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Rule 424(b)(3)
Registration Statement No. 333-24823
PROSPECTUS
[LOGO]
OFFER TO EXCHANGE SHARES OF
ITS 11 1/4% SERIES A CUMULATIVE EXCHANGEABLE PREFERRED STOCK
FOR ANY AND ALL OUTSTANDING SHARES OF ITS
EXISTING PREFERRED STOCK (AS DEFINED BELOW)
------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JULY 16,
1997, UNLESS EXTENDED.
Fairfield Manufacturing Company, Inc., a Delaware corporation (the
'Company'), hereby offers (the 'Exchange Offer'), upon the terms and subject to
the conditions set forth in this Prospectus (this 'Prospectus') and the
accompanying Letter of Transmittal (the 'Letter of Transmittal') to exchange one
share of its 11 1/4% Series A Cumulative Exchangeable Preferred Stock, par value
$.01 per share, liquidation preference $1,000.00 per share (the 'New Preferred
Stock'), which have been registered under the Securities Act of 1933, as amended
(the 'Securities Act'), for each issued and outstanding share of its 11 1/4%
Cumulative Exchangeable Preferred Stock, par value $.01 per share, liquidation
preference $1,000.00 per share (the 'Existing Preferred Stock'), of which 50,000
shares are outstanding. The Existing Preferred Stock and the New Preferred Stock
are sometimes collectively referred to herein as the 'Preferred Stock'. The
terms of the New Preferred Stock are identical in all material respects to the
terms of the Existing Preferred Stock for which they may be exchanged pursuant
to the Exchange Offer except that (i) the shares of New Preferred Stock will
have been registered under the Securities Act, and thus will not bear
restrictive legends restricting their transfer pursuant to the Securities Act
and (ii) holders of New Preferred Stock will not be entitled to registration
rights that holders of the Existing Preferred Stock have under the Registration
Agreement (as defined) except under limited circumstances.
Dividends on the New Preferred Stock will accumulate from the last dividend
payment date on which dividends were paid on the shares of Existing Preferred
Stock surrendered in exchange therefor or, if no dividends have been paid, from
the original date of issuance of the Existing Preferred Stock, and will be
payable semi-annually commencing September 15, 1997, at a rate per annum of
11 1/4% of the liquidation preference per share. Dividends may be paid, at the
Company's option, on any dividend payment date occurring on or prior to March
15, 2002 either in cash or by the issuance of additional shares of New Preferred
Stock (including fractional shares) having an aggregate liquidation preference
equal to the amount of such dividends (but not less than $1.00). The liquidation
preference of the New Preferred Stock will be $1,000 per share. The New
Preferred Stock will be redeemable at the Company's option, in whole or in part,
at any time on or after March 15, 2002, at the redemption prices set forth
herein, plus, without duplication, accumulated and unpaid dividends to the date
of redemption. The Company will be required, subject to certain conditions, to
redeem all of the New Preferred Stock outstanding on March 15, 2009, at a
redemption price equal to 100% of the liquidation preference thereof, plus,
without duplication, accumulated and unpaid dividends to the redemption date.
Upon the occurrence of a Change of Control (as defined) occurring on or after
July 2, 2001, the Company will, only if and only to the extent permitted by any
Indebtedness (as defined) of the Company then outstanding, offer to redeem the
outstanding shares of New Preferred Stock at a redemption price equal to 101% of
the liquidation preference thereof, plus, without duplication, accumulated and
unpaid dividends to the redemption date. In addition, upon the occurrence of a
Change of Control occurring prior to July 2, 2001, the Company will have the
option to offer to redeem the New Preferred Stock, in whole but not in part, at
a redemption price equal to 101% of the liquidation preference thereof, plus,
without duplication, accumulated and unpaid dividends to the redemption date. If
the Company does not make a Change of Control Offer (as defined) upon a Change
of Control occurring prior to July 2, 2001, the annual dividend rate on the New
Preferred Stock will increase by 4.0% over the then-applicable annual dividend
rate.
The New Preferred Stock is exchangeable at the option of the Company, in
whole but not in part, for the Company's Subordinated Exchange Debentures due
2009 (including any such securities paid in lieu of cash interest, as described
herein, the 'Exchange Debentures') on any dividend payment date occurring after
the earlier of (i) July 2, 2001 and (ii) the date on which all of the Existing
Notes (as defined) are redeemed, subject to the satisfaction of certain
conditions and provided that such exchange is permitted pursuant to the terms of
the Company's Indebtedness then outstanding. Interest on the Exchange Debentures
will be payable at a rate of 11 1/4% per annum and will accrue from the date of
issuance thereof. Interest on the Exchange Debentures will be payable
semi-annually in cash or, at the option of the Company, on or prior to March 15,
2002 in additional Exchange Debentures, in arrears on each March 15 and
September 15, commencing on the first such date after the exchange of the
Exchange Debentures for the New Preferred Stock. The Exchange Debentures will
mature on March 15, 2009 and will be redeemable, at the option of the Company,
in whole or in part, on or after March 15, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest to the date of redemption.
The New Preferred Stock will rank junior in right of payment upon
liquidation to all existing and future Indebtedness of the Company, including,
without limitation, Indebtedness under the Credit Agreement (as defined) and
Indebtedness in respect of the Existing Notes (as defined). The New Preferred
Stock will rank senior in right of payment (with respect to dividend rights and
upon liquidation), to the common stock of the Company and will, subject to the
terms described herein, rank senior to, on parity with, or junior to, other
classes of preferred stock issued by the Company from time to time. The Exchange
Debentures will be subordinated to all existing and future Senior Debt (as
defined) of the Company and will rank pari passu with or senior to all future
Indebtedness of the Company that expressly provides that it ranks pari passu
with or junior to the Exchange Debentures, as the case may be. As of December
31, 1996, there would have been $118.0 million of Indebtedness of the Company
ranking senior to the New Preferred Stock and the Exchange Debentures.
The Exchange Offer is not conditioned upon any minimum aggregate liquidation
preference of Existing Preferred Stock being tendered or accepted for exchange.
The Exchange Offer will expire at 5:00 p.m., New York City time, on July 16,
1997, unless extended by the Company (such date as it may be so extended, the
'Expiration Date'). The date of acceptance for exchange of properly tendered
shares of Existing Preferred Stock (the 'Exchange Date') will be the first
business day following the Expiration Date. Shares of Existing Preferred Stock
tendered pursuant to the Exchange Offer may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date; otherwise such tenders
are irrevocable. Shares of New Preferred Stock will be issued in exchange for
properly tendered shares of Existing Preferred Stock will be delivered through
the facilities of The Depository Trust Company by the Exchange Agent (as
defined) promptly after acceptance thereof.
(Continued on next page)
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SEE 'RISK FACTORS' BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PURCHASERS OF THE NEW PREFERRED STOCK.
------------------------
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 JUNE 13, 1997.
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CUSTOM GEAR
[In this place appears a picture of the Company's custom gear products.]
Fairfield's custom gear products are used in a variety of applications,
including those pictured below.
[In this place appears [In this place appears [In this place appears
a picture of a picture of a picture of
certain applications certain applications certain applications
of the of the of the
Company's custom Company's custom Company's custom
gear products.] gear products.] gear products.]
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(cover page continued)
The Existing Preferred Stock was originally issued and sold on March 12,
1997 in a transaction exempt from registration under the Securities Act and
resold to certain qualified institutional buyers in reliance on, and subject to
the restrictions imposed pursuant to, Rule 144A under the Securities Act (the
'Initial Offering'). Based on interpretations by the Staff of the Securities and
Exchange Commission (the 'Commission') as set forth in no-action letters issued
to third parties (including Exxon Capital Holding Corp. (available May 13,
1988), Morgan Stanley & Co. Incorporated (available June 5, 1991) and K-III
Communications Corporation (available May 14, 1993), the Company believes that
New Preferred Stock issued pursuant to the Exchange Offer in exchange for
Existing Preferred Stock may be offered to resale, resold and otherwise
transferred by holders thereof (other than any such holder that is a
broker-dealer or 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 (a) such New
Preferred Stock is acquired in the ordinary course of such holder's business,
(b) at the time of the commencement of the Exchange Offer such holder has no
arrangement with any person to participate in a distribution of the New
Preferred Stock and (c) such holder is not engaged in, and does not intend to
engage in, a distribution of the New Preferred Stock. Holders of the Existing
Preferred Stock which, at the time of the commencement of the Exchange Offer,
are engaged in, intend to engage in, or have an arrangement to engage in, a
distribution of the New Preferred Stock may not rely on the applicable
interpretations of the Staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. In addition, since the
Commission has not considered the Exchange Offer in the context of a no-action
letter, there can be no assurance that the Staff of the Commission would make a
similar determination with respect to the Exchange Offer as in such other
circumstances. Each holder of Existing Preferred Stock that desires to
participate in the Exchange Offer will be required to make certain
representations described in 'The Exchange Offer--Terms of the Exchange Offer.'
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an 'underwriter' within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Preferred Stock received in exchange for Existing Preferred
Stock where such Existing Preferred Stock was acquired by such 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 date that the Registration
Statement relating to the Exchange Offer has been declared effective by the
Commission, it will make this Prospectus available to any broker-dealer for use
in connection with any such resale. Any holder that cannot rely upon such
interpretations must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. See 'The Exchange Offer' and 'Plan of Distribution.'
The New Preferred Stock will be represented by one or more Global
Securities registered in the name of a nominee of The Depository Trust Company,
as Depositary. Beneficial interest in the Global Securities will be shown on,
and transfers will be effected only through, records maintained by the
Depositary and its participants. See 'Description of New Preferred Stock and
Exchange Debentures--Book-Entry, Delivery and Form.'
There has not previously been any public market for the New Preferred Stock
or the Exchange Debentures. The Company does not intend to list the New
Preferred Stock or the Exchange Debentures 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 Preferred Stock or the Exchange
Debentures will develop. See 'Risk Factors--Lack of Established Market for the
New Preferred Stock and the Exchange Debentures.' Moreover, to the extent that
shares of Existing Preferred Stock are tendered and accepted in the Exchange
Offer, a holder's ability to sell untendered, and tendered but unaccepted,
shares of Existing Preferred Stock could be adversely affected. Following
consummation of the Exchange Offer, the holders of the Existing Preferred Stock
will continue to be subject to the existing restrictions or transfer thereof and
the Company will have no further obligation to such holders to provide for the
registration under the Securities Act of the Existing Preferred Stock except
under certain limited circumstances. See 'Exchange Offer--Consequences of
Failure to Exchange.'
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to pay the expenses of the Exchange Offer, other than certain
commissions, if any, relating to a holder's disposition of its shares of
Existing Preferred Stock in connection with the Exchange Offer. No dealer
manager is being utilized in connection with the Exchange Offer.
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THE EXCHANGE OFFER IS NOT BEING MADE, NOR WILL THE COMPANY ACCEPT SURRENDER
FOR EXCHANGE FROM, HOLDERS OF SHARES OF EXISTING PREFERRED STOCK IN ANY
JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE
IN COMPLIANCE WITH THE SECURITIES AND BLUE SKY LAWS OF SUCH JURISDICTION.
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FOR NEW HAMPSHIRE RESIDENTS ONLY
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B WITH THE STATE OF NEW HAMPSHIRE NOR
THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN
THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER
ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'), and, in accordance
therewith, files reports and other information with the Commission. Such reports
and other information can be inspected and copied at the principal office of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following regional offices of the Commission: Citicorp
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511; and
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained by mail from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates and such material is contained on the worldwide
web site maintained by the Commission at http://www.sec.gov.
The Company has filed with the Commission a Registration Statement under
the Securities Act, with respect to the New Preferred Stock offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all of the information included or incorporated by reference in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus or in any document incorporated herein or therein
as to the contents of any contract or other document referred to herein or
therein and filed as an exhibit to, or incorporated by reference in, the
Registration Statement are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to, or incorporated by reference in, the Registration Statement, each
such statement being qualified in all respects by such reference. For further
information with respect to the Company and the New Preferred Stock, reference
is hereby made to the Registration Statement and the exhibits and schedules
thereto.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for its fiscal year ended December
31, 1996 and the Company's Quarterly Report on Form 10-Q for its fiscal quarter
ended March 31, 1997, which were previously filed with the Commission pursuant
to the Exchange Act (File No.33-62598), are incorporated herein by reference.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Exchange Offer shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
such documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (NOT INCLUDING EXHIBITS TO SUCH
DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE IN
SUCH DOCUMENTS), ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST
DIRECTED TO: VICE PRESIDENT-FINANCE, FAIRFIELD MANUFACTURING COMPANY, INC., U.S.
ROUTE 52 SOUTH, LAFAYETTE, INDIANA 47905 (TELEPHONE: (765) 474-3474).
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TABLE OF CONTENTS
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PAGE
NO.
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Available Information...................................................................................... ii
Incorporation of Certain Documents by Reference............................................................ ii
Prospectus Summary......................................................................................... 1
The Company.............................................................................................. 1
Use of Proceeds.......................................................................................... 2
The Exchange Offer....................................................................................... 3
Summary of Terms of New Preferred Stock.................................................................. 6
Risk Factors............................................................................................... 12
Leverage................................................................................................. 12
Limitation on Ability to Pay Dividends................................................................... 12
Ranking of the New Preferred Stock; Subordination of Exchange Debentures................................. 13
Restrictions Imposed by Terms of Indebtedness............................................................ 13
Controlling Stockholders................................................................................. 14
Fraudulent Conveyance.................................................................................... 14
Change of Control........................................................................................ 14
Lack of Established Market for the New Preferred Stock and the Exchange Debentures....................... 15
Proposed Tax Law Changes................................................................................. 15
Susceptibility to General Economic Conditions............................................................ 15
Labor Relations.......................................................................................... 15
Competition.............................................................................................. 16
Environmental Regulation................................................................................. 16
Certain Tax Considerations............................................................................... 16
Use of Proceeds............................................................................................ 17
Capitalization............................................................................................. 17
Selected Historical and Pro Forma Combined Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 20
Business................................................................................................... 24
Management................................................................................................. 29
Ownership of Capital Stock................................................................................. 33
Related Transactions....................................................................................... 34
Description of Existing Indebtedness....................................................................... 35
Description of Capital Stock............................................................................... 39
The Exchange Offer......................................................................................... 40
Description of New Preferred Stock and Exchange Debentures................................................. 46
Certain Federal Income Tax Considerations.................................................................. 79
Plan of Distribution....................................................................................... 85
Legal Matters.............................................................................................. 86
Experts.................................................................................................... 86
Index to Consolidated Financial Statements................................................................. F-1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the related notes, appearing elsewhere in this Prospectus.
THE COMPANY
The Company believes that it is the leading independent manufacturer (based
on sales) of high precision custom gears and planetary gear systems in North
America, with an estimated market share in each of the custom gear and planetary
gear system markets of more than two times that of its nearest competitors. The
majority of the Company's custom gears and planetary gear systems are used by
original equipment manufacturers ('OEMs') as components in various kinds of
heavy mobile equipment. The Company's customers include such industry leaders as
General Electric, John Deere, Caterpillar and General Motors. For the year ended
December 31, 1996, the Company had net sales and EBITDA of $195.2 million and
$32.0 million, respectively.
Custom gears, which accounted for $112.3 million, or 57.5%, of the
Company's 1996 net sales, are components of larger systems such as axles, drive
differentials and transmission units. The Company's custom gear customers
consist principally of OEMs of rail (such as locomotives), mining, agricultural
(such as tractors and specialty harvesting equipment), industrial, construction
and materials-handling equipment, for many of whom the Company is the sole
independent supplier of selected gear products.
Planetary gear systems, which accounted for $82.9 million, or 42.5%, of the
Company's 1996 net sales, are integrated, self-contained power transmission and
torque conversion systems that provide propulsion, swing and/or rotation to
wheels, axles and other components in applications where the use of axles would
otherwise present design difficulties. The Company markets its planetary gear
systems under its Torque-Hub(Registered) name. The Company believes that, as a
result of the performance history and reputation for quality of the Company's
Torque-Hub(Registered) products, the Torque-Hub(Registered) name has become
closely identified with planetary gear systems. Customers for the Company's
Torque-Hub(Registered) products include OEMs of access platform (such as
aerial-lift), road rehabilitation (such as pavers and road rollers),
construction (such as excavators), forestry and agricultural (such as crop
sprayers) equipment.
The Company has been certified as a 'preferred supplier' (based on systems
compliance and on-site inspections) by all of its major customers that have
certification procedures, including General Motors, General Electric, John
Deere, Caterpillar and Ingersoll-Rand. The Company has also been certified as
meeting 'ISO-9001' standards, which are increasingly being used by OEMs in lieu
of individual certification procedures. In addition, the Company expects to
receive 'QS-9000' certification by the end of 1997, which is the level of
certification expected to be required by automotive OEMs beginning in 1998. The
Company believes that certification provides it with a competitive advantage
because a number of OEMs require certification as a condition to doing business.
The Company believes that its strong market position in the custom gear and
planetary gear systems markets is the result of its (i) breadth and quality of
product offerings, (ii) longstanding relationships (in many cases of 20 years or
more) with its major custom gear and planetary gear system customers, (iii)
state-of-the-art engineering and manufacturing technology, including its
in-house heat treating facilities, computer-aided design and manufacturing
systems and computer numerically-controlled machine tools and gear grinders,
(iv) ability to deliver products within short lead times, (v) cost
competitiveness, (vi) experienced engineering staff, which, together with the
Company's sales force, works closely with customers in designing and developing
products to meet customers' needs and (vii) stable, knowledgeable sales force,
many of whose members have engineering degrees and have worked with the same
customers for many years. In addition, the Company believes that its management
team, which has an average of over 25 years of experience in general
manufacturing, will be instrumental in further strengthening the Company's
market position.
The Company's principal executive office is located at U.S. Route 52 South,
Lafayette, Indiana 47905 (Telephone: (765) 474-3474).
BUSINESS STRATEGY
Management intends to strengthen the Company's position as the leading
independent supplier of custom gears and planetary gear systems by implementing
a business strategy based on the following elements:
o Taking Advantage of Industry Trends. The Company seeks to increase its
revenues and market share by taking advantage of industry trends, including:
(i) the trend among captive gear manufacturers (OEMs who
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produce gears in-house for use in their own products) to 'outsource,' or
purchase portions of their gear requirements from independent manufacturers
such as the Company, rather than manufacture such products in-house; (ii) the
trend among OEMs to develop sourcing relationships with their suppliers,
whereby an OEM purchases all of its supply requirements within selected
product lines from a single manufacturer like the Company; and (iii) the
trend among OEMs to purchase complete gear assemblies or systems rather than
individual gear products. The Company believes that these trends are driven
by OEMs' desire to reduce their production and supply costs and focus on
their core competencies.
The Company has taken advantage of these industry trends to date. For
example, the Company receives orders from a number of captive gear
manufacturers, such as those of General Motors, General Electric and John
Deere, with respect to certain gear products that such OEMs previously
produced in-house. In addition, the Company has established sole sourcing
relationships with many of its major customers with respect to selected gear
products. The Company has also experienced growth in its sales of complete
gear assemblies and systems, particularly to manufacturers of agricultural
and heavy-duty equipment. The Company believes that it is well-positioned to
continue to take advantage of these industry trends as a result of its broad
product offerings, large manufacturing capacity, sophisticated manufacturing
and design capabilities and established reputation for producing high quality
custom gear and planetary gear system products.
o Reducing Lead Times. The Company believes that reducing lead times has been,
and will continue to be, a key competitive factor in the gear manufacturing
industry. The Company has reduced average manufacturing cycle times through
the manufacturing process from 50 days in 1995 to 32 days at the end of 1996.
Work-in-process inventory has also been reduced by 26.5% during this same
period. These reductions are the result of manufacturing improvements and
inventory controls implemented by management, including reduction in lot
sizes and the installation of new, more efficient machinery. The Company is
seeking to reduce lead times further by installing an enhanced computer
program designed to improve customer order scheduling and inventory
management.
o Continuing Cost Control Efforts. The Company will continue to be dedicated
to remaining price competitive and minimizing production costs. The Company
believes that it has already significantly lowered its operating costs by
reorganizing the physical layout of its manufacturing work space, installing
new, more efficient machinery and improving its employee training programs.
The Company is seeking to reduce costs further through various purchasing
initiatives (including worldwide sourcing, consolidation of the supplier base
and long-term supply agreements) and by reducing set-up times and scrap.
o Improving Manufacturing Capabilities. The Company believes that its
broad-based, integrated manufacturing capabilities, including its
state-of-the-art heat treating facilities, computer-aided design and
manufacturing systems and computer numerically machine tools and gear
grinders, provide it with a distinct competitive advantage. Over the past
three years, the Company invested $34.2 million in capital equipment, of
which $23.7 million was used to purchase new equipment and maintain and
upgrade existing equipment. The Company believes that its manufacturing
capacity is substantially larger than that of its independent competitors,
enabling it to accommodate large orders. The Company plans to continue to
selectively make capital investments which will improve its manufacturing
processes.
o Introducing New Products and Applications. The Company is currently in the
process of developing, testing and marketing a number of new products and new
applications for existing products in an effort to increase revenues,
operating margins and market share. Historically, the Company's planetary
gear system business has generated most of the Company's new products and new
product applications. New products and new product applications accounted for
22.3% of the Company's planetary gear system business in 1996, as compared to
5.7% in 1992. The Company intends to broaden its new custom gear product
applications and is currently developing a number of such applications
including: differentials for off-highway trucks and on-highway automotive,
industrial and commercial vehicles; transmissions; and aerospace gearing.
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The net
proceeds of the Initial Offering (approximately $47.7 million) were used to fund
a dividend to Lancer Industries Inc. ('Lancer'), the Company's parent and the
owner of 100% of the common stock of the Company. The proceeds received by
Lancer in the form of the dividend were used to redeem approximately $47.7
million aggregate liquidation preference of Lancer's Series C Preferred Stock
(the 'Lancer Preferred Stock'). At December 31, 1996, the aggregate liquidation
preference of the Lancer Preferred Stock was approximately $53 million. See 'Use
of Proceeds' and 'Related Transactions.'
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THE EXCHANGE OFFER
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Registration Agreement.................... The Existing Preferred Stock was issued on March 12, 1997 (the 'Issue
Date') to the initial purchaser (the 'Initial Purchaser') of the
Existing Preferred Stock. The Initial Purchaser resold the Existing
Preferred Stock to certain qualified institutional buyers in reliance
on, and subject to the restrictions imposed pursuant to, Rule 144A of
the Securities Act. In connection therewith, the Company and the
Initial Purchaser entered into the Share Registration Rights
Agreement, dated as of March 12, 1997 (the 'Registration Agreement'),
providing for, among other things, the Exchange Offer. See 'The
Exchange Offer.'
The Exchange Offer........................ New Preferred Stock is being offered in exchange for an equal
liquidation preference of Existing Preferred Stock accepted in the
Exchange Offer. As of the date hereof, $50,000,000 aggregate
liquidation preference of Existing Preferred Stock is outstanding.
Existing Preferred Stock may be tendered only in integral multiples
of $1,000.
Resale of New Preferred Stock............. Based on interpretations by the Staff of the Commission as set forth
in no-action letters issued to third parties (including Exxon Capital
Holding Corp. (available May 13, 1988), Morgan Stanley & Co.
Incorporated (available June 5, 1991) and K-III Communications
Corporation (available May 14, 1993), the Company believes that the
New Preferred Stock issued pursuant to the Exchange Offer may be
offered for resale, resold or otherwise transferred by any holder
thereof (other than any such holder that is a broker-dealer or 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
(i) such New Preferred Stock is acquired in the ordinary course of
such holder's business, (ii) at the time of the commencement of the
Exchange Offer such holder has no arrangement with any person to
participate in a distribution of the New Preferred Stock and (iii)
such holder is not engaged in, and does not intend to engage, in a
distribution of the New Preferred Stock. By tendering Existing
Preferred Stock in exchange for New Preferred Stock, each holder will
represent to the Company that: (i) it is not such an affiliate of the
Company, (ii) any New Preferred Stock to be received by it will be
acquired in the ordinary course of such holder's business and (iii)
at the time of the commencement of the Exchange Offer it had no
arrangement with any person to participate in a distribution of the
New Preferred Stock and, if such holder is not a broker-dealer, it is
not engaged in, and does not intend to engage in, a distribution of
New Preferred Stock. If a holder of Existing Preferred Stock is
unable to make the foregoing representations (i.e., if a holder of
the Existing Preferred Stock, at the time of the commencement of the
Exchange Offer, is engaged in, intends to engage in, or has an
arrangement to engage in, a distribution of the New Preferred Stock),
such holder may not rely on the applicable interpretations of the
Staff of the Commission and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection
with any secondary resale transaction.
</TABLE>
3
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Each broker-dealer that receives New Preferred Stock 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
Preferred Stock. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an 'underwriter' within the meaning
of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Preferred Stock where such Existing
Preferred Stock was acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has
agreed that, starting on the Expiration Date and ending on the close
of business 180 days after the date the Registration Statement
relating to the Exchange Offer has become effective (the 'Effective
Date'), it will make this Prospectus available to any participating
broker-dealer for use in connection with any such resale. See 'Plan
of Distribution.'
To comply with the securities laws of certain jurisdictions, it may
be necessary to qualify for sale or register the New Preferred Stock
prior to offering or selling such New Preferred Stock. The Company
has agreed, pursuant to the Registration Agreement and subject to
certain specified limitations therein, to register or qualify the New
Preferred Stock for offer or sale under the securities or 'blue sky'
laws of such jurisdictions as may be necessary to permit the holders
of New Preferred Stock to trade the New Preferred Stock without any
material restrictions or limitations under the securities laws of the
several states of the United States.
Consequences of Failure to
Exchange Existing Preferred Stock....... Upon consummation of the Exchange Offer, subject to certain limited
exceptions, holders of Existing Preferred Stock who do not exchange
their Existing Preferred Stock for New Preferred Stock in the
Exchange Offer will no longer be entitled to registration rights
under the Registration Agreement and will not be able to offer or
sell their Existing Preferred Stock, unless such Existing Preferred
Stock is subsequently registered under the Securities Act (which,
subject to certain limited exceptions, the Company will have no
obligation to do), except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state
securities laws. See 'The Exchange Offer--Terms of the Exchange
Offer' and '--Consequences of Failure to Exchange.'
Expiration Date........................... 5:00 p.m., New York City time, on July 16, 1997 (30 calendar days
following the commencement of the Exchange Offer), 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.
Dividends on the New Preferred Stock...... The New Preferred Stock will accumulate dividends at a rate of
11 1/4% per annum from the last dividend payment date on which
dividends were paid on the shares of Existing Preferred Stock
surrendered in exchange therefor or, if no dividends have been paid,
from the Issue Date. Dividends on the New Preferred Stock are payable
on March 15 and September 15 of each year, commencing on September
15, 1997.
</TABLE>
4
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<TABLE>
<S> <C>
Conditions to the Exchange Offer The Exchange Offer is not conditioned upon any minimum principal
amount of Existing Preferred Stock being tendered for exchange.
However, the Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See 'The Exchange
Offer--Conditions.' Except for the requirements of applicable federal
and state securities laws, there are no federal or state regulatory
requirements to be complied with or obtained by the Company in
connection with the Exchange Offer.
Procedures for Tendering Existing
Preferred Stock......................... Each holder of Existing Preferred Stock wishing to accept the
Exchange Offer must complete, sign and date the 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, together with
any other required documentation to the Exchange Agent (as defined
herein) at the address set forth herein and effect a tender of
Existing Preferred Stock pursuant to the procedures for book-entry
transfer as provided for herein. See 'The Exchange Offer--Procedures
for Tendering' and '--Book Entry Transfer.'
Guaranteed Delivery Procedures............ Holders of Existing Preferred Stock who wish to tender their Existing
Preferred Stock and who cannot deliver their Existing Preferred Stock
and a properly completed Letter of Transmittal or any other documents
required by the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date may tender their Existing Preferred Stock
according to the guaranteed delivery procedures set forth in 'The
Exchange Offer--Guaranteed Delivery Procedures.'
Withdrawal Rights......................... Tenders of Existing Preferred Stock 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 Existing Preferred Stock, a written or facsimile
transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein under 'The Exchange Offer--
Exchange Agent' prior to 5:00 p.m., New York City time, on the
Expiration Date.
Acceptance of Existing Preferred Stock
and Delivery of New Preferred
Stock................................... Subject to certain conditions, any and all shares of Existing
Preferred Stock that are properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time, on the Expiration Date will
be accepted for exchange. The New Preferred Stock issued pursuant to
the Exchange Offer will be delivered promptly following the
Expiration Date. See 'The Exchange Offer--Terms of the Exchange
Offer.'
Certain U.S. Tax Consequences............. The exchange of Existing Preferred Stock for New Preferred Stock
should not constitute a taxable exchange for U.S. federal income tax
purposes. See 'Certain Federal Income Tax Considerations.'
Exchange Agent............................ United States Trust Company of New York is serving as exchange agent
(the 'Exchange Agent') in connection with the Exchange Offer.
</TABLE>
5
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<TABLE>
<S> <C>
Fees and Expenses......................... All expenses incident to the Company's consummation of the Exchange
Offer and compliance with the Registration Agreement will be borne by
the Company, other than certain commissions, if any, relating to a
holder's disposition of its shares of Existing Preferred Stock in
connection with the Exchange Offer. See 'The Exchange Offer--Fees and
Expenses.'
Use of Proceeds........................... There will be no cash proceeds payable to the Company from the
issuance of the New Preferred Stock pursuant to the Exchange Offer.
The proceeds from the sale of the Existing Preferred Stock were used
to fund a dividend to Lancer, which dividend was in turn used by
Lancer to redeem approximately $47.7 aggregate liquidation preference
of the Lancer Preferred Stock. See 'Use of Proceeds' and 'Related
Transactions.'
</TABLE>
SUMMARY OF TERMS OF NEW PREFERRED STOCK
The Exchange Offer relates to the exchange of up to $50,000,000 aggregate
liquidation preference of Existing Preferred Stock for an equal aggregate
liquidation preference of New Preferred Stock. Shares of New Preferred Stock
will be entitled to the benefits of a Certificate of Designation, the form and
terms of which are identical in all material respects to the form and terms of
the Certificate of Designation governing the Existing Preferred Stock, except
that (i) the shares of New Preferred Stock will have been registered under the
Securities Act, and thus will not bear restrictive legends restricting their
transfer pursuant to the Securities Act and (ii) holders of New Preferred Stock
will not be entitled to registration rights that holders of the Existing
Preferred Stock have under the Registration Agreement except under limited
circumstances. See 'Description of New Preferred Stock and Exchange Debentures.'
<TABLE>
<S> <C>
Liquidation Preference.................... $1,000 per share, plus accumulated and unpaid dividends.
Optional Redemption....................... The New Preferred Stock is redeemable, at the option of the Company,
in whole or in part, at any time on or after March 15, 2002, at the
redemption prices set forth herein, plus, without duplication,
accumulated and unpaid dividends to the date of redemption.
Mandatory Redemption...................... The Company is required, subject to certain conditions, to redeem all
of the New Preferred Stock outstanding on March 15, 2009, at a
redemption price equal to 100% of the liquidation preference thereof,
plus, without duplication, accumulated and unpaid dividends to the
date of redemption.
Dividends................................. The New Preferred Stock will pay dividends at a rate equal to 11 1/4%
per annum of the liquidation preference per share, payable semi-
annually beginning September 15, 1997 and accumulating from the last
dividend payment date on which dividends were paid on the shares of
Existing Preferred Stock surrendered in exchange therefor or, if no
dividends have been paid, from the Issue Date. The Company may, at
its option, pay dividends on any dividend payment date occurring on
or before March 15, 2002 either in cash or by the issuance of
additional shares of New Preferred Stock (including fractional
shares) having an aggregate liquidation preference equal to the
amount of such dividends (but not less than $1.00). See 'Risk
Factors--Certain Tax Considerations' and 'Certain Federal Income Tax
Considerations--Distributions on the New Preferred Stock.'
Dividend Payment Dates.................... March 15 and September 15, commencing September 15, 1997.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Voting.................................... The New Preferred Stock will be non-voting, except as otherwise
required by law and except in certain circumstances described herein,
including (i) amending certain rights of the holders of the New
Preferred Stock and (ii) the issuance of any class of equity
securities that ranks on a parity with or senior to the New Preferred
Stock. In addition, if the Company fails (i) to pay dividends after
March 15, 2002, in respect of three or more semi-annual dividend
periods (whether or not consecutive), (ii) to make a mandatory
redemption or a Change of Control Offer in the event of a Change of
Control occurring on or after July 2, 2001, or (iii) to comply with
certain covenants or fails to make certain payments on its
Indebtedness, holders of a majority of the outstanding shares of New
Preferred Stock, voting as a class, will be entitled to elect the
lesser of two directors or that number of directors constituting at
least 25% of the Company's board of directors (the 'Board of
Directors'). See 'Description of New Preferred Stock and Exchange
Debentures--The New Preferred Stock--Voting Rights.'
Exchange Provisions....................... The New Preferred Stock will be exchangeable at the option of the
Company, in whole but not in part, for the Exchange Debentures on any
scheduled dividend payment date occurring after the earlier of (i)
July 2, 2001 and (ii) the date on which all of the Existing Notes are
redeemed, subject to the satisfaction of certain conditions and
provided that such exchange is permitted pursuant to the terms of the
Company's Indebtedness then outstanding.
Ranking................................... The New Preferred Stock will rank senior in right of payment (with
respect to dividend rights and upon liquidation) to the common stock
of the Company and will, subject to the terms described herein, rank
senior to, on parity with, or junior to, other classes of preferred
stock issued by the Company from time to time. The New Preferred
Stock will rank junior in right of payment upon liquidation to all
existing and future Indebtedness of the Company, including, without
limitation, Indebtedness under the Credit Agreement and Indebtedness
in respect of the Existing Notes. As of December 31, 1996 and March
31, 1997, there would have been $118.0 million and approximately
$114.3 million, respectively of Indebtedness of the Company ranking
senior to the New Preferred Stock.
Change of Control......................... In the event of a Change of Control occurring on or after July 2,
2001, only if and only to the extent permitted by any other
Indebtedness of the Company then outstanding, the Company will offer
to redeem the outstanding shares of New Preferred Stock at a
redemption price equal to 101% of the liquidation preference thereof,
plus, without duplication, accumulated and unpaid dividends to the
date of purchase. In addition, upon the occurrence of a Change of
Control occurring prior to July 2, 2001, the Company will have the
option to offer to redeem the New Preferred Stock, in whole but not
in part, at a redemption price equal to 101% of the liquidation
preference thereof, plus, without duplication, accumulated and unpaid
dividends to the date of purchase. If a Change of Control occurs
prior to July 2, 2001 and the Company fails to make an offer to
redeem the New Preferred Stock, the annual dividend rate on the New
Preferred Stock will increase by 4.0% over the then-applicable annual
dividend rate. There can be no assurance
</TABLE>
7
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<TABLE>
<S> <C>
that the Company would be permitted to purchase the New Preferred
Stock upon a Change of Control, that the Company would have
sufficient funds for any such purchase or that the Company would be
able to obtain financing for any such purchase on favorable terms, if
at all. See 'Risk Factors--Change of Control' and 'Description of New
Preferred Stock and Exchange Debentures--The New Preferred
Stock--Change of Control.'
Certain Restrictive Provisions............ The Certificate of Designation governing the New Preferred Stock will
contain restrictive provisions that, among other things, limit the
ability of the Company and its subsidiaries to incur additional
Indebtedness, pay dividends or make certain other restricted
payments, enter into transactions with affiliates, merge or
consolidate with or sell all or substantially all of their assets to
any other person or issue additional preferred stock that ranks on a
parity with or senior to the New Preferred Stock. See 'Description of
New Preferred Stock and Exchange Debentures--The New Preferred
Stock--Certain Covenants.' These restrictive provisions have a number
of important exceptions, including with respect to the New Equity
Incentive Plan (as defined) for senior management. See
'Management--New Equity Incentive Plan.'
THE EXCHANGE DEBENTURES
Issue..................................... 11 1/4% Subordinated Exchange Debentures due 2009 issuable in
exchange for the New Preferred Stock in an aggregate principal amount
equal to the liquidation preference of the New Preferred Stock, plus,
without duplication, accumulated and unpaid dividends to the date
fixed for the exchange thereof (the 'Exchange Date'), plus any
additional Exchange Debentures issued from time to time in lieu of
cash interest.
Maturity.................................. March 15, 2009.
Interest Rate and Payment Dates........... The Exchange Debentures will bear interest at a rate of 11 1/4% per
annum. Interest will accrue from the most recent interest payment
date to which interest has been paid or provided for or, if no
interest has been paid or provided for, from the Exchange Date.
Interest will be payable semi-annually in cash (or, at the option of
the Company, on or prior to March 15, 2002, in additional Exchange
Debentures in an aggregate principal amount equal to the amount at
such interest payment (including, in the case of interest payments or
portions thereof of less than $1,000.00 but greater than $1.00, by
issuing Exchange Debentures of less than $1,000.00) in arrears on
each March 15 and September 15, commencing with the first such date
after the Exchange Date. See 'Risk Factors--Certain Tax
Considerations' and 'Certain Federal Income Tax Considerations--
Taxation of Stated Interest and Original Issue Discount on Exchange
Debentures.'
Optional Redemption....................... The Exchange Debentures are redeemable, at the option of the Company,
in whole or in part, at any time on or after March 15, 2002 at the
redemption prices set forth herein, plus accrued and unpaid interest
to the date of redemption.
Ranking................................... The Exchange Debentures will be unsecured subordinated obligations of
the Company, subordinated to all existing and future Senior Debt of
</TABLE>
8
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<S> <C>
the Company, including, without limitation, Indebtedness under the
Credit Agreement. In addition, the Exchange Debentures will be
effectively subordinated to all existing and future Indebtedness of
the Company's subsidiaries. The Exchange Debentures will rank pari
passu or senior to any class or series of Indebtedness that expressly
provides that it ranks pari passu or subordinate to the Exchange
Debentures, as the case may be. As of December 31, 1996, there would
have been $118.0 million of Indebtedness of the Company ranking
senior to the Exchange Debentures.
Change of Control......................... In the event of a Change of Control occurring on or after July 2,
2001, only if and to the extent permitted by any Senior Debt of the
Company then outstanding, the Company will offer to redeem all
outstanding Exchange Debentures at a redemption price equal to 101%
of the principal amount thereof, plus accrued and unpaid interest to
the date of purchase. In addition, upon the occurrence of a Change of
Control occurring prior to July 2, 2001, the Company will have the
option to offer to redeem the Exchange Debentures, in whole but not
in part, at a redemption price equal to 101% of the principal amount
thereof, plus, without duplication, accrued and unpaid interest to
the date of purchase. If a Change of Control occurs prior to July 2,
2001 and the Company fails to make an offer to redeem the Exchange
Debentures in accordance with the terms of the Indenture governing
the Exchange Debentures (the 'Exchange Indenture'), the annual
interest rate on the Exchange Debentures will increase by 4.0% over
the then-applicable interest rate. There can be no assurance that the
Company would be permitted to purchase the Exchange Debentures upon a
Change of Control, that the Company would have sufficient funds for
any such purchase or that the Company would be able to obtain
financing for any such purchase on favorable terms, if at all. See
'Risk Factors--Change of Control' and 'Description of New Preferred
Stock and Exchange Debentures--The Exchange Debentures--Change of
Control.'
Certain Covenants......................... The Exchange Indenture will contain certain covenants that, among
other things, limit the ability of the Company and its subsidiaries
to incur additional Indebtedness, pay dividends or make certain other
restricted payments, sell assets, enter into certain transactions
with affiliates, merge or consolidate with or sell all or
substantially all of their assets to any other person or, in the case
of the Company's subsidiaries, to issue preferred stock or become
guarantors. See 'Description of New Preferred Stock and Exchange
Debentures--The Exchange Debentures--Certain Covenants.' These
covenants have a number of important exceptions, including with
respect to the New Equity Incentive Plan for senior management. See
'Management--New Equity Incentive Plan.'
</TABLE>
RISK FACTORS
Prospective purchasers of the New Preferred Stock should carefully consider
all of the information set forth in this Prospectus and, in particular, should
evaluate the specific factors under 'Risk Factors' for risks involved with an
investment in the New Preferred Stock.
9
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following summary historical financial information for the Company for
the five years ended December 31, 1996 has been derived from the audited
consolidated financial information for the Company for such periods. The
information for the three-month periods ended March 31, 1996 and March 31, 1997
is unaudited, but in the opinion of the Company reflects all adjustments
necessary for a fair presentation of such data. The results of operations for
the three-month period ended March 31, 1997 are not necessarily indicative of
results of operations for the 1997 fiscal year. The following summary financial
data should be read in conjunction with 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' and the Consolidated Financial
Statements and the notes thereto of the Company which are contained elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................ $108,613 $124,779 $150,689 $ 192,111 $ 195,205 $ 51,340 $ 49,235
Cost of sales........................ 90,583 103,603 123,092 151,890 158,668 41,675 39,852
Selling, general and administrative
expenses........................... 12,451 12,323 15,924 14,759 16,868 4,038 4,218
-------- -------- -------- --------- --------- -------- --------
Operating income..................... 5,579 8,853 11,673 25,462 19,669 5,627 5,165
Interest expense, net................ 11,493 11,345 12,377 12,905 11,930 3,070 3,231
Other expense, net................... 136 227 199 127 90 21 20
-------- -------- -------- --------- --------- -------- --------
Income (loss) before income taxes,
extraordinary item and cumulative
effect of change in accounting
principle.......................... (6,050) (2,719) (903) 12,430 7,649 2,536 1,914
Provision (benefit) for income
taxes.............................. (1,898) (935) (164) 5,520 3,730 983 940
-------- -------- -------- --------- --------- -------- --------
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle..... (4,152) (1,784) (739) 6,910 3,919 1,553 974
Extraordinary loss on early
extinguishment of debt,
net of tax(1)...................... -- (4,455) -- -- -- -- --
Cumulative effect of change in
accounting principle, net of
tax(2)............................. -- (4,625) (1,554) -- -- -- --
-------- -------- -------- --------- --------- -------- --------
Net income (loss).................... $ (4,152) $(10,864) $ (2,293) $ 6,910 $ 3,919 $ 1,553 $ 974
-------- -------- -------- --------- --------- -------- --------
-------- -------- -------- --------- --------- -------- --------
OTHER DATA:
EBITDA(3)............................ $ 17,774 $ 19,475 $ 22,621 $ 36,971 $ 32,016 $ 8,769 $ 8,349
Depreciation......................... 10,724 9,242 9,540 10,027 10,830 2,763 2,803
Amortization(4)...................... 3,037 2,604 2,310 2,245 2,277 400 401
Cash interest expense, net(5)........ 10,063 10,348 11,674 12,269 11,260 2,915 3,060
Capital expenditures................. 3,151 4,145 9,164 15,090 9,986 2,984 2,081
CASH FLOW FROM:
Operations........................... $ 8,324 $ 1,611 $ 9,590 $ 13,856 $ 23,174 $ 7,330 $ (299)
Investing............................ (3,151) (4,073) (9,164) (11,645) (7,720) (2,681) (486)
Financing............................ (3,939) 4,615 (5,434) 663 (13,593) (8,871) (3,686)
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA(6)
---------------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
<S> <C> <C>
EBITDA....................................... $32,016 $8,349
Preferred stock dividends(7)................. 5,625 1,406
Ratio of EBITDA to cash interest expense,
net(8)..................................... 2.8x 2.7x
Ratio of EBITDA to cash interest expense, net
and preferred stock dividends(9)........... 1.9x 1.9x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
------------------------
ACTUAL ADJUSTED(10) AS OF MARCH 31, 1997
-------- ------------ -----------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................................. $ 12,123 $ 12,080 $ 9,530
Total assets..................................................... 176,370 176,327 173,808
Long-term debt (including current maturities).................... 118,000 118,000 114,250
Redeemable preferred stock....................................... -- 47,700 47,707
Stockholder's equity (deficit)................................... (4,570) (52,313) (51,230)
(see footnotes on the following page)
</TABLE>
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NOTES TO SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
(1) During 1993, the Company recorded an extraordinary loss of $4.5 million,
net of tax, relating to the early extinguishment, and refinancing of, the
outstanding debt at June 30, 1993.
