<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1997
REGISTRATION NO. 333-34391
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GLASSTECH, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3567 13-3440225
(State or Other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Code Identification No.)
Number)
</TABLE>
------------------------
AMPOINT INDUSTRIAL PARK
995 FOURTH STREET
PERRYSBURG, OHIO 43551
(419) 661-9500
(Address, including ZIP code, and telephone number, including area code,
of Registrant's principal executive offices)
KENNETH H. WETMORE, ESQ.
GENERAL COUNSEL
GLASSTECH, INC.
AMPOINT INDUSTRIAL PARK
995 FOURTH STREET
PERRYSBURG, OHIO 43551
(419) 661-9500
(Name, address, including ZIP code, and telephone number,
including area code, of agent for service)
With a copy to
R. STEVEN KESTNER, ESQ.
BAKER & HOSTETLER LLP
3200 NATIONAL CITY CENTER
1900 EAST NINTH STREET
CLEVELAND, OHIO 44114
(216) 621-0200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of the Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 8, 1997
PROSPECTUS
(GLASSTECH LOGO) GLASSTECH, INC.
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF ITS
SERIES B 12 3/4% SENIOR NOTES DUE 2004
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR
EACH $1,000 IN PRINCIPAL AMOUNT OF ITS OUTSTANDING
12 3/4% SENIOR NOTES DUE 2004, OF WHICH
$70,000,000 PRINCIPAL AMOUNT IS OUTSTANDING
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1997, UNLESS EXTENDED.
------------------------
Glasstech, Inc., a Delaware corporation (the "Company"), hereby offers (the
"Exchange Offer"), upon the terms and conditions set forth in this Prospectus
(the "Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange $1,000 principal amount of its Series B 12 3/4%
Senior Notes due 2004 (the "New Notes"), registered under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to a Registration Statement of
which this Prospectus is a part, for each $1,000 principal amount of its
outstanding 12 3/4% Senior Notes due 2004 (the "Old Notes"), of which
$70,000,000 principal amount is outstanding. The form and terms of the New Notes
are the same as the form and terms of the Old Notes (which they replace), except
that the New Notes will bear a Series B designation and will have been
registered under the Securities Act and, therefore, will not bear legends
restricting their transfer and will not contain certain provisions relating to
an increase in the interest rate which were included in the terms of the Old
Notes in certain circumstances relating to the timing of the Exchange Offer. The
New Notes will evidence the same debt as the Old Notes (which they replace) and
will be issued under and be entitled to the benefits of the Indenture, dated as
of July 2, 1997 between Glasstech Sub Co., a Delaware corporation ("Sub Co."),
and United States Trust Company of New York, as trustee (the "Trustee"), as
supplemented by the Supplemental Indenture, dated July 2, 1997 between the
Company and the Trustee (collectively, the "Indenture"). The Old Notes and the
New Notes are sometimes referred to herein collectively as the "Notes." See "The
Exchange Offer" and "Description of the Notes."
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time on , 1997,
unless extended by the Company in its sole discretion (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m. on the
Expiration Date. The Exchange Offer is subject to certain customary conditions.
(Continued on next page)
------------------------
SEE "RISK FACTORS" ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PURCHASERS OF THE NEW NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1997.
<PAGE> 3
(Continued from cover)
Interest on the New Notes will be payable in cash semi-annually on each
January 1 and July 1, commencing January 1, 1998. The Notes are redeemable at
the option of the Company, in whole or in part, at any time on or after July 1,
2002, at the redemption prices set forth herein, plus accrued and unpaid
interest to the date of redemption. In addition, the Company, at its option, may
redeem in the aggregate up to $17.5 million, or 25%, of the original principal
amount of the Notes at any time and from time to time prior to July 1, 2000 at
112.75% of the aggregate principal amount so redeemed, plus accrued and unpaid
interest to the redemption date, with the Net Proceeds (as defined herein) of
one or more Qualified Equity Offerings (as defined herein) of the Company or
Glasstech Holding Co., a Delaware corporation and sole stockholder of the
Company ("Holding") to the extent such proceeds were contributed to the Company
as common equity, provided that at least $52.5 million of the principal amount
of the Notes originally issued remain outstanding immediately after the
occurrence of any such redemption and that any such redemption occurs within 90
days following the closing of any such Qualified Equity Offering. See
"Description of the Notes -- Optional Redemption."
Upon a Change of Control (as defined herein), each holder of the Notes will
be entitled to require the Company to repurchase such holder's Notes at 101% of
the principal amount thereof plus accrued and unpaid interest to the repurchase
date. The Revolving Credit Facility (as defined herein), which was entered into
in connection with the Transactions (as defined herein), restricts the Company's
ability to repurchase any Notes pursuant to a Change of Control Offer (as
defined herein) unless, in connection with such Change of Control Offer, the
Company pays the obligations in full under or in respect of the Revolving Credit
Facility or obtains the requisite consents under the Revolving Credit Facility.
There can be no assurance that if a Change of Control Offer were to occur, the
Company would have sufficient assets to satisfy its obligations in respect of
the Revolving Credit Facility and then to repurchase all the Notes. See
"Description of the Notes -- Change of Control Offer." In addition, the Company
is obligated in certain instances to make an offer to repurchase the Notes at a
purchase price in cash equal to 100% of the principal amount thereof plus
accrued and unpaid interest to the date of repurchase with the net cash proceeds
of certain asset sales. See "Description of the Notes -- Certain
Covenants -- Limitation on Certain Asset Sales."
The New Notes will be general senior unsecured obligations of the Company,
ranking pari passu in right of payment with all other existing and future senior
indebtedness of the Company and senior in right of payment to any subordinated
indebtedness of the Company. The New Notes will be effectively subordinated in
right of payment to all secured indebtedness of the Company, including
indebtedness under the Revolving Credit Facility. Upon completion of the Initial
Offering (as defined herein), the Company had $10.0 million available under the
Revolving Credit Facility and no senior indebtedness outstanding, including
indebtedness under the Revolving Credit Facility, other than the Old Notes. On a
pro forma basis as of June 30, 1997, after giving effect to the Transactions,
which includes the issuance of the Old Notes, the Company would be unable to
borrow any additional senior indebtedness under the terms of the Indenture other
than Permitted Indebtedness (as defined herein), which includes the Revolving
Credit Facility. See "Risk Factors -- High Level of Indebtedness and Leverage,"
"Use of Proceeds" and "Capitalization."
The Old Notes were sold on July 2, 1997 (the "Issue Date") to CIBC Wood
Gundy Securities Corp. (the "Initial Purchaser") in a transaction not registered
under the Securities Act in reliance upon an exemption under the Securities Act
as part of a sale of 70,000 units (the "Units"), consisting of the sale of the
Old Notes by Sub Co., an acquisition vehicle used by Holding to acquire the
Company pursuant to a merger, in an aggregate principal amount of $70.0 million
and the sale of 70,000 warrants (the "Warrants") by Holding, then the sole
stockholder of Sub Co., to purchase 877.21 shares of Class A Common Stock (as
defined herein) of Holding. These transactions are collectively hereinafter
referred to as the "Initial Offering." The Initial Purchaser subsequently placed
the Units with qualified institutional buyers in reliance upon Rule 144A under
the Securities Act. The Warrants were immediately detachable from the Old Notes.
Accordingly, the Units, Warrants and Old Notes may not be reoffered, resold or
otherwise transferred in the United States unless registered under the
Securities Act or unless an applicable exemption from the registration
requirements of the Securities Act is available. The New Notes are being offered
hereunder solely in exchange for the Old Notes in order to satisfy the
obligations of the Company under the Registration Rights
ii
<PAGE> 4
Agreement (as defined herein) entered into by the Company in connection with the
Initial Offering. Neither the Company nor Holding has any obligation under to
Registration Rights Agreement or any other agreement to exchange the Warrants or
register the Warrants under the Securities Act. See "The Exchange Offer."
Based upon no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by any holder thereof (other than any such
holder that is an affiliate of the Company within the meaning of Rule 405 under
the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's business and such holder has no
arrangement or understanding with any person to participate in the distribution
of such New Notes. See "The Exchange Offer -- Resale of the New Notes." Each
broker-dealer (a "Participating Broker-Dealer") that receives New Notes for its
own account pursuant to the Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such Participating Broker-Dealer
as a result of market-making activities or other trading activities. The Company
has agreed that, for a period of 180 days after the Expiration Date, it will
make this Prospectus available to any participating Broker-Dealer for use in
connection with any such resale. See "Plan of Distribution."
Holders of Old Notes not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. The Company
will pay all the expenses incurred by it incident to the Exchange Offer. See
"The Exchange Offer."
There has not previously been any public market for the Old Notes or the
New Notes. The Company does not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. There can be no assurance that an active market for the New Notes will
develop. See "Risk Factors -- Absence of a Public Market." Moreover, to the
extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Old Notes could be
adversely affected.
The New Notes will be available initially only in book-entry form and the
Company expects that the New Notes issued pursuant to the Exchange Offer will be
issued in the form of a Global Note (as defined herein), which will be deposited
with, or on behalf of, The Depository Trust Company ("DTC") and registered in
its name or in the name of Cede & Co., its nominee. Beneficial interests in the
Global Note representing the New Notes will be shown on, and transfers thereof
will be effected through, records maintained by DTC and its participants. After
the initial issuance of the Global Note, New Notes in certificated form will be
issued in exchange for the Global Note only under the limited circumstances set
forth in the Indenture. See "Description of the Notes -- Book-Entry, Delivery
and Form."
There will be no cash proceeds payable to the Company from the issuance of
the New Notes pursuant to the Exchange Offer and no underwriter is being used in
connection with the Exchange Offer. Initially, the Old Notes were issued by Sub
Co., a corporation formed for the sole purpose of effecting the acquisition of
the Company by the Key Equity Group (as defined herein). The net proceeds from
the Initial Offering, together with an equity contribution of $15.0 million to
Sub Co. by Holding, a corporation wholly-owned by the Key Equity Group, were
used by Sub Co. to acquire all the outstanding capital stock of the Company. The
acquisition was effected pursuant to the terms of a merger agreement among
Holding, Sub Co. and the Company, as amended (the "Merger Agreement"). On July
2, 1997 the Initial Offering was consummated and Sub Co. was merged with and
into the Company, with the Company becoming the surviving corporation and
obligor on the Old Notes.
iii
<PAGE> 5
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement," which definition shall
encompass all amendments, exhibits, annexes and schedules thereto) pursuant to
the Securities Act, and the rules and regulations promulgated thereunder,
covering the New Notes being offered hereby. This Prospectus does not contain
all the information set forth in the Exchange Offer Registration Statement. For
further information with respect to the Company and the Exchange Offer,
reference is made to the Exchange Offer Registration Statement. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Exchange Offer
Registration Statement, reference is made to the exhibit for a more complete
description of the document or matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Exchange Offer
Registration Statement, including the exhibits thereto, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at the Regional Offices of
the Commission at 7 World Trade Center, 13th Floor, New York, New York 10048 and
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of such
site is http://www.sec.gov.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, the Company will become subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith will be required to file periodic reports and
other information with the Commission. The obligation of the Company to file
periodic reports and other information with the Commission will be suspended if
the Notes are held of record by fewer than 300 holders as of the beginning of
any fiscal year of the Company other than the fiscal year in which the Exchange
Offer Registration Statement is declared effective. The Company has agreed that,
whether or not it is required to do so by the rules and regulations of the
Commission, for so long as any of the Notes remain outstanding, it will furnish
to the holders of the Notes and file with the Commission (unless the Commission
will not accept such a filing) (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
forms, including for each a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual information
only, a report thereon by the Company's independent auditors and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports.
FORWARD-LOOKING STATEMENTS
This Prospectus contains and incorporates by reference certain statements
that are "forward-looking statements." Those statements include, among other
things, the discussions of the Company's business strategy and expectations
concerning the Company's market position, future operations, margins,
profitability, liquidity and capital resources. Investors are cautioned that
reliance on any forward-looking statement involves risks and uncertainties, and
that although the Company believes that the assumptions on which the
forward-looking statements contained herein are reasonable, any of those
assumptions could prove to be inaccurate, and as a result, the forward-looking
statements based on those assumptions also could be incorrect. The uncertainties
in this regard include, but are not limited to, those identified in the risk
factors discussed herein. See "Risk Factors." In light of these and other
uncertainties, the inclusion of a forward-looking statement herein should not be
regarded as a representation by the Company that the Company's plans and
objectives will be achieved.
iv
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[Page intentionally left blank]
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. As used in this Prospectus, the
"Company" or "Glasstech" refers to Glasstech, Inc. and its subsidiaries,
"Holding" refers to Glasstech Holding Co. and "Sub Co." refers to Glasstech Sub
Co., unless the context otherwise requires.
THE COMPANY
The Company is a market and technological leader in the design and assembly
of state-of-the-art glass bending and tempering (i.e., strengthening) systems
used by glass manufacturers and processors in the conversion of flat glass into
safety glass. The Company sells its systems worldwide, primarily to automotive
glass manufacturers and processors (the "Automotive Market"), and also to
architectural glass manufacturers and processors (the "Architectural Market").
The Company's systems are designed to meet customers' safety glass production
requirements for complexity, accuracy and optical quality while simultaneously
enhancing system productivity, flexibility and cost efficiency. For the
Automotive Market, the Company has developed bending and tempering systems that
meet automobile manufacturers' safety glass specifications for current and
future production models. Management believes that the Company has a leading
share of and is the only significant independent supplier in the market for
technologically advanced systems used to bend and temper automotive glass into
complex shapes. For the Architectural Market, the Company's energy-efficient
processing systems are capable of producing high-quality bent or flat glass at
output rates tailored to meet customer-specific production requirements. As a
result of the long useful life and growing worldwide installed base of its
systems, the Company is able to complement its sale of complete systems
("Original Equipment") with the sale of aftermarket products and services
consisting of retrofits, tooling (i.e., molds used to shape automotive glass)
and replacement parts. The Company's products feature proprietary technologies
that have been developed over the last 25 years and are protected by more than
700 patents and patent application filings worldwide.
For the fiscal year ended June 30, 1997, the Company generated revenue and
Adjusted EBITDA (as defined in Note (e) to the Summary Historical and Pro Forma
Consolidated Financial and Other Data) of $76.4 million and $16.8 million,
respectively. Original Equipment revenue totaled $50.2 million, or 65.7%, of the
Company's total revenue for the same period. The balance of the Company's
revenue was generated through aftermarket sales including retrofits, tooling and
replacement part sales intended to maintain or enhance the Company's installed
base of systems.
A Glasstech system performs a series of processes that bend and strengthen
flat glass in the production of safety glass products such as car windows. In
each system, flat glass supplied by glass manufacturers is conveyed horizontally
on ceramic rollers through a high temperature furnace, a bending module and a
quench module (which completes the tempering process by rapidly cooling the
heated glass). Microprocessor-based controls regulate temperature, speed and
glass location throughout the entire process. In addition, the Company develops
its own proprietary software to control the integrated system. The modular
design of a Glasstech system readily enables the Company to offer customized
systems that meet specific technical requirements of its customers. Such a
design also creates equipment retrofit and upgrade opportunities for the
Company. The Company works closely with its customers as they identify capacity
and functionality requirements for a new system and then throughout the usual
ten to twelve month order, installation and acceptance cycle to ensure
satisfaction with their completed system. Systems designed for the Automotive
Market, which are used to form and temper glass for automotive back, side and
roof windows, as well as to form and anneal glass used for windshields, range in
price from approximately $2.5 million to $7.0 million. Systems designed for the
Architectural Market process curved and flat tempered glass which are used for
skylights, insulating glass, patio doors, furniture and appliances. These
systems range in price from approximately $0.5 million to $3.0 million.
The Company has an installed base of more than 375 systems located in over
40 countries on six continents. Sales in the United States, Europe and
Asia-Pacific represented 29.1%, 6.6% and 51.5%, respectively, of the Company's
total sales in fiscal 1997. The Company's customers include virtually all major
glass manufacturers and processors including: Chrysler Corporation, Ford Motor
Company, Guardian
1
<PAGE> 8
Industries Corp. and PPG Industries, Inc. in the United States; Compagnie de
Saint-Gobain and Pilkington plc in Europe; Asahi Glass Company, Central Glass
Company and Nippon Sheet Glass Company in Japan; Hankuk Glass Industry Company
and Keumkang Ltd. in Korea; and Shatterprufe (Pty) Limited in South Africa.
Management believes that the Company's future growth in the Automotive Market
will be driven by customer demand for more advanced safety glass bending
capabilities, the sale of systems that will supply new automobile factories
under construction worldwide and the opportunity to sell systems to glass
manufacturers and processors who desire to "outsource" (i.e., purchase glass
processing systems rather than develop them internally). Management further
believes that future sales in the Architectural Market will be derived, in part,
from the adoption of stringent building codes worldwide that mandate the use of
tempered glass and the increased use of coated glass for products such as
energy-efficient windows.
The Company was founded in 1971 to manufacture flat glass tempering systems
for the Architectural Market. Building on its success in that market, in 1977
the Company delivered its first bending and tempering system used to produce
simple glass shapes for the Automotive Market. Through continued product
development programs and technological enhancements, the Company manufactured
its first bending and tempering system for complex glass shapes for the
Automotive Market in 1985. This system enables the Company's customers to bend
and form glass while it is still inside the furnace, which results in enhanced
quality, higher yields (i.e., reduced breakage and fewer defects) and more
precision in the final shape of the safety glass product. The introduction of a
new system by the Company expands its total product offering because new
products typically complement, rather than replace, existing products. Recent
new product introductions by the Company include a bending system used to form
curved architectural glass (fiscal 1990), a tight radius cylindrical bending
system for furniture and display case applications (fiscal 1992), a constant
radius bending system for automotive side and roof windows (fiscal 1994), a
windshield bending and annealing system (fiscal 1995) and a forced convection
heating system intended for more energy-efficient glass production (fiscal
1996). See "Business -- Products."
Management believes that the Company's competitive advantage in the
production of high-quality glass bending and tempering systems, as well as its
market leadership, is the result of its: (i) development of patented,
state-of-the-art, cost-efficient technology; (ii) installed base of more than
375 systems in over 40 countries; (iii) experienced technical staff, which works
closely with customers in the development and design of new systems; (iv)
longstanding relationships (often of 20 years or more) with its major automotive
and architectural customers; (v) knowledgeable sales force, many of whom have
technical degrees; and (vi) ability to develop new products within reasonably
short lead times. In addition, the Company believes that its management team,
which has an average of more than 20 years of experience in the glass industry,
continues to be instrumental in further strengthening the Company's leading
market and technological position.
RECENT CHANGES IN OWNERSHIP
In 1988, the Company was purchased in a leveraged buyout for $89.1 million.
The change in automotive styling to more aerodynamic designs (which require more
complex glass shapes), led by the introduction of the Ford Taurus, provided the
impetus for the Company's growth in the late 1980s, which culminated with the
Company generating revenue and EBITDA of $93.5 million and $30.7 million,
respectively, in fiscal 1989. Based upon these historically high operating
results, the Company was purchased for $242.6 million in a leveraged buyout in
1989.
In fiscal 1990, the Company achieved comparable results to 1989. However,
beginning in fiscal 1991, the Company's operating results declined significantly
due to several factors including: (i) the completion of the significant increase
in system orders driven by the introduction of the Taurus by Ford Motor Company
(i.e., automotive glass processors required more complex shapes used in the
ensuing aerodynamic styling trend led by the Ford Taurus); and (ii) other
external factors such as (a) a worldwide economic recession, (b) market
interruptions due to geopolitical events such as the fall of communist
governments in Russia and Eastern Europe, and (c) the war in the Persian Gulf.
As a result of the confluence of these industry and external factors, the
Company's EBITDA declined to $5.5 million in fiscal 1991, leading to the
Company's inability to
2
<PAGE> 9
meet its significant debt service obligations on the $269.5 million of
indebtedness outstanding as of May 1993, $193.0 million of which was incurred in
connection with the 1989 leveraged buyout. In fiscal 1992, the Company's EBITDA
further declined to $1.8 million as the continuing effects of these industry and
external factors required management to focus on the restructuring of its debt
obligations rather than on the daily operation of its business.
In December 1992, the Company reorganized its senior management, with Mark
Christman assuming the position of President. In May 1993, the Company filed for
protection under Chapter 11 of the Federal Bankruptcy Code. While under the
protection of Chapter 11, the new management team refocused its business
strategy by, among other things, focusing on the sale of a more profitable
product mix and on the containment of costs. As a result of these efforts, a
reorganization of its senior management and a reorganization of the Company's
debt under a bankruptcy plan of reorganization, the Company emerged from Chapter
11 in January 1995 (the "Reorganization"). Upon consummation of the
Reorganization, the Company's debt holders converted their debt obligations into
100% of the Company's equity, $42.0 million of 10% Senior Notes and the right to
receive certain cash payments. See "The Transactions" and "Business -- History."
THE TRANSACTIONS
Holding and Sub Co. were newly organized Delaware corporations formed to
effect the acquisition of the Company by Key Equity Capital Corporation
("KECC"), certain of KECC's affiliates and certain members of management of the
Company (collectively, the "Key Equity Group"). The acquisition was consummated
on July 2, 1997 pursuant to an Agreement and Plan of Merger, dated as of June 5,
1997, among Holding, Sub Co. and the Company, as amended (the "Merger
Agreement"). Under the terms of the Merger Agreement, Sub Co. was merged into
the Company, and the Company continued as the surviving corporation (the
"Merger"). The aggregate consideration for the Merger was $76.2 million (the
"Purchase Price"), subject to certain adjustments. To finance and complete the
Merger (including the payment of related fees and expenses): (i) the Key Equity
Group purchased, for $15.0 million, all of the outstanding shares of capital
stock of Holding; (ii) Holding purchased, for $15.0 million, all of the
outstanding shares of capital stock of Sub Co. (the "Equity Contribution");
(iii) Sub Co. consummated the Initial Offering; and (iv) upon completion of the
Merger, the Company, as the surviving entity, became the obligor on the Old
Notes. The foregoing transactions, together with the Initial Offering, the
establishment of the Revolving Credit Facility (as defined herein), the
application of the proceeds from the Initial Offering and the Equity
Contribution and the payment of related transaction fees and expenses are
collectively referred to herein as the "Transactions."
Prior to the consummation of the Merger, the Company redeemed its existing
indebtedness at a premium, paid certain Transaction-related expenses and
remitted any remaining unrestricted cash in excess of $2.0 million to its
stockholders. Also, prior to the consummation of the Merger all existing stock
options and common stock warrants of the Company were deemed exercised and
exchanged for their pro rata share of the Purchase Price.
The Merger resulted in the Company having substantial goodwill, an increase
in long-term debt, original equity of approximately $11.7 million and a
significant reduction in cash. See "Unaudited Proforma Financial Data." In
addition, the Company incurred an extraordinary charge of $4.2 million relating
to the early extinguishment of debt and other charges aggregating approximately
$3.7 million. These charges are reflected in the Company's statement of
operations for the period of July 1, 1997 through July 2, 1997.
In connection with the Merger, the Company entered into a new $10.0 million
revolving credit facility (the "Revolving Credit Facility"), which is secured by
substantially all of the assets of the Company. The Company has not drawn on the
Revolving Credit Facility in connection with the Transactions.
3
<PAGE> 10
THE INITIAL OFFERING
OLD NOTES
Pursuant to a Securities Purchase Agreement dated as of July 2, 1997 (the
"Purchase Agreement"), Sub Co. sold the Old Notes in an aggregate principal
amount of $70.0 million to the Initial Purchaser on July 2, 1997 as part of the
sale of 70,000 Units, which included the sale of the Old Notes by Sub Co. and
the sale of 70,000 Warrants by Holding to purchase an aggregate of 877.21 shares
of Class A Common Stock of Holding. The Initial Purchaser subsequently resold
the Old Notes purchased from the Company to qualified institutional buyers
pursuant to Rule 144A under the Securities Act. Pursuant to the Merger, the
Company became the obligor on the Old Notes.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Purchase Agreement, Sub Co. and the Initial Purchaser
entered into a Registration Rights Agreement, dated as of July 2, 1997 (the
"Registration Rights Agreement"), which granted holders of the Old Notes certain
exchange and registration rights. The Exchange Offer is intended to satisfy such
exchange and registration rights which terminate after consummation of the
Exchange Offer. No offer to exchange the Warrants is being made in this
Prospectus and neither the Company (as the successor to Sub Co. pursuant to the
Merger) nor Holding is obligated to register or exchange the Warrants pursuant
to the Registration Rights Agreement or any other agreement.
THE EXCHANGE OFFER
Securities Offered............ $70,000,000 aggregate principal amount of
Series B 12 3/4% Senior Notes due 2004 of the
Company.
The Exchange Offer............ $1,000 principal amount of New Notes in
exchange for each $1,000 principal amount of
Old Notes. As of the date hereof, $70,000,000
aggregate principal amount of Old Notes are
outstanding. The Company will issue the New
Notes to holders on or promptly after the
Expiration Date.
Based upon interpretations by the staff of the
Commission set forth in no-action letters
issued to third parties, the Company believes
that New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by
any holder thereof (other than any such holder
which is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities
Act) without compliance with the registration
and prospectus delivery provisions of the
Securities Act, provided that such New Notes
are acquired in the ordinary course of such
holder's business and that such holder does not
intend to participate and has no arrangement or
understanding with any person to participate in
the distribution of such New Notes. Each holder
accepting the Exchange Offer is required to
represent to the Company in the Letter of
Transmittal that, among other things, the New
Notes will be acquired by the holder in the
ordinary course of business and the holder does
not intend to participate and has no
arrangement or understanding with any person to
participate in the distribution of such New
Notes.
Any Participating Broker-Dealer that acquired
Old Notes for its own account as a result of
market-making activities or other trading
activities may be a statutory underwriter. Each
Participating Broker-Dealer that receives New
Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any
resale of such New Notes. The Letter of
4
<PAGE> 11
Transmittal states that by so acknowledging and
by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that
it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may
be amended or supplemented from time to time,
may be used by a Participating Broker-Dealer in
connection with resale of New Notes received in
exchange for Old Notes where such Old Notes
were acquired by such Participating
Broker-Dealer as a result of market-making
activities or other trading activities. The
Company has agreed that, for a period of 180
days after the Expiration Date, it will make
this Prospectus available to any Participating
Broker-Dealer for use in connection with any
such resale. See "Plan of Distribution."
Any holder who tenders in the Exchange Offer
with the intention to participate, or for the
purpose of participating, in a distribution of
the New Notes will not be able to rely on the
position of the staff of the Commission set
forth in no-action letters and, in the absence
of an exemption therefrom, must comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with any resale transaction. Failure
to comply with such requirements may result in
such holder incurring liability under the
Securities Act for which the holder is not
indemnified by the Company.
Minimum Condition............. The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes
being tendered or accepted for exchange.
Expiration Date............... 5:00 p.m., New York City time, on
, 1997 unless the Exchange Offer
is extended, in which case the term "Expiration
Date" means the latest date and time to which
the Exchange Offer is extended.
Accrued Interest on the New
Notes and the Old Notes....... Each New Note will bear interest from its
issuance date. Holders of Old Notes that are
accepted for exchange will receive, in cash,
accrued interest thereon to, but not including,
the issuance date of the New Notes. Such
interest will be paid with the first interest
payment on the New Notes. Interest on the Old
Notes accepted for exchange will cease to
accrue upon issuance of the New Notes.
Conditions to the Exchange
Offer......................... The Exchange Offer is subject to certain
customary conditions, which may be waived by
the Company. See "The Exchange Offer --
Conditions." The Company reserves the right to
terminate or amend the Exchange Offer at any
time prior to the Expiration Date upon the
occurrence of any such condition.
Procedures for Tendering Old
Notes......................... Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver such Letter of
Transmittal, or such facsimile, or an Agent's
Message (as defined herein) in connection with
a book-entry transfer, together with the Old
Notes and other required documentation to the
Exchange Agent (as defined herein) at the
address set forth herein. By executing the
Letter of Transmittal, each holder will
represent to the Company that, among other
things, the New Notes acquired pursuant to the
Exchange Offer are being obtained in the
ordinary course of business of the person
receiving such New Notes, whether or not such
person is the holder, that neither the holder
nor any such other person (i) has any
5
<PAGE> 12
arrangement or understanding with any person to
participate in the distribution of such New
Notes, (ii) is engaging or intends to engage in
the distribution of such New Notes, or (iii) is
an affiliate as defined under Rule 405 of the
Securities Act, of the Company. See "The
Exchange Offer -- Purpose and Effect of the
Exchange Offer" and "The Exchange
Offer -- Procedures for Tendering."
Untendered Old Notes.......... Following the consummation of the Exchange
Offer, holders of Old Notes eligible to
participate but who do not tender their Old
Notes will not have any further exchange rights
and such Old Notes will continue to be subject
to certain restrictions on transfer.
Accordingly, the liquidity of the market for
such Old Notes could be adversely affected.
Consequences of Failure to
Exchange...................... The Old Notes that are not exchanged pursuant
to the Exchange Offer will remain restricted
securities. Accordingly, such Old Notes may be
resold only (i) to the Company, (ii) pursuant
to Rule 144A or Rule 144 under the Securities
Act or pursuant to some other exemption under
the Securities Act, (iii) outside the United
States to a non-U.S. person pursuant to the
requirements of Rule 904 under the Securities
Act, or (iv) pursuant to an effective
registration statement under the Securities
Act. See "The Exchange Offer -- Consequences of
Failure to Exchange."
Shelf Registration
Statement..................... In the event that changes in the law or the
applicable interpretations of the staff of the
Commission do not permit the Company to effect
the Exchange Offer, or if for any other reason
the Exchange Offer is not consummated within
210 days of the date of the original issuance
of the Old Notes, the Company will (i) as
promptly as possible, file a shelf registration
statement (the "Shelf Registration Statement")
covering resales of the Old Notes, (ii) use its
respective best efforts to cause the Shelf
Registration Statement to be declared effective
under the Securities Act and (iii) use its best
efforts to keep the Shelf Registration
Statement effective until three years after its
effective date. A holder of the Old Notes that
sells such Old Notes pursuant to the Shelf
Registration Statement generally would be
required to be named as a selling security
holder in the related prospectus and to deliver
a prospectus to purchasers, will be subject to
certain of the civil liability provisions under
the Securities Act in connection with such
sales and will be bound by the provisions of
the Registration Rights Agreement which are
applicable to such holder (including certain
indemnification obligations).
Special Procedures for
Beneficial Owners............. Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such owner's own behalf, such
owner must, prior to completing and executing
the Letter of Transmittal and delivering its
Old Notes, either make appropriate arrangements
to register ownership of the Old Notes in such
owner's name or obtain a properly completed
bond power from the registered holder. The
transfer of registered ownership may take
considerable time. The Company will keep the
Exchange Offer open for not less than thirty
days in order to provide for the transfer of
registered ownership.
6
<PAGE> 13
Guaranteed Delivery
Procedures.................... Holders of Old Notes who wish to tender their
Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes, the Letter of Transmittal or
any other documents required by the Letter of
Transmittal to the Exchange Agent (or comply
with the procedures for book-entry transfer)
prior to the Expiration Date must tender their
Old Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer --
Guaranteed Delivery Procedures."
Withdrawal Rights............. Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the
Expiration Date.
Acceptance of Old Notes and
Delivery of New Notes....... The Company will accept for exchange any and
all Old Notes which are properly tendered in
the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The New
Notes issued pursuant to the Exchange Offer
will be delivered promptly following the
Expiration Date. See "The Exchange
Offer -- Terms of the Exchange Offer."
Federal Income Tax
Consequences.................. The exchange of Old Notes for New Notes by
tendering holders will not be a taxable
exchange for federal income tax purposes, and
such holders should not recognize any taxable
gain or loss or any interest income as a result
of such exchange.
Use of Proceeds............... There will be no cash proceeds to the Company
from the exchange pursuant to the Exchange
Offer.
Exchange Agent................ United States Trust Company of New York.
THE NEW NOTES
General....................... The form and terms of the New Notes are the
same as the form and terms of the Old Notes
(which they replace) except that (i) the New
Notes bear a Series B designation, (ii) the New
Notes have been registered under the Securities
Act and, therefore, will not bear legends
restricting the transfer thereof, and (iii) the
holders of New Notes will not be entitled to
certain rights under the Registration Rights
Agreement, including the provisions providing
for an increase in the interest rate on the Old
Notes in certain circumstances relating to the
timing of the Exchange Offer, which rights will
terminate when the Exchange Offer is
consummated. See "The Exchange Offer -- Purpose
and Effect of the Exchange Offer." The New
Notes will evidence the same debt as the Old
Notes and will be entitled to the benefits of
the Indenture. See "Description of the Notes."
The Old Notes and the New Notes are referred to
collectively herein as the "Notes."
Issuer........................ Glasstech, Inc.
Notes Offered................. $70,000,000 principal amount of Series B
12 3/4% Senior Notes due 2004.
Maturity Date................. July 1, 2004.
Interest Payment Dates........ Interest will accrue on the New Notes from the
date of issuance and will be payable
semi-annually on each January 1 and July 1,
commencing January 1, 1998.
Ranking....................... The New Notes will be general senior unsecured
obligations of the Company, ranking pari passu
in right of payment with all other existing and
future senior indebtedness of the Company and
senior
7
<PAGE> 14
in right of payment to any subordinated
indebtedness of the Company. The New Notes will
be effectively subordinated in right of payment
to all senior secured indebtedness of the
Company, including indebtedness under the
Revolving Credit Facility. The Revolving Credit
Facility provides for a total revolving credit
commitment of $10.0 million, subject to certain
conditions, and initial borrowing availability
of up to $8.0 million. The Company has no
senior indebtedness outstanding, including
indebtedness under the Revolving Credit
Facility, other than the Notes.
Guarantees by Future
Subsidiaries.................. The New Notes will be fully and unconditionally
guaranteed, on a senior unsecured basis, as to
the payment of principal, premium, if any, and
interest, jointly and severally (the
"Guarantees"), by all future direct and
indirect domestic Restricted Subsidiaries (as
defined herein) of the Company having either
assets or stockholders' equity in excess of
$10,000 (the "Guarantors"). As of the date of
this Prospectus, no Guarantees were in effect.
Each Guarantee will be effectively subordinated
to all secured indebtedness of such Guarantor.
See "Description of the Notes -- Certain
Covenants -- Limitation on Creation of
Subsidiaries" and "Description of the
Notes -- Future Guarantees."
Optional Redemption........... The Notes will be redeemable at the option of
the Company, in whole or in part, at any time
on or after July 1, 2002, at the redemption
prices set forth herein plus accrued interest
to the date of redemption. In addition, the
Company, at its option, may redeem in the
aggregate up to $17.5 million, or 25%, of the
original principal amount of the Notes at any
time and from time to time prior to July 1,
2000 at a redemption price equal to 112.75% of
the principal amount thereof plus accrued and
unpaid interest to the redemption date with the
Net Proceeds of one or more Qualified Equity
Offerings of the Company or Holding to the
extent such proceeds were contributed to the
Company as common equity; provided, that at
least $52.5 million aggregate principal amount
of Notes originally issued remain outstanding
immediately after the occurrence of any such
redemption and that any such redemption occurs
within 90 days following the closing of any
such Qualified Equity Offering.
Change of Control............. In the event of a Change of Control, holders of
the Notes will have the right to require the
Company to repurchase their Notes at 101% of
the aggregate principal amount thereof plus
accrued and unpaid interest to the repurchase
date. The Revolving Credit Facility restricts
the Company's ability to repurchase any Notes
pursuant to a Change of Control Offer (as
defined herein) unless, in connection with such
Change of Control Offer, the Company pays the
obligations in full under or in respect of the
Revolving Credit Facility or obtains the
requisite consents under the Revolving Credit
Facility. There can be no assurance that if a
Change of Control Offer were to occur, the
Company would have sufficient assets to satisfy
its obligations in respect of the Revolving
Credit Facility and then to repurchase all the
Notes. See "Description of the Notes -- Change
of Control Offer."
Asset Sale Proceeds........... The Company will be obligated in certain
instances to make offers to repurchase the
Notes at a purchase price in cash equal to 100%
of the principal amount thereof plus accrued
and unpaid interest to the date of repurchase
with the net cash proceeds of certain asset
sales.
8
<PAGE> 15
See "Description of the Notes -- Certain
Covenants -- Limitation on Certain Asset
Sales."
Certain Covenants............. The indenture contains covenants for the
benefit of the holders of the Notes that, among
other things, restrict the ability of the
Company and any Restricted Subsidiaries to: (i)
incur additional indebtedness; (ii) pay
dividends and make distributions; (iii) issue
stock of subsidiaries; (iv) make certain
investments; (v) repurchase stock; (vi) create
liens; (vii) enter into transactions with
affiliates; (viii) enter into sale and
leaseback transactions; (ix) create dividend or
other payment restrictions affecting Restricted
Subsidiaries; (x) merge or consolidate the
Company; and (xi) transfer and sell assets.
These covenants are subject to a number of
important exceptions. See "Description of the
Notes -- Certain Covenants."
Registration Rights........... Pursuant to the Registration Rights Agreement,
the Company agreed to use its best efforts to
file within 60 days, and cause to become
effective within 150 days of the closing date
of the Initial Offering, an Exchange Offer
Registration Statement with respect to an offer
to exchange the Old Notes for the New Notes of
the Company with terms substantially identical
to the Old Notes (except the New Notes will not
be subject to transfer restrictions). In
addition, under certain circumstances, the
Company may be required to file a Shelf
Registration Statement. Among other provisions,
in the event that (i) the Registration
Statement or Shelf Registration Statement has
not been filed with the Commission within 60
days after the Issue Date; (ii) the
Registration Statement or Shelf Registration
Statement is not declared effective within 150
days after the Issue Date; or (iii) the
Exchange Offer is not consummated within 60
days after the Registration Statement is
declared effective (each such event referred to
in clauses (i) through (iii) above is a
"Registration Default"), the sole remedy
available to holders of the Old Notes will be
the immediate assessment of additional interest
("Additional Interest") as follows: the per
annum interest rate on the Old Notes will
increase by 0.50%, and the per annum interest
rate will increase by an additional 0.25% for
each subsequent 90-day period during which the
Registration Default remains uncured, up to a
maximum additional interest rate of 2.0% per
year in excess of the interest rate set forth
on the cover page hereof. All Additional
Interest will be payable to holders of the Old
Notes in cash on each January 1 and July 1,
commencing with the first such date occurring
after any such Additional Interest commences to
accrue, and continuing until such Registration
Default is cured. After the date on which such
Registration Default is cured, the interest
rate on the Old Notes will revert to the
interest rate originally borne by the Old
Notes. See "Exchange Offer."
