PAGE
<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
Rexnord Corporation
(Name of Registrant as Specified in its Charter)
Rexnord Corporation
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock
2) Aggregate number of securities to which transaction applies:
9,583,944
3) Per unit price or other underlying value of transaction computed pur-
suant to Exchange Act Rule 0-11:
$215,638,740
4) Proposed maximum aggregate value of transaction:
$215,638,740
/X/ Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $43,127.75
2) Form, Schedule or Registration Statement No.: Schedule 14A
3) Filing Party: Rexnord Corporation
4) Date Filed: December 22, 1993
PAGE
<PAGE>
[LOGO]
REXNORD CORPORATION
4701 WEST GREENFIELD AVENUE
MILWAUKEE, WISCONSIN 53214
January 5, 1994
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Rexnord Corporation (the "Company"), to be held at The Pfister Hotel, 424
East Wisconsin Avenue, Milwaukee, Wisconsin, on Thursday, January 27, 1994 at
10:00 a.m., local time. A notice of the Special Meeting, a proxy and a proxy
statement containing information about the matters to be acted upon are en-
closed. All holders of the Company's outstanding shares of Common Stock as
of the close of business on December 30, 1993 (the "Record Date") will be
entitled to notice of and to vote at the Special Meeting.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger, dated as of
December 1, 1993 (the "Merger Agreement"), between the Company and BTR
Dunlop Holdings, Inc., a Delaware corporation ("BTR Holdings"), and the
transactions contemplated thereby, pursuant to which, among other things,
(i) BTR Holdings or, at the discretion of BTR Holdings, a subsidiary
thereof, will be merged with and into the Company, with the Company being
the surviving corporation (the "Merger") and (ii) each outstanding share
of the common stock, par value $.01 per share ("Common Stock"), of the
Company (other than shares of Common Stock owned by BTR Holdings or the Com-
pany or any affiliate thereof and other than shares of Common Stock held by
the Company as treasury stock immediately prior to the Effective Time (as
defined in the Merger Agreement), which shares will be cancelled, and other
than shares of Common Stock held by stockholders, if any, who properly exer-
cised their dissenters' rights under Delaware law) will be cancelled and
converted into the right to receive in cash the greater of (a) $22.50 or (b)
the highest price paid by BTR Holdings (or any affiliate thereof) to pur-
chase shares of Common Stock from any affiliate of the Company at or prior
to the Effective Time. The Company has been advised by BTR Holdings that it
has not purchased and has no intention to purchase shares of Common Stock
from any affiliate of the Company for a price higher than $22.50 per share.
BTR Holdings is an indirect wholly-owned subsidiary of BTR plc, a United
Kingdom limited liability company ("BTR"). BTR is not a party to the
Merger Agreement.
Details of the Merger and other important information are set forth in
the accompanying Proxy Statement, which you are urged to read carefully.
Approval and adoption of the Merger Agreement requires the affirmative
vote of holders of at least a majority of the outstanding shares of the Com-
mon Stock of the Company. BTR Holdings, as of the Record Date, beneficially
owned approximately 52.8% of the outstanding shares of Common Stock and,
therefore, has sufficient voting power to approve all matters to be consid-
ered at the Special Meeting, regardless of the vote of any other stockholder
of the Company. BTR Holdings has informed the Company that it intends to
PAGE
<PAGE>
vote all of its shares of Common Stock in favor of the approval and adoption
of the Merger Agreement and transactions contemplated thereby. Nevertheless,
your Board of Directors believes that your representation at the Special
Meeting is important and urges you to vote your shares of Common Stock.
Your Board of Directors, together with a special committee of indepen-
dent directors (the "Special Committee"), has carefully reviewed and con-
sidered the terms and conditions of the Merger. In addition, the Special
Committee has received the written opinion of its financial advisor, Donald-
son, Lufkin & Jenrette Securities Corporation, to the effect that the con-
sideration to be received by the Company's stockholders (other than stock-
holders who are affiliates of the Company) in the Merger is fair to such
stockholders from a financial point of view.
Your Board of Directors, upon recommendation of the Special Committee,
has unanimously determined that the terms of the Merger are fair to, and in
the best interests of, the Company and its stockholders (other than stock-
holders who are affiliates of the Company), has approved and adopted the
Merger Agreement and the transactions contemplated thereby and recommends
that the stockholders of the Company vote FOR the approval and adoption of
the Merger Agreement and the transactions contemplated thereby.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN AND DATE THE ACCOMPANYING PROXY CARD AND RETURN IT IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE AS SOON AS POSSIBLE SO THAT YOUR SHARES WILL BE
REPRESENTED. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON EVEN
IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
Sincerely,
James R. Swenson
Chairman of the Board, President
and Chief Executive Officer
PAGE
<PAGE>
[LOGO]
REXNORD CORPORATION
4701 WEST GREENFIELD AVENUE
MILWAUKEE, WISCONSIN 53214
--------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
JANUARY 27, 1994
TO THE STOCKHOLDERS OF REXNORD CORPORATION:
Notice is hereby given that a Special Meeting of the stockholders of
Rexnord Corporation (the "Company") will be held at The Pfister Hotel, 424
East Wisconsin Avenue, Milwaukee, Wisconsin, on Thursday, January 27, 1994
at 10:00 a.m., local time, for the following purposes:
(1) To consider and vote upon a proposal to approve and adopt the Agree-
ment and Plan of Merger, dated as of December 1, 1993 (the "Merger
Agreement"), between the Company and BTR Dunlop Holdings, Inc. a
Delaware corporation ("BTR Holdings"), and the transactions con-
templated thereby, pursuant to which, among other things, (i) BTR
Holdings or, at the discretion of BTR Holdings, a subsidiary
thereof, will be merged with and into the Company, with the Company
being the surviving corporation (the "Merger") and (ii) each out-
standing share of the common stock, par value $.01 per share (the
"Common Stock"), of the Company (other than shares of Common Stock
owned by BTR Holdings or the Company or any affiliate thereof and
other than shares of Common Stock held by the Company as treasury
stock immediately prior to the Effective Time (as defined in the
Merger Agreement), which shares will be cancelled, and other than
shares of Common Stock held by stockholders, if any, who properly
exercised their dissenters' rights under Delaware law) will be can-
celled and converted into the right to receive in cash the greater
of (a) $22.50 or (b) the highest price paid by BTR Holdings (or any
affiliate thereof) to purchase shares of Common Stock from any af-
filiate of the Company at or prior to the Effective Time (the Com-
pany has been advised by BTR Holdings that it has not purchased and
has no intention to purchase shares of Common Stock from any affili-
ate of the Company for a price higher than $22.50 per share), as
more fully described in the accompanying Proxy Statement; and
(2) To transact such other business as may properly be brought before
the meeting or any adjournment or postponement thereof.
A copy of the Merger Agreement is attached as Annex A to the Proxy
Statement that accompanies this Notice of Special Meeting.
Your Board of Directors, upon recommendation of the Special Committee
(consisting of three disinterested directors), has unanimously determined
that the terms of the Merger are fair to, and in the best interests of, the
Company and its stockholders (other than stockholders who are affiliates of
the Company), has approved and adopted the Merger Agreement and the transac-
tions contemplated thereby and recommends that the stockholders of the Com-
pany vote FOR the approval and adoption of the Merger Agreement and the
transactions contemplated thereby.
Stockholders of record at the close of business on December 30, 1993
(the "Record Date") are entitled to notice of, and to vote at, the Special
Meeting and any adjournments or postponements thereof.
BTR Holdings, as of the Record Date, beneficially owned approximately
52.8% of the outstanding shares of the Common Stock and, therefore, has
sufficient voting power to approve all matters to be considered at the Spe-
cial Meeting, regardless of the vote of any other stockholder of the Com-
pany. BTR Holdings has informed the Company that it intends to vote all of
its shares of Common Stock in favor of the approval and adoption of the
Merger Agreement and the transactions contemplated thereby. Nevertheless,
your Board of Directors believes that your representation at the Special
Meeting is important and urges you to vote your shares of Common Stock.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE PROMPTLY. IF
YOU ATTEND THE MEETING AND WISH TO VOTE YOUR SHARES PERSONALLY, YOU MAY DO
SO BY REVOKING YOUR PROXY AT ANY TIME PRIOR TO THE VOTING THEREOF.
By order of the Board of Directors,
Thomas J. Jansen,
Secretary
Milwaukee, Wisconsin
January 5, 1994
PAGE
<PAGE>
REXNORD CORPORATION
4701 WEST GREENFIELD AVENUE
MILWAUKEE, WISCONSIN 53214
--------------------
PROXY STATEMENT
--------------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 27, 1994
--------------------
This Proxy Statement is furnished to holders of common stock, par value
$.01 per share (the "Common Stock"), of Rexnord Corporation, a Delaware
corporation (the "Company"), in connection with the solicitation by the
Board of Directors of the Company of proxies to be used at the Special Meet-
ing of Stockholders of the Company to be held on January 27, 1994, and any
adjournments or postponements thereof (the "Special Meeting"). The date on
which this Proxy Statement and the enclosed proxy are being first sent to
stockholders is on or about January 5, 1994.
At the Special Meeting, stockholders will be asked to consider and vote
upon a proposal to approve and adopt an Agreement and Plan of Merger, dated
as of December 1, 1993, a copy of which is attached hereto as Annex A (the
"Merger Agreement"), between the Company and BTR Dunlop Holdings, Inc., a
Delaware corporation ("BTR Holdings"), and the transactions contemplated
thereby, pursuant to which, among other things, (i) BTR Holdings or, at the
discretion of BTR Holdings, a subsidiary thereof, will be merged with and
into the Company, with the Company being the surviving corporation (the
"Merger") and (ii) each outstanding share of the Common Stock (other than
shares of Common Stock owned by BTR Holdings or the Company or any affiliate
thereof and other than shares of Common Stock held by the Company as trea-
sury stock immediately prior to the Effective Time (as defined herein),
which shares will be cancelled and other than shares of Common Stock held by
stockholders, if any, who properly exercised their dissenters' rights under
Delaware law) will be cancelled and converted into the right to receive in
cash the greater of (a) $22.50 or (b) the highest price paid by BTR Holdings
(or any affiliate thereof) to purchase shares of Common Stock from any af-
filiate of the Company prior to the Effective Time. The Company has been ad-
vised by BTR Holdings that it has not purchased and has no intention to pur-
chase shares of Common Stock from any affiliate of the Company for a price
higher than $22.50 per share. BTR Holdings is an indirect wholly-owned sub-
sidiary of BTR plc, a United Kingdom limited liability company ("BTR").
BTR is not a party to the Merger Agreement.
Stockholders of record at the close of business on December 30, 1993
(the "Record Date") are entitled to notice of, and to vote at, the Special
Meeting and any adjournments or postponements thereof. At the Record Date
there were outstanding 18,895,356 shares of Common Stock, each of which
will be entitled to one vote on each matter to be acted upon at the Special
Meeting and all adjournments thereof.
The information herein concerning (i) the Company and its advisors has
been furnished by the Company, (ii) BTR, BTR Holdings and their advisors has
been furnished by BTR and BTR Holdings and (iii) The Fairchild Corporation,
a Delaware corporation ("TFC"), has been furnished by TFC.
The Merger is conditioned upon, among other things, approval of the
Merger by holders of at least a majority of the outstanding shares of Common
Stock. BTR Holdings, as of the Record Date, beneficially owned approximately
52.8% of the outstanding shares of Common Stock and, therefore, has suffi-
cient voting power to approve all matters to be considered at the Special
Meeting, regardless of the vote of any other stockholder of the Company. BTR
Holdings has informed the Company it intends to vote all of its shares of
Common Stock in favor of the approval and adoption of the Merger Agreement
and the transactions contemplated thereby.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNEC-
TION WITH THE SOLICITATION OF PROXIES HEREBY AND, IF GIVEN OR MADE, SUCH IN-
FORMATION OR REPRESENTATION MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OTHER PERSON.
PAGE
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY ................................................................ 5
THE SPECIAL MEETING .................................................... 11
Date, Place and Time ............................................... 11
Matters to be Considered at the Meeting ............................ 11
Record Date; Voting at the Meeting ................................. 11
Vote Required ...................................................... 12
Solicitation, Revocation and Use of Proxies ........................ 12
THE MERGER ............................................................. 13
Background of the Merger ........................................... 13
Recommendation of the Board of Directors; Reasons for the Merger ... 15
Opinion of Financial Advisor ....................................... 16
Interests of Certain Persons in the Merger ......................... 21
THE MERGER AGREEMENT ................................................... 25
The Merger ......................................................... 25
Representations and Warranties ..................................... 26
Certain Covenants .................................................. 26
Conditions to the Merger ........................................... 28
Amendment and Modification ......................................... 28
Termination ........................................................ 29
Indemnification .................................................... 29
Merger Agreement Guarantee ......................................... 30
Federal Income Tax Consequences .................................... 30
Accounting Treatment ............................................... 31
Regulatory Matters ................................................. 31
APPRAISAL RIGHTS ....................................................... 32
CERTAIN OTHER AGREEMENTS ............................................... 34
The Standstill Agreement ........................................... 34
The Purchase Agreements ............................................ 34
SELECTED FINANCIAL DATA ................................................ 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ........................................................ 38
Results of Operations .............................................. 38
Pro Forma Financial Results ........................................ 44
Liquidity, Capital Expenditures and Financial Condition ............ 44
Inflation .......................................................... 46
THE COMPANY'S BUSINESS ................................................. 47
Overview ........................................................... 47
History ............................................................ 47
Products ........................................................... 48
Sales and Marketing ................................................ 49
Competition ........................................................ 50
Backlog of Orders .................................................. 51
International Operations ........................................... 51
Raw Materials ...................................................... 51
PAGE
<PAGE>
Page
Research and Development ........................................... 51
Patents and Trademarks ............................................. 51
Executive Officers of the Company .................................. 52
Employees .......................................................... 53
Environmental Matters .............................................. 53
1988 Restructuring ................................................. 55
Properties ......................................................... 55
Certain Legal Proceedings .......................................... 56
Change of Control of the Company ................................... 57
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ........................................................... 58
MARKET PRICE DATA ...................................................... 59
Market Information ................................................. 59
Approximate Number of Stockholders ................................. 59
Dividend History and Restrictions .................................. 59
CERTAIN INFORMATION CONCERNING BTR HOLDINGS ............................ 59
INDEPENDENT AUDITORS ................................................... 59
OTHER MATTERS .......................................................... 59
STOCKHOLDER PROPOSALS .................................................. 60
INDEX TO FINANCIAL STATEMENTS .......................................... 61
Annex A - Merger Agreement
Annex B - Appraisal Rights
Annex C - Opinion of Donaldson, Lufkin & Jenrette Securities Corporation
PAGE
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. Reference is made to, and this summary is qualified in
its entirety by, the more detailed information appearing in this Proxy
Statement and the Annexes hereto. Unless otherwise defined herein, capital-
ized terms used in this summary have the respective meanings set forth else-
where in this Proxy Statement. Stockholders are urged to read this Proxy
Statement and the Annexes hereto in their entirety.
THE COMPANIES
Rexnord Corporation..... The Company is one of the largest manufacturers
and suppliers of mechanical power transmission
components and related products in the world,
offering the broadest product line in the indus-
try. The principal executive offices of the Com-
pany are located at 4701 West Greenfield Avenue,
Milwaukee, Wisconsin 53214 and the telephone
number is (414) 643-3000.
BTR Dunlop Holdings,
Inc..................... BTR Holdings, a Delaware corporation, is an indi-
rectly wholly-owned subsidiary of BTR. BTR,
through its operating subsidiaries, is princi-
pally engaged in the manufacture and sale of
various industrial, electrical, energy, trans-
portation and consumer products throughout the
world. BTR Holdings is one of BTR's United
States holding companies. BTR Holdings' princi-
pal offices are located at 1105 North Market
Street, Suite 1300, Wilmington, Delaware 19801-
8985 and the telephone number is (302) 427-7650.
THE SPECIAL MEETING
Date, Place and Time.... The Special Meeting of stockholders of the Company
is to be held at The Pfister Hotel, 424 East
Wisconsin Avenue, Milwaukee, Wisconsin on Janu-
ary 27, 1994 at 10:00 a.m., local time. See "THE
SPECIAL MEETING-Date, Place and Time."
Matters to be Considered
at the Special Meeting.. The purposes of the Special Meeting are to (i)
consider and vote upon the Merger Agreement and
(ii) transact any other business as may properly
come before the Special Meeting. See "THE SPE-
CIAL MEETING-Matters to be Considered at the
Special Meeting."
Record Date; Voting at
the Meeting............. Holders of record of shares of Common Stock at the
close of business on December 30, 1993 are enti-
tled to notice of and to vote at the Special
Meeting. At the Record Date there were outstand-
ing 18,895,356 shares of Common Stock, each of
which will be entitled to one vote on each mat-
ter to be acted upon at the Special Meeting and
all adjournments thereof. See "THE SPECIAL
MEETING-Record Date; Voting at the Meeting."
<PAGE>
Vote Required........... The Merger is conditioned on, among other things,
the affirmative vote of holders of a majority of
the outstanding shares of Common Stock. BTR
Holdings, which, as of the Record Date benefi-
cially owned approximately 52.8% of the out-
standing shares of Common Stock, has informed
the Company that it intends to vote all of its
shares of Common Stock in favor of the approval
and adoption of the Merger Agreement and the
transactions contemplated thereby. Accordingly,
the Merger will be approved regardless of the
vote of any other stockholder of the Company.
See "THE SPECIAL MEETING-Vote Required."
Solicitation, Revocation
and Use of Proxies...... All expenses of the solicitation of the stockhold-
ers of the Company in connection with this Proxy
Statement will be borne by the Company. Any
proxy given pursuant to this solicitation may be
revoked at any time prior to its exercise by the
execution of a proxy signed at a later date or
by the giving of written notice of revocation to
the Secretary of the Company at any time before
the taking of the vote at the Special Meeting.
See "THE SPECIAL MEETING-Solicitation, Revoca-
tion and Use of Proxies."
THE MERGER
Background of the
Merger.................. See "THE MERGER-Background of and Reasons for the
Merger."
Recommendation of the
Board of Directors; Rea-
sons for the Merger..... The Board of Directors of the Company, upon recom-
mendation of the Special Committee and pursuant
to Section 203 of the Delaware General Corpora-
tion Law ("DGCL"), has unanimously approved
the Merger Agreement and the transactions con-
templated thereby and recommends that the hold-
ers of Common Stock vote FOR its approval and
adoption. For a discussion of the factors con-
sidered by the Board of Directors in reaching
its decision, see "THE MERGER-Recommendation of
the Board of Directors; Reasons for the
Merger."
Opinion of Financial Ad-
visor................... Donaldson, Lufkin & Jenrette Securities Corpora-
tion ("DLJ") on December 1, 1993 delivered its
oral opinion to the Special Committee to the ef-
fect that, as of such date, the Merger Consider-
ation is fair from a financial point of view to
holders of Common Stock (other than stockholders
who are affiliates of the Company). A copy of
the confirmatory written opinion of DLJ, dated
December 2, 1993, which sets forth the assump-
tions made, matters considered and limits of its
review, is attached to this proxy statement as
Annex C and should be read in its entirety. See
"THE MERGER-Opinion of the Financial Advisor."
Interests of Certain
Persons in the Merger... In considering the recommendation of the Board of
Directors of the Company with respect to the
Merger Agreement, stockholders should be aware
that certain members of the Board of Directors
and of the Company's management may have certain
interests in the Merger that are in addition to
or different from the interests of stockholders
of the Company generally. See "THE MERGER-In-
terests of Certain Persons in the Merger." The
Board of Directors was aware of these interests
and considered them, among other matters, in ap-
proving and adopting the Merger Agreement.
THE MERGER AGREEMENT
The Merger.............. Upon consummation of the Merger, pursuant to the
Merger Agreement (i) BTR Holdings or, at the
discretion of BTR Holdings, a subsidiary
thereof, will be merged with and into the Com-
pany, with the Company being the surviving cor-
poration (the "Surviving Corporation") and
(ii) each outstanding share of Common Stock
(other than shares of Common Stock owned by BTR
Holdings or the Company or any affiliate thereof
and other than shares of Common Stock held by
the Company as treasury stock immediately prior
to the Effective Time, which shares will be can-
celled, and other than shares of Common Stock
held by stockholders, if any, who properly exer-
cised their dissenters' rights of appraisal un-
der Delaware law) will be cancelled and
converted into the right to receive in cash the
greater of (a) $22.50 or (b) the highest price
paid by BTR Holdings (or any affiliate thereof)
to purchase shares from any affiliate of the
Company at or prior to the Effective Time (the
"Merger Consideration") payable to the holder
thereof, without interest, upon surrender of the
certificate evidencing such share in accordance
with the Merger Agreement. BTR Holdings has ad-
vised the Company that it has not purchased, and
has no intention to purchase, shares of Common
Stock from any affiliate of the Company for a
price greater than $22.50 per share. See "THE
MERGER AGREEMENT-The Merger."
Effective Time of the
Merger.................. The Merger will become effective upon the filing
of a Certificate of Merger with the Secretary of
State of the State of Delaware or at such later
time as is provided in such certificate (the
"Effective Time"). See "THE MERGER AGREEMENT-
The Merger."
Closing................. After the Merger Agreement is approved and adopted
by the requisite vote of the stockholders of the
Company and certain other conditions to the
Merger are satisfied or waived, a closing of the
Merger (the "Closing") will be held as soon as
practicable, but in any event not later than the
date that is two business days after the date on
which the last of the required conditions to
Closing has been satisfied or waived, or such
other date as is agreed upon by the Company and
BTR Holdings. The date on which the Closing oc-
curs is referred to herein as the "Closing
Date." See "THE MERGER AGREEMENT-The Merger."
Conditions to the
Merger.................. The respective obligations of the Company and BTR
Holdings to consummate the Merger are subject to
the satisfaction or, where permissible, waiver
of the following conditions: (i) approval by
holders of at least a majority of the outstand-
ing shares of Common Stock and (ii) the absence
of any permanent injunction or restraining order
issued by any court or other governmental entity
of competent jurisdiction which prohibits or re-
stricts the consummation of the Merger. The ob-
ligation of the Company to consummate the Merger
is subject to additional conditions. See "THE
MERGER AGREEMENT-Conditions to the Merger." BTR
Holdings, which, as of the Record Date benefi-
cially owned approximately 52.8% of the out-
standing shares of Common Stock, has informed
the Company that it intends to vote all of its
shares of Common Stock in favor of the approval
and adoption of the Merger Agreement and the
transactions contemplated thereby. Accordingly,
the condition described in clause (i) above will
be satisfied.
Termination of the
Merger Agreement........ The Merger Agreement may be terminated (i) by mu-
tual consent of the Company and BTR Holdings,
(ii) by either the Company or BTR Holdings if a
condition to such party's obligation to consum-
mate the Merger becomes incapable of satisfac-
tion prior to Closing of the Merger (iii) by ei-
ther the Company or BTR Holdings if the Closing
does not occur on or prior to March 31, 1994, or
(iv) by the Company, if the Board of Directors
of the Company determines in good faith pursuant
to its fiduciary duties to approve another
transaction in accordance with the Merger Agree-
ment. See "THE MERGER AGREEMENT-Termination."
Indemnification......... The Merger Agreement provides that the existing
indemnification available to present and former
directors, officers and employees of the Company
will be continued for a period of six years af-
ter the Effective Time. See "THE MERGER AGREE-
MENT-Indemnification." In addition, the members
of the Special Committee are parties to separate
indemnification agreements with the Company. See
"THE MERGER-Interests of Certain Persons in the
Merger."
Merger Agreement Guaran-
tee..................... On December 1, 1993, concurrent with the execution
of the Merger Agreement, the Merger Agreement
Guarantee was executed by BTR Dunlop, Inc., a
wholly-owned subsidiary of BTR Holdings. Pursu-
ant to such guarantee, BTR Dunlop, Inc. uncondi-
tionally guaranteed the (i) due and punctual
payment of the Merger Consideration by BTR Hold-
ings and (ii) BTR Holdings' indemnity obliga-
tions under the Merger Agreement. See "THE
MERGER AGREEMENT-Merger Agreement Guarantee."
Certain Federal Income
Tax Consequences........ The receipt of cash by a stockholder of the Com-
pany pursuant to the Merger or pursuant to the
exercise of dissenters' rights under Delaware
law will be a taxable transaction for federal
income tax purposes for stockholders generally
subject to federal income tax, the gain or loss
recognized thereon generally will be treated as
a capital gain or capital loss, and such trans-
action may also be taxable under applicable
state, local and foreign tax laws and may be
subject to backup withholding. All stockholders
are urged to consult their own tax advisors. For
a discussion of the federal income tax conse-
quences to the Company, see "THE MERGER-Federal
Income Tax Consequences."
Accounting Treatment.... The Merger will be accounted for as a "purchase"
under generally accepted accounting principles.
See "THE MERGER AGREEMENT-Accounting
Treatment."
Regulatory Matters...... The Company is not aware of any federal or state
regulatory approvals that must be obtained in
order to consummate the Merger other than ap-
provals which have been obtained. See "THE
MERGER AGREEMENT-Regulatory Matters."
Appraisal Rights........ Pursuant to the DGCL, holders of shares of Common
Stock will be entitled to dissenters' rights of
appraisal in connection with the Merger. See
"APPRAISAL RIGHTS" and Annex B hereto.
CERTAIN OTHER AGREEMENTS
The Standstill Agree-
ment.................... The Company is party to an Exchange and Standstill
Agreement (the "Standstill Agreement"), dated
as of June 19, 1992, among it, TFC and Rexnord
Holdings, Inc., a Delaware corporation and a
wholly-owned subsidiary of TFC ("RHI"). The
Standstill Agreement provides, among other
things, that during the period from June 19,
1992 until July 9, 1995, without the approval of
a majority of the directors not designated by
TFC, RHI or their affiliates, neither TFC nor an
affiliate thereof (a) may acquire in excess of
46% of the voting stock of the Company, subject
to certain exceptions, or (b) may transfer any
shares of Common Stock of the Company unless the
transferee agrees to be bound by the Standstill
Agreement, subject to certain exceptions. The
requisite directors consented to the transfer of
shares of Common Stock from TFC and RHI Holdings
(as defined below) to BTR Holdings pursuant to
the TFC Purchase Agreement (as defined herein).
See "CERTAIN OTHER AGREEMENTS-The Standstill
Agreement."
The Purchase Agreements. On December 23, 1993, BTR Holdings purchased (i)
from TFC and RHI Holdings, Inc., a Delaware cor-
poration and a wholly owned subsidiary of TFC
("RHI Holdings"), 8,083,248 shares of Common
Stock pursuant to a Purchase Agreement dated as
of December 2, 1993 (the "TFC Purchase Agree-
ment") and (ii) from Weiss Peck & Greer, L.P.,
a limited partnership ("WPG"), 1,039,500
shares of the Common Stock pursuant to a Pur-
chase Agreement dated as of December 2, 1993
(the "WPG Purchase Agreement"), in each case
for a purchase price of $22.50 per share, in
cash. Pursuant to the TFC Purchase Agreement,
TFC and RHI Holdings have agreed to indemnify
BTR Holdings and the Company for certain liabil-
ities and TFC has entered into an escrow agree-
ment to secure the payment of certain liabili-
ties. See "CERTAIN OTHER AGREEMENTS-The
Purchase Agreements."
PAGE
<PAGE>
THE SPECIAL MEETING
Date, Place and Time
The Special Meeting will be held at The Pfister Hotel, 424 East Wiscon-
sin Avenue, Milwaukee, Wisconsin, on Thursday, January 27, 1994 at 10:00 a.m.,
local time.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Special Meeting, the stockholders of the Company as of the Record
Date (as defined herein) will be asked: (i) to consider and vote upon a pro-
posal to approve and adopt the Merger Agreement and the transactions contem-
plated thereby; and (ii) to transact such other business as may properly
come before the Special Meeting and any adjournments or postponements
thereof.
The Board of Directors, upon the unanimous recommendation of the Special
Committee (as defined herein), has unanimously approved the Merger Agreement
and the transactions contemplated thereby and recommends a vote FOR approval
and adoption of the Merger Agreement and the transactions contemplated
thereby by the stockholders of the Company.
RECORD DATE; VOTING AT THE MEETING
The Board of Directors has fixed December 30, 1993, as the Record Date
for the determination of the stockholders of the Company entitled to notice
of and to vote at the Special Meeting and any adjournments or postponements
thereof. On the Record Date, there were 18,895,356 shares of Common Stock
outstanding which shares were held by approximately 38 holders of record.
Shares of Common Stock are the only authorized voting securities of the Com-
pany. Each holder of record of Common Stock on the Record Date is entitled
to cast one vote per share, exercisable in person or by properly executed
proxy, upon each matter properly submitted for the vote of the stockholders
at the Special Meeting. The presence, in person or by properly executed
proxy, of holders of a majority of the shares of Common Stock outstanding
and entitled to vote at the Special Meeting is necessary to constitute a
quorum at the Special Meeting. The Board of Directors of the Company has de-
termined that the terms of the Merger are fair to, and in the best interests
of, the Company and its stockholders (other than stockholders who are affil-
iates of the Company), has approved and adopted the Merger Agreement and the
transactions contemplated thereby and recommends that the stockholders of
the Company vote FOR the approval and adoption of the Merger Agreement and
the transactions contemplated thereby.
The Company is holding a meeting of its stockholders and soliciting
proxies for the approval and adoption of the Merger Agreement because the
rules of the New York Stock Exchange, Inc. (the "NYSE") require that ac-
tively operating listed companies solicit proxies for all meetings of stock-
holders, annual or special. If the Company wished to have its stockholders
act by written consent in lieu of holding a meeting of stockholders in order
to approve and adopt the Merger Agreement, the approval of the NYSE would
have been required. Even if such approval had been granted, the NYSE gener-
ally requires that the consent of all stockholders be solicited and, gener-
ally, that disclosure and timing requirements relating to proxy statements
for stockholder meetings be followed. In any event, holders of Common Stock
will be entitled to dissenters' appraisal rights under the Delaware General
Corporation Law (the "DGCL") in connection with the Merger regardless of
whether a meeting of stockholders is held to vote upon the Merger, stock-
holders' consents to act in lieu of a meeting are solicited or if BTR Hold-
ings, as beneficial owner of a majority of Common Stock, were to execute a
stockholder consent approving the Merger. Stockholders of the Company who
vote in favor of the Merger, however, will waive their dissenters' appraisal
rights. See "APPRAISAL RIGHTS."
This Proxy Statement is being furnished to stockholders of the Company
in connection with the solicitation of proxies by and on behalf of the Board
of Directors for use at the Special Meeting. All shares of Common Stock
which are entitled to vote and are represented at the Special Meeting by
properly executed proxies received and not duly and timely revoked will be
voted at the Special Meeting in accordance with the instructions contained
therein. IN THE ABSENCE OF CONTRARY INSTRUCTIONS, SUCH SHARES WILL BE VOTED
FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
If any other matters are properly presented for consideration at the
Special Meeting, the persons named in the enclosed proxy and acting thereun-
der will have discretion to vote on such matters in accordance with their
best judgment.
VOTE REQUIRED
The Merger cannot be effected unless, among other conditions, it is ap-
proved by holders of a majority of the outstanding shares of Common Stock.
As of the Record Date, BTR Holdings beneficially owned 9,982,052 shares of
Common Stock (representing approximately 52.8% of the shares of Common
Stock outstanding on such date) and, therefore, has sufficient voting power
to constitute a quorum and to approve and adopt the Merger Agreement regard-
less of the vote of any other stockholder of the Company. BTR Holdings has
informed the Company that it intends to vote all of its shares of Common
Stock in favor of the approval and adoption of the Merger Agreement and the
transactions contemplated thereby.
SOLICITATION, REVOCATION AND USE OF PROXIES
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement will be borne by the Company. In addition to
solicitation by use of the mails, proxies may be solicited by directors, of-
ficers and employees of the Company or its subsidiaries in person or by
telephone, telegram or other means of communication. Such directors, offic-
ers and employees will not be additionally compensated, but may be
reimbursed for reasonable out-of-pocket expenses in connection with such so-
licitation. Arrangements will be made with custodians, nominees and fiducia-
ries for forwarding of proxy solicitation materials to beneficial owners of
shares held of record by such custodians, nominees and fiduciaries, and the
Company will reimburse such custodians, nominees and fiduciaries for reason-
able expenses incurred in connection therewith. D.F. King & Co., Inc. has
been retained by the Company to solicit proxies for a fee estimated at
$5,000 and reimbursement of expenses.
Any proxy given pursuant to this solicitation may be revoked at any time
prior to its exercise by the execution of a proxy signed at a later date or
by the giving of written notice of revocation to the Secretary of the Com-
pany at any time before the taking of the vote at the Special Meeting. Fur-
thermore, a stockholder giving a proxy may revoke such proxy by attending
the Special Meeting and voting his or her shares in person. However, a revo-
cation during the Special Meeting will not affect any vote previously taken.
Any written notice of revocation or subsequent proxy should be sent so as to
be delivered to Rexnord Corporation, 4701 West Greenfield Avenue, Milwaukee,
Wisconsin 53214, Attention: Secretary, or hand delivered to the Secretary of
the Company at or before the taking of the vote at the Special Meeting.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
PAGE
<PAGE>
THE MERGER
BACKGROUND OF THE MERGER
In early October 1993, a senior BTR officer contacted Jeffrey Steiner,
the Chairman of TFC, who expressed BTR's interest in the possible purchase
of certain of TFC's assets including acquiring the Common Stock owned
by TFC.
On October 19, a representative of TFC met with representatives of BTR
in New York who reiterated BTR's interest in purchasing the Common
Stock from TFC. Following the meeting, the BTR representatives were advised
that TFC would only consider such a sale if the same opportunity was made
available to all of the Company's stockholders.
On October 29, several TFC representatives as well as TFC's outside
counsel, met in London with several BTR representatives, BTR's financial
advisor, Dillon, Read & Co. Inc., and BTR's outside counsel to discuss
publicly available information concerning the Company and possible
transaction structures. A sub-group, which included certain senior
officers, met again in the morning of October 30. Throughout these meetings,
it was TFC's position that it would not sell Common Stock it owned unless
a similar offer was extended (on similar terms and conditions, including the
same price) to all other stockholders of the Company. At these meetings, BTR
responded that it would be willing to acquire all of the Company, but only
if it were able to acquire at least a majority of the Common Stock in
connection with the execution of an acquisition agreement.
In early November 1993, TFC was provided with a due diligence request
list from BTR and during the week ended November 5, 1993 and into the early
part of the following week, BTR participated in several meetings in Washing-
ton, D.C. with representatives of TFC regarding certain tax and environmen-
tal matters relating to the 1988 Restructuring (as defined below in "THE
COMPANY'S BUSINESS-Overview"). On November 16, certain members of senior
management of the Company were advised of BTR's interest.
At a Company Board of Directors meeting held on November 19, 1993, the
directors were informed by Mr. Steiner that TFC was in preliminary discus-
sions with BTR with respect to the possible sale by TFC of the approximately
44% block of Common Stock held by TFC and its affiliates (the "TFC
Shares") to BTR or an affiliate thereof. Mr. Steiner also informed the
Board that as part of any such sale the public holders of Common Stock not
affiliated with TFC (the "Public Holders") were expected to be given the
opportunity to sell their shares of Common Stock to BTR or an affiliate
thereof in a merger transaction (as defined below) at a cash price no less
than that being paid to TFC.
Following the November 19, 1993 Board of Directors' meeting, the Company
formed a special committee of its disinterested directors (the "Special
Committee") consisting of John P. Calhoun, Alain de Wulf and Peter H. Bard-
ach, who was designated as Chairman. None of the members of the Special Com-
mittee are or were officers or employees of the Company or directors, offic-
ers or employees of TFC or any affiliate thereof, other than Mr. Calhoun who
retired as Chairman of the Company in June 1990 and served as an officer and
director of a subsidiary of TFC from August 1988 to June 1990. In addition,
Mr. Calhoun and Mr. Bardach hold options to purchase Common Stock. See "In-
terests of Certain Persons in the Merger." The Special Committee was given
full authority to (i) consider any and all proposals requiring approval of
the Board of Directors of the Company with respect to the sale of the Com-
pany including, without limitation, by merger (a "merger transaction"),
(ii) negotiate on behalf of the Board of Directors and the Company the terms
of any such merger transaction and (iii) engage counsel and one or more fi-
nancial advisors and other consultants deemed necessary by the Special Com-
mittee to assist it in the exercise of its authority. Following such meet-
ing, the Special Committee met with representatives of and retained Dewey
Ballantine as special counsel to the Special Committee. At such Special Com-
mittee meeting, the Special Committee discussed with Dewey Ballantine the
Special Committee's role generally in any merger transaction and the fidu-
ciary obligations of the Special Committee to the Public Holders.
The Special Committee met with representatives of Dewey Ballantine on
November 22, 1993 to interview investment bankers and to discuss the role of
the financial advisor to the Special Committee. Also on November 22, BTR de-
livered to the Special Committee a draft merger agreement which proposed the
merger of a wholly-owned indirect subsidiary of BTR with and into the Com-
pany, but did not provide for an amount of Merger Consideration. On November
23, 1993 the Special Committee met with representatives of Dewey Ballantine
and retained Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ")
as its financial advisor to advise and assist the Special Committee in their
consideration of and negotiations with respect to the financial terms of a
merger transaction and to issue an opinion as to the fairness, from a finan-
cial point of view, of the Merger Consideration to be received by the Public
Holders in connection therewith. DLJ had significant familiarity with the
Company as a result of prior engagements by, or relating to, the Company, as
discussed below. At such meeting DLJ reviewed generally the methodologies it
would employ in evaluating the fairness, from a financial point of view, of
any Merger Consideration received by the Public Holders. The Special Commit-
tee met again with representatives of Dewey Ballantine on November 24, 1993
to discuss the terms of the draft merger agreement received from BTR and to
review the role of DLJ.
On November 26, 1993, the members of the Special Committee met with rep-
resentatives of Dewey Ballantine and DLJ. First, the Special Committee re-
viewed with Dewey Ballantine the Special Committee's fiduciary obligations
to the Public Holders. Thereafter, representatives of DLJ reported on DLJ's
progress to date and discussed generally the financial condition of the Com-
pany and the valuation methodologies and factors DLJ would employ and con-
sider in connection with evaluating the fairness, from a financial point of
view, to the Public Holders of the Merger Consideration, when and if pro-
posed. The DLJ representatives indicated that these methodologies and fac-
tors would include, but would not be limited to, analysis of trading statis-
tics for comparable companies, analysis of comparable acquisition
statistics, discounted cash flow valuation analysis, leveraged buyout analy-
sis, as well as a review of the initial public offering prices in the Com-
pany's initial public offering of Common Stock in July 1992 (the "IPO")
and previous efforts to sell the Company.
On November 28, 1993, the members of the Special Committee met with rep-
resentatives of Dewey Ballantine to discuss further the status of the nego-
tiation of the draft merger agreement with BTR and to discuss the Special
Committee's fiduciary obligations in the context of the Merger. Also at such
meeting, representatives of Dewey Ballantine reported on its due diligence
review of the Company.
On November 29, 1993, representatives of BTR proposed to the Special
Committee that the Merger Consideration for each share of Common Stock in
the Merger be $22.10. The Special Committee informed DLJ of the $22.10 offer
and met with representatives of DLJ and Dewey Ballantine later that day and
again on November 30, 1993.
At the November 29 meeting, the DLJ representatives reviewed with the
Special Committee their preliminary analysis of the Company. Such analysis
included a review of the filing and offering prices in the Company's initial
public offering, a trading history analysis (including a performance compar-
ison among the Company's common stock, the S&P 400 Index and an index based
on the performance of a group of comparable companies), a publicly traded
comparable company analysis, a review of multiples (of revenue, EBITDA,
EBIT, net income and book value) paid in recent mergers and acquisitions
transactions involving industrial companies, an analysis of control premiums
paid in recent mergers and acquisitions transactions, a leveraged buyout
analysis and a discounted cash flow analysis. The DLJ representatives also
reviewed DLJ's published research reports with respect to the Company and
DLJ's engagement in 1990 and 1991, as well as their subsequent attempts, re-
lating to the sale of the Company. Also at the November 29 meeting, repre-
sentatives of Dewey Ballantine reviewed with the members of the Special Com-
mittee their fiduciary obligations to the Public Holders.
Following the November 29 meeting, after discussion with Dewey Ballan-
tine and DLJ, the Special Committee instructed DLJ to contact BTR to negoti-
ate for an increase in the Merger Consideration. On November 29 and November
30, representatives of DLJ had discussions and negotiations with representa-
tives of BTR with respect to the Merger Consideration and representatives of
Dewey Ballantine had discussions and negotiations with BTR's legal advisors
with respect to the terms and conditions of the Merger Agreement. As a re-
sult of such discussions and negotiations, BTR proposed an increase of the
Merger Consideration to $22.50 per share of Common Stock.
On December 1, 1993, the Special Committee met with Dewey Ballantine and
DLJ and reviewed in detail the proposed terms of the merger transaction in-
cluding the increased Merger Consideration of $22.50 per share of Common
Stock. At such meeting, DLJ updated certain of the preliminary analyses as
to fairness from a financial point of view of the Merger Consideration to
the Public Holders presented earlier to the Special Committee and rendered
its oral fairness opinion to the Special Committee with respect to the
Merger Consideration. Dewey Ballantine reviewed for the Special Committee
the history of the negotiations of the Merger Agreement, described in detail
certain key provisions of the draft Merger Agreement and again reviewed with
the Special Committee their fiduciary obligations to the Public Holders.
Following the presentations by DLJ (including the rendering of their fair-
ness opinion) and Dewey Ballantine, the Special Committee instructed DLJ to
attempt to negotiate a transaction more favorable to the Public Holders with
representatives of BTR. BTR informed DLJ and the Special Committee that
their merger proposal, including Merger Consideration of $22.50, represented
BTR's final and best offer. After further discussion with DLJ and Dewey Bal-
lantine, the Special Committee concluded that the proposed Merger was the
best available alternative for the Public Holders.
In light of the foregoing, the financial advice of DLJ, and the render-
ing of their fairness opinion (see "Opinion of Financial Advisor") and af-
ter full consideration of the terms of the draft Merger Agreement, the Spe-
cial Committee at the December 1, 1993 meeting unanimously determined that
it would recommend to the full Board of Directors of the Company that the
Merger Agreement, including the increased Merger Consideration of $22.50 per
share of Common Stock, and the transactions contemplated thereby be approved
and adopted.
On December 1, following the Special Committee meeting, the Board of Di-
rectors of the Company, based upon the unanimous recommendation of the Spe-
cial Committee, voted unanimously to, among other things, approve and adopt
the Merger Agreement, to authorize its execution and delivery by the Company
and to recommend that the stockholders of the Company vote in favor of the
Merger Agreement. In addition, at such meeting the Board of Directors unani-
mously waived the applicable provisions of the Standstill Agreement and con-
sented to the transfer by TFC to BTR Holdings of the TFC Shares, thereby
making Section 203 of the DGCL inapplicable. See "CERTAIN OTHER AGREEMENTS-
The Standstill Agreement."