(2) During 1993, the Company recorded a one-time non-cash charge of $4.6
million, net of tax, relating to the cumulative effect of adopting
Statement of Financial Accounting Standard No. 106, 'Employers Accounting
for Postretirement Benefits Other Than Pensions.' During 1994, the Company
recorded a one-time non-cash charge of $1.6 million, net of tax, relating
to the cumulative effect of adopting Statement of Financial Accounting
Standard No. 112, 'Employers Accounting for Postemployment Benefits.'
(3) EBITDA represents income (loss) before income taxes, extraordinary item and
cumulative effect of a change in accounting principle, interest expense,
net, depreciation and amortization. Although EBITDA is not a measure of
performance under generally accepted accounting principles, the Company has
presented EBITDA because it is commonly used by investors and analysts to
analyze and compare companies on the basis of operating performance and to
determine a company's ability to service debt. Nevertheless, EBITDA should
not be considered in isolation or as a substitute for income from
operations, net income, cash flow from operating activities or any other
measure under generally accepted accounting principles for determining the
Company's operating performance, financial position and cash flows. In
addition, since companies and analysts may measure EBITDA in different
ways, the Company's EBITDA figures may not be comparable to
similarly-titled measures employed by other companies and analysts.
(4) Includes the amortization of deferred financing costs and the amortization
of the excess of investment over net assets acquired.
(5) Cash interest expense, net includes interest income, but excludes
amortization of deferred financing costs of $1.4 million for fiscal 1992,
$1.0 million for fiscal 1993, $0.7 million for fiscal 1994, $0.6 million
for fiscal 1995, $0.2 million for the three months ended March 31, 1996,
$0.7 million for fiscal 1996 and $0.2 million for the three months ended
March 31, 1997.
(6) Pro forma giving effect to the Initial Offering as if such event had
occurred on January 1, 1996.
(7) Dividends on the New Preferred Stock based on a dividend rate of 11 1/4%
per annum, payable semi-annually.
(8) The Company has presented the ratio of the Company's EBITDA to its net cash
interest expense because this ratio is commonly used by investors and
analysts to analyze and compare companies on the basis of their ability to
meet their debt service obligations. This ratio should not be considered in
isolation or as a substitute for income from operations, net income, cash
flow from operating activities or any other measures under generally
accepted accounting principles for determining the Company's ability to
meet its debt service obligations. In addition, since companies and
analysts may measure this ratio in different ways, the Company's ratio may
not be comparable to similarly-titled measures employed by other companies
and analysts.
(9) The Company has presented the ratio of the Company's EBITDA to its net cash
interest expense and preferred stock dividends because this ratio is
commonly used by investors and analysts to analyze and compare companies on
the basis of their ability to meet their debt service and preferred stock
dividend obligations. This ratio should not be considered in isolation or
as a substitute for income from operations, net income, cash flow from
operating activities or any other measures under generally accepted
accounting principles for determining the Company's ability to meet its
debt service and preferred stock dividend obligations. In addition, since
companies and analysts may measure this ratio in different ways, the
Company's ratio may not be comparable to similarly-titled measures employed
by other companies and analysts.
(10) Adjusted to give effect to the Initial Offering as if such event had
occurred on December 31, 1996.
11
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, before
tendering their Existing Preferred Stock for the New Preferred Stock, holders of
Existing Preferred Stock should consider carefully the following factors, which
are generally applicable to the Existing Preferred Stock and the New Preferred
Stock.
LEVERAGE
The Company currently has a significant amount of outstanding indebtedness.
As of December 31, 1996 and March 31, 1997, the Company had total outstanding
indebtedness of $118.0 million and approximately $114.3 million, respectively,
ranking senior to the New Preferred Stock. See 'Capitalization.' The Company's
ability to make scheduled payments of principal or interest on, or to refinance,
its indebtedness depends on its future operating performance, which is subject
to economic, financial, competitive and other factors beyond its control.
The degree to which the Company is leveraged could have important
consequences to holders of New Preferred Stock, including: (i) the Company's
increased vulnerability to adverse general economic and industry conditions;
(ii) the Company's impaired ability to obtain additional financing for future
working capital, capital expenditures, acquisitions, general corporate purposes
or other purposes; (iii) the dedication of a substantial portion of the
Company's cash flow from operations to the payment of principal and interest on
indebtedness, thereby reducing the funds available for operations and future
business opportunities; (iv) all of the Company's borrowings under the Credit
Agreement are at variable rates of interest, which could cause the Company to be
vulnerable to increases in interest rates (a one percentage point increase in
the interest rate under the Credit Agreement would increase the Company's annual
interest expense thereunder by approximately $0.3 million, based on outstanding
indebtedness of $33.0 million); and (v) all of the indebtedness incurred in
connection with the Credit Agreement and the Company's 11 3/8% Senior
Subordinated Notes due July 1, 2001 (the 'Existing Notes') would become due
prior to the Company's ability to pay cash dividends on, and satisfy its
redemption obligations in respect of, the New Preferred Stock. In addition, the
Credit Agreement and the indenture governing the Existing Notes (the 'Existing
Indenture') contain certain covenants which could limit the Company's operating
and financial flexibility. See 'Description of Existing Indebtedness--GE Credit
Agreement' and 'Description of Existing Indebtedness--Senior Subordinated
Notes.'
The Company's ability to pay cash dividends on, and satisfy its redemption
obligations in respect of, the New Preferred Stock will depend upon its future
operating performance, which will be affected by prevailing economic conditions
and financial, business and other factors, many of which are beyond its control.
The Company expects that its operating cash flow will be sufficient to meet its
operating expenses and to service its debt requirements as they become due. If
the Company is unable to service its indebtedness, whether upon acceleration of
such indebtedness or in the ordinary course of business, it will be forced to
adopt an alternative strategy that may include actions such as reducing or
delaying capital expenditures, selling assets, restructuring or refinancing its
indebtedness or seeking additional equity capital. There can be no assurance
that any of these strategies could be effected on satisfactory terms, if at all,
and the implementation of any of these alternative strategies could have a
negative impact on the value of the New Preferred Stock. In the event of a
liquidation of the Company, the New Preferred Stock would be subordinated in
right of payment to the Company's indebtedness then outstanding and any
preferred stock ranking senior to the New Preferred Stock then outstanding which
was issued in accordance with the terms of the Certificate of Designation. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
LIMITATIONS ON ABILITY TO PAY DIVIDENDS
The Credit Agreement and the Existing Indenture limit the payment of cash
dividends on the New Preferred Stock. For all dividend payment dates through and
including March 15, 2002, the Company may, at its option, pay dividends either
in cash or by the issuance of additional shares of New Preferred Stock
(including fractional shares) having an aggregate liquidation preference equal
to the amount of such dividends (but not less than $1.00). If after March 15,
2002, the Company is in arrears in the payment of cash dividends for three or
more
12
<PAGE>
semi-annual dividend periods, the holders of the New Preferred Stock will be
permitted to elect the lesser of two directors or that number of directors
constituting 25% of the Board of Directors of the Company.
In addition to the limitations imposed on the payment of dividends by the
Credit Agreement and the Existing Indenture, under Delaware law the Company is
permitted to pay dividends on its capital stock, including the New Preferred
Stock, only out of its surplus or, in the event that it has no surplus, out of
its net profits for the year in which a dividend is declared or for the
immediately preceding fiscal year. Surplus is defined as the excess of a
company's total assets over the sum of its total liabilities plus the par value
of its outstanding capital stock. In order to pay dividends in cash, the Company
must have surplus or net profits equal to the full amount of the cash dividend
at the time such dividend is declared.
In determining the Company's ability to pay dividends, Delaware law permits
the Board of Directors of the Company to revalue the Company's assets and
liabilities from time to time to their fair market values in order to create
surplus. The Company cannot predict what the value of its assets or the amount
of its liabilities will be in the future and, accordingly, there can be no
assurance that the Company will be able to pay cash dividends on the New
Preferred Stock.
RANKING OF THE NEW PREFERRED STOCK; SUBORDINATION OF EXCHANGE DEBENTURES
The New Preferred Stock will rank junior in right of payment upon
liquidation to all existing and future Indebtedness of the Company, including,
without limitation, Indebtedness under the Credit Agreement and Indebtedness in
respect of the Existing Notes. The New Preferred Stock will rank senior in right
of payment upon liquidation to the common stock of the Company, the only other
class of equity security of the Company which will be outstanding upon
consummation of the Offering. The payment of principal, premium, if any, and
interest on, and any other amounts owing in respect of, the Exchange Debentures,
if issued, will be subordinated to the prior payment in full of all existing and
future Senior Debt of the Company. In addition, the Exchange Debentures will be
effectively subordinated to all existing and future Indebtedness of the
Company's subsidiaries. As of December 31, 1996 and March 31, 1997, $118.0
million and approximately $114.3 million, respectively, of Senior Debt was
outstanding (represented by Indebtedness under the Credit Agreement and the
Existing Notes) and $20.0 million would have been available for borrowing under
the Credit Agreement as of such dates. In the event of the bankruptcy,
liquidation, dissolution, reorganization or other winding up of the Company, the
assets of the Company will be available to pay obligations on the Exchange
Debentures only after all Senior Debt has been paid in full, and there may not
be sufficient assets remaining to pay amounts due on any or all of the Exchange
Debentures. In addition, under certain circumstances, the Company may not pay
principal of, premium, if any, or interest on, or any other amounts owing in
respect of, the Exchange Debentures, or purchase, redeem or otherwise retire the
Exchange Debentures, if a payment default or a non-payment default exists with
respect to certain Senior Debt. See 'Description of the New Preferred Stock and
Exchange Debentures--The Exchange Debentures--Subordination.'
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Credit Agreement and the Existing Indenture each contain certain
covenants that restrict, among other things, the Company's ability to incur
additional indebtedness, incur liens, make investments, pay dividends or make
certain other restricted payments, consummate certain asset sales, consolidate
with any other person or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of the assets of the Company. The Credit
Agreement also requires the Company to maintain certain financial ratios. The
Company's ability to meet these financial ratios may be affected by events
beyond its control, and there can be no assurance that they will be met. A
breach of any of these covenants could result in an event of default under the
Credit Agreement or the Existing Indenture. In addition, (i) the Company's
failure to pay when due, upon acceleration or otherwise, $3 million or more of
indebtedness (including indebtedness under the Existing Indenture) will result
in an event of default under the Credit Agreement and (ii) the Company's failure
to pay when due, upon acceleration or otherwise, $5 million or more of other
indebtedness (including indebtedness under the Credit Agreement) will result in
an event of default under the Existing Indenture. Upon the occurrence of an
event of default under the Credit Agreement or the Existing Indenture, the
lenders or holders thereunder could elect to declare all amounts outstanding
thereunder, together with accrued interest, to be immediately due and payable.
In the event that indebtedness under the Credit Agreement or the Existing
Indenture were to be accelerated, it is unlikely the
13
<PAGE>
Company would have sufficient funds available to repay such indebtedness and any
other borrowed money indebtedness of the Company which became due and payable.
In the case of the Credit Agreement, if the Company were unable to repay those
amounts, the lenders thereunder could proceed against the collateral granted to
them to secure that indebtedness. If the Credit Agreement indebtedness were to
be accelerated, there can be no assurance that the assets of the Company would
be sufficient to repay in full that indebtedness and the other indebtedness of
the Company. Substantially all of the assets of the Company have been pledged as
security under the Credit Agreement. See 'Description of Existing
Indebtedness--GE Credit Agreement .'
CONTROLLING STOCKHOLDERS
All of the outstanding shares of common stock of the Company are owned by
Lancer. A majority of Lancer's voting stock is owned by the Lancer Employee
Stock Ownership Plan (the 'ESOP'). Two participants in the ESOP, Messrs. Peter
A. Joseph and Paul S. Levy, collectively have the power to direct the voting of
approximately 46.8% of Lancer's common stock. In addition, each of Messrs.
Joseph and Levy have the right to purchase an aggregate of approximately 3.0% of
Lancer's common stock. As a result, these two individuals have the ability to
exercise control over the current and future business and affairs of the
Company, including the ability to cause or prevent a change of control of the
Company, through their ability to elect the Company's Board of Directors and
their voting power with respect to actions requiring stockholder approval. See
'Ownership of Capital Stock.'
FRAUDULENT CONVEYANCE
Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be utilized by a court to subordinate or avoid the Exchange
Debentures, if issued, in favor of other existing or future creditors of the
Company. If a court, in a lawsuit on behalf of any unpaid creditor of the
Company or a representative of the Company's creditors, were to find that, at
the time the Company issued the Exchange Debentures, the Company (x) intended to
hinder, delay or defraud any existing or future creditor or contemplated
insolvency with a design to prefer one or more creditors to the exclusion in
whole or in part of others or (y) did not receive fair consideration or
reasonably equivalent value for issuing such Exchange Debentures and the Company
(i) was insolvent, (ii) was rendered insolvent by reason of such issuance, (iii)
was engaged or about to engage in a business or transaction for which its
remaining assets constituted unreasonably small capital to carry on its business
or (iv) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, such court could void the Company's
obligations under the Exchange Debentures and void such transactions.
Alternatively, in such event, claims of the holders of such Exchange Debentures
could be subordinated to claims of the other creditors of the Company.
CHANGE OF CONTROL
The Company is not required to make a Change of Control Offer with respect
to the New Preferred Stock to the extent a Change of Control occurs prior to
July 2, 2001. However, in the event that a Change of Control occurs prior to
July 2, 2001, the Company will have the option to offer to redeem the New
Preferred Stock, in whole but not in part, at a redemption price equal to 101%
of the liquidation preference thereof, plus, without duplication, accumulated
and unpaid dividends to the date of purchase. If a Change of Control occurs
prior to July 2, 2001 and the Company fails to make an offer to redeem the New
Preferred Stock, the annual dividend rate on the New Preferred Stock will
increase by 4.0% over the then-applicable annual dividend rate. Any offer to
redeem the New Preferred Stock upon a Change of Control will be subject to the
terms of the Credit Agreement (which prohibits the Company from repurchasing
shares of New Preferred Stock) and the Existing Indenture (which limits the
amount (if any) of New Preferred Stock that may be purchased by the Company).
Future debt instruments of the Company are likely to contain similar
prohibitions or restrictions. Accordingly, there can be no assurance that the
Company would be permitted to make an optional offer to purchase shares of New
Preferred Stock upon a Change of Control.
A 'change of control' (as defined in the Credit Agreement) constitutes an
event of default under the Credit Agreement. Upon the occurrence of a 'change of
control' (as defined in the Existing Indenture), the Company will be required,
subject to certain conditions, to make an offer to purchase all outstanding
Existing Notes at a price equal to 101% of the principal amount thereof plus
accrued and unpaid interest to the date of purchase. See
14
<PAGE>
'Description of Existing Indebtedness--Senior Subordinated Notes.' An event
constituting a Change of Control will also constitute a 'change of control' for
purposes of the Credit Agreement and the Existing Indenture. There can be no
assurance that in the event of any such change of control, the Company will have
sufficient funds to repay its Indebtedness under the Credit Agreement and pay
the required purchase price for all Existing Notes tendered by holders thereof
and, if the Company were to elect to make an offer to redeem shares of the New
Preferred Stock, all shares of the New Preferred Stock tendered by holders
thereof, or that the Company would be able to obtain financing for such purpose
on favorable terms, if at all.
LACK OF ESTABLISHED MARKET FOR THE NEW PREFERRED STOCK AND THE EXCHANGE
DEBENTURES
There has not previously been any public market for the New Preferred Stock
or the Exchange Debentures. The Company does not intend to list such securities
on any securities exchange or to seek approval for quotation through any
automated quotation system. Accordingly, no assurance can be given as to (i) the
likelihood that an active market for such securities will develop, (ii) the
liquidity of any such market, (iii) the ability of holders to sell such
securities or (iv) the prices that they may obtain for such securities upon any
sale. Future trading prices for such securities will depend upon many factors,
including, among others, the Company's operating results, the market for similar
securities and fluctuating interest rates.
PROPOSED TAX LAW CHANGES
The Clinton Administration's Budget Proposal for fiscal year 1998, released
February 6, 1997, proposed certain tax law changes that would, among other
things, (i) reduce the dividends received deduction available to corporate U.S.
Holders (as defined) from 70% to 50% of dividends received with respect to
dividends paid or accrued more than 30 days after the date of enactment of
legislation, (ii) require a corporate U.S. Holder to satisfy the holding period
required by section 246(c) of the Internal Revenue Code of 1986, as amended (the
'Code'), immediately before or immediately after the U.S. Holder becomes
entitled to receive any dividend with respect to dividends paid or accrued more
than 30 days after the date of enactment of legislation and (iii) require
immediate recognition or gain under section 1059 of the Code to the extent a
corporate U.S. Holder's tax basis with respect to which any extraordinary
dividend is received is reduced below zero with respect to distributions after
September 13, 1995. On June 9, 1997, the Chairman of the House Committee on
Ways and Means introduced a legislative proposal which included the proposed
tax law changes described in (ii) and (iii) above. It is not clear whether any
such proposals will be enacted or, if enacted, whether they will be enacted in
the form proposed. See 'Certain Federal Income Tax Considerations.'
SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS
The Company's revenues and results of operations will be subject to
fluctuations based upon general economic conditions. If there were to be a
general economic downturn or a recession in the United States or certain other
markets, the Company believes that certain of its customers may reduce or delay
their demand for the Company's products which may have a negative effect on the
Company's revenues. 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 negatively 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 growth in the markets for
the Company's products will occur or that such growth will result in increased
demand for the Company's products.
LABOR RELATIONS
Approximately 83% of the Company's employees are unionized. The collective
bargaining agreement between the Company and UAW-Local 2317 was ratified in
October 1995 and will expire in October 1998. Although the Company believes its
relations with its employees are satisfactory, a dispute between the Company and
its employees could have a material adverse effect on the Company's business,
financial condition and operating results.
15
<PAGE>
COMPETITION
The industry in which the Company operates is highly competitive. The
Company's custom gear business competes primarily with major domestic
manufacturers, regional domestic manufacturers, foreign producers and captive
gear manufacturers. The Company's planetary gear business competes primarily
with several large competitors and a large number of relatively small suppliers.
There can be no assurance that the Company's products will compete successfully
with those of its competitors or that the Company would be able to maintain its
operating margins if the competitive environment changes.
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'). Because Environmental Laws frequently
are revised and supplemented, with a trend towards greater stringency,
expenditures for compliance responsibilities are difficult to estimate and may
exceed anticipated costs. The Company believes that compliance with existing and
publicly proposed Environmental Laws and the resolution of known environmental
liabilities associated with waste disposal and releases will not have a material
adverse effect on its business, financial condition or operating results.
However, future events, such as changes in existing Environmental Laws or their
interpretation and more rigorous enforcement policies of regulatory agencies,
may give rise to additional expenditures or liabilities that could be material.
See 'Business--Environmental Matters.'
CERTAIN TAX CONSIDERATIONS
Distributions on the New Preferred Stock made out of the Company's current
or accumulated earnings and profits, as determined under U.S. federal income tax
principles, will be taxable as ordinary dividend income whether paid in cash or
in additional shares of New Preferred Stock. In addition, holders may be
required to treat a portion of the difference between the redemption price and
issue price of the New Preferred Stock ('Preferred Stock Discount') as
constructive distributions that are includible in income on an economic accrual
basis. If shares of New Preferred Stock (including additional shares of New
Preferred Stock distributed by the Company in lieu of cash dividend payments)
bear Preferred Stock Discount, such shares generally will have different tax
characteristics than other shares of New Preferred Stock and might trade
separately, which might adversely affect the liquidity of such shares. See
'Certain Federal Income Tax Considerations--Preferred Stock Discount.'
Holders should also note that if shares of New Preferred Stock are
exchanged for Exchange Debentures and the stated redemption price at maturity of
such Exchange Debentures exceeds their issue price by more than a de minimis
amount, the Exchange Debentures will be treated as having original issue
discount equal to the entire amount of such excess. Exchange Debentures issued
on or before March 15, 2002, when the Company has the option to pay interest on
the Exchange Debentures in additional Exchange Debentures, will have original
issue discount. Each holder of Exchange Debentures with original issue discount
will be required to include in gross income an amount equal to the sum of the
'daily portions' of the original issue discount for all days during the taxable
year in which such holder holds the Exchange Debentures, regardless of the
holder's regular method of accounting and regardless of whether interest is paid
by the Company in cash or in additional Exchange Debentures. See 'Certain
Federal Income Tax Considerations--Original Issue Discount' and 'Certain Federal
Income Tax Considerations--Taxation of Stated Interest and Original Issue
Discount on Exchange Debentures.'
For a discussion of these and other relevant tax issues, see 'Certain
Federal Income Tax Considerations.'
16
<PAGE>
USE OF PROCEEDS
There will be no cash proceeds payable to the Company from the issuance of
the New Preferred Stock pursuant to the Exchange Offer. The net proceeds to the
Company from the sale of the Existing Preferred Stock were used to fund a
dividend to Lancer, which dividend was used by Lancer to redeem approximately
$47.7 million of Lancer Preferred Stock.
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of March 31, 1997. 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 Memorandum.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
--------------------
<S> <C>
Total long-term debt, including current portion:
Credit Facilities(1)................................................... $ 29,250
Existing Notes......................................................... 85,000
-----------
Total long-term debt................................................ 114,250
New Preferred Stock(2)................................................... 47,707
Stockholder's equity (deficit):
Common stock, par value $.01 per share (10,000,000 shares authorized,
7,857,000 shares issued and outstanding)............................ 79
Additional paid-in capital............................................. 37,196
Accumulated deficit.................................................... (88,505)
-----------
Total common stockholder's equity (deficit)......................... (51,230)
-----------
Total capitalization................................................ $110,727
-----------
-----------
</TABLE>
- ------------------
(1) As of March 31, 1997, the Credit Facilities (as defined) consisted of $29.3
million in term loans and a $20.0 million revolving credit facility.
Advances under the revolving credit facility are subject to borrowing base
availability. As of March 31, 1997, total borrowings under the Credit
Facilities were approximately $29.3 million, comprising approximately $29.3
million in term loans and no borrowings under the revolving credit facility.
See 'Description of Indebtedness--GE Credit Agreement.'
(2) Represents net proceeds to the Company from the Initial Offering after
deduction for approximately $2.3 million in estimated costs and expenses
relating to the Initial Offering.
17
<PAGE>
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following selected historical and pro forma financial information for
the Company for the five years ended December 31, 1996 has been derived from the
audited consolidated financial information for the Company for such periods. The
information for the three-month periods ended March 31, 1996 and March 31, 1997
is unaudited, but in the opinion of the Company reflects all adjustments
necessary for a fair presentation of such data. The results of operations for
the three-month period ended March 31, 1997 are not necessarily indicative of
results of operations for the 1997 fiscal year. The following selected financial
data should be read in conjunction with 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' and the Consolidated Financial
Statements and the notes thereto of the Company which are contained elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
--------------------------------------------------------------- ------------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $ 108,613 $ 124,779 $ 150,689 $ 192,111 $ 195,205 $ 51,340 $ 49,235
Cost of sales......................... 90,583 103,603 123,092 151,890 158,668 41,675 39,852
Selling, general and administrative
expenses............................ 12,451 12,323 15,924 14,759 16,868 4,038 4,218
---------- ---------- ---------- ---------- ----------- ---------- ----------
Operating income...................... 5,579 8,853 11,673 25,462 19,669 5,627 5,165
Interest expense, net................. 11,493 11,345 12,377 12,905 11,930 3,070 3,231
Other expense, net.................... 136 227 199 127 90 21 20
---------- ---------- ---------- ---------- ----------- ---------- ----------
Income (loss) before income taxes,
extraordinary item and cumulative
effect of change in accounting
principle........................... (6,050) (2,719) (903) 12,430 7,649 2,536 1,914
Provision (benefit) for income
taxes............................... (1,898) (935) (164) 5,520 3,730 983 940
---------- ---------- ---------- ---------- ----------- ---------- ----------
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle............. (4,152) (1,784) (739) 6,910 3,919 1,553 974
Extraordinary loss on early
extinguishment of debt, net of
tax(1).............................. -- (4,455) -- -- -- -- --
Cumulative effect of change in
accounting principle, net of
tax(2).............................. -- (4,625) (1,554) -- -- -- --
---------- ---------- ---------- ---------- ----------- ---------- ----------
Net income (loss)..................... $ (4,152) $ (10,864) $ (2,293) $ 6,910 $ 3,919 $ 1,553 $ 974
---------- ---------- ---------- ---------- ----------- ---------- ----------
---------- ---------- ---------- ---------- ----------- ---------- ----------
Net income (loss) per common share.... $ (2.01) $ (3.65) $ (0.77) $ 1.15 $ 0.51 $ 0.20 $ 0.09
Dividend declared per common share.... -- 0.67 -- -- 2.19 -- 6.50
Weighted average common shares
outstanding......................... 2,064,303 2,976,471 2,976,471 6,018,072 7,726,557 7,676,275 7,805,604
OTHER DATA:
EBITDA(3)............................. $ 17,774 $ 19,475 $ 22,621 $ 36,971 $ 32,016 $ 8,769 $ 8,349
Depreciation.......................... 10,724 9,242 9,540 10,027 10,830 2,763 2,803
Amortization(4)....................... 3,037 2,604 2,310 2,245 2,277 400 401
Cash interest expense, net(5)......... 10,063 10,348 11,674 12,269 11,260 2,915 3,060
Capital expenditures.................. 3,151 4,145 9,164 15,090 9,986 2,984 2,081
Ratio of earnings to combined fixed
charges(6).......................... -- -- -- 2.0x 1.6 x 1.8x 1.6x
CASH FLOW FROM:
Operations............................ 8,324 1,611 9,590 13,856 23,174 7,330 (299)
Investing............................. (3,151) (4,073) (9,164) (11,645) (7,720) (2,681) (486)
Financing............................. (3,939) 4,615 (5,434) 663 (13,593) (8,871) (3,686)
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA(7)
--------------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
<S> <C> <C>
EBITDA...................................................................... $ 32,016 $ 8,349
Pro forma preferred stock dividends(8)...................................... 5,625 1,406
Ratio of EBITDA to cash interest expense, net(8)............................ 2.8x 2.7x
Ratio of EBITDA to cash interest expense, net and preferred stock
dividends(9).............................................................. 1.9x 1.9x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF MARCH 31, 1997
--------------------------- --------------------
ACTUAL ADJUSTED(10)
------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................................................ $ 12,123 $ 12.080 $ 9,530
Total assets................................................................... 176,370 176,327 173,808
Long-term debt (including current maturities).................................. 118,000 118,000 114,250
Redeemable preferred stock..................................................... -- 47,700 47,707
Stockholder's equity (deficit)................................................. (4,570) (52,313) (51,230)
</TABLE>
(see footnotes on the following page)
18
<PAGE>
NOTES TO SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
(1) During 1993, the Company recorded an extraordinary loss of $4.5 million, net
of tax, relating to the early extinguishment, and refinancing of, the
outstanding debt at June 30, 1993.
(2) During 1993, the Company recorded a one-time non-cash charge of $4.6
million, net of tax, relating to the cumulative effect of adopting Statement
of Financial Accounting Standard No. 106, 'Employers Accounting for
Postretirement Benefits Other Than Pensions.' During 1994, the Company
recorded a one-time non-cash charge of $1.6 million, net of tax, relating to
the cumulative effect of adopting Statement of Financial Accounting Standard
No. 112, 'Employers Accounting for Postemployment Benefits.'
(3) EBITDA represents income (loss) before income taxes, extraordinary item and
cumulative effect of a change in accounting principle, interest expense,
net, depreciation and amortization. Although EBITDA is not a measure of
performance under generally accepted accounting principles, the Company has
presented EBITDA because it is commonly used by investors and analysts to
analyze and compare companies on the basis of operating performance and to
determine a Company's ability to service debt. Nevertheless, EBITDA should
not be considered in isolation or as a substitute for income from
operations, net income, cash flow from operating activities or any other
measure under generally accepted accounting principles for determining the
Company's operating performance, financial position and cash flows. In
addition, since companies and analysts may measure EBITDA in different ways,
the Company's EBITDA figures may not be comparable to similarly-titled
measures employed by other companies and analysts.
(4) Includes the amortization of deferred financing costs and the amortization
of the excess of investment over net assets acquired.
(5) Cash interest expense, net includes interest income, but excludes
amortization of deferred financing costs of $1.4 million for fiscal 1992,
$1.0 million for fiscal 1993, $0.7 million for fiscal 1994, $0.6 million for
fiscal 1995, $0.2 million for the three months ended March 31, 1996, $0.7
million for fiscal 1996, and $0.2 million for the three months ended March
31, 1997.
(6) For purposes of this calculation, earnings are defined as income (loss)
before income taxes, extraordinary items, the cumulative effect of a change
in accounting principle and fixed charges. Fixed charges consist of interest
expense and amortization of deferred financing costs. Earnings were
insufficient to cover fixed charges by $6.1 million in 1992, $2.7 million in
1993 and $0.9 million in 1994.
(7) Pro forma giving effect to the Initial Offering as if such event had
occurred on January 1, 1996.
(8) Dividends on the New Preferred Stock based on a dividend rate of 11 1/4% per
annum, payable semi-annually.
(9) The Company has presented the ratio of the Company's EBITDA to its net cash
interest expense because this ratio is commonly used by investors and
analysts to analyze and compare companies on the basis of their ability to
meet their debt service obligations. This ratio should not be considered in
isolation or as a substitute for income from operations, net income, cash
flow from operating activities or any other measures under generally
accepted accounting principles for determining the Company's ability to meet
its debt service obligations. In addition, since companies and analysts may
measure this ratio in different ways, the Company's ratio may not be
comparable to similarly-titled measures employed by other companies and
analysts.
(10) The Company has presented the ratio of the Company's EBITDA to its net cash
interest expense and preferred stock dividends because this ratio is
commonly used by investors and analysts to analyze and compare companies on
the basis of their ability to meet their debt service and preferred stock
dividend obligations. This ratio should not be considered in isolation or
as a substitute for income from operations, net income, cash flow from
operating activities or any other measures under generally accepted
accounting principles for determining the Company's ability to meet its
debt service and preferred stock dividend obligations. In addition, since
companies and analysts may measure this ratio in different ways, the
Company's ratio may not be comparable to similarly-titled measures employed
by other companies and analysts.
(11) Adjusted to give effect to the Initial Offering as if such event had
occurred on December 31, 1996.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company experienced significant growth during the period from 1992 to
1996, as net sales increased from $108.6 million in 1992 to $195.2 million in
1996, representing a compound annual growth rate of 15.8%. This increase in net
sales was primarily as a result of (i) increased demand for the Company's
products, (ii) new product introductions and (iii) the Company's growth in
market share. This sales increase was also accompanied by a substantial shift in
the Company's product mix. Sales of the Company's planetary gear systems
increased as a percentage of net sales from 29.4% in 1992 to 42.5% in 1996.
Conversely, sales of the Company's custom gear products as a percentage of net
sales decreased from 70.6% to 57.5% during the same period. The Company's net
sales growth in 1996 was 1.6% (compared to 27.5% in 1995, 20.7% in 1994 and
14.9% in 1993). The Company believes that net sales growth slowed in 1996
because customer demand outpaced the Company's manufacturing processes in 1995,
resulting in the loss of certain customers in late 1995 and 1996. The Company
believes that it has made appropriate investments in its infrastructure and
personnel to recapture this business.
The Company's operating expenses increased during the period from 1994 to
1996, primarily as a result of the Company's investment in personnel.
Investments in personnel during 1995 were driven by internal factors, primarily
the need to increase manufacturing capacity. For example, in 1995 the Company
(i) added approximately 200 manufacturing personnel in order to meet increased
customer demand for the Company's products, (ii) invested additional amounts to
upgrade the technical skill level of a portion of the Company's manufacturing
employees because of a shortage of trained workers in the available labor market
and (iii) added human resources personnel to oversee the implementation of the
collective bargaining agreement resulting from the unionization of the Company's
manufacturing employees in 1994. Investments in 1996 were made in response to
external factors, namely the changing needs of the marketplace. In 1996, the
Company increased the size of its marketing and sales and design engineering
staffs in an effort to increase the Company's sales by means of continued growth
in market share and new product introductions.
Cost of sales increased from 1994 to 1995 primarily as a result of volume
growth, a change in the Company's product mix and the investments in
manufacturing personnel detailed above. From 1995 to 1996, the increase of cost
of sales was influenced by a number of factors including (i) sales of the
Company's planetary gear systems, which have a higher material cost component
compared to custom gear products, increased by $8.8 million in 1996, while sales
of custom gear products decreased by $5.7 million and (ii) the Company's 1996
investment in new processes to improve manufacturing cycle times which resulted
in a reduction in inventory. The impact from 1995 to 1996 of these activities,
as measured by reduced labor and overhead in inventory, was $4.2 million.
Without the effect of these new processes and the related inventory reduction,
the Company's 1996 EBITDA would have been $36.2 million.
The improvement in manufacturing cycle times from 50 days in 1995 to 32
days at the end of 1996 resulted in the following benefits: (i) improved on-time
delivery (a 65% improvement in 1996 versus 1995); (ii) increased inventory turns
(eight times in 1996 versus five times in 1995); (iii) reduced inventory
investment ($18.9 million in 1996 versus $24.9 million in 1995); and (iv) a
substantial increase in cashflow from operations ($23.2 million in 1996 and
$13.9 million in 1995). The Company believes that its improved manufacturing
cycle times have provided it with a competitive advantage.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 Compared with Three Months Ended March 31,
1996
Net sales for the three months ended March 31, 1997 decreased by $2.1
million, or 4.1%, to $49.2 million compared to $51.3 million for the three
months ended March 31, 1996. Sales for three months ended March 31, 1996
included $3.9 million of orders which were past due at December 31, 1995.
Cost of sales for the three months ended March 31, 1997 decreased by $1.8
million, or 4.4%, to $39.9 million, or 80.9% of net sales, compared to $41.7
million, or 81.2% of net sales for the three months ended March 31, 1996. The
decrease resulted primarily from the decrease in sales volume.
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Selling, general and administrative expenses was $4.2 million, or 8.6% of
net sales, for the three months ended March 31, 1997, compared to $4.0 million,
or 7.9% of net sales, for the three months ended March 31, 1996. The $0.2
million increase in selling, general and administrative expenses from 1996
resulted principally from investments in marketing and sales and design
engineering.
Earnings from operations for the three months ended March 31, 1997 were
$5.2 million, or 10.5% of net sales compared to $5.6 million, or 11.0% of net
sales for the three months ended March 31, 1996.
Interest expense for the first three months of 1997 and 1996 was $3.2
million and $3.1 million, respectively. Interest expense increased due to a
higher average debt balance during the first three months of 1997 compared to
the first three months of 1996.
The Company's income before income taxes was $1.9 million for the first
three months of 1997, compared to $2.5 million for the first three months of
1996.
The Company's net income was $1.0 million for the first three months of
1997 as compared to $1.6 million for the first three months of 1996.
Fiscal Year 1996 Compared with Fiscal Year 1995
Net sales for 1996 increased by $3.1 million, or 1.6%, to $195.2 million
compared to $192.1 million in 1995. This increase was primarily due to (i) an
increase in planetary gear sales of $8.8 million, partially offset by a decrease
in custom gear sales of $5.7 million and (ii) minor increases in prices.
Cost of sales for 1996 increased by $6.8 million, or 4.5%, to $158.7
million, or 81.3% of net sales, compared to $151.9 million, or 79.1% of net
sales in 1995. This increase primarily resulted from the increased sales of
planetary gear systems, which have a higher material cost component compared to
custom gear products, as well as increased costs associated with the Company's
investment in new processes that reduced manufacturing cycle times from 50 days
in 1995 to 32 days at the end of 1996 and resulted in a reduction in inventory.
The Company does not expect cost of sales, as a percentage of net sales, to
increase in 1997 as compared to 1996 (although there can be no assurance that
this will be the case).
Selling, general and administrative expenses, including goodwill
amortization, increased to $16.9 million in 1996, compared to $14.8 million in
1995. This increase resulted primarily from investments in marketing, sales and
design engineering and the write-off of a $0.5 million receivable due to a
customer's bankruptcy. The Company expects selling, general and administrative
expenses to increase in 1997, but at a reduced rate compared to the 1996
increase.
Earnings from operations for 1996 decreased $5.8 million to $19.7 million,
compared to $25.5 million in 1995, primarily due to the factors mentioned above.
Interest expense, including amortization of deferred financing costs, was
$11.9 million for 1996, compared to $12.9 million for 1995. The principal reason
for the decrease was lower average outstanding debt levels due to improvements
in working capital management and the reduction in inventory described above.
Income before income taxes, was $7.6 million for 1996, compared to $12.4
million for 1995.
The effective tax rates for 1996 and 1995 were 48.8% and 44.4%,
respectively. See the Notes to the Consolidated Financial Statements for a
further discussion of income taxes.
The Company's net income was $3.9 million for 1996, compared to $6.9
million for 1995.
Fiscal Year 1995 Compared with Fiscal Year 1994
Net sales for 1995 increased by $41.4 million, or 27.5%, to $192.1 million,
compared to $150.7 million in 1994. Net sales increased in 1995 because of
increased sales volume. Increased sales volumes of the Company's products were
the result of a variety of factors including additional outsourcing by captive
gear manufacturers, continued growth in sales of products and applications
developed over the last few years, improvements in manufacturing capabilities,
and improvements in the markets served by the Company's customers.
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Cost of sales for 1995 increased by $28.8 million, or 23.4%, to $151.9
million, or 79.1% of net sales, compared to $123.1 million, or 81.7% of net
sales, in 1994. This increase primarily resulted from volume growth, a change in
the Company's product mix and investments in manufacturing personnel.
Selling, general and administrative expenses, including goodwill
amortization, decreased to $14.8 million, or 7.7% of net sales, in 1995,
compared to $15.9 million, or 10.6% of net sales, in 1994. This decrease
resulted primarily from one-time re-engineering and consulting fees incurred in
1994.
Earnings from operations for 1995 increased $13.8 million, or 118.1%, to
$25.5 million, or 13.3% of net sales, compared to $11.7 million, or 7.7% of net
sales, in 1994.
Interest expense, including amortization of deferred financing costs, for
1995 was $12.9 million, compared to $12.4 million for 1994. Despite declining
interest rates in 1995 and a $2.0 million decrease in outstanding debt from
December 31, 1994, the average outstanding debt during 1995 exceeded 1994,
resulting in higher interest costs for the year.
Income before income taxes, extraordinary item and cumulative effect of
change in accounting principle was $12.4 million for 1995, compared to a loss of
$0.9 million for 1994.
The effective tax rates for 1995 and 1994 were 44.4% and (18.2)%,
respectively. The provision for income taxes for 1995 is primarily the result of
current year income. The benefit for income taxes for 1994 is principally the
result of the reversal of previously recorded deferred tax liabilities. See the
Notes to the Consolidated Financial Statements for a further discussion of
income taxes.
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 112, 'Employers Accounting for Postemployment Benefits' ('SFAS No.
112'). SFAS No. 112 requires employers to account for postemployment benefits
under the accrual, rather than the pay-as-you-go, method of accounting, such
that the expected benefits to be paid in future years are recorded during the
period in which the employee renders the service necessary to qualify for these
benefits. The Company implemented SFAS No. 112 by recognizing the total prior
service obligation immediately. As a result of the adoption of SFAS No. 112, the
Company recorded a one-time non-cash charge of $1.6 million ($1.9 million less a
deferred tax benefit of $0.3 million) for the cumulative effect of the change in
accounting principle.
The Company's net income was $6.9 million for 1995, compared to the $2.3
million net loss for 1994. The increase in the net income is primarily due to
the higher sales volume and productivity improvements in 1995, combined with the
cumulative effect of the change in accounting principle adjustment in 1994.
LIQUIDITY AND CAPITAL RESOURCES
On July 7, 1993, the Company completed the sale of $85.0 million aggregate
principal amount of Existing Notes. The Existing Notes mature on July 1, 2001
and are redeemable at the option of the Company, in whole or in part, on or
after July 1, 1998, at certain specified redemption prices. Concurrent with the
issuance of the Existing Notes, the Company entered into a loan agreement with a
senior lending institution which provides for a revolving credit facility and a
term loan. The loan agreement was amended in December 1996 to, among other
things, increase the term loan to $33.0 million (with quarterly amortization of
$0.75 million per quarter in 1997, $1.0 million per quarter in 1998, $1.75
million per quarter in 1999, $2.25 million per quarter in 2000 and a final
payment of $7.0 million in December 2000 (after giving effect to a $3.0 million
prepayment in March 1997)) and, subject to certain conditions, provide for a
$5.0 million increase in the revolving credit facility commitment at the option
of the Company (from $20.0 million to $25.0 million). The revolving credit
facility matures on July 2001. See 'Description of Existing Indebtedness--GE
Credit Agreement.'