RISK FACTORS
Before tendering their Old Notes for New Notes offered hereby, holders of
the Old Notes should consider carefully the information set forth under the
caption "Risk Factors," and all other information set forth in this Prospectus.
9
<PAGE> 16
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth summary historical consolidated financial
and other data of the Company for the three years ended June 30, 1997 which have
been derived from the Company's audited consolidated financial statements. The
summary pro forma consolidated data give effect to the consummation of the
Transactions, including the Initial Offering and the application of the net
proceeds therefrom, as if they had occurred at the beginning of the pro forma
period. The summary pro forma and adjusted consolidated balance sheet data as of
June 30, 1997 have been prepared as if the Transactions had occurred as of June
30, 1997. In May 1993, the Company filed for protection under Chapter 11
("Chapter 11") of the United States Bankruptcy Code, as amended (the "Bankruptcy
Code"). Upon emergence from Chapter 11 on January 4, 1995, the Company adopted
"fresh start" financial reporting, thereby reflecting the Company's assets and
liabilities at their fair market value and eliminating the accumulated deficit
as of January 3, 1995. The information presented on the following pages should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and notes thereto included elsewhere herein.
10
<PAGE> 17
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
----------- REORGANIZED COMPANY
PERIOD FROM -------------------------------------------
JULY 1, PERIOD FROM
1994 JANUARY 4, 1995
THROUGH THROUGH YEAR ENDED YEAR ENDED
JANUARY 3, JUNE 30, JUNE 30, JUNE 30,
1995 1995 1996 1997(J)
----------- --------------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue................................................ $ 25,948 $27,854 $ 62,771 $ 76,433
Cost of goods sold......................................... 16,576 17,036 39,024 45,603
--------- ------- -------- --------
Gross profit........................................... 9,372 10,818 23,747 30,830
Selling, general and administrative expenses............... 3,430 5,105 10,723 12,866
Research and development expenses.......................... 2,082 2,302 4,557 4,594
Amortization expense....................................... 2,512 1,203 2,407 2,306
--------- ------- -------- --------
Operating profit....................................... 1,348 2,208 6,060 11,064
Interest expense........................................... -- (2,077) (4,200) (4,200)
Other income (expense) -- net.............................. 35 784 1,540 2,263
--------- ------- -------- --------
Income before items below.............................. 1,383 915 3,400 9,127
Reorganization items(a).................................... (1,164) -- -- --
Income taxes not payable in cash(b)........................ -- (445) (1,418) (2,551)
Federal income taxes, current.............................. -- -- (105) (78)
Extraordinary gain(c)...................................... 214,773 -- -- --
Cumulative effect on prior years of change in method of
accounting for non-pension post-retirement benefits...... (1,906) -- -- --
--------- ------- -------- --------
Net income............................................. $ 213,086 $ 470 $ 1,877 $ 6,498
========= ======= ======== ========
OTHER DATA:
EBITDA(d).................................................. $ 4,625 $ 4,109 $ 9,781 $ 14,829
Depreciation and amortization.............................. 3,277 1,901 3,721 3,765
Capital expenditures....................................... 480 680 2,152 990
Backlog.................................................... 31,941 25,931 38,910 30,307
PRO FORMA AND ADJUSTED DATA:
Adjusted EBITDA(e)......................................... $ 16,808
Pro forma cash interest expense............................ 8,925
Ratio of Adjusted EBITDA to pro forma cash interest
expense.................................................. 1.88x
Ratio of total debt to Adjusted EBITDA..................... 4.16x
Ratio of net debt to Adjusted EBITDA....................... 3.76x
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
--------------------------
ACTUAL(J) PRO FORMA
---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficiency)(f)..... $ 39,518 $ (2,011)
Total assets........................ 99,364 101,705
Total debt(g)....................... 42,000 70,000
Net debt(g)(h)...................... (9,805) 63,273
Shareholders' equity(i)............. 29,232 11,722
</TABLE>
(See footnotes on following page)
11
<PAGE> 18
NOTES TO SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS)
(a) Reorganization (as defined herein) items relate to the period in which the
Company was operating under the protection of Chapter 11 of the Bankruptcy
Code.
(b) Income taxes not payable in cash represent the tax effect of certain tax
attributes existing prior to the Reorganization and are recorded as a
reduction to reorganization value in excess of amounts allocable to
identifiable assets as required by SOP 90-7.
(c) An extraordinary gain of $214,773 was recognized on January 3, 1995 because
the consideration for the discharge of pre-petition liabilities was less
than the carrying value of the recorded liabilities discharged.
(d) "EBITDA" for any period means operating profit plus depreciation and
amortization. EBITDA is determined after the deduction of directors' fees,
consulting fees and related expenses (the "Directors' Fees") of $0, $203,
$995 and $1,289 for the periods ended January 3, 1995, June 30, 1995, June
30, 1996 and June 30, 1997, respectively. Upon completion of the
Transactions, these fees were replaced by a post-Merger KECC advisory fee of
$200 per year. Management understands that EBITDA is an indicator
customarily used by investors to gauge a company's ability to service its
interest and principal obligations. EBITDA should not be considered in
isolation from, as a substitute for or as being more meaningful than net
income, cash flows from operating, investing and financing activities, or
other income or cash flow statement data prepared in accordance with
generally accepted accounting principles, and it should not be construed as
an indication of the Company's operating performance or as a measure of
liquidity. EBITDA, as presented herein, may be calculated differently by
other companies and, as such, EBITDA amounts presented herein may not be
comparable to other similarly titled measures of other companies.
(e) "Adjusted EBITDA" for any period means EBITDA adjusted to reflect: (i) the
add-back of Directors' Fees paid during such period, offset by a
post-Merger KECC advisory fee of $200 per year; and (ii) for the reporting
periods ended June 30, 1997, the add-back of an $890 one-time accrual
relating to the replacement of certain components in forced convection
heaters due to an error in material specifications. For the year ended June
30, 1997, Adjusted EBITDA reflects a net reduction in Directors' Fees of
$1,089 and the add-back of the $890 one-time expense accrual.
(f) Working capital is defined as total current assets less total current
liabilities, which includes a current liability of $10.7 million of
billings in excess of costs and estimated earnings on uncompleted contracts
("Unearned Revenue"). Unearned Revenue represents progress payments
received or due on contracts in advance of the recognition of the revenue
on such contracts.
(g) Total debt and net debt reflect the principal amount of indebtedness due
under the Notes.
(h) Net debt is equal to total debt less cash and cash equivalents, which, on a
pro forma basis, includes restricted cash that was reclassified as
unrestricted cash upon the establishment of the Revolving Credit Facility.
(i) Shareholders' equity includes $750 attributable to the value of the
Warrants and a shareholders' basis reduction of $4,028 to reflect the
carryover predecessor basis of certain carryover ownership interests.
(j) On July 2, 1997, the Transactions described elsewhere herein were
consummated, pursuant to which the Company was purchased for approximately
$76.2 million, subject to certain adjustments. The Transactions resulted in
the Company having substantial goodwill, an increase in long-term debt,
original equity of approximately 11.7 million, and a significant reduction
in cash, the effects of all of which are reflected in the unaudited pro
forma financial data included elsewhere herein. In addition, the Company
incurred an extraordinary charge of $4.2 million relating to the early
extinguishment of debt and other charges aggregating approximately $3.7
million that have been reflected in the Company's statement of operations
for the period July 1, 1997 through July 2, 1997.
12
<PAGE> 19
RISK FACTORS
Holders of the Old Notes should carefully consider the following factors,
in addition to the other information set forth in this Prospectus, before making
an investment in the New Notes offered hereby. Certain of the statements in this
Prospectus are forward-looking in nature and, accordingly, are subject to many
risks and uncertainties. The actual results that the Company achieves may differ
materially from any forward-looking statements in this Prospectus. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below and those contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," as
well as those discussed elsewhere in this Prospectus.
HIGH LEVEL OF INDEBTEDNESS AND LEVERAGE
Upon consummation of the Transactions, the Company became highly leveraged.
At July 2, 1997, after consummation of the Transactions, the Company's total
indebtedness (including current maturities) and shareholders' equity was $69.2
million and $11.7 million, respectively. The Company, subject to certain
conditions, also has the ability to borrow up to $10.0 million pursuant to the
Revolving Credit Facility. Management believes that the Company's cash flow from
operations, together with borrowings available under the Revolving Credit
Facility, will be adequate to meet its anticipated requirements for working
capital, capital expenditures, interest payments and scheduled principal
payments over the next twelve months. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The Company's ability to make scheduled payments of the principal
of, or interest on, or to refinance its indebtedness (including the Notes)
depends, however, on its future performance, which to a certain extent is
subject to economic, financial, competitive and other factors beyond its
control.
The Company's high level of indebtedness will have several important
effects on its future operations, including the following: (i) the financial
covenants and other restrictions contained in the Revolving Credit Facility and
the Indenture require the Company to meet certain financial tests and restrict
its ability to, among other things, borrow additional funds, make certain
investments and acquire or dispose of assets; and (ii) because of the Company's
debt service requirements, funds available for working capital, R&D, capital
expenditures, acquisitions and general corporate purposes may be limited. The
Company's leveraged position may increase its vulnerability to competitive
pressures, the cyclical nature of the automobile and architectural industries
and general economic conditions, all of which may influence the market demand
for the Company's products. In addition, although management believes that
capital expenditures above maintenance levels can be deferred to address cash
flow or other constraints, such initiatives cannot be deferred for extended
periods without an adverse effect on revenue, cash flow and operating results,
which may be material. The Company's continued growth depends, in part, on its
ability to adequately invest in the development of new technologies, and,
therefore, to the extent it is unable to do so with internally generated cash,
the Company's inability to finance such projects with borrowed funds could have
a material adverse effect on its future operations.
RESTRICTIONS UNDER DEBT AGREEMENTS
The Indenture contains covenants that, among other things, limit the
ability of the Company and its Restricted Subsidiaries to incur additional
indebtedness, incur liens, pay dividends and make certain other restricted
payments, make certain investments, consummate certain asset sales, enter into
certain transactions with affiliates, issue subsidiary stock, create dividend or
other payment restrictions affecting Restricted Subsidiaries, consolidate or
merge with any other person or transfer all or substantially all of the assets
of the Company. See "Description of the Notes -- Certain Covenants."
In addition, the Revolving Credit Facility contains restrictive covenants
which, generally, are more restrictive than those contained in the Indenture and
limit the ability of the Company and its subsidiaries to prepay their
indebtedness (including the Notes). The Revolving Credit Facility requires the
Company to maintain specified consolidated financial ratios and satisfy certain
consolidated financial tests. The Company's ability to meet those ratios and
tests can be affected by events beyond its control, and there can be no
assurance that the Company will meet those ratios and tests. A breach of any of
the covenants under the
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<PAGE> 20
Revolving Credit Facility or the Indenture could result in a default under other
outstanding indebtedness, including the Revolving Credit Facility and the
Indenture. If an event of default occurs under the Revolving Credit Facility,
the lender could elect to declare all amounts outstanding thereunder, together
with accrued interest, to be immediately due and payable. If the Company is
unable to repay those amounts, the lender could proceed against the collateral
granted to it to secure such indebtedness. Any such action taken by the lender
under the Revolving Credit Facility would likely result in an acceleration of
the indebtedness represented by the Notes. The Revolving Credit Facility is
secured by substantially all of the assets of the Company. See "Description of
the Notes" and "Description of the Revolving Credit Facility."
FLUCTUATIONS IN CASH FLOW
The Company's cash flow is subject to fluctuation from quarter to quarter
or year to year due to a number of factors, including the number and timing of
new system orders from customers and the timing of customer progress payments
during the build-and-install cycle for a new system. Such progress payments are
generally due upon contract signing, system shipment and final system acceptance
by the customer. See "Business -- Marketing and Sales." Variations in the number
and timing of system orders, changes to installation schedules that lead to the
deferral of progress payments or unanticipated increases in production costs or
other costs could have a material adverse effect on the Company's ability to
meet its debt obligations as they become due. In addition, the period during
which the Company recognizes revenue for a new system may not be the period
during which payment is actually received from the customer, and thus EBITDA and
other financial indicators generally relied on by investors to evaluate a
company's ability to service its debt may not, in the case of the Company,
reflect actual cash received during a given period. See "Management's Discussion
and Analysis of Financial Conditions and Operating Results."
CYCLICALITY OF AUTOMOBILE INDUSTRY; SUSCEPTIBILITY TO ECONOMIC CONDITIONS
The Company's business depends primarily on capital expenditures by
manufacturers of automotive safety glass products, which, in turn, rely on
purchases of their glass products by automobile manufacturers. The Company
estimates that for the last three fiscal years revenue from customers that
manufacture and process safety glass for sale to the automotive industry has
represented from 70% to 85% of the Company's total revenues on a consolidated
basis. The automobile industry is and historically has been a cyclical industry.
Currently, the automobile industry is relatively strong as is the demand for
high-quality, complex glass shapes. Although the Company is currently
experiencing demand for its Original Equipment systems and aftermarket products
and services, there can be no assurance that such demand will continue in the
future. The cyclicality of the automobile industry, among other factors,
including fluctuations in market demand based on general economic conditions in
the United States or internationally, may cause prospective customers to
postpone decisions regarding major capital expenditures, including purchases of
the Company's systems or aftermarket products and services. Most of the factors
that might influence customers and prospective customers to reduce their capital
budgets under these circumstances are beyond the Company's control. During prior
recessionary periods, the Company's operating performance has been materially
adversely affected, and there can be no assurance that any future economic
downturn would not materially and adversely affect the Company's business,
financial condition and operating results. In addition, there can be no
assurance that the Company's customers will continue to require new glass
bending capabilities or increased capacity, thereby reducing demand for the
Company's products.
PATENT AND PROPRIETARY RIGHTS; RISK OF LITIGATION
The Company relies on patent, trademark, copyright and trade secret laws,
employee and third-party non-disclosure agreements and other methods to protect
its proprietary rights. The Company holds more than 100 patents in the United
States and more than 350 patents outside the United States (which primarily
extend the patent protection acquired in the United States to its foreign
markets) and has more than 250 patent application filings worldwide that cover
certain aspects of its technology. Typically, several patents cover various
controls, bending processes or general aspects of the equipment. While
management does not believe that the loss of any one patent would have a
material adverse effect on the Company's business, it believes the
14
<PAGE> 21
Company's aggregate patent position provides it with an important competitive
advantage. There can be no assurance that any pending or future patent
applications will be granted, that any current or future patents will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide competitive advantages to the Company. There can also be no
assurance that the Company's trade secrets or nondisclosure agreements will
provide meaningful protection of the Company's proprietary information.
Furthermore, there can be no assurance that others will not independently
develop similar technologies or duplicate any technology developed by the
Company or that the Company's technology will not infringe upon patents or other
rights owned by others. The Company does not own all the patent rights with
respect to certain technology relating to the forced convection heater which it
recently developed in conjunction with the Gas Research Institute, a nonprofit
trade association of gas companies ("GRI"). See "Business -- Patents and
Proprietary Rights." The Company's inability to maintain a competitive advantage
based on proprietary rights would have a material adverse effect on the
Company's business, financial condition and results of operations.
Although the Company is not currently the subject of any patent or
proprietary rights infringement litigation, there can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future products. In addition, one of the Company's
European architectural patents has been opposed by two of the Company's
competitors, and management believes that one of its customers may be infringing
on certain U.S. and foreign counterpart patents. There can be no assurance that
the outcome of either of these matters, or any other opposition of or
infringement upon the Company's proprietary rights, will support the Company's
patent position. In addition, the Company may be subject to additional risks as
it enters into transactions in countries where intellectual property laws are
not well developed or are poorly enforced. Legal protection of the Company's
rights may be ineffective in such countries. Any claims or litigation, with or
without merit, could be costly and could result in a diversion of management's
attention. Adverse determinations of such claims or litigation could also have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Patents and Proprietary Rights."
CONTINUANCE OF TECHNOLOGICAL ADVANTAGE
The Company's success will depend in part upon its ability to improve
existing products and services, and to develop and introduce new products and
services to meet changing customer requirements. Such product enhancements
require the incorporation of sophisticated technology and computer software. The
application of such technologies and software to the Company's products has
grown increasingly complex. There can be no assurance that the Company will
successfully complete the development of new products in a timely fashion or
that the Company's current or future products will satisfy the needs of the
worldwide safety glass market. In addition, certain of the Company's customers
require that products be customized to address the unique characteristics of
their businesses. The Company's commitment to customization could burden its
resources or delay the delivery or installation of products. Such results could
adversely affect the Company's relationship with its customers, which could
adversely affect its business, financial condition or results of operations.
1993 BANKRUPTCY FILING
In May 1993, the Company filed for protection under Chapter 11 of the
Bankruptcy Code, largely as a result of the Company's inability to meet its
obligations with respect to $269.5 million of indebtedness outstanding as of May
1993, $193.0 million of which was incurred in connection with a leveraged buyout
in 1989. The Company emerged from Chapter 11 in January of 1995. See
"Business -- History."
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS
Sales to customers in countries other than the United States accounted for
63.7%, 70.1% and 70.9% of net revenue in fiscal 1995, 1996 and 1997,
respectively. Management anticipates that international sales will continue to
account for a substantial portion of the Company's revenue in the future. Sales
and operating activities outside of the United States are subject to certain
inherent risks, including fluctuations in the value of the United States dollar
relative to foreign currencies, tariffs, quotas, taxes and other market
barriers, political and economic instability, restrictions on the export or
import of technology, potentially limited
15
<PAGE> 22
intellectual property protection, difficulties in staffing and managing
international operations and potentially adverse tax consequences. There can be
no assurance that any of these factors will not have a material adverse effect
on the Company's business, financial condition or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RELIANCE ON LIMITED CUSTOMER BASE
The Company's customer base in the Automotive Market and the Architectural
Market is comprised of a limited number of firms that produce or use safety
glass. For example, in fiscal years 1995, 1996, and 1997 Asahi Glass Company,
Chrysler Corporation, Nippon Sheet Glass Company and Pilkington plc collectively
accounted for 40.5%, 40.8% and 50.6% of the Company's revenue, respectively. In
addition, (i) in fiscal 1995, Asahi Glass Company and Pilkington plc each
accounted for more than 10.0% of the Company's revenue, (ii) in fiscal 1996,
Pilkington plc accounted for more than 10.0% of the Company's revenue and (iii)
in fiscal 1997 Asahi Glass Company, Chrysler Corporation, Nippon Sheet Glass
Company and Pilkington plc each accounted for more than 10% of the Company's
revenue. Accordingly, a significant portion of the Company's revenue in any
particular period is attributable to sales to a limited number of customers. The
Company's largest customers change from period to period as projects are
completed and new projects are initiated. Management expects that sales of the
Company's products to relatively few customers will continue to account for a
high percentage of its revenue in the foreseeable future. If completed contracts
are not replaced on a timely basis by new orders from the same or other
customers, the Company's revenue and related cash flow could be materially
adversely affected. The loss of a significant customer, a reduction in orders
from any significant customer or the cancellation of a significant order from a
customer, including reductions or cancellations due to customer departures from
recent buying patterns, financial difficulties of a customer or market, or
economic or competitive conditions in the glass manufacturing industry could
materially adversely affect the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Marketing and Sales."
COMPETITION
The Company faces competition primarily from the in-house engineering
departments of its customers in the Automotive Market and from one major
independent producer in the Architectural Market. There can be no assurance
that: (i) the Company's Automotive Market customers will not increase their
in-house design and assembly of glass bending and tempering systems or will not
try to market systems developed in-house to other customers of the Company; (ii)
the Company's existing competitors in the Architectural Market will not develop
superior technology; or (iii) new competitors will not enter the Company's
markets. Any of these factors, alone or in the aggregate, could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Business -- Competition."
EMERGENCE OF A SUBSTITUTE FOR AUTOMOTIVE SAFETY GLASS
Automobile manufacturers and certain automobile component suppliers such as
plastic manufacturers are constantly evaluating methods to reduce the weight and
cost of automobiles, including the substitution of automotive safety glass with
some form of plastic. While to date there has been no cost-effective substitute
developed which would have the required durability, optical quality and fracture
patterns found in safety glass, there can be no assurance that such a product,
if developed and introduced in the automotive safety glass market, would not
have a material adverse effect on the Company's business, financial condition or
operating results.
DEPENDENCE ON THIRD-PARTY SUPPLIERS AND MANUFACTURERS
The Company purchases substantially all of its materials and component
parts incorporated into its products from third-party suppliers and
manufacturers. Management believes that there are numerous available sources of
supply for such required materials. While the Company attempts to maintain
alternative sources for materials, the Company's businesses are subject to the
risk of price fluctuations and periodic delays in the delivery of materials.
Failure by certain suppliers to continue to supply the Company with materials on
16
<PAGE> 23
commercially reasonable terms, or at all, could have a material adverse effect
on the Company's business, financial condition and operating results. In
addition, the Company is, to some degree, dependent upon the ability of such
manufacturers, among other things, to meet stringent performance and quality
specifications and to conform to delivery schedules. Failure by such third-party
manufacturers to comply with these and other requirements could have a material
adverse effect on the Company's ability to deliver its products on a timely
basis.
ENVIRONMENTAL REGULATION
The operations and properties of the Company are subject to a wide variety
of federal, state and local laws and regulations, including those governing the
use, storage, handling, generation, treatment, emission, release, discharge and
disposal of certain materials, substances and wastes, the remediation of
contaminated soil and groundwater, and the health and safety of employees
(collectively, the "Environmental Laws"). Since Environmental Laws frequently
are revised and supplemented, with a trend toward greater stringency,
expenditures for compliance and liabilities under Environmental Laws are
difficult to estimate and may exceed anticipated costs. Based upon its
experience to date, management believes that compliance with existing
Environmental Laws will not have a material adverse effect on the Company's
business, financial condition or results of operations. However, future events,
such as the discovery of new information, changes in existing Environmental Laws
or their interpretation and more vigorous enforcement policies of regulatory
agencies, may give rise to additional expenditures or liabilities that could be
material. See "Business -- Environmental Matters."
OWNERSHIP OF HOLDING AND THE COMPANY
Upon consummation of the Transactions, the Key Equity Group became the
owner of all of the outstanding capital stock of Holding, which owns all of the
voting stock of the Company. By virtue of such stock ownership, such persons
have the power to direct the affairs of Holding and the Company and to determine
the outcome of all matters required to be submitted to stockholders of Holding
and the Company for approval, including the election of Holding's and the
Company's directors and any amendment to the certificate of incorporation of
Holding and the Company. The interests of the members of the Key Equity Group as
equity holders may differ from the interests of holders of the Notes. See
"Certain Transactions" and "Ownership and Control."
CHANGE OF CONTROL
Upon a Change of Control, the Company will be required to offer to
repurchase all of the outstanding Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest to the date of repurchase. There can be no
assurance that the Company will have sufficient funds available to finance a
Change of Control Offer. In addition, upon a Change of Control, the Indenture
would require the Company, before repurchase of the Notes, to (i) repay in full
all obligations under or in respect of the Revolving Credit Facility or offer to
repay in full all obligations under or in respect of the Revolving Credit
Facility or (ii) obtain the requisite consent under the Revolving Credit
Facility to permit the repurchase of the Notes as described above. See
"Description of the Notes -- Change of Control Offer." The Company's inability
to repay its obligations or to obtain the requisite consent under the Revolving
Credit Facility, and to repurchase all of the tendered Notes, would constitute
an event of default under the Indenture.
FRAUDULENT CONVEYANCE
The incurrence by the Company of indebtedness such as the Notes may be
subject to review under relevant state and federal fraudulent conveyance laws if
a bankruptcy case or lawsuit is commenced by or on behalf of unpaid creditors of
the Company. Under these laws, if a court were to find that, after giving effect
to the sale of the Notes and the application of the net proceeds therefrom,
either (i) the Company incurred such indebtedness with the intent of hindering,
delaying or defrauding creditors or contemplated insolvency with a design to
prefer one or more creditors to the exclusion in whole or in part of others; or
(ii) the Company received less than reasonably equivalent value or consideration
for incurring such indebtedness and (a) was
17
<PAGE> 24
insolvent or rendered insolvent by reason of such transaction, (b) was engaged
in a business or transaction for which the assets remaining with the Company
constituted unreasonably small capital or (c) intended to incur, or believed
that it would incur, debts beyond its ability to pay such debts as they matured,
such court may subordinate such indebtedness to presently existing and future
indebtedness of the Company, avoid the issuance of such indebtedness and direct
the repayment of any amounts paid thereunder to the Company's creditors or take
other action detrimental to the holders of such indebtedness.
The measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer varies depending upon the law of the
jurisdiction which is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all its liabilities, including contingent
liabilities, were greater than the value of all its property at a fair
valuation, or if the present fair saleable value of the debtor's assets were
less than the amount required to repay its probable liabilities on its debts,
including contingent liabilities, as they become absolute and matured.
It was a condition to consummation of the Initial Offering that the Company
receive a solvency opinion, delivered by Houlihan Lokey Howard & Zukin, Inc.,
mutually acceptable to the Company and the Initial Purchaser. The Company
believes that the indebtedness represented by the Old Notes was incurred for
proper purposes and in good faith and, at the time the Old Notes were issued and
the New Notes are issued, the Company was and will be, as the case may be: (i)
neither insolvent nor rendered insolvent thereby; (ii) in possession of
sufficient capital to operate its business effectively; and (iii) incurring
debts within its ability to pay as the same mature or become due. See
"Management's Discussions and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." There can be no assurance,
however, that a court passing on these issues would make the same determination.
DEPENDENCE ON SENIOR MANAGEMENT
The Company's business depends upon the efforts, abilities and expertise of
its executive officers and other key employees. The Company has entered into
five-year employment contracts with several senior members of management in an
effort to ensure the continuance of the existing management team. The agreements
generally contain certain noncompete provisions. If the Company were to lose the
services of certain of these executive officers or key employees, the Company's
operating results could be adversely affected, perhaps materially. See
"Management -- Employment Agreements and Arrangements."
EFFECTIVE SUBORDINATION OF THE NOTES
The Notes are general senior unsecured obligations of the Company and are
effectively subordinated in right of payment to all secured indebtedness of the
Company, including indebtedness under the Revolving Credit Facility, which
provides for a total revolving credit commitment of $10.0 million, subject to
certain conditions. The Company has no borrowings outstanding under the
Revolving Credit Facility. The Indenture will limit, but not prohibit, the
ability of the Company and its Restricted Subsidiaries to incur additional
secured indebtedness.
PAYMENTS TO AFFILIATES
Prior to the consummation of the Transactions, the Company made certain
payments to its affiliates, including payments of Directors' Fees, payments to
KECC in connection with assisting and structuring, arranging and closing the
Transactions and payments of bonuses to the members of Executive Management in
connection with the successful completion of the Transactions. See "Certain
Transactions -- Pre-Merger Transactions." Payment of these fees were not subject
to the restrictions contained in the Indenture. KECC has been retained by the
Company to provide advisory services in exchange for which it will receive an
annual fee of $200,000, which payment is permitted under the terms of the
Indenture. The Indenture provides for limitations on all other transactions with
affiliates and payment of dividends and distributions. See "Certain
Transactions -- Post-Merger Transactions -- Advisory Agreement" and "Description
of the Notes -- Certain Covenants -- Limitation on Transactions with Affiliates"
and "-- Limitation on Restricted Payments."
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<PAGE> 25
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
The Old Notes were issued to, and the Company believes the Old Notes are
currently owned by, a relatively small number of beneficial owners. Prior to the
Exchange Offer, there has not been any public market for the Old Notes. The Old
Notes have not been registered under the Securities Act and will be subject to
restrictions on transferability to the extent that they are not exchanged for
New Notes by holders who are entitled to participate in the Exchange Offer. The
holders of Old Notes (other than any such holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) who are not
eligible to participate in the Exchange Offer are entitled to certain
registration rights, and the Company is required to file a Shelf Registration
Statement with respect to such Old Notes. The New Notes will constitute a new
issue of securities with no established trading market. The Company does not
intend to list the New Notes on any national securities exchange or seek the
admission thereof to trading in the National Association of Securities Dealers
Automated Quotation System. The Initial Purchaser has advised the Company that
it currently intends to make a market in the New Notes, but it is not obligated
to do so and may discontinue such market making at any time. In addition, such
market making activity will be subject to the limits imposed by the Securities
Act and the Exchange Act and may be limited during the Exchange Offer and the
pendency of the Shelf Registration Statement. Accordingly, no assurance can be
given that an active public or other market will develop for the New Notes or as
to the liquidity of the trading market for the New Notes. If a trading market
does not develop or is not maintained, holders of the New Notes may experience
difficulty in reselling the New Notes or may be unable to sell them at all. If a
market for the New Notes develops, any such market may be discontinued at any
time.
If a public trading market develops for the New Notes, future trading
prices of such securities will depend on many factors including, among other
things, prevailing interest rates, the Company's results of operations and the
market for similar securities. Depending on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition of the Company, the New Notes may trade at a discount from their
principal amount.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of the Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth in the legend thereon, as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act and applicable state
securities laws, or pursuant to an exemption therefrom. The Company does not
intend to register the Old Notes under the Securities Act. In addition, any
holder of Old Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the New Notes may be deemed to have received
restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. To the extent Old Notes are tendered and
accepted in the Exchange Offer, the trading market, if any, for the Old Notes
not so tendered could be adversely affected. See "The Exchange Offer."
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<PAGE> 26
THE TRANSACTIONS
The Company, Holding and Sub Co. each entered into certain transactions
(defined herein as the "Transactions"), including ones with each other, that,
upon their consummation, resulted in the ownership by Holding, which is in turn
wholly-owned by the Key Equity Group, of all of the capital stock of the
Company. The Transactions relating to such sale include: (i) the Merger; (ii)
the Initial Offering; (iii) the Equity Contribution; and (iv) the establishment
of the Revolving Credit Facility. The Transactions were consummated on July 2,
1997.
THE MERGER
On June 5, 1997, the Company, Holding and Sub Co. entered into the Merger
Agreement, pursuant to which, on July 2, 1997, Sub Co. was merged into the
Company (defined herein as the "Merger") and the Company continued as the
surviving entity and became a wholly-owned subsidiary of Holding. Upon
consummation of the Merger: (i) each outstanding share of capital stock of the
Company was converted into the right to receive its proportionate share of $76.2
million in cash to be paid to the existing stockholders of the Company by Sub
Co., subject to certain adjustments; (ii) each share of capital stock of Sub Co.
was converted into one share of capital stock of the Company; and (iii) each
share of capital stock of the Company outstanding immediately prior to the
Merger was cancelled. The Company agreed that, prior to the consummation of the
Merger, it would use its unrestricted cash to repay $42.0 million aggregate
principal amount of Senior Notes due 2001 and pay accrued interest and a
prepayment penalty on such notes of $6.3 million, as well as certain
Transaction-related expenses. The Purchase Price of $76.2 million was adjusted
to reflect changes in the net working capital of the Company. At the closing of
the Merger, approximately $3.5 million of the Purchase Price was deposited into
certain escrow accounts (the "Escrow Accounts") to secure any payment for losses
incurred as a result of any breach of certain representations and warranties
made in the Merger Agreement and to adjust the final Purchase Price in
accordance with the Merger Agreement. The Purchase Price was financed through
the Initial Offering and the Equity Contribution. See "Use of Proceeds."
THE INITIAL OFFERING
The proceeds from the Initial Offering, together with the proceeds from the
Equity Contribution, were used to acquire all of the outstanding shares of
capital stock of the Company from its existing stockholders pursuant to the
terms of the Merger Agreement and to pay fees and expenses relating to the
Transactions. Warrants were issued by Holding and became immediately detachable.
Upon consummation of the Merger, the Company, as the surviving corporation,
became the obligor on the Old Notes to the same extent that Sub Co. was liable
under the Old Notes prior to the Merger.
THE EQUITY CONTRIBUTION
As part of or prior to the consummation of the Merger and the Initial
Offering, the Key Equity Group purchased, for $15.0 million, all of the
outstanding shares of capital stock of Holding, a Delaware corporation formed
for the sole purpose of effecting the Merger and holding its investment in the
Company. Holding then purchased for $15.0 million all of the outstanding shares
of common stock of Sub Co., a Delaware corporation formed for the sole purpose
of effecting the Merger. The proceeds of the Equity Contribution, together with
the proceeds of the Initial Offering, were used to acquire all of the
outstanding shares of capital stock of the Company from its existing
stockholders pursuant to the terms of the Merger Agreement and to pay fees and
expenses relating to the Transactions.
REVOLVING CREDIT FACILITY
To assist the Company in meeting its ongoing working capital requirements
upon the consummation of the Merger and the Initial Offering, the Company
arranged for a Revolving Credit Facility with an aggregate borrowing capacity of
$10.0 million. No borrowings have been drawn under the Revolving Credit
Facility. Advances on the Revolving Credit Facility are secured by substantially
all of the assets of the Company. See "Description of the Revolving Credit
Facility."
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<PAGE> 27
USE OF PROCEEDS
The proceeds from the Initial Offering, together with the proceeds from the
Equity Contributions, were used to (i) pay the Purchase Price pursuant to the
Merger Agreement ($76.2 million), (ii) pay certain fees and expenses ($4.5
million) and (iii) fund working capital of the Company ($4.3 million).
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1997 and pro forma as adjusted to give effect to the Transactions as
if each had occurred on June 30, 1997 (dollars in thousands). The table should
be read in conjunction with the consolidated financial statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------
ACTUAL PRO FORMA
------- ---------
<S> <C> <C>
Cash and cash equivalents(a).............................................. $51,805 $ 6,727
======= =======
Total long-term debt, including current portion(b):
Notes offered pursuant to the Initial Offering and the Exchange
Offer(c)............................................................. -- 69,250
10% Senior Notes due 2001(d)............................................ 42,000 --
------- -------
Total long-term debt................................................. 42,000 69,250
Shareholders' equity(e):
Common stock............................................................ 10 10
Additional paid-in capital(f)........................................... 20,377 15,740
Retained earnings....................................................... 8,845 --
------- -------
29,232 15,750
Shareholders' basis reduction(g)........................................ -- (4,028)
------- -------
Shareholders' equity................................................. 29,232 11,722
------- -------
Total capitalization................................................. $71,232 $80,972
======= =======
</TABLE>
- ---------------
(a) Prior to the consummation of the Merger, the Company redeemed its existing
indebtedness at a premium and paid certain Transaction-related expenses.
(b) The Company established a Revolving Credit Facility that permits the Company
to draw amounts of up to $10.0 million. No funds were drawn on the Revolving
Credit Facility upon consummation of the Merger. The Revolving Credit
Facility is secured by substantially all of the assets of the Company. See
"Description of the Revolving Credit Facility."
(c) Reflects the issuance of $70.0 million aggregate principal amount of Notes,
net of $750,000 relating to the value attributable to the Warrants.
(d) Reflects $42.0 million aggregate principal amount of 10% Senior Notes due
2001 issued in connection with the Reorganization and retired pursuant to
the consummation of the Transactions.
(e) Reflects the recording of the Equity Contribution of $15.0 million, $750,000
attributable to the value of the Warrants and the elimination of historical
shareholders' equity as a result of the Transactions.
(f) Includes $750,000 relating to the value attributable to the Warrants.
(g) Reflects the recording of the carryover predecessor basis of certain
carryover ownership interests.
21
<PAGE> 28
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma consolidated balance sheet of the Company
gives effect to the Transactions and the pro forma adjustments described in the
notes thereto as if the Transactions had occurred on June 30, 1997. The
unaudited pro forma consolidated statements of earnings of the Company for the
year ended June 30, 1997 give effect to the Transactions and the pro forma
adjustments described in the notes thereto as if the Transactions had occurred
on July 1, 1996.
As part of the Transactions, Holding acquired all of the outstanding shares
of the Company in the Merger through its wholly-owned subsidiary, Sub Co. (the
acquirer for accounting purposes), which was merged with and into the Company.
The acquisition of the Company was accounted for in the accompanying unaudited
pro forma balance sheet and unaudited pro forma statement of earnings using the
purchase method of accounting. Accordingly, the Purchase Price was allocated to
the net assets acquired based upon preliminary estimates of their fair values.
The pro forma financial data is for informational purposes only and may not
necessarily be indicative of the results of operations and financial position of
the Company in the future or what the results of operations or financial
position of the Company would have been had the Transactions occurred on the
dates indicated. The pro forma data is based on a Purchase Price of $76.2
million, as adjusted in accordance with the terms of the Merger Agreement. The
adjustments primarily affect the amount of pro forma cash and the pro forma
goodwill and goodwill amortization.
The unaudited pro forma consolidated statements and accompanying notes
thereto should be read in conjunction with the consolidated financial statements
and the notes thereto included elsewhere in this Prospectus.
