 7,267
-------
$33,100
=======
</TABLE>
J. INCOME TAXES
Provision (benefit) for federal income taxes from continuing operations is
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Currently payable........................................ $1,430 $ 940 $1,411
Deferred, net............................................ 689 674 (181)
------ ------ ------
$2,119 $1,614 $1,230
====== ====== ======
</TABLE>
F-15
<PAGE> 137
NEWCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
J. INCOME TAXES -- (CONTINUED)
Significant components of the deferred tax assets and liabilities as of
October 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets:
Accrued postretirement benefits........................... $2,408 $2,157
Percentage of completion revenue.......................... 265 113
Accrued vacation and employee benefits.................... 380 379
Costs related to sale of businesses....................... 684 1,270
Other..................................................... 728 819
------ ------
Total deferred tax assets......................... 4,465 4,738
------ ------
Deferred tax liabilities:
Depreciation.............................................. 2,658 1,395
Pensions.................................................. 755 634
Goodwill and other........................................ 374 258
------ ------
Total deferred tax liabilities.................... 3,787 2,287
------ ------
Net deferred tax asset............................ $ 678 $2,451
====== ======
</TABLE>
Reconciliation of the statutory federal tax rate to the effective rate is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ---- -------
<S> <C> <C> <C>
Statutory rate............................................ 34.0% 34.0% 34.0%
Nondeductible expenses.................................... 2.1 1.6 1.8
Foreign sales corporation................................. (0.5) (1.2) (1.4)
Other items, net.......................................... (0.3) (3.2) (0.4)
------ ---- -------
Effective tax rate........................................ 35.3% 31.2% 34.0%
====== ==== =======
Income taxes paid (refunded).............................. $1,615 $550 $(1,667)
</TABLE>
K. EMPLOYEE RETIREMENT BENEFITS
Pension Plans:
The Company provides retirement benefits for certain employees under
several defined benefit pension plans. Benefits from these plans are based on
compensation, years of service and either fixed dollar amounts per year of
service or employee compensation during the later years of employment. The
assets of the plans consist principally of cash equivalents, corporate and
government bonds, and common and preferred stocks. The Company's policy is to
fund only amounts required to satisfy minimum legal requirements.
F-16
<PAGE> 138
NEWCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
K. EMPLOYEE RETIREMENT BENEFITS -- (CONTINUED)
The following tables summarize the funded status, net periodic pension
(benefit) expense and actuarial assumptions:
<TABLE>
<CAPTION>
1997 1996
--------------------------- -------------------------
ACCUMULATED ASSETS ACCUMULATED
ASSETS EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated
benefit obligations:
Vested benefit obligation................. $16,853 $8,321 $15,438 $ 7,974
Nonvested benefit obligation.............. 214 249 499 99
------- ------ ------- -------
$17,067 $8,570 $15,937 $ 8,073
------- ------ ------- -------
Actuarial present value of projected benefit
obligations............................... $18,514 $8,570 $17,851 $ 8,073
Plan assets at market value................. 23,826 7,438 21,230 6,428
------- ------ ------- -------
Plan assets in excess of (less than)
projected benefit obligation.............. 5,312 (1,132) 3,379 (1,645)
Unrecognized net asset...................... (1,236) (109) (1,500) (131)
Unrecognized net (gain) loss and other...... (1,384) 614 414 1,425
------- ------ ------- -------
Prepaid (accrued) pension expense........... $ 2,692 $ (627) $ 2,293 $ (351)
======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1996
------- ------- -------
<S> <C> <C> <C>
Net periodic pension (benefit) expense:
Service cost-benefits earned during the period............ $ 460 $ 808 $ 846
Interest cost on projected benefit obligation............. 1,968 1,938 1,912
Actual return on assets................................... (5,337) (4,045) (4,015)
Amortization of net gain and deferral..................... 2,828 2,335 2,370
------- ------- -------
Net periodic pension (benefit) expense.................... $ (81) $ 1,036 $ 1,113
------- ------- -------
Actuarial assumptions at end of year:
Discount rates............................................ 7.5% 8.0% 8.0%
Expected return on plan assets............................ 9.0% 9.0% 9.0%
Compensation increases.................................... 5.0% 5.0% 6.0%
</TABLE>
The sale of Wilson during 1996 resulted in Wilson employees no longer
earning additional benefits under the plans. As a result of the recognition of
prior service costs for these employees, the Company recognized a pre-tax
pension curtailment charge of approximately $400 as a component of the loss on
discontinued operations in 1996.
Retiree Health Care and Life Insurance Benefits
The Company provides health care and life insurance benefits to certain
eligible retired employees but has discontinued retiree health benefits for all
active employees who retire after January 1, 1993. The plans are unfunded.
Benefits and cost-sharing provisions vary by location. Generally, the medical
plans pay a stated percentage of most medical expenses, reduced for any
deductible and payments made by government programs or other group coverage. The
cost of providing most of these benefits is shared with the retirees. The
F-17
<PAGE> 139
NEWCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
K. EMPLOYEE RETIREMENT BENEFITS -- (CONTINUED)
cost sharing limits the Company's future retiree medical cost increases to the
rate of inflation, as measured by the Consumer Price Index.
The following tables summarize the accrued postretirement benefit
obligation, net periodic postretirement benefit costs and actuarial assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ----
<S> <C> <C> <C>
Accumulated postretirement benefit obligations:
Retirees.................................................. $6,048 $6,333
Other fully eligible participants......................... 105 98
------ ------
Total accumulated postretirement benefit obligations........ 6,153 6,431
Unrecognized net gain (loss) from changes in assumptions.... 185 (86)
------ ------
Accrued postretirement benefit cost......................... $6,338 $6,345
====== ======
Net periodic postretirement benefit cost, principally
interest cost on projected benefit obligations............ $ 478 $ 485 $538
====== ====== ====
Actuarial assumptions:
Discount rates............................................ 8.0% 8.0%
Health care cost current rate of increase:
Medical................................................... 7.8% 8.0%
Prescription drugs........................................ 9.6% 10.0%
Ultimate health care cost rate of increase by 2004:
Medical................................................... 6.0% 6.0%
Prescription drugs........................................ 6.0% 6.0%
Increase due to a 1% increase in health care cost trend
rate:
APBO...................................................... 7.3% 6.6%
Net periodic postretirement benefit cost.................. 7.6% 6.9%
</TABLE>
L. STOCK OPTION PLANS
The Company has four stock option plans: a 1982 plan and a 1993 plan which
are expired except as to options still outstanding and two 1996 plans (the
Non-Employee Directors Stock Option Plan and the Employee Incentive Stock Plan).
Under the Non-Employee Directors Stock Option Plan, 105,000 common stock options
may be granted to non-employee directors. The Employee Incentive Stock Plan
provides for the use of several long-term incentive compensation tools for key
employees, including incentive stock options which are limited to a maximum of
315,000 shares. Option prices for both plans must not be less than the fair
market value of the Company's stock on the date granted. Options are exercisable
over 10 years and vest at a rate of 25% each year, commencing in the second
year. All options granted to date under these plans have a grant/exercise price
the same as the fair market value at the date of grant. Options expire upon
termination of
F-18
<PAGE> 140
NEWCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
L. STOCK OPTION PLANS -- (CONTINUED)
employment or one year following death or retirement. No charge is made against
income when options are exercised. Common stock options outstanding are as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES OPTION PRICE
------- ------------
<S> <C> <C>
Outstanding at November 1, 1994............................. 75,264 $8.77
Granted................................................... 113,925 6.68
Exercised................................................. (1,889) 5.13
Expired................................................... (26,364) 9.89
-------
Outstanding at October 31, 1995............................. 160,936 7.63
Granted................................................... 16,695 9.01
Exercised................................................. (7,631) 5.13
Expired................................................... (5,513) 8.33
-------
Outstanding at October 31, 1996............................. 164,487 7.86
Granted................................................... 73,815 8.00
Exercised................................................. -- --
Expired................................................... (6,300) 9.14
-------
Outstanding at October 31, 1997............................. 232,002 $7.83
-------
Exercisable shares at October 31, 1997...................... 91,062 $8.09
=======
Options available to grant at October 31, 1997.............. 339,501
=======
</TABLE>
The exercise price range for the outstanding options at each year end date
was $4.29 - $11.19. Approximately 40 percent of the outstanding options at
October 31, 1997 had exercise prices of $8.00 or more. The average weighted
average remaining exercise period relating to outstanding options at October 31,
1997 was approximately seven years.
The Company applies the intrinsic value based method to account for stock
options granted to employees. This method is set forth in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". Under this
method, no compensation expense is recognized on the grant date since on that
date the option price equals the market price of the underlying common stock.
Net income and net income per share for 1997 and 1996 would not have been
materially different from reported amounts if compensation expense had been
determined based on the fair value method as set forth in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
M. SEGMENT REPORTING
The Company reports its activities under three industry segments: Precision
Machined Products, Rubber and Plastic, and Special Machines. The Precision
Machined Products segment consists of automotive components and farm equipment
parts machined in dedicated manufacturing cells. The Rubber and Plastic segment
consists of molded rubber and plastic parts primarily for the automotive
industry. These two segments had previously been known as the Components and
Assemblies segment. Further segmentation was due to the growth of the Company's
Components and Assemblies business. Special Machines consist of standard
F-19
<PAGE> 141
NEWCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
M. SEGMENT REPORTING -- (CONTINUED)
individual machines, as well as custom designed machines, all manufactured on a
made-to-order basis. Information by industry segment is summarized below:
<TABLE>
<CAPTION>
PRECISION
MACHINED RUBBER AND SPECIAL
PRODUCTS PLASTIC MACHINES CORPORATE CONSOLIDATED
--------- ---------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers(1)
1997........................... $60,471 $48,517 $21,860 $130,848
1996........................... 48,439 32,447 30,858 111,744
1995........................... 42,382 17,165 30,626 90,173
Operating income (loss) from
continuing operations
1997........................... $ 5,336 $ 2,015 $ 2,275 $(1,323) $ 8,303
1996........................... 3,711 1,908 2,907 (1,745) 6,781
1995........................... 3,638 1,161 2,228 (1,673) 5,354
Identifiable assets
1997........................... $32,683 $34,192 $10,855 $13,153 $ 90,883
1996........................... 30,789 20,940 15,050 10,720 77,499
1995........................... 32,036 6,050 30,857 8,610 77,553
Capital expenditures
1997........................... $ 1,332 $ 1,057 $ 332 $ 818 $ 3,539
1996........................... 1,547 755 639 5 2,946
1995........................... 3,499 661 395 25 4,580
Depreciation and amortization
1997........................... $ 2,113 $ 1,677 $ 376 $ 114 $ 4,280
1996........................... 2,278 770 468 106 3,622
1995........................... 2,080 284 453 33 2,850
</TABLE>
- ---------------
(1) Sales to three manufacturers in the automotive industry, all representing
over 10% of consolidated sales, aggregated approximately $58, $46, and $39
million in 1997, 1996, and 1995, respectively. Sales to agricultural
equipment manufacturers, principally one customer, were $40, $19, and $14
million in 1997, 1996, and 1995, respectively.