Net cash used by operations for the three months ended March 31, 1997 was
$0.3 million, a decrease of $7.6 million compared with net cash provided by
operations of $7.3 million for the three months ended March 31, 1996 period. The
decrease in cash from operations in comparison to the prior year period was due
primarily to an increase in inventory at March 31, 1997.
Net cash provided by operating activities was $23.2 million in 1996
compared to $13.9 million in 1995 and $9.6 million in 1994. The increase in cash
flow from operating activities in 1996 was principally due to the impact of
improved manufacturing cycle times reducing inventory.
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Capital expenditures for various machine tools, equipment and building
improvement items totaled $2.1 million and $3.0 million during the first three
months of 1997 and 1996, respectively. Of the $2.1 million as of March 31, 1997,
$1.6 million has been funded by an increase in accounts payable in the balance
sheet versus $0.3 million of the $3.0 million of capital expenditures in 1996.
The capital expenditures for both 1997 and 1996 were principally targeted at
increasing capacity and productivity to meet increased customer demand.
Capital expenditures totaled $10.0 million, $15.1 million and $9.1 million
in 1996, 1995 and 1994, respectively. The level of capital spending during 1994
to 1996 was primarily a result of increased manufacturing requirements due to
increased sales volume. The Company expects that capital expenditures will be
approximately $10.0 million for fiscal 1997 (including $0.7 million relating to
the addition of in-line dual frequency induction hardening equipment).
Net cash from financing activities was a net usage of $13.6 million in
1996, a net source of $0.7 million in 1995, and a net usage of $5.4 million in
1994. The 1996 net usage funded a portion of the $17.0 million dividend paid to
Lancer and the $3.0 million advance made to Lancer in December 1996.
Under the Tax Sharing Agreement (as defined), Lancer made capital
contributions to the Company of $1.6 million, $2.5 million, and $1.1 million in
1996, 1995 and 1994, respectively. See Notes to the Consolidated Financial
Statements for a further discussion of capital contributions made pursuant to
the Tax Sharing Agreement.
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BUSINESS
The Company believes that it is the leading independent manufacturer (based
on sales) of high precision custom gears and planetary gear systems in North
America, with an estimated market share in each of the custom gear and planetary
gear system markets of more than two times that of its nearest competitors. The
majority of Fairfield's custom gears and planetary gear systems are used by OEMs
as components in various kinds of heavy mobile equipment. The Company's
customers include such industry leaders as General Electric, John Deere,
Caterpillar and General Motors. For the year ended December 31, 1996, the
Company had net sales and EBITDA of $195.2 million and $32.0 million,
respectively.
Custom gears, which accounted for $112.3 million, or 57.5%, of the
Company's 1996 net sales, are components of larger systems such as axles, drive
differentials and transmission units. The Company's custom gear customers
consist principally of OEMs of rail (such as locomotives), mining, agricultural
(such as tractors and specialty harvestry equipment), industrial, construction
and materials-handling equipment, for many of whom the Company is the sole
independent supplier of selected gear products.
Planetary gear systems, which accounted for $82.9 million, or 42.5%, of the
Company's 1996 net sales, are integrated, self-contained power transmission and
torque conversion systems that provide propulsion, swing and/or rotation to
wheels, axles and other components in applications where the use of axles would
otherwise present design difficulties. The Company markets its planetary gear
systems under its Torque-Hub(Registered) name. The Company believes that, as a
result of the performance history and reputation for quality of the Company's
Torque-Hub(Registered) products, the Torque-Hub(Registered) name has become
closely identified with planetary gear systems. Customers for the Company's
Torque-Hub(Registered) products include OEMs of access platform (such as
aerial-lift), road rehabilitation (such as pavers and road rollers),
construction (such as excavators), forestry and agricultural (such as crop
sprayers) equipment.
The Company has been certified as a 'preferred supplier' (based on systems
compliance and on-site inspections) by all of its major customers that have
certification procedures, including General Motors, General Electric, John
Deere, Caterpillar and Ingersoll-Rand. The Company has also been certified as
meeting 'ISO-9001' standards, which is increasingly being used by OEMs in lieu
of individual certification procedures. In addition, the Company expects to
receive 'QS-9000' certification by the end of 1997, which is the level of
certification expected to be required by automotive OEMs beginning in 1998. The
Company believes that certification provides it with a competitive advantage
because a number of OEMs require certification as a condition to doing business.
The Company believes that its strong market position in the custom gear and
planetary gear systems markets is the result of its (i) breadth and quality of
product offerings, (ii) longstanding relationships (in many cases of 20 years or
more) with its major custom gear and planetary gear system customers, (iii)
state-of-the-art engineering and manufacturing technology, including its
in-house heat treating facilities, computer-aided design and manufacturing
systems and computer numerically-controlled machine tools and gear grinders,
(iv) ability to deliver products within short lead times, (v) cost
competitiveness, (vi) experienced engineering staff, which, together with the
Company's sales force, works closely with customers in designing and developing
products to meet customers' needs and (vii) stable, knowledgeable sales force,
many of whose members have engineering degrees and have worked with the same
customers for many years. In addition, the Company believes that its management
team, which has an average of over 25 years of experience in general
manufacturing, will be instrumental in further strengthening the Company's
market position.
The Company was founded in 1919 as a manufacturer of custom gear products
and was family-owned until 1977. At that time, the Company was purchased by
Rexnord Corporation, which subsequently sold the Company in 1987 to Neoax Inc.
Lancer purchased the Company in 1989. The Company's principal executive offices
are located at U.S. 52 South, Lafayette, Indiana 47905. The Company's telephone
number is (765) 474-3474.
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BUSINESS STRATEGY
The Company's management team intends to strengthen the Company's position
as the leading independent supplier of custom gears and planetary gear systems
by implementing a business strategy based on the following elements:
o Taking Advantage of Industry Trends. The Company seeks to increase its
revenues and market share by taking advantage of industry trends, including:
(i) the trend among captive gear manufacturers (OEMs who produce gears
in-house for use in their own products) to 'outsource,' or purchase portions
of their gear requirements from independent manufacturers such as the Company,
rather than manufacture such products in-house; (ii) the trend among OEMs to
develop sourcing relationships with their suppliers, whereby an OEM purchases
all of its supply requirements within selected product lines from a single
manufacturer like the Company; and (iii) the trend among OEMs to purchase
complete gear assemblies or systems rather than individual gear products. The
Company believes that these trends are driven by OEMs' desire to reduce their
production and supply costs and focus on their core competencies.
The Company has taken advantage of these industry trends to date. For
example, the Company receives orders from a number of captive gear
manufacturers, such as those of General Motors, General Electric and John
Deere, with respect to certain gear products that they previously produced
in-house. In addition, the Company has established sole sourcing relationships
with many of its major customers with respect to selected gear products. The
Company has also experienced growth in its sales of complete gear assemblies
and systems, particularly to manufacturers of agricultural and heavy-duty
equipment. The Company believes that it is well-positioned to continue to take
advantage of these industry trends as a result of its broad product offerings,
large manufacturing capacity, sophisticated manufacturing and design
capabilities and established reputation for producing high quality custom gear
and planetary gear system products.
o Reducing Lead Times. The Company believes that reducing lead times has been,
and will continue to be, a key competitive factor in the gear manufacturing
industry. The Company has reduced average manufacturing cycle times through
the manufacturing process from 50 days in 1995 to 32 days at the end of 1996.
Work-in-process inventory has also been reduced by 26.5% during this same
period. These reductions are the result of manufacturing and inventory
controls implemented by management, including reduction in lot sizes and the
installation of new, more efficient machinery. The Company is seeking to
reduce lead times further by installing an enhanced computer program designed
to improve inventory management.
o Continuing Cost Control Efforts. The Company will continue to be dedicated to
remaining price competitive and minimizing production costs. The Company
believes that it has already significantly lowered its operating costs by
reorganizing the physical layout of its manufacturing work space, installing
new, more efficient machinery and improving its employee training programs.
The Company is seeking to reduce costs further through various purchasing
initiatives (including worldwide sourcing, consolidation of the supplier base
and long-term supply agreements) and by reducing set-up times and scrap.
o Improving Manufacturing Capabilities. The Company believes that its
broad-based, integrated manufacturing capabilities, including its
state-of-the-art heat treating facilities, computer-aided design and
manufacturing systems and computer numerically machine tools and gear
grinders, provide it with a distinct competitive advantage. Over the past
three years, the Company has invested $34.2 million in capital equipment, of
which $23.7 million was used to purchase new equipment and maintain and
upgrade existing equipment. The Company believes that its manufacturing
capacity is substantially larger than that of its independent competitors,
enabling it to accommodate large orders. The Company plans to continue to
selectively make capital investments which will improve its manufacturing
processes.
o Introducing New Products and Applications. The Company is currently in the
process of developing, testing and marketing a number of new products and new
applications for existing products in an effort to increase revenues,
operating margins and market share. Historically, the Company's planetary gear
system business has generated most of the Company's new products and new
product applications. New products and new product applications accounted for
22.3% of the Company's planetary gear system business in 1996, compared to
approximately 5.7% in 1992. The Company intends to broaden its new product
applications in the custom gear
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area and is currently developing a number of such applications including:
differentials for off-highway trucks and on-highway automotive, industrial and
commercial vehicles; transmissions; and aerospace gearing.
PRODUCTS
Custom Gears. Custom gears accounted for $112.3 million, or 57.5%, of the
Company's net sales in 1996. The Company manufactures a wide variety of custom
gears, ranging in type (e.g., helical, spiral bevel, spur and
HYPOID(Registered)) and size (from one inch to five feet), and has manufacturing
capabilities which the Company believes are the broadest in the custom gear
business. The Company's custom gears are manufactured according to customers'
specifications, sometimes developed by or with the assistance of the Company,
for use as component parts in various types of heavy mobile equipment. Custom
gears are engineering-intensive and, although such products represent a
relatively small portion of the cost of the equipment in which they are used,
are critical to the operation of such equipment.
Historically, the Company has focused on high margin custom gears. Such
products, which are design- and engineering-intensive, are used in rail, mining,
agricultural, industrial, construction and materials-handling and other
equipment demanding a high degree of product quality and reliability. Many
customers in these markets do not have the necessary engineering and/or
manufacturing facilities, and/or personnel to design and manufacture their gear
requirements in-house. In addition, there is a trend among OEMs to focus on
their core competencies rather than produce gears in-house.
Torque-Hub(Registered) Products. Torque-Hub(Registered) products accounted
for $82.9 million, or 42.5%, of the Company's net sales in 1996. The Company
believes that the Torque-Hub(Registered) name has become closely identified with
planetary gear systems, which provide drive, swing, and/or rotation to the
equipment in which they are used and are primarily employed in cases where the
use of axles present design difficulties. The Company produces a broad line of
planetary gear systems under its Torque-Hub(Registered) trade name, including
wheel drives (used to propel off-highway equipment), shaft outputs (used to
power remote in-plant machinery like mixers as well as mobile aerial lifts and
cranes) and spindle outputs (used to power the drive wheels of vehicles with
small diameter wheels such as small lift trucks and mowers).
The Company has introduced a number of new Torque-Hub(Registered) products
in recent years, including two-speed drives (Torque II series) and compact
drives (CW and CT series) for wheeled or tracked vehicles. The Company believes
that the two-speed drive is ideal for machinery requiring low- and high-speed
settings, such as road paving equipment. The compact drive incorporates the
brakes and hydraulic drive systems into a single compact unit, which the Company
believes allows for better flexibility and is well-suited for a variety of
applications. These recently-introduced products are used in a wide range of
industrial and construction equipment, including excavators, crawler dozers and
loaders, rubber-tired pavers and multi-speed winches.
MARKETING AND DISTRIBUTION
The Company's customers are OEMs and include such industry leaders as
General Electric, John Deere, Caterpillar and General Motors. The Company has
had relationships of 20 years or more with each of the above-mentioned
customers, as well as with many of its other major customers. No single customer
accounted for more than 10% of the Company's 1996 net sales.
The Company has been certified as a 'preferred supplier' by each of General
Motors, General Electric, John Deere, Caterpillar and Ingersoll-Rand as well as
by all of its other major customers that have certification procedures. The
Company has also been certified as meeting 'ISO-9001' standards, which are
increasingly being used by OEMs in lieu of individual certification procedures.
In addition, the Company expects to receive 'QS-9000' certification by the end
of 1997, which is the level of certification expected to be required by
automotive OEMs beginning in 1998. The Company believes that certification
provides it with a competitive advantage because a number of OEMs require
certification as a condition of doing business.
The Company believes its stable, experienced sales force is a primary
reason for the Company's success in maintaining customer loyalty and building
new customer relationships. The Company's sales department is organized
geographically and consists of 14 sales engineers, who have an average of over
15 years of service and most of whom have worked with the same customers for
many years. In addition, each sales engineer has
26
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substantial expertise concerning the Company's products and product
applications. Application engineers work closely with the Company's sales
department and provide customers with guidance concerning product applications
and specific design problems. By becoming a part of the customer's purchasing
and design decisions, the Company has developed close working relationships with
many of its customers. Customer loyalty to the Company is further enhanced by
the development, tooling and production costs associated with changing gear
sources, as such costs are typically borne by the customer.
All of the Company's custom gear products and approximately 70% of its
Torque-Hub(Registered) products are sold directly to OEMs. Since
Torque-Hub(Registered) products can be sold to more than one customer, the
Company uses distributors to increase its penetration of the planetary gear
systems market. The Company sells approximately 30% of its
Torque-Hub(Registered) line through a network of approximately 40 distributors
located in the United States and abroad. International sales accounted for
approximately $11 million, or approximately 6%, of the Company's 1996 net sales.
DESIGN AND MANUFACTURING
The Company believes that its state-of-the-art technology and experienced
engineering staff provide it with a competitive advantage and are major factors
behind the Company's strong market position.
Technology. The Company has selectively invested in state-of-the-art
manufacturing technology in recent years to improve product quality and price
competitiveness, and to reduce lead time. The Company's manufacturing technology
includes the latest computer-aided design and manufacturing (CAD/CAM) systems,
and over one hundred computer numerically controlled (CNC) machine tools and
gear grinders.
The Company's CAD/CAM systems, which enable hundreds of design solutions to
be visualized quickly and easily, facilitate product design and manufacturing.
The Company's computer systems are capable of finite element analysis and
simulation which allows many aspects of a design to be evaluated prior to
production, resulting in lower tooling costs, reduced testing requirements and
quicker time to market. In addition, the Company's CNC gear cutting machines
allow for many different styles and sizes of gears to be run quickly in small
lot sizes with a high degree of accuracy. The Company is in the process of
installing an enhanced computer program designed to improve customer order
scheduling and inventory management.
The Company has its own comprehensive heat treating facilities. These
in-house facilities allow the Company to control the annealing and carburizing
processes that determine the load-carrying capacity of the final product. The
Company's heat treating operations help ensure proper development and
maintenance of gear tooth characteristics. As a result, the Company believes
that it is able to provide its customers with improved quality and reduced lead
times in filling orders. In-line dual frequency induction hardening equipment
will be added in 1997, continuing the Company's practice of selectively adding
advanced technology in its manufacturing processes.
Engineering Staff. The Company's engineering department consists of
approximately 70 engineers and technicians, including specialists in product,
tool, manufacturing and industrial engineering. In addition, the Company has a
metallurgy laboratory which determines the appropriate metallurgy for a specific
gear application. These engineering groups, with their distinct specialties,
work together as a team to develop solutions to specific customer requirements.
These capabilities enable the Company to service clients who demand high
quality, creative solutions to their product needs.
MATERIALS AND SUPPLY ARRANGEMENTS
The Company generally manufactures its custom gear and
Torque-Hub(Registered) products to its customers' specifications and, as a
result, does not generally contract for or maintain substantial inventory in raw
materials or components. The Company purchases its three principal raw materials
(steel forgings, steel bars and castings) on a spot basis based on specific
customer orders. No single supplier accounted for more than 10% of the Company's
raw material purchases in 1996. In addition, alternative sources are available
to fulfill each of the Company's major raw material requirements. The Company
has never experienced a delay in production as a result of a supply shortage of
a major raw material.
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COMPETITION
The North American custom gear business is highly competitive but very
fragmented. Competition can be broken down into four principal groups: major
domestic manufacturers, regional domestic manufacturers, foreign producers and
captive gear manufacturers. Although captive gear manufacturers supply all or a
portion of their internal gear requirements and constitute a significant portion
of the custom gear market, the Company believes there is a trend among such
manufacturers to outsource, or purchase their gears from independent
manufacturers such as the Company. The North American planetary gear system
market is also highly competitive and is concentrated among several large
competitors, with the remaining market divided among a large number of
relatively small suppliers. The Company competes with other manufacturers based
on a number of factors, including delivery capability, quality and price. The
Company believes that its breadth of manufacturing, engineering and
technological capabilities provide it with a competitive advantage.
PROPERTIES
The Company owns and operates a single facility in Lafayette, Indiana
consisting of 39 acres of land, approximately 520,000 square feet of
manufacturing space and approximately 60,000 square feet of office space. The
Lafayette facility is well maintained and is in good condition.
EMPLOYEES
At December 31, 1996, the Company had 1,195 permanent employees, of whom
approximately 83% were employed in manufacturing, approximately 6% were
engineers employed in the engineering department, and the remainder were office
and managerial employees. The Company's production and maintenance employees
became members of the United Auto Workers (UAW) union in October 1994 and the
Company entered into a labor contract with the union in October 1995, which is
scheduled to expire in October 1998. The Company considers its relations with
its employees to be satisfactory.
BACKLOG
As of December 31, 1996 and December 31, 1995, the Company had total order
backlog of approximately $77.0 million and $85.0 million, respectively, for
shipments due to be delivered by the Company for the six-month period following
such dates. This reduction was attributable to the Company's ongoing business
strategy of reducing lead times for its products.
INTELLECTUAL PROPERTY
The trade name Torque-Hub(Registered) is a registered trademark. The
Company's planetary gear systems are sold under the Torque-Hub(Registered) trade
name. The Company, directly and through its wholly owned subsidiary, T-H
Licensing, Inc. ('T-H Licensing') owns numerous patents worldwide. None of such
patents is considered material to the Company's business.
LEGAL PROCEEDINGS
The Company is a party to routine litigation incidental to the conduct of
its business, much of which is covered by insurance and none of which is
expected to have a material adverse effect on the Company.
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. The Company believes its
operations and properties are in substantial compliance with Environmental Laws.
Based upon its experience to date, the Company believes that the future cost of
compliance with existing Environmental Laws, and liablility for known
environmental claims pursuant to such Environmental Laws, will not have a
material adverse effect on the Company's business, financial condition or
operating results. However, future events, such as 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.
28
<PAGE>
MANAGEMENT
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of December 31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- -----------------------------------------------------
<S> <C> <C>
W.B. Lechman.............................. 64 Director, Chairman of the Board
Kenneth A. Burns.......................... 44 President, and Chief Operating Officer
Peter A. Joseph........................... 44 Director, Vice President and Secretary
Paul S. Levy.............................. 49 Director, Vice President and Assistant Secretary
Richard A. Bush........................... 39 Vice President Finance
James R. Dammon........................... 53 Vice President Engineering
Michael M. Manty.......................... 53 Vice President Human Resources
Frederick G. Sharp........................ 42 Vice President Marketing and Sales
Jess C. Ball.............................. 55 Director
</TABLE>
Mr. Lechman was appointed Chairman of the Board effective October 1994.
Prior to his appointment, Mr. Lechman had been President of the Company from
1983 to October 1994 and was Chief Executive Officer from 1989 to October 1994.
Mr. Lechman has been a Director of the Company since 1989. Mr. Lechman serves on
the Board of Directors of Bank One Lafayette, Lafayette Life Insurance Co.,
Lafayette Community Foundation, Lafayette Junior Achievement, The Salvation Army
and Lafayette Chamber of Commerce and is President Emeritus of the American Gear
Manufacturers Association.
Mr. Burns was named President and Chief Executive Officer of the Company
effective April 1997. Prior to his appointment, Mr. Burns had served as
President and Chief Operating Officer from May 1996 to April 1997 and as Vice
President Operations from January 1996 to May 1996. From 1987 through July 1995,
Mr. Burns served as an executive officer of Abex/NWL Aerospace and its
predecessors, including Executive Vice President.
Mr. Joseph has been Vice President and Secretary and a Director of the
Company since 1989. Mr. Joseph has been a General Partner of Joseph Littlejohn &
Levy since its inception in 1988. Mr. Joseph has served as President of Lancer
since April 1992 and as Secretary and Director of Lancer since July 1989. Mr.
Joseph is also on the Board of Directors of Freedom Chemical Company, Foodbrands
America, Inc., Hayes Wheels International, Inc., Peregrine, Inc., and Tenet
Healthcare Corporation.
Mr. Levy has been Vice President and Assistant Secretary and a Director of
the Company since 1989. Mr. Levy has been a General Partner of Joseph Littlejohn
& Levy since its inception in 1988. Mr. Levy has served as Chief Executive
Officer and Chairman of the Board of Directors of Lancer since July 1989. Mr.
Levy is also on the Board of Directors of Freedom Chemical Company, Foodbrands
America, Inc., Hayes Wheels International, Inc., Peregrine, Inc., and Tenet
Healthcare Corporation.
Mr. Bush has been Vice President Finance of the Company since November
1994. From 1990 to 1994, Mr. Bush was Controller for two different aerospace
units of Abex Inc. From 1980 to 1990, Mr. Bush was with Arthur Andersen & Co. in
the audit and financial consulting practice.
Mr. Dammon has been Vice President Engineering since 1987. Prior to his
present position, Mr. Dammon was Director of Engineering, Manager of New Product
Development, Manager of Customer Engineering Service and Gear Design Engineer.
Mr. Dammon has been with the Company for over 30 years.
Mr. Manty has been Vice President Human Resources of the Company since
February 1995 and Vice President Total Quality and Human Resources since January
1997. From 1990 to 1995, Mr. Manty was Director of Human Resources for Allied
Signal Aerospace. Prior to 1990, Mr. Manty performed labor relations consulting
work with Modern Management, Inc. and held senior level human resource positions
with Pneumo Corporation and Chrysler Corporation.
Mr. Sharp has been Vice President of Marketing and Sales of the Company
since August, 1996. From 1991 to July 1996, Mr. Sharp served as Director of
Program Management for United Defense L.P. and its predecessor
29
<PAGE>
BMY Combat Systems Division. Prior to 1991, Mr. Sharp held senior level
positions with General Electric and NWL Control Systems.
Mr. Ball was President and Chief Executive Officer of the Company from
October 1994 to May 1996. Mr. Ball has been a Director of the Company since
1991. From February 1991 through November 1991, Mr. Ball served as President and
Chief Executive Officer of Alford Industries (a company which filed for
bankruptcy protection and has been liquidated). From December 1991 through
September 1994, Mr. Ball was President and Chief Executive Officer of Golding
Industries, Inc. From January 1988 through January 1991, Mr. Ball served as
President and Chief Executive Officer of DelCorp.
COMPENSATION OF DIRECTORS
Except for the period October 1994 to December 1996, Mr. Ball receives an
annual fee of $30,000 per year for services as a director. No other director
receives any additional compensation for services as a director or for serving
on committees of the Board of Directors of the Company or for attending
meetings.
EXECUTIVE COMPENSATION
The following table sets forth for each of the fiscal years ending December
31, 1996, 1995 and 1994, the compensation paid to or accrued by (i) Chairman of
the Board (the 'Chairman') of the Company and (ii) each of the four most highly
compensated executive officers other than the Chairman.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2)
- ------------------------------------------------------------- ---- -------- -------- ---------------
<S> <C> <C> <C> <C>
W.B. Lechman ................................................ 1996 $256,668 $ 50,000 $ 135,720
Chairman of the Board 1995 253,891 -- 131,363
1994 253,860 50,803 130,250
Kenneth A. Burns ............................................ 1996 $185,279 $100,000 $ 3,325
President and Chief Operating Officer
James R. Dammon ............................................. 1996 $114,437 $ 57,000 $ 4,988
Vice President Engineering 1995 110,431 65,467 5,524
1994 104,268 21,992 6,364
Richard A. Bush ............................................. 1996 $103,537 $ 52,000 $ 5,950
Vice President Finance 1995 100,031 59,300 4,399
Michael M. Manty ............................................ 1996 $102,257 $ 52,000 $ 24,981
Vice President Human Resources 1995 93,495 94,154 5,234
</TABLE>
- ------------------
(1) Amounts shown were earned under the Fairfield Manufacturing Company
Management Incentive Compensation Plan.
(2) Amounts shown include contributions by the Company to The Savings Plan For
Employees of Fairfield Manufacturing Company, Inc. for the benefit of the
named executives, imputed income on life insurance provided by the Company,
reimbursement of relocation expenses for Mr. Manty, imputed income on an
automobile for Mr. Lechman, and contributions to an insurance company of
$110,000 for each of the years shown above to fund a supplemental retirement
annuity policy for Mr. Lechman.
30
<PAGE>
FY-END SAR VALUES
<TABLE>
<CAPTION>
NO. OF UNEXERCISED SARS AT VALUE OF UNEXERCISED SARS
FY-END EXERCISABLE/ AT FY-END
NAME UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE
- ------------------------------------------------------------ -------------------------- -------------------------
<S> <C> <C>
W.B. Lechman................................................ 0/63,000 $ 0/0
James R. Dammon............................................. 0/10,800 0/0
</TABLE>
- ------------------
(1) Equity Participation Rights (the 'Rights') issued to participants in the
Fairfield Manufacturing Company, Inc. Equity Participation Plan (the 'Equity
Participation Plan'). Mr. Lechman and Mr. Dammon hold 63,000 and 10,800
Rights, respectively, under the Equity Participation Plan, all of which are
fully vested. Each Right entitles Mr. Lechman and Mr. Dammon to receive,
upon the occurrence of a Trigger Event (as defined in the Equity
Participation Plan), an amount in cash equal to the difference between the
Fair Market Value of a Right (as of the Trigger Event) and $16.67, the
initial value assigned to each Right.
PENSION PLAN TABLE
The Company maintains the Retirement Plan for Employees of Fairfield
Manufacturing Company, Inc., a defined benefit pension plan intended to be
qualified under the Internal Revenue Code (the 'Pension Plan').
<TABLE>
<CAPTION>
YEARS OF SERVICE(2)
-------------------------------------------------------------------------
REMUNERATION(1) 5 10 15 20 25 30 35
- ------------------------------------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$100,000............................. $ 6,796 $13,593 $20,389 $27,186 $33,982 $40,778 $42,028
$125,000............................. 8,609 17,218 25,827 34,436 43,044 51,653 53,216
$150,000 and over.................... 10,421 20,843 31,264 41,686 52,107 62,528 64,403
</TABLE>
- ------------------
(1) The preceding table illustrates the aggregate pension benefits provided by
the Pension Plan calculated on a straight life annuity basis. The amounts
set forth in the table are subject to reduction for any Social Security
offset. Average annual compensation covered under the Pension Plan is the
highest average annual total compensation received from the Company for any
60 month period during the 120 months immediately preceding the
participant's separation from service. Annual total compensation for Pension
Plan purposes includes all compensation disclosed in the Summary
Compensation Table.
(2) At December 31, 1996, Messrs. Lechman, Burns, Dammon, Bush, and Manty had
13, 1, 31, 2 and 2 whole years of credited service, respectively, for
purposes of calculating their benefits under the Pension Plan.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Kenneth A. Burns,
effective June 1, 1996.
Mr. Burns' employment agreement provides that he will serve as President
and Chief Operating Officer of the Company. The agreement is for a term that
expires on June 1, 1998. The agreement provides for Mr. Burns to receive a base
salary of $200,000 or such greater amount as may be determined by the Board of
Directors of the Company. In addition, Mr. Burns is eligible to participate in
any benefit plan that the Company provides to its executives from time to time.
Mr. Burns' employment agreement contains restrictions on disclosure by him
of confidential information and generally restricts his right to compete with
the Company during the term of his employment and for two years thereafter. Mr.
Burns' employment pursuant to the agreement is terminable upon his death or
disability or by the Company or Mr. Burns for cause (as defined therein) or
without cause. Upon Mr. Burns' death or disability prior to June 1, 1998, he or
his estate will receive any salary accrued through the termination date. If,
prior to June 1, 1998, Mr. Burns' employment is terminated by the Company for
cause, or he terminates his employment other than for cause, he will receive his
salary accrued through the termination date. In the event
31
<PAGE>
Mr. Burns terminates his employment for cause or the Company terminates his
employment without cause prior to June 1, 1998, he will be entitled to his base
salary through June 1, 1998.
NEW EQUITY INCENTIVE PLAN
The Company intends to establish a long-term incentive compensation plan
covering the Company's executives and selected other key management employees
(the 'New Equity Incentive Plan'). Pursuant to the proposed New Equity Incentive
Plan, a participant is expected to be granted incentive compensation awards
entitling the participant to a long-term incentive bonus if the Company and the
participant achieve certain performance objectives during the performance period
specified in the New Equity Incentive Plan.
Non-cash accruals and cash expenses made pursuant to the New Equity
Incentive Plan will reduce the Company's Consolidated Net Income in the year
such accruals and expenses are incurred. Pursuant to the terms of the
Certificate of Designation and the Exchange Indenture, non-cash accruals and
cash expenses made pursuant to the New Equity Incentive Plan will be added back
(without duplication and to the extent such accruals or expenses reduce net
income) to the Company's Consolidated Net Income (as defined) and Consolidated
EBITDA (as defined) in the manner described herein, thereby increasing the
Company's capacity to incur Indebtedness and make Restricted Payments (as
defined). See 'Description of New Preferred Stock and Exchange Debentures.'
32
<PAGE>
OWNERSHIP OF CAPITAL STOCK
The following table sets forth information regarding the beneficial
ownership of the common stock of the Company by (i) each director of the
Company, (ii) the executive officers of the Company listed under the caption
'Management' and (iii) each person known by the Company to beneficially own in
excess of 5% of the outstanding shares of the Company's common stock as of
December 31, 1996. The number of authorized shares of the Company's capital
stock as of December 31, 1996 was 10,150,000, consisting of 10,000,000 shares of
common stock and 150,000 shares of preferred stock.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NUMBER OF PERCENT OF FULLY FULLY
SHARES SHARES DILUTED DILUTED
NAME OWNED OUTSTANDING SHARES SHARES
- ------------------------------------------------------------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Lancer Industries Inc.(1) ................................... 7,805,000 100% 7,805,000 100%
450 Lexington Avenue, Suite 3350
New York, New York 10017
Chase Manhattan Bank, ....................................... --(2) -- -- --
as Trustee of the Lancer Industries Inc. Employee Stock
Ownership Plan
1 Chase Manhattan Plaza
New York, New York 10005
Peter A. Joseph ............................................. --(2) -- -- --
Paul S. Levy ................................................ --(2) -- -- --
W.B. Lechman ................................................ -- -- -- --
Jess C. Ball ................................................ -- -- -- --
Kenneth A. Burns ............................................ -- -- -- --
Richard A. Bush ............................................. -- -- -- --
James R. Dammon ............................................. -- -- -- --
Michael M. Manty ............................................ -- -- -- --
Frederick G. Sharp .......................................... -- -- -- --
All directors and executive officers ........................ -- -- -- --
as a group (9 persons)
</TABLE>
- ------------------
(1) 100% of the common stock of the Company is directly owned by Lancer. Lancer
has pledged such shares to the lender under the GE Credit Agreement (as
defined) as security for the Company's obligations thereunder.
(2) Lancer, which is currently the owner of 100% of the capital stock of the
Company, has one class of common stock, Class B Common Stock, with a par
value of $478.44 per share. 10.05 shares, or approximately 57.1%, of the
Class B Common Stock, are held by the ESOP. Messrs. Joseph and Levy are
participants in the ESOP. Each of Messrs. Joseph and Levy have sole voting
power with respect to approximately 4.12 shares of the Class B Common Stock
held by the ESOP; and other participants in the ESOP have sole voting power
with respect to approximately 1.81 shares of such stock. Messrs. Joseph and
Levy, and in limited circumstances the ESOP trustee, have shared investment
power with respect to 10.05 shares of such stock. Messrs. Joseph and Levy
have been allocated an aggregate of approximately 8.24 shares, or
approximately 82.0%, of the Class B Common Stock held by the ESOP
(representing 46.8% of the Lancer Class B Common Stock outstanding). Each of
Messrs. Joseph and Levy disclaim beneficial ownership of any shares of Class
B Common Stock held by the ESOP that have been allocated to other parties.
In addition, each of Messrs. Joseph and Levy have the right to purchase
approximately 0.26 shares of Class B Common Stock, or approximately 3.0% of
the Class B Common Stock in the aggregate. In addition, certain funds
affiliated with Mutual Series Fund Inc. beneficially own the remaining 40%
of the Lancer Class B Common Stock.
33
<PAGE>
RELATED TRANSACTIONS
CONTROLLING STOCKHOLDERS
The Company is a wholly-owned subsidiary of Lancer. A majority of Lancer's
voting stock is owned by the ESOP. Two participants in the ESOP, Messrs. Peter
A. Joseph and Paul S. Levy, collectively have the power to direct the voting of
approximately 46.8% of Lancer's common stock. In addition, each of Messrs.
Joseph and Levy have the right to purchase an aggregate of approximately 3.0% of
Lancer's common stock. As a result, these two participants in the ESOP have the
ability to exercise control over the current and future business and affairs of
the Company, including the ability to cause or prevent a change of control of
the Company, through their ability to elect the Company's Board of Directors and
their voting power with respect to actions requiring stockholder approval.
TAX SHARING AGREEMENT
The Company is included in the affiliated group of which Lancer is the
common parent, and the Company's federal taxable income and loss will be
included in such group's consolidated tax return filed by Lancer. The Company
and Lancer have entered into the Tax Sharing Agreement pursuant to which the
Company has agreed to pay to Lancer amounts equal to the taxes that the Company
would otherwise have to pay if it were to file separate federal, state or local
tax returns (including amounts determined to be due as a result of a
redetermination of the tax liability of Lancer). In addition, pursuant to the
Tax Sharing Agreement, to the extent that the Company's separate return
liability is absorbed by net operating losses or other credits and deductions of
Lancer or its subsidiaries (other than the Company and its subsidiaries), Lancer
will make a capital contribution to the Company in an amount equal to 50% of
such separate return liability. Under certain circumstances, however, such as
the Company ceasing to be a member of the Lancer consolidated group or the
disallowance by the IRS of the use of Lancer's net operating losses, Lancer no
longer would be required to make capital contributions under the Tax Sharing
Agreement.
OTHER ARRANGEMENTS WITH LANCER
From time to time, Lancer incurs legal, accounting and miscellaneous other
expenses on behalf of the Company. In fiscal 1996, 1995 and 1994, the Company
made aggregate payments to Lancer in respect of such expenses incurred by Lancer
on the Company's behalf in the amounts of approximately $0.6 million, $0.6
million and $0.5 million, respectively.
On December 5, 1996, the Company declared and paid a $17.0 million dividend
to Lancer (the '1996 Dividend') and made a $3.0 million advance to Lancer (the
'1996 Advance'). On February 10, 1997, the Company declared and paid a dividend
to Lancer of approximately $3.1 million, the proceeds of which dividend were
used by Lancer to repay in full the principal amount of the 1996 Advance,
together with all interest accrued thereon through the repayment date.
The proceeds of the 1996 Dividend and the 1996 Advance were used by Lancer
to redeem $20.0 million aggregate liquidation preference of the Lancer Preferred
Stock. As of December 31, 1996 (after giving effect to the $20.0 million
redemption made in December 1996), there was approximately $53 million aggregate
liquidation preference of Lancer Preferred Stock outstanding. On March 12, 1997,
Lancer redeemed approximately $47.7 million aggregate liquidation preference of
the Lancer Preferred Stock from the proceeds of the dividend paid by the Company
from the net proceeds of the Initial Offering. Lancer expects that all remaining
shares of Lancer Preferred Stock will be redeemed from Lancer's available cash.
FIRST COLONY FARMS MERGER
On March 27, 1997, First Colony Farms, Inc., a Delaware corporation and
wholly-owned subsidiary of Lancer ('First Colony'), merged with and into the
Company, with the Company being the surviving corporation of the merger.
Immediately prior to the merger, First Colony had (i) no known liabilities
(including contingent liabilities) and (ii) assets consisting of approximately
$10,000 in cash and certain net operating loss carry forwards. The merger
complied with the requirements of the Existing Indenture and the Certificate of
Designation governing the Existing Preferred Stock. In addition, the agent and
lender under the Credit Agreement consented to the merger. Following the merger,
the Company will continue to make payments to Lancer under the Tax Sharing
Agreement in accordance with its past practice.
34
<PAGE>
DESCRIPTION OF EXISTING INDEBTEDNESS
GE CREDIT AGREEMENT
The Company, T-H Licensing and General Electric Capital Corporation ('GE')
are party to the Credit Agreement, dated as of July 7, 1993, as amended (the 'GE
Credit Agreement'). The Credit Agreement provides for (i) $33.0 million in term
loans (the 'Term Loans') and (ii) a $20.0 million revolving credit facility (the
'Revolving Credit Facility' and, together with the Term Loans, the 'Credit
Facilities'), including up to $1.0 million under a letter of credit subfacility,
subject to borrowing base availability. At the Company's option, the Revolving
Credit Facility commitment may be increased by up to $5.0 million, subject to
the satisfaction of certain conditions. As of December 31, 1996 and March 31,
1997, total borrowings under the Credit Facilities were $33.0 million and
approximately $29.3 million, respectively, comprising $33.0 million and
approximately $29.3 million in Term Loans, respectively, and no borrowings under
the Revolving Credit Facility as of such dates. The following description of the
Credit Facilities does not purport to be complete and is qualified in its
entirety by reference to the GE Credit Agreement, a copy of which is available
from the Company upon request.
The Term Loans mature on December 31, 2000 and commitments under the
Revolving Credit Facility terminate on July 1, 2001. The Term Loans are payable
quarterly on February 15, May 15, August 15 and November 15 of each year
beginning in 1997 as follows: $3.0 million in 1997, $4.0 million in 1998, $7.0
million in 1999 and $9.0 million in 2000. The balance of the Term Loans, in the
amount of $7.0 million (after giving effect to a $3.0 million prepayment in
March 1997) is payable on December 31, 2000.
Interest under the Credit Facilities is payable at one of the two specified
rates, as selected by the Company, as follows: (i) 0.75% per annum over the
higher of (x) the highest prime rate announced by any of the five largest member
banks of the New York Clearing Association or (y) the published rate for
ninety-day dealer commercial paper or (ii) 2.25% per annum over a rate
calculated based on the one, two, three or six month eurodollar rate. Overdue
amounts under the Credit Facilities bear interest at the applicable interest
rate plus 2.00%. On or after January 1, 1998, the applicable margin on
eurodollar rate loans will vary from 1.75% per annum to 2.25% per annum (in the
case of the Term Loans) and from 1.50% per annum to 2.00% per annum (in the case
of advances under the Revolving Credit Facility) based on the ratio of the
Company's Consolidated EBITDA to Consolidated Net Interest Expense for the
preceding fiscal quarter.
The Company has agreed to pay certain customary fees and commissions to GE
under the Credit Agreement, including (i) an unused facility fee based on the
average unused daily balance of the Revolving Credit Facility, (ii) an annual
administrative fee and (iii) letter of credit fees based on the outstanding face
amount of letters of credit arranged for under the Credit Agreement, together
with all fees paid by GE to any issuing bank in respect of the letter of credit
subfacility.
The GE Credit Agreement permits the Company to make optional prepayments
under the Credit Facilities upon, in certain cases, payment of certain premiums,
costs and expenses. In addition, the Credit Agreement requires the Company to
make annual prepayments on the Term Loans in an amount equal to 50% of the
Company's Consolidated Excess Cash Flow (as defined in the Credit Agreement)
applied in the inverse order of maturity of the remaining installments due on
the Term Loans. In addition, the Company is required to make prepayments on the
Term Loans in an amount equal to the net proceeds received from (i) permitted
dispositions of assets out of the ordinary course of business by the Company or
its subsidiaries, (ii) 50% of net proceeds from permitted equity offerings by
the Company or its subsidiaries (excluding the net proceeds from this Offering)
and (iii) pension plan reversions, all applied in inverse order of maturity of
the remaining installments due on the Term Loans.
Borrowings under the Credit Facilities are guaranteed by T-H Licensing and
any future subsidiaries of the Company. Indebtedness under the Credit Facilities
is secured by a pledge of the Company's common stock owned by Lancer and a lien
on, and security interest in, substantially all of the Company's assets,
including, without limitation, all capital stock of subsidiaries, real estate,
equipment, inventory, accounts receivable and cash. The guarantee by T-H
Licensing and any other subsidiary guarantor is secured by substantially all
personal property of such guarantor.
35
<PAGE>
The GE Credit Agreement contains certain restrictive covenants that, among
other things, impose limitations (subject to certain exceptions) on the Company
(and in certain cases the Company's subsidiaries) with respect to: (i) certain
dispositions of property; (ii) restrictions on certain fundamental changes,
including, among other things, mergers, consolidations, liquidations, wind-ups
or dissolutions, transfers of all or substantially all of the assets of the
Company or its subsidiaries, and certain acquisitions; (iii) dividend payments
and other distributions with respect to the Company's capital stock, payments
with respect to subordinated indebtedness and purchases or redemptions of
warrants or securities; (iv) restrictions on certain amendments to the Existing
Indenture and, following the Offering, the Certificate of Designation; (v) the
creation or incurrence of certain liens; (vi) the incurrence of indebtedness;
(vii) transactions with affiliates; (viii) sale and leaseback transactions; (ix)
investments, loans, advances or capital contributions by the Company; (x) the
maintenance of bank accounts; (xi) the cancellation of any material claim; (xii)
the taking, or the failure to take, certain actions with respect to the Tax
Sharing Agreement; (xiii) capital expenditures exceeding certain specified
amounts; and (xiv) operating leases. The GE Credit Agreement also requires that
(i) the ratio of consolidated current assets to consolidated current
liabilities, (ii) the ratio of Consolidated Cash Flow to Consolidated Fixed
Charges and (iii) the ratio of Consolidated EBITDA to Consolidated Net Interest
Expense not be less than certain specified amounts.