22
<PAGE> 29
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................ $ 51,805 $ (45,078)(a) $ 6,727
Restricted cash.......................................... 1,529 (1,529)(a) --
Accounts receivable:
Contracts:
Uncompleted, including unbilled amounts of $2,188... 3,652 -- 3,652
Completed, less allowance of $101 for doubtful
accounts.......................................... 1,676 -- 1,676
Trade, less allowance of $40 for doubtful accounts..... 1,530 -- 1,530
-------- --------- ---------
Total accounts receivable...................... 6,858 -- 6,858
Inventory................................................ 4,265 -- 4,265
Prepaid expenses......................................... 481 -- 481
-------- --------- ---------
Total current assets........................... 64,938 (46,607) 18,331
Property, plant and equipment, net....................... 8,390 -- 8,390
Other assets:
Goodwill............................................... -- 52,311(b) 52,311
Patents, less accumulated amortization of $4,317....... 18,283 -- 18,283
Reorganization value in excess of amounts allocable to
identifiable assets, less accumulated amortization
of $1,599........................................... 7,583 (7,583)(c) --
Deferred financing costs............................... 170 4,220(d) 4,390
-------- --------- ---------
Total other assets............................. 26,036 48,948 74,984
-------- --------- ---------
Total assets................................... $ 99,364 $ 2,341 $ 101,705
======== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable......................................... $ 3,413 $ -- $ 3,413
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 10,720 -- 10,720
Accrued liabilities...................................... 11,287 (5,078)(e) 6,209
-------- --------- ---------
Total current liabilities...................... 25,420 (5,078) 20,342
Long-term debt........................................... 42,000 27,250(f) 69,250
Non-pension post-retirement benefit obligation........... 2,712 (2,321)(g) 391
Shareholders' equity:
Common stock........................................... 10 -- 10
Additional paid-in capital............................. 20,377 (4,637)(h) 15,740
Retained earnings...................................... 8,845 (8,845)(i) --
-------- --------- ---------
29,232 (13,482) 15,750
Shareholders' basis reduction.......................... -- (4,028)(j) (4,028)
-------- --------- ---------
Shareholders' equity................................ 29,232 (17,510) 11,722
-------- --------- ---------
Total liabilities and shareholders' equity..... $ 99,364 $ 2,341 $ 101,705
======== ========= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet
23
<PAGE> 30
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(a) Prior to the consummation of the Merger, the Company reduced its existing
cash balance by redeeming its existing indebtedness at a premium, paying
certain Transaction-related expenses and remitting any remaining
unrestricted cash in excess of $2,000 to existing stockholders. The
following reflects the net decrease in cash and cash equivalents as a result
of the pre-closing payments and the Transactions:
<TABLE>
<S> <C>
Pre-closing adjustments:
Repayment of existing long-term debt......................................... $(42,000)
Payment of interest and prepayment penalty on existing long-term debt(1)..... (6,312)
Payment of employee bonuses and certain Transaction-related expenses......... (6,627)
Payment to existing stockholders(2).......................................... (989)
Proceeds from the exercise of stock options and stock warrants............... 6,236
--------
Total pre-closing adjustments.............................................. (49,692)
Transaction adjustments:
Excess proceeds from the Initial Offering and the Equity Contribution(3)..... 3,085
Reclassification of restricted cash to cash.................................. 1,529
--------
Total Transaction adjustments.............................................. 4,614
--------
Total...................................................................... $(45,078)
========
</TABLE>
- ---------------
(1) Includes a 10% prepayment penalty of $4,200 and accrued interest of
$2,112.
(2) Existing stockholders were required to leave $2,000 in unrestricted
cash in the Company at closing.
(3) Includes proceeds of $70,000 from the Initial Offering and $15,000 from
the Equity Contribution less payments to existing stockholders of
$77,701 and payment of capitalized Transaction-related expenses of
$4,214.
(b) Reflects goodwill of $52,311 representing the excess of the $77,701 adjusted
pro forma purchase price over the net assets acquired of $21,362 reduced by
the shareholders' basis reduction of $4,028 to reflect the carryover
predecessor basis of certain carryover ownership interests.
(c) Reflects the elimination of reorganization value in excess of amounts
allocable to identifiable assets of $7,583.
(d) Reflects an increase in deferred financing costs as a result of the Initial
Offering of $4,220.
(e) Reflects the payment of certain incentive compensation, interest costs and
Transaction-related expenses that were accrued prior to June 30, 1997. See
Note (a) above.
(f) Reflects the net increase in long-term debt resulting from the Transactions
as follows:
<TABLE>
<S> <C>
Notes........................................................................ $ 70,000
Value attributable to the Warrants........................................... (750)
Repayment of existing long-term debt......................................... (42,000)
--------
Total...................................................................... $ 27,250
========
See Note (a) above.
</TABLE>
(g) Reflects purchase price accounting adjustment to state non-pension
post-retirement benefit obligation at fair value.
(h) Reflects the net decrease in additional paid-in capital as follows:
<TABLE>
<S> <C>
Exercise of stock options and stock warrants................................. $ 6,236
Payment to existing stockholders............................................. (989)
Elimination of historical additional paid-in capital......................... (20,377)
Elimination of additional paid-in capital relating to issuance of stock
options and warrants........................................................ (6,236)
Elimination of additional paid-in capital relating to the payment to existing
stockholders................................................................ 989
Recording of additional paid-in capital from the Equity Contribution......... 14,990
Recording of value attributable to the Warrants.............................. 750
--------
Total...................................................................... $ (4,637)
========
</TABLE>
(i) Reflects the elimination of historical retained earnings as a result of the
Transactions.
(j) Reflects the shareholders' basis reduction of $4,028 to record the carryover
predecessor basis of certain carryover ownership interest.
24
<PAGE> 31
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
--------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net revenue.................................................. $ 76,433 $ -- $76,433
Cost of goods sold........................................... 45,603 -- 45,603
-------- ------- -------
Gross profit............................................... 30,830 -- 30,830
Selling, general and administrative expenses................. 12,866 (1,433)(a) 11,433
Research and development expenses............................ 4,594 -- 4,594
Amortization expense......................................... 2,306 2,037(b) 4,343
-------- ------- -------
Operating profit........................................... 11,064 (604) 10,460
Interest expense............................................. (4,200) (4,832)(c) (9,659)
(627)(d)
Other income (expense) -- net................................ 2,263 (1,967)(e) 296
-------- ------- -------
Income (loss) before income taxes.......................... 9,127 (8,030) 1,097
Income taxes not payable in cash............................. (2,551) 1,492(f) (1,059)
Federal income taxes, current................................ (78)(g) 113 35
-------- ------- -------
Net income (loss).......................................... $ 6,498 $(6,425) $ 73
======== ======= =======
OTHER DATA:
Ratio of earnings to fixed charges(h)........................ 3.12x -- 1.11x
Depreciation and amortization................................ $ 3,765 $ 2,037 $ 5,802
EBITDA(i).................................................... 14,829 1,433 16,262
Adjusted EBITDA(j)........................................... $ 16,808 $ 344 $17,152
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statements of
Earnings
25
<PAGE> 32
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1997
-------------
<S> <C> <C>
(a) Reflects the elimination of certain Transaction-related professional fees and other costs
and historical Directors' Fees, offset by a new annual advisory fee payable to KECC:
Elimination of certain Transaction-related professional fees................ $ (460)
Elimination of historical Directors' Fees................................... (1,289)
Addition of a new annual KECC advisory fee.................................. 200
Reduction in net periodic post-retirement benefit cost resulting from a
purchase price accounting adjustment........................................ $ 116
--------
Total................................................................ $(1,433)
========
(b) Reflects the elimination of historical amortization of the reorganization
value in excess of identifiable costs and the addition of amortization of
goodwill resulting from the Merger as follows:
Elimination of historical amortization of reorganization value in excess of
identifiable costs.......................................................... $ (579)
Addition of goodwill amortization (20 years straight line).................. 2,616
--------
Total................................................................ $ 2,037
========
(c) Reflects the adjustment to interest expense as follows:
Elimination of historical interest expense.................................. $ 4,200
Interest expense on the Notes(1)............................................ (9,032)
--------
Total................................................................ $(4,832)
========
---------------
(1) Reflecting cash interest expense on $70,000 at an interest rate of 12.75% and
amortization of original issue discount relating to the value attributable to the Warrants.
(d) Reflects the amortization of capitalized costs arising from the Transactions (7 years
straight line).
(e) Reflects the adjustment to interest income as follows:
Elimination of historical interest income................................... $(2,303)
Interest income on pro forma cash balance(1)................................ 336
--------
Total................................................................ $(1,967)
========
</TABLE>
<TABLE>
<S> <C>
---------------
(1) Assuming an interest income rate of 5.0%.
(f) Reflects adjustments to the Company's income taxes not payable in cash based upon the
Company's effective income tax rate for the period presented.
(g) Reflects estimated alternative minimum taxes ("AMT") payable for the period.
(h) For purposes of this computation, earnings are defined as earnings or losses before
extraordinary items and fixed charges. Fixed charges are the sum of: (i) interest expense,
including the amortization of original issue discount relating to the value attributable to
the Warrants; (ii) amortization of deferred financing costs; and (iii) that portion of
rental expense that is the functional equivalent to interest expense.
</TABLE>
26
<PAGE> 33
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C> <C>
(i) "EBITDA" means operating profit plus depreciation and amortization. EBITDA is determined
after the deduction of Directors' Fees of $1,289 for the year ended June 30, 1997. Upon the
completion of the Transactions, these fees were replaced by a post-Merger KECC advisory fee
of $200 per year. Management understands that EBITDA is an indicator customarily used by
investors to gauge a company's ability to service its interest and principal obligations.
EBITDA should not be considered in isolation from, as a substitute for or as being more
meaningful than net income, cash flows from operating, investing and financing activities,
or other income or cash flow statement data prepared in accordance with generally accepted
accounting principles, and it should not be construed as an indication of the Company's
operating performance or as a measure of liquidity. EBITDA, as presented herein, may be
calculated differently by other companies and, as such, EBITDA amounts presented herein may
not be comparable to other similarly titled measures of other companies.
(j) "Adjusted EBITDA" means EBITDA adjusted to reflect: (i) an add-back of Directors' Fees paid
during fiscal 1997, offset by a post-Merger KECC advisory fee of $200 per year; and (ii)
the add-back of an $890 one-time accrual relating to the replacement of certain components
in forced convection heaters due to an error in material specifications.
</TABLE>
27
<PAGE> 34
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS)
The following table sets forth selected historical consolidated financial
and other data of the Company for the five years ended June 30, 1997 which have
been derived from the Company's audited consolidated financial statements. The
information presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's consolidated financial statements and notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY REORGANIZED COMPANY
----------------------------------------- -------------------------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JUNE 30, JULY 1, 1994 JAN. 4, 1995
----------------------- THROUGH THROUGH YEAR ENDED YEAR ENDED
1993 1994 JAN. 3, 1995 JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1997
--------- --------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue..................... $ 55,194 $ 51,975 $ 25,948 $27,854 $62,771 $76,433
Cost of goods sold.............. 41,879 33,329 16,576 17,036 39,024 45,603
--------- --------- --------- ------- ------- -------
Gross profit.................. 13,315 18,646 9,372 10,818 23,747 30,830
Selling, general and
administrative expenses....... 8,093 7,001 3,430 5,105 10,723 12,866
Research and development
expenses...................... 4,933 4,520 2,082 2,302 4,557 4,594
Amortization expense............ 9,276 5,434 2,512 1,203 2,407 2,306
--------- --------- --------- ------- ------- -------
Operating profit (loss)....... (8,987) 1,691 1,348 2,208 6,060 11,064
Interest expense................ (26,556) -- -- (2,077) (4,200) (4,200)
Other income (expense) -- net... (53,192) (16) 35 784 1,540 2,263
--------- --------- --------- ------- ------- -------
Income before items below..... (88,735) 1,675 1,383 915 3,400 9,127
Reorganization items(a)......... (275) (271) (1,164) -- -- -- (2,551)
Income taxes not payable in
cash(b)....................... 386 -- -- (445) (1,418)
Federal income taxes, current... -- -- -- -- (105) (78)
Extraordinary gain(c)........... -- -- 214,773 -- -- --
Cumulative effect on prior years
of change in method of
accounting for non-pension
post-retirement benefits...... -- -- (1,906) -- -- --
--------- --------- --------- ------- ------- -------
Net income (loss)............. $ (88,624) $ 1,404 $ 213,086 $ 470 $ 1,877 $ 6,498
========= ========= ========= ======= ======= =======
OTHER DATA:
EBITDA(d)....................... $ 2,177 $ 8,736 $ 4,625 $ 4,109 $ 9,781 $14,829
Depreciation and amortization... 11,164 7,045 3,277 1,901 3,721 3,765
Capital expenditures............ 141 484 480 680 2,152 990
Backlog......................... 18,890 21,249 31,941 25,931 38,910 30,307
Ratio of earnings to fixed
charges(e).................... -- 15.00x 5.40x 1.40x 1.80x 3.12x
Deficiency of earnings to cover
fixed charges................. $ 89,010 -- -- -- -- --
CASH FLOW PROVIDED BY (USED IN):
Operating activities............ $ 4,426 $ 8,319 $ 13,803 $(1,389) $22,521 $ 8,973
Investing activities............ (72) (468) (479) 90 (1,663) (978)
Financing activities............ -- -- (6,200) (3,797) 125 (5)
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital................. $ 21,174 $ 29,062 $ 18,649 $21,725 $27,599 $39,518
Total assets.................... 81,574 85,983 87,952 83,808 95,977 99,364
Total debt...................... 269,504 269,411 42,000 42,000 42,000 42,000
Shareholders' equity (capital
deficiency)................... (194,316) (192,912) 20,174 20,644 22,652 29,232
</TABLE>
(See footnotes on following page)
28
<PAGE> 35
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS)
(a) Reorganization items relate to the period in which the Company was operating
under the protection of Chapter 11 of the Bankruptcy Code.
(b) Income taxes not payable in cash represent the tax effect of certain tax
attributes existing prior to the Reorganization and are recorded as a
reduction to reorganization value in excess of amounts allocable to
identifiable assets as required by SOP 90-7.
(c) An extraordinary gain of $214,773 was recognized on January 3, 1995 because
the consideration for the discharge of pre-petition liabilities was less
than the carrying value of the recorded liabilities discharged.
(d) EBITDA for any period means operating profit plus depreciation and
amortization. EBITDA is determined after deduction of Directors' Fees of $0,
$0, $0, $203, $995 and $1,289 for the periods ended June 30, 1993, June 30,
1994, January 3, 1995, June 30, 1995, June 30, 1996 and June 30, 1997,
respectively. Upon completion of the Transactions, these fees were replaced
by a post-Merger KECC advisory fee of $200 per year. Management understands
that EBITDA is an indicator customarily used by investors to gauge a
company's ability to service its interest and principal obligations. EBITDA
should not be considered in isolation from, as a substitute for or as being
more meaningful than net income, cash flows from operating, investing and
financing activities, or other income or cash flow statement data prepared
in accordance with generally accepted accounting principles, and should not
be construed as an indication of the Company's operating performance or as a
measure of liquidity. EBITDA, as presented herein, may be calculated
differently by other companies and, as such, EBITDA amounts presented herein
may not be comparable to other similarly titled measures of other companies.
(e) For purposes of this computation, earnings are defined as earnings or loss
before extraordinary items and fixed charges. Fixed charges are the sum of
(i) interest expense; (ii) amortization of deferred financing costs; and
(iii) that portion of rental expense that is the functional equivalent to
interest expense.
29
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a market and technological leader in the design and assembly
of state-of-the-art glass bending and tempering (or strengthening) systems used
in the production of safety glass. The Company sells its systems worldwide
primarily to the Automotive Market and the Architectural Market. The Company
complements its sale of complete systems (Original Equipment) with the sale of
aftermarket products and services consisting of retrofits, tooling and
replacement parts. The Company has generated a continuing stream of aftermarket
revenue due to the long life and growing installed base of more than 375 systems
worldwide.
For fiscal year 1997, the Company generated revenue and EBITDA of $76.4
million and $14.8 million, respectively. Original Equipment revenue totaled
$50.2 million or 65.7% of the Company's total revenue, with $26.2 million or
34.3% of total revenue generated by aftermarket sales in connection with the
maintenance and enhancement of the Company's installed base of systems.
The Company expects to introduce two improvements to its Deep Bending
System (as defined herein) in 1997. Both improvements are currently in prototype
production and were developed to address specific customer needs. Management
believes that these two improvements will create sales opportunities for its
Original Equipment and aftermarket product offerings. See "Business -- Product
Development."
In May of 1993, the Company filed for protection under Chapter 11 largely
as a result of its inability to meet its obligations with respect to
approximately $269.5 million of indebtedness outstanding as of May 1993, $193.0
million of which was incurred in connection with a leveraged buyout in 1989. See
"Business -- History." Upon emergence from bankruptcy on January 4, 1995 with
new shareholders, a reorganized senior management team, a business strategy
focused on a more profitable product mix and cost containment and significantly
reduced debt service obligations, the Company adopted "fresh start" financial
reporting that reflected the financial impact of the Reorganization. The
Company's assets and liabilities were adjusted to reflect their estimated fair
value and the accumulated deficit as of January 3, 1995 was eliminated.
As a result of the Reorganization, the results of operations, financial
condition and cash flow of the Company for dates and periods subsequent to
January 3, 1995 are not necessarily comparable to those prior to January 4,
1995. The following table sets forth the amounts and the percentage of revenue
of certain revenue and expense items for the periods indicated. The
pre-Reorganization six-month period ended January 3, 1995 and the
post-Reorganization six-month period ended June 30, 1995 have been combined for
purposes of this discussion (dollars in millions).
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue(a):
Original Equipment................................... $33.0 61.3% $34.2 54.5% $50.2 65.7%
Aftermarket.......................................... 20.8 38.7 28.6 45.5 26.2 34.3
----- ----- ----- ----- ----- -----
Total net revenue.................................. 53.8 100.0 62.8 100.0 76.4 100.0
Cost of goods sold(a).................................. 33.6 62.5 39.0 62.1 45.6 59.7
----- ----- ----- ----- ----- -----
Gross profit........................................... 20.2 37.5 23.8 37.9 30.8 40.3
SG&A expense........................................... 8.5 15.8 10.7 17.1 12.9 16.8
R&D expense............................................ 4.4 8.2 4.6 7.3 4.6 6.0
Amortization expense................................... 3.7 6.8 2.4 3.8 2.3 3.0
----- ----- ----- ----- ----- -----
Operating profit..................................... $ 3.6 6.7% $ 6.1 9.7% $11.0 14.5%
===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(a) Contract revenue and cost of goods sold are recognized on a percentage of
completion basis measured by the percentage of costs incurred to the
estimated total costs of each contract.
30
<PAGE> 37
RESULTS OF OPERATIONS
Fiscal Year 1997 Compared with Fiscal Year 1996
Net revenue for fiscal 1997 increased $13.6 million, or 21.7%, to $76.4
million from $62.8 million for fiscal 1996. Original Equipment revenue increased
$16.0 million, or 46.8%, to $50.2 million for fiscal 1997 compared to $34.2
million for fiscal 1996. The increase in Original Equipment revenue was
primarily the result of increased contract signings and demand for the Company's
products, particularly automotive systems. Aftermarket revenue decreased $2.4
million, or 8.4%, to $26.2 million for fiscal 1997 from $28.6 million for fiscal
1996. The decrease in aftermarket revenue was due to a decline in automotive
retrofit and tooling revenue partially offset by an increase in replacement
parts revenue. Generally, automotive retrofit and tooling revenues fluctuate
based on customer demands and are influenced by a variety of factors, including
economic conditions and the customers' retrofit and tooling schedules.
A significant portion of the Company's revenue is generated from customers
outside of the United States. For fiscal 1997, Original Equipment revenue from
foreign customers was $37.1 million (73.9% of total Original Equipment revenue)
as compared to $24.9 million (72.8% of total Original Equipment revenue) for
fiscal 1996. The percentage of aftermarket revenue from foreign customers
decreased to 65.1% of total aftermarket revenue for fiscal 1997 compared to
66.9% for fiscal 1996.
Gross profit increased $7.0 million, after the effect of a one-time expense
of $0.9 million to replace certain components in forced convection heaters, to
$30.8 million, or a gross margin percentage of 40.3%, for fiscal 1997 compared
to $23.8 million, or a gross margin of 37.9%, for fiscal 1996. The increase in
gross profit was due to increased revenue for 1997. The increase in the gross
margin is the result of a more profitable product mix (reflecting a shift toward
increased sales to the Automotive Market) for fiscal 1997 as compared to fiscal
1996.
The one-time expense of $0.9 million to fabricate, replace and install
certain components in forced convection heaters was a result of the use of an
inadequate grade of stainless steel in those components. After identifying the
problem, the Company identified an appropriate grade of stainless steel for
fabrication of replacement components to be installed in those forced convection
heaters. Based on the Company's past experience, the Company believes that its
materials testing procedures are adequate to prevent a recurrence of a similar
event.
Selling, general and administrative expenses increased $2.2 million, or
20.6%, to $12.9 million for fiscal 1997 from $10.7 million for fiscal 1996. This
increase was primarily the result of increases in incentive compensation costs
due to increased earnings and Directors' Fees.
Research and development expenses were $4.6 million for fiscal 1997 and
fiscal 1996.
Amortization expense for fiscal 1997 was $2.3 million compared to $2.4
million for fiscal 1996.
Operating profit increased $4.9 million, or 80.3%, to $11.0 million for
fiscal 1997 from $6.1 million for fiscal 1996. Operating profit as a percentage
of revenue was 14.5% for fiscal 1997 as compared to 9.7% for fiscal 1996 due to
increased revenue and a more profitable product mix.
Interest expense for fiscal 1997 and fiscal 1996 was $4.2 million. Other
income, net, which is comprised primarily of interest income, increased $0.7
million, or 46.9%, to $2.3 million for fiscal 1997 from $1.6 million for fiscal
1996. This increase was the result of an $8.0 million, or 18.2%, increase in the
average cash balance for fiscal 1997 as compared to fiscal 1996.
Since the Reorganization, the Company's effective tax rate has been greater
than the statutory tax rate as a result of the amortization expense relating to
the Reorganization that is not deductible for income tax purposes. The Company's
effective tax rate decreased to 28.8% for fiscal 1997 compared to 44.8% for
fiscal 1996 as a result of the reduction in the valuation allowance of deferred
taxes and significantly higher pretax income, without an increase in the
nondeductible amortization expenses. Income taxes not payable in cash relate to
pre-Reorganization temporary differences, primarily related to patent
amortization, and utilization of pre-Reorganization net operating loss
carryforwards. Income taxes not payable in cash increased $1.1 million
31
<PAGE> 38
to $2.5 million for fiscal 1997 from $1.4 million for fiscal 1996 due primarily
to increased earnings in fiscal 1997. See the notes to the consolidated
financial statements included herein for a further discussion of income taxes.
Net income increased $4.6 million, after the effect of a one-time expense
of $0.9 million to replace certain components in forced convection heaters, to
$6.5 million for fiscal 1997 compared to $1.9 million for fiscal 1996. This
increase in net income was due primarily to increased operating profit.
Fiscal Year 1996 Compared with Fiscal Year 1995
Net revenue for fiscal 1996 increased $9.0 million, or 16.7%, to $62.8
million from $53.8 million for fiscal 1995. Original Equipment revenue increased
$1.2 million, or 3.7%, to $34.2 million for fiscal 1996 compared to $33.0
million for the same period in fiscal 1995. The increase in Original Equipment
revenue was primarily the result of increased contract signings and demand for
the Company's products, particularly architectural systems. Aftermarket revenue
increased $7.8 million, or 37.3%, to $28.6 million for fiscal 1996 from $20.8
million for fiscal 1995 due in part to automotive retrofits for Glasstech
systems and a strong demand for automotive aftermarket products.
Original Equipment revenue from foreign customers for fiscal 1996 was $24.9
million (72.8% of total Original Equipment revenue) as compared to $23.6 million
(71.5% of total Original Equipment revenue) for fiscal 1995. The percentage of
aftermarket revenue from foreign customers increased to 66.9% of total
aftermarket revenue for fiscal 1996 compared to 51.5% for fiscal 1995.
Gross profit increased $3.6 million to $23.8 million, or a gross margin of
37.9%, for fiscal 1996 compared to $20.2 million, or a gross margin of 37.5%,
for fiscal 1995. The increase in gross profit was due to increased Original
Equipment and aftermarket revenue.
Selling, general and administrative expenses increased $2.2 million, or
25.6%, to $10.7 million for fiscal 1996 from $8.5 million in fiscal 1995. This
increase was primarily the result of increases in incentive compensation costs
and Directors' Fees, neither of which were incurred in the period from July 1,
1994 through January 3, 1995, and professional fees.
Research and development expenses increased $0.2 million, or 3.9%, to $4.6
million for fiscal 1996 from $4.4 million for fiscal 1995. This increase was
primarily the result of an increase in general development project activities.
Amortization expense decreased $1.3 million, or 35.2%, to $2.4 million for
fiscal 1996 compared to $3.7 million for fiscal 1995. The decrease in
amortization expense resulted from the fair value adjustments made to patents
and other intangibles at January 3, 1995 in conjunction with fresh start
reporting.
Operating profit increased $2.5 million, or 69.4%, to $6.1 million for
fiscal 1996 compared to $3.6 million for fiscal 1995. This increase resulted
from higher Original Equipment and aftermarket revenue and lower amortization
expenses as previously discussed.
Interest expense increased $2.1 million to $4.2 million for fiscal 1996
from $2.1 million for fiscal 1995 as a result of debt service obligations
beginning on January 3, 1995. Other income, net, which is comprised primarily of
interest income, increased $0.8 million to $1.6 million for fiscal 1996 compared
to $0.8 million for fiscal 1995. Prior to January 4, 1995, interest income of
$0.7 million was netted against certain Reorganization items.
The Company's effective tax rate increased to 44.8% for fiscal 1996
compared to 39.3% for combined fiscal 1995. Since the Reorganization, the
Company's effective tax rate has been greater than the statutory tax rate as a
result of amortization expense relating to the Reorganization that is not
deductible for income tax purposes. The lower effective tax rate in fiscal 1995
was a result of the use of net operating loss carryovers in the Reorganization
period. See the notes to the consolidated financial statements included herein
for a further discussion of income taxes.
An extraordinary gain of $214.8 million was recognized at January 3, 1995
because the consideration for the discharge of pre-petition liabilities was less
than the carrying value of the recorded liabilities discharged.
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Upon emerging from bankruptcy, liabilities subject to compromise totaling $269.5
million were discharged for 100% of the Company's common stock, $12.6 million in
cash and $42.0 million of new senior debt.
Net income for fiscal 1996 was $1.9 million compared to $213.6 million for
fiscal 1995. Net income for fiscal 1995 included an extraordinary gain of $214.8
million related to the discharge of pre-petition liabilities, an expense of $1.9
million related to the cumulative effect on prior years of a change in the
Company's method of accounting for non-pension post-retirement benefits and
expenses related to the Reorganization of $1.2 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is from funds provided by
operations. On June 30, 1997, the Company had cash of $51.8 million and
long-term principal amounts of indebtedness of $42.0 million in the form of 10%
Senior Notes, which as of June 30, 1997 carried a 10% prepayment penalty. The
Company's working capital balance was $27.6 million at June 30, 1996 and $39.5
million at June 30, 1997. The $11.9 million increase in working capital from
June 30, 1996 to June 30, 1997 resulted from an increase in cash generated by
new system orders. In most instances, progress payments on new system orders are
received or invoiced in advance of revenue recognition. When progress payments
are received or invoiced in advance of such revenue recognition, the Company
increases current liabilities represented by its billings in excess of costs and
estimated earnings on uncompleted contracts. When the revenue is earned, the
Company recognizes the revenue and reduces the billings in excess of costs and
estimated earnings on uncompleted contracts balance.
Net cash provided by operating activities can vary significantly from
quarter to quarter or year to year due to the number of new system signings and
the amount and timing of new system payments. In particular, due to the timing
of receipt of cash progress payments, net cash provided by operating activities
for fiscal 1997 was $9.0 million, whereas for fiscal 1996, net cash provided by
operating activities was $22.5 million. The increased level of net cash provided
by operating activities for fiscal 1996 was principally the result of a
significant number of new system orders in the fourth quarter of fiscal 1996.
Net cash provided by operating activities in the fourth quarter of fiscal 1996
was $11.5 million.
Capital expenditures, including investment in prototype fixed assets, were
$1.0 million for fiscal 1997 and $2.2 million for fiscal 1996. Future capital
expenditures, excluding prototype assets, will be used to fund the replacement
or improvement of operating equipment and facilities at levels approximating
$1.5 million per year. In addition, the Company may need to make periodic
investments in prototype fixed assets to be used for customer demonstrations and
research and development purposes. Existing prototype fixed assets which outlive
their usefulness for customer demonstrations or research and development
purposes, or both, may be refurbished and sold.
As of June 30, 1997, the Company had net operating loss ("NOL")
carryforwards for regular and alternative minimum tax purposes of approximately
$21.0 million and $17.0 million, respectively, which expire in the years 2009
through 2011. As a result of the change of control effected pursuant to the
Merger, future years will be subject to an annual usage limitation.
Upon consummation of the Transactions, the Company's existing cash of $51.8
million, except for $2.0 million, was used to repurchase the 10% Senior Notes
and pay the prepayment penalty on the 10% Senior Notes and other related
expenses. The Company, as successor to Sub Co., also became the obligor on the
Old Notes after the Merger was effected and the proceeds from the sale of the
Old Notes, together with the Equity Contribution, were used to pay the existing
stockholders of the Company, pay Transaction-related expenses and fund working
capital of the Company. On a pro forma basis as of June 30, 1997, the cash of
the Company would have been reduced to $6.7 million and the Company would have
had a working capital deficiency of $2.0 million, which includes $10.7 million
of billings in excess of costs and estimated earnings on uncompleted contracts.
The Notes do not require any principal payments prior to maturity. Also, in
connection with the Transactions, the Company established a $10.0 million
Revolving Credit Facility which will be used primarily
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<PAGE> 40
to fund working capital requirements and to secure issuances of standby letters
of credit, which were $1.5 million at June 30, 1997.
As a result of the Transactions, the Company will incur additional interest
charges of $4.73 million per year (exclusive of deferred financing costs and the
amortization expense attributable to the warrants) plus any additional amounts
of interest on any outstanding balances under the Revolving Credit Facility. The
Company will also experience a decrease in other income, in the form interest
income, resulting from the decrease in outstanding cash balances in existence
prior to the Transactions. In fiscal 1997, the Company had interest income equal
to $2.3 million. The Company will also benefit from the elimination of
Director's Fees, which for fiscal 1997 were $1.3 million, but will incur an
ongoing advisory fee payable to KECC of $200,000 per year.
Although the Company's ability to generate liquidity will be effected by
the additional interest expense and a decrease in interest income discussed
above, management believes that internally generated funds, together with
amounts available under the Revolving Credit Facility, will be sufficient to
satisfy the Company's operating cash requirements and make scheduled interest
and principal payments under the Revolving Credit Facility and scheduled
interest payments on the Notes. However, the ability of the Company to satisfy
its obligations will be primarily dependent upon its future financial and
operating performance and upon its ability to renew or refinance borrowings or
to raise additional equity capital if necessary. The Company's business is
subject to fluctuations due to changes in the world markets for the end products
produced by its equipment (largely in the cyclical markets of automobiles and
construction), currency fluctuations, geopolitical events and other
macroeconomic forces largely beyond the ability of the Company to predict or
control. Except with respect to the effects of the Transactions discussed above,
management is not currently aware of any trends, demands, commitments or
uncertainties which will or are reasonably likely to result in a material change
in the Company's liquidity.
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BUSINESS
OVERVIEW
The Company is a market and technological leader in the design and assembly
of state-of-the-art glass bending and tempering (i.e., strengthening) systems
used by glass manufacturers and processors in the conversion of flat glass into
safety glass. The Company sells its systems worldwide, primarily to the
Automotive Market and the Architectural Market. The Company's systems are
designed to meet customers' safety glass production requirements for complexity,
accuracy and optical quality while simultaneously enhancing system productivity,
flexibility and cost efficiency. For the Automotive Market, the Company has
developed bending and tempering systems that meet automobile manufacturers'
safety glass specifications for current and future production models. Management
believes that the Company has a leading share of and is the only significant
independent supplier in the market for technologically advanced systems used to
bend and temper automotive glass into complex shapes. For the Architectural
Market, the Company's energy-efficient processing systems are capable of
producing high-quality bent or flat glass at output rates tailored to meet
customer-specific production requirements. As a result of the long useful life
and growing worldwide installed base of its systems, the Company is able to
complement its sale of Original Equipment with the sale of aftermarket products
and services consisting of retrofits, tooling (i.e., molds used to shape
automotive glass) and replacement parts. The Company's products feature
proprietary technologies that have been developed over the last 25 years and are
protected by more than 700 patents and patent application filings worldwide.
For the fiscal year ended June 30, 1997, the Company generated revenue and
Adjusted EBITDA of $76.4 million and $16.8 million, respectively. Original
Equipment revenue totaled $50.2 million, or 65.7%, of the Company's total
revenue for the same period. The balance of the Company's revenue was generated
through aftermarket sales including retrofits, tooling and replacement part
sales intended to maintain or enhance the Company's installed base of systems.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General" for Original Equipment and aftermarket revenues for each
of the last three years.
A Glasstech system performs a series of processes that bend and strengthen
flat glass in the production of safety glass products such as car windows. In
each system, flat glass supplied by glass manufacturers is conveyed horizontally
on ceramic rollers through a high temperature furnace, a bending module and a
quench module (which completes the tempering process by rapidly cooling the
heated glass). Microprocessor-based controls regulate temperature, speed and
glass location throughout the entire process. In addition, the Company develops
its own proprietary software to control the integrated system. The modular
design of a Glasstech system readily enables the Company to offer customized
systems that meet specific technical requirements of its customers. Such a
design also creates equipment retrofit and upgrade opportunities for the
Company. The Company works closely with its customers as they identify capacity
and functionality requirements for a new system and then throughout the usual
ten to twelve month order, installation and acceptance cycle to ensure
satisfaction with their completed system. Systems designed for the Automotive
Market, which are used to form and temper glass for automotive back, side and
roof windows, as well as to form and anneal glass used for windshields, range in
price from approximately $2.5 million to $7.0 million. Systems designed for the
Architectural Market process curved and flat tempered glass which are used for
skylights, insulating glass, patio doors, furniture and appliances. These
systems range in price from approximately $0.5 million to $3.0 million.
The Company has an installed base of more than 375 systems located in over
40 countries on six continents. The Company's customers include virtually all
major glass manufacturers and processors including: Chrysler Corporation, Ford
Motor Company, Guardian Industries Corp. and PPG Industries, Inc. in the United
States; Compagnie de Saint-Gobain and Pilkington plc in Europe; Asahi Glass
Company, Central Glass Company and Nippon Sheet Glass Company in Japan; Hankuk
Glass Industry Company and Keumkang Ltd. in Korea; and Shatterprufe (Pty)
Limited in South Africa. Management believes that the Company's future growth in
the Automotive Market will be driven by customer demand for more advanced safety
glass bending capabilities, the sale of systems that will supply new automobile
factories under construction worldwide and the opportunity to sell systems to
glass manufacturers and processors who desire
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<PAGE> 42
to "outsource" (i.e., purchase glass processing systems rather than develop them
internally). Management further believes that future sales in the Architectural
Market will be derived, in part, from the adoption of stringent building codes
worldwide that mandate the use of tempered glass and the increased use of coated
glass for products such as energy-efficient windows.
The Company's revenue by geographic region are as follows:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY REORGANIZED COMPANY
------------ ---------------------------------------
PERIOD FROM PERIOD FROM
JULY 1, 1994 JANUARY 4,
THROUGH 1995 THROUGH YEARS ENDED JUNE 30,
JANUARY 3, JUNE 30, --------------------
1995 1995 1996 1997
------------ --------------- -------- --------
<S> <C> <C> <C> <C>
United States................................... $ 9,924 $ 9,608 $ 18,794 $ 22,269
Asia-Pacific.................................... 5,341 10,261 20,101 39,371
Europe.......................................... 3,250 5,351 9,827 5,030
Latin American.................................. 5,889 1,992 6,208 2,616
Other........................................... 1,544 642 7,841 7,147
Total Non-United States Sales................... 16,024 18,246 43,977 54,164
-------- ------- -------- --------
Total Overall Sales............................. $ 25,948 $27,854 $ 62,771 $ 76,433
======== ======= ======== ========
</TABLE>
HISTORY
The Company was founded in 1971 to manufacture flat glass tempering systems
for the Architectural Market. Building on its success in that market, in 1977
the Company delivered its first bending and tempering system used to produce
simple glass shapes for the Automotive Market. Through continued product
development programs and technological enhancements, the Company manufactured
its first bending and tempering system for complex glass shapes for the
Automotive Market in 1985. This system enables the Company's customers to bend
and form glass while it is still inside the furnace, which results in enhanced
quality, higher yields (i.e., reduced breakage and fewer defects) and more
precision in the final shape of the safety glass product.
In 1988, the Company was purchased in a leveraged buyout for $89.1 million.
The change in automotive styling to more aerodynamic designs (which require more
complex glass shapes), led by the introduction of the Ford Taurus, provided the
impetus for the Company's growth in the late 1980s, which culminated with the
Company generating revenue and EBITDA of $93.5 million and $30.7 million,
respectively, in fiscal 1989. Based upon these historically high operating
results, the Company was purchased for $242.6 million in a leveraged buyout in
1989.
In fiscal 1990, the Company achieved comparable results to 1989. However,
beginning in fiscal 1991, the Company's operating results declined significantly
due to several factors including: (i) the completion of the significant increase
in system orders driven by the introduction of the Taurus by Ford Motor Company
(i.e., automotive glass processors required more complex shapes used in the
ensuing aerodynamic styling trend led by the Ford Taurus); and (ii) other
external factors such as (a) a worldwide economic recession, (b) market
interruptions due to geopolitical events such as the fall of communist
governments in Russia and Eastern Europe, and (c) the war in the Persian Gulf.
As a result of the confluence of these industry and external factors, the
Company's EBITDA declined to $5.5 million in fiscal 1991, leading to the
Company's inability to meet its significant debt service obligations on the
$269.5 million of indebtedness outstanding as of May 1993, $193.0 million of
which was incurred in connection with the 1989 leveraged buyout. In fiscal 1992,
the Company's EBITDA further declined to $1.8 million as the continuing effects
of these industry and external factors required management to focus on the
restructuring of its debt obligations rather than on the daily operation of its
business.
In December 1992, the Company reorganized its senior management, with Mark
Christman assuming the position of President. In May 1993, the Company filed for
protection under Chapter 11 of the Federal Bankruptcy Code. While under the
protection of Chapter 11, the new management team refocused its
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<PAGE> 43
business strategy by, among other things, focusing on the sale of a more
profitable product mix and on the containment of costs. As a result of these
efforts, a reorganization of its senior management and a reorganization of the
Company's debt under a bankruptcy plan of reorganization, the Company emerged
from Chapter 11 in January 1995. Upon consummation of the Reorganization, the
Company's debt holders converted their debt obligations into 100% of the
Company's equity, $42.0 million of 10% Senior Notes and the right to receive
certain cash payments. The Company's stockholders agreed to sell their interests
in the Company to Holding pursuant to the terms of the Merger Agreement. See
"The Transactions."