F-20
<PAGE> 142
NEWCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
N. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
-------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
1997:
Sales..................................... $27,975 $34,589 $32,385 $35,899 $130,848
Gross margin.............................. 5,330 6,539 5,465 6,431 23,765
Net income................................ 366 1,082 1,222 1,220 3,890
Net income per share...................... $ 0.07 $ 0.22 $ 0.25 $ 0.25 $ 0.79
Share prices:
High................................... $ 9.41 $ 9.17 $ 8.69 $ 9.88 --
Low.................................... 7.03 7.50 6.91 7.50 --
Dividends................................. 0.05 0.05 0.05 0.05 --
1996:
Sales..................................... $23,260 $27,128 $27,902 $33,454 $111,744
Gross margin.............................. 5,335 5,497 5,038 6,787 22,657
Income from continuing operations......... 1,247 834 604 873 3,558
Loss from discontinued operations......... (772) (3,931) -- -- (4,703)
------- ------- ------- ------- --------
Net income (loss)......................... $ 475 $(3,097) $ 604 $ 873 $ (1,145)
Earnings (loss) per share:
Continuing operations.................. $ 0.25 $ 0.17 $ 0.12 $ 0.18 $ 0.72
Discontinued operations................ (0.16) (0.80) -- -- (0.96)
------- ------- ------- ------- --------
Net income (loss) per share............... $ 0.09 $ (0.63) $ 0.12 $ 0.18 $ (0.24)
Share prices:
High................................... $ 9.77 $ 10.23 $ 11.91 $ 9.41 --
Low.................................... 6.91 7.27 8.45 7.86 --
Dividends................................. 0.05 0.05 0.05 0.05 --
</TABLE>
O. CONTINGENT LIABILITIES
The Company has been notified by one of its largest customers that the
customer is defending itself in a patent infringement lawsuit involving certain
processes/methods used on manufacturing equipment supplied by numerous vendors
including one of the Company's former divisions within the Special Machines
segment. The Company retained responsibility for this matter when it sold the
related business. Certain component suppliers of the Company have been notified
of their potential responsibility to the Company in connection with this action.
The Company does not possess sufficient information to evaluate the validity of
this claim and, accordingly, is unable to determine whether it will ultimately
be required to make any payment related to this lawsuit, or the extent to which
any such payment could be offset or mitigated by claims against suppliers.
During the past two years, the Company sold several of its businesses,
including the division that produced the equipment described above. In each case
the Company's agreement with the purchaser requires it to indemnify the
purchaser for various claims including certain environmental, product liability,
warranty and other claims that may arise relating to the conduct of the business
before the date of sale, subject in some cases to limits on the time within
which an indemnification claim may be brought or the maximum amount the Company
may be required to pay. The Company provided for its estimated indemnification
obligations when these businesses were sold and has no reason to believe there
are potential claims against it in excess of this provision, although no
specific amounts are included in such reserve with respect to the patent
infringement action described above.
Various other legal matters arising during the normal course of business
are pending against the Company. Management does not expect that the ultimate
liability, if any, of these matters will have a material effect on future
consolidated financial statements.
F-21
<PAGE> 143
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Machine Tool & Gear, Inc.:
We have audited the accompanying balance sheet of Machine Tool & Gear, Inc.
as of December 31, 1996 and the related statements of income and retained
earnings, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Machine Tool & Gear, Inc. as
of December 31, 1996, and the results of operations and cash flows for the year
then ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Detroit, Michigan
November 19, 1997, except as to the last paragraph
of Note 8 for which the date is December 24, 1997.
F-22
<PAGE> 144
MACHINE TOOL & GEAR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 234,379 $ 827,891
Accounts receivable....................................... 2,393,512 2,530,031
Inventories............................................... 1,218,183 1,983,258
Prepaid expenses and other................................ 62,213 111,108
Deposits on equipment to be leased........................ 501,876 2,482,587
---------- -----------
Total current assets................................... 4,410,163 7,934,875
Property, plant and equipment, net.......................... 4,757,897 6,083,664
---------- -----------
Total assets........................................... $9,168,060 $14,018,539
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 582,053 $ 2,686,283
Borrowings under revolving credit agreement............... 250,000 1,566,500
Accounts payable.......................................... 1,444,320 2,876,706
Accrued expenses.......................................... 70,748 123,824
---------- -----------
Total current liabilities.............................. 2,347,121 7,253,313
Long-term debt, less current portion........................ 2,188,802 3,427,516
---------- -----------
Total liabilities...................................... 4,535,923 10,680,829
Common stock, par value $1 per share:
Authorized: 50,000 shares
Issued and outstanding: 14,000 shares..................... 14,000 14,000
Capital in excess of par.................................... 8,000 8,000
Retained earnings........................................... 5,051,531 3,879,575
Advances to officers/shareholders........................... (441,394) (563,865)
---------- -----------
Total shareholders' equity............................. 4,632,137 3,337,710
---------- -----------
Total liabilities and shareholders' equity............. $9,168,060 $14,018,539
========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE> 145
MACHINE TOOL & GEAR, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
NINE NINE
YEAR MONTHS MONTHS
ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1996
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Sales................................................. $23,262,343 $16,596,725 $18,071,974
Cost of sales......................................... 18,033,213 13,413,924 14,002,494
----------- ----------- -----------
Gross margin.......................................... 5,229,130 3,182,801 4,069,480
Selling, general and administrative expenses.......... 2,473,105 2,662,411 1,910,905
----------- ----------- -----------
Operating income.................................... 2,756,025 520,390 2,158,575
Other expense:
Interest expense.................................... 176,045 364,716 144,167
Charitable contributions............................ 201,400 739,930 160,200
Loss on sale of fixed assets........................ 18,212 -- 18,212
----------- ----------- -----------
Net income (loss)................................... 2,360,368 (584,256) 1,835,996
Retained earnings, beginning of period................ 4,422,363 5,051,531 4,422,363
Distributions to shareholders......................... (1,731,200) (587,700) (921,200)
----------- ----------- -----------
Retained earnings, end of period...................... $ 5,051,531 $ 3,879,575 $ 5,337,159
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE> 146
MACHINE TOOL & GEAR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE NINE
YEAR ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1996
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 2,360,368 $ (584,256) $ 1,835,996
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation..................................... 686,887 504,357 509,807
Loss on sales of fixed assets.................... 18,212 -- 18,212
Changes in operating assets and liabilities:
Accounts receivable............................ (216,053) (136,519) (694,822)
Inventories.................................... 227,974 (765,075) 191,746
Deposits....................................... (483,375) (1,980,711) (358,875)
Prepaid expenses and other assets.............. (28,558) (48,895) (10,153)
Accounts payable and accrued expenses.......... (465,395) 1,485,462 272,155
----------- ----------- -----------
Total adjustments................................ (260,308) (941,381) (71,930)
----------- ----------- -----------
Net cash provided by (used in) operating
activities..................................... 2,100,060 (1,525,637) 1,764,066
Cash flows from investing activities:
Expenditures for property, plant and equipment...... (1,359,210) (1,830,124) (1,209,229)
Proceeds from sale of assets........................ 291,000 -- 291,000
----------- ----------- -----------
Net cash used in investing activities............ (1,068,210) (1,830,124) (918,229)
Cash flows from financing activities:
Net (payments) borrowings under revolving credit
agreement........................................ (1,100,000) 1,316,500 (50,000)
Proceeds from term debt obligations................. 2,800,000 3,763,948 500,000
Payments on term debt obligations................... (919,080) (421,004) (500,290)
Distributions to shareholders....................... (1,731,200) (587,700) (921,200)
Advances to officers/shareholders................... (370,986) (122,471) (288,274)
----------- ----------- -----------
Net cash (used in) provided by financing
activities..................................... (1,321,266) 3,949,273 (1,259,764)
----------- ----------- -----------
Net increase (decrease) in cash....................... (289,416) 593,512 (413,927)
Cash, beginning of year............................... 523,795 234,379 523,795
----------- ----------- -----------
Cash, end of year..................................... $ 234,379 $ 827,891 $ 109,868
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.............. $ 176,045
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE> 147
MACHINE TOOL & GEAR, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. Nature of Business: Machine Tool & Gear, Inc. (the "Company") is a
manufacturer of differential pinion and side gears, output shafts and rear axle
shafts for the automotive industry in North America.
b. Interim Financial Information: The unaudited interim basic financial
statements included herein as of September 30, 1997 and for the nine-month
periods ended September 30, 1997 and 1996, include, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the Company's financial position, results of
operations, and cash flows. Operating results for the nine-months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997.
c. Accounts Receivable: The Company's trade receivables are substantially
due from customers in the automotive industry. One customer represented more
than 50 percent of the sales of the Company during 1996.
d. Inventory: Inventories are stated at the lower of cost or market with
cost being determined on the first-in, first-out basis.
e. Property, Plant and Equipment: Property, plant and equipment are stated
at cost and are depreciated using the straight-line method over the estimated
useful lives of the assets. The general range of lives is fifteen to thirty-nine
years for buildings and leasehold improvements and five to ten years for
machinery and equipment, furniture and fixtures and vehicles. Upon sale or
retirement, the cost of the assets and related accumulated depreciation are
eliminated from the respective accounts, and the resulting gain or loss is
included in income. Normal repairs and maintenance are charged to expense when
incurred.
f. Income Taxes: The Company has elected to be treated as an S corporation
under the Internal Revenue Code. Under these provisions, the Company does not
pay federal corporate income taxes on its taxable income. The shareholders of
the Company are taxed on their proportionate share of the Company's taxable
income. Accordingly, no provision for federal corporate income taxes has been
reflected in the financial statements.
g. Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. INVENTORY:
Inventory at December 31, 1996 consists of the following:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
Finished goods.............................................. $ 474,494
Work in Process............................................. 616,929
Raw Materials............................................... 126,760
-----------
$ 1,218,183
===========
</TABLE>
F-26
<PAGE> 148
MACHINE TOOL & GEAR, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at December 31, 1996 consists of the
following:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
Land........................................................ $ 101,725
Buildings................................................... 655,845
Leasehold improvements...................................... 836,282
Furniture, fixtures and other............................... 444,583
Machinery and equipment..................................... 6,587,339
Construction in progress.................................... 93,920
-----------
8,719,694
Accumulated depreciation.................................... (3,961,797)
-----------
Property, plant and equipment, net........................ $ 4,757,897
===========
</TABLE>
4. CREDIT AGREEMENTS AND LONG-TERM DEBT:
At December 31, 1996 the Company had $250,000 outstanding under a revolving
credit agreement with a bank. The credit agreement allows for maximum borrowings
of $4,300,000 with interest at the lower of the prime rate (the bank's prime
rate was 8.25 percent at December 31, 1996) or a lesser interest rate that is
based upon certain financial ratios and is due upon demand. During 1996, the
Company converted $2,300,000 from the credit agreement to two term notes. A
summary of long-term debt at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
MATURITY INTEREST RATE AMOUNT
--------- ------------- ----------
<S> <C> <C> <C>
Term notes, bank.................................. 2001-2002 8.25% $2,220,000
Mortgage notes.................................... 1999-2001 8.0-8.25% 550,855
----------
Total........................................... 2,770,855
Portion due within one year....................... 582,053
----------
Total long-term debt............................ $2,188,802
==========
</TABLE>
Borrowings under the bank credit agreement are collateralized by accounts
receivable and substantially all assets not otherwise encumbered, as well as a
first mortgage on all commercial property owned by the Company, and are
guaranteed by a related entity under common ownership. The term notes require
quarterly payments of principal and interest through maturity. The mortgage
notes require monthly payments of principal and interest through maturity. In
addition, the Company is bound by various restrictive covenants including
working capital, total debt and tangible net worth. The Company has an
additional revolving credit agreement of $1,500,000 with a bank which was unused
at December 31, 1996.
F-27
<PAGE> 149
MACHINE TOOL & GEAR, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. CREDIT AGREEMENTS AND LONG-TERM DEBT -- CONTINUED
Annual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Year ended December 31:
1997...................................................... $ 582,053
1998...................................................... 592,417
1999...................................................... 572,658
2000...................................................... 570,835
2001...................................................... 417,892
Thereafter................................................ 35,000
----------
$2,770,855
==========
</TABLE>
5. OPERATING LEASES:
During the year ended December 31, 1996, the Company leased an operating
facility on a month-to-month basis from a related entity under common control
for $7,500 per month. The Company leased another facility in Detroit from a
non-related entity on a month-to-month basis for $6,204 per month. Total lease
expense for both facilities for the year ended December 31, 1996 was $164,446.