The GE Credit Agreement also contains (i) certain customary affirmative
covenants (including a covenant requiring the Company to deposit amounts
collected in respect of inventory and accounts receivable on a daily basis into
certain lockbox accounts), (ii) certain customary events of default (including
events of default upon the occurrence of any material breach by the Company
under the Tax Sharing Agreement, any Change of Control (as defined below) and
the Company's failure to pay when due, upon acceleration or otherwise, $3
million or more of indebtedness, including indebtedness in respect of the
Existing Notes) and (iii) certain customary representations and warranties.
In February 1997, the Company and GE entered into an amendment to the GE
Credit Agreement to, among other things, permit the Initial Offering and the
Exchange Offer and the payment of cash dividends on the Preferred Stock.
CERTAIN DEFINITIONS
The following definitions are used in the GE Credit Agreement:
'Change of Control' means (a) the sale, in one or a series of related
transactions, of all or substantially all of the Company's assets as an entirety
to any person or related group of persons, (b) except as permitted under the GE
Credit Agreement, the merger or consolidation of the Company with or into
another person or the consolidation or merger of any other person with or into
the Company, (c) the failure of Lancer at any time (i) to maintain in the
aggregate a direct or indirect beneficial interest in the Company at least equal
to 50% of the entire beneficial equity interest held by all persons in the
Company or (ii) to own beneficially, directly or indirectly, capital stock
representing voting control of the Company or (d) a 'Change of Control' as
defined in the Existing Indenture or any other indenture or governing instrument
with respect to any subordinated indebtedness.
'Consolidated Cash Flow' means, for any period, without duplication, the
sum of: (a) Consolidated EBITDA for such period, plus (b) all payments made by
the Company and its subsidiaries pursuant to operating leases during such
period, less (c) capital expenditures made by the Company and its subsidiaries
during such period, plus (d) all tax capital contributions made to the Company
during such period and all other capital contributions made to the Company
during such period by any of its affiliates, in each case determined on a
consolidated basis in accordance with generally accepted accounting principles.
'Consolidated EBITDA' means, for any period, the sum of (a) Consolidated
Net Income for such period, plus (b) Consolidated Net Interest Expense for such
period, plus (c) all taxes computed on a stand-alone basis for the Company and
its subsidiaries accrued for such period on or measured by income, to the extent
treated as expense in the determination of Consolidated Net Income for such
period, plus (d) all depreciation and amortization of fees or intangibles of any
kind for such period, to the extent treated as expense in the determination of
Consolidated Net Income for such period, in each case determined on a
consolidated basis in accordance with generally accepted accounting principles.
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'Consolidated Excess Cash Flow' means, for any period, (a) Consolidated
Cash Flow for such period, plus (b) any decrease in Consolidated Working Capital
of the Company and its subsidiaries during such period, plus (c) the cash
portion of extraordinary gains during such period, less (d) any increase in
Consolidated Working Capital of the Company and its subsidiaries during such
period, less (e) consolidated Fixed Charges (exclusive of Consolidated Net
Interest Expense) for such period, less (f) net cash interest expense for such
periods, less (g) the Cash portion of extraordinary losses for such period, less
(h) Permitted Dividends (as defined in the GE Credit Agreement) declared and
paid during such period.
'Consolidated Fixed Charges' means, for any period, without duplication,
the sum of (a) Consolidated Net Interest Expense for such period (including,
without limitation, under capital leases), plus (b) scheduled amortization
during such period of the principal balance of the Term Loan, plus (c) all
payments made by the Company and its subsidiaries pursuant to operating leases
during such period, plus (d) all taxes payable by the Company and its
subsidiaries during such period, including all amounts paid or payable to Lancer
under the Tax Sharing Agreement during such period (without giving effect to any
corresponding capital contribution or other reduction therein provided for in
the Tax Sharing Agreement), plus (e) all payments made by the Company in cash
during such period as permitted under the restricted payments provisions of the
GE Credit Agreement (to the extent not added or subtracted in calculating
Consolidated Cash Flow), in each case determined on a consolidated basis in
accordance with generally accepted accounting principles.
'Consolidated Net Income' means, for any period, the net income (or loss)
after taxes of the Company and its subsidiaries for such period, determined on a
consolidated basis in accordance with generally accepted accounting principles,
but without giving effect to extraordinary losses or gains for such period or to
non-operating or non-cash items of income or expense (or expenses relating to
LIFO reserves) during such period, and excluding net income (or loss) of any
person other than the Company and its subsidiaries that is included in the
determination of such net income (or loss) except to the extent of dividends or
distributions paid to the Company or its subsidiaries.
'Consolidated Net Interest Expense' means, for any period, the gross
interest expense of the Company and its subsidiaries for such period, plus (a)
the portion of the upfront costs and expenses for interest rate contracts (to
the extent not included in gross interest expense) fairly allocated to such
interest rate contracts as expenses for such period, less interest income (to
the extent not deducted from gross interest expense), interest rate contracts
payments received and amortized debt discount and deferred financing fees (to
the extent not deducted from gross interest expense) of the Company and its
subsidiaries for such period, in each case determined on a consolidated basis in
accordance with generally accepted accounting principles.
'Consolidated Working Capital' means consolidated current assets minus
consolidated current liabilities.
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EXISTING NOTES
The following summary of certain terms of the Existing Notes and the
Existing Indenture does not purport to be complete and is subject to, and
qualified in its entirety by, reference to the provisions of the Existing
Indenture, including the definitions of certain terms contained therein and
those terms made part of the Existing Indenture by reference to the Trust
Indenture Act of 1939, as amended. Copies of the Existing Indenture are
available from the Company upon request.
As of December 31, 1996, the aggregate principal amount of Existing Notes
outstanding was $85.0 million. The Existing Notes are general unsecured
obligations of the Company, subordinated in right of payment to all existing and
future 'senior indebtedness' (as defined in the Existing Indenture), including
borrowings under the Credit Agreement. The Existing Notes will mature on July 1,
2001. The Existing Notes bear interest at a rate of 11.375% per annum, payable
semiannually in arrears on January 1 and July 1 of each year.
The Existing Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after July 1, 1998 at a redemption price equal to
104.250% of the principal amount thereof during the twelve-month period
beginning on July 1, 1998, 102.125% of the principal amount thereof during the
twelve-month period beginning on July 1, 1999 and 100% of the principal amount
thereof after July 1, 2000, together with accrued and unpaid interest to the
redemption date.
Under the Existing Indenture, in the event of a 'change of control' (as
defined below) the Company will be required to make an offer to purchase all
outstanding Existing Notes at a price equal to 101% of the principal amount
thereof plus accrued and unpaid interest to the date of purchase. The Existing
Indenture provides that a 'change of control' will occur in the event that any
one or more of the following events occurs: (a) any 'person' or 'group' (as such
terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended (the 'Exchange Act'), excluding Permitted Holders, is or
becomes the 'beneficial owner' (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person shall be deemed to have 'beneficial
ownership' of all securities that such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total Voting Stock of the
Company; (b) the Company consolidates with, or merges with or into, another
person or sells, assigns, conveys, transfers, leases or otherwise disposes of
all or substantially all of its assets to any person, or any person consolidates
with, or merges with or into, the Company, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Company is converted
into or exchanged for cash, securities or other property, other than any such
transaction where (i) the outstanding Voting Stock of the Company is converted
into or exchanged for (1) Voting Stock (other than Redeemable Capital Stock) of
the surviving or transferee corporation or (2) cash, securities and other
property in an amount which could be paid by the Company as a restricted payment
under the Existing Indenture and (ii) immediately after such transaction no
'person' or 'group' (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act), excluding Permitted Holders, is the 'beneficial owner' (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person
shall be deemed to have 'beneficial ownership' of all securities that such
person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time), directly or indirectly, of more than 50% of
the total Voting Stock of the surviving or transferee corporation; or (c) during
any consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the stockholders of the Company was approved by a vote of 66 2/3% of
the directors then still in office who were either directors at the beginning of
such period or persons whose election as directors or nomination for election
was previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office. 'Redeemable Capital Stock'
means any class or series of Capital Stock that, whether by its terms, by the
terms of any security into which it is convertible or exchangeable or by contact
or otherwise, is, or upon the happening of an event or passage of time would be,
required to be redeemed prior to any Stated Maturity (as defined) of the
Existing Notes or is redeemable at the option of the holder thereof at any time
prior to any Stated Maturity of the Existing Notes, or, at the option of the
holder thereof, is convertible into or exchangeable for debt securities at any
time prior to any Stated Maturity of the Existing Notes. 'Stated Maturity'
means, when used with respect to any Existing Note or any installment of
interest thereon, the date specified in such Existing Note as the fixed date on
which any principal of such Existing Note or such installment of interest is due
and payable, and when used with respect to any other Indebtedness or
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any installments of interest thereon, means any date specified in the instrument
governing such Indebtedness as the fixed date on which the principal of such
Indebtedness, or such installment of interest thereon, is due and payable.
The Existing Indenture contains certain covenants that, among other things
(and subject to certain exceptions), restrict the incurrence of additional
Indebtedness, the payment of dividends on, and redemptions of capital stock and
subordinated indebtedness, the making of investments, transactions with
affiliates, the sale of certain assets, the issue and sale of preferred stock of
Restricted Subsidiaries, the incurrence of liens, the incurrence of restrictions
on the ability of Restricted Subsidiaries to pay dividends or other payments,
the making of certain guarantees by Restricted Subsidiaries, the incurrence of
other senior subordinated indebtedness, the issuance and sale of preferred stock
by Restricted Subsidiaries, and the ability of the Company to engage in certain
mergers or consolidations or to transfer all or substantially all of its assets
to another person. In addition, the Existing Indenture contains certain
customary events of default (including upon the Company's failure to pay when
due, upon acceleration or otherwise, $5 million or more of indebtedness,
including indebtedness under the Credit Agreement).
DESCRIPTION OF CAPITAL STOCK
Immediately prior to the Exchange Offer, the authorized capital stock of
the Company will consist of (i) 10,000,000 shares of common stock, par value
$.01 per share, of which 7,805,000 shares were issued and outstanding and owned
of record and beneficially by Lancer and (ii) 250,000 shares of preferred stock,
consisting of (a) 50,000 shares of Existing Preferred Stock issued and
outstanding, (b) 75,000 shares of Existing Preferred Stock reserved for issuance
pursuant to the terms of the Certificate of Designation governing the Existing
Preferred Stock and (c) 125,000 shares of New Preferred Stock reserved for
issuance in connection with the Exchange Offer and pursuant to the terms of the
Certificate of Designation governing the New Preferred Stock.
100% of the issued and outstanding shares of the Company's common stock are
owned by Lancer. The Company issues common stock to Lancer from time to time in
connection with capital contributions made by Lancer under the Tax Sharing
Agreement. Upon liquidation, dissolution or winding up of the Company, the
holders of the Company's common stock are entitled to ratably share in all
assets available for distribution after payment in full of creditors and holders
of the New Preferred Stock. Lancer has pledged the shares of the Company's
common stock that it owns to GE as security for the Company's obligations under
the GE Credit Agreement. Subject to the terms of the Company's existing debt
agreements and the terms of the Certificate of Designation, the Company may pay
dividends on its common stock if, when and as declared by the Board of Directors
from legally available funds.
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THE EXCHANGE OFFER
The summary herein of certain provisions of the Registration Agreement does
not purport to be complete and reference is made to the provisions of the
Registration Agreement, which has been filed as an exhibit to the Registration
Statement and a copy of which is available as set forth under the heading
'Available Information.'
TERMS OF THE EXCHANGE OFFER
General
In connection with the issuance of the Existing Preferred Stock pursuant to
a Securities Purchase Agreement, dated as of March 7, 1997, between the Company
and the Initial Purchaser, the Initial Purchaser and their respective assignees
became entitled to the benefits of the Registration Agreement.
Under the Registration Agreement, the Company has agreed (i) to use its
best efforts to file with the Commission within 30 days of the Issue Date, the
Registration Statement of which this Prospectus is a part with respect to a
registered offer to exchange the Existing Preferred Stock for the New Preferred
Stock, (ii) to use its best efforts to cause the Registration Statement to be
declared effective under the Securities Act within 150 days after the Issue Date
and (iii) to use its best efforts to consummate the Exchange Offer within 180
calendar days after the Issue Date. The Company will keep the Exchange Offer
open for not less than 30 days after the date notice of the Exchange Offer is
mailed to holders of the Existing Preferred Stock. The Exchange Offer being made
hereby, if commenced and consummated within the time periods described in this
paragraph, will satisfy those requirements under the Registration Agreement.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, all Existing Preferred Stock validly tendered
and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date
will be accepted for exchange. New Preferred Stock will be issued in exchange
for an equal liquidation preference of outstanding Existing Preferred Stock
accepted in the Exchange Offer. Existing Preferred Stock may be tendered only in
integral multiples of $1,000. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders as of June 11, 1997. The
Exchange Offer is not conditioned upon any minimum principal amount of Existing
Preferred Stock being tendered for exchange. However, the obligation to accept
Existing Preferred Stock for exchange pursuant to the Exchange Offer is subject
to certain conditions as set forth herein under '--Conditions.'
Existing Preferred Stock shall be deemed to have been accepted as validly
tendered 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 of Existing Preferred Stock for the purposes of receiving the New
Preferred Stock and delivering New Preferred Stock to such holders.
Based on interpretations by the Staff of the Commission as set forth in
no-action letters issued to third parties (including Exxon Capital Holding Corp.
(available May 13, 1988), Morgan Stanley & Co. Incorporated (available June 5,
1991) and K-III Communications Corporation (available May 14, 1993) the Company
believes that the New Preferred Stock 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 a broker-dealer or 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 (i) such New Preferred Stock is acquired in the
ordinary course of such holder's business, (ii) at the time of the commencement
of the Exchange Offer such holder has no arrangement with any person to
participate in a distribution of such New Preferred Stock and (iii) such holder
is not engaged in, and does not intend to engage in, a distribution of such New
Preferred Stock. The Company has not sought, and does not intend to seek, a
no-action letter from the Commission with respect to the effects of the Exchange
Offer, and there can be no assurance that the Staff would make a similar
determination with respect to the New Preferred Stock as it has in such
no-action letters.
By tendering Existing Preferred Stock in exchange for New Preferred Stock
and executing the Letter of Transmittal, each holder will represent to the
Company that: (i) it is not an affiliate of the Company, (ii) any New Preferred
Stock to be received by it will be acquired in the ordinary course of such
holder's business and (iii) at the time of the commencement of the Exchange
Offer it had no arrangement with any person to participate in a distribution of
the New Preferred Stock and, if such holder is not a broker-dealer, it is not
engaged in, and does
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not intend to engage in, a distribution of New Preferred Stock. If a holder of
Existing Preferred Stock is unable to make the foregoing representations, such
holder may not rely on the applicable interpretations of the Staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction unless such sale is made pursuant to an exemption from such
requirements.
Each broker-dealer that receives New Preferred Stock for its own account in
exchange for Existing Preferred Stock where such Existing Preferred Stock was
acquired by such broker-dealer as a result of market-making or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Preferred Stock. See 'Plan of Distribution.'
Upon consummation of the Exchange Offer, subject to certain limited
exceptions, holders of Existing Preferred Stock who do not exchange their
Existing Preferred Stock for New Preferred Stock in the Exchange Offer will no
longer be entitled to registration rights under the Registration Agreement and
will not be able to offer or sell their Existing Preferred Stock, unless such
Existing Preferred Stock is subsequently registered under the Securities Act
(which, subject to certain limited exceptions, the Company will have no
obligation to do), except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws.
Expiration Date; Extensions; Amendments; Termination
The term 'Expiration Date' shall mean July 16, 1997 (30 calendar days
following the commencement of the Exchange Offer), unless the Company, in its
sole discretion, extends the Exchange Offer, in which case the term 'Expiration
Date' shall mean the latest date to which the Exchange Offer is extended.
Notwithstanding any extension of the Exchange Offer, if the Exchange Offer is
not consummated within 180 days after the Issue Date, the interest rate borne by
the Existing Preferred Stock will increase as provided in the Certificate of
Designation governing the Existing Preferred Stock.
To extend the Expiration Date, the Company will notify the Exchange Agent
of any extension by oral or written notice and will notify the holders of the
Existing Preferred Stock by means of a press release or other public
announcement prior to 9:00 A.M., New York City time, on the next business day
after the previously scheduled Expiration Date. Such announcement may state that
the Company is extending the Exchange Offer for a specified period of time.
The Company reserves the right (i) to delay acceptance of any Existing
Preferred Stock, to extend the Exchange Offer or to terminate the Exchange Offer
and not permit acceptance of Existing Preferred Stock not previously accepted if
any of the conditions set forth herein under '--Conditions' shall have occurred
and shall not have been waived by the Company, 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 deemed by it to be advantageous to
the holders of the Existing Preferred Stock. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the Exchange Agent. If the Exchange Offer
is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment in a manner reasonably
calculated to inform the holders of the Existing Preferred Stock of such
amendment.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligations to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
DIVIDENDS ON THE NEW PREFERRED STOCK
The New Preferred Stock will accumulate dividends at the rate of 11 1/4%
per annum from the last dividend payment date on which dividends were paid on
the shares of Existing Preferred Stock surrendered in exchange therefor or, if
no dividends have been paid, from the Issue Date of the Existing Preferred
Stock. Dividends on the New Preferred Stock are payable on March 15 and
September 15 of each year, commencing September 15, 1997.
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PROCEDURES FOR TENDERING
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 any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) a timely confirmation of a
book-entry transfer (a 'Book-Entry Confirmation') of such Existing Preferred
Stock into the Exchange Agent's account at The Depository Trust Company (the
'Book-Entry Transfer Facility') pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date or (ii) the holder must comply with the guaranteed delivery
procedures described below. Holders can execute the tender through the DTC
Automated Tender Offer Program ("ATOP") for which the transaction will be
eligible. DTC participants should transmit their acceptance to DTC which will
verify the acceptance, execute a book-entry delivery to the Exchange Agent's
account at DTC and send an Agent's Message (as defined herein) to the Exchange
Agent for its acceptance. See "--Book-Entry Transfer." THE METHOD OF DELIVERY
OF LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY
THROUGH DTC AND ANY ACCEPTANCE OF AGENT'S MESSAGES TRANSMITTED THROUGH ATOP,
IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OTHER REQUIRED DOCUMENTS SHOULD BE
SENT TO THE COMPANY. Delivery of all documents must be made to the Exchange
Agent at its address set forth below. Holders may also request their respective
brokers, dealers, commercial banks, trust companies or nominees to effect such
tender for such holders.
The tender by a holder of Existing Preferred Stock will constitute an
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. Any
beneficial owner whose Existing Preferred Stock is 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 his behalf.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an 'eligible guarantor' institution within the meaning of Rule
17Ad-15 under the Exchange Act (each an 'Eligible Institution') unless the
Existing Preferred Stock tendered pursuant thereto is tendered for the account
of an Eligible Institution.
If the Letter of Transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such person should so indicate
when signing, and unless waived by the Company, evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Existing Preferred Stock 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
Existing Preferred Stock not properly tendered or any Existing Preferred Stock
which, if accepted, would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the absolute right to waive any
irregularities or conditions of tender as to particular Existing Preferred
Stock. 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 Existing Preferred Stock must be cured within such
time as the Company shall determine. Neither the Company, the Exchange Agent nor
any other person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Existing Preferred Stock, nor shall
any of them incur any liability for failure to give such notification. Tenders
of Existing Preferred Stock will not be deemed to have been made until such
irregularities have been cured or waived. Any Existing Preferred Stock received
by the Exchange Agent that is not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned without cost to
such holder by the Exchange Agent, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the respective Certificates of Designation governing the
Preferred Stock, to (i) purchase or make offers for any Existing Preferred Stock
that remains outstanding subsequent to the Expiration Date or, as set forth
under
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'--Conditions', to terminate the Exchange Offer in accordance with the terms of
the Registration Agreement, (ii) to redeem Existing Preferred Stock as a whole
or in part at any time and from time to time, as set forth under 'Description of
New Preferred Stock and Exchange Debentures--Optional Redemption' and (iii) to
the extent permitted by applicable law, purchase Existing Preferred Stock in the
open market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers could differ from the terms of the Exchange Offer.
ACCEPTANCE OF EXISTING PREFERRED STOCK FOR EXCHANGE; DELIVERY OF NEW PREFERRED
STOCK
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all shares of Existing Preferred Stock properly tendered will be accepted on the
first business day after the Expiration Date, and the New Preferred Stock will
be issued promptly after acceptance of the Existing Preferred Stock. See
'--Conditions.' For purposes of the Exchange Offer, Existing Preferred Stock
shall be deemed to have been accepted as validly tendered for exchange when, as
and if the Company has given oral or written notice thereof to the Exchange
Agent.
In all cases, issuance of shares of New Preferred Stock for shares of
Existing Preferred Stock that is accepted for exchange pursuant to the Exchange
Offer will be made only after timely receipt by the Exchange Agent of a
Book-Entry Confirmation of such Existing Preferred Stock into the Exchange
Agent's account at the Book-Entry Transfer Facility, a properly completed and
duly executed Letter of Transmittal and all other required documents. If any
tendered Existing Preferred Stock is not accepted for any reason set forth in
the terms and conditions of the Exchange Offer, such unaccepted or such
nonexchanged Existing Preferred Stock will be credited to an account maintained
with such Book-Entry Transfer Facility as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Existing Preferred Stock at the Book-Entry Transfer Facility for purposes
of the Exchange Offer within two business days after the date of this
Prospectus. Any financial institution that is a participant in the Book-Entry
Transfer Facility's systems may make book-entry delivery of Existing Preferred
Stock by causing the Book-Entry Transfer Facility to transfer such Existing
Preferred Stock into the Exchange Agent's account at the Book-Entry Transfer
Facility in accordance with such Book-Entry Transfer Facility's procedures for
transfer. However, the Letter of Transmittal or facsimile thereof with any
required signature guarantees or an Agent's Message and any other required
documents must, in any case, be transmitted to and received by the Exchange
Agent at one of the addresses set forth below under '--Exchange Agent' on or
prior to the Expiration Date or the guaranteed delivery procedures described
below must be complied with. Delivery of documents to DTC does not constitute
delivery to the Exchange Agent. The term "Agent's Message" means a message
transmitted to DTC to, and received by, the Exchange Agent and forming a part of
the Book-Entry Confirmation, which states that DTC has received an express
acknowledgment from the participant in DTC tendering the Existing Preferred
Stock 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.
GUARANTEED DELIVERY PROCEDURES
If the procedures for book-entry transfer cannot be completed on a timely
basis, a tender may be effected if (i) the tender is made through an Eligible
Institution, (ii) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by the Company (by facsimile transmission,
mail or hand delivery), or an Agent's Message with respect to guaranteed
delivery that is accepted by the Company, setting forth the name and address of
the holder of Existing Preferred Stock and the amount of Existing Preferred
Stock tendered, stating that the tender is being made thereby and guaranteeing
that within three New York Stock Exchange ('NYSE') trading days after the date
of execution of the Notice of Guaranteed Delivery, a Book-Entry Confirmation and
any other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent and (iii) a Book-Entry
Confirmation and all other documents required by the Letter of Transmittal are
received by the Exchange Agent within three NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery.
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WITHDRAWAL OF TENDERS
Tenders of Existing Preferred Stock may be withdrawn at any time prior to
5:00 p.m., New York City time on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to 5:00 p.m., New York City time on the
Expiration Date at one of the addresses set forth below under
'--Exchange Agent.' Any such notice of withdrawal must specify the name and
number of the account at the Book-Entry Transfer Facility from which the
Existing Preferred Stock was tendered, identify the principal amount of the
Existing Preferred Stock to be withdrawn, and specify the name and number of the
account at the Book-Entry Transfer Facility to be credited with the withdrawn
Existing Preferred Stock and otherwise comply with the procedures of such
facility. All questions as to the validity, form and eligibility (including time
of receipt) of such notice will be determined by the Company, whose
determination shall be final and binding on all parties. Any Existing Preferred
Stock so withdrawn will be deemed not be have been validly tendered for exchange
for purposes of the Exchange Offer. Any Existing Preferred Stock which has been
tendered for exchange but which is not exchanged for any reason will be credited
to an account maintained with such Book-Entry Transfer Facility for the Existing
Preferred Stock as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Existing Preferred Stock
may be retendered by following one of the procedures described under
'--Procedures for Tendering' and '--Book-Entry Transfer' above at any time on or
prior to the Expiration Date.
CONDITIONS
The Company has no obligation to consummate the Exchange Offer if the
Company or the holders of a majority in aggregate liquidation preference of the
Existing Preferred Stock reasonably determines in good faith (after conferring
with counsel) that (i) the New Preferred Stock to be received by such holder or
holders of Existing Preferred Stock in the Exchange Offer, upon receipt, will
not be tradable by such holder without restriction under the Securities Act and
the Exchange Act and without material restrictions under the 'blue sky' or
securities laws of the several states of the United States, (ii) the interests
of the holder of the Existing Preferred Stock would be materially adversely
affected by consumation of the Exchange Offer or (iii) the Commission is
unlikely to permit the consumation of the Exchange Offer within 180 days of the
Issue Date. In the event that the Company is not obligated to consumate the
Exchange Offer as a result of the occurence of one of the foregoing events, then
the Company shall be obligated to file a shelf registration statement with
respect to the Existing Preferred Stock and keep such shelf registration
statement continuously effective for three years.
44
<PAGE>
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance and requests
for additional copies of this Prospectus or of the Letter of Transmittal should
be directed to the Exchange Agent addressed as follows:
<TABLE>
<CAPTION>
By Mail: By Hand to 4:30 p.m.:
<S> <C>
United States Trust Company United States Trust Company
of New York of New York
P.O. Box 843 111 Broadway
Cooper Station New York, New York
New York, New York 10006 10006
Attn: Corporate Trust Services Attn: Lower Level Corporate Trust
Window
By Overnight Courier and By Hand
after 4:30 p.m.: By Facsimile:
(212) 420-6152
United States Trust Company (For Eligible Institutions Only)
of New York By Telephone:
770 Broadway, 13th floor (800)548-6565
New York, New York 10003
Attn: Corporate Trust Redemption
Unit
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Company.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of the Prospectus and related documents to the beneficial
owners of the Existing Preferred Stock, and in handling or forwarding tenders
for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of the Exchange Agent and
accounting, legal, printing and related fees and expenses but excluding certain
commissions, if any, relating to a holder's disposition of its shares of
Existing Preferred Stock in connection with the Exchange Offer.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Existing Preferred Stock who do not exchange their Existing
Preferred Stock for New Preferred Stock pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer of such Existing
Preferred Stock as set forth in the legend thereon as a consequence of the
issuance of the Existing Preferred Stock 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 Existing Preferred Stock
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Existing Preferred Stock under
the Securities Act. To the extent that Existing Preferred Stock is tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Existing Preferred Stock could be adversely affected.
45
<PAGE>
DESCRIPTION OF NEW PREFERRED STOCK AND EXCHANGE DEBENTURES
THE NEW PREFERRED STOCK
The summary contained herein of certain provisions of the New Preferred
Stock to be issued by the Company in connection with the Exchange Offer does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all of the provisions of the Certificate of Designation relating
thereto. A copy of the form of Certificate of Designation for the New Preferred
Stock is filed as an exhibit to the Registration Statement of which this is
part. The definitions of certain capitalized terms used in the following summary
are set forth under '--Certain Definitions' below. Other capitalized terms used
herein and not otherwise defined under '--Certain Definitions' below are defined
in the Certificate of Designation.
GENERAL
The Company is authorized to issue 250,000 shares of preferred stock, par
value $.01 per share. The Board of Directors has adopted resolutions designating
125,000 of such shares of preferred stock as Existing Preferred Stock and has
filed a Certificate of Designation with respect thereto with the Secretary of
State of the State of Delaware as required by Delaware law. On or prior to the
exchange of the New Preferred Stock for the Existing Preferred Stock, the Board
of Directors will adopt resolutions designating 125,000 of such shares of
preferred stock as New Preferred Stock and will file a Certificate of
Designation with respect thereto with the Secretary of State of Delaware as
required by Delaware law. The shares of New Preferred Stock so designated will
be issued in connection with the Exchange Offer or will be reserved for issuance
as dividends in the event the Company elects (in accordance with the terms of
the Certificate of Designation governing the New Preferred Stock) to pay
dividends on the New Preferred Stock by issuing additional shares (including
fractional shares) of such stock (but not less than $1.00). See '--Dividends'
below. Other than untendered or tendered but unaccepted shares of Existing
Preferred Stock, no other shares of preferred stock of the Company will be
outstanding upon consummation of the Exchange Offer. Subject to certain
conditions, if and only to the extent permitted by any Indebtedness of the
Company then outstanding, the New Preferred Stock is exchangeable for Exchange
Debentures at the option of the Company on any Dividend Payment Date on or after
July 2, 2001. The New Preferred Stock, when issued and paid for by the Initial
Purchaser in accordance with the terms of the purchase agreement, will be fully
paid and non-assessable and holders thereof will not have any subscription or
preemptive rights in connection therewith.
RANKING
The New Preferred Stock will, with respect to dividend rights and rights on
liquidation, winding-up and dissolution, rank (i) senior to all classes of
Common Stock of the Company and to each other class of Capital Stock or series
of Preferred Capital Stock established after the Offering by the Board of
Directors of the Company the terms of which do not expressly provide that it
ranks senior to, or on a parity with, the New Preferred Stock as to dividend
rights and rights on liquidation, winding-up and dissolution of the Company
(collectively referred to, together with all classes of common stock of the
Company, as 'Junior Stock'); (ii) subject to certain conditions, on a parity
with each other class of Capital Stock or series of Preferred Capital Stock
issued by the Company established after the Offering by the Board of Directors
of the Company the terms of which expressly provide that such class or series
will rank on a parity with the New Preferred Stock as to dividend rights and
rights on liquidation, winding-up and dissolution (collectively referred to as
'Parity Stock'); and (iii) subject to certain conditions, junior to each class
of Capital Stock or series of Preferred Capital Stock established after the date
hereof by the Board of Directors of the Company the terms of which expressly
provide that such class or series will rank senior to the New Preferred Stock as
to dividend rights and rights upon liquidation, winding-up and dissolution of
the Company (collectively referred to as the 'Senior Stock'). The New Preferred
Stock will be subject to the issuance of series of Junior Stock, Parity Stock
and Senior Stock; provided, that the Company may not issue any new class of
Parity Stock or Senior Stock (or amend the provisions of any existing class of
capital stock to make such class of stock Parity Stock or Senior Stock) without
the approval of the holders of at least a majority of the shares of New
Preferred Stock then outstanding, voting or consenting, as the case may be,
together as one class.
46
<PAGE>
DIVIDENDS
Holders of New Preferred Stock will be entitled to receive, when, as and if
declared by the Board of Directors of the Company, out of funds legally
available therefor, cash dividends on the New Preferred Stock at a rate per
annum equal to 11 1/4% of the then effective liquidation preference per share of
the New Preferred Stock, payable semi-annually. In the event that dividends on
the New Preferred Stock are in arrears and unpaid for more than three
semi-annual dividend periods occurring after March 15, 2002 (whether or not
consecutive), holders of New Preferred Stock will be entitled to certain voting
rights. See '--Voting Rights.' All dividends will be cumulative, whether or not
earned or declared, on a daily basis from the last dividend payment date on
which dividends were paid on the shares of Existing Preferred Stock surrendered
in exchange thereafter or, if no dividends have been paid, from the Issue Date
and will be payable semi-annually in arrears on March 15 and September 15 of
each year, commencing on September 15, 1997 to holders of record on the March 1
and September 1, immediately preceding the relevant Dividend Payment Date. The
Credit Agreement and the Existing Indenture limit the Company's ability to pay
cash dividends on its Capital Stock, including the New Preferred Stock. See
'Description of Existing Indebtedness.' The Company may, at its option, pay
dividends on any Dividend Payment Date occurring on or before March 15, 2002
either in cash or by the issuance of additional shares of New Preferred Stock
(including fractional shares) having an aggregate liquidation preference equal
to the amount of such dividends (but not less than $1.00). In the event that on
or prior to March 15, 2002 dividends are declared and paid through the issuance
of additional shares of New Preferred Stock, as provided in the previous
sentence, such dividends will be deemed paid in full and will not accumulate.
No full dividends may be declared or paid or funds set apart for the
payment of dividends on any Parity Stock for any period unless full cumulative
dividends shall have been or contemporaneously are declared and paid in full or
declared and, if payable in cash, a sum in cash set apart for such payment on
the New Preferred Stock. If full dividends are not so paid, the New Preferred
Stock will share dividends pro rata with the Parity Stock. No dividends may be
paid or set apart for such payment on Junior Stock (except dividends on Junior
Stock in additional shares of Junior Stock) and no Junior Stock or Parity Stock
may be repurchased, redeemed or otherwise retired nor may funds be set apart for
payment with respect thereto, if full cumulative dividends have not been paid on
the New Preferred Stock. Unpaid dividends accruing after March 15, 2002 on the
New Preferred Stock for any past dividend period and dividends in connection
with any optional redemption may be declared and paid at any time, without
reference to any regular Divided Payment Date, to holders of record on such
date, not more than forty-five (45) days prior to the payment thereof, as may be
fixed by the Board of Directors of the Company. So long as any shares of the New
Preferred Stock are outstanding, the Company shall not make any payment on
account of, or set apart money for a sinking fund or other similar fund for, the
purchase, redemption or other retirement of, any of the Parity Stock or Junior
Stock or any warrants, rights, calls or options exercisable for or convertible
into any of the Parity Stock or Junior Stock, and shall not permit any
corporation or other entity directly or indirectly controlled by the Company to
purchase or redeem any of the Parity Stock or Junior Stock or any such warrants,
rights, calls or options unless full cumulative dividends determined in
accordance herewith on the New Preferred Stock have been paid in full.
OPTIONAL REDEMPTION
The New Preferred Stock may be redeemed (subject to contractual and other
restrictions with respect thereto and to the legal availability of funds
therefor) at any time on or after March 15, 2002, in whole or in part, at the
option of the Company, at the redemption prices (expressed in percentages of the
then effective liquidation preference thereof) set forth below, plus, without
duplication, an amount in cash equal to all accumulated and unpaid dividends
(including an amount in cash equal to a prorated dividend for the period from
the Dividend
47
<PAGE>
Payment Date immediately prior to the redemption date to the redemption date),
if redeemed during the 12-month period beginning March 15 of each of the years
set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ----------------------------------------------------------- ----------
<S> <C>
2002....................................................... 105.625%
2003....................................................... 104.219%
2004....................................................... 102.813%
2005....................................................... 101.406%
2006 and thereafter........................................ 100.000%
</TABLE>
In the event of partial redemption of the New Preferred Stock, the shares
to be redeemed shall be determined pro rata, except that the Company may redeem
all shares held by holders of fewer than ten shares (or shares held by holders
who would hold less than ten shares as a result of such redemption), as may be
determined by the Company.
No optional redemption may be authorized or made unless prior thereto full
unpaid cumulative dividends shall have been paid or a sum set apart for such
payment on the New Preferred Stock.
MANDATORY REDEMPTION
The New Preferred Stock will also be subject to mandatory redemption
(subject to contractual and other restrictions with respect thereto and to the
legal availability of funds therefor) in whole on March 15, 2009, at a price
equal to 100% of the liquidation preference thereof, plus, without duplication,
all accumulated and unpaid dividends to the redemption date. Future debt
agreements or certificates of designation with respect to Senior Stock or Parity
Stock may prohibit or restrict the Company's ability to redeem the New Preferred
Stock.
PROCEDURE FOR REDEMPTION
On and after the redemption date, unless the Company defaults in the
payment of the applicable redemption price, dividends will cease to accrue on
shares of New Preferred Stock called for redemption and all rights of holders of
such shares will terminate except for the right to receive the redemption price,
without interest. If a notice of redemption shall have been given as provided in
the succeeding sentence and the funds necessary for redemption (including an
amount in respect of all dividends that will accrue to the redemption date)
shall have been segregated and irrevocably set apart by the Company, in trust
for the benefit of the holders of the shares called for redemption, then
dividends shall cease to accumulate on the redemption date on the shares to be
redeemed and, at the close of business on the day when such funds are segregated
and set apart, the holders of the shares to be redeemed shall cease to be
stockholders of the Company and shall be entitled only to the redemption price
for such shares. The Company will send a written notice of redemption by first
class mail to each holder of record of shares of New Preferred Stock, not fewer
than 30 days nor more than 60 days prior to the date fixed for such redemption
at its registered address. Shares of New Preferred Stock issued and reacquired
will, upon compliance with the applicable requirements of Delaware law, have the
status of authorized but unissued shares of preferred stock of the Company
undesignated as to series and may, with any and all other authorized but
unissued shares of preferred stock of the Company, be designated or redesignated
and issued or reissued, as the case may be, as part of any series of preferred
stock of the Company, except that any issuance or reissuance of shares of New
Preferred Stock must be in compliance with the Certificate of Designation.
EXCHANGE
The New Preferred Stock is exchangeable at the option of the Company, in
whole but not in part, for the Exchange Debentures on any scheduled dividend
payment date occurring after the earlier of (i) July 2, 2001 and (ii) the date
on which all of the Existing Notes are redeemed, only if and only to the extent
such exchange is permitted pursuant to the terms of the Company's Indebtedness
then outstanding; provided that (i) on the date of such exchange there are no
accumulated and unpaid dividends on the New Preferred Stock (including the
dividend payable on such date) or other contractual impediment to such exchange;
(ii) there shall be legally available funds sufficient therefor; and (iii)
immediately after giving effect to such exchange, no Default or Event
48
<PAGE>
of Default (each as defined in the Exchange Indenture) would exist under the
Exchange Indenture and no default or event of default would exist under the
Credit Agreement.
The Company intends to comply with the provisions of Rule 13e-4 promulgated
pursuant to the Exchange Act in connection with the exchange, to the extent
applicable. The exchange of the New Preferred Stock into Exchange Debentures
will be prohibited by covenants contained in the Credit Agreement, relating,
among other things, to the incurrence of indebtedness.
Upon any exchange pursuant to the preceding paragraph, holders of
outstanding shares of New Preferred Stock will be entitled to receive, subject
to the second succeeding sentence, $1.00 principal amount of Exchange Debentures
for each $1.00 liquidation preference of New Preferred Stock held by them. The
Exchange Debentures will be issued in registered form, without coupons. Exchange
Debentures issued in exchange for New Preferred Stock will be issued in
principal amounts of $1,000 and integral multiples thereof to the extent
possible, and will also be issued in principal amounts less than $1,000 so that
each holder of New Preferred Stock will receive certificates representing the
entire amount of Exchange Debentures to which such holder's shares of New
Preferred Stock entitle such holder; provided that the Company may pay cash in
lieu of issuing an Exchange Debenture in a principal amount less than $1,000.
The Company will send a written notice of exchange by mail to each holder of
record of shares of New Preferred Stock no less than 30 days nor more than 60
days before the date fixed for such exchange. On and after date of exchange,
dividends will cease to accrue on the outstanding shares of New Preferred Stock,
and all rights of the holders of New Preferred Stock (except the right to
receive the Exchange Debentures, an amount in cash, to the extent applicable,
equal to the accumulated and unpaid dividends to the date of exchange and, if
the Company so elects, cash in lieu of any Exchange Debenture which is in an
amount that is not an integral multiple of $1,000) will terminate. The person
entitled to receive the Exchange Debentures issuable upon such exchange will be
treated for all purposes as the registered holder of such Exchange Debentures.
See '--The Exchange Debentures.'
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, holders of New Preferred Stock will be entitled to be paid, out of
the assets of the Company available for distribution, $1,000 per share, plus an
amount in cash equal to accumulated and unpaid dividends thereon to the date
fixed for liquidation, dissolution or winding-up (including an amount equal to a
prorated dividend for the period from the last dividend payment date to the date
fixed for liquidation, dissolution or winding-up), before any distribution is
made on any Junior Stock, including, without limitation, common stock of the
Company. If, upon any voluntary or involuntary liquidation, dissolution or
winding-up of the Company, the amounts payable with respect to the New Preferred
Stock and all other Parity Stock are not paid in full, the holders of the New
Preferred Stock and the Parity Stock will share equally and ratable in any
distribution of assets of the Company in proportion to the full liquidation
preference to which each is entitled. After payment of the full amount of the
liquidation preference and accumulated and unpaid dividends to which they are
entitled, the holders of shares of New Preferred Stock will not be entitled to
any further participation in any distribution of assets of the Company. However,
neither the sale, conveyance, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the property
or assets of the Company nor the consolidation or merger of the Company with one
or more corporations shall be deemed to be a liquidation, dissolution or
winding-up of the Company.
The Certificate of Designation for the New Preferred Stock will not contain
any provision requiring funds to be set aside to protect the liquidation
preference of the New Preferred Stock, although such liquidation preference will
be substantially in excess of the par value of such shares of New Preferred
Stock. In addition, the Company is not aware of any provision of Delaware law or
any controlling decision of the courts of the State of Delaware (the state of
incorporation of the Company) that requires a restriction upon the surplus of
the Company solely because the liquidation preference of the New Preferred Stock
will exceed its par value. Consequently, there will be no restriction upon the
surplus of the Company solely because the liquidation preference of the New
Preferred Stock will exceed its par value and there will be no remedies
available to holders of the New Preferred Stock before or after the payment of
any dividend, other than in connection with the liquidation of the Company,
solely by reason of the fact that such dividend would reduce the surplus of the
Company to an amount less than the difference between the liquidation preference
of the New Preferred Stock and its par value.