On December 1, WPG was contacted and BTR and WPG commenced negotiations
regarding the acquisition of the approximately 6% of the Common Stock of the
Company which WPG controlled. At such time, BTR continued its negotiations
with TFC regarding the purchase of the TFC Shares. Agreements were reached
and signed regarding these purchases on December 2, 1993. See "CERTAIN
OTHER AGREEMENTS-The Purchase Agreements."
Following approval by the Board of Directors, the Merger Agreement was
executed by the Company and BTR Holdings as of December 1, 1993. See "THE
MERGER AGREEMENT." Following the execution of the Merger Agreement, the
Purchase Agreements (as defined below) were executed by BTR Holdings with
TFC, RHI and WPG. See "CERTAIN OTHER AGREEMENTS-The Purchase Agreements."
RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS FOR THE MERGER
The Board of Directors believes that the Merger is in the best interests
of the Company. Accordingly, the Board of Directors has unanimously approved
and adopted the Merger Agreement and recommends to the Company's stockhold-
ers that they vote FOR approval and adoption of the Merger Agreement and the
transactions contemplated thereby.
At meetings of the Board of Directors of the Company held on November
19, 1993 and December 1, 1993 and meetings of the Special Committee held on
November 19, 22, 23, 24, 26, 28, 29 and 30, and December 1, 1993, the Board
of Directors of the Company and the Special Committee, respectively,
received presentations from, and carefully reviewed the terms of the Merger
Agreement with representatives of Dewey Ballantine and DLJ. See "Background
of the Merger."
In reaching its conclusions, the principal factors considered by the
Board of Directors were as follows:
(i) The relationship of the Merger Consideration to the historical
market prices for the shares of Common Stock. The Merger Consideration
represents a significant premium over the $18.25 per share closing price
on December 1, 1993, the last date that the Common Stock was traded
prior to the announcement of the Merger.
(ii) The Special Committee's recommendation to adopt and approve the
Merger Agreement and the transactions contemplated thereby. The Special
Committee determined that the Merger is fair to and in the best inter-
ests of the Public Holders and recommended to the Board of Directors of
the Company that the Board of Directors approve the Merger and submit
the Merger Agreement to the holders of Common Stock with the favorable
recommendation of the Board of Directors of the Company.
(iii) The opinion of DLJ that the Merger Consideration of $22.50 per
share of Common Stock is fair, from a financial point of view, to the
Public Holders. A copy of DLJ's written opinion is set forth as Annex C
to this Proxy Statement. See "Opinion of Financial Advisor."
(iv) The fact that DLJ had been engaged to sell the Company during
the period November 1990 to March 1991 during which time DLJ marketed
the Company to a total of 71 companies without receiving any firm offers
and that DLJ subsequently had maintained contact with certain of such
companies and from time to time discussed with such companies an acqui-
sition of the Company without receiving any indication of interest. See
"Opinion of Financial Advisor."
(v) The Special Committee's belief, based upon (A) presentations by
DLJ with respect to alternative methods of valuing the Common Stock, (B)
the large number of shares of Common Stock comprising the TFC Shares and
TFC's willingness to sell such shares to BTR and (C) the earlier
attempts to market the Company, that it was unlikely that the Public
Holders would receive an alternative offer superior to that of BTR.
(vi) The knowledge the Special Committee and the Board of Directors
had regarding the Company's financial condition, business, operating re-
sults and prospects. The Special Committee and the Board of Directors
reviewed and considered information supplied by the Company, including,
but not limited to, historical and current financial statements and in-
formation, annual reports and annual proxy statements. The Special Com-
mittee also reviewed certain data compiled by DLJ in connection with the
rendering of its opinion. See "Opinion of Financial Advisor."
(vii) The relative certainty of BTR Holdings completing the Merger
by virtue of the fact BTR's offer was and is not subject to any financ-
ing contingency and the terms of the Merger Agreement provide for lim-
ited conditions to BTR Holdings' obligations to close the Merger. See
"THE MERGER AGREEMENT-Conditions to the Merger."
(viii) The fact that the Merger Consideration would be paid in cash,
which the Board of Directors believed would be desired by most stock-
holders, and was not subject to reduction.
(ix) The increase in the Merger Consideration to $22.50 per share of
Common Stock from the $22.10 initially offered by BTR.
(x) The limited growth prospects for the Company due to its high le-
verage combined with the slow pace of the U.S. economic recovery in the
industrial segments in which the Company operates and the current eco-
nomic outlook for Europe.
The Board of Directors believes that, based on the foregoing reasons,
the Merger is in the best interests of the Company and its Public Holders.
In view of the variety of factors considered in connection with its evalua-
tion of the Merger, the Board of Directors did not find it practicable to,
and did not, quantify or otherwise attempt to assign relative weights to the
specific factors considered in reaching its determination.
OPINION OF FINANCIAL ADVISOR
As described above under "Background of the Merger" and "Recommen-
dation of the Board of Directors; Reasons for the Merger," the Company en-
gaged DLJ to act as its financial advisor to advise and assist the Special
Committee in their consideration of and negotiations with respect to the fi-
nancial terms of a merger transaction and to issue an opinion as to the
fairness, from a financial point of view, of the Merger Consideration to be
received by the Public Holders in connection therewith. On December 1, 1993,
at the meeting of the Special Committee at which the forms, terms and provi-
sions of the Merger Agreement were approved and adopted by the Special Com-
mittee, DLJ delivered its oral opinion to the Special Committee that the
Merger Consideration to be received by the holders of Common Stock in the
Merger was fair, from a financial point of view, to the Public Holders. No
limitations were placed on DLJ by the Board of Directors with respect to the
investigation made or the procedures followed in preparing and rendering its
opinion.
In arriving at its opinion, DLJ reviewed the Merger Agreement and finan-
cial and other information which was publicly available as well as informa-
tion furnished to it by the Company, including information provided during
discussions with the Company's management. Included in the information pro-
vided by management were certain financial projections for the Company for
the years ending June 30, 1994 through June 30, 1998. DLJ also discussed the
past and current operations, financial conditions and prospects of the Com-
pany with its management and conducted such other financial studies, analy-
ses and investigations as DLJ deemed appropriate for the purposes of its
opinion.
In rendering its opinion, DLJ assumed, without independent verification,
the accuracy, completeness and fair presentation of all financial and other
information that was available to it from public sources and that was pro-
vided to it by the Company or its representatives. With respect to the fi-
nancial projections supplied to it, DLJ assumed that such projections were
reasonably prepared on the basis reflecting the best currently available es-
timates and judgments of the management of the Company as to the future op-
erating and financial performance of the Company. DLJ did not make any inde-
pendent evaluation of the Company's assets or liabilities and relied without
independent verification on the accuracy of all the information reviewed by
it.
DLJ's opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available
to it as of, the date of its opinion. It should be understood that, although
subsequent developments may affect its opinion, DLJ does not have any obli-
gation to update, revise or reaffirm its opinions. However, as of the date
hereof, the Company has made inquiry of DLJ and DLJ has not advised the Com-
pany that anything has come to its attention which would cause it to with-
draw or otherwise modify its opinion.
The following presentation summarizes certain financial analyses per-
formed by DLJ in arriving at its oral opinion of December 1, 1993 and its
confirmatory written opinion dated December 2, 1993.
Comparable Company Analysis: DLJ compared selected historical share,
price, earnings and operating and financial ratios for the Company to the
corresponding data and ratios for certain other comparable companies whose
securities are publicly traded. Such data and ratios included (i) the ratio
of total market capitalization of common stock plus long-term debt less cash
on hand ("Enterprise Value") to (A) the latest twelve-months' ("LTM")
earnings before depreciation, amortization, interest and taxes ("EBITDA"),
(B) LTM earnings before interest and taxes ("EBIT"), and (C) LTM revenues,
as well as (ii) the ratio of current stock price to (A) LTM net earnings
("earnings"), (B) calendar 1993 earnings (as estimated by Institutional
Brokers Estimating System ("IBES")), (C) 1994 calendar year estimated
earnings (as estimated by IBES), (D) after tax cash flow (defined as net in-
come plus depreciation and amortization plus changes in deferred taxes) and
(E) book value. All of these items were adjusted for non-recurring and ex-
traordinary items. In addition, DLJ looked at the relative five-year growth
rates for revenues, EBITDA, EBIT and earnings for comparable companies as
well as average EBITDA, EBIT and net income margins for the past five years
for the Company and comparable companies. The financial multiples implied by
the BTR offer and the Company's historical and projected financial results
were compared to the results of two sets of industrial companies.
The first set of comparisons was made to a selected group of six large
industrial companies which were the same companies used for comparative pur-
poses by DLJ when it acted as lead managing underwriter in connection with
the IPO. These companies were BWIP Holdings, Inc., Cooper Industries, Inc.,
Illinois Tool Works, Ingersoll Rand Co., Parker-Hannifan Corp. and Reliance
Electric Co. (the "Large Capitalization Companies"). In general, most of
these companies (with the exception of BWIP and Reliance Electric) were sig-
nificantly larger than the Company and had better historical growth rates
than did the Company.
The second set of comparisons was made to a selected group of smaller
industrial companies with smaller market capitalizations whose size and his-
torical growth patterns more closely resembled those of the Company than the
size and growth characteristics of the first group of comparable companies.
These companies were BWIP Holdings, Inc., Duriron Company, Inc., Interlake
Corp., Kaydon Corporation, Kennametal, Inc., Moorco International, Inc. and
Reliance Electric Co. (the "Smaller Capitalization Companies"). The
Smaller Capitalization Companies have generally been valued over the past
few years at a discount to the first group of companies described above.
DLJ noted that it used the Large Capitalization Companies to determine
the price range which was included on the cover page of the preliminary pro-
spectus used in connection with the IPO. Such price range was $21.00 to
$24.00 per share with the midpoint of such range ($22.50) representing the
following premiums/(discounts) to the average public trading multiples of
such companies at the time of the IPO: price to LTM earnings (20.8%); price
to calendar year 1992 estimated earnings (4.5%); price to 1993 estimated
earnings (17.1%); price to LTM after cash flow (28.4%); price to book value
26.1%; Enterprise Value to LTM revenues 40.0%; Enterprise value to LTM
EBITDA 1.4% and Enterprise Value to LTM EBIT (7.0%). The IPO price was ulti-
mately set at $17.00 per share which represented the following premiums/(di-
scounts) to the average trading prices of such companies: price to LTM earn-
ings (28.6%); price to calendar year 1992 projected earnings (14.1%); price
to calendar year 1993 projected earnings (26.8%); price to LTM after tax
cash flow (37.9%); price to book value 4.3%; Enterprise Value to LTM reve-
nues 25.0%; Enterprise Value to LTM EBITDA (4.1%); and Enterprise Value to
LTM EBIT (12.0%). DLJ further noted that since the IPO, the Common Stock had
consistently traded at a discount to the trading multiples of the Large Cap-
italization Companies and that the current market price of the Common Stock
($18.00 per share immediately prior to the public announcement of the
Merger) represented the following premiums/(discounts) to the average trad-
ing multiples of such companies: price to LTM earnings (17.6%); price to
projected calendar 1993 earnings (20.1%); price to projected calendar 1994
earnings (35.9%); price to LTM after tax cash flow (47.2%); price to book
value 28.0%; Enterprise Value to LTM revenues 18.2% Enterprise Value to
EBITDA (13.8%) and Enterprise Value to EBIT (15.2%).
Comparing the Merger Consideration to the trading ranges of the Large
Capitalization Companies, the analysis of Enterprise Value to LTM revenues
yielded a range of 0.6x to 1.5x for the six comparable companies versus 1.5x
for the Merger Consideration. The analysis of Enterprise Value to EBITDA
yielded a range of 5.5x to 9.7x for the six comparable companies versus 7.7x
for the Merger Consideration. The analysis of Enterprise Value to EBIT
yielded a range of 8.6x to 13.9x for the six comparable companies versus
10.6x for the Merger Consideration. The analysis of stock price to LTM earn-
ings yielded a range of 17.4x to 22.0x for the six comparable companies ver-
sus 21.2x for the Merger Consideration. The analysis of stock price to pro-
jected 1993 calendar earnings yielded a range of 17.0x to 24.5x for the six
comparable companies versus 19.8x for the Merger Consideration. The analysis
of stock price to projected 1994 calendar year earnings yielded a range of
14.3x to 18.9x for the six comparable companies versus 13.4x for the Merger
Consideration. The analysis of stock price to after tax cash flow yielded a
range of 6.8x to 15.0x for the six comparable companies versus 6.9x for the
Merger Consideration. The analysis of stock price to book value yielded a
range of 1.8x to 3.5x for the six comparable companies versus 4.0x for the
Merger Consideration.
With regard to the Smaller Capitalization Companies, the analysis of En-
terprise Value to revenues yielded a range of 0.6x to 1.7x for the seven
comparable companies versus 1.5x for the Merger Consideration. The analysis
of Enterprise Value to EBITDA yielded a range of 5.5x to 9.0x for the seven
comparable companies versus 7.7x for the Merger Consideration. The analysis
of Enterprise Value to EBIT yielded a range of 7.3x to 12.5x for the seven
comparable companies versus 10.6x for the Merger Consideration. The analysis
of stock price to LTM earnings yielded a range of 11.9x to 24.3x for the
seven comparable companies versus 21.2x for the Merger Consideration. The
analysis of stock price to projected 1993 calendar earnings yielded a range
of 11.7x to 22.9x for the seven comparable companies versus 19.8x for the
Merger Consideration. The analysis of stock price to projected 1994 calendar
year earnings yielded a range of 10.3x to 16.0x for the seven comparable
companies versus 13.4x for the Merger Consideration. The analysis of stock
price to after tax cash flow yielded a range of 6.6x to 13.0x for the seven
comparable companies versus 6.9x for the Merger Consideration. The analysis
of stock price to book value yielded a range of 1.8x to 3.4x for the seven
comparable companies versus 4.0x for the Merger Consideration.
Transaction Analysis: DLJ reviewed the transaction multiples paid on
eleven selected industrial company M&A transactions that occurred in the
past three years where the transaction size was greater than $75 million.
DLJ excluded stock swap transactions from this analysis. Although in general
the transactions DLJ was able to identify were not directly comparable to
the Company due to the size of the targets and the nature of the targets'
respective businesses, DLJ compared certain financial multiples (consisting
of Enterprise Value to LTM revenues, Enterprise Value to LTM EBITDA, Enter-
prise Value to LTM EBIT, price to LTM net income and price to tangible book
value) paid in such transactions to the multiples implied by the Merger Con-
sideration.
An analysis of Enterprise Value to LTM revenues yielded a range of 0.5x
to 1.8x for the industrial transactions versus a multiple of 1.5x for the
Merger Consideration. An analysis of Enterprise Value to LTM EBITDA yielded
a range of 6.0x to 18.1x for the industrial transactions versus a multiple
of 7.7x for the Merger Consideration. An analysis of Enterprise Value to LTM
EBIT yielded a range of 9.0x to 39.4x for the industrial transactions versus
a multiple of 10.6x for the Merger Consideration. An analysis of price to
LTM net income yielded a range of 11.9x to 53.3x for the industrial transac-
tions versus a multiple of 21.2x for the Merger Consideration. The analysis
of price to tangible book value was not relevant due to the Company having
negative tangible net worth at the time the Merger was proposed.
M&A Premium Analysis: DLJ examined premiums paid in completed and pend-
ing M&A transactions during 1992 and 1993 to the stock price of the target
in those transactions, in each case one day, one week and one month prior to
the announcement of those transactions. DLJ also performed the same analysis
for "going private" and "squeeze out" transactions from 1991 to 1993.
DLJ then compared those premiums to the premiums implied by the Merger Con-
sideration. In performing this analysis, DLJ removed certain transactions
from the analysis (those transactions effected at a discount to the current
stock price of the target or at a premium in excess of 60% of a target's
stock price) before calculating average premiums paid. The average premiums
paid in these merger transactions one day, one week and one month prior to
announcement were 24.6%, 28.1% and 30.2%, respectively, in 1992; and 29.1%,
30.9% and 31.5%, respectively, for 1993. The average premiums paid in going
private transactions were 24.3%, 34.8% and 31.8%, respectively, for 1993 and
25.5% 29.0% and 29.7%, respectively, for 1992. When DLJ considered only all-
cash transactions, the average premiums paid were 32.3%, 30.1% and 34.5%,
respectively, in 1993 and 28.8%, 29.8% and 29.1%, respectively, in 1992. The
average premiums for squeeze out transactions for the period 1992 to 1993
were 23.6%, 27.2% and 24.9%, respectively. These premiums compared to the
25% premium being offered at each of the listed intervals for the BTR offer.
Leveraged Buyout Analysis: DLJ performed an analysis designed to deter-
mine the price that could be paid by a financial investor who wished to com-
plete a leveraged buyout ("LBO") of the Company. Such analysis assumed
that (i) an LBO investor would require a 25% return on its equity invest-
ment; (ii) the Company could be sold at a multiple of EBITDA of 6.9x (equal
to the trading multiple of the Company in the public market immediately
prior to BTR's offer) after a five-year holding period; (iii) the transac-
tion could be financed using a capital structure of (a) 35% bank debt at an
assumed interest rate equal to the prime rate plus 1.5%, (b) 35% subordi-
nated debt at an assumed interest rate of 11%, and (c) 30% equity; (iv) the
Company's 10.75% Senior Notes due 2002 (the ("Senior Notes") could be re-
purchased at a price of 110% (approximately equal to the current market
price); and (v) management's operating projections for the Company for the
next five years were realized. DLJ performed this same analysis assuming a
transaction financed with 20% equity.
These LBO analyses returned a purchase price of approximately $18.00
(assuming a 30% equity capitalization) and approximately $22.50 (assuming a
20% equity capitalization) per share for the Common Stock.
Discounted Cash Flow Analysis: DLJ estimated the present value of the
cash flows that the holders of Common Stock could expect to receive if they
were to hold the stock for a five year period. DLJ then discounted these
cash flows back to the present using a leveraged equity discount rate. This
analysis was designed to act as a proxy for the value of Common Stock to
current shareholders if they decided to hold such stock. The assumptions
used in this analysis were as follows: (i) all free cash flow from the Com-
pany's operations (after interest payments and capital expenditures) would
be applied in the following priority: (a) to amortize bank debt, (b) to am-
ortize the Senior Notes (assuming that they were callable at par at the time
of realization of such excess cash flow), and (c) payment of dividends to
holders of Common Stock; and (ii) an exit multiple in five years equal to
10.7x the projected net income for the following year (the one-year forward
trading multiple for the Company immediately prior to the announcement of
the Merger).
Because there is no published Beta for the Corporation due to the fact
that it has only been publicly traded for about one and a half years, DLJ
was unable to use the Capital Asset Pricing Model ("CAP-M") to determine
the Company's leveraged cost of equity. Accordingly, DLJ selected a range of
leveraged costs of equity from 10% to 20%. Assuming a risk-free rate of 5.0%
(the five-year T-Bill rate) and a risk premium of 7.9% (the historical ex-
cess return of stocks to the risk free rate), this range would cover Betas
from .63 (at the low end) to 1.89 (at the high end).
This discount cash flow analysis returned a range of value from $15.18
per share (using a 20% discount rate which implies a Beta of 1.89) to $23.46
per share (using a 10% discount rate which implies a Beta of .63).
Stock Trading History: DLJ examined the history of the trading prices
and volume for the Common Stock and the relationship between movements in
the price of the Common Stock and movements in certain stock indices from
the time the Company became a public company to the present. DLJ also exam-
ined a comparison of trading multiples based on projected one-year forward
earnings.
Since the time of the IPO, the highest and lowest prices at which the
Common Stock has traded were $19.50 per share and $14.00 per share, respec-
tively. Since the time of the announcement of the Merger, the Common Stock
has traded in the range of $21.75 to $22.125 per share which tends, in DLJ's
view, to support DLJ's overall analysis and opinion as to the fairness of
the Merger Consideration from a financial point of view.
Other Factors: In November 1990, DLJ was retained by Banner Industries,
Inc. ("Banner") to act as its agent in attempting to sell the Company. In
the ten-month period following that date, DLJ contacted a total of 71 compa-
nies including 27 U.S. companies, 22 European companies, 18 Japanese compa-
nies and 4 Asian and Pacific companies. DLJ received no firm offers for the
Company. Banner terminated DLJ's engagement in March 1991. Since that time,
DLJ maintained contact with six U.S. companies with whom it had discussed
the Company and from time to time raised with such companies the idea of
buying the Company. No firm offers were received by DLJ.
Other factors which DLJ took into account in determining the fairness of
the Merger Consideration were: (i) the lack of historical and projected rev-
enue growth at the Company, (ii) the large amount of goodwill on the Com-
pany's balance sheet, (iii) the non-availability of "pooling of interest"
accounting for a prospective purchaser until July 1, 1994, (iv) the
Company's dependence upon a limited number of product lines for a signifi-
cant portion of the Company's operating profits, (v) the expensive,
non-callable Senior Notes and (vi) the current economic outlook for the U.S.
and Europe.
No company or transaction used in DLJ's analysis is directly comparable
to the Company or the Merger. Accordingly, an analysis of the results of the
foregoing is not mathematical nor necessarily precise; rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics of companies and other factors that could affect
the public trading volumes.
The summary set forth above is not a complete description of the analy-
ses performed by DLJ. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Accordingly, notwithstanding the separate factors sum-
marized above, DLJ believes that its analyses must be considered as a whole
and that selecting portions of its analyses and the factors considered by
it, without considering all of the analyses and factors, would create an in-
complete view of the evaluation process underlying its opinion. In perform-
ing its analyses, DLJ made numerous assumptions with respect to industry
performance, business and economic conditions and other matters. The analy-
ses performed by DLJ are not necessarily indicative of actual values or fu-
ture results, which may be significantly more or less favorable than those
suggested by such analyses.
The Special Committee selected DLJ as its financial advisor because DLJ
is a nationally recognized investment banking firm with substantial experi-
ence in transactions similar to the Merger and because of DLJ's significant
familiarity with the Company as a result of prior engagements by, or relat-
ing to, the Company. As part of its investment banking business, DLJ is reg-
ularly engaged in the valuation of businesses and securities in connection
with mergers, acquisitions, underwritings, sales and distributions of listed
and unlisted securities, private placements and valuations for estate, cor-
porate and other purposes.
Pursuant to an engagement letter dated November 23, 1993, for its ser-
vices as financial advisor to the Company in connection with the Merger, DLJ
has earned fees of $750,000. The Company has also agreed to reimburse DLJ
for its expenses up to an amount of $50,000 and to indemnify DLJ against
certain liabilities, including liabilities under the federal securities
laws, relating to or arising out of services performed by DLJ as the Com-
pany's financial advisor. As set forth above, from November 1990 until Sep-
tember 1991, DLJ was engaged by Banner to sell the Company. DLJ has also
acted as the lead-managing underwriter for the IPO and as a co-managing un-
derwriter for the Senior Notes offering of July 1992 for which DLJ received
normal and customary compensation; and, in addition, in mid-1993 DLJ per-
formed preliminary work relating to the issuance of an Exchangeable Deben-
ture for TFC which would have been exchangeable into Common Stock and fur-
ther performed preliminary work on the sale of the TFC Shares in a secondary
public offering. DLJ did not receive any compensation from either TFC or the
Company in relation to those proposed transactions. Wendy Evrard Lane, a di-
rector of the Company, is the wife of Frederick Lane, a Managing Director of
DLJ. Except as described above, no material relationship has existed between
DLJ and the Company, nor between DLJ and TFC or TFC's other affiliates, dur-
ing the past two years. The terms of the fee arrangement with DLJ, which are
customary in transactions of this nature, were negotiated at arm's length
between the Company and DLJ and, at the time it received DLJ's fairness
opinion, the Board of Directors and the Special Committee were aware of such
fee arrangement.
THE FULL TEXT OF THE OPINION OF DLJ, WHICH SETS FORTH CERTAIN ASSUMP-
TIONS MADE, MATTERS CONSIDERED, AND LIMITATIONS ON THE REVIEWS UNDERTAKEN,
IS ATTACHED HERETO AS ANNEX C. THE COMPANY'S STOCKHOLDERS ARE URGED TO READ
SUCH OPINION CAREFULLY IN ITS ENTIRETY. THE DLJ OPINION DOES NOT CONSTITUTE
A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE
AT THE MEETING.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Company's Board of Directors
with respect to the Merger Agreement, stockholders should be aware that cer-
tain members of the Company's management and Board of Directors have certain
interests in the Merger that are in addition to or different from the inter-
ests of the stockholders of the Company generally. The Board of Directors
was aware of these interests and considered them, among other matters, in
approving and adopting the Merger Agreement.
1989 Stock Option Plan and 1992 Stock Option Plan
Under the terms of the Company's 1989 Stock Option Plan (the "1989
Plan"), if the Company is merged or consolidated with another corporation,
the Stock Option Committee (the "Committee") may, by written notice to the
grantee of any stock option, provide that (i) all of the grantee's outstand-
ing options will be terminated unless exercised within 30 days (or such
longer period as the Committee shall determine) after the date of such no-
tice, and (ii) the date upon which any such affected options will be fully
exercisable (if not already so) will be advanced to the date of such notice.
The Company's 1992 Stock Option Plan (the "1992 Plan") provides that
the stock options will become fully exercisable upon the occurrence of any
"Triggering Event" (as defined in the 1992 Plan). The acquisition by BTR
Holdings of Common Stock from TFC and WPG pursuant to the Purchase Agree-
ments constitutes such a Triggering Event. See "CERTAIN OTHER AGREEMENTS-
The Purchase Agreements" and "THE COMPANY'S BUSINESS-Change in Control."
In addition, under the terms of the 1992 Plan, if there is a Triggering
Event, then the Committee may, by written notice to a grantee of any stock
option, provide that all of the grantee's outstanding options will be termi-
nated unless exercised within 30 days (or such longer period as the Commit-
tee shall determine) after the date of such notice.
Under the 1989 Plan and the 1992 Plan, stock options to purchase 670,640
shares of Common Stock were outstanding as of December 30, 1993. All stock
options under the 1989 Plan became currently exercisable upon delivery, as
described above, of a written notice dated December 28, 1993 and, as
described above, all stock options under the 1992 Plan became currently ex-
ercisable on December 23, 1993 upon consummation of the transactions contem-
plated by the Purchase Agreements. See "CERTAIN OTHER AGREEMENTS-The Pur-
chase Agreements."
The Merger Agreement requires the Committee to take the necessary action
to terminate the stock options outstanding at the Effective Time in exchange
for a cash payment with respect to each such stock option equal to the ex-
cess of the Merger Consideration over the exercise price per share subject
to each stock option (the "Cash Payment"). The 1989 Plan and the 1992 Plan
each have been amended in accordance with such requirements of the
Merger Agreement. The Cash Payment will be made by the Surviving Corporation
at or as promptly as practicable after the Effective Time and will be subject
to applicable withholding of income and other taxes.
The following table indicates, for each person who is an executive of-
ficer or director of the Company and who held stock options at December 30,
1993, (a) the number of shares of Common Stock subject to such options that
were vested at December 22, 1993, (b) the number of shares of Common Stock
subject to such options that would not have been vested at December 30, 1993
but for the consummation of the transactions contemplated by the Purchase
Agreements on December 23, 1993, (c) the weighted average exercise price per
share of Common Stock of all such options, (d) the total cash payment
that would be payable to such holder assuming that (i) all such options
continue to be outstanding at the Effective Time, and (ii) the Merger
Consideration will equal $22.50:
<TABLE>
<CAPTION>
Common Stock Weighted
Common Stock Subject to Average Aggregate
Subject to Unvested Exercise Price of Cash
Option Holder Vested Options Options (1) Stock Options Payment
<S> <C> <C> <C> <C>
James R. Swenson ............................... 47,500 52,500 $ 12.50 $1,000,000
Robert R. Wallis ............................... 21,875 30,000 $ 13.57 463,438
Peter C. Wallace ............................... 20,875 30,000 $ 13.79 442,938
Robert M. MacQueen ............................. 12,500 15,000 $ 12.91 263,750
Thomas J. Jansen ............................... 9,500 32,500 $ 16.43 254,750
William C. Andersen ............................ 14,375 22,500 $ 14.20 305,938
Michael N. Andrzejewski ........................ 10,000 22,500 $ 15.85 216,250
Peter H. Bardach ............................... 5,000 - $ 17.00 27,500
John P. Calhoun ................................ 5,000 - $ 17.00 27,500
Total .................................... 146,625 205,000 - $ 3,002,064
</TABLE>
(1) All such options vested on December 23, 1993 upon the consummation of the
transactions contemplated by the Purchase Agreements. See "CERTAIN OTHER
AGREEMENTS-The Purchase Agreements."
On December 24, 1993, pursuant to a letter agreement with BTR Holdings
dated December 2, 1993 following written notice from BTR Holdings, Jeffrey
Steiner exercised vested options for 238,054 shares of Common Stock (of
which 102,750 options were granted under the 1989 Plan and the 1992 Plan).
Upon issuance of such shares of Common Stock, Mr. Steiner assigned such
shares to BTR Holdings. In connection therewith, Mr. Steiner received from
BTR Holdings an amount in cash equal to the Merger Consideration for
each such share. In addition, on December 24, 1993 Mr. Steiner exercised
the remaining 221,250 options held by him, which options vested upon the
consummation of the transactions contemplated by the Purchase Agreements
on December 23, 1993, and sold such Common Stock to BTR Holdings for an amount
in cash equal to the Merger Consideration for each such share. The weighted
average exercise price of all such options exercised by Mr. Steiner was $11.72.
CERTAIN EMPLOYMENT/SEVERANCE AGREEMENTS
On October 15, 1992, Messrs. Swenson, Wallace, Wallis and Jansen and two
other executive officers (collectively, the "Employees") entered into new
employment agreements with the Company (collectively, the "1992 Executive
Employment Agreements"). Pursuant to the 1992 Executive Employment Agree-
ments, if a "Change in Control" (as defined in the 1992 Executive Employ-
ment Agreements) of the Company occurs, Mr. Swenson (if terminated within 60
days prior to or within two years after the occurrence of a Change of Con-
trol) will receive his monthly base salary for three years after the date of
termination and three years of bonus under the Company's Performance Incen-
tive Plan (the "PIC Plan") and Messrs. Wallis, Wallace and Jansen (in each
case if terminated within 60 days prior to or two years after the occurrence
of a Change of Control) will each receive his monthly base salary for two
years after the date of termination and two years of bonus under the PIC
Plan. The acquisition by BTR Holdings of Common Stock from TFC and WPG pur-
suant to the Purchase Agreements constitutes a Change of Control for pur-
poses of the 1992 Executive Employment Agreements, entitling Messrs. Swen-
son, Wallis, Wallace and Jansen to severance payments of $1,048,252
($1,371,717 before giving effect to the reduction referred to in the following
paragraph), $547,603, $469,926 and $309,168, respectively. See "CERTAIN OTHER
AGREEMENTS-The Purchase Agreements," and "THE COMPANY'S BUSINESS-Change in
Control." In order to induce such executive officers to continue their em-
ployment with the Company, BTR Holdings has agreed to pay to each such exec-
utive officer who does not terminate his employment with the Company and
does not exercise his right to receive such severance payments for 180 days
following the Merger a bonus equal to such executive officer's total compen-
sation for such 180-day period.
Under the 1992 Executive Employment Agreements, if any amount payable to
the Employee would be deemed a "Parachute Payment" under Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code"), the amount
payable to the Employee would be reduced by an amount necessary to reduce
the aggregate amount of all such payments to the Employee to one dollar less
than three times the Executive's "Base Amount" (as defined in the 1992 Ex-
ecutive Employment Agreements).
Jeffrey Steiner entered into an employment agreement with the Company
which was effective July 9, 1992 (the "Steiner Agreement"). Upon the oc-
currence of a "Triggering Event" (as defined in the Steiner Agreement),
Mr. Steiner was entitled to receive a severance payment equal to 2.99 times
the sum of (i) his base salary as of the date immediately preceding the
Triggering Event and (ii) the amount of the bonus or bonuses paid to Mr.
Steiner by the Company during the fiscal year immediately preceding the date
of the Triggering Event less that portion of the acceleration of payments
under stock options which are vested solely as a result of the Triggering
Event which are considered parachute payments. The acquisition by BTR Hold-
ings of Common Stock from TFC and WPG pursuant to the Purchase Agreements on
December 23, 1993 constituted such a Triggering Event for purposes of
the Steiner Agreement and all of such payments, constituting $1,377,219,
were made by the Company on December 24, 1993. See "CERTAIN OTHER
AGREEMENTS-The Purchase Agreements" and "THE COMPANY'S BUSINESS-Change in
Control."
Indemnification
The Merger Agreement provides that the existing indemnification avail-
able to present and former directors, officers and employees of the Company
will be continued for a period of six years after the Effective Time. The
Company has also entered into indemnification agreements with each of the
Special Committee members. See "THE MERGER AGREEMENT-Indemnification."
Other Matters
BTR Holdings has agreed to take all necessary action to cause the Sur-
viving Corporation to assume all continuing obligations of the Company under
the Company's employment agreement with John P. Calhoun, dated July 1, 1988,
which agreement includes the Company's continuing obligation to provide to
Mr. Calhoun group term life insurance coverage in the amount of $715,000.
Upon the establishment of the Special Committee, Peter H. Bardach, as
Chairman of the Special Committee, received a fee of $50,000 and John P.
Calhoun and Alain de Wulf each received a fee of $35,000. Additionally, each
Special Committee member received the regular directors' fee of $1,000 for
each meeting attended, or $500 if more than one meeting occurred within a
twenty-four hour period, whether a Special Committee or Board of Directors
meeting.
Pursuant to the Merger Agreement, the officers of the Company immedi-
ately prior to the Effective Time will be the officers of the Surviving Cor-
poration. See "THE MERGER AGREEMENT-The Merger."
PAGE
<PAGE>
THE MERGER AGREEMENT
The following is a brief summary of the Merger Agreement, a copy of
which is attached hereto as Annex A to this Proxy Statement and is incorpo-
rated herein by reference. Such summary is qualified in its entirety by ref-
erence to the Merger Agreement. Capitalized terms which are not otherwise
defined in this summary have the meanings set forth in the Merger Agreement.
THE MERGER
The Merger Agreement provides that, upon the satisfaction or waiver of
certain conditions, BTR Holdings or, at its election a subsidiary thereof,
will be merged with and into the Company, and the separate corporate exist-
ence of BTR Holdings (or such subsidiary) will cease and the Company will
continue as the surviving corporation (the Company, in such capacity is
sometimes referred to herein as the "Surviving Corporation").
The Merger will become effective at the time (the "Effective Time") of
filing with the Delaware Secretary of State of a duly executed Certificate
of Merger or at such later time as is provided in such Certificate.
Pursuant to the Merger Agreement, at the Effective Time (i) each share
of the Common Stock issued and outstanding immediately prior to the Effec-
tive Time (other than shares of Common Stock owned by BTR Holdings or the
Company or any affiliate thereof and other than shares of Common Stock held
by the Company as treasury stock immediately prior to the Effective Time,
which shares will be cancelled, and other than shares of Common Stock, held
by stockholders, if any, who properly exercised their dissenters' rights un-
der the DGCL) will be cancelled and converted into the right to receive in
cash the greater of (i) $22.50 or (ii) the highest price paid by BTR Hold-
ings (or any affiliate thereof) to purchase shares from any affiliate of the
Company at or prior to the Effective Time (the "Merger Consideration")
payable to the holder thereof, without interest, upon surrender of the cer-
tificate evidencing such share in the manner provided below. The Company has
been advised by BTR Holdings that it has not purchased and has no intention
to purchase, shares of Common Stock from any affiliate of the Company for a
price higher than $22.50 per share. BTR Holdings is an indirect wholly-owned
subsidiary of BTR. BTR is not a party to the Merger Agreement. No interest
will be paid on the Merger Consideration.
Promptly after the Effective Time, letters of transmittal will be mailed
by an exchange agent selected by BTR Holdings (the "Exchange Agent") to
each holder of record of a certificate or certificates, which immediately
prior to the Effective Time represented issued and outstanding shares of the
Common Stock, accompanied by instructions for use in effecting the surrender
of the certificates for payment therefor. After receipt of such transmittal
form, each holder of certificates formerly representing the Common Stock
should surrender such certificates together with a duly executed letter of
transmittal to the Exchange Agent, and each such holder will receive in ex-
change therefor such amount of cash to which such holder has become enti-
tled. STOCKHOLDERS OF THE COMPANY SHOULD NOT SEND IN THEIR CERTIFICATES UN-
TIL THEY RECEIVE A TRANSMITTAL FORM.
Until so surrendered and exchanged, each certificate evidencing Common
Stock will be deemed, for all purposes, to evidence the right to receive the
Merger Consideration in respect of the number of shares previously evidenced
by such certificate, without any interest thereon.
After the Merger Agreement is approved and adopted by the requisite vote
of the stockholders of the Company and certain other conditions to the
Merger are satisfied or waived, the Closing will be held as soon as is prac-
ticable, but in any event not later than the date that is two business days
after the date on which the last of the required conditions to Closing has
been satisfied or waived, or such other date as is agreed upon by the Com-
pany and BTR Holdings.
The Merger Agreement also provides that (i) the certificate of incorpo-
ration of the Company, as in effect at the Effective Time, will be the cer-
tificate of incorporation of the Surviving Corporation, (ii) the by-laws of
the Company, as in effect at the Effective Time, will be the by-laws of the
Surviving Corporation, (iii) directors of BTR Holdings immediately prior to
the Effective Time will be the directors of the Surviving Corporation and
(iv) the officers of the Company immediately prior to the Effective Time
will be the officers of the Surviving Corporation.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
the Company as to, among other things, (i) the due organization and good
standing of the Company; (ii) the authorization, execution and delivery of
the Merger Agreement, the validity and enforceability thereof against the
Company and the non-contravention thereof with the certificate of incorpora-
tion, by-laws, material contracts and agreements of the Company and with any
material applicable laws, judgments, orders or decrees; (iii) the Company's
ownership of all issued and outstanding shares of capital stock of each of
the Company's subsidiaries, except as provided; (iv) the possession by the
Company of the material franchises, licenses, authorizations and approvals
needed to conduct its business; (v) the capitalization of the Company; (vi)
equity interests owned by the Company; (vii) the material compliance with
the Securities Act of 1933, as amended and the Securities Exchange Act of
1934, as amended (the "Exchange Act") in connection with the Company's required
filings with the Securities and Exchange Commission (the "SEC") since March
31, 1989 and the accuracy of certain financial statements of the Company and
the absence of undisclosed liabilities; (viii) certain environmental matters;
(ix) the ownership or lease of real and personal property of the Company;
(x) the ownership or right to use all intellectual property of the Company;
(xi) material litigation with respect to the Company; (xii) the absence of
material adverse changes in the business of the Company; (xiii) compliance by
the Company with material applicable laws; (xiv) the adequacy of the Company's
insurance policies; (xv) certain pension plan matters; (xvi) certain tax matters
and (xvii) the composition of the Company's Board of Directors.
The Merger Agreement also contains representations and warranties of BTR
Holdings as to, among other things, (i) its due organization and good stand-
ing; (ii) the authorization, execution and delivery of the Merger Agreement,
the validity and enforceability thereof against BTR Holdings and the non-
contravention thereof with the certificate of incorporation, by-laws, mate-
rial contracts and agreements of BTR Holdings and with any material laws,
judgments, orders or decrees; (iii) the absence of actions, proceedings or
claims likely to materially affect BTR Holdings' ability to consummate the
Merger; and (iv) the availability of funds sufficient to enable BTR Holdings
to consummate the Merger.
CERTAIN COVENANTS
Conduct of Business Prior to Effective Time
The Company has agreed that, except as contemplated by the Merger Agree-
ment or as expressly agreed to in writing by BTR Holdings, during the period
from the date of the Merger Agreement to the Effective Time, the Company and
its subsidiaries will each conduct its operations according to its ordinary
and usual course of business consistent with past practice, and the Company
and its subsidiaries will each use all reasonable efforts to preserve intact
its business organization, to keep available the services of its officers
and employees and to maintain satisfactory relationships with suppliers,
distributors, customers and others. The Company and its subsidiaries also
have agreed not to do any of the following without the prior written consent
of BTR Holdings: (i) amend its certificate of incorporation or by-laws; (ii)
authorize for issuance, issue, sell, deliver or agree to commit to issue,
sell or deliver any shares of any class of its capital stock or any securi-
ties or other rights convertible or exchangeable into or exercisable for
shares of any class of its capital stock, other than pursuant to currently
outstanding options; (iii) split, combine or reclassify any shares of its
capital stock, or declare or pay any dividend or other distribution in re-
spect of its capital stock or purchase, redeem or otherwise acquire any
shares of its own capital stock or any of its subsidiaries; (iv) except in
the ordinary and usual course of business, consistent with past practice (x)
create, incur, assume, maintain or permit to exist or prepay any long-term
debt or any short-term debt for borrowed money, other than existing lines of
credit; (y) assume, guarantee, endorse or otherwise become liable or respon-
sible for the obligations of any other person except wholly-owned subsidiar-
ies of the Company in the ordinary and usual course of business, consistent
with past practice; (z) make any loans, advances or capital contributions
to, or investments in, any other person; (v) except in connection with the
Company's restructuring plan announced in October 1993 or as contemplated by
the Merger Agreement or plans existing on the date of the Merger Agreement,
(a) increase the compensation or benefits of any director, officer or em-
ployee, except in the ordinary course of business and in accordance with its
customary past practice; (b) pay or agree to pay any pension, retirement al-
lowance or other employee benefit not required, or enter into or agree to
enter into any agreement or arrangement with such director, officer or em-
ployee, whether past or present, relating to any such pension, retirement,
allowance or other employee benefit, except as required under currently ex-
isting agreements, plans or arrangements, or as consistent with past prac-
tice; (c) grant any severance or termination pay to, or enter into any em-
ployment, change of control, termination, severance, indemnification,
management, consultation, confidentiality or invention rights, agreement
with any director, officer or other employee of the Company or its subsid-
iaries, or amend any of such agreements in existence on the date of the
Merger Agreement, except on a basis consistent with past practice and other
than indemnification agreements with independent directors of the Company on
a basis consistent with existing indemnification provisions or (d) except in
accordance with its customary past practices or as may be required to comply
with applicable law, become obligated (other than pursuant to any new or re-
newed collective bargaining agreement) under any new pension plan, welfare
plan, multiemployer plan, employee benefit plan, benefit arrangement, or
similar plan or arrangement, which was not in existence on the date of the
Merger Agreement, including any bonus, incentive, deferred compensation,
stock purchase, stock option, stock appreciation right, group insurance,
severance pay, retirement or other benefit plan, agreement or arrangement,
with or for the benefit of any person, and to amend any of such plans or any
of such agreements in existence on the date of the Merger Agreement; (vi)
except in the ordinary and usual course of business, consistent with past
practices, sell, transfer, lease, license, pledge, mortgage or otherwise
dispose of, any material properties, real, personal or mixed; (vii) enter
into any other agreement, commitments or contracts, except agreements, com-
mitments or contracts contemplated by the Merger Agreement or for the pur-
chase, sale or lease of goods or services in the ordinary course of busi-
ness, consistent with past practice; (viii) authorize, recommend, propose or
announce an intention to authorize, recommend or propose, or enter into any
agreement in principle or an agreement with respect to, any plan of liquida-
tion or dissolution (other than the Merger), any acquisition of a material
amount of assets or securities, any disposition of a material amount of as-
sets or securities or any material change in its capitalization, or any en-
try into a material contract or any amendment or modification of any mate-
rial contract or any release or relinquishment of any material contract
rights not in the ordinary and usual course of business, except as contem-
plated by the Merger Agreement; (ix) except as previously approved by the
Board of Directors of the Company and as identified to BTR Holdings prior to
the date of the Merger Agreement or otherwise consistent with past practice,
authorize or commit to make capital expenditures in an amount in excess of
the Company's 1994 budget for capital expenditures; (x) permit any insurance
policy naming it as a beneficiary or a loss payee to be cancelled or termi-
nated, except in the ordinary and usual course of business; (xi) make any
change to its accounting methods, principles or practices, except as may be
required or permitted by generally accepted accounting principles; or (xii)
maintain the books and records of the Company in a manner not consistent
with past business practices. The Company has also agreed not to agree to do
any of (i) through (xii) above.