The Company leases certain machinery and equipment under noncancelable
operating leases expiring in various years through 2001. Several new leases were
entered into at the end of 1996 which will increase rent expense in future
years. Total rent expense for this machinery and equipment for the year ended
December 31, 1996 was $65,181.
Minimum future lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
1997........................................................ $ 336,381
1998........................................................ 329,671
1999........................................................ 310,332
2000........................................................ 296,519
2001........................................................ 271,809
----------
$1,544,712
==========
</TABLE>
6. RELATED PARTY TRANSACTIONS:
For the year ended December 31, 1996, the Company made contributions
totaling $201,400 to a private academy. The officers of the Company also serve
as directors of the academy. In addition, the Company owns a house on the
premises of the academy which is provided rent free to academy personnel.
7. CONTINGENCIES AND COMMITMENTS:
Various claims arising during the normal course of business are pending
against the Company. Management does not reasonably expect that the ultimate
liability, if any, of these matters will have a material effect on future
financial statements.
F-28
<PAGE> 150
MACHINE TOOL & GEAR, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. SUBSEQUENT EVENTS:
The Company has been awarded substantial new business commencing in 1997
through 2003. To accommodate this new business, the Company is currently
expanding an existing manufacturing facility. The expansion is expected to cost
approximately $2,000,000. At December 31, 1996, total costs incurred were
$93,920.
In addition, the Company has placed orders for machinery and equipment in
excess of $10,000,000 as a result of the newly acquired business. Of this
amount, machinery with an approximate value of $6,000,000 will be leased for up
to seven years based on a commitment from a leasing company and the remaining
$4,000,000 is expected to be leased for up to seven years.
In 1997, the Company refinanced existing credit agreements and obtained
additional bank credit facilities of $8,550,000.
In October 1997, the Company signed a definitive agreement to sell the
assets and business of the Company to Newcor, Inc. The sale was completed in
December 1997. Newcor, Inc. designs and manufacturers precision machined
components and assemblies and custom rubber and plastic products primarily for
the automotive and agricultural vehicle markets.
F-29
<PAGE> 151
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Grand Machining Company and
Deco Technologies, Inc., "The Deco Group":
We have audited the accompanying combined balance sheets of Grand Machining
Company and Deco Technologies, Inc. ("the Deco Group") as of December 31, 1997,
1996 and 1995 and the related combined statements of income and retained
earnings, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Deco Group as of
December 31, 1997, 1996 and 1995 and the results of operations and cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
Detroit, Michigan
March 27, 1998
F-30
<PAGE> 152
THE DECO GROUP
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 4,782,328 $ 4,678,857 $ 7,616,441
Marketable securities............................... 8,600,034 7,415,571 6,418,244
Accounts receivable, trade.......................... 6,377,381 6,773,906 6,398,508
Inventories......................................... 2,046,713 2,299,291 2,248,910
Prepaid expenses and other assets................... 172,347 99,169 119,291
Receivable, affiliates.............................. -- -- 121,331
----------- ----------- -----------
Total current assets............................. 21,978,803 21,266,794 22,922,725
Property, plant and equipment, net.................... 7,743,710 8,727,182 10,955,374
----------- ----------- -----------
Total assets................................... $29,722,513 $29,993,976 $33,878,099
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion...................... $ -- $ 111,808 $ 99,224
Payable, affiliates................................. 195,423 52,516 --
Accounts payable, trade............................. 3,065,889 1,869,151 3,863,245
Accrued liabilities:
Payroll and related expenses..................... 1,285,056 1,533,657 1,264,051
Pension and profit sharing plans................. 504,255 252,339 238,216
Property taxes................................... 363,114 288,875 301,169
Other accrued liabilities........................ 280,358 217,360 254,437
----------- ----------- -----------
Total current liabilities...................... 5,694,095 4,325,706 6,020,342
Notes payable, stock redemption agreement........... -- 20,017 131,825
----------- ----------- -----------
Total liabilities.............................. 5,694,095 4,345,723 6,152,167
Shareholders' equity:
Common stock........................................ 16,408 16,408 16,408
Additional paid in capital.......................... 10,534,242 10,534,242 8,734,242
Retained earnings................................... 10,936,278 14,010,834 18,080,094
Unrealized net holding gain on marketable
securities....................................... 2,541,490 1,086,769 895,188
----------- ----------- -----------
Total shareholders' equity..................... 24,028,418 25,648,253 27,725,932
----------- ----------- -----------
Total liabilities and shareholders' equity..... $29,722,513 $29,993,976 $33,878,099
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-31
<PAGE> 153
THE DECO GROUP
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales............................................. $75,516,647 $74,122,960 $77,632,368
Cost of sales......................................... 61,462,979 59,967,536 63,635,554
----------- ----------- -----------
Gross margin........................................ 14,053,668 14,155,424 13,996,814
Selling, general and administrative expenses.......... 13,084,475 13,091,555 13,861,869
----------- ----------- -----------
Operating income.................................... 969,193 1,063,869 134,945
Other income, net, principally investment earnings.... 786,978 1,101,871 739,256
----------- ----------- -----------
Net income.......................................... 1,756,171 2,165,740 874,201
Retained earnings, beginning of year.................. 14,010,834 18,080,094 18,156,893
Distributions to shareholders......................... 4,830,727 6,235,000 951,000
----------- ----------- -----------
Retained earnings, end of year........................ $10,936,278 $14,010,834 $18,080,094
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-32
<PAGE> 154
THE DECO GROUP
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 1,756,171 $ 2,165,740 $ 874,201
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 2,758,967 2,994,311 2,804,530
Gain on sale of investments...................... (394,165) (607,090) (419,100)
Changes in operating assets and liabilities:
Accounts receivable............................ 396,525 (375,398) 2,130,145
Inventories.................................... 252,578 (50,381) 430,189
Prepaid expenses and other assets.............. (73,178) 20,122 28,779
Accounts payable and accrued liabilities....... 1,337,290 (1,759,736) (842,242)
----------- ----------- -----------
Total adjustments................................ 4,278,017 221,828 4,132,301
----------- ----------- -----------
Net cash provided by operating activities........ 6,034,188 2,387,568 5,006,502
Cash flows from investing activities:
Investment in property and equipment................ (1,775,495) (766,119) (1,745,503)
Investments in marketable securities................ (4,004,355) (7,339,042) (7,409,729)
Proceeds from sale of marketable securities......... 4,668,778 7,140,386 9,256,358
Received from (payments to) affiliates, net......... 142,907 173,847 (179,354)
----------- ----------- -----------
Net cash used in investing activities............ (968,165) (790,928) (78,228)
Cash flows from financing activities:
Principal payments on debt obligations.............. (131,825) (99,224) (88,057)
Distributions to shareholders....................... (4,830,727) (6,235,000) (951,000)
Shareholders' capital contributions................. -- 1,800,000 1,400,000
----------- ----------- -----------
Net cash provided by (used in) financing
activities..................................... (4,962,552) (4,534,224) 360,943
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... 103,471 (2,937,584) 5,289,217
Cash and cash equivalents, beginning of year.......... 4,678,857 7,616,441 2,327,224
----------- ----------- -----------
Cash and cash equivalents, end of year................ $ 4,782,328 $ 4,678,857 $ 7,616,441
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-33
<PAGE> 155
THE DECO GROUP
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. Nature of Business: The Deco Group ("the Company") is a manufacturer of
high volume, precision machined components and assemblies for the North American
medium and heavy truck and automotive industries of which over 50 percent of
such products are sold to one customer. The Company's products include rocker
arms and assemblies, transmission shafts, axle shafts and thrust plates.
b. Basis of Presentation: The financial statements represent the combined
financial operations of Grand Machining Company and Deco Technologies, Inc.,
corporations under common control. All significant intercompany balances and
transactions have been eliminated. Deco International, Inc., another affiliated
company under common control, is immaterial and experienced insignificant
business activity during the periods presented and has not been combined in
these financial statements.
c. Cash and Cash Equivalents: Cash and cash equivalents are defined as
short-term, highly liquid investments with original maturities of three months
or less.
d. Marketable Securities: Marketable equity securities are carried at their
fair value. The cost of marketable securities used in determining realized gains
and losses upon sale is in accordance with the specific identification method.
e. Inventories: Inventories, which consist primarily of work in process,
are stated at the lower of cost or net realizable value. Cost is determined on
the first-in, first-out basis.
f. Property, Plant and Equipment: Property, plant and equipment is stated
at cost and is depreciated using principally the straight-line method over the
assets estimated useful lives. The general range of lives is thirty-one to
thirty-nine years for buildings and building improvements and five to ten years
for machinery and equipment, furniture and fixtures and vehicles. Maintenance
and repairs are charged to expense as incurred. Upon sale or retirement, the
cost of the assets and related accumulated depreciation are eliminated from the
respective accounts, and the resulting gain or loss is included in income.
g. Income Taxes: There is no provision for federal income taxes since the
Company as an "S" Corporation is not liable for such taxes. Taxable income of
the Company will be included in the tax returns of the Company's shareholders.
h. Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-34
<PAGE> 156
THE DECO GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. MARKETABLE SECURITIES:
At December 31, 1997, 1996, and 1995 the marketable securities of the
Company were classified as available for sale. Accordingly, the securities are
carried at fair value with unrealized gains and losses excluded from income and
reported as a separate component of shareholders' equity.
The cost and fair values of the securities at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAIN LOSS VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Corporate bonds......................... $ 502,454 $ 15,046 -- $ 517,500
Mutual stock funds...................... 2,535,546 813,446 -- 3,348,992
Other securities, primarily common
stocks................................ 3,020,544 1,712,998 -- 4,733,542
---------- ---------- -- ----------
$6,058,544 $2,541,490 -- $8,600,034
========== ========== == ==========
</TABLE>
The cost and fair values of the securities at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAIN LOSS VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Corporate bonds......................... $1,205,295 $ 13,850 -- $1,219,145
Mutual stock funds...................... 2,319,933 325,577 -- 2,645,510
Other securities, primarily common
stocks................................ 2,803,574 747,342 -- 3,550,916
---------- ---------- -- ----------
$6,328,802 $1,086,769 -- $7,415,571
========== ========== == ==========
</TABLE>
The cost and fair values of the securities at December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAIN LOSS VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Corporate bonds.......................... $ 940,534 $ -- $18,849 $ 921,685
Mutual stock funds....................... 2,057,051 429,237 -- 2,486,288
Other securities, primarily common
stocks................................. 2,525,471 484,800 -- 3,010,271
---------- -------- ------- ----------
$5,523,056 $914,037 $18,849 $6,418,244
========== ======== ======= ==========
</TABLE>
For the years ended December 31, 1997, 1996 and 1995 adjustments to the
cost basis of debt securities to recognize discount or premium between the
original cost of the securities and their face value were immaterial.
F-35
<PAGE> 157
THE DECO GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
3. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Land.......................................... $ 68,346 $ 68,346 $ 68,346
Buildings..................................... 511,553 511,553 511,553
Building Improvements......................... 306,721 294,021 294,021
Furniture and fixtures........................ 710,609 698,359 649,540
Machinery and equipment....................... 23,278,899 21,751,848 21,253,919
Vehicles...................................... 79,855 101,554 101,554
Deposits...................................... -- -- 186,005
----------- ----------- -----------
24,955,983 23,425,681 23,064,938
Less: accumulated depreciation.............. 17,212,273 14,698,499 12,109,564
----------- ----------- -----------
Net property, plant and equipment........ $ 7,743,710 $ 8,727,182 $10,955,374
=========== =========== ===========
</TABLE>
4. STOCK REDEMPTION NOTES PAYABLE:
In 1988, final stock redemption agreements with two shareholders were
entered into, resulting in promissory notes of $353,164 payable to each
shareholder. These notes were paid in full in 1997.