49
<PAGE>
VOTING RIGHTS
Holders of the New Preferred Stock will have no voting rights with respect
to general corporate matters except as provided by law or as set forth in the
Certificate of Designation. The Certificate of Designation will provide that if
(i) after March 15, 2002, cash dividends on the New Preferred Stock are in
arrears and unpaid for three semi-annual periods (whether or not consecutive);
(ii) the Company fails to redeem the New Preferred Stock on or before March 15,
2009 or fails to discharge any redemption obligation with respect to the New
Preferred Stock; (iii) the Company fails to make a Change of Control Offer in
the event of a Change of Control occurring on or after July 2, 2001 or fails to
purchase shares of the New Preferred Stock from holders who elect to have such
shares purchased pursuant to the Change of Control Offer; (iv) a breach or
violation of any of the provisions described under the caption '--Certain
Covenants' below occurs and the breach or violation continues for a period of 30
days or more after the Company receives notice thereof specifying the default
from the holders of at least 25% of the shares of the New Preferred Stock then
outstanding; or (v) the failure to pay at the final stated maturity (giving
effect to any extensions thereof and applicable grace periods) the principal
amount of any Indebtedness of the Company or any Subsidiary of the Company, or
the acceleration of the final stated maturity of any such Indebtedness, if the
aggregate principal amount of such Indebtedness, together with the aggregate
principal amount of any other such Indebtedness in default for failure to pay
principal at the final stated maturity (giving effect to any extensions thereof
and applicable grace periods) or which has been accelerated, aggregates $5.0
million or more at any time, in each case, after a 10-day period during which
such default shall not have been cured or such acceleration rescinded, then the
number of directors constituting the Board of Directors will be adjusted to
permit the holders of the majority of the then outstanding New Preferred Stock,
voting separately as a class, to elect the lesser of two directors or that
number of directors constituting at least 25% of the Board of Directors of the
Company; provided, that, in the event more than one of the above defaults
occurs, at the same or at different times, the maximum number of directors that
such holders shall be entitled to elect is the lesser of two directors and that
number constituting at least 25% of the Board of Directors of the Company. Such
voting rights will continue until such time as, in the case of a dividend
default, all accumulated and unpaid dividends on the New Preferred Stock are
paid in full in cash and, in all other cases, any failure, breach or default
giving rise to such voting right is remedied, at which time the term of any
directors elected pursuant to the provisions of this paragraph shall terminate.
Each such event described in clauses (i) through (v) above is referred to herein
as a 'Voting Rights Triggering Event.'
The Certificate of Designation will also provide that, except as stated
above under '--Ranking', the Company will not authorize any additional shares of
New Preferred Stock or any class of Senior Stock or Parity Stock (other than the
Exchange Preferred Stock) without the affirmative vote or consent of holders of
at least a majority of the shares of New Preferred Stock then outstanding which
are entitled to vote thereon, voting or consenting, as the case may be, together
as one class. In addition, the Certificate of Designation will provide that the
Company may not amend the Certificate of Designation so as to effect adversely
the specified rights, preferences, privileges or voting rights of holders of
shares of New Preferred Stock or authorize the issuance of any additional shares
of New Preferred Stock (other than shares of New Preferred Stock issued as a
dividend on shares of New Preferred Stock), without the affirmative vote or
consent of the holders of at least a majority of the then outstanding shares of
New Preferred Stock which are entitled to vote thereon, voting or consenting, as
the case may be, together as one class. The Certificate of Designation will also
provide that, except as set forth above, (a) the creation, authorization or
issuance of any shares of Junior Stock, Parity Stock or Senior Stock, including
the designation of a series thereof within the existing class of New Preferred
Stock, or (b) the increase or decrease in the amount of authorized Capital Stock
of any class, including any Preferred Capital Stock, shall not require the
consent of the holders of New Preferred Stock and shall not be deemed to affect
adversely the rights, preferences, privileges or voting rights of shares of New
Preferred Stock. In addition, the Certificate of Designation will provide that,
in the event that shares of either Private Exchange Preferred Stock or Existing
Preferred Stock are outstanding following the consummation of the Exchange
Offer, the holders of such Existing Preferred Stock and Private Exchange
Preferred Stock will vote as one class with the holders of the New Preferred
Stock then outstanding for all purposes (except for purposes of certain
amendments to the Certificate of Designation and the certificate of designation
for the Existing Preferred Stock) under this '--Voting Rights' as if the holders
of such Existing Preferred Stock and Private Exchange Preferred Stock were
holders of New Preferred Stock.
50
<PAGE>
Under Delaware law, holders of the New Preferred Stock will be entitled to
vote as a class upon a proposed amendment to the certificate of incorporation,
whether or not entitled to vote thereon by the certificate of incorporation, if
the amendment would increase or decrease the par value of the shares of such
class, or alter or change the powers, preferences or special rights of the
shares or such class so as to affect them adversely.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control occurring on or after July 2,
2001, the Company will, only if and only to the extent permitted by any
Indebtedness of the Company then outstanding, offer to redeem all or a portion
of the outstanding shares of New Preferred Stock at a redemption price equal to
101% of the liquidation preference thereof, plus, without duplication,
accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for the period from the Dividend Payment Date immediately
prior to the Change of Control Payment Date (as defined) to the Change of
Control Payment Date) to the Change of Control Payment Date. In addition, upon
the occurrence of a Change of Control occurring prior to July 2, 2001, the
Company will have the option to offer to redeem the New Preferred Stock, in
whole but not in part, at a redemption price equal to 101% of the liquidation
preference thereof, plus, without duplication, accumulated and unpaid dividends
to the Change of Control Payment Date. If the Company does not make an offer to
redeem all of the outstanding New Preferred Stock upon a Change of Control
occurring prior to July 2, 2001, the annual dividend rate on the New Preferred
Stock will increase by 4.0% over the then-applicable annual dividend rate. Any
offer to redeem the New Preferred Stock upon a Change of Control as provided
above will be referred to herein as a 'Change of Control Offer.'
Prior to the mailing of the notice referred to below, but in any event
within 30 days following the date on which a Change of Control occurs, the
Company covenants that if the redemption of the New Preferred Stock would
violate or constitute a default or be otherwise prohibited under any
Indebtedness of the Company then outstanding, then the Company shall either (i)
repay in full all such Indebtedness (and terminate all commitments thereunder)
or after to repay in full all such Indebtedness (and terminate all such
commitments) or (ii) obtain the requisite consents, if any, under such
Indebtedness required to permit the redemption of the New Preferred Stock as
provided below. The Company will first comply with the covenant in the preceding
sentence before it will be required to redeem, or prior to any optional offer to
redeem, the New Preferred Stock pursuant to the provisions described below.
To effect a Change of Control Offer, within 30 days following the date upon
which a Change of Control occurs, the Company will send, by first class mail, a
notice to each holder of New Preferred Stock, which notice shall govern the
terms of the Change of Control Offer. Such notice shall state, among other
things, the redemption date, which must be no earlier than 30 days nor later
than 60 days from the date such notice is mailed, other than as may be required
by law (the 'Change of Control Payment Date'). Holders electing to have any
shares of New Preferred Stock redeemed pursuant to a Change of Control Offer
will be required to surrender such shares of New Preferred Stock, properly
endorsed for transfer, together with such other customary documents as the
Company may reasonably request, to the transfer agent and registrar for the New
Preferred Stock at the address specified in the notice prior to the close of
business on the business day prior to the Change of Control Payment Date.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
redemption of shares of New Preferred Stock pursuant to a Change of Control
Offer.
This '--Change of Control' covenant will not apply in the event of (a)
changes in a majority of the Board of Directors of the Company in certain
instances as contemplated by the definition of 'Change of Control' and (b)
certain transactions with, or among Permitted Holders. In addition, this
covenant is not intended to afford holders of shares of New Preferred Stock
protection in the event of certain highly leveraged transactions,
reorganizations, restructurings, mergers and other similar transactions that
might adversely affect the holders of shares of New Preferred Stock, but would
not constitute a Change of Control. The Company could, in the future, enter in
to certain transactions including certain recapitalizations of the Company, that
would not constitute a Change of Control, but would increase the amount of
Indebtedness outstanding at such time. However, the Certificate of Designation
will contain limitations on the ability of the Company to incur additional
Indebtedness
51
<PAGE>
and to engage in certain mergers, consolidations and sales of assets, whether or
not a Change of Control is involved. See '--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness' and '--Certain Covenants--Merger,
Consolidation and Sale of Assets.'
If a Change of Control were to occur, there can be no assurance that the
Company would have sufficient funds to pay the redemption price for all shares
of New Preferred Stock or the Existing Notes that the Company might be required
to purchase. Moreover, as of the date hereof, after giving effect to the
Offering and the application of the proceeds therefrom and the Company's
outstanding Senior Debt, the Company would not have sufficient funds available
to redeem all of the outstanding shares of New Preferred Stock pursuant to a
Change of Control Offer. In the event that the Company were to redeem
outstanding shares of New Preferred Stock pursuant to a Change of Control Offer,
the Company expects that it would need to seek third-party financing to the
extent it does not have available funds to meet its redemption obligations.
However, there can be no assurance that the Company would be able to obtain such
financing on favorable terms, if at all.
With respect to the sale of 'all or substantially all' of the assets of the
Company, which would constitute a Change of Control for purposes of the
Certificate of Designation, the meaning of the phrase 'all or substantially all'
varies according to the facts and circumstances of the subject transaction, has
no clearly established meaning under relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of 'all or substantially all' of the assets of a Person and
therefore it may be unclear whether a Change of Control has occurred and whether
the New Preferred Stock is subject to a Change of Control Offer.
None of the provisions in the Certificate of Designation relating to a
purchase of New Preferred Stock upon a Change of Control are waivable by the
Board of Directors of the Company. Without the consent of each holder of New
Preferred Stock affected thereby, after the mailing of the notice of a Change of
Control Offer, no amendment to the Certificate of Designation may, directly or
indirectly, affect the Company's obligation to purchase the outstanding New
Preferred Stock or amend, modify or change the obligation of the Company to
consummate a Change of Control Offer or waive any default in the performance
thereof or modify any of the provisions of the definitions with respect to any
such offer.
CERTAIN COVENANTS
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any Restricted Subsidiary of the Company to, directly or
indirectly, incur any Indebtedness (including Acquired Indebtedness) other than
Permitted Indebtedness. Notwithstanding the foregoing limitation, the Company
and its Restricted Subsidiaries may incur Indebtedness if on the date of the
incurrence of such Indebtedness, after giving effect to the incurrence of such
Indebtedness, the Consolidated Fixed Charge Coverage Ratio of the Company and
its Restricted Subsidiaries is at least equal to 2.0 to 1.0.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, make any
Restricted Payment if at the time of such Restricted Payment and immediately
after giving effect thereto:
(i) any Voting Rights Triggering Event shall have occurred and be
continuing; or
(ii) the Company could not incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the '--Limitation on
Incurrence of Additional Indebtedness' covenant; or
(iii) the aggregate amount of Restricted Payments made subsequent to
the Issue Date (the amount expended for such purposes, if other than in
cash, being the fair market value of such property as determined by the
Board of Directors of the Company, whose determination shall be conclusive)
exceeds the sum of (a) 50% of the aggregate Consolidated Net Income of the
Company accrued on a cumulative basis during the period (treated as one
accounting period) beginning on the last day of the fiscal quarter
immediately preceding the Issue Date and ending on the last day of the
fiscal quarter of the Company immediately preceding the date of such
proposed Restricted Payment (or, if such aggregate cumulative Consolidated
Net Income of the Company for such period shall be a deficit, minus 100% of
such deficit) plus (b) the aggregate net proceeds received by the Company
either (1) as capital contributions to the Company after the Issue Date,
excluding any capital contributions pursuant to the Tax Sharing Agreement
or (2) from the
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issuance or sale of Qualified Capital Stock (including Qualified Capital
Stock issued upon the conversion of convertible Indebtedness, in exchange
for outstanding Indebtedness or from the exercise of options, warrants or
rights to purchase Qualified Capital Stock) of the Company to any person
(other than to a Restricted Subsidiary of the Company) after the Issue Date
plus (c) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment made after the Issue Date (excluding any
Investment made pursuant to clause (4) of the following paragraph), an
amount equal to the lesser of the return of capital with respect to such
Investment and the cost of such Investment, in either case, less the cost
of the disposition of such Investment minus (d) 20% of all cash payments
made pursuant to the New Equity Incentive Plan. For purposes of the
preceding clause (iii)(b)(2), the value of the aggregate net proceeds
received by the Company upon the issuance of Qualified Capital Stock either
upon the conversion of convertible Indebtedness or in exchange for
outstanding Indebtedness or upon the exercise of options, warrants or
rights will be the net cash proceeds received upon the issuance of such
Indebtedness, options, warrants or rights plus the incremental amount
received by the Company upon the conversion, exchange or exercise thereof.
(b) Notwithstanding the foregoing, these provisions will not prohibit: (1)
the payment of any dividend or the making of any distribution within 60 days
after the date of its declaration if such dividend or distribution would have
been permitted on the date of declaration; (2) the purchase, redemption or other
acquisition or retirement of any Capital Stock of the Company or any warrants,
options or other rights to acquire shares of any class of such Capital Stock (x)
solely in exchange for shares of Qualified Capital Stock (including any such
exchange pursuant to a conversion right or privilege in connection with which
cash paid in lieu of fractional shares or scrip), (y) through the application of
the net cash proceeds of a substantially concurrent sale (other than to a
Restricted Subsidiary of the Company) of shares of Qualified Capital Stock or
warrants, options or other rights to acquire Qualified Capital Stock or (z) in
the case of Disqualified Capital Stock, solely in exchange for, or through the
application of the net cash proceeds of a substantially concurrent sale (other
than to a Restricted Subsidiary of the Company) of, Disqualified Capital Stock
that has a redemption date no earlier than, is issued by the Company or the same
Person as and requires the payment of current dividends or distributions in cash
no earlier than, in each case, the Disqualified Capital Stock being purchased,
redeemed or otherwise acquired or retired and which Disqualified Capital Stock
does not prohibit cash dividends on the New Preferred Stock or the exchange
thereof for Exchange Debentures; (3) payments by the Company to Lancer pursuant
to the Tax Sharing Agreement; (4) Investments constituting Restricted Payments
made as a result of the receipt of non-cash consideration from any Asset Sale;
and (5) guarantees in respect of Indebtedness incurred by officers or employees
of the Company or any Restricted Subsidiary in the ordinary course of business
and payments in discharge thereof in an amount not to exceed $500,000 in any
fiscal year.
Limitations on Transactions with Affiliates. The Company will not, and
will not cause or 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 or holder of 10% or
more of the Company's Common Stock (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. Any
Affiliate Transaction involving an amount or having a value in excess of $1.0
million which is not permitted under clause (i) above shall have been approved
by a majority of the Company's Board of Directors. 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 an independent investment banking firm.
The foregoing provisions will not apply to (i) any Restricted Payment that
is not prohibited by the provisions described under '--Limitation on Restricted
Payments' contained herein, (ii) payments to Lancer under the Tax Sharing
Agreement, (iii) payments to participants in the Equity Participation Plan in an
amount not exceeding $1.32 million in any fiscal year and $5.28 million in the
aggregate, (iv) reasonable and customary regular fees to directors of the
Company who are not employees of the Company, (v) loans or advances to officers
of the
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Company and its Restricted Subsidiaries for bona fide business purposes of the
Company in the ordinary course of business, (vi) royalty payments by the Company
to T-H Licensing pursuant to that certain letter agreement dated as of December
29, 1989 between the Company and T-H Licensing (as such agreement may be amended
from time to time pursuant to its terms), provided that any such payment (less
any amounts permitted to be retained by T-H Licensing pursuant to the Credit
Agreement) is returned to the Company as a loan within sixty days after receipt
of such payment by T-H Licensing, (vii) payments or distributions to
participants in the New Equity Incentive Plan pursuant to the terms thereof,
(viii) payments of the Company's allocated portion of the Lancer consolidated
group's corporate expenses and fees to Lancer or any Affiliate of Lancer
incurred in connection with Lancer's or any Affiliate of Lancer's performance of
management consulting, monitoring and financial advisory services with respect
to the Company and any Restricted Subsidiary in an amount not to exceed $2.0
million in any fiscal year (excluding amounts paid prior to the date hereof);
provided, however, that notwithstanding anything to the contrary contained in
the Certificate of Designation, the Company shall not be permitted to pay to
Lancer or any Affiliate of Lancer any amount for such services in excess of the
amount set forth in this clause (viii).
Merger, Consolidation and Sale of Assets. Without the affirmative vote of
the holders of a majority of the issued and outstanding shares of New Preferred
Stock, voting or consenting, as the case may be, as a separate class, the
Company will not, in a single transaction or a series of related transactions,
consolidate with or merge with or into, or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its assets to, another
Person or adopt a plan of liquidation unless (i) either (1) the Company is the
surviving or continuing Person or (2) the Person (if other than the Company)
formed by such consolidation or into which the Company is merged or the Person
that acquires by conveyance, transfer or lease the properties and assets of the
Company substantially as an entirety or, in the case of a plan of liquidation,
the Person to which assets of the Company have been transferred shall be a
corporation, partnership or trust organized and existing under the laws of the
United States or any State thereof or the District of Columbia; (ii) if the
Company is not the surviving or continuing Person, the New Preferred Stock shall
be converted into or exchanged for and shall become shares of such successor,
transferee or resulting Person, having in respect of such successor, transferee
or resulting Person the same powers, preferences and relative participating,
optional or other special rights and the qualifications, limitations or
restrictions thereon, that the New Preferred Stock had immediately prior to such
transaction; (iii) immediately after giving effect to such transaction and the
use of the proceeds therefrom (on a pro forma basis, including giving effect to
any Indebtedness incurred or anticipated to be incurred in connection with such
transaction), the Company (in the case of clause (1) of the foregoing clause
(i)) or such Person (in the case of clause (2) of the foregoing clause (i))
shall be able to incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with the '--Limitation on Incurrence of Additional
Indebtedness' covenant; (iv) immediately after giving effect to such
transactions, no Voting Rights Triggering Event shall have occurred or be
continuing; and (v) such surviving Person shall have delivered to the transfer
agent for the New Preferred Stock prior to the consummation of the proposed
transaction an officers' certificate and an opinion of counsel, each stating
that such consolidation, merger or transfer complies with the Certificate of
Designation and that all conditions precedent in the Certificate of Designation
relating to such transaction have been satisfied. For purposes of the foregoing,
the transfer (by lease, assignment, sale or otherwise, in a single transaction
or series of related transactions) of all or substantially all of the properties
and assets of one or more Subsidiaries, the Capital Stock of which constitutes
all or substantially all of the properties or assets of the Company, will be
deemed to be the transfer of all or substantially all of the properties and
assets of the Company.
Limitation on Preferred Capital Stock of Restricted Subsidiaries. The
Company will not permit any Restricted Subsidiary to issue any Preferred Capital
Stock (except to the Company or to a Restricted Subsidiary) or permit any Person
(other than the Company or a Restricted Subsidiary) to hold any such Preferred
Capital Stock unless the Company or such Restricted Subsidiary would be entitled
to incur or assume Indebtedness in compliance with the '--Limitation on
Incurrence of Additional Indebtedness' covenant in an aggregate principal amount
equal to the aggregate liquidation value of the Preferred Capital Stock to be
issued.
Reports. The Company will provide to the holders of New Preferred Stock,
within 15 days after it files them with the Commission, copies of the annual
reports and of the information, documents and other reports (or copies of such
portions of any of the foregoing as the Commission may by rules and regulations
prescribe) which the Company files with the Commission pursuant to Section 13 or
15(d) of the Exchange Act. In the event that
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the Company is no longer required to furnish such reports to its securityholders
pursuant to the Exchange Act, the Company will cause its consolidated financial
statements, comparable to those which would have been required to appear in
annual or quarterly reports, to be delivered to the holders of New Preferred
Stock.
TRANSFER AGENT AND REGISTRAR
United States Trust Company of New York will be the transfer agent and
registrar (the 'Transfer Agent') for the New Preferred Stock.
THE EXCHANGE DEBENTURES
The Exchange Debentures, if issued, will be issued under the Exchange
Indenture, dated as of March 12, 1997, by and between the Company and United
States Trust Company of New York, as Trustee (the 'Trustee'). The terms of the
Exchange Debentures include those stated in the Exchange Indenture and those
made part of the Exchange Indenture by reference to the Trust Indenture Act of
1939, as amended (the 'Trust Indenture Act') as in effect on the date of the
Exchange Indenture. The Exchange Debentures are subject to all such terms, and
holders of the Exchange Debentures are referred to the Exchange Indenture and
the Trust Indenture Act for a statement of them. The following is a summary of
the material terms and provisions of the Exchange Debentures. This summary does
not purport to be a complete description of the Exchange Debentures and is
subject to the detailed provisions of, and qualified in its entirety by
reference to, the Exchange Debentures and the Exchange Indenture (including the
definitions contained therein). A copy of the Exchange Indenture is filed as an
exhibit to the Registration Statement of which this is part. 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
Exchange Indenture and such definitions are incorporated herein by reference.
GENERAL
The Exchange Debentures will be general unsecured subordinated obligations
of the Company and will be limited in aggregate principal amount to the
liquidation preference of the New Preferred Stock, plus accrued and unpaid
dividends, on the date of exchange of the New Preferred Stock into Exchange
Debentures (plus any additional Exchange Debentures issued in lieu of cash
interest as described herein). The Exchange Debentures will be issued in fully
registered form only in denominations of $1,000 and integral multiples thereof
(other than as described in '--The New Preferred Stock--Exchange' or with
respect to additional Exchange Debentures issued in lieu of cash interest as
described herein). The Exchange Debentures will be subordinated to all existing
and future Senior Debt of the Company.
The Exchange Debentures will mature on March 15, 2009. Each Exchange
Debenture will bear interest at the rate of 11 1/4% per annum from the Exchange
Date or from the most recent interest payment date to which interest has been
paid or provided for or, if no interest has been paid or provided for, from the
Exchange Date. Interest will be payable semi-annually in cash (or, at the option
of the Company, on or prior to March 15, 2002, in additional Exchange Debentures
in an aggregate principal amount equal to the amount of such interest payment
(including, in the case of interest payments or portions thereof of less than
$1,000.00 but greater than $1.00, by issuing Exchange Debentures in
denominations of less than $1,000.00)) in arrears on each March 15 and September
15 commencing with the first such date after the Exchange Date. Interest on the
Exchange Debentures will be computed on the basis of a 360-day year comprised of
twelve 30-day months and the actual number days elapsed.
MATURITY, INTEREST AND PRINCIPAL
Principal of, and premium, if any, and interest on the Exchange Debentures
will be payable, and the Exchanged Debentures may be presented for registration
of transfer or exchange, at the office of the Paying Agent and Registrar. At the
Company's option, interest, to the extent paid in cash, may be paid by check
mailed to the registered address of holders of the Exchange Debentures as shown
on the register for the Exchange Debentures. The Trustee will initially act as
Paying Agent and Registrar. The Company may change any Paying
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Agent and Registrar without prior notice to holders of the Exchange Debentures.
Holders of the Exchange Debentures must surrender Exchange Debentures to the
Paying Agent to collect principal payments.
OPTIONAL REDEMPTION
The Exchange Debentures will be redeemable, at the Company's option, in
whole at any time or in part from time to time, on and after March 15, 2002, at
the redemption prices (expressed as percentages of the principal amount
thereof), together, in each case, with accrued and unpaid interest to the
redemption date set forth below if redeemed during the 12-month period beginning
on March 15 of each of the years set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ----------------------------------------------------------- ----------
<S> <C>
2002....................................................... 105.625%
2003....................................................... 104.219%
2004....................................................... 102.813%
2005....................................................... 101.406%
2006 and thereafter........................................ 100.000%
</TABLE>
In the event of redemption of fewer than all of the Exchange Debentures,
the Trustee shall select by lot or in such other manner as it shall deem fair
and equitable the Exchange Debentures to be redeemed. The Exchange Debentures
will be redeemable in whole or in part upon not less than 30 or more than 60
days' prior written notice, mailed by first class mail to a holder's last
address as it shall appear on the register maintained by the Registrar of the
Exchange Debentures. On and after any redemption date, interest will cease to
accrue on the Exchange Debentures or portions thereof called for redemption
unless the Company shall fail to redeem any such Exchange Debentures.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control occurring on or after July 2,
2001, the Company will, only if and to the extent permitted by any Senior Debt
of the Company then outstanding, offer to redeem all outstanding Exchange
Debentures at a redemption price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest to the Change of Control Payment Date (as
defined). In addition, upon the occurrence of a Change of Control occurring
prior to July 2, 2001, the Company will have the option to offer to redeem the
Exchange Debentures, in whole but not in part, at a redemption price equal to
101% of the principal amount thereof, plus, without duplication, accrued and
unpaid interest to the Change of Control Payment Date. If a Change of Control
occurs prior to July 2, 2001 and the Company fails to make an offer to redeem
the Exchange Debentures in accordance with the terms of the Exchange Indenture,
the annual interest rate on the Exchange Debentures will increase by 4.0% over
the then-applicable interest rate. Any offer to redeem the Exchange Debentures
upon a Change of Control as provided above will be referred to herein as a
'Change of Control Offer.'
The Exchange Indenture will provide that, prior to the mailing of the
notice referred to below, but in any event within 30 days following the date on
which a Change of Control occurs, the Company covenants that if the purchase of
the Exchange Debentures would violate or constitute a default under any
outstanding Senior Debt, then the Company will, to the extent needed to permit
the purchase of Exchange Debentures, either (i) repay in full all Indebtedness
such Senior Debt (and terminate all commitments thereunder) or offer to repay in
full all such Senior Debt (and terminate all such commitments) or (ii) obtain
the requisite consents under the instrument governing such Senior Debt to permit
the repurchase of the Exchange Debentures as provided below. The Company will
first comply with the covenant in the preceding sentence before it will be
required to repurchase Exchange Debentures pursuant to the provisions described
below; provided that the Company's failure to comply with the covenant described
in the preceding sentence shall constitute an Event of Default described under
clause (iii) under '--Events of Default' below.
To effect a Change of Control, within 30 days following the date upon which
a Change of Control occurs, the Company will send, by first class mail, a notice
to each holder of record of the Exchange Debentures, with a copy to the Trustee,
which notice shall govern the terms of the Change of Control Offer. Such notice
will state, among other things, the purchase date, which must be no earlier than
30 days nor later than 60 days from the date such notice is mailed, other than
as may be required by law (the 'Change of Control Payment Date'). Holders
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electing to have an Exchange Debenture purchased pursuant to a Change of Control
Offer will be required to surrender the Exchange Debenture, properly endorsed
for transfer together with such other customary documents as the Company may
reasonably request, to the paying agent at the address specified in the notice
prior to the close of business on the business day prior to the Change of
Control Payment Date.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the purchase
of Exchange Debentures pursuant to a Change of Control Offer.
This '--Change of Control' covenant will not apply in the event of (a)
certain changes in composition of the Board of Directors of the Company and (b)
certain transactions with, or among, Permitted Holders. In addition, this
covenant is not intended to afford holders of the Exchange Debentures protection
in the event of certain highly leveraged transactions, reorganizations,
restructurings, mergers and other similar transactions that might adversely
affect the holders of Exchange Debentures but would not constitute a Change of
Control. The Company could, in the future, enter into certain transactions,
including certain recapitalizations of the Company, that would not constitute a
Change of Control, but would increase the amount of Indebtedness outstanding at
such time. However, the Exchange Indenture will contain limitations on the
ability of the Company to incur additional Indebtedness and to engage in certain
mergers, consolidations and sales of assets, whether or not a Change of Control
is involved. See '--Limitation on Incurrence of Additional Indebtedness,'
'--Limitation on Asset Sales' and '--Merger, Consolidation and Sale of Assets.'
If a Change of Control were to occur, there can be no assurance that the
Company would have sufficient funds to pay the purchase price for all Exchange
Debentures that the Company might be required to purchase. Moreover, as of the
date hereof, after giving effect to the Offering and the application of the
proceeds and the Change of Control provisions on the Company's outstanding
Senior Debt therefrom, the Company would not have sufficient funds available to
purchase all the outstanding Exchange Debentures, assuming they had been issued,
pursuant to a Change of Control Offer. In the event that the Company were
required to purchase Exchange Debentures pursuant to a Change of Control Offer,
the Company expects that it would need to seek third-party financing to the
extent it does not have available funds to meet its purchase obligations.
However, there can be no assurance that the Company would be able to obtain such
financing on favorable terms, if at all. See 'Description of Existing
Indebtedness.'
With respect to the sale of 'all or substantially all' of the assets of the
Company, which would constitute a Change of Control for purposes of the Exchange
Indenture, the meaning of the phrase 'all or substantially all' as used in the
Exchange Indenture varies according to the facts and circumstances of the
subject transaction, has no clearly established meaning under relevant law and
is subject to judicial interpretation. Accordingly, in certain circumstances
there may be a degree of uncertainty in ascertaining whether a particular
transaction would involve a disposition of 'all or substantially all' of the
assets of a person and therefore it may be unclear whether a Change of Control
has occurred and whether the Exchange Debentures are subject to a Change of
Control Offer.
None of the provisions relating to a purchase of Exchange Debentures upon a
Change of Control are waivable by the Board of Directors of the Company. Without
the consent of each holder of the Exchange Debentures affected thereby, after
the mailing of the notice of the Change of Control Offer, no amendment to the
Exchange Indenture may, directly or indirectly, affect the Company's obligation
to purchase the Exchange Debentures or amend, modify or change the obligation of
the Company to consummate a Change of Control Offer or waive any default in the
performance thereof or modify any of the provisions or definitions with respect
to any such offer. In addition, the Trustee may not waive the right of any
holder of the Exchange Debentures to require the repurchase of its Exchange
Debentures upon a Change of Control.
SUBORDINATION
The Obligations represented by the Exchange Debentures are, to the extent
and in the manner provided in the Exchange Indenture, subordinated in right of
payment to the prior indefeasible payment and satisfaction in full in cash of
all existing and future Senior Debt of the Company. As of December 31, 1996, the
principal amount of outstanding Senior Debt of the Company, on a consolidated
basis, would have been $118.0 million.
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In the event of any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, arrangement, reorganization or other similar case or
proceeding in connection therewith, relative to the Company or to its creditors,
as such, or to its assets, whether voluntary or involuntary, or any liquidation,
dissolution or other winding-up of the Company, whether voluntary or involuntary
and whether or not involving insolvency or bankruptcy, or any general assignment
for the benefit of creditors or other marshaling of assets or liabilities of the
Company (except in connection with the merger or consolidation of the Company or
its liquidation or dissolution following the transfer of substantially all of
its assets, upon the terms and conditions permitted under the circumstances
described under '--Mergers, Consolidation and Sale of Assets') (all of the
foregoing referred to herein individually as a 'Bankruptcy Proceeding' and
collectively as 'Bankruptcy Proceedings'), the holders of Senior Debt of the
Company will be entitled to receive payment and satisfaction in full in cash of
all amounts due on or in respect of all Senior Debt of the Company before the
holders of the Exchange Debentures are entitled to receive or retain any payment
or distribution of any kind on account of the Exchange Debentures. In the event
that, notwithstanding the foregoing, the Trustee or any holder of Exchange
Debentures receives any payment or distribution of assets of the Company of any
kind, whether in cash, property or securities, including, without limitation, by
way of set-off or otherwise, in respect of the Exchange Debentures before all
Senior Debt of the Company is paid and satisfied in full in cash, then such
payment or distribution will be held by the recipient in trust for the benefit
of holders of Senior Debt and will be immediately paid over or delivered to the
holders of Senior Debt or their representative or representatives to the extent
necessary to make payment in full of all Senior Debt remaining unpaid, after
giving effect to any concurrent payment or distribution, or provision therefor,
to or for the holders of Senior Debt. By reason of such subordination, in the
event of liquidation or insolvency, creditors of the Company who are holders of
Senior Debt may recover more, ratably, than other creditors of the Company, and
creditors of the Company who are not holders of Senior Debt or of the Exchange
Debentures may recover more, ratably, than the holders of the Exchange
Debentures.
No payment or distribution of any assets or securities of the Company or
any Restricted Subsidiary of any kind or character (including, without
limitation, cash, property and any payment or distribution which may be payable
or deliverable by reason of the payment of any other Indebtedness of the Company
being subordinated to the payment of the Exchange Debentures by the Company) may
be made by or on behalf of the Company or any Restricted Subsidiary, including,
without limitation, by way of set-off or otherwise, for or on account of the
Exchange Debentures, or for or on account of the purchase, redemption or other
acquisition of the Exchange Debentures, and neither the Trustee nor any holder
or owner of any Exchange Debentures shall take or receive from the Company or
any Restricted Subsidiary, directly or indirectly in any manner, payment in
respect of all or any portion of Exchange Debentures following the delivery by
the representative of the holders of Designated Senior Debt (the
'Representative') to the Trustee of written notice of the occurrence of a
Payment Default, and in any such event, such prohibition shall continue until
such Payment Default is cured, waived in writing or ceases to exist. At such
time as the prohibition set forth in the preceding sentence shall no longer be
in effect, subject to the provisions of the following paragraph, the Company
shall resume making any and all required payments in respect of the Exchange
Debentures, including any missed payments.
Upon the occurrence of a Non-Payment Event of Default on Designated Senior
Debt, no payment or distribution of any assets of the Company of any kind may be
made by the Company, including, without limitation, by way of set-off or
otherwise, on account of the Exchange Debentures, or on account of the purchase
or redemption or other acquisition of Exchange Debentures, for a period (a
'Payment Blockage Period') commencing on the date of receipt by the Trustee of
written notice from the Representative of such Non-Payment Event of Default
unless and until (subject to any blockage of payments that may then be in effect
under the preceding paragraph) the earliest of (x) more than 179 days shall have
elapsed since receipt of such written notice by the Trustee, (y) such
Non-Payment Event of Default shall have been cured or waived in writing or shall
have ceased to exist or such Designated Senior Debt shall have been paid in full
or (z) such Payment Blockage Period shall have been terminated by written notice
to the Company or the Trustee from such Representative, after which, in the case
of clause (x), (y) or (z), the Company shall resume making any and all required
payments in respect of the Exchange Debentures, including any missed payments.
Notwithstanding any other provision of the Exchange Indenture, in no event shall
a Payment Blockage Period commenced in accordance with the provisions of the
Exchange Indenture described in this paragraph extend beyond 179 days from the
date of the receipt by the Trustee of the notice referred to above (such period,
an 'Initial Blockage Period'). Any number of additional Payment Blockage Periods
may be commenced during the Initial Blockage Period; provided, however, that no
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such additional Payment Blockage Period shall extend beyond the Initial Blockage
Period. After the expiration of the Initial Blockage Period, no Payment Blockage
Period may be commenced until at least 180 consecutive days have elapsed from
the last day of the Initial Blockage Period. Notwithstanding any other provision
of the Exchange Indenture, no Non-Payment Event of Default with respect to
Designated Senior Debt which existed or was continuing on the date of the
commencement of any Payment Blockage Period initiated by the Representative
shall be, or be made, the basis for the commencement of a second Payment
Blockage Period initiated by the Representative, whether or not within the
Initial Blockage Period, unless such Non-Payment Event of Default shall have
been waived for a period of not less than 90 consecutive days.
If the Company or any Guarantor fails to make any payment on the Exchange
Debentures or any Guarantee, as the case may be, when due or within any
applicable grace period, whether or not on account of payment blockage
provisions, such failure would constitute an Event of Default under the Exchange
Indenture and would enable the holders of the Exchange Debentures to accelerate
the maturity thereof. See '--Events of Default.'
A holder of Exchange Debentures by his acceptance of Exchange Debentures
agrees to be bound by such provisions and authorizes and expressly directs the
Trustee, on his behalf, to take such action as may be necessary or appropriate
to effectuate the subordination provided for in the Exchange Indenture and
appoints the Trustee his attorney-in-fact for such purpose.
CERTAIN COVENANTS
The Exchange Indenture will contain, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not
and will not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly incur (as defined) any Indebtedness (including Acquired Indebtedness)
other than Permitted Indebtedness. Notwithstanding the foregoing limitations,
the Company and its Restricted Subsidiaries may incur Indebtedness if after
giving effect to the incurrence of such Indebtedness, the Consolidated Fixed
Charge Coverage Ratio of the Company and its Restricted Subsidiaries is at least
equal to 2.0 to 1.0.
Limitation on Restricted Payments. (a) The Company will not and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
make any Restricted Payment if at the time of such Restricted Payment and
immediately after giving effect thereto:
(i) any Default or Event of Default shall have occurred and be
continuing; or
(ii) the Company is not able to incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the '--Limitation on
Incurrence of Additional Indebtedness' covenant; or
(iii) the aggregate amount of Restricted Payments made subsequent to
the Issue Date (the amount expended for such purposes, if other than in
cash, being the fair market value of such property as determined by the
Board of Directors of the Company, whose determination shall be conclusive)
exceeds the sum of (a) 50% of the aggregate Consolidated Net Income of the
Company accrued on a cumulative basis during the period (treated as one
accounting period) beginning on the last day of the fiscal quarter
immediately preceding the Issue Date and ending on the last day of the
fiscal quarter of the Company immediately preceding the date of such
proposed Restricted Payment (or, if such aggregate cumulative Consolidated
Net Income of the Company for such period shall be a deficit, minus 100% of
such deficit) plus (b) the aggregate net proceeds received by the Company
either (1) as capital contributions to the Company after the Issue Date,
excluding any capital contributions pursuant to the Tax Sharing Agreement
or (2) from the issuance or sale of Qualified Capital Stock (including
Qualified Capital Stock issued upon the conversion of convertible
Indebtedness, in exchange for outstanding Indebtedness or from the exercise
of options, warrants or rights to purchase Qualified Capital Stock) of the
Company to any person (other than to a Restricted Subsidiary of the
Company) after the Issue Date plus (c) in the case of the disposition or
repayment of any Investment constituting a Restricted Payment made after
the Issue Date (excluding any Investment made pursuant to clause (4) of the
following paragraph), an amount equal to the lesser of the return of
capital with respect to such Investment and the cost of such Investment, in
either case, less the cost of the disposition of such Investment minus (d)
20% of all cash payments made pursuant to the New Equity Incentive Plan.
For
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purposes of the preceding clause (iii)(b)(2), the value of the aggregate
net proceeds received by the Company upon the issuance of Qualified Capital
Stock either upon the conversion of convertible Indebtedness or in exchange
for outstanding Indebtedness or upon the exercise of options, warrants or
rights will be the net cash proceeds received upon the issuance of such
Indebtedness, options, warrants or rights plus the incremental amount
received by the Company upon the conversion, exchange or exercise thereof.
(b) Notwithstanding the foregoing, these provisions will not prohibit: (1)
the payment of any dividend or the making of any distribution within 60 days
after the date of its declaration if such dividend or distribution would have
been permitted on the date of declaration; (2) the purchase, redemption or other
acquisition or retirement of any Capital Stock of the Company or any warrants,
options or other rights to acquire shares of any class of such Capital Stock
either (x) solely in exchange for shares of Qualified Capital Stock (including
any such exchange pursuant to a conversion right or privilege in connection with
which cash paid in lieu of fractional shares or scrip), or (y) through the
application of the net cash proceeds of a substantially concurrent sale (other
than to a Subsidiary of the Company) of shares of Qualified Capital Stock or
warrants, options or other rights to acquire Qualified Capital Stock; (3) the
acquisition of Indebtedness of the Company that is subordinate or junior in
right of payment to the Exchange Debentures either (x) solely in exchange for
shares of Qualified Capital Stock (or warrants, options or other rights to
acquire Qualified Capital Stock) or for Indebtedness of the Company that is
subordinate or junior in right of payment to the Exchange Debentures, at least
to the extent that the Indebtedness being acquired is subordinated to the
Exchange Debentures and has a Weighted Average Life to Maturity no less than
that of the Indebtedness being acquired or (y) through the application of the
net cash proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary of the Company) of shares of Qualified Capital Stock (or warrants,
options or other rights to acquire Qualified Capital Stock) or Indebtedness of
the Company which is subordinate or junior in right of payment to the Exchange
Debentures, at least to the extent that the Indebtedness being acquired is
subordinated to the Exchange Debentures and has a Weighted Average Life to
Maturity no less than that of the Indebtedness being refinanced; (4) payments by
the Company to Lancer pursuant to the Tax Sharing Agreement; (5) Investments
constituting Restricted Payments made as a result of the receipt of non-cash
consideration from any Asset Sale; and (6) guarantees in respect of Indebtedness
incurred by officers or employees of the Company or any Restricted Subsidiary in
the ordinary course of business and payments in discharge thereof in an amount
not to exceed $500,000 in any fiscal year.
Limitations on Transactions with Affiliates. The Company will not, and
will not cause or 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 or holder of 10% or
more of the Company's Common Stock (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 is fair and reasonable to the Company or
such Restricted Subsidiaries, 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. Any Affiliate Transaction involving an amount or having a value in
excess of $1.0 million which is not permitted under clause (i) above shall have
been approved by a majority of the Company's Board of Directors. 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 an independent investment banking firm.
The foregoing provisions will not apply to (i) any Restricted Payment that
is not prohibited by the provisions described under '--Limitation on Restricted
Payments' contained herein, (ii) payments to Lancer under the Tax Sharing
Agreement, (iii) payments to participants in the Equity Participation Plan in an
amount not exceeding $1.32 million in any fiscal year and $5.28 million in the
aggregate, (iv) reasonable and customary regular fees to directors of the
Company who are not employees of the Company, (v) loans or advances to officers
of the Company and its Restricted Subsidiaries for bona fide business purposes
of the Company in the ordinary course of business, and (vi) royalty payments by
the Company to T-H Licensing pursuant to that certain letter agreement dated as
of December 29, 1989 between the Company and T-H Licensing (as such agreement
may be amended from time to time pursuant to its terms), provided that any such
payment (less any amounts permitted to be retained by T-H Licensing pursuant to
the Credit Agreement) is returned to the Company as a loan within sixty
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days after receipt of such payment by T-H Licensing, (vii) payments or
distributions to participants in the New Equity Incentive Plan pursuant to the
terms thereof, and (viii) payments of the Company's allocated portion of the
Lancer consolidated group's corporate expenses and fees to Lancer or any
Affiliate of Lancer incurred in connection with Lancer's or any Affiliate of
Lancer's performance of management consulting, monitoring and financial advisory
services with respect to the Company and any Restricted Subsidiary in an amount
not to exceed $2.0 million in any fiscal year (excluding amounts paid prior to
the Issue Date); provided, however, that notwithstanding anything to the
contrary contained in the Exchange Indenture, the Company shall not be permitted
to pay to Lancer or any Affiliate of Lancer any amount for such services in
excess of the amount set forth in this clause (viii).