Throughout the early 1990s, the Company continued to introduce new Original
Equipment systems, enabling it to maintain its strong market positions in the
Automotive Market and the Architectural Market. The Company's significant
product introductions include a bending system used to form curved architectural
glass (fiscal 1990), a tight radius cylindrical bending system for furniture and
display case applications (fiscal 1992), a constant radius bending system for
automotive side and roof windows (fiscal 1994), an automotive windshield bending
and annealing system (fiscal 1995) and a forced convection heating system
intended for more energy-efficient glass production (fiscal 1996). See
"Business -- Products."
Management believes that the Company's competitive advantage in the
production of high-quality glass bending and tempering systems, as well as its
market leadership, is the result of its: (i) development of patented,
state-of-the-art, cost-efficient technology; (ii) installed base of more than
375 systems in over 40 countries; (iii) experienced technical staff, which works
closely with customers in the development and design of new systems; (iv)
longstanding relationships (often of 20 years or more) with its major automotive
and architectural customers; (v) knowledgeable sales force, many of whom have
technical degrees; and (vi) ability to develop new products within reasonably
short lead times. In addition, the Company believes that its management team,
which has an average of more than 20 years of experience in the glass industry,
continues to be instrumental in further strengthening the Company's leading
market and technological position.
The Company's executive offices are located at Ampoint Industrial Park, 995
Fourth Street, Perrysburg, Ohio 43551. Its telephone number is (419) 661-9500.
BUSINESS AND OPERATING STRATEGY
The Company's strategy is to strengthen its leadership position as a
provider of technologically advanced and cost-efficient glass bending and
tempering systems by: (i) capitalizing on current trends in the Automotive
Market; (ii) leveraging its long-term relationships with major customers; (iii)
offering customers a market-driven product development effort; (iv) maintaining
its position as a high-quality, low-cost manufacturer; (v) providing extensive
aftermarket products and services; and (vi) continuing to capitalize on
international growth opportunities.
- Capitalizing on Current Trends in the Automotive Market. Management
believes that the Company is well positioned to capitalize on current
trends in the Automotive Market including: (i) customer demand for
improved productivity from its safety glass processing equipment; (ii)
the emergence of advanced automotive designs which feature complex-shaped
glass in vehicle windows and an increase in the average glass content per
vehicle; (iii) customer demand for greater optical quality in safety
glass products; (iv) shorter lead times for each car design modification
or new model introduction; and (v) the replacement of older bending
systems initially installed by the Company's competitors or developed
in-house by its customers.
- Leveraging Long-Term Relationships with Major Customers. Management
believes that the Company's strong relationships with major glass
manufacturers and processors have developed in large part due to the
following factors: (i) the continuity of the Company's customer
relationships, many of which have existed since the Company's inception;
(ii) the Company's awareness of and involvement in its customers' capital
budgeting and planning processes; and (iii) the Company's commitment to
provide the ongoing technical service required to properly maintain a
Glasstech system. Based upon its strong relationships, the Company is
better able to predict future demand for its systems and aftermarket
products, as well as to proactively design and implement creative
solutions to meet its customers' evolving safety glass requirements.
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<PAGE> 44
- Offering Customers a Market-Driven Product Development Effort. The
Company's technological leadership is a result of its commitment to R&D.
The objective of the Company's R&D effort is to develop new products and
to improve existing products to meet present and future market demands.
The Company has spent an average of $4.5 million annually on R&D in
fiscal years 1995 through 1997 and has 47 employees (17% of total
employees) in its R&D department. Recent product introductions and
improvements include bending and tempering systems that provide tighter
part tolerances, higher output capability, shorter tooling changeover
periods, faster cycle times, improved optical quality, greater depth of
bend and an ability to produce shapes with greater complexity. In
addition, the Company is developing modeling software which is intended
to enable both automotive designers and glass processors to analyze the
shape and optical quality of various safety glass configurations without
actually constructing costly prototypes.
- Maintaining Position as a High-Quality, Low-Cost Manufacturer. The
Company is dedicated to
producing high-quality, cost-efficient systems that minimize its
customers' safety glass production costs. As an example of its commitment
to quality, the Company recently received its ISO-9001 certification,
which is an internationally recognized quality standards certification.
By continually striving to reduce its customers' cost of producing safety
glass, the Company increases its opportunities to sell its systems to
those glass manufacturers and processors that might otherwise develop
such systems in-house. To improve its own operating results, the Company
has significantly reduced its operating costs by: (i) improving its
production process by modularizing and standardizing product engineering;
(ii) using advanced computer-aided design systems; and (iii) improving
employee training programs. The Company's success in developing new
high-quality, cost-efficient systems and in implementing cost reductions
internally has contributed to an increase in Adjusted EBITDA from
approximately $8.7 million in fiscal 1995 to $16.8 million in fiscal
1997. During the same period, Adjusted EBITDA margins have improved from
16.2% to 22.0%.
- Providing Extensive Aftermarket Products and Services. The Company's
aftermarket products and services, which include retrofits, automotive
tooling, replacement parts and customer service programs, provide an
ongoing source of revenue and cash flow that complement the Company's
sale of Original Equipment. Retrofits consist of extensions, upgrades and
improvements to existing systems, while replacement parts consist of both
proprietary and nonproprietary components. Aftermarket revenue was $26.2
million for fiscal 1997, or approximately 34.3% of the Company's total
revenue. Management believes that aftermarket sales will remain a
significant component of the Company's revenue as the Company's installed
base of systems continues to expand.
- Continuing to Capitalize on International Growth Opportunities. The
Company's service organization continuously interacts with customers in
more than 40 countries. Sales to the United States, Europe and
Asia-Pacific represented 29.1%, 6.6% and 51.5%, respectively, of the
Company's total fiscal 1997 sales. The Company's geographically diverse
customer base positions it to capitalize on the increasing globalization
and development of markets in areas such as Asia-Pacific (including
China), Eastern Europe and Russia. Such diversification also mitigates
the impact of regional economic downturns and a reliance on any one
market. Management believes that the Company will continue to sell new
systems to its existing customers in both established and developing
markets.
THE MARKET FOR SAFETY GLASS PRODUCTS
In the United States, automobile manufacturers purchase most of their
safety glass products from independent glass manufacturers and processors,
except for Ford Motor Company and Chrysler Corporation, each of which produces a
portion of its safety glass requirements in-house. In Europe and Asia-Pacific,
the majority of automobile glass manufacturers purchase safety glass products
from independent manufacturers and processors. Most of the major glass
manufacturers and processors are customers of the Company.
Automotive safety glass products are formed into either simple or complex
shapes. Simple glass, which is relatively flat and has little curvature, is
required to conform to exacting physical dimensions and fracture requirements.
Significant bending technology is not required to process this type of glass.
Unlike simple glass,
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<PAGE> 45
complex glass has a high degree of curvature, or "bulge." The more curvature
that a piece of glass has, the more likely it is to develop optical distortions
unless it is produced to precise specifications. For this reason, it is
important that the bending of complex glass be done in a manner that produces
consistent, repeatable results subject to minimal process variation.
In the Automotive Market, the majority of side, back and roof windows
consist of a single piece of tempered glass. The majority of windshields are of
laminated construction, which requires the insertion of a plastic layer between
two pieces of safety glass. The most common architectural glazing product
worldwide is flat tempered glass which is made either with single-glazed or
double-glazed (sealed unit) construction. Such glass is used for commercial or
domestic building windows, patio doors, shower enclosures, display cases,
furniture glass and appliance glass. Flat laminated glass is less frequently
used for such products.
THE SAFETY GLASS PRODUCTION PROCESS
The Company's systems process flat glass produced by glass manufacturers
into safety glass. The Company designs and assembles Original Equipment systems
that bend and temper automotive glass primarily for side, back and roof windows
and for commercial and domestic architectural applications. The Company also
designs and assembles systems that anneal (rather than temper) glass for use in
the production of laminated glass for products such as automotive windshields.
The basic fabrication process involves placing a piece of glass horizontally on
a conveyor of ceramic rollers which transfers the glass through a furnace where
it is heated to the desired temperature. If the glass then requires bending, it
generally will be bent into either a simple or complex shape. The glass is then
moved into the quench where, depending upon the desired end-product, it is
either tempered or annealed.
Heating Process. Traditionally, all Glasstech systems heated glass with
electric radiant heat ("ERH"). Recently, the Company has introduced gas-fired
forced convection heat ("FCH") as an alternative. FCH was developed in
conjunction with the Gas Research Institute. FCH is currently available in a
flat glass tempering system for sale to the Architectural Market and is expected
to be available in a system for sale to the Automotive Market by the end of
1997. FCH offers customers significant advantages over ERH technology. For
example, FCH can be more cost-effective than ERH, because gas often is less
expensive than electricity. In addition, FCH can heat glass with special
coatings faster and more uniformly than ERH, resulting in lower production
costs, faster outputs and higher quality glass. In spite of FCH's significant
advantages, not all product applications justify the additional capital expense
of an FCH furnace. Accordingly, the Company expects to continue to offer systems
with ERH. See "-- Patents and Proprietary Rights" and "-- Product Development."
Bending Process. Glasstech systems generally bend glass into simple and
complex shapes through one of three techniques. The gravity-sag technique
creates simple shapes by placing a piece of glass on a ring mold, heating it to
its softening point and allowing the shape to form via gravity. The deep bending
technique creates complex shapes by placing the glass on a ring mold, heating it
and pressing the heated glass against a full surface area mold. The cylindrical
bending technique creates simple shapes with a single curve by placing the glass
on rollers, heating it and using a set of flexible rollers to curve the glass.
Tempering Process. Tempering is the process of strengthening heated glass
by cooling it rapidly. Tempered glass is up to five times stronger than
untempered glass and, if broken, fractures into small pieces, reducing the risk
of injury. Conversely, untempered glass will splinter and produce sharp edges.
The process the Company uses to temper safety glass is called "quenching" which
involves moving the heated glass into the quench where, through a
computer-controlled process, it is cooled with air directed on the surfaces of
the glass by an array of nozzles that diffuse air from a large blower or fan.
Glass tempered by a Glasstech system meets international fracture standards.
Annealing Process. The annealing process is a preparatory step in the
process of producing laminated glass, which is used to form most vehicle
windshields. The annealing process is similar to the tempering process, except
that instead of cooling the glass rapidly, it is cooled slowly to produce a
relatively weaker safety glass product. Annealed glass breaks more easily upon
impact and, unlike tempered glass, splinters when broken. To complete the
lamination process, glass processors and fabricators layer two pieces of
annealed
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<PAGE> 46
glass, which can be produced by one of the Company's Original Equipment systems,
around a piece of plastic such that the annealed glass adheres to the plastic
when broken. A laminated glass product breaks relatively easily into a
spiderweb-like pattern without permitting the object creating the impact to
break through the glass, and any glass particles remain adhered to the plastic
layer, thereby reducing the risk of injury to the vehicle's occupants.
PRODUCTS
Original Equipment -- Automotive. Systems designed and assembled for the
Automotive Market process flat glass by bending and tempering it to produce
automotive side, back and roof windows and by bending and annealing flat glass
in the production of laminated glass for windshields. These systems range in
price from $2.5 million to $7.0 million. The Company sells four basic systems,
which are primarily differentiated by their bending techniques, to automotive
glass manufacturers and processors.
- Quick-Sag System. Introduced in the late 1970s, the Company's quick-sag
system (the "Quick-Sag System") bends and tempers glass for side, back
and roof automotive windows. Using the gravity-sag technique, the
Quick-Sag System produces high-optical-quality glass in simple shapes.
Although this is the Company's oldest system, demand for it continues in
markets such as China, South America and other developing markets. Such a
system may be retrofitted to provide higher output deep bending or
cylindrical bending capabilities if required by the Company's customers.
- Deep Bending System. The Company's deep bending system (the "Deep Bending
System") was first introduced in 1985 in response to customers' demands
for more complex safety glass shapes that could not be produced by the
gravity-sag technique used in the Quick-Sag System. By using the deep-
bending technique, such systems shape glass with enhanced optical quality
to precise tolerances with deep and complex bends for automotive side and
back windows. Deep Bending Systems are currently available with ERH and
will soon be available with FCH heating technology. To form different
shapes of complex safety glass, the Deep Bending System requires
different sets of tooling, which the Company offers as part of its
aftermarket business.
- Cylindrical Bending System. Introduced in fiscal 1994 to produce
accurate, simple cylindrical bends using flexible rollers (rather than
tooling), the cylindrical bending system (the "Cylindrical Bending
System") produces side and roof vehicle windows that require a simple
cylindrical bend. Prior to the introduction of this system, it generally
was not cost-effective for the Company to offer a system that produced
glass with a simple cylindrical bend because the Company was unable to
compete favorably against equipment designed in-house by the Company's
customers. With the introduction of the Cylindrical Bending System,
however, the Company now offers customers the ability to make faster
changeovers by eliminating the tooling requirements typical of its other
bending systems. This feature reduces the customers' production costs and
maximizes their system performance.
- In-line System. Unlike the movement of glass in a Quick-Sag System or a
Deep Bending System, in which glass exits from the side of the bending
module, the glass in an in-line system (the "In-line System") travels in
a straight line throughout the entire process. An In-line System is
capable of producing higher quality glass at faster output rates and at
lower costs per piece of glass than a side-exit system. The first
generation of the In-line System was introduced in 1985. The most recent
generation of the In-line System was introduced in fiscal 1995 to produce
simple and complex bends for automotive side, rear and roof windows,
generally by using a more advanced deep bending technique. The Company
recently introduced a new version of the In-line System that has been
designed to produce complex-shaped glass for automotive windshields and
back windows.
Original Equipment -- Architectural. Systems designed and assembled for the
Architectural Market process flat glass by tempering or by bending and tempering
it for applications including residential and commercial construction,
furniture, display cases, shower enclosures and appliances. Such systems range
in price from $0.5 million to $3.0 million.
40
<PAGE> 47
- Flat Glass Tempering Systems. The Company's initial generation of flat
glass tempering for architectural applications was introduced in 1971.
Current systems can be equipped with either ERH or FCH heating
technology. A system with FCH is more expensive initially than one with
ERH, but offers significant energy cost savings and output advantages,
particularly for reflective or low-emissivity glass.
- Bending and Tempering Systems. Initially introduced in 1990 in response
to the demand for curved glass from the Architectural Market, these
systems are designed to shape glass of varying thicknesses into
custom-specified curves. Shape is controlled by computer, eliminating the
need for extensive tooling.
Original Equipment -- Other. In 1992, the Company formed Stir-Melter, Inc.
("Stir-Melter"), a wholly-owned subsidiary that designs and assembles a
glass-melting system that vitrifies (i.e., changes into a glass-like substance
by fusion due to heat) hazardous waste for safe disposal. Stir-Melter's systems
are rapid glass melters that employ aggressive mechanical stirring action in
combination with direct electrical heating. Since its inception, Stir-Melter has
incurred certain expenses in connection with, among other things, the Company's
effort to procure patents covering certain Stir-Melter technology.
Aftermarket Business. Aftermarket products and services complement the
Company's Original Equipment business. Sales in this area consist of the
following items: (i) retrofits (extensions or improvements of current systems);
(ii) tooling (complete sets of bending and tempering equipment designed to
produce specific complex-shaped glass products); (iii) ceramic rollers (used to
convey glass through the furnace); (iv) replacement parts for all the individual
system components; and (v) technical services.
- Retrofits. Retrofits are purchased by customers who want to increase
production capacity, extend bending capability, increase system
efficiency or take advantage of the latest computer and control system
developments. Typical retrofits and improvements include: (i) extensions
of heater length to increase capacity; (ii) conversions from automotive
simple bending systems to complex bending systems, such as from a
Quick-Sag System to a Deep Bending System; (iii) quench upgrades; (iv)
conversion of a single-function system to a dual-function system, such as
adding a Cylindrical Bending System to a Quick-Sag System; and (v)
computer or control upgrades.
- Tooling. The Company's customers in the Automotive Market operate complex
bending and tempering systems that require part-dedicated tooling
equipment to produce individual vehicle window parts that meet precise
design and shape specifications. The Company's tooling products generally
include: (i) bending molds; (ii) bending rings (to press the glass to the
mold); (iii) lift jets (to raise the glass from the conveyor to the
mold); (iv) quench rings (to transport the glass from the mold to the
quench); and (v) quenching heads (which incorporate nozzles and direct
air against the glass surface).
- Ceramic Rollers. The Company's roller hearth technology was introduced to
eliminate the marks left on glass by older vertical systems that tempered
flat glass by hanging it from tongs. The ceramic rollers are used to
convey the glass horizontally into and through the furnace and are
manufactured to strict specifications in order to reduce distortion or
markings on the glass surface.
- Replacement Parts. Both proprietary and nonproprietary parts are offered
to replace components used in Glasstech systems. Customers are encouraged
to purchase an initial consignment of replacement parts when purchasing a
new system and to maintain critical parts in inventory throughout the
life of their system.
- Technical Services. The Company's technical services department provides
it with an important competitive advantage. The customer service staff,
which consists of 28 full-time employees, provides aftermarket technical
support and gathers feedback from customers regarding specific product
improvement recommendations for Glasstech systems. The Company expects to
launch a pilot program in 1997 to offer additional customer service
through longer-term customer service contracts.
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<PAGE> 48
PRODUCT DEVELOPMENT
The Company's R&D effort is a significant factor in maintaining its market
and technological leadership. The objective of the Company's R&D effort is to
develop new products and to improve existing products to meet present and future
market demands. The Company works closely with its customers to identify their
current and future needs, enabling it to proactively design creative solutions
to meet future industry requirements. Development proposals are submitted to the
Company's Executive Technical Committee to be analyzed and assessed. Proposals
are authorized only when the committee is satisfied that the proposal meets
customer or market needs and the proposed program can be conducted
cost-effectively with a reasonable probability of achieving the desired level of
profitability.
The Company has spent approximately $4.4 million, $4.6 million and $4.6
million (exclusive of expenditures relating to prototypes) in fiscal years 1995,
1996 and 1997, respectively, on the development of new systems or on the
improvement of existing systems. 47 employees (or 17% of total employees) work
in the R&D department.
As a result of its recent R&D efforts, the Company expects to introduce two
improvements to its Deep Bending System in 1997. Both improvements are currently
in prototype production. The first improvement is expected to provide a
four-fold reduction in the tooling changeover time for a Deep Bending System.
The second improvement is the introduction of FCH heating technology to a Deep
Bending System for sale to the Automotive Market. In addition, the Company is
developing modeling software that is intended to enable both automotive
designers and glass manufacturers and processors to analyze the shape and
optical precision of various glass configurations without the need to develop
costly prototypes.
MARKETING AND SALES
The Company's sales efforts are conducted by well-qualified and experienced
personnel operating in the Americas, Europe (including Africa and the Middle
East) and Asia-Pacific. The Company's international sales efforts are
supplemented by nonexclusive sales agents retained on a commission basis.
Commission is paid only when sales are confirmed and payments have been received
from the customer. The Company's sales efforts in Europe are supported by
Glasstech Ltd., a wholly-owned subsidiary of the Company.
The Company has installed more than 375 systems in 40 countries on six
continents. The Company's customers include virtually all major glass
manufacturers and processors, such as Chrysler Corporation, Ford Motor Company,
Guardian Industries Corp. and PPG Industries, Inc. in the United States;
Compagnie de Saint-Gobain and Pilkington plc in Europe; Asahi Glass Company,
Central Glass Company and Nippon Sheet Glass Company in Japan; Hankuk Glass
Industry Company and Keumkang Ltd. in Korea; and Shatterprufe (Pty) Limited in
South Africa.
As part of its marketing process, the Company maintains close customer
relationships that enable management to understand its customers' needs for
existing and new product capabilities. Due to the size of a Glasstech system,
from both a physical and economic perspective, a significant commitment with
respect to planning is required on the part of the Company's customers before
they order new equipment and subsequently place it into operation. As part of
this planning process, the customer involves the Company in discussions that can
last up to one or two years before an order is actually placed. At any point in
time, the Company and its customers are involved in numerous discussions that
occur between their respective management teams, technical staffs and
sales/purchasing staffs.
The customer service staff, which consists of 28 full-time employees,
provides aftermarket technical support and gathers information from customers
regarding specific product improvement recommendations for Glasstech systems.
Customer service representatives are also available to the Company's customers
as consultants on a per diem basis. The Company's technical representatives
train the customer's workforce to properly operate its Glasstech system and
consult on specific technical issues or production goals. The Company's customer
service department has a program which provides customers with 24-hour
troubleshooting services via telephone. In-house computers enable the Company to
simulate system problems that a customer might experience and provide the
customer with prompt solutions.
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<PAGE> 49
An installation of a Glasstech system typically requires ten to twelve
months from the time the customer executes a contract to final acceptance of the
system. Following the execution of a contract, a project manager coordinates all
technical details with customer personnel before any parts are ordered from the
Company's suppliers. Design, delivery of parts and assembly generally takes the
Company four to six months, with shipment normally occurring five to seven
months after the initial signing of the contract. Shipment to the customer can
take up to one month, depending upon the destination. Installation time at the
customer's location varies according to system type, but generally requires
between one and two months from the simplest to the most complex systems.
Following installation, the system must meet certain predetermined performance
tests before the customer accepts the system. Depending on the system's
complexity and customer cooperation, these tests typically take two to eight
weeks.
Completion of aftermarket sales vary with each product. A typical retrofit
order, for example, takes between six and ten months to complete. A typical
tooling order requires three to four months to complete, while orders for
replacement parts and ceramic rollers typically range from six to ten weeks to
complete. Customer service calls, on the other hand, are typically completed in
24 to 48 hours.
A substantial portion of the Company's revenue historically has been
comprised of sales to a limited number of customers. For example, in fiscal
years 1995, 1996 and 1997, Asahi Glass Company, Chrysler Corporation, Nippon
Sheet Glass Company and Pilkington plc collectively accounted for 40.5%, 40.8%
and 50.6 % of total revenue, respectively. In addition, (i) in fiscal 1995,
Asahi Glass Company and Pilkington plc each accounted for more than 10.0% of
revenue; (ii) in fiscal 1996, Pilkington plc accounted for more than 10.0% of
revenue; and (iii) in fiscal 1997, Asahi Glass Company, Chrysler Corporation,
Nippon Sheet Glass Company and Pilkington plc accounted for more than 10.0% of
revenue. The Company also generates a substantial portion of its revenue outside
of the United States. See Note 9 to the Company's consolidated financial
statements included herein.
COMPETITION
The Company's primary competition in the Automotive Market comes from
either (i) the engineering departments of certain of its customers, such as
Pilkington plc and Compagnie de Saint-Gobain, which design and build glass
processing systems in-house or (ii) glass manufacturers which process safety
glass and sell it to automobile manufacturers, such as Chrysler Corporation and
Ford Motor Company, which elect to purchase processed safety glass rather than
install their own Glasstech system. In either case, the Company primarily
competes against its customers by developing systems with greater capabilities
than those currently produced in-house. Current trends in the automobile
industry are expected to provide the Company with the opportunity to further
differentiate the capabilities of its new systems from those developed by
in-house engineering departments.
In the Architectural Market, there is significant competition among
manufacturers of flat glass tempering systems, but less significant competition
for bending and tempering systems. The Company's principal competitor in the
Architectural Market is Tamglass Oy of Finland, which mainly competes against
the Company in the market for flat glass tempering systems. Although management
believes that the Company is well positioned in the flat glass tempering market,
it focuses most of its marketing effort on the bent glass tempering market,
which is generally comprised of customers that place a premium on the
capabilities, quality and service provided by the Company rather than the price
of the system.
PATENTS AND PROPRIETARY RIGHTS
The Company protects its technology by filing patents and patent
applications in the U.S. and in major markets worldwide. It is the Company's
policy to aggressively pursue patent coverage for any significant product
developments and, where appropriate, multiple patent coverage both in the U.S.
and other countries (which primarily extends the patent protection acquired in
the U.S. to critical foreign markets). The Company holds over 100 patents in the
U.S. and more than 350 patents outside the United States. In addition, the
Company has more than 250 patent application filings worldwide. Typically,
within each Glasstech system, numerous patents cover various controls, bending
processes or general aspects of the equipment. While
43
<PAGE> 50
management does not believe that the loss of any one patent would have a
material adverse effect on the Company's business, it believes the Company's
aggregate patent position provides it with an important competitive advantage.
The Company's patents cover a range of products and product features,
including: (i) the Quick-Sag System; (ii) the Company's complex in-furnace
bending process (used in both Deep Bending and In-line Systems); (iii) the
Cylindrical Bending System; (iv) quenching systems; (v) process controls for
systems; and (vi) general aspects of its technologies and equipment. As patents
on some of the Company's older technologies, such as the Quick-Sag System, begin
to expire, the Company continually applies for and is generally issued patents
relating to its newer, leading edge technologies. These newer patents will
generally remain in effect for more than 15 years.
The Company received funding from GRI for the development of the FCH
technology. Under an agreement with GRI, GRI retained rights to the resulting
U.S. patents. Under the GRI agreement, the Company received two exclusive patent
licenses in the U.S. One license permits the Company to use FCH technology in
systems that produce flat tempered glass (the "Flat License") and the other
license permits the Company to use FCH technology in systems that produce bent
glass (the "Bent License"). The exclusivity with respect to the Flat License and
Bent License expires in 2000 and 2002, respectively. Subject to certain
obligations to exploit FCH technology with respect to the Bent License, the
Company will continue to hold nonexclusive licenses for FCH technology for the
duration of the underlying patents. Under the terms of the GRI agreement, the
Company holds the exclusive rights to the FCH patents outside of the U.S.
Although the Company is not currently subject to any patent or proprietary
rights infringement litigation, management believes that one of its customers
may be infringing on certain U.S. and foreign counterpart patents relating to
its Quick-Sag System and Deep Bending System technologies. In addition, one of
the Company's European architectural patents relating to quenching apparatus for
roller conveyed glass sheets has been opposed by two of the Company's
competitors. This opposition is proceeding in the European Patent Office and may
result in a change of scope, or loss, or the claims granted under this patent in
Europe.
Substantially all Company employees execute technology agreements that have
a confidentiality provision and assign patent rights to the Company. Upon
consummation of the Transactions, members of senior management will enter into
employment agreements that contain noncompete provisions. See
"Management -- Employment Agreements and Arrangements."
MATERIALS AND SUPPLY ARRANGEMENTS
The Company has reached agreement with many of its suppliers, including its
ten largest suppliers, which guarantee firm pricing, generally for one year, but
do not have purchase volume requirements obligating the Company to purchase
certain quantities. Management believes that the Company has made adequate
arrangements with backup suppliers to avoid any material adverse effect that
would occur if one of its primary suppliers were unable to fill Company orders.
In fiscal 1997, the Company did not purchase more than 10% of its materials and
supplies from any one supplier.
PROPERTIES
The Company's facilities are located in Perrysburg, Ohio. The Company
leases a 96,800-square-foot facility that houses both its offices and plant, as
well as an adjacent 43,200-square-foot facility for production and storage. The
96,800-square-foot facility is subject to a five-year lease that will expire on
December 31, 1999, after which the Company has an option to extend the lease for
two additional five-year periods. The 43,200-square-foot building is subject to
a three-year lease that will expire on January 31, 1998. The Company also owns
an adjacent 108,000-square-foot building that houses R&D, tooling design,
tooling production and prototype production equipment. The Company believes that
its current facilities are adequate for its foreseeable needs.
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<PAGE> 51
EMPLOYEES
As of June 30, 1997, the Company employed 272 people, 160 of whom work in
the operations department. The Company has experienced low personnel turnover
throughout its history. The Company has no union employees, and no attempt has
ever been made to organize its workforce. Management believes that its relations
with its employees are good.
BACKLOG
The Company had a backlog (on a percentage of completion basis) as of June
30, 1997 of approximately $30.3 million as compared to $38.9 million on June 30,
1996. The Company expects to complete this backlog by the end of fiscal 1998.
LEGAL PROCEEDINGS
On January 15, 1997, James E. Heider ("Heider"), a former executive officer
of the Company, commenced an action against the Company and Mark Christman, the
President of the Company, in the Common Pleas Court of Wood County, Ohio,
relating to the nonrenewal of his employment agreement. In the amended
complaint, Heider alleges that the Company breached his written employment
agreement and breached implied and express employment agreements that, according
to the complaint, were created pursuant to certain alleged oral statements. The
complaint also alleges that Heider was terminated in retaliation for reporting
on the conduct of certain employees and that Heider was wrongfully denied the
ability to exercise certain stock options. Heider seeks compensation of
approximately $9.5 million for lost wages, bonuses, back pay, vacation pay and
the value of other fringe benefits he would have received through continued
employment with the Company. The Company believes that this action is without
merit and is barred by the provisions of Heider's written employment agreement
with the Company. The Company intends to contest this action vigorously, and
management does not believe that this action will have a material adverse effect
on the Company's financial condition or operating results.
From time to time, the Company is a party to various other legal actions
and proceedings. Management does not believe that an unfavorable determination
in any such other action or proceeding would have a material adverse effect upon
the Company's operations.
ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to a wide variety of
increasingly complex and stringent Environmental Laws. As such, the nature of
the Company's operations exposes it to the risk of claims with respect to such
matters and there can be no assurance that material costs or liabilities will
not be incurred in connection with such claims. Management believes its
operations and properties are in compliance in all material respects with
Environmental Laws. Based upon its experience to date, management believes that
the future cost of compliance with and liability under existing Environmental
Laws will not have a material adverse effect on the Company's business,
financial condition or operating results. However, future events, such as the
discovery of new information, changes in existing Environmental Laws or their
interpretations and more vigorous enforcement policies of regulatory agencies,
may give rise to additional expenditures or liabilities that could be material.
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<PAGE> 52
MANAGEMENT
The following table sets forth the names and ages of the Company's
executive officers (the "Executive Management") and the directors of the Company
and Holding (the "Directors"). Within 12 months of the consummation of the
Transactions, the Company and Holding anticipate increasing the number of
Directors to five and appointing at least one independent director to the board
of directors of the Company and Holding (the "Board of Directors").
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- -----------------------------------------------
<S> <C> <C>
Mark D. Christman 45 Director, President and Chief Executive Officer
John S. Baxter 57 Director and Senior Vice President, Marketing
and Sales
Kenneth H. Wetmore 50 Vice President, General Counsel and Secretary
Ronald A. McMaster, Ph.D. 57 Vice President, Corporate Development
Diane S. Tymiak 40 Vice President, Treasurer and Chief Financial
Officer
Larry E. Elliott 47 Vice President, Manufacturing and Engineering
James P. Schnabel 36 Vice President, Development
David P. Given 42 Director
</TABLE>
Mark D. Christman has been President and Chief Operating Officer of the
Company since December 31, 1992. Mr. Christman joined the Company in 1976, and
since that time has served in various capacities, including Vice President,
Treasurer, Chief Financial Officer and Executive Vice President. Upon the
consummation of the Transactions, Mr. Christman began to serve as President and
Chief Executive Officer.
John S. Baxter has been Senior Vice President, Marketing and Sales, since
1992. Mr. Baxter joined the Company in 1981 and was Managing Director of
Glasstech Ltd. from 1981 to 1992. Prior to joining the Company, Mr. Baxter was
employed by Triplex Safety Glass, a subsidiary of Pilkington plc, for five
years.
Kenneth H. Wetmore joined the Company in 1988 as General Counsel and was
elected Secretary in 1989 and Vice President in 1991. Mr. Wetmore is also
President of Stir-Melter, Inc. Prior to joining the Company, Mr. Wetmore was
employed by Owens Corning Fiberglass Corp. for 19 years.
Ronald A. McMaster, Ph.D. has been Vice President, Corporate Development
since 1988. Dr. McMaster joined the Company in 1977 and has served in various
capacities, including Vice President, Research and Development and Vice
President, Advanced Engineering. Mr. McMaster and Mr. Christman are first
cousins.
Diane S. Tymiak has been Vice President, Treasurer and Chief Financial
Officer since 1993. Ms. Tymiak joined the Company in 1980 and has served in
various capacities since that time, most recently as Treasurer.
Larry E. Elliott joined the Company in July 1996 as Vice President,
Development. In December 1996, he was elected as Vice President, Manufacturing
and Engineering. Prior to joining the Company, Mr. Elliott was employed by the
glass division of Ford Motor Company for 25 years, most recently as Supervisor,
Fabrication Facilities Engineering.
James P. Schnabel was elected Vice President, Development in 1997. He has
served in various engineering capacities with the Company since 1984, most
recently as Director, Product Development.
David P. Given has been President of KECC, a venture capital firm, since
1995. Mr. Given joined KECC as a Vice President in 1990. Mr. Given serves as a
director of several privately-held companies.
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<PAGE> 53
EXECUTIVE COMPENSATION
The following table sets forth the compensation received by the Company's
Chief Operating Officer and the four other highest paid executive officers
(together with the Chief Operating Officer, the "Named Executive Officers") for
services to the Company in fiscal 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
NAME AND ---------------------- ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION(A)
- ------------------------------------------------------- --------- -------- ---------------
<S> <C> <C> <C>
Mark D. Christman...................................... $ 291,110 $700,000 $12,520
President and Chief Operating Officer
John S. Baxter......................................... 219,516 215,000 12,590
Senior Vice President, Marketing and Sales
Kenneth H. Wetmore..................................... 190,448 115,000 12,590
Vice President, General Counsel and Secretary
Dianne S. Tymiak....................................... 142,493 95,000 12,713
Vice President, Chief Financial Officer
Norman J. Klatt........................................ 175,827 55,000 7,696
Vice President Sales - Asia
</TABLE>
- ---------------
(a) Represents (i) a pension plan contribution equal to 5% of each Named
Executive Officer's first $150,000 of salary and bonus under the Company's
pension plan and (ii) imputed income on life insurance provided by the
Company on all such persons except Mr. Klatt.
PRE-MERGER STOCK OPTION HOLDINGS
No options were issued or exercised in fiscal 1997. The following table
sets forth the value of options held by each of the Named Executive Officers at
June 30, 1997.
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
---------------------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
JUNE 30, 1997(A) JUNE 30, 1997(B)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mark D. Christman.......................... 26,424 32,283 $ 995,855 $ 1,216,666
John S. Baxter............................. 6,176 4,118 232,758 155,197
Kenneth H. Wetmore......................... 3,529 2,353 132,999 88,679
Diane S. Tymiak............................ 3,529 2,353 132,999 88,679
Norman J. Klatt............................ -- -- $ -- $ --
</TABLE>
- ---------------
(a) All outstanding options vested and were exercised upon consummation of the
Merger.
(b) The values are based on the value received by the Named Executive Officers
upon the deemed exercise of their options in connection with the Merger.
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS
Mr. Christman has entered into a five-year employment agreement with
Holding and the Company pursuant to which Mr. Christman serves as the President
and Chief Executive Officer of Holding and the Company (the "President"). Mr.
Christman is paid a base salary of $272,760 per year, subject to certain cost-
of-living adjustments, and receives customary executive benefits. Additionally,
pursuant to his agreement and the Stockholders Agreement (as defined herein), he
is entitled to receive no less than 40% of all distributions from the
Performance Bonus Pool (as defined herein), participate in the Restricted Stock
Program (as
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<PAGE> 54
defined herein), and participate in the Performance Share Program (as defined
herein). See "-- Management Incentive Plans." The employment agreement also
contains a noncompetition provision that prohibits Mr. Christman from competing
or holding certain ownership interests in other businesses that compete against
the Company for the later of five years after the initial date of the agreement
or two years following the termination of Mr. Christman's employment (unless Mr.
Christman is terminated without cause, in which case no restriction shall
apply). The employment agreement is renewable by the Company for one-year
successive terms upon completion of the initial five-year term.
Each of the other members of Executive Management also entered into an
employment agreement (each, an "Employment Agreement" and, collectively with the
President's employment agreement, the "Employment Agreements") that is
substantially similar to Mr. Christman's agreement, but is paid a base salary
per year, subject to certain cost-of-living adjustments, as follows:
<TABLE>
<CAPTION>
ANNUAL
NAME SALARY
----------------------------------------------------- --------
<S> <C>
John S. Baxter....................................... $213,438
Kenneth H. Wetmore................................... 182,210
Ronald A. McMaster, Ph.D............................. 175,844
Diane S. Tymiak...................................... 138,452
Larry E. Elliott..................................... 153,914
James P. Schnabel.................................... 132,843
</TABLE>
MANAGEMENT INCENTIVE PLANS
In connection with the Transactions, the Company established: (i) a
performance bonus pool (the "Performance Bonus Pool"); (ii) a restricted stock
plan (the "Restricted Stock Program"); and (iii) a performance share program
(the "Performance Share Program"), all of which were designed to retain and
reward members of Executive Management.
Performance Bonus Pool. Commencing fiscal 1998, each member of Executive
Management will be eligible to receive a distribution from the Performance Bonus
Pool. Amounts made available by the Company pursuant to the Performance Bonus
Pool at the end of each fiscal year shall be based on the operating results of
the Company for such fiscal year. If EBITDA (which for such purpose will be
computed before deducting any fees payable to KECC) is between $14.0 million and
$15.0 million for such fiscal year, then amounts available for distribution
pursuant to the Performance Bonus Pool will generally be 5.0% of such EBITDA. If
EBITDA is more than $15.0 million but not over $16.0 million, then amounts
available for distribution pursuant to the Performance Bonus Pool will generally
be 7.5% of EBITDA. If EBITDA is more than $16.0 million, then amounts available
for distribution pursuant to the Performance Bonus Pool will generally be 10.0%
of EBITDA. The Board of Directors, in consultation with the President, will
distribute the Performance Bonus Pool among the members of Executive Management
using its discretion; provided, however, Mr. Christman, pursuant to the terms of
his employment agreement, shall be entitled to receive at least 40% of the
Performance Bonus Pool. The Board of Directors will be required to distribute
the entire amount of the Performance Bonus Pool among some or all members of
Executive Management.
Restricted Stock Program. Simultaneous with the consummation of the
Transactions, Holding and the members of the Key Equity Group entered into a
stockholders agreement (the "Stockholders Agreement"), pursuant to which Holding
established the Restricted Stock Program. Under the terms of the Restricted
Stock Program, members of Executive Management were granted, pursuant to their
employment agreements, in the aggregate, 1,667 shares of restricted Class C
Common Stock (as defined herein) of Holding. The restricted Class C Common Stock
may not be sold or otherwise transferred while the restrictions are in effect
and may be forfeited to the Company if the recipient leaves the Company before
the restrictions lapse. The shares of Class C Common Stock are non-voting and
the restrictions will generally lapse in equal amounts over a four-year period.