5. COMMON STOCK:
The authorized share capital of Grand Machining Company consists of 500
$100 par value common shares. At December 31, 1997, 1996, and 1995 163.086
common shares were issued and outstanding.
The authorized share capital of Deco Technologies, Inc. consists of 60,000
no par value common shares. At December 31, 1997, 1996, and 1995 100 common
shares were issued and outstanding.
6. EMPLOYEE BENEFIT PLANS:
a. Profit Sharing Contributions: A profit sharing contribution is made
annually as determined by the Board of Directors subject to limitations based
upon current operating profits and participant's compensation. Contributions
expensed for 1997, 1996 and 1995, were $294,895, $186,065 and $213,110,
respectively.
b. Pension Plans: Substantially all employees are covered by defined
benefit pension plans. Plan benefits under the hourly employees' pension plan
are based primarily on years of service. The benefit levels used to compute
pension costs and related disclosures under SFAS No. 87 were $12.00 per month
for 1997 and $9.50 per month for 1996 and 1995. The Plan benefits under the
salaried employees' pension plan are a function of years of service and
employee's compensation near retirement. Plan assets for both plans consist
primarily of short-term funds, commercial paper, and common stock. The Company's
funding policy is to contribute the amount of maximum tax deduction allowed.
The actuarially computed pension cost for 1997, 1996 and 1995 included the
following components:
<TABLE>
<CAPTION>
1997 1996 1995
SALARIED SALARIED SALARIED
AND HOURLY AND HOURLY AND HOURLY
---------- ---------- ----------
<S> <C> <C> <C>
Service cost............................................. $ 142,866 $136,373 $ 121,225
Interest cost on projected benefit obligation............ 138,131 116,851 86,281
Actual return on assets.................................. (161,785) (82,038) (101,205)
Net amortization and deferraltion........................ 14,528 (34,400) (4,622)
--------- -------- ---------
Total pension cost..................................... $ 133,740 $136,786 $ 101,679
========= ======== =========
</TABLE>
F-36
<PAGE> 158
THE DECO GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. EMPLOYEE BENEFIT PLANS -- CONTINUED:
The following table presents the funded status of the plans and significant
assumptions as of December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
SALARIED SALARIED SALARIED
AND HOURLY AND HOURLY AND HOURLY
---------- ---------- ----------
<S> <C> <C> <C>
Accumulated benefit obligation (vested and
nonvested)......................................... $1,736,807 $1,146,068 $ 897,737
========== ========== ==========
Actuarial present value of projected benefit
obligation......................................... $2,068,920 $1,476,396 $1,147,350
Plan assets at fair value............................ 1,644,515 1,465,367 1,276,777
---------- ---------- ----------
Plan assets in excess of (less than) projected
benefit obligation................................. (424,405) (11,029) 129,427
Unamortized net assets at transition................. (267,774) (288,358) (308,942)
Unrecognized prior service costs and net gain........ 330,684 248,897 144,274
---------- ---------- ----------
Accrued pension liability.......................... $ (361,495) $ (50,490) $ (35,241)
========== ========== ==========
Discount rate........................................ 7.5% 8.5% 8.5%
Long-term rate of return:
Salaried........................................... 9% 7.75% 7.75%
Hourly............................................. 9% 7.5% 7.5%
Rate of Increase in compensation level (salaried) per
annum.............................................. 5% 5% 5%
</TABLE>
c. Self-Insured Workers' Compensation: In January 1990, the Company elected
to operate a self-insured program for costs incurred pursuant to the Workers'
Compensation Laws of the State of Michigan. The Company entered into a contract
with a service agent who supervises and administers claims as well as a contract
with an insurance company for excess liability coverage.
The Company recognizes expense for the self-insured program as claims are
paid. The amount of, and change in, the estimated incurred but not paid claims
at each balance sheet date was immaterial to net worth and net income for each
year presented.
d. Self-Insured Health Care Benefits: The Company operates a self-insured
health care program for the benefit of all of its employees. The Company has a
contract with a service provider who supervises and processes claims under the
program. The Company recognizes expense for the self-insured program as claims
are paid. The amount of, and change in, the estimated incurred but not reported
claims at each balance sheet date was immaterial to net worth and net income for
each year presented.
7. LEASE AGREEMENTS:
Grand Machining Company leases space from one of its shareholders. The
lease provides for annual rental payments of $318,800 through 2001. Deco
Technologies, Inc. leases a building under an operating lease from a third party
which expires in 1998 but contains options to extend the term. In addition, the
Company pays real and personal property taxes and all repairs and maintenance
costs on the leased premises. Total combined rent expense for the years ended
December 31, 1997, 1996, and 1995 was $581,454, $518,233 and $510,900,
respectively.
8. CONTINGENCIES:
Various claims arising during the normal course of business are pending
against the Company. Management does not reasonably expect that the ultimate
liability, if any, of these matters will have a material effect on future
financial statements.
F-37
<PAGE> 159
THE DECO GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
9. SUBSEQUENT EVENT:
In December 1997, the Company signed a definitive agreement to sell the
common stock of the Company to Newcor, Inc. The sale was completed in early
March of 1998. Newcor, Inc. designs and manufacturers precision machined
components and assemblies and custom rubber and plastic products primarily for
the automotive and agricultural vehicle markets.
F-38
<PAGE> 160
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Turn-Matic, Inc.:
We have audited the accompanying balance sheet of Turn-Matic, Inc. as of
September 30, 1997 and the related statements of income and retained earnings,
and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Turn-Matic, Inc. as of
September 30, 1997 and the results of operations and cash flows for the year
then ended in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Detroit, Michigan
December 5, 1997 except as to
Note 10 for which the date is January 19, 1998.
F-39
<PAGE> 161
TURN-MATIC, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,217,568 $ 2,926,691
Accounts receivable, trade................................ 1,790,765 2,005,951
Notes receivable, officer/shareholder..................... 248,454 766,891
Inventory................................................. 899,844 884,392
Prepaid expenses.......................................... 98,793 63,740
----------- -----------
Total current assets................................... 6,255,424 6,647,665
Property, plant and equipment, net.......................... 5,253,416 5,135,911
Cash surrender value of officers' life insurance............ 306,342 306,342
----------- -----------
Total assets........................................... $11,815,182 $12,089,918
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion........................... $ 541,167 $ 541,167
Accounts payable.......................................... 754,845 541,858
Accrued liabilities, principally payroll and related
expenses............................................... 259,797 122,225
Federal income tax payable................................ 147,653 319,747
----------- -----------
Total current liabilities.............................. 1,703,462 1,524,997
Long-term debt, noncurrent portion.......................... 2,040,285 1,904,994
Deferred federal income tax................................. 600,665 602,300
----------- -----------
Total liabilities...................................... 4,344,412 4,032,291
Shareholders' equity:
Common stock, $1.00 par value:
Authorized:
50,000 shares
Issued and outstanding: 30,000 shares.................. 30,000 30,000
Retained earnings......................................... 7,440,770 8,027,627
----------- -----------
Total shareholders' equity............................. 7,470,770 8,057,627
----------- -----------
Total liabilities and shareholders' equity............. $11,815,182 $12,089,918
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-40
<PAGE> 162
TURN-MATIC, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1997 1997 1996
------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Sales................................................ $15,796,477 $3,504,566 $4,615,910
Cost of sales........................................ 11,291,823 2,388,699 2,968,483
----------- ---------- ----------
Gross profit....................................... 4,504,654 1,115,867 1,647,427
Selling, general and administration expenses......... 1,946,300 360,638 417,607
Interest expense, net of interest income of $68,606,
$38,914, and $6,807, respectively.................. 173,111 40,432 57,445
----------- ---------- ----------
Income before nonrecurring gain and federal income
taxes........................................... 2,385,243 714,797 1,172,375
Nonrecurring gain on sale of machinery and
equipment.......................................... 440,810 -- 133,000
Other income*........................................ -- 196,872 --
Federal income taxes................................. (970,000) (324,812) (442,184)
----------- ---------- ----------
Net income......................................... 1,856,053 586,857 863,191
Retained earnings, beginning of year................. 5,584,717 7,440,770 5,584,717
----------- ---------- ----------
Retained earnings, end of year....................... $ 7,440,770 $8,027,627 $6,447,908
=========== ========== ==========
</TABLE>
* Represents the agreed upon repayment by an officer/shareholder of disallowed
fiscal year 1996 compensation resulting from an IRS examination.
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE> 163
TURN-MATIC, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1997 1997 1996
------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 1,856,053 $ 586,857 $ 863,191
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 1,002,002 257,505 242,259
Gain on sale of property and equipment............ (440,810) -- (133,000)
Deferred income taxes............................. 85,467 1,635 18,120
Other income...................................... -- (196,872) --
Changes in operating assets and liabilities:
Accounts receivable............................... 1,079,002 (215,186) 89,559
Inventory......................................... (26,058) 15,452 (41,331)
Prepaid expenses.................................. 13,075 35,053 7,100
Cash surrender value.............................. (47,408) -- (8,830)
Accounts payable.................................. (62,205) (212,987) 217,794
Accrued expenses.................................. (12,370) (137,572) (24,398)
Federal income tax payable........................ (211,612) 172,094 156,919
----------- ---------- ----------
Net cash provided by operating activities....... 3,235,136 305,979 1,387,383
----------- ---------- ----------
Cash flows from investing activities:
Expenditures for property, plant and equipment....... (1,175,810) (140,000) (699,456)
Proceeds from sale of property, plant and
equipment......................................... 448,000 -- 133,000
----------- ---------- ----------
Net cash used in investing activities........... (727,810) (140,000) (566,456)
----------- ---------- ----------
Cash flows from financing activities:
Net payments/(borrowings) note receivable,
officer/shareholder............................... (1,659) (321,565) 2,502
Principal payments on long-term debt................. (541,167) (135,291) (180,389)
----------- ---------- ----------
Net cash used in financing activities........... (542,826) (456,856) (177,887)
----------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents.................................. 1,964,500 (290,877) 643,040
Cash and cash equivalents at beginning of year......... 1,253,068 3,217,568 1,253,068
----------- ---------- ----------
Cash and cash equivalents at end of year............... $ 3,217,568 $2,926,691 $1,896,108
=========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest............... $ 243,301
-----------
Cash paid during the year for federal income taxes... $ 1,096,145
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-42
<PAGE> 164
TURN-MATIC, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. Nature of Business: Turn-Matic, Inc. (the "Company") is a manufacturer
of engine components including oil filter adapters, main bearing caps and intake
and exhaust manifolds for the automotive industry in North America of which
nearly 80 percent is sold to one customer.
b. Interim Financial Information: The unaudited interim basic financial
statements included herein as of December 31, 1997 and for the three-month
periods ended December 31, 1997 and 1996 include, in the opinion of management,
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly the Company's financial position, results of operations, and cash
flows. Operating results for the three-months ended December 31, 1997 are not
necessarily indicative of the results that may be expected for the year ended
September 30, 1998.
c. Revenue Recognition/Accounts Receivable: Revenue from sale of
manufactured products is recognized upon passage of title to the customer, which
generally coincides with physical delivery.
d. Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
e. Inventory: Inventory is stated at the lower of cost or market, with cost
being determined by actual purchased material, processing and labor costs
incurred against specific jobs, plus an allocated portion of factory burden.
f. Property, Plant and Equipment: Property, plant and equipment are
recorded at cost. The Company provides for depreciation using the straight line
method at rates based on the estimated service lives as indicated below:
<TABLE>
<S> <C>
Leasehold improvements...................................... 5-31 years
Machinery and equipment..................................... 5-12 years
Furniture and fixtures...................................... 5-10 years
</TABLE>
Assets retired or disposed of are removed from the asset and accumulated
depreciation accounts, and the net amount, less proceeds from disposal, is
charged or credited to income. Normal repairs and maintenance are charged to
expense when incurred.
g. Cash and Cash Equivalents: For purposes of reporting cash flows, the
Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
2. NOTE RECEIVABLE, SHAREHOLDER:
At September 30, 1997, the Company has an unsecured 6 percent demand note
receivable in the amount of $248,454 from Raymond B. Dorris, Sr., a shareholder
of the Company.