Limitation on Asset Sales. The Company will not, and will not cause or
permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless
(i) the Company or such Restricted Subsidiary, 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 75%
of the consideration received by the Company or its Subsidiaries, as the case
may be, is in the form of cash or Cash Equivalents; and (iii) the Net Cash
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, make
an offer to redeem or purchase Indebtedness under any then existing Senior Debt
of the Company or any Restricted Subsidiary; 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 Net Cash 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 ('Replacement Assets'), provided that such Investment occurs
within 360 days following the receipt of such Net Cash Proceeds, so long as the
Company or such Restricted Subsidiary has notified the Trustee in writing on or
prior to the 270th day following such Asset Sale (the 'Reinvestment Date') that
it has determined to apply the Net Cash Proceeds from such Asset Sale to an
investment in such Replacement Assets; (c) third, to make an offer to redeem or
purchase the Existing Notes or Indebtedness under any other then existing Senior
Debt of the Company or any Restricted Subsidiary in accordance with the terms of
the Existing Indenture or the document governing such other Senior Debt, as the
case may be; (d) fourth, if any Net Cash Proceeds from any Asset Sale are not
applied as provided in the preceding clauses (a) through (d) within 420 days of
such Asset Sale, the Company shall apply an amount equal to the Net Cash
Proceeds not so applied (the 'Available Net Cash Proceeds') to an offer to
repurchase the Exchange Debentures, 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 Net
Cash Proceeds not required to repurchase Exchange Debentures.
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 of the Exchange Debentures stating, among other things: (1) that such
holders have the right to require the Company to apply the Available Net Cash
Proceeds to repurchase such Exchange Debentures 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 such holder
must follow in order to have such Exchange Debentures repurchased; and (4) the
calculations used in determining the amount of Available Net Cash Proceeds to be
applied to the repurchase of such Exchange Debentures.
Limitation on Dividends 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 of the Company to (a) pay dividends, in cash or otherwise,
or make any other distributions on or in respect of its Capital Stock or any
other interest or participation in, or measured by, its profits, (b) pay any
Indebtedness owed to the Company or any other Restricted Subsidiary of the
Company, (c) make loans or advances to the Company or any other Restricted
Subsidiary of the Company, (d) transfer any of its properties or assets to the
Company or any
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other Restricted Subsidiary of the Company (other than any customary restriction
on transfers of property subject to a Permitted Lien (other than a Lien on cash
not constituting proceeds of non-cash property subject to a Permitted Lien)
which could not materially adversely affect the Company's ability to satisfy its
obligations hereunder), or (e) guarantee any Indebtedness of the Company or any
other Restricted Subsidiary of the Company, except for such encumbrances or
restrictions existing under or by reason of (i) applicable law, (ii) any
agreement or other instrument of a person acquired by the Company or any
Restricted Subsidiary of the Company in existence at the time of such
acquisition (but not created in contemplation thereof), which encumbrance or
restriction is not applicable to any person, or the properties or assets of any
person, other than the person, or the property or assets of the person, so
acquired, (iii) any encumbrance or restriction in any agreement existing on the
Issue Date to the extent and in the manner such encumbrance or restriction is in
effect on the Issue Date and (iv) any encumbrance or restriction pursuant to any
agreement that extends, refinances, renews or replaces any agreement described
in clause (ii) above, which is not materially more restrictive or less favorable
to the holders of Exchange Debentures than those existing under the agreement
being extended, refinanced, renewed.
Limitation on Preferred Capital Stock of Restricted Subsidiaries. The
Company will not permit any of its Restricted Subsidiaries to issue any
Preferred Capital Stock (other than to the Company or to a Wholly-Owned
Restricted Subsidiary) or permit any Person (other than the Company or a
Wholly-Owned Restricted Subsidiary) to own any Preferred Capital Stock of any
Restricted Subsidiary unless the Company or such Restricted Subsidiary would be
entitled to incur or assume Indebtedness in compliance with the '--Limitation on
Incurrence of Additional Indebtedness' covenant in an aggregate principal amount
equal to the aggregate liquidation value of the Preferred Capital Stock to be
issued.
Limitation on Guarantees by Restricted Subsidiaries. The Company will not
permit any Restricted Subsidiary, directly or indirectly, to assume, guarantee
or in any other manner become liable with respect to any Indebtedness of the
Company or any Guarantor, unless such Restricted Subsidiary is a Guarantor or
simultaneously executes and delivers a supplemental indenture providing for the
guarantee of payment of the Exchange Debentures by such Restricted Subsidiary;
provided, however, that a Restricted Subsidiary may guarantee the Company's
obligations under the Credit Agreement without executing and delivering such
supplemental indenture or guaranteeing the Exchange Debentures; provided,
further, that in the case of any guarantee of any Guarantor with respect to
Senior Debt, the guarantee of the payment of the Exchange Debentures by such
Guarantor to be provided in accordance herewith shall be subordinated to the
guarantee with respect to such Senior Debt in the same manner and to the same
extent as the Exchange Debentures are subordinated to such Senior Debt. Each
guarantee created pursuant to the provisions described above is referred to as a
'Guarantee' and the issuer of each such Guarantee, so long as the Guarantee
remains outstanding, is referred to as a 'Guarantor.'
Notwithstanding the foregoing, in the event that a Guarantor is released
from all obligations which pursuant to the first sentence of the preceding
paragraph obligate it to become a Guarantor, such Guarantor shall be released
from all obligations under its Guarantee (provided that the provisions of the
first sentence of the preceding paragraph shall apply anew in the event that
such Guarantor subsequent to being released incurs any obligations that pursuant
to such sentence obligate it to become a Guarantor). In addition, upon any sale
or disposition (by merger or otherwise) of any Guarantor by the Company or a
Restricted Subsidiary of the Company to any person that is not an Affiliate of
the Company or any of its Restricted Subsidiaries which is otherwise in
compliance with the terms of the Exchange Indenture, such Guarantor will be
deemed to be released from all obligations under its Guarantee; provided,
however, that each such Guarantor is sold or disposed of in accordance with the
'--Limitation on Asset Sales' covenant above; provided, further, that the
foregoing proviso shall not apply to the sale or disposition of a Guarantor in a
foreclosure to the extent that such proviso would be inconsistent with the
requirements of the Uniform Commercial Code.
Merger, Consolidation and Sale of Assets. The Company will not and will
not cause or permit any Guarantor to, in a single transaction or series of
related transactions, consolidate with or merge with or into, or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
assets to, another Person or adopt a plan of liquidation unless (i) either (1)
the Company or the Guarantor, as the case may be, is the survivor of such merger
or consolidation or (2) the surviving or transferee Person is a corporation,
partnership or trust organized and existing under the laws of the United States,
any state thereof or the District of Columbia and such surviving or transferee
Person expressly assumes by supplemental indenture all the obligations of the
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Company or the Guarantor, as the case may be, under the Exchange Debentures and
the Exchange Indenture; (ii) immediately after giving effect to such transaction
and the use of proceeds therefrom (on a pro forma basis, including any
Indebtedness incurred or anticipated to be incurred in connection with such
transaction), the Company or the surviving or transferee Person is able to incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the '--Limitation on Incurrence of Additional Indebtedness'
covenant; (iii) immediately after giving effect to such transaction (including
any Indebtedness incurred or anticipated to be incurred in connection with the
transaction) no Default or Event of Default has occurred and is continuing; and
(iv) the Company has delivered to the Trustee an officers' certificate and
opinion of counsel, each stating that such consolidation, merger or transfer
complies with the Exchange Indenture, that the surviving Person agrees by
supplemental indenture to be bound thereby, and that all conditions precedent in
the Exchange Indenture relating to such transaction have been satisfied. For
purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of related transactions) of all or
substantially all of the properties and assets of one or more Subsidiaries the
Capital Stock of which constitutes all or substantially all of the properties
and assets of the Company will be deemed to be the transfer of all or
substantially all of the properties and assets of the Company.
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, to any holder of any Exchange Debentures for or as
an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Exchange Debentures unless such consideration is offered to be
paid or agreed to be paid to all holders of the Exchange Debentures who so
consent, waive or agree to amend in the time frame set forth in solicitation
documents relating to such consent, waiver or agreement.
EVENTS OF DEFAULT
The following events are defined in the Exchange Indenture as 'Events of
Default':
(i) the failure to pay interest on any Exchange Debentures when the
same becomes due and payable and the Default continues for a period of 30
days (whether or not such payment is prohibited by the subordination
provisions of the Exchange Indenture);
(ii) the failure to pay the principal, or premium, if any, on any
Exchange Debentures, when such principal becomes due and payable, at
maturity, upon redemption or otherwise (whether or not such payment is
prohibited by the subordination provisions of the Exchange Indenture);
(iii) a default in the observance or performance of any other covenant
or agreement contained in the Exchange Debentures or the Exchange Indenture
which default continues for a period of 60 days after the Company receives
written notice thereof specifying the default from the Trustee or holders
of at least 25% in aggregate principal amount of outstanding Exchange
Debentures;
(iv) default in the payment at final maturity of principal in an
aggregate amount of $5.0 million or more with respect to any Indebtedness
of the Company or any Restricted Subsidiary thereof 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, or the acceleration
of any such Indebtedness aggregating $5.0 million or more which
acceleration shall not be rescinded or annulled within 20 days after
written notice as provided in the Exchange Indenture;
(v) any final judgment or judgments which can no longer be appealed
for the payment of money in excess of $5.0 million 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 of bankruptcy, insolvency or reorganization
affecting Company or any of its Restricted Subsidiaries.
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The Exchange Indenture provides that the Trustee may withhold notice to the
holders of the Exchange Debentures of any default (except in payment of
principal or premium, if any, or interest on the Exchange Debentures) if the
Trustee considers it to be in the best interest of the holders of the Exchange
Debentures to do so.
Upon the happening of any Event of Default specified in the Exchange
Indenture, the Trustee may, and the Trustee upon the request of 25% in principal
amount of the Exchange Debentures shall or the holders of at least 25% in
aggregate principal amount of outstanding Exchange Debentures may, declare the
principal of and accrued but unpaid interest, if any, on all the Exchange
Debentures to be due and payable by notice in writing to the Company and the
Trustee specifying the respective Event of Default and that it is a 'notice of
acceleration' (the 'Acceleration Notice'), and the same (i) shall become
immediately due and payable or (ii) if there are any amounts outstanding under
the Credit Agreement, will become due and payable upon the first to occur of an
acceleration under the Credit Agreement or 5 Business Days after receipt by the
Company and the Representative under the Credit Agreement of such Acceleration
Notice (unless all Events of Default specified in such Acceleration Notice have
been cured or waived). If an Event of Default with respect to bankruptcy
proceedings occurs and is continuing, then such amount will ipso facto become
and be immediately due and payable without any declaration or other act on the
part of the Trustee or any holder of Exchange Debentures.
The Exchange Indenture will provide that, at any time after a declaration
of acceleration with respect to the Exchange Debentures as described in the
preceding paragraph, the holders of a majority in principal amount of the
Exchange Debentures then outstanding (by notice to the Trustee) may rescind and
cancel such declaration and its consequences if (i) the rescission would not
conflict with any judgment or decree of a court of competent jurisdiction, (ii)
all existing Events of Default have been cured or waived except nonpayment of
principal or interest on the Exchange Debentures that has become due solely by
such declaration of acceleration, (iii) to the extent the payment of such
interest is lawful, interest (at the same rate specified in the Exchange
Debentures) on overdue installments of interest and overdue principal which has
become due otherwise than by such declaration of acceleration, has been paid,
(iv) the Company has paid the Trustee its reasonable compensation and reimbursed
the Trustee for its expenses, disbursements and advances and (v) in the event of
the cure or waiver of a Default or Event of Default of the type described in
clause (vi) of the description above of Events of Default, the Trustee has
received an officers' certificate and an opinion of counsel that such Default or
Event of Default has been cured or waived. The holders of a majority in
principal amount of the Exchange Debentures may waive any existing Default or
Event of Default under the Exchange Indenture, and its consequences, except a
default in the payment of the principal of or interest on any Exchange
Debentures.
The Company is required to deliver to the Trustee, on or before 100 days
after the end of the Company's fiscal year and on or before 50 days after the
end of the first, second and third fiscal quarters of such years, a certificate
indicating whether the signing officers know of any Default or Event of Default
that occurred during the previous year or quarter, as the case may be, and
whether the Company has complied with its obligations under the Exchange
Indenture. In addition, the Company will be required to notify the Trustee of
the occurrence and continuation of any Default or Event of Default within five
business days after the Company becomes aware of the same.
Subject to the provisions of the Exchange Indenture relating to the duties
of the Trustee in case an Event of Default thereunder should occur and be
continuing, the Trustee will be under no obligation to exercise any of the
rights or powers under the Exchange Indenture at the request or direction of any
of the holders of the Exchange Debentures unless such holders have offered to
the Trustee reasonable indemnity or security against any loss, liability or
expense. Subject to such provision for security or indemnification and certain
limitations contained in the Exchange Indenture, the holders of a majority in
principal amount of the outstanding Exchange Debentures have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee.
SATISFACTION AND DISCHARGE OF EXCHANGE INDENTURE; DEFEASANCE
The Exchange Indenture provides the Company may elect either (a) to defease
and be discharged from any and all obligations with respect to the Exchange
Debentures (except for the obligations to register the transfer or exchange of
such Exchange Debentures, to replace temporary or mutilated, destroyed, lost or
stolen Exchange Debentures, to maintain an office or agency in respect of the
Exchange Debentures and to hold monies for payment in trust) ('defeasance') or
(b) to be released from their obligations with respect to the Exchange
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Debentures under certain covenants contained in the Exchange 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 Exchange Debentures on the scheduled due dates therefor or on a selected
date of redemption in accordance with the terms of the Exchange Indenture. Such
a trust may only be established if, among other things, the Company had
delivered to the Trustee an opinion of counsel (as specified in the Exchange
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) to the effect that holders of the Exchange
Debentures 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 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 which, in
the case of a defeasance only, must be based upon a private ruling concerning
the Exchange Debentures, a published ruling of the Internal Revenue Service or a
change in applicable federal income tax law.
REPORTS TO HOLDERS
The Company will file with the Trustee and provide to the holders of
Exchange Debentures, within 15 days after it files them with the Commission,
copies of the annual reports and of the information, documents and other reports
(or copies of such portions of any of the foregoing as the Commission may by
rules and regulations prescribe) which the Company files with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. In the event the Company is
no longer required to furnish such reports to its securityholders pursuant to
Exchange Act, the Company will cause its consolidated financial statements,
comparable to those which would have been required to appear in annual or
quarterly reports, to be delivered to the holders of the Exchange Debentures.
MODIFICATION OF THE EXCHANGE INDENTURE
From time to time, the Company, the Guarantors and the Trustee, together,
without the consent of the holders of the Exchange Debentures, may amend or
supplement the Exchange Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies, so long as such change does not,
adversely affect the rights of any of the holders in any material respect. Other
modifications and amendments of the Exchange Indenture may be made with the
consent of the holders of a majority in principal amount of the then outstanding
Exchange Debentures, except that, without the consent of each holder of the
Exchange Debentures affected thereby, no amendment may directly or indirectly
(i) reduce the amount of Exchange Debentures whose holders must consent to an
amendment; (ii) reduce the rate of or change the time for payment of interest,
including defaulted interest, on any Exchange Debentures; (iii) reduce the
principal of or change the fixed maturity of any Exchange Debentures, or change
the date on which any Exchange Debentures may be subject to redemption or
repurchase, or reduce the redemption or repurchase price therefor; (iv) make any
Exchange Debentures payable in money other than that stated in the Exchange
Debentures; (v) make any change in provisions of the Exchange Indenture
protecting the right of each holder of a Exchange Debenture to receive payment
of principal of and interest on such Exchange Debenture on or after the due date
thereof or to bring suit to enforce such payment or permitting holders of a
majority in principal amount of a class of Exchange Debentures to waive Defaults
or Events of Default, other than ones with respect to the payment of principal
of or interest on the Exchange Debentures, or relating to certain amendments of
the Exchange Indenture; (vi) after the Company's obligation to purchase the
Exchange Debentures arises under the Exchange Indenture, amend, modify or change
the obligation of the Company to make or consummate a Change of Control Offer or
any Excess Proceeds Offer, as the case may be, or waive any default in the
performance thereof or modify any of the provisions or definitions with respect
to any such offer; or (vii) modify the subordination provisions of the Exchange
Indenture to adversely affect the holders of Exchange Debentures.
THE TRUSTEE
United States Trust Company of New York will be the Trustee under the
Exchange Indenture. The Trustee under the Exchange Indenture will be the
Registrar and Paying Agent with regard to the Exchange Debentures. The Exchange
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
Exchange Indenture. During the existence of an Event
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of Default, the Trustee will exercise such rights and powers vested in it under
the Exchange 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 Exchange Debentures may transfer or Exchange Debentures in
accordance with the Exchange Indenture. The Registrar under such Exchange
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 Exchange Indenture. The Registrar is not required to
transfer or exchange any Exchange Debenture selected for redemption. Also, the
Registrar is not required to transfer or exchange any Exchange Debenture for a
period of 15 days before selection of the Exchange Debentures to be redeemed.
The Exchange Debentures will be issued in a transaction exempt from
registration under the Securities Act and will be subject to the restrictions on
transfer described in 'Notice to Investors.'
The registered holder of an Exchange Debenture may be treated as the owner
of it for all purposes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Certificate of Designation and the Exchange Indenture. Reference is made to the
Certificate of Designation and the Exchange Indenture for the full definition of
all such terms, as well as any other terms used herein for which no definition
is provided.
'Acquired Indebtedness' means Indebtedness of a person (a) assumed in
connection with an Asset Acquisition from such person or (b) existing at the
time such person becomes a Subsidiary of any other person.
'Affiliate' means, with respect to any specified person, any other person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified person.
'Asset Acquisition' means (a) an Investment by the Company or any
Subsidiary of the Company in any other person pursuant to which such person
shall become a Restricted Subsidiary of the Company, or shall be merged with or
into the Company or any Restricted Subsidiary of the Company, or (b) the
acquisition by the Company or any Restricted Subsidiary of the Company of the
assets of any person which constitute all or substantially all of the assets of
such person or any division or line of business of such person.
'Asset Sale' means any sale, issuance, conveyance, transfer, lease or other
disposition to any person other than the Company or a Wholly-Owned Restricted
Subsidiary of the Company, in one or a series of related transactions, of: (a)
any Capital Stock of any Restricted Subsidiary of the Company; (b) all or
substantially all of the properties and assets of any division or line of
business of the Company or any Restricted Subsidiary of the Company; or (c) any
other properties or assets of the Company or a Restricted Subsidiary (including
proprietary brand names, whether registered or otherwise) other than in the
ordinary course of business (it being understood that the sale or lease of any
used or obsolete equipment is in the ordinary course of business). For the
purposes of this definition, the term 'Asset Sale' shall not include (i) any
sale, issuance, conveyance, transfer, lease or other disposition of properties
or assets that is governed by the provisions described under '--Merger,
Consolidation or Sale of Assets' and (ii) any sale, issuance, conveyance,
transfer, lease or other disposition of properties or assets, whether in one
transaction or a series of related transactions, involving assets with a fair
market value determined by the Company to be not in excess of $1,000,000.
'Capital Stock' means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated) of capital stock, including each class of common stock and preferred
stock of such Person and (ii) with respect to any Person that is not a
corporation, any and all partnership or other equity interests.
'Capitalized Lease Obligation' means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation under GAAP; and, for the purpose of this definition, the amount of
such obligation at any date shall be the capitalized amount thereof at such
date, determined in accordance with GAAP consistently applied.
'Cash Equivalents' means, at any time: (i) any evidence of Indebtedness
with a maturity of 180 days or less issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (ii) certificates of deposit, time deposits,
Eurodollar time deposits and bankers' acceptances
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with a maturity of 180 days or less of any financial institution that is a
member of the Federal Reserve System having combined capital and surplus and
undivided profits at the time of investment of not less than $500,000,000; (iii)
commercial paper with a maturity of 180 days or less issued by a corporation
that is not an Affiliate of the Company organized under the laws of any state of
the United States or the District of Columbia and rated at the time of
investment at least A-1 by S&P or at least P-1 by Moody's or at least an
equivalent rating category of another nationally recognized securities rating
agency; and (iv) repurchase agreements and reverse repurchase agreements
relating to marketable direct obligations issued or unconditionally guaranteed
by the government of the United States of America or issued by any agency
thereof and backed by the full faith and credit of the United States of America,
in each case maturing within 180 days from the date of acquisition; provided
that the terms of such agreements comply with the guidelines set forth in the
Federal Financial Agreements of Depository Institutions With Securities Dealers
and Others, as adopted by the Comptroller of the Currency on October 31, 1985.
'Change of Control' means the occurrence of any of the following events:
(a) any 'person' or 'group' (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act), excluding Permitted Holders, is or becomes the 'beneficial
owner' (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a person shall be deemed to have 'beneficial ownership' of all securities that
such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than 50% of the total Voting Stock of the Company; (b) the Company consolidates
with, or merges with or into, another person or sells, assigns, conveys,
transfers, leases or otherwise disposes of all or substantially all of its
assets to any person, or any person consolidates with, or merges with or into,
the Company, in any such event pursuant to a transaction in which the
outstanding Voting Stock of the Company is converted into or exchanged for cash,
securities or other property, other than any such transaction where (i) the
outstanding Voting Stock of the Company is converted into or exchanged for (1)
Voting Stock (other than Disqualified Capital Stock) of the surviving or
transferee corporation or (2) cash, securities and other property in an amount
which could be paid by the Company as a Restricted Payment under the Indenture
and (ii) immediately after such transaction no 'person' or 'group' (as such
terms are used in Sections 13(d) and 14(d) of the Exchange Act), excluding
Permitted Holders, is the 'beneficial owner' (as defined in Rules 13d-3 and
13d-5 under the Exchange Act, except that a person shall be deemed to have
'beneficial ownership' of all securities that such person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total Voting Stock of
the surviving or transferee corporation; or (c) during any consecutive two-year
period, individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by such
Board of Directors or whose nomination for election by the stockholders of the
Company was approved by a vote of 66 2/3% of the directors then still in office
who were either directors at the beginning of such period or persons whose
election as directors or nomination for election was previously so approved)
cease for any reason to constitute a majority of the Board of Directors of the
Company then in office.
'Common Stock' means, with respect to any person, any and all shares,
interests or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of, such person's common stock, whether
outstanding at the Issue Date or issued after the Issue Date, and includes,
without limitation, all series and classes of such common stock.
'Consolidated EBITDA' means, with respect to any person for any period, (i)
the sum of, without duplication, the amount for such period, taken as a single
accounting period, of (a) Consolidated Net Income, (b) Consolidated Non-cash
Charges, (c) Consolidated Interest Expense, (d) Consolidated Income Tax Expense
and (e) all non-cash accruals or cash expenses relating to the New Equity
Incentive Plan (to the extent such accruals or expenses reduce net income), less
(ii) non-cash items increasing Consolidated Net Income (other than in the
ordinary course of business); provided, however, that if, during such period,
such person or any of its Restricted Subsidiaries shall have consummated any
Asset Sale or Asset Acquisition, Consolidated EBITDA for such person and its
Restricted Subsidiaries for such period shall be adjusted (in the manner set
forth in the definition of the term 'Consolidated Fixed Charge Coverage Ratio')
to give pro forma effect to the Consolidated EBITDA directly attributable to the
assets which are the subject of such Asset Sales or Asset Acquisitions during
such period.
'Consolidated Fixed Charge Coverage Ratio' means, with respect to any
person, the ratio of the aggregate amount of Consolidated EBITDA of such person
for the four full fiscal quarters for which financial information
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in respect thereof is available immediately preceding the date of the
transaction (the 'Transaction Date') giving rise to the need to calculate the
Consolidated Fixed Charge Coverage Ratio (such four full fiscal quarter period
being referred to herein as the 'Four Quarter Period') to the aggregate amount
of Consolidated Fixed Charges of such person for the Four Quarter Period. In
addition to and without limitation of the foregoing, for purposes of this
definition 'Consolidated EBITDA' and 'Consolidated Fixed Charges' shall be
calculated after giving effect on a pro forma basis for the period of such
calculation to, without duplication, (a) the incurrence of any Indebtedness of
such person or any of its Restricted Subsidiaries, or the repayment of any
Indebtedness of such person or its Restricted Subsidiary (other than the
incurrence and repayment of Indebtedness under a revolving credit facility)
during the period commencing on the first day of the Four Quarter Period to and
including the Transaction Date (the 'Reference Period'), including, without
limitation, the incurrence of the Indebtedness giving rise to the need to make
such calculation, as if such incurrence occurred on the first day of the
Reference Period, and (b) any Asset Sales or Asset Acquisitions (including,
without limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such person or one of its Restricted Subsidiaries
(including any person who becomes a Subsidiary as a result of the Asset
Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness) occurring during the Reference Period, as if such Asset Sale or
Asset Acquisition occurred on the first day of the Reference Period.
Furthermore, in calculating 'Consolidated Fixed Charges' for purposes of
determining the denominator (but not the numerator) of this 'Consolidated Fixed
Charge Coverage Ratio,' (i) interest on outstanding Indebtedness determined on a
fluctuating basis as of the Transaction Date and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per annum
equal to the rate of interest on such Indebtedness in effect on the Transaction
Date, (ii) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a factor of a
prime or similar rate, a eurocurrency interbank offered rate, or other rates,
then the interest rate in effect on the Transaction Date will be deemed to have
been in effect during the Reference Period; (iii) notwithstanding clauses (i)
and (ii) above, interest on Indebtedness determined on a fluctuating basis, to
the extent such interest is covered by Interest Rate Agreements, shall be deemed
to have accrued at the rate per annum resulting after giving effect to the
operation of such agreements and (iv) interest on any Indebtedness incurred
pursuant to a revolving credit facility shall will be based on the average daily
principal amount outstanding under such facility during such Four Quarter
Period. In calculating the Consolidated Fixed Charge Coverage Ratio, and giving
pro forma effect to any incurrence of Indebtedness during a Reference Period,
pro forma effect shall be given to the use of proceeds thereof to permanently
repay or retire Indebtedness. If such person or any of its Restricted
Subsidiaries directly or indirectly guaranteed Indebtedness of a third person,
the above clauses shall give effect to the incurrence of such guaranteed
Indebtedness as if such person or such Restricted Subsidiary had directly
incurred or otherwise assumed such guaranteed Indebtedness.
'Consolidated Fixed Charges' means, with respect to any person for any
period, the sum of, without duplication, the amounts for such period of (i)
Consolidated Interest Expense and (ii) the aggregate amount of cash dividends
and other distributions paid or accrued during such period in respect of
Disqualified Capital Stock of such person and its Restricted Subsidiaries on a
consolidated basis; provided, however, that if, during such period, such person
or any of its Restricted Subsidiaries shall have made any Asset Sales or Asset
Acquisitions, Consolidated Fixed Charges for such person and its Restricted
Subsidiaries for such period shall be adjusted (in the manner set forth in the
definition of the term 'Consolidated Fixed Charge Coverage Ratio') to give pro
forma effect to the Consolidated Fixed Charges directly attributable to the
assets which are the subject of such Asset Sales or Asset Acquisitions during
such period.
'Consolidated Income Tax Expense' means, with respect to any person for any
period, the provision for federal, state, local and foreign income taxes of such
person and its Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP consistently applied.
'Consolidated Interest Expense' means, with respect to any person for any
period, without duplication, the (i) sum of (a) the interest expense of such
person and its Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP consistently applied, including,
without limitation, (1) any amortization of debt discount, (2) the net cost
under Interest Rate Agreements (including any amortization of discounts), (3)
the interest portion of any deferred payment obligation which in accordance with
GAAP is required to be reflected on an income statement, (4) all commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, and (5) all accrued interest and (b) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by such person
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and its Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP consistently applied, minus, in the case of the Company,
(ii) any non-cash interest expense of the Company in respect of Permitted
Indebtedness incurred in connection with the New Equity Incentive Plan, minus
(iii) any amortization of deferred financing discount costs and expenses.
'Consolidated Net Income' means, with respect to any person, for any
period, the consolidated net income (or loss) of such person and its Restricted
Subsidiaries for such period as determined in accordance with GAAP consistently
applied adjusted, (A) to the extent included in calculating such net income, by
excluding, without duplication, (i) all extraordinary gains or losses (net of
fees and expenses relating to the transaction giving rise thereto) and the
non-recurring cumulative effect of accounting changes, (ii) the portion of net
income (or loss) of such person and its Restricted Subsidiaries allocable to
minority interests in unconsolidated persons to the extent that cash dividends
or distributions have not actually been received by such person or one of its
Restricted Subsidiaries, (iii) net income (or loss) of any person combined with
such person or one of its Restricted Subsidiaries on a 'pooling of interests'
basis attributable to any period prior to the date of combination, (iv) one time
unusual non-cash charges, (v) any gain or loss realized upon the termination of
any employee pension benefit plan, on an after-tax basis, (vi) gains or losses
in respect of any Asset Sales by such person or one of its Restricted
Subsidiaries (net of fees and expenses relating to the transaction giving rise
thereto), on an after-tax basis, (vii) the net income of any Restricted
Subsidiary of such person to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is not at the
time permitted, directly or indirectly, by operation of the terms of its charter
or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Subsidiary or its stockholders and
(viii) the amount of any Consolidated Non-cash Charges of such person
attributable to the purchase method of accounting treatment in accordance with
Accounting Principles Board Opinion No. 16 dated August 1970, entitled 'Business
Combinations' and (B) by adding, in the case of the Company, (i) without
duplication, capital contributions made by Lancer to the Company pursuant to the
Tax Sharing Agreement to the extent such capital contributions represent a
return to the Company of amounts which had been included as income taxes in
computing the Company's Consolidated Net Income and (ii) for purposes of
determining the Company's ability to make Restricted Payments pursuant to the
'--Limitation on Restricted Payments' covenant, 100% (without duplication) of
all non-cash accruals or cash expenses relating to the New Equity Incentive Plan
(to the extent such accruals or expenses reduce net income.)
'Consolidated Non-cash Charges' means, with respect to any person for any
period, the aggregate depreciation, amortization and other non-cash expenses
(including, without limitation, non-cash reserves and non-cash charges) of such
person and its Restricted Subsidiaries reducing Consolidated Net Income of such
person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP consistently applied.
'Credit Agreement' means (a) the GE Credit Agreement, together with all
amendments, documents and instruments from time to time delivered in connection
with the GE Credit Agreement (including, without limitation, any guaranty
agreements and security documents), as in effect on the date hereof and, subject
to the proviso to the next succeeding sentence, as the GE Credit Agreement and
such other agreements, documents and instruments may be amended, amended and
restated, renewed, extended, restructured, supplemented or otherwise modified
from time to time, and (b) any credit agreement, loan agreement, note purchase
agreement, indenture or other agreement, document or instrument refinancing,
refunding or otherwise replacing the GE Credit Agreement or any other agreement
deemed a Credit Agreement under clause (a) or (b) hereof, whether or not with
the same agent, trustee, representative lenders or holders, and, subject to the
proviso to the next succeeding sentence, irrespective of any changes in the
terms and conditions thereof. Without limiting the generality of the foregoing,
the term 'Credit Agreement' shall include any amendment, amendment and
restatement, renewal, extension, restructuring, supplement or modification to
any Credit Agreement and all refundings, refinancings and replacements of any
Credit Agreement, including any agreement (i) extending the maturity of any
Indebtedness incurred thereunder or contemplated thereby, (ii) adding or
deleting borrowers or guarantors thereunder, so long as borrowers and issuers
include one or more of the Company and its Subsidiaries and their respective
successors and assigns, and (iii) increasing the amount of Indebtedness incurred
thereunder or available to be borrowed thereunder, provided that on the date
thereof such Indebtedness would not be prohibited under the Exchange Indenture.
'Default' means any event that is, or after notice or passage of time or
both would be, an Event of Default.
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'Designated Senior Debt' means (i) all Senior Debt under the Credit
Agreement, (ii) Indebtedness in respect of the Existing Notes, and (iii) any
other Senior Debt which (a) at the time of determination exceeds $10,000,000 in
aggregate principal amount and (b) is specifically designated by the Company in
the instrument evidencing such Senior Debt as 'Designated Senior Debt' by the
Company.
'Disqualified Capital Stock' means any Capital Stock (other than the
Existing Preferred Stock or the Private Exchange Preferred Stock) which, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable), or upon the happening of any event, matures (excluding any
maturity as the result of an optional redemption by the issuer thereof) or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof, in whole or in part, on
or prior to (i) the mandatory redemption date of the New Preferred Stock, in the
case of the New Preferred Stock or (ii) the final maturity date of the Exchange
Debentures, in the case of the Exchange Debentures. Without limitation of the
foregoing, Disqualified Capital Stock shall be deemed to include (i) any
Preferred Capital Stock of a Restricted Subsidiary of the Company, (ii) any
Preferred Capital Stock of the Company, with respect to either of which, under
the terms of such Preferred Capital 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 redemption date of the New
Preferred Stock or the maturity date of the Exchange Debentures; and (iii) as
long as the New Preferred Stock remains outstanding, Senior Stock and Parity
Stock. Notwithstanding anything in this definition to the contrary, Preferred
Capital Stock of the Company or any Restricted Subsidiary thereof that is issued
with the benefit of provision requiring a change of control offer to be made for
such Preferred Capital 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 Certificate of Designation and Exchange Indenture
described under '--Change of Control,' shall not be deemed to be Disqualified
Capital Stock solely by virtue of such provisions.
'Exchange Date' means the date of original issuance of the Exchange
Debentures.
'Exchange Debentures' means the Company's 11 1/4% Subordinated Exchange
Debentures due 2009 issuable in exchange for the New Preferred Stock.
'Existing Indenture' means the indenture pursuant to which the Existing
Notes were issued.
'Existing Notes' means the Company's 11 3/8% Senior Subordinated Notes due
2001.
'Existing Preferred Stock' means the Company's unregistered 11 1/4%
Cumulative Exchangeable Preferred Stock issued on or about the Issue Date.
'Event of Default' has the meaning set forth under '--Events of Default'
herein.
'GAAP' means generally accepted accounting principles in the United States
set forth in the Statements of Financial Accounting Standards and
Interpretations, Accounting Principles Board Opinions and AICPA Accounting
Research Bulletins which are applicable as of the Issue Date.
'GE Credit Agreement' means the Credit Agreement, dated as of July 7, 1993,
as amended from time to time, among the Company, T-H Licensing, Inc., as
guarantor, the lenders named therein and General Electric Capital Corporation,
as agent for such lenders.
'Guarantee' has the meaning set forth under '--Limitation on Guarantees by
Restricted Subsidiaries' herein.
'guarantee' means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (ii) an agreement. direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
'Guarantor' means the issuer at any time of a Guarantee (so long as such
Guarantee remains outstanding).
'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 (other than previously recorded), 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);
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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, with respect to any person, without duplication, (a)
all liabilities of such person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities incurred in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such person in
connection with any letters of credit, banker's acceptance or other similar
credit transaction, (b) all obligations of such person evidenced by bonds,
notes, debentures or other similar instruments, (c) all indebtedness created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by such person (even if the rights and remedies of
the seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade accounts payable
arising in the ordinary course of business, (d) all Capitalized Lease
Obligations of such person, (e) all Indebtedness referred to in the preceding
clauses of other persons and all dividends of other persons, the payment of
which is secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien upon
property (including, without limitation, accounts and contract rights) owned by
such person, even though such person has not assumed or become liable for the
payment of such Indebtedness (the amount of such obligations being deemed to be
the lesser of the value of such property or asset or the amount of the
obligation so secured), (f) all guarantees of Indebtedness referred to in this
definition by such person, (g) all Disqualified Capital Stock valued at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued dividends, (h) all obligations under or in respect of currency exchange
contracts and Interest Rate Agreements of such person and (i) any amendment,
supplement, modification, deferral, renewal, extension or refunding of any
liability of the types referred to in clauses (a) through (h) above. For
purposes hereof, (x) the 'maximum fixed repurchase price' of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined in good faith by the
board of directors of the issuer of such Disqualified Capital Stock, and (y)
Indebtedness is deemed to be incurred pursuant to a revolving credit facility
each time an advance is made thereunder; provided, however, that, with respect
to the Company, Indebtedness referred to in this definition shall exclude all
obligations of the Company to Lancer under the Tax Sharing Agreement and any
liability for federal, state, local or other taxes owed or owing by the Company.
'Interest Rate Agreement' means the obligations of any person pursuant to
any arrangement with any other person whereby, directly or indirectly, such
person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
'Investment' means, with respect to any person, any direct or indirect loan
or other extension of credit, guarantee or capital contribution to (by means of
any transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition by
such person of any Capital Stock, bonds, notes, debentures or other securities
or evidences of Indebtedness issued by, any other person. For the purpose of
making any calculations under the Exchange Indenture (i) Investment shall
include the fair market value of the net assets of any Subsidiary at the time
that such Subsidiary is designated an Unrestricted Subsidiary and shall exclude
the fair market value of the net assets of any Unrestricted Subsidiary that is
designated a Restricted Subsidiary and (ii) any property transferred to or from
an Unrestricted Subsidiary shall be valued at fair market value at the time of
such transfer; provided that in each case, the fair market value of an asset or
property shall be as determined by the Board of Directors of the Company in good
faith. For the purpose of the Exchange Indenture, the change in designation of a
Restricted Subsidiary to an Unrestricted Subsidiary shall be an Investment.
'Investments' shall exclude extensions of trade credit on commercially
reasonable terms consistent with the normal course of business of the Company
and the Restricted Subsidiaries.
'Issue Date' means the date of original issuance of the Existing Preferred
Stock.
'Lancer' means Lancer Industries Inc., a Delaware corporation.
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'Lien' means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind. A person shall be deemed to own subject to a Lien any property which such
person has acquired or holds subject to the interest of a vendor or lessor under
any conditional sale agreement, capital lease or other title retention
agreement.
'Moody's' means Moody's Investors Services, Inc. and its successors.
'Net Cash Proceeds' means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Company or any Restricted Subsidiary of the Company) net of
(i) brokerage commissions and other fees and expenses (including, without
limitation, fees and expenses of legal counsel and investment bankers) related
to such Asset Sale, (ii) provisions for all taxes payable as a result of such
Asset Sale, (iii) amounts required to be paid and which have been paid, or
amounts required to be pledged and which are pledged to secure Indebtedness owed
to any person (other than the Company or any Restricted Subsidiary of the
Company) owning a beneficial interest in the assets subject to the Asset Sale
(which, in the case of a Lien, is being pledged to permanently reduce
Indebtedness secured by such Lien) and (iv) appropriate amounts to be provided
by the Company or any Restricted Subsidiary of the Company, as the case may be,
as a reserve required in accordance with GAAP consistently applied against any
liabilities associated with such Asset Sale and retained by the Company or any
Restricted Subsidiary of the Company, as the case may be, after such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale, all as
reflected in an officers' certificate delivered to the Trustee.
'New Equity Incentive Plan' means any long-term incentive compensation plan
adopted by the Company covering the Company's executives and selected other key
management employees.
'New Preferred Stock' means the Company's 11 1/4% Series A Cumulative
Exchangeable Preferred Stock, par value $.01 per share, and as described in
'--The New Preferred Stock.'
'Non-Payment Event of Default' means any event (other than a Payment
Default) the occurrence of which entitles one or more Persons to accelerate the
maturity of any Designated Senior Debt.
'Obligations' means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing, or otherwise relating to, any
Indebtedness.
'Payment Default' means any default, whether or not any requirement for the
giving of notice, the lapse of time or both, or any other condition to such
default becoming an event of default has occurred, in the payment of principal
of (or premium, if any) or interest on or any other amount payable in connection
with Designated Senior Debt.
'Permitted Holders' means (i) Lancer and its Affiliates and (ii) any
'group' (as such term is used in Sections 13(d) and 14(d) of the Exchange Act)
comprised solely of Lancer and its Affiliates (it being understood that a
'group' that includes any other Person shall not be a Permitted Holder).
'Permitted Indebtedness' means each and all of the following:
(1) Indebtedness of the Company or any Guarantor under the Credit
Agreement in an aggregate principal amount at any time outstanding not to
exceed the greater of (x) $58,000,000, less the amount of any scheduled
principal payments actually made (excluding, without limitation, any
prepayments required to be made based upon the Company's excess cash flow)
or the amount of any other payments which are applied or credited against
scheduled principal payments on the date such scheduled principal payments
would otherwise have been made (except to the extent refinanced under a
replacement Credit Agreement at the time of the respective repayment) by
the Company or any Guarantor in respect of any term loans under the Credit
Agreement and the amount by which the aggregate commitment under any
revolving credit facility under the Credit Agreement at any time has been
permanently reduced to the extent that any repayments required to be made
in connection with effecting such permanent reduction have been made (it
being understood that to the extent a reduction in commitments under any
revolving credit facility under the Credit Agreement arises solely in
connection with a refinancing of outstanding amounts under such revolving
credit facility with borrowings under a replacement Credit Agreement and
the commitments under
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the Credit Agreement are thereby replaced with commitments under such
replacement Credit Agreement such a permanent reduction shall not have
occurred); provided, however, that the Company or any Guarantor shall be
permitted to incur an additional amount of Indebtedness not to exceed
$15,000,000 under its revolving credit facility if the borrowing base
requirement under such facility permits such incurrence and (y) the amount
equal to the sum of 80% of the net book value of accounts receivable and
60% of the net book value of inventory (determined on a first-in-first-out
basis) of the Company and its Restricted Subsidiaries on a consolidated
basis at the time such Indebtedness is incurred, as determined in
accordance with GAAP;
(2) Indebtedness of the Company and its Restricted Subsidiaries
pursuant to the Existing Notes and the Existing Indenture;
(3) Indebtedness of the Company and its Restricted Subsidiaries
pursuant to the Exchange Debentures and the Exchange Indenture;
(4) Indebtedness of the Company outstanding on the date of the
Exchange Indenture;
(5) Interest Rate Agreements of the Company or any Guarantor covering
Indebtedness of the Company or any such Guarantor; provided, however, that
(i) any Indebtedness to which any such Interest Rate Agreement relate bears
interest at fluctuating interest rates and is otherwise permitted to be
incurred under this covenant and (ii) the notional amount of any such
Interest Rate Agreement does not exceed the principal amount of the
Indebtedness to which such Interest Rate Agreement relates;
(6) Indebtedness of a Wholly-Owned Restricted Subsidiary of the
Company (x) to the Company or (y) to another Wholly-Owned Restricted
Subsidiary of the Company; provided, however, that any such Indebtedness of
a Wholly-Owned Restricted Subsidiary of the Company that is not a Guarantor
is not subordinated in right of payment to any other Indebtedness of such
Restricted Subsidiary;
(7) Indebtedness of the Company to a Wholly-Owned Restricted
Subsidiary of the Company which is unsecured and, unless owing to a
Guarantor, subordinated in right of payment from and after such time as the
Exchange Debentures shall become due and payable (whether at a Stated
Maturity, by acceleration or otherwise) to the payment and performance of
the Company's obligations under the Exchange Indenture and the Exchange
Debentures; provided, however, that any subsequent issuance or transfer of
Capital Stock that results in such Wholly-Owned Restricted Subsidiary
ceasing to be such, or any subsequent transfer of such Indebtedness (other
than to the Company or a Wholly-Owned Restricted Subsidiary) will be
deemed, in each case, to constitute the issuance of such Indebtedness by
the Company or of such Indebtedness by such Wholly-Owned Restricted
Subsidiary;
(8) Indebtedness of the Company to T-H Licensing arising in connection
with the loans described in clause (vi) of the '--Limitation on
Transactions With Affiliates' covenant.