Other Agreements of the Company and BTR Holdings
Pursuant to the Merger Agreement, the Company has agreed to take all ac-
tion necessary to convene the Special Meeting to consider and vote upon the
approval and adoption of the Merger Agreement and the transactions contem-
plated thereby. The Company also agreed through its Board of Directors, sub-
ject to the Board of Directors' fiduciary obligations, to recommend to the
Company's stockholders the approval and adoption of the Merger Agreement and
the transactions contemplated thereby and to use all reasonable efforts to
obtain such approval and adoption.
The Company has agreed that, prior to the Effective Time, it will not,
and will not permit any of its directors, officers, employees, agents or
representatives or those of any of its subsidiaries to directly or
indirectly, solicit, initiate or encourage (including by way of furnishing
non-public information) inquiries or proposals concerning any merger, con-
solidation or acquisition or purchase of all or any substantial portion of
the assets or capital stock of the Company or negotiate with any third party
(other than BTR Holdings or its affiliates) with respect to any such trans-
action; provided, however, that (i) the Company may engage in discussions or
negotiations with a third party who seeks to initiate such discussions or
negotiations and may furnish such third party information concerning the
Company and its business, properties and assets, (ii) the Company's Board of
Directors may take and disclose to the Company's stockholders a position
contemplated by Rule 14e-2(a) promulgated under the Exchange Act and (iii)
following receipt of a proposal for such a transaction made in accordance with
the foregoing clause (i), the Board of Directors of the Company will notify
BTR Holdings of the terms and conditions of such proposal and then, the
Board of Directors of the Company may withdraw, modify or not make its
recommendation to the stockholders to approve and adopt the Merger Agreement,
but in each case referred to in the foregoing clauses (i) through (iii) only
to the extent that the Board of Directors of the Company conclude in
good faith on the basis of the advice of the Company's outside counsel that
such action is required by the Board of Directors' fiduciary obligations under
applicable law.
Pursuant to the Merger Agreement, the Company and BTR Holdings have
agreed not to issue any press release or other public statements concerning
the Merger without consulting with the other party, except as required by
law or court order, in which case the Company and BTR Holdings will make
reasonable efforts to consult with each other prior to the making of such
public statement.
CONDITIONS TO THE MERGER
The respective obligations of the Company and BTR Holdings to consummate
the Merger are subject to the satisfaction of certain conditions, including
(i) the approval and adoption of the Merger Agreement by holders of a major-
ity of the outstanding shares of Common Stock and (ii) the expiration or
termination of all necessary waiting periods applicable under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). BTR Holdings has advised the Company that it intends to vote all of
its shares of Common Stock (52.8% of the outstanding shares as of the
Record Date) in favor of the Merger, thereby satisfying the condition de-
scribed in clause (i), and the Federal Trade Commission granted early termi-
nation of the waiting period under the HSR Act on December 21, 1993, thereby
causing the condition described in (ii) to be satisfied.
The obligation of BTR Holdings to consummate the Merger is further sub-
ject to the satisfaction (or waiver by BTR Holdings) of the following condi-
tions: (i) the representations and warranties of the Company being true and
correct in all material respects on the date of the Merger Agreement and at
and on the Closing Date; (ii) the compliance by the Company in all material
respects with all agreements, obligations and covenants required by the
Merger Agreement to be complied with on or prior to the Closing, and the re-
ceipt of a certificate of an authorized officer of the Company to that ef-
fect; (iii) the absence of any injunction or order of any court or govern-
mental entity against the Company or BTR Holdings, which prohibit or
restrict the consummation of the Merger and (iv) the receipt of an opinion
of the Associate General Counsel of the Company and/or Dewey Ballantine, as
special counsel to the Company.
The obligation of the Company to consummate the Merger is further sub-
ject to the satisfaction (or waiver by the Company) of the following condi-
tions: (i) the representations and warranties of BTR Holdings being true and
correct in all material respects as of the date of the Merger Agreement and
at and on the Closing Date; (ii) the compliance by BTR Holdings in all mate-
rial respects with all agreements, obligations and covenants required by the
Merger Agreement to be complied with on or prior to the Closing, and the re-
ceipt of a certificate of an authorized officer of BTR Holdings to that ef-
fect; (iii) the absence of any injunction or order of any court or govern-
mental entity against the Company or BTR Holdings, which prohibit or
restrict the consummation of the Merger and (iv) the receipt of an opinion
of Cahill Gordon & Reindel, as special counsel to BTR Holdings.
AMENDMENT AND MODIFICATION
The Merger Agreement may be amended, modified or supplemented only by
written agreement of BTR Holdings and the Special Committee of the Board of
Directors of the Company at any time prior to the Effective Time but, after
approval and adoption of the Merger Agreement by the stockholders of the
Company, no such amendment or modification may reduce the amount or change
the form of the consideration to be delivered to the stockholders of the
Company.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time: (i) by mutual written consent of the re-
spective Board of Directors of the Company and BTR Holdings; (ii) by either
the Company or BTR Holdings if, without fault of such terminating party, the
Merger shall not have been consummated on or before March 31, 1994; (iii) by
either BTR Holdings or the Company if any court of competent jurisdiction or
other governmental body in the United States shall have issued an order
(other than a temporary restraining order), decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the Merger, and
such order, decree, ruling or other action shall have become final and non-
appealable; (iv) by either BTR Holdings or the Company if the stockholders
of the Company fail to duly adopt and approve the Merger Agreement; (v) by
the Board of Directors of BTR Holdings, at any time prior to the Effective
Time, before or after approval and adoption by the stockholders of the Com-
pany, if the conditions to the obligations of BTR Holdings are not capable
of satisfaction prior to the Closing; and (vi) by the Board of Directors of
the Company, at any time prior to the Effective Time, before or after the
approval and adoption of the stockholders of the Company if (x) the condi-
tions to the obligations of the Company are not capable of satisfaction
prior to the Closing or (y) the Board of Directors determines in good faith
that its fiduciary duties require it to approve a merger, consolidation or
acquisition to purchase all or any substantial portion of the assets or cap-
ital stock of the Company.
INDEMNIFICATION
The Merger Agreement provides that for a period not ending sooner than
the sixth anniversary of the Effective Time, the Surviving Corporation will
maintain all rights to indemnification (including with respect to advance-
ment of expenses incurred in the defense of any action or suit) existing on
the date of the Merger Agreement in favor of the present and former direc-
tors, officers, employees and agents of the Company and its subsidiaries and
affiliates (the "Indemnified Persons") as provided in the Company's cer-
tificate of incorporation and by-laws or otherwise in each case in effect on
the date of the Merger Agreement, subject to applicable law, and that during
such period, the certificate of incorporation and by-laws of the Surviving
Corporation will not be amended to reduce or limit the rights of indemnity
afforded to the Indemnified Persons, or the ability of the Surviving Corpo-
ration to indemnify them, subject to applicable law.
The Merger Agreement further provides that the Surviving Corporation
will indemnify against all losses, damages, liabilities or claims made
against Indemnified Persons arising from their service as an officer, direc-
tor, employee or agent prior to and including the Effective Time, to the
fullest extent as such persons are currently required to be indemnified pur-
suant to the Company's certificate of incorporation and by-laws, subject to
applicable law, for a period ending not sooner than the sixth anniversary of
the Effective Time. To the extent that the Surviving Corporation does not
satisfy its obligation to indemnify the Indemnified Persons pursuant to the
Merger Agreement, BTR Holdings will indemnify the Indemnified Persons.
The Merger Agreement provides that (i) the Surviving Corporation will
maintain directors' and officers' liability insurance with respect to mat-
ters occurring prior to the Effective Time for a period ending not sooner
than the sixth anniversary of the Effective Time at no expense to the bene-
ficiaries thereof and (ii) with respect to non-continuing officers and di-
rectors, prior to the Closing, the Company will purchase (x) a run-off pol-
icy for current directors' and officers' liability insurance maintained by
the Company, such policy to become effective at the Closing and remain in
effect for a period of six years after Closing, at a premium not to exceed
five times the annual premium of the Company's director's and officer's in-
surance policy in effect on the date of the Merger Agreement and (y) run-off
policies for current fiduciary liability insurance maintained by the Company
for directors, officers, employees of the Company and its subsidiaries ap-
plicable to employee benefit plans of the Company and its subsidiaries, such
policies to become effective at the Closing and remain in effect for a pe-
riod of six years after the Closing, at a premium not to exceed five times
the annual premium of the Company's director's and officer's insurance pol-
icy in effect on the date of the Merger Agreement.
In addition, the Company has entered into indemnification agreements,
each dated as of November 19, 1993, with each of the Special Committee mem-
bers that provide for the indemnification of such Special Committee members
by the Company to the fullest extent permitted by applicable law in effect
on the date of such agreements. The indemnification agreements provide for,
among other things, the indemnification by the Company of certain costs and
expenses of the Special Committee members in connection with actions or pro-
ceedings against any Special Committee member (i) by reason of the fact that
he is or was a director, officer, employee, agent or fiduciary of the Com-
pany or is or was serving at the request of the Company in any such capacity
of any other entity or by reason of anything done or not done by him in any
such capacity and (ii) brought by or in the right of the Company to procure
a judgment in its favor by reason of the fact that he is or was a director,
officer, employee, agent or fiduciary of the Company or is, or was serving
at the request of the Company in any such capacity of any other entity or by
reason of anything done or not done by him in any such capacity. The indem-
nification provided for in the indemnification agreements survives for a pe-
riod ending upon the later of: (A) ten years after the Special Committee
member has ceased to occupy any of the positions or have any of the rela-
tionships described in (i) and (ii) above or (B) the final termination of
all pending or threatened actions or proceedings with respect to such Spe-
cial Committee member.
The representations, warranties, covenants and agreements of the Company
and BTR Holdings contained in the Merger Agreement will not survive the Ef-
fective Time or the termination of the Merger Agreement, as the case may be,
except that the agreements with respect to (i) further assurances, (ii) con-
version of shares, (iii) indemnification and insurance and (iv) expenses
will survive the Effective Time and certain provisions regarding (i)
notices, (ii) effect of termination and abandonment, (iii) governing law,
(iv) severability and (v) interpretation will survive any termination of the
Merger Agreement.
MERGER AGREEMENT GUARANTEE
BTR Dunlop, Inc., a wholly-owned subsidiary of BTR Holdings, has pursu-
ant to the Merger Agreement Guarantee dated December 1, 1993 (the "Merger
Agreement Guarantee"), unconditionally guaranteed the (i) due and punctual
payment of the Merger Consideration pursuant to the terms and conditions of
the Merger Agreement and (ii) BTR Holdings' indemnity obligations under the
Merger Agreement. See "Indemnification."
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain federal income tax consequences of
the Merger to stockholders of the Company. This summary does not purport to
discuss all tax consequences of the Merger to all stockholders.
The receipt of cash by a stockholder of the Company pursuant to the
Merger or pursuant to the exercise of dissenters' rights of appraisal, will
be a taxable event for federal income tax purposes and may also be a taxable
transaction under applicable state, local, foreign or other tax laws. In
general, a stockholder will recognize a gain or loss equal to the differ-
ence, if any, between the stockholder's adjusted tax basis in his or her
shares and the amount of cash received for such shares in the Merger. In
general, a stockholder who is not exercising his or her dissenters' rights
of appraisal will recognize such gain or loss at the Effective Time. In gen-
eral, such gain or loss will be capital gain or loss, provided the shares
are held as capital assets, and will be a long-term capital gain or loss if
the stockholder's holding period for such shares exceeds one year.
The receipt of cash by a stockholder pursuant to the Merger (or exercise
of dissenter's rights) may be subject to backup withholding at the rate of
31% unless the stockholder (i) is a corporation or comes within certain
other exempt categories, or (ii) provides a certified taxpayer identifica-
tion number on Form W-9 and otherwise complies with the backup withholding
rules. Backup withholding is not an additional tax; any amounts so withheld
may be credited against the federal income tax liability of the stockholder
subject to the withholding.
EACH STOCKHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT
TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER IN HIS OR HER OWN INDI-
VIDUAL CIRCUMSTANCES AND WITH RESPECT TO THE STATE, LOCAL, FOREIGN OR OTHER
TAX CONSEQUENCES OF THE MERGER. FURTHER, ANY STOCKHOLDER WHO IS A CITIZEN OR
RESIDENT OF A COUNTRY OTHER THAN THE UNITED STATES SHOULD CONSULT HIS OR HER
OWN TAX ADVISOR WITH RESPECT TO THE TAX TREATMENT IN SUCH COUNTRY OF THE
MERGER AND WITH RESPECT TO THE QUESTION OF WHETHER TAX CONSEQUENCES OTHER
THAN THOSE DESCRIBED ABOVE MAY APPLY BY REASON OF THE PROVISIONS OF THE IN-
TERNAL REVENUE CODE APPLICABLE TO FOREIGN PERSONS OR THE PROVISIONS OF ANY
TAX TREATY APPLICABLE TO SUCH STOCKHOLDER.
ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase" under generally ac-
cepted accounting principles.
REGULATORY MATTERS
Under the HSR Act, and the rules promulgated thereunder by the Federal
Trade Commission (the "FTC"), the Merger may not be consummated until no-
tifications have been given and certain information has been furnished to
the FTC and the Antitrust Division of the Department of Justice (the "Anti-
trust Division") and specified waiting period requirements have been satis-
fied. On December 2, 1993 and December 8, 1993, BTR Holdings and the Com-
pany, respectively, filed notification and report forms under the HSR Act
with the FTC and the Antitrust Division. Early termination of the required
waiting period under the HSR Act was granted effective December 21, 1993. At
any time before or after the closing of the Merger, the FTC, the Antitrust
Division or others could take action under the antitrust laws with respect
to the Merger, including seeking to enjoin the consummation of the Merger or
seeking the divestiture of stock or businesses acquired as a result of the
Merger. Pursuant to German law, certain information with respect to the
Merger was required to be filed with the German Federal Cartel Office. On
December 6, 1993, BTR Holdings filed the relevant information with the Ger-
man Federal Cartel Office. Termination of the Merger review was granted by
the German Federal Cartel Office on December 10, 1993. Except as aforesaid,
the Company is not aware of any federal or state regulatory approvals that
must be obtained to consummate the Merger other than approvals which have
also been obtained.
PAGE
<PAGE>
APPRAISAL RIGHTS
Under the DGCL, any stockholder who does not wish to accept the Merger
Consideration provided for in the Merger Agreement has the right to dissent
from the Merger and to seek an appraisal of, and to be paid the fair cash
value for, his or her shares of Common Stock (the "Dissenting Shares")
provided that the stockholder complies with the provisions of Section 262 of
the DGCL ("Appraisal Rights").
The following is intended as a brief summary of the material provisions
of the statutory procedures required to be followed by a stockholder in or-
der to dissent from the Merger and perfect the stockholder's Appraisal
Rights. This summary, however, is not a complete statement of all applicable
requirements and is qualified in its entirety by reference to Section 262 of
the DGCL, the text of which is set forth in Annex B hereto.
If any stockholder elects to demand appraisal of his or her shares of
Common Stock, the stockholder must satisfy each of the following conditions:
(i) the stockholder must deliver to the Company a written demand for
appraisal of his or her shares of Common Stock before the vote with re-
spect to the Merger is taken (this written demand for appraisal must be
in addition to and separate from any proxy or vote abstaining from or
against the Merger; voting against or failing to vote for the Merger by
itself does not constitute a demand for appraisal within the meaning of
Section 262); and
(ii) the stockholder must not vote in favor of the Merger (an ab-
stention or failure to vote will satisfy this requirement, but a vote in
favor of the Merger, by proxy or in person, will constitute a waiver of
the stockholder's Appraisal Rights in respect of the shares of Common
Stock so voted and will nullify any previously filed written demands for
appraisal).
If any stockholder fails to comply with either of these conditions and
the Merger becomes effective, the stockholder will be entitled to receive
the Merger Consideration as provided for in the Merger Agreement but will
have no Appraisal Rights with respect to his or her shares of Common Stock.
All demands for appraisal should be addressed to Rexnord Corporation,
4701 West Greenfield Avenue, Milwaukee, Wisconsin 53214, Attention: Secre-
tary, before the vote on the Merger Agreement is taken at the Special Meet-
ing, and should be executed by, or on behalf of, the holder of record of the
shares of Common Stock. The demand must reasonably inform the Company of the
identity of the stockholder and the intention of the stockholder to demand
appraisal of his or her shares of Common Stock.
To be effective, a demand for appraisal must be made by or in the name
of the registered stockholder, fully and correctly, as the stockholder's
name appears on his or her stock certificate(s) and cannot be made by the
beneficial owner if the beneficial owner does not also hold the shares of
Common Stock of record. The beneficial holder must, in such cases, have the
registered owner submit the required demand in respect of such shares of
Common Stock.
If shares of Common Stock are owned of record in a fiduciary capacity,
such as by a trustee, guardian or custodian, execution of a demand for ap-
praisal should be made in such a capacity, and if the shares of Common Stock
are owned of record by more than one person, as in joint tenancy or tenancy
in common, the demand should be executed by or for all joint owners. An au-
thorized agent, including one for two or more joint owners, may execute the
demand for appraisal for a stockholder of record; however, the agent must
identify the record owner or owners and expressly disclose the fact that, in
executing the demand, he or she is acting as agent for the record owner. A
record owner, such as a broker, who holds shares of Common Stock as a nomi-
nee for others, may exercise his or her right of appraisal with respect to
the shares of Common Stock held for one or more beneficial owners, while not
exercising this right for other beneficial owners. In such case, the written
demand should state the number of shares of Common Stock as to which
appraisal is sought. Where no number of shares of Common Stock is expressly
mentioned, the demand will be presumed to cover all shares of Common Stock
held in the name of such record owner.
Within ten days after the Effective Time, the Company must give written
notice that the Merger has become effective to each stockholder who so filed
a written demand for appraisal and who did not vote in favor of the Merger.
Within 120 days after the Effective Time, but not thereafter, either the
Company or any stockholder who has complied with the requirements of Section
262 of the DGCL may file a petition in the Delaware Court of Chancery (the
"Court") demanding a determination of the fair value of the shares of Com-
mon Stock held by all stockholders entitled to appraisal. The Company does
not presently intend to file such a petition in the event there are dissent-
ing stockholders. Inasmuch as the Company has no obligation to file such a
petition, the failure of a stockholder to do so within the period specified
could nullify such stockholder's previously written demand for appraisal. At
any time within 60 days after the Effective Time, any stockholder who has
demanded appraisal has the right to withdraw the demand and to accept the
payment of the Merger Consideration pursuant to the Merger Agreement.
If a petition for appraisal is duly filed by a stockholder and a copy
thereof is delivered to the Company, the Company will then be obligated
within 20 days thereafter to provide the Court with a duly verified list
containing the names and addresses of all stockholders who have demanded an
appraisal of their shares of Common Stock. After notice to such stockhold-
ers, the Court is empowered to conduct a hearing upon the petition, to de-
termine those stockholders who have complied with Section 262 of the DGCL
and who have become entitled to Appraisal Rights. The Court may require the
stockholders who have demanded payment for their shares of Common Stock to
submit their stock certificates to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings
as to such stockholder.
After determination of the stockholders entitled to an appraisal, the
Court will appraise the shares of Common Stock, determining their fair value
exclusive of any element of value arising from the accomplishment or expec-
tation of the Merger. When the value is so determined, the Court will direct
the payment by the Company of such value, with interest thereon accrued dur-
ing the pendency of the proceeding if the Court so determines, to the stock-
holders entitled to receive the same, upon surrender to the Company by such
holders of the certificates representing such shares of Common Stock. In de-
termining fair value, the Court is required to take into account all rele-
vant factors.
Stockholders considering seeking appraisal should be aware that the fair
value of their shares of Common Stock determined under Section 262 could be
more, the same, or less than the Merger Consideration that they are entitled
to receive pursuant to the Merger Agreement if they do not seek appraisal of
their shares of Common Stock, and that investment banking opinions as to
fairness from a financial point of view are not necessarily opinions as to
fair value under Section 262.
Costs of the appraisal proceeding may be imposed upon the parties
thereto (i.e., the Company and the stockholders participating in the
appraisal proceeding) by the Court as the Court deems equitable in the cir-
cumstances. Upon the application of a stockholder, the Court may order all
or a portion of the expenses incurred by any stockholder in connection with
the appraisal proceeding, including, without limitation, reasonable attor-
neys' fees and the fees and expenses of experts, to be charged pro rata
against the value of all shares of Common Stock entitled to appraisal.
Any stockholder who had demanded Appraisal Rights will not, after the
Effective Time, be entitled to vote shares of Common Stock subject to such
demand for any purpose or to receive payments of dividends or any other dis-
tribution with respect to such shares of Common Stock (other than with re-
spect to payment as of a record date prior to the Effective Time) or to re-
ceive the Merger Consideration pursuant to the Merger Agreement; however, if
no petition for appraisal is filed within 120 days after the Effective Time,
or if such stockholder delivers a written withdrawal of his or her demand
for appraisal and an acceptance of the Merger, either within 60 days after
the Effective Time, or thereafter with written approval of the Company, then
the right of such stockholder to appraisal will cease and such stockholder
will be entitled to receive the Merger Consideration without interest.
Failure to follow the steps required by Section 262 of the DGCL for per-
fecting Appraisal Rights may result in the loss of such rights. In view of
the complexity of Section 262 of the DGCL, stockholders of the Company who
are considering dissenting from the Merger should consult their legal advi-
sors.
PAGE
<PAGE>
CERTAIN OTHER AGREEMENTS
THE STANDSTILL AGREEMENT
The Company, TFC and TFC's wholly-owned subsidiary, RHI, are parties
to the Standstill Agreement which provides, among other things, that during
the "Restricted Period" (June 19, 1992 through July 9, 1995), without the
approval of a majority of the Company's directors not designated by TFC, RHI
or their affiliates (i) neither TFC nor an affiliate thereof may acquire in
excess of 46% of the Voting Power of the Company; provided, however, that
TFC and its affiliates may (A) acquire Common Stock or other securities of
the Company in connection with an offering by the Company to all stockhold-
ers if the transaction is effected on substantially the same terms available
to all other holders of Common Stock, (B) convert any other security not ac-
quired in contravention of the Standstill Agreement into Common Stock or (C)
purchase Common Stock at a price less than two-thirds of the price of Common
Stock paid by purchasers in the equity offering; and (ii) neither TFC nor an
affiliate thereof may transfer any shares of Common Stock of the Company un-
less the transferee agrees to be bound by the Standstill Agreement;
provided, however, that such restriction will not prohibit a transfer of Re-
stricted Shares (as defined below) (i) to any person who would be the bene-
ficial owner of less than 20% of total Voting Power (as defined below) of
the Company after such transfer, (ii) to any person who is not the benefi-
cial owner of the Restricted Shares but who is the holder for the benefit of
certain persons, (iii) pursuant to an underwritten public offering of Re-
stricted Shares, (iv) to any person who acquires 50% or more of the total
Voting Power of the Company or (v) sold, transferred or exchanged pursuant
to any Extraordinary Transaction (as defined below).
For purposes of the Standstill Agreement, "Extraordinary Transaction"
means generally a merger, consolidation, sale or transfer of assets, liqui-
dation, dissolution, recapitalization, reclassification of securities or
other extraordinary corporate transaction or a series of related transac-
tions involving the Company; "Restricted Shares" means the Common Stock
issued to RHI in certain exchange offers (the "Covered Common Stock"), the
Common Stock acquired upon the exercise of certain options (the "Option
Shares"), any security received as a dividend or in connection with a stock
split, recapitalization or similar transaction involving the Covered Common
Stock or the Option Shares or exchangeable or exchanged thereof in any
transaction and any other shares of stock in the Company held by TFC or its
affiliates during the Restricted Period including, without limitation, all
shares of Common Stock held by TFC or its affiliates on the date of the
Standstill Agreement or immediately after consummation of the aforementioned
exchange offers; and "Voting Power" means the percentage of the aggregate
votes of all voting securities outstanding entitled under ordinary circum-
stances to be cast in the election of directors.
In connection with the Merger, the Board of Directors of the Company
consented to the transfer of shares of Common Stock from TFC and RHI Hold-
ings to BTR Holdings pursuant to the TFC Purchase Agreement, thereby waiving
the applicable provisions of the Standstill Agreement. As a result, BTR
Holdings is not subject to the terms, conditions and restrictions set forth
in the Standstill Agreement.
THE PURCHASE AGREEMENTS
On December 23, 1993, BTR Holdings purchased (i) from TFC and RHI Hold-
ings an aggregate of 8,083,248 shares of Common Stock pursuant to a Purchase
Agreement, dated as of December 2, 1993 (the "TFC Purchase Agreement"),
and (ii) from WPG 1,039,500 shares of the Common Stock pursuant to a Pur-
chase Agreement dated as of December 2, 1993 (the "WPG Purchase
Agreement"), in each case for a purchase price of $22.50 per share, in
cash. The TFC Purchase Agreement and the WPG Purchase Agreement are referred
to herein collectively as, the "Purchase Agreements." In accordance with
the WPG Purchase Agreement, in the event that the consideration paid to the
Company's stockholders pursuant to the Merger is in excess of $22.50 per
share, then the purchase price paid to WPG will be increased to such higher
price.
In addition, pursuant to the TFC Purchase Agreement, TFC and RHI Hold-
ings have agreed to indemnify BTR Holdings and the Company for certain envi-
ronmental liabilities for prior periods. Pursuant to a Tax Agreement among
TFC, RHI Holdings, the Company and BTR Holdings, dated December 2, 1993, TFC
and RHI Holdings have agreed jointly to indemnify BTR Holdings and the Com-
pany for certain tax liabilities. Pursuant to an Escrow Agreement among TFC,
RHI Holdings and BTR Holdings, dated December 2, 1993, TFC is required to
deposited in escrow at the Closing under the TFC Purchase Agreement shares of
common stock of Banner Aerospace, Inc., a Delaware corporation, having an
aggregate market value equal to $25 million for the purpose of securing the
payment of certain tax liabilities indemnified against under the Tax Agree-
ment. Pursuant to an undertaking, dated December 2, 1993, by BTR Holdings,
BTR Holdings agreed upon consummation of the Merger, to cause the Surviving
Corporation to pay to each of the directors of the Company (other than James
Swenson and Jeffrey Steiner) the sum of $36,562.50 in lieu of any stock op-
tions to which such director would have been entitled to under the Company's
Directors Stock Option Plan approved by the Board of Directors of the Com-
pany on October 7, 1993.
PAGE
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data for
the Company and its subsidiaries. The data should be read in connection with
the financial statements and the notes thereto in this Proxy Statement. The
financial information for the Company set forth in the table has been de-
rived from historical financial statements of the Company.
<TABLE>
<CAPTION>
Nine
Months
Three Months Ended Ended
September 30, Years Ended June 30, June 30,
1993 1992 1993 1992 1991 1990 1989
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales .................................. $128,038 $126,618 $532,499 $514,809 $551,970 $566,580 $416,967
Operating Expenses ......................... 112,554 108,155 449,792 443,475 455,045 470,415 346,672
Restructuring Charge (a) ................... 11,000 - - 3,100 - - -
Operating Profit ........................... 4,484 18,463 82,707 68,234 96,925 96,165 70,295
Interest Expense, net ...................... 8,868 10,269 39,803 56,793 64,075 65,050 51,881
Earnings Before Income Taxes................ (4,384) 8,194 42,904 11,441 32,850 31,115 18,414
Provision for Income Taxes ................. (1,720) 3,851 19,018 8,348 19,103 18,690 11,935
Net Earnings Before Extraordinary Loss, Cu-
mulative Effect of Change in Accounting
Principles and Dividends on Preferred
Stock .................................... (2,664) 4,343 23,886 3,093 13,747 12,425 6,479
Extraordinary Loss-Recapitalization (b) .... - (28,303) (28,303) - - - -
Cumulative Effect on Prior Years of Changes
in Accounting Principles (c)
-Post retirement benefits .............. (26,245) - - - - - -
-Income taxes .......................... (1,835) - - - - - -
Net Earnings (Loss) ........................ (30,744) (23,960) (4,417) 3,093 13,747 12,425 6,479
Dividends on Preferred Stock (d) ........... - 1,158 1,158 22,114 18,882 15,984 11,229
Net Earnings (Loss) Applicable to Common
Shares ................................... $(30,744) $(25,118) $ (5,575) $(19,021) $ (5,135) $ (3,559) $ (4,750)
Earnings Per Share:
Earnings Before Extraordinary Loss and Cumu-
lative Effect of Change in Accounting
Principles................................ $ (.14) $ .19 $ 1.27 $ (3.80) $ (1.02) $ (.71) $ (.95)
Extraordinary Loss-Recapitalization (b) .... - (1.58) (1.58) - - - -
Cumulative Effect on Prior Years of Changes
in Accounting Principles (c) ............. (1.53) - - - - - -
Net Earnings (Loss) Per Share .............. $ (1.67) $ (1.39) $ (.31) $ (3.80) $ (1.02) $ (.71) $ (.95)
BALANCE SHEET DATA:
Working Capital ............................ $ 83,843 $102,145 $ 89,128 $ 85,703 $ 71,502 $ 77,478 $ 95,723
Total Assets ............................... 725,770 672,555 680,151 663,223 671,115 715,440 720,560
Long-Term Debt ............................. 376,131 382,366 379,293 404,573 400,388 433,518 461,673
Stockholders' Equity ....................... 104,031 118,090 134,249 74,486 70,955 58,089 44,268
OPERATING DATA:
EBITDA (e) ................................. $ 23,107 $ 24,361 $105,761 $ 90,453 $117,961 $120,611 $ 85,944
</TABLE>
PAGE
<PAGE>
[CAPTION]
<TABLE>
Nine
Months
Three Months Ended Ended
September 30, Years Ended June 30, June 30,
1993 1992 1993 1992 1991 1990 1989
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA Pct. ................................ 18.0% 19.2% 19.9% 17.6% 21.4% 21.3% 20.6%
Capital Expenditures ....................... 5,493 2,557 17,350 12,092 10,076 16,310 9,816
Number of Employees at End of Period ....... 4,875 4,816 4,769 5,024 5,335 5,622 5,649
</TABLE>
(a) The September 1993 restructuring of operations charge includes rational-
ization of manufacturing capacity (including severances, move costs and
asset writedowns) the movement of certain product lines and the realign-
ment of sales, marketing and administrative functions in Europe, and
severance and other costs related to domestic employment reductions and
cost containment programs.
(b) In connection with the Recapitalization, the Company incurred certain
extraordinary charges to earnings as a result of premiums paid to retire
the Subordinated Notes and the write-off of unamortized deferred financ-
ing fees. Such charges aggregated $28.3 million or $1.58 per share, net
of income tax benefits of $11.0 million.
(c) During the quarter ended September 30, 1993, the Company adopted SFAS
No. 106 (Postretirement Benefits Other Than Pensions) and SFAS No. 109
(Income Taxes) and recorded a one-time charge to earnings of $26.2 mil-
lion ($1.43 per share) and $1.8 million ($.10 per share), respectively.
(d) All dividends paid on the Preferred Stock prior to fiscal 1993 were made
in the form of payment-in-kind dividends. All Preferred Stock was re-
deemed or retired in connection with the Recapitalization.
(e) EBITDA is defined as earnings before total interest expense, provision
for income taxes, depreciation, goodwill amortization and amortization
of other intangible assets. The Senior Note Indenture (as defined below)
and the Amended Credit Agreement (as defined below) require the Company
to meet financial covenants which require among other things, the calcu-
lation of EBITDA.
PAGE
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1993 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1992 (UNAUDITED)
Overview
In the quarter ended September 30, 1993, the Company adopted two new ac-
counting standards and announced a restructuring of its operations specifi-
cally targeted to improve productivity and efficiency, reduce costs and in-
crease manufacturing capacity utilization and increase future operating
income and cash flow. The Company incurred one-time after-tax charges in
connection with adopting the accounting changes and a pretax charge in con-
nection with the restructuring. These events have had a significant impact
on the Company's operating profit and net earnings for the quarter. The fol-
lowing analysis has been prepared in order to provide a better understanding
of the impact of the accounting changes and the restructuring charge.
Before Cumulative Effect
of Accounting Changes
Operating Net Earnings
Profit Earnings Per Share
(Dollars in Millions,
Except Per Share Data)
Before restructuring charge and accounting
changes .................................... $ 17.7 $ 4.2 $ .23
Restructuring charge ......................... (11.0) (6.7) (.36)
SFAS 106-Postretirement benefits ............. (1.2) (0.2) (.01)
SFAS 109-Income taxes ........................ (1.0) - -
After restructuring charge and accounting
changes .................................... $ 4.5 $ (2.7) $ (.14)
Restructuring Charge. Due to the continuation of depressed market condi-
tions in Europe and in order to take advantage of synergy opportunities made
possible by the June 1993 addition of the Marbett SpA product lines, the
Company announced a restructuring of its European operations. The restruc-
turing charge includes $8 million for rationalization of manufacturing ca-
pacity (including severance and moving costs and asset writedowns), reloca-
tion of product lines and realignment of sales, marketing and administrative
functions in Europe. These actions are expected to reduce the cost of doing
business in Europe and to downsize the operations to reflect current busi-
ness levels. The remaining $3 million of the restructuring charge covers
severance and other costs related to domestic employment reductions and cost
containment programs. Management of the Company anticipates that if success-
ful in the implementation of these restructuring actions, operating income
and cash flows would be enhanced by approximately $9 million annually by the
end of fiscal 1995.
SFAS No. 106-Postretirement Benefits. This new standard requires that
the expected cost of these benefits be charged to expense during the years
that the employees render service. The first quarter results include a
charge of $42,288 ($26,245, net of tax, or $1.43 per share) for the immedi-
ate recognition of the net transition obligation with respect to benefits
earned by active and retired employees as of July 1, 1993. In addition, the
new standard had the effect of decreasing operating profit for the quarter
by $250, or $.01 per share. Net periodic postretirement benefit expense for
fiscal 1994 is expected to be approximately $6,626.
SFAS No. 109-Income Taxes. This new standard requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences
of temporary timing differences between the financial statement and tax
bases of the Company's assets and liabilities using currently enacted tax
rates. The first quarter results include a cumulative charge of $1,835, or
$.10 per share, required to provide net deferred taxes with respect to the
aggregate of the differences between the book and tax basis of the Company's
assets and liabilities as of July 1, 1993.
The effect of these accounting changes on net earnings is summarized in
the table below:
Accounting Changes
Increase (Decrease) in Net Earnings Postretirement Income Taxes Total
Cost of sales ...................... $ (1,127) $ (997) $ (2,124)
SG&A expenses ...................... (125) - (125)
Net interest expense ............... 1,002 - 1,002
Tax provision ...................... 118 997 1,115
Earnings before accounting changes . (132) - (132)
Cumulative effect of changes in
accounting
principles ....................... (26,245) (1,835) (28,080)
Increase (decrease) in Net Earnings $(26,377) $(1,835) $(28,212)
PAGE
<PAGE>
Financial Summary
Three Months Ended September 30,
1993 1992
000's % 000's %
(Dollars in Thousands,
Except Per Share Data)
New orders ......................... $134,207 $129,303
Net sales .......................... $128,038 100.0 $126,618 100.0
Cost of goods sold ................. 90,159 70.4 87,150 68.8
Gross margin ..................... 37,879 29.6 39,468 31.2
Selling, general & administrative
expense .......................... 20,379 15.9 19,716 15.6
Goodwill amortization .............. 2,157 1.7 2,107 1.7
Other miscellaneous income ......... (141) (.1) (818) (.7)
Restructuring charge ............... 11,000 8.6 - -
Operating profit ................... 4,484 3.5 18,463 14.6
Interest expense ................... 8,900 7.0 10,398 8.2
Interest (income) .................. (32) - (129) (.1)
Net interest expense ............... 8,868 7.0 10,269 8.1
Pretax profit (loss) ............... (4,384) (3.5) 8,194 6.5
Provision for income taxes ......... (1,720) 39.2 3,851 47.0
Earnings before extraordinary loss,
cumulative effect of change in ac-
counting principles and dividends
on preferred stock ............... $ (2,664) (2.1) $ 4,343 3.4
Extraordinary loss-recapitalization - (28,303)
Cumulative effect of change in ac-
counting principles .............. (28,080) -
Net earnings (loss) ................ $(30,744) $(23,960)
Dividends on preferred stock ....... - (1,158)
Net earnings (loss) applicable for
common shares .................... $(30,744) $(25,118)
New Orders and Net Sales. New orders increased 3.8% to $134.2 million
for the quarter ended September 30, 1993 as compared to $129.3 million dur-
ing the same period in the prior year. If the Company's German operations
and commercial aerospace business were excluded, orders increased 12.6% in
the quarter (7.3% excluding the effect of acquisitions). This order increase
relates primarily to domestic and export markets which account for approxi-
mately 80% of total Company orders. The increase in domestic activity is a
result of the moderate economic recovery in the United States markets, but
principally in the food and beverage, packaging and handling, construction
and domestic cement markets. These gains were offset by a 22% reduction in
orders (of which 13% was due to currency fluctuations) in the Company's
German-based operations due to the continuation of the recession in Europe.
In addition, orders declined 36% in the commercial aerospace business (which
accounts for approximately 7% of total orders) due to depressed conditions
in that market. Based on the strength of the domestic markets, net sales for
the quarter improved 1.1% to $128.0 million from $126.6 million during the
first quarter last year. Sales for the quarter increased by 4.2% (excluding
the impact of currency) as compared to the same quarter last year. The weak-
ened European currencies and the Canadian dollar had a negative impact on
sales of $3.7 million during the quarter.
Cost of Goods Sold. Cost of goods sold as a percentage of net sales in-
creased 1.6% to 70.4% in the quarter ended September 30, 1993 compared to
the first quarter in the prior year. Most of this increase is due to an ad-
ditional $1.0 million of depreciation expense resulting from the
newly-adopted standard for income tax accounting (SFAS No. 109). SFAS No.
109 increased the recorded book values and resulting depreciation of certain
assets, primarily property, plant and equipment, acquired by the Company in
acquisitions accounted for under the purchase method of accounting. The re-
maining increase in cost of goods sold is attributed to deteriorating market
conditions in Europe, principally Germany, and competitive pricing pressure
in domestic markets.
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses
totaled $20.4 million or 15.9% of net sales in the current quarter compared
to $19.7 million or 15.6% of net sales in the first quarter of the prior
year. The increase was due to the implementation of several growth initia-
tives started in fiscal 1993 to expand sales and marketing efforts in key
domestic and international markets.
Interest Expense. Interest expense declined by $1.5 million to $8.9 mil-
lion due to the reclassification of $1.0 million of interest related to dis-
counted retiree medical liabilities to SG&A expense in accordance with SFAS
No. 106. The remaining decrease is due to lower overall debt levels and in-
terest rates.
Pretax Profit, Provision for Income Taxes and Net Earnings. The $11 mil-
lion restructuring charge and the impact of the adoption of SFAS No. 106 and
SFAS No. 109 contributed to a pretax loss of $4.4 million for the current
quarter compared to a profit of $8.2 million in the same quarter of last
year. The effective tax rate of 39% is higher than the statutory rate due to
the effects of nondeductible goodwill amortization, and is lower than last
year's rate of 47% due to the effects of the adoption of SFAS No. 109. Due
to the restructuring charge and the accounting changes, a net loss of $30.7
million was reported in the September 1993 quarter compared to a net loss of
$25.1 million in the same quarter of last year. Last year's net loss
included a $28.3 million loss in connection with the July 1992 recapitaliza-
tion and dividends on preferred stock of $1.2 million.
COMPARISON OF FISCAL YEARS ENDED
JUNE 30, 1993, JUNE 30, 1992 AND JUNE 30, 1991
Overview
Since August 1988, the Company has been highly leveraged as a result of
the issuance of $250 million principal amount of 13.625% Subordinated Notes
due 1998 (the "Subordinated Notes") and three classes of preferred stock
(the "Preferred Stock") which carried a dividend averaging nearly 15% per
year. In order to reduce debt, increase stockholders' investment, take ad-
vantage of lower long-term interest rates and, in effect, lower its overall
cost of capital, the Company designed a complete and comprehensive recapi-
talization which was completed on July 9, 1992, referred to herein as the
"Recapitalization". The Recapitalization replaced all of the high cost
Subordinated Notes and Preferred Stock with lower cost Senior Notes and ad-
ditional common equity. As a result, the Company has returned to a more tra-
ditional capital structure. This new structure has improved the Company's
operating performance and financial flexibility and enhanced its ability to
pursue its growth strategy.
The Company's growth strategy includes strategic and geographic expan-
sion of its product lines serving niche markets that leverage off existing
sales, marketing and distribution networks. As part of this strategy, the
Company purchased a substantial equity interest in Marbett SpA ("Marbett")
on June 23, 1993. Marbett is an Italian manufacturer of conveyor components
and accessories serving primarily the European market with annual sales of
approximately $20 million. Marbett is highly regarded and respected in in-
dustrial markets for the quality, engineering and innovation in its prod-
ucts. The Marbett product line is an excellent fit both geographically and
strategically with the Company's existing products. This alliance gives the
Company a more substantial presence in Europe and creates enhanced growth
potential for Marbett products worldwide. The operating results of Marbett
subsequent to June 23, 1993 are included in the consolidated statement of
earnings. The Company's growth strategy also includes an increased focus on
international sales, marketing and distribution which it believes will fur-
ther enhance opportunities abroad, particularly for those specialty products
which employ proprietary technology.
The Recapitalization
The principal sources of funds for the Recapitalization were: (i) the
public offering of 9,200,000 shares of Common Stock at an initial offering
price of $17.00 per share; (ii) the public offering of $172.5 million aggre-
gate principal amount of the Senior Notes issued pursuant that certain In-
denture dated as of July 9, 1992 (the "Senior Note Indenture"); (iii) an
increase of $59 million in the amount of borrowing available under the bank
credit agreement (the "Amended Credit Agreement"); and (iv) the exchange
of all shares of Preferred Stock owned by RHI for shares of Common Stock.
RHI and Banner Investments Inc. are subsidiaries of TFC and are referred to
herein, together with TFC, as the "Fairchild Group."