3. INVENTORY:
Inventory at September 30, 1997 is summarized as follows:
<TABLE>
<S> <C>
Material, tooling and outside processing.................... $848,598
Direct labor and factory burden............................. 51,246
--------
$899,844
========
</TABLE>
F-43
<PAGE> 165
TURN-MATIC, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. NOTE PAYABLE, BANK, LINE OF CREDIT:
The Company has a revolving line of credit aggregating $2,000,000 with a
bank bearing interest at the prime interest rate. Accounts receivable, inventory
and machinery and equipment serve as collateral for borrowings under the line.
The line was unused at September 30, 1997.
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<S> <C>
Leasehold improvements...................................... $ 454,165
Machinery and equipment..................................... 10,599,677
Furniture and fixtures...................................... 96,004
-----------
11,149,846
Accumulated depreciation.................................... (5,896,430)
-----------
Property, plant and equipment, net.......................... $ 5,253,416
===========
</TABLE>
6. LONG-TERM DEBT:
The Company's long-term debt at September 30, 1997 is summarized as
follows:
<TABLE>
<CAPTION>
CURRENT NONCURRENT
PORTION PORTION TOTAL
------- ---------- -----
<S> <C> <C> <C>
Bank loan dated September 14, 1995, due May 14,
2002. The loan in the original amount of
$2,748,012 is payable in monthly installments of
$34,323 plus interest at the prime rate. All the
assets of the Company serve as collateral........ $411,881 $1,512,369 $1,924,250
Bank loan dated September 28, 1995, due September
28, 2002. The loan in the original amount of
$905,000 is payable in monthly installments of
$10,774 plus interest at the prime rate. All the
assets of the Company serve as collateral........ 129,286 527,916 657,202
-------- ---------- ----------
$541,167 $2,040,285 $2,581,452
======== ========== ==========
</TABLE>
Principal payments on long-term debt during the next five years are due as
follows:
<TABLE>
<S> <C>
Year ended September 30:
1998...................................................... $ 541,167
1999...................................................... 541,167
2000...................................................... 541,167
2001...................................................... 541,167
2002...................................................... 416,784
----------
$2,581,452
==========
</TABLE>
F-44
<PAGE> 166
TURN-MATIC, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
7. FEDERAL INCOME TAX EXPENSE:
Federal income tax expense at September 30, 1997 is summarized as follows:
<TABLE>
<S> <C>
Current..................................................... $884,533
Deferred.................................................... 85,467
--------
$970,000
========
</TABLE>
The deferred federal income tax liability is a result of temporary
differences due to the utilization of accelerated depreciation methods for tax
purposes.
8. LEASE AGREEMENTS:
The Company leased a building located in Clinton Township, Michigan from
Raymond B. Dorris, Sr. and Marie E. Dorris, shareholders of the Company. The
month to month lease agreement was for the Company to pay monthly rent of $4,500
plus taxes, insurance, maintenance and utilities. The lease was terminated on
September 30, 1997.
The Company leases two buildings located in Clinton Township, Michigan from
a related partnership. The 5-year lease agreements dated April 1, 1995 are for
the Company to pay monthly rent of $10,000 and $24,000, respectively, plus
taxes, insurance, maintenance and utilities. The mortgages held by the
partnership are guaranteed by the Company.
Total rental expense, net of sublease rental income of $19,800 and
exclusive of taxes, insurance, maintenance and utilities for the year ended
September 30, 1997 was $442,220.
9. PROFIT SHARING PLAN:
The Company has a profit sharing plan for all eligible employees. Eligible
employees are defined as those completing one year of service and have reached
the age of 21. The amount of contribution to the plan each year is discretionary
and is determined by the Company based on eligible employees compensation not to
exceed the maximum allowable as a deduction to the Company under the provisions
of the Internal Revenue Code. Profit sharing plan expense for the year ended
September 30, 1997 was $152,158.
10. SUBSEQUENT EVENT:
In January 1998 the Company signed a definitive agreement to sell all of
the common stock of the Company to Newcor, Inc. The sale is expected to be
completed in early 1998. Newcor, Inc. designs and manufacturers precision
machined components and assemblies and custom rubber and plastic products
primarily for the automotive and agricultural vehicle markets.
F-45
<PAGE> 167
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 168
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
EXCHANGE NOTES BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING THE
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Additional Information................ i
Forward-Looking Statements............ ii
Summary............................... 1
Risk Factors.......................... 14
The Exchange Offer.................... 21
Certain Federal Income Tax
Consequences of the Exchange
Offer............................... 28
The Acquisitions...................... 29
Pro Forma Capitalization.............. 31
Unaudited Pro Forma Condensed
Consolidated Financial Data......... 32
Selected Consolidated Historical
Financial Data...................... 40
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 41
Business.............................. 50
Glossary.............................. 65
Management and Directors.............. 69
Security Ownership of Certain
Beneficial Owners and Management.... 78
Description of Exchange Notes......... 81
Description of Notes.................. 109
Registration Rights; Liquidated
Damages............................. 109
Description of Other Debt............. 110
Certain Federal Tax Considerations for
Foreign Persons..................... 112
Plan of Distribution.................. 115
Legal Matters......................... 115
Experts............................... 115
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
NEWCOR, INC. LOGO
NEWCOR, INC.
OFFER TO EXCHANGE
ALL OUTSTANDING
9 7/8% SENIOR SUBORDINATED
NOTES DUE 2008
($125,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
9 7/8% SERIES B SENIOR
SUBORDINATED NOTES DUE 2008
($125,000,000 PRINCIPAL AMOUNT)
--------------------
PROSPECTUS
--------------------
JUNE 10, 1998
======================================================
<PAGE> 169
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The General Corporation Law of the State of Delaware ("DGCL"), under which
the Issuer is organized, empowers a corporation to indemnify any person who was
or is a party or is threatened to be made a party to any action, suit or
proceeding (each a "proceeding"), other than a proceeding by or in the right of
the corporation, by reason of the fact that he or she is or was a director,
officer, employee, or agent of the corporation or, at the corporation's request,
a director, officer, employee, or agent of another entity or enterprise against
expenses, judgments, fines, and amounts paid in settlement actually and
reasonably incurred by the indemnitee in connection with the proceeding, if the
Indemnitee acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the corporation and, with respect
to any criminal proceeding, without reasonable cause to believe his or her
conduct was unlawful. The DGCL further empowers a corporation to indemnify any
of the same types of indemnitees against expenses actually and reasonably
incurred by him or her in connection with the defense or settlement of a
proceeding by or in the right of the corporation if the indemnitee met the same
standards of conduct, except that indemnification with respect to any claim,
issue, or matter as to which the indemnitee has been adjudged to be liable to
the corporation may be made only if and to the extent determined to be proper by
a court. In addition, the DGCL also requires such a corporation to indemnify any
such indemnitee who is successful on the merits or otherwise in defense of any
proceeding of the types described above, or in defense of any claim, issue, or
matter in any such proceeding, against his or her actual and reasonable expenses
incurred in connection with such defense, and it permits advancement by the
corporation of an indemnitee's expenses under certain circumstances. In general,
Article Ninth of the Issuer's Restated Certificate of Incorporation requires
indemnification of and expense advancement to all of the potential types of
indemnitees described above (including each current Newcor director or officer
and each of its directors, officers, employees, or agents who currently is
serving at the Issuer's request as a director or officer of a Subsidiary
Guarantor) to the fullest extent permitted by the DGCL.
The Michigan Business Corporation Act ("MBCA"), under which each Subsidiary
Guarantor other than Plastronics Plus, Inc. is organized, contains mandatory and
permissive indemnification provisions indemnification provisions substantially
similar to those of the DGCL. The bylaws of each of these Subsidiary Guarantors
contain provisions effectively mandating indemnification of and the advancement
of expense to such Subsidiary Guarantor's directors and officers to the fullest
extent permitted by the MBCA.
The Wisconsin Business Corporation Law ("WBCL"), under which Plastronics
Plus, Inc. is organized, generally requires a Wisconsin business corporation to
indemnify any current or former director or officer who has been successful on
the merits or otherwise in the defense of a proceeding for all reasonable
expenses incurred in the proceeding, if the indemnitee was a party to the
proceeding because of being a director or officer of the corporation. In
addition, the WBCL generally mandates indemnification against liability incurred
by such an indemnitee in any other proceeding, unless the liability was incurred
because the indemnitee breached or failed to perform a duty owed by him or her
to the corporation and the breach or failure to perform constitutes (i) a
violation of the criminal law (unless the indemnitee had reasonable cause to
believe that his or her conduct was lawful or no reasonable cause to believe
that it was unlawful), (ii) a wilful failure to deal fairly with the corporation
in a matter in which the indemnitee has a material conflict of interest, (iii) a
transaction in which the indemnitee derived an improper personal profit, or (iv)
wilful misconduct. The WBCA permits a corporation to limit the indemnification
obligations described above by doing so in its articles of incorporation, but
the Articles of Incorporation of Plastronics Plus, Inc. contain no such
limitations.
Insurance is maintained on a regular basis (and not specifically in
connection with this offering or the offering of the Notes) against liabilities
arising on the part of directors and officers out of their performance in such
capacities or arising on the part of any of the Registrants out of the
above-described indemnification provisions of such Registrant, subject to
certain exclusions and to the policy limits.
II-1
<PAGE> 170
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. (File number for all documents incorporated by reference is
Commission File Number 1-5985.)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
*3.1 Restated Certificate of Incorporation of the Issuer, as
amended
*3.2 Bylaws of the Issuer
*3.3 Articles of Incorporation of Rochester Gear, Inc., as
amended
*3.4 Bylaws of Rochester Gear, Inc.
*3.5 Articles of Incorporation of Plastronics Plus, Inc.
*3.6 Bylaws of Plastronics Plus, Inc.
*3.7 Restated Articles of Incorporation of Grand Machining
Company
*3.8 Bylaws of Grand Machining Company
*3.9 Articles of Incorporation of Deco Technologies, Inc.
*3.10 Bylaws of Deco Technologies, Inc.
*3.11 Articles of Incorporation of Deco International, Inc.
*3.12 Bylaws of Deco International, Inc.
*3.13 Restated Articles of Incorporation of Turn-Matic, Inc.
*3.14 Amended and Restated Bylaws of Turn-Matic, Inc.
4.1.1 Indenture relating to the Notes (including forms of Notes
and related Subsidiary Guarantees), dated as of March 4,
1998, among the Issuer, the Subsidiary Guarantors, and First
Trust National Association, as trustee, relating to the
Notes (incorporated by reference to exhibit 4.(a) to the
Issuer's Form 8-K current report filed on March 13, 1998)
4.1.2 A/B Exchange Registration Rights Agreement, dated as of
March 4, 1998, among the Issuer, the Subsidiary Guarantors,
and the Initial Purchasers (incorporated by reference to
exhibit 4.(b) to the Issuer's Form 8-K current report filed
on March 13, 1998)
*4.1.3 Form of Exchange Notes (including related Subsidiary
Guarantees)
4.2.1 Third Amended and Restated Revolving Credit Agreement, dated
January 15, 1998, between the Issuer and Comerica Bank
(incorporated by reference to exhibit 4(a) to the Issuer's
Form 10-K annual report for the fiscal year ended October
31, 1997)
4.2.2 First Amendment to Third Amended and Restated Revolving
Credit Agreement, dated February 12, 1998, between the
Issuer and Comerica Bank (incorporated by reference to
exhibit 4(m) to the Issuer's Form 10-Q quarterly report for
the quarterly period ended January 31, 1998)
*4.2.3 Guaranty in favor of Comerica Bank entered into as of
January 15, 1998 by certain of subsidiaries of the Issuer,
including Rochester Gear, Inc. and Plastronics Plus, Inc.