(9) Indebtedness of the Company or any Guarantor representing
Capitalized Lease Obligations so long as such Indebtedness does not exceed
6.0% of the amount of the gross property, plant and equipment of the
Company and its Restricted Subsidiaries determined on a consolidated basis,
as shown on the balance sheet of the Company as of the end of the most
recent fiscal quarter, in accordance with GAAP consistently applied;
(10) Indebtedness of the Company or any Restricted Subsidiary arising
from the honoring by a bank or other financial institution of a check,
draft or similar instrument inadvertently (except in the case of daylight
overdrafts) drawn against insufficient funds in the ordinary course of
business; provided, that such Indebtedness is extinguished within 5
business days of incurrence;
(11) Indebtedness of the Company or any Restricted Subsidiary
consisting of guarantees, indemnities or obligations in respect of purchase
price adjustments in connection with the acquisition or disposition of
assets permitted under the Exchange Indenture;
(12) Following the Exchange Date, any Indebtedness or other
obligations of the Company issued to participants in the New Equity
Incentive Plan, provided that such Indebtedness is subordinated in right of
payment to the Exchange Debentures;
(13) Indebtedness of the Company or any Guarantor in addition to that
described in clauses (1) through (12) above not to exceed $20,000,000
outstanding at any time in the aggregate, which Indebtedness may be
incurred under the Credit Agreement; or
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(14) (i) Indebtedness of the Company or any Guarantor, the proceeds of
which are used solely to refinance (whether by amendment, renewal,
extension or refunding) Indebtedness of the Company (including all or a
portion of the Exchange Debentures) or any of its Restricted Subsidiaries
and (ii) Indebtedness of any Restricted Subsidiary of the Company the
proceeds of which are used solely to refinance (whether by amendment,
renewal, extension or refunding) Indebtedness of such Restricted
Subsidiary; provided, however, that (A) the principal amount of
Indebtedness incurred pursuant to this clause (14) (or, if such
Indebtedness provides for an amount less than the principal amount thereof
to be due and payable upon a declaration of acceleration of the maturity
thereof, the original issue price of such Indebtedness) shall not exceed
the sum of the principal amount of Indebtedness so refinanced (or, if the
Indebtedness so refinanced provides for an amount less than the principal
amount thereof to be due and payable upon a declaration of acceleration of
the maturity thereof, the original issue price of such Indebtedness plus
any accretion value attributable thereto since the original issuance of
such Indebtedness) plus the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of such Indebtedness
or the amount of any premium reasonably determined by the Company as
necessary to accomplish such refinancing by means of a tender offer or
privately negotiated purchase, plus the amount of expenses in connection
therewith and (B) in the case of any refinancing of Indebtedness that is
not Senior Debt, (1) such new Indebtedness is made subordinated to the
Exchange Debentures in the same manner and at least to the same extent as
the Indebtedness being refinanced and (2) such new Indebtedness has a
Weighted Average Life to Maturity and final Stated Maturity of principal
that exceeds the Weighted Average Life to Maturity and final Stated
Maturity of principal, respectively, of the Indebtedness being refinanced.
'Permitted Investment' means any of the following: (i) Investments by the
Company or any Wholly-Owned Restricted Subsidiary of the Company in another
person, if as a result of such Investment such other person is merged or
consolidated with or into, or transfers or conveys all or substantially all of
its assets to the Company or such Wholly-Owned Restricted Subsidiary; (ii)
Investments in obligations of, or guaranteed by, the United States government or
any agency or political subdivision thereof, maturing within one year of the
date of purchase; (iii) Investments in commercial paper issued by corporations,
each of which shall have a consolidated net worth of at least $100,000,000
maturing within 180 days from the date of the original issue thereof, and rated
'P-1' or better by Moody's or 'A-1' or better by S&P or an equivalent rating or
better by any other nationally recognized securities rating agency; (iv)
Investments in certificates of deposit issued or acceptances accepted by or
guaranteed by any bank or trust company 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 $100,000,000
maturing within one year of the date of purchase; (v) Investments representing
Capital Stock or obligations issued to the Company or any of its Restricted
Subsidiaries in settlement claims against any other person by reason of a
composition or readjustment of debt or a reorganization of any debtor of the
Company or of such Restricted Subsidiary; (vi) Investments in Cash Equivalents;
(vii) loans and advances to officers of the Company and its Restricted
Subsidiaries made in compliance with clause (v) of the second paragraph under
the covenant '--Limitation on Transactions with Affiliates' described above;
(viii) Investments by the Company or a Wholly-Owned Restricted Subsidiary in the
Capital Stock of a Wholly-Owned Restricted Subsidiary; (ix) money market funds
organized under the laws of the United States of America or any state thereof
that invest substantially all of their assets in any of the types of investments
described in clause (ii), (iii), (iv) or (vi) above; (x) Investments in any of
the Exchange Debentures; (xi) receivables owing to the Company of any Restricted
Subsidiary created in the ordinary course of business, (xii) Investments
consisting of Indebtedness permitted under clause (5) of the definition of
Permitted Indebtedness; and (xiii) Investments in the aggregate amount of
$10,000,000 at any time outstanding.
'Permitted Liens' means the following types of Liens:
(a) Liens for taxes, assessments or governmental charges or claims
either (i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or any of its Restricted
Subsidiaries shall have set aside on its books such reserves as may be
required pursuant to GAAP;
(b) security for the payment of workers' compensation, unemployment
insurance, other social security benefits or other insurance-related
obligations (including, but not limited to, in respect of deductibles,
self-insured retention amounts and premiums and adjustments thereto);
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(c) deposits or pledges in connection with bids, tenders, leases and
contracts (other than contracts for the payment of money);
(d) zoning restrictions, easements, licenses, reservations,
provisions, covenants, conditions, waivers, restrictions on the use of
property or minor irregularities of title (and with respect to leasehold
interests, mortgages, obligations, liens and other encumbrances incurred,
created, assumed or permitted to exist and arising by, through or under a
landlord or owner of the leased property, with or without consent of the
lessee), none of which interferes in any material respect with the ordinary
conduct of the business of the Company or any of its Subsidiaries or
materially impairs the use of any parcel of property;
(e) deposits or pledges to secure public or statutory obligations,
progress payments, surety and appeal bonds or other obligations of like
nature incurred in the ordinary course of business;
(f) certain surveys, exceptions, title defects, encumbrances,
easements, reservations of, or rights of others for, rights of way, sewers,
electric lines, telegraph or telephone lines and other similar purposes or
zoning or other restrictions as to the use of real property not materially
interfering with the ordinary conduct of the business of the Company and
its Subsidiaries taken as a whole; or
(g) Liens arising by operation of law in favor of landlords,
mechanics, carriers, warehousemen, materialmen, laborers, employees,
suppliers or the like, incurred in the ordinary course of business for sums
which are not yet delinquent or are being contested in good faith by
negotiations or by appropriate proceedings which suspend the collection
thereof.
'Person' means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
'Preferred Capital Stock' of any Person means any Capital Stock of such
Person that has preferential rights to any other Capital Stock of such Person
with respect to dividends or redemption or upon liquidation.
'Private Exchange Preferred Stock' means a series of the Company's
exchangeable preferred stock having terms identical in all material respects to
the Existing Preferred Stock.
'Qualified Capital Stock' means any Capital Stock that is not Disqualified
Capital Stock.
'Redeemable Dividend' means, for any dividend or distribution with regard
to Disqualified Capital Stock, the quotient of the dividend or distribution
divided by the difference between one and the maximum statutory federal income
tax rate (expressed as a decimal number between 1 and 0) then applicable to the
issuer of such Disqualified Capital Stock.
'Restricted Payment' means the following:
(A) For purposes of the Exchange Indenture, (i) the declaration or
payment of any dividend or the making of any other distribution (other than
dividends or distributions payable in Qualified Capital Stock) on shares of
the Company's Capital Stock, (ii) the purchase, redemption, retirement or
other acquisition for value of any Capital Stock of the Company, or any
warrants, rights or options to acquire shares of Capital Stock of the
Company, other than through the exchange of such Capital Stock or any
warrants, rights or options to acquire shares of any class of such Capital
Stock for Qualified Capital Stock or warrants, rights or options to acquire
Qualified Capital Stock, (iii) the making of any principal payment on, or
the purchase, defeasance, redemption, prepayment, decrease or other
acquisition or retirement for value, prior to any scheduled final maturity,
scheduled repayment or scheduled sinking fund payment, of, any Indebtedness
of the Company or its Subsidiaries that is subordinated or junior in right
of payment to the Exchange Debentures, and (iv) the making of any
Investment (other than a Permitted Investment).
(B) For purposes of the Certificate of Designation, (i) the
declaration or payment of any dividend or the making of any other
distribution (other than dividends or distributions payable in Qualified
Capital Stock) on shares of the Company's Parity Stock or Junior Stock,
(ii) any purchase, redemption, retirement or other acquisition for value of
any Parity Stock or Junior Stock of the Company, or any warrants, rights or
options to acquire shares of Parity Stock or Junior Stock of the Company,
other than through the exchange of such Parity Stock or Junior Stock or any
warrants, rights or options to acquire shares of any class of such Parity
Stock or Junior Stock for Qualified Capital Stock or warrants, rights or
options to acquire Qualified Capital Stock, and (iii) the making of any
Investment (other than a Permitted Investment).
'Restricted Subsidiary' means (i) T-H Licensing, Inc. and (ii) any other
Subsidiary of the Company other than an Unrestricted Subsidiary.
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'S&P' means Standard & Poor's Corporation and its successors.
'Senior Debt' means the principal of, premium, if any, and interest on any
Indebtedness of the Company, whether outstanding on the Issue Date or thereafter
created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness is pari
passu with or subordinated in right of payment to the Exchange Debentures.
Without limiting the generality of the foregoing, 'Senior Debt' shall also
include (i) all obligations of the Company, whether outstanding on the Issue
Date or thereafter created, incurred or assumed, under or in respect of the
Credit Agreement, whether for principal, interest (including, without
limitation, interest accruing after the filing of a petition initiating any
proceeding under any state or federal bankruptcy law whether or not such
interest is an allowable claim), reimbursement of amounts drawn under letters of
credit issued or arranged for pursuant thereto, guarantees in respect thereof,
and all charges, fees, expenses (including reasonable fees and expenses of
counsel) and other amounts in respect of the Credit Agreement incurred by or
owing to the lenders under the Credit Agreement or their representative, agent
or trustee, and all other obligations of the Company incurred under or in
respect of the Credit Agreement (including, without limitation, any Interest
Rate Agreements and in respect of premiums, indemnities or otherwise, and all
indebtedness under the Credit Agreement which is disallowed, avoided or
subordinated pursuant to Section 548 of Title 11, United States Code or any
applicable state fraudulent conveyance law) and (ii) all obligations of the
Company under or in respect of the Existing Notes and the Existing Indenture.
Notwithstanding the foregoing, 'Senior Debt' shall not include (a) Indebtedness
evidenced by the Exchange Debentures, (b) Indebtedness that is expressly
subordinate or junior in right of payment to any Senior Debt of the Company, (c)
Indebtedness which, when incurred and without respect to any election under
Section 1111(b) of Title 11, United States Code, is by its terms without
recourse to the Company, (d) any repurchase, redemption or other obligation in
respect of Disqualified Capital Stock, (e) to the extent it might constitute
Indebtedness, amounts owing for goods, materials or services purchased in the
ordinary course of business or consisting of trade payables or other current
liabilities (other than any current liabilities owing under the Credit Agreement
or the current portion of any long-term Indebtedness which would constitute
Senior Debt but for the operation of this clause (e) ), (f) to the extent it
might constitute Indebtedness, amounts owed by the Company for compensation to
employees or for services rendered to the Company, (g) to the extent it might
constitute Indebtedness, any liability for federal, state, local or other taxes
owed or owing by the Company, (h) Indebtedness of the Company to a Subsidiary of
the Company or any other Affiliate of the Company or any of such Affiliate's
Subsidiaries and (i) that portion of any Indebtedness which at the time of
issuance is issued in violation of the Exchange Indenture (but, as to any such
Indebtedness, no such violation of the Exchange Indenture shall be deemed to
exist for purposes of this clause (i) if the holder(s) of such Indebtedness or
their representative or the Company shall have furnished to the Trustee an
opinion of independent counsel, unqualified in all material respects, addressed
to the Trustee (which legal counsel may, as to matters of fact, rely upon an
officer's certificate of the Company) to the effect that the incurrence of such
Indebtedness does not violate the provisions of the Exchange Indenture).
'Significant Subsidiary' shall have the same meaning as in Rule 1.02(v) of
Regulation S-X under the Securities Act, provided that each Guarantor shall in
all events be deemed a Significant Subsidiary.
'Stated Maturity' means, when used with respect to any Exchange Debenture
or any installment of interest thereon, the date specified in such Exchange
Debenture as the fixed date on which any principal of such Exchange Debenture or
such installment of interest is due and payable, and when used with respect to
any other Indebtedness or any installments of interest thereon, means any date
specified in the instrument governing such Indebtedness as the fixed date on
which the principal of such Indebtedness, or such installment of interest
thereon, is due and payable.
'Subsidiary', with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
'Tax Sharing Agreement' means the Tax Sharing Agreement, dated as of July
18, 1990, between the Company and Lancer, as amended from time to time.
'Unrestricted Subsidiary' means a Subsidiary of the Company designated as
such by the Company (a) no portion of the Indebtedness or any other obligation
(contingent or otherwise) of which (i) is guaranteed by the
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Company or any other Subsidiary of the Company, (ii) is recourse to or obligates
the Company or any other Subsidiary of the Company in any way or (iii) subjects
any property or asset of the Company or any other Subsidiary of the Company,
directly or indirectly, contingently or otherwise, to the satisfaction thereof,
(b) which has no Indebtedness or any other obligation that, if in default in any
respect (including a nonpayment default), would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any
Restricted Subsidiary to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its Stated Maturity,
(c) with which the Company or any other Subsidiary of the Company has no
contract, agreement, arrangement, understanding or is subject to an obligation
of any kind, whether written or oral, other than a transaction on terms no less
favorable to the Company or any other Subsidiary of the Company than those which
might be obtained at the time from persons who are not Affiliates of the
Company, and (d) with which neither the Company nor any other Subsidiary of the
Company has any obligation (other than by the terms of the Exchange Indenture)
(i) to subscribe for additional shares of Capital Stock or other equity interest
therein or (ii) to maintain or preserve such Subsidiary's financial condition or
to cause such Subsidiary to achieve certain levels of operating results;
provided, however, that in no event shall any Guarantor be an Unrestricted
Subsidiary. The Company may designate an Unrestricted Subsidiary as a Restricted
Subsidiary by written notice to the Trustee under the Exchange Indenture;
provided, however, that the Company shall not be permitted to designate any
Unrestricted Subsidiary as a Restricted Subsidiary unless (A) after giving pro
forma effect to such designation, the Company would be permitted to incur $1.00
of additional Indebtedness (other than Permitted Indebtedness) under the
Exchange Indenture and (B) any Indebtedness or Liens of such Unrestricted
Subsidiary would be permitted to be incurred by a Restricted Subsidiary of the
Company under the Exchange Indenture. A designation of an Unrestricted
Subsidiary as a Restricted Subsidiary may not thereafter be rescinded.
'Voting Stock' means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of
the happening of any contingency).
'Weighted Average Life to Maturity' means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the total of the
product obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
'Wholly-Owned Restricted Subsidiary' means any Restricted Subsidiary of the
Company of which 100% of the outstanding Capital Stock is owned by the Company
or another Wholly-Owned Restricted Subsidiary of the Company. For purposes of
this definition, any directors' qualifying shares or investments by foreign
nationals mandated by applicable law shall be disregarded in determining the
ownership of a Restricted Subsidiary.
BOOK-ENTRY, DELIVERY AND FORM
The New Preferred Stock initially will be represented by a single permanent
global certificate in definitive, fully registered form (the 'Global
Certificate'). The Global Certificate will be deposited with, or on behalf of,
The Depository Trust Company, New York, New York ('DTC') and registered in the
name of a nominee of DTC.
The Global Certificate. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Certificate, DTC or its
custodian will credit, on its internal system, the number of shares of New
Preferred Stock of the individual beneficial interests represented by such
global securities to the respective accounts of persons who have accounts with
such depositary and (ii) ownership of beneficial interests in the Global
Certificate will be shown on, and the transfer of such ownership will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of the
shares of New Preferred Stock, DTC or such nominee, as the case may be, will be
considered the sole owner or holder of the shares of New Preferred Stock
represented by such Global Certificate for all purposes. No beneficial owner of
an interest in the
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Global Certificate will be able to transfer that interest except in accordance
with DTC's procedures, in addition to those procedures provided for in the
Certificate of Designation.
Payments of the liquidation preference or redemption price and dividends on
(including Additional Dividends) the Global Certificate will be made to DTC or
its nominee, as the case may be, as the registered owner thereof. Neither the
Company nor the Transfer Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Certificate or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
the liquidation preference, redemption price or dividends (including Additional
Dividends) in respect of the Global Certificate, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of the Global Certificate as shown on the
records of DTC or its nominee. The Company also expects that payments by
participants to owners of beneficial interests in the Global Certificate held
through such participants will be governed by standing instructions and
customary practice, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Security for any reason,
including to sell shares of New Preferred Stock to persons in states that
require physical delivery of the Certificate, or to pledge such securities, such
holder must transfer its interest in the Global Certificate, in accordance with
the normal procedures of DTC and with the procedures set forth in the
Certificate of Designation.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of New Preferred Stock (including the presentation of shares
of New Preferred Stock for exchange as described below) only at the direction of
one or more participants to whose account the DTC interests in the Global
Certificate are credited and only in respect of such shares of New Preferred
Stock as to which such participant or participants has or have given such
direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a 'clearing corporation' within the meaning of the
Uniform Commercial Code and a 'Clearing Agency' registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
('indirect participants').
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Certificate among participants of DTC, it
is under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Transfer Agent will have
any obligations under the rules and procedures governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Certificate and a successor depositary
is not appointed by the Company within 90 days, Certificated Securities will be
issued in exchange for the Global Certificate.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain U.S. federal income tax
consequences of the exchange of the Existing Preferred Stock for the New
Preferred Stock and the ownership and disposition of the New Preferred Stock and
the Exchange Debentures by U.S. Holders, as defined below, acquiring the New
Preferred Stock offered hereby on original issue. This summary is based on the
Code, Treasury Regulations, Internal Revenue Service ('IRS') rulings and
pronouncements and judicial decisions now in effect, all of which are subject to
change at any time by legislative, judicial or administrative action. Any such
changes may be applied retroactively in a manner that could adversely affect a
U.S. Holder of the New Preferred Stock or the Exchange Debentures. This summary
discusses only New Preferred Stock and Exchange Debentures held as capital
assets within the meaning of section 1221 of the Code. It does not discuss all
of the tax consequences that may be relevant to a U.S. Holder in light of such
holder's particular circumstances or to holders subject to special rules, such
as certain financial institutions, insurance companies, tax-exempt
organizations, dealers in securities, non-U.S. persons and taxpayers subject to
alternative minimum tax.
Although the characterization of an instrument as indebtedness or equity
involves a facts and circumstances determination that cannot be predicted with
certainty, the Company intends to treat the New Preferred Stock as equity and
the Exchange Debentures as indebtedness for U.S. federal income tax purposes and
the balance of this summary is based on the assumption that such treatment will
be respected. This summary is not binding on the IRS or the courts and there can
be no assurance that the IRS will not take a different position concerning the
tax consequences of the purchase, ownership or disposition of the New Preferred
Stock or the Exchange Debentures.
As used herein, the term 'U.S. Holder' means a beneficial owner of the New
Preferred Stock or the Exchange Debentures that is for U.S. federal income tax
purposes (i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in or under the laws of the United States or
any political subdivision thereof or (iii) an estate or trust that is not a
foreign estate or trust.
PROSPECTIVE HOLDERS OF THE NEW PREFERRED STOCK ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS WITH REGARD TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE
EXCHANGE OF THE EXISTING PREFERRED STOCK FOR THE NEW PREFERRED STOCK AND THE
OWNERSHIP AND DISPOSITION OF THE NEW PREFERRED STOCK AND THE EXCHANGE
DEBENTURES, INCLUDING THE APPLICABILITY OF ANY FEDERAL ESTATE OR GIFT TAX LAWS,
THE LAWS OF ANY STATE, LOCAL OR FOREIGN JURISDICTION, ANY CHANGES IN APPLICABLE
TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION OR REGULATIONS.
EXCHANGE OFFER
The exchange of the Existing Preferred Stock for the New Preferred Stock
should not constitute a taxable exchange of the Existing Preferred Stock. As a
result, the New Preferred Stock should have the same issue price (and adjusted
issue price immediately after the exchange) and the same amount of Preferred
Stock Discount (as defined below), if any, as the Existing Preferred Stock, and
each U.S. Holder should have the same adjusted basis and holding period in the
New Preferred Stock as it had in the Existing Preferred Stock immediately before
the exchange. The following discussion assumes that the exchange of the Existing
Preferred Stock for the New Preferred Stock pursuant to the Exchange Offer will
not be treated as an exchange for U.S. federal income tax purposes, and that the
Existing Preferred Stock and the New Preferred Stock will be treated as the same
security for U.S. federal income tax purposes.
DISTRIBUTIONS ON THE NEW PREFERRED STOCK
Distributions on the New Preferred Stock made out of the Company's current
or accumulated earnings and profits, as determined under U.S. federal income tax
principles, whether paid in cash or in additional shares of New Preferred Stock
('Dividend Shares'), will be taxable to a U.S. Holder as ordinary dividend
income in an amount equal to such cash or the fair market value of such Dividend
Shares on the date of distribution. The amount of the Company's earnings and
profits at any particular time depends on past and future actions and financial
performance of the Company and, therefore, no assurance can be given that any
distributions on the New Preferred Stock will be treated as dividends for U.S.
federal income tax purposes.
To the extent, if any, that the amount of any such distribution is not made
out of the Company's current or accumulated earnings and profits, as determined
under U.S. federal income tax principles, it will first reduce the U.S. Holder's
adjusted tax basis in the New Preferred Stock and, to the extent such
distribution exceeds such
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adjusted tax basis, will be treated as capital gain and will be long-term
capital gain if the U.S. Holder's holding period for such New Preferred Stock
exceeds one year. A U.S. Holder's initial tax basis in any Dividend Shares
distributed by the Company generally will equal the fair market value of such
Dividend Shares on the date of their distribution. The holding period for such
Dividend Shares will commence with their distribution and will not include the
U.S. Holder's holding period for outstanding shares of New Preferred Stock with
respect to which such Dividend Shares were distributed. For purposes of the
remainder of this discussion, the term 'dividend' means a distribution made out
of current or accumulated earnings and profits, unless the context indicates
otherwise.
Under current law, dividends received by corporate U.S. Holders of the
Company generally will be eligible for the 70% dividends received deduction
under section 243 of the Code. There are, however, many exceptions and
restrictions relating to the availability of the dividends received deduction,
including restrictions relating to the holding period of the stock under section
246(c) of the Code and debt-financed portfolio stock under section 246A of the
Code.
In addition, under section 1059 of the Code, the tax basis of any shares of
New Preferred Stock that have been held by a corporate U.S. Holder for two years
or less (ending on the earliest of the date on which the Company declares,
announces or agrees to the payment of an actual or constructive dividend) is
reduced (but not below zero) by the non-taxed portion of an 'extraordinary
dividend' for which a dividends received deduction is allowed. To the extent
that a corporate U.S. Holder's tax basis in its New Preferred Stock would have
been reduced below zero but for the foregoing limitation, such holder must
increase the amount of gain recognized on the ultimate sale or exchange of such
New Preferred Stock. Generally, an 'extraordinary dividend' is a dividend that
(i) equals or exceeds 5% of the U.S. Holder's adjusted basis in the New
Preferred Stock (treating all dividends having ex-dividend dates within an
85-day period as a single dividend) or (ii) exceeds 20% of the U.S. Holder's
adjusted basis in the New Preferred Stock (treating all dividends having
ex-dividend dates within a 365-day period as a single dividend). If an election
is made by the U.S. Holder, under certain circumstances, the fair market value
of the New Preferred Stock as of the day before the ex-dividend date may be
substituted for such U.S. Holder's basis in applying these tests.
Special rules exist with respect to extraordinary dividends for 'qualified
preferred dividends,' which are defined in the Code as any fixed dividends
payable with respect to any share of stock which (i) provides for fixed
preferred dividends payable not less frequently than annually and (ii) is not in
arrears as to dividends at the time the U.S. Holder acquires such stock. A
qualified preferred dividend does not include any dividend payable with respect
to any share of stock if the actual rate of return of such stock for the period
the stock has been held by the U.S. Holder receiving the dividend exceeds 15%.
Corporate U.S. Holders are urged to consult their tax advisors regarding
the extent, if any, to which the exceptions and restrictions and rules under
section 1059 of the Code apply to the purchase, ownership and disposition of the
New Preferred Stock.
The Clinton Administration's Budget Proposal for Fiscal Year 1998, released
February 6, 1997 (the 'Administration's Proposal'), proposed certain tax law
changes that would, among other things, (i) reduce the dividends received
deduction available to corporate U.S. Holders from 70% to 50% of dividends
received with respect to dividends paid or accrued more than 30 days after the
date of enactment of legislation, (ii) require a corporate U.S. Holder to
satisfy the holding period required by section 246(c) of the Code immediately
before or immediately after the U.S. Holder becomes entitled to receive any
dividend with respect to dividends paid or accrued more than 30 days after the
date of enactment of legislation and (iii) require immediate recognition of gain
under section 1059 of the Code to the extent a corporate U.S. Holder's tax basis
with respect to which any extraordinary dividend is received is reduced below
zero with respect to distributions after September 13, 1995. On June 9, 1997,
the Chairman of the House Committee on Ways and Means introduced a legislative
proposal (the "Chairman's Proposal") which included the proposed tax law
changes described in (ii) and (iii) above. It is not clear whether any such
proposals will be enacted or, if enacted, whether they will be enacted in the
form proposed.
In addition, the Administration's Proposal includes a provision that would
eliminate the dividends received deduction for dividends on limited term
preferred stock issued more than 30 days after the date of enactment of
legislation. For this purpose, limited term preferred stock generally includes
any preferred stock if the issuer or a related person is required to redeem or
purchase the stock within 20 years of the issue date. It is not clear whether
such proposal will be enacted or, if enacted, whether it will be enacted in the
form proposed. The Chairman's Proposal did not contain a similar provision.
However, if the proposal to eliminate the dividends received deduction on
limited term preferred stock is enacted in the form proposed in the
Administration's Proposal, the dividends received deduction may be eliminated
with respect to Dividend Shares issued more than
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30 days after the date of enactment of legislation. If the Administration's
Proposal is enacted in its current form, it is possible that the IRS may assert
that the New Preferred Stock received pursuant to the Exchange Offer would be
considered issued at the time of the exchange for purposes of determining the
applicability of such legislation. Prospective holders of New Preferred Stock
are urged to consult their tax advisors with respect to the effect of proposed
legislation.
PREFERRED STOCK DISCOUNT
Pursuant to section 305(c) of the Code, U.S. Holders of the New Preferred
Stock (including Dividend Shares) may be required to treat a portion of the
difference between the redemption price and issue price of the New Preferred
Stock as constructive distributions that are includible in income on an economic
accrual basis. For purposes of determining whether such constructive
distribution treatment applies, the mandatory and optional redemption features
of the New Preferred Stock are tested separately. Constructive distribution
treatment is required if either (or both) of these tests is satisfied.
Section 305(c) of the Code provides that the entire amount of a redemption
premium with respect to preferred stock that may be redeemed in certain
circumstances is treated as being distributed to the holders of such preferred
stock on an economic accrual basis. Preferred stock is generally considered to
have redemption premium for this purpose if its redemption price exceeds its
issue price by more than a de minimis amount. For this purpose, such excess (the
'Preferred Stock Discount') will be treated as zero if it is less than 1/4 of 1%
of the redemption price of the preferred stock multiplied by the number of
complete years from the date of issuance of the stock until the redemption date.
Preferred Stock Discount is taxable as a constructive distribution to the holder
(treated as a dividend to the extent made out of the Company's current or
accumulated earnings and profits and otherwise subject to the treatment
described above for distributions) over the term of the preferred stock using a
constant interest rate method similar to that described below for accruing
original issue discount ('OID'). See '--Original Issue Discount' below.
Preferred Stock Discount with respect to preferred stock that is subject to
mandatory redemption generally will arise if the price at which the preferred
stock must be redeemed exceeds its issue price by more than a de minimis amount.
The Company does not expect that its obligation to redeem the New Preferred
Stock acquired in connection with this Offering on March 15, 2009 will result in
Preferred Stock Discount.
Preferred Stock Discount with respect to preferred stock that has an
optional redemption feature generally will arise only if, based on all of the
facts and circumstances as of the date the preferred stock is issued, redemption
pursuant to an issuer's right to redeem is more likely than not to occur. Even
if redemption is more likely than not to occur, however, constructive
distribution treatment would not result if the redemption premium were solely in
the nature of a penalty for premature redemption. For this purpose, a redemption
premium is not a penalty for premature redemption unless it is a premium paid as
a result of changes in economic or market conditions over which neither the
issuer nor the holder has legal or practical control, such as changes in
prevailing dividend rates. In addition, pursuant to a safe harbor contained in
Treasury Regulations, redemption pursuant to an issuer's right to redeem is not
treated as more likely than not to occur if (i) the issuer and the holder are
unrelated, (ii) there are no arrangements that effectively require or are
intended to compel the issuer to redeem the stock and (iii) exercise of the
option to redeem would not reduce the yield of the stock. The Company does not
believe that its right to redeem of the New Preferred Stock acquired in
connection with this Offering on or after March 15, 2002 should be treated as
more likely than not to be exercised under these rules. Accordingly, the
optional redemption features of the New Preferred Stock acquired in connection
with this Offering should not result in Preferred Stock Discount.
Notwithstanding the above, it is not entirely clear how the rules relating
to Preferred Stock Discount apply to the Company's rights and obligations to
redeem the New Preferred Stock in the event of a Change of Control.
Dividend Shares received by U.S. Holders of the New Preferred Stock may
bear Preferred Stock Discount depending upon the issue price of such Dividend
Shares. If shares of New Preferred Stock (including Dividend Shares) bear
Preferred Stock Discount, such shares generally will have different tax
characteristics from other shares of New Preferred Stock and might trade
separately, which might adversely affect the liquidity of such shares.
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REDEMPTION, SALE OR EXCHANGE OF NEW PREFERRED STOCK
A redemption of shares of New Preferred Stock for cash generally will be
treated as a sale or exchange of such shares if (i) the U.S. Holder does not
own, actually or constructively within the meaning of section 318 of the Code,
any stock of the Company other than the redeemed New Preferred Stock or (ii) the
redemption is 'not essentially equivalent to a dividend' with respect to such
U.S. Holder under section 302(b)(1) of the Code. A distribution to a U.S. Holder
will be 'not essentially equivalent to a dividend' if it results in a
'meaningful reduction' in the U.S. Holder's stock interest in the Company. For
this purpose, a redemption of the New Preferred Stock that results in a
reduction in the proportionate interest in the Company (taking into account any
actual ownership of common stock of the Company and any stock constructively
owned) of a U.S. Holder whose relative stock interest in the Company is minimal
and who exercises no control over corporate affairs should be regarded as a
meaningful reduction in such holder's stock interest in the Company. In other
circumstances, a redemption of the New Preferred Stock may be treated as a
dividend to the extent treated as made out of the Company's current and
accumulated earnings and profits (as determined for U.S. federal income tax
purposes).
If the redemption of the New Preferred Stock for cash is treated as a sale
or exchange, the U.S. Holder would recognize capital gain or loss in an amount
equal to the difference between the amount of cash received on such redemption
(except to the extent the redemption price of the New Preferred Stock is
attributable to dividends declared by the Board of Directors of the Company
prior to the redemption, which generally will be taxable as ordinary income) and
such holder's adjusted tax basis in the New Preferred Stock.
Similarly, gain or loss realized by a U.S. Holder on the sale of the New
Preferred Stock (other than in a redemption or in an exchange for Exchange
Debentures) generally will be subject to U.S. federal income tax as capital gain
or loss in an amount equal to the difference between the sum of the amount of
cash and the fair market value of other property received and the U.S. Holder's
adjusted basis in such New Preferred Stock.
Gain or loss realized by a U.S. Holder on the exchange of the New Preferred
Stock for the Exchange Debentures will be subject to the same general rules as a
redemption for cash, except that such holder will realize capital gain or loss
in an amount equal to the difference between the issue price of the Exchange
Debentures received (as determined for purposes of computing the original issue
discount on such Exchange Debentures) and such holder's adjusted tax basis in
the New Preferred Stock. See the discussion below under 'Original Issue
Discount.' In addition, any such gain may be eligible for deferral under the
installment sale method provided neither the Exchange Debentures nor the New
Preferred Stock are readily tradable on an established securities market.
If a redemption or exchange of New Preferred Stock is treated as a
distribution that is taxable as a dividend, the amount of the distribution will
be measured by the amount of cash or the issue price of the Exchange Debentures,
as the case may be, received by the U.S. Holder. The U.S. Holder's adjusted tax
basis in the redeemed New Preferred Stock will be transferred to any remaining
stock holdings in the Company. If the U.S. Holder does not retain any actual
stock ownership in the Company (having only a constructive stock interest), the
U.S. Holder may lose such basis entirely. In addition, a corporate U.S. Holder,
under certain circumstances, may be required to reduce its basis in its
remaining shares of stock of the Company (and possibly recognize gain upon a
disposition of shares) under the 'extraordinary dividend' provisions of section
1059 of the Code. The Administration's Proposal includes a provision, generally
effective for distributions after May 3, 1995, that would require immediate
recognition of gain under section 1059 of the Code with respect to any
redemption treated as a dividend (in whole or in part) when the non-taxed
portion of the dividend exceeds the basis of the shares surrendered, if the
redemption is treated as a dividend due to options being counted as stock
ownership. It is not clear whether such proposal will be enacted or, if enacted,
whether it will be enacted in the form proposed.
ORIGINAL ISSUE DISCOUNT
In the event that the New Preferred Stock is exchanged for Exchange
Debentures and the 'stated redemption price at maturity' of the Exchange
Debentures exceeds their 'issue price' by more than a de minimis amount, the
Exchange Debentures will be treated as having OID equal to the entire amount of
such excess.
If the Exchange Debentures are traded on an established securities market
within the sixty-day period ending thirty days after the exchange date, the
issue price of the Exchange Debentures will be their fair market value as of
their issue date. Subject to certain limitations described in Treasury
Regulations, the Exchange Debentures will be deemed to be traded on an
established securities market if, among other things, price quotations are
readily
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available from dealers, brokers or traders. If the New Preferred Stock, but not
the Exchange Debentures exchanged therefor, is traded on an established
securities market within the sixty-day period ending thirty days after the
exchange, the issue price of each Exchange Debenture will be the fair market
value of the New Preferred Stock exchanged therefor at the time of the exchange.
The New Preferred Stock generally will be deemed to be traded on an established
securities market if it appears on a system of general circulation that provides
a reasonable basis to determine fair market value by disseminating either recent
price quotations or actual prices of recent sale transactions. In the event that
neither the New Preferred Stock nor the Exchange Debentures are traded on an
established securities market within the applicable period, the issue price of
the Exchange Debentures will be their stated principal amount unless either (i)
the Exchange Debentures do not bear 'adequate stated interest' within the
meaning of section 1274 of the Code, in which case the issue price of such
Exchange Debentures generally will be the 'imputed principal amount' of the
Exchange Debentures or (ii) the Exchange Debentures are issued in a
so-called 'potentially abusive situation' as defined in Treasury
Regulations under section 1274 of the Code (including a situation involving a
recent sales transaction), in which case the issue price of such Exchange
Debentures generally will be the fair market value of the New Preferred Stock
surrendered in exchange therefor.
The 'stated redemption price at maturity' of the Exchange Debentures should
equal the total of all payments under the Exchange Debentures, other than
payments of 'qualified stated interest.' 'Qualified stated interest' generally
is stated interest that is unconditionally payable in cash or other property
(other than Exchange Debentures) at least annually at a single fixed rate. The
Exchange Debentures that are issued when the Company has the option to pay
interest for certain periods in additional Exchange Debentures should be treated
as having been issued without any qualified stated interest. Accordingly, the
sum of all interest payable pursuant to the stated interest rate on such
Exchange Debentures over the entire term should be included (along with stated
principal) in the stated redemption price at maturity of such Exchange
Debentures. Stated interest on Exchange Debentures issued after the period for
paying interest in additional Exchange Debentures has passed should qualify as
qualified stated interest and none of such stated interest would be included in
the stated redemption price at maturity of the Exchange Debentures.
TAXATION OF STATED INTEREST AND ORIGINAL ISSUE DISCOUNT ON EXCHANGE DEBENTURES
Each U.S. Holder of an Exchange Debenture with OID will be required to
include in gross income an amount equal to the sum of the 'daily portions' of
the OID for all days during the taxable year in which such holder holds the
Exchange Debentures, regardless of the holder's regular method of accounting.
The daily portions of OID required to be included in a U.S. Holder's gross
income in a taxable year will be determined under a constant yield method by
allocating to each day during the taxable year in which the holder holds the
Exchange Debenture a pro rata portion of the OID thereon which is attributable
to the 'accrual period' in which such day is included. The amount of OID
attributable to each accrual period will be the product of the 'adjusted issue
price' of the Exchange Debenture at the beginning of such accrual period
multiplied by the 'yield to maturity' of the Exchange Debenture (properly
adjusted for the length of the accrual period). The adjusted issue price of an
Exchange Debenture at the beginning of an accrual period is the sum of the issue
price of the Exchange Debenture plus the aggregate amount of OID that accrued in
all prior accrual periods, less any cash payments made on the Exchange
Debentures (other than qualified stated interest payments). The 'yield to
maturity' of the Exchange Debenture is the discount rate that, when used in
computing the present value of all principal and interest payments to be made
under the Exchange Debenture, produces an amount equal to the issue price of the
Exchange Debenture. An 'accrual period' may be of any length and may vary in
length over the term of the debt instrument, provided that each accrual period
is no longer than one year and each scheduled payment of principal or interest
occurs either on the final day or the first day of an accrual period. The actual
timing of accrual of OID may vary depending on the issue price of the Exchange
Debentures and whether interest is paid in cash or additional Exchange
Debentures.
An additional Exchange Debenture (a 'Secondary Debenture') issued in
payment of interest with respect to an initially issued Exchange Debenture (an
'Initial Debenture') will not be considered as a payment made on the Initial
Debenture and will be aggregated with the Initial Debenture for purposes of
computing and accruing OID on the Initial Debenture. The adjusted issue price of
the Initial Debenture would be allocated between the Initial Debenture and the
Secondary Debenture in proportion to their respective principal amounts. That
is, upon the issuance of a Secondary Debenture with respect to an Initial
Debenture, the Initial Debenture and the
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Secondary Debenture derived from the Initial Debenture are treated as initially
having the same adjusted issue price and inherent amount of OID per dollar of
principal amount. The Initial Debenture and the Secondary Debenture derived
therefrom would be treated as having the same yield to maturity. Similar
treatment would be applied when additional Exchange Debentures are issued on
Secondary Debentures.
In the event that the Exchange Debentures are not issued with OID, because
(i) they are issued after March 15, 2002, when the Company does not have the
option to pay interest thereon in additional Exchange Debentures and (ii) the
redemption price of the Exchange Debentures does not exceed their issue price by
more than a de minimis amount, stated interest would be included in income by a
U.S. Holder in accordance with such U.S. Holder's method of accounting. In all
other cases, stated interest will be treated as payments on the Exchange
Debentures under the rules discussed above.
The Company will furnish annually to the IRS and to record holders of the
Exchange Debentures information relating to OID, if any, accruing during the
calendar year. Such information will be based on the amount of OID that would
have accrued to a U.S. Holder who acquired the Exchange Debenture on original
issue.
BOND PREMIUM ON EXCHANGE DEBENTURES
If the New Preferred Stock is exchanged for Exchange Debentures that are
not treated as having OID and the issue price of such Exchange Debentures
exceeds the amount payable at the maturity date (or earlier call date), such
excess will be deductible by the U.S. Holder of the Exchange Debentures as
amortizable bond premium over the term of the Exchange Debentures (taking into
account earlier call dates, as appropriate) under a yield-to-maturity formula,
if an election by the U.S. Holder under section 171 of the Code is made or is
already in effect. This election is revocable only with the consent of the IRS
and applies to all obligations owned or acquired by the U.S. Holder on or after
the first day of the taxable year to which the election applies. To the extent
the excess is deducted as amortizable bond premium, the U.S. Holder's adjusted
tax basis in the Exchange Debentures will be reduced. Except as may otherwise be
provided in future Treasury Regulations, the amortizable bond premium will be
treated as an offset to interest income on the Exchange Debentures rather than
as a separate deduction item.