The proceeds of the Recapitalization of $454 million were used: (i) to
retire the Subordinated Notes at an aggregate cost of $285.9 million, in-
cluding accrued interest and redemption premiums; (ii) to redeem the out-
standing shares of Preferred Stock held by persons and entities other than
the Fairchild Group (the "Other Preferred Stock") at an aggregate cost of
$79.4 million, including redemption premiums and dividends to the date of
redemption; (iii) to exchange shares of Preferred Stock owned by TFC for
shares of Common Stock; and (iv) to pay financing and transaction costs of
approximately $24 million in connection with the Recapitalization. The indi-
vidual transactions comprising the Recapitalization were as follows:
Common Stock Offering
On July 9, 1992, the Company sold 9,200,000 shares of Common Stock at an
initial public offering price of $17.00 per share resulting in gross pro-
ceeds to the Company of $156.4 million.
Debt Offering
On July 9, 1992, the Company issued $172.5 million in aggregate princi-
pal amount of the Senior Notes. The Senior Notes are general unsecured obli-
gations of the Company and rank pari passu with existing and future senior
indebtedness of the Company. However, because the borrowings under the
Amended Credit Agreement are secured by substantially all of the assets of
the Company and its subsidiaries, the Senior Notes are effectively subordi-
nated to borrowings under the Amended Credit Agreement. The Senior Notes ma-
ture in 2002 and are not redeemable by the Company prior to July 9, 1997.
Amended Credit Agreement
The Amended Credit Agreement replaced four term loan facilities amount-
ing to $121.2 million with one term loan facility of $180 million and ex-
tended the maturity date for a revolving credit facility of $100 million to
September 1, 1998.
Tender Offer and Redemption of the Subordinated Notes
On July 9, 1992, the Company completed a tender offer for the Subordi-
nated Notes which provided for a net cash payment by the Company of $1,090
(plus accrued interest) for each $1,000 principal amount of the Subordinated
Notes tendered to the Company. On July 9, 1992, $221.5 million in aggregate
principal amount of the Subordinated Notes was redeemed for $253.5 million
which included accrued interest to the payment date of $12.1 million. The
remaining $28.5 million in principal amount of the Subordinated Notes was
redeemed on August 15, 1992 at a price of $1,068.20 (plus accrued interest)
for each $1,000 in principal amount then remaining outstanding.
Fairchild Exchange
On July 9, 1992, the Fairchild Group received 3,893,386 shares of Common
Stock in exchange for 3,294,404 shares of Preferred Stock outstanding at
that date (including 10,465 shares of Preferred Stock assumed to have been
issued to the date of exchange as payment-in-kind ("PIK") dividends). The
exchange ratio of 1.181818 was determined based upon the redemption price of
$26.00 per share of Preferred Stock divided by an agreed upon amount of
$22.00 per share of Common Stock.
Preferred Stock Redemption
On July 9, 1992, the Company notified the holders of the Other Preferred
Stock of its intention to redeem all outstanding shares of such stock on Au-
gust 8, 1992 at a per share redemption price equal to $26.00 per share, to-
gether with accrued and unpaid dividends to the redemption date. On August
8, 1992, 3,009,279 shares of Other Preferred Stock were redeemed for an ag-
gregate cash cost of $79.4 million which included unpaid dividends of $1.1
million.
Merger, Name Change and Stock Split
In connection with the Recapitalization, the Company was merged (the
"RPT Merger") with and into Rex-PT Holdings Inc. ("RPT"). RPT changed
its corporate name to "Rexnord Corporation" and a one-for-two reverse
stock split of the then outstanding shares of Common Stock was effected. The
consolidated financial statements reflect the RPT Merger, name change and
reverse stock split for all periods presented. All shares of Common Stock
and earnings per share data throughout this Proxy statement have been re-
stated to give effect to the reverse stock split.
Extraordinary Loss-Recapitalization
In connection with the Recapitalization, the Company incurred certain
extraordinary charges to earnings as a result of the premiums paid to retire
the Subordinated Notes and the write-off of unamortized deferred loan costs.
These extraordinary charges amounted to $28.3 million, or $1.58 per share,
net of income tax benefits of $11.0 million. <PAGE>
Financial Summary
<TABLE>
<CAPTION>
Percentage of Sales
Years Ended June 30, Years Ended June 30,
1993 1992 1991 1993 1992 1991
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
Net Sales .................................. $532,499 $ 514,809 $551,970 100.0% 100.0% 100.0%
Cost of goods sold ......................... 345,920 339,525 357,767 65.0 66.0 64.8
Gross profit ............................. 186,579 175,284 194,203 35.0 34.0 35.2
Engineering, selling, general and adminis-
trative expense .......................... 98,013 101,167 92,281 18.4 19.7 16.7
Interest expense, net ...................... 39,803 56,793 64,075 7.5 11.0 11.6
Goodwill amortization ...................... 8,433 8,429 8,429 1.6 1.6 1.5
Other miscellaneous (income) ............... (2,574) (2,546) (3,432) (0.5) (0.5) (0.6)
Earnings before income taxes ............... 42,904 11,441 32,850 8.0 2.2 6.0
Provision for income taxes ................. 19,018 8,348 19,103 3.6 1.6 3.5
Net earnings before extraordinary loss ..... $ 23,886 $ 3,093 $ 13,747 4.4% 0.6% 2.5%
Extraordinary loss-recapitalization......... (28,303) - -
Net earnings (loss) ........................ $ (4,417) $ 3,093 $ 13,747
Dividends on preferred stock ............... 1,158 22,114 18,882
Net earnings (loss) applicable to common
shares ................................... $ (5,575) $(19,021) $(5,135)
</TABLE>
Net Sales. Net sales for the fiscal year ended June 30, 1993 were $532.5
million, up 3.4 percent over last year's sales of $514.8 million. The in-
crease in sales is due almost exclusively to the strength of the U.S. indus-
trial and export markets in fiscal 1993. Sales of the Company's U.S.-based
industrial products continued their solid recovery in both the domestic and
export markets with sales to these markets increasing nearly 5 percent over
last year. The increased activity in domestic markets was broad-based and
included year over year gains in the food and beverage, packaging and han-
dling, construction, and domestic cement markets. These gains were partially
offset by the recession in Europe (principally Germany), further declines in
worldwide commercial aerospace markets and very competitive pricing in
nearly all markets worldwide. Net new orders for the fiscal year ended June
30, 1993 were $541.2 million, up 2.2 percent over last year's orders of
$529.7 million.
Fiscal 1992 net sales of $514.8 million were 6.7 percent lower than fis-
cal 1991, due entirely to reduced activity levels in many domestic indus-
trial markets caused by the economic recession in the United States. The re-
cession caused many of the Company's end-market customers to reduce their
spending for new plants or expansions in industries such as pulp and paper,
construction and housing, forest products, steel and commercial aerospace
markets.
Cost of Goods Sold. Cost of goods sold as a percentage of sales improved
by 1.0 percent to 65 percent in fiscal 1993, down from 66 percent in fiscal
1992. This improvement is principally related to the increase in sales vol-
ume as well as productivity enhancements. The productivity enhancements in-
cluded the consolidation of the domestic roller chain production capacity
into the Company's Indianapolis manufacturing facility during the second
fiscal quarter and the related closing of the Company's Springfield, Massa-
chusetts facility. The restructuring of the Company's presence in Mexico
early in the year included the closing of two Mexico City plants and the
opening of a value-added service center and warehouse outside of Mexico
City. The fiscal 1993 improvements were partially offset by a deterioration
in margins in products manufactured in Germany due to the recession-induced
decline in sales volume.
In fiscal 1992, cost of goods sold increased 1.2 percent to 66 percent
of sales compared to fiscal 1991. This increase was primarily a result of
the spreading of fixed costs over a lower sales volume and, to a lesser ex-
tent, lower prices caused by the recession in certain of the Company's mar-
kets during fiscal 1992.
Engineering, Selling, General and Administrative Expenses
("E,S,G&A"). E,S,G&A expenses totaled $98.0 million in fiscal 1993, or
18.4 percent of sales, compared to $101.2 million, or 19.7 percent of sales,
in fiscal 1992. The decline in E,S,G&A expense is primarily attributed to
nonrecurring income of $1.7 million related to a settlement of pension lia-
bilities during the second fiscal quarter and an actuarial gain of $4.6 mil-
lion related to the recalculation of retiree medical liabilities in the
fourth fiscal quarter. In fiscal 1992, E,S,G&A expense included a $3.1 mil-
lion pretax restructuring charge related to severance pay in connection with
Company-wide employment reductions and the costs associated with the consol-
idation of the domestic roller chain manufacturing operations. Exclusive of
these nonrecurring gains and restructuring charge, fiscal 1993 E,S,G&A ex-
pense as a percentage of sales was 19.6 percent compared to 19.0 percent in
fiscal 1992. This increase in spending was due to the implementation of sev-
eral growth initiatives started in fiscal 1993 to expand sales and marketing
efforts in key domestic and international markets.
Exclusive of the fiscal 1992 restructuring charge and certain gains ag-
gregating $6.7 million in fiscal 1991, E,S,G&A expenses in fiscal 1992 de-
clined by $1.0 million, or 1 percent from fiscal 1991. This decline reflects
the benefit of cost reduction actions implemented during fiscal 1991 and
1992 which primarily focused on reductions in employment levels and the
elimination or deferral of discretionary spending. Gains recorded in fiscal
1991 included an actuarial gain of $2.1 million, favorable settlement of
litigation claims of $3.1 million, and other credits of $1.5 million.
Interest Expense. Interest expense declined by $17.0 million during fis-
cal 1993 to a total of $39.8 million, compared to $56.8 million last year.
This reduction is due primarily to the reduction of debt and lower interest
rates effected in connection with the Recapitalization. Interest expense
also declined by $7.3 million during fiscal 1992 as compared to fiscal 1991
due to the gradual lowering of interest rates during that year in the United
States.
Goodwill Amortization. Amortization of goodwill was constant at $8.4
million in each of the three fiscal years 1993, 1992 and 1991. Amortization
relates to the excess of purchase price paid over fair value of assets ac-
quired in connection with the PTC Acquisition and the 1988 Restructuring.
Goodwill amortization is not deductible for tax purposes and, as a result,
this amortization had the effect of reducing earnings per share by $.47 per
share in fiscal 1993 and $1.68 per share in fiscal 1992 and 1991.
Earnings Before Income Taxes, Provision for Income Taxes and Net Ear-
nings. Earnings before income taxes increased by 275% in fiscal 1993 to a
total of $42.9 million, up from $11.4 million in the prior year as a result
of the increase in sales volume, the reduction in interest expense and the
nonrecurring gains in fiscal 1993. The effective tax rate was higher than
the statutory rate as a result of the nondeductibility of certain expenses
including the amortization of goodwill and higher tax rates on earnings of
subsidiaries in certain foreign countries. In fiscal 1993 the effective tax
rate improved to 44.3 percent, down from 73.0 percent in fiscal 1992. This
was due to the substantial increase in pretax earnings which lessened the
impact of nondeductible expenses. Because of these factors, net earnings be-
fore extraordinary items and preferred dividends improved substantially in
fiscal 1993 to $23.9 million, up from $3.1 million in fiscal 1992. Net earn-
ings as a percent of sales increased from 0.6 percent in fiscal 1992 to 4.4
percent in the current year. This earnings improvement was one of the antic-
ipated effects of the Recapitalization.
Earnings in fiscal 1992 compared to fiscal 1991 were severely affected
by the recession in the United States, the fiscal 1992 restructuring charge
of $3.1 million and certain nonrecurring gains aggregating $6.7 million in
fiscal 1991. As a result, pretax earning fell to $11.4 million from $32.9
million a year earlier. Net earnings declined as well to $3.1 million in
fiscal 1992 from $13.7 million in fiscal 1991.
PRO FORMA FINANCIAL RESULTS
Because the Recapitalization dramatically changed the capital structure
of the Company, reduced interest costs, eliminated dividends on Preferred
Stock and increased the number of shares of Common Stock outstanding, net
earnings for fiscal 1993 are not comparable to fiscal 1992. Pro forma income
statement data after giving effect to the Recapitalization as if it had oc-
curred at the beginning of fiscal 1993 and fiscal 1992, respectively, is as
follows:
Fiscal Fiscal
1993 1992
Pro Forma Net Earnings (in thousands) .. $24,194 $14,993
Pro Forma Earnings Per Share ........... $ 1.33 $ .87
Pro Forma information is provided for informational proposes only and
does not purport to be indicative of the Company's financial position or re-
sults of operations which would actually have been obtained or which may be
obtained in the future.
LIQUIDITY, CAPITAL EXPENDITURES AND FINANCIAL CONDITION
The Company's financial condition significantly improved during fiscal
1993 primarily due to the effects of the Recapitalization and increased
earnings. Total debt outstanding at June 30, 1993 was $404.2 million com-
pared to $417.5 million a year earlier. The total debt to equity ratio con-
tinued its improvement during fiscal 1993 and ended the year at 3.0 to 1,
down from 5.6 to 1 at the end of fiscal 1992, and down significantly from a
peak leverage ratio of 13.0 to 1 in 1988. The reduction in overall debt lev-
els in 1993 was accomplished in spite of increased spending for capital im-
provements and the acquisition of Marbett which was financed by additional
long-term borrowings of $15 million during the last week of fiscal 1993.
Total debt outstanding at September 30, 1993 was $403.0 million repre-
senting a total debt to equity ratio of 3.9 to 1. The increase in the debt
to equity ratio is primarily the result of the restructuring charge and ac-
counting changes recorded in the quarter ended September 30, 1993 which re-
duced equity by approximately $34.9 million.
The current ratio at September 30, 1993 was 1.7 compared to 1.9 at June
30, 1993 and June 30, 1992. Working capital was $83.8 million at September
30, 1993 compared to $89.1 million at June 30, 1993 and $85.7 million at
June 30, 1992. The decrease in working capital at September 30, 1993 was due
to the impact of the restructuring charge. The increase in working capital
in fiscal 1993 was due to increased inventory required to support the in-
crease in sales activity during fiscal 1993. Inventory turnover on an ana-
lyzed FIFO basis was 2.2 times for the quarter ended September 30, 1993, 2.5
times for the fiscal year ended June 30, 1993 and 2.6 times for the fiscal
year ended June 30, 1992. Accounts receivable days sales outstanding
increased to 43.6 days at September 30, 1993 from 41.0 days at June 30, 1993
and 1992.
The Company has a history of generating positive cash flow in both ris-
ing and falling economic cycles and the Company is optimistic that its major
markets in the United States will continue to improve. Net cash provided by
operations was $20.6 million in fiscal 1993, down from $32.9 million during
fiscal 1992. The decline is attributable to an $11.7 million decrease in ac-
crued interest payable at June 30, 1993 as compared to June 30, 1992 result-
ing from the different semi-annual interest payment dates on the Senior
Notes as compared to the previously outstanding Subordinated Notes. The Com-
pany also incurred additional one-time cash charges for severance pay, em-
ployee relocation and moving expense in connection with the plant closings
in Springfield, Massachusetts and Mexico City during fiscal 1993. Cash pro-
vided by operations for the quarter ended September 30, 1993 was $6.6 mil-
lion which was used primarily for capital expenditures of $5.5 million and
the net reduction in debt of $1.1 million.
Capital expenditures increased to $17.4 million during fiscal 1993, up
$5.3 million from last year's total of $12.1 million, reflecting the Com-
pany's increased focus on business and capital expansion projects that in-
crease efficiency and reduce costs. The Company expects to continue to spend
approximately $20 million in each of the next two fiscal years for similar
projects, which is approximately $4 million to $10 million more per year
than in the recent periods prior to the Recapitalization. In addition, the
Company paid $18 million for its investment in Marbett. This investment is
consistent with the Company's growth strategy to add profitable product
lines in niche markets that are complementary to the Company's existing
product offerings.
The Company's backlog of orders at June 30, 1993 was $94.0 million com-
pared to $109.6 million at June 30, 1992. Approximately one-half of the re-
duction in backlog relates to the decrease in demand in European industrial
markets (principally Germany) due to the recession in Europe, and weaker
foreign currencies. The remaining decrease in backlog is due to declines in
the worldwide commercial aerospace market and certain international bulk ma-
terial handling markets. Backlog related to the U.S. industrial and export
markets is essentially unchanged between the two years. The Company gener-
ally ships its products within 60 days of obtaining an order and expects
that substantially all of its backlog of orders will be shipped within the
next twelve months. In addition, a substantial portion of new sales orders
are filled in the same calendar month in which they are placed and are
therefore not reflected in the fiscal year end backlog.
The Amended Credit Agreement replaced four term loan facilities with one
term loan facility of $169.1 million, extended the maturity date of the $100
million revolving credit facility to September 1, 1998, and contains less
restrictive covenants and conditions than those contained in the prior
credit agreement. However, the Amended Credit Agreement and, to a lesser ex-
tent, the Senior Note Indenture, will impose substantial financial and oper-
ating restrictions on the Company, including certain limitations on the Com-
pany's ability to make capital expenditures or acquisitions. However,
management believes that the Company will generate cash from operations and
will have flexibility under the Amended Credit Agreement and the Senior Note
Indenture sufficient to conduct its business, make all anticipated capital
expenditures necessary to carry out its business plan and meet its require-
ments for principal and interest payments under the Amended Credit Agree-
ment, the Senior Note Indenture and other obligations as they come due.
INFLATION
During the past several years, the rate of inflation had not had a sig-
nificant impact on the Company's operations. The Company uses the LIFO
method of accounting for the majority of its inventories. Under this method,
the cost of goods sold which is reported in the financial statements should
closely approximate current costs. The Company believes the impact of infla-
tion and changing prices on its operating results and financial condition
during the current year has been minimal.
PAGE
<PAGE>
THE COMPANY'S BUSINESS
OVERVIEW
The Company is a leading worldwide manufacturer and supplier of mechani-
cal power transmission components and related products for sale to a broad
base of domestic and international manufacturers and users of industrial
equipment. The Company's principal products include engineered, conveying,
flat top and roller chains, various types of anti-friction bearings, speed
reducers, shaft couplings and seals, idlers, sprockets and electric motor
brakes and clutches. The Company's products have established, highly
respected brand names including Rex(Registered Trademark), TableTop(Registered
Trademark), MatTop(Registered Trademark), Shafer(Registered Trademark),
Thomas(Registered Trademark), Stearns(Registered Trademark) and
Link-Belt(Registered Trademark) for power transmission components. The
Company believes that it produces the broadest and most comprehensive product
line of components in the mechanical power transmission industry. Virtually
all of the Company's products are moving, mechanical components which are
consumed in use and require replacement on a regular basis. As a result, over
half of the Company's annual sales consists of replacement parts.
The Company's products are sold to more than 2,000 original equipment
manufacturers ("OEMs"), and more than 400 industrial distributors which
resell the products to industrial consumers and to smaller OEMs through
1,500 branches. Major markets for the Company's products include the food
and beverage processing, commercial aerospace, chemical, petrochemical,
coal, oil field, transportation, sanitation, construction machinery, cement,
forest products, farm machinery and industrial equipment industries. The
types of products the Company manufactures are often critical to the opera-
tion of manufacturing and processing facilities and are relatively inexpen-
sive compared to the value of such facilities and their output. The Company
believes that it enjoys a reputation for quality and reliability and, as a
result, the Company's products are often specified by OEMs and other end-
users for original and replacement or maintenance applications. In addition,
the Company believes that the breadth of its product line and its strong
brand name position make the Company one of the most important suppliers to
its industrial distributors.
The Company's strategy is to develop strong market positions for its
products through technological innovation, product differentiation, cost ef-
ficiency, customer service and quality. The Company focuses its marketing
efforts directly on OEMs and other end-users of its products by offering
products which solve customers' specific needs for mechanical power trans-
mission components. These solutions may be variations of existing products
or new products designed to meet customers' specifications. The Company be-
lieves that its principal competitive strengths are its reliable, high qual-
ity products and well-established brand names, the breadth of its product
line, its integrated sales organization, a strong and established distribu-
tion network and its design and engineering capabilities.
On July 9, 1992, the Company completed the Recapitalization designed to
increase stockholders' equity, reduce indebtedness and interest expense,
eliminate all classes of preferred stock outstanding and their related divi-
dend requirements and improve the Company's operating and financial flexi-
bility. The Recapitalization provides the Company with an opportunity to ex-
tend product lines by developing or acquiring new products and technologies,
participate in additional joint ventures outside the United States and in-
crease its market presence in Europe, South America and the Far East. Man-
agement believes that the Company's strong relationships with its customers
allow it to identify and satisfy new product requirements and that the Com-
pany's large and fully integrated sales and marketing network enhances its
ability to introduce new products efficiently.
The Company has 17 manufacturing facilities in the United States and 9
manufacturing facilities in other countries including Germany, Brazil, Italy
and Australia.
HISTORY
The Company is the successor to the business of two leading suppliers of
mechanical power transmission components which were established over 100
years ago and combined in 1988. The business of the Chain Belt Company,
which was incorporated in 1892, was operated as the Mechanical Power Divi-
sion ("MPD") of Rexnord Inc. ("Original Rex") until August 1988 when it
was acquired by the Company as part of a corporate restructuring of Original
Rex (the "1988 Restructuring"). The business of the Link Belt Company,
which was incorporated in 1877, was operated by PT Components, Inc.
("PTC") until PTC was acquired by the Company as part of the 1988 Restruc-
turing. The combination of MPD and PTC resulted in a company that is able to
serve customers more completely with broadened product lines and brand
names, large market shares in a number of key product categories, an exten-
sive international distribution system and expanded customer base. Since
1988, the Company has successfully integrated PTC's administrative, market-
ing and manufacturing operations, eliminated PTC's headquarters staff, com-
bined and eliminated duplicate computer facilities and has closed five manu-
facturing plants and four warehouses.
PRODUCTS
The Company operates in a single business segment, the manufacture and
marketing of mechanical power transmission products. The Company generally
segregates its products into three groups: (i) chain and conveying products;
(ii) bearings and seals; and (iii) couplings, clutches, brakes and drives.
During the last three years, sales for each of the product groupings were as
follows:
<TABLE>
<CAPTION>
1993 1992 1991
Sales % Sales % Sales %
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Chain and conveying products ........... 259,481 49% $255,400 50% $268,768 49%
Bearings and seals ..................... 170,508 32 161,381 31 178,643 32
Couplings, clutches, brakes and drives . 102,510 19 98,028 19 104,559 19
$ 532,499 100% $514,809 100% $551,970 100%
</TABLE>
Chain and Conveying Products
Chain and conveying products consist of roller chains used for power
transmission, material handling and positioning, engineered chain which gen-
erally is larger and heavier than roller chain and is more commonly used for
material handling and conveying applications, flat-top chain which is used
primarily in the food processing and consumer products packaging industry,
and conveying equipment which is used primarily for bulk material handling.
The primary markets for these products are the food processing, packaging,
construction machinery, cement, sanitation, forest products, agricultural
equipment, automated handling, mining and oil field industries. The Company
markets these products worldwide, with major emphasis in North America, Eu-
rope and South America. The Company produces chain and conveying products in
facilities in the United States, Italy, Germany, Australia and Brazil.
Roller Chain. Roller chain is used to transmit power, generally from one
shaft to another through sprockets, and can be modified with attachments for
use in many light duty conveyor applications. The Company's roller chain
products consist of drive, conveyor and leaf chains. The product line cur-
rently consists of ANSI, British standard, oilfield, silent chain, positive
infinitely variable chain, leaf chain and sprockets. Roller chains are uti-
lized in a number of applications including food processing, automated han-
dling, oil field equipment, construction equipment, agricultural equipment
and other general industrial areas.
Engineered Chain. The engineered chain product line consists of a broad
offering of chains and sprockets designed to transmit power and convey mate-
rials. The engineered chain business was started by the Company in 1891 (by
its predecessor, the Chain Belt Company) with cast, detachable chains. Since
that time, the Company has introduced innovations in its engineered chain
product line such as welded steel chain, engineered steel chain, combination
chain, nonmetallic chain and segmental and nonmetallic sprockets. The Com-
pany's engineered chain product line consists of elevator and conveyor
chains, drive chains, polymeric chains, welded steel chains, drop forged
chains, cast chains, sprockets and idler wheels. Engineered chain is uti-
lized in construction machinery, cement processing, sanitation, forest prod-
ucts, food processing, automated handling and mining. Management believes
that the Company has one of the most complete engineered chain product lines
in the industry, thus giving the Company a competitive advantage in market-
ing its products.
Flat-Top Chain. Flat-top chain products provide the conveying surface
for a variety of conveyed products and are primarily sold to the food, bev-
erage, consumer products and parts processing industries. Management
believes that the Company is generally regarded as a leader in application
engineering and product innovation and development for this type of product
with its stainless and carbon steel and plastic TableTop(Registered Trademark)
and MatTop(Registered Trademark) chain product lines. The flat-top product
line consists of metal unit link, plastic unit link, roller chain base,
MatTop(Registered Trademark) chain, low blackline pressure chain and
accessories.
Conveying Products. The Company manufactures various types of bulk mate-
rial handling conveyors, most of which incorporate other Company products
such as chain, bearings and reducers. The Company also manufactures belt
conveyor idlers which are the components that support belts in a belt con-
veyor system. The Company's conveyors include bucket elevators, apron con-
veyors, drag conveyors and belt conveyor idlers which are marketed to the
cement, solid waste, aggregate, mining and forest products industries. The
idler product line is principally sold by the Company to the sand and
gravel, cement, coal and forest products industries.
Bearings and Seals
The Company's bearing and seal product lines include Rex(Registered
Trademark), Link-Belt(Registered Trademark), Shafer(Registered Trademark)
and Cartriseal(Registered Trademark) brands, consisting of collar mounted
roller bearings, spherical roller bearings, cylindrical roller bearings, ball
bearings, sleeve bearings, filament wound bearings, aerospace roller bearings,
aerospace slotted entry bearings and mechanical shaft seals. Most of these
products are offered in a variety of housing configurations to suit specific
industrial applications. The Company's bearing and seal product lines
primarily serve the aerospace and defense, forest products, transportation,
construction equipment, coal, automated handling, recreational vehicle, of-
fice equipment and agricultural equipment industries.
Couplings, Clutches, Brakes and Drives
Couplings. Couplings are the interface between two shafts which permit
power to be transmitted from one shaft to the other. Because shafts are of-
ten misaligned, the Company designs its couplings with a flexible central
portion that accommodates a small amount of misalignment. The Company manu-
facturers several lines of shaft couplings, including Thomas(Registered
Trademark) flexible disc couplings, Rex(Registered Trademark) and
Omega(Trademark) flexible couplings, roller chain couplings and
gear couplings. The Company's products are marketed to the chemical, petro-
chemical, food, steel, forest products, and pulp and paper industries.
Industrial Clutches and Brakes. The Company manufactures and sells
Stearns(Registered Trademark) and BSD electric brakes, clutches and clutch-brake
combination units. These products are either internally mounted with motors
and gearmotors or externally mounted units and are electromagnetically,
mechanically, pneumatically or hydraulically activated. The Company's clutch
and brake products consist of electric brakes, electric clutches and combination
clutch-brake units marketed principally to manufacturers of motors for use
in a variety of industries, including the off-road vehicle, construction
equipment, forest products and metal-working industries.
Speed Reducers and Drives. The Company's reducer and drive products are
used in a variety of industrial applications to reduce the output speed and
increase the torque of an electric motor or engine to that required to drive
a particular piece of equipment. The Company's reducer and drive products
include parallel shaft reducers, shaft mounted reducers, in-line reducers,
worm gear reducers, planetary gear reducers and mechanical variable speed
drives which are marketed to the forest products, cement, iron and steel,
automated handling and industrial conveying industries.
SALES AND MARKETING
Marketing Philosophy
The Company's marketing focus on end-users of its products helps the
Company develop brand name loyalty and maintain market share. The Company
encourages end-users to specify the Company's products when placing orders
and to place their orders with the Company's distributors. In addition, the
marketing emphasis on OEMs creates demand in the replacement parts market.
The marketing focus on both OEMs and end-users who buy through distributors
allows the Company to use its engineering capability to respond to custom-
ers' demands for new products and innovations to existing products.
The Company's information systems, including its MRP-II (Manufacturing
Resources Planning), DRP (Distribution Resource Planning), EDI (electronic
data interchange) and DART (Distributor Access and Response Terminal, the
Company's direct link to many of its distributors), are intended to maximize
both sales and cash flow through reduction of through-put time, better re-
sponsiveness to customers and management of inventories. Stocking programs,
buying programs, and other promotional programs for distributors are all de-
signed to maximize the availability of the Company's products for customers
and end-users. Management believes that the availability and implementation
of these information systems gives the Company a marketing and sales advan-
tage over its competitors.
Sales Force
The Company utilizes its own domestic field sales force of approximately
130 people to service and sell to all customers and end-users, including
OEMs and industrial distributors. Approximately 20 of these salesmen are
specialists focusing on a particular industry or product line, of whom ten
focus on the aerospace industry. In addition, the Company has approximately
15 product specialists located at its manufacturing plants to assist in the
sales, marketing and product development processes.
The Company's international sales force is comprised of approximately 60
employees based in the United States, various European countries, Singapore,
Canada, Brazil, Mexico and Australia.
Customers
Customers for the Company's products include more than 2,000 domestic
and foreign OEMs, and more than 400 domestic and foreign industrial distrib-
utors which resell the products to industrial consumers and to smaller OEMs
through approximately 1,500 branches. Management believes that the Company
is one of the top several suppliers to many of its distributors. On an over-
all basis, the Company's sales are divided about evenly between industrial
distributors and OEMs; however, some products are sold primarily to OEMs
while others are sold primarily to distributors. Because most of the Com-
pany's products are consumed in use and need regular replacement, more than
half of the Company's sales are for replacement parts or scheduled mainte-
nance applications. The Company does not separately account for or record
sales of replacement parts as compared to sales to OEMs. Historically, sales
of replacement parts have been somewhat less sensitive to general economic
conditions than sales to OEMs, which has lessened the effect of economic cy-
cles on the Company's sales. No single customer accounts for more than 10
percent of total sales. In terms of sales to particular industries, manage-
ment of the Company believes that the end-users of its products and direct
customers are primarily in the following industries (in declining order of
sales): food and beverage processing and packaging (including unit handling
applications in a variety of other industries); commercial aerospace; forest
products; construction; material handling; chemical and petrochemical; min-
ing; agriculture and cement processing. No industry accounts for more than
10 percent of the Company's sales other than food and beverage processing
and packaging.
Return Policy
The Company permits each authorized distributor to return slow moving
merchandise for a credit, providing an order equal to the value of the re-
turned goods is placed. Such credit may be reduced by a restocking or refur-
bishment charge. During the past five years, approximately 2% of the Com-
pany's gross sales were returned pursuant to this policy. In addition, if
the Company terminates its relationship with a distributor, the distributor
may return all of its Company products. In its historical and pro forma fi-
nancial statements, the Company reports sales after returns and allowances.
COMPETITION
Most of the Company's markets are highly competitive. The Company's ma-
jor product lines are at varying stages of product maturity although they
are generally characterized by long life cycles and incremental product in-
novation. The principal competitive factors are price, reliability, design
and customer service. The Company's most significant competitors in the
United States are the Dodge Manufacturing Division of Reliance Electric Com-
pany, SKF Industries of Sweden, the Emerson Power Transmission Division of
Emerson Electric Company, Falk Corporation and UST, a United States subsid-
iary of Tsubakimoto Chain Co. Ltd., a Japanese manufacturer. The Company's
largest competitors in the international market are Tsubakimoto, Nippon Min-
iature Bearing Corp., Flexibox Inc. and Sumitomo Machinery Corp. of North
America.
BACKLOG OF ORDERS
The Company's backlog of orders at June 30, 1993 was $94.0 million, as
compared to $109.6 million at June 30, 1992. Approximately one-half of the
backlog decline relates to the decrease in demand in European industrial
markets (principally Germany) due to the recession in Europe, and weaker
foreign currencies. The remaining decrease in backlog is due to declines in
the worldwide commercial aerospace market and certain international bulk ma-
terial handling markets. Backlog related to the U.S. industrial and export
markets is essentially unchanged between years. The Company generally ships
its products within 60 days of obtaining an order and expects that substan-
tially all of its backlog of orders will be shipped within the current fis-
cal year. Management of the Company believes that a substantial portion of
new sales orders are filled in the same calendar month in which they are
placed and are therefore not reflected in the Company's fiscal year-end
backlog.
INTERNATIONAL OPERATIONS
The Company's international activities include both manufacturing and
marketing operations outside the United States and exports from domestic op-
erations. The Company has a total of nine manufacturing locations in other
countries, including Germany, Brazil, Italy and Australia where it manufac-
tures or assembles roller chain, engineered chain, TableTop(Registered
Trademark) chain, clutches, brakes and couplings. The Company derives
approximately 16% of its total sales from products manufactured or assembled
at these locations. Sales of products manufactured in the United States and
sold elsewhere comprised approximately 15% of sales in the fiscal year ended
June 30, 1993, and 13% of sales in the fiscal year ended June 30, 1992 and were
made to foreign-based OEMs, industrial distributors and affiliated companies.
For summary financial information regarding international and domestic opera-
tions, see Note 12 of Notes to Consolidated Financial Statements included
elsewhere in this Proxy Statement.
RAW MATERIALS
The principal raw materials utilized in the Company's manufacturing op-
erations are sheet, plate and bar steel, castings, forgings and a variety of
metal components such as stampings and bearings. The major non-metal raw ma-
terials include high performance engineered plastic. During the fiscal year
ended June 30, 1993, more than 300 suppliers furnished such materials to the
Company. Management of the Company believes that there is a ready available
supply of raw materials in sufficient quantity from a variety of sources.
The Company acquires steel and plastic resins either pursuant to supply con-
tracts or purchases on the open market. Other raw materials are purchased by
the Company on the open market.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts include development of
new products, testings evaluation and improvement of existing products and
improvements in manufacturing techniques and processes. The Company's annual
expenditures for research and development during the last three fiscal years
have averaged approximately 1% of the Company's consolidated net sales.
PATENTS AND TRADEMARKS
The Company owns numerous patents relating to the design and manufacture
of its products. From time to time, the Company grants to others licenses
under certain of its patents and obtains licenses under the patents of oth-
ers.
In July, 1992, the Company purchased certain trademarks owned by RHI, a
subsidiary of TFC, the holder at that time of approximately 44 percent of
the Company's outstanding Common Stock, for a cash payment of $1.5 million
and additional contingent payments of $.7 million for each of the first five
fiscal years in which the Company's earnings before interest and taxes
("EBIT") exceed $120 million. Since the Company's EBIT was less than
$120 million in fiscal 1993, no such contingent payment has been made
to RHI. The Company owns registered United States trademarks on the following
principal products: Rex(Registered Trademark) mounted roller bearings and
filament wound bearings; Shafer(Registered Trademark) aerospace roller bearings;
Thomas(Registered Trademark) flexible disc couplings; Rex(Registered Trademark)
engineered and Duckworth(Registered Trademark) roller chain products;
Rex(Registered Trademark) Omega(Trademark) elastomer couplings;
Rex(Registered Trademark)planetgear speed reducers; Cartriseal(Registered
Trademark) mechanical seals; Rex(Registered Trademark) conveying equipment;
Rex(Registered Trademark) belt conveyor idlers and spray nozzles;
Rex(Registered Trademark) TableTop(Registered Trademark) and
MatTop(Registered Trademark) metallic and non-metallic chains; and
Stearns(Registered Trademark) electric motor brakes and clutches.
Pursuant to an agreement with FMC Corporation ("FMC"), the Company was
granted an exclusive worldwide license (subject to one license previously
granted by FMC) to use, sell and/or market certain mechanical power trans-
mission products under the Link-Belt(Registered Trademark) and similar
trademarks. The Company has agreed to pay FMC a royalty for the use of such
trademarks which is based on a specified percentage of the Company's annual
sales of idler products through September 30, 1998, following which the license
will continue on a royalty-free basis. The Company paid FMC a royalty fee of
$425,000 during the fiscal year ended June 30, 1993. The grant of the license
is for the term of the trademarks and any renewals thereof.
Management believes that although, in the aggregate, the Company's pat-
ents and trademarks are important in the operation of its business, the suc-
cessful manufacture and sale of its products generally depends primarily
upon its own technological, manufacturing and marketing skills.
PAGE
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following table provides certain information about the Company's ex-
ecutive officers:
Years with the
Name Age Position Company*
James R. Swenson ......... 54 Chairman, President, Chief 26
Executive Officer and a Di-
rector
Robert R. Wallis ......... 57 Senior Vice President-Opera- 35
tions and Technology
Peter C. Wallace ......... 39 Vice President-Marketing and 17
International Operations
William C. Andersen ...... 49 Vice President-Sales and 27
Continuous Improvement
Thomas J. Jansen.......... 42 Vice President-Finance, 12
Chief Financial Officer,
Secretary and Treasurer
Michael N. Andrzejewski .. 40 Vice President and Control- 19
ler
Robert M. MacQueen ....... 54 Vice President-Human Re- 31
sources and Community Af-
fairs
* Includes, in the case of certain executive officers, years of service with
Original Rex.
Mr. Swenson has been Chief Executive Officer of the Company since March
1990, Chairman since July 1990 and President and a director of the Company
since October 1988. Mr. Swenson was Chief Operating Officer of the Company
from October 1988 to March 1990 and served as President of MPD from April
1987 to October 1988. Mr. Swenson served as Director of Sales and Marketing
of MPD from February 1986 to April 1987; as Director, Chain Operations-U.S.
and Europe from July 1985 to February 1986; and as General Manager-
Engineered Chain and Idler Operations of MPD from September 1983 to July
1985. Mr. Swenson is also a director of UNICO, Inc. (an electronic controls
manufacturer).
Mr. Wallis has been Senior Vice President-Operations and Technology of
the Company since June 1990 and was Vice President-Manufacturing from Octo-
ber 1986 to June 1990; served as Director of Manufacturing of MPD from Feb-
ruary 1986 to October 1988 and was Director of Marketing of MPD from Septem-
ber 1983 to February 1986.
Mr. Wallace has been Vice President-Marketing and International Opera-
tions of the Company since July 1992; Vice President-Marketing since October
1988; served as Director of Sales and Marketing of MPD from April 1987 to
October 1988; was Product Manager of Engineered Chain and Idlers of MPD from
March 1986 to April 1987; was Regional Sales Manager of MPD from July 1985
to March 1986; and was Manager, International Business Development of MPD
from May 1984 to July 1985.
Mr. Andersen has been Vice President-Sales and Continuous Improvement of
the Company since February 1989; was General Manager-Chain Group from Sep-
tember 1988 to February 1989; was General Manager-Plant Operations of Engi-
neered Chain and Idlers for MPD from July 1985 to September 1988; and was
General Manager-Plant Operations of Castings of Original Rex for three years
prior to July 1985.
Mr. Jansen has been Vice President-Finance, Chief Financial Officer and
Secretary of the Company since March 1992 and Treasurer since October 1988;
was Vice President and Assistant Secretary from October 1988 to March 1992;
was Controller for Donohue & Associates, Inc. from January 1988 to October
1988; was Assistant Controller for Original Rex from July 1986 to December
1987; and was Director of Financial Reporting for Original Rex from April
1981 to July 1986.
Mr. Andrzejewski has been Vice President and Controller of the Company
since August 1988; served as Director of Accounting of MPD from May 1987 to
October 1988; was Controller-Coupling Operation for MPD from November 1983
to May 1987; and was Controller-Electronic Products Division, Research and
Development for Original Rex from November 1982 to November 1983.
Mr. MacQueen has been Vice President-Human Resources and Community Af-
fairs of the Company since February 1989; was Vice President of Human Re-
sources for Original Rex from July 1985 to January 1989; and was Director of
Human Resources for Original Rex from 1978 to 1985.
EMPLOYEES
As of June 30, 1993, the Company employed a total of approximately 4,769
persons worldwide. Approximately 1,600 employees engaged in manufacturing
are covered by collective bargaining agreements, including agreements with
foreign unions. Agreements covering approximately 264, 129 and 698 employees
expire in April 1994, August 1995 and September 1995, respectively. The Com-
pany has had satisfactory relations with its employees and has not suffered
any work stoppages, strikes or any other similar type of labor unrest in the
last five years.
ENVIRONMENTAL MATTERS
In the ordinary course of its business, the Company generates wastes
that must be disposed of in accordance with applicable federal, state, local
and foreign environmental laws and regulations. Although management believes
the Company's manufacturing facilities, processes and disposal practices are
in substantial compliance with all such regulations, there can be no assur-
ance that the Company will not incur significant liabilities in the future
in connection with the cleanup of various waste disposal sites. Management
continues to take actions that reduce the impact of the Company's manufac-
turing processes on the environment. Such actions include removal of under-
ground storage tanks and the reduction or elimination of certain chemicals
used in the Company's operations.
In 1990, in the process of removing underground storage tanks from the
Company's roller chain facility in Indianapolis, the Company discovered soil
contamination from petroleum-based products and notified the State of Indi-
ana. In a letter dated May 1, 1992, the Indiana Department of Environmental
Management ("IDEM") requested that the Company proceed with cleanup of the
petroleum-based contamination at the Indianapolis facility. At a meeting
with the Chief of the Underground Storage Tank Section of the IDEM on May
18, 1992, the Company proposed to conduct additional monitoring at the fa-
cility and, following such monitoring, provide a plan of remediation in the
future. The IDEM accepted the Company's proposal but stated that remediation
will be required at the facility. The Company is continuing to monitor the
facility. It is not possible at this time for the Company to estimate the
extent or the cost of any such remediation that may be necessary in the fu-
ture.
In 1992 the Company attended several meetings with a group of companies
("Interested Parties") who allegedly sent waste material to the Barrett
Landfill located in New Berlin, Wisconsin. The Barrett Landfill is a facil-
ity for nonhazardous wastes which the Wisconsin Department of Natural Re-
sources (the "DNR") is seeking to close. The Company has contributed waste
to the Barrett Landfill; however, while information is incomplete, it is
probable that the Company is responsible for less than 2% of the overall
waste at this site. There is insufficient information available at this
stage of the dispute between the DNR and the owners of Barrett Landfill to
determine the amount of the Company's liability, if any, related to the Bar-
rett Landfill.
In June 1992, the Environmental Protection Agency ("EPA") notified the
Company of its potential liability for cleanup costs associated with a site
located in Connecticut known as the Solvents Recovery of New England site.
EPA estimates that cleanup of the site may cost between $10 million and $30
million. The Company has been identified along with approximately 900 other
companies as a "potentially responsible party" ("PRP") under the Federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") at the site. Based upon records currently available for the
site, the Company believes that its volumetric share of total waste material
sent to the site is approximately .01%. The Company has joined a group of
PRPs (the "PRP Group") for the site, and agreed to a settlement requiring
a payment by the Company of approximately $20,000. In addition, in October
1992, the EPA notified the Company of its potential liability for cleanup
costs associated with a site located in Greer, South Carolina known as the
Aqua-Tech Environmental Inc. site. The Company has been identified along
with approximately 700 other companies as a PRP under CERCLA at the site.
The Company has joined a PRP Group for the site, and has made interim pay-
ments of approximately $9,000. Surface cleanup at the site is estimated to
cost $12 million. There is no definitive estimate of soil and subsurface re-
mediation costs. Based upon records currently available for the site, the
Company believes that its volumetric share of total waste material sent to
the site is approximately .01%. Although joint and several liability could
be imposed under CERCLA to each PRP, the extent of the Company's contribu-
tion to the cleanup of these sites is expected to be limited based upon the
number of other named PRPs and the volumes and types of waste involved which
might be attributed to the Company.