However, all such restrictions will lapse upon a Change of Control (as defined
in the Employment Agreements).
Performance Share Program. The Performance Share Program was established
pursuant to the Stockholders Agreement. See "Certain Transactions -- Post Merger
Transactions -- Stockholders Agreement."
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<PAGE> 55
Under the terms of the Performance Share Program, members of Executive
Management purchased shares of Class D Common Stock of Holding (the "Class D
Holders") by paying $0.01 in cash and paying for the balance by issuing to
Holding promissory notes in consideration therefor and pledging such shares to
Holding to secure such debt. Upon the occurrence of a Liquidity Event (as
defined herein), a final determination of the number of shares of Class D Common
Stock that will be retained by members of Executive Management will be made
based upon the achievement by the Key Equity Group of certain goals relating to
its return on the Equity Contribution as adjusted to account for the value
attributable to the Warrants. "Liquidity Event" is defined in the Stockholders
Agreement as the first to occur of: (i) the sale of Holding and (ii) a public
offering of any of Holding's securities (each, a "Liquidity Event"). The Company
will have the right to repurchase shares of Class D Common Stock under certain
circumstances upon a termination of employment.
EMPLOYEES' PENSION PLAN AND EMPLOYEES' SAVINGS PLAN
The Company's Employees' Pension Plan and Employees' Savings Plan cover
substantially all of its employees. Under the Employees' Pension Plan, the
Company may make annual contributions to the participants equal to 5% of each
participant's compensation up to $150,000. For the fiscal years ended June 30,
1995, 1996 and 1997, the Company made contributions under the Employees' Pension
Plan of approximately $459,000 $541,000 and $604,000 respectively. The Company
does not match contributions made by employees under the Employees' Savings
Plan, a 401(k) plan.
DIRECTOR COMPENSATION
No Director currently receives compensation solely in connection with his
or her duties as a Director. The Company will institute a compensation program
for independent Directors at the time the independent Director joins the Board
of Directors. The Company will pay the reasonable out-of-pocket expenses
incurred by each Director in connection with their attendance at meetings of the
Board of Directors (and any committee hereof) of the Company or any of its
subsidiaries.
Members of the Board of Directors prior to the consummation of the
Transactions have received certain fees and options and warrants to purchase
shares of common stock of the Company since the Reorganization. See "Certain
Transactions -- Pre-Merger Transactions."
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<PAGE> 56
CERTAIN TRANSACTIONS
POST-MERGER TRANSACTIONS
Advisory Agreement
Upon consummation of the Transactions, the Company entered into an advisory
agreement with KECC, pursuant to which KECC consults with the Directors and
members of Executive Management on such general business and financial matters
as may be requested by the Board of Directors, including: (i) corporate
strategy; (ii) budgeting of future corporate investment; and (iii) acquisition
and divestiture strategies. In exchange for such services, KECC receives an
annual fee of $200,000, payable quarterly in arrears.
Stockholders Agreement
Simultaneously with the consummation of the Transactions, members of the
Key Equity Group and Holding entered into the Stockholders Agreement which,
together with the Amended and Restated Certificate of Incorporation of Holding
(the "Certificate of Incorporation"), governs the terms of the capital stock of
Holding.
Classes of Common Stock. The authorized shares of capital stock of Holding
(the "Common Stock") consists of: (i) 18,072 authorized shares of Class A Voting
Common Stock, $0.01 par value (the "Class A Common Stock"); (ii) 13,070
authorized shares of Class B Non-Voting Common Stock, $0.01 par value (the
"Class B Common Stock"); (iii) 5,002 shares of Class C Stock Non-Voting Common
Stock, $0.01 par value (the "Class C Common Stock"); and (iv) 10,000 shares of
Class D Non-Voting Common Stock, $0.01 par value (the "Class D Common Stock").
The holders of Class A Common Stock have the right to vote on all matters to be
voted on by the stockholders of Holding. At every meeting of stockholders of
Holding, each holder of Class A Common Stock is entitled to one vote per share.
Except as otherwise required by law, a holder of Class B Common Stock, Class C
Common Stock or Class D Common Stock has no voting rights with respect to such
Common Stock.
Control. The Certificate of Incorporation requires Holding to obtain the
approval by vote or written consent of 55% of the then-outstanding shares of
Class A Common Stock, in addition to any other vote required by law, in order to
do any of the following: (i) redeem, purchase or otherwise acquire for value any
shares of Common Stock or any other shares of its capital stock, except as
specifically permitted in the Stockholders Agreement; (ii) authorize or issue,
or obligate itself to authorize or issue, additional shares of Common Stock or
any other shares of its capital stock except as contemplated in the Certificate
of Incorporation or in the Stockholders Agreement; (iii) amend, alter or repeal
the Certificate of Incorporation or the By-Laws of Holding (the "By-Laws"); (iv)
declare or pay any dividends or make any distributions with respect to any of
its capital stock; or (v) except as specifically permitted by the Stockholders
Agreement, effect, or obligate itself to effect, any sale, lease, assignment,
transfer or other conveyance of all or substantially all of the assets of
Holding or any subsidiary thereof, or any consolidation or merger involving
Holding or any subsidiary thereof, or any reclassification or other change of
capital stock, or any recapitalization or reorganization or any dissolution,
liquidation or winding up of Holding or any subsidiary thereof, except for the
merger into Holding of, or the transfer of assets to Holding from, any
wholly-owned subsidiary.
In addition, the Stockholders Agreement provides that Holding will not, and
will not permit any of its subsidiaries (including the Company), to take any of
the following actions without the written consent of KECC or Key Equity Partners
97, a general partnership comprised of certain affiliates of KECC ("KEP 97"):
(i) acquire any assets (other than in the ordinary course of business), capital
stock, or any other interest in another business or entity; (ii) sell, lease,
transfer, mortgage, pledge, or encumber all or substantially all of its assets;
(iii) dispose of any business entity or product line or any division or
subsidiary; (iv) enter into any merger, consolidation, reorganization or
recapitalization, or any agreement to do any of the foregoing or reclassify any
of its equity securities; (v) issue any equity security, or issue any options,
warrants, convertible securities, or other rights (contingent or otherwise) to
acquire any equity securities, except for shares of Class A Common Stock issued
pursuant to the Warrants and the issuance of stock to an employee of Holding
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<PAGE> 57
or any of its subsidiaries in accordance with a stock purchase or award program
plan or the conversion of stock as described in the Certificate of
Incorporation; (vi) form or acquire any subsidiary except those now existing;
(vii) except as otherwise contemplated by the Stockholders Agreement, declare or
pay any dividends or distributions on the Common Stock or other equity
securities or redeem or repurchase any Common Stock; (viii) grant its consent to
a transfer of stock otherwise prohibited by the Stockholders Agreement; (ix)
incur, assume or guaranty any indebtedness for borrowed money in excess of
certain amounts in any fiscal year; (x) make any loans or advances to any
stockholders or any employees of Holding or any of its subsidiaries other than
advances to employees in the ordinary course of business which do not exceed
certain amounts per year; (xi) make capital expenditures in excess of certain
amounts in any fiscal year; (xii) except as otherwise contemplated by the
Stockholders Agreement, enter into any transaction with any stockholder or any
affiliate of Holding or its subsidiaries or any stockholder that is on terms
less favorable to Holding and its subsidiaries than could be obtained from
unaffiliated third parties on an arm's-length basis; (xiii) amend its
Certificate of Incorporation or By-Laws; or (xiv) enter into any agreement to do
any of the foregoing.
Conversion. Each holder of Class B Common Stock is entitled at any time and
from time to time to convert any or all of the shares of that holder's Class B
Common Stock into the same number of shares of Class A Common Stock as provided
in the Certificate of Incorporation; each holder of Class A Common Stock is
entitled at any time and from time to time to convert any or all of the shares
of that holder's Class A Common Stock into the same number of shares of Class B
Common Stock as provided in the Certificate of Incorporation; provided that in
the case of a conversion from Class B Common Stock, which is non-voting, into
Class A Common Stock, which is voting, the holder of shares to be converted
would be permitted under applicable law to hold the total number of shares of
Class A Common Stock which would be held after giving effect to the conversion.
Each holder of Class C Common Stock is entitled to convert any or all of
the shares of that holder's Class C Common Stock into the same number of shares
of Class A Common Stock only upon the occurrence of any public offering or
public sale of securities of the Corporation (including a public offering
registered under the Securities Act and a sale pursuant to Rule 144 of the
Securities Act or any similar rule then in effect) (any such offering, a
"Conversion Event"). In addition, each holder of Class C Common Stock is
entitled to convert shares of Class C Common Stock if such holder reasonably
believes that a Conversion Event will be consummated. The Company is obligated,
upon written request of the holder of Class C Common Stock, to effect such
conversion in a timely manner so as to enable each such holder to participate in
such Conversion Event. If any shares of Class C Common Stock are converted into
shares of Class A Common Stock in connection with a Conversion Event and such
shares of Class A Common Stock are not actually distributed, disposed of or sold
pursuant to such Conversion Event, such shares of Class A Common Stock will
promptly be converted back into the same number of shares of Class C Common
Stock that had been the subject of the request for conversion.
Restrictions on Transfer. Generally, the shares of Common Stock are subject
to certain restrictions on transfer contained in the Stockholders Agreement. The
shares of Common Stock may be transferred among affiliates and immediate family
members without restrictions as long as the recipient complies with the
provisions of the Stockholders Agreement and the applicable rules and
regulations of the Commission. In addition, Holding may repurchase shares of
Common Stock from departing members of Executive Management.
Preemptive Rights. The holders of Common Stock have a pro rata right to
participate in all future offerings of shares of equity securities of Holding or
any securities convertible into or exchangeable for or carrying rights or
options to purchase any shares or any other equity securities of the Company.
Certain Rights of KECC and KEP 97. KECC and KEP 97 have the right, in the
future to exercise a right to require Holding to repurchase their shares of
Common Stock any time after June 2004. In addition, KECC and KEP 97 also have
certain demand registration rights pursuant to which members of Executive
Management also be able to participate.
Election of Directors of Holding. The Board of Directors of Holding
initially consists of three members as follows: (i) a representative selected by
KECC (initially, Mr. Given); (ii) the Chief Executive Officer of the Company
(initially, Mr. Christman); and (iii) an individual to be jointly designated by
Mr. Given and
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<PAGE> 58
Mr. Christman (initially, Mr. Baxter). The board of directors of each subsidiary
of Holding (including the Company) will be the same as the Board of Directors of
Holding. Holding and the Company anticipate increasing the size of the Board of
Directors to five within 12 months of the consummation of the Transactions and
electing at least one independent Director.
Advances to Holding
Through August 1, 1997, the Company has advanced to Holding the sum of
$656,399. The advances have been made to Holding to permit Holding to satisfy
certain obligations it entered into in connection with the Transactions,
including, without limitation, obligations to loan funds to members of Executive
Management to allow them to satisfy certain tax liabilities. The tax liabilities
resulted from the members of Executive Management making certain elections under
Section 83(b) of the Code with respect to the shares of Class C Common Stock.
See "Ownership and Control." The advances are payable from Holding to the
Company on demand and bear interest at a rate of 4.96% per annum.
PRE-MERGER TRANSACTIONS
In connection with the Reorganization, the Company entered into a long-term
agreement to lease its manufacturing and office building from H.N.F. Realty Co.,
a partnership comprised of certain parties who were stockholders prior to the
consummation of the Reorganization. The minimum annual rental associated with
this lease for each of the next two years is approximately $300,000, after which
the Company has an option to extend the lease for two additional five-year
periods. Total rental expense amounted to approximately $300,000 for each of the
years ended June 30, 1997, 1996 and 1995. Management believes the terms of the
lease are no less favorable than the Company could have received from an
unaffiliated third party.
In connection with the Reorganization, the Company entered into a
stockholders agreement dated January 3, 1995 (the "1995 Stockholders Agreement")
with the institutional and independent holders of all of the outstanding shares
of the Company's capital stock issued upon its emergence from Chapter 11.
Pursuant to the 1995 Stockholders Agreement, a new Board of Directors of the
Company was appointed that was comprised of Jay P. Goldsmith, Chairman of the
Board, Harry Freund, Vice Chairman of the Board (together, the "Executive
Directors"), and Clifford B. Cohn, Richard P. Rifenburgh, Larry Schafran and
William J. Nightingale, as directors (collectively, the "Remaining Directors").
The 1995 Stockholders Agreement terminated upon consummation of the Merger, and
each of the directors resigned.
In connection with their appointments and performance as the Executive
Directors, each Executive Director received annual compensation of approximately
$25,000 and 58,823 options to purchase shares of common stock at $20.00 per
share in fiscal 1995, annual compensation of $95,333, a bonus of $200,000 and
warrants to purchase 32,645 shares of common stock at $25.00 per share in fiscal
1996 and during fiscal 1997 annual compensation of $108,333 and a bonus of
$300,000. In connection with their appointments and performance as the Remaining
Directors, each Remaining Director received approximately $23,000 in annual
compensation and meeting fees and 5,000 options to purchase shares of common
stock at $20.00 per share in fiscal 1995, annual compensation and meeting fees
of approximately $46,000 in fiscal 1996 and annual compensation and meeting fees
of approximately $52,500 in fiscal 1997. All options and warrants were exercised
in connection with the Transactions.
In fiscal 1996, the Company also paid consulting fees to Anthony Pacchia
and Donald Weisburg, affiliates of Balfour Investors Inc., of approximately
$110,000 and $88,000, respectively, and in fiscal 1997 the Company paid Mr.
Pacchia and Mr. Weisburg consulting fees in the amount of approximately $125,000
and $63,000, respectively. Balfour Investors Inc. was an affiliate of the
Company since the Reorganization.
KECC received a financing fee in an amount equal to $1.0 million for its
assistance in structuring, arranging and closing the Transactions.
The Company arranged for the payment of success bonuses to members of
Executive Management in connection with the successful completion of the
Transactions. The aggregate amount of such success bonuses was $2.7 million, the
allocation of which was as follows: (i) Mark D. Christman received $1,865,000;
(ii) John S. Baxter received $280,000; (iii) Kenneth H. Wetmore received
$165,000; (iv) Diane S. Tymiak received 165,000; (v) Larry E. Elliott received
$95,000; and (vi) James P. Schnabel, Jr. received $95,000.
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<PAGE> 59
OWNERSHIP AND CONTROL
Holding owns 100% of the issued and outstanding common stock of the
Company. As of July 2, 1997, the following entities or persons owned the
outstanding Common Stock of Holding as set forth below.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
SHARES OF SHARES OF PERCENT SHARES OF PERCENT SHARES OF PERCENT
CLASS A PERCENT OF CLASS B OF CLASS CLASS C OF CLASS D OF
COMMON CLASS A COMMON B COMMON CLASS C COMMON CLASS D
STOCK(a) OWNERSHIP(b) STOCK(c) OWNERSHIP STOCK OWNERSHIP STOCK OWNERSHIP
--------- ------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Key Equity Capital Corporation
127 Public Square, 6th Floor
Cleveland, Ohio
44114-1306(d)(e)............. 1,600 38.7% 8,405 100.0% -- -- -- --
Key Equity Partners 97
127 Public Square, 6th Floor
Cleveland, Ohio
44114-1306(e)................ -- -- -- -- 3,335 66.7% -- --
David Given(f)
127 Public Square, 6th Floor
Cleveland, Ohio 44114-1306... 1,600 38.7 8,405 100.0% 3,335 66.7% -- --
Executive Management(g)
Mark D. Christman............ 1,010 24.4% -- -- 834 16.7% 4,000 40.0%
John S. Baxter............... 175 4.2% -- -- 267 5.3% 1,800 18.0%
Kenneth H. Wetmore........... 125 3.0% -- -- 133 2.7% 1,000 10.0%
Ronald A. McMaster, Ph.D..... 150 3.6% -- -- 67 1.3% 500 5.0%
Diane S. Tymiak.............. 90 2.2% -- -- 100 1.9% 700 7.0%
Larry E. Elliot.............. 35 0.9% -- -- 133 2.7% 1,000 10.0%
James P. Schabel............. 75 1.8% -- -- 133 2.7% 1,000 10.0%
Key Equity Group(h)............ 3,260 78.8% 8,405 100.0% 5,002 100.0% 10,000 100.0%
All officers and directors as a
group........................ 3,260 78.8% 8,405 100.0% 5,002 100.0% 10,000 100.0%
</TABLE>
- ---------------
(a) Does not include shares of Class A Common Stock issuable upon conversion of
Class B Common Stock, or following the occurrence of a Conversion Event,
Class C Common Stock.
(b) Assumes 877.21 shares of Class A Common Stock issuable pursuant to the
Warrants are outstanding.
(c) Does not include shares of Class B Common Stock issuable upon conversion of
Class A Common Stock.
(d) KECC is a wholly-owned subsidiary of Key Bank, N.A., which is a wholly-owned
subsidiary of KeyCorp, a bank holding corporation.
(e) Mr. Given is the President and Director of KECC and is a partner of KEP 97.
Accordingly, Mr. Given may be deemed to beneficially own the shares owned by
KECC and KEP 97. Mr. Given disclaims beneficial ownership of the shares
owned by KECC.
(f) Includes all the shares of Class A Common Stock and Class B Common Stock
owned by KECC and all the shares of Class C Common Stock owned by KEP 97,
because as the President and a Director of KECC and a partner of KEP 97, Mr.
Given may be deemed to beneficially own all such shares.
(g) Simultaneously with the consummation of Transactions, Executive Management
purchased 1,660 shares of Class A Common Stock on the same terms and
conditions as those shares of Class A Common Stock that are purchased by
KECC. In addition, Executive Management received 1,667 shares of Class C
Common Stock in connection with the Restricted Stock Plan and up to 10,000
shares of Class D Common Stock that may be earned under the Performance
Share Program.
(h) The Key Equity Group is comprised of Executive Management, KECC and KEP 97.
See "Certain Transactions -- Post-Merger Transactions."
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<PAGE> 60
DESCRIPTION OF THE REVOLVING CREDIT FACILITY
The Company has entered into certain loan agreements with NationsBank, N.A.
("NationsBank") to provide the Revolving Credit Facility, a senior secured
revolving line of credit in an aggregate principal amount of $10.0 million. The
following summary of the Revolving Credit Facility is based upon the terms of
such loan agreements.
Borrowings under the Revolving Credit Facility bear interest either at: (i)
NationsBank's Prime Rate (as defined therein); or (ii) reserve adjusted LIBOR
plus 2.0% per annum. The Revolving Credit Facility provides for certain ongoing
fees, including an unused line fee on the portion of the Revolving Credit
Facility that is not utilized equal to 0.25% per annum.
The Revolving Credit Facility extends for an initial term of five years and
will renew in increments of one year thereafter, subject to termination as
provided for therein. The required minimum unused availability under the
Revolving Credit Facility was $2.0 million on its closing date and is $500,000
at all times thereafter.
The obligations of the Company under the Revolving Credit Facility are
secured by a first priority lien upon all of the Company's existing and acquired
or created assets, including, but not limited to, accounts receivable,
inventory, chattel paper, documents, instruments, deposit accounts, contract
rights, general intangibles, machinery, equipment, real estate and other
personal property.
The Revolving Credit Facility contains, among other things, covenants
restricting the ability of the Company to incur indebtedness, to dispose of
assets, make distributions to Holding or the Company's subsidiaries, create
liens, make capital expenditures, make certain investments or acquisitions,
enter into transactions with affiliates and otherwise restrict certain
activities. The Revolving Credit Facility contains financial covenants pursuant
to which the Company pledges to maintain a minimum net worth (with annual
step-ups) and minimum current, fixed charge and leverage ratios.
Events of default under the Revolving Credit Facility include those usual
and customary for facilities of this type, including, among other things,
default in the payment of principal or interest in respect of material amounts
of indebtedness of the Company or its subsidiaries; any nonpayment on such
indebtedness; a change of control (as defined therein); any breach of the
covenants or a material breach of the representations and warranties included in
the Revolving Credit Facility and related documents; the institution of any
bankruptcy proceedings; and the failure of any security agreement related to the
Revolving Credit Facility or lien granted thereunder to be valid and
enforceable. Upon the occurrence and continuance of an event of default under
the Revolving Credit Facility, the lender may terminate its commitment to lend
and declare the then-outstanding loan due and payable.
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<PAGE> 61
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Company to the Initial Purchaser
pursuant to the Purchase Agreement. The Initial Purchaser subsequently resold
the Old Notes to qualified institutional buyers in reliance on Rule 144A under
the Securities Act. As a condition to the Purchase Agreement, Sub Co. entered
into the Registration Rights Agreement with the Initial Purchaser pursuant to
which the Company, as successor to Sub Co., has agreed, for the benefit of the
holders of the Old Notes, at the Company's cost, to use its best efforts to (i)
file the Exchange Offer Registration Statement within 60 days after the date of
the original issue of the Old Notes with the Commission with respect to the
Exchange Offer for the New Notes; (ii) use its best efforts to cause the
Exchange Offer Registration Statement to be declared effective under the
Securities Act within 150 days after the date of the original issuance of the
Old Notes and (iii) unless the Exchange Offer would not be permitted by
applicable law or Commission policy, commence the Exchange Offer and use its
best efforts to issue on or prior to 60 days after the date on which the
Exchange Offer Registration Statement was declared effective by the Commission
(the "Exchange Offer Effectiveness Date") New Notes in exchange for all Old
Notes tendered prior thereto in the Exchange Offer. Upon the Exchange Offer
Registration Statement being declared effective, the Company will offer the New
Notes in exchange for surrender of the Old Notes. The Company will keep the
Exchange Offer open for not less than 30 days (or longer if required by
applicable law) after the date on which notice of the Exchange Offer is mailed
to the holders of the Old Notes. For each Old Note surrendered to the Company
pursuant to the Exchange Offer, the holder of such Old Note will receive a New
Note having a principal amount equal to that of the surrendered Old Note. Each
New Note will bear interest from its issuance date. Holders of Old Notes that
are accepted for exchange will receive, in cash, accrued interest thereon to,
but not including, the issuance date of the New Notes. Such interest will be
paid with the first interest payment on the New Notes. Interest on the Old Notes
accepted for exchange will cease to accrue upon issuance of the New Notes.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the New Notes will in general be
freely tradeable after the Exchange Offer without further registration under the
Securities Act. However, any purchaser of Old Notes who is an affiliate of the
Company or who intends to participate in the Exchange Offer for the purpose of
distributing the New Notes (i) will not be able to rely on the interpretation of
the staff of the Commission, (ii) will not be able to tender its Old Notes in
the Exchange Offer and (iii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or
transfer of the Old Notes, unless such sale or transfer is made pursuant to an
exemption from such requirements.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the New Notes are to be
acquired by the holder or the person receiving such New Notes, whether or not
such person is the holder, in the ordinary course of business, (ii) the holder
or any such other person (other than a brokerdealer referred to in the next
sentence) is not engaging, and does not intend to engage, in distribution of the
New Notes, (iii) the holder or any such other person has no arrangement or
understanding with any person to participate in the distribution of the New
Notes, (iv) neither the holder nor any such other person is an affiliate of the
Company within the meaning of Rule 405 under the Securities Act, and (v) the
holder or any such other person acknowledges that if such holder or any other
person participates in the Exchange Offer for the purpose of distributing the
New Notes it must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the New
Notes and cannot rely on those no-action Letters. As indicated above, each
Participating Broker-Dealer that receives New Notes for its own account in
exchange for Old Notes must acknowledge that it (i) acquired the Old Notes for
its own account as a result of market-making activities or other trading
activities, (ii) has not entered into any arrangement or understanding with the
Company or any affiliate of the Company (within the meaning of Rule 405 under
the Securities Act) to distribute the New Notes to be received in the Exchange
Offer and (iii) will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes. For a
description of the procedures for resales by Participating Broker-Dealers, see
"Plan of Distribution."
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<PAGE> 62
In the event that changes in the law or the applicable interpretations of
the staff of the Commission do not permit the Company to effect such an Exchange
Offer, or if for any other reason the Exchange Offer is not consummated within
210 days of the date of the original issuance of the Old Notes, the Company will
(i), as promptly as possible, file the Shelf Registration Statement covering
resales of the Old Notes, (ii) use its best efforts to cause the Shelf
Registration Statement to be declared effective under the Securities Act and
(iii) use its respective best efforts to keep effective the Shelf Registration
Statement until three years after its effective date. The Company will, in the
event of the filing of the Shelf Registration Statement, provide to each holder
of the Old Notes copies of the prospectus which is a part of the Shelf
Registration Statement, notify each such holder when the Shelf Registration
Statement has become effective and take certain other actions as are required to
permit unrestricted resale of the Old Notes. A holder of the Old Notes that
sells such Old Notes pursuant to the Shelf Registration Statement generally
would be required to be named as a selling security holder in the related
prospectus and to deliver a prospectus to purchasers, will be subject to certain
of the civil liability provisions under the Securities Act in connection with
such sales and will be bound by the provisions of the Registration Rights
Agreement which are applicable to such a holder (including certain
indemnification obligations).
The Registration Rights Agreement provides that (i) the Company will file
an Exchange Offer Registration Statement with the Commission on or prior to 60
days after the date of the original issue of the Old Notes, (ii) the Company
will use its best efforts to have the Exchange Offer Registration Statement
declared effective by the Commission on or prior to 150 days after the date of
the original issue of the Old Notes, (iii) unless the Exchange Offer would not
be permitted by applicable law or Commission policy, the Company will commence
the Exchange Offer and use its best efforts to issue on or prior to 60 days
after the effectiveness of the Exchange Offer Registration Statement New Notes
in exchange for all Old Notes tendered prior thereto in the Exchange Offer and
(iv) if obligated to file the Shelf Registration Statement, the Company will use
its best efforts to file the Shelf Registration Statement with the Commission in
a timely fashion. If (a) the Company fails to file any of the registration
statements required by the Registration Rights Agreement on or before the date
specified for such filing, (b) any of such registration statements is not
declared effective by the Commission on or prior to the date specified for such
effectiveness, (c) the Company fails to consummate the Exchange Offer within 60
days of the effectiveness of the Exchange Offer Registration Statement, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable in connection
with resales of Transfer Restricted Securities (as defined herein) during the
period specified in the Registration Rights Agreement (each such event referred
to in clauses (a) through (d) above a "Registration Default"), the sole remedy
available to holders of the Old Notes will be the immediate assessment of
Additional Interest as follows: the per annum interest rate on the Old Notes
will increase by 0.5% during the first 90-day period the Registration Default
exists and is not waived or cured and the per annum interest rate will increase
by an additional 0.25% for each subsequent 90-day period during which the
Registration Default remains uncured, up to a maximum additional interest rate
of 2.0% per annum in excess of 12 3/4% per annum. All Additional Interest will
be payable to holders of the Old Notes in cash on each January 1 and July 1,
commencing with the first such date occurring after any such Additional Interest
commences to accrue, until such Registration Default is cured. After the date on
which such Registration Default is cured, the interest rate on the Old Notes
will revert to 12 3/4% per annum. For purposes of the foregoing, "Transfer
Restricted Securities" means each Note until (i) the date on which such Note has
been exchanged by a person other than a broker-dealer for a New Note in the
Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange
Offer of a Note for a New Note, the date on which such New Note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of the prospectus contained in the Exchange Offer Registration
Statement, (iii) the date on which such Note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iv) the date on which such Note is distributed to the
public pursuant to Rule 144 under the Act.
Holders of Old Notes will be required to make certain representations (as
described in the Registration Rights Agreement) in order to participate in the
Exchange Offer and will be required to deliver information to be used in
connection with the Shelf Registration Statement within the time periods set
forth in the
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Registration Rights Agreement in order to have their Old Notes included in the
Shelf Registration Statement and benefit from the provisions regarding
Additional Interest set forth above.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, a copy
of which is filed as an exhibit to the Exchange Offer Registration Statement of
which this Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Old Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration rights and such Old Notes
will continue to be subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for such Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of New Notes
in exchange for each $1,000 principal amount of Old Notes accepted in the
Exchange Offer. Holders may tender some or all of their Old Notes pursuant to
the Exchange Offer. However, Old Notes may be tendered only in integral
multiples of $1,000.
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes bear a Series B designation and a
different CUSIP number from the Old Notes, (ii) the New Notes have been
registered under the Securities Act and hence will not bear legends restricting
the transfer thereof and (iii) the holders of the New Notes will not be entitled
to certain rights under the Registration Rights Agreement, including the
provisions providing for an increase in the interest rate on the Old Notes in
certain circumstances relating to the timing of the Exchange Offer, all of which
rights will terminate when the Exchange Offer is terminated. The New Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits of
the Indenture.
As of the date of this Prospectus, $70,000,000 aggregate principal amount
of Old Notes were outstanding. The Company has fixed the close of business on
, 1997 as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation law of Delaware or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than transfer taxes in certain circumstances, in connection with the
Exchange Offer. See "-- Fees and Expenses."
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<PAGE> 64
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1997, unless the Company in its sole discretion extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
The Company reserves the right, in its sole discretion, prior to the
Expiration Date (i) to delay accepting any Old Notes, to extend the Exchange
Offer or to terminate the Exchange Offer if any of the conditions set forth
below under "Conditions" shall not have been satisfied, by giving oral or
written notice of such delay, extension or termination to the Exchange Agent or
(ii) to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the registered holders.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from their date of issuance. Holders of
Old Notes that are accepted for exchange will receive, in cash, accrued interest
thereon to, but not including, the date of issuance of the New Notes. Such
interest will be paid with the first interest payment on the New Notes on
January 1, 1998. Interest on the Old Notes accepted for exchange will cease to
accrue upon issuance of the New Notes.
Interest on the New Notes is payable semiannually on each January 1 and
July 1, commencing on January 1, 1998.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes and any other required documents, to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date. To be tendered effectively,
the Old Notes, Letter of Transmittal or an Agent's Message (as defined herein)
in connection with a book-entry transfer and other required documents must be
completed and received by the Exchange Agent at the address set forth below
under "Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration
Date. Delivery of the Old Notes may be made by book-entry transfer in accordance
with the procedures described below. Confirmation of such book-entry transfer
must be received by the Exchange Agent prior to the Expiration Date.
The term "Agent's Message" means a message, transmitted by a book-entry
transfer facility to, and received by, the Exchange Agent, forming a part of a
confirmation of a book-entry transfer, which states that such book-entry
transfer facility has received an express acknowledgment from the participant in
such book-entry transfer facility tendering the Notes that such participant has
received and agrees to be bound by the terms of the Letter of Transmittal and
that the Company may enforce such agreement against such participant.
By executing the Letter of Transmittal, each holder will make the
representations set forth above in the third paragraph under the heading
"-- Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK
OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY
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<PAGE> 65
MAIL, HOLDERS MAY WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE
AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD
BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALER,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See "Instructions
to Registered Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined herein)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of the
Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Old Notes at DTC for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution that is a
participant in DTC's system may make book-entry delivery of Old Notes by causing
DTC to transfer such Old Notes into the Exchange Agent's account with respect to
the Old Notes in accordance with DTC's procedures for such transfer. Although
delivery of the Old Notes may be effected through book-entry transfer into the
Exchange Agent's account at DTC, an appropriate Letter of Transmittal properly
completed and duly executed with any required signature guarantee and all other
required documents must in each case be transmitted to and received or confirmed
by the Exchange Agent at its address set forth below on or prior to the
Expiration Date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures. Delivery
of documents to DTC does not constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not property tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right in its sole discretion to waive
any defects, irregularities or conditions of tender as to particular old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the
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<PAGE> 66
defects or irregularities have not been cured or waived will be returned by the
Exchange Agent to the tendering holders, unless otherwise provided in the Letter
of Transmittal, as soon as practicable following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the Expiration
Date, may effect a tender if:
(a) the tender is made through an Eligible Institution,
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a property completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the holder, the certificate number(s) of such Old Notes and
the principal amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that, within three New York Stock Exchange trading
days after the Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with the certificates) representing the Old Notes (or a confirmation of
book-entry transfer of such Notes into the Exchange Agent's account at DTC), and
any other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent; and
(c) such property completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificates) representing all tendered Old
Notes in proper form for transfer (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at DTC), and all other
documents required by the Letter of Transmittal are received by the Exchange
Agent upon three New York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"); (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case of
Old Notes transferred by book-entry transfer, the name and number of the account
at DTC to be credited); (iii) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Old Notes are
to be registered, if different from that of the Depositor. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for purposes of the Exchange Offer and no New Notes will
be issued with respect thereto unless the Old Notes so withdrawn are validly
retendered. Any Old Notes which have been tendered but which are not accepted
for exchange will be returned to the holder thereof without cost to such holder
as soon as practicable after withdrawal, rejection of tender or termination of
the Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described above under "-- Procedures for Tendering" at any
time prior to the Expiration Date.
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<PAGE> 67
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate or amend the Exchange Offer as provided herein prior to the
Expiration Date, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable discretion that any of the
above conditions are not satisfied, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering holders, (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of holders to withdraw such
Old Notes (see "-- Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all property tendered
Old Notes which have not been withdrawn.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C> <C>
BY REGISTERED OR BY OVERNIGHT COURIER AND
BY HAND TO 4:30 P.M.: CERTIFIED MAIL: BY HAND AFTER 4:30 P.M.:
United States Trust United States Trust Company United States Trust
Company of New York Company
of New York P.O. Box 844 of New York
111 Broadway Cooper Station 770 Broadway
Lower Level New York, New York New York, New York 10003
Corporate Trust Window 10276-0844 Attn: Corporate Trust
New York, New York 10006
</TABLE>
BY FACSIMILE:
United States Trust Company of New York
(212) 780-0592
Attn: Corporate Trust
CONFIRM BY TELEPHONE:
(800) 548-6565
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
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<PAGE> 68
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value less the value attributable to the Warrants upon the
issuance of the Old Notes, as reflected in the Company's accounting records on
the date of exchange. Accordingly, no gain or loss for accounting purposes will
be recognized by the Company. The expenses of the Exchange Offer will be
expensed over the term of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Company (upon redemption thereof or otherwise), (ii) so
long as the Old Notes are eligible for resale pursuant to Rule 144A, to a person
inside the United States whom the seller reasonably believes is a qualified
institutional buyer within the meaning of Rule 144A under the Securities Act in
a transaction meeting the requirements of Rule 144A, (iii) in accordance with
Rule 144 under the Securities Act, or pursuant to another exemption from the
registration requirements of the Securities Act (and based upon an opinion of
counsel reasonably acceptable to the Company), (iv) outside the United States to
a foreign person in a transaction meeting the requirements of Rule 904 under the
Securities Act, or (v) pursuant to an effective registration under the
Securities Act, in each case in accordance with any applicable securities laws
of any state of the United States.
RESALE OF THE NEW NOTES
With respect to resales of New Notes, based on interpretations by the staff
of the Commission set forth in no-action letters issued to third parties, the
Company believes that a holder or other person who receives New Notes, whether
or not such person is the holder (other than a person that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act) who
receives New Notes in exchange for Old Notes in the ordinary course of business
and who is not participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in the distribution
of the New Notes, will be allowed to resell the New Notes to the public without
further registration under the Securities Act and without delivering to the
purchasers of the New Notes a prospectus that satisfies the requirements of
Section 10 of the Securities Act. However, if any holder acquires New Notes in
the Exchange Offer for the purpose of distributing or participating in a
distribution of the New Notes, such holder cannot rely on the position of the
staff of the Commission set forth in such no-action letters or any similar
interpretive letters, and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction, unless an exemption from registration is otherwise available.
Further, each Participating Broker-Dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
Participating Broker-Dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes.
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<PAGE> 69
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the New Notes are to be
acquired by the holder or the person receiving such New Notes, whether or not
such person is the holder, in the ordinary course of business, (ii) the holder
or any such other person (other than a brokerdealer referred to in the next
sentence) is not engaging, and does not intend to engage, in the distribution of
the New Notes, (iii) the holder or any such other person has no arrangement or
understanding with any person to participate in the distribution of the New
Notes, (iv) neither the holder nor any such other person is an affiliate of the
Company within the meaning of Rule 405 under the Securities Act, and (v) the
holder or any such other person acknowledges that if such holder or other person
participates in the Exchange Offer for the purpose of distributing the New Notes
it must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale of the New Notes and cannot rely on
those no-action letters. As indicated above, each Participating Broker-Dealer
that receives a New Note for its own account in exchange for Old Notes must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. For a description of the procedures for such resales by
Participating Broker-Dealers, see "Plan of Distribution."
DESCRIPTION OF THE NOTES
The Old Notes were issued under the Indenture and the New Notes will be
issued under the Indenture. The terms of the New Notes include those stated in
the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act") as in effect on
the date of the Indenture. The form and terms of the New Notes are the same as
the form and terms of the Old Notes (which they replace) except that (i) the New
Notes bear a Series B designation, (ii) the New Notes have been registered under
the Securities Act and, therefore, will not bear legends restricting transfer
thereof, and (iii) the holders of New Notes will not be entitled to certain
rights under the Registration Rights Agreement, including the provisions
providing for an increase in the interest rate on the Old Notes in certain
circumstances relating to the timing of the Exchange Offer, which rights will
terminate when the Exchange Offer is consummated. The New Notes are subject to
all such terms, and holders of the New Notes are referred to the Indenture and
the Act for a statement of them. The following is a summary of the material
terms and provisions of the New Notes. This summary does not purport to be a
complete description of the New Notes and is subject to the detailed provisions
of, and qualified in its entirety by reference to, the New Notes and the
Indenture (including the definitions contained therein). A copy of the form of
Indenture may be obtained from the Company by any holder or prospective investor
upon request. Definitions relating to certain capitalized terms are set forth
under " -- Certain Definitions" and throughout this description. Capitalized
terms that are used but not otherwise defined herein have the meanings assigned
to them in the Indenture and such definitions are incorporated herein by
reference. The term Notes means the New Notes and the Old Notes treated as a
single class.
GENERAL
The Notes will be general senior unsecured obligations of the Company,
limited in aggregate principal amount to $70,000,000.
The Notes will be fully and unconditionally guaranteed, on a senior
unsecured basis, as to payment of principal, premium, if any, and interest,
jointly and severally, by each Restricted Subsidiary which guarantees payment of
the Notes pursuant to the covenant described under "-- Certain
Covenants -- Limitation on Creation of Subsidiaries".