SALE OR REDEMPTION OF EXCHANGE DEBENTURES
Gain or loss realized by a U.S. Holder on the sale, redemption or other
disposition of Exchange Debentures generally will be subject to U.S. federal
income tax in an amount equal to the difference between the sum of the cash
amount and the fair market value of all other property received on such sale,
redemption or disposition (except to the extent that cash received is
attributable to accrued, but previously untaxed, qualified stated interest,
which would be taxed as ordinary income) and such U.S. Holder's adjusted tax
basis in the Exchange Debentures. The adjusted tax basis of an Exchange
Debenture received in exchange for the New Preferred Stock generally will be
equal to the issue price of the Exchange Debenture increased by any OID with
respect to the Exchange Debenture included in the U.S. Holder's income prior to
sale, redemption or other disposition of the Exchange Debenture, reduced by any
amortizable bond premium applied against the U.S. Holder's income prior to sale,
redemption or other disposition of the Exchange Debenture and by payments other
than payments of qualified stated interest. Except to the extent that an
intention to call the Exchange Debentures prior to their maturity existed at the
time of their original issue as an agreement or understanding between the
Company and the original holders of a substantial amount of the Exchange
Debentures, such gain or loss would be long-term capital gain or loss if the
U.S. Holder's holding period for the Exchange Debentures exceeds one year.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND CORPORATE HOLDERS
In the event the Exchange Debentures are 'applicable high yield discount
obligations' ('AHYDOs'), pursuant to sections 163(e) and 163(i) of the Code, a
portion of the OID (if any) accruing on the Exchange Debentures may be treated
as a dividend generally eligible for the dividends-received deduction (subject
to the exceptions and restrictions described above) in the case of corporate
U.S. Holders and the Company would not be entitled to deduct the 'disqualified
portion' of the OID accruing on the Exchange Debentures and would be allowed to
deduct the remainder of the OID only when paid in cash.
The Exchange Debentures will constitute AHYDOs if they (i) have a term of
more than five years, (ii) have a yield to maturity equal to or greater than the
sum of the applicable federal rate at the time of issuance of the Exchange
Debentures (the 'AFR') plus five percentage points, and (iii) have 'significant'
OID. A debt
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instrument is treated as having 'significant' OID if the aggregate amount that
would be includible in gross income with respect to such debt instrument for
periods before the close of any accrual period ending after the date five years
after the date of issue exceeds the sum of (i) the aggregate amount of interest
to be paid in cash under the debt instrument before the close of such accrual
period and (ii) the product of the initial issue price of such debt instrument
and its yield to maturity. Because the amount of OID, if any, attributable to
the Exchange Debentures will be determined at the time such Exchange Debentures
are issued and the AFR at that point in time is not predictable, it is
impossible currently to determine whether Exchange Debentures will be treated as
AHYDOs.
If an Exchange Debenture is treated as an AHYDO, a U.S. Holder would be
treated as receiving dividend income to the extent of the lesser of (i) the
Company's current and accumulated earnings and profits, and (ii) the
'disqualified portion' of the OID of such AHYDO. The 'disqualified portion' of
the OID is equal to the lesser of (i) the amount of OID or (ii) the portion of
the 'total return' (i.e., the excess of all payments to be made with respect to
the Exchange Debenture over its issue price) in excess of the AFR plus six
percentage points.
BACKUP WITHHOLDING
A U.S. Holder may be subject to backup withholding at the rate of 31% with
respect to dividends on the New Preferred Stock, interest on the Exchange
Debentures or proceeds of the sale or other disposition of the New Preferred
Stock or the Exchange Debentures, unless such U.S. Holder (i) is a corporation
or comes within certain other exempt categories and, when required, demonstrates
such exemption, or (ii) provides a correct taxpayer identification number,
certifies as to no loss of exemption from backup withholding and otherwise
complies with applicable requirements of the backup withholding rules.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Preferred Stock 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 Preferred Stock. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Preferred Stock received in
exchange for Existing Preferred Stock where such Existing Preferred Stock was
acquired as a result of market-making activities or other trading activities.
The Company has agreed that, for a period of 180 days following the Effective
Date, it will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sale of New Preferred
Stock by broker-dealers. New Preferred Stock received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Preferred Stock or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such New
Preferred Stock. Any broker-dealer that resells New Preferred Stock that was
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 Preferred Stock may be
deemed to be an 'underwriter' within the meaning of the Securities Act and any
profit or any such resale of New Preferred Stock and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an 'underwriter' within the
meaning of the Securities Act
For a period of 180 days after the Effective Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer, other than certain commissions, if any, relating
to a holder's depositing its shares of Existing Preferred Stock in connection
with the Exchange Offer and will indemnify the holders of the New Preferred
Stock (including any broker-dealers) against certain liabilities, including
certain liabilities under the Securities Act.
85
<PAGE>
LEGAL MATTERS
The validity of the New Preferred Stock will be passed upon for the Company
by Debevoise & Plimpton, New York, New York.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1996 and
1995 and the consolidated statements of operations, stockholder's equity
(deficit) and cash flows for each of the three years ended December 31, 1996 ,
included in this Registration Statement, have been included herein in reliance
on the report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
86
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets, December 31, 1996 and 1995.................................................... F-3
Consolidated Statements of Operations for the three years ended December 31, 1996.......................... F-4
Consolidated Statements of Stockholder's Equity (Deficit) for the three years ended
December 31, 1996........................................................................................ F-5
Consolidated Statements of Cash Flows for the three years ended December 31, 1996.......................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
Consolidated Balance Sheets, March 31, 1997 (unaudited) and December 31, 1996.............................. F-15
Consolidated Statements of Operation for the three months ended March 31, 1997 and 1996 (unaudited)........ F-16
Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1996 (unaudited)....... F-17
Consolidated Statements of Stockholder's Equity (Deficit) for the three months ended March 31, 1997
(unaudited).............................................................................................. F-18
Notes to Consolidated Financial Statements................................................................. F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Fairfield Manufacturing Company, Inc.
We have audited the accompanying consolidated balance sheets of Fairfield
Manufacturing Company, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholder's equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Fairfield Manufacturing Company, Inc. as of December 31, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
January 31, 1997, except
Note 11, as to which the
date is March 12, 1997
F-2
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 6,185 $ 4,324
Trade receivables, less allowance of $600 in 1996 and in 1995........................... 24,696 24,328
Inventory............................................................................... 18,918 24,912
Prepaid expenses........................................................................ 853 897
-------- --------
Total current assets................................................................. 50,652 54,461
Property, plant and equipment, net........................................................ 70,211 71,056
Other assets:
Excess of investment over net assets acquired, less accumulated amortization
of $11,868 in 1996 and $10,261 in 1995............................................... 52,491 54,098
Deferred financing costs, less accumulated amortization of $2,355 in 1996 and
$1,685 in 1995....................................................................... 3,016 3,540
-------- --------
Total other assets................................................................... 55,507 57,638
-------- --------
Total assets......................................................................... $176,370 $183,155
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt.................................................... $ 3,000 $ 3,000
Accounts payable........................................................................ 13,260 11,150
Due to parent........................................................................... 287 807
Accrued liabilities..................................................................... 18,182 17,524
Deferred income taxes................................................................... 3,800 4,700
-------- --------
Total current liabilities............................................................ 38,529 37,181
Accrued retirement costs.................................................................. 15,423 14,758
Deferred income taxes..................................................................... 11,988 11,258
Long-term debt, net of current maturities................................................. 115,000 110,000
Stockholder's equity (deficit):
Common stock, par value $.01 per share; 10,000,000 shares authorized; 7,805,000
and 7,676,000 issued and outstanding in 1996 and 1995, respectively.................. 78 77
Additional paid-in capital.............................................................. 36,788 35,209
Accumulated deficit..................................................................... (41,436) (25,328)
-------- --------
Total stockholder's equity (deficit)................................................. (4,570) 9,958
-------- --------
Total liabilities and stockholder's equity (deficit)................................. $176,370 $183,155
-------- --------
-------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-3
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net sales..................................................... $ 195,205 $ 192,111 $ 150,689
Cost of sales................................................. 158,668 151,890 123,092
Selling, general and administrative expenses.................. 16,868 14,759 15,924
---------- ---------- ----------
Operating income............................................ 19,669 25,462 11,673
Interest expense, net......................................... 11,930 12,905 12,377
Other expense, net............................................ 90 127 199
---------- ---------- ----------
Income (loss) before income taxes and cumulative effect of
change in accounting principle........................... 7,649 12,430 (903)
Provision (benefit) for income taxes.......................... 3,730 5,520 (164)
---------- ---------- ----------
Income (loss) before cumulative effect of change in
accounting principle..................................... 3,919 6,910 (739)
Cumulative effect of change in accounting principle, net of
benefit for income taxes of $346 in 1994.................... -- -- (1,554)
---------- ---------- ----------
Net income (loss)........................................... $ 3,919 $ 6,910 $ (2,293)
---------- ---------- ----------
---------- ---------- ----------
Income (loss) per share data:
Before cumulative effect of change in accounting
principle................................................ $ 0.51 $ 1.15 $ (0.25)
Cumulative effect of change in accounting principle......... -- -- $ (0.52)
---------- ---------- ----------
Net income (loss) per common share.......................... $ 0.51 $ 1.15 $ (0.77)
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding.................. 7,726,557 6,018,072 2,976,471
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL STOCKHOLDER'S
COMMON PAID-IN ACCUMULATED EQUITY
STOCK CAPITAL DEFICIT (DEFICIT)
------ ---------- ----------- --------------
<S> <C> <C> <C> <C>
Balance, January 1, 1994...................................... $ 30 $ 31,193 $ (29,945) $ 1,278
Contributed capital......................................... -- 1,060 -- 1,060
Net loss.................................................... -- -- (2,293) (2,293)
------ ---------- ----------- ------------
Balance, December 31, 1994.................................... 30 32,253 (32,238) 45
Contributed capital......................................... 47 2,956 -- 3,003
Net income.................................................. -- -- 6,910 6,910
------ ---------- ----------- ------------
Balance, December 31, 1995.................................... 77 35,209 (25,328) 9,958
Contributed capital......................................... 1 1,579 -- 1,580
Dividend.................................................... -- -- (17,000) (17,000)
Advance to Parent........................................... -- -- (3,027) (3,027)
Net income.................................................. -- -- 3,919 3,919
------ ---------- ----------- ------------
Balance, December 31, 1996.................................... $ 78 $ 36,788 $ (41,436) $ (4,570)
------ ---------- ----------- ------------
------ ---------- ----------- ------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Operating activities:
Net income (loss)............................................................ $ 3,919 $ 6,910 $(2,293)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Cumulative effect of change in accounting principle, net.................. -- -- 1,554
Depreciation and amortization............................................. 13,108 12,272 11,850
Loss on disposal of equipment............................................. -- -- 768
Deferred income tax benefit............................................... (170) (1,178) (2,700)
Decrease (increase) in accrued retirement costs........................... 665 2,079 (864)
(Increase) decrease in current assets:
Trade receivables......................................................... (368) (7,886) (1,922)
Receivable from parent.................................................... -- 1,097 155
Inventory................................................................. 5,994 681 (2,714)
Prepaids.................................................................. 44 (434) (42)
Increase (decrease) in current liabilities:
Accounts payable.......................................................... (156) (2,418) 3,316
Due to parent............................................................. (520) 807 --
Accrued liabilities....................................................... 658 1,926 2,482
-------- -------- -------
Net cash provided by operating activities...................................... 23,174 13,856 9,590
-------- -------- -------
Investing activities:
Additions to plant and equipment, net........................................ (7,720) (11,645) (9,164)
-------- -------- -------
Net cash used by investing activities.......................................... (7,720) (11,645) (9,164)
-------- -------- -------
Financing activities:
Proceeds from additional capital contribution................................ 1,580 3,003 1,060
Payment of dividend.......................................................... (17,000) -- --
Advance to parent............................................................ (3,027) -- --
Proceeds of long-term debt................................................... 20,000 11,000 3,000
Payment of long-term debt.................................................... (15,000) (13,000) (9,444)
Payment of debt issuance costs............................................... (146) (340) (50)
-------- -------- -------
Net cash provided (used) by financing activities............................... (13,593) 663 (5,434)
-------- -------- -------
Increase (decrease) in cash and cash equivalents............................... 1,861 2,874 (5,008)
Cash and cash equivalents:
Beginning of year............................................................ 4,324 1,450 6,458
-------- -------- -------
End of year.................................................................. $ 6,185 $ 4,324 $ 1,450
-------- -------- -------
-------- -------- -------
Supplemental Disclosures:
Cash paid for:
Interest.................................................................. $ 11,627 $ 12,387 $11,298
Taxes to parent........................................................... $ 2,450 $ 1,650 $ 904
Non-cash activities:
Additions to plant and equipment included in accounts payable at December 31, 1996 and 1995 are
excluded from operating activities above.
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Fairfield Manufacturing Company, Inc. ('the Company') is wholly-owned by
Lancer Industries Inc. ('Lancer'). The Company, its subsidiary and Lancer are
Delaware corporations. The Company has one subsidiary, T-H Licensing, Inc.,
which owns certain of the Company's intangible assets. These consolidated
financial statements include the accounts of Fairfield Manufacturing Company,
Inc. and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
The Company manufactures high precision custom gears and planetary gear
systems at its Lafayette, Indiana facility. Customers consist of original
equipment manufacturers serving diverse markets which include rail, industrial,
construction, road rehabilitation, mining, materials-handling, forestry and
agricultural.
Concentration of Credit Risk
During 1996, no single customer accounted for more than 10% of consolidated
net sales. Net sales to one customer representing more than 10% of consolidated
net sales were $21,109 in 1995 and $19,601 in 1994. Foreign sales are not
material.
Revenue Recognition
Sales are recognized at the time of shipment to the customer.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Inventory
Inventory is valued at the lower of last-in, first-out (LIFO) cost or
market.
Property, Plant and Equipment, Net
Property, plant and equipment, net are carried at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets ranging from 3 to 30 years.
Income Taxes
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards No. 109 'Accounting for
Income Taxes' ('SFAS 109'). The liability method measures the expected tax
impact of future taxable income or deductions resulting from differences in the
tax and financial reporting bases of assets and liabilities reflected in the
consolidated balance sheets and the expected tax impact of carryforwards for tax
purposes.
Excess of Investment Over Net Assets Acquired
Excess of investment over net assets acquired is amortized using the
straight-line method over 40 years. At each balance sheet date management
assesses whether there has been a permanent impairment in the value of this
excess of investment over net assets acquired and the amount of any impairment
by comparing anticipated undiscounted cash flows from operating activities with
the carrying value. The factors considered by management in performing this
assessment include current operating results, trends and prospects as well as
the effects of obsolescence, demand, competition and other economic factors. The
Company has concluded the excess of investment over net assets acquired is not
impaired, and that its products, markets and prospects continue to support a 40
year life.
F-7
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Deferred Financing Costs
Debt issuance costs are being amortized by the use of the effective
interest method over the expected term of the related debt agreement.
Computation of Net Income (Loss) Per Share
Income (loss) per share is based upon the weighted average number of shares
of common stock outstanding.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The fair value of financial assets held by the Company approximate their
carrying value. The fair value of the financial liabilities which consists of
senior and subordinated debt, also approximate their carrying value.
Reclassifications
Certain amounts in the 1995 and 1994 consolidated financial statements and
notes to consolidated financial statements have been reclassified to conform
with the 1996 presentation.
2. INVENTORY
Inventory at December 31, consists of:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Raw materials..................................................................... $ 4,178 $ 4,039
Work in process................................................................... 8,070 10,978
Finished products................................................................. 7,490 10,350
------- -------
19,738 25,367
Less: Excess of FIFO cost over LIFO cost.......................................... (820) (455)
------- -------
$18,918 $24,912
------- -------
------- -------
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net at December 31, includes the following:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Land and improvements............................................................. $ 1,312 $ 1,211
Buildings and improvements........................................................ 11,869 11,567
Machinery and equipment........................................................... 129,747 121,819
------- -------
142,928 134,597
Less: Accumulated depreciation.................................................... (72,717) (63,541)
------- -------
$70,211 $71,056
------- -------
------- -------
</TABLE>
F-8
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. ADVANCE TO PARENT
On December 5, 1996, the Company advanced $3,000 to Lancer and anticipates
repayment during February 1997. This advance has been classified as a component
of stockholders' equity (deficit) at December 31, 1996, at which date the
related accrued interest was $27.
5. ACCRUED LIABILITIES
Accrued liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Compensation and employee benefits................................................ $ 5,970 $ 6,602
Accrued retirement and postemployment costs....................................... 3,002 1,750
Interest payable.................................................................. 5,021 5,187
Other............................................................................. 4,189 3,985
------- -------
$18,182 $17,524
------- -------
------- -------
</TABLE>
6. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan which covers
substantially all of its employees. The benefits are based on years of service
and the employee's earnings preceding retirement. The Company's funding policy
is to contribute each year an amount at least equal to the minimum required
contribution as defined by the Employee Retirement Income Security Act of 1974.
Assets of the plan are principally deposit administration insurance contracts.
The projected benefit obligation has been determined by using the projected unit
credit method.
Net pension cost for years ended December 31, consists of:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Service cost--benefits earned during the period............................ $1,387 $1,180 $1,427
Interest cost.............................................................. 2,862 2,626 2,440
Actual return on plan assets............................................... (2,043) (3,061) (764)
Net amortization and deferral.............................................. (317) 906 (1,438)
------ ------ ------
Net pension cost........................................................... $1,889 $1,651 $1,665
------ ------ ------
------ ------ ------
</TABLE>
The plan's funded status and amounts included in the December 31 balance
sheets based upon actuarial valuations at October 1, 1996 and 1995 are:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits................................................................. $27,420 $25,115
Nonvested benefits.............................................................. 1,984 1,651
------- -------
Accumulated benefit obligation.................................................... 29,404 26,766
Effect of projected future compensation increases................................. 13,568 12,995
------- -------
Projected benefit obligation...................................................... 42,972 39,761
Plan assets at fair value......................................................... 31,349 30,493
------- -------
Projected benefit obligation in excess of plan assets............................. 11,623 9,268
Unrecognized gain................................................................. 33 1,084
Unrecognized prior service cost................................................... (1,921) (2,111)
------- -------
Accrued liability included in balance sheet....................................... $ 9,735 $ 8,241
------- -------
------- -------
Assumed discount rate............................................................. 7.25% 7.25%
Assumed long-term return on plan assets........................................... 8.5% 8.5%
</TABLE>
F-9
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. EMPLOYEE BENEFIT PLANS--(CONTINUED)
The Company has a contributory defined contribution savings plan which
covers all of its eligible employees. Eligibility in the plan is obtained the
month following hire with no minimum age requirement. A participant may make a
basic contribution to the plan ranging from 2% to 6% of the participant's salary
and a supplemental contribution of 2%, 4%, or 6% of the participant's salary.
The Company matches 70% of the participant's basic contribution. Expense
recognized each of the years ended December 31, 1996, 1995 and 1994 was $1,356,
$1,238 and $909, respectively.
In addition to pension and savings plan benefits, the Company provides
limited health care and life insurance benefits for certain retired employees.
Effective January 1, 1994, the Company amended its postretirement medical
plan. The plan amendment changed the eligibility provisions to be age 60 with 15
years of service for all active employees.
Net periodic postretirement benefit cost for years ended December 31,
includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
------ ---- ----
<S> <C> <C> <C>
Service cost................................................................... $ 332 $257 $251
Interest cost.................................................................. 656 587 534
Unrecognized net loss.......................................................... 214 78 48
Prior service cost............................................................. (63) (63) (63)
------ ---- ----
$1,139 $859 $770
------ ---- ----
------ ---- ----
</TABLE>
The actuarial and recorded liabilities for these postretirement benefits,
none of which have been funded, are as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Actuarial present value of postretirement benefitobligation:
Retirees and dependents............................................................ $5,817 $5,023
Active employees eligible to retire and receive benefits........................... 840 654
Active employees not yet eligible to retire and receive benefits................... 2,939 2,390
------ ------
Total accumulated postretirement benefit obligation.................................. 9,596 8,067
Unrecognized loss.................................................................... (3,118) (1,941)
Unrecognized prior service cost...................................................... 314 376
------ ------
Accrued postretirement benefit liability included in balance sheet................... $6,792 $6,502
------ ------
------ ------
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% for 1996 and 1995. The health care
cost trend rate is not a factor in the calculation of the accumulated
postretirement benefit obligation as the plan limits benefits paid to retirees
to a lifetime maximum amount per retiree. Claims in excess of this amount are
the responsibility of the retiree.
The Company provides postemployment benefits to certain former and inactive
employees. The Company adopted SFAS No. 112, 'Employers' Accounting for
Postemployment Benefits' as of the beginning of fiscal 1994. This accounting
standard requires the accrual of the cost of postemployment benefits over the
employees' years of service rather than accounting for such costs on a cash
basis. A one-time cumulative adjustment of $1,900 ($1,554, net of tax) was
recognized as of the beginning of fiscal 1994.
F-10
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. EMPLOYEE BENEFIT PLANS--(CONTINUED)
Net periodic postemployment benefit cost for years ended December 31
included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service Cost.................................................................... $115 $131 $ 75
Interest Cost................................................................... 157 349 98
---- ---- ----
$272 $480 $173
---- ---- ----
---- ---- ----
</TABLE>
The recorded liabilities for these postemployment benefits, none of which
have been funded, are $1,894 and $1,765 at December 31, 1996 and 1995,
respectively.
7. INCOME TAXES
The Company files separate state income tax returns and is included in the
consolidated federal income tax return of its parent company, Lancer. The
Company and Lancer have entered into a Tax Sharing Agreement under which the
Company is required to calculate its federal income tax liability on a separate
return basis. Accordingly, the Company has also calculated its credit/expense
equivalent to benefit/provision for federal income taxes on a separate return
basis.
The (credit)/expense equivalent to (benefit)/provision for income taxes
each of the three years in the period ended December 31, consists of:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Current, principally federal............................................... $3,900 $6,698 $2,545
Deferred, principally federal.............................................. (170) (1,178) (3,055)
------ ------ ------
$3,730 $5,520 $ (510)
------ ------ ------
------ ------ ------
</TABLE>
The credit equivalent to benefit for income taxes for 1994 results
principally from the reversal of previously provided deferred taxes. The expense
equivalent to provision for income taxes for 1996 and 1995 results principally
from current year operating results.
A reconciliation of the expected (credit)/expense equivalent to
(benefit)/provision for income taxes at the statutory federal income tax rate
and the actual tax benefit/provision each of the three years ended December 31,
is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
------ ---- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Expected total tax benefit/provision at statutory rate.. $2,677 35.0% $4,351 35.0% $(953) (34.0)%
State taxes, net of federal............................. 231 3.0 626 5.0 (277) (9.9)
Non-deductible amortization on excess of investment over
net assets acquired................................... 555 7.3 555 4.4 540 19.3
Other, net.............................................. 267 3.5 (12) (0.0) 180 6.4
------ ---- ------ ----- ------ -----
$3,730 48.8% $5,520 44.4% $(510) (18.2)%
------ ---- ------ ----- ------ -----
------ ---- ------ ----- ------ -----
</TABLE>
F-11
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
7. INCOME TAXES--(CONTINUED)
Deferred income taxes applicable to temporary differences at December 31,
are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current:
Inventory basis difference..................................................... $ (6,317) $ (5,634)
Employee benefits.............................................................. 1,288 1,456
Other, net..................................................................... 1,229 (522)
-------- --------
Total current deferred tax liability, net...................................... (3,800) (4,700)
Long-term:
Inventory basis difference..................................................... 626 515
Property, plant and equipment basis difference................................. (18,952) (18,547)
Employee benefits.............................................................. 7,381 6,412
Other, net..................................................................... (1,043) 362
-------- --------
Total long-term deferred tax liability, net.................................... (11,988) (11,258)
-------- --------
Total deferred tax liability, net.............................................. $(15,788) $(15,958)
-------- --------
-------- --------
</TABLE>
Under the Tax Sharing Agreement between the Company and Lancer, the Company
is required to pay Lancer an amount equal to the Company's current federal
income tax liability calculated on a separate return basis. To the extent such
tax liability is reduced by the Company's utilization of Lancer's available tax
benefits, Lancer is required to reimburse the Company for 50% of the amount of
such reduction by making a capital contribution to the Company. Lancer made
capital contributions to the Company of $1,580, $2,503, and $1,060 during 1996,
1995 and 1994, respectively.
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Senior Term Credit.............................................................. $ 33,000 $ 21,000
Senior Revolving Credit......................................................... -- 7,000
Senior Subordinated Notes....................................................... 85,000 85,000
-------- --------
118,000 113,000
Less current maturities......................................................... (3,000) (3,000)
-------- --------
$115,000 $110,000
-------- --------
-------- --------
</TABLE>
The future maturities of long-term debt as of December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997.................................................................... $ 3,000
1998.................................................................... 4,000
1999.................................................................... 7,000
2000.................................................................... 19,000
2001.................................................................... 85,000
--------
$118,000
--------
--------
</TABLE>
The Company's Senior Subordinated Notes (the 'Notes') bear interest at a
rate of 11 3/8% and mature on July 1, 2001. The Notes are redeemable at the
option of the Company, in whole or in part, on or after July 1998 at certain
specified redemption prices.
Concurrent with the issuance of the Notes, the Company entered into a loan
agreement with a senior lending institution which provides for a Revolving
Credit Facility and a Term Loan (together, the 'Credit Facilities'). The loan
agreement was amended during December, 1996. The amendment increased the Term
Loan to $33,000 and is payable quarterly through December, 2000. The Revolving
Credit Facility permits the Company to borrow
F-12
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. LONG-TERM DEBT--(CONTINUED)
up to $20,000 subject to borrowing base availability (as defined) and, at the
option of the Company (subject to certain conditions) may be increased by an
additional $2,000 at December 1996 increasing to $5,000 by December 1997. The
Revolving Credit Facility matures on July 1, 2001. Interest under the Credit
Facilities is payable at varying rates based on prime or Eurodollar rates. At
December 31, 1996, the Eurodollar rate loans ranged from 7.64% to 7.91%
resulting in a weighted average rate of 7.83%. The unused Revolving Credit
Facility at December 31, 1996, net of $698 of outstanding letters of credit, was
$19,302.
Borrowings under the Credit Facilities are collateralized by substantially
all the assets of the Company, including the assignment of all leases and rents
and a pledge of the outstanding common stock of the Company. The Credit
Facilities and the Notes contain various restrictive covenants that, among other
restrictions, require the Company to maintain certain financial ratios. The
December 1996 amendment provides for the payment of dividends under the same
provisions as the Notes.
9. STOCKHOLDER'S EQUITY
Merger
On March 31, 1995 the Company and Holdings merged with and into Central
Alabama Grain Company, Inc. ('CAG'), a wholly-owned, non-operating subsidiary of
Lancer, with CAG continuing as the surviving corporation of the mergers. Upon
completion of the mergers, CAG vested in all of the estate, property, rights,
privileges, powers and franchises of the Company including T-H Licensing, Inc.
its wholly-owned subsidiary. CAG assumed all obligations and liabilities of the
Company. All of the Company's officers and directors became officers and
directors of CAG. Concurrent with the merger, CAG changed its name to Fairfield
Manufacturing Company, Inc.
Issuance of Common Stock
The Company issued 25,000 additional shares of its common stock on March
31, 1996, 51,000 shares on June 30, 1996, 23,000 shares on September 30, 1996,
and 30,000 shares on December 31, 1996, to Lancer in consideration of certain
capital contributions made by Lancer to the Company pursuant to the Tax Sharing
Agreement and other capital contributions.
Dividend
On December 5, 1996, the Company, with the approval of its senior lender,
declared and paid a dividend of $17,000 to Lancer.
10. OTHER FINANCIAL DATA
Operating Leases
The Company is obligated to make payments under noncancellable operating
leases expiring at various dates through 2000.
Future minimum payments by year, and in the aggregate, under operating
leases consist of the following at December 31, 1996:
<TABLE>
<CAPTION>
YEAR MINIMUM RENTAL
- --------------------------------------------------------- --------------
<S> <C>
1997..................................................... $ 372
1998..................................................... 355
1999..................................................... 321
2000..................................................... 241
-------
$1,289
-------
-------
</TABLE>
F-13
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. OTHER FINANCIAL DATA--(CONTINUED)
Rental expense for the years ended December 31, 1996, 1995 and 1994 was
$446, $698, and $974 respectively.
Equity Participation Plan
The Company maintains an Equity Participation Plan (the 'Plan') which
provides for the award of up to an aggregate of 180,000 Equity Participation
Rights ('Rights') to certain current and past officers and key employees. At
December 31, 1996, all 180,000 rights were granted and have vested.
Under the Plan, each participant is entitled to receive, upon the
occurrence of a Trigger Event, (as defined below) and exercise of a Right, an
amount in cash equal to the difference between the fair market value of a share
of the Company's common stock on the date the Trigger Event occurs and the
initial value assigned to each Right. A Trigger Event means (a) any of the
following transactions which results in a change in control: (i) a merger or
consolidation of the Company with or into another corporation; (ii) the sale or
exchange for cash, securities or other consideration of all or substantially all
of the assets of the corporation; or (iii) the sale or exchange for cash,
securities or any other consideration of all or substantially all of the
outstanding common equity of the Company or (b) the later of the fifth
anniversary of the date the Right was granted or the date the participant
retires from the Company at or after age 60.
Payments under the Plan may not exceed $1,320 in any fiscal year and $5,280
in the aggregate.
During the period that a stock appreciation right (or Right) is
outstanding, the ultimate amount of compensation inherent in the Right is
indeterminate. APB Opinion No. 25 and FASB Interpretation No. 28 require interim
calculations of the amount of compensation inherent in the stock appreciation
right. This amount is generally equal to the increase in the fair market value
since date of grant or award multiplied by the total number of share or rights
outstanding, regardless of the exercisable status of the rights.
At December 31, 1996, 1995 and 1994 the exercise price exceeds estimated
fair market value of the Company's common stock. Accordingly, there has been no
compensation charged to earnings for this plan.
11. SUBSEQUENT EVENT--SALE OF PREFERRED STOCK
On March 12, 1997, the Company completed a private offering of 50,000
shares of 11 1/4% Cumulative Exchangeable Preferred Stock ('Preferred Stock').
Each share has a liquidation preference of $1,000, plus accumulated and unpaid
dividends. The Company is required, subject to certain conditions, to redeem all
of the Preferred Stock outstanding on March 15, 2009 at a redemption price equal
to 100% of the liquidation preference. Dividends are payable semi-annually at an
annual rate of 11 1/4%, and may be paid, at the Company's option, either in cash
or in additional shares of Preferred Stock.
The net proceeds from this offering ($47.7 million) were used to fund a
dividend to Lancer, and used by Lancer to redeem $47.7 million of its Series C
Preferred Stock. Had this transaction occurred as of December 31, 1996, the
Company's summary balance sheet would have been as follows:
<TABLE>
<CAPTION>
ACTUAL PROFORMA
-------- --------
<S> <C> <C>
Working capital....................................................... $ 12,123 $ 12,080
Total Assets.......................................................... 176,370 176,327
Long-term debt, including current maturities.......................... 118,000 118,000
Redeemable preferred stock............................................ -- 47,700
Stockholder's equity (deficit)........................................ (4,570) (52,313)
</TABLE>
F-14
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 1,714 $ 6,185
Trade receivables, less allowance of $600 in 1997 and 1996.................. 25,667 24,696
Inventory................................................................... 21,237 18,918
Prepaid expenses............................................................ 755 853
-------------- -----------------
Total current assets..................................................... 49,373 50,652
Property, plant and equipment, net............................................ 69,500 70,211
Other Assets:
Excess of investment over net assets acquired, less accumulated amortization
of 12,269 in 1997 and 11,868 in 1996..................................... 52,090 52,491
Deferred financing costs, less accumulated amortization of $2,526 in 1997
and $2,355 in 1996....................................................... 2,845 3,016
-------------- -----------------
Total other assets....................................................... 54,935 55,507
-------------- -----------------
Total assets............................................................. $173,808 $ 176,370
-------------- -----------------
-------------- -----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt........................................ $ 3,250 $ 3,000
Accounts payable............................................................ 14,843 13,260
Due to parent............................................................... 445 287
Accrued liabilities......................................................... 17,505 18,182
Deferred income taxes....................................................... 3,800 3,800
-------------- -----------------
Total current liabilities................................................ 39,843 38,529
Accrued retirement costs...................................................... 14,442 15,423
Deferred income taxes......................................................... 12,046 11,988
Long-term debt, net of current maturities..................................... 111,000 115,000
11 1/4% cumulative exchangeable preferred stock............................... 47,707 --
Stockholder's equity (deficit):
Common stock: par value $.01 per share, 10,000,000 shares authorized,
7,857,000 and 7,805,000 issued and outstanding in 1997 and 1996,
respectively............................................................. 79 78
Additional paid-in capital.................................................. 37,196 36,788
Accumulated deficit......................................................... (88,505) (41,436)
-------------- -----------------
Total stockholder's equity (deficit)..................................... (51,230) (4,570)
-------------- -----------------
Total liabilities and stockholder's equity (deficit)..................... $173,808 $ 176,370
-------------- -----------------
-------------- -----------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-15
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
Net sales........................................................................ $ 49,235 $ 51,340
Cost of sales.................................................................... 39,852 41,675
Selling, general and administrative expenses..................................... 4,218 4,038
-------------- --------------
Operating income............................................................... 5,165 5,627
Interest expense, net............................................................ 3,231 3,070
Other expense, net............................................................... 20 21
-------------- --------------
Income before income taxes..................................................... 1,914 2,536
Provision for income taxes....................................................... 940 983
-------------- --------------
Net income..................................................................... $ 974 $ 1,553
-------------- --------------
-------------- --------------
Preferred stock dividends and discount accretion................................. (300) --
-------------- --------------
Net income available to common stockholder..................................... $ 674 $ 1,553
-------------- --------------
-------------- --------------
Income per share data:
Net income per common share................................................. $ 0.09 $ 0.20
-------------- --------------
-------------- --------------
Weighted average common shares outstanding.................................. 7,805,604 7,676,275
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-16
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
Operating activities:
Net income..................................................................... $ 974 $ 1,553
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 3,373 3,318
Deferred income tax benefit................................................. 58 (60)
(Decrease) increase in accrued retirement costs............................. (981) 150
(Increase) decrease in current assets:
Trade receivables........................................................... (971) (1,908)
Inventory................................................................... (2,319) 4,526
Prepaids.................................................................... 98 35
Increase (decrease) in current liabilities:
Accounts payable............................................................ (12) 3,353
Due to parent............................................................... 158 (537)
Accrued liabilities......................................................... (677) (3,100)
-------------- --------------
Net cash (used in) provided by operating activities............................ (299) 7,330
-------------- --------------
Investing activities:
Additions to plant and equipment, net.......................................... (496) (2,681)
Merger with First Colony Farms, Inc............................................ 10 --
-------------- --------------
Net cash used by investing activities....................................... (486) (2,681)
-------------- --------------
Financing activities:
Proceeds from additional capital contribution.................................. 399 379
Payment of dividends........................................................... (50,770) --
Advance to parent.............................................................. 3,027 --
Proceeds of long-term debt..................................................... 4,000 5,000
Payment of long-term debt...................................................... (7,750) (14,250)
Proceeds of preferred stock offering........................................... 50,000 --
Payment of preferred stock issuance costs...................................... (2,300) --
Preferred stock dividend accrued............................................... (292) --
-------------- --------------
Net cash (used) in financing activities........................................ (3,686) (8,871)
-------------- --------------
Decrease in cash and cash equivalents............................................ (4,471) (4,222)
Cash and cash equivalents:
Beginning of period............................................................ 6,185 4,324
-------------- --------------
End of period.................................................................. $ 1,714 $ 102
-------------- --------------
-------------- --------------
Supplemental Disclosures:
Cash paid for:
Interest.................................................................... $ 5,581 $ 5,524
Taxes to parent............................................................. $ 300 $ 1,000
Non-cash activities:
Additions to plant and equipment included in accounts payable at March 31, 1997 and 1996 of $1,595 and $303,
respectively, are excluded from operating activities above.
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-17
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
AS OF MARCH 31, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL STOCKHOLDER'S
COMMON PAID-IN ACCUMULATED EQUITY
STOCK CAPITAL DEFICIT (DEFICIT)
------ ---------- ----------- --------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997...................................... $ 78 $ 36,788 $ (41,436) $ (4,570)
Issuance of common stock.................................... 1 (1) -- --
Capital contribution........................................ -- 399 -- 399
Common stock dividends...................................... -- -- (50,770) (50,770)
Preferred stock discount accretion.......................... -- -- (7) (7)
Preferred stock dividends accrued........................... -- -- (293) (293)
Advance to parent........................................... -- -- 3,027 3,027
Merger with First Colony Farms, Inc......................... -- 10 -- 10
Net income.................................................. -- -- 974 974
------ ---------- ----------- --------------
Balance, March 31, 1997....................................... $ 79 $ 37,196 $ (88,505) $(51,230)
------ ---------- ----------- --------------
------ ---------- ----------- --------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-18
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL INFORMATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and Rule 10-01 of Regulation S-X. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared under
generally accepted accounting principles have been condensed or omitted pursuant
to such regulations. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the Fairfield Manufacturing Company, Inc.'s (the 'Company') financial position,
results of operations and cash flows have been included. The results for the
three months ended March 31, 1997 and 1996 are not necessarily indicative of the
results to be expected for the full year or for any interim period.
2. PARENT COMPANY OF REGISTRANT
The Company is wholly-owned by Lancer Industries Inc. ('Lancer').
On March 27, 1997, First Colony Farms, Inc., a Delaware corporation and
wholly-owned subsidiary of Lancer ('First Colony'), merged with and into the
Company, with the Company being the surviving corporation of the merger.
Immediately prior to the merger, First Colony had (i) no known liabilities
(including contingent liabilities) and (ii) assets consisting of approximately
$10 thousand in cash and certain net operating loss carry forwards.
3. SALE OF PREFERRED STOCK
On March 12, 1997, the Company completed a private offering of 50,000
shares of 11 1/4% Cumulative Exchangeable Preferred Stock ('Preferred Stock').
Each share has a liquidation preference of $1,000, plus accumulated and unpaid
dividends. The Company is required, subject to certain conditions, to redeem all
of the Preferred Stock outstanding on March 15, 2009 at a redemption price equal
to 100% of the liquidation preference. Dividends are payable semi-annually at an
annual rate of 11 1/4%, and may be paid, at the Company's option, on any
dividend payment date occuring on or prior to March 15, 2002 either in cash or
in additional shares of Preferred Stock.
The net proceeds from this offering ($47.7 million) were used to fund a
dividend to Lancer, and used by Lancer to redeem approximately $47.7 million of
its Series C Preferred Stock.
4. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
(IN THOUSANDS)
-----------------------------------
<S> <C> <C>
Raw materials....................................................... $ 4,449 $ 4,178
Work in progress.................................................... 8,477 8,070
Finished goods...................................................... 8,922 7,490
-------------- -----------------
21,848 19,738
Less: Excess of FIFO cost over LIFO cost............................ (611) (820)
-------------- -----------------
$ 21,237 $18,918
-------------- -----------------
-------------- -----------------
</TABLE>
5. INCOME PER COMMON SHARE
Net income per common share is based on the weighted average number of
common shares outstanding during the period, which, for the three months ended
March 31, 1997 was 7,805,604 and for March 31, 1996 was 7,676,275. The increase
in the weighted average common shares outstanding is due to the Company issuing
additional shares of its common stock to Lancer in consideration of certain
capital contributions made by Lancer to the Company primarily pursuant to the
Tax Sharing Agreement.
6. DEBT
In connection with the sale of Preferred Stock, the Company amended its
loan agreement (which provides for a Revolving Credit Facility and a Term Loan)
with a senior lending institution. The amendment allowed for the sale of the
Preferred Stock (see Note 3) and the approximately $47.7 million dividend to
Lancer.
F-19
<PAGE>
TORQUE-HUB(REGISTERED)
<TABLE>
<S> <C> <C>
[In this place appears a picture of the [In this place appears a picture of the [In this place appears a picture of the
Company's Torque-Hub(Registered) Company's Torque-Hub(Registered) Company's Torque-Hub(Registered)
products.] products.] products.]
[In this place appears a picture of [In this place appears a picture of
the Company's the Company's
Torque-Hub(Registered) products.] Torque-Hub(Registered) products.]
</TABLE>
Fairfield's Torque-Hub(Registered) products provide propulsion, swing and/or
rotation to equipment primarily in cases where the use of axles presents design
difficulties. Examples of such equipment are pictured below.
<TABLE>
<S> <C> <C>
[In this place appears a picture [In this place appears a picture [In this place appears a picture
of certain applications for the of certain applications for the of certain applications for the
Company's Torque-Hub(Registered) Company's Torque-Hub(Registered) Company's Torque-Hub(Registered)
products.] products.] products.]
</TABLE>
Torque-Hub(Registered) is a registered trademark of Fairfield
Manufacturing Company, Inc.
<PAGE>
------------------------------------------------------
------------------------------------------------------
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 OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE EXCHANGE AGENT. NEITHER THIS PROSPECTUS NOR THE
ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, 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 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 THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN 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 OR THEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information........................... ii
Incorporation of Certain Documents by
Reference..................................... ii
Prospectus Summary.............................. 1
Risk Factors.................................... 12
Use of Proceeds................................. 17
Capitalization.................................. 17
Selected Historical and Pro Forma
Combined Financial Data....................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 20
Business........................................ 24
Management...................................... 29
Ownership of Capital Stock...................... 33
Related Transactions............................ 34
Description of Existing Indebtedness............ 35
Description of Capital Stock.................... 39
The Exchange Offer.............................. 40
Description of New Preferred Stock and Exchange
Debentures.................................... 46
Certain Federal Income Tax Considerations....... 79
Plan of Distribution............................ 85
Legal Matters................................... 86
Experts......................................... 86
Index to Consolidated Financial Statements...... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
[LOGO]
FAIRFIELD MANUFACTURING
COMPANY, INC.
OFFER TO EXCHANGE SHARES OF
ITS 11 1/4% SERIES A CUMULATIVE EXCHANGEABLE PREFERRED STOCK
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED
FOR ANY AND ALL OUTSTANDING SHARES OF
ITS 11 1/4% CUMULATIVE EXCHANGEABLE PREFERRED STOCK
JUNE 13, 1997
------------------------------------------------------
------------------------------------------------------