In the process of closing a lagoon at a waste treatment facility at the
Company's bearing facility in Indianapolis, Indiana, the Company discovered
solvent contamination of soil and reported it to the Marion County, Indiana
Health Department (the "County"). While the County indicated that it did
not find any regulations which required clean-up of the soil, in November
1992 the County issued a notice of violation of the Code of the Health and
Hospital Corporation of Marion County alleging contamination of groundwater
by the solvent containing soil. With the approval of the County, the Company
is conducting a subsurface investigation to identify the extent of solvent
contamination. The investigation has located a separate area of solvent
contamination at the facility as well as an area of groundwater contamination,
both of which have been reported to the County. The investigation has not yet
confirmed the amount or extent of the contamination or the possible cost of
remediation. The Company is also gathering information to evaluate whether
the prior owner of the facility may have liability for a portion of
the contamination. In addition, in December 1992, in the process of reviewing
the environmental status of the vacant roller chain facility in Springfield,
Massachusetts prior to its sale, the Company discovered solvent contamination.
The Company is installing a remediation system. Consulting engineers working
on the Massachusetts site currently estimate the cost of remediation at
$275,000 to $350,000.
Although it is difficult to quantify the financial cost of compliance
with environmental protection laws, management believes the ultimate cost to
the Company of environmental remediation at landfill and plant sites will
not have a material adverse effect on its future financial condition or re-
sults of operations. The Company has established reserves of $2.7 million at
June 30, 1993 for potential liabilities for environmental matters.
1988 RESTRUCTURING
The following summarizes certain transactions leading up to and in con-
nection with the formation of the Company in August 1988.
Liquidation of Original Rex
RHI, ChemRex Inc. ("ChemRex"), Envirex Inc. ("Envirex") and the Com-
pany were formed by TFC in 1987 to acquire, and immediately prior to the
1988 Restructuring owned, all of the issued and outstanding capital stock of
Original Rex, which had been an independent, public corporation before it
was acquired by TFC. The purpose of the 1988 Restructuring was to transfer
several distinct businesses of Original Rex to its stockholders. On August
16, 1988, Original Rex redeemed and cancelled all of its issued and
outstanding stock owned by ChemRex, Envirex and the Company. In payment for
the shares redeemed from ChemRex, Original Rex transferred all of the as-
sets, subject to various related liabilities of its Chemical Products Group,
as well as certain other specified liabilities of Original Rex, to ChemRex.
In payment for the shares redeemed from Envirex, Original Rex transferred
all of the assets, subject to various related liabilities of its Envirex Di-
vision, as well as certain other specified liabilities of Original Rex, to
Envirex. In payment for the shares redeemed from the Company, Original Rex
transferred all of the assets of MPD, subject to various related liabilities
of MPD, as well as certain other specified liabilities of Original Rex, to
the Company.
As part of the 1988 Restructuring, Original Rex was merged with and into
RHI, which was the surviving corporation in the merger. As a result of the
merger, all of the remaining assets and liabilities of Original Rex (princi-
pally, the assets and liabilities of its Specialty Fastener Division) were
transferred to RHI.
The PTC Acquisition
Immediately after the 1988 Restructuring, the Company acquired PTC (the
"PTC Acquisition"). Simultaneously with the PTC Acquisition, PTC sold cer-
tain assets, subject to certain related liabilities, having a net value of
approximately $12 million, to unrelated purchasers. After giving effect to
these asset sales, the Company paid a net purchase price of approximately
$179.5 million for PTC.
PAGE
<PAGE>
PROPERTIES
The Company owns and leases facilities throughout the United States and
in several foreign countries. Listed below are the locations of the
Company's principal manufacturing facilities, all of which it owns:
Square
Location Footage Manufactured Products
West Milwaukee, Wisconsin..... 406,000 Engineered chain
Morganton, North Carolina..... 242,000 Engineered and flat-top chain
Indianapolis, Indiana......... 435,000 Roller chain
Indianapolis, Indiana......... 554,000 Bearings
Downers Grove, Illinois....... 210,000 Bearings
Clinton, Tennessee ........... 177,000 Bearings
Grafton, Wisconsin ........... 38,000 Flat-top chain
Philadelphia, Pennsylvania.... 275,000 Drives
Warren, Pennsylvania.......... 123,000 Couplings
Milwaukee, Wisconsin.......... 186,000 Clutches and brakes
Betzdorf, Germany ............ 179,000 Roller chain
Hagen Fley, Germany .......... 125,000 Flat-top chain and roller chain
Los Llanos, Puerto Rico....... 35,000 Flat-top chain
Wheeling, Illinois ........... 82,000 Seals
The Company also owns and leases a number of smaller facilities in the
United States and several foreign countries. Each of the domestic properties
listed above is mortgaged to secure the Company's indebtedness under the
Amended Credit Agreement. Although the extent of capacity varies by location
and product line, management estimates that as of June 30, 1993, the overall
utilization rate of the facilities listed above was approximately 72%. The
Company also owns three warehouses and leases five others in the United
States. The Arlington, Texas, Atlanta, Georgia and Columbus, Ohio
warehouses, at approximately 30,000 square feet each, are the largest, while
the Atlanta, Georgia warehouse, with approximately $51 million in shipments
for the fiscal year ended June 30, 1993 handles the greatest volume of
sales. In addition, the Company leases warehouses which are located in Can-
ada, Belgium, Mexico, the United Kingdom and France. Management believes
that the properties of the Company are adequately equipped, maintained and
suited for its present needs.
CERTAIN LEGAL PROCEEDINGS
The Company is a defendant in a number of lawsuits brought by individu-
als who seek to recover significant compensatory and/or punitive damages in
connection with their contracting various asbestosis-related diseases alleg-
edly as a result of exposure to asbestos-containing products, including
clutches and brakes manufactured by the Stearns division of FMC
("Stearns"). Stearns was purchased by PTC from FMC in October 1981. Under
the terms of the agreements governing such sales, FMC agreed to indemnify
PTC against all liabilities relating to products sold by Stearns before Oc-
tober 1981. There are currently approximately 1,200 claimants in such cases
pending in state and federal courts and it is anticipated that a significant
number of additional lawsuits may be filed. Approximately 20 claimants in
federal cases remain consolidated in the Eastern District of Pennsylvania by
the Judicial Panel on Multidistrict Litigation. The Company's liability, if
any, arises from the plaintiffs' claim of exposure to Stearns' products, of
which a component incorporated asbestos. Stearns continued to sell asbestos-
containing products from October 1981 until 1986. Pursuant to an agreement
between FMC and the Company, FMC will be responsible for 90% of all defense
costs in the aforementioned actions. Management believes that FMC also will
be found responsible for at least 80% and probably 90% of any settlements
and awards in such actions based on an analysis of the number of brakes sold
by Stearns prior to its acquisition by PTC. The Company, through August 1,
1993, has been dismissed from the lawsuits of approximately 2,100 claimants,
including all lawsuits in West Virginia, Arkansas and Mississippi. No cases
have gone to trial. No cases have been settled by payment to plaintiffs.
While the precise impact of these proceedings is impossible to predict, man-
agement believes that the Company has meritorious defenses to the remaining
actions and that the ultimate resolution of such cases will not have a mate-
rial adverse effect on the Company's consolidated financial position or re-
sults of operations.
Original Rex and the Company were previously involved in litigation with
The Laitram Corp. and Intralox Inc. (collectively, "Laitram") concerning
the alleged infringement by the Company's 5900 Series MatTop(Registered
Trademark) plastic modular chains of certain patents owned by Laitram. On
October 22, 1992, the Company and Laitram entered into a settlement agreement
(the "Settlement Agreement") which resulted in the dismissal of all lawsuits
involving the Company, Original Rex and Laitram. In the Settlement Agreement,
Laitram agreed not to enforce any of its patents relating to plastic modular
chains against the Company. The Company paid Laitram $1,500,000 upon execution
of the Settlement Agreement and has agreed to make annual royalty payments to
Laitram of $300,000 in July 1994 and each year thereafter through July 1998
(together with interest at the rate of 5% per annum) and $200,000 in July
1999 and each year thereafter through July 2003 (without interest).
The Company is a defendant in an action entitled Odeco Drilling, Inc.,
Odeco Enterprises, Inc. and Diamond-M Odeco, Ltd. v. Baroid Equipment, Inc.
f/k/a Shaffer, Inc., Varco Shaffer Co., Rexnord Corporation, CDI Corpora-
tion-Creative Designs and Inventions Corporation and 21st Century
Lubricants, Inc., which was commenced on October 16, 1992 in state court in
Harris County, Texas. The claims arise out of the alleged failure of ten-
sioner systems designed and manufactured by one of the defendants for in-
stallation on certain semi-submersible drilling rigs owned or operated by
the plaintiffs. The Company supplied engineered chain used on the tensioner
systems. The plaintiffs have asserted claims against the Company and other
defendants for breach of warranty, common law fraud, negligent misrepresen-
tation, negligence, product liability and breach of contract. The complaint
alleges total damages against all parties in the amount of $4,500,000. In
answers to interrogatories, the plaintiffs claim that their actual total
damages are approximately $12,575,000. The plaintiffs have also asked for
punitive damages. Management believes that the Company has meritorious de-
fenses to the suit and intends to defend the suit vigorously.
On July 1, 1993, the Company received a subpoena from the SEC to produce
certain documents and records relating to securities sold by the Company
in the 1988 Restructuring. The subpoena concerned the SEC's investigation
entitled "In the Matter of Certain Transactions by, through or in conjunction
with Drexel Burnham Lambert Incorporated" ("Drexel Burnham"). Drexel Burnham
acted as underwriter and private placement agent for the sale by the Company
of shares of its Common Stock and Preferred Stock and the Company's previously
outstanding Subordinated Notes during the 1988 Restructuring. The Company
does not believe that it is a target of the investigation of the above matter
and has fully complied with the SEC's subpoena.
The Company is involved in various claims and lawsuits arising in the
normal course of business. In the opinion of management, any ultimate lia-
bility with respect to such claims and lawsuits will not have a material ad-
verse effect on the financial statements of the Company and the reserves of
approximately $2.2 million established therefor will be adequate to cover
the amount of any such liabilities.
CHANGE OF CONTROL OF THE COMPANY
As a result of BTR Holdings' purchases of Common Stock pursuant to the
Purchase Agreements described in "CERTAIN OTHER AGREEMENTS-The Purchase
Agreements," and subsequent purchases of shares of Common Stock in open
market transactions, BTR Holdings is the beneficial owner, as of the Record
Date, of 9,982,052 shares of Common Stock representing approximately
52.8% of the shares of Common Stock outstanding as of such date. BTR Hold-
ings purchases were funded by working capital of BTR, which may be contrib-
uted or loaned to BTR Holdings, and by unsecured short-term loans by BTR
Holdings under one or more existing credit facilities with J.P. Morgan & Co.
Incorporated, Mellon Bank, NationsBank, National Westminister Bank, Royal
Bank of Canada, Societe Generale and Sumitomo Bank, with an expected annual
interest rate of 4.0% per annum.
PAGE
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 30, 1993: (i) the shares
of Common Stock beneficially owned by each of the directors of the Company,
the Company's Chief Executive Officer and the four other most highly compen-
sated executive officers and by all of the directors and executive officers
of the Company as a group; and (ii) the persons known by the Company to be
the beneficial owners of more than five percent (5%) of the shares of Common
Stock outstanding.
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT
BENEFICIAL OWNERS OWNERSHIP(A) OF CLASS
James R. Swenson ....................... 100,000(b) *
Robert R. Wallis ....................... 51,875(b) *
Peter C. Wallace........................ 50,875(b) *
Robert M. MacQueen ..................... 27,500(b) *
Thomas J. Jansen ....................... 42,000(b) *
Michael T. Alcox ....................... - *
Peter H. Bardach ....................... 5,000(b) *
John P. Calhoun ........................ 5,000(b) *
Alain de Wulf .......................... - -
Lorne Weil ............................. - -
Jeffrey J. Steiner ..................... - -
Eric I. Steiner ........................ - -
Wendy Evrard Lane ...................... 5,000(b) *
All directors and executive officers as
a group (15 persons) ............... 356,625 1.9%
BTR Holdings............................ 9,982,052 51.9%
The Prudential Insurance Company of
America...............................
Prudential Plaza
Newark, NJ 07102-3777 962,700(c) 5.0%
_______________
* Less than 1%
(a) Nature of beneficial ownership is direct and arises from sole voting
power and/or sole investment power unless otherwise indicated by foot-
note.
(b) Represents shares of Common Stock which could be acquired upon exercise
of vested stock options which are currently exercisable.
(c) In a report on Schedule 13G dated February 11, 1993, The Prudential In-
surance Company of America ("Prudential") reported that it
beneficially owned 962,700 shares of the Common Stock as of December 31,
1992. The shares are held for the benefit of Prudential's clients in
separate accounts, externally managed accounts, registered investment
companies, subsidiaries and/or other affiliates.
PAGE
<PAGE>
MARKET PRICE DATA
MARKET INFORMATION
Prior to July 9, 1992 there was no public market for the Common Stock.
The Common Stock is listed on the NYSE under the symbol "REX". The follow-
ing table sets forth, for the periods indicated, the high and low closing
prices per share of the Common Stock on the NYSE based on published finan-
cial sources.
FISCAL QUARTER ENDED HIGH LOW
September 30, 1992 (from July 9,
1992)............................. $18 $14 1/8
December 31, 1992 .................. 18 5/8 15 1/2
March 31, 1993 ..................... 18 3/8 16 3/4
June 30, 1993 ...................... 19 1/2 15 1/2
September 30, 1993 ................. 19 1/4 15 5/8
On December 1, 1993 the last full trading day preceding the public an-
nouncement by the Company of the Merger, the high and low sales prices of
the Common Stock on the NYSE were $18 1/4 and $18 1/8 per share,
respectively. On January 4, 1994, the last full trading day preceding the
printing of this Proxy Statement, the closing price of the Common Stock was
$22 1/8.
APPROXIMATE NUMBER OF STOCKHOLDERS
As of December 30, 1993, there were approximately 38 holders of record
of Common Stock.
DIVIDEND HISTORY AND RESTRICTIONS
Since its incorporation, the Company has paid no dividends on Common
Stock. The payment of dividends on Common Stock is severely restricted under
the terms of the Amended Credit Agreement and the Senior Note Indenture.
CERTAIN INFORMATION CONCERNING BTR HOLDINGS
BTR Holdings is an indirectly wholly-owned subsidiary of BTR. BTR,
through its operating subsidiaries, is principally engaged in the manufac-
ture and sale of various industrial, electrical, energy, transportation and
consumer products around the world. BTR Holdings is one of BTR's United
States holding companies. BTR Holdings' principal offices are located at
1105 North Market Street, Suite 1300, Wilmington, Delaware 19801-8985. On
December 27, 1993, BTR Holdings commenced a tender offer for all outstanding
Senior Notes for 122% of their principal amount, plus accrued interest. In
connection with the tender offer, BTR Holdings is also soliciting consents
to the adoption of certain proposed amendments to the Senior Note Indenture.
The tender offer will expire at 12:00 a.m. New York City time on January 25,
1994, unless extended by BTR Holdings.
INDEPENDENT AUDITORS
Arthur Andersen & Co. are the Company's independent auditors. Represen-
tatives of Arthur Andersen & Co. are expected to be present at the Special
Meeting to respond to appropriate questions of Stockholders and make a
statement if they so desire.
OTHER MATTERS
The Company's Board of Directors does not presently know of any matters
to be presented for consideration at the Special Meeting other than matters
described in the Notice of Special Meeting mailed together with this Proxy
Statement, but if other matters are presented, it is the intention of the
persons named in the accompanying proxy to vote on such matters in accor-
dance with their best judgment.
STOCKHOLDER PROPOSALS
If the Merger is consummated, no 1993 annual meeting of stockholders of
the Company will be held. If the Merger is not consummated, the Company
would promptly thereafter hold an annual meeting of stockholders to elect
directors and conduct other appropriate business. Since the date of any such
annual meeting cannot currently be determined, stockholders will be informed
(by press release or other means determined reasonable by the Company) of
the date of any such meeting and the date that stockholder proposals for in-
clusion in the proxy material must be received by the Company, which propos-
als must comply with the rules and regulations of the SEC then in effect.
THOMAS J. JANSEN
Secretary
PAGE
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Consolidated Financial Statements:
Report of Independent Public Accountants ....................... F-1
Consolidated Statements of Earnings for the Years Ended June 30,
1993, June 30, 1992 and June 30, 1991 ........................ F-2
Consolidated Balance Sheets at June 30, 1993 and June 30, 1992 . F-3
Consolidated Statements of Stockholders' Equity for the Years
ended June 30, 1993, June 30, 1992 and June 30, 1991 ......... F-4
Consolidated Statements of Cash Flows for the Years Ended June
30, 1993, June 30, 1992 and June 30, 1991 .................... F-5
Notes to Consolidated Financial Statements ..................... F-6
Quarterly Results and Market Data (unaudited) .................. F-20
Consolidated Statements of Income for the periods ended Septem-
ber 30, 1993 and September 30, 1992 (unaudited) .............. F-21
Consolidated Balance Sheets at September 30, 1993 (unaudited)
and June 30, 1993 ............................................ F-22
Consolidated Statements of Stockholders' Equity at September 30,
1993, June 30, 1993 and June 30, 1992 (unaudited) ............ F-23
Consolidated Statements of Cash Flows for the periods ended Sep-
tember 30, 1993 and September 30, 1992 (unaudited) ........... F-24
Notes to Unaudited Consolidated Financial Statements ........... F-25
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rexnord Corporation:
We have audited the accompanying consolidated balance sheets of REXNORD
CORPORATION (a Delaware corporation) and subsidiaries as of June 30, 1993
and 1992, and the related consolidated statements of earnings, stockholders'
equity and cash flows for the years ended June 30, 1993, 1992 and 1991.
These financial statements are the responsibility of the Company's manage-
ment. Our responsibility is to express an opinion on these financial state-
ments 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 ob-
tain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evi-
dence 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 ba-
sis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rexnord
Corporation and subsidiaries as of June 30, 1993 and 1992, and the results
of their operations and their cash flows for the years ended June 30, 1993,
1992 and 1991, in conformity with generally accepted accounting principles.
Arthur Andersen & Co.
Milwaukee, Wisconsin
August 9, 1993.
PAGE
<PAGE>
REXNORD CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in Thousands, Except Per Share Data)
Years Ended June 30,
1993 1992 1991
Net Sales $532,499 $514,809 $551,970
Cost of Goods Sold 345,920 339,525 357,767
Gross Profit 186,579 175,284 194,203
Engineering, Selling, General and
Administrative
Expense 98,013 101,167 92,281
Goodwill Amortization 8,433 8,429 8,429
Other Miscellaneous (Income) (2,574) (2,546) (3,432)
Operating Profit 82,707 68,234 96,925
Interest Expense, Net 39,803 56,793 64,075
Earnings Before Income Taxes 42,904 11,441 32,850
Provision for Income Taxes 19,018 8,348 19,103
Net Earnings Before Extraordinary Loss 23,886 3,093 13,747
Extraordinary Loss-Recapitalization (Note 1) (28,303) - -
Net Earnings (Loss) $ (4,417) $ 3,093 $ 13,747
Dividends on Preferred Stock 1,158 22,114 18,882
Net Earnings (Loss) Applicable for Common
Shares $ (5,575)$(19,021) $(5,135)
Earnings Per Share:
Before Extraordinary Loss-Recapitalization $ 1.27 $ (3.80) $ (1.02)
Extraordinary Loss-Recapitalization (1.58) - -
Net Earnings (Loss) Per Share $ (0.31)$ (3.80) $ (1.02)
Average Number of Common Shares Outstanding
(in 000's) 17,856 5,010 5,010
The accompanying notes to consolidated financial statements
are an integral part of these statements.
PAGE
<PAGE>
REXNORD CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
June 30, 1993 June 30, 1992
ASSETS
CURRENT ASSETS
Cash, including time deposits $ 4,387 $ 7,267
Receivables, less allowance for doubtful accounts
of $1,766 in 1993 and $1,896 in 1992 68,571 67,817
Inventories 107,516 102,851
Other Current Assets 10,284 6,232
190,758 184,167
OTHER ASSETS
Deferred Loan Costs 11,326 17,263
Other Noncurrent Assets 18,591 7,580
Cost in Excess of Net Assets of Purchased Busi-
nesses 305,783 305,429
335,700 330,272
PROPERTIES
Buildings 39,942 37,417
Machinery & Equipment 150,824 138,061
Less-accumulated depreciation (47,544) (37,270)
Land 10,471 10,576
153,693 148,784
$680,151 $663,223
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable $ 5,223 $ 2,878
Accounts Payable 31,217 24,766
Other Current Liabilities 42,372 59,398
Accrued Income Taxes 3,141 1,403
Current Maturities of Long-term Debt 19,677 10,019
101,630 98,464
LONG-TERM LIABILITIES
Long-term Debt 379,293 404,573
Long-term Accrued Liabilities 47,260 66,706
Deferred Income Taxes 14,083 14,128
440,636 485,407
PREFERRED STOCK ISSUED BY CONSOLIDATED
SUBSIDIARY - 4,866
STOCK ISSUED SUBJECT TO REPURCHASE AGREEMENT 3,636 -
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value - 63
Common Stock, $.01 par value; 50,000,000 shares
authorized; 18,415,422 shares issued in 1993 and
5,010,468 issued in 1992 182 50
Paid in Capital 177,374 104,617
Retained Earnings (Deficit) (43,394) (32,465)
PAGE
<PAGE>
June 30, 1993 June 30, 1992
Minimum Pension Liability Adjustment (650) -
Cumulative Translation Adjustment 737 2,221
134,249 74,486
$680,151 $663,223
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets
PAGE
<PAGE>
REXNORD CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Minimum
Retained Pension Cumulative
Preferred Common Paid in Earnings Liability Transaction
Stock Stock Capital* (Deficit) Adjustment Adjustment TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1990 $ 47 $ 48 $ 64,517 $ (8,309) $ - $ 1,786 $ 58,089
Net earnings - - - 13,747 - - 13,747
Translation adjustment - - - - - (882) (882)
Dividends on preferred stock 8 - 18,874 (18,882) - - -
Other - 2 (1) - - - 1
Balance, June 30, 1991 55 50 83,390 (13,444) - 904 70,955
Net earnings - - - 3,093 - - 3,093
Translation adjustment - - - - - 1,317 1,317
Dividends on preferred stock 8 - 21,227 (22,114) - - (879)
Balance, June 30, 1992 63 50 104,617 (32,465) - 2,221 74,486
Net loss - - - (4,417) - - (4,417)
Minimum pension liability adjustment - - - - (650) - (650)
Translation adjustment - - - - - (1,484) (1,484)
Stock options exercised - 1 171 - - 172
Common stock issued, net of expenses - 92 145,453 - - - 145,545
Dividends on preferred stock - - - (1,158) - - (1,158)
Fairchild Exchange (33) 39 (6) - - - -
Preferred stock redemption (30) - (73,065) (5,354) - - (78,449)
Other - - 204 - - - 204
Balance, June 30, 1993 $ - $182 $177,374 $(43,394) $(650) $ 737 $134,249
</TABLE>
----------
* Includes Predecessor Cost Basis Adjustment of ($59,292)
The accompanying notes to consolidated financial statements
are an integral part of these statements
PAGE
<PAGE>
REXNORD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
1993 1992 1991
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (4,417) $ 3,093 $ 13,747
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary loss on recapitalization 28,303 - -
Gain on sale of fixed assets 45 (439) (83)
Depreciation and amortization 24,989 25,541 24,236
Provision for deferred income taxes 8,759 4,316 7,747
Actuarial and settlement gains on benefit plans (6,328) - (2,100)
Change in receivables 5,109 (589) 4,078
Change in inventories (1,253) 2,852 15,479
Change in other current assets (3,037) (1,371) 1,082
Change in accounts payable and accruals (31,529) (488) (33,696)
Total adjustments 25,058 29,822 16,743
Net cash provided by operating activities 20,641 32,915 30,490
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (17,350) (12,092) (10,076)
Proceeds from the sale of fixed assets 2,532 815 893
Change in other noncurrent assets (3,772) (3,190) (1,378)
Acquisition of subsidiary, net of cash acquired (18,227) - -
Net cash used in investing activities (36,817) (14,467) (10,561)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in notes payable to banks 396 (3,837) 6,088
Proceeds from issuance of long-term debt 236,795 - 3,065
Payment of long-term debt (297,319) (34,965) (23,786)
Change in bank revolver 8,688 20,600 (3,500)
Issuance of common stock (net of expenses) 145,920 - -
Preferred stock issued (redeemed) by subsidiary (5,074) 3,987 -
Redemption of preferred stock (78,241) - -
Dividends paid (1,158) - -
Stock issued subject to repurchase agreement 3,636 - -
Net cash provided (used) in financing activities 13,643 (14,215) (18,133)
Effect of exchange rate changes on cash equivalents (347) (834) 59
Net increase (decrease) in cash and cash equivalents (2,880) 3,399 1,855
Cash and cash equivalents at beginning of period 7,267 3,868 2,013
Cash and cash equivalents at end of period $ 4,387 $ 7,267 $ 3,868
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements
PAGE
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
Note 1-Recapitalization
Recapitalization Plan
On July 9, 1992, the Company completed a recapitalization plan (the
"Recapitalization") which increased stockholders' equity, reduced indebt-
edness and interest expense, eliminated the three classes of Preferred Stock
which were outstanding and their related dividend requirements and improved
the Company's operating and financial flexibility. The principal sources of
funds for the Recapitalization were: (i) the public offering of 9,200,000
shares of Common Stock at an initial public offering price of $17.00 per
share; (ii) the public offering of $172.5 million aggregate principal amount
of 10.75% Senior Notes due 2002 (the "Senior Notes"); (iii) an increase of
$59 million in the amount of borrowing available under the bank credit fa-
cilities (the "Amended Credit Agreement"); and (iv) the exchange of all
shares of Preferred Stock owned by RHI Holdings Inc. ("RHI") for shares of
Common Stock of the Company. RHI and Banner Investments Inc. are subsidiar-
ies of The Fairchild Corporation ("Fairchild"), and are referred to
herein, together with Fairchild, as the "Fairchild Group."
The proceeds of the Recapitalization of approximately $454 million were
used: (i) to retire the Company's outstanding 13.625% Senior Subordinated
Notes due 1998 (the "Subordinated Notes") at an aggregate cost of $285.9
million, including accrued interest and redemption premiums; (ii) to redeem
the outstanding shares of Preferred Stock held by persons and entities other
than the Fairchild Group (the "Other Preferred Stock") at an aggregate
cost of $79.4 million, including dividends to the date of redemption; (iii)
to exchange shares of Preferred Stock owned by Fairchild for shares of Com-
mon Stock; and (iv) to pay financing and transaction costs of approximately
$24 million in connection with the Recapitalization. The individual transac-
tions comprising the Recapitalization were as follows:
Common Stock Offering
On July 9, 1992 the Company sold 9,200,000 shares of Common Stock at an
initial public offering price of $17.00 per share resulting in gross pro-
ceeds to the Company of $156.4 million.
Debt Offering
On July 9, 1992, the Company issued $172.5 million in aggregate princi-
pal amount of the Senior Notes. The Senior Notes are general unsecured obli-
gations of the Company and rank pari passu with existing and future senior
indebtedness of the Company. However, because the borrowings under the
Amended Credit Agreement are secured by substantially all of the assets of
the Company and its subsidiaries, the Senior Notes are effectively subordi-
nated to the Amended Credit Agreement. The Senior Notes mature in 2002 and
are not redeemable by the Company prior to July 1, 1997.
Amended Credit Agreement
The Amended Credit Agreement replaced four term loan facilities with one
term loan facility of $180 million and extended the maturity date for a re-
volving credit facility of $100 million to September 1, 1998.
PAGE
<PAGE>
Tender Offer and Redemption of the Subordinated Notes
As part of the Recapitalization, on July 9, 1992, the Company completed
a tender offer for the Subordinated Notes which provided for a net cash pay-
ment by the Company of $1,090 (plus accrued interest) for each $1,000 prin-
cipal amount tendered to the Company. On July 9, 1992, $221.5 million in ag-
gregate principal amount of the Subordinated Notes were redeemed for $253.5
million which included accrued interest to the redemption date of $12.1 mil-
lion. The remaining $28.5 million in principal amount were redeemed at a
price of $1,068.20 (plus accrued interest) for each $1,000 in principal
amount outstanding on August 15, 1992.
Fairchild Exchange
On July 9, 1992, the Fairchild Group received 3,893,386 shares of Common
Stock in exchange for 3,294,404 shares of Preferred Stock outstanding at
that date, including 10,465 shares of Preferred Stock assumed to have been
issued to the date of Exchange as payment-in-kind dividends. The exchange
ratio of 1.181818 was determined based upon the redemption price of $26.00
per share of Preferred Stock divided by an agreed upon amount of $22.00 per
share of Common Stock.
Preferred Stock Redemption
On July 9, 1992, the Company notified the holders of the Other Preferred
Stock of its intention to redeem all outstanding shares of such stock on Au-
gust 8, 1992 at a per share redemption price equal to $26.00 per share, to-
gether with accrued and unpaid dividends to the redemption date. On August
8, 1992, 3,009,279 shares of Other Preferred Stock were redeemed for an ag-
gregate cash cost of $79.4 million which included unpaid dividends of $1.1
million.
Merger, Name Change and Stock Split
In connection with the Recapitalization, the Board of Directors and
stockholders of Rex-PT Holdings Inc. approved a one-for-two reverse common
stock split and the merger of a subsidiary of Rex-PT Holdings Inc. ("RPT")
into RPT in which RPT changed its name to Rexnord Corporation. The consoli-
dated financial statements reflect the merger, name change and reverse stock
split for all periods presented. All shares of Common Stock and earnings per
share data have been restated to give effect to the reverse stock split.
PAGE
<PAGE>
Ownership
On June 30, 1993, the Fairchild Group directly owned 8,083,248 shares of
Common Stock representing approximately 43.9 percent of the 18,415,422
shares of Common Stock outstanding at that date.
Unaudited Pro Forma Financial Information
The following selected unaudited pro forma income statement data is pre-
sented giving effect to the Recapitalization as if it had occurred on July
1, 1992 for fiscal 1993 data, and on July 1, 1991 for fiscal 1992 data.
Fiscal Fiscal
1993 1992
Pro Forma Net Earnings $ 24,194 $ 14,993
Pro Forma Earnings Per Share $ 1.33 $ .87
The pro forma adjustments are based upon available information and upon
certain assumptions that the Company believes are reasonable. The pro forma
adjustments include adjustments to interest expense and the provision for
income taxes. For pro forma purposes, the assumed annual interest rate on
borrowings under the Amended Credit Agreement is 6.0 percent.
The pro forma financial data is provided for informational purposes only
and does not purport to be indicative of the Company's financial position or
results which would actually have been obtained had the Recapitalization
been completed as of the date or for the periods presented, or which may be
obtained in the future.
Extraordinary Loss
In connection with the Recapitalization, during the first quarter of
fiscal 1993, the Company incurred certain extraordinary charges to earnings
as a result of premiums paid to retire the Subordinated Notes and the write-
off of unamortized deferred loan costs. Such charges amounted to $28.3 mil-
lion ($1.58 per share), net of income tax benefits of $11.0 million.
Note 2-Summary of Accounting Policies
Principles of Consolidation
The consolidated financial statements include accounts of the Company
and all majority-owned subsidiaries. All material intercompany balances and
transactions are eliminated in consolidation.
Revenue Recognition
Revenue recognition on sales occurs at the time of shipment. The Company
permits each distributor to return slow moving merchandise for credit. Such
returns are subject to a restocking charge and must be accompanied by an or-
der for new product equal to the value of the returned goods. Net sales in
the accompanying Consolidated Statements of Earnings reflect sales after re-
turns and allowances.
PAGE
<PAGE>
Deferred Loan Costs
Loan issuance and other deferred costs were incurred in connection with
the bank financings and issuance of long-term debt and are being amortized
over their respective terms. Amortization of deferred loan costs was $1,753,
$3,435 and $3,378 for the years ended June 30, 1993, 1992 and 1991, respec-
tively. Accumulated amortization of deferred loan costs at June 30, 1993 was
$1,677. Deferred loan costs of $13,923 were written off in connection with
the Recapitalization in the first quarter of fiscal 1993.
Amortization
Cost in excess of net assets of purchased businesses (goodwill) are be-
ing amortized over 40 years from the respective dates of acquisition. Amor-
tization expense was $8,433 for the year ended June 30, 1993 and $8,429 for
the years ended June 30, 1992 and 1991. Accumulated amortization of costs in
excess of net assets of purchased businesses was $40,070 at June 30, 1993
and $31,637 at June 30, 1992. Other intangible assets, primarily trademarks,
are included in other noncurrent assets and are amortized over their respec-
tive lives.
Inventory Valuation
Inventories accounted for using the last-in, first-out (LIFO) method
(approximately 76% at June 30, 1993) are stated at cost which does not ex-
ceed market. The remaining inventories (primarily non-U.S. inventories) are
stated at the lower of cost or market using the first-in, first-out (FIFO)
method. Inventory amounts as of June 30, 1993 and 1992 are as follows:
June 30, June 30,
1993 1992
Raw materials and supplies $ 20,609 $ 19,643
Work-in-process 26,309 27,374
Finished goods 72,777 66,080
Total on a FIFO basis, which approximates
current cost 119,695 113,097
LIFO reserve 12,179 10,246
Inventories at LIFO $107,516 $102,851
Property and Depreciation
Properties are recorded at cost and are being depreciated over their re-
maining useful lives, generally on a straight-line basis. For Federal income
tax purposes, accelerated depreciation methods are used. No interest costs
were capitalized as of June 30, 1993.
Earnings Per Common Share
Earnings per common share is computed by dividing net income applicable
to common stockholders (after deducting dividends on Preferred Stock) by the
weighted average number of common shares outstanding during the period. The
dilutive effect of Common Stock equivalents is not material.
Foreign Exchange Contracts
The Company enters into foreign exchange contracts as a hedge against
foreign accounts payable and cash flows from its foreign subsidiaries. Mar-
ket value gains and losses are recognized, and the resulting credit or debit
offsets foreign exchange gains and losses on those payables and other cash
flows. At June 30, 1993, the Company had one contract to sell deutschemarks
maturing in July 1993 that had U.S. dollar equivalent of $670 at the con-
tract rate on that date.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, trade re-
ceivables, trade payables, debt, and foreign currency forward contracts. The
carrying amount of cash, trade receivables, trade payables, debt (excluding
the Senior Notes), and foreign currency forward contracts are considered to
be representative of their respective fair values. Based on quoted market
prices, the fair value of the Senior Notes is $188.0 million, exceeding the
carrying value by 9 percent.
Translation of Foreign Currencies
Most foreign currency assets and liabilities are translated into United
States dollars at the rate of exchange existing at the end of the period.
Income amounts are translated at the average of the daily exchange rates for
the year. Gains and losses resulting from translation of foreign currency
financial statements are recorded as a separate component of stockholders'
equity.
Research and Development Costs
Research and development costs are expensed as incurred. These costs
were $5,013, $4,110 and $4,573 for the years ended June 30, 1993, 1992 and
1991, respectively.
Statement of Cash Flows
Cash paid for interest and income taxes are as follows:
Years Ended June 30,
1993 1992 1991
Interest paid $45,510 $49,572 $57,354
Income taxes paid 2,597 5,242 9,173
For purposes of the Statement of Cash Flows, all highly liquid investments
with a maturity of three months or less are considered cash equivalents.
Note 3-Product Line Additions
On June 23, 1993, the Company purchased a substantial equity position in
Marbett SpA, a company based in Italy serving primarily the European market-
place. Marbett is a manufacturer of conveyor components and accessories with
annual sales of approximately $20 million. The total investment in Marbett
is approximately $18 million, of which $3.6 million was paid through the is-
suance of 230,881 shares of Common Stock subject to a repurchase agreement.
The acquisition is being accounted for as a purchase and, accordingly, the
statements of earnings include results of Marbett since the effective date
of purchase and are not material. The excess of cost over the fair value of
net assets acquired has been estimated at $8.8 million.
PAGE
<PAGE>
Note 4-Bank Facilities and Long-Term Debt
Long-term debt consisted of the following:
June 30,
1993 1992
Senior Bank Financing:
Revolving credit loans $ 45,587 $ 36,900
Term loan 158,694 121,199
Industrial Revenue Bonds (net of unamortized
discount of $113 and $203) due through 2009,
effective interest rate of 11% 3,039 3,574
Senior Notes due 2002 172,500 -
Senior Subordinated Notes due 1998 - 250,000
Revolving Term Credit Facilities 19,150 2,919
398,970 414,592
Less current portion 19,677 10,019
$379,293 $404,573
In connection with the Recapitalization, the Company entered into new
credit facilities with certain financial institutions, herein referred to as
the Amended Credit Agreement, which amended and restated the terms and pro-
visions of the prior credit agreement. The senior bank financing is provided
under the Amended Credit Agreement in the form of term loans with annual am-
ortization payments required through 1998 and a $100 million revolving
credit facility that terminates in 1998. Amounts borrowed under the Amended
Credit Agreement will bear interest, at the option of the Company, at the
following rates per annum: (i) 1.5% plus the Base Rate; or (ii) 2.5% plus
the Eurodollar Rate (as defined in the Amended Credit Agreement). The
Amended Credit Agreement provides for reduced interest rates based on the
Company's ability to achieve certain improved financial performance ratios.
The Amended Credit Agreement contains a material adverse change clause
and numerous terms, covenants and conditions which impose substantial limi-
tations on the Company including, (i) payment of dividends or other distri-
butions; (ii) minimum "Consolidated Net Worth" (as defined in the Amended
Credit Agreement) of not less than $118 million at all times prior to June
29, 1994 increasing annually to a minimum of $168 million as of June 30,
1995 and all times thereafter; (iii) minimum interest coverage ratio of 2.70
to 1.00 for the period through March 31, 1994 and increasing annually to a
minimum of 3.25 to 1.00 as of April 1, 1995 and all times thereafter; (iv)
minimum fixed charge coverage ratios; and (v) minimum "Consolidated
EBITDA" (as defined in the Amended Credit Agreement) of $193 million, cumu-
latively, for the fiscal year ending June 30, 1994, $300 million, cumula-
tively, for the fiscal year ending June 30, 1995 and the minimum amount for
the preceding fiscal year plus $110 million for each fiscal year thereafter.
The Amended Credit Agreement is secured by, among other things,
substantially all of the assets of the Company. The Company is required un-
der the Amended Credit Agreement to make mandatory prepayments of its loan
facilities out of, among other things, (i) net cash proceeds received from
the sale of certain assets, (ii) the issuance of capital stock or subordi-
nated debt, and (iii) a percentage of the Company's excess cash flow.
The Amended Credit Agreement provides for a long-term $100 million re-
volving credit facility of which $32.9 million was available at June 30,
1993. The revolving credit facility may be used for general corporate pur-
poses, including working capital and back-up for commercial paper.
The Subordinated Notes were purchased or called for redemption as part
of the Recapitalization. On July 9, 1992, $221.5 million principal amount of
Subordinated Notes were tendered and the remaining $28.5 million were repur-
chased on August 15, 1992. On July 9, 1992, the Company issued $172.5 mil-
lion of new 10.75% Senior Notes due in 2002. The Senior Notes are not re-
deemable prior to July 1, 1997, and thereafter will be redeemable at the
option of the Company, initially at a price of 105.375% of principal and
thereafter at prices declining ratably to 100% on and after July 1, 2000,
plus accrued interest. Under the terms of the Senior Notes, the Company is
subject to limitations on certain restricted payments which severely
restrict its ability to pay dividends. The Company is also restricted in its
ability to incur additional indebtedness and is required to maintain certain
financial ratios.
The revolving term credit facilities include a $4 million (Canadian dol-
lars) facility of which $2,730 was outstanding at June 30, 1993, and $16,420
under a $19 million European facility. Both facilities bear interest at
rates similar to those paid under the Amended Credit Agreement. The Canadian
facility expires in August, 1995 and the European facility expires in Sep-
tember, 1998.
Future maturities of long-term debt through June 30, 1998 are $19,677 in
1994, $23,859 in 1995, $28,306 in 1996, $33,003 in 1997 and $37,700 in 1998.
Certain of the Company's operating units in Germany have bank facilities
aggregating approximately $10.0 million of which $3,273 was outstanding at
June 30, 1993. Interest rates vary from 7.75% to 12.25%. Compensating bal-
ances and non-use fees for these bank facilities are immaterial.
PAGE
<PAGE>
Note 5-Leases
The Company leases certain office and warehouse facilities and equipment
under noncancellable operating leases expiring on various dates. Rental ex-
pense on operating leases was $7,066, $6,307 and $6,561 for the years ended
June 30, 1993, 1992 and 1991, respectively.
Minimum future lease obligations under noncancellable operating leases
for the periods ending June 30, are as follows:
Fiscal 1994..................................... $ 4,352
Fiscal 1995..................................... 3,811
Fiscal 1996..................................... 2,013
Fiscal 1997..................................... 1,387
Fiscal 1998..................................... 862
Thereafter ..................................... 1,499
Note 6-Employee Benefit Plans
The Company sponsors several qualified retirement plans covering most
employees, including several defined benefit plans which are noncontributory
and provide benefits based on various formulae.
The components of total net periodic pension expense are as follows:
Years Ended June 30,
1993 1992 1991
Service cost (benefits earned during the period) $ 1,854 $ 1,931 $ 1,923
Interest cost on projected benefit obligation 9,638 9,488 9,094
Actual return on plan assets (11,025) (8,795) (7,696)
Net amortization and deferral 3,228 1,229 464
Pension expense $ 3,695 $ 3,853 $ 3,785
Assumptions used in determining pension expense for the defined benefit
plans are as follows:
1993 1992 1991
Discount rate 8.5% 8.5% 9%
Expected rate of increase in compensation 5% 5% 5%
Expected long-term rate of return on assets 9% 9% 9%
It is the Company's policy to make contributions to these plans suffi-
cient to meet the minimum funding requirements of applicable laws and regu-
lations, plus additional amounts, if any, as the Company's actuarial con-
sultants advise to be appropriate.