*4.2.4 Guaranty entered into as of March 4, 1998 by all other
Subsidiary Guarantors
The Issuer hereby undertakes to furnish to the Commission,
upon its request, copies of documents relating to the $6.1
million Michigan Strategic Fund Limited Obligation Refunding
Revenue Bonds, Series 1995 referred to in Part I of this
Registration Statement.
*5.1 Opinion and consent of Miller, Canfield, Paddock and Stone,
P.L.C.
10.1 Purchase Agreement, dated February 27, 1998, among the
Issuer, the Subsidiary Guarantors, and the Initial
Purchasers (incorporated by reference to exhibit 1. to the
Issuer's Form 8-K current report filed on March 13, 1998)
</TABLE>
II-2
<PAGE> 171
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
10.2.1 Asset Purchase Agreement dated October 1, 1997 between the
Issuer and Machine Tool & Gear, Inc. ("MT&G") (incorporated
by reference to exhibit 2 to the Issuer's Form 8-K/A filed
on March 6, 1998)
10.2.2 First Amendment to Asset Purchase Agreement, dated October
28, 1997, between the Issuer and MT&G (incorporated by
reference to exhibit 2.1 to the Issuer's Form 8-K/A filed on
March 6, 1998)
10.2.3 Second Amendment to Asset Purchase Agreement between the
Issuer and MT&G (incorporated by reference to exhibit 2.3 to
the Issuer's Form 8-K/A filed on March 6, 1998)
10.2.4 Third Amendment to Asset Purchase Agreement between the
Issuer and MT&G (incorporated by reference to exhibit 2,3 to
the Issuer's Form 8-K/A filed on March 6, 1998)
10.2.5 Fourth Amendment to Asset Purchase Agreement between the
Issuer and MT&G (incorporated by reference to exhibit 2.4 to
the Issuer's Form 8-K/A filed on March 6, 1998)
10.3.1 Stock Purchase Agreement, dated December 9, 1997, between
the Issuer and Stephen Grand, individually and as Trustee of
the Stephen Grand Revocable Trust u/a dtd July 5, 1979 and
the Stephen M. Grand Property Trust u/a dtd January 22, 1997
(incorporated by reference to exhibit 10(1) to the Issuer's
Form 10-K annual report for the fiscal year ended October
31, 1997)
10.3.2 Amendment to Stock Purchase Agreement, dated March 4, 1998,
between the Issuer and Stephen Grand, individually and as
Trustee of the Stephen Grand Revocable Trust u/a dtd July 5,
1979 and the Stephen M. Grand Property Trust u/a dtd January
22, 1997 (incorporated by reference to exhibit 10.(b) to the
Issuer's Form 8-K current report filed on March 13, 1998)
10.4 Stock Purchase Agreement, dated January 16, 1998, by and
among the Issuer and each of the shareholders of Turn-Matic,
Inc. (incorporated by reference to exhibit 10(m) to the
Issuer's Form 10-K annual report for the fiscal year ended
October 31, 1997)**
10.5 1982 Incentive Stock Option Plan (incorporated by reference
to exhibit 10(a) to the Issuer's Form 10-K annual report for
the fiscal year ended October 31, 1983)**
10.6 Newcor, Inc. Directors' Retirement Plan (incorporated by
reference to exhibit 10(b) to the Issuer's Form 10-K annual
report for the fiscal year ended October 31, 1988)**
10.7 Board of Directors Deferred Directors' Fees plan
(incorporated by reference to exhibit 10(e) to the Issuer's
Form 10-K annual report for the fiscal year ended October
31, 1987)**
10.8.1 Newcor, Inc. Management Stock Incentive Plan (incorporated
by reference to exhibit 10(j) to the Issuer's Form 10-K
annual report for the fiscal year ended October 31, 1994)**
10.8.2 Amendment to Newcor, Inc. Management Stock Incentive Plan
(incorporated by reference to exhibit 10(k) to the Issuer's
Form 10-K annual report for the fiscal year ended October
31, 1994)**
10.9 1996 Employee Incentive Stock Plan (incorporated by
reference to Appendix A to the Issuer's proxy statement
dated February 5, 1996)**
10.10 1996 Non-Employee Directors Stock Option Plan (incorporated
by reference to Appendix B to the Issuer's proxy statement
dated February 5, 1996)**
10.11 Employment Agreement with W. John Weinhardt, dated February
13, 1995 (incorporated by reference to exhibit 10(g) to the
Issuer's Form 10-K annual report for the fiscal year ended
October 31, 1995)**
10.12 Change in Control Agreement with W. John Weinhardt, dated
February 13, 1995 (incorporated by reference to exhibit
10(h) to the Issuer's Form 10-K annual report for the fiscal
year ended October 31, 1995)**
10.13 Agreement with Thomas D. Parker, dated June 7,1988
(incorporated by reference to exhibit 10(h) to the Issuer's
Form 10-K annual report for the fiscal year ended October
31, 1992)**
</TABLE>
II-3
<PAGE> 172
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.14 Employment Agreement with Dennis H. Reckinger, dated July
31, 1992 (incorporated by reference to exhibit 10(n) to the
Issuer's Form 10-K annual report for the fiscal year ended
October 31, 1997)**
10.15 Employment Agreement with Robert C. Ballou, dated September
25, 1992 (incorporated by reference to exhibit 10(o) to the
Issuer's Form 10-K annual report for the fiscal year ended
October 31, 1997)**
10.16 Employment Agreement with Keith Hale, dated March 4, 1998
(incorporated by reference to exhibit 4(l) to the Issuer's
Form 10-Q quarterly report for the quarterly period ended
January 31, 1998)**
*12.1 Statement re computation of ratios
*21.1 List of subsidiaries of the Issuer
23.1 Consent of Coopers & Lybrand LLP
23.2 Consent of Miller, Canfield, Paddock and Stone, P.L.C.
(contained in Exhibit 5.1)
*24.1 Powers of Attorney (contained in signature pages of original
Registration Statement)
*25.1 Statement of Eligibility and Qualification of Trustee on
Form T-1 of First Trust National Association under the Trust
Indenture Act of 1939
*99.1 Form of Letter of Transmittal with respect to the Exchange
Offer
*99.2 Form of Notice of Guaranteed Delivery with respect to the
Exchange Offer
99.3 Form of Exchange Agent Agreement
</TABLE>
- -------------------------
* Filed with original Registration Statement on April 30, 1998
** Indicates contract or compensatory plan or arrangement with one or more
Company executive officers and/or directors of the Issuer
(b) Financial Statement Schedules
None required
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of any
of the Registrants pursuant to the foregoing provisions, or otherwise, each
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by a Registrant
of expenses incurred or paid by a director, officer or controlling person of
such Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, such Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-4
<PAGE> 173
Each undersigned Registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the date of this Registration Statement (or most recent post-effective
amendment thereof) which, individual or in the aggregate, represent a
fundamental change in the information set forth in this Registration
Statement. Notwithstanding the foregoing, any increase or decrease in
volume of the securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
this Registration Statement through the date of responding to the request.
(c) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in this Registration Statement when it
became effective.
II-5
<PAGE> 174
NEWCOR, INC.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
named above has duly caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Bloomfield Hills, State
of Michigan, on June 10, 1998.
NEWCOR, INC.
By: /s/ W. JOHN WEINHARDT
--------------------------------------
W. John Weinhardt
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<C> <S> <C>
* Chairman of the Board and Director June 10, 1998
- ------------------------------------------
William A. Lawson
/s/ W. JOHN WEINHARDT President and Chief Executive Officer and June 10, 1998
- ------------------------------------------ Director
W. John Weinhardt
* Vice President-Finance, Treasurer and June 10, 1998
- ------------------------------------------ Chief Financial Officer (also principal
John J. Garber accounting officer)
Director
- ------------------------------------------
Jerry D. Campbell
* Director June 10, 1998
- ------------------------------------------
Shirley E. Gofrank
Director
- ------------------------------------------
Jack R. Lousma
* Director June 10, 1998
- ------------------------------------------
Richard A. Smith
Director
- ------------------------------------------
Kurt O. Tech
*By: /s/ W. JOHN WEINHARDT
------------------------------------
W. John Weinhardt
Attorney-in-Fact
</TABLE>
S-1
<PAGE> 175
ROCHESTER GEAR, INC.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
named above has duly caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Bloomfield Hills, State
of Michigan, on June 10, 1998.
ROCHESTER GEAR, INC.
By: /s/ W. JOHN WEINHARDT
------------------------------------
W. John Weinhardt
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<C> <S> <C>
/s/ W. JOHN WEINHARDT Chairman of the Board (principal June 10, 1998
- ------------------------------------------ executive officer) and Director
W. John Weinhardt
* Treasurer (principal financial officer June 10, 1998
- ------------------------------------------ and principal accounting officer)
John J. Garber
* Director June 10, 1998
- ------------------------------------------
Robert C. Ballou
Director
- ------------------------------------------
Donald A. Septer
*By: /s/ W. JOHN WEINHARDT
------------------------------------
W. John Weinhardt
Attorney-in-Fact
</TABLE>
S-2
<PAGE> 176
PLASTRONICS PLUS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
named above has duly caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Bloomfield Hills, State
of Michigan, on June 10, 1998.
PLASTRONICS PLUS, INC.
By: /s/ W. JOHN WEINHARDT
------------------------------------
W. John Weinhardt
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<C> <S> <C>
/s/ W. JOHN WEINHARDT Chairman of the Board (principal June 10, 1998
- ------------------------------------------ executive officer) and Director
W. John Weinhardt
* Treasurer (principal financial officer June 10, 1998
- ------------------------------------------ and principal accounting officer)
John J. Garber
* Director June 10, 1998
- ------------------------------------------
Dennis H. Reckinger
Director
- ------------------------------------------
Clifford R. Haggenjos, Jr.
*By: /s/ W. JOHN WEINHARDT
------------------------------------
W. John Weinhardt
Attorney-in-Fact
</TABLE>
S-3
<PAGE> 177
GRAND MACHINING COMPANY
DECO TECHNOLOGIES, INC.
DECO INTERNATIONAL, INC.
TURN-MATIC, INC.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
Registrants named above has duly caused this Amendment to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Bloomfield
Hills, State of Michigan, on June 10, 1998.
GRAND MACHINING COMPANY
DECO TECHNOLOGIES, INC.
DECO INTERNATIONAL, INC.
TURN-MATIC, INC.
By: /s/ W. JOHN WEINHARDT
------------------------------------
W. John Weinhardt
Chairman of the Board (of each)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed by the following persons in the capacities with each of the
above-named registrants and on the dates indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<C> <S> <C>
/s/ W. JOHN WEINHARDT Chairman of the Board (principal June 10, 1998
--------------------------------------------- executive officer) and Director
W. John Weinhardt
* Treasurer (principal financial June 10, 1998
--------------------------------------------- officer and principal accounting
John J. Garber officer) and Director
* Director June 10, 1998
---------------------------------------------
Keith Hale
*By: /s/ W. JOHN WEINHARDT
------------------------------------
W. John Weinhardt
Attorney-in-Fact
</TABLE>
S-4
<PAGE> 178
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
*3.1 Restated Certificate of Incorporation of the Issuer, as
amended
*3.2 Bylaws of the Issuer
*3.3 Articles of Incorporation of Rochester Gear, Inc., as
amended
*3.4 Bylaws of Rochester Gear, Inc.