MATURITY, INTEREST AND PRINCIPAL
The Notes will mature on July 1, 2004. The Notes will bear interest at a
rate of 12 3/4% per annum from the date of original issuance until maturity.
Interest is payable semi-annually in arrears on January 1 and July 1, commencing
January 1, 1998, to holders of record of the Notes at the close of business on
the immediately preceding December 15 and June 15, respectively.
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<PAGE> 70
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after July 1, 2002 at the following redemption prices
(expressed as a percentage of principal amount), together, in each case, with
accrued and unpaid interest to the redemption date, if redeemed during the
twelve-month period beginning on July 1 of each year listed below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
--------------------------------------------------------------- ----------
<S> <C>
2002........................................................... 103.188%
2003........................................................... 100.000%
</TABLE>
Notwithstanding the foregoing, the Company may redeem in the aggregate up
to 25% of the original principal amount of Notes at any time and from time to
time prior to July 1, 2000 at a redemption price equal to 112.75% of the
aggregate principal amount so redeemed, plus accrued and unpaid interest to the
redemption date out of the Net Proceeds of one or more Qualified Equity
Offerings; provided, that at least $52.5 million of the principal amount of
Notes originally issued remain outstanding immediately after the occurrence of
any such redemption and that any such redemption occurs within 90 days following
the closing of any such Qualified Equity Offering.
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not then listed on a
national securities exchange, on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate; provided, however, that no Notes of
a principal amount of $1,000 or less shall be redeemed in part; and provided,
further, that if a partial redemption is made with the proceeds of a Qualified
Equity Offering, selection of the Notes or portions thereof for redemption shall
be made by the Trustee only on a pro rata basis or on as nearly a pro rata basis
as is practicable (subject to the procedures of the Depository Trust Company),
unless such method is otherwise prohibited. Notice of redemption shall be mailed
by first-class mail at least 30 but not more than 60 days before the redemption
date to each holder of Notes to be redeemed at its registered address. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in a principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original Note. On and after the redemption date, interest will cease to
accrue on Notes or portions thereof called for redemption as long as the Company
has deposited with the Paying Agent for the Notes funds in satisfaction of the
applicable redemption price pursuant to the Indenture.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants. Except as
otherwise specified, all of the covenants described below appear in the
Indenture.
Limitation on Additional Indebtedness
The Company will not, and will not permit any Restricted Subsidiary of the
Company to, directly or indirectly, incur (as defined) any Indebtedness
(including Acquired Indebtedness) unless (a) after giving effect to the
incurrence of such Indebtedness and the receipt and application of the proceeds
thereof, the Company's Fixed Charge Coverage Ratio (determined on a pro forma
basis for the last four fiscal quarters of the Company for which financial
statements are available at the date of determination) is greater than 2.25 to
1, and (b) no Default or Event of Default shall have occurred and be continuing
at the time or as a consequence of the incurrence of such Indebtedness. On a pro
forma basis as of June 30, 1997, the Company would be unable to incur any
additional Indebtedness other than Permitted Indebtedness.
Notwithstanding the foregoing, the Company and its Restricted Subsidiaries
may incur Permitted Indebtedness.
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<PAGE> 71
Limitation on Restricted Payments
The Company will not make, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make, any Restricted Payment, unless:
(a) no Default or Event of Default shall have occurred and be
continuing at the time of or immediately after giving effect to such
Restricted Payment;
(b) immediately after giving pro forma effect to such Restricted
Payment, the Company could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under the covenant set forth under
" -- Limitation on Additional Indebtedness"; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Issue Date
does not exceed the sum of (1) 50% of the cumulative Consolidated Net
Income of the Company (or in the event such Consolidated Net Income shall
be a deficit, minus 100% of such deficit), plus (2) 100% of the aggregate
Net Proceeds and the fair market value of securities or other property
received by the Company from the issue or sale, after the Issue Date, of
Capital Stock (other than Disqualified Capital Stock or Capital Stock of
the Company issued to any Subsidiary of the Company) of the Company or any
Indebtedness or other securities of the Company convertible into or
exercisable or exchangeable for Capital Stock (other than Disqualified
Capital Stock) of the Company which has been so converted or exercised or
exchanged, as the case may be. For purposes of determining under this
clause (c) the amount expended for Restricted Payments, cash distributed
shall be valued at the face amount thereof and property other than cash
shall be valued at its fair market value.
The provisions of this covenant shall not prohibit (i) the payment of any
distribution within 60 days after the date of declaration thereof, if at such
date of declaration such payment would comply with the provisions of the
Indenture, (ii) so long as no Default or Event of Default shall have occurred
and be continuing, the retirement of any shares of Capital Stock of the Company
or subordinated Indebtedness (A) by conversion into, or by or in exchange for,
shares of Capital Stock (other than Disqualified Capital Stock) of the Company,
or (B) out of, the Net Proceeds of the substantially concurrent sale (other than
to a Subsidiary of the Company) of other shares of Capital Stock of the Company
(other than Disqualified Capital Stock), (iii) so long as no Default or Event of
Default shall have occurred and be continuing, the redemption or retirement of
Indebtedness of the Company subordinated to the Notes in exchange for, by
conversion into, or out of the Net Proceeds of, a substantially concurrent sale
or incurrence of Indebtedness (other than any Indebtedness owed to a Subsidiary)
of the Company that is contractually subordinated in right of payment to the
Notes to at least the same extent as the Subordinated Indebtedness being
redeemed or retired, (iv) so long as no Default or Event of Default shall have
occurred and be continuing, the retirement of any shares of Disqualified Capital
Stock by conversion into, or by exchange for, shares of Disqualified Capital
Stock, or out of the Net Proceeds of the substantially concurrent sale (other
than to a Subsidiary of the Company) of other shares of Disqualified Capital
Stock; provided that (a) such Disqualified Capital Stock is not subject to
mandatory redemption earlier than the maturity of the Notes, (b) such
Disqualified Capital Stock is in an aggregate liquidation preference that is
equal to or less than the sum of (x) the aggregate liquidation preference of the
Disqualified Capital Stock being retired, (y) the amount of accrued and unpaid
dividends, if any, and premiums owed, if any, on the Disqualified Capital Stock
being required and (z) the amount of customary fees, expenses and costs related
to the incurrence of such Disqualified Capital Stock and (c) such Disqualified
Capital Stock is incurred by the same person that initially incurred the
disqualified Capital Stock being retired, except that the Company may incur
Disqualified Capital Stock to refund or refinance Disqualified Capital Stock of
any Wholly-Owned Restricted Subsidiary of the Company, (v) the payment by the
Company of cash dividends to Holding for the purpose of paying, so long as all
proceeds thereof are promptly used by Holding to pay, franchise taxes and
federal, state and local income taxes and interest and penalties with respect
thereto, if any, payable by Holding, provided that any refund shall be promptly
returned by Holding to the Company, (vi) so long as no Default or Event of
Default shall have occurred and be continuing, payments to employees for
repurchases of Capital Stock of Holding; provided, however, that the amount of
all such payments under this clause (vi) does not exceed $250,000 during any
twelve month period;
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(vii) deposits and loans, not to exceed $3.0 million at any time outstanding,
made in connection with acquisition agreements; (viii) the making of payments by
the Company to Holding to pay (A) upon consummation of the Transactions, up to
$65,000 in connection with the delivery of an opinion relating to the solvency
of the Company on the Issue Date and (B) operating expenses, not to exceed
$25,000 in any fiscal year; or (ix) any payment from the Company to Holding in
the amount of any payment received by the Company pursuant to a distribution
from the Escrow Accounts in connection with the Merger under the terms of the
Merger Agreement, not to exceed $50,000. In determining the aggregate amount of
Restricted Payments made subsequent to the Issue Date in accordance with clause
(c) of the immediately preceding paragraph, amounts expended pursuant to clauses
(i), (ii)(B) and (iv) shall be included in such calculation and, in the event
the acquisition contemplated in clause (vii) is not consummated within 180 days
after the deposit or loan is made in connection therewith, (vii) shall also be
included in such calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "-- Limitation on Restricted Payments" were computed,
which calculations may be based upon the Company's latest available financial
statements, and that no Default or Event of Default exists and is continuing and
no Default or Event of Default will occur immediately after giving effect to any
Restricted Payments.
Limitations on Investments
The Company will not, and will not permit any of its Restricted
Subsidiaries to, make any Investment other than (i) a Permitted Investment or
(ii) an Investment that is made as a Restricted Payment in compliance with the
"-- Limitation on Restricted Payments" covenant, after the Issue Date.
Limitations on Liens
The Company will not, and will not permit any of its Restricted
Subsidiaries to, create, incur or otherwise cause or suffer to exist or become
effective any Liens of any kind (other than Permitted Liens) upon any property
or asset of the Company or any Restricted Subsidiary or any shares of stock or
debt of any Restricted Subsidiary which owns property or assets, now owned or
hereafter acquired, unless (i) if such Lien secures Indebtedness which is pari
passu with the Notes, then the Notes are secured on an equal and ratable basis
with the obligations so secured until such time as such obligation is no longer
secured by a Lien or (ii) if such Lien secures Indebtedness which is
subordinated to the Notes, any such Lien shall be subordinated to a Lien on such
property or asset or shares of stock or debt granted to the holders of the Notes
to the same extent as such subordinated Indebtedness is subordinated to the
Notes.
Limitation on Transactions with Affiliates
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or suffer to exist any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, property or services) with any
Affiliate (including entities in which the Company or any of its Restricted
Subsidiaries own a minority interest) or holder of 10% or more of the Common
Stock of the Company (an "Affiliate Transaction") or extend, renew, waive or
otherwise modify the terms of any Affiliate Transaction entered into prior to
the Issue Date unless (i) such Affiliate Transaction is between or among the
Company and its Wholly-Owned Restricted Subsidiaries; or (ii) the terms of such
Affiliate Transaction are fair and reasonable to the Company or such Restricted
Subsidiary, as the case may be, and the terms of such Affiliate Transaction are
at least as favorable as the terms which could be obtained by the Company or
such Restricted Subsidiary, as the case may be, in a comparable transaction made
on an arm's-length basis between unaffiliated parties. In any Affiliate
Transaction involving an amount or having a value in excess of $1.0 million
which is not permitted under clause (i) above, the Company must obtain a
resolution of the Board of Directors certifying that such Affiliate Transaction
complies with clause (ii) above. In transactions with a value in excess of $5.0
million which are not permitted under clause (i) above, the Company must obtain
a written opinion as to the fairness of such a transaction from a nationally
recognized independent investment banking firm.
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The foregoing provisions will not apply to (i) any Restricted Payment that
is not prohibited by the provisions described under "-- Limitations on
Restricted Payments" contained herein, (ii) any transaction, approved by the
Board of Directors of the Company, with an officer or director of the Company or
of any Subsidiary in his or her capacity as officer or director entered into in
the ordinary course of business, (iii) any transactions with KECC for advisory
services to the extent the payment for such services do not exceed $200,000 per
year, (iv) customary banking transactions with an Affiliate of KECC, (v)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Subsidiary
of the Company as determined in good faith by the Company's Board of Directors,
or (vi) transactions exclusively between or among the Company and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries, provided such transactions are not otherwise prohibited by the
Indenture.
Limitation on Creation of Subsidiaries
The Company shall not create or acquire, nor permit any of its Restricted
Subsidiaries to create or acquire, any Subsidiary other than (i) a Restricted
Subsidiary existing as of the date of the Indenture, (ii) a Restricted
Subsidiary conducting a business similar or reasonably related to the business
of the Company and its Subsidiaries on the Issue Date, or (iii) an Unrestricted
Subsidiary; provided, however, that each Restricted Subsidiary organized under
the laws of the United States or any State thereof or the District of Columbia
acquired or created pursuant to clause (ii) shall, at the time it has either
assets or shareholder's equity in excess of $10,000, execute a guarantee, in the
form attached to the Indenture and reasonably satisfactory in form and substance
to the Trustee (and with such documentation relating thereto as the Trustee
shall require, including, without limitation a supplement or amendment to the
Indenture and opinions of counsel as to the enforceability of such guarantee).
See "-- Future Guarantees."
Limitation on Certain Asset Sales
The Company will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless (i) the Company or its
Restricted Subsidiaries, as the case may be, receives consideration at the time
of such sale or other disposition at least equal to the fair market value
thereof (as determined in good faith by the Company's board of directors, and
evidenced by a board resolution); (ii) not less than 85% of the consideration
received by the Company or its Subsidiaries, as the case may be, is in the form
of cash or cash equivalents (those equivalents allowed under "Temporary Cash
Investments"); and (iii) the Asset Sale Proceeds received by the Company or such
Restricted Subsidiary are applied (a) first, to the extent the Company elects,
or is required to prepay, repay or purchase Indebtedness (other than
Subordinated Indebtedness) of the Company or any Restricted Subsidiary within
270 days following the receipt of the Asset Sale Proceeds from any Asset Sale,
provided that any such repayment shall result in a permanent reduction of the
commitments thereunder in an amount equal to the principal amount so repaid; (b)
second, to the extent of the balance of Asset Sale Proceeds after application as
described above, to the extent the Company elects, to an investment in assets
(including Capital Stock or other securities purchased in connection with the
acquisition of Capital Stock or property of another person) used or useful in
businesses similar or ancillary to the business of the Company or Restricted
Subsidiary as conducted at the time of such Asset Sale, provided that such
investment occurs or the Company or a Restricted Subsidiary enters into
contractual commitments to make such investment, subject only to customary
conditions (other than the obtaining of financing), on or prior to the 271st day
following receipt of such Asset Sale Proceeds (the "Reinvestment Date") and
Asset Sale Proceeds contractually committed are so applied within 365 days
following the receipt of such Asset Sale Proceeds; and (c) third, if on the
Reinvestment Date with respect to any Asset Sale, the Available Asset Sale
Proceeds exceed $5.0 million, the Company shall apply an amount equal to
Available Asset Sale Proceeds to an offer to repurchase the Notes, at a purchase
price in cash equal to 100% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of repurchase (an "Excess Proceeds Offer").
If an Excess Proceeds Offer is not fully subscribed, the Company may retain the
portion of the Available Asset Sale Proceeds not required to repurchase Notes.
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If the Company is required to make an Excess Proceeds Offer, the Company
shall mail, within 30 days following the Reinvestment Date, a notice to the
Holders stating, among other things: (1) that such holders have the right to
require the Company to apply the Available Asset Sale Proceeds to repurchase
such Notes at a purchase price in cash equal to 100% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase; (2)
the purchase date, which shall be no earlier than 30 days and not later than 60
days from the date such notice is mailed; (3) the instructions, determined by
the Company, that each Holder must follow in order to have such Notes
repurchased; and (4) the calculations used in determining the amount of
Available Asset Sale Proceeds to be applied to the repurchase of such Notes.
Limitation on Preferred Stock of Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary to issue any
Preferred Stock (except Preferred Stock to the Company or a Restricted
Subsidiary) or permit any Person (other than the Company or a Subsidiary) to
hold any such Preferred Stock unless the Company or such Restricted Subsidiary
would be entitled to incur or assume Indebtedness under the first paragraph of
the covenant described under "-- Limitation on Additional Indebtedness" in the
aggregate principal amount equal to the aggregate liquidation value of the
Preferred Stock to be issued.
Limitation on Capital Stock of Restricted Subsidiaries
The Company will not (i) sell, pledge, hypothecate or otherwise convey or
dispose of any Capital Stock of a Subsidiary (other than under the Revolving
Credit Facility or a successor facility) or (ii) permit any of its Subsidiaries
to issue any Capital Stock, other than to the Company or a Wholly-Owned
Restricted Subsidiary of the Company. The foregoing restrictions shall not apply
to an Asset Sale made in compliance with "-- Limitation on Certain Asset Sales"
or the issuance of Preferred Stock in compliance with the covenant described
under "-- Limitation on Preferred Stock of Restricted Subsidiaries."
Limitation on Sale and Lease-Back Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any Sale and Lease-Back Transaction unless (i) the consideration
received in such Sale and Lease-Back Transaction is at least equal to the fair
market value of the property sold, as determined by a board resolution of the
Company and (ii) the Company could incur the Attributable Indebtedness in
respect of such Sale and Lease-Back Transaction in compliance with the covenant
described under "-- Limitation on Additional Indebtedness."
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (a)(i) pay dividends or make any other distributions to
the Company or any of its Restricted Subsidiaries (A) on its Capital Stock or
(B) with respect to any other interest or participation in, or measured by, its
profits, or (ii) pay any Indebtedness owed to the Company or any of its
Restricted Subsidiaries, (b) make loans or advances or capital contributions to
the Company or any of its Restricted Subsidiaries or (c) transfer any of its
properties or assets to the Company or any of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of (i)
encumbrances or restriction existing on the Issue Date or under the Revolving
Credit Facility, (ii) the Indenture, the Notes and the Guarantees, if
applicable, (iii) applicable law, (iv) any instrument governing Indebtedness or
Capital Stock of a Person acquired by the Company or any of its Restricted
Subsidiaries or of any Person that becomes a Restricted Subsidiary as in effect
at the time of such acquisition or such Person becoming a Restricted Subsidiary
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition or such Person becoming a Restricted
Subsidiary), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person (including any Subsidiary of the Person), so
acquired, provided that the EBITDA of such Person is not taken into account (to
the extent of such restriction) in determining whether any financing or
Restricted Payment in connection with such acquisition was permitted by the
terms of the Indenture,
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(v) customary nonassignment provisions in leases or other agreements entered
into in the ordinary course of business and consistent with past practices, (vi)
Refinancing Indebtedness; provided that such restrictions are in the aggregate
no more restrictive than those contained in the agreements governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
or (vii) customary restrictions in security agreements, liens or mortgages
securing Indebtedness of the Company or a Restricted Subsidiary to the extent
such restrictions restrict the transfer of the property subject to such security
agreements and mortgages.
Payments for Consent
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, including out-of-pocket costs and expenses, to any
holder of any Notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or agreed to be paid to all holders of the
Notes which so consent, waive or agree to amend in the time frame set forth in
solicitation documents relating to such consent, waiver or agreement.
CHANGE OF CONTROL OFFER
Within 20 days of the occurrence of a Change of Control, the Company shall
notify the Trustee in writing of such occurrence and shall make an offer to
purchase (the "Change of Control Offer") the outstanding Notes at a purchase
price equal to 101% of the principal amount thereof plus any accrued and unpaid
interest thereon to the Change of Control Payment Date (as hereinafter defined)
(such applicable purchase price being hereinafter referred to as the "Change of
Control Purchase Price") in accordance with the procedures set forth in this
covenant.
Within 30 days of the occurrence of a Change of Control, the Company also
shall (i) cause a notice of the Change of Control Offer to be sent at least once
to the Dow Jones News Service or similar business news service in the United
States and (ii) send by first-class mail, postage prepaid, to the Trustee and to
each holder of the Notes, at the address appearing in the register maintained by
the Registrar of the Notes, a notice stating:
(1) that the Change of Control Offer is being made pursuant to this
covenant and that all Notes tendered will be accepted for payment, and
otherwise subject to the terms and conditions set forth herein;
(2) the Change of Control Purchase Price and the purchase date (which
shall be a Business Day no earlier than 30 business days from the date such
notice is mailed (the "Change of Control Payment Date"));
(3) that any Note not tendered will continue to accrue interest;
(4) that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any Notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
(5) that holders accepting the offer to have their Notes purchased
pursuant to a Change of Control Offer will be required to surrender the
Notes to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day preceding the Change of Control
Payment Date;
(6) that holders will be entitled to withdraw their acceptance if the
Paying Agent receives, not later than the close of business on the third
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of the Notes delivered for purchase, and a
statement that such holder is withdrawing his election to have such Notes
purchased;
(7) that holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered, provided that each Note purchased and each such new
Note issued shall be in an original principal amount in denominations of
$1,000 and integral multiples thereof;
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(8) any other procedures that a holder must follow to accept a Change
of Control Offer or effect withdrawal of such acceptance; and
(9) the name and address of the Paying Agent.
On the Change of Control Payment Date, the Company shall, to the extent
lawful, (i) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer, (ii) deposit with the Paying Agent money sufficient
to pay the purchase price of all Notes or portions thereof so tendered and (iii)
deliver or cause to be delivered to the Trustee Notes so accepted together with
an Officers' Certificate stating the Notes or portions thereof tendered to the
Company. The Paying Agent shall promptly mail to each holder of Notes so
accepted payment in an amount equal to the purchase price for such Notes, and
the Company shall execute and issue, and the Trustee shall promptly authenticate
and mail to such holder, a new Note equal in principal amount to any unpurchased
portion of the Notes surrendered; provided that each such new Note shall be
issued in an original principal amount in denominations of $1,000 and integral
multiples thereof.
The Revolving Credit Facility restricts the Company's ability to repurchase
any Notes pursuant to a Change of Control Offer prior to repayment in full of
all obligations under or in respect of the Revolving Credit Facility or requires
the Company to obtain the requisite consent under the Revolving Credit Facility
to permit the repurchase of the Notes pursuant to a Change of Control Offer. The
Revolving Credit Facility contains a "change of control" provision that is
similar in most respects to the provision of the Indenture relating to a Change
of Control, and the occurrence of such a "change of control" will constitute an
event of default under the Revolving Credit Facility.
The Indenture requires that if the Revolving Credit Facility is in effect,
or any amounts are owing thereunder or in respect thereof, at the time of the
occurrence of a Change of Control, prior to the mailing of the notice to holders
described in the second preceding paragraph, but in any event within 30 days
following any Change of Control, the Company shall (i) repay in full all
obligations under or in respect of the Revolving Credit Facility or offer to
repay in full all obligations under or in respect of the Revolving Credit
Facility and repay the obligations under or in respect of the Revolving Credit
Facility of each lender who has accepted such offer or (ii) obtain the requisite
consent under the Revolving Credit Facility to permit the repurchase of the
Notes as described above. The Company must first comply with the covenant
described in the preceding sentence before it may commence a Change of Control
Offer in the event of a Change of Control; provided that the Company's failure
to comply with the covenant described in the preceding sentence constitutes an
Event of Default described in clause (iii) under "-- Events of Default" below if
not cured within 30 days after the notice required by such clause. As a result
of the foregoing, a holder of the Notes may not be able to compel the Company to
purchase the Notes unless the Company is able at the time to refinance all of
the obligations under or in respect of the Revolving Credit Facility or obtain
requisite consents under the Revolving Credit Facility. There can be no
assurance that if a Change of Control were to occur, the Company would have
sufficient assets to first satisfy its obligations in respect of the Revolving
Credit Facility and then to repurchase all of the Notes that might be delivered
by holders seeking to accept a Change of Control Offer. Failure by the Company
to make a Change of Control Offer when required by the Indenture constitutes a
default under the Indenture and, if not cured within 30 days after notice,
constitutes an Event of Default.
The Indenture provides that, (A) if the Company or any Subsidiary thereof
has issued any outstanding (i) Indebtedness that is subordinated in right of
payment to the Notes or (ii) Preferred Stock, and the Company or such Subsidiary
is required to make a Change of Control Offer or to make a distribution with
respect to such subordinated Indebtedness or Preferred Stock in the event of a
change of control, the Company shall not consummate any such offer or
distribution with respect to such subordinated Indebtedness or Preferred Stock
until such time as the Company shall have paid the Change of Control Purchase
Price in full to the holders of Notes that have accepted the Company's Change of
Control Offer and shall otherwise have consummated the Change of Control Offer
made to holders of the Notes and (B) the Company will not issue Indebtedness
that is subordinated in right of payment to the Notes or Preferred Stock with
change of control provisions requiring the payment of such Indebtedness or
Preferred Stock prior to the payment of the Notes in the event of a Change in
Control under the Indenture.
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In the event that a Change of Control occurs and the holders of Notes
exercise their right to require the Company to purchase Notes, if such purchase
constitutes a "tender offer" for purposes of Rule 14e-1 under the Exchange Act
at that time, the Company will comply with the requirements of Rule 14e-1 as
then in effect with respect to such repurchase.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company will not and will not permit any Guarantor, if applicable, to
consolidate with, merge with or into, or transfer all or substantially all of
its assets (as an entirety or substantially as an entirety in one transaction or
a series of related transactions), to any Person unless: (i) the Company or the
Guarantor, as the case may be, shall be the continuing Person, or the Person (if
other than the Company or the Guarantor) formed by such consolidation or into
which the Company or the Guarantor, as the case may be, is merged or to which
the properties and assets of the Company or the Guarantor, as the case may be,
are transferred shall be a corporation organized and existing under the laws of
the United States or any State thereof or the District of Columbia and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, in form satisfactory to the Trustee, all of the obligations of the
Company or the Guarantor, as the case may be, under the Notes and the Indenture,
and the obligations under the Indenture shall remain in full force and effect;
(ii) immediately before and immediately after giving effect to such transaction,
no Default or Event of Default shall have occurred and be continuing; (iii)
immediately after giving effect to such transaction or series of transactions on
a pro forma basis the Consolidated Net Worth of the Company or the surviving
entity as the case may be is at least equal to the Consolidated Net Worth of the
Company immediately before such transaction or series of transactions; and (iv)
immediately after giving effect to such transaction on a pro forma basis the
Company or such Person could incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) under the covenant set forth under
"-- Certain Covenants -- Limitation on Additional Indebtedness;" provided that a
Person that is a Guarantor may consolidate with, merge into or transfer all or
substantially all of its assets to the Company or another Person that is a
Guarantor without complying with this clause (iv).
In connection with any consolidation, merger or transfer of assets
contemplated by this provision, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to the
Trustee, an Officers' Certificate and an opinion of counsel, each stating that
such consolidation, merger or transfer and the supplemental indenture in respect
thereto comply with this provision and that all conditions precedent herein
provided for relating to such transaction or transactions have been complied
with by the appropriate Persons.
FUTURE GUARANTEES
The Notes will be fully and unconditionally guaranteed, jointly and
severally, on a senior unsecured basis by the Guarantors.
The obligations of each Guarantor are limited to the maximum amount as
will, after giving effect to all other contingent and fixed liabilities of such
Guarantor and after giving effect to any collections from or payments made by or
on behalf of any other Guarantor in respect of the obligations of such other
Guarantor under its Guarantee or pursuant to its contribution obligations under
the Indenture, result in the obligations of such Guarantor under the Guarantee
not constituting a fraudulent conveyance or fraudulent transfer under federal or
state law. Each Guarantor that makes a payment or distribution under a Guarantee
shall be entitled to a contribution from each other Guarantor in a pro rata
amount based on the Adjusted Net Assets of each Guarantor.
A Guarantor shall be released from all of its obligations under its
Guarantee if all or substantially all of its assets are sold or all of its
Capital Stock is sold, in each case in a transaction in compliance with the
covenant described under "-- Certain Covenants -- Limitation on Certain Asset
Sales," or the Guarantor merges with or into or consolidates with, or transfers
all or substantially all of its assets to, the Company or another Guarantor in a
transaction in compliance with "-- Merger, Consolidation or Sale of Assets," and
such
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Guarantor has delivered to the Trustee an Officers' Certificate and an opinion
of counsel, each stating that all conditions precedent herein provided for
relating to such transaction have been complied with.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) default in payment of any principal of, or premium, if any, on the
Notes;
(ii) default for 30 days in payment of any interest on the Notes;
(iii) default by the Company or any Guarantor in the observance or
performance of any other covenant in the Notes or the Indenture for 30 days
after written notice from the Trustee or the holders of not less than 25%
in aggregate principal amount of the Notes then outstanding;
(iv) failure to pay when due principal, interest or premium in an
aggregate amount of $5.0 million or more with respect to any Indebtedness
of the Company or any Restricted Subsidiary thereof, or the acceleration of
any such Indebtedness aggregating $5.0 million or more which default shall
not be cured, waived or postponed pursuant to an agreement with the holders
of such Indebtedness within 60 days after written notice as provided in the
Indenture, or such acceleration shall not be rescinded or annulled within
20 days after written notice as provided in the Indenture;
(v) any final judgment or judgments which can no longer be appealed
for the payment of money in excess of $3.0 million (which are not paid or
covered by insurance so long as the insurer has not disclaimed coverage or
so long as a court of competent jurisdiction has ordered, in a final and
nonappealable order, the insurer to make payment) shall be rendered against
the Company or any Restricted Subsidiary thereof, and shall not be
discharged for any period of 60 consecutive days during which a stay of
enforcement shall not be in effect; and
(vi) certain events involving bankruptcy, insolvency or reorganization
of the Company or any Restricted Subsidiary thereof.
The Indenture provides that the Trustee may withhold notice to the holders
of the Notes of any default (except in payment of principal or premium, if any,
or interest on the Notes) if the Trustee considers it to be in the best interest
of the holders of the Notes to do so.
The Indenture provides that if an Event of Default (other than an Event of
Default resulting from certain events of bankruptcy, insolvency or
reorganization) shall have occurred and be continuing, then the Trustee or the
holders of not less than 25% in aggregate principal amount of the Notes then
outstanding may declare to be immediately due and payable the entire principal
amount of all the Notes then outstanding plus accrued interest to the date of
acceleration; provided, however, that after such acceleration but before a
judgment or decree based on acceleration is obtained by the Trustee, the holders
of a majority in aggregate principal amount of outstanding Notes may, under
certain circumstances, rescind and annul such acceleration if all Events of
Default, other than nonpayment of accelerated principal, premium or interest,
have been cured or waived as provided in the Indenture. In case an Event of
Default resulting from certain events of bankruptcy, insolvency or
reorganization shall occur, the principal, premium and interest amount with
respect to all of the Notes shall be due and payable immediately without any
declaration or other act on the part of the Trustee or the holders of the Notes.
The holders of a majority in principal amount of the Notes then outstanding
shall have the right to waive any existing default or compliance with any
provision of the Indenture or the Notes and to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee, subject to
certain limitations specified in the Indenture.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless also the holders of at least 25% in aggregate principal
amount of the outstanding Notes shall have made written request and offered
reasonable indemnity to the Trustee to institute
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such proceeding as a trustee, and unless the Trustee shall not have received
from the holders of a majority in aggregate principal amount of the outstanding
Notes a direction inconsistent with such request and shall have failed to
institute such proceeding within 60 days. However, such limitations do not apply
to a suit instituted on such Note on or after the respective due dates expressed
in such Note.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company may elect either (a) to defease and
be discharged from any and all obligations with respect to the Notes (except for
the obligations to register the transfer or exchange of such Notes, to replace
temporary or mutilated, destroyed, lost or stolen Notes, to maintain an office
or agency in respect of the Notes and to hold monies for payment in trust)
("defeasance") or (b) to be released from their obligations with respect to the
Notes under certain covenants contained in the Indenture and described above
under "-- Certain Covenants" ("covenant defeasance"), upon the deposit with the
Trustee (or other qualifying trustee), in trust for such purpose, of money
and/or U.S. Government Obligations which through the payment of principal and
interest in accordance with their terms will provide money, in an amount
sufficient to pay the principal of, premium, if any, and interest on the Notes,
on the scheduled due dates therefor or on a selected date of redemption in
accordance with the terms of the Indenture. Such a trust may only be established
if, among other things, the Company has delivered to the Trustee an Opinion of
Counsel (as specified in the Indenture) (i) to the effect that neither the trust
nor the Trustee will be required to register as an investment company under the
Investment Company Act of 1940, as amended, and (ii) describing either a private
ruling concerning the Notes or a published ruling of the Internal Revenue
Service, to the effect that holders of the Notes or persons in their positions
will not recognize income, gain or loss for federal income tax purposes as a
result of such deposit, defeasance and discharge and will be subject to federal
income tax on the same amount and in the same manner and at the same times, as
would have been the case if such deposit, defeasance and discharge had not
occurred.
MODIFICATION OF INDENTURE
From time to time, the Company, the Guarantors, if applicable, and the
Trustee may, without the consent of holders of the Notes, amend or waive
provisions of the Indenture or the Notes or supplement the Indenture for certain
specified purposes, including providing for uncertificated Notes in addition to
certificated Notes, and curing any ambiguity, defect or inconsistency, or making
any other change that does not materially and adversely affect the rights of any
holder. The Indenture contains provisions permitting the Company, the
Guarantors, if applicable, and the Trustee, with the consent of holders of at
least a majority in principal amount of the outstanding Notes, to modify or
supplement the Indenture or the Notes, except that no such modification shall,
without the consent of each holder affected thereby, (i) reduce the principal
amount of outstanding Notes whose holders must consent to an amendment,
supplement, or waiver to the Indenture or the Notes, (ii) reduce the rate of or
change the time for payment of interest on any Note, (iii) reduce the principal
of or premium on or change the stated maturity of any Note, (iv) make any Note
payable in money other than that stated in the Note or change the place of
payment from New York, New York, (v) change the amount or time of any payment
required by the Notes or reduce the premium payable upon any redemption of
Notes, or change the time before which no such redemption may be made, (vi)
waive a default on the payment of the principal of, interest on, or redemption
payment with respect to any Note, (vii) alter the Company's obligation to
purchase the Notes in accordance with the Indenture following the occurrence of
an Asset Sale or a Change of Control or waive any default in the performance
thereof, (viii) affect the ranking of the Notes in a manner adverse to the
holders of the Notes or (ix) take any other action otherwise prohibited by the
Indenture to be taken without the consent of each holder affected thereby.
REPORTS TO HOLDERS
So long as the Company is subject to the periodic reporting requirements of
the Exchange Act, it will furnish the information required thereby to the
Commission and to the holders of the Notes. The Indenture provides that even if
the Company is entitled under the Exchange Act not to furnish such information
to the Commission or to the holders of the Notes, it will nonetheless furnish to
the Commission and holders of the
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Notes (i) within 120 days after the end of each fiscal year of the Company, (x)
audited year-end consolidated financial statements (including a balance sheet,
income statement and statement of changes of cash flow) prepared in accordance
with GAAP and substantially in the form required under Regulation S-X under the
Securities Act and (y) the information described in Item 303 of Regulation S-K
under the Securities Act with respect to such period and (ii) within 60 days
after the end of each of the first three fiscal quarters of each fiscal year of
the Company, (x) unaudited quarterly consolidated financial statements
(including a balance sheet, income statement and statement of changes of cash
flows) prepared in accordance with GAAP and substantially in the form required
by Regulation S-X under the Securities Act and (y) the information described in
Item 303 of Regulation S-K under the Securities Act with respect to such period.
COMPLIANCE CERTIFICATE
The Company will deliver to the Trustee on or before 120 days after the end
of the Company's fiscal year and on or before 50 days after the end of each the
first, second and third fiscal quarters in each year an Officers' Certificate
stating whether or not the signers know of any Default or Event of Default that
has occurred. If they do, the certificate will describe the Default or Event of
Default and its status.
THE TRUSTEE
The Trustee under the Indenture will be the Registrar and Paying Agent with
regard to the Notes. The Indenture provides that, except during the continuance
of an Event of Default, the Trustee will perform only such duties as are
specifically set forth in the Indenture. During the existence of an Event of
Default, the Trustee will exercise such rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
TRANSFER AND EXCHANGE
Holders of the Notes may transfer or exchange Notes in accordance with the
Indenture. The Registrar under such Indenture may require a holder, among other
things, to furnish appropriate endorsements and transfer documents, and to pay
any taxes and fees required by law or permitted by the Indentures. The Registrar
is not required to transfer or exchange any Note selected for redemption. Also,
the Registrar is not required to transfer or exchange any Note for a period of
15 days before selection of the Notes to be redeemed.
The registered holder of a Note may be treated as the owner of it for all
purposes.
GOVERNING LAW
The Indenture provides that the Indenture, the Notes and any Guarantee will
be governed by and construed in accordance with the internal laws of the State
of New York, without giving effect to principles of conflicts of laws.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants contained in the Indenture. Reference is made to the Indenture for the
full definition of all such terms as well as any other capitalized terms used
herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (including an
Unrestricted Subsidiary) existing at the time such Person becomes a Restricted
Subsidiary or assumed in connection with the acquisition of assets from such
Person.
"Adjusted Net Assets" of a Guarantor at any date shall mean the lesser of
the amount by which (x) the fair value of the property of such Guarantor exceeds
the total amount of liabilities, including, without limitation, contingent
liabilities (after giving effect to all other fixed and contingent liabilities),
but excluding liabilities under the Guarantee, of such Guarantor at such date
and (y) the present fair salable value of the assets of such Guarantor at such
date exceeds the amount that will be required to pay the probable liability of
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such Guarantor on its debts (after giving effect to all other fixed and
contingent liabilities and after giving effect to any collection from any
subsidiary of such Guarantor in respect of the obligations of such Subsidiary
under the Guarantee), excluding Indebtedness in respect of the Guarantee, as
they become absolute and matured.
"Affiliate" of any specified Person means any other Person which directly
or indirectly through one or more intermediaries controls, or is controlled by,
or is under common control with, such specified Person. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by," and "under common control with"), as used with
respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise; provided that the term "Affiliate" shall not include any portfolio
company of KECC so long as such portfolio company does not own or control any
shares of capital stock of the Company or Holding and the Company or Holding
does not own or control any shares of the capital stock of such portfolio
company.
"Asset Sale" means the sale, transfer or other disposition (other than to
the Company or any of its Restricted Subsidiaries) in any single transaction or
series of related transactions of (a) any Capital Stock of or other equity
interest in any Restricted Subsidiary of the Company, (b) all or substantially
all of the assets of the Company or of any Restricted Subsidiary thereof, (c)
real property, other than the lease thereof in the ordinary course of business,
or (d) all or substantially all of the assets of any business owned by the
Company or any Restricted Subsidiary thereof, or a division, line of business or
comparable business segment of the Company or any Restricted Subsidiary thereof;
provided that Asset Sales shall not include sales, leases, conveyances,
transfers or other dispositions to the Company or to a Restricted Subsidiary or
to any other Person if after giving effect to such sale, lease, conveyance,
transfer or other disposition such other Person becomes a Restricted Subsidiary.