PAGE
<PAGE>
The funded status of the U.S. defined benefit plans as of the latest ac-
tuarial valuation date (March 31, 1993 and March 31, 1992) is as follows:
<TABLE>
<CAPTION>
U.S. Plans
Plans with Assets in Excess Plans with Accumulated
of Accumulated Benefits Benefits in Excess of Assets
1993 1992 1993 1992
<S> <C> <C> <C> <C>
Projected benefit obligation:
Vested benefits $67,674 $66,364 $ 22,426 $ 22,572
Non-vested benefits 3,086 3,976 1,245 1,346
Accumulated benefit obligation 70,760 70,340 23,671 23,918
Effect of projected future compensation levels 6,192 4,305 70 70
76,952 74,645 23,741 23,988
Plan assets at market value 82,763 78,823 12,493 8,710
Plan assets in excess of (or less than) projected
benefit obligation 5,811 4,178 (11,248) (15,278)
Prior service cost not yet recognized in net peri-
odic pension cost 389 207 1,185 1,324
Unrecognized net gain (2,576) (726) 1,468 (1,254)
Minimum liability - - (2,583) -
Deferred income tax benefit (liability) (1,029) (1,029) 2,756 5,033
Prepaid (accrued) pension cost $ 2,595 $ 2,630 $ (8,422) $(10,175)
</TABLE>
In general, pension plans outside the United States are funded, except
in Germany. Pension plans in Germany are typically not funded because of lo-
cal tax laws; however, the Company has recorded the unfunded liability for
those plans in long-term accrued liabilities. The funded status of the Non-
U.S. defined benefit plans as of June 30, 1993 and 1992 is as follows:
<TABLE>
<CAPTION>
Non-U.S. Plans
Plans with Assets in Excess Plans with Accumulated
of Accumulated Benefits Benefits in Excess of Assets
1993 1992 1993 1992
<S> <C> <C> <C> <C>
Projected benefit obligation:
Vested benefits $ 2,369 $ 4,433 $ 12,773 $ 12,992
Non-vested benefits - - 1,831 2,836
Accumulated benefit obligation 2,369 4,433 14,604 15,828
Effect of projected future compensation levels - - 2,814 3,574
2,369 4,433 17,418 19,402
Plan assets at market value 5,683 8,020 - -
Plan assets in excess of (or less than) projected
benefit obligation 3,314 3,587 (17,418) (19,402)
Unrecognized net (gain) loss 76 (174) (436) 87
Unrecognized net (asset) obligation at date of
transition (279) (2,272) 2,793 3,391
Prepaid (accrued) pension cost $ 3,111 $ 1,141 $(15,061) $(15,924)
</TABLE>
During fiscal 1993, the Company concluded a partial settlement of its
obligations under a Canadian retirement plan and recorded a pretax gain of
$1.7 million.
The Company also sponsors a defined contribution plan which covers most
U.S. employees. The Company contributes six percent of each eligible non-
union employee's pay to this plan. Additionally, all eligible employees con-
tribute a percentage of their pay to this plan, and the Company contributes
a matching percentage. The total cost of this plan was $6,565, $6,423 and
$6,145 for the years ended June 30, 1993, 1992 and 1991, respectively.
The Company provides limited health care benefits for retired employees.
A discounted liability related to the obligation existing for certain retir-
ees as of August 16, 1988 has been recorded on the balance sheet and as of
June 30, 1993, totals $25,389, net of the related income tax benefit of
$14,281. Interest expense related to this discounted obligation was $3,900,
$3,953 and $4,115 for the years ended June 30, 1993, 1992 and 1991, respec-
tively, and is reflected in interest expense in the accompanying consoli-
dated statements of earnings. For this obligation, the Company recognizes
actuarial gains and losses in the year they occur. In fiscal 1993, the Com-
pany refined its estimate of its future retiree medical liability for cer-
tain retirees and, as a result, recorded an actuarial gain of $4.6 million
(or $.16 per share after income taxes). Similarly, an actuarial gain of $2.1
million (or $.27 per share after income taxes) was recorded in fiscal 1991.
Post-retirement benefits for retirees subsequent to August 16, 1988 are ex-
pensed as paid and are not material.
In December 1990, the Financial Accounting Standards Board issued State-
ment No. 106, "Employers Accounting for Postretirement Benefits Other Than
Pensions." This new standard requires that the expected cost of these bene-
fits be charged to expense during the years that the employees render ser-
vice.
Upon adoption, the new standard requires the recognition of a transition
obligation which represents that portion of future retiree health care costs
related to service already rendered by both active and retired employees up
to the date of adoption. This initial liability can be either recognized im-
mediately as a one-time charge to earnings or be amortized through charges
to earnings over a period of 20 years. Based on current benefit plan provi-
sions and a preliminary review by actuaries engaged by the Company, the Com-
pany estimates the transition obligation at July 1, 1993 to be approximately
$82.0 million of which $39.7 million is already reflected in the accompany-
ing balance sheet as of June 30, 1993.
The Company will adopt the new accounting and disclosure rules in the
first fiscal quarter ended September 1993, but has not decided if it will
amortize the transition obligation over future years or incur a one-time
charge. A one-time extraordinary charge to earnings of approximately $27.1
million, net of related income taxes, will be recorded if the transition ob-
ligation is recognized immediately. The annual after-tax expense for retiree
health care costs following the adoption and the effects of certain antici-
pated plan changes is estimated to increase by approximately $.6 million if
the transition obligation is recognized immediately, or by $1.9 million if
the transition obligation is deferred and amortized over a period of 20
years.
Note 7-Related Party Transactions
The Company entered into an administrative services agreement with a
member of the Fairchild Group for administrative and computer services. Pur-
suant to the agreement, the parties have agreed to provide each other with
certain services. The charge for services provided to the Company was $231,
$212 and $155 for the years ended June 30, 1993, 1992 and 1991,
respectively. The charge for services provided by the Company was $59, $120
and $346 for the years ended June 30, 1993, 1992 and 1991, respectively. It
is the opinion of management that the fees charged for these services are
comparable to those available for similar services from unaffiliated per-
sons.
In July 1992, the Company purchased certain trademarks owned by the
Fairchild Group for a cash payment of $1.5 million and an additional contin-
gent payment of $.7 million for each of the first five fiscal years in which
the Company's earnings before interest and taxes exceed $120 million.
PAGE
<PAGE>
Note 8-Contingencies
The Company is one of a number of defendants in an action entitled Odeco
Drilling Inc. which was commenced in October 1992. The complaint seeks dam-
ages against all defendants in the total amount of $4.5 million as a result
of the alleged failure of tensioner systems designed and manufactured by one
of the defendants for installation on certain semi-submersible drilling rigs
owned or operated by Odeco. The Company supplied engineered chain used on
the tensioner systems. In answers to interrogatories, the plaintiffs claim
their actual total damages against all parties amount to $12.6 million. The
plaintiffs have also asked for punitive damages. Management believes the
Company has meritorious defenses to the suit and intends to defend the suit
vigorously.
The Company has been named a potentially responsible party ("PRP") un-
der federal superfund laws with respect to two waste disposal sites.
Although joint and several liability could be imposed under these laws
against each PRP, the extent of the Company's contribution to the cleanup of
these sites is expected to be limited based upon the number of other named
PRPs and the volumes and types of waste involved which might be attributed
to the Company. The Company is also involved in four other remedial response
and voluntary environmental cleanup situations, including three at certain
of its plant sites discovered through its own investigation. Although it is
difficult to quantify the financial cost of compliance with environmental
protection laws, management believes the ultimate cost to the Company of en-
vironmental remediation with regard to both disposal and plant sites will
not have a material adverse effect on its future financial condition or re-
sults of operations. Management believes the Company's manufacturing facili-
ties and processes are in substantial compliance with all federal, state,
local and foreign environmental laws and regulations, and continues to take
actions that reduce the impact of its manufacturing processes on the envi-
ronment. Such actions include removal of many of its underground storage
tanks and reduction or elimination of certain chemicals and wastes used in
its operations.
The Company is involved in a number of other various claims and lawsuits
incidental to its business and has established reserves of $4.9 million at
June 30, 1993 for these and the foregoing matters. In the opinion of manage-
ment, the ultimate liability, if any, after considering the reserves estab-
lished, will not have a material adverse effect on the consolidated finan-
cial statements.
Note 9-Stock Options
On November 8, 1989, the stockholders of the Company approved a 1989
Stock Option Plan (the "1989 Plan") reserving 270,608 shares of Common
Stock for the issuance of stock options to officers, directors, consultants
and key employees. Options granted under the 1989 Plan may be either "non-
qualified" or "incentive stock options." Options may be granted at an ex-
ercise price not less than the fair market value of the stock at the time of
the granting of the option and are generally exercisable for a period of 10
years from the date of grant. Options will generally become exercisable with
respect to 25% of the shares subject thereto on the first anniversary of the
date of grant and with respect to an additional 25% on each of the second,
third and fourth anniversaries of the date of grant.
On May 5, 1989, the Company entered into a stock option agreement with
Mr. Jeffrey Steiner, Vice Chairman and a director of the Company pursuant to
which the Company granted options for 135,304 shares of Common Stock to Mr.
Steiner at an exercise price of $2.00 per share, the fair market value of
such shares on the date of grant. All such options became exercisable on
July 9, 1992 effective with the Recapitalization.
On October 28, 1992, the stockholders approved the Rexnord Corporation
1992 Stock Option Plan (the "1992 Plan") which reserved 900,000 shares of
Common Stock for the issuance of stock options to certain officers, direc-
tors, consultants and key employees. Provisions of the 1992 Plan related to
the issuance, exercise price and vesting of options are generally similar to
the 1989 Plan.
PAGE
<PAGE>
<TABLE>
<CAPTION>
Options Outstanding
Shares 1992 1989 Other Exercise
Available Option Option Option Prices
For Grant Plan Plan Plans Per Share
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1990 5,017 - 260,123 135,304 $ 2.00-$ 7.00
Options granted (6,250) - 6,250 - $ 7.00
Options exercised - - (1,665) - $ 2.00-$ 3.30
Options cancelled 1,247 - (1,247) - $ 3.30
Balance at June 30, 1991 14 - 263,461 135,304 $ 2.00-$ 7.00
Options cancelled 1,875 - (1,875) - $ 7.00
Balance at June 30, 1992 1,889 - 261,586 135,304 $ 2.00-$ 7.00
Options authorized 900,000 - - - -
Options granted (847,000) 847,000 - - $ 17.00-$17.63
Options exercised - - (80,691) - $ 2.00-$ 3.30
Options cancelled 12,625 (12,000) (625) - $ 2.00-$17.00
Balance at June 30, 1993 67,514 835,000 180,270 135,304 $ 2.00-$17.63
</TABLE>
The aggregate option price was $14,948 as of June 30, 1993, $920 as of
June 30, 1992 and $933 as of June 30, 1991. At June 30, 1993, options for
297,299 shares of Common Stock were exercisable.
Note 10-Income Taxes
For periods prior to September 30, 1988, financial results of the Com-
pany were included in Rexnord Inc.'s (a predecessor of the Company) consoli-
dated Federal income tax returns.
In connection with the liquidation of Rexnord Inc., the Company entered
into a tax-sharing agreement dated August 16, 1988 and as amended (the "Tax
Agreement") with certain members of the Fairchild Group which sets forth
agreements with respect to certain tax obligations while the Company was a
member of the Fairchild Group for Federal income tax purposes. Such members
of the Fairchild Group have agreed jointly and severally to assume liability
for and indemnify the Company from and against certain Federal, state, local
and foreign taxes specified in the Tax Agreement that may arise as a direct
or indirect result of the liquidation of Rexnord Inc. or with respect to any
taxable period prior to the deconsolidation of the Company from the consoli-
dated Fairchild Group. However, the Company is not indemnified against and
will be required to pay the first $6.1 million in taxes allocable to it (not
including any interest, addition to tax or interest and penalties with re-
spect thereto) that would otherwise be the obligation of RHI and the Fair-
child Group under the Tax Agreement. The Company has established reserves on
its consolidated balance sheets for this contingent liability. In addition,
the Company is obligated to pay to the Fairchild Group any Tax Saving (as
defined in the Tax Agreement) as a result of (i) the corporate restructuring
of Rexnord Inc. in 1988 not being treated in whole or in part as tax-free,
or (ii) any adjustment made on audit for which RHI and the Fairchild Group
have assumed liability.
All Internal Revenue Service (the "Service") examinations of Rexnord
Inc. for income tax returns for fiscal years through October 31, 1984, and
protests thereof have been completed and closed. On July 19, 1993, the Ser-
vice completed an examination and proposed certain adjustments to Rexnord
Inc.'s Federal income tax returns for fiscal years ending October 31, 1985
and 1986, and February 28, 1987. Federal income tax on the adjustments pro-
posed by the Service is $15.6 million, excluding interest. The most signifi-
cant adjustments involve treatment of professional fees incurred by Rexnord
Inc. in 1986 and 1987 with respect to a proposed recapitalization of Rexnord
Inc. The Fairchild Group is protesting the adjustments through the appeals
process of the Service. Management of the Fairchild Group has indicated to
the Company that it believes that these adjustments will be reduced through
the appeals process. According to management of the Fairchild Group, this
belief is based on the experience of employees and management of the Fair-
child Group with the Service and its appeals process and an analysis by the
Fairchild Group of relevant facts and legal precedent applicable to these
tax returns. In the opinion of the management of the Company, adequate pro-
vision has been made for all income taxes and interest which may apply to
the Company under the tax agreement described above with respect to both
such tax returns, and any tax liability of the Company which may arise as a
result of the proposed adjustments, will not have a material effect on the
consolidated financial statements of the Company.
Deferred income taxes represent the cumulative effects of timing differ-
ences between income and expense items reported for financial statement pur-
poses and for income tax purposes since September 30, 1988.
The foreign component of income before provision for income taxes
amounted to $2,054, $2,150 and $7,216 for the years ended June 30, 1993,
1992 and 1991, respectively.
The provision for income taxes is as follows:
Years Ended June 30,
1993 1992 1991
United States income taxes
Current $ 9,976 $3,596 $ 7,925
Deferred 8,759 4,316 7,747
State income taxes 45 150 424
Foreign income taxes 238 286 3,007
$19,018 $8,348 $19,103
PAGE
<PAGE>
The differences between the provision for income taxes at the statutory
Federal income tax rate and that reported in the consolidated statements of
earnings are summarized as follows:
Years Ended June 30,
1993 1992 1991
Federal income tax at statutory rate 34.0% 34.0% 34.0%
Items taxed at preferential rates (4.2) (18.4) (2.1)
Goodwill 6.7 25.0 8.7
Difference in tax rate on earnings
or losses of foreign subsidiaries,
net (including U.S. income taxes
on foreign earnings expected to be
repatriated) 1.7 9.4 9.4
Difference in tax and book basis of
assets acquired 4.7 17.7 6.2
State income taxes, net of federal
benefits .1 .9 .9
Other, net 1.3 4.4 1.1
44.3% 73.0% 58.2%
PAGE
<PAGE>
The principal items in the deferred tax provisions are as follows:
Years Ended June 30,
1993 1992 1991
Excess of tax over book depreciation $2,307 $1,679 $2,467
Deferred loan costs (5) (88) (87)
Changes in employee benefit plan ac-
cruals (180) (212) (346)
Realization of deferred tax benefits
on liabilities assumed in acquisi-
tions 7,221 3,125 5,849
Others, net (584) (188) (136)
$8,759 $4,316 $7,747
Domestic income taxes, less allowable credits, are provided on the unre-
mitted income of foreign entities and affiliated companies, including an en-
tity operating in Puerto Rico under tax incentive grants, to the extent that
such earnings are intended to be repatriated. No domestic income taxes are
provided on the undistributed earnings of foreign entities and affiliates
that are considered permanently invested or would be offset by allowable
foreign tax credits.
In February 1992, the Financial Accounting Standards Board issued State-
ment No. 109, "Accounting for Income Taxes." The Company is required to
adopt the new accounting and disclosure rules in the first fiscal quarter
ended September 30, 1993. Adoption of Statement No. 109 may be implemented
through a cumulative catch-up adjustment in the year adopted or in the re-
statement of the prior financial statements. The Company has not decided
whether it will restate prior periods. The impact of adopting the new ac-
counting principle is not expected to be material.
Note 11-Other Financial Data
June 30,
1993 1992
Other Current Liabilities
Accrued wages, salaries and commissions $ 7,054 $ 7,428
Accrued vacation pay 8,797 8,993
Interest payable 1,589 13,255
Accrued general taxes and taxes withheld 4,752 6,287
Customer advance payments 2,037 1,285
Accrued benefit costs 5,783 5,545
Retirement plan costs 3,552 3,806
Other 8,808 12,799
$42,372 $59,398
Long-Term Accrued Liabilities
Accrued retirement plan costs $19,475 $23,132
Accrued post-retirement benefit costs 22,652 26,543
Other 5,133 17,031
$47,260 $66,706
PAGE
<PAGE>
Note 12-Business Information
The Company operates in a single business segment. The Company is a
leading worldwide manufacturer and supplier of power transmission
components. The Company's principal products are bearings, engineered chain,
roller chain, flat top chain, speed reducers, shaft couplings, clutches and
brakes, belt conveyor idlers, mechanical shaft seals and sprockets. The Com-
pany's products are sold to original equipment manufacturers ("OEMs") and
industrial distributors which resell the products to industrial consumers
and to smaller OEMs. Major end-markets include food and beverage processing,
commercial aerospace, chemical, petrochemical, coal, oil field, transporta-
tion, sanitation, construction machinery, cement, forest products, farm ma-
chinery and general industrial equipment.
The Company's domestic sales are divided evenly between distributors and
OEMs.
Summary financial information by geographic area included in the consol-
idated statements is as follows:
Years Ended June 30,
1993 1992 1991
Net Sales
United States $453,402 $431,422 $457,322
Western Europe 83,765 82,578 87,926
Other 26,308 27,220 29,935
Eliminations (30,976) (26,411) (23,213)
$532,499 $514,809 $551,970
Operating Income
United States $ 88,136 $ 73,442 $ 98,046
Western Europe 222 985 5,768
Other 2,782 2,236 1,540
Operating Income from Operations 91,140 76,663 105,354
Goodwill amortization (8,433) (8,429) (8,429)
Operating Income 82,707 68,234 96,925
Interest expense, net (39,803) (56,793) (64,075)
Earnings Before Income Taxes $ 42,904 $ 11,441 $ 32,850
Assets
United States $289,229 $289,060 $292,845
Western Europe 69,447 56,753 50,728
Other 15,692 11,981 12,645
Identifiable Assets 374,368 357,794 356,218
Goodwill 305,783 305,429 313,858
$680,151 $663,223 $670,076
Export sales included in the United States sales approximated $78,217,
$66,836 and $57,795 for the years ended June 30, 1993, 1992 and 1991, re-
spectively. No customer accounted for more than ten percent of total sales
in any period.
PAGE
<PAGE>
Quarterly Results and Market Data (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
FISCAL 1993
Net Sales ...................................... $126,618 $125,602 $ 139,758 $ 140,521
Gross Profit ................................... 44,690 42,861 48,705 50,323
Net Earnings Before Extraordinary Loss ......... 4,343 4,354 5,740 9,449(2)
Extraordinary Loss - Recapitalization(1) ....... (28,303) - - -
Net Earnings (Loss) ............................ $(23,960) $ 4,354 $ 5,740 $ 9,449
Earnings Per Share:
Before Extraordinary Loss - Recapitalization . $ .19 $ .24 $ .32 $ .52(2)
Extraordinary Loss - Recapitalization(1) ..... (1.58)(3) - - -
Net Earnings (Loss) Per Share .................. $ (1.39) $ .24 $ .32 $ .52
NYSE Market Price(4) ...........................
High ......................................... $ 18 $ 18 5/8 $ 18 3/8 $ 19 1/2
Low .......................................... 14 1/8 15 1/2 16 3/4 15 1/2
FISCAL 1992
Net Sales ...................................... $123,048 $124,102 $ 132,126 $ 135,533
Gross Profit ................................... 40,504 40,454 46,823 47,503
Net Earnings ................................... 105 46 775 2,167
Net Earnings (Loss) Per Share .................. $ (1.06) $ (1.07) $ (0.94) $ (0.72)
</TABLE>
(1) Extraordinary loss on the Recapitalization in the first fiscal quarter
originally estimated at $27.3 million and $(1.61) per share was revised
and restated to $28.3 million, or $(1.58) per share.
(2) In the fourth quarter ended June 30, 1993, the Company refined its esti-
mate of retiree medical liabilities for certain retirees and recorded a
pretax actuarial gain of $4.6 million ($2.8 million or $.16 per share,
after income taxes).
(3) Calculated based on weighted average number of shares outstanding for
the year.
(4) Prior to the Common Stock Offering on July 9, 1992, there was no public
market for the Common Stock. As of August 20, 1993, there were approxi-
mately 450 holders of record for the Common Stock. Since its incorpora-
tion, the Company has paid no dividends on the Common Stock.
PAGE
<PAGE>
REXNORD CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
SEPTEMBER 30,
1993 1992
Net Sales $128,038 $126,618
Cost of Goods Sold 90,159 87,150
Gross Profit 37,879 39,468
Selling, General & Administrative Expense 20,379 19,716
Goodwill Amortization 2,157 2,107
Other Miscellaneous Income (141) (818)
Restructuring Charge 11,000 -
Operating Profit 4,484 18,463
Interest Expense 8,900 10,398
Interest (Income) (32) (129)
Net Interest Expense 8,868 10,269
Pretax Profit (Loss) (4,384) 8,194
Tax Provision (1,720) 3,851
Earnings (Loss) Before Extraordinary Loss,
Cumulative Effect of Change in Accounting
Principles & Dividends on Preferred Stock (2,664) 4,343
Extraordinary Loss-Recapitalization - (28,303)
Cumulative Effect of Change in Accounting
Principles (28,080) -
Net Earnings (Loss) $(30,744) $(23,960)
Dividends on Preferred Stock - (1,158)
Net Earnings (Loss) Applicable for Common
Shares $(30,744) $(25,118)
EARNINGS (LOSS) PER SHARE:
Before Extraordinary Loss & Cumulative Ef-
fect of Change in Accounting Principles $ (.14) $ .19
Extraordinary Loss - Recapitalization - (1.58)
Cumulative Effect of Change in Accounting
Principles (1.53) -
Earnings (Loss) per Share $ (1.67) $ (1.39)
Weighted Average Number of Shares Out-
standing (000's) 18,424 16,968
The accompanying notes to consolidated financial statements
are an integral part of these statements.
PAGE
<PAGE>
REXNORD CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, JUNE 30,
1993 1993
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash, including time deposits $ 4,037 $ 4,387
Receivables, less allowance for doubtful
accounts of $1,888 in Sept. and $1,766
in June 61,891 68,571
Inventories 124,590 107,516
Other Current Assets 8,077 10,284
198,595 190,758
OTHER ASSETS
Deferred Loan Costs 10,920 11,326
Other Noncurrent Assets 24,475 18,591
Cost in Excess of Net Assets of Purchased
Businesses 302,757 305,783
338,152 335,700
PROPERTIES
Buildings 51,167 39,942
Machinery & Equipment 183,728 150,824
Less-accumulated depreciation (57,467) (47,544)
Land 11,595 10,471
189,023 153,693
$725,770 $680,151
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable $ 7,134 $ 5,223
Accounts Payable 23,890 31,217
Other Current Liabilities 61,782 42,372
Accrued Income Taxes 2,173 3,141
Current Maturities of LT Debt 19,773 19,677
114,752 101,630
LONG-TERM LIABILITIES
Long-term Debt 376,131 379,293
Long-term Accrued Liabilities 117,114 58,599
Deferred Income Taxes 10,106 2,744
503,351 440,636
STOCK ISSUED SUBJECT TO REPURCHASE AGREEMENT 3,636 3,636
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value; 50,000,000
shares authorized; 18,432,444 shares is-
sued 182 182
PAGE
<PAGE>
SEPTEMBER 30, JUNE 30,
1993 1993
Paid in Capital 177,408 177,374
Retained Earnings (Deficit) (74,138) (43,394)
Minimum Pension Liability Adjustment (650) (650)
Cumulative Translation Adjustment 1,229 737
104,031 134,249
$725,770 $680,151
The notes to consolidated financial statements are an integral part of these
balance sheets.
PAGE
<PAGE>
REXNORD CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED MINIMUM CUMULATIVE
PREFERRED COMMON PAID IN EARNINGS PENSION TRANSACTION
STOCK STOCK CAPITAL (DEFICIT) LIABILITY ADJ. ADJUSTMENT TOTALS
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1992 $ 63 $ 50 $ 104,617 $ (32,465) $ - $ 2,221 $ 74,486
Net Loss - - - (4,417) - - 4,417)
Minimum pension liability adjust-
ment - - - - (650) - (650)
Translation adjustment - - - - - (1,484) (1,484)
Stock options exercised - 1 171 - - - 172
Common shares issued, net of ex-
penses - 92 145,453 - - - 145,545
Dividends on preferred stock - - - (1,158) - - (1,158)
Fairchild exchange (33) 39 (6) - - - -
Preferred stock redemption (30) - (73,065) (5,354) - - (78,449)
Other - - 204 - - - 204
Balance, June 30, 1993 - 182 177,374 (43,394) (650) 737 134,249
Net earnings or loss - - - (30,744) - - (30,744)
Translation adjustment - - - - - 492 492
Stock options exercised - 35 - - - 35
Other - - (1) - - - (1)
Balance, September 30, 1993 $ - $ 182 $177,408 $(74,138) $ (650) $ 1,229 $104,031
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
PAGE
<PAGE>
REXNORD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30,
1993 1992
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (30,744) $ (23,960)
Adjustments to reconcile net earnings to
net cash provided by operating activi-
ties:
Extraordinary loss on recapitalization - 28,303
Cumulative effect of change in account-
ing principles 28,080 -
Restructuring charge 11,000 -
Depreciation and amortization 8,099 6,381
Change in deferred income taxes 2,412 (1,130)
Change in receivables 6,680 (1,457)
Change in inventories (5,235) (5,970)
Change in other current assets 2,207 (688)
Change in accounts payable and accruals (15,929) (14,132)
Total Adjustments 37,314 11,307
Net cash provided by (used for) operat-
ing activities 6,570 (12,653)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,493) (2,557)
Change in other noncurrent assets (342) (1,715)
Net cash used in investing activities (5,835) (4,272)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in notes payable to banks 1,911 3,366
Proceeds from issuance of long-term debt - 221,393
Payment of debt (9,551) (290,997)
Change in bank revolver 6,500 16,889
Redemption of Subsidiary's Preferred Stock - (5,074)
Redemption of Preferred Stock - (78,241)
Proceeds from issuance of common stock
(net expenses) 34 145,921
Dividends paid - (1,158)
Net cash provided by (used for) financing
activities (1,106) 12,099
Effect of exchange rate changes on cash 21 (787)
Net increase (decrease) in cash (350) (5,613)
Cash at beginning of period 4,387 7,267
Cash at end of period $ 4,037 $ 1,654
The accompanying notes to consolidated financial statements are an integral
part of these statements.
PAGE
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1-SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include accounts of the Company
and all majority-owned subsidiaries. All material intercompany balances and
transactions are eliminated in consolidation.
The financial statements included herein are unaudited. In the opinion
of management, these statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial posi-
tion of the Company as of September 30, 1993 and its results of operations
and cash flows for the three months ended September 30, 1993 and 1992.
The results of operations for the three months ended September 30, 1993
and 1992 are not necessarily indicative of the results to be expected for a
full year.
Amortization
The amounts included in the accompanying consolidated balance sheets as
"Cost in Excess of Net Assets of Purchased Businesses" are being amortized
over 40 years from the respective dates of acquisition. Amortization expense
was $2,157 for the three months ended September 30, 1993 and $2,107 for the
three months ended September 30, 1992. Accumulated amortization of Cost in
Excess of Net Assets of Purchased Businesses was $42,227 at September 30,
1993 and $40,070 at June 30, 1993. Other intangible assets, primarily trade-
marks, are included in other noncurrent assets and are amortized over their
respective lives.
Earnings Per Common Share
Earnings per common share is computed by dividing net income applicable
to common stockholders by the weighted average number of common shares out-
standing during the period. The dilutive effect of common stock equivalents
is not material.
Postretirement Benefits other than Pensions
Effective July 1, 1993, the Company adopted SFAS No. 106 (Employers' Ac-
counting for Postretirement Benefits other than Pensions). This new standard
requires the Company to follow an accrual method of accounting for postreti-
rement benefits. Such benefits in years prior to 1994 fiscal were accounted
for on an accrual basis and in part on a cash basis.
Income Taxes
The Company adopted SFAS No. 109 (Accounting for Income Taxes) on July
1, 1993. In accordance with SFAS No. 109, certain assets and liabilities of
acquired businesses are no longer reported net of tax on the balance sheet
as was required under APB No. 11 - Accounting for Income Taxes, as amended.
The primary effect of this tax reporting change on the balance sheet was an
increase in inventories of $11.8 million, an increase of $34.4 million in
property, plant and equipment, an increase of $25.1 million in long-term ac-
crued liabilities and an increase in deferred income taxes of $19.5 million.
Prior years have not been restated and accordingly reflect the procedures
required by APB No. 11.
The provision for income taxes for interim periods includes deferred
taxes and is based on an estimated annual effective tax rate.
Reclassification of Certain Expenses
Certain expenses previously classified as selling, general and adminis-
trative expenses have been reclassified to cost of sales to properly reflect
the current costs associated with the manufacturing of the Company's prod-
ucts. These costs that were reclassified generally include certain engineer-
ing costs, accounting, personnel and administrative costs related to the
Company's manufacturing plants and shipping costs. The amount that was re-
classified for the three months ended September 30, 1992 was $5,222.
Consolidated Statements of Cash Flows
Cash paid for interest and income taxes are as follows:
Three Months Ended September 30,
1993 1992
Interest paid $3,792 $16,806
Income taxes paid 996 1,272
For purposes of the Consolidated Statements of Cash Flows, all highly
liquid investments with a maturity of three months or less are considered
cash equivalents.
1992 Recapitalization Plan
On July 9, 1992, the Company completed a comprehensive recapitalization
plan in connection with which the Company incurred certain extraordinary
charges to earnings as a result of premiums paid to retire the Company's
previously outstanding Senior Subordinated Notes and the write-off of una-
mortized deferred loan costs. This extraordinary loss, reported in the three
months ended September 30, 1992, was originally estimated at $27.3 million
($1.61 per share), but was revised and restated to $28.3 million ($1.58 per
share).
PAGE
<PAGE>
NOTE 2-CHANGES IN ACCOUNTING PRINCIPLES
During the three months ended September 30, 1993, the Company was re-
quired to adopt SFAS No. 106 (Employers' Accounting for Postretirement Bene-
fits other than Pensions) and SFAS No. 109 (Accounting for Income Taxes). As
a consequence, the results of operations reflect a cumulative adjustment of
$28.1 million, net of tax, or $1.53 per share as of July 1, 1993 necessary
to adjust the Company's net assets for compliance with the new standards.
The effect of these accounting changes on net earnings is summarized in the
table below:
Accounting Changes
Increase (Decrease) in Net
Earnings Postretirement Income Taxes Total
Cost of sales $ (1,127) $ (997) $ (2,124)
SG&A expenses (125) - (125)
Net interest expense 1,002 - 1,002
Tax provision 118 997 1,115
Earnings before accounting changes (132) - (132)
Cumulative effect of changes in
accounting principles (26,245) (1,835) (28,080)
Increase (decrease) in Net
Earnings $(26,377) $(1,835) $(28,212)
SFAS No. 106-Employers' Accounting for Postretirement Benefits other than
Pensions
The Company provides postretirement medical and life insurance benefits
to certain retirees and eligible dependents. Most plans are contributory,
with retiree contributions adjusted annually. The plans are unfunded and pay
stated percentages of covered medically necessary expenses incurred by re-
tirees, after subtracting payments by Medicare or other providers and after
stated deductibles have been met. For most plans, the Company has
established cost maximums to more effectively control future medical costs.
The Company has reserved the right to change or eliminate these plans with
respect to the level of benefits provided.
This new standard requires that the expected cost of these benefits be
charged to expense during the years that the employees render service. The
first quarter results include a charge of $42,288 ($26,245, net of tax, or
$1.43 per share) for the immediate recognition of the net transition obliga-
tion with respect to benefits earned by active and retired employees as of
July 1, 1993. In addition, the new standard had the effect of decreasing op-
erating profit for the quarter by $250, or $.01 per share. Net periodic post
retirement benefit expense for fiscal 1994 is expected to be approximately
$6,626.
The accumulated postretirement benefit obligation ("APBO") included in
the Company's balance sheet on July 1, 1993 is as follows:
Retired employees $53,522
Employees eligible to retire 11,586
Other employees 16,849
Accrued postretirement benefit obliga-
tion $81,957
Net periodic postretirement benefit expense included the following com-
ponents for the three months ended September 30, 1993:
Service cost $ 247
Interest Cost 1,550
Amortization of unrecognized prior ser-
vice cost (141)
Net periodic postretirement benefit ex-
pense $ 1,656
The discount rate used in determining the APBO was 8.5%. The assumed
health care cost trend rate used in measuring the APBO varies by year and by
plan design. For fiscal 1994, the health care cost trend rate assumed ranged
from 10.5% to 6.5%. These rates are assumed to decrease gradually to the ul-
timate level of 5.5% in 1997 and remain at that level thereafter.
If the health care cost trend rate assumptions were increased by 1%, the
APBO as of July 1, 1993, would be increased by 9.0%. The effect of this
change on the sum of the service cost and interest cost components of net
periodic postretirement benefit cost for fiscal 1994 would be an increase of
27.4%.
SFAS No. 109-Accounting for Income Taxes
This new standard requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary timing
differences between the financial statement and tax bases of the Company's
assets and liabilities using current enacted tax rates. The first quarter
results include a cumulative charge of $1,835, or $.10 per share, required
to provide net deferred taxes with respect to the aggregate of the differ-
ences between the book and tax basis of the Company's assets and liabilities
as of July 1, 1993.
PAGE
<PAGE>
After adoption of SFAS No. 109, the primary components of the Company's
deferred tax assets and liabilities as of July 1, 1993 were as follows:
Components of deferred tax balances:
Deferred Tax Liabilities:
Property, plant and equipment $(48,570)
Inventories (9,406)
Other (1,254)
Total deferred tax liabilities (59,230)
Deferred tax assets:
Postretirement benefits other than
pensions $ 30,324
Retirement plans 2,131
Vacation pay accrual 2,560
Other 8,750
Total deferred tax assets 43,765
Net deferred tax liabilities $ (15,465)
NOTE 3-RESTRUCTURING CHARGE
The charge for restructuring of operations reported for the three months
ended September 30, 1993 of $11,000 ($6,700 after-tax, or $.36 per share)
includes $8,000 for rationalization of manufacturing capacity (including
severance and moving costs and asset writedowns), the relocation of certain
product lines and realignment of sales, marketing and administrative func-
tions in Europe, and $3,000 for severance and other costs related to domes-
tic employment reductions and cost containment programs. The Company expects
the restructuring actions will be substantially completed by June 30, 1994.
NOTE 4-BANK FACILITIES AND LONG-TERM DEBT
Long-term debt consisted of the following:
September 30, June 30,
1993 1993
Senior Bank Financing:
Revolving credit loans $ 52,088 $ 45,587
Term loan 149,300 158,694
Revolving credit facilities 19,110 19,150
Industrial Revenue Bonds (net of unamortized
discount of $90 and $113) due through 2009,
effective interest rate of 11% 2,906 3,039
Senior Notes due 2002 172,500 172,500
395,904 398,970
Less current portion 19,773 19,677
$376,131 $379,293
The senior bank financing is provided to the Company under a Restated
and Amended Credit Agreement (the "Amended Credit Agreement") in the form
of a term loan with annual amortization payments required through 1998 and a
$100 million revolving credit facility that terminates in 1998. At September
30, 1993, there was $23.2 million available under the revolving credit fa-
cility. Amounts borrowed under the Amended Credit Agreement bear interest,
at the option of the Company, at the following rates per annum: (i) 1.5%
plus the "Base Rate"; or (ii) 2.5% plus the "Eurodollar Rate" (each as
defined in the Amended Credit Agreement). The rate that the company most of-
ten chooses to apply to such financing is a rate equal to the Eurodollar
Rate (3.2% at September 30, 1993) plus 2.5%, or 5.7%. As of September 30,
1993, the weighted average interest rate on borrowings outstanding under the
Amended Credit Agreement was 5.8%. The Amended Credit Agreement provides for
reduced interest rates based on the Company's ability to achieve certain im-
proved financial performance ratios.
The Senior Notes due 2002 (the "Senior Notes") bear interest at the
rate of 10.75%. The Senior Notes are not redeemable prior to July 1, 1997,
and thereafter will be redeemable at the option of the Company, initially at
a price of 105.375% of principal and thereafter at prices declining ratably
to 100% on and after July 1, 2000, plus accrued interest. Under the terms of
the Senior Notes, the Company is subject to limitations on certain
restricted payments which severely restrict its ability to pay dividends.
The Company is also restricted in its ability to incur additional indebted-
ness and is required to maintain certain financial ratios.
NOTE 5-OTHER FINANCIAL DATA
September 30, June 30,
1993 1993
(Unaudited)
Inventories
Raw materials and supplies $ 23,841 $ 20,609
Work-in-process 30,875 26,309
Finished goods 82,305 72,777
Total on a FIFO basis, which approximates cur-
rent cost 137,021 119,695
Less LIFO reserve 12,431 12,179
Inventories at LIFO $124,590 $107,516
Other Current Liabilities
Accrued wages, salaries and commissions $ 5,939 $ 7,054
Accrued vacation pay 8,947 8,797
Interest payable 6,126 1,589
Accrued general taxes and taxes withheld 5,142 4,752
Customer advance payments 2,470 2,037
Accrued benefit costs 7,605 5,783
Retirement plan 5,587 3,552
Restructuring reserve 9,809 -
Other current liabilities 10,157 8,808
$ 61,782 $ 42,372
Long-Term Accrued Liabilities
Accrued retirement plan costs $ 19,974 $ 19,475
Accrued postretirement benefit costs 77,788 22,652
Other 19,352 16,472
$117,114 $ 58,599
PAGE
<PAGE>
ANNEX A
MERGER AGREEMENT
PAGE
<PAGE>
AGREEMENT AND PLAN
OF MERGER
BY AND AMONG
REXNORD CORPORATION
AND
BTR DUNLOP HOLDINGS, INC.
DATED AS OF DECEMBER 1, 1993
PAGE
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
THE MERGER............................................................... 1
Section 1.01. The Merger........................................... 1
Section 1.02. Certificate of Incorporation and By-Laws............. 2
Section 1.03. Directors and Officers............................... 2
Section 1.04. Stockholders' Meeting................................ 2
Section 1.05. Effective Time....................................... 2
Section 1.06. Filing of Certificate of Merger...................... 3
Section 1.07. Further Assurances................................... 3
ARTICLE II
CONVERSION OF SHARES..................................................... 3
Section 2.01. Shares............................................... 3
Section 2.02. Dissenting Shares.................................... 4
Section 2.03. Purchaser Common Stock............................... 5
Section 2.04. Exchange of Shares................................... 5
Section 2.05 Options.............................................. 6
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.......................... 7
Section 3.01. Organization......................................... 7
Section 3.02. Authority Relative to This Agreement and The Purchase
Agreement............................................ 7
Section 3.03. Noncontravention; Consents and Approvals............. 8
Section 3.04. Available Funds...................................... 9
Section 3.05. Broker's Fees........................................ 9
Section 3.06. Proxy Statement...................................... 9
Section 3.07. Purchase Agreement................................... 9
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................ 9
Section 4.01. Organization......................................... 10
Section 4.02. Authority Relative to This Agreement................. 10
Section 4.03. Noncontravention; Consents and Approvals............. 11
Section 4.04. Capitalization....................................... 12
Section 4.05. SEC Documents; Financial Statements.................. 13
Section 4.06. Absence of Certain Changes........................... 14
Section 4.07. Litigation........................................... 14
Section 4.08. Compliance with Law.................................. 14
Section 4.09. No Default........................................... 15
Section 4.10. Investment Bankers and Finders....................... 15
Section 4.11. Taxes................................................ 15
Section 4.12. Environmental Matters................................ 16
Section 4.13. Employee Benefit Plans; ERISA....................... 20
Section 4.14. Insurance........................................... 23
Section 4.15. Composition of the Board of Directors............... 23
Section 4.16. Title to and Condition of Properties................ 24
Section 4.17. Leases.............................................. 24
Section 4.18. Contracts and Commitments........................... 24
Section 4.19. Employment and Labor Contracts...................... 24
Section 4.20. Patents and Trademarks.............................. 25
Section 4.21. Other Agreements.................................... 25
Section 4.22. Labor Matters....................................... 25
Section 4.23. Proxy Statement..................................... 26
ARTICLE V
COVENANTS............................................................... 26
Section 5.01. Conduct of Business of the Company.................. 26
Section 5.02. No Solicitation..................................... 29
Section 5.03. Access to Information............................... 30
Section 5.04. Filings; Other Action............................... 30
Section 5.05. Public Announcements................................ 31
Section 5.06. Notification of Certain Matters..................... 31
Section 5.07. Indemnification and Insurance....................... 31
Section 5.08. Expenses............................................ 33
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER AND THE COMPANY.......... 33
Section 6.01. Stockholder Approval................................ 33
Section 6.02. Hart-Scott-Rodino................................... 34
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER.......................... 34
Section 7.01. Representations and Warranties True................. 34
Section 7.02. Performance......................................... 34
Section 7.03. Certificates........................................ 34
Section 7.04. Certain Proceedings................................. 34
Section 7.05. Opinion of Counsel.................................. 34
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY............................ 35
Section 8.01. Representations and Warranties True................. 35
Section 8.02. Performance......................................... 35
Section 8.03. Certificates........................................ 35
Section 8.04. Certain Proceedings................................. 35
Section 8.05. Opinion of Counsel.................................. 35
Section 8.06. Purchaser Undertaking............................... 35
ARTICLE IX
CLOSING................................................................. 36
Section 9.01. Time and Place...................................... 36
Section 9.02. Filings at the Closing.............................. 36
ARTICLE X
TERMINATION AND ABANDONMENT............................................. 36
Section 10.01. Termination........................................ 36
Section 10.02. Termination by the Purchaser....................... 37
Section 10.03. Termination by the Company......................... 37
Section 10.04. Procedure for Termination.......................... 37
Section 10.05. Effect of Termination and Abandonment.............. 37
ARTICLE XI
MISCELLANEOUS........................................................... 38
Section 11.01. Nonsurvival of Representations, Etc................ 38
Section 11.02. Amendment and Modification......................... 38
Section 11.03. Waiver of Compliance; Consents..................... 38
Section 11.04. Investigations..................................... 38
Section 11.05. Reasonable Efforts................................. 39
Section 11.06. Notices............................................ 39
Section 11.07. Assignment......................................... 40
Section 11.08. Governing Law...................................... 40
Section 11.09. Counterparts....................................... 40
Section 11.10. Severability....................................... 40
Section 11.11. Interpretation..................................... 41
Section 11.12. Entire Agreement................................... 41
Section 11.13. Schedules.......................................... 41
SCHEDULES
Schedule 4.01 Certificate of Incorporation and By-Laws, List of Subsidiaries
Schedule 4.03 Consents and Approvals
Schedule 4.04 Stock Options
Schedule 4.05 Liabilities
Schedule 4.06 Certain Changes
Schedule 4.07 Litigation
Schedule 4.08 Violations of Law
Schedule 4.09 Defaults
Schedule 4.11 Taxes
Schedule 4.12 Environmental Matters
Schedule 4.13 Employee Benefit Matters
Schedule 4.14 Insurance
Schedule 4.15 Directors
Schedule 4.16 Real Properties
Schedule 4.17 Leases
Schedule 4.18 Contracts and Commitments
Schedule 4.19 Employment and Labor Contracts
Schedule 4.20 Patents and Trademarks
Schedule 8.06 Certain Agreements
EXHIBITS
Exhibit A Purchase Agreement
PAGE
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of December 1, 1993 (the
"Agreement"), by and among Rexnord Corporation, a Delaware corporation
(the "Company"), BTR Dunlop Holdings, Inc., a Delaware corporation (the
"Purchaser"). The Company and the Purchaser are hereinafter sometimes col-
lectively referred to as the "Constituent Corporations."