*3.5 Articles of Incorporation of Plastronics Plus, Inc.
*3.6 Bylaws of Plastronics Plus, Inc.
*3.7 Restated Articles of Incorporation of Grand Machining
Company
*3.8 Bylaws of Grand Machining Company
*3.9 Articles of Incorporation of Deco Technologies, Inc.
*3.10 Bylaws of Deco Technologies, Inc.
*3.11 Articles of Incorporation of Deco International, Inc.
*3.12 Bylaws of Deco International, Inc.
*3.13 Restated Articles of Incorporation of Turn-Matic, Inc.
*3.14 Amended and Restated Bylaws of Turn-Matic, Inc.
4.1.1 Indenture relating to the Notes (including forms of Notes
and related Subsidiary Guarantees), dated as of March 4,
1998, among the Issuer, the Subsidiary Guarantors, and First
Trust National Association, as trustee, relating to the
Notes (incorporated by reference to exhibit 4.(a) to the
Issuer's Form 8-K current report filed on March 13, 1998)
4.1.2 A/B Exchange Registration Rights Agreement, dated as of
March 4, 1998, among the Issuer, the Subsidiary Guarantors,
and the Initial Purchasers (incorporated by reference to ex-
hibit 4.(b) to the Issuer's Form 8-K current report filed on
March 13, 1998)
*4.1.3 Form of Exchange Notes (including related Subsidiary
Guarantees)
4.2.1 Third Amended and Restated Revolving Credit Agreement, dated
January 15, 1998, between the Issuer and Comerica Bank
(incorporated by reference to exhibit 4(a) to the Issuer's
Form 10-K annual report for the fiscal year ended October
31, 1997)
4.2.2 First Amendment to Third Amended and Restated Revolving
Credit Agreement, dated February 12, 1998, between the
Issuer and Comerica Bank (incorporated by reference to
exhibit 4(m) to the Issuer's Form 10-Q quarterly report for
the quarterly period ended January 31, 1998)
*4.2.3 Guaranty in favor of Comerica Bank entered into as of
January 15, 1998 by certain of subsidiaries of the Issuer,
including Rochester Gear, Inc. and Plastronics Plus, Inc.
*4.2.4 Guaranty entered into as of March 4, 1998 by all other
Subsidiary Guarantors
The Issuer hereby undertakes to furnish to the Commission,
upon its request, copies of documents relating to the $6.1
million Michigan Strategic Fund Limited Obligation Refunding
Revenue Bonds, Series 1995 referred to in Part I of this
Registration Statement.
*5.1 Opinion and consent of Miller, Canfield, Paddock and Stone,
P.L.C.
10.1 Purchase Agreement, dated February 27, 1998, among the
Issuer, the Subsidiary Guarantors, and the Initial
Purchasers (incorporated by reference to exhibit 1. to the
Issuer's Form 8-K current report filed on March 13, 1998)
10.2.1 Asset Purchase Agreement dated October 1, 1997 between the
Issuer and Machine Tool & Gear, Inc. ("MT&G") (incorporated
by reference to exhibit 2 to the Issuer's Form 8-K/A filed
on March 6, 1998)
</TABLE>
<PAGE> 179
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
10.2.2 First Amendment to Asset Purchase Agreement, dated October
28, 1997, between the Issuer and MT&G (incorporated by
reference to exhibit 2.1 to the Issuer's Form 8-K/A filed on
March 6, 1998)
10.2.3 Second Amendment to Asset Purchase Agreement between the
Issuer and MT&G (incorporated by reference to exhibit 2.3 to
the Issuer's Form 8-K/A filed on March 6, 1998)
10.2.4 Third Amendment to Asset Purchase Agreement between the
Issuer and MT&G (incorporated by reference to exhibit 2,3 to
the Issuer's Form 8-K/A filed on March 6, 1998)
10.2.5 Fourth Amendment to Asset Purchase Agreement between the
Issuer and MT&G (incorporated by reference to exhibit 2.4 to
the Issuer's Form 8-K/A filed on March 6, 1998)
10.3.1 Stock Purchase Agreement, dated December 9, 1997, between
the Issuer and Stephen Grand, individually and as Trustee of
the Stephen Grand Revocable Trust u/a dtd July 5, 1979 and
the Stephen M. Grand Property Trust u/a dtd January 22, 1997
(incorporated by reference to exhibit 10(1) to the Issuer's
Form 10-K annual report for the fiscal year ended October
31, 1997)
10.3.2 Amendment to Stock Purchase Agreement, dated March 4, 1998,
between the Issuer and Stephen Grand, individually and as
Trustee of the Stephen Grand Revocable Trust u/a dtd July 5,
1979 and the Stephen M. Grand Property Trust u/a dtd January
22, 1997 (incorporated by reference to exhibit 10.(b) to the
Issuer's Form 8-K current report filed on March 13, 1998)
10.4 Stock Purchase Agreement, dated January 16, 1998, by and
among the Issuer and each of the shareholders of Turn-Matic,
Inc. (incorporated by reference to exhibit 10(m) to the
Issuer's Form 10-K annual report for the fiscal year ended
October 31, 1997)**
10.5 1982 Incentive Stock Option Plan (incorporated by reference
to exhibit 10(a) to the Issuer's Form 10-K annual report for
the fiscal year ended October 31, 1983)**
10.6 Newcor, Inc. Directors' Retirement Plan (incorporated by
reference to exhibit 10(b) to the Issuer's Form 10-K annual
report for the fiscal year ended October 31, 1988)**
10.7 Board of Directors Deferred Directors' Fees plan
(incorporated by reference to exhibit 10(e) to the Issuer's
Form 10-K annual report for the fiscal year ended October
31, 1987)**
10.8.1 Newcor, Inc. Management Stock Incentive Plan (incorporated
by reference to exhibit 10(j) to the Issuer's Form 10-K
annual report for the fiscal year ended October 31, 1994)**
10.8.2 Amendment to Newcor, Inc. Management Stock Incentive Plan
(incorporated by reference to exhibit 10(k) to the Issuer's
Form 10-K annual report for the fiscal year ended October
31, 1994)**
10.9 1996 Employee Incentive Stock Plan (incorporated by
reference to Appendix A to the Issuer's proxy statement
dated February 5, 1996)**
10.10 1996 Non-Employee Directors Stock Option Plan (incorporated
by reference to Appendix B to the Issuer's proxy statement
dated February 5, 1996)**
10.11 Employment Agreement with W. John Weinhardt, dated February
13, 1995 (incorporated by reference to exhibit 10(g) to the
Issuer's Form 10-K annual report for the fiscal year ended
October 31, 1995)**
10.12 Change in Control Agreement with W. John Weinhardt, dated
February 13, 1995 (incorporated by reference to exhibit
10(h) to the Issuer's Form 10-K annual report for the fiscal
year ended October 31, 1995)**
10.13 Agreement with Thomas D. Parker, dated June 7,1988
(incorporated by reference to exhibit 10(h) to the Issuer's
Form 10-K annual report for the fiscal year ended October
31, 1992)**
10.14 Employment Agreement with Dennis H. Reckinger, dated July
31, 1992 (incorporated by reference to exhibit 10(n) to the
Issuer's Form 10-K annual report for the fiscal year ended
October 31, 1997)**
</TABLE>
<PAGE> 180
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.15 Employment Agreement with Robert C. Ballou, dated September
25, 1992 (incorporated by reference to exhibit 10(o) to the
Issuer's Form 10-K annual report for the fiscal year ended
October 31, 1997)**
10.16 Employment Agreement with Keith Hale, dated March 4, 1998
(incorporated by reference to exhibit 4(l) to the Issuer's
Form 10-Q quarterly report for the quarterly period ended
January 31, 1998)**
*12.1 -- Statement re computation of ratios
*21.1 -- List of subsidiaries of the Issuer
23.1 -- Consent of Coopers & Lybrand LLP
23.2 -- Consent of Miller, Canfield, Paddock and Stone, P.L.C.
(contained in Exhibit 5.1)
*24.1 -- Powers of Attorney (contained in signature pages of this
Registration Statement)
*25.1 -- Statement of Eligibility and Qualification of Trustee on
Form T-1 of First Trust National Association under the Trust
Indenture Act of 1939
*99.1 -- Form of Letter of Transmittal with respect to the Exchange
Offer
*99.2 -- Form of Notice of Guaranteed Delivery with respect to the
Exchange Offer
99.3 -- Form of Exchange Agent Agreement
</TABLE>
- -------------------------
* Filed with original Registration Statement on April 30, 1998
** Indicates contract or compensatory plan or arrangement with one or more
Company executive officers and/or directors of the Issuer
<PAGE> 1
EX-23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-4 (File No.
333-51415) of our reports for the dates and periods indicated in such reports on
our audits of the financial statements of Newcor, Inc., Machine Tool & Gear,
Inc., The Deco Group, and Turn-Matic, Inc. appearing on pages F-2, F-22, F-30
and F-39, respectively, in such Registration Statement. We also consent to the
reference of our Firm under the caption "Experts."
Detroit, Michigan
June 9, 1998
<PAGE> 1
Exhibit 99.3
EXCHANGE AGENT AGREEMENT
EXCHANGE OFFER
As of June 10, 1998
U.S. Bank Trust National Association
Buhl Building, Suite 740
535 Griswold Street
Detroit, Michigan 48226
Ladies and Gentlemen:
Newcor, Inc., a Delaware corporation (the "Issuer"), is offering (the "Exchange
Offer") to exchange $1,000 principal amount of its 9 7/8% Series B Senior
Subordinated Notes due 2008 (the "Exchange Notes") for each $1,000 principal
amount of its 9 7/8% Senior Subordinated Notes due 2008 (the "Notes"), upon the
terms and conditions set forth in the Prospectus dated June 10, 1998 (the
"Prospectus") and the related Letter of Transmittal (the "Letter of
Transmittal") and Notice of Guaranteed Delivery (the "Notice of Guaranteed
Delivery"), copies of all of which are attached to this Agreement as Exhibit A.
The Exchange Offer is being made by the Issuer to any and all holders of the
Notes who were such on or about June 10, 1998 or who become such prior to the
Expiration Date of the Exchange Offer. The Letter of Transmittal that will
accompany the Prospectus, which is addressed to you and is to be used by holders
of the Notes to accept the Exchange Offer, contains instructions with respect to
the delivery of certificates for, or book-entry delivery of, Notes tendered in
the Exchange Offer.
This will confirm our agreement with you to act as Exchange Agent in connection
with the Exchange Offer. In such capacity, you will act as agent for the holders
of the Notes to receive and exchange Exchange Notes for Notes tendered pursuant
to the Exchange Offer. In carrying out your duties as Exchange Agent, you are to
act in accordance with the following:
1. The Exchange Offer will expire at 5:00 p.m., New York City time, on July
10, 1998 (the "Initial Expiration Date") or at any subsequent time to
which the Issuer may extend the Exchange Offer. The Issuer expressly
reserves the right to extend the Exchange Offer from time to time by
giving written notice to you before 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date. In this
Agreement, "Expiration Date" means the later of the Initial Expiration
Date or the latest time and date to which the Exchange Offer may be so
extended.
<PAGE> 2
2. Promptly following the commencement of the Exchange Offer, you will
establish a book entry account with The Depository Trust Corporation
("DTC") for purposes of the Exchange Offer. Any financial institution that
is a participant in DTC may make book-entry delivery of Notes by causing
DTC to transfer such Notes into the account maintained by you pursuant to
this paragraph in accordance with procedures for such transfer.