"Asset Sale Proceeds" means, with respect to any Asset Sale, (i) cash
received by the Company or any Restricted Subsidiary from such Asset Sale
(including cash received as consideration for the assumption of liabilities
incurred in connection with or in anticipation of such Asset Sale), after (a)
provision for all income or other taxes measured by or resulting from such Asset
Sale, (b) payment of all brokerage commissions, underwriting and other fees and
expenses related to such Asset Sale, (c) provision for minority interest holders
in any Restricted Subsidiary as a result of such Asset Sale and (d) deduction of
appropriate amounts to be provided by the Company or a Restricted Subsidiary as
a reserve, in accordance with GAAP, against any liabilities associated with the
assets sold or disposed of in such Asset Sale and retained by the Company or a
Restricted Subsidiary after such Asset Sale, including, without limitation,
pension and other post employment benefit liabilities and liabilities related to
environmental matters or against any indemnification obligations associated with
the assets sold or disposed of in such Asset Sale, and (ii) promissory notes and
other noncash consideration received by the Company or any Restricted Subsidiary
from such Asset Sale or other disposition upon the liquidation or conversion of
such notes or noncash consideration into cash.
"Attributable Indebtedness" under the Indenture in respect of a Sale and
Lease-Back Transaction means, as at the time of determination, the greater of
(i) the fair value of the property subject to such arrangement (as determined by
the Board of Directors) and (ii) the present value (discounted according to GAAP
at the cost of indebtedness implied in the lease) of the total obligations of
the lessee for rental payments during the remaining term of the lease included
in such Sale and Lease-Back Transaction (including any period for which such
lease has been extended).
"Available Asset Sale Proceeds" means, with respect to any Asset Sale, the
aggregate Asset Sale Proceeds from such Asset Sales that have not been applied
or committed in accordance with clauses (iii)(a) or (iii)(b), and which has not
yet been the basis for an Excess Proceeds Offer in accordance with clause
(iii)(c) of the first paragraph of "Certain Covenants -- Limitation on Certain
Asset Sales".
"Capital Stock" means, with respect to any Person, any and all shares or
other equivalents (however designated) of capital stock, partnership interests
or any other participation, right or other interest in the nature of an equity
interest in such Person or any option, warrant or other security convertible
into any of the foregoing.
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"Capitalized Lease Obligations" means Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such Indebtedness
shall be the capitalized amount of such obligations determined in accordance
with GAAP.
A "Change of Control" will be deemed to have occurred at such time as (i)
the Permitted Holders, individually or in the aggregate, cease to beneficially
own (as defined under Rule 13d-3 or any successor rule or regulation promulgated
under the Exchange Act), directly or indirectly, 50.1% or more of the Common
Equity Interests of the Company or Holding, (ii) there shall be consummated any
consolidation or merger of the Company or Holding in which the Company or
Holding, as the case may be, is not the continuing or surviving corporation or
pursuant to which the Common Equity Interests of the Company or Holding, as the
case may be, would be converted into cash, securities or other property, other
than a merger or consolidation of the Company in which the holders of the Common
Equity Interests of the Company or Holding, as the case may be, outstanding
immediately prior to the consolidation or merger hold, directly or indirectly,
at least a majority of the Common Equity Interests of the surviving corporation
immediately after such consolidation or merger, (iii) there is a sale, lease or
transfer of all or substantially all of the assets of the Company or Holding to
any Person or group (as such term is defined in Section 13(d)(3) of the Exchange
Act), other than a Permitted Holder or (iv) the replacement of a majority of the
Board of Directors of Holding over a two-year period from the directors who
constituted the Board of Directors of Holding at the beginning of such period,
and such replacement shall not have been approved or recommended by a vote of at
least a majority of the Board of Directors of Holding then still in office who
either were members of such Board of Directors at the beginning of such period
or whose election as a member of such Board of Directors was previously so
approved.
"Common Equity Interests" of any Person means all Equity Interests of such
Person that are generally entitled to (i) vote in the election of directors of
such person or (ii) if such person is not a corporation, vote or otherwise
participate in the selection of the governing body, partners, managers or others
that will control the management and policies of such Person.
"Common Stock" of any Person means all Capital Stock of such Person that is
generally entitled to (i) vote in the election of directors of such Person or
(ii) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will control
the management and policies of such Person.
"Consolidated Fixed Charges" means, with respect to any Person the sum of a
Person's (i) Consolidated Interest Expense, plus (ii) the product of (x) the
aggregate amount of all dividends paid on Disqualified Capital Stock of the
Company or on each series of preferred stock of each Subsidiary of such Person
(other than dividends paid or payable in additional shares of preferred stock or
to the Company or any of its Wholly-Owned Restricted Subsidiaries) times (y) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current effective combined federal, state and local tax rate of
such Person (expressed as a decimal), in each case, for such four-quarter
period.
"Consolidated Interest Expense" means, with respect to any Person, for any
period, the aggregate amount of interest which, in conformity with GAAP, would
be set forth opposite the caption "interest expense" or any like caption on an
income statement for such Person and its Subsidiaries on a consolidated basis,
imputed interest included in Capitalized Lease Obligations, all commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, the net costs associated with hedging
obligations, amortization of other financing fees and expenses, the interest
portion of any deferred payment obligation, amortization of discount or premium,
if any, and all other non-cash interest expense (other than interest amortized
to cost of sales) plus, without duplication, all net capitalized interest for
such period and all interest incurred or paid under any guarantee of
Indebtedness (including a guarantee of principal, interest or any combination
thereof) of any Person.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate of the Net Income (before preferred stock dividends) of
such Person and its Subsidiaries for such period, on a consolidated basis,
determined in accordance with GAAP; provided, however, that (a) the Net Income
of any Person (the "other Person") in which the Person in question or any of its
Subsidiaries has less than a 100%
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interest (which interest does not cause the net income of such other Person to
be consolidated into the net income of the Person in question in accordance with
GAAP) shall be included only to the extent of the amount of dividends or
distributions paid to the Person in question or the Subsidiary, (b) the Net
Income of any Subsidiary of the Person in question that is subject to any
restriction or limitation on the payment of dividends or the making of other
distributions (other than pursuant to the Notes or the Indenture) shall be
excluded to the extent of such restriction or limitation, (c)(i) the Net Income
of any Person acquired in a pooling of interests transaction for any period
prior to the date of such acquisition and (ii) any net gain (but not loss)
resulting from an Asset Sale by the Person in question or any of its
Subsidiaries other than in the ordinary course of business shall be excluded,
and (d) extraordinary, unusual and non-recurring gains and losses shall be
excluded.
"Consolidated Net Worth" means, with respect to any Person at any date, the
consolidated stockholder's equity of such Person less the amount of such
stockholder's equity attributable to Disqualified Capital Stock of such Person
and its Subsidiaries, as determined in accordance with GAAP.
"Currency Agreement" means, for any Person, any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement designed to
protect such Person against fluctuations in currency values.
"Disqualified Capital Stock" means any Capital Stock of the Company or a
Restricted Subsidiary thereof which, by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable at the
option of the holder), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part, on or
prior to the maturity date of the Notes, for cash or securities constituting
Indebtedness. Without limitation of the foregoing, Disqualified Capital Stock
shall be deemed to include (i) any Preferred Stock of a Restricted Subsidiary of
the Company and (ii) any Preferred Stock of the Company, with respect to either
of which, under the terms of such Preferred Stock, by agreement or otherwise,
such Restricted Subsidiary or the Company is obligated to pay current dividends
or distributions in cash during the period prior to the maturity date of the
Notes; provided, however, that Preferred Stock of the Company or any Restricted
Subsidiary thereof that is issued with the benefit of provisions requiring a
change of control offer to be made for such Preferred Stock in the event of a
change of control of the Company or Restricted Subsidiary, which provisions have
substantially the same effect as the provisions of the Indenture described under
"Change of Control," shall not be deemed to be Disqualified Capital Stock solely
by virtue of such provisions.
"EBITDA" means, for any Person, for any period, an amount equal to (a) the
sum of (i) Consolidated Net Income for such period, plus (ii) the provision for
taxes for such period based on income or profits to the extent such income or
profits were included in computing Consolidated Net Income and any provision for
taxes utilized in computing net loss under clause (i) hereof, plus (iii)
Consolidated Interest Expense for such period, plus (iv) depreciation for such
period on a consolidated basis, plus (v) amortization of intangibles for such
period on a consolidated basis, plus (vi) any other non-cash items reducing
Consolidated Net Income for such period, plus, minus (b) all non-cash items
increasing Consolidated Net Income for such period, all for such Person and its
Subsidiaries determined in accordance with GAAP, except that with respect to the
Company each of the foregoing items shall be determined on a consolidated basis
with respect to the Company and its Restricted Subsidiaries only; and provided,
however, that, for purposes of calculating EBITDA during any fiscal quarter,
cash income from a particular Investment of such Person shall be included only
(x) if cash income has been received by such Person with respect to such
Investment during each of the previous four fiscal quarters, or (y) if the cash
income derived from such Investment is attributable to Temporary Cash
Investments.
"Equity Interests" means, with respect to any Person, any and all shares or
other equivalents (however designated) of capital stock, partnership interests
or any other participation, right or other interest in the nature of an equity
interest in such Person or any option, warrant or other security convertible or
exchangeable for any of the foregoing.
"Fixed Charge Coverage Ratio" of any Person means, with respect to any
determination date, the ratio of (i) EBITDA for such Person's prior four full
fiscal quarters for which financial results have been reported
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immediately preceding the determination date, to (ii) Consolidated Fixed Charges
of such Person. For purposes of computing the Fixed Charge Coverage Ratio, (A)
if the Indebtedness which is the subject of a determination under this provision
is Acquired Indebtedness, or Indebtedness incurred in connection with the
simultaneous acquisition (by way of merger, consolidation or otherwise) of any
Person, business, property or assets (an "Acquisition"), then such ratio shall
be determined by giving effect to (on a pro forma basis, as if the transaction
had occurred at the beginning of the four-quarter period used to make such
calculation) to both the incurrence or assumption of such Acquired Indebtedness
or such other Indebtedness and the inclusion in the Company's EBITDA of the
EBITDA of the acquired Person, business, property or assets, (B) if any
Indebtedness outstanding or to be incurred (x) bears a floating rate of
interest, the interest expense on such Indebtedness shall be calculated as if
the rate in effect on the date of determination had been the applicable rate for
the entire period (taking into account on a pro forma basis any Interest Rate
Agreement applicable to such Indebtedness if such Interest Rate Agreement has a
remaining term as at the date of determination in excess of 12 months), (y)
bears, at the option of the Company or a Restricted Subsidiary, a fixed or
floating rate of interest, the interest expense on such Indebtedness shall be
computed by applying, at the option of the Company or such Restricted
Subsidiary, either a fixed or floating rate and (z) was incurred under a
revolving credit facility, the interest expense on such Indebtedness shall be
computed based upon the average daily balance of such Indebtedness during the
applicable period, (C) for any quarter prior to the date hereof included in the
calculation of such ratio, such calculation shall be made on a pro forma basis,
giving effect to the issuance of the Notes and the use of the net proceeds
therefrom as if the same had occurred at the beginning of the four-quarter
period used to make such calculation and (D) for any quarter included in the
calculation of such ratio prior to the date that any Asset Sale was consummated,
or that any Indebtedness was incurred, or that any Acquisition was effected, by
the Company or any of its Subsidiaries, such calculation shall be made on a pro
forma basis, giving effect to each Asset Sale, incurrence of Indebtedness or
Acquisition, as the case may be, and the use of any proceeds therefrom, as if
the same had occurred at the beginning of the four quarter period used to make
such calculation.
"GAAP" means generally accepted accounting principles consistently applied
as in effect in the United States on the Issue Date.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such person (and
"incurrence," "incurred," "incurable," and "incurring" shall have meanings
correlative to the foregoing); provided that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Indebtedness shall
not be deemed an incurrence of such Indebtedness.
"Indebtedness" means (without duplication), with respect to any Person, any
indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balances that constitute accounts
payable or trade payables, and other accrued liabilities (including long-term
pension and healthcare liabilities) arising in the ordinary course of business)
if and to the extent any of the foregoing indebtedness would appear as a
liability upon a balance sheet of such Person prepared in accordance with GAAP,
and shall also include, to the extent not otherwise included (i) any Capitalized
Lease Obligations, (ii) obligations secured by a lien to which the property or
assets owned or held by such Person is subject, whether or not the obligation or
obligations secured thereby shall have been assumed, (iii) guarantees of items
of other Persons which would be included within this definition for such other
Persons, (iv) all obligations for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar credit transaction, (v) in the case of
the Company, Disqualified Capital Stock of the Company or any Restricted
Subsidiary thereof, and (vi) obligations of any such Person under any Interest
Rate Agreement applicable to any of the foregoing (if and to the extent such
Interest Rate Agreement obligations would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP). The amount of
Indebtedness of any Person at any date
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shall be the outstanding balance at such date of all unconditional obligations
as described above and, with respect to contingent obligations, the maximum
liability upon the occurrence of the contingency giving rise to the obligation,
provided (i) that the amount outstanding at any time of any Indebtedness issued
with original issue discount, including the Notes, is the principal amount of
such Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with GAAP
and (ii) that Indebtedness shall not include any liability for federal, state,
local or other taxes. Notwithstanding any other provision of the foregoing
definition, any trade payable arising from the purchase of goods or materials or
for services obtained in the ordinary course of business shall not be deemed to
be "Indebtedness" of the Company or any Restricted Subsidiaries for purposes of
this definition. Furthermore, guarantees of (or obligations with respect to
letters of credit supporting) Indebtedness otherwise included in the
determination of such amount shall not also be included.
"Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement designed to protect the party indicated therein against
fluctuations in interest rates.
"Investments" means, directly or indirectly, any advance, account
receivable (other than an account receivable arising in the ordinary course of
business), loan or capital contribution to (by means of transfers of property to
others, payments for property or services for the account or use of others or
otherwise), the purchase of any stock, bonds, notes, debentures, partnership or
joint venture interests or other securities of, the acquisition, by purchase or
otherwise, of all or substantially all of the business or assets or stock or
other evidence of beneficial ownership of, any Person or the making of any
investment in any Person. Investments shall exclude (i) extensions of trade
credit on commercially reasonable terms in accordance with normal trade
practices and (ii) the repurchase of securities of any Person by such Person.
"Issue Date" means the date the Notes were first issued by Sub Co. and
authenticated by the Trustee under the Indenture.
"Lien" means, with respect to any property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance, preference,
priority, or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including,
without limitation, any Capitalized Lease Obligation, conditional sales, or
other title retention agreement having substantially the same economic effect as
any of the foregoing).
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"Net Proceeds" means (a) in the case of any sale of Capital Stock by
Holding or the Company, the aggregate net proceeds received by such Person,
after payment of expenses, commissions and the like incurred in connection
therewith, whether such proceeds are in cash or in property (valued at the fair
market value thereof, as determined in good faith by the board of directors, at
the time of receipt), (b) in the case of any exchange, exercise, conversion or
surrender of outstanding securities of any kind for or into shares of Capital
Stock of the Company which is not Disqualified Capital Stock, the net book value
of such outstanding securities on the date of such exchange, exercise,
conversion or surrender (plus any additional amount required to be paid by the
holder to the Company upon such exchange, exercise, conversion or surrender,
less any and all payments made to the holders, e.g., on account of fractional
shares and less all expenses incurred by the Company in connection therewith)
and (c) in the case of any issuance of any Indebtedness by the Company or any
Restricted Subsidiary, the aggregate net cash proceeds received by such Person
after the payment of expenses, commissions, underwriting discounts and the like
incurred in connection therewith.
"Officers' Certificate" means, with respect to any Person, a certificate
signed by the Chief Executive Officer, the Chief Operating Officer, the
President or any Vice President and the Chief Financial Officer or any Treasurer
of such Person that shall comply with applicable provisions of the Indenture.
"Permitted Holders" means (i) KECC and its Affiliates, (ii) any "group" (as
such term is used in Section 13(d) and 14(d) of the Exchange Act) comprised
solely of the Key Equity Group and its Affiliates
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(it being understood that a "group" that includes any other Person shall not be
a Permitted Holder) and (iii) any Person if (A) at least a majority of the total
voting and economic power of the Common Stock in such Person is owned by at
least a majority of the officers of KECC at the time of such transfer, (B) such
Person has at least $50.0 million in cash funds available for investment, and
(C) such Person is under no contractual restriction (whether pursuant to its
charter documents or otherwise) to make further investments in the Company.
"Permitted Indebtedness" means:
(i) Indebtedness incurred pursuant to the Revolving Credit Facility in
an aggregate principal amount at any time outstanding not to exceed the
greater of (i) the sum of (x) 85.0% of the net book value of eligible
accounts receivable of the Company and its Restricted Subsidiaries and (y)
65.0% of the net book value of eligible inventory of the Company and its
Restricted Subsidiaries and (ii) $10.0 million, in each case, reduced by
any required permanent repayments thereunder;
(ii) Indebtedness under the Notes and the Guarantees, if applicable;
(iii) Indebtedness not covered by any other clause of this definition
which is outstanding on the date of the Indenture;
(iv) Indebtedness of the Company to any Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary to the Company or another
Restricted Subsidiary;
(v) Purchase Money Indebtedness and Capitalized Lease Obligations
incurred to acquire property in the ordinary course of business which
Indebtedness and Capitalized Lease Obligations do not in the aggregate
exceed 5% of the Company's consolidated total assets;
(vi) Interest Rate Agreements and Currency Agreements;
(vii) additional Indebtedness of the Company not to exceed $3.0
million in principal amount outstanding at any time;
(viii) Refinancing Indebtedness;
(ix) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of day-light overdrafts) drawn against insufficient
funds in the ordinary course of business;
(x) Indebtedness of the Company and any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of business;
(xi) Indebtedness arising from guarantees of loans and advances by
third parties to employees and officers of the Company or its Subsidiaries
in the ordinary course of business for bona fide business purposes,
provided that the aggregate amount of such guarantees does not exceed
$250,000; and
(xii) Indebtedness arising from the repurchase of Capital Stock of
Holding if otherwise permitted under "--Certain Covenants -- Limitation on
Restricted Payments."
"Permitted Investments" means, for any Person, Investments made on or after
the date of the Indenture consisting of:
(i) Investments by the Company, or by a Restricted Subsidiary thereof,
in the Company or a Restricted Subsidiary;
(ii) Temporary Cash Investments;
(iii) Investments by the Company, or by a Restricted Subsidiary
thereof, in a Person, if as a result of such Investment (a) such Person
becomes a Restricted Subsidiary of the Company or (b) such Person
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is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the
Company or a Restricted Subsidiary thereof;
(iv) reasonable and customary loans made to employees not to exceed
$250,000 in the aggregate at any one time outstanding and other loans to
Holding or employees of the Company to the extent the proceeds of such
loans are used by such employees of the Company exclusively to purchase
shares of Capital Stock of Holding pursuant to the terms of the
Stockholders Agreement;
(v) an Investment that is made by the Company or a Restricted
Subsidiary thereof in the form of any stock, bonds, notes, debentures,
partnership or joint venture interests or other securities that are issued
by a third party to the Company or Restricted Subsidiary (i) solely as
consideration for the consummation of an Asset Sale of Stir Melter or (ii)
otherwise permitted under the covenant described under "-- Certain
Covenants -- Limitation on Sale of Assets";
(vi) any Investment existing on the Issue Date;
(vii) any Investment acquired by the Company or any of its Restricted
Subsidiaries (a) in exchange for any other Investment or accounts
receivable held by the Company or any such Restricted Subsidiary in
connection with or as a result of a bankruptcy, workout, reorganization or
recapitalization of the issuer of such Investment or accounts receivable or
(b) as the result of a foreclosure by the Company or any of its Restricted
Subsidiaries with respect to any secured Investment or other transfer of
title with respect to any secured Investment in default;
(viii) Investments the payment for which consists of Capital Stock of
the Company (exclusive of Disqualified Capital Stock); and
(ix) additional Investments having an aggregate fair market value,
taken together with all other Investments made pursuant to this clause (ix)
that are at that time outstanding, not to exceed $1.0 million.
"Permitted Liens" means (i) Liens on property or assets of, or any shares
of stock of or secured debt of, any corporation existing at the time such
corporation becomes a Restricted Subsidiary of the Company or at the time such
corporation is merged into the Company or any of its Restricted Subsidiaries,
provided that such Liens are not incurred in connection with, or in
contemplation of, such corporation becoming a Restricted Subsidiary of the
Company or merging into the Company or any of its Restricted Subsidiaries, (ii)
Liens securing Refinancing Indebtedness, provided that any such Lien does not
extend to or cover any Property, shares or debt other than the Property, shares
or debt securing the Indebtedness so refunded, refinanced or extended, (iii)
Liens in favor of the Company or any of its Restricted Subsidiaries, (iv) Liens
securing industrial revenue bonds, (v) Liens to secure Purchase Money
Indebtedness that is otherwise permitted under the Indenture, provided that (a)
any such Lien is created solely for the purpose of securing Indebtedness
representing, or incurred to finance, refinance or refund, the cost (including
sales and excise taxes, installation and delivery charges and other direct costs
of, and other direct expenses paid or charged in connection with, such purchase
or construction) of such Property, (b) the principal amount of the Indebtedness
secured by such Lien does not exceed 100% of such costs, and (c) such Lien does
not extend to or cover any Property other than such item of Property and any
improvements on such item, (vi) statutory liens or landlords', carriers',
warehouseman's, mechanics', suppliers', materialmen's, repairmen's or other like
Liens arising in the ordinary course of business which do not secure any
Indebtedness and with respect to amounts not yet delinquent or being contested
in good faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor, (vii) other Liens securing obligations incurred in the ordinary
course of business which obligations do not exceed $1.0 million in the aggregate
at any one time outstanding, (viii) Liens for taxes, assessments or governmental
charges that either are not delinquent or are being contested in good faith by
appropriate proceedings, (ix) Liens securing Capital Lease Obligations permitted
to be incurred under clause (v) of the definition of "Permitted Indebtedness,"
provided that such Lien does not extend to any property other than that subject
to the underlying lease, (x) Liens securing Indebtedness under the Revolving
Credit Facility, (xi) Liens of the Company's customers encumbering property or
assets under construction arising from the obligations of such
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customers to make progress or partial payment relating to such construction,
(xii) judgment Liens that otherwise would not give rise to an Event of Default,
(xiii) easements, rights-of-way, zoning restrictions and other similar charges
or encumbrances in respect of real property not interfering in any material
respect with the ordinary conduct of the business of the Company or any of its
Subsidiaries, (xiv) Liens securing reimbursement obligations with respect to
commercial letters of credit that encumber documents and other property relating
to such letters of credit and products and proceeds thereof, (xv) Liens
encumbering deposits made to secure obligations arising from statutory,
regulatory, contractual, or warranty requirements of the Company or any of its
Subsidiaries, including rights of offset and set-off, (xvi) Liens existing on
the Issue Date and (xvii) any extensions, substitutions, replacements or
renewals of the foregoing.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government (including any agency or political subdivision thereof).
"Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person and its Subsidiaries under
GAAP.
"Purchase Money Indebtedness" means any Indebtedness incurred in the
ordinary course of business by a Person to finance the cost (including the cost
of construction) of an item of Property, the principal amount of which
Indebtedness does not exceed the sum of (i) 100% of such cost and (ii)
reasonable fees and expenses of such Person incurred in connection therewith.
"Qualified Equity Offering" means an offering by the Company or Holding of
shares of its common stock (however designated and whether voting or non-voting)
and any and all rights, warrants or options to acquire such common stock,
whether registered or exempt from registration under the Securities Act;
provided, however, that in connection with a Qualified Equity Offering of
Holding, the net proceeds of such Qualified Equity Offering are contributed to
the Company as common equity.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances or
extends any Indebtedness of the Company outstanding on the Issue Date or other
Indebtedness permitted to be incurred by the Company or its Restricted
Subsidiaries pursuant to the terms of the Indenture, but only to the extent that
(i) if the Indebtedness being refunded, refinanced or extended was subordinate
to the Indebtedness represented by the Notes, then the Refinancing Indebtedness
is subordinated to the Notes to at least the same extent, (ii) the Refinancing
Indebtedness is scheduled to mature either (a) no earlier than the Indebtedness
being refunded, refinanced or extended, or (b) after the maturity date of the
Notes, (iii) the portion, if any, of the Refinancing Indebtedness that is
scheduled to mature on or prior to the maturity date of the Notes has a weighted
average life to maturity at the time such Refinancing Indebtedness is incurred
that is equal to or greater than the weighted average life to maturity of the
portion of the Indebtedness being refunded, refinanced or extended that is
scheduled to mature on or prior to the maturity date of the Notes, (iv) such
Refinancing Indebtedness is in an aggregate principal amount that is equal to or
less than the sum of (a) the aggregate principal amount then outstanding under
the Indebtedness being refunded, refinanced or extended, (b) the amount of
accrued and unpaid interest, if any, and premiums owed, if any, not in excess of
preexisting prepayment provisions on such Indebtedness being refunded,
refinanced or extended and (c) the amount of customary fees, expenses and costs
related to the incurrence of such Refinancing Indebtedness, and (v) such
Refinancing Indebtedness is incurred by the same Person that initially incurred
the Indebtedness being refunded, refinanced or extended, except that the Company
may incur Refinancing Indebtedness to refund, refinance or extend Indebtedness
of any Wholly-Owned Restricted Subsidiary of the Company; provided, however,
that subclauses (ii) and (iii) of this definition will not apply to any
refunding, refinancing or extension of any Indebtedness under the Revolving
Credit Facility.
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution or payment on Capital Stock of
the Company or any Restricted Subsidiary of the Company
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or any payment made to the direct or indirect holders (in their capacities as
such) of Capital Stock of the Company or any Restricted Subsidiary of the
Company (other than (x) dividends or distributions payable solely in Capital
Stock (other than Disqualified Capital Stock) or in options, warrants or other
rights to purchase Capital Stock (other than Disqualified Capital Stock), and
(y) in the case of Restricted Subsidiaries of the Company, dividends or
distributions payable to the Company or to a Wholly-Owned Restricted Subsidiary
of the Company), (ii) the purchase, redemption or other acquisition or
retirement for value of any Capital Stock of the Company or any of its
Restricted Subsidiaries (other than Capital Stock owned by the Company or a
Wholly-Owned Restricted Subsidiary of the Company, excluding Disqualified
Capital Stock), (iii) the making of any principal payment on, or the purchase,
defeasance, repurchase, redemption or other acquisition or retirement for value,
prior to any scheduled maturity, scheduled repayment or scheduled sinking fund
payment, of any Subordinated Indebtedness (other than Subordinated Indebtedness
acquired in anticipation of satisfying a scheduled sinking fund obligation,
principal installment or final maturity, in each case due within one year of the
date of acquisition), (iv) the making of any Investment or guarantee of any
Investment in any Person other than a Permitted Investment, (v) any designation
of a Restricted Subsidiary as an Unrestricted Subsidiary on the basis of the
Investment by the Company therein and (vi) forgiveness of any Indebtedness of an
Affiliate of the Company to the Company or a Restricted Subsidiary. For purposes
of determining the amount expended for Restricted Payments, cash distributed or
invested shall be valued at the face amount thereof and property other than cash
shall be valued at its fair market value.
"Restricted Subsidiary" means a Subsidiary of the Company other than an
Unrestricted Subsidiary and includes all of the Subsidiaries of the Company
existing as of the Issue Date. The Board of Directors of the Company may
designate any Unrestricted Subsidiary or any Person that is to become a
Subsidiary as a Restricted Subsidiary if immediately after giving effect to such
action (and treating any Acquired Indebtedness as having been incurred at the
time of such action), the Company could have incurred at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"-- Certain Covenants -- Limitation on Additional Indebtedness" covenant.
"Revolving Credit Facility" means the revolving credit facility by and
among the Company, the lender named therein, and NationsBank, N.A., as agent, as
amended, modified, replaced, renewed, refunded, refinanced or supplemented from
time to time, and whether by the same or any other agent, lender or group of
lenders.
"Sale and Lease-Back Transaction" means any arrangement with any Person
providing for the leasing by the Company or any Restricted Subsidiary of the
Company of any real or tangible personal property, which property has been or is
to be sold or transferred by the Company or such Restricted Subsidiary to such
Person in contemplation of such leasing.
"Subordinated Indebtedness" means any Indebtedness of the Company which is
expressly subordinated in right of payment to the Notes.
"Subsidiary" of any specified Person means any corporation, partnership,
joint venture, association or other business entity, whether now existing or
hereafter organized or acquired, (i) in the case of a corporation, of which more
than 50% of the total voting power of the Capital Stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
officers or trustees thereof is held by such first-named Person or any of its
Subsidiaries; or (ii) in the case of a partnership, joint venture, association
or other business entity, with respect to which such first-named Person or any
of its Subsidiaries has the power to direct or cause the direction of the
management and policies of such entity by contract or otherwise or if in
accordance with generally accepted accounting principles such entity is
consolidated with the first-named Person for financial statement purposes.
"Temporary Cash Investments" means (i) Investments in marketable, direct
obligations issued or guaranteed by the United States of America, or of any
governmental agency or political subdivision thereof, maturing within 365 days
of the date of purchase; (ii) Investments in certificates of deposit issued by a
bank organized under the laws of the United States of America or any state
thereof or the District of Columbia, in each case having capital, surplus and
undivided profits totaling more than $500,000,000 and rated at least A by
Standard & Poor's Corporation and A-2 by Moody's Investors Service, Inc.,
maturing within 365 days of
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purchase; (iii) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of Investment, having a rating of at least A-1
from S&P or at least P-1 from Moody's; (iv) repurchase obligations with a term
of not more than seven days for the underlying securities of the types described
in clause (i) above entered into with any bank meeting the qualifications
specified in clause (ii) above; or (v) Investments not exceeding 365 days in
duration in money market funds that invest substantially all of such funds'
assets in the Investments described in the preceding clauses (i) and (ii).
"Unrestricted Subsidiary" means (a) any Subsidiary of an Unrestricted
Subsidiary and (b) any Subsidiary of the Company which is classified after the
Issue Date as an Unrestricted Subsidiary by a resolution adopted by the Board of
Directors of the Company; provided that a Subsidiary organized or acquired after
the Issue Date may be so classified as an Unrestricted Subsidiary only if such
classification is in compliance with the covenant set forth under "-- Certain
Covenants -- Limitation on Restricted Payments." The Trustee shall be given
prompt notice by the Company of each resolution adopted by the Board of
Directors of the Company under this provision, together with a copy of each such
resolution adopted.
"Wholly-Owned Restricted Subsidiary" means any Restricted Subsidiary, all
of the outstanding voting securities (other than directors' qualifying shares)
of which are owned, directly or indirectly, by the Company.
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BOOK-ENTRY, DELIVERY AND FORM
The New Notes initially will be represented by one or more Notes in
registered, global form without interest coupons (collectively, the "Global
Note"). The Global Note will be deposited upon issuance with the Trustee, as
custodian for DTC, in New York, New York, and registered in the name of DTC or
its nominee, in each case for credit to an account of a direct or indirect
participant as described below. Notes sold to Accredited Investors (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) may be represented
by the Global Note or, if such an investor may not hold an interest in the
Global Note, a certificated Note.
Except as set forth below, the Global Note may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Note may not be exchanged for Notes
in certificated form except in the limited circumstances described below. See
"-- Exchange of Book-Entry Notes for Certificated Notes."
The Notes may be presented for registration of transfer and exchange at the
offices of the Registrar of the Notes.
Depository Procedures
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between the Participants through electronic
book-entry changes in accounts of the Participants. The Participants include
securities brokers and dealers (including the Initial Purchaser), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interest and transfer of ownership interest of each
actual purchaser of each security held by or on behalf of DTC are recorded on
the records of the Participants and the Indirect Participants.
DTC has also advised the Company that pursuant to procedures established by
it (i) upon deposit of the Global Note, DTC will credit the accounts of
Participants designated by the Exchange Agent with portions of the principal
amount of the Global Note and (ii) ownership of such interests in the Global
Note will be shown on, and the transfer of ownership thereof will be effected
only through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other owners of
beneficial interests in the Global Note).
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in the Global Note to such persons may be limited
to that extent. Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants and certain banks, the ability of a
person having beneficial interests in the Global Note to pledge such interests
to persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of such interests, may be affected by the lack of a
physical certificate evidencing such interests. For certain other restrictions
on the transferability of the Notes, See "-- Exchange of Book-Entry Notes for
Certificated Notes."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTE WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of (and premium, if any) and interest
on the Global Note registered in the name of DTC or its nominee will be payable
to DTC or its nominee in its capacity as the registered holder under the
Indenture. Under the terms of the Indenture, the Company and the Trustee will
treat the
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persons in whose names the Notes, including the Global Note, are registered as
the owners thereof for the purpose of receiving such payments and for any and
all other purposes whatsoever. Consequently, neither the Company, the Trustee
nor any agent of the Company or the Trustee has or will have any responsibility
or liability for (i) any aspect or accuracy of DTC's records or any
Participant's or Indirect Participant's records relating to our payments made on
account of beneficial ownership interests in the Global Note, or for
maintaining, supervising or reviewing any of DTC's records or any Participant's
or Indirect Participant's records relating to the beneficial ownership interests
in the Global Note, or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants.
DTC has advised the Company that its current practice, upon receipt of any
payment in respect of securities such as the Notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in principal amount of beneficial interests in the relevant security
such as the Global Note as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of Notes
will be governed by standing instructions and customary practices and will not
be the responsibility of DTC, the Trustee or the Company. Neither the Company
nor the Trustee will be liable for any delay by DTC or any of the Participants
in identifying the beneficial owners of the Notes, and the Company and the
Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee as the registered owner of the Notes for
all purposes.
Interest in the Global Note will trade in DTC's Same-Day Funds Settlement
System and secondary market trading activity in such interests will therefore
settle in immediately available funds, subject in all cases to the rules and
procedures of DTC and its participants. Transfers between Participants in DTC
will be effected in accordance with DTC's procedures, and will be settled in
same-day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Participants to
whose account will DTC interests in the Global Notes are credited and only in
respect of such portion of the aggregate principal amount of the Notes as to
which such Participant or Participants has or have given such direction.
However, if any of the events described under "-- Exchange of Book Entry Notes
for Certificated Notes" occur, DTC reserves the right to exchange the Global
Note for Notes in certificated form, and to distribute such Notes to the
relevant Participants.
The information in this section concerning DTC and its book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Note among accountholders in DTC, it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company, the Trustee nor
any agent of the Company or Trustee will have any responsibility for the
performance of DTC, or its respective accountholders, indirect participants or
accountholders of their respective obligations under the rules and procedures
governing their operations.
Exchange of Book-Entry Notes for Certificated Notes
The Global Note is exchangeable for definitive Notes in registered
certificated form if (i) DTC (x) notifies the Company that it is unwilling or
unable to continue as depositary for the Global Note and the Company thereupon
fails to appoint a successor depositary or (y) has ceased to be a clearing
agency registered under the Exchange Act; (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the
Notes in certificated form or (iii) there shall have occurred and be continuing
a Default or an Event of Default with respect to the Notes. In all cases,
certificated Notes delivered in exchange for the Global Note or beneficial
interests therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with
its customary procedures).
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury Regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service (the "IRS") will not take a contrary view, and
no ruling from the IRS has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the ta
consequences to holders. Certain holders (including insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States)
may be subject to special rules not discussed below. The Company recommends that
each holder consult such holder's own tax adviser as to the particular tax
consequences of exchanging such holder's Old Notes for New Notes, including the
applicability and effect of any state, local or foreign tax laws.
The Company believes that the exchange of Old Notes for New Notes pursuant
to the Exchange Offer will not be treated as an "exchange" for federal income
tax purposes because the New Notes will not be considered to differ materially
in kind or extent from the Old Notes. Rather, the New Notes received by a holder
will be treated as a continuation of the Old Notes in the hands of such holder.
As a result, there will be no federal income tax consequences to holders
exchanging Old Notes for New Notes pursuant to the Exchange Offer.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any Participating
Broker-Dealer for use in connection with any such resale. In addition, until
, 1997 (90 days after the commencement of the Exchange Offer), all
dealers effecting transactions in the New Notes, whether or not participating in
this distribution, may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of the New Notes
by Participating Broker Dealers. New Notes received by Participating
Broker-Dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating BrokerDealer and/or the purchasers of
any such New Notes. Any Participating Broker-Dealer that resells the New Notes
that were received by it for its own account pursuant to the Exchange Offer and
any broker or dealer that participates in a distribution of such New Notes may
be deemed to be an "underwriter" within the meaning of the Securities Act and
any profit on any such resale of New Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
LEGAL MATTERS
The validity of the New Notes will be passed upon for the Company by Baker
& Hostetler LLP.
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EXPERTS
The consolidated financial statements of Glasstech, Inc. (and its
predecessor Glasstech Industries, Inc., as applicable) as of June 30, 1997 and
1996 and for each of the periods in the three years ended June 30, 1997
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
88
<PAGE> 95
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors......................................................... F-2
Consolidated Balance Sheets at June 30, 1996 and 1997.................................. F-3
For the periods ended January 3 and June 30, 1995 and the years ended June 30, 1996 and
1997:
Consolidated Statements of Income................................................. F-4
Consolidated Statements of Shareholders' Equity................................... F-5
Consolidated Statements of Cash Flows............................................. F-6
Notes to Consolidated Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE> 96
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Glasstech, Inc.
We have audited the accompanying consolidated balance sheets of Glasstech, Inc.
as of June 30, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for the years ended June 30, 1997 and 1996,
and for the period from January 4, 1995 through June 30, 1995 and as to its
predecessor (see Note 1) the period from July 1, 1994 through January 3, 1995.
Our audits also included the financial statement schedule listed in item 21(b)
of this Registration Statement. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as an evaluation of the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As more fully described in the notes to the consolidated financial statements,
effective January 3, 1995, the Company emerged from bankruptcy pursuant to a
plan of reorganization confirmed by the Bankruptcy Court on December 6, 1994. In
accordance with an American Institute of Certified Public Accountants' Statement
of Position, the Company has adopted "fresh start" reporting whereby its assets,
liabilities and new capital structure have been adjusted to reflect estimated
fair values as of January 3, 1995. As a result, the consolidated financial
statements as of June 30, 1997 and 1996 and for the years ended June 30, 1997
and 1996, and for the period from January 4, 1995 through June 30, 1995 reflect
this basis of reporting and are not comparable to the Company's
pre-reorganization consolidated financial statements.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Glasstech, Inc. at June 30, 1997 and 1996, and the consolidated results of its
operations and its cash flows for the years ended June 30, 1997 and 1996, and
for the period from January 4, 1995 through June 30, 1995, and the consolidated
results of its predecessor's operations and its predecessor's cash flows for the
period from July 1, 1994 through January 3, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 6 to the consolidated financial statements, effective July
1, 1994, the Company changed its method of accounting for post-retirement
benefits other than pensions.