RECITALS
WHEREAS, the Company desires to merge with the Purchaser and the Pur-
chaser desires to merge with the Company, all upon the terms and subject to
the conditions of this Agreement;
WHEREAS, the Company and the Purchaser desire to make certain represen-
tations, warranties, covenants and agreements in connection with the merger
of the Company and the Purchaser; and
WHEREAS, the Board of Directors of the Company has adopted resolutions
approving this Agreement and the transactions contemplated hereby and recom-
mending that the Company's stockholders approve this Agreement and the
transactions contemplated hereby.
NOW, THEREFORE, in consideration of the premises and the mutual repre-
sentations, warranties, covenants, agreements and conditions contained
herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.01 The Merger. (a) In accordance with the provisions of this
Agreement and the General Corporation Law of the State of Delaware
("DGCL"), at the Effective Time (as defined in Section 1.05), the
Purchaser shall be merged with and into the Company (the "Merger"), and
the Company shall be the surviving corporation (hereinafter sometimes called
the "Surviving Corporation") and shall continue its corporate existence
under the laws of the State of Delaware. The name of the Surviving Corpora-
tion shall be "Rexnord Corporation." At the Effective Time (as hereinafter
defined) the separate existence of the Purchaser shall cease.
(b) The Surviving Corporation shall possess all the rights, privileges,
immunities, powers and purposes of each of the Constituent Corporations and
shall by operation of law assume and be liable for all the liabilities, ob-
ligations and penalties of each of the Constituent Corporations.
(c) At the election of Purchaser, any direct or indirect wholly owned
subsidiary of Purchaser, may be substituted for Purchaser as a constituent
corporation in the Merger. If the Purchaser elects to so substitute a con-
stituent corporation, any reference in Article I and II to the Purchaser
shall refer to such other corporations and each other reference to the Pur-
chaser shall refer both to the Purchaser and such other corporation.
Section 1.02 Certificate of Incorporation and By-Laws. The Certificate
of Incorporation and By-Laws of the Company as in effect immediately prior
to the Effective Time shall be the Certificate of Incorporation and By-Laws
of the Surviving Corporation until thereafter amended in accordance with the
terms thereof and as provided by law.
Section 1.03 Directors and Officers. Directors of the Purchaser and of-
ficers of the Company immediately prior to the Effective Time shall be the
directors and officers of the Surviving Corporation and will hold office
from and after the Effective Time until their respective successors are duly
elected or appointed and qualified in the manner provided in the Certificate
of Incorporation and By-Laws of the Surviving Corporation, or as otherwise
provided by law.
Section 1.04 Stockholders' Meeting. The Company will take all action
necessary in accordance with applicable law and its Certificate of Incorpo-
ration and By-laws to convene a special meeting of its stockholders (the
"Stockholders' Meeting"), as soon as practicable hereafter to consider and
vote upon the approval of this Agreement, or to have the stockholders of the
Company take such action by written consent. The Company, through its Board
of Directors, shall (subject to the proviso contained in the first sentence
of Section 5.02) recommend to its stockholders approval of this Agreement
and the transactions contemplated hereby and shall use all reasonable ef-
forts to obtain approval and adoption of this Agreement and the transactions
contemplated hereby by the stockholders of the Company.
Section 1.05 Effective Time. The Merger shall become effective on the
date and at the time of filing of a certificate of merger, in the form re-
quired by and executed in accordance with the DGCL, with the Secretary of
State of the State of Delaware in accordance with the provisions of Section
251 of the DGCL (the "Certificate of Merger"). The date and time when the
Merger shall become effective is herein referred to as the "Effective
Time."
Section 1.06 Filing of Certificate of Merger. At the Closing (as defined
in Section 9.01), the Purchaser and the Company shall cause a Certificate of
Merger to be executed and filed with the Secretary of State of the State of
Delaware as provided in the DGCL, and shall take any and all other lawful
actions and do any and all other lawful things to cause the Merger to become
effective.
Section 1.07 Further Assurances. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments, assurances or any other actions or things are
necessary or desirable to vest, perfect or confirm of record or otherwise in
the Surviving Corporation its right, title or interest in, to or under any
of the rights, properties or assets of either of the Constituent Corpora-
tions acquired or to be acquired by the Surviving Corporation as a result
of, or in connection with, the Merger or otherwise to carry out this Agree-
ment, the officers and directors of the Surviving Corporation shall be au-
thorized to execute and deliver, in the name and on behalf of each of the
Constituent Corporations or otherwise, all such deeds, bills of sale, as-
signments and assurances and to take and do, in the name and on behalf of
each of the Constituent Corporations or otherwise, all such other actions
and things as may be necessary or desirable to vest, perfect or confirm any
and all right, title and interest in, to and under such rights, properties
or assets in the Surviving Corporation or otherwise to carry out this Agree-
ment.
PAGE
<PAGE>
ARTICLE II
CONVERSION OF SHARES
Section 2.01 Shares. (a) Each share (a "Share") of the Company's com-
mon stock, par value $.01 per share, issued and outstanding immediately
prior to the Effective Time (except for Dissenting Shares (as hereinafter
defined)) shall, by virtue of the Merger and without any action on the part
of the holder thereof, be cancelled and converted at the Effective Time into
the right to receive in cash the greater of (i) $22.50 or (ii) the highest
price paid by Purchaser or any affiliate thereof to purchase Shares from any
affiliate of the Company at or prior to the Effective Time (the "Merger
Consideration") payable to the holder thereof, without interest, upon sur-
render of the certificate evidencing such Share in the manner provided in
Section 2.04.
(b) All Shares (including Dissenting Shares), by virtue of the Merger
and without any action on the part of the holders thereof, shall at the Ef-
fective Time no longer be outstanding and shall be cancelled and retired and
shall cease to exist, and each holder of a certificate representing any such
Shares shall thereafter cease to have any rights with respect to such
Shares, except the right to receive the Merger Consideration for such Shares
upon the surrender of such certificate in accordance with Section 2.04 or
the right, if any, to receive payment from the Surviving Corporation of the
"fair value" of such Shares as determined in accordance with Section 262
of the DGCL.
(c) Notwithstanding anything contained in this Section 2.01 to the con-
trary, each Share held in the treasury of the Company and each Share owned
by Purchaser or any affiliate of Purchaser or the Company immediately prior
to the Effective Time shall be cancelled without any conversion thereof and
no payment shall be made with respect thereto.
Section 2.02 Dissenting Shares. Notwithstanding anything in this Agree-
ment to the contrary, Shares which are outstanding immediately prior to the
Effective Time and which are held by stockholders who shall have properly
exercised their rights for appraisal of such Shares in the manner provided
in Section 262 of the DGCL ("Dissenting Shares") shall not be converted
into or be exchangeable for the right to receive the Merger Consideration,
but the holders thereof shall be entitled to payment of the appraised value
of such Dissenting Shares in accordance with the provisions of Section 262
of the DGCL; provided, however, that (i) if any holder of Dissenting Shares
shall subsequently deliver a written withdrawal of his demand for appraisal
of such Dissenting Shares (with the written approval of the Surviving Corpo-
ration, if such withdrawal is not tendered within 60 days after the Effec-
tive Time), or (ii) if any holder fails to establish his entitlement to ap-
praisal rights as provided in Section 262 of the DGCL, or (iii) if neither
any holder of Dissenting Shares nor the Surviving Corporation has filed a
petition demanding a determination of the value of all Dissenting Shares
within the time provided in Section 262 of the DGCL, such holder or holders
(as the case may be) shall forfeit the right to appraisal of such Shares and
such Shares shall thereupon be deemed to have been converted into and to
have become exchangeable for, as of the Effective Time, the right to receive
the Merger Consideration, without any interest thereon (and such Shares
shall not, for purposes hereof, then be deemed to be "Dissenting Shares").
The Surviving Corporation shall pay to a holder of Dissenting Shares who
subsequently fails to perfect or otherwise withdraws such holder's claim for
appraisal rights as provided above, against surrender of the certificate
representing such Shares in accordance with Section 2.04, the Merger Consid-
eration payable with respect to such Shares.
Section 2.03 Purchaser Common Stock. Each common share, par value $.01
per share, of the Purchaser issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the
part of the holder thereof, be converted at the Effective Time into one val-
idly issued, fully paid and nonassessable share of common stock of the Sur-
viving Corporation.
Section 2.04 Exchange of Shares. (a) At or prior to the Effective Time,
the Purchaser shall designate a bank or trust company to serve as exchange
agent for the Shares (the "Exchange Agent") and shall deposit with the Ex-
change Agent for the benefit of the holders of certificates which
represented Shares immediately prior to the Effective Time, such amount of
funds as equals the aggregate Merger Consideration. Such funds shall be in-
vested by the Exchange Agent as directed by the Purchaser in obligations of
or guarantees by the United States of America, in commercial paper obliga-
tions rated A-1 or P-1 or better by Moody's Investor Services, Inc. or Stan-
dard & Poor's Corporation, respectively, or in certificates of deposit, bank
repurchase agreements or bankers acceptances of commercial banks with capi-
tal exceeding $100 million.
(b) Promptly after the Effective Time, the Exchange Agent shall mail to
each record holder, as of the Effective Time, of an outstanding certificate
or certificates which immediately prior to the Effective Time represented
Shares (the "Certificates") a form letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to
the Exchange Agent) and instructions for use in effecting the surrender of
the Certificates for payment therefor. Upon surrender to the Exchange Agent
of a Certificate, together with such letter of transmittal duly executed,
the holder of such Certificate shall be entitled to receive in exchange
therefor such amount of cash which such holder has the right to receive un-
der this Article II, and such Certificate shall forthwith be cancelled. If
payment is to be made to a person other than the person in whose name the
Certificate surrendered is registered, it shall be a condition of payment
that the Certificate so surrendered shall be properly endorsed or otherwise
in proper form for transfer and that the person requesting such payment
shall pay any transfer or other taxes required by reason of the payment to a
person other than the registered holder of the Certificate surrendered or
such person shall establish to the satisfaction of the Surviving Corporation
that such tax has been paid or is not applicable. Until surrendered in ac-
cordance with the provisions of this Section 2.04, each Certificate (other
than Certificates representing Dissenting Shares or Shares referred to in
Section 2.01(c)) shall represent, for all purposes, the right to receive the
Merger Consideration in respect of the number of Shares previously evidenced
by such Certificate, without any interest thereon.
(c) From and after the Effective Time there shall be no transfers on the
stock transfer books of the Surviving Corporation of the Shares which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation, they shall be
cancelled and exchanged as provided in this Article II.
(d) At any time following six months after the Effective Time, the Sur-
viving Corporation shall be entitled to require the Exchange Agent to de-
liver to it any funds (including any interest received with respect thereto)
which have been made available to the Exchange Agent and which have not been
disbursed to holders of Certificates and, thereafter, such holders shall be
entitled to look to the Surviving Corporation (subject to abandoned prop-
erty, escheat or other similar laws) only as general creditors thereof with
respect to the Merger Consideration payable upon due surrender of their Cer-
tificates. Notwithstanding the foregoing, neither the Surviving Corporation
nor the Exchange Agent shall be liable to any holder of a Certificate for
the Merger Consideration delivered to a public official pursuant to any ap-
plicable abandoned property, escheat or similar law.
Section 2.05 Options. Prior to the Effective Time, the Board of Direc-
tors of the Company (or, if appropriate, the committees administering the
Company's 1989 and 1992 Stock Option Plans (the "Option Plans")) shall
take such action as is necessary (i) to provide for the cancellation of all
options outstanding under the Option Plans (the "Outstanding Options") on
the terms set forth in this Section 2.05, and (ii) to cause such other ac-
tion as is necessary or appropriate to be taken so that, at the Effective
Time, each such then Outstanding Option shall be cancelled (so that such op-
tion may be exercised, if at all, only prior to the Merger) in exchange for
a payment in cash (the "Option Consideration") equal to the excess of the
Merger Consideration over the exercise price per share subject to such Out-
standing Option. Payment of the Option Consideration shall be made by the
Surviving Corporation to the holders of Outstanding Options at or as
promptly as practicable after the Effective Time and shall be subject to ap-
plicable withholding of income and other taxes.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE PURCHASER
The Purchaser represents and warrants to the Company as follows:
Section 3.01 Organization. The Purchaser is a corporation duly organized
and validly existing under the laws of the state of its incorporation. The
copies of the Certificate of Incorporation and by-laws of Purchaser hereto-
fore delivered to the Company are correct and complete, and in full force
and effect, as of the date of this Agreement.
Section 3.02 Authority Relative to This Agreement and The Purchase
Agreement. The Purchaser has full corporate power and authority to execute
and deliver this Agreement and the Purchase Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Purchase Agreement and the consummation of the trans-
actions contemplated hereby and thereby have been duly and validly autho-
rized and approved by the Board of Directors of the Purchaser and by the
sole stockholder of the Purchaser, and no other corporate proceedings on the
part of the Purchaser are necessary to authorize this Agreement and the Pur-
chase Agreement or the consummation of the transactions contemplated hereby
and thereby. This Agreement has been, and the Purchase Agreement will be,
duly and validly executed and delivered by the Purchaser and, assuming this
Agreement constitutes, and the Purchase Agreement will constitute, a legal,
valid and binding agreement of the Company, this Agreement constitutes, and
the Purchase Agreement will constitute a legal, valid and binding agreement
of the Purchaser, enforceable against it in accordance with its terms, sub-
ject to applicable bankruptcy, insolvency, fraudulent conveyance, reorgani-
zation, moratorium and similar laws affecting creditors' rights and remedies
generally and subject, as to enforceability, to general principles of eq-
uity, including principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a proceeding at law
or in equity).
Section 3.03 Noncontravention; Consents and Approvals. (a) Assuming that
all filings, permits, authorizations, consents and approvals or waivers
thereof have been duly made or obtained as contemplated by Section 3.03(b),
the execution and delivery of this Agreement and the Purchase Agreement by
the Purchaser and the consummation by the Purchaser of the transactions con-
templated hereby and thereby will not (i) conflict with or result in any
breach of any provision of the Certificate of Incorporation or by-Laws of
the Purchaser, (ii) result in a violation or breach of, or constitute (with
or without due notice or lapse of time or both) a default under the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
agreement or other instrument or obligation to which the Purchaser is a
party, or by which the Purchaser or any of its properties or assets is
bound, or (iii) violate any order, writ, injunction, decree, statute, rule
or regulation applicable to the Purchaser or any of its properties or as-
sets, excluding from the foregoing clauses (ii) and (iii) violations,
breaches or defaults which, either individually or in the aggregate, would
not impair the Purchaser's ability to consummate the transactions contem-
plated hereby or thereby.
(b) No filing or registration with, notification to and no permit, au-
thorization, consent or approval of, any governmental entity is required by
the Purchaser in connection with the execution and delivery of this Agree-
ment or the Purchase Agreement by the Purchaser or the consummation by the
Purchaser of the transactions contemplated hereby or thereby, except (i) in
connection with the applicable requirements of the Hart-Scott-Rodino Anti-
trust Improvements Act of 1976, as amended (the "HSR Act"), (ii) in con-
nection, or in compliance, with the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), (iii) the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware, (iv) such fil-
ings and consents as may be required under any environmental law pertaining
to any notification, disclosure or required approval triggered by the Merger
or the transactions contemplated by this Agreement, (v) such filings, regis-
trations, notifications, permits, authorizations, consents or approvals, as
may be required under the corporation or takeover laws of various states,
and (vi) such other filings, registrations, notifications, permits, authori-
zations, consents or approvals the failure of which to be obtained, made or
given would not, individually or in the aggregate, materially impair the
ability of the Purchaser to consummate the transactions contemplated hereby
or thereby.
Section 3.04 Available Funds. Purchaser has or will have prior to Clos-
ing sufficient available funds necessary to consummate the Merger on the
terms and conditions set forth in this Agreement and to satisfy or refinance
any obligations relating to any outstanding indebtedness of the Company the
maturity of which may come due as a result of the Company entering into this
Agreement and/or the consummation of the Merger.
Section 3.05 Broker's Fees. Except for the engagement of Dillon, Read &
Co. Inc., the Purchaser nor any of its affiliates has employed any broker or
finder or incurred any liability for any broker's fees, commissions, finan-
cial advisory or finder's fees in connection with any of the transactions
contemplated by this Agreement.
PAGE
<PAGE>
Section 3.06 Proxy Statement. None of the information to be supplied by
Purchaser for inclusion or incorporation by reference in the proxy statement
on Schedule 14A (the "Proxy Statement") to be delivered to the Company's
stockholders will, at the time it is mailed to stockholders and at the time
of the Stockholders' Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading.
Section 3.07 Purchase Agreement. Following the execution of this Agree-
ment, Purchaser, The Fairchild Corporation and RHI Holdings, Inc. will enter
into the Purchase Agreement in the form of EXHIBIT A hereto.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchaser as follows:
Section 4.01 Organization. (a) The Company is a corporation duly orga-
nized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as now being con-
ducted. The Company is duly qualified or licensed and in good standing to do
business in each jurisdiction in which the property owned, leased or oper-
ated by it or the nature of the business conducted by it makes such qualifi-
cation necessary, except in such jurisdictions where the failure to be so
duly qualified or licensed and in good standing will not individually or in
the aggregate have a material adverse effect on the business, assets, finan-
cial condition or results of operations of the Company and its Subsidiaries
(as defined in Section 11.10) taken as a whole (a "Material Adverse
Effect"). Set forth as Schedule 4.01(a) are accurate and complete copies of
the Company's Certificate of Incorporation and By-Laws, as they are
currently in effect.
(b) Set forth on Schedule 4.01(b) is an accurate and complete list of
the Company's Subsidiaries and Material Subsidiaries and their jurisdictions
of organization. Except as set forth on Schedule 4.01(b), all issued and
outstanding shares of capital stock of each of the Company's Subsidiaries
(except for directors' qualifying shares, if any) are owned directly or in-
directly by the Company free and clear of any charges, liens, encumbrances
or security interest with respect thereto. Each Subsidiary is a corporation
duly organized, validly existing and, provided it is a domestic corporation,
in good standing under the laws of the jurisdiction of its organization and
each Subsidiary has all requisite corporate powers and authority to own,
lease and operate its properties and to carry on its business as now being
conducted, except where the failure to be so organized, existing and in good
standing or to have such power and authority will not individually or in the
aggregate have a Material Adverse Effect. Each Subsidiary is duly qualified
or licensed and in good standing to do business in each jurisdiction in
which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification necessary, except in such
jurisdictions where the failure to be so duly qualified or licensed and in
good standing will not, individually or in the aggregate, have a Material
Adverse Effect.
Section 4.02 Authority Relative to This Agreement. The Company has full
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby, subject to the approval of
the Merger and the approval and adoption of this Agreement by a majority of
the Company's stockholders, and the filing and recordation of appropriate
Merger documents as required by Delaware law. The execution and delivery of
this Agreement, and the consummation of the transactions contemplated
hereby, have been duly and validly authorized and approved by the Company's
Board of Directors and no other corporate proceedings on the part of the
Company are necessary to authorize this Agreement, and except for the ap-
proval of the Merger and the adoption of this Agreement by the Company's
stockholders, no other corporate proceedings on the part of the Company are
necessary to consummate the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by the Company, and assum-
ing this Agreement constitutes a legal, valid and binding agreement of each
of the Parent and the Purchaser, this Agreement constitutes a legal, valid
and binding agreement of the Company, enforceable against the Company in ac-
cordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and subject, as to enforceability,
to general principles of equity, including principles of commercial reason-
ableness, good faith and fair dealing (regardless of whether enforcement is
sought in a proceeding at law or in equity).
Section 4.03 Noncontravention, Consents and Approvals. Except as set
forth in Schedule 4.03, (a) assuming that all filings, permits, authoriza-
tions, consents and approvals or waivers thereof have been duly made or ob-
tained pursuant to Section 4.03(b), the execution and delivery of this
Agreement by the Company and the consummation by the Company of the transac-
tions contemplated hereby will not (i) subject to obtaining the requisite
approval of a majority of the Company's stockholders, conflict with or re-
sult in any breach of any provision of the Certificate of Incorporation or
by-laws (or equivalent organizational documents) of the Company or any of
its Material Subsidiaries, (ii) result in a violation or breach of, or con-
stitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration) under,
any of the terms, conditions or provisions of any note, bond, mortgage, in-
denture or other evidence or instrument of, or agreement relating to, in-
debtedness to which the Company or any of its Subsidiaries is a party or by
which any of them or any of their properties or assets are bound, (iii) re-
sult in a violation or breach of, or constitute (with or without due notice
or lapse of time or both) a default (or give rise to any right of termina-
tion, cancellation or acceleration) under, any of the terms, conditions or
provisions of any license, agreement or other instrument or obligation to
which the Company or any of its Subsidiaries is a party or by which any of
them or any of their properties or assets is bound, or (iv) violate any or-
der, writ, injunction, decree, statute, rule or regulation applicable to the
Company, any of its Subsidiaries or any of their properties or assets, ex-
cluding from the foregoing clauses (ii), (iii) and (iv) violations, breaches
or defaults which, either individually or in the aggregate, will not have a
Material Adverse Effect or which would not impair the Company's ability to
consummate the transactions contemplated hereby.
(b) Except as set forth in Schedule 4.03, no filing or registration
with, notification to and no permit, authorization, consent or approval of,
any government entity is necessary for the execution and delivery of this
Agreement by the Company or the consummation by the Company of the transac-
tions contemplated by this Agreement except (i) in connection with the ap-
plicable requirements of the HSR Act, (ii) in connection or in compliance
with the Exchange Act, (iii) the filing of the Certificate of Merger with
the Secretary of State of the State of Delaware, (iv) such filings and con-
sents as may be required under any environmental law pertaining to any noti-
fication, disclosure or required approval triggered by the Merger or the
transactions contemplated by this Agreement, (v) such filings,
registrations, notifications, permits, authorizations, consents or approv-
als, as may be required under the corporation or takeover laws of various
states, and (vi) such other filings, registrations, notices, permits, autho-
rizations, consents and approvals which if not obtained, made or given will
not, individually or in the aggregate, have a Material Adverse Effect or im-
pair the Company's ability to consummate the transactions contemplated
hereby.
(c) The Board of Directors of the Company has taken all appropriate and
necessary action such that (i) the provisions of Section 203 of the DGCL
will not apply to the acquisition by the Purchaser of Shares pursuant to the
Purchase Agreement or to the Merger and (ii) the sale of Shares by RHI Hold-
ings, Inc. pursuant to the Purchase Agreement shall not be restricted or
prohibited by that certain Exchange and Standstill Agreement dated as of
June 19, 1992.
Section 4.04 Capitalization. The authorized capital stock of the Company
consists of 50,000,000 Shares and 3,000,000 shares of preferred stock, none
of which is outstanding. As of the date hereof, there are 18,434,390 Shares
issued and outstanding and no Shares held in the Company's treasury. As of
the date hereof, there were outstanding options entitling the holders
thereof to purchase up to 1,133,552 Shares. Set forth on Schedule 4.04 is a
true and correct list of all outstanding options, their exercise prices and
dates and the names of the holders thereof. Except for such options, there
are not now, and at the Effective Time there will not be, any existing op-
tions, warrants, calls, subscriptions, or other rights or other agreements
or commitments obligating the Company to issue, transfer or sell any shares
of capital stock of the Company or any other securities convertible into or
evidencing the right to subscribe for any such shares. All issued and out-
standing Shares are duly authorized and validly issued, fully paid,
non-assessable and free of preemptive rights with respect thereto.
Section 4.05 SEC Documents; Financial Statements. (a) The Company has
filed all required documents with the Securities and Exchange Commission
(the "SEC") since March 31, 1989 (the "SEC Documents"). As of their re-
spective dates, the SEC Documents complied in all material respects with the
requirements of the Securities Act of 1933 (the "Securities Act") or the
Exchange Act, as the case may be, and none of the SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not mis-
leading.
(b) Except as set forth in the SEC Document, the balance sheets of the
Company, and the related statements of income, changes in stockholders' eq-
uity and cash flows including the footnotes thereto, included in the SEC
Documents, fairly present the consolidated financial position of the Company
and its Subsidiaries as at such dates and the results of operations,
retained earnings and cash flows, as the case may be, of the Company and its
Subsidiaries for the periods set forth therein (subject, in the case of un-
audited quarterly statements, to normal year-end audit adjustments), all in
accordance with generally accepted accounting principles consistently ap-
plied (except, in the case of unaudited quarterly statements as permitted by
Form 10-Q under the Act) during the periods involved, except as may be noted
therein. The Company's balance sheet as at June 30, 1993 is sometimes herein
referred to as the "Balance Sheet."
(c) Except as set forth on Schedule 4.05 or disclosed in the SEC Docu-
ments, there are no liabilities or obligations (and no basis therefor), ac-
crued, absolute, contingent or threatened, and whether due or to become due
("Liabilities"), other than liabilities and obligations which, individu-
ally or in the aggregate, will not have a Material Adverse Effect, other
than liabilities reflected, or adequately reserved against, on the Balance
Sheet. Since September 30, 1993, there have been no changes by the Company
in accounting methods, principles or practices except as required or permit-
ted by generally accepted accounting principles.
Section 4.06 Absence of Certain Changes. Except as set forth on Schedule
4.06 or disclosed on the Balance Sheet or in the SEC Documents filed with
the SEC prior to the date hereof, since September 30, 1993, the Company has
not suffered or incurred any actual or, to the Company's knowledge, will
suffer or incur any damage, destruction, or loss whether or not covered by
insurance; any labor dispute; any Liabilities except Liabilities incurred in
the ordinary and usual course of business and consistent with past practices
and Liabilities incurred in connection with the Merger; or any agreements by
the Company to do any of the foregoing things or any other event or condi-
tion of any character, except for changes, decreases, losses, Liabilities,
agreements, events or conditions which, individually or in the aggregate,
will not have a Material Adverse Effect.
Section 4.07 Litigation. Except as set forth on Schedule 4.07 or dis-
closed on the Balance Sheet (and other than with respect to environmental
matters covered by section 4.12), (i) there is no claim, action, suit or
proceeding pending or, to the best knowledge of the Company, threatened
against or relating to the Company or any of its Subsidiaries before any
court or governmental or regulatory authority or body or arbitration tribu-
nal, and (ii) there is no outstanding judgment, order, writ, injunction or
decree, or application, request or motion therefor, of any court, governmen-
tal agency or arbitration tribunal in a proceeding to which the Company or
any Subsidiary was or is a party except, in the case of clauses (i), and
(ii) above, such as will not, individually or in the aggregate, have a Mate-
rial Adverse Effect if adversely determined against the Company or such Sub-
sidiary.
Section 4.08 Compliance with Law. Except as set forth on Schedule 4.08
(and other than with respect to environmental matters covered by section
4.12), neither the Company nor any of its Subsidiaries has violated or
failed to comply with any statute, law, ordinance, regulation, rule or order
of any foreign, federal, state or local government or any other governmental
department or agency, or any judgment, decree or order of any court, appli-
cable to its business or operations, except where any such violations or
failures to comply will not, individually or in the aggregate, have a Mate-
rial Adverse Effect. Except as set forth on Schedule 4.08 (and other than
with respect to environmental matters covered by Section 4.12) the Company
and its Subsidiaries have all permits, licenses and franchises from govern-
mental agencies required to conduct their businesses as now being conducted,
except for such permits, licenses and franchises the absence of which will
not, in the aggregate, have a Material Adverse Effect.
Section 4.09 No Default. Except as set forth on Schedule 4.09 and except
as set forth in the SEC Documents, neither the Company nor any of its Sub-
sidiaries is in default or violation (and no event has occurred which, with
notice or the lapse of time or both, would constitute a default or viola-
tion) of any term, condition or provision of (i) their respective charter
and by-laws (or equivalent organizational documents) or (ii) any note, bond,
mortgage, indenture, license, agreement or other instrument or obligation to
which the Company or any of its Subsidiaries is now a party or by which the
Company or any of its Subsidiaries or any of their respective properties or
assets may be bound (except for the requirement under certain of such in-
struments to file supplemental indentures as a result of the transactions
contemplated hereby), excluding from the foregoing clause (ii) defaults or
violations which, individually or in the aggregate, will not have a Material
Adverse Effect.
Section 4.10 Investment Bankers and Finders. Except for the engagement
of Donaldson, Lufkin & Jenrette Securities Corporation, the fees and
expenses of which will be paid by the Company, the Company has not employed
any broker, finder or financial advisor or incurred any liability for any
brokerage fees, commissions, finders' or financial advisory fees in connec-
tion with the transactions contemplated hereby.
Section 4.11 Taxes. "Tax" or "Taxes" shall mean all federal, state,
local and foreign taxes and assessments of any nature, including all inter-
est, penalties and additions imposed with respect to such amounts. Except as
set forth on Schedule 4.11, the Company and its Subsidiaries have prepared
and timely filed or will timely file with the appropriate governmental agen-
cies all franchise, income and all other material Tax returns and reports
required to be filed (copies of which for the past four fiscal years have
been made available to the Purchaser). Except as set forth on Schedule 4.11,
all Taxes of the Company and its subsidiaries in respect of the pre-Merger
period have been paid in full to the proper authorities (or adequate
reserves have been established therefor). The United States federal income
tax liability of (i) Rexnord Inc. (a predecessor of the Company and its Sub-
sidiaries) has been examined and audited by the Internal Revenue Service
through the fiscal year ended February 28, 1987 and closed through the fis-
cal year ended October 31, 1984 and (ii) PT Components, which was merged
into the Company on June 30, 1989, have been examined, audited and closed by
the IRS through its fiscal year ended August 15, 1988. All deficiencies re-
sulting from Tax examinations of federal, state, and foreign income, sales
and franchise and all other material Tax returns filed by the Company and
its Subsidiaries have either been paid or adequately provided for, except as
set forth on Schedule 4.11. Schedule 4.11. further sets forth any Tax exami-
nations or audits currently proceeding for the Company or its Subsidiaries,
the periods being examined, the category of Tax and the examining authority
and any corresponding revenue agents' reports furnished to the Company or
its Subsidiaries have been made available to the Purchaser. Neither the Com-
pany nor any of its Subsidiaries has made any agreement with any tax author-
ity extending the period for assessment or collection of any Tax, except as
set forth on Schedule 4.11. Neither the Company nor any of its Subsidiaries
is a party to any action or proceeding with any governmental or tax author-
ity for the assessment, collection of Taxes, nor has any Tax lien been filed
or claim for assessment or collection of Taxes been asserted in writing
against the Company or its Subsidiaries, except as set forth on Schedule
4.11. The Company has made timely payments of the Taxes required to be de-
ducted and withheld from the wages paid to its employees. Set forth on
Schedule 4.11 is a true and complete list of all Tax sharing or Tax alloca-
tion or similar agreements to which the Company is a party.
Section 4.12 Environmental Matters. (a) Except as set forth on Schedule
4.12, to the knowledge of the Company:
(i) the Company has obtained all permits, licenses, approvals and other
authorizations (hereinafter "Authorizations") that are required with re-
spect to the operation of its business, property and assets under the Envi-
ronmental Laws and which are in full force and effect, and is in compliance
with all terms and conditions of such Authorizations, except where the ab-
sence of such Authorizations or the failure to comply with the terms and
conditions of such Authorization would not, in the aggregate, have a Mate-
rial Adverse Effect;
(ii) the Company is in compliance with the Environmental Laws
(including, without limitation, compliance with standards, schedules and
timetables therein), except where failure to comply would not, individually
or in the aggregate, have a Material Adverse Effect;
(iii) no real property or facility owned, used, operated, leased, man-
aged or controlled by the Company or any predecessor in interest, is listed
or proposed for listing on the National Priorities List or the Comprehensive
Environmental Response, Compensation, and Liability Information System, both
promulgated under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), or on any comparable state
or local list established pursuant to any Environmental Law;
(iv) the Company has not received any written notification of potential
or actual liability or request for information under CERCLA or any compara-
ble state or local law;
(v) no real property or facility owned, operated, leased, managed or
controlled by the Company has been used for the disposal of any Hazardous
Materials, except where such disposal would not, individually or in the ag-
gregate, have a Material Adverse Effect;
(vi) no underground storage tank or other underground storage recepta-
cle, or related piping, is located on such facility or property, except
where the presence of such tank, receptable or piping would not have, indi-
vidually or in the aggregate, a Material Adverse Effect;
(vii) no asbestos has been used or disposed of, or is located at, on or
under any such facilities or properties, except where such use, disposal, or
presence would not have, individually or in the aggregate, a Material Ad-
verse Effect;
(viii) there have been no releases (i.e., any past or present releasing,
spilling, leaking, pumping, pouring, emitting, emptying, discharging, in-
jecting, escaping, leaching, disposing or dumping, on-site or off-site) of
Hazardous Materials by the Company or any predecessor in interest at, on,
under, from or into any facility or real property owned, operated, leased,
managed or controlled by the Company, except where such releases would not,
individually or in the aggregate, have a Material Adverse Effect;
(ix) there are no polychlorinated biphenyls located in, at, on or under
any facility or real property owned, leased, managed, used or controlled by
the Company, except such as will not, individually or in the aggregate, have
a Material Adverse Effect;
(x) there have been no releases (i.e., any past or present releasing,
spilling, leaking, pumping, pouring, emitting, emptying, discharging, in-
jecting, escaping, leaching, disposing or dumping, on-site or off-site), of
any Hazardous Materials at, on, under, from or into any facility or real
property in the vicinity of any facility or real property owned, operated,
leased, managed, used or controlled by the Company or, to its knowledge, any
predecessor in interest, which releases have affected or are reasonably
likely to affect said facility or real property so as to have, individually
or in the aggregate, a Material Adverse Effect;
(xi) the Company has no liability, absolute or contingent, under any En-
vironmental Law and there is no civil, criminal or administrative action,
suit, demand, hearing, notice of violation or deficiency, investigation,
proceeding, notice or demand letter pending or threatened against the Com-
pany under any Environmental Law, except where such liability or action,
suit, demand, hearing, notice, investigation, proceeding, notice or demand
letter would not individually or in the aggregate, have a Material Adverse
Effect; and
(xii) there are no past or present events, conditions, circumstances,
activities, practices, incidents, actions or plans relating to the business,
property or operations of the Company that are reasonably likely to inter-
fere with or prevent compliance by the Company with any Environmental Law,
or that are reasonably likely to give rise to any liability under the Envi-
ronmental Laws, except where such interference or noncompliance or liability
would not, in the aggregate, have a Material Adverse Effect.
(b) The Company has given Purchaser access to all records and files in
its possession at both its corporate headquarters and its facilities cur-
rently owned, operated, leased, managed, used or controlled by the Company,
including, without limitation, all reports, studies, analyses, tests or mon-
itoring results, pertaining to the existence of Hazardous Materials or any
other environmental concerns relating to facilities or real property owned,
operated, leased, managed, used or controlled by the Company or concerning
compliance with or liability under any Environmental Laws, including, with-
out limitation, the Occupational Safety and Health Act.
(c) For purposes of this Section 4.12, the definition of the Company
shall include all of the Company's Subsidiaries and its former Subsidiaries.
(d) For the purposes of this Agreement, "Environmental Laws" means the
common law and all federal, state, local and foreign laws or regulations,
codes, orders, decrees, judgments or injunctions issued, promulgated, ap-
proved or entered thereunder, now in effect, relating to pollution or pro-
tection of human health or the environment, including, without limitation,
laws relating to (i) emissions, discharges, releases or threatened releases
of pollutants, contaminants, chemicals, or industrial, toxic or hazardous
constituents, substances or wastes, including, without limitation, polychlo-
rinated biphenyls, asbestos containing materials, petroleum, including crude
oil or any fraction thereof, or any petroleum product or other wastes, chem-
icals or substances regulated by any Environmental Law (collectively
referred to as "Hazardous Materials"), into the environment (including,
without limitation, ambient air, surface water, ground water, land surface
or subsurface strata) (ii) the manufacture, processing, distribution, use,
generation, treatment, storage, disposal, transport or handling of Hazardous
Materials, and (iii) underground storage tanks, and related piping, and
emissions, discharges, releases or threatened releases therefrom.
(e) Prior to Closing, the Company shall have made all notifications,
registrations, and filings in accordance with all State and Local Real Prop-
erty Disclosure Requirements applicable to the Assets, including the use of
forms provided by state or local agencies, where such forms exist, whether
to Buyer or to, or with, the state or local agency, provided, that where no-
tification, registration, or filing was made to, or with, a state or local
agency, a copy of such notification, registration, or filing shall be pro-
vided to Buyer prior to Closing.
PAGE
<PAGE>
(f) For the purposes of this Agreement, "State and Local Real Property
Disclosure Requirements" means any state and local laws requiring notifica-
tion of the buyer of real property, or notification, registration, or filing
to or with any state or local agency, prior to the sale of any real property
or transfer of control of an establishment, of the actual or threatened
presence or release into the environment, or the use, disposal, or handling
of Hazardous Materials on, at, under, or near the real property to be sold
or the establishment for which control is to be transferred.
Section 4.13. Employee Benefit Plans; ERISA.
(a) Except as set forth on Schedule 4.13, other than multiemployer
plans, there are no material "employee pension benefit plans" as defined
in Section 3(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and subject to ERISA, presently maintained by the Com-
pany or any of its Subsidiaries, or to which the Company or any of its Sub-
sidiaries contributes or is obligated to make payments thereunder ("Pension
Benefit Plans").
(b) The Company has furnished Parent with a true and complete schedule
of all material "welfare benefit plans" (as defined in Section 3(1) of
ERISA and subject to ERISA) maintained by the Company or any of its Subsid-
iaries ("Welfare Plans") or multiemployer plans as defined in Section
3(37) of ERISA and subject to ERISA to which the Company or any of its Sub-
sidiaries is required to make contributions pursuant to collective bargain-
ing agreements.
(c) The Company and each of its Subsidiaries, and each of the Pension
Benefit Plans and Welfare Plans, are in compliance in all material respects
with the applicable provisions of ERISA and other applicable employee bene-
fit laws.
(d) Except as set forth on Schedule 4.13, all contributions to, and pay-
ments from, the Pension Benefit Plans which are required to have been made
in accordance with the Pension Benefit Plans and, when applicable, Section
302 of ERISA or Section 412 of the Code have been timely made. All such con-
tributions to the Pension Benefit Plans, all contributions to Welfare Plans
and all payments under the Pension Benefit Plans, except those to be made
from a trust qualified under Section 401(a) of the Code, for any period end-
ing before the date hereof that are not yet, but will be, required to be
made are properly accrued and reflected on the Company's Balance Sheet to
the extent such amounts were required to be accrued as of September 30, 1993
under generally accepted accounting principles including FAS 106.
(e) All reports, returns and similar documents with respect to the Pen-
sion Benefit Plans or Welfare Plans required to be filed with any governmen-
tal entity or distributed to any Pension Benefit or Welfare Plan participant
have been duly and timely filed or distributed, unless the failure to so
file or distribute will not, individually or in the aggregate, have a Mate-
rial Adverse Effect.
(f) Except as set forth on Schedule 4.13, the Pension Benefit Plans in-
tended to qualify under Section 401 of the Code have been determined by the
Internal Revenue Service ("IRS") to be so qualified and nothing has oc-
curred with respect to the operation of such Pension Benefit Plans which
could cause the loss of such qualification or exemption or the imposition of
any material liability, penalty or tax under ERISA or the Code assuming such
plans are amended on a timely basis to comply with changes to the Code made
PAGE
<PAGE>
by the Tax Reform Act of 1986 or other legislative, regulatory or adminis-
trative requirements subject to the remedial amendment period applicable to
such Act.
(g) There are no investigations pending, to the best knowledge of the
Company, by any governmental entity involving the Pension Benefit or Welfare
Plans, no deficiency or termination proceedings involving the Pension Bene-
fit Plans and no pending or, to the best of the Company's knowledge, threat-
ened claims (other than routine claims for benefits), suits or proceedings
against any Pension Benefit or Welfare Plan, against the assets of any of
the trusts under any Pension Benefit or Welfare Plan or against any fidu-
ciary of any Pension Benefit or Welfare Plan with respect to the operation
of such plan or asserting any rights or claims to benefits under any Pension
Benefit Plan or against the assets of any trust under such plan, which would
give rise to any material liability, nor, to the best of the Company's
knowledge, are there any facts which would give rise to any material liabil-
ity in the event of any such investigation, claim, suit or proceeding.
(h) Neither the Pension Benefit Plans, Welfare Plans, the Company, any
of its Subsidiaries, nor any employee of the foregoing, nor, any trusts cre-
ated thereunder, nor any trustee, administrator or other fiduciary thereof,
nor any other "party in interest" or "disqualified person" with respect
to the Pension Benefit Plans or Welfare Plans has engaged in a "prohibited
transaction" (as such term is defined in Section 4975 of the Code or Sec-
tion 406 of ERISA) which would be reasonably likely to result in a material
tax or material penalty on the Company or any of its Subsidiaries under Sec-
tion 4975 of the Code or Section 502(i) of ERISA.
(i) Neither the Pension Benefit Plans subject to Title IV of ERISA nor
any trust created thereunder has been terminated nor have there been any
"reportable events" (as defined in Section 4043 of ERISA and the regula-
tions thereunder, but excluding events for which the requirement for notice
has been waived by the Pension Benefit Guaranty Corporation ("PBGC")) with
respect to either thereof nor has there been any event with respect to any
Pension Benefit Plan requiring disclosure under Section 4063(a) of ERISA
which could result in a material liability to the Company or any of its Sub-
sidiaries or any event with respect to any Pension Benefit Plan requiring
disclosure under Section 4041(c)(3)(C) of ERISA.
(j) No Pension Benefit Plan subject to Title IV of ERISA has incurred
any liability to the PBGC other than for the payment of premiums, all of
which have been paid when due. No Pension Benefit Plan has applied for, or
received, a waiver of the minimum funding standards imposed by Section 412
of the Code. The Company has made available to Parent the most recent actu-
arial report with respect to each Pension Benefit Plan that is a defined
benefit plan, as defined in Section 3(35) of ERISA intended to be qualified
under Section 401 of the Code. The information supplied to the actuary by
the Company or any of its Subsidiaries for use in preparing the most recent
actuarial report for Pension Benefit Plans is complete and accurate in all
material respects.
(k) Neither the Company nor any of its Subsidiaries has incurred any li-
ability under Section 4062 of ERISA to the PBGC or to a trustee appointed
under Section 4042(b) or (c) of ERISA.
PAGE
<PAGE>
(l) Neither the Company, any of its Subsidiaries nor any trade or busi-
ness (whether or not incorporated) under common control within the meaning
of Section 4001(b)(1) of ERISA has withdrawn in a complete or partial with-
drawal from any multiemployer plan, within the meaning of Section 3(37) of
ERISA, which liability has not been fully satisfied.
(m) Any bonding required with respect to the Pension Benefit Plans in
accordance with applicable provisions of ERISA has been obtained and is in
full force and effect.
(n) Except as disclosed in Schedule 4.13, with respect to each of the
Pension Benefit and Welfare Plans, true, correct and complete copies of the
following documents have been made available to Purchaser: (i) the current
plans and related trust documents, including amendments thereto, (ii) any
current summary plan descriptions, (iii) the most recent Forms 5500, finan-
cial statements, and actuarial reports, if applicable and (iv) the most re-
cent Internal Revenue Service determination letter, if applicable.