3. You are to examine the Letters of Transmittal, the certificates for Notes
and the other documents delivered or mailed to you in connection with
tenders of Notes to ascertain whether they are filled out and executed in
accordance with the instructions set forth in the Letter of Transmittal.
If any Letter of Transmittal has been improperly completed or executed,
or the certificates for Notes accompanying such Letter of Transmittal are
not in proper form for transfer (as required by the instructions) or are
not received, or no Automated Tender Offer Program ("ATOP") message with
respect to delivery of book-entry Notes has been received, or if some
other irregularity in connection with the acceptance of the Exchange
Offer exists, you will endeavor to take such action as may be necessary
to cause such irregularity to be corrected.
4. If a holder desires to tender Notes pursuant to the Exchange Offer but
such holder's certificates for such Notes are not immediately available,
or time will not permit all required documents to reach you before the
Expiration Date, or the procedure for book-entry tender cannot be
completed on a timely basis, such Notes may nevertheless be tendered if
all the following conditions are satisfied:
(i) the tender is made by or through an Eligible Institution (as
defined in the Prospectus);
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery is received by you as provided below before the
Expiration Date; and
(iii) the certificates for all tendered Notes, in proper form for
transfer (or a confirmation of a book-entry transfer of such
Notes into your account at DTC), together with a properly
completed and duly executed Letter of Transmittal (or
facsimile) and any other documents required by the Letter of
Transmittal, are received by you within three New York Stock
Exchange trading days after the Expiration Date.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
telegram, telex, facsimile transmission or mail to you and must include a
guarantee by an Eligible Institution in the form set forth in the Notice of
Guaranteed Delivery.
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<PAGE> 3
If necessary or advisable, you may communicate with Eligible Institutions which
have tendered Notes by means of the procedures described above to ascertain
additional information in connection therewith.
Notwithstanding any other provision of this Agreement, exchange for Notes
tendered pursuant to the Exchange Offer will in all cases be made only after
timely receipt by you of certificates for such Notes (or a confirmation of a
book-entry transfer), a properly completed and duly executed Letter of
Transmittal (or a facsimile) and any other documents required by the Letter of
Transmittal.
5. Determination of all questions as to the validity, form, eligibility
(including timeliness of receipt) and acceptance of any Notes tendered or
delivered shall be determined by you on behalf of the Issuer in the first
instance, but final decisions on all matters shall be made by the Issuer.
The Issuer will reserve in the Prospectus the absolute right to reject any
or all tenders of Notes not properly tendered or any Notes the acceptance
of which would, in the opinion of the Issuer's counsel, be unlawful and to
waive any of the conditions of the Exchange Offer or any defect or
irregularity in the tender of any Notes, and the Issuer's interpretation
of the terms and conditions of the Exchange Offer will be final and
binding.
6. Exchange Notes issuable in exchange for Notes duly tendered shall be
delivered as soon as practicable after notice of acceptance of the Notes
by the Issuer is received by you.
Notes tendered pursuant to the Exchange Offer may be withdrawn as set
forth in the section of the Prospectus entitled "The Exchange Offer --
Withdrawals of Tenders." As promptly as possible after notification of
such withdrawal, you shall return the certificates for such Notes to, or
in accordance with the instruction of, such noteholder and such Notes
shall no longer be considered properly tendered. All questions as to the
form and validity of notices of withdrawal, including timeliness of
receipt, shall be determined by the Issuer, whose determination shall be
final and binding.
7. On each business day up to and including the Expiration Date you shall
advise by telephone, not later than 5:00 p.m., New York City time, either
of John J. Garber or W. John Weinhardt, each an employee of the Issuer, at
(248) 253-2400, and such other persons as either of them may direct in
writing, of the principal amount of Notes which have been duly tendered on
that day, stating separately the principal amount of Notes tendered by
book-entry delivery, the principal amount of Notes tendered by Notice of
Guaranteed Delivery, the principal amount of Notes tendered about which
you have questions concerning validity and the cumulative principal amount
of Notes tendered through the time of such call. Promptly thereafter (by
the next business day), if requested, you shall
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<PAGE> 4
confirm such advice to one of the above named persons in writing, to be
transmitted by telecopier, pouch or other special form of delivery. You
shall also inform one of the above named persons, and such other persons
as may be designated by either of them, upon request made from time to
time, of such other information as either of them may request, including,
without limitation, the names and addresses of registered holders of
tendered Notes.
8. Originals of Letters of Transmittal or facsimile transmissions submitted
in lieu of Letters of Transmittal pursuant to the Prospectus prior to the
Expiration Date shall be preserved by you in accordance with your standard
practices. If any Letters of Transmittal or facsimiles are received by you
on or after the Expiration Date, such documents shall be stamped by you to
show the date and time of receipt. You shall keep a record of all
electronic communications with respect to Notes tendered by ATOP.
9. You shall follow and act upon these instructions, and upon any further
instructions given to you in connection with the Exchange Offer, any of
which may be given to you by the Issuer or such other persons as it may
authorize.
10. If, pursuant to the provisions of Instruction 3 of the Letter of
Transmittal, fewer than all the Notes evidenced by any certificate
submitted to you are to be tendered, you shall, promptly after the
Expiration Date, return a new certificate for the remainder of such Notes
not being tendered to, or in accordance with the instructions of, each of
such noteholders who has made a partial tender of Notes.
11. The Issuer shall not be required to exchange any Notes tendered if there
shall occur any of the events set forth in the Section of the Prospectus
entitled "The Exchange Offer -- Conditions" or if any of the other
conditions set forth in the Prospectus are not met. Notice of any decision
by the Issuer not to exchange any Notes tendered shall be given in writing
by the Issuer to you.
12. If, pursuant to the Exchange Offer, the Issuer does not accept for
exchange all or part of the Notes tendered, you shall promptly, after
receipt of instructions from the Issuer, return the deposited certificates
for such Notes or, as the case may be, issue an ATOP message with respect
to Notes tendered by book-entry delivery, with any related required
documents that are in your possession, to or in accordance with the
instructions of the persons who deposited the same, together with a notice
in form satisfactory to the Issuer explaining the reasons for their
return.
13. Certificates for unexchanged Notes, or newly issued certificates for
Exchange Notes, shall be forwarded promptly by first-class mail under a
blanket surety bond protecting you and the Issuer from loss or liability
arising out of the non-receipt or non-delivery of such certificates.
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<PAGE> 5
14. As Exchange Agent hereunder you:
(a) will be regarded as making no representations and having no
responsibilities as to the validity, sufficiency, value or
genuineness of the Notes or any certificates for Notes deposited with
you pursuant to the Exchange Offer and will not be required to and
will make no representation as to the validity, value or genuineness
of the Exchange Offer;
(b) shall not initiate any legal action hereunder without written
approval of the Issuer and then only upon such reasonable indemnity
as you may request;
(c) may rely on and shall be protected in acting in reliance upon any
certificate, instrument, opinion, notice, letter, telegram or other
document or security delivered to you and believed by you to be
genuine and to have been signed by the proper party or parties;
(d) may rely on and shall be protected in acting upon written or oral
instructions from either of the persons set forth in Section 7 with
respect to any matter relating to your actions as Exchange Agent
specifically covered by this Agreement, or supplementing or
qualifying any such actions;
(e) may consult counsel satisfactory to you (including counsel for the
Issuer), and the written advice or opinion of such counsel shall be
full and complete authorization and protection in respect of any
action taken, suffered or omitted by you hereunder in good faith and
in accordance with the opinion of such counsel;
(f) shall not at any time solicit any person to tender Notes pursuant to
the Exchange Offer or otherwise advise any person tendering Notes
pursuant to the Exchange Offer as to the wisdom of making such tender
or as to the market value or decline or appreciation in market value
of either the Notes or the Exchange Notes; and
(g) shall have no duties or obligations other than those specifically set
forth herein or in an exhibit hereto.
15. It is understood and agreed that the securities to be deposited with or
received by you as Exchange Agent from the Issuer and tendering
noteholders constitute a special trust account, held solely for the
benefit of the Issuer and the noteholders tendering Notes, as their
respective interests may appear. Such securities need not be segregated
from the securities, money, assets or properties of you or any other
person, firm or corporation except to the extent required by law. You
hereby waive any and all rights of lien, attachment or setoff whatsoever,
if any, against
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<PAGE> 6
the securities so to be deposited, whether such rights arise by reason of
statutory or common law, by contract or otherwise.
16. For services rendered as Exchange Agent hereunder, you shall be entitled
to payment as specified in Schedule A attached hereto.
17. The Issuer covenants and agrees to indemnify you and to hold you harmless
against any costs, expenses (including reasonable fees of your legal
counsel), losses or damages which may be paid, incurred or suffered by you
or to which you may become subject, arising from or out of, directly or
indirectly, any claim or liability resulting from your actions as Exchange
Agent pursuant hereto; provided, that such covenant and agreement does not
extend to, and you shall not be indemnified and held harmless with respect
to, such costs, expenses, losses and damages incurred or suffered by you
as a result of, or arising out of, your negligence, bad faith or willful
failure to perform your obligations hereunder. Promptly after you have
received any written assertion of a claim or have been served with a
summons or other first legal process giving information as to the nature
and basis of the claim, you shall notify the Issuer, by letter or by cable
or telex confirmed by letter, of the written assertion of such claim
against you or of any action commenced against you or of the service of
any summons on you, or other first legal process giving information as to
the nature and basis of the claim. If you fail to supply the Issuer with
the notification required pursuant to the preceding sentence, the Issuer
shall not be liable to you under this Section 17 to the extent that your
failure to so give notification actually prejudiced the Issuer or
otherwise increased its obligations under this Section 17. The Issuer will
be entitled to participate at its own expense in the defense. If the
Issuer so elects at any time after receipt of such notice and agree in
writing that such claim is a claim for which you are entitled to be
indemnified and held harmless hereunder or if you in such notice request
and the Issuer agrees, the Issuer will assume the defense of any suit
brought to enforce any such claim. In the event the Issuer assumes the
defense of any such suit, the Issuer may select counsel of its own
choosing for such purpose provided such counsel is reasonably satisfactory
to you, and the Issuer will not be liable for the fees and expenses of any
additional counsel thereafter retained by you, except that if you have
reasonably concluded that there may be legal defenses available to you
which are not available to the Issuer, you shall have the right to select
separate counsel and to assume such legal defense and to otherwise
participate in the defense of such action at the Issuer's expense. The
Issuer shall not be required to pay for any settlement made without their
consent.
18. This Agreement and your appointment as Exchange Agent shall be governed
and construed in accordance with the laws of the State of Michigan
applicable to agreements made and to be performed entirely within such
state and shall inure to
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<PAGE> 7
the benefit of, and the obligations created hereby shall be binding upon,
the successors and assigns of the parties hereto.
19. This Agreement may be executed in separate counterparts, each of which
when executed and delivered shall be an original, but all such
counterparts shall together constitute but one and the same instrument.
20. This Agreement may not be amended except in a writing executed by the
Issuer and you.
If the foregoing is acceptable to you, please acknowledge receipt of this letter
and confirm the arrangements herein provided by signing and returning the
enclosed copy hereof.
Sincerely,
Newcor, Inc.
By: /s/John J. Garber
---------------------------------
John J. Garber
Vice President Finance, Treasurer
and Chief Financial Officer
Accepted and agreed to as of the
date first above written:
U.S. Bank Trust National Association
By: /s/James D. Khami
---------------------------------
James D. Khami
Vice President
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<PAGE> 8
SCHEDULE A
NEWCOR, INC.
SCHEDULE OF FEES
TO ACT AS
EXCHANGE AGENT
As Exchange Agent $1,500.00
<PAGE> 9
Exhibit A
See Following Documents
A-1