ERNST & YOUNG LLP
Toledo, Ohio
August 15, 1997
F-2
<PAGE> 97
GLASSTECH, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------
1996 1997
------- -------
<S> <C> <C>
ASSETS (NOTE 4)
Current assets:
Cash and cash equivalents............................................... $43,815 $51,805
Restricted cash......................................................... 1,418 1,529
Accounts receivable:
Contracts:
Uncompleted, including unbilled amounts of $3,041 and $2,188....... 4,902 3,652
Completed, less allowance of $138 and $101 for doubtful accounts... 1,588 1,676
Trade, less allowance of $40 for doubtful accounts................... 1,764 1,530
------- -------
8,254 6,858
Inventory:
Replacement and service parts........................................ 1,607 2,083
Furnace contracts and other.......................................... 962 2,182
------- -------
2,569 4,265
Prepaid expenses........................................................ 315 481
------- -------
Total current assets...................................................... 56,371 64,938
Property, plant and equipment, net (Note 3)............................... 8,882 8,390
Other assets:
Patents, less accumulated amortization of $2,590 and $4,317............. 20,009 18,283
Reorganization value in excess of amounts allocable to identifiable
assets, less accumulated amortization of $1,020 and $1,599........... 10,713 7,583
Other................................................................... 2 170
------- -------
Total other assets........................................................ 30,724 26,036
------- -------
$95,977 $99,364
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 3,863 $ 3,413
Billings in excess of costs and estimated earnings on uncompleted
contracts............................................................ 15,637 10,720
Accrued liabilities:
Salaries and wages................................................... 2,760 3,606
Contract costs....................................................... 2,701 3,780
Interest............................................................. 2,100 2,100
Other................................................................ 1,711 1,801
------- -------
9,272 11,287
------- -------
Total current liabilities................................................. 28,772 25,420
Long-term debt (Note 4)................................................... 42,000 42,000
Non-pension post-retirement benefit obligation (Note 6)................... 2,553 2,712
Shareholders' equity (Note 5):
Common stock $.01 par value; 10,000,000 shares authorized; 1,000,001
shares issued and outstanding........................................ 10 10
Additional capital...................................................... 20,295 20,377
Retained earnings....................................................... 2,347 8,845
------- -------
Total shareholders' equity................................................ 22,652 29,232
======= =======
$95,977 $99,364
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 98
GLASSTECH, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY REORGANIZED COMPANY
------------ -------------------------------------------------------
PERIOD FROM PERIOD FROM
JULY 1, 1994 JANUARY 4, 1995
THROUGH THROUGH YEARS ENDED JUNE 30,
JANUARY 3, JUNE 30, -----------------------------------
1995 1995 1996 1997
------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net revenue......................... $ 25,948 $27,854 $62,771 $76,433
Cost of goods sold.................. 16,576 17,036 39,024 45,603
-------- ------- ------- -------
Gross profit........................ 9,372 10,818 23,747 30,830
Selling, general and administrative
expenses.......................... 3,430 5,105 10,723 12,866
Research and development expenses... 2,082 2,302 4,557 4,594
Amortization expense................ 2,512 1,203 2,407 2,306
-------- ------- ------- -------
Operating profit.................... 1,348 2,208 6,060 11,064
Interest expense.................... -- (2,077) (4,200) (4,200)
Other income (expense) -- net....... 35 784 1,540 2,263
-------- ------- ------- -------
Income before items below........... 1,383 915 3,400 9,127
Reorganization items (Note 1)....... (1,164) -- -- --
-------- ------- ------- -------
Income before income taxes,
extraordinary gain and change in
method of accounting.............. 219 915 3,400 9,127
Income taxes not payable in cash
(Note 7).......................... -- (445) (1,418) (2,551)
Federal income taxes, current....... -- -- (105) (78)
-------- ------- ------- -------
Income before extraordinary gain and
change in method of accounting.... 219 470 1,877 6,498
Extraordinary gain (Note 1)......... 214,773 -- -- --
Cumulative effect on prior years of
change in method of accounting for
non-pension post-retirement
benefits (Note 6)................. (1,906) -- -- --
-------- ------- ------- -------
Net income.......................... $213,086 $ 470 $ 1,877 $ 6,498
======== ======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 99
GLASSTECH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK SHAREHOLDERS' RETAINED TREASURY STOCK
-------------------- ADDITIONAL BASIS EARNINGS -------------------
SHARES AMOUNT CAPITAL REDUCTION (DEFICIT) SHARES AMOUNT
--------- ------ ---------- ------------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1994................ 430,000 $ 4 $ 43,010 $ (46,705) $(189,158) 635 $ (63)
Net income......................... -- -- -- -- 213,086 -- --
Cancellation of predecessor common
stock.............................. (430,000) (4) (43,010) 46,705 (3,754) (635) 63
Issuance of reorganized company
common stock....................... 1,000,001 10 (10) -- -- -- --
Record enterprise value of
reorganized company................ -- -- 20,174 -- (20,174) -- --
--------- ---- -------- --------- --------- ---- -----
Balance, January 3, 1995............. 1,000,001 10 20,164 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income......................... -- -- -- -- 470 -- --
--------- ---- -------- --------- --------- ---- -----
Balance June 30, 1995................ 1,000,001 10 20,164 -- 470 -- --
Net income......................... -- -- -- -- 1,877 -- --
Issuance of common stock
warrants........................ -- -- 131 -- -- -- --
--------- ---- -------- --------- --------- ---- -----
Balance June 30, 1996................ 1,000,001 10 20,295 -- 2,347 -- --
Net income......................... -- -- -- -- 6,498 -- --
Issuance of common stock........... 4,118 -- 82 -- -- -- --
--------- ---- -------- --------- --------- ---- -----
Balance June 30, 1997................ 1,004,119 $ 10 $ 20,377 $ -- $ 8,845 -- $ --
========= ==== ======== ========= ========= ==== =====
<CAPTION>
TOTAL
---------
<S> <C>
Balance, July 1, 1994................ $(192,912)
Net income......................... 213,086
Cancellation of predecessor common
stock.............................. --
Issuance of reorganized company
common stock....................... --
Record enterprise value of
reorganized company................ --
---------
Balance, January 3, 1995............. 20,174
- ----------------------------------------------------------
Net income......................... 470
---------
Balance June 30, 1995................ 20,644
Net income......................... 1,877
Issuance of common stock
warrants........................ 131
---------
Balance June 30, 1996................ 22,652
Net income......................... 6,498
Issuance of common stock........... 82
---------
Balance June 30, 1997................ $ 29,232
=========
</TABLE>
See accompanying notes.
F-5
<PAGE> 100
GLASSTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY REORGANIZED COMPANY
------------- ---------------------------------------
PERIOD FROM PERIOD FROM
JULY 1, 1994 JANUARY 4,
THROUGH 1995 THROUGH YEARS ENDED JUNE 30,
JANUARY 3, JUNE 30, ----------------------
1995 1995 1996 1997
------------- ------------ -------- ---------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Income before extraordinary gain and change in
method of accounting......................... $ 219 $ 470 $ 1,877 $ 6,498
Adjustment to reconcile income before
extraordinary item and change in method of
accounting to net cash provided by (used in)
operating activities:
Depreciation and amortization................ 3,277 1,901 3,721 3,764
Income taxes not payable in cash............. -- 445 1,418 2,551
Non-pension post-retirement benefit
obligation expense in excess of
payments.................................. 135 135 377 159
Other........................................ (193) 33 13 11
Changes in assets and liabilities affecting
operations:
Restricted cash.............................. 3,384 1,051 1,095 (111)
Accounts receivable.......................... (724) (4,056) 3,978 1,397
Inventory.................................... (181) (427) 246 (1,697)
Prepaid expenses............................. 71 10 6 (166)
Accounts payable............................. 531 (976) 817 (450)
Billings in excess of costs and estimated
earnings on uncompleted contracts......... 4,914 (2,153) 8,274 (4,917)
Accrued liabilities.......................... 2,370 2,178 699 1,934
------- -------- -------- -------
Net cash provided by (used in) operating
activities................................... 13,803 (1,389) 22,521 8,973
INVESTING ACTIVITIES
Additions to property, plant and equipment..... (480) (680) (2,152) (990)
Proceeds on sale of prototype.................. -- 755 491 --
Other.......................................... 1 15 (2) 12
------- -------- -------- -------
Net cash provided by (used in) investing
activities................................... (479) 90 (1,663) (978)
FINANCING ACTIVITIES
Issuance of stock warrants..................... -- -- 131 --
Issuance of common stock....................... -- -- -- 82
Effective date payments to noteholders and
other........................................ (6,200) (3,797) (6) (87)
------- -------- -------- -------
Net cash provided by (used in) financing
activities................................... (6,200) (3,797) 125 (5)
------- -------- -------- -------
Increase (decrease) in cash and cash
equivalents.................................. 7,124 (5,096) 20,983 7,990
Cash and cash equivalents at beginning of
period....................................... 20,804 27,928 22,832 43,815
------- -------- -------- -------
Cash and cash equivalents at end of period..... $27,928 $ 22,832 $ 43,815 $51,805
======= ======== ======== =======
Supplemental disclosure of cash flow
information:
Cash paid during the period for the
following:
Interest.................................. $ -- $ -- $ 4,177 $ 4,200
------- -------- -------- -------
Income taxes.............................. $ -- $ -- $ 105 $ 337
======= ======== ======== =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 101
GLASSTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
Glasstech Industries, Inc. (Industries and Predecessor), a Delaware
corporation, and its wholly-owned subsidiary, GLT Corp., were formed to acquire
most of the assets and certain liabilities of Glasstech International L.P.
(GILP), a Delaware limited partnership, in a leveraged buyout transaction. The
acquisition was completed by GLT Corp. as of May 19, 1989 and thereafter it was
merged into Glasstech, Inc. (Glasstech and Successor), a Delaware corporation.
Prior to such date, Industries and GLT Corp. engaged only in activities related
to the acquisition. Glasstech has two wholly-owned subsidiaries, Glasstech Ltd.,
a corporation in the United Kingdom, and Stir-Melter, Inc., a Delaware
corporation.
On May 24 and 25, 1993, respectively, Industries and Glasstech filed
voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code
(Reorganization). A Joint Second Amended Plan of Reorganization (the "Joint
Plan") proposed by Industries and Glasstech on December 6, 1994, was confirmed
by the Federal Bankruptcy Court in the District of Delaware and became effective
on January 3, 1995 (the "Effective Date"). Industries was merged into Glasstech
and the bankruptcy effectively ended on that date.
Reorganization items included in the consolidated statements of income for
the period from July 1, 1994 through January 3, 1995 consisted of approximately
$1,341 of professional fees and related costs, $704 of incentive compensation, a
$193 gain on fair value adjustments to the Company's assets and liabilities and
$688 of interest earned on accumulated cash.
Glasstech designs and assembles glass bending and tempering equipment and
markets and sells such equipment worldwide to both automotive glass fabricators
and architectural glass producers. Glasstech Ltd. provides engineering, sales,
and service support in Europe, the Middle East, and Africa. Stir-Melter, Inc.
designs and markets glass-melting equipment for the treatment of certain waste
products.
In accounting for the effects of emergence from bankruptcy, Glasstech
implemented Statement of Financial Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," (SOP 90-7) issued by the
American Institute of Certified Public Accountants. Accordingly, Glasstech
adopted "fresh start" reporting; its assets and liabilities were adjusted to
reflect their estimated fair value and the accumulated deficit as of January 3,
1995 was eliminated. Accordingly, the consolidated financial statements for
periods prior to January 3, 1995 are not necessarily comparable to consolidated
financial statements presented subsequent to that date. Black lines on the
consolidated financial statements distinguish between pre-reorganization and
post-reorganization activity.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
For financial reporting purposes, the Company includes in income the
ratable portion of profits on uncompleted contracts determined in accordance
with the stage of completion measured by the percentage of costs incurred to
estimated total costs of each contract. When estimates indicate a probable
ultimate loss on a contract, the full amount of the estimated loss is charged
against operations. For income tax purposes, contracts are accounted for on the
inventory accrual basis whereby income is recognized when the equipment is
accepted by the customer. Unbilled amounts included in uncompleted contract
accounts receivable represent revenues recognized in excess of amounts billed.
Billings in excess of costs and estimated earnings on uncompleted contracts
represent amounts billed in excess of revenues recognized.
Revenue from sales other than contracts is recognized when the products are
shipped.
F-7
<PAGE> 102
GLASSTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CREDIT PRACTICES
Credit terms are granted to customers and periodically revised based on
evaluations of the customers' financial condition with collateral generally not
being required. In certain instances, letters of credit may be obtained to
secure payment. Credit losses relating to customers consistently have been
within management's expectations.
CASH AND CASH EQUIVALENTS
The Company considers all unrestricted highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Restricted cash primarily represents cash collateral for outstanding
standby letters of credit issued on behalf of the Company in support of the
Company's performance obligations under various sales contracts. These funds
become available upon performance under the applicable sales contracts or
expiration of the underlying letter of credit, or both.
INVENTORY
Inventory is stated at the lower of cost or market determined by the
first-in, first-out (FIFO) method.
ACCRUED CONTRACT COSTS
The Company provides a provision for estimated future contract costs at the
time of completion of the contract and periodically adjusts such amounts for
changes in estimates.
DEPRECIATION AND AMORTIZATION
Depreciation is based on the estimated useful lives of the assets and is
generally computed using accelerated methods. Amortization of leasehold
improvements is provided on the straight-line basis over the estimated useful
lives of the assets or the terms of the leases, whichever is shorter. The useful
lives range from 10 to 40 years for building and leasehold improvements; 3 to 12
years for machinery and equipment; 7 to 12 years for prototype glass tempering
furnaces; and 3 to 12 years for office equipment and other.
Patents are being amortized on the straight-line basis over their estimated
useful lives of 12 to 15 years.
Reorganization value in excess of amounts allocable to identifiable assets
is being amortized on the straight-line basis over 20 years.
STOCK OPTIONS
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APBO No. 25). The disclosure requirements of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" are not
material.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE> 103
GLASSTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
AS OF JUNE 30,
-----------------
1996 1997
------- ------
<S> <C> <C>
Cost:
Land..................................................................... $ 110 $ 110
Building and leasehold improvements...................................... 2,448 2,512
Machinery and equipment.................................................. 1,448 1,830
Prototype glass tempering furnaces....................................... 4,554 4,776
Office equipment......................................................... 2,165 2,456
Other.................................................................... 33 17
------- ------
10,758 11,701
Less accumulated depreciation and amortization........................... (1,876) (3,311)
------- ------
Net property, plant and equipment.......................................... $ 8,882 $8,390
======= ======
</TABLE>
4. LONG-TERM DEBT
Long-term debt at June 30, 1996 and 1997 consists of $42,000 of senior
notes. The senior notes have a maturity date of July 1, 2001 and bear interest,
payable semi-annually, at the rate of 10%. The notes may be redeemed at the
Company's option after December 31, 1996 at 110% of the principal amount,
declining to 102% after December 31, 2000. Mandatory sinking fund requirements
during the five fiscal years subsequent to June 30, 1997 are as follows:
1998-1999 -- $0; 2000 -- $10,000; 2001 -- $10,000; 2002 -- $22,000.
The senior notes are secured by all assets of Glasstech. In addition, the
Indenture pursuant to which the senior notes were issued contains numerous
financial and other covenants which include the maintenance of certain levels of
earnings as defined in the Indenture, a prohibition on the payment of dividends,
and a restriction on additional indebtedness and obligations as well as certain
types of business activities and investments. The Company is in compliance with
all such covenants.
At June 30, 1996 and 1997, the carrying value of the Company's long-term
debt approximates its fair value based on the Company's incremental borrowing
rates.
5. COMMON STOCK
Effective January 5, 1995, the Company adopted a nonqualified stock option
plan ("Plan") authorizing the issuance of up to 5% of the Company's outstanding
Common Stock on a fully diluted basis. The Plan provides for granting options to
officers and key employees to purchase shares of the Company's common stock at a
price established by the Board of Directors, which approximates fair market
value. Options have terms of ten years and become vested and exercisable in 20%
increments beginning on the grant date and on each successive anniversary date
of the grant. Options for 58,823 shares have been authorized and granted under
the Plan at an exercise price of $20.00 per share. In addition, the Company
granted options for an additional 181,646 shares under separate agreements. The
options were granted at an exercise price of $20.00 per share with terms
identical to those contained in the Plan. No options were exercised or cancelled
through June 30, 1996. During 1997, options for 4,118 shares were exercised and
options for 6,176 shares were cancelled.
During 1996, the Company issued 65,290 common stock purchase warrants to
certain directors for total proceeds of $131. Subject to certain anti-dilution
provisions, each warrant entitles the holder to purchase one
F-9
<PAGE> 104
GLASSTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMON STOCK (CONTINUED)
share of the Company's common stock for $25.00 per share through January 5,
2001. No warrants have been exercised through June 30, 1997.
6. EMPLOYEE BENEFIT PLANS
Glasstech has defined contribution retirement plans which cover
substantially all employees. Contributions, which are based on participants'
compensation, are funded and approximated $270, $189, $541 and $604, for the
periods from July 1, 1994 through January 3, 1995, January 4, 1995 through June
30, 1995, and the years ended June 30, 1996 and 1997, respectively.
In addition, Glasstech provides certain retiree health care insurance
benefits to eligible retired employees. Employees are generally eligible for
benefits upon retirement and completion of a specified number of years of
creditable service. These benefits are provided at the discretion of Glasstech
and are subject to revision or termination at any time.
Effective July 1, 1994, Glasstech adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," on the immediate recognition
basis. Previously, the Company had expensed the cost of such benefits on the
pay-as-you-go (cash) basis. The cumulative effect as of July 1, 1995 of adopting
SFAS No. 106 was to decrease net earnings by $1,906. The change resulted in a
decrease in net income of approximately $135 for the period ended January 3,
1995 and $89 for the period ended June 30, 1995. The Company funds such costs as
they are incurred.
The components of the net periodic post-retirement benefit cost are as
follows:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY REORGANIZED COMPANY
--------------- ---------------------------------
PERIOD FROM PERIOD FROM
JULY 1, 1994 JANUARY 4, 1995 YEARS ENDED
THROUGH THROUGH JUNE 30,
JANUARY 3, JUNE 30, -------------
1995 1995 1996 1997
--------------- --------------- ---- ----
<S> <C> <C> <C> <C>
Service cost (benefits earned during the
period)........................................ $ 83 $ 79 $206 $117
Interest cost on accumulated post-retirement
benefit obligation............................. 77 73 200 128
Net amortization and deferral.................... -- -- 9 (55)
----- ----- ---- ----
Net periodic post-retirement benefit cost........ $ 160 $ 152 $415 $190
===== ===== ==== ====
</TABLE>
The components of the accumulated post-retirement benefit obligation and
amounts accrued at June 30 were as follows:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Actuarial present value of benefit obligations:
Retirees and dependents.................................................. $ 214 $ 174
Eligible active employees................................................ 438 97
Other active employees................................................... 1,792 120
Unrecognized prior service credit.......................................... -- 2009
Unrecognized net gain...................................................... 109 312
------ ------
Total accrued post-retirement benefits..................................... $2,553 $2,712
====== ======
</TABLE>
Effective February 1, 1997, the Company portion of the retiree health care
insurance benefits was revised to a fixed monthly contribution amount. Prior to
the date, the Company's monthly contribution was the actual
F-10
<PAGE> 105
GLASSTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
cost in excess of a fixed monthly contribution by each retiree. The effect of
this amendment will reduce the Company's non-pension post-retirement benefit
obligation by approximately $2,009 which is being amortized on the straight-line
method over approximately 20 years.
Assumed health care cost inflation was based on an initial rate of 8.6%
declining ratably over 14 years to an ultimate rate of 5.5%. A one percentage
point increase in these rates would have no impact on the accumulated
post-retirement benefit obligation at June 30, 1997 and increased the net
post-retirement benefit cost for 1997 by $51. The assumed discount rate used in
determining the accumulated postretirement benefit obligation was 8.25% at June
30, 1997 and 1996 (8.00% at June 30, 1995).
7. FEDERAL INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income tax liabilities and assets at June 30 are as
follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred income tax liabilities:
Contract revenues..................................................... $(4,040) $(5,388)
Property, plant and equipment......................................... (951) (892)
Other................................................................. (205) --
-------- -------
Total deferred income tax liabilities................................... (5,196) (6,280)
Deferred income tax assets:
Federal income tax operating loss carryovers.......................... 8,178 7,155
Accrued liabilities and reserves...................................... 2,126 2,326
Excess tax basis on purchased assets.................................. 3,909 2,404
Other................................................................. 399 431
-------- -------
Total deferred income tax assets........................................ 14,612 12,316
Less valuation reserve.................................................. 9,416 6,036
-------- -------
Net deferred income tax assets.......................................... 5,196 6,280
-------- -------
Total deferred income taxes -- net...................................... $ -- $ --
======== =======
</TABLE>
The valuation allowance has been recorded against the Company's net
deferred income tax assets due to the uncertainties surrounding the realization
of any future tax benefit.
F-11
<PAGE> 106
GLASSTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. FEDERAL INCOME TAXES (CONTINUED)
The consolidated effective income tax rate differs from the statutory U.S.
federal tax rate for the following reasons and by the following percentages:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY REORGANIZED COMPANY
------------- -----------------------------------
PERIOD FROM PERIOD FROM
JULY 1, JANUARY 4,
1994 1995 YEARS ENDED
THROUGH THROUGH JUNE 30,
JANUARY 3, JUNE 30, --------------------
1995 1995 1996 1997
------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Statutory U.S. federal tax rate.................... 34.0% 34.0% 34.0% 34.0%
Increase (reduction) in tax rate resulting from:
Effect of reduction in valuation reserve for
deferred income taxes......................... -- -- -- (8.6)
Amortization of excess reorganization value...... -- 12.6 6.8 2.2
Effects of net operating losses.................. (187.0) -- -- --
Write-off on non-deductible intangible assets.... 147.6 -- -- --
Other............................................ 5.4 2.0 4.0 1.2
------ ---- ---- ----
Effective tax rate................................. --% 48.6% 44.8% 28.8%
====== ==== ==== ====
</TABLE>
The "Effect of reduction in valuation reserve for deferred income taxes"
represents the effect of change in post reorganization temporary differences
fully reserved by the Company's valuation reserve.
At June 30, 1997, the Company has net operating loss carryforwards for
regular and alternative minimum tax purposes of approximately $21,045 and
$17,517, respectively, which expire in the years 2009 through 2011. For regular
and alternative minimum tax purposes, approximately $18,168 and $12,886 of each
loss carryforward has an annual usage limitation of $1,378 which, if not
utilized in a given year, may be utilized in subsequent years.
Income taxes not payable in cash represent the tax effect of certain
temporary differences existing prior to the reorganization and are recorded as a
reduction to reorganization value in excess of amounts allocated to identifiable
assets as required by SOP 90-7.
8. FOREIGN REVENUES AND REVENUES CONCENTRATION
Revenues by geographic region and revenues from customers who accounted for
10% or more of total revenues are as follows:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY REORGANIZED COMPANY
------------ ------------------------------------
PERIOD FROM PERIOD FROM
JULY 1, 1994 JANUARY 4,
THROUGH 1995 THROUGH YEARS ENDED JUNE 30,
JANUARY 3, JUNE 30, --------------------
REVENUE BY GEOGRAPHIC REGION 1995 1995 1996 1997
- -------------------------------------------------- ------------ ------------ -------- --------
<S> <C> <C> <C> <C>
United States..................................... $ 9,924 $ 9,608 $ 18,794 $ 22,269
Asia-Pacific...................................... 5,341 10,261 20,101 39,371
Europe............................................ 3,250 5,351 9,827 5,030
Latin American.................................... 5,889 1,992 6,208 2,616
Other............................................. 1,544 642 7,841 7,147
-------- -------- -------- --------
$ 25,948 $ 27,854 $ 62,771 $ 76,433
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MAJOR CUSTOMERS
- --------------------------------------------------
<S> <C> <C> <C> <C>
A............................................ $4,827 $6,521 $ 5,897 $ 9,455
B............................................ 2,287 1,210 4,210 10,945
C............................................ 120 189 4,807 9,660
D............................................ 4,988 1,648 10,677 8,654
</TABLE>
F-12
<PAGE> 107
GLASSTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LEASES
The Company leases a manufacturing and office building under a long-term
agreement with a partnership comprised of certain former shareholders of
Industries. The minimum annual rental associated with this lease through its
expiration on December 31, 1999 is approximately $300. The Company has the
option to renew the lease for two additional five-year periods at slightly
higher rates. Total rental expense amounted to approximately $150, $150, $300
and $300 for the periods from July 1, 1994 through January 3, 1995, January 4,
1995 through June 30, 1995, and the years ended June 30, 1996 and 1997,
respectively.
10. LEGAL PROCEEDINGS
On January 15, 1997, James E. Heider, a former executive officer of the
Company, commenced an action against the Company and Mark Christman, the
President of the Company, in the Common Pleas Court of Wood County, Ohio,
relating to the nonrenewal of his employment agreement. In the amended
complaint, Mr. Heider alleges that the Company breached his written employment
agreement and breached implied and express employment agreements that, according
to the complaint, were created pursuant to certain alleged oral statements. The
complaint also alleges that Mr. Heider was terminated in retaliation for
reporting on the conduct of certain employees and that Mr. Heider was wrongfully
denied the ability to exercise certain stock options. Mr. Heider seeks
compensation of approximately $9.5 million for lost wages, bonuses, back pay,
vacation pay and the value of other fringe benefits he would have received
through continued employment with the Company. The Company believes that this
action is without merit and is barred by the provisions of Mr. Heider's written
employment agreement with the Company. The Company intends to contest this
action vigorously and does not believe that this action will have a material
adverse effect on the Company's financial condition or operating results.
11. SALE OF COMPANY
Effective July 2, 1997, a sale of the Company was completed to Key Equity
Capital Corporation and certain members of management of the Company for
approximately $76.2 million, subject to certain adjustments. The transaction
resulted in the new company having substantial goodwill, an increase in long-
term debt, original equity of approximately $11.7 million, and a significant
reduction in cash. Also in connection with the proposed transaction all existing
stock options and common stock warrants of the Company were deemed exercised and
exchanged for their pro rata share of the purchase price. In addition, the
Company incurred an extraordinary charge of $4.2 million relating to the early
extinguishment of debt and other charges aggregating approximately $3.7 million
to be reflected in its income statement for the period of July 1, 1997 through
July 2, 1997.
F-13
<PAGE> 108
===============================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH AN OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.............................. iv
Prospectus Summary................................. 1
Risk Factors....................................... 13
The Transactions................................... 20
Use of Proceeds.................................... 21
Capitalization..................................... 21
Unaudited Pro Forma Financial Data................. 22
Selected Historical Consolidated Financial and
Other Data....................................... 28
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 30
Business........................................... 35
Management......................................... 46
Certain Transactions............................... 50
Ownership and Control.............................. 53
Description of the Revolving Credit Facility....... 54
The Exchange Offer................................. 55
Description of the Notes........................... 63
Certain U.S. Federal Income Tax Considerations..... 87
Plan of Distribution............................... 87
Legal Matters...................................... 87
Experts............................................ 88
Index to Consolidated Financial Statements......... F-1
</TABLE>
UNTIL , 1997 (90 DAYS AFTER THE COMMENCEMENT OF THE
EXCHANGE OFFER), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================
===============================================================
$70,000,000
GLASSTECH, INC.
OFFER TO EXCHANGE $1,000
IN PRINCIPAL AMOUNT OF ITS
SERIES B 12 3/4% SENIOR NOTES DUE 2004
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT FOR EACH $1,000
IN PRINCIPAL AMOUNT OF ITS OUTSTANDING
12 3/4% SENIOR NOTES DUE 2004
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
UNITED STATES TRUST COMPANY OF NEW YORK
----------------------------------
PROSPECTUS
----------------------------------
, 1997
===============================================================
<PAGE> 109
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation incorporates substantially
the provisions of the General Corporation Law of the State of Delaware providing
for indemnification of directors and officers of the Registrant against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that such person is or was an officer or director of the Registrant or is
or was serving at the request of the Registrant as a director, officer,
employee, agent or trustee of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise.
As permitted by Section 102 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation contains provisions eliminating a
director's personal liability for monetary damages to the Registrant and its
stockholders arising from a breach of a director's fiduciary duty except for
liability (a) for any breach of the director's duty of loyalty to the Registrant
or its stockholders, (b) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (c) under Section
174 of the Delaware General Corporation Law, or (d) for any transaction from
which the director derived an improper personal benefit.
Section 145 of the Delaware General Corporation Law provides generally that
a person sued as a director, officer, employee or agent of a corporation may be
indemnified by the corporation for reasonable expenses, including attorney's
fees, if in the case of other than derivative suits he has acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation (and, in the case of a criminal proceeding, had no
reasonable cause to believe that his conduct was unlawful). In the case of a
derivative suit, an officer, employee or agent of the corporation who is not
protected by the Certificate of Incorporation may be indemnified by the
corporation for reasonable expenses, including attorney's fees, if he has acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, except that no indemnification shall be
made in the case of a derivative suit in respect of any claim as to which an
officer, employee or agent has been adjudged to be liable to the corporation
unless that person is fairly and reasonably entitled to indemnity for proper
expenses.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger
2.2 Amendment to Agreement and Plan of Merger
3.1 Restated Certificate of Incorporation of the Registrant
3.2 By-laws of the Registrant
4.1 Indenture (including form of Note)
4.2 First Supplemental Indenture
5.1* Opinion of Baker & Hostetler LLP as to the legality of the securities being
registered
10.1 Financing and Security Agreement between NationsBank, N.A. and the Registrant
10.2 Plant and Office Lease
10.3 Warehouse Lease
10.4 Advisory Agreement between the Registrant and Key Equity Capital Corporation
10.5 Form of Exchange Agent Agreement between United States Trust Company of New York
and the Registrant
10.6 Employment Agreement among Glasstech Holding Co., the Registrant and John S.
Baxter
10.7 Employment Agreement among Glasstech Holding Co., the Registrant and Mark D.
Christman
10.8 Employment Agreement among Glasstech Holding Co., the Registrant and Larry E.
Elliott
</TABLE>
II-1
<PAGE> 110
<TABLE>
<C> <S>
10.9 Employment Agreement among Glasstech Holding Co., the Registrant and Ronald A.
McMaster
10.10 Employment Agreement among Glasstech Holding Co., the Registrant and James P.
Schnabel, Jr.
10.11 Employment Agreement among Glasstech Holding Co., the Registrant and Diane S.
Tymiak
10.12 Employment Agreement among Glasstech Holding Co., the Registrant and Kenneth H.
Wetmore
10.13 Securities Purchase Agreement between the Registrant, as successor to Glasstech
Sub Co., and CIBC Wood Gundy Securities Corp.
10.14 Registration Rights Agreement between the Registrant, as successor to Glasstech
Sub Co., and CIBC Wood Gundy Securities Corp.
12.1* Statement re: Computation of Ratio of Earnings to Fixed Charges
21.1 List of Subsidiaries
23.1* Consent of Ernst and Young LLP
23.2* Consent of Baker & Hostetler LLP (included in Exhibit 5.1)
24.1 Powers of Attorney (included on page II-4)
25.1 Statement of Eligibility and Qualification on Form T-1 Under the Trust Indenture
Act of 1939 of United States Trust Company of New York, as Trustee Under the
Indenture
27.1 Financial Data Schedule
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
</TABLE>
- ---------------
* Filed herewith.
(b) Financial Statement Schedule.
<TABLE>
<CAPTION>
SCHEDULE
NUMBER DESCRIPTION OF DOCUMENT PAGE
-------- ------------------------------------------------ ----
<S> <C> <C>
II Valuation and Qualifying Accounts S-1
</TABLE>
(c) Report, Opinion or Appraisal.
Not Applicable.
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in the documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
II-2
<PAGE> 111
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
(d) The undersigned Registrant hereby undertakes:
1. To file during any period in which offers and sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
2. That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE> 112
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
PERRYSBURG, STATE OF OHIO, ON THE 8TH DAY OF OCTOBER, 1997.
GLASSTECH, INC.
/s/ MARK D. CHRISTMAN
--------------------------------------
Mark D. Christman
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- -------------------------------------- -----------------
<C> <S> <C>
/s/ MARK D. CHRISTMAN Director, President and Chief October 8, 1997
- ------------------------------------- Executive Officer (Principal Executive
Mark D. Christman Officer)
/s/ DIANE S. TYMIAK Chief Financial Officer (Principal October 8, 1997
- ------------------------------------- Financial Officer and Principal
Diane S. Tymiak Accounting Officer)
/s/ JOHN S. BAXTER Director October 8, 1997
- -------------------------------------
John S. Baxter
Director
- -------------------------------------
David P. Given
</TABLE>
II-4
<PAGE> 113
GLASSTECH, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED TO COSTS AMOUNT BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES CHARGED OFF END OF PERIOD
- ------------------------------------------------ ---------- ---------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended June 30, 1997:
Allowance for doubtful accounts............... $ 178 $ (37) $ -- $ 141
====== ====== ======= =======
Year ended June 30, 1996:
Allowance for doubtful accounts............... $ 281 $ (103) $ -- $ 178
====== ====== ======= =======
Period from January 4, 1995 through June 30,
1995:
Allowance for doubtful accounts............... $ 274 $ 7 $ -- $ 281
====== ====== ======= =======
Period from July 1, 1994 through January 3,
1995:
Allowance for doubtful accounts............... $ 372 $ (98) $ -- $ 274
====== ====== ======= =======
</TABLE>
S-1
<PAGE> 114
EXHIBIT INDEX
<TABLE>
<C> <S>
5.1 Opinion of Baker & Hostetler LLP as to the legality of the securities being
registered
12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Ernst and Young LLP
23.2 Consent of Baker & Hostetler LLP (included in Exhibit 5.1)
</TABLE>
<PAGE> 1
Exhibit 5.1
[BAKER & HOSTETLER LLP LETTERHEAD]
October 8, 1997
Glasstech, Inc.
Ampoint Industrial Park
995 Fourth Street
Perrysburg, Ohio 43551
RE: AMENDMENT NO. 1 TO REGISTRATION STATEMENT OF FORM S-4 WITH
RESPECT TO $70,000,000 AGGREGATE PRINCIPAL AMOUNT SERIES
B 12 3/4% SENIOR NOTES DUE 2004 OF GLASSTECH, INC.
Gentlemen:
As counsel for Glasstech, Inc., a Delaware corporation (the "Issuer"),
we are familiar with the Issuer's Registration Statement on Form S-4 (the
"Registration Statement"), filed with the Securities & Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), on
October 8, 1997. Pursuant to the Registration Statement, the Issuer is
proposing to offer for exchange (the "Exchange Offer") up to $70,000,000
aggregate principal amount Series B 12 3/4% Senior Notes due 2004 (the "New
Notes") for its $70,000,000 aggregate principal amount 12 3/4% Senior Notes due
2004 (the "Old Notes") that are presently outstanding.
In connection with the foregoing, we have examined such records of the
Issuer and such other documents as we deem necessary to render this opinion.
Based on such examination, we are of the opinion that when the
Registration Statement has become effective under the Act, the New Notes, when
issued pursuant to the Indenture (as defined in the Registration Statement) in
exchange for the Old Notes pursuant to the Exchange Offer as contemplated in the
Registration Statement, in the form attached as Exhibit A to Exhibit 4.1 of the
Registration Statement, will be the legal, valid and binding obligation of the
Issuer, except as may be limited by bankruptcy, insolvency, reorganization or
other laws relating to the enforcement of creditor's rights generally or by
general principles of equity.
<PAGE> 2
Glasstech, Inc.
October 8, 1997
Page 2
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and the reference to us under the caption "Legal Matters"
in the Prospectus that is a part of the Registration Statement.
Sincerely,
/s/ Baker & Hostetler LLP
Baker & Hostetler LLP
<PAGE> 1
Exhibit 12.1
<TABLE>
<CAPTION>
GLASSTECH, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
PREDECESSOR COMPANY REORGANIZED COMPANY
------------------------------------------- -------------------------------------------
PERIOD FROM PERIOD FROM
JULY 1, 1994 JANUARY 4, 1995
YEAR ENDED YEAR ENDED THROUGH THROUGH YEAR ENDED YEAR ENDED
JUNE 30, 1993 JUNE 30, 1994 JANUARY 3, 1995 JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1997
------------- ------------ --------------- ------------- ------------- ------------
<S> <C> <C> <C> | <C> <C> <C>
Consolidated income before income taxes $ (89,010) $ 1,404 $ 219 | $ 915 $ 3,400 $ 9,127
Add: |
Interest expense 26,556 - - | 2,077 4,200 4,200
Amortization of deferred financing costs 3,289 - - | - - -
Portion of operating lease rentals deemed |
to be interest 100 100 50 | 50 100 100
--------- ---------- ---------- | --------- ---------- ----------
Consolidated income as adjusted $ (59,086) $ 1,504 $ 269 | $ 3,042 $ 7,700 $ 13,427
========= ========== ========== | ========= ========== ==========
|
Fixed charges: |
Interest expense $ 26,556 $ - $ - | $ 2,077 $ 4,200 $ 4,200
Amortization of deferred financing costs 3,289 - - | - - -
Portion of operating lease rentals deemed |
to be interest 100 100 50 | 50 100 100
--------- ---------- ---------- | --------- ---------- ----------
Total fixed charges $ 29,945 $ 100 $ 50 | $ 2,127 $ 4,300 $ 4,300
========= ========== ========== | ========= ========== ==========
|
Ratio of earnings to fixed charges - 15.00 5.40 | 1.40 1.80 3.12
Deficiency of earnings to cover fixed charges $ 89,010 |
</TABLE>
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 15, 1997, in Amendment No. 1 to the Registration
Statement (Form S-4 No. 333-34391) and related Prospectus of Glasstech, Inc.
dated October 8, 1997.
/s/ Ernst & Young LLP
Ernst & Young LLP
Toledo, Ohio
October 8, 1997