(o) Neither the Company, any of its Subsidiaries nor any organization to
which the Company is a successor or parent corporation, within the meaning
of Section 4069(b) of ERISA, has engaged in any transaction, within the
meaning of Section 4069(a) of ERISA.
(p) Except as disclosed in Schedule 4.13, none of the Welfare Plans
maintained by the Company or any of its Subsidiaries are retiree life or re-
tiree health insurance plans which provide for continuing benefits or cover-
age for any participant or any beneficiary of a participant following termi-
nation of employment, except as may be required under the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), and at
the expense of the participant or the participant's beneficiary. The Company
and each of its Subsidiaries which maintains a "group health plan" within
the meaning of Section 5000(b)(1) of the Code has complied in all material
respects with the notice and continuation requirements of Section 4980B of
the Code, COBRA, Part 6 of Subtitle B of Title I of ERISA and the regula-
tions thereunder.
(q) No liability under any Pension Benefit or Welfare Plan has been
funded nor had any such obligation been satisfied with the purchase of a
contract from an insurance company as to which the Company or any of its
Subsidiaries has received notice that such insurance company is in rehabili-
tation.
Section 4.14 Insurance. Schedule 4.14 lists all material insurance poli-
cies in force on the date hereof covering the businesses, properties and as-
sets of the Company and its Material Subsidiaries, and all such policies are
currently in effect. True and complete copies of all such policies have been
or will be, prior to Closing, made available to the Purchaser. Except as set
forth on Schedule 4.14, the Company has not received notice of the cancella-
tion of any of such insurance in effect on the date of this Agreement.
Section 4.15 Composition of the Board of Directors. The name of each
director of the Company and its Subsidiaries is set forth on Schedule 4.15.
Except as set forth on Schedule 4.15, there have been no changes in the mem-
bers of the Board of Directors of the Company since the members of the Board
of Directors were elected at the Company's most recent annual stockholders
meeting.
PAGE
<PAGE>
Section 4.16 Title to and Condition of Properties. Except as set forth
in Schedule 4.16, the Company and its Material Subsidiaries have good title
to all of the real property and own outright all of the personal property
(except for leased property or assets) which are reflected in the Balance
Sheet except for (i) property since sold or otherwise disposed of in the or-
dinary course of business and consistent with past practice and (ii) such
property the failure of which to so own will not, individually or in the ag-
gregate, have a Material Adverse Effect ("Material Properties"). No Mate-
rial Property is subject to claims, liens, or encumbrances whether by mort-
gage, pledge, lien, conditional sales agreement, charge or otherwise, except
for those which will not, individually or in the aggregate, have a Material
Adverse Effect. A true and complete list of Material Properties consisting
of real properties owned by the Company is set forth on Schedule 4.16.
Section 4.17 Leases. There has been made available to the Purchaser true
and complete copies of each lease to which the Company or any of its Subsid-
iaries is a party or any of its properties are bound, except for such leases
the loss of which will not, individually or in the aggregate, have a Mate-
rial Adverse Effect. A true and complete list of each such lease is set
forth on Schedule 4.17. All of the leases so listed are valid and subsisting
and in full force and effect with respect to the Company and its Subsidiar-
ies and, to the best of the Company's knowledge, with respect to any other
party thereto.
Section 4.18 Contracts and Commitments. Except as are listed on Schedule
4.18 or attached as an Exhibit to any SEC Document, the Company is not a
party to any existing material contract or commitment, written or oral,
other than such contracts or commitments, the loss, default, breach or vio-
lation of which will not, individually or in the aggregate, have a Material
Adverse Effect. The Company is not a party to any commitment to register the
Shares which commitment will survive the Merger contemplated hereby.
Section 4.19 Employment and Labor Contracts. Neither the Company nor
any of its domestic Subsidiaries is a party to any employment, management,
or consultation contract, with any officer, director or employee which con-
tains an agreement with respect to any change of control other than those
set forth on Schedule 4.19, true and complete copies of which contracts have
been made available to the Purchaser.
Section 4.20 Patents and Trademarks. The Company owns or has the right
to use, all patents, patent applications, trademarks, trademark
applications, trade names, inventions, processes, know-how and trade secrets
except for those the failure of which to own will not, individually or in
the aggregate, have a Material Adverse Effect ("Proprietary Rights"). All
issued patents, trademark registrations and pending patent and trademark ap-
plications of the Proprietary Rights are set forth on Part (a) of Schedule
4.20. No rights or licenses to use Company Proprietary Rights have been
granted by the Company except those as are listed on Part (b) of Schedule
4.20 or those the loss of which will not, individually or in the aggregate,
have a Material Adverse Effect; and no contrary assertion has been made to
the Company or notice of conflict with any asserted right of others has been
given by any person, firm or corporation except as are set forth on Part (c)
of Schedule 4.20 or those the loss of which will not, individually or in the
aggregate, have a Material Adverse Effect. All licenses granted to the Com-
pany are listed on Part (d) of Schedule 4.20. True and complete copies of
all license agreements under which the Company is a licensor or licensee
have been, or will be prior to Closing, made available to the Purchaser ex-
cept for such license agreements the absence of which will not, individually
or in the aggregate, have a Material Adverse Effect.
Section 4.21 Other Agreements. The Company has not entered into any
other agreement relating to the sale of all or substantially all of the as-
sets, business or property of the Company.
Section 4.22 Labor Matters. The Company and each of its subsidiaries is
in compliance in all material respects with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, and neither the Company nor any of its subsidiaries is en-
gaged in any unfair labor practice, except any of which, in either case,
will not, individually or in the aggregate, have a Material Adverse Effect.
There is no labor strike, slowdown or stoppage pending (or, to the best
knowledge of the Company, any labor strike or stoppage threatened) against
or affecting the Company or any of its subsidiaries, except any of which
will not, individually or in the aggregate, have a Material Adverse Effect.
No petition for certification has been filed and is pending before the Na-
tional Labor Relations Board with respect to any employees of the Company or
any of its subsidiaries who are not currently organized, except for any
which, if successful, will not, individually or in the aggregate, have a Ma-
terial Adverse Effect.
Section 4.23 Proxy Statement. None of the information to be supplied by
the Company for inclusion or incorporation by reference in the Proxy State-
ment will, at the time it is mailed to stockholders and at the time of the
Stockholders' Meeting, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances in
which they were made, not misleading. If at any time prior to the Effective
Time any event with respect to the Company shall occur which is required to
be described in the Proxy Statement, such event shall be so described, and
an amendment or supplement shall be promptly filed with the SEC and, as re-
quired by law, disseminated to the stockholders of the Company. The Proxy
Statement will (with respect to the Company) comply as to form in all mate-
rial respects with the provisions of the Exchange Act.
ARTICLE V
COVENANTS
Section 5.01 Conduct of Business of the Company. Except as contemplated
by this Agreement or as expressly agreed to in writing by the Purchaser,
during the period from the date of this Agreement to the Effective Time, the
Company and its Subsidiaries will each conduct its operations according to
its ordinary and usual course of business consistent with past practice, and
the Company and its Subsidiaries will each use all reasonable efforts to
preserve intact its business organization, to keep available the services of
its officers and employees and to maintain satisfactory relationships with
suppliers, distributors, customers and others having business relationships
with it. Without limiting the generality of the foregoing, and except as
otherwise expressly provided in this Agreement, prior to the Effective Time,
neither the Company nor any of its Subsidiaries will, without the prior
written consent of the Purchaser (which consent shall not be unreasonably
withheld):
(a) amend its Certificate of Incorporation or By-Laws;
PAGE
<PAGE>
(b) authorize for issuance, issue, sell, deliver or agree or commit
to issue, sell or deliver any shares of any class of its capital stock
or any securities or other rights convertible or exchangeable into or
exercisable for shares of any class of its capital stock, other than
pursuant to currently outstanding options;
(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock or purchase, redeem or otherwise acquire any shares of its
own capital stock or any of its subsidiaries;
(d) except in the ordinary and usual course of business, consistent
with past practices (i) create, incur, assume, maintain or permit to ex-
ist or prepay any long-term debt or any short-term debt for borrowed
money other than under existing lines of credit; (ii) assume, guarantee,
endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person ex-
cept wholly owned subsidiaries of the Company in the ordinary and usual
course of business, consistent with past practices; or (iii) make any
loans, advances or capital contributions to, or investments in, any
other person;
(e) except in connection with the Company's restructuring plan an-
nounced in October 1993, or as contemplated by this Agreement (including
amendments necessary to comply with Section 2.05) or plans existing on
the date hereof, (i) increase in any manner the compensation of any of
its directors, officers or other employees, except in the ordinary
course of business and in accordance with its customary past practices;
(ii) pay or agree to pay any pension, retirement allowance or other em-
ployee benefit not required, or enter into or agree to enter into any
agreement or arrangement with such director, officer or employee,
whether past or present, relating to any such pension, retirement allow-
ance or other employee benefit, except as required under currently ex-
isting agreements, plans or arrangements or as consistent with past
practice; (iii) grant any severance or termination pay to, or enter into
any employment, change of control, termination, severance, indemnifica-
tion, management, consultation, confidentiality or invention rights,
agreement with any director, officer or other employee of the Company or
its Subsidiaries or to amend any of such agreements in existence on the
date hereof, except on a basis consistent with past practice and other
than indemnification agreements with independent directors of the Com-
pany on a basis consistent with existing indemnification provisions; or
(iv) except in accordance with its customary past practices or as may be
required to comply with applicable law, become obligated (other than
pursuant to any new or renewed collective bargaining agreement) under
any new pension plan, welfare plan, multiemployer plan, employee benefit
plan, benefit arrangement, or similar plan or arrangement, which was not
in existence on the date hereof, including any bonus, incentive,
deferred compensation, stock purchase, stock option, stock appreciation
right, group insurance, severance pay, retirement or other benefit plan,
agreement or arrangement, with or for the benefit of any person, and to
amend any of such plans or any of such agreements in existence on the
date hereof;
(f) except in the ordinary and usual course of business, consistent
with past practices, sell, transfer, lease, license, pledge, mortgage,
or otherwise dispose of, or encumber, or agree to sell, transfer, lease,
license, pledge, mortgage or otherwise dispose of or encumber, any prop-
erties, real, personal or mixed, except such as will not, individually
or in the aggregate, have a Material Adverse Effect;
(g) enter into any other agreements, commitments or contracts, ex-
cept agreements, commitments or contracts as contemplated by Section
5.07 or for the purchase, sale or lease of goods or services in the or-
dinary course of business, consistent with past practice, except such as
will not, individually or in the aggregate, have a Material Adverse Ef-
fect;
(h) authorize, recommend, propose or announce an intention to autho-
rize, recommend or propose, or enter into any agreement in principle or
an agreement with respect to, any plan of liquidation or dissolution
(other than the Merger), any acquisition of a material amount of assets
or securities, any disposition of a material amount of assets or securi-
ties or any material change in its capitalization, or any entry into a
material contract or any amendment or modification of any material con-
tract or any release or relinquishment of any material contract rights
not in the ordinary and usual course of business, except as contemplated
by Section 5.02;
(i) except as previously approved by the Board of Directors of the
Company and as identified to the Purchaser prior to the date hereof or
otherwise consistent with past practice, authorize or commit to make
capital expenditures in an amount in excess of the Company's 1994 budget
for Capital expenditures;
(j) permit any insurance policy naming it as a beneficiary or a loss
payee to be cancelled or terminated, except in the ordinary and usual
course of business;
(k) make any change to its accounting methods, principles or prac-
tices, except as may be required or permitted by generally accepted ac-
counting principles;
(l) maintain the books and records of the Company in a manner not
consistent with past business practices; or
(m) agree to do any of the foregoing.
Section 5.02 No Solicitation. The Company agrees that, prior to the Ef-
fective Time, it shall not, and shall not permit any of its directors, of-
ficers, employees, agents or representatives or those of any of its Subsid-
iaries to, directly or indirectly, solicit, initiate or encourage (including
by way of furnishing non-public information) inquiries or proposals concern-
ing any merger, consolidation or acquisition or purchase of all or any sub-
stantial portion of the assets or capital stock of the Company (an "Acqui-
sition Transaction") or negotiate with any third party (other than
Purchaser or its affiliates) with respect to any Acquisition Transaction;
provided, however, that, notwithstanding any other provision of this Agree-
ment, (i) the Company may engage in discussions or negotiations with a third
party who seeks to initiate such discussions or negotiations and may furnish
such third party information concerning the Company and its business, prop-
erties and assets, (ii) the Company's Board of Directors may take and dis-
close to the Company's stockholders a position contemplated by Rule 14e-2(a)
promulgated under the Exchange Act and (iii) following receipt of a proposal
for an Acquisition Transaction made in accordance with the foregoing clause
(i) the Board of Directors of the Company shall notify the Purchaser of the
terms and conditions of such proposal and, then the Board of Directors of
the Company may withdraw, modify or not make its recommendation or take the
actions referred to in Section 1.04, but in each case referred to in the
foregoing clauses (i) through (iii) only to the extent that the Board of Di-
rectors of the Company shall conclude in good faith on the basis of the ad-
vice of the Company's outside counsel that such action is required by the
Board of Directors' fiduciary obligations under applicable law. The Company
shall immediately advise the Purchaser of any inquiries or proposals it re-
ceives or attempts to negotiate relating to an Acquisition Transaction.
Section 5.03 Access to Information. (a) From the date of this Agreement
until the Effective Time, the Company will give the Purchaser and their au-
thorized representatives (including counsel, environmental and other con-
sultants, accountants and auditors), upon reasonable notice and in a manner
so as to not unduly interfere with the Company's operations, full access
during normal business hours to all facilities, personnel and operations and
to all books and records of the Company and its Subsidiaries, will permit
the Purchaser to make such inspections as they may reasonably require (in-
cluding without limitation any air, water or soil testing or sampling deemed
reasonably necessary by the Purchaser) and will cause its officers and those
of its subsidiaries to furnish the Purchaser with such financial and operat-
ing data and other information with respect to the business and properties
of the Company and its Subsidiaries as the Purchaser may from time to time
reasonably request.
(b) The Purchaser will hold and will cause its consultants and advisors
to hold in strict confidence all documents and information concerning the
Company and its Subsidiaries furnished to the Purchaser in connection with
the transactions contemplated by this Agreement. With respect to any infor-
mation (whether oral or written) conveyed to the Company or its agents by
the Purchaser or its agents, such information shall also be held in strict
confidence.
Section 5.04 Filings; Other Action. (a) Subject to the terms and condi-
tions herein provided, the Company and the Purchaser shall use all reason-
able efforts promptly to take, or cause to be taken, all other actions and
do, or cause to be done, all other things necessary, proper or appropriate
under applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including (i) the filing of No-
tification and Report Forms under the HSR Act with the Federal Trade Commis-
sion (the "FTC") and the Antitrust Division of the Department of Justice
(the "Antitrust Division") and using all of their reasonable efforts to
respond as promptly as practicable to all inquiries received from the FTC or
the Antitrust Division for additional information or documentation and (ii)
the filing with the SEC of the Proxy Statement and using all of their re-
spective reasonable efforts to cause the SEC to clear the Proxy Statement
for delivery to stockholders.
(b) The Company shall take all actions and do, or cause to be done, all
things reasonably requested by the Purchaser to facilitate the consummation
of any offer to purchase made by the Purchaser, at its discretion, for the
10.75% Senior Notes due 2002 of the Company, along with a request for the
consent of the holders thereof to certain amendments to the Indenture dated
as of July 9, 1992 by and between the Company and The Bank of New York, as
Trustee.
(c) The Company shall not settle or compromise any claim with respect to
Dissenting Shares prior to the Effective Time without the prior written con-
sent of the Purchaser.
Section 5.05 Public Announcements. The Purchaser and the Company will
consult with each other before issuing any press release or otherwise making
any public statements with respect to the Merger and shall not issue any
such press release or make any such public statement prior to such consulta-
tion, except as may be required by law or court order, in which case the
parties will make reasonable efforts to consult with each other prior to the
making of such public statement.
Section 5.06 Notification of Certain Matters. The Company shall give
prompt notice to the Purchaser of any notice of, or other communication re-
lating to, a default or event which, with notice or lapse of time or both,
would become a default, received by the Company or any of its Subsidiaries
subsequent to the date of this Agreement and prior to the Effective Time,
under any contract or arrangement except for such a default or event, which,
with notice of lapse of time or both would become a default, which will not,
individually or in the aggregate have a Material Adverse Effect.
Section 5.07 Indemnification and Insurance. (a) The Surviving Corpora-
tion and Purchaser agree that for a period ending not sooner than the sixth
anniversary of the Effective Time the Surviving Corporation will maintain
all rights to indemnification (including with respect to the advancement of
expenses incurred in the defense of any action or suit) existing on the date
of this Agreement in favor of the present and former directors, officers,
employees and agents of the Company and its Subsidiaries and affiliates
("Indemnified Persons") as provided in the Company's Certificate of Incor-
poration and By-Laws or otherwise, in each case in effect on the date of
this Agreement but subject to applicable law, and that, during such period,
the Certificate of Incorporation and By-Laws of the Surviving Corporation
shall not be amended to reduce or limit the rights of indemnity afforded to
the Indemnified Persons, or the ability of the Surviving Corporation to in-
demnify them, subject to applicable law, nor to hinder, delay or make more
difficult the exercise of such rights of indemnity or the ability to indem-
nify.
(b) The Surviving Corporation will indemnify against all losses, dam-
ages, liabilities or claims made against Indemnified Persons arising from
their service as an officer, director, employee or agent prior to and in-
cluding the Effective Time, to the fullest extent as such persons are cur-
rently required to be indemnified pursuant to the Company's Certificate of
Incorporation and By-Laws, subject to applicable law, for a period ending
not sooner than the sixth anniversary of the Effective Time. To the extent
that the Surviving Corporation does not satisfy its obligation to indemnify
the Indemnified Persons pursuant to this Section 5.07, the Purchaser shall
indemnify the Indemnified Persons.
(c) Should any claim or claims be made, on or prior to the sixth anni-
versary of the Effective Time, against any Indemnified Persons, arising from
their services as an officer, director, employee or agent, the provisions of
this Section 5.07 respecting the Certificate of Incorporation and By-Laws
shall continue in effect until the final disposition of all such claims.
(d) The Surviving Corporation shall cause to be maintained in effect for
a period ending not sooner than the sixth anniversary of the Effective Time,
at no expense to the beneficiaries thereof, directors' and officers' liabil-
ity insurance with respect to matters occurring prior to the Effective Time,
providing at least the same coverage with respect to the Company's officers
and directors who are continuing officers and directors as the current poli-
cies maintained by or on behalf of the Company, and containing terms and
conditions which are no less advantageous. In the event any claim is made
against Indemnified Persons that is covered or potentially covered by insur-
ance, the Surviving Corporation and the Purchaser shall do nothing that
would forfeit, jeopardize, restrict or limit the insurance coverage avail-
able for that claim until the final disposition of that claim.
(e) With respect to non-continuing officers and directors, prior to the
Closing, the Company shall purchase (and the Purchaser shall not object to
such purchase) (i) a run-off policy for current directors' and officers' li-
ability insurance maintained by the Company, such policy to become effective
at the Closing and remain in effect for a period of six years after the
Closing, at a premium not to exceed five times the annual premium of the
Company's director's and officer's insurance policy in effect on the date
hereof, and (ii) run-off policies for current fiduciary liability insurance
maintained by the Company for directors, officers and employees of the Com-
pany and its Subsidiaries applicable to employee benefit plans of the Com-
pany and its Subsidiaries, such policies to become effective at the Closing
and remain in effect for a period of six years after the Closing, at a pre-
mium not to exceed five times the annual premium of the Company's director's
and officer's insurance policy in effect on the date hereof.
(f) In the event the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other person and shall not
be the continuing or surviving corporation or entity of such consolidation
or merger or (ii) transfers all or substantially all of its properties and
assets to any person, then and in each such case, proper provisions shall be
made so that the successors and assigns of the Surviving Corporation or the
Purchaser shall assume the obligations of the Surviving Corporation set
forth in this Section 5.07.
(g) The provisions of this Section 5.07 are intended to be for the bene-
fit of, and shall be enforceable by, each Indemnified Person and his or her
heirs and representatives.
Section 5.08 Expenses. The Purchaser, on the one hand, and the Company
shall bear their respective expenses incurred in connection with the contem-
plated sale of the Company, including without limitation the preparation,
execution and performance of this Agreement and the transactions
contemplated hereby, including, without limitation, all fees and expenses of
investment bankers, finders, brokers, agents, representatives, counsel and
accountants.
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS OF
THE PURCHASER AND THE COMPANY
The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Closing of each of the follow-
ing conditions:
Section 6.01 Stockholder Approval. This Agreement shall have been
adopted by the affirmative vote of the holders of at least a majority of the
Shares at the Stockholders' Meeting, or by written consent in lieu thereof.
Section 6.02 Hart-Scott-Rodino. All necessary waiting periods under the
HSR Act shall have expired or been terminated.
PAGE
<PAGE>
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF
THE PURCHASER
The obligation of the Purchaser to effect the Merger and to perform
their other obligations to be performed at or subsequent to the Closing
shall be subject to the fulfillment at or prior to the Closing of the fol-
lowing additional conditions, any one or more of which may be waived by the
Purchaser:
Section 7.01 Representations and Warranties True. The representations
and warranties of the Company contained herein shall be true and correct in
all material respects on the date of this Agreement and at and on the Clos-
ing Date as though such representations and warranties were made at and on
such date, except for changes permitted or contemplated by this Agreement.
Section 7.02 Performance. The Company shall have performed and complied
in all material respects with all agreements, obligations and conditions re-
quired by this Agreement to be performed or complied with by it on or prior
to the Closing Date.
Section 7.03 Certificates. The Company shall furnish such certificates
of its officers to evidence compliance with the conditions set forth in Sec-
tions 7.01 and 7.02 as may be reasonably requested by the Purchaser.
Section 7.04 Certain Proceedings. No writ, order, decree or injunction
of a court of competent jurisdiction or governmental entity shall have been
entered against the Purchaser or the Company which prohibit or restrict the
consummation of the Merger or would otherwise restrict Purchaser's exercise
of full rights to own and operate the Company.
Section 7.05 Opinion of Counsel. The Purchaser shall have received the
opinion of James Eastham, Esq., Associate General Counsel of the Company and
/or Dewey Ballantine, special counsel to the Company, in form and substance
reasonably satisfactory to the Purchaser.
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
The obligations of the Company under this Agreement to effect the Merger
shall be subject to the fulfillment on or before the Closing Date of each of
the following additional conditions, any one or more of which may be waived
by the Company:
Section 8.01 Representations and Warranties True. The representations
and warranties of the Purchaser contained herein shall be true and correct
in all material respects on the date of this Agreement and at and on the
Closing Date as though such representations and warranties were made at and
on such date, except for changes permitted or contemplated by this Agree-
ment.
Section 8.02 Performance. The Purchaser shall have performed and com-
plied in all material respects with all agreements, obligations and condi-
tions required by this Agreement to be performed or complied with by it on
or prior to the Closing Date.
PAGE
<PAGE>
Section 8.03 Certificates. The Purchaser shall furnish such certificates
of its officers to evidence compliance with the conditions set forth in Sec-
tions 8.01 and 8.02 as may be reasonably requested by the Company.
Section 8.04 Certain Proceedings. No writ, order, decree or injunction
of a court of competent jurisdiction or governmental entity shall have been
entered against the Parent, the Purchaser or the Company which prohibit or
restrict the consummation of the Merger, and any waiting period applicable
to the consummation of the Merger under the HSR Act shall have expired or
been terminated.
Section 8.05 Opinion of Counsel. The Company shall have received the
opinion of Cahill Gordon & Reindel, counsel to the Purchaser, in form and
substance reasonably satisfactory to the Company.
Section 8.06 Purchaser Undertaking. Purchaser shall take all action nec-
essary (to the reasonable satisfaction of the Company) to cause the Surviv-
ing Corporation to be obligated under the Agreement disclosed in Schedule
8.06.
ARTICLE IX
CLOSING
Section 9.01 Time and Place. Subject to the provisions of Articles VI,
VII, VIII and X, the closing of the Merger (the "Closing") shall take
place at the offices of Cahill Gordon & Reindel, 80 Pine Street, New York,
New York, as soon as practicable but in no event later than 9:30 A.M., local
time, on the second business day after the later to occur of:
(a) the day the Merger is approved and adopted by a majority of the
stockholders of the Company pursuant to Section 5.04; or
(b) the date on which each of the conditions set forth in Articles
VI, VII and VIII have been satisfied or waived by the party or parties
entitled to the benefit of such conditions; or at such other place, at
such other time, or on such other date as the Purchaser and the Company
may mutually agree. The date on which the Closing actually occurs is
herein referred to as the "Closing Date."
Section 9.02 Filings at the Closing. Subject to the provisions of Arti-
cles VI, VII, VIII and X hereof, the Purchaser and the Company shall file at
the Closing the Certificate of Merger and shall cause the Certificate of
Merger to be recorded in accordance with the applicable provisions of the
DGCL and shall take any and all other lawful actions and do any and all
other lawful things necessary to cause the Merger to become effective.
ARTICLE X
TERMINATION AND ABANDONMENT
Section 10.01 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval by the stock-
holders of the Company:
(a) by mutual consent of the Boards of Directors of the Purchaser
and the Company;
PAGE
<PAGE>
(b) by either the Purchaser or the Company if, without fault of such
terminating party, the Merger shall not have been consummated on or be-
fore March 31, 1994, which date may be extended by mutual consent of the
parties hereto;
(c) by either the Purchaser or the Company, if any court of compe-
tent jurisdiction in the United States or other governmental body in the
United States shall have issued an order (other than a temporary
restraining order), decree or ruling or taken any other action restrain-
ing, enjoining or otherwise prohibiting the Merger, and such order, de-
cree, ruling or other action shall have become final and nonappealable;
or
(d) by either the Purchaser or the Company, if the stockholders of
the Company fail to duly adopt and approve this Agreement by the affir-
mative vote contemplated by Section 6.01.
Section 10.02 Termination by the Purchaser. This Agreement may be termi-
nated and the Merger may be abandoned by action of the Board of Directors of
the Purchaser, at any time prior to the Effective Time, before or after the
approval by holders of Shares, if the conditions to the obligations of the
Purchaser hereunder are not capable of satisfaction prior to the Closing.
Section 10.03 Termination by the Company. This Agreement may be termi-
nated and the Merger may be abandoned at any time prior to the Effective
Time, before or after the approval by holders of Shares, by action of the
Board of the Directors of the Company, if (i) the conditions to the obliga-
tions of the Company hereunder are not capable of being satisfied prior to
the Closing, or (ii) the Board of Directors determines in good faith that
its fiduciary duties requires it to approve an Acquisition Transaction pur-
suant to Section 5.02.
Section 10.04 Procedure for Termination. In the event of termination and
abandonment of the Merger by the Parent, the Purchaser or the Company pursu-
ant to this Article X, written notice thereof shall forthwith be given to
the other.
Section 10.05 Effect of Termination and Abandonment. In the event of
termination of this Agreement and abandonment of the Merger pursuant to this
Article X, no party hereto (or any of its directors or officers) shall have
any liability or further obligation to any other party to this Agreement,
except that nothing herein shall relieve any party from liability for any
breach of this Agreement.
ARTICLE XI
MISCELLANEOUS
Section 11.01 Nonsurvival of Representations, Etc. None of the repre-
sentations, warranties, covenants and agreements in this Agreement (or the
Schedules hereto) or in any instrument delivered pursuant to this Agreement
shall survive the Effective Time or the termination of this Agreement pursu-
ant to Article X, as the case may be, except that the agreements contained
in Section 1.07, Article II and Sections 5.07 and 5.08 shall survive the Ef-
fective Time and the agreements contained in Sections 10.05, 11.06, 11.08,
11.10 and 11.11 shall survive any termination.
PAGE
<PAGE>
Section 11.02 Amendment and Modification. Subject to applicable law,
this Agreement may be amended, modified or supplemented only by written
agreement of the Purchaser and the Special Committee of the Board of Direc-
tors of the Company at any time prior to the Effective Time with respect to
any of the terms contained herein; provided, however, that, after this
Agreement is adopted by the stockholders pursuant to Section 1.04, no such
amendment or modification shall reduce the amount or change the form of the
consideration to be delivered to the Stockholders.
Section 11.03 Waiver of Compliance; Consents. Any failure of the Pur-
chaser or the Company to comply with any obligation, covenant, agreement or
condition herein may be waived by the Company or the Purchaser,
respectively, only by a written instrument signed by the party granting such
waiver, but such waiver or failure to insist upon strict compliance with
such obligation, covenant, agreement or condition shall not operate as a
waiver of, or estoppel with respect to, any subsequent or other failure.
Whenever this Agreement requires or permits consent by or on behalf of any
party hereto, such consent shall be given in writing in a manner consistent
with the requirements for a waiver of compliance as set forth in this Sec-
tion 11.03.
Section 11.04 Investigations. The respective representations and warran-
ties of the Purchaser and the Company contained herein or in any certifi-
cates or other documents delivered prior to or at the Closing shall not be
deemed waived or otherwise affected by any investigation made by any party
hereto.
Section 11.05 Reasonable Efforts. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use all reasonable ef-
forts to take, or cause to be taken, all action, and to do, or cause to be
done, all things necessary, proper and advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
by this Agreement. If a constituent corporation has been substituted pursu-
ant to Section 1.01(c), the Purchaser shall cause such substituted corpora-
tion to perform all of its obligations under this Agreement and shall not
take any action which would cause the Company to fail to perform its obliga-
tions hereunder.
Section 11.06 Notices. All notices and other communications hereunder
shall be in writing and shall be delivered personally or mailed by regis-
tered or certified mail (return receipt requested), first class postage pre-
paid, or telecopied with confirmation of receipt, to the parties at the ad-
dresses specified below (or at such other address for a party as shall be
specified by like notice; provided that notices of a change of address shall
be effective only upon receipt thereof). Any such notice shall be effective
upon receipt, if personally delivered or telecopied, or three days after
mailing, if deposited in the U.S. mail, first class postage prepaid.
(a) if to the Company, to
Rexnord Corporation
4701 West Greenfield Avenue
Milwaukee, WI 53214-5300
Attention: James Eastham, Associate General Counsel
<PAGE>
with copies to
Dewey Ballantine
1301 Avenue of the Americas
New York, New York 10019-6092
Telecopy: 212-259-6333
Attention:
Morton A. Pierce, Esq.
Douglas L. Getter, Esq.
(b) if to the Purchaser, to
BTR Dunlop Holdings, Inc.
c/o BTR plc
Silvertown House
Vincent Square
London, England SW1P 2PL
Telecopy: (071) 630-1014
Attention: Stanley K. Williams,
Group Commercial Attorney
with a copy to
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Telecopy: (212) 269-5420
Attention: W. Leslie Duffy, Esq.
Section 11.07 Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns, but neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto without the prior written consent of
the other parties, nor is this Agreement intended to confer any rights or
remedies hereunder upon any other person except the parties hereto and, with
respect to Section 5.07, the officers, directors and employees of the Com-
pany and any constituent corporation substituted pursuant to Section
1.01(c).
Section 11.08 Governing Law. This Agreement shall be governed by the
laws of the State of Delaware (regardless of the laws that might otherwise
govern under applicable Delaware principles of conflicts of law) as to all
matters, including but not limited to matters of validity, construction, ef-
fect, performance and remedies.
Section 11.09 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Section 11.10 Severability. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in
any respect against a party hereto, the validity, legality and enforceabil-
ity of the remaining provisions contained herein shall not in any way be af-
fected or impaired thereby and such invalidity, illegality or unenforceabil-
ity shall only apply as to such party in the specific jurisdiction where
such judgment shall be made.
Section 11.11 Interpretation. The article and section headings contained
in this Agreement are solely for the purpose of reference, are not part of
the agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement. As used in this Agreement, (i) the term
"person" shall mean and include an individual, a partnership, a joint ven-
ture, a corporation, a trust, an unincorporated organization and a govern-
ment or any department or agency thereof; (ii) the term "Subsidiary" of
any specified corporation shall mean any person of which a majority of the
outstanding securities or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other governing body,
or, if there are no such voting interests, a majority of the equity inter-
ests, are directly or indirectly owned by such specified corporation, (iii)
the term "Material Subsidiary" shall mean each of the entities listed un-
der such heading in Schedule 4.01(b) and (iv) the phrase "to the best
knowledge of the Company" or phrases of similar import means the actual
knowledge of the officers of the Company.
Section 11.12 Entire Agreement. This Agreement, including the exhibits
hereto and the documents and instruments referred to herein, embodies the
entire agreement and understanding of the parties hereto in respect of the
subject matter contained herein and supersedes all prior agreements and the
understandings between the parties with respect to such subject matter.
There are no representations, promises, warranties, covenants, or undertak-
ings, other than those expressly set forth or referred to herein and
therein.
Section 11.13 Schedules. For purposes of this Agreement, Schedules shall
mean the Schedules contained in the Confidential Disclosure Schedule, dated
the date hereof, delivered in connection with this Agreement and initialed
by the parties hereto.
IN WITNESS WHEREOF, the Purchaser and the Company have caused this
Agreement to be signed by their respective duly authorized officers as of
the date first above written.
REXNORD CORPORATION
By: /s/ James R. Swenson
---------------------
Name: James R. Swenson
Title: President and Chief
Executive Officer
BTR DUNLOP HOLDINGS, INC.
By: /s/ Stanley K. Williams
-----------------------
Name: Stanley K. Williams, Esq.
Title: Attorney-in-fact
PAGE
<PAGE>
Annex B
Appraisal Rights
PAGE
<PAGE>
APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of
this section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing pursu-
ant to (Section) 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by
those words and also membership or membership interest of a member of a
nonstock corporation.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (Sections) 251, 252, 254, 257, 258, 263 or 264 of this
title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock which, at the
record date fixed to determine the stockholders entitled to receive notice
of and to vote at the meeting of stockholders to act upon the agreement of
merger or consolidation, were either (i) listed on a national securities ex-
change or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc. or
(ii) held of record by more than 2,000 stockholders; and further provided
that no appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require for
its approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of (Section) 251 of this title.
(2) Notwithstanding paragraph (l) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to (Sections) 251,
252, 254, 257, 258, 263 and 264 of this title to accept for such stock any-
thing except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation;
b. Shares of stock of any other corporation which at the effective date
of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system secu-
rity on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000
stockholders;
c. Cash in lieu of fractional shares of the corporations described in
the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock and cash in lieu of fractional
shares described in the foregoing subparagraphs a., b. and c. of this
paragraph.
PAGE
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (Section) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the as-
sets of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in sub-
sections (d) and (e) of this section, shall apply as nearly as is practica-
ble.
(d) Appraisal rights shall be perfected as follows:
(1) If proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are avail-
able for any or all of the shares of the constituent corporations, and shall
include in such notice a copy of this section. Each stockholder electing to
demand the appraisal of his shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of his shares. Such demand will be sufficient if it reasonably in-
forms the corporation of the identity of the stockholder and that the stock-
holder intends thereby to demand the appraisal of his shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand.
A stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or con-
solidation of the date that the merger or consolidation has become effec-
tive; or
(2) If the merger or consolidation was approved pursuant to (Section) 228 or
(Section) 253 of this title, the surviving or resulting corporation, either
before the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal rights
of the effective date of the merger or consolidation and that appraisal rights
are available for any or all of the shares of the constituent corporation,
and shall include in such notice a copy of this section. The notice shall be
sent by certified or registered mail, return receipt requested, addressed to
the stockholder at his address as it appears on the records of the corpora-
tion. Any stockholder entitled to appraisal rights may, within 20 days after
the date of the mailing of the notice, demand in writing from the surviving
or resulting corporation the appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal
of his shares.
(e) Within 120 days after the effective date of the merger or consolida-
tion, the surviving or resulting corporation or any stockholder who has com-
plied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders. Notwith-
standing the foregoing, at any time within 60 days after the effective date
of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the require-
ments of subsections (a) and (d) hereof, upon written request, shall be en-
titled to receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate number of
shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the stock-
holder within 10 days after his written request for such a statement is re-
ceived by the surviving or resulting corporation or within 10 days after the
expiration of the period for delivery of demands for appraisal under subsec-
tion (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the Reg-
ister in Chancery in which the petition was filed a duly verified list con-
taining the names and addresses of all stockholders who have demanded pay-
ment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified mail
to the surviving or resulting corporation and to the stockholders shown on
the list at the addresses therein stated. Such notice shall also be given by
1 or more publications at least 1 week before the day of the hearing, in a
newspaper of general circulation published in the City of Wilmington, Dela-
ware or such publication as the Court deems advisable. The forms of the no-
tices by mail and by publication shall be approved by the Court, and the
costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become enti-
tled to appraisal rights. The Court may require the stockholders who have
demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chan-
cery for notation thereon of the pendency of the appraisal proceedings; and
if any stockholder fails to comply with such direction, the Court may dis-
miss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant factors. In de-
termining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by
any stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings
and may proceed to trial upon the appraisal prior to the final determination
of the stockholder entitled to an appraisal. Any stockholder whose name ap-
pears on the list filed by the surviving or resulting corporation pursuant
to subsection (f) of this section and who has submitted his certificates of
stock to the Register in Chancery, if such is required, may participate
fully in all proceedings until it is finally determined that he is not enti-
tled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as
the Court may direct. Payment shall be so made to each such stockholder, in
the case of holders of uncertificated stock forthwith, and the case of hold-
ers of shares represented by certificates upon the surrender to the corpora-
tion of the certificates representing such stock. The Court's decree may be
enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of
any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon ap-
plication of a stockholder, the Court may order all or a portion of the ex-
penses incurred by any stockholder in connection with the appraisal proceed-
ing, including, without limitation, reasonable attorney's fees and the fees
and expenses of experts, to be charged pro rata against the value of all the
shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or
to receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); pro-
vided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or consolida-
tion, either within 60 days after the effective date of the merger or con-
solidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder
to an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they as-
sented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
PAGE
<PAGE>
ANNEX C
OPINION OF DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PAGE
<PAGE>
[LETTERHEAD]
December 2, 1993
Committee of Independent Directors
Rexnord Corporation
4701 West Greenfield Avenue
Milwaukee, Wisconsin 53214
Dear Sirs:
You have requested our opinion as to the fairness from a financial point
of view to the shareholders of Rexnord Corporation (the "Company") other
than shareholders who are affiliates of the Company (the "Public Sharehold-
ers") of the consideration to be received by such Public Shareholders pur-
suant to the terms of the Agreement and Plan of Merger dated as of December
1, 1993, between BTR Dunlop Holdings, Inc., a Delaware corporation ("BTR")
and the Company (the "Agreement").
Pursuant to the Agreement, each share of common stock of the Company
will be converted into the right to receive in cash, the greater of (i)
$22.50 or (ii) the highest price per share paid by BTR or any affiliate
thereof to purchase shares from any affiliate of the Company at or prior the
Effective Time (as defined in the Agreement).
In arriving at our opinion, we have reviewed the Agreement. We have also
reviewed the financial and other information that was publicly available or
furnished to us by the Company including information provided during discus-
sions with the management of the Company. Included in the information pro-
vided during discussions with the Company's management was certain financial
projections of the Company for the fiscal years ending June 30, 1994 to June
30, 1998 prepared by the management of the Company. In addition, we have
compared certain financial and securities data of the Company with that of
various other companies whose securities are traded in public markets, re-
viewed the historical stock prices and trading volumes of the common stock
of the Company, reviewed prices and premiums paid in other business combina-
tions and conducted such other financial studies, analyses and investiga-
tions as we deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed, without inde-
pendent verification, the accuracy, completeness and fairness of all of the
financial and other information that was available to us from public
sources, that was provided to us by the Company, its management or its repre-
sentatives, or that was otherwise reviewed by us. With respect to the finan-
cial projections supplied to us by the management of the Company, we have
assumed that they have been reasonably prepared on the basis reflecting the
best currently available estimates and judgments of the management of the
Company as to the future operating and financial performance of the Company.
PAGE
<PAGE>
Committee of Independent Directors
Rexnord Corporation
December 2, 1993
We did not make any independent evaluation of the Company's assets or lia-
bilities and we relied, without independent verification, on the accuracy of
all information reviewed by us.
Our opinion is necessarily based on economic, market, financial and
other conditions as they exist on, and on the information made available to
us as of, the date of this letter. It should be understood that, although
subsequent developments may affect this opinion, we do not have any obliga-
tion to update, revise or reaffirm this opinion. Our opinion does not con-
stitute a recommendation to any shareholder as to how such shareholder
should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part
of its investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions, underwrit-
ings, sales and distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. DLJ has
performed investment banking and other services for the Company in the past,
including lead-managing an initial public offering of common stock and co-
managing a public offering of debt for the Company in July 1992, and has
been compensated for such services.
Based upon the foregoing and such other factors as we deem relevant, we
are of the opinion that the consideration to be received by the Public
Shareholders of the Company pursuant to the Agreement is fair to such Public
Shareholders from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ Joel J. Cohen
__________________
Joel J. Cohen
Managing Director
<PAGE>
<PAGE>
REXNORD CORPORATION COMMON
PROXY CARD SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS
JANUARY 27, 1994
The undersigned hereby appoints as proxies for the undersigned James R.
Swenson and Thomas J. Jansen, or each one of them, with full power of substi-
tution in each, to vote all of the Common Stock of the undersigned of Rex-
nord Corporation (the "Company") entitled to vote at the Special Meeting
of Stockholders of the Company, to be held at The Pfister Hotel, 424
East Wisconsin Avenue, Milwaukee, Wisconsin, on Thursday, January 27, 1994, at
10:00 A.M., local time, or at any adjournment or adjournments thereof, upon
a single proposal to approve and adopt an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of December 1, 1993, between the Company and
BTR Dunlop Holdings, Inc., a Delaware corporation ("BTR Holdings"), pursu-
ant to which, among other things, (i) BTR Holdings or, at the discretion of
BTR Holdings, a subsidiary thereof, will be merged with and into the Com-
pany, with the Company being the surviving corporation (the "Merger") and
(ii) each outstanding share of Common Stock of the Company (other than
shares of Common Stock owned by BTR Holdings or the Company or any affiliate
thereof and other than shares of Common Stock held by the Company as trea-
sury stock immediately prior to the Effective Time (as defined in the Merger
Agreement), which shares will be cancelled, and other than shares of Common
Stock held by stockholders, if any, who properly exercised their dissenters'
rights under Delaware law) will be cancelled and converted into the right to
receive in cash the greater of (a) $22.50 or (b) the highest price paid by
BTR Holdings (or any affiliate thereof) to purchase shares of Common Stock
from any affiliate of the Company at or prior to the Effective Time.
(continued and to be signed and dated on the reverse side)
PAGE
<PAGE>
COMMON
Please mark your vote as in this example /X/
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR THE PROPOSAL.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
FOR AGAINST ABSTAIN
1. Approval and adoption of the merger / / / / / /
agreement
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment or
adjournments thereof.
Date: , 1994
____________________________
(Signature of Stockholder)
----------------------------
(Signature of
Stockholder - if held jointly)
Signature(s): Please sign name(s) as
printed hereon. When shares are held
by joint tenants, both should sign.
When signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full cor-
porate name by president or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
